INTERVEST BANCSHARES CORPORATION
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
February 10, 2000
Dear Shareholder:
You are cordially invited to attend a special meeting of Shareholders
of Intervest Bancshares Corporation, to be held at 9:30 a.m., local time, on
March 10, 2000, at the offices of Intervest National Bank, One Rockefeller Plaza
(Suite 300), New York, New York 10020.
At the special meeting, you will be asked to consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated November 1, 1999, by
and among Intervest Bancshares Corporation, ICNY Acquisition Corporation, a
wholly-owned subsidiary of Intervest Bancshares Corporation and Intervest
Corporation of New York which, if approved, will result in the acquisition of
Intervest Corporation of New York. Approval of this proposal requires the
affirmative vote of a majority of the outstanding shares of Class A and Class B
Common Stock. In connection with the merger, we will also consider at the
special meeting proposals to increase the number of shares of Class A Common
Stock that the Company is authorized to issue and to grant a stock bonus to the
Chairman of the Board of Directors. Your Board of Directors has unanimously
adopted the proposed merger and has determined that the merger and the other
proposals on the agenda are advisable and in the best interests of Intervest
Bancshares Corporation and its Shareholders. Accordingly, the Board of Directors
unanimously recommends approval of these proposals by the Shareholders.
The attached Proxy Statement describes all of the proposals on the
agenda in detail, sets forth the basis of the positive recommendation by the
Board of Directors and the opinion of Hatcher/Johnson Valuation, Inc., as to the
fairness from a financial point of view of the consideration to be paid by our
Company. I urge you to give this material your careful attention.
Whether or not you intend to attend the special meeting in person and
regardless of the number of shares you own, we request that you complete, sign,
date and return the enclosed proxy promptly in the accompanying prepaid
envelope. You may, of course, attend the special meeting and vote in person,
even if you have previously returned your proxy.
Sincerely,
Jerome Dansker
Chairman
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INTERVEST BANCSHARES CORPORATION
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 10, 2000
To the Shareholders of INTERVEST BANCSHARES CORPORATION:
NOTICE HEREBY IS GIVEN that a Special Meeting of Shareholders (the
"Special Meeting") of Intervest Bancshares Corporation, a Delaware corporation
(the "Company"), will be held at 9:30 a.m., local time, on Friday, March 10,
2000, at the offices of Intervest National Bank, One Rockefeller Plaza (Suite
300), New York, New York for the following purposes:
1. To consider and vote upon a proposal to adopt the Agreement and Plan
of Merger, dated November 1, 1999, among Intervest Bancshares Corporation, ICNY
Acquisition Corporation and Intervest Corporation of New York (the "Merger
Agreement"), pursuant to which ICNY Acquisition Corporation would be merged (the
"Merger") with and into Intervest Corporation of New York and the shareholders
of Intervest Corporation of New York would receive an aggregate of 1,250,000
shares of Class A Common Stock of Intervest Bancshares Corporation, in
accordance with the terms of the Merger Agreement, a copy of which is attached
as Annex A.
2. To consider and vote upon a proposal to amend the certificate of
incorporation of Intervest Bancshares Corporation to increase the number of
shares of Class A Common Stock that may be issued from 7,500,000 shares to
9,500,000 shares.
3. To consider and vote upon a proposal to grant a stock bonus,
consisting of 50,000 shares of Class B Common Stock, to the Chairman of the
Board of Directors of Intervest Bancshares Corporation.
4. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements hereof.
The affirmative vote of the holders of at least a majority of the
shares of Class A and Class B Common Stock voting at the meeting is required for
adoption of the Merger Agreement and approval of the other items on the agenda.
Record holders of Class A and Class B Common Stock at the close of business on
February 1, 2000 are entitled to notice of and to vote at the Special Meeting
and any adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF THE COMPANY, AFTER CAREFUL REVIEW AND
CONSIDERATION OF THE TERMS OF THE MERGER AGREEMENT AND
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OTHER FACTORS, INCLUDING THE OPINION OF HATCHER/JOHNSON VALUATION INC. WITH
RESPECT TO THE FAIRNESS OF THE MERGER FROM A FINANCIAL POINT OF VIEW, HAS
UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND BELIEVES THAT THE MERGER IS
ADVISABLE AND IN THE BEST INTERESTS OF THE COMPANY'S SHAREHOLDERS. ACCORDINGLY,
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE IN FAVOR OF ADOPTION OF THE MERGER AGREEMENT AND THE REMAINING PROPOSALS ON
THE AGENDA.
PLEASE EXECUTE AND RETURN PROMPTLY THE ENCLOSED PROXY CARD WHETHER OR
NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING. YOUR PROXY, ONCE GIVEN, MAY BE
REVOKED AT ANY TIME PRIOR TO THE SPECIAL MEETING BY FILING A PROXY BEARING A
LATER DATE AND PRESENTING IT AT THE SPECIAL MEETING OR BY YOUR APPEARING AT THE
SPECIAL MEETING AND VOTING IN PERSON. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE
FOR MAILING IN THE UNITED STATES.
By Order of the Board of Directors
Lawrence G. Bergman
Secretary
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY
PROMPTLY, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING.
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INTERVEST BANCSHARES CORPORATION
PROXY STATEMENT
MAILED ON OR ABOUT FEBRUARY 10, 2000
SPECIAL MEETING OF SHAREHOLDERS
MARCH 10, 2000
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Intervest Bancshares Corporation of proxies for use
at the special meeting of shareholders to be held on Friday, March 10, 2000 at
9:30 a.m., local time, at the offices of Intervest National Bank, One
Rockefeller Plaza, Suite 300, New York, New York, and all adjournments thereof.
The Board of Directors of Intervest Bancshares Corporation has agreed
to a merger transaction in which Intervest Corporation of New York will be
acquired by Intervest Bancshares Corporation, through the merger of a
wholly-owned subsidiary of Intervest Bancshares Corporation with and into
Intervest Corporation of New York with Intervest Corporation of New York
continuing as the surviving corporation.
In order to complete the merger, Intervest Bancshares Corporation and
Intervest Corporation of New York must obtain the necessary governmental
approvals and third party consents, as well as the approval of Intervest
Bancshares Corporation's shareholders. Intervest Bancshares Corporation will
hold a special meeting of shareholders to consider and vote on this Merger. In
connection with the merger transaction, the Board of Directors has also
recommended the grant of a stock bonus to the Chairman of the Board of
Directors. Because the merger transaction would result in the issuance of a
substantial portion of the authorized but unissued shares of Intervest
Bancshares Corporation, the Board of Directors has also proposed an increase in
the number of shares of Class A Common Stock that the corporation will be
authorized to issue. This document describes each of those proposals.
Your vote is very important. Whether or not you plan to attend the
special meeting, please take the time to vote by completing and mailing the
enclosed proxy card. If you date and mail your proxy card without indicating how
you want to vote, your proxy will be voted as vote "FOR" the merger, the
proposed stock bonus and the proposed increase in authorized shares of Class A
Common Stock.
This Proxy Statement gives you detailed information about the proposed
merger and it includes the merger agreement as Annex A. You also can obtain
information about Intervest Bancshares from publicly available documents we have
filed with the Securities and Exchange Commission. We encourage you to read this
entire document carefully.
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FORWARD-LOOKING STATEMENTS
This Proxy Statement contains certain forward-looking statements with
respect to the financial condition, results of operation and business of both
Intervest Bancshares Corporation and Intervest Corporation of New York. These
statements may include statements for the period following the consummation of
the Merger. You can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "estimates" or similar expressions.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties. Factors that may cause actual results to be materially
different from those contemplated by the forward-looking statements include,
among others, the following possibilities:
o Further consolidations and other competitive pressures in the
traditional and mortgage banking industries may increase significantly.
o Revenues may be lower and costs may be higher than presently expected.
o Costs or difficulties related to the integration of the businesses of
the companies may be greater than expected.
o General economic or business conditions may be less favorable than
expected.
o Legislative or regulatory changes may adversely affect the business in
which the companies are engaged.
WHERE YOU CAN FIND MORE INFORMATION
Both Intervest Bancshares Corporation and Intervest Corporation of New
York file reports, proxy statements and other information with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended.
You may read and copy this information at the following SEC locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center City Corp. Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York , New York 10048 Suite 1400
Chicago, Illinois
60661-2511
You also may obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. Further information on the operation of the
SEC's Public Reference Room in Washington, D.C. may be obtained by calling the
SEC at 1-800-SEC-0330.
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The SEC also maintains a worldwide website that contains reports, proxy
statements and other information about registrants, such as us, that file
electronically with the SEC.
The address of that website is: http:\\www.sec.gov.
The SEC allows Intervest Bancshares Corporation and Intervest
Corporation of New York to "incorporate by reference" the information they have
filed with it, which means that they can disclose important information to you
by referring to those documents. These incorporated documents contain important
business and financial information about Intervest Bancshares Corporation and
Intervest Corporation of New York that may not be included in or delivered with
this proxy statement. The information incorporated by reference is considered to
be part of this proxy statement and later information filed with the SEC will
update and supersede this information. Intervest Bancshares Corporation
incorporates by reference the documents listed below and any future filings made
with the SEC under the Securities Exchange Act prior to the consummation of the
merger:
o Intervest Bancshares Corporation's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1999 and June 30, 1999;
o the description of Intervest Bancshares Corporation common stock set
forth in its Registration Statement on Form 8-A filed by Intervest
Bancshares Corporation pursuant to Section 12 of the Exchange Act,
including any amendment or report filed for purposes of updating any
such description; and
o the portions of Intervest Bancshares Corporation proxy statement for
the annual meeting of stockholders held in 1999 that had been
incorporated by reference in the 1998 Intervest Bancshares Corporation
Form 10-K.
Intervest Corporation of New York incorporates by reference the
documents listed below and any future filings made with the SEC under the
Securities Exchange Act prior to the consummation of the merger:
o Intervest Corporation of New York's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1999 and June 30, 1999.
A copy of Intervest Bancshares Corporation's Report on Form 10-K for
the fiscal year ended December 31, 1998 and its quarterly report on Form 10-Q
for the quarter ended September 30, 1999 are included in this proxy statement as
Annex C and Annex D, respectively. A copy of Intervest Corporation of New York'
s Annual Report on Form 10-K for the year ended December 31, 1998 and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 are
included in this proxy statement as Annex E and Annex F, respectively.
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TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS....................................................5
WHERE YOU CAN FIND MORE INFORMATION...........................................5
SUMMARY .....................................................................9
SPECIAL MEETING..............................................................12
General ...........................................................12
Matters to be Considered............................................12
Recommendation of the Board of Directors............................12
Record Date; Proxies................................................13
Persons Making the Solicitation.....................................13
Quorum, Vote Required...............................................13
THE MERGER...................................................................14
General ...........................................................14
Background of Merger................................................14
Reasons for the Merger..............................................15
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS ADOPTION OF THE
MERGER AGREEMENT BY THE SHAREHOLDERS OF THE COMPANY.................17
Opinion of Financial Advisor........................................17
Compensation of HJV.................................................23
Interests of Certain Persons in the Merger..........................23
Operation and Management of the Company After the Merger............24
Effective Date of the Merger........................................24
Effect of the Merger................................................24
Representations and Warranties......................................24
Conditions to the Merger............................................25
Conduct of Business Pending the Merger..............................26
No Solicitation by the Company......................................26
Termination of the Merger Agreement; Amendments.....................26
Certain Regulatory Matters..........................................27
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY..............................27
NO DISSENTERS RIGHTS.........................................................28
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
...................................................................29
EXPERTS ....................................................................34
PROPOSED INCREASE IN AUTHORIZED SHARES.......................................34
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STOCK BONUS..................................................................35
SHAREHOLDER PROPOSALS........................................................35
OTHER MATTERS................................................................36
ANNEX A - Agreement and Plan of Merger
ANNEX B - Opinion of Hatcher/Johnson Valuation Inc.
ANNEX C - Intervest Bancshares Corporation Report on Form 10-K
for the year ended December 31, 1998
ANNEX D - Intervest Bancshares Corporation Report on Form 10-Q
for the quarter ended September 30, 1999
ANNEX E - Intervest Corporation of New York Report on Form 10-K
for the year ended December 31, 1998
ANNEX F - Intervest Corporation of New York Report on Form 10-Q
for the quarter ended September 30, 1999
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SUMMARY
This brief summary highlights selected information from this Proxy
Statement. It does not contain all of the information that is important to you.
We urge you to carefully read the Proxy Statement and the Annexes attached to
this document to fully understand the merger. See "Where You Can Find More
Information" (Page 7). Each item in this summary includes a page reference
directing you to a more complete description of that item.
The Parties to the Merger (Page 14)
Intervest Bancshares Corporation
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
(212) 218-2800
Intervest Bancshares Corporation, a Delaware corporation (sometimes
called the "Company"), is a registered bank holding company. Its primary
business is the operation of Intervest Bank and Intervest National Bank, its two
wholly-owned banking subsidiaries. Intervest Bank is a Florida state-chartered
commercial bank that provides a wide-range of banking services through its
banking offices located in Pinellas County, Florida. Intervest National Bank is
a full service commercial bank with its banking office located in the City of
New York.
ICNY Acquisition Corporation
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
(212) 218-2800
ICNY Acquisition Corporation, a New York corporation, was recently
formed as a wholly-owned subsidiary of Intervest Bancshares Corporation to
accommodate a closing of this transaction.
Intervest Corporation of New York
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
(212) 218-2800
Intervest Corporation of New York is a New York corporation that owns
mortgages on real estate. Substantially all of its mortgages are secured by
multi-family apartment buildings. At September 30, 1999, the Company had 43 real
estate mortgage loans in its portfolio, totaling $52,807,000 in aggregate
principal amount.
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Special Meeting (Page 12)
The special meeting of shareholders of Intervest Bancshares will be
held on Friday, March 10, 2000 at 9:30 a.m., local time, at the offices of
Intervest National Bank, One Rockefeller Plaza, Suite 300, New York, New York.
Record Date; Vote Required (Page 13)
You can vote at the Special Meeting if you owned Class A or Class B
common stock of Intervest Bancshares at the close of business on February 1,
2000. On that date, there were 2,285,629 shares of the Company's Class A common
stock and 305,000 shares of Class B common stock issued and outstanding. The
holders of both Class A and Class B common stock as of the record date are
entitled to vote at the meeting and each is entitled to one vote for each share
held on the record date. The affirmative vote of the holders of a majority of
all of the shares of Class A and Class B Common Stock entitled to vote, voting
as a single class, who are present or represented at the meeting is required to
adopt the Merger Agreement, to approve the increase in authorized shares of
Class A Common Stock and to approve the grant of a stock bonus to the Chairman.
As of February 1, 2000, directors, executive officers and principal
shareholders of Intervest Bancshares Corporation held 1,282,500 shares (or
56.11%) of the Intervest Bancshares Corporation's common stock entitled to vote
at the special meeting. We expect that each of them will vote in favor of all of
the proposals on the agenda.
Recommendation of the Board of Directors (Page 12)
The board of directors of Intervest Bancshares Corporation believes
that the merger and the related proposals are advisable and in the best interest
of the corporation and its shareholders. Accordingly, the board of directors
unanimously recommends that you vote "FOR" the proposals related to the merger,
the increase in the number of Shares of Class A Common Stock that the Company is
authorized to issue and the grant a stock bonus to the Chairman of the Board.
The Merger (Page 14)
The merger agreement is attached to this document as Annex A. Please
read the merger agreement. It is the legal document that governs the merger.
General.
We propose a merger in which a wholly-owned subsidiary of Intervest
Bancshares Corporation will merge into Intervest Corporation of New York.
Intervest Corporation of New York will be the surviving corporation in the
merger. When the merger is complete, all of the shares of Intervest Corporation
of New York's stock will automatically convert into
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the right to receive an aggregate of 1,250,000 shares of Intervest Bancshares
Class A Common Stock.
Opinion of Financial Advisor (Page 16)
Hatcher/Johnson Valuation Inc. has delivered its opinion to Intervest
Bancshares Corporation's Board of Directors that the consideration to be paid in
the merger is fair from the financial point of view to the holders of Intervest
Bancshares common stock. A copy of the opinion delivered by Hatcher/Johnson
Valuation Inc. is attached to this document as Annex B. You should read the
opinion completely to understand the assumptions made, matters considered and
limitations of the review undertaken by Hatcher/Johnson Valuation Inc. in
providing this opinion.
Effective Date (Page 20).
The merger will occur shortly after all of the conditions to a closing
of the merger, including approval by the shareholders of Intervest Bancshares
Corporation and approval by the Federal Reserve Board, have been satisfied. It
is currently expected that the merger will occur promptly after the special
meeting of shareholders.
Conditions to the Merger (Page 21)
The completion of the merger depends on a number of conditions being
met. In addition to some standard conditions regarding compliance with the
merger agreement these include:
o Adoption of the merger agreement by Intervest Bancshares Corporation's
shareholders
o Obtaining certain regulatory clearances in connection with the merger
If the law permits, either Intervest Bancshares Corporation or
Intervest Corporation of New York could choose to waive a condition to its
obligation to complete the merger even though that condition had not been
satisfied. We cannot be certain when (or if) the conditions to the merger will
be satisfied or waived, or that the merger will be completed.
Interest of Certain Persons in the Merger
You should be aware that certain members of the board of directors of
Intervest Bancshares Corporation and Intervest Bancshares Corporation's
management have certain interests which may present them with potential
conflicts of interest in the merger. Among other things, certain directors and
officers and their family members own all of the shares of stock of Intervest
Corporation of New York. As a result, they will receive the shares of Class A
Common Stock of Intervest Bancshares Corporation to be issued in the merger.
Each of these arrangements is described in more detail in this proxy statement.
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Conduct of Business Pending the Merger (Page 22)
Intervest Corporation of New York has agreed to conduct its business
pending the merger only in the ordinary course, except as otherwise permitted by
the merger agreement.
SPECIAL MEETING
General
This Proxy Statement is being furnished by Intervest Bancshares
Corporation, a Delaware corporation (the "Company"), to the holders of
outstanding shares of its Class A Common Stock and Class B Common Stock in
connection with the solicitation of proxies by the Board of Directors from
holders of such shares. The proxies are to be used at the Special Meeting of
Shareholders of the Company (the "Special Meeting") to be held at the offices of
Intervest National Bank, One Rockefeller Plaza, Suite 300, New York, New York at
9:30 a.m., local time, on Friday, March 10, 2000, and at any adjournments or
postponements thereof. Holders of Common Stock are entitled to one vote for each
share held by them.
Matters to be Considered
One purpose of the Special Meeting is to consider and vote upon a
proposal to adopt the Agreement and Plan of Merger, dated as of November 1, 1999
(the "Merger Agreement"), among Intervest Bancshares Corporation, ICNY
Acquisition Corporation, a wholly-owned subsidiary of Intervest Bancshares
Corporation, providing for the merger of ICNY Acquisition Corporation into
Intervest Corporation of New York (the "Merger"). As a result of the Merger,
Intervest Corporation of New York will continue as the surviving corporation and
will become a wholly-owned subsidiary of Intervest Bancshares Corporation. In
the Merger, the Company will issue an aggregate of 1,250,000 shares of its Class
A Common Stock to the shareholders of Intervest Corporation of New York. At the
Special Meeting, we will also consider and vote upon related proposals to
increase the number of shares of Class A Common Stock which the Company is
authorized to issue from 7,500,000 shares to 9,500,000 shares, and to grant a
stock bonus of 50,000 shares of Class B Common Stock to the Chairman of the
Board of Directors in recognition of his efforts in connection with this
transaction.
Recommendation of the Board of Directors
The Board of Directors of the Company has unanimously adopted the
Merger Agreement and has determined that the Merger is advisable and in the best
interests of the Company and its shareholders. The Board has also unanimously
approved the proposals to increase the number of authorized shares and to grant
of a stock bonus to the Chairman of the Board of Directors. Accordingly, the
Board of Directors of the Company unanimously recommends that Company's
shareholders vote "FOR" these proposals. For a discussion of the factors
considered by the Company's Board of Directors in approving the Merger
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Agreement and the transactions contemplated thereby, see "The Merger -- Reasons
for the Merger."
Record Date; Proxies
Pursuant to the provisions of the Delaware General Corporation Law and
the Company's By-Laws, the Board of Directors of the Company has fixed the close
of business on February 1, 2000 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the Special
Meeting. Accordingly, only holders of record of shares of Class A and Class B
Common Stock at the close of business on the Record Date will be entitled to
notice of, and to vote at, the Special Meeting.
A proxy card for use at the Special Meeting is enclosed. Shares of
Class A and Class B Common Stock represented by properly executed proxies,
unless such proxies have been previously revoked, will be voted in accordance
with the instructions indicated in such proxies. If no instructions are so
indicated, such shares will be voted in favor of the adoption of the Merger
Agreement and in the discretion of the proxy holder as to any other matter that
properly may come before the Special Meeting. The Board of Directors of the
Company knows of no business that will be presented for consideration at the
Special Meeting other than those set out in the Notice of the Meeting. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting by filing an instrument revoking it with the
Company, by duly executing a proxy bearing a later date and presenting it at the
Special Meeting or by appearing at the Special Meeting and voting in person. The
mere presence at the Special Meeting of the person who has given a proxy will
not revoke such proxy.
Persons Making the Solicitation
This solicitation of proxies is being made by the Board of Directors of
the Company. All expenses associated with soliciting proxies, including the
preparation, assembly, printing and mailing of this Proxy Statement, will be
borne by the Company. It is contemplated that proxies will be solicited
principally through the use of the mail, but officers, directors and employees
of the Company may solicit proxies personally or by telephone, without receiving
special compensation therefor. In addition, the Company will reimburse banks,
brokerage houses, and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding these proxy materials to their principals.
Quorum, Vote Required
The presence, either in person or by properly executed proxy, of the
holders of a majority of the voting power of the outstanding shares of Class A
and Class B Common Stock entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting.
The affirmative vote of a majority of all of the shares of Class A and
Class B Common Stock entitled to vote who are present or represented at the
meeting is required to
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adopt the Merger Agreement and to approve the increase in authorized shares and
the stock bonus. Abstentions and broker non-votes will be counted as shares of
Class A or Class B Common Stock present for purposes of determining the presence
of a quorum. However, neither Abstentions nor "broker non-votes" will be counted
as votes cast for purposes of determining whether a proposal has received
sufficient votes for approval. A "broker non- vote" occurs when a nominee does
not have discretionary voting power with respect to that proposal and has not
received instructions from the beneficial owner.
As of the Record Date, 2,285,629 shares of Class A Common Stock were
outstanding and held by approximately 800 record holders, and 305,000 shares of
Class B Common Stock were outstanding and held by four shareholders. Each
shareholder of the Company is entitled to one vote for each share of Common
Stock held in his or her name on the Record Date.
THE MERGER
The following information with respect to the Merger is qualified in
its entirety by reference to the complete text of the Merger Agreement, a copy
of which is included in this Proxy Statement as Annex A. The following
information includes a summary of the material terms of the Merger Agreement,
which sets forth the terms and conditions upon which the Merger is to be
affected. If the Merger Agreement is adopted by the requisite vote of
shareholders at the Special Meeting, and all other conditions to the obligations
of the parties thereto are satisfied or waived, the Merger will be consummated
and ICNY Acquisition Corporation will merge with and into Intervest Corporation
of New York at the Effective Time (as defined below). Intervest Corporation of
New York will be the surviving corporation in the Merger, but will become a
wholly-owned subsidiary of the Company. Shareholders are urged to read the
Merger Agreement in its entirety for a more complete description of the Merger.
General
Pursuant to the Merger Agreement, at the time the Merger becomes
effective (the "Effective Time"), each outstanding share of capital stock of
Intervest Corporation of New York, will be converted automatically into the
right to receive the Merger Consideration. As a result of the Merger, holders of
shares of capital stock of Intervest Corporation of New York will cease to have
an equity or other interest in, or possess any rights as shareholders of,
Intervest Corporation of New York, which will be the surviving corporation and
will become a wholly-owned subsidiary of the Company.
Background of Merger
From time to time, the Board of Directors of Intervest Bancshares
Corporation has reviewed various strategic alternatives for enhancing
profitability and maximizing shareholder value. During 1999, management of
Intervest Bancshares Corporation, in consultation with the Board of Directors of
Intervest Bancshares Corporation, determined to explore the possibility of an
acquisition transaction whereby Intervest Bancshares Corporation would
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acquire Intervest Corporation of New York. Because the two companies are
affiliated, with a common board of directors and with the principal shareholders
of Intervest Corporation of New York serving as officers and directors of
Intervest Bancshares Corporation, the board of directors determined that it
would retain the services of Hatcher/Johnson Valuation Inc. as its financial
advisor to evaluate the fairness, from the financial point of view, of any final
merger proposal and, on August 6, 1999, Intervest Bancshares Corporation
retained that firm. Discussions with respect to a definitive merger agreement
commenced in August of 1999 and, at its meeting held on August 25, 1999, the
board of directors evaluated preliminary information and determined it
appropriate to proceed with further evaluation. At meetings held on October 14,
1999, the board of directors received a complete briefing from counsel and from
Hatcher/Johnson Valuation with respect to factors affecting the valuation of
Intervest Bancshares Corporation and Intervest Corporation of New York and
valuation and merger structuring issues. Following that briefing, the board of
directors approved the merger transaction, upon the terms and conditions set
forth in the Agreement and Plan of Reorganization attached as Annex A, subject
to its receipt of a fairness opinion, as well as the remaining conditions set
forth in the Agreement and Plan of Reorganization.
Reasons for the Merger
In determining whether to adopt the Merger and the Merger Agreement,
the Board of Directors consulted with the Company's management, as well as its
legal counsel, Hatcher/Johnson Valuation, its auditors and other advisors, and
considered a number of factors, including the following principal factors:
(i) the oral presentation of Hatcher/Johnson Valuation and the written
opinion of Hatcher/Johnson Valuation with respect to its determination as to the
fairness of the Merger from a financial point of view to the Company's
shareholders, and the analyses, methodologies and conclusions underlying such
determination (see "The Merger -- Opinion of Financial Advisor");
(ii) the benefits to the Company through the availability of enhanced
mortgage banking capabilities;
(iii) the ability to expand through a subsidiary of the Company a
complementary line of business;
(iv) conditions in the industry in which the Company competes,
including increased competition and consolidation in that industry;
(v) the prices and multiples of value to sales and value to earnings in
recent acquisitions of companies deemed to be similar in certain respects to the
Company (see "The Merger - Opinion of Financial Advisor");
(vi) the likelihood that the Merger could be consummated, noting the
timing of and conditions to the Merger.
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<PAGE>
The Company believes that the merger will create opportunities for
additional business and revenue enhancements through the integration of the two
companies. The Company also believes that the merger will strengthen its
competitive and capital position in the financial services industry, which is
highly competitive and rapidly changing.
The Board also evaluated the anticipated financial impact of the
transaction on the combined companies' future financial performance. For
example, the pro forma combined statement of earnings, included elsewhere in
this proxy statement, show basic and diluted earnings per share for the combined
companies of $.34 and $.31, respectively, for the nine months ended September
30, 1999, as compared with basic and diluted earnings per share of $.29 and $.24
for the Company for the same period.
Among other things, the Board determined that the issuance of 1,250,000
of its shares of Class A Common Stock, which will represent approximately 30% of
the issued and outstanding shares and approximately $7.8 million in value, based
on the closing sale price on January 31, 2000, reflects a fair consideration.
The Board also carefully considered the opinion and valuation analyses of its
financial advisor, which are discussed in detail later in this proxy statement.
Those analyses produced a range of value for the merger transaction of $11.1 to
$13.0 million for Intervest Corporation of New York.
The Board of Directors determined that the terms of the merger and the
issuance of shares of the Company's common stock in connection with the merger
are advisable and fair to, and in the best interests of, the Company and its
shareholders. The Board concluded that the exchange ratio was fair to the
shareholders of the Company.
The foregoing discussion of the information and factors considered by
the Board of Directors of the Company is not meant to be exhaustive but is
believed to include all material factors considered by the Board of Directors of
the Company. The Board of Directors did not quantify or attach any particular
weight to the various factors that it considered in reaching its determination
that the Merger Agreement is advisable, and in the best interest of, the
shareholders of the Company. Rather, the Board of Directors made its
determination based on the total mix of information available to it, and the
judgments of individual directors may have been influenced to a greater or
lesser degree by different factors. In considering the recommendation of the
Board of Directors of the Company with respect to the Merger, shareholders of
the Company should be aware that the interests of certain directors and
executive officers with respect to the Merger are or may be different from or in
addition to the interest of the shareholders of the Company generally. The Board
of Directors was aware of these interests, and took those interests into
account. See "The Merger - Interests of Certain Persons in the Merger."
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS ADOPTION OF THE MERGER AGREEMENT
BY THE SHAREHOLDERS OF THE COMPANY.
Opinion of Financial Advisor
The Company retained Hatcher/Johnson Valuation, Inc. ("HJV") to deliver
an opinion as to the fairness of the Merger Consideration from a financial point
of view to the Company's shareholders. At the October 14, 1999 Board of
Directors meeting of the Company at which the Board of Directors reviewed and
considered the terms of the Merger, HJV made a presentation discussing the
factors that it considered in evaluating the proposed terms of the transaction
and delivered its oral opinion that the Merger Consideration was fair to the
Intervest Bancshares Corporation stockholders from a financial point of view.
The presentation included a discussion of the basis for, and the methodologies
used by HJV to reach its oral Opinion. HJV subsequently delivered to the
Company's Board of Directors its written opinion (the "Opinion"), dated November
1, 1999, confirming its oral opinion that, as of that date and based upon and
subject to the various considerations described therein, the Merger
Consideration of 1,250,000 shares of the Class A Common Stock (Merger Shares) of
Intervest Bancshares Corporation, to be paid by Intervest Bancshares Corporation
pursuant to the Merger Agreement, was fair to the Intervest Bancshares
Corporation shareholders from a financial point of view.
You should consider the following when reading the discussion of the opinions of
the Company's financial advisors in this document:
o Shareholders should carefully read the entire opinion of HJV
attached as Annex B and pay particular attention to the
sections describing HJV's review process, including procedures
followed, assumptions made, matters considered and various
qualifications and limitations both to HJV's review and to the
opinion itself.
o The following descriptions of the financial advisors' opinions
are qualified by reference to the full opinions attached to
this Joint Proxy Statement- Prospectus.
o The financial advisors' advisory services and opinions were
provided to the Company's Board for its information in its
consideration of the merger and were directed only to the
fairness of the exchange ratio from a financial point of view
to holders of Intervest Bancshares Corporation common stock.
o The financial advisors' opinions do not address the merits of
the Company's underlying business decision to engage in the
merger.
o The financial advisors' opinions were necessarily based upon
conditions as they existed and could be evaluated on the date
of this Joint Proxy Statement- Prospectus, and the financial
advisors assumed no responsibility to update or revise their
opinions based upon circumstances or events occurring after
that date.
o The Opinion does not constitute a recommendation to the
Company's Board in connection with the merger, and does not
constitute a recommendation to any
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<PAGE>
holder of Intervest Bancshares Corporation common stock as to
how to vote on the merger or any related matter.
o As set forth in its Opinion, HJV assumed and relied upon,
without independent verification, the accuracy and
completeness of the information reviewed by it for the
purposes of its Opinion.
o HJV expressed no opinion as to how the prices of any security
of the Company might develop in future trading.
Although HJV evaluated the fairness, from a financial point of view, of the
exchange ratio to the holders of Intervest Bancshares Corporation common stock,
HJV was not involved in the negotiation of the Merger Agreement or the
determination of the amount of the Merger Consideration. Intervest Bancshares
Corporation did not provide specific instructions to, or place any limitations
on, its financial advisor with respect to the procedures to be followed or
factors to be considered by the advisor in performing its analyses or providing
its opinion.
HJV is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, tax planning and reporting, corporate
purposes and other purposes. Additionally, HJV has recent valuation experience
in the banking industry. However, HJV is not an expert in the evaluation of loan
and lease portfolios for the purposes of assessing the adequacy of the
allowances for losses with respect to those portfolios and assumed that those
allowances for each of Intervest Bancshares Corporation and Intervest
Corporation of New York are, in the aggregate, adequate to cover all those
losses. HJV did not make or obtain an independent evaluation or appraisal of the
assets or liabilities of either Intervest Corporation of New York or Intervest
Bancshares Corporation. HJV was not authorized to, and did not, solicit from
other parties indications of interest with respect to combining with or
acquiring Intervest Corporation of New York or any of its assets. HJV neither
compiled nor audited the financial statements of Intervest Corporation of New
York or Intervest Bancshares Corporation, nor did HJV independently verify the
information reviewed. HJV does not have and has not previously had any
relationship with Intervest Bancshares Corporation or Intervest Corporation of
New York.
In arriving at its opinion, HJV procedures included, but were not
limited to, the following:
1. A review of the Agreement and Plan of Merger and the a draft
of the Company's Proxy Statement;
2. Review and analysis of audited and unaudited financial
information of the Company and its subsidiaries and other
corporate information;
3. Review of recent 10-K and 10-Q filings and peer review reports
for the Company;
4. On-site interviews and various follow-up discussions with the
management of the Company and Intervest Corporation of New
York;
5. Review and analysis of audited and unaudited financial
information of Intervest Corporation of New York and other
corporate information; 6. Review of recent 10-K and 10-Q
filings of Intervest Corporation of New York;
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<PAGE>
7. A review of the prospectus used by Intervest Corporation of
New York in connection with the offer and sale of its
Convertible Subordinated Debentures;
8. A review of the economic, competitive and demographic
conditions as well as business risks and opportunities within
the respective markets of the Company and the Bank;
9. A review and analysis of the public trading activity of the
Company's shares, as well as the potential impact of the
Merger on trading volumes and price movements;
10. A review and analysis of actual transactions involving the
sale of Southeast and Florida banks similar in size and
capitalization to the Company;
11. A review and analysis of publicly trading prices of Southeast
and Florida banks similar in size and capitalization to the
Bank;
12. A search for and analysis of transactions involving financial
companies with characteristics similar to Intervest
Corporation of New York;
13. An analysis of the relative values of the two companies as if
they were to remain independent;
14. A review of the financial and tax consequences of the Merger
on both Company and Intervest Corporation of New York
shareholders.
Factors HJV considered in rendering its opinion included: (i) the terms
of the Merger Agreement; (ii) a review of the Company's historical financial
performance and projected financial performance; (iii) a review of Intervest
Corporation of New York's historical financial performance and projected
financial performance; (iv) a comparison of the pricing of the Merger relative
to other recent bank change of control transactions; (v) a comparison of the
pricing of the Merger relative to comparable publicly traded banks and financial
institutions; and (vi) an analysis of the potential value to be realized for
Intervest Corporation of New York shareholders were Intervest Corporation of New
York to remain independent for the foreseeable future.
The following is a summary of the material financial analyses used by HJV in
connection with providing its opinion to the Company's Board on October 14, 1999
and does not purport to be a complete description of the analyses performed by
HJV. The following quantitative information, to the extent it is based on market
data, is based on market data as it existed at or about October 12, 1999 and is
not necessarily indicative of current market conditions. You should understand
that the order of analyses (and results of those analyses) described does not
represent relative importance or weight given to those analyses by HJV. The
summary of financial analyses includes information presented in tabular format.
THE TABLES SHOULD BE READ TOGETHER WITH THE TEXT.
Guideline Public Company Comparison - Intervest Bancshares Corporation
HJV recognized that the shares of Intervest Bancshares Corporation are
thinly traded and might trade at different values were the shares trading in
higher volumes. As a result, HJV sought to determine an independent range of
value for Intervest Bancshares Corporation by comparing it to guideline publicly
trading Southeast banks. After searching publicly available databases, HJV
identified nearly 140 guideline publicly traded banks with
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<PAGE>
performance characteristics similar to Intervest Bancshares Corporation. HJV
reviewed commonly accepted valuation ratios of these guideline banks and
ultimately relied on multiples to book value and earnings in their analysis.
Using these guideline banks, HJV determined an independent range of value for
Intervest Bancshares Corporation of $8.11 to $13.33 per share or $10,137,500 to
$16,662,500 for the Merger Shares. The table below summarizes results from this
analysis.
Southeastern Small Publicly Traded Banks & Bank Holding Companies (1)
<TABLE>
<CAPTION>
All Transactions (2) Selected Transactions (3)
-------------------- -------------------------
Range Average Average Median
----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Price to Book Value of Equity (%) 73 - 545 158 164 192
Price to Earnings (x) 10.0 - 214.1 24.4 16.7 21.7
</TABLE>
(1) Publicly trading minority value basis.
(2) With total assets greater than $50 million but less than $500 million.
140 small publicly traded banks considered
(3) Selection criteria:
Total assets greater than $50 million but less than $500 million
Capitalization greater than 7% but less than 10% Equity ratios greater
than 100% but less than 300% Earnings ratios greater than 10 times but
less than 35 times
Guideline Transaction Comparison - Intervest Bancshares Corporation
HJV also sought to determine an independent range of value for Intervest
Bancshares Corporation by comparing it to guideline transactions of Southeast
banks and bank holding companies. After searching publicly available databases,
HJV identified 53 guideline banks involved in arm's-length transactions similar
in size and capitalization to Intervest Bancshares Corporation. HJV reviewed
commonly accepted valuation ratios of these guideline transactions and
ultimately relied on multiples to book value and earnings in their analysis.
Using these guideline transactions, HJV determined an independent range of value
for Intervest Bancshares Corporation of $9.72 to $14.38 per share or $12,150,000
to $17,975,000 for the Merger Shares. Note that the per share prices for the
transactions were converted to "as if publicly traded" minority prices per
share. Also, since trading volume is very small and the market impact of sales
of large blocks of shares is unknown, HJV determined the above prices without
dilution. The table below summarizes results from this analysis.
20
<PAGE>
<TABLE>
<CAPTION>
Southeastern Bank & Bank Holding Company Sales Transactions (1)
All Transactions (2) Selected Transactions (3)
-------------------- -------------------------
Range Average Average Median
----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Price to Book Value of Equity (%) 104 - 559 273 254 290
Price to Earnings (x) 12.6 - 59.7 25.4 26.7 24.8
</TABLE>
(1) On a control value basis.
(2) In market and partial market transactions within the Southeastern U.S.
53 selected transactions considered
(3) Selection criteria:
Total assets greater than $50 million but less than $500 million
Capitalization greater than 7% but less than 10% Equity ratios greater
than 200% but less than 300% Earnings ratios greater than 20 times but
less than 40 times
Trading Value - Intervest Bancshares Corporation
HJV analyzed the recent trading prices of Intervest Bancshares Corporation.
Based on a recent closing price of $715/16, the Merges Shares had a value of
$9,921,875. However, as indicated above, the Intervest Bancshares Corporation
stock is thinly traded and, as such, potentially may not be trading at the same
level as it would be with higher trading activity. This is supported by the
higher independent valuations above for Intervest Bancshares Corporation.
Income Approach - Intervest Corporation of New York
Since Intervest Corporation of New York is a closely held entity, HJV sought to
estimate the value using certain income approaches, specifically discounted
future earnings and capitalization of historical earnings. In the discounted
future earnings methodology, HJV assumed income earning assets would grow at an
average rate of 5.0%, the net interest spread on these assets would moderately
increase to 2.0% from an average of over 1.50%, and this net interest spread
would produce a pretax return on assets of slightly over 2.0%. Projected future
earnings over the next five years and an estimate of the value of Intervest
Corporation of New York at the end of this fifth year were discounted to present
value at a discount of 14.5%. In the capitalization of historical earnings
methodology, HJV estimated constant growth earnings at the weighted average of
the earnings over the past two annual periods and capitalized this "normalized"
level of earnings at a capitalization rate of 7.5%. The discount rate used in
the discounted future earnings methodology and the capitalization rate used in
the capitalization of historical earnings methodology were developed using two
independent cost of equity capital models and indicate the required return on an
investment in Intervest Corporation of New York. These analyses produced a range
of value of $12,204,000 to $12,893,000. These values are on a control basis,
since the shareholders of Intervest Corporation of New York are selling 100% of
the Company collectively.
21
<PAGE>
Market Approach - Intervest Corporation of New York
HJV sought to estimate the value of Intervest Corporation of New York by
comparing it to guideline publicly traded financial companies. HJV recognizes
that no publicly traded companies are directly comparable. Using publicly
available databases, HJV identified 17 publicly traded finance companies that
had somewhat similar economic characteristics to Intervest Corporation of New
York. The guideline companies included the following:
American Insured Mortgage Investors
American Residential Investment Trust
Annaly Mortgage Management
Apex Mortgage Capital
BRT Realty Trust
Capital Alliance Income Trust
Capstead Mortgage
Dynex Capital
Hanover Capital
Impac Commercial Holdings
Impac Mortgage Holdings
Imperial Credit Commercial Mortgage
LASER Mortgage
NovaStar Financial
Resource Asset Investment
Starwood Financial
Redwood Trust
For each of these guideline companies, HJV calculated the ratio of the market
value of the equity to reported book value and latest fiscal year pretax
earnings. The ratios of the market value of the equity to reported book value
for these guideline companies had a median of 0.59, ranged from 0.28 to 1.47 and
averaged 0.64. The ratios of the market value of the equity to latest fiscal
year pretax earnings had a median of 7.5, ranged from 2.8 to 24.5, and averaged
9.2. While some of these guideline companies were more comparable to Intervest
Corporation of New York than others, all the guideline companies were utilized
to indicate a value for Intervest Corporation of New York. HJV used both of
these valuation ratios to indicate a value of Intervest Corporation of New York.
This analysis produced a range of value of $11,073,000 to $12,953,000 and
supported the range of value estimated in the income approaches.
Contribution Analysis
HJV compared the reported equity values of the respective businesses.
At August 31, 1999, Intervest Bancshares Corporation reported a book value of
$8.13 per share or $10,162,500 for the Merger Shares. This value was compared to
the reported book value of $12,168,000 for Intervest Corporation of New York.
While the reported equity value of Intervest Corporation of New York is
reasonably close to the independent valuation conclusions, such is not the case
with Intervest Bancshares Corporation.
22
<PAGE>
Other factors HJV considered in rendering its opinion included: (i) the
limitation of Intervest Corporation of New York shareholders being able to
liquidate the shares of Intervest Bancshares Corporation Common Stock received
in the Merger via a sale in the public market after the Merger; (ii) the
enhancement in liquidity for Intervest Corporation of New York shareholders via
the exchange of their closely held stock for publicly traded stock; and (iii)
the thin market for Intervest Bancshares Corporation's Common Stock.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the summary set forth
above, without considering the analyses as a whole, could create an incomplete
view of the processes underlying HJV's opinion. In arriving at its fairness
determination, HJV considered the results of all those analyses and did not
attribute any particular weight to any factor or analysis considered by it;
rather, HJV made its determination as to fairness on the basis of its experience
and professional judgment after considering the results of all these analyses.
In addition, in performing its analyses, HJV made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters. No company or transaction used in the
above analyses as a comparison is directly comparable to Intervest Bancshares
Corporation or Intervest Corporation of New York or the merger. The analyses
were prepared for purposes of HJV providing its opinion to the Company's Board
as to the fairness of the exchange ratio from a financial point of view and do
not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by those analyses.
Because those analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors, HJV does not assume responsibility if future results are materially
different from those forecast.
Based upon all factors considered, HJV concluded that the Merger
Consideration of 1,250,000 of Class A Common Stock of Intervest Bancshares
Corporation, to be paid by Intervest Bancshares Corporation pursuant to the
Merger Agreement, is fair from a financial point of view to Intervest Bancshares
Corporation shareholders.
Compensation of HJV
In August 1999, Intervest Bancshares Corporation retained HJV to act as its
financial advisor in connection with the proposed transaction. Intervest
Bancshares Corporation paid HJV $20,000 for its services pursuant to the terms
of the engagement letter. Intervest Bancshares Corporation also agreed to
reimburse HJV for its reasonable out-of-pocket expenses.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors with
respect to the Merger, shareholders of the Company should be aware that certain
members of the Board of
23
<PAGE>
Directors and management have certain interests in the Merger which may present
them with potential conflicts of interest in connection with the Merger.
Specifically, Jerome Dansker, Lowell S. Dansker, Lawrence G. Bergman
and members of their families own all of the issued and outstanding shares of
capital stock of Intervest Corporation of New York. As a result, all of the 1,
250,000 shares of Class A Common Stock of Intervest Bancshares Corporation to be
issued in the Merger will be issued to them in exchange for their shares of
capital stock of Intervest Corporation of New York.
Operation and Management of the Company After the Merger
The persons presently serving as the directors and officers of
Intervest Corporation of New York will continue to serve as directors and
officers after the Merger. Intervest Corporation of New York will, however, be a
wholly-owned subsidiary of Intervest Bancshares Corporation.
Effective Date of the Merger
Pursuant to the Merger Agreement, ICNY Acquisition Corporation will be
merged with and into Intervest Corporation of New York at the Effective Time,
and Intervest Corporation of New York will thereupon be the Surviving
Corporation. The Merger will become effective upon the filing of a Certificate
of Merger with the Secretary of State of the State of New York, and the date
upon which such effectiveness occurs is referred to as the "Effective Date." It
is anticipated that such filing will be made promptly following receipt of the
requisite approval of shareholders of Intervest Bancshares Corporation and
satisfaction or waiver of all other conditions to the Merger. Each of the
parties to the Merger Agreement will have certain rights to terminate the Merger
Agreement in the event that the Merger is not consummated on or before June 30,
2000. See "Termination of the Merger Agreement; Amendments." Although it is
anticipated that the Certificate of Merger will be filed and the Effective Date
will occur on or before June 30, 2000, there can be no assurance that there will
be no further delay between the date of the Special Meeting and the Effective
Date, that the conditions to the Merger will be satisfied or waived or that the
Merger will occur. See "Conditions to the Merger."
Effect of the Merger
Intervest Corporation of New York will be the Surviving Corporation
upon the effectiveness of the Merger and will succeed to all of the debts and
liabilities and all of the rights and property of the Company. The Surviving
Corporation will become a wholly-owned subsidiary of the Company. Intervest
Corporation of New York's results of operations will be included in the
consolidated results of operations reflected in the Company's periodic reports.
Intervest Acquisition Inc. will cease to exist following the Effective Date.
Representations and Warranties
Each of Intervest Bancshares Corporation, ICNY Acquisition Corporation
and Intervest Corporation of New York has made certain customary representations
and
24
<PAGE>
warranties in the Merger Agreement, including those which relate to, among other
things (i) organization and existence of each party and its subsidiaries, (ii)
the authorization, execution, delivery and performance of the Merger Agreement
and other matters relating to its enforceability, (iii) the absence of broker
fees, and (iv) the absence of any undisclosed consents, approvals or
authorizations required for the execution, delivery or performance of the Merger
Agreement and the consummation of the transactions contemplated thereby.
Intervest Corporation of New York also has made certain customary
representations and warranties relating to, among other things (i) the absence
of material adverse changes and undisclosed liabilities, (ii) its capital
structure, (iii) its filing of all reports and documents required to be filed
with the Securities and Exchange Commission and the accuracy of filings made
pursuant thereto, (iv) the accuracy and preparation of certain financial
statements (v) the adoption of the Merger Agreement by its Board of Directors
and shareholders, (vii) the granting of approvals and the taking of steps to
exempt the Merger from the provisions of state anti-takeover laws, and (viii)
other matters relating to the conduct of its business including, among other
things, its employees, benefit plans, litigation, real estate, permits,
compliance with laws, including environmental laws, title to and condition of
properties, payment of taxes, Year 2000 compliance, absence of defaults,
government and other contracts, intellectual property rights, and the absence of
any undisclosed material adverse change in the financial condition, results of
operation, business or assets.
Conditions to the Merger
Consummation of the Merger by Intervest Bancshares Corporation is
subject to the satisfaction of certain conditions set forth in the Merger
Agreement, including, but not limited to (i) the making of all filings and the
receipt of all consents, authorizations, orders and approvals required by
governmental or regulatory authorities, or any non-governmental third party,
(ii) the accuracy of the representations and warranties of Intervest Corporation
of New York as of the Effective Time, (iii) the absence of any judgment, decree,
injunction, ruling or order of any court, governmental department, commission,
agency or instrumentality outstanding against any party to the Agreement which
prohibits, restricts or delays consummation of the Merger or of any of the
conditions to the consummation of the Merger, (iv) receipt of all required
regulatory approvals, and (v) the adoption of the Merger Agreement by the
shareholders of Intervest Bancshares Corporation, (vi) the performance or
compliance in all material respects by Intervest Corporation of New York with
all covenants and agreements pursuant to the Agreement.
The obligation of Intervest Corporation of New York to consummate the
Merger is subject to the satisfaction of conditions corresponding to those
described for the Company in the preceding paragraph.
The Merger Agreement provides that any party may waive any condition to
its obligation to consummate the Merger.
25
<PAGE>
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, Intervest Corporation of New York is
required to conduct its business in the usual, regular and ordinary course of
business consistent with past practice and use its best efforts to preserve its
business. Intervest Corporation of New York is further required to refrain from
taking certain actions without the written consent of Intervest Bancshares
Corporation (unless such actions are provided for in the Merger Agreement),
including, but not limited to (i) declaring or paying any dividend on its
capital stock, (ii) splitting, combining or reclassifying any of its capital
stock or issuing or authorizing the issuance of any securities with respect to
its capital stock, (iii) purchasing, redeeming or otherwise acquiring shares of
capital stock, (iv) issuing, delivering, selling, pledging or otherwise
encumbering any shares of capital stock, (v) amending its charter or bylaws,
(vi) acquiring or agreeing to acquire any other person or the assets or business
operations of any person, (vii) selling, licensing, mortgaging or otherwise
encumbering or disposing of any of its property or assets, except in the
ordinary course of business consistent with past practice, (xi) waiving,
releasing granting or transferring any rights of material value or modify or
change in any material respect any existing contract other than in the ordinary
course of business, (xii) adopting any resolution or plan providing for or
authorizing a complete or partial liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization, (xiii)
entering into any new contract except in the ordinary course of business
consistent with past practice or modifying or terminating any existing contract
if it would have a material adverse effect on the Company or enter into any
license, franchise or similar agreements, (xiv) engaging in any unusual or novel
method of transacting business or change any accounting principals, (xv)
settling or compromising any litigation, except where the amount paid in
settlement or compromise is not material, or (xvi) taking or omitting to take
any action that would cause any of the representations or warranties of the
Company contained in the Merger Agreement not to be true and correct, in all
material respects.
No Solicitation by the Company
The Merger Agreement also provides that Intervest Corporation of New
York will not initiate, solicit, cooperate or encourage, or take any other
action to facilitate any inquiries or the making of any proposal or public
announcement, or enter into any agreement with a third party relating to any
possible acquisition of Intervest Corporation of New York.
Termination of the Merger Agreement; Amendments
The Merger Agreement may be modified or amended by an agreement signed
by the parties. However, no amendment may be made after adoption by Intervest
Bancshares' shareholders that, by law, would require shareholder approval. It is
the intention of management of Intervest Bancshares to submit any amendment that
might have a material adverse effect on the rights of shareholders to the
shareholders for approval. The Merger Agreement expressly permits the waiver or
extension of any term, provision or condition in writing by the party entitled
to the benefits thereof.
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<PAGE>
The Merger Agreement provides that it may be terminated at any time,
whether before or after approval by Intervest Bancshare's shareholders: (i) by
mutual consent of the Intervest Bancshares Corporation and Intervest Corporation
of New York; (ii) by either Intervest Bancshares Corporation or Intervest
Corporation of New York if any governmental action shall have been taken to
enjoin or prohibit the Merger or any other legal restraint or prohibition
against the Merger is in effect; (iii) by Intervest Bancshares Corporation if
Intervest Corporation of New York executes a binding agreement with a third
party regarding an Alternative Transaction, (iv) by Intervest Corporation of New
York in the event of an uncured material breach of the Merger Agreement on the
part of Intervest Bancshares (v) by Intervest Bancshares in the event of an
uncured material breach by Intervest Corporation of New York, (vi) by Intervest
Corporation of New York if there is a material adverse change with respect to
Intervest Bancshares Corporation, (vii) by Intervest Bancshares if Intervest
Corporation of New York's Board of Directors fails to recommend or withdraws,
modifies or changes its recommendation to adopt the Merger Agreement or takes
any position inconsistent with such recommendation, (viii) by either Intervest
Corporation of New York or Intervest Bancshares Corporation if the shareholders
of Intervest Bancshares Corporation do not adopt the Merger at the Shareholder's
Meeting, (ix) by either party if the Merger shall not have been consummated on
or before June 30, 2000.
Certain Regulatory Matters
The Merger requires the prior approval of the Federal Reserve Bank of
Atlanta under the Bank Holding Company Act. Specifically, Intervest Bancshares
Corporation must obtain prior approval to engage in the nonbanking activities
presently conducted by Intervest Corporation of New York.
The parties do not believe that any additional governmental filings in
the United States, other than the certificate of merger to be filed with the New
York Secretary of State, and other than filings in connection with the
dissolution of ICNY Acquisition Corporation are required with respect to the
Merger. Consummation of the Merger is conditioned upon, among other things, the
absence of any preliminary or permanent injunction or other order issued by any
court or other judicial or administrative body of competent jurisdiction which
prohibits or prevents consummation of the Merger.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Intervest Bancshares Corporation Class A Common Stock is publicly
traded on the Nasdaq Small Cap Market under the symbol "IBCA." At September 30,
1999, there were approximately 800 record holders of Class A Common Stock. The
following table sets forth, for the calendar periods indicated, the high and low
sale prices per share for the Common Stock, as reported by Nasdaq. Trading of
the Company's Class A Common Stock on the SmallCap Market commenced on November
25, 1997.
Calendar Year Quarter High Low
------------- ------- ---- ---
1997 November 25, 1997 to $12.25 $11.50
December 31, 1997
27
<PAGE>
1998 First 15.25 11.00
Second 16.00 11.25
Third 13.00 8.25
Fourth 10.00 8.00
1999 First 11.00 7.625
Second 19.00 7.813
Third 9.75 7.438
There is no market for the Company's Class B Common Stock. On October
29, 1999, the date preceding the public announcement of the execution of the
Merger Agreement, the closing sale price for the Class A Common Stock as
reported by Nasdaq was $9.00. The high and low sale price for the Class A Common
Stock as reported by Nasdaq on January 31, 2000, the last full trading day prior
to the printing of this Proxy Statement, was $6.25 per share. Shareholders are
urged to obtain current market quotations for the Class A Common Stock.
The Company has never paid any cash dividends and does not intend to do
so in the near future.
NO DISSENTERS RIGHTS
Holders of Intervest Bancshares Stock Corporation do not have a right
to dissent under applicable law in connection with the Merger. Section 262(b)(1)
of the Delaware General Corporation Law provides, in relevant part, that the
right to dissent and receive payment of the fair value of shares shall not be
available to a shareholder for shares which, at the record date fixed for the
special meeting, were designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., such as Intervest Bancshares Corporation's shares of Class A Common Stock.
28
<PAGE>
UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statement of
financial condition as of September 30, 1999, combines the historical
consolidated statements of financial condition of Intervest Bancshares
Corporation and its Subsidiaries ("IBC") and Intervest Corporation of New York
("ICNY") as if the two companies had merged as of September 30, 1999 using the
"pooling-of-interests" method of accounting, and after giving effect to the
related pro forma adjustments described in the accompanying explanatory notes.
In the merger, ICNY shareholders will receive an aggregate of
1,250,000 shares of IBC's Class A common stock in exchange for all of ICNY's
capital stock. ICNY is a closely held corporation with approximately 48 shares
of capital stock outstanding.
The following condensed combined statements of earnings for the nine
months ended September 30, 1999 and for the year ended December 31, 1998,
combine the historical consolidated statements of earnings of IBC and ICNY as if
the two companies had merged on January 1, 1998 using the "pooling-of-interests"
method of accounting and after giving effect to the related pro forma
adjustments described in the accompanying explanatory notes.
Both IBC's and ICNY's fiscal years end on December 31.
Under the "pooling-of-interests" method of accounting, the recorded
assets, liabilities, shareholders' equity, income and expenses of IBC and ICNY
are combined and recorded at their historical cost amounts, except as described
below and in the explanatory footnotes. The accounting policies of IBC and ICNY
are substantially comparable.
The unaudited pro forma condensed combined consolidated financial
statements included herein are presented for informational purposes only. This
information includes various estimates and may not necessarily be indicative of
the financial position or results of operations that would have occurred if the
merger had been consummated on the date or at the beginning of the periods
indicated or which may be obtained in the future.
The unaudited pro forma condensed combined consolidated financial
statements and the accompanying explanatory notes should be read in conjunction
with and are qualified in their entirety by reference to the historical
financial statements and related notes thereto of IBC and ICNY referenced in
this Proxy Statement.
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
and Intervest Corporation of New York
Unaudited Pro Forma Condensed Combined Statement of Financial Condition
As of September 30, 1999
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
($ in thousands) IBC ICNY Adjustments Combined
- - --------------------------------------------------- ------------- ----------- -------------- ----- ------------
ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,210 $ 273 $ (100)(a) $ 3,383
Federal funds sold 15,343 -- -- 15,343
Short-term investments 288 41,357 (5,806)(b) 35,839
-------- -------- -------- ------------
Total cash and cash equivalents 18,841 41,630 (5,906) 54,565
Interest-bearing deposits with banks 100 -- -- 100
Securities held to maturity, net 80,168 -- -- 80,168
Restricted security, Federal Reserve Bank stock, at 508 -- -- 508
cost
Loans receivable, net of allowance for loan losses 121,067 52,353 (275)(c) 173,145
Accrued interest receivable 1,801 865 -- 2,666
Premises and equipment, net 5,698 59 -- 5,757
Deferred income tax asset 721 27 -- 748
Other assets 1,252 3,613 46 (d) 4,911
- - --------------------------------------------------- -------- -------- -------- ------------
Total assets $230,156 $ 98,547 $ (6,135) $322,568
- - --------------------------------------------------- -------- -------- -------- ------------
LIABILITIES
Deposits:
Demand deposits $ 3,464 $ -- $ -- $ 3,464
NOW deposits 7,943 -- -- 7,943
Savings deposits 21,951 -- -- 21,951
Money-market deposits 59,227 -- (5,806)(b) 53,421
Time deposits 104,766 -- -- 104,766
-------- -------- -------- ------------
Total deposits 197,351 -- (5,806) 191,545
Convertible subordinated debentures payable 6,930 -- -- 6,930
Subordinated debentures payable -- 77,400 -- 77,400
Accrued interest on debentures payable 738 6,601 -- 7,339
Mortgage escrow funds 2,491 1,978 -- 4,469
Official checks outstanding 1,108 -- -- 1,108
Other liabilities 1,111 389 (275)(c) 1,225
- - --------------------------------------------------- -------- -------- -------- ------------
Total liabilities 209,729 86,368 (6,081) 290,016
- - --------------------------------------------------- -------- -------- -------- ------------
Minority interest 18 -- -- 18
STOCKHOLDERS' EQUITY
Class A common stock 2,194 2,000 (2,000)(e)
1,250 (e) 3,444
Class B common stock 305 100 (100)(e) 305
Additional paid-in-capital 13,909 3,509 (3,509)(e)
4,359 (e) 18,268
Retained earnings 4,001 6,570 (54)(f) 10,517
- - --------------------------------------------------- -------- -------- -------- ------------
Total stockholders' equity 20,409 12,179 (54) 32,534
- - --------------------------------------------------- -------- -------- -------- ------------
Total liabilities and stockholders' equity $230,156 $ 98,547 $ (6,135) $322,568
- - --------------------------------------------------- -------- -------- -------- ------------
</TABLE>
See accompanying explanatory notes to the condensed consolidated
financial statements.
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
and Intervest Corporation of New York
Unaudited Pro Forma Condensed Combined Statement of Earnings
For The Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
($ in thousands, except per share data) IBC ICNY Adjustments Combined
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 6,580 $7,192 $ - $13,772
Securities 3,674 887 - 4,561
Other interest-earning assets 350 134 (50) (g) 434
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Total interest and dividend income 10,604 8,213 (50) 18,767
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
INTEREST EXPENSE
Deposits 6,181 - (50) (g) 6,131
Convertible debentures 473 6,799 - 7,272
Federal funds purchased 9 - - 9
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Total interest expense 6,663 6,799 (50) 13,412
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Net interest and dividend income 3,941 1,414 - 5,355
Provision for loan loss reserves 605 - - 605
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Net interest and dividend income
after provision for loan loss reserves 3,336 1,414 - 4,750
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
NONINTEREST INCOME
Customer service fees 100 - - 100
Income from mortgage activities 250 516 - 766
All other 1 21 - 22
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Total noninterest income 351 537 - 888
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits 1,114 447 - 1,561
Occupancy and equipment, net 552 136 - 688
Advertising and promotion 17 94 - 111
Professional fees and services 163 20 100 (a) 283
Stationery, printing and supplies 107 12 - 119
All other 332 115 - 447
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Total noninterest expenses 2,285 824 100 3,209
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Earnings before income taxes & change in accounting principle 1,402 1,127 - 2,429
Provision for income taxes (544) (516) 46 (d) (1,014)
Cumulative effect of change in accounting principle (128) - - (128)
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Net earnings $ 730 $ 611 $(54) $1,287
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Basic earnings per share:
Earnings before change in accounting principle $ 0.34 NM NM $0.38
Cumulative effect of change in accounting principle (0.05) NM NM (0.04)
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Net earnings per share $ 0.29 NM NM $0.34
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Diluted earnings per share:
Earnings before change in accounting principle $ 0.29 NM NM $0.34
Cumulative effect of change in accounting principle (0.04) NM NM (0.03)
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
Net earnings per share $ 0.25 NM NM $0.31
- - ----------------------------------------------------------------- ----------- ----------- --------------- -------------
NM -computation is not meaningful and not presented.
See accompanying explanatory notes to the condensed consolidated financial
statements.
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
and Intervest Corporation of New York
Unaudited Pro Forma Condensed Combined Statement of Earnings
For The Year Ended December 31, 1998
Historical Historical Pro Forma Pro Forma
($ in thousands, except per share data) IBC ICNY Adjustments Combined
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 8,278 $11,106 $ - $19,384
Securities 4,224 592 - 4,816
Other interest-earning assets 432 45 (29) (g) 448
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Total interest and dividend income 12,934 11,743 (29) 24,648
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
INTEREST EXPENSE
Deposits 7,977 - (29) (g) 7,948
Convertible debentures 319 9,401 - 9,720
Federal funds purchased 1 - - 1
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Total interest expense 8,297 9,401 (29) 17,669
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Net interest and dividend income 4,637 2,342 6,979
Provision for loan loss reserves 479 - 479
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Net interest and dividend income
after provision for loan loss reserves 4,158 2,342 - 6,500
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
NONINTEREST INCOME
Customer service fees 139 - - 139
Income from mortgage activities 195 317 - 512
All other 15 33 - 48
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Total noninterest income 349 350 - 699
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
NONINTEREST EXPENSES
Salaries and employee benefits 1,056 293 - 1,349
Occupancy and equipment, net 467 107 - 574
Advertising and promotion 31 118 - 149
Professional fees and services 225 331 - 556
Stationery, printing and supplies 98 5 - 103
All other 256 90 - 346
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Total noninterest expenses 2,133 944 - 3,077
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Earnings before income taxes 2,374 1,748 - 4,122
Provision for income taxes (939) (801) - (1,740)
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Net earnings $ 1,435 $ 947 - $2,382
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
Basic earnings per share: $ 0.58 NM - $ 0.64
Diluted earnings per share: $ 0.46 NM - $ 0.54
- - -------------------------------------------------------------- ------------- -------------- --------------- -------------
NM -computation is not meaningful and not presented.
See accompanying explanatory notes to the condensed consolidated financial
statements.
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
and Intervest Corporation of New York
Explanatory Notes to Unaudited Pro Forma Condensed Combined Financial Statements
A) Represents estimated transaction costs of the merger. The charges
consist primarily of consulting fees and other professional fees
associated with consummating the merger.
B) Represents the elimination of intercompany cash balances maintained in
deposit accounts at IBC's subsidiaries.
C) Represents the reclassification of certain unearned income related to
loans from all other liabilities in order to conform to IBC's
accounting policies and procedures.
D) Represents the expected tax benefit associated with the pro forma
adjustments.
E) Represents the elimination of ICNY's stockholders' equity and the
issuance of 1,250,000 shares of IBC Class A common stock with a par
value of $1.00.
F) Represents the after-tax effect of all pro forma adjustments.
G) Represents the elimination of intercompany interest income and expense
on deposit accounts.
H) The weighted-average number of common shares used for basic and diluted
earnings per share computations are summarized in the table that
follows:
For the Nine Months Ended September 30, 1999 Historical Shares Pro Forma
IBC Issued Combined
------------------------------------------------------------------------ ------------ ----------- ------------
<S> <C> <C> <C>
Basic earnings per share:
------------------------------------------------------------------------ ------------ ----------- ------------
Average number of common shares outstanding 2,494,410 1,250,000 3,744,410
------------------------------------------------------------------------ ------------ ----------- ------------
Diluted earnings per share:
------------------------------------------------------------------------ ------------ ----------- ------------
Average number of common shares outstanding 2,494,410 1,250,000 3,744,410
Average number of potentially dilutive shares outstanding 455,035 - 455,035
------------------------------------------------------------------------ ------------ ----------- ------------
Total average number of common shares outstanding used for dilution 2,949,445 1,250,000 4,199,445
------------------------------------------------------------------------ ------------ ----------- ------------
For the Year Ended December 31, 1998 Historical Shares Pro Forma
IBC Issued Combined
------------------------------------------------------------------------ ------------ ----------- ------------
Basic earnings per share:
------------------------------------------------------------------------ ------------ ----------- ------------
Average number of common shares outstanding 2,457,113 1,250,000 3,707,113
------------------------------------------------------------------------ ------------ ----------- ------------
Diluted earnings per share:
------------------------------------------------------------------------ ------------ ----------- ------------
Average number of common shares outstanding 2,457,113 1,250,000 2,457,113
Average number of potentially dilutive shares outstanding 1,106,403 - 1,106,403
------------------------------------------------------------------------ ------------ ----------- ------------
Total average number of outstanding used for dilution computation 3,473,516 1,250,000 4,723,516
(1)
------------------------------------------------------------------------ ------------ ----------- ------------
(1) Adjusted earnings for the 1998 fully diluted earnings per share
computations amounted to $1,607,000 for Historical IBC and
$2,554,000 for Pro Forma Combined.
</TABLE>
<PAGE>
EXPERTS
The Consolidated Financial Statements of Intervest Bancshares
Corporation as of December 31, 1998 and 1997, and for each of the years in the
three year period ended December 31, 1998, are included in the Report on Form
10-K for the year ended December 31, 1998, which is included as Annex C to this
Proxy Statement. The Intervest Bancshares Corporation Financial Statements have
been so included in reliance upon the report of Hacker, Johnson, Cohen & Grieb
P.A., independent accountants, included therein given upon the authority of said
firm as experts in accounting and auditing.
The Consolidated Financial Statements of Intervest Corporation of New
York as of December 31, 1998 and 1997, and for each of the years in the three
year period ended December 31, 1998, are included in the Report on Form 10-K for
the year ended December 31, 1998, which is included as Annex E to this Proxy
Statement. The Intervest Corporation of New York Financial Statements have been
so included in reliance upon the report of Richard A. Eisner & Co., LLP,
independent accountants, included therein given upon the authority of said firm
as experts in accounting and auditing.
PROPOSED INCREASE IN AUTHORIZED SHARES
The board of directors has proposed that the Certificate of
Incorporation of Intervest Bancshares Corporation be amended to increase the
number of shares of Class A Common Stock that the corporation is authorized to
issue from 7,500,000 shares to 9,500,000 shares. At October 31, 1999, 2,271,879
shares of Class A Common Stock were issued and outstanding. In addition, an
aggregate of approximately 3,516,000 shares of Class A Common Stock were
reserved for issuance upon conversion of issued and outstanding shares of Class
B Common Stock, the exercise of outstanding warrants for the purchase of Class A
Common Stock and the conversion of outstanding debentures which provide for
conversion into shares of Class A Common Stock. In addition, an aggregate of
1,250,000 shares of Class A Common Stock will issued if the merger is approved
by the shareholders. As a result, only a limited number of shares of Class A
Common Stock would remain available for general corporate purposes, including
capital transactions, employee incentives and acquisitions.
The amendment would increase the number of shares of Class A Common
Stock that the Company is authorized to issue from 7,500,000 shares to 9,500,000
shares in order to have additional authorized but unissued shares available for
issuance to meet business demands as they may arise. The Board of Directors
believes that such additional shares will provide Intervest Bancshares
Corporation with the flexibility to issue Class A Common Stock for possible
future acquisitions, dividends, splits, stock option plans, possible future
financings or other corporate purposes which may be identified in the future by
the Board of Directors, without the possible expense and delay of a special
shareholders meeting.
The authorized shares of Class A Common Stock in excess of those issued
will be available for issuance at such times and for such corporate purposes as
the Board of Directors may deem advisable, without further action by the
shareholders, except as may be required by applicable law, the rules of the
Nasdaq SmallCap Market, or by the rules of any stock exchange or national
securities association trading system on which the securities may
34
<PAGE>
then be listed or traded. Upon issuance, such shares will have the same rights
as the outstanding shares of Class A Common Stock. Holders of Class A Common
Stock have no preemptive rights.
The Company has no arrangements, agreements, understandings or plans at
the present time for the issuance or use of the additional shares of Class A
Common Stock proposed to be authorized. The issuance of additional shares of
Class A Common Stock may have a dilutive effect on earnings per share and for
persons who do not purchase additional shares to maintain their pro rata
interest in the Company, on such shareholder's percentage voting power.
Although the Company has no present intention to issue shares of Class
A Common Stock to make acquisitions of control of the Company more difficult and
is unaware of any pending proposals to acquire the Company, any future issuances
of Class A Common Stock could have that effect. For example, the acquisition of
shares of the Company's Class A Common Stock by an entity seeking to acquire
control of the Company might be discouraged through the public or private
issuance of the additional shares of Class A Common Stock, since such issuance
would dilute the stock ownership of the acquiring entity.
The proposal relating to the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Class A Common
Stock from 7,500,000 shares to 9,500,000 shares requires approval by a majority
of the shares of Class A and Class B Common Stock present or represented at the
meeting. The Board of Directors recommends a vote FOR this proposal.
STOCK BONUS
The board of directors of the company has approved the grant to the
Chairman of the Board of Directors of a stock bonus of 50,000 shares of Class B
Common Stock for his services with respect to the development, structuring and
other activities associated with the proposed Merger. The grant, which is
subject to approval of the shareholders, is subject to the following
restrictions: until October 14, 2004 or the death of the Chairman, if earlier:
(i) the shares will not be transferable, except for transfers to members of his
immediate family (in which case the shares would remain subject to these
restrictions until October 14, 2004); (ii) the shares will not be convertible
into shares of Class A Common Stock; and (iii) any dividends declared on the
shares of Class B Common Stock will be forfeited and retained by the company.
Approval of this proposal requires the affirmative vote of the holders
of a majority of shares of Class A and Class B Common Stock present or
represented at the meeting and the board of directors recommends a vote FOR this
proposal.
SHAREHOLDER PROPOSALS
Any proposals of shareholders to be presented at Intervest Bancshares
2000 Annual Meeting of Shareholders must have been received by the Company on or
before December 1, 1999 for inclusion in the Company's Proxy Statement related
to such meeting, subject to the rules and regulations of the Securities and
Exchange Commission. In addition, the Company
35
<PAGE>
may use its discretion in voting proxies with respect to shareholder proposals
not included in the Proxy Statement for the 2000 Annual Meeting of Shareholders,
unless the Company receives notice of such proposals prior to February 19, 2000.
OTHER MATTERS
Management knows of no other business to be transacted at the Special
Meeting, but, if any other matters do properly come before the Special Meeting,
the persons named as proxies or their substitute will vote or act with respect
to such other matters in accordance with the direction of a majority of the
Board of Directors.
By Order of the Board of Directors
Lawrence G. Bergman, Secretary
36
<PAGE>
ANNEX A - AGREEMENT AND PLAN OF MERGER
- - --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF NOVEMBER 1, 1999
AMONG
INTERVEST BANCSHARES CORPORATION
ICNY ACQUISITION CORPORATION
AND
INTERVEST CORPORATION OF NEW YORK
-------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE 1 1
THE MERGER 1
Section 1.1. The Merger 1
Section 1.2. Effective Time 1
Section 1.3. Closing of the Merger 2
Section 1.4. Effects of the Merger 2
Section 1.5. Certificate of Incorporation and Bylaws 2
Section 1.6. Directors 2
Section 1.7. Officers 2
Section 1.8. Merger Consideration; Conversion of Shares 2
Section 1.9. Exchange of Certificates 3
ARTICLE 2 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4
2.1. CAPITAL STRUCTURE OF THE COMPANY 4
2.2. ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY 4
2.3. OWNERSHIP OF THE COMPANY SUBSIDIARIES; CAPITAL STRUCTURE OF THE COMPANY SUBSIDIARIES 5
2.4. ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY SUBSIDIARIES 5
2.5. AUTHORIZED AND EFFECTIVE AGREEMENT 5
2.6. SEC DOCUMENTS; REGULATORY FILINGS 6
2.7. FINANCIAL STATEMENTS; BOOKS AND RECORDS; MINUTE BOOKS 7
2.8. MATERIAL ADVERSE CHANGE 7
2.9. ABSENCE OF UNDISCLOSED LIABILITIES 7
2.10. PROPERTIES 7
2.11. LOANS 8
2.12. TAX MATTERS 8
2.13. EMPLOYEE BENEFIT PLANS 9
2.14. CERTAIN CONTRACTS 9
2.15. LEGAL PROCEEDINGS 10
2.16. COMPLIANCE WITH LAWS 10
2.17. LABOR MATTERS 11
2.18. BROKERS AND FINDERS 11
2.19. INSURANCE 11
2.20. ENVIRONMENTAL LIABILITY 11
2.21. INTELLECTUAL PROPERTY 12
2.22. INSIDER INTERESTS 12
2.23. YEAR 2000 12
2.24. TAX TREATMENT 12
ARTICLE 3 13
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION 13
Section 3.1. Organization 13
Section 3.2. Capitalization of Parent and its Subsidiaries 13
Section 3.3. Authority Relative to this Agreement 13
Section 3.4. SEC Reports 14
Section 3.5. Consents and Approvals; No Violations 14
Section 3.6. Litigation 14
Section 3.7. Tax Treatment 15
Section 3.8. Brokers 15
Section 3.9. No Prior Activities 15
Section 3.10. No Undisclosed Liabilities; Absence of Changes 15
Section 3.11. Compliance with Applicable Law 15
Section 3.12. Representations Complete 15
ARTICLE 4 16
COVENANTS 16
Section 4.1. Conduct of Business of the Company 16
----------------------------------
Section 4.2. No Solicitation or Negotiation 17
------------------------------
Section 4.3. Meeting of Stockholders 18
-----------------------
Section 4.4. Sale of Shares; Stockholder Matters 18
-----------------------------------
Section 4.5. Access to Information 18
---------------------
Section 4.6. Confidentiality 18
---------------
Section 4.7. Expenses 19
--------
Section 4.8. Consent 19
-------
Section 4.9. Reasonable Efforts 19
------------------
Section 4.10. Notification of Certain Matters 20
-------------------------------
Section 4.11 Additional Documents and Further Assurances 20
-------------------------------------------
Section 4.12. Certain Filings; Reasonable Efforts 20
-----------------------------------
Section 4.13. Public Announcements 20
--------------------
ARTICLE 5 21
CONDITIONS TO CONSUMMATION OF THE MERGER 21
Section 5.1. Conditions to Each Party's Obligations to Effect the Merger 21
Section 5.2. Conditions to the Obligations of the Company 21
Section 5.3. Conditions to the Obligations of Parent and Acquisition 22
ARTICLE 6 23
TERMINATION; AMENDMENT; WAIVER 23
Section 6.1. Termination 23
Section 6.2. Effect of Termination 24
Section 6.3. Amendment 24
Section 6.4. Extension; Waiver 24
ARTICLE 7 24
MISCELLANEOUS 24
Section 7.1. Nonsurvival of Representations and Warranties 24
Section 7.2. Entire Agreement; Assignment 24
Section 7.3. Validity 24
Section 7.4. Notices 24
Section 7.5. Governing Law and Venue; Waiver of Jury Trial 25
Section 7.6. Descriptive Headings 25
Section 7.7. Parties in Interest 25
Section 7.8. Certain Definitions 25
Section 7.9. Personal Liability 26
Section 7.10. Counterparts 27
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of
November 1, 1999, is by and among INTERVEST CORPORATION OF NEW YORK, a New York
corporation (the "Company"), INTERVEST BANCSHARES CORPORATION, a Delaware
corporation (the "Parent"), and ICNY ACQUISITION CORPORATION, a New York
corporation and a wholly owned subsidiary of Parent ("Acquisition"), Capitalized
terms not otherwise defined herein shall have the meanings ascribed to such
terms in Section 7.8 of this Agreement.
WHEREAS, the Boards of Directors of the Company, Parent and Acquisition
have each (i) determined that the Merger (as defined below) is advisable and
fair and in the best interests of their respective stockholders and (ii)
approved the Merger upon the terms and subject to the conditions set forth in
this Agreement; and
WHEREAS, for Federal income tax purposes it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company, Parent and Acquisition desire to make certain
representations and warranties and other agreements in connection with the
Merger,
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, the Company, Parent and Acquisition hereby
agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger. At the Effective Time (as defined below) and upon the
terms and subject to the conditions of this Agreement and in accordance with the
New York Business Corporation Law (the "NYBCL"), Acquisition shall be merged
with and into the Company (the "Merger"). Following the Merger, the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
the separate corporate existence of Acquisition shall cease. The Merger is
intended to qualify as a tax-free reorganization under Section 368(a) of the
Code. Parent, as the sole stockholder of Acquisition, hereby approves the Merger
and this Agreement.
Section 1.2 Effective Time. Subject to the terms and conditions set forth in
this Agreement, on the Closing Date (as defined in Section 1.3), (a) a
Certificate of Merger (the "Certificate of Merger") shall be duly executed and
acknowledged by Acquisition and the Company and thereafter delivered for filing
to the Secretary of State of the State of New York for filing pursuant to
Section 904 of the NYBCL and (b) the parties shall make such other filings with
the Secretary of State of the State of New York as shall be necessary to effect
the Merger. The Merger shall become effective at such time as a properly
executed copy of the Certificate of Merger is duly filed with the Secretary of
State of the State of New York in accordance with Section 251 of the DGCL, or
such later time as Parent and the Company may agree upon and as may be set forth
in the Certificate of Merger (the time the Merger becomes effective being
referred to herein as the "Effective Time").
Section 1.3 Closing of the Merger. The closing of the Merger (the "Closing")
will take place at a time and on a date (the "Closing Date") to be specified by
the parties, which shall be no later than the second business day after
satisfaction (or waiver) of the latest to occur of the conditions set forth in
Article 5, at the offices of the Parent, 10 Rockefeller Plaza, Suite 1015, New
York, New York 10020 unless another time, date or place is agreed to in writing
by the parties hereto.
Section 1.4 Effects of the Merger. The Merger shall have the effects set forth
in the NYBCL. Without limiting the generality of the foregoing and subject
thereto, at the Effective Time, all the properties, rights, privileges, powers
and franchises of the Company and Acquisition shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and
Acquisition shall become the debts, liabilities and duties of the Surviving
Corporation.
Section 1.5 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of the Company in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until amended in
accordance with Applicable Law. The bylaws of the Company in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with Applicable Law.
Section 1.6 Directors. The directors of the Company at the Effective Time shall
be the initial directors of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and bylaws of the Surviving
Corporation until such director's successor is duly elected or appointed and
qualified.
Section 1.7 Officers. The officers of the Company at the Effective Time shall be
the initial officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and bylaws of the Surviving
Corporation until such officer's successor is duly elected or appointed and
qualified.
Section 1.8 Merger Consideration; Conversion of Shares.
(a) At the Effective Time, each share of common stock and Class B Stock
of the Company (individually a "Share" and collectively the "Shares") issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of Acquisition, the Company or the
holder thereof, be converted into the right to receive a number of fully paid
and nonassessable shares of Class A common stock, par value $1.00 per share, of
Parent ("Parent Common Stock") equal to the Exchange Ratio (as defined below).
(b) The "Exchange Ratio" shall be 26,189 shares of Parent Common Stock
for each Share, so that an aggregate of 1,250,000 shares of Parent Common Stock
shall be issued for the 47.73 issued and outstanding Shares.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Parent Common Stock or the Shares shall have been changed
into a different number of shares or a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, then the Exchange Ratio shall be correspondingly adjusted to
reflect such stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares.
Section 1.9 Exchange of Certificates.
(a) Following the Effective Time, Parent shall instruct its transfer
agent to issue certificates representing the appropriate number of shares of
Parent Common Stock issuable pursuant to Section 1.8 in exchange for outstanding
Shares.
(b) Not later than two (2) business days after the Effective Time,
Parent shall mail to each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding Shares (the
"Certificates") and whose shares were converted into the right to receive shares
of Parent Common Stock pursuant to Section 1.8: (i) a letter of transmittal
(which shall specify that delivery shall be effected and risk of loss and title
to the Certificates shall pass only upon delivery of the Certificates to the
transfer agent and shall be in such form and have such other provisions as
Parent and the Company may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock. Upon surrender of a Certificate for
cancellation to the transfer agent together with such letter of transmittal duly
executed, the holder of such Certificate shall be issued a certificate
representing that number of whole shares of Parent Common Stock, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Shares that is not registered in the transfer records
of the Company, a certificate representing the proper number of shares of Parent
Common Stock shall be issued to a transferee if the Certificate representing
such Shares is presented to the transfer agent accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 1.9, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of Parent Common Stock.
(c) No dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby, until the
holder of record of such Certificate shall surrender such Certificate. Subject
to the effect of Applicable Law, following surrender of any such Certificate
there shall be paid to the record holder of the certificates representing whole
shares of Parent Common Stock issued in exchange therefor without interest (i)
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such number of whole shares of
Parent Common Stock and (ii) at the appropriate payment date the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Parent Common Stock.
(d) All shares of Parent Common Stock issued as part of the Merger
Consideration upon the surrender for exchange of Shares in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such Shares; subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other distributions
with a record date prior to the date hereof that remain unpaid at the Effective
Time, and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the Shares that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
(e) No fractions of a share of Parent Common Stock shall be issued in
the Merger . Rather, an aggregate of 1,250,000 shares of Parent Common Stock
will be allocated among the holders of Shares such that each holder of Shares
shall receive a whole number of shares, determined by rounding after application
of the Exchange Ratio, with the procedure for such rounding to be determined by
the Company. The Company shall, prior to the Closing Date, furnish Parent with a
list of its shareholders and the whole number of shares of Parent Common Stock
to be issued to each.
(f) If any certificate for shares of Parent Common Stock is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance thereof
that the Certificate so surrendered will be properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange will have
paid to Parent or the transfer agent any transfer or other taxes required by
reason of the issuance of a certificate for shares of Parent Common Stock in any
name other than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Parent or the transfer agent that such tax
has been paid or is not payable.
(g) Notwithstanding anything to the contrary in this Section 1.9, none
of the transfer agent, the Surviving Corporation or any party hereto shall be
liable to any person for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or Applicable Law.
(h) It is intended by the Company that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Internal Revenue Code
(the "Code"). Neither Parent nor Acquisition makes any representation that the
transaction will in fact constitute a reorganization.
(i) The shares of Parent Common Stock to be issued in connection with
the Merger will be issued in a transaction exempt from registration under the
Securities Act, by reason of Section 4(2) thereof.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Acquisition as
follows:
2.1. CAPITAL STRUCTURE OF THE COMPANY
The authorized capital stock of the Company consists of 200 shares of
common stock, no par value and 100 shares of Class B stock, no par value of
which, as of the date hereof, 31.84 shares of Common Stock and 15.89 shares of
Class B stock are issued and outstanding.
2.2. ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY
The Company is a duly organized corporation, validly existing and in
good standing under the laws of New York with full corporate power and authority
to carry on its business as now conducted and is duly licensed or qualified to
do business in the states of the United States and foreign jurisdictions where
its ownership or leasing of property or the conduct of its business requires
such qualification, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on the Company.
2.3. OWNERSHIP OF THE COMPANY SUBSIDIARIES; CAPITAL STRUCTURE OF
THE COMPANY SUBSIDIARIES
Except as Previously Disclosed, as of the date hereof, the Company does
not own, directly or indirectly, 5% or more of the outstanding capital stock or
other voting securities of any corporation, bank or other organization except
the Company Subsidiaries as Previously Disclosed. Except as Previously
Disclosed, the outstanding shares of capital stock or other equity interests of
each Company Subsidiary have been duly authorized and validly issued and are
fully paid and (except as provided by applicable law) nonassessable and all such
shares or equity interests are directly or indirectly owned by the Company free
and clear of all liens, claims and encumbrances. No Company Subsidiary has or is
bound by any Rights which are authorized, issued or outstanding with respect to
the capital stock or other equity interests of any Company Subsidiary and,
except as Previously Disclosed, there are no agreements, understandings or
commitments relating to the right of the Company to vote or to dispose of said
shares. None of the shares of capital stock or other equity interests of any
Company Subsidiary has been issued in violation of the preemptive rights of any
person.
2.4. ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY
SUBSIDIARIES
Each Company Subsidiary is a duly organized corporation, banking
association or other organization, validly existing and in good standing under
applicable laws. Each Company Subsidiary (i) has full power and authority to
carry on its business as now conducted, and (ii) is duly licensed or qualified
to do business in the states of the United States and foreign jurisdictions
where its ownership or leasing of property or the conduct of its business
requires such licensing or qualification, except where failure to be so licensed
or qualified would not have a Material Adverse Effect on the Company. Each
Company Subsidiary has all federal, state, local and foreign governmental
authorizations necessary for it to own or lease its properties and assets and to
carry on its business as it is now being conducted, except where the failure to
be so authorized would not have a Material Adverse Effect on the Company.
2.5. AUTHORIZED AND EFFECTIVE AGREEMENT
(a) The Company has all requisite corporate power and authority to
enter into and perform all of its obligations under this Agreement and Plan of
Merger. The execution and delivery of this Agreement and Plan of Merger and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
the Company.
(b) Assuming the accuracy of the representation contained in Section
3.5(b) hereof, this Agreement and Plan of Merger constitutes the legal, valid
and binding obligation of the Company, enforceable against it in accordance with
its terms, subject as to enforceability, to bankruptcy, insolvency and other
laws of general applicability relating to or affecting creditors' rights and to
general equity principles.
(c) Except as Previously Disclosed, neither the execution and delivery
of this Agreement and Plan of Merger nor consummation of the transactions
contemplated hereby, nor compliance by the Company with any of the provisions
hereof shall (i) conflict with or result in a breach of any provision of the
articles or certificate of incorporation or association, charter or bylaws of
the Company or any Company Subsidiary, (ii) assuming the consents and approvals
contemplated and the consents and approvals which are Previously Disclosed are
duly obtained, constitute or result in a breach of any term, condition or
provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon any property or asset of the
Company or any Company Subsidiary pursuant to, any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation, or (iii)
assuming the consents and approvals contemplated hereby and the consents and
approvals which are Previously Disclosed are duly obtained, violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Company
or any Company Subsidiary, except (in the case of clauses (ii) and (iii) above)
for such violations, rights, conflicts, breaches, creations or defaults which,
either individually or in the aggregate, would not have a Material Adverse
Effect on the Company.
(d) Other than as contemplated hereby and except as Previously
Disclosed, no consent, approval or authorization of, or declaration, notice,
filing or registration with, any governmental or regulatory authority, or any
other person, is required to be made or obtained by the Company or any Company
Subsidiary on or prior to the Closing Date in connection with the execution,
delivery and performance of this Agreement and the Plan of Merger or the
consummation of the transactions contemplated hereby or thereby. Neither the
Company nor any Company Subsidiary is aware of any reason why the conditions set
forth in this Agreement and Plan of Merger will not be satisfied without undue
delay and without the imposition of any condition or requirement of the type
referred to in the provisions thereof.
2.6. SEC DOCUMENTS; REGULATORY FILINGS
The Company has filed all required forms, reports and documents
("Company SEC Reports") with the SEC since January 1, 1997, each of which
complied at the time of filing in all material respects with all applicable
requirements of the Securities Act and the Exchange Act, each law as in effect
on the dates such forms, reports and documents were filed. None of such Company
SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained when filed any untrue statement of
a material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading,
except to the extent superseded by a Company SEC Report filed subsequently and
prior to the date hereof. The audited consolidated financial statements of the
Company included in the Company SEC Reports fairly present in conformity in all
material respects with generally accepted accounting principles applied on a
consistent basis (except as may be indicated in the notes thereto) the
consolidated financial position of the Company and its consolidated subsidiaries
as of the dates thereof and their consolidated results of operations and changes
in financial position for the periods then ended. The Company and each Company
Subsidiary has filed all reports required by statute or regulation to be filed
with any federal or state agency, except where the failure to so file would not
have a Material Adverse Effect on the Company, and such reports were prepared in
accordance with the applicable statutes, regulations and instructions in
existence as of the date of filing of such reports in all material respects, and
none of the reports contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained
therein not misleading.
2.7. FINANCIAL STATEMENTS; BOOKS AND RECORDS; MINUTE BOOKS
The financial statements filed by the Company in the Company SEC
Reports (the "Company Financial Statements"), prior to the date of this
Agreement fairly present in all material respects, and the Company Financial
Statements filed by the Company after the date of this Agreement will fairly
present in all material respects the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates indicated and the
consolidated results of operations, changes in stockholders' equity and cash
flows of the Company and its consolidated Subsidiaries for the periods then
ended and each such financial statement has been or will be, as the case may be,
prepared in conformity with generally accepted accounting principles applied on
a consistent basis. The books and records of the Company and each Company
Subsidiary fairly reflect in all material respects the transactions to which it
is a party or by which its properties are subject or bound. Such books and
records have been properly kept and maintained and are in compliance with all
applicable legal and accounting requirements in all material respects. The
minute books of the Company and each Company Subsidiary contain records which
are accurate in all material respects of all corporate actions of each of their
respective stockholders and board of directors (including committees of their
respective board of directors).
2.8. MATERIAL ADVERSE CHANGE
Except as Previously Disclosed, the Company has not, on a consolidated
basis, suffered any change in its financial condition, results of operations or
business since December 31, 1998 which individually or in the aggregate with any
other such changes would constitute a Material Adverse Effect with respect to
the Company.
2.9. ABSENCE OF UNDISCLOSED LIABILITIES
Neither the Company nor any Company Subsidiary has any liability
(contingent or otherwise), excluding contractually assumed contingencies, that
is material to the Company on a consolidated basis, or that, when combined with
all similar liabilities, would be material to the Company on a consolidated
basis, except as Previously Disclosed, as disclosed in the Company Financial
Statements filed with the SEC prior to the date hereof and except for
liabilities incurred in the ordinary course of business subsequent to September
30, 1999.
2.10. PROPERTIES
Except as Previously Disclosed, the Company and the Company
Subsidiaries have good and marketable title free and clear of all liens,
encumbrances, charges, defaults or equitable interests to all of the properties
and assets, real and personal, which, individually or in the aggregate, are
material to the business of the Company and its Subsidiaries taken as a whole,
and which are reflected on the Company Financial Statements as of September 30,
1999 or acquired after such date, except (i) liens for taxes not yet due and
payable, (ii) pledges to secure deposits and other liens incurred in the
ordinary course of banking business, (iii) such imperfections of title,
easements and encumbrances, if any, as are not material in character, amount or
extent and (iv) dispositions and encumbrances for adequate consideration in the
ordinary course of business. All leases pursuant to which the Company or any
Company Subsidiary, as lessee, leases real and personal property which,
individually or in the aggregate, are material to the business of the Company
and its Subsidiaries taken as a whole are valid and enforceable in accordance
with their respective terms except where the failure of such lease or leases to
be valid and enforceable would not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
2.11. LOANS
Each loan reflected as an asset in the Company Financial Statements (i)
is evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles, in each case other
than loans as to which the failure to satisfy the foregoing standards would not
have a Material Adverse Effect on the Company.
2.12. TAX MATTERS
(a) Except as Previously Disclosed, the Company and each Company
Subsidiary have timely filed federal income tax returns for each year through
December 31, 1998 and have timely filed, or caused to be filed, all other
federal, state, local and foreign tax returns (including, without limitation,
estimated tax returns, returns required under Sections 1441-1446 and 6031-6060
of the Code and the regulations thereunder and any comparable state, foreign and
local laws, any other information returns, withholding tax returns, FICA and
FUTA returns and back up withholding returns required under Section 3406 of the
Code and any comparable state, foreign and local laws) required to be filed with
respect to the Company or any Company Subsidiary, except where the failure to
file timely such federal income and other tax returns would not, in the
aggregate, have a Material Adverse Effect on the Company. All taxes due in
respect of the periods covered by such tax returns have been paid or adequate
reserves have been established for the payment of such taxes and such reserves
are reflected on the Company Financial Statements, except where any such failure
to pay or establish adequate reserves would not, in the aggregate, have a
Material Adverse Effect on the Company and, as of the Closing Date, all taxes
due in respect of any subsequent periods (or portions thereof) ending on or
prior to the Closing Date will have been paid or adequate reserves will have
been established for the payment thereof, except where any such failure to pay
or establish adequate reserves would not, in the aggregate, have a Material
Adverse Effect on the Company. Except as Previously Disclosed, no material (i)
audit examination, (ii) deficiency, or (iii) refund litigation with respect to
such returns or periods has been proposed, asserted or assessed or is pending.
Neither the Company nor any Company Subsidiary will have any liability for any
such taxes in excess of the amounts so paid or reserves or accruals so
established except where such liability would not have a Material Adverse Effect
on The Company.
(b) All federal, state and local (and, if applicable, foreign) tax
returns filed by the Company and each Company Subsidiary are complete and
accurate in all material respects. Neither the Company nor any Company
Subsidiary is delinquent in the payment of any material tax, assessment or
governmental charge, and, except as Previously Disclosed, none of them has
requested any extension of time within which to file any tax returns in respect
of any fiscal year or portion thereof which have not since been filed. Except as
Previously Disclosed, no material deficiencies for any tax, assessment or
governmental charge have been proposed, asserted or assessed (tentatively or
otherwise) against the Company or any Company Subsidiary which have not been
settled and paid. Except as Previously Disclosed, there are currently no
agreements in effect with respect to the Company or any Company Subsidiary to
extend the period of limitations for the assessment or collection of any tax.
(c) Except as Previously Disclosed, neither the transactions
contemplated hereby nor the termination of the employment of any employees of
the Company or any Company Subsidiary prior to or following consummation of the
transactions contemplated hereby could result in the Company or any Company
Subsidiary making or being required to make any "excess parachute payment" as
that term is defined in Section 280G of the Code.
(d) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary is a party to any agreement providing for the allocation or sharing
of, or indemnification for, taxes.
(e) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary is required to include in income any adjustment in any taxable period
ending after the date hereof pursuant to Section 481(a) of the Code.
(f) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary has entered into any agreement with any taxing authority that will
bind the Company or an affiliate thereof after the Closing Date.
(g) For purposes of this Section 2.12, references to the Company and
any Company Subsidiary shall include predecessors thereof.
2.13. EMPLOYEE BENEFIT PLANS
The Company has made available to Parent copies of all of the following
as to which the Company is a party or by which it is bound: contracts with
officers and employees, profit sharing, retirement, insurance and other employee
benefit or welfare plans or similar plans or arrangements; and published
employment policies. Except as Previously Disclosed, no corporation or other
entity is a member with the Company of a controlled group of corporations
defined in Section 4.1.4(b) of the Code, or is under common control with the
Company as defined in Section 4.1.4(c) of the Code. Except as Previously
Disclosed, no employee benefit plan maintained by the Company is a
"Multi-Employer Plan" as defined in Section 3(37)(A) of ERISA and, except as
Previously Disclosed, the Company does not maintain any plan that is subject to
the reporting and disclosure requirements of ERISA.
2.14. CERTAIN CONTRACTS
(a) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary is a party to, or is bound by, (i) any material contract as defined
in Item 601(b)(10) of Regulation S-K of the SEC or any other material contract
or similar arrangement whether or not made in the ordinary course of business
(other than loans or loan commitments and funding transactions in the ordinary
course of business of any Company Subsidiary) or any agreement restricting the
nature or geographic scope of its business activities in any material respect,
(ii) any agreement, indenture or other instrument relating to the borrowing of
money by the Company or any Company Subsidiary or the guarantee by the Company
or any Company Subsidiary of any such obligation, other than instruments
relating to transactions entered into in the customary course, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
who was formerly a director or executive officer or the employment, election,
retention in office or severance of any present or former director or officer,
or (iv) any contract, agreement or understanding with a labor union, in each
case whether written or oral.
(b) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary is in default under any material agreement, commitment, arrangement,
lease, insurance policy or other instrument whether entered into in the ordinary
course of business or otherwise and whether written or oral, and there has not
occurred any event that, with the lapse of time or giving of notice or both,
would constitute such a default, except for such defaults which would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
2.15. LEGAL PROCEEDINGS
Except as Previously Disclosed, there are no actions, suits or
proceedings instituted, pending or, to the knowledge of the Company or any
Company Subsidiary, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against the Company or any Company Subsidiary or against
any asset, interest or right of the Company or any Company Subsidiary as to
which there is a reasonable probability of an unfavorable outcome and which, if
such an unfavorable outcome was rendered, would, individually or in the
aggregate, have a Material Adverse Effect on the Company. To the knowledge of
the Company or any Company Subsidiary, there are no actual or threatened
actions, suits or proceedings which present a claim to restrain or prohibit the
transactions contemplated herein or to impose any material liability in
connection therewith as to which there is a reasonable probability of an
unfavorable outcome and which, if such an unfavorable outcome was rendered,
would, individually or in the aggregate, have a Material Adverse Effect on the
Company. There are no actions, suits or proceedings instituted, pending or, to
the knowledge of the Company or any Company Subsidiary, threatened (or
unasserted but considered probable of assertion and which if asserted would be
reasonably expected to have an unfavorable outcome) against any present or
former director or officer of the Company or any Company Subsidiary, that might
give rise to a claim for indemnification and that (i) has a reasonable
probability of an unfavorable outcome and (ii) in the event of an unfavorable
outcome, would, individually or in the aggregate, have a Material Adverse Effect
on the Company.
2.16. COMPLIANCE WITH LAWS
Except as Previously Disclosed, the Company and each Company Subsidiary
is in compliance in all material respects with all statutes and regulations
applicable to the conduct of its business, and neither the Company nor any
Company Subsidiary has received notification from any agency or department of
federal, state or local government (i) asserting a material violation of any
such statute or regulation, (ii) threatening to revoke any license, franchise,
permit or government authorization or (iii) restricting or in any way limiting
its operations, except for such noncompliance, violations, revocations and
restrictions which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. Neither the Company nor any Company Subsidiary is
subject to any regulatory or supervisory cease and desist order, agreement,
directive, memorandum of understanding or commitment which could be reasonably
anticipated to have a Material Adverse Effect on the Company, and none of them
has received any communication requesting that they enter into any of the
foregoing.
2.17. LABOR MATTERS
With respect to their employees, neither the Company nor any Company
Subsidiary is a party to any labor agreement with any labor organization, group
or association and has not engaged in any unfair labor practice. Since January
1, 1999 and prior to the date hereof, the Company and Company Subsidiaries have
not experienced any attempt by organized labor or its representatives to make
the Company or any Company Subsidiary conform to demands of organized labor
relating to their employees or to enter into a binding agreement with organized
labor that would cover the employees of the Company or any Company Subsidiary.
There is no unfair labor practice charge or other complaint by any employee or
former employee of the Company or any Company Subsidiary against any of them
pending before any governmental agency arising out of the Company's or such
Company Subsidiary's activities, which charge or complaint (i) has a reasonable
probability of an unfavorable outcome and (ii) in the event of an unfavorable
outcome would, individually or in the aggregate, have a Material Adverse Effect
on the Company; there is no labor strike or labor disturbance pending or
threatened against any of them; and neither the Company nor any Company
Subsidiary has experienced a work stoppage or other labor difficulty since
January 1, 1999.
2.18. BROKERS AND FINDERS
Neither the Company nor any Company Subsidiary, nor any of their
respective officers, directors or employees, has employed any broker, finder or
financial advisor or incurred any liability for any fees or commissions in
connection with the transactions contemplated herein or the Plan of Merger.
2.19. INSURANCE
The Company and the Company Subsidiaries each currently maintains
insurance in amounts considered by the Company and any Company Subsidiary as
applicable, to be reasonably necessary for their operations. Neither the Company
nor any Company Subsidiary has received any notice of a material premium
increase or cancellation with respect to any of its insurance policies or bonds,
and within the last three years, neither the Company nor any Company Subsidiary
has been refused any insurance coverage sought or applied for, and the Company
has no reason to believe that existing insurance coverage cannot be renewed as
and when the same shall expire, upon terms and conditions as favorable as those
presently in effect, other than possible increases in premiums or unavailability
in coverage that have not resulted from any extraordinary loss experience of the
Company or any Company Subsidiary.
2.20. ENVIRONMENTAL LIABILITY
Except as Previously Disclosed, neither the Company nor any Company
Subsidiary has received any written notice of any legal, administrative,
arbitral or other proceeding, claim or action and, to the knowledge of the
Company and Company Subsidiaries, there is no governmental investigation of any
nature ongoing, in each case that could reasonably be expected to result in the
imposition, on the Company or any Company Subsidiary of any liability arising
under any local, state or federal environmental statute, regulation or ordinance
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, which liability would have a
Material Adverse Effect on the Company; except as Previously Disclosed, there
are no facts or circumstances which could reasonably be expected to form the
basis for any such proceeding, claim, action or governmental investigation that
would impose any such liability; and neither the Company nor any Company
Subsidiary is subject to any agreement, order, judgment, decree or memorandum by
or with any court, governmental authority, regulatory agency or third party
imposing any such liability.
2.21. INTELLECTUAL PROPERTY
Except as Previously Disclosed, the Company or a Company Subsidiary
owns the entire right, title and interest in and to, or has valid licenses or
otherwise has the required legal rights with respect to, all of the Intellectual
Property necessary in all material respects to conduct the business and
operations of the Company and the Company Subsidiaries as presently conducted,
except where the failure to do so would not, individually or in the aggregate,
have a Material Adverse Effect on the Company. None of such Intellectual
Property is subject to any outstanding order, decree, judgment, stipulation,
settlement, lien, charge, encumbrance or attachment, which order, decree,
judgment, stipulation, settlement, lien, charge, encumbrance or attachment would
have a Material Adverse Effect on the Company. Except as Previously Disclosed,
upon consummation of the transactions contemplated by this Reorganization
Agreement the Company and Company Subsidiaries will be entitled to continue to
use all such Intellectual Property without the payment of any fees, licenses or
other payments (other than ongoing payments required under license agreements
for software used by the Company or the Company Subsidiaries in Previously
Disclosed amounts consistent with past practice).
2.22. INSIDER INTERESTS
All outstanding loans and other contractual arrangements (including
deposit relationships) between the Company or any Company Subsidiary and any
officer, director or employee of the Company or any Company Subsidiary conform
to the applicable rules and regulations and requirements of all applicable
regulatory agencies which were in effect when such loans and other contractual
arrangements were entered into.
2.23. YEAR 2000
The Company's disclosures contained in the Company SEC Reports related
to Year 2000 computer issues are true, complete and accurate in all material
respects.
2.24. TAX TREATMENT
As of the date of this Reorganization Agreement, the Company knows of
no reason relating to it or any of Company Subsidiaries which would reasonably
cause it to believe that the Merger will not qualify as tax free reorganization
under Section 368(a) of the Code.
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION
Parent and Acquisition hereby jointly and severally represent and
warrant to the Company as follows:
Section 3.1 Organization.
(a) Parent is duly organized, validly existing and in good standing
under the laws of Delaware and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Acquisition is duly organized, validly existing and in good standing
under the laws of New York and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Parent has heretofore made available to the Company accurate and
complete copies of the Certificates of Incorporation and bylaws as currently in
full force and effect, of Parent and Acquisition. (b) Each of Parent and
Acquisition is duly qualified or licensed and in good standing to do business in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing would not have a Material Adverse
Effect on Parent. When used in connection with Parent or Acquisition the term
"Material Adverse Effect on Parent" means any circumstance, change in, or effect
on Parent and its subsidiaries, taken as a whole, that is, or is reasonably
likely in the future to be, materially adverse to the operations, financial
condition, assets, earnings, or results of operations, or the business
(financial or otherwise) of Parent and its subsidiaries, taken as a whole,
provided that none of the following shall be deemed, either alone or in
combination, to constitute a Material Adverse Effect on the Parent.
Section 3.2 Capitalization of Parent and its Subsidiaries.
(a) The authorized capital stock of Parent consists of 7,500,000 shares
of Parent Common Stock, 700,000 shares of Class B common stock and 300,000
shares of Series Preferred Stock, of which, as of September 30, 1999, 2,271,879
shares of Parent Common Stock, 305,000 shares of Class B common stock and no
shares of preferred stock were issued and outstanding.
(b) The shares of Acquisition Common Stock to be issued pursuant to the
Merger, when issued, will be duly authorized, validly issued, fully paid and
nonassessable.
Section 3.3 Authority Relative to this Agreement. Each of Parent and
Acquisition has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the boards of directors of Parent and
Acquisition and by Parent as the sole stockholder of Acquisition, and except for
approval by the shareholders of Parent, no other corporate proceedings on the
part of Parent or Acquisition are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by each of Parent and Acquisition and
constitutes, assuming the due authorization, execution and delivery hereof by
the Company, a valid, legal and binding agreement of each of Parent and
Acquisition enforceable against each of Parent and Acquisition in accordance
with its terms, subject to any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditors' rights generally or to general principles of equity.
Section 3.4 SEC Reports. Parent has filed all required forms, reports and
documents ("Parent SEC Reports") with the SEC since January 1, 1997, each of
which complied at the time of filing in all material respects with all
applicable requirements of the Securities Act and the Exchange Act, each law as
in effect on the dates such forms, reports and documents were filed. None of
such Parent SEC Reports, including any financial statements or schedules
included or incorporated by reference therein, contained when filed any untrue
statement of a material fact or omitted to state a material fact required to be
stated or incorporated by reference therein or necessary in order to make the
statements therein in light of the circumstances under which they were made not
misleading, except to the extent superseded by a Parent SEC Report filed
subsequently and prior to the date hereof. The audited consolidated financial
statements of Parent included in the Parent SEC Reports fairly present in
conformity in all material respects with generally accepted accounting
principles applied on a consistent basis (except as may be indicated in the
notes thereto) the consolidated financial position of Parent and its
consolidated subsidiaries as of the dates thereof and their consolidated results
of operations and changes in financial position for the periods then ended.
Section 3.5 Consents and Approvals; No Violations. Except for filings, permits,
authorizations, consents and approvals as may be required under and other
applicable requirements of the Federal Reserves Act, the Securities Act, the
Exchange Act, state securities or blue sky laws, the HSR Act, and any filings
under similar merger notification laws or regulations of Governmental Entities
and the filing and recordation of the Certificate of Merger as required by the
NYBCL, no material filing with or notice to, and no material permit,
authorization, consent or approval of any Governmental Entity is necessary for
the execution and delivery by Parent or Acquisition of this Agreement or the
consummation by Parent or Acquisition of the transactions contemplated hereby.
Neither the execution, delivery and performance of this Agreement by Parent or
Acquisition or the consummation by Parent or Acquisition of the transactions
contemplated hereby will (i) conflict with or result in any breach of any
provision of the respective Certificates of Incorporation or bylaws (or similar
governing documents) of Parent or Acquisition, (ii) result in a violation or
breach of or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration or Lien) under any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which Parent or Acquisition or any of Parent's
other subsidiaries is a party or by which any of them or any of their respective
properties or assets are bound or (iii) violate any material order, writ,
injunction, decree, law, statute, rule or regulation applicable to Parent or
Acquisition or any of Parent's other subsidiaries or any of their respective
properties or assets.
Section 3.6 Litigation. There is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of Parent threatened, against Parent
or any of its subsidiaries or any of their respective properties or assets
before any Governmental Entity that could reasonably be expected to prevent or
delay the consummation of the transactions contemplated by this Agreement beyond
the Final Date. Neither Parent nor any of its subsidiaries is subject to any
outstanding order, writ, injunction or decree that could reasonably be expected
to prevent or delay the consummation of the transactions contemplated hereby.
Section 3.7 Tax Treatment. Neither Parent, Acquisition nor, to the knowledge of
Parent, any of its affiliates has taken, proposes to take, or has agreed to take
any action that would prevent the Merger from constituting are organization
qualifying under the provisions of Section 368(a) of the Code.
Section 3.8 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Parent or Acquisition.
Section 3.9 No Prior Activities. Except for obligations incurred in connection
with its incorporation or organization or the negotiation and consummation of
this Agreement and the transactions contemplated hereby, Acquisition has neither
incurred any obligation or liability nor engaged in any business or activity of
any type or kind or entered into any agreement or arrangement with any person.
Section 3.10 No Undisclosed Liabilities; Absence of Changes. Except as and to
the extent publicly disclosed by Parent in the Parent SEC Reports, neither
parent nor any of its subsidiaries has any material liabilities or obligations
of any nature, whether or not accrued, contingent or otherwise, that would be
required by generally accepted accounting principles to be reflected on a
consolidated balance sheet of Parent (including the notes thereto). There have
been no events, changes or effects with respect to Parent or its subsidiaries
that have had a Material Adverse Effect on Parent that have not been publicly
disclosed by Parent in the Parent SEC Reports.
Section 3.11 Compliance with Applicable Law. Except as publicly disclosed by
Parent in the Parent SEC Reports, to the knowledge of Parent, Parent and its
subsidiaries hold all material permits, licenses, variances, exemptions, orders
and approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses (the "Parent Permits"). Except as publicly disclosed
by Parent in the Parent SEC Reports, Parent and its subsidiaries are in material
compliance with the terms of Parent Permits. Except as publicly disclosed by
Parent in the Parent SEC Reports, to the knowledge of Parent, the businesses of
Parent and its subsidiaries have been and are being conducted in material
compliance with all material Applicable Laws. Except as publicly disclosed by
Parent in the Parent SEC Reports, no investigation or review by any Governmental
Entity with respect to Parent or any of its subsidiaries is pending or, to the
knowledge of Parent, threatened, nor, to the knowledge of Parent, has any
Governmental Entity indicated an intention to conduct the same.
Section 3.12 Representations Complete. None of the representations or warranties
made by Parent in this Agreement or any statement made in any Schedule or
certificate furnished by Parent pursuant to this Agreement, or furnished in or
in connection with documents mailed or delivered to the stockholders of the
Company in connection with soliciting their proxy or consent to this Agreement
and the Merger, contains or will contain at the Effective Time, any untrue
statement of a material fact, or omits or will omit at the Effective Time to
state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
<PAGE>
ARTICLE 4
COVENANTS
Section 4.1 Conduct of Business of the Company. Except as contemplated by this
Agreement, during the period from the date hereof to the Effective Time, the
Company covenants and agrees to conduct its operations in the ordinary course of
business consistent with past practice and, to the extent consistent therewith,
with no less diligence and effort than would be applied in the absence of this
Agreement, use commercially reasonable efforts to preserve intact its current
business organizations, keep available the service of its current officers and
employees and preserve its relationships with customers, suppliers,
distributors, lessors, creditors, employees, contractors and others having
business dealings with it with the intention that its goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing, except as otherwise expressly provided in this
Agreement, prior to the Effective Time, neither the Company nor any of its
subsidiaries will, without the prior written consent of Parent:
(a) amend its Certificate of Incorporation or bylaws (or other similar
governing instrument);
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other debt or equity securities or equity equivalents;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock,
make any other actual, constructive or deemed distribution in respect of its
capital stock or otherwise make any payments to stockholders in their capacity
as such, or redeem or otherwise acquire any of its securities or any securities
of any of its subsidiaries;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of the Company or any of its subsidiaries (other than the Merger);
(e) alter through merger, liquidation, reorganization, restructuring or
any other fashion the corporate structure of any subsidiary;
(f) except as may be required by Applicable Law, enter into, adopt or
amend or terminate any bonus, special remuneration, compensation, severance,
stock option, stock purchase agreement, retirement, health, life, or disability
insurance, severance or other employee benefit plan agreement, trust, fund or
other arrangement for the benefit or welfare of any director, officer, employee
or consultant in any manner or increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit not required by
any plan and arrangement as in effect as of the date hereof (including the
granting of stock appreciation rights or performance units);
(g) grant any severance or termination pay to any director, officer,
employee or consultant, except payments made pursuant to written agreements
outstanding on the date hereof or as required by applicable federal, state or
local law or regulations;
(h) except as may be required as a result of a change in law or in
generally accepted accounting principles, materially change any of the
accounting principles, practices or methods used by it;
(i) make any material tax election or settle or compromise any material
income tax liability or permit any material insurance policy naming it as a
beneficiary or loss-payable to expire, or to be canceled or terminated, unless a
comparable insurance policy reasonably acceptable to Parent is obtained and in
effect;
(j) fail to file any Tax Returns when due (or, alternatively, fail to
file for available extensions) or fail to cause such Tax Returns when filed to
be complete and accurate in all material respects;
(k) fail to pay any Taxes or other material debts when due;
(l) settle or compromise any pending or threatened suit, action or
claim not covered by insurance that (i) relates to the transactions contemplated
hereby or (ii) the settlement or compromise of which would involves more than
Fifty Thousand Dollars ($50,000) or that would otherwise be material to the
Company; or
(m) take or agree in writing or otherwise to take any of the actions
described in Sections 4.1(a) through 4.1(l) (and it shall use all reasonable
efforts not to take any action that would make any of the representations or
warranties of the Company contained in this Agreement (including the exhibits
hereto) untrue or incorrect).
Section 4.2 No Solicitation or Negotiation. Until the earlier of the Effective
Time and the date of termination of this Agreement pursuant to the provisions of
Section 6.1 hereof, the Company covenants and agrees that it shall not (nor will
the Company permit any of the Company's officers, directors, stockholders,
agents, representatives or affiliates to) directly or indirectly, take any of
the following actions with any party other than Parent and its designees: (a)
solicit, initiate, entertain, or encourage any proposals or offers from, or
conduct discussions with or engage in negotiations with, any person relating to
any possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise), any material portion of its
capital stock or assets or any equity interest in the Company; (b) provide
information with respect to the Company to any person, other than Parent,
relating to, or otherwise cooperate with, facilitate or encourage any effort or
attempt by any such person with regard to, any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise), any material portion of its capital stock or assets or any equity
interest in the Company; (c) enter into an agreement with any person, other than
Parent, providing for the acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise), any material
portion of its capital stock or assets or any equity interest in the Company; or
(d) make or authorize any statement, recommendation or solicitation in support
of any possible acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise), any material position of its
capital stock or assets or any equity interest in the Company by any person,
other than by Parent.
Section 4.3 Meeting of Stockholders. Parent shall take all actions necessary in
accordance with Delaware General Corporation Law ("DGCL"), the Nasdaq
Marketplace Rules and its Certificate of Incorporation and bylaws to duly call,
give notice of, convene and hold a meeting of its stockholders as promptly as
practicable to consider and vote upon the adoption and approval of this
Agreement and the transactions contemplated hereby (the"Meeting"). The
stockholder vote required for the adoption and approval of the transactions
contemplated by this Agreement shall be the vote required by the DGCL and the
Company's Certificate of Incorporation and bylaws. Parent will, through its
Board of Directors, recommend to its stockholders approval of such matters.
Section 4.4 Sale of Shares; Stockholder Matters.
(a) Sale of Shares. The parties hereto acknowledge and agree that the
Merger Consideration issuable to the Company's stockholders shall constitute
"restricted securities" within the meaning of the Securities Act. The
certificates for shares of Parent Common Stock to be issued in the Merger shall
bear appropriate legends to identify such privately placed shares as being
restricted under the Securities Act and to comply with applicable state
securities laws.
(b) Additional Assurances. At the request of Parent, the Company shall
execute and deliver to Parent such instruments and do and perform such acts and
things as may be necessary or desirable for complying with all applicable
securities laws and state corporate law.
Section 4.5 Access to Information. Each party shall afford the others and their
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of its
properties, books, contracts, commitments and records, and (b) all other
information concerning its business, properties and personnel (subject to
restrictions imposed by applicable law) as the others may reasonably request,
subject, in the case of Parent, to reasonable limits on access to its technical
and other nonpublic information. No information or knowledge obtained in any
investigation pursuant to this Section 4.5 shall affect or be deemed to modify
any representation or warranty contained herein or the conditions of the parties
to consummate the Merger.
Section 4.6 Confidentiality. It is understood that the business of the Parent
and the Company, and all matters related thereto, are of a confidential nature.
Prior to the date hereof, there may have been revealed, and on or after the date
hereof there may be revealed, to Parent and its affiliates or representatives,
on the one hand, and to the Company and its affiliates and representatives, on
the other, "Confidential Information" (as hereinafter defined) concerning the
business of the Parent or the business of the Company. In consideration for and
as an inducement to the parties to execute, deliver and perform this Agreement,
each of the parties hereto hereby agrees that, following the termination of this
Agreement or any other failure of the Merger to be consummated, neither party
shall divulge or appropriate for their own use, or for the use of any third
party, any Confidential Information of the other party. As used herein, the term
"Confidential Information" means the following oral or written information
relating to each party's business: know-how, technology, inventions, designs,
methodologies, trade secrets, patents, secret processes and formulae,
information relating to the development, research, testing, manufacturing,
marketing, sales, distribution and uses of products, sources of supplies,
budgets and strategic plans, the identity and special needs of customers, plants
and other properties, and any other information which may give the party who
received such Confidential Information an opportunity to obtain an advantage
over its competitors who do not know or use such information; provided, however,
that the term "Confidential Information" shall not include (i) any such
information that, prior to its use or disclosure by any party hereto, can be
shown to have been in the public domain or generally known or available to
customers, suppliers or competitors of the business of Parent or the Company, as
the case may be, through no breach of the provisions of this Section 4.6 or
other non-disclosure covenants that were executed for the benefit of Parent or
the Company, as the case may be; (ii) any such information that, prior to its
use or disclosure by any party hereto was rightfully in the receiving party's
possession, without violation of the provisions of this Section 4.6 or other
non-disclosure covenants that were executed for the benefit of Parent or the
Company, as the case may be; or (iii) any such information that, prior to its
use or disclosure by Parent or the Company, as the case may be, was developed by
such party without violation of the provisions of this Section 4.6 or other
non-disclosure covenants that were executed for the benefit of Parent or the
Company, as the case may be. The parties hereto hereby acknowledge and agree
that the breach by any of the parties hereto of the restrictive covenant
contained in this Section 4.6 would cause irreparable injury to the other party
and that the remedy at law for any such breach would be inadequate. As a result,
each of the parties hereto hereby covenant, agree and consent that, in addition
to any other available remedy, temporary and permanent injunctive relief may be
granted in any proceeding which may be brought by any party to this Agreement to
enforce the restrictive covenant set forth above without necessity of proof that
any other remedy at law is inadequate.
Section 4.7 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby shall be the obligation
of the respective party incurring such fees and expenses.
Section 4.8 Consent. The Company shall use its best efforts to obtain the
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Company Schedules) so as to preserve all rights of and benefits to
Acquiror thereunder.
Section 4.9 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
ensure that its representations and warranties remain true and correct in all
material respects, and to take promptly, or cause to be taken, all actions, and
to do promptly, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated hereby, to obtain all necessary waivers, consents and
approvals, to effect all necessary registrations and filings, and to remove any
injunctions or other impediments or delays, legal or otherwise, in order to
consummate and make effective the transactions contemplated by this Agreement
for the purpose of securing to the parties hereto the benefits contemplated by
this Agreement, and to cause the conditions to the opposite party's obligations
to be satisfied.
<PAGE>
Section 4.10 Notification of Certain Matters.
(a) The Company shall give prompt written notice to Parent of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company contained
in this Agreement to be untrue or inaccurate at or prior to the Effective Time
and (ii) any failure of the Company to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder. The
delivery of any such notice pursuant to this Section 4.10(a) shall be deemed
disclosure for purposes of this Agreement as if fully disclosed by the Company
herein.
(b) Parent hereby covenants and agrees that it shall give prompt
written notice to the Company of (i) the occurrence or non-occurrence of any
event, the occurrence or non-occurrence of which is likely to cause any
representation or warranty of Parent contained in this Agreement to be untrue or
inaccurate at or prior to the Effective Time and (ii) any failure of Parent to
comply or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder. The delivery of any such notice pursuant to this
Section 4.10(b) shall be deemed disclosure for purposes of this Agreement as
fully disclosed by Parent hereunder.
Section 4.11 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
Section 4.12 Certain Filings; Reasonable Efforts.
Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take or cause to be taken
all action and to do or cause to be done all things reasonably necessary, proper
or advisable under Applicable Law to consummate and make effective the
transactions contemplated by this Agreement, including using all reasonable
efforts to do the following, (i) cooperate in the preparation and filing of the
Proxy Statement and any amendments thereto, any filings that may be required
under the HSR Act and any filings under similar merger notification laws or
regulations of foreign Governmental Entities; (ii) obtain consents of all third
parties and Governmental Entities necessary, proper, advisable or reasonably
requested by Parent or the Company, for the consummation of the transactions
contemplated by this Agreement; (iii) contest any legal proceeding relating to
the Merger; and (iv) execute any additional instruments necessary to consummate
the transactions contemplated hereby. Subject to the terms and conditions of
this Agreement, Parent and Acquisition agree to use all reasonable efforts to
cause the Effective Time to occur as soon as practicable after the stockholder
vote with respect to the Merger. If at any time after the Effective Time any
further action is necessary to carry out the purposes of this Agreement the
proper officers and directors of each party hereto shall take all such necessary
action.
Section 4.13 Public Announcements. Neither Parent, Acquisition nor the Company
shall issue any press release or otherwise make any public statements with
respect to the transactions contemplated by this Agreement, including the
Merger, or any Third Party Acquisition, without the prior consent of Parent and
Acquisition (in the case of the Company) or the Company (in the case of Parent
or Acquisition, which consent may be unreasonably withheld), except as may be
required by Applicable Law, or by the rules and regulations of, or pursuant to
any agreement with, the Nasdaq Small Cap Market.
ARTICLE 5
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 5.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each party hereto to effect the Merger are subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) this Agreement shall have been approved and adopted by the
requisite vote of the stockholders of Parent;
(b) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
United States federal or state court or United States federal or state
Governmental Entity that prohibits, restrains, enjoins or restricts the
consummation of the Merger;
(c) any waiting period applicable to the Merger under the HSR Act shall
have terminated or expired;
(d) any governmental or regulatory notices, approvals or other
requirements necessary to consummate the transactions contemplated hereby and to
operate the Business after the Effective Time in all material respects as it was
operated prior thereto shall have been given, obtained or complied with, as
applicable; and
(e) Parent shall have received all state securities laws or "blue sky"
permits and authorizations necessary to issue shares of Parent Common Stock in
exchange for Shares in the Merger.
Section 5.2 Conditions to the Obligations of the Company. The obligation of the
Company to effect the Merger is subject to the satisfaction at or prior to the
Effective Time of the following conditions:
(a) the representations and warranties of Parent and Acquisition
contained in this Agreement shall be true and correct (except to the extent that
the aggregate of all breaches thereof would not have a Material Adverse Effect
on Parent) at and as of the Effective Time with the same effect as if made at
and as of the Effective Time (except to the extent such representations
specifically relate to an earlier date, in which case such representations shall
be true and correct as of such earlier date, and in any event, subject to the
foregoing Material Adverse Effect qualification) and, at the Closing, Parent and
Acquisition shall have delivered to the Company a certificate to that effect,
executed by executive officers of Parent and Acquisition;
(b) each of the covenants and obligations of Parent and Acquisition to
be performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or before
the Effective Time and, at the Closing, Parent and Acquisition shall have
delivered to the Company a certificate to that effect, executed by executive
officers of Parent and Acquisition; and
(c) the Company shall have received the opinion of tax counsel to the
Company or tax counsel to Parent to the effect that (i) the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code and (ii) each of Parent, Acquisition and the
Company will be a party to the reorganization within the meaning of Section
368(b) of the Code, which opinion may rely on such representations as such
counsel reasonably deems appropriate, and such opinion shall not have been
withdrawn or modified in any material respect.
Section 5.3 Conditions to the Obligations of Parent and Acquisition. The
respective obligations of Parent and Acquisition to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) the representations and warranties of the Company contained in this
Agreement shall be true and correct (except to the extent that the aggregate of
all breaches thereof would not have a Material Adverse Effect on the Company) at
and as of the Effective Time with the same effect as if made at and as of the
Effective Time (except to the extent such representations specifically relate to
an earlier date, in which case such representations shall be true and correct as
of such earlier date, and in any event, subject to the foregoing Material
Adverse Effect qualification) and, at the Closing, the Company shall have
delivered to Parent and Acquisition a certificate to that effect, executed by
executive officers of the Company;
(b) each of the covenants and obligations of the Company to be
performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or before
the Effective Time and, at the Closing, the Company shall have delivered to
Parent and Acquisition a certificate to that effect, executed by two (2)
executive officers of the Company;
(c) there shall have been no events, changes or effects, individually
or in the aggregate, with respect to the Company or its subsidiaries having, or
that would reasonably be expected to have, a Material Adverse Effect on the
Company;
(d) Parent shall have received the opinion of tax counsel to Parent or
tax counsel to the Company to the effect that (i) the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and (ii) each of Parent, Acquisition and the Company will be
a party to the reorganization within the meaning of Section 368(b) of the Code,
which opinion may rely on such representations as such counsel reasonably deems
appropriate, and such opinion shall not have been withdrawn or modified in any
material respect; and
(e) Parent shall have received an opinion from Hatcher/Johnson
Valuation, Inc. to the effect that the Exchange Ratio is fair from a financial
point of view to the stockholders of Parent.
<PAGE>
ARTICLE 6
TERMINATION; AMENDMENT; WAIVER
Section 6.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time whether before or after
approval and adoption of this Agreement by Parent's stockholders:
(a) by mutual written consent of Parent, Acquisition and the Company;
(b) by Parent and Acquisition or the Company if (i) any court of
competent jurisdiction in the United States or other United States federal or
state Governmental Entity shall have issued a final order, decree or ruling, or
taken any other final action, restraining, enjoining or otherwise prohibiting
the Merger and such order, decree, ruling or other action is or shall have
become nonappealable or (ii) the Merger has not been consummated by June 30,
2000 (the "Final Date"); provided that no party may terminate this Agreement
pursuant to this clause (ii) if such party's failure to fulfill any of its
obligations under this Agreement shall have been a principal reason that the
Effective Time shall not have occurred on or before said date;
(c) by the Company if (i) there shall have been a breach of any
representations or warranties on the part of Parent or Acquisition set forth in
this Agreement or if any representations or warranties of Parent or Acquisition
shall have become untrue, such that the conditions set forth in Section 4.2(a)
would be incapable of being satisfied by the Final Date, provided that the
Company has not breached any of its obligations hereunder in any material
respect; or (ii) there shall have been a breach by Parent or Acquisition of any
of their respective covenants or agreements hereunder having a Material Adverse
Effect on Parent or materially adversely affecting (or materially delaying) the
ability of Parent, Acquisition or the Company to consummate the Merger, and
Parent or Acquisition, as the case may be, has not cured such breach within
fifteen (15) business days after notice by the Company thereof, provided that
the Company has not breached any of its obligations hereunder in any material
respect; or
(d) by Parent and Acquisition if (i) there shall have been a breach of
any representations or warranties on the part of the Company set forth in this
Agreement or if any representations or warranties of the Company shall have
become untrue, such that the conditions set forth in Section 4.3(a) would be
incapable of being satisfied by the Final Date, provided that neither Parent nor
Acquisition has breached any of their respective obligations hereunder in any
material respect; or (ii) there shall have been a breach by the Company of one
or more of its covenants or agreements hereunder having a Material Adverse
Effect on the Company or materially adversely affecting (or materially delaying)
the ability of Parent, Acquisition or the Company to consummate the Merger, and
the Company has not cured such breach within fifteen (15) business days after
notice by Parent or Acquisition thereof, provided that neither Parent nor
Acquisition has breached any of their respective obligations hereunder in any
material respect; or
(e) by Parent or Acquisition if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger, by any governmental entity, which would: (i) prohibit
Acquisition's or the Company's ownership or operation of all or any portion of
the business of the Company or (ii) compel Acquisition or the Company to dispose
of or hold separate all or a portion of the business or assets of the Company or
Acquisition as a result of the Merger
Section 6.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 6.1, this Agreement shall
forthwith become void and have no effect without any liability on the part of
any party hereto or its affiliates, directors, officers or stockholders.
Section 6.3 Amendment. This Agreement may be amended by action taken by the
Company, Parent and Acquisition at any time before or after approval of the
Merger by the stockholders of Parent but after any such approval no amendment
shall be made that requires the approval of such stockholders under Applicable
Law without such approval. This Agreement may be amended only by an instrument
in writing signed on behalf of the parties hereto.
Section 6.4 Extension; Waiver. At any time prior to the Effective Time, each
party hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any party hereto to any such extension or
waiver shall be valid only if set forth in an instrument, in writing, signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
ARTICLE 7
MISCELLANEOUS
Section 7.1 Nonsurvival of Representations and Warranties. The representations
and warranties made herein shall not survive beyond the Effective Time or a
termination of this Agreement. This Section 7.1 shall not limit any covenant or
agreement of the parties hereto that by its terms requires performance after the
Effective Time.
Section 7.2 Entire Agreement; Assignment. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all other prior and contemporaneous agreements and understandings
both written and oral between the parties with respect to the subject matter
hereof and (b) shall not be assigned by operation of law or otherwise; provided,
however, that Parent may assign any or all of its rights and obligations under
this Agreement to any wholly owned subsidiary of Parent, but no such assignment
shall relieve Parent of its obligations hereunder if such assignee does not
perform such obligations.
Section 7.3 Validity. If any provision of this Agreement or the application
thereof to any person or circumstance is held invalid or unenforceable, the
remainder of this Agreement and the application of such provision to other
persons or circumstances shall not be affected thereby and to such end the
provisions of this Agreement are agreed to be severable.
Section 7.4 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the addresses set forth below or to such other address as the party
to whom notice is to be given may have furnished to the other parties hereto in
writing in accordance herewith. Any such notice or communication shall be deemed
to have been delivered and received (A) in the case of personal delivery, on the
date of such delivery, (B) in the case of telecopier, on the date sent if
confirmation of receipt is received and such notice is also promptly mailed by
registered or certified mail (return receipt requested), (C) in the case of a
nationally-recognized overnight courier in circumstances under which such
courier guarantees next business day delivery, on the next business day after
the date when sent and (D) in the case of mailing, on the third business day
following that on which the piece of mail containing such communication is
posted:
if to Parent or Acquisition: Intervest Bancshares Corporation
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
Attn: Chairman
if to the Company to: Intervest Corporation of New York
10 Rockefeller Plaza (Suite 1015)
New York, New York 10020
Attn: Chairman
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
Section 7.5 Governing Law and Venue; Waiver of Jury Trial.
THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
Section 7.6 Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
Section 7.7 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and its successors and permitted
assigns and, except as expressly provided herein, nothing in this Agreement is
intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement nor shall
any such person be entitled to assert any claim hereunder. In no event shall
this Agreement constitute a third party beneficiary contract.
Section 7.8 Certain Definitions. For the purposes of this Agreement the term:
(a) "affiliate" means a person that, directly or indirectly, through
one or more intermediaries controls, is controlled by or is under common control
with the first-mentioned person;
(b) "Applicable Law" means, with respect to any person, any domestic or
foreign, federal, state or local statute, law, ordinance, rule, regulation,
order, writ, injunction, judgment, decree or other requirement of any
Governmental Entity existing as of the date hereof or as of the Effective Time
applicable to such Person or any of its respective properties, assets, officers,
directors, employees, consultants or agents.
(c) "capital stock" means common stock, preferred stock, partnership
interests, limited liability company interests or other ownership interests
entitling the holder thereof to vote with respect to matters involving the
issuer thereof;
(d) "knowledge" or "known" means, with respect to any fact,
circumstance, event or other matter in question, the knowledge of such fact,
circumstance, event or other matter of any executive officer of the Company or
Parent, as the case may be, and, in addition, with respect to the Company, the
persons listed on Section 7.9(f) of the Company Disclosure Schedule. Any such
individual will be deemed to have knowledge of a particular fact, circumstance,
event or other matter if (1) such individual has actual knowledge of such fact,
circumstance, event or other matter, or (2) such fact, circumstance, event or
other matter is reflected in one or more documents (including e-mails sent to
such individual) in, or that have been in, such individual's files.
(e) "include" or "including" means "include, without limitation" or
"including, without limitation," as the case may be, and the language following
"include" or "including" shall not be deemed to set forth an exhaustive list.
(f) "person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization or other
legal entity including any Governmental Entity;
(g) "Previously Disclosed" means disclosed in writing by either party
in any document filed with the SEC prior to the date hereof or in a writing
delivered to the other party prior to the execution of this Agreement. Any
information disclosed by one party to the other for any purpose hereunder shall
be deemed to be disclosed for all purposes hereunder. The inclusion of any
matter in information previously disclosed shall not be deemed an admission or
otherwise imply that any such matter is material for purposes of this Agreement.
(h) "Securities Act" means the Securities Act of 1933, as amended;
(i) "subsidiary" or "subsidiaries" of the Company, Parent, the
Surviving Corporation or any other person means any corporation, partnership,
limited liability company, association, trust, unincorporated association or
other legal entity of which the Company, Parent, the Surviving Corporation or
any such other person, as the case may be (either alone or through or together
with any other subsidiary), owns, directly or indirectly, 50% or more of the
capital stock the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
Section 7.9 Personal Liability. This Agreement shall not create or be deemed to
create or permit any personal liability or obligation on the part of any direct
or indirect stockholder of the Company or Parent or Acquisition or any officer,
director, employee, agent, representative or investor of any party hereto.
Section 7.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
INTERVEST BANCSHARES CORPORATION
/s/ Lowell S. Dansker
Name: Lowell S. Dansker
Title: President
ICNY ACQUISITION CORPORATION
/s/ Lowell S. Dansker
Name: Lowell S. Dansker
Title: President
INTERVEST CORPORATION OF NEW YORK
/s/ Lawrence G. Bergman
Name: Lawrence G. Bergman
Title: Vice President
<PAGE>
ANNEX B - OPINION OF HATCHER/JOHNSON VALUATION
<PAGE>
November 1, 1999
Board of Directors
Intervest Bancshares Corporation
10 Rockefeller Plaza
New York, New York 10020-1903
re: Fairness Opinion regarding the Merger of Intervest Corporation of New
York into Intervest Bancshares Corporation
Gentlemen:
Hatcher/Johnson Valuation, Inc. has been retained by the Board of Directors
of Intervest Bancshares Corporation ("IBCA" or the "Bank") to render an opinion
as to the fairness from a financial point of view of the consideration to be
given up by the shareholders of the Bank in connection with the proposed merger
of IBCA and Intervest Corporation of New York ("ICNY" or the "Company"). This
letter represents HJV's opinion and is issued from a financial point of view on
behalf of the shareholders of IBCA. IBCA is publicly-traded on the NASDAQ
National Public Market System. IBCA has approximately 2.5 million common shares
outstanding.
Hatcher/Johnson Valuation, Inc. ("HJV") is an full-service appraisal firm
that specializes in the valuation of closely-held corporations and provides
fairness opinions as part of its practice. Because of its prior experience in
the appraisal of banks and other financial companies involved in mergers, it has
developed an expertise in valuation and fairness opinions related to the
securities of financial institutions. HJV has been retained by the Company for
the purpose of rendering a fairness opinion to provide support to the
shareholders of IBCA relative to the shares exchange ratio of the merger. For
its opinion, HJV will be paid a fixed compensation.
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement")
dated November 1, 1999, ICNY will exchange its 47.73 outstanding shares for
1,250,000 shares of IBCA's common stock. The final merger is also subject to the
ICNY Proxy vote. The resulting exchange ratio gives the shareholders of ICNY
26,189 shares of stock in the Bank for each of the shares tendered in the
merger. This ratio is fixed based upon the terms of the Merger Agreement.
<PAGE>
Board of Directors
Intervest Bancshares Corporation
November 1, 1999
Page two
Intervest Corporation of New York lends on commercial real estate primarily
located in New York City with selected loans in other U.S. East Coast cities. It
has been and continues to be the objective of the Company to acquire or
originate additional mortgages on real estate. The majority of the loans
outstanding are secured by mortgages on multifamily residential real estate with
the remainder of the loans secured by other commercial property. Substantially
all mortgages are non-recourse, and the Company does not maintain any allowance
for loan loss. However, the Company has to date experienced only one default,
and the full principal amount of this loan was paid back to the Company. No
additional delinquencies are anticipated on the current portfolio.
As of August, 1999, ICNY had annualized pre-tax income for the year of $1.6
million and total assets of $103.4 million. Of this asset amount, approximately
$62 million was in Mortgages Receivable and $37.0 million in cash and equivalent
investments. Subordinated debentures, used as the outside source for funds, was
approximately $81.4 million. At August 31, 1999, Stockholders' Equity was $12.2
million. The Company continues to seek new loan opportunities as
additional funds become available to it.
Intervest Bancshares Corporation is a holding company with two subsidiaries,
Intervest Bank, a state-chartered Florida bank with five offices and Intervest
National Bank with one location in New York City. Intervest Bank was the sole
business of the holding company until April of 1999 when Intervest National Bank
received its charter as a national bank. Both banks focus on providing
personalized banking services to businesses and individuals. The subsidiary
banks primarily originate real estate loans on commercial and multifamily
properties with some commercial and consumer lending.
At August, 1999 the Bank on a consolidated basis had total assets of $213.9
million and shareholders' equity of $20.3 million. The Bank's collective loan
portfolio accounts for approximately half of the total assets at $106.5 million.
Securities held to maturity were $81.7 million as of August month-end. The core
deposit base was $181.7 million, and the capitalization ratio (equity divided by
total assets) was 9.5%. On an annualized basis pre-tax income was $1.9 million.
Upon completion of the merger, the Bank is anticipated to have total assets of
approximately $325 million and combined equity of approximately $32 million.
In performing its analysis, HJV relied upon and assumed without independent
verification, the accuracy and completeness of all information provided to it.
HJV has not issued any independent appraisal or evaluation of the assets of the
ICNY or of IBCA or any of its subsidiaries. As such, HJV does not express an
opinion as to the Fair Market Value of either the Company or the Bank. The
opinion of financial fairness expressed herein is necessarily based on market
and economic factors as well as other relevant considerations as they existed
and could be evaluated as of the end of the third quarter of 1999.
<PAGE>
Board of Directors
Intervest Bancshares Corporation
November 1, 1999
Page three
In arriving at its opinion, HJV reviewed and analyzed financial information
regarding the Company, the Bank and its subsidiaries as well as the rationale of
the transaction, the merger documents, peer group information and publicly
available information on local area economic conditions and demographics. HJV
also researched and analyzed comparable bank sale transactions, especially
relating to the sales of Southeast and Florida banks. Overall, HJV's analyses
generally covered but were not limited to the following:
1. Reviews and analyses of audited and unaudited financial information on the
Company and the Bank;
2. Reviews of Securities and Exchange Commission recent 10K and 10Q filings
and peer review reports for the Bank;
3. A review of Company Prospectus offerings of Subordinated Debentures;
4. Discussions with the management of the Company and attendance at the
October 14, 1999 board of Directors meeting;
5. A review of the Agreement and Plan of Merger and the Company's Proxy
Statement;
6. A review of the economic, competitive and demographic conditions as well as
business risks and opportunities within the respective markets of the
Company and the Bank;
7. A review and analysis of the public trading activity of the Bank's shares
as well as the potential impact of the Merger on trading volummes and price
movements;
8. A review and analysis of actual transactions involving the sale of
Southeast and Florida banks similar in size and capitalization to the Bank;
9. A search for and analysis of transactions involving financial companies
with economic returns similar to ICNY;
10. A review and analysis of publicly trading prices of Southeast and Florida
banks similar in size and capitalization to the Bank;
11. An analysis of the relative values of the Company and the Bank as if they
were to remain independent;
12. A review of the financial and tax consequences of the Merger on both
Company and Bank shareholders.
The Merger Agreement indicates an exchange ratio for the tendering of the
ICNY shares for IBCA shares of 26,189 to 1. At the October 14, 1999 date of the
Board of Directors meeting where the merger was approved, the Bank's shares were
trading at $7.5000 per share. At the date of this letter, the most recent trade
of October 27th indicated a price $9.000 per share. Given 47.73 shares of ICNY
at these dates, a value range of between $9.4 million and $11.3 million for the
ICNY stock would be indicated.
<PAGE>
Board of Directors
Intervest Bancshares Corporation
November 1, 1999
Page four
To perform its independent analysis, HJV first analyzed guideline
publicly-trading Southeast banks and determined a independent range of trading
prices for IBCA based on these comparable small banks. HJV notes that the shares
of IBCA are thinly traded and might trade at different values were daily or
higher volume trades occurring. Using this independent range of prices, HJV
developed a value for IBCA of from $8.11 to $13.33 per share. HJV next analyzed
actual Southeast sale transactions involving selling banks of IBCA's size and
capitalization. This analysis resulted in a range of from $9.72 to $14.38 per
share. Note that the per share prices for the transactions were converted to "as
if publicly traded" minority prices per share. Also, since trading volume is
very small and the market impact of sales of large blocks of shares is unknown,
HJV determined the above prices without dilution.
HJV next performed valuation analyses to determine the respective per share
values for ICNY. To do this HJV used guideline trading prices of similar
financial firms, recognizing that no directly comparable businesses are publicly
traded. This analysis produced a range of values from $232 up to $271 thousand
per share (47.73 shares outstanding). HJV also used certain income approaches,
specifically discounted future earnings and capitalization of historical pre-tax
earnings. These analyses produced a range of from $256 up to $270 per share.
These values are on a control basis, since the shareholders of IBCA are selling
100% of the Company collectively.
Based upon the above per share indications, HJV determined a range of value
for the merger transaction from $11.1 to $13.0 million. This would indicate a
share exchange ratio range of from 18,846 up to 28,607 to 1.
HJV also looked at the recent trading prices of IBCA and determined an
exchange ratio range of from 29,200 up to 34,200 to 1. However, as indicated the
IBCA stock is thinly traded and, as such, may not be trading at the same level
as it would with more trading activity. Accordingly, the independent valuations
with their lower exchange ratio indicate that the stock has been trading below
what the analyses would indicate.
Lastly, HJV did analyses similar to the above using the recorded equity
values for the respective businesses. The resulting ratio range was 28,500 up to
33,400 to 1. While the actual equity of ICNY is reasonably close to the
independent valuation conclusions, such is not the case with the Bank. As a
result, use of "book equity" tends to distort the value of the Bank's shares,
raising the exchange ratio.
As predicated in the Merger documents, the fixed exchange ratio is 26,189
to 1. This ratio is within the indicated range of ratios determined by the
independent value analyses. The selection of this exchange ratio is also
favorable to the shareholders of IBCA in that the
<PAGE>
Board of Directors
Intervest Bancshares Corporation
November 1, 1999
Page five
selected higher relative values for the Bank lower the number of shares to be
received by the ICNY shareholders.
Collectively, HJV's analyses and ultimate conclusion are predicated upon
the terms and conditions set forth in the Agreement and Plan of Merger, dated
November 1, 1999. As such, any changes to this document could have a material
impact on HJV's opinion. Therefore, our opinion is subject to review and
consideration of any such changes.
Accordingly, in consideration of the above, it is the opinion of HJV that,
based on the structure of the transaction presented in the Agreement and Plan of
Merger between Intervest Corporation of New York and Intervest Bancshares
Corporation and on the analyses that have been performed, the consideration to
be given by the shareholders of the IBCA to the shareholders of ICNY is fair
from a financial point of view.
Respectfully submitted,
Hatcher/Johnson Valuation, Inc.
<PAGE>
ANNEX C - INTERVEST BANCSHARES CORPORATION REPORT ON FORM 10-K
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended Commission File Number
December 31, 1997 000-23377
- - ------------------------- ----------------------
INTERVEST BANCSHARES CORPORATION
- - --------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 13-3699013
- - ------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer No.)
Incorporation or Organization)
10 Rockefeller Plaza, New York, New York 10020-1903
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 757-7300
Issuer's Telephone Number, Including Area Code
Securities Registered Pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities Register Pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Issuer was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge in definitive proxy or information statements
incorporated by reference in Part III to this Form 10-KSB or any amendment to
this Form 10-KSB (X) .
The Issuer's total interest income and total other income for its most recent
fiscal year was $9,347,000 and $136,000, respectively.
<PAGE>
The aggregate market value of the Issuer's voting stock held by non-affiliates
as of March 15, 1998 was $16,228,310.
As of March 15, 1998 there were 2,136,675 shares of the Issuer's Class A common
stock and 300,000 shares of the Issuer's Class B common stock outstanding.
Indicate by check mark whether the Issuer is utilizing the Transitional Small
Business Format.
YES NO X .
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting to be held on May 27, 1998 - Part III
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I
Pages
-----
<S> <C>
Item 1 Description of Business 4
Item 2 Description of Property 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis of Plan or Operations 11
Item 7 Financial Statements 33
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons of the
Registrant; Compliance with Section 16(a) of the Exchange Act 58
Item 10 Executive Compensation 58
Item 11 Security Ownership of Certain Beneficial Owners and Management 58
Item 12 Certain Relationships and Related Transactions 58
Item 13 Exhibits, Lists and Reports on Form 8-K 59
SIGNATURES
</TABLE>
<PAGE>
PART I
Item 1. Description of Business
Intervest Bancshares Corporation (the "Company) is a registered bank
holding company incorporated under the laws of the State of Delaware on February
5, 1993. The principal offices of the Company are located at 10 Rockefeller
Plaza, Suite 1015, New York, New York 10020-1903, and its telephone number is
212-757-7300. The Company's primary asset is Intervest Bank (the "Bank"), a
Florida chartered bank which is a member of the Federal Reserve System. The
Company owns approximately 99.78% of the issued and outstanding shares of the
Bank. The Company, through its controlling ownership of the Bank, engages in the
business of commercial banking. The Company engages in no substantial business
activities other than mortgage lending and activities related to its ownership
of the Bank.
The Bank was originally chartered in December, 1987. The principal
executive offices of the Bank are located at 625 Court Street, Clearwater,
Florida 34625, and its telephone number is (813) 442- 2551. In addition to its
principal office, the Bank operates four branch offices, three in Clearwater,
Florida at 1875 Belcher Road North, 2175 Nursery Road, and 2575 Ulmerton Road,
and one in South Pasadena, Florida at 6750 Gulfport Blvd.
The Bank is subject to examination and comprehensive regulation by the
Federal Reserve Board (the "FRB") and its deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the extent permitted by law. The
Bank is a member of the Federal Reserve System. The Bank is also subject to the
supervision of and examination by the Florida Department of Banking and Finance.
The Bank primarily focuses on providing personalized banking services
to businesses and individuals within the market area where its banking offices
are located. Management believes that this local market strategy enables the
Bank to attract and retain low cost core deposits which provide substantially
all of the Bank's funding requirements.
Deposit services include certificates of deposit, individual retirement
accounts ("IRAs") and other time deposits, checking and other demand deposit
accounts, NOW accounts, savings accounts and money market accounts. The
transaction accounts and time certificates are tailored to the principal market
areas at rates competitive to those in the area. All deposit accounts are
insured by the FDIC up to the maximum limits permitted by law. The Bank solicits
these accounts from small businesses, professional firms and households located
throughout its primary market area.
The Bank also offers ATM services with access to local, state, and
national networks, safe deposit boxes, wire transfers, direct deposit of payroll
and social security checks, and automatic drafts for various accounts. The Bank
periodically reviews the scope of the products and services it offers so as to
assess whether additional products or services should, consistent with market
opportunities and available resources, be included in the Bank's products and
services.
The Bank conducts commercial and consumer banking business which
primarily consists of attracting deposits from the areas served by its banking
offices and using those deposits, together with funds derived from other
sources, to originate a variety of commercial, consumer and real estate loans
(including commercial loans collateralized by real estate). Commercial loans
include both collateralized and uncollateralized loans for working capital
4
<PAGE>
(including inventory and receivables), business expansion (including real estate
acquisitions and improvements), and purchases of equipment and machinery.
Consumer loans include collateralized and uncollateralized loans for financing
automobiles, boats, home improvements, and personal investments.
The revenues of the Bank are primarily derived from interest on, and
fees received in connection with, commercial real estate and other loans, and
from interest and dividends from securities, and short-term investments. The
principal sources of funds for the Bank's lending activities are its deposits,
repayment of loans, the income from and maturity of securities and capital
contributions from the Company. The principal expenses of the Bank are the
interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, the Bank's
operations are materially and significantly influenced by general economic
conditions and by related monetary and fiscal policies of financial institution
regulatory agencies, including the FRB, the FDIC, and the State of Florida.
Deposit flows and cost of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered and other factors affecting local demand and availability of funds. The
Bank faces strong competition in the attraction of deposits (its primary source
of lendable funds) and in the origination of loans.
Market Area
The Bank's facilities are located in Pinellas County, which is the
Bank's primary market area. Pinellas County has an estimated resident population
of approximately 890,000 people. The area has many more seasonal residents. The
Bank's deposit gathering and lending markets are concentrated on the communities
surrounding its offices in Clearwater and South Pasadena, Florida. Management
believes that its offices are located in an area serving small and mid-sized
businesses and serving middle and upper income residential communities.
Market for Services
Management believes that the Bank's principal markets are: (i) the
established and expanding commercial market within the primary market area: and
(ii) the moderate and the affluent residential market within the primary market
area. Moreover, management believes that a community bank is well positioned to
establish these relationships with both commercial customers and households.
Management believes that the Bank is well positioned to take advantage of its
market segment.
Businesses are solicited through the personal efforts of the Bank's
directors and officers. Management believes a locally-based bank is often
perceived by the local business community as possessing a clearer understanding
of local commerce and its needs. Consequently, the Company expects that the Bank
will be able to make prudent lending decisions quickly and more efficiently than
its competitors without compromising asset quality or the Bank's profitability.
5
<PAGE>
Lending Activities
The primary source of income generated by the Bank is from the interest
earned from both the loan and securities portfolios. The Bank maintains
diversification when considering investments and the granting of loan requests.
Emphasis is placed on the borrower's ability to generate cash flow to support
its debt obligations and other cash related expenses. Lending activities include
commercial and consumer loans and real estate loans. Commercial loans are
originated for working capital funding. Consumer loans include those for the
purchase of automobiles, boats, home improvements and investments. Real estate
loans include primarily the origination of loans for commercial property. While
the Bank's lending activities include single-family residential mortgages, such
lending activities are not emphasized.
At December 31, 1997 the Bank's net loan portfolio was $74.9 million,
representing 52.6% of its total assets. As of such date, the loan portfolio
consisted of 4.4% commercial loans, 95.3% real-estate mortgage loans and 0.3%
consumer and other loans.
Real Estate Mortgage Loans
A substantial portion of the Bank's loan portfolio is composed of loans
secured by commercial real estate, including apartment buildings, office
buildings and retail shopping centers. The properties are personally inspected
by representatives of the Bank and the Bank's real estate loans relate primarily
to properties in the Bank's primary market area. The Bank requires mortgage
title insurance and hazard insurance in amounts deemed appropriate by
Management.
Commercial Lending
The Bank offers a variety of commercial loan services including term
loans, lines of credit and equipment financing. Short-to-medium term commercial
loans, both collateralized and uncollateralized, are made available to
businesses for working capital (including inventory and receivables), business
expansion (including acquisitions of real estate and improvements), and the
purchase of equipment and machinery. The purpose of a particular loan generally
determines its structure.
The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Bank takes as collateral a lien on any
available real estate, equipment, or other assets. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his employment and other
income and which are collateralized by real property whose value tends to be
more readily ascertainable, commercial loans typically are underwritten on the
basis of the borrower's ability to make repayment from the cash flow of his
business and generally are collateralized by business assets, such as accounts
receivable, equipment and inventory. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the success
of the business itself. Further, the collateral underlying the loans may
depreciate over time, cannot be appraised with as much precision as residential
real estate, and may fluctuate in value based on the success of the business.
6
<PAGE>
Consumer Loans
Consumer loans made by the Bank have included automobiles, recreation
vehicles, boats, second mortgages, home improvements, home equity lines of
credit, personal (collateralized and uncollateralized) and deposit account
collateralized loans. The terms of these loans periodically range from 36 to 180
months and vary based upon the kind of collateral and size of loan.
Consumer loans typically have a short term and carry higher interest
rates than that charged on other types of loans. Installment loans, however, do
pose additional risks of collectability when compared to traditional types of
loans granted by commercial banks such as residential mortgage loans. In many
instances, the Bank is required to rely on the borrower's ability to repay since
the collateral may be of reduced value at the time of collection. Accordingly,
the initial determination of the borrower's ability to repay is of primary
importance in the underwriting of consumer loans.
Loan Solicitation and Processing
Loan originations are derived from a number of sources. Loan
originations can be attributed to direct solicitation by the Bank's loan
officers, existing customers and borrowers, advertising, walk-in customers and
referrals from brokers.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment income and credit standing. An
appraisal, where required, of any real estate intended to collateralize the
proposed loan is undertaken by an appraiser approved by the Bank.
Competition
The Bank encounters strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an
increasing level of interstate banking have created a highly competitive
environment for commercial banking in the Bank's primary market area. In one or
more aspects of its business, the Bank competes with other commercial banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, and other
financial intermediaries operating in Pinellas County and elsewhere. Most of
these competitors, some of which are affiliated with large bank holding
companies, have substantially greater resources and lending limits, and may
offer certain services that the Bank does not currently provide. In addition,
many of the Company's non-bank competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally insured
banks. See "Investment Considerations and Risk Factors-Competition."
Management believes that the Company and the Bank are well positioned
to compete successfully in its primary market area, although no assurances can
be given. Competition among financial institutions is based upon interest rates
offered on deposit accounts, interest rates charged on loans and other credit
and service charges, the quality and scope of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial
borrowers, relative lending limits. As an independent community bank
headquartered in the Bank's primary market area, management believes that the
Bank's community commitment and involvement in its primary market area, as well
7
<PAGE>
as its commitment to quality, personalized banking services, are factors that
contribute to the Bank's competitiveness.
Employees
At December 31, 1997, the Company and the Bank together employed 30
full-time employees and 1 part-time employee. None of these employees is covered
by a collective bargaining agreement and the Company believes that its employee
relations are good.
Item 2. Description of Property
The office of the Company is at 10 Rockefeller Plaza, New York, New
York. The Bank maintains its principal office at 625 Court Street, Clearwater,
Florida. In addition to its principal office the bank operates four branch
offices. Three of the branch offices are in Clearwater, Florida, at 1875 Belcher
Road North, 2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750
Gulfport Blvd., South Pasadena, Florida. With the exception of the Belcher Road
office, which is leased, all of the offices are owned by the Bank.
The office at 625 Court Street consists of a two story building
containing approximately 22,000 sq. ft. The Bank occupies the ground floor
(approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial
tenant. The branch office at 1875 Belcher Road is a two story building in which
the bank leases approximately 5,100 sq. ft. for its branch office. The branch
office at 2175 Nursery Road is a one story building containing approximately
2,700 sq. ft. which is entirely occupied by the Bank. The branch office at 2575
Ulmerton Road is a three story building containing approximately 17,000 sq. ft.
The bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the
upper floors to commercial tenants. The branch office at 6750 Gulfport Blvd. is
a one story building containing approximately 2,800 sq. ft. which is entirely
occupied by the Bank. In addition, each of the Bank's offices include
drive-through teller facilities.
Item 3. Legal Proceedings
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank's business. Management
does not believe that there is any pending or threatened proceeding against the
Company or the Bank which, if determined adversely, would have a material effect
on the business, results of operations, or financial position of the Company or
the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
8
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholders Matters
Market for Securities
The Company's Class A Common Stock was approved for listing on the
NASDAQ SmallCap Market (Symbol: IBCA) in November of 1997. Prior to then, there
had been no established public trading market for the securities of the Company.
The high and low sales prices for Class A Common Stock during the period from
November 25, 1997, when trading commenced, and December 31, 1997 were $12.25 and
$11.50, respectively. At December 31, 1997, there were approximately 272 holders
of record of the Company's Class A Common Stock and three holders of record of
the Company's Class B Common Stock.
Dividends
Holders of the Company's Class A common stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefor. No dividends may be declared or paid with respect to shares
of Class B common stock until January 1, 2000.
The Company has not paid any cash dividends on its capital stock and
there is no immediate prospect or contemplation of the payment of dividends on
the Company's Stock.
The Company's ability to pay dividends is generally limited to earnings
from the prior year, although retained earnings and dividends from the Bank to
the Company may also be used to pay dividends under certain circumstances. The
primary source of funds for dividends payable by the Company to its shareholders
is dividends payable to it by the Bank.
The payment of dividends by the Bank is subject to a determination by
the Bank's Board of Directors and is dependent upon a number of factors,
including capital requirements, regulatory limitations, the Bank's results of
operations and financial condition, tax considerations of the Bank and the
Company, the number of outstanding shares of stock, and general economic
conditions. There are various legal limitations with respect to the Bank's
financing or otherwise supplying funds to the Company. In particular, under
federal banking law, the Bank may not declare a dividend that exceeds undivided
profits. In addition, the approval of the Federal Reserve Bank of Atlanta (the
"Atlanta FRB"), as well as the Florida Department of Banking and Finance, is
required if the total amount of all dividends declared in any calendar year
exceeds the Bank's net profits, as defined, for that year, combined with its
retained net profits for the proceeding two years. The Atlanta FRB also has the
authority to limit further the payment of dividends by the Bank under certain
circumstances. In addition, federal banking laws prohibit or restrict the Bank
from extending credit to the Company under certain circumstances. The FRB not
only has established certain financial and capital requirements that affect the
ability of the Bank to pay dividends, but it has also the general authority to
prohibit the Bank from engaging in an unsafe or unsound practice in conducting
its business. Depending upon the financial condition of the Bank, the payment of
cash dividends could be deemed to constitute such an unsafe or unsound practice.
Both the FRB and the Florida Department of Banking and Finance, which
regulate and supervise the Bank and the Company, have publicly stated their view
that it is generally an unsafe and unsound practice to pay cash dividends except
9
<PAGE>
out of current operating earnings. Under FRB policy, a bank holding company is
expected to act as a source of financial strength to its subsidiary banks and to
commit resources to support each such bank. Consistent with this policy, the FRB
has stated that, as a matter of prudent banking, a bank holding company
generally should not pay cash dividends unless the available net earnings of the
bank holding company is sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be consistent with the
Company's capital needs, asset quality and overall financial condition.
The ability of the Bank and the Company to pay cash dividends is
currently, and in the future could be further influenced by bank regulatory
policies or agreements and by capital guidelines. Accordingly, the actual
amount, if any, and timing of future dividends will depend on, among other
things, future earnings, the financial condition of the Bank and the Company,
the amount of cash on hand at the Company level, outstanding debt obligations,
if any, and the requirements imposed by regulatory authorities.
10
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
SELECTED FINANCIAL DATA
The following table presents selected financial data for the Company
and the Bank. The data set forth below for the seven months ended December 31,
1993, five months ended May 31, 1993, and the years ended December 31, 1997,
1996, 1995 and 1994 are derived from the audited consolidated financial
statements of the Company or the Bank, as the case may be. The selected
financial data should be read in conjunction with, and are qualified in their
entirety by, the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
<TABLE>
<CAPTION>
At or for the
Seven At or for the
At or for the Years Ended Months Ended Five Months Ended
December 31, December 31, May 31,
----------------------------------------------- ------------ -----------------
1997 1996 1995 1994 1993(1) 1993(2)
---- ---- ---- ---- ------- -------
(Dollars in Thousands, Except Per Share Data)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets .............. $ 150,755 105,196 68,942 40,117 29,071 22,557
Cash and cash equivalents . 9,176 6,320 8,551 6,088 5,519 2,569
Net Loans ................. 75,652 59,499 36,465 22,385 16,224 16,163
Securities ................. 58,821 34,507 19,630 8,638 5,231 2,958
Deposits .................. 131,167 93,447 58,601 30,092 22,195 20,138
Borrowed funds ............ -- -- -- -- -- --
Retained earnings
(Accumulated deficit) ... 1,836 992 434 164 (17) (2,050)
Total stockholders' equity 17,620 9,747 9,189 8,884 5,828 1,275
Income Statement Data:
Interest income ........... 9,347 6,381 4,190 2,158 1,007 741
Interest expense .......... 5,894 3,745 2,225 803 345 335
Net interest income ....... 3,453 2,636 1,965 1,355 662 406
Provision for loan losses . (352) (250) (233) (124) -- (90)
Net interest income after
provision for loan losses 3,101 2,386 1,732 1,231 662 316
Other income .............. 136 106 89 112 59 102
Other expense ............. (1906) (1,551) (1,415) (1,054) (738) (401)
Earnings (Loss) before
income taxes .............. 1,331 941 406 289 (17) 17
Provision for income taxes (487) (383) (136) (108) -- --
Net earnings (Loss) ....... 844 558 270 181 (17) 17
Per Share Data:
Net Basic earnings (Loss) ... .49 .34 .16 .11 (.01) .05
Book value at period end .... $ 7.27 5.91 5.57 5.38 3.53 3.64
</TABLE>
- - ---------------------------------
(1) Includes the consolidated financial information of the Company from
June 1, 1993.
(2) Financial information of the Bank only
11
<PAGE>
General
The Company's principal asset is its ownership of a controlling
interest in the Bank. Accordingly, the Company's results of operations are
primarily dependent upon the results of operations of the Bank. The Bank
conducts a commercial banking business which consists of attracting deposits
from the general public and applying those funds to the origination of
commercial, consumer and real estate loans (including commercial loans
collateralized by real estate). The Bank's profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets (i.e., loans and investments) less the interest
expense incurred on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest-rate
earned and paid on these balances. Net interest income is dependent upon the
Bank's interest-rate spread, which is the difference between the average yield
earned on its interest-earning assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest rates,
deposit flows, and loan demand. Additionally, and to a lesser extent, the Bank's
profitability is affected by such factors as the level of noninterest income and
expenses, the provision for credit losses, and the effective tax rate.
Noninterest income consists primarily of loan and other fees. Noninterest
expense consists of compensation and benefits, occupancy related expenses,
deposit insurance premiums paid to the FDIC, and other operating expenses.
Since its acquisition of control of the Bank in 1993, the Company has
sought to strengthen the operation of the Bank, to improve asset quality, to
increase the loan portfolio and to decrease nonperforming loans. During 1997,
the Company completed a public offering of 747,500 Units for gross proceeds of
$7,475,000 (the "1997 Offering"). Each Unit consisted of one share of the
Company's Class A Common Stock and one warrant to purchase an additional share
of Class A Common Stock. In connection with the 1997 Offering, the Company
issued warrants related to 145,850 shares of Class A Common Stock to the
Underwriter and participating broker/dealers. The Company has reserved a total
of 2,494,348 shares of Class A stock for issuance upon exercise of the Company's
warrants to purchase shares of Class A Common Stock.
Management believes that additional capital is the key to any expansion
program and, to this end, it will continually assess the need for capital, both
at the Bank and the Company levels. If it is determined that additional capital
is necessary to support the operations of the Company or the Bank or to support
any expansion or acquisition activities, transactions to obtain additional
financing will be considered by the Company.
The Bank's present offices are located in or near Clearwater, Florida.
Clearwater is located in Pinellas County, which is the most populous county in
the Tampa Bay area of Florida. It also has a branch office in South Pasadena,
which is also in Pinellas County. The "Tampa Bay" area is located on the West
Coast of Florida, midway up the Florida peninsula. The major cities in the area
are Tampa (Hillsborough County) and St. Petersburg and Clearwater (Pinellas
County).
The current population of the Tampa Bay area is estimated at
approximately 2,200,000, which reflects population increases of approximately
45% between 1970 and 1980, and approximately 27% between 1980 and 1990. Pinellas
is the most densely populated county in Florida, with more than 2,800 people per
square mile. The average age of the population for the region is estimated at 45
years (as compared to 38 years for the State of Florida), and this reflects the
12
<PAGE>
history of Pinellas County as a retirement area. Recent years have shown a
slight drop in average age due to an increase in office and manufacturing
employment opportunities.
The economy of Pinellas County has historically been tourist and
retirement oriented. Pinellas County has recently attracted a larger share of
new business, particularly in the high technology industries. Total per capita
personal income in Pinellas County increased from approximately $15,000 in 1984
to approximately $22,700 in 1992. Employment in the region reflects a
broad-based economy, with an emphasis on the retail trade and service
industries.
The housing market in the region remains stable in the view of
management, although housing starts have slowed from the high levels experienced
during the 1970's.
Clearwater is the county seat of Pinellas County and its second largest
city. It encompasses approximately 32 square miles and has a population of
approximately 100,000.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the financial
condition and results of operations of the Company for the years ended December
31, 1997 and 1996. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes presented elsewhere
herein.
Results Of Operations
Comparison of Year Ended December 31, 1997 and 1996.
General
- - -------
Net earnings for the year ended December 31, 1997 were $844,000
compared to $558,000 for the year ended December 31, 1996. This increase in the
Company's net earnings was primarily due to an increase in net interest income
partially offset by an increase in noninterest expenses and the provision for
income taxes.
Interest Income and Expense
- - ---------------------------
Interest income increased by $2,966,000 from $6,381,000 for the year
ended December 31, 1996 to $9,347,000 for the year ended December 31, 1997.
Interest income on loans increased $1,791,000 due to an increase in the average
loan portfolio balance from $49.3 million for the year ended December 31, 1996
to $68.7 million for 1997, partially offset by a decrease in the weighted
average yield of 5 basis points. Interest on securities increased $1,118,000 due
to an increase in the average securities balance from $25.6 million in 1996 to
$42.8 million in 1997 and an increase in the average yield from 5.92% in 1996 to
6.15% in 1997. Interest on other interest-earning assets increased $57,000
primarily due to an increase from $4.7 million in average other interest-earning
assets in 1996 to $6.9 million in 1997.
Interest expense increased to $5,894,000 for the year ended December
31, 1997 from $3,745,000 for the year ended December 31, 1996. Interest expense
on deposit accounts increased primarily because of a $39.0 million increase in
the average balance, in addition to an increase of 4 basis points in the average
yield paid on deposits for the year ended December 31, 1997 compared to 1996.
13
<PAGE>
Provision for Loan Losses
- - -------------------------
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Bank,
industry standards, the amount of nonperforming loans, general economic
conditions, particularly as they relate to the Bank's market areas, and other
factors related to the collectability of the Bank's loan portfolio. The
provision increased from $250,000 for the year ended December 31, 1996 to
$352,000 for the year ended December 31, 1997. At December 31, 1997, there were
no non-performing loans. Management believes that the allowance for loan loss of
$1,173,000 is adequate at December 31, 1997.
Other Income
- - ------------
Total other income increased $30,000 for the year ended December 31,
1997 compared to 1996.
Other Expenses
- - --------------
Total other expenses increased $355,000 for the year ended December 31,
1997 when compared to 1996, primarily due to an increase in employee
compensation and benefits and occupancy and equipment expenses. The increase is
primarily due to additional costs for the new branches and the overall growth of
the Company.
Provision for Income Taxes
- - --------------------------
In 1997 the provision for income taxes is $487,000, an effective income
tax rate of 36.6%, as compared to $383,000 and 40.7% respectively, in 1996. In
1996, a greater portion of the consolidated earnings was generated by the
holding company which has a higher state income tax rate.
Net Interest Income
Net interest income, which constitutes the principal source of income
for the Company, represents the difference between income on interest-earning
assets and interest expense on interest-bearing liabilities. The principal
interest-earning assets are securities and loans made to businesses and
individuals. Interest-bearing liabilities primarily consist of time deposits,
interest paying checking accounts ("NOW accounts"), retail savings deposits and
money market accounts. Funds attracted by these interest-bearing liabilities are
invested in interest-earning assets. Accordingly, net interest income depends
upon the volume of the average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or paid on them.
Net interest income was $3,453,000 for the Company for the year ended
December 31, 1997 compared with $2,636,000 for the year ended December 31, 1996.
This improvement in net interest income is primarily a result of a higher volume
of net interest-earning assets.
14
<PAGE>
The following tables set forth, for the periods indicated, information
regarding (i) the total dollar amount of interest and dividend income of the
Company from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average costs; (iii) net interest/dividend income; (iv) interest rate
spread; (v) net interest margin. Average balances are based on average daily
balances.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------
(Dollars in thousands)
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans(1) ....................... $ 68,711 6,415 9.34% $49,266 4,624 9.39%
Securities ..................... 42,763 2,632 6.15% 25,577 1,514 5.92%
Other interest-earning assets(2) 6,913 300 4.34% 4,730 243 5.14%
----- --- ---- ----- --- ----
Total interest-earning
assets .............. 118,387 9,347 7.90% 79,573 6,381 8.02%
----- -----
Noninterest-earning assets ....... 14,823 4,089
------ -----
Total assets ............ $133,210 $83,662
======== ========
Interest-bearing liabilities:
Demand, money market and
NOW deposits ................ 18,087 816 4.51% 8,432 310 3.68%
Savings ....................... 9,128 446 4.89% 1,470 62 4.22%
Certificates of deposit ....... 81,167 4,632 5.71% 59,437 3,371 5.67%
Other ......................... -- -- -- 34 2 5.88%
------ --- ---- ----- --- ----
Total interest-bearing
liabilities .......... 108,382 5,894 5.44% 69,373 3,745 5.40%
-----
Noninterest-bearing liabilities .. 5,425 4,840
Stockholders' equity ............. 19,403 9,449
------ -----
Total liabilities and
stockholders' equity . $133,210 $83,662
======== =======
Net interest/dividend income ..... $ 3,453 $ 2,636
======== ========
Interest rate spread(3) .......... 2.46% 2.62%
==== ====
Net interest margin(4) ........... 2.92% 3.31%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities ........... 1.09 1.15
==== ====
</TABLE>
15
<PAGE>
- - ------------------------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits.
(3) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
- - --------------------
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
December 31,
1997 vs. 1996
--------------------------------------
Increase (Decrease) Due to
--------------------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
Interest-earning assets: (Dollars in thousands)
Loans $ (25) 1,826 (10) 1,791
Securities 59 1,020 39 1,118
Other interest-earning assets (38) 112 (17) 57
------ ------ ------ ------
Total (4) 2,958 12 2,966
------ ------ ------ ------
Interest-bearing liabilities:
Demand, Money Market and NOW Deposits 70 356 80 506
Savings 10 323 51 384
Certificates of Deposit 24 1,228 9 1,261
Other Borrowings (2) (2) 2 (2)
------ ------ ------ ------
Total 102 1,905 142 2,149
------ ------ ------ ------
Net change in net interest income
before provision for credit losses $ (106) 1,053 (130) 817
====== ====== ====== ======
Income Taxes
- - ------------
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes available to offset future federal taxable income.
They were in the aggregate amount of $494,000, with specified portions expiring
in each year from 2006 through 2008. The carryforwards are subject to an annual
limitation of $332,000.
At the time of its incorporation, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires it to take into account changes in tax rates when valuing
the deferred income tax amounts carried on its balance sheets.
16
<PAGE>
Asset/Liability Management
- - --------------------------
A principal objective of the Bank's asset/liability management strategy is to
minimize the Bank's exposure to changes in interest rates by matching the
maturity and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is overseen in part through the direction of the
Asset and Liability Committee of the Bank (the "ALCO Committee") which
establishes policies and monitors results to control interest rate sensitivity.
As a part of the Bank's interest rate risk management policy, the ALCO
Committee examines the extent to which its assets and liabilities are "interest
rate-sensitive" and monitors the Bank's interest rate sensitivity "gap." An
asset or liability is considered to be interest rate-sensitive if it will
reprice or mature within the time period analyzed, usually one year or less. The
interest rate-sensitivity gap is the difference between interest-earning assets
and interest-bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate-sensitive
assets exceeds the amount of interest rate-sensitive liabilities. A gap is
considered negative when the amount of interest rate-sensitive liabilities
exceeds interest rate-sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of the Bank's assets and
liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition, certain
assets, such as adjustable rate mortgage loans, have features (generally
referred to as "interest rate caps") which limit changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels also could deviate
significantly from those assumed in calculating the interest-rate gap. The
ability of many borrowers to service their debts also may decrease in the event
of an interest-rate increase.
Management's strategy is to maintain a balanced interest rate risk position to
protect its net interest margin from market fluctuations. To this end, the ALCO
Committee reviews, on a monthly basis, the maturity and repricing of assets and
liabilities. The ALCO Committee has adopted a goal of achieving and maintaining
a six-month ratio between rate sensitive assets to rate sensitive liabilities of
.80 to 1.20.
Principal among the Bank's asset/liability management strategies has been the
emphasis on managing its interest-rate sensitive liabilities in a manner
designed to attempt to reduce the Bank's exposure during periods of fluctuating
interest rates. Management believes that the type and amount of the Bank's
interest rate-sensitive liabilities may reduce the potential impact that a rise
in interest rates might have on the Bank's net interest income. Additionally,
the Bank maintains a "floor," or minimum rate, on many of its floating or prime
based loans. The "floor" amount for each specific loan is determined in relation
to the prevailing market rates on the date of origination and management retains
a great deal of flexibility in connection with the establishment of floors for
particular loans. Management recognizes that floors allow the Bank to continue
to earn a higher rate when the floating rate falls below the established "floor"
rate.
17
<PAGE>
The following table sets forth certain information relating to the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1997
that are estimated to mature or are scheduled to reprice within the period
shown.
<TABLE>
<CAPTION>
More than More than
One Year and Five Years and
0-3 4-12 Less than Less than
Months Months Five Years Ten Years Total
------ ------ ---------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage and commercial loans (1):
Commercial loans $ 2,371 386 333 191 3,281
Commercial real estate loans 4,390 10,213 55,819 111 70,533
Residential mortgage loans 275 526 1,112 1,237 3,150
Consumer loans 15 14 233 -- 262
-------- -------- -------- -------- --------
Total loans 7,051 11,139 57,497 1,539 77,226
Federal funds sold 162 -- -- -- 162
Interest-bearing deposits with banks -- -- 99 -- 99
Securities (2)(3) 11,065 9,382 33,122 12,761 66,330
-------- -------- -------- -------- --------
Total rate-sensitive assets 18,278 20,521 90,718 14,300 143,817
-------- -------- -------- --------
Deposit accounts (2):
Money market deposits 17,180 -- -- -- 17,180
NOW deposits 4,290 -- -- -- 4,290
Savings deposits 12,829 -- -- -- 12,829
Certificates of deposit 13,930 33,059 45,235 1,154 93,378
-------- -------- -------- -------- --------
Total rate-sensitive liabilities 48,229 33,059 45,235 1,154 127,677
-------- -------- -------- -------- --------
GAP (repricing differences) $(29,951) (12,538) 45,483 13,146 16,140
======== ======== ======== ======== ========
Cumulative GAP $(29,951) (42,489) 2,994 16,140
======== ======== ======== ========
Cumulative GAP/total assets (19.87%) (28.18%) 1.99% 10.71%
======== ======== ======== ========
- - -------------------------------
</TABLE>
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed rate loans are
scheduled, including repayment, according to their maturities.
(2) Money market, NOW, and savings deposits are regarded as ready
accessible withdrawable accounts. All other time deposits are scheduled
through the maturity dates. Securities are also scheduled through the
maturity dates.
(3) Includes Federal Reserve Bank stock and short-term investments.
18
<PAGE>
Financial Condition
Lending Activities
- - ------------------
A significant source of income for the Company is the interest earned
on loans. At December 31, 1997, the Company's total assets were $150.8 million
and its net loans were $75.7 million or 50% of total assets as compared to
$105.2 million of total assets at December 31, 1996, and net loans of $59.5
million representing 57% of the total assets at December 31, 1996.
Lending activities are conducted pursuant to a written policy which has
been adopted by the Bank. Each loan officer has defined lending authority beyond
which loans, depending upon their type and size, must be reviewed and approved
by a loan committee comprised of certain directors of the Bank.
LOAN PORTFOLIO ANALYSIS
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated.
At December 31, 1997 At December 31, 1996
------------------------ ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in thousands)
Commercial loans $ 3,281 4.3% $ 3,514 5.8%
Commercial real estate loans 70,533 91.3 54,198 89.4
Residential mortgage loans 3,150 4.1 2,784 4.6
Consumer loans 262 .3 157 .2
------ ---- ------ ----
Total loans 77,226 100.0% 60,653 100.0%
===== =====
Add (Deduct):
Deferred loan fees (401) (343)
Allowance for loan losses (1,173) (811)
------ ----
Loans, net $ 75,652 $ 59,499
======== =========
19
<PAGE>
The following table reflects the contractual principal repayments by
period of the Company's loan portfolio at December 31, 1997.
<TABLE>
<CAPTION>
Residential Commercial
Years Ended Commercial Mortgage Real Estate Consumer
December 31, Loans Loans Loans Loans Total
------------ ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1998 $2,513 482 5,321 67 8,383
1999 431 279 6,650 66 7,426
2000-2001 269 457 21,602 87 22,415
2002-2003 68 657 18,587 42 19,354
2004-2010 ---- 1,275 18,373 ---- 19,648
-------- ----- ------ ---- ------
Total $3,281 3,150 70,533 262 77,226
====== ===== ====== === ======
</TABLE>
Of the $68.8 million of loans due after 1998, 33% of such loans have
fixed interest rates and 67% have adjustable interest rates.
The following table sets forth total loans originated and repaid during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Originations:
Commercial loans $ 502 $ 497
Real estate loans 23,180 30,802
Consumer loans 162 145
------- -------
Total loans originated 23,844 31,444
Principal reductions (7,271) (8,082)
------- -------
Increase (decrease) in total loans $16,573 $23,362
======= =======
</TABLE>
Asset Quality
- - -------------
Management seeks to maintain a high quality of assets through
conservative underwriting and sound lending practices. The majority of the loans
in the Bank's loan portfolio are collateralized by commercial real estate
mortgages. As of December 31, 1997, approximately 91.3%, and as of December 31,
1996, approximately 89.4% of the total loan portfolio was collateralized by this
type of property. The level of delinquent loans and foreclosed real estate also
is relevant to the credit quality of a loan portfolio. There were no
non-performing assets at December 31, 1997, while as of December 31, 1996
non-performing assets totaled $185,000.
In an effort to maintain the quality of the loan portfolio management
seeks to minimize higher risk types of lending. In view of the relative
significance of real estate related loans, a downturn in the value of the real
estate could have an adverse impact on the Company's profitability. However, as
20
<PAGE>
part of its loan portfolio management strategy, the Company typically limits its
loans to a maximum of 75% of the value of the underlying real estate as
determined by an MAI appraisal. In addition, knowledgeable members of management
make physical inspections of properties being considered for mortgage loans.
Management believes that such precautions reduce the Company's exposure to the
risks associated with a downturn in real estate values. See "Investment
Considerations and Risk Factors--Local Economic Conditions."
Commercial loans also entail risks since repayment is usually dependent
upon the successful operation of the commercial enterprise. They also are
subject to adverse conditions in the economy. Commercial loans are generally
riskier than mortgage loans because they are typically underwritten on the basis
of the ability to repay from the cash flow of a business rather than on the
ability of the borrower or guarantor to repay. Further, the collateral
underlying commercial loans may depreciate over time, cannot be appraised with
as much precision as real estate, and may fluctuate in value based on the
success of the business.
Loan concentrations are defined as amounts loaned to a number of
borrowers engaged in similar activities which would cause them to be similarly
impacted by economic or other conditions. The Company, on a routine basis,
monitors these concentrations in order to make necessary adjustments in its
leading practices that most clearly reflect the economic conditions, loan to
deposit ratios, and industry trends. Concentrations of loans in the following
categories constituted the total loan portfolio as of December 31, 1997:
Commercial loans 4.2%
------
Real estate mortgage loans 91.3%
-----
Consumer and other loans 4.5%
------
The Loan Committee of the Board of Directors of the Bank concentrates
its efforts and resources, and that of its senior management and lending
officers, on loan review and underwriting procedures. Internal controls include
ongoing reviews of loans made to monitor documentation and ensure the existence
and valuations of collateral. In addition, management of the Bank has
established a review process with the objective of quickly identifying,
evaluating, and initiating necessary corrective action for marginal loans. The
goal of the loan review process is to address classified and non-performing
loans as early as possible. Management maintains a cautious outlook in
anticipating the potential effects of uncertain economic conditions (both
locally and nationally) and the possibility of more stringent regulatory
standards.
See "Investment Considerations and Risk Factors-Supervision and Regulation."
Classification of Assets
- - ------------------------
Generally, interest on loans is accrued and credited to income based
upon the principal balance outstanding. It is management's policy to discontinue
the accrual of interest income and classify a loan as non-accrual when principal
or interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans will be charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans will not be
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate. At December 31,
1997, the Bank had no foreclosed real estate. Foreclosed real estate is recorded
at the lower of cost or fair value less estimated selling costs, and the
estimated loss, if any, is charged to the allowance for loan losses at the time
it is transferred. Further allowances for losses are recorded at the time
management believes additional deterioration in value has occurred.
21
<PAGE>
The following table sets forth certain information on nonaccrual loans
and foreclosed real estate, the ratio of such loans and foreclosed real estate
to total assets as of the dates indicated, and certain other related
information.
At December 31,
---------------
1997 1996
---- ----
(Dollars in thousands)
Nonaccrual loans:
Residential mortgage loans -- --
Commercial loans -- --
Consumer and other loans -- --
---- -------
Total non-accrual loans -- --
==== =======
Total nonperforming loans -- --
==== =======
Total nonperforming loans to
total loans ---% ---%
Total nonperforming loans to
total assets -- --
---- -------
Foreclosed real estate:
Real estate acquired by foreclosure or
deed in lieu of foreclosure $-- $ 185
---- -------
Total nonperforming loans and
foreclosed real estate $-- $ 185
==== =======
Total nonperforming loans and
foreclosed real estate to total assets -- .17%
==== =======
Loan Impairment and Losses
- - --------------------------
The Company follows Statements of Financial Accounting Standards No.
114 and 118 ("SFAS 114 and 118"). These Statements address the accounting by
creditors for impairment of certain loans. The Statements generally require the
Company to identify loans for which the Company probably will not receive full
repayment of principal and interest, as impaired loans. The Statements require
that impaired loans be valued at the present value of expected future cash
flows, discounted at the loan's effective interest rate, or at the observable
market price of the loan, or the fair value of the underlying collateral if the
loan is collateral dependent. The Company has implemented the Statements by
modifying its monthly review of the adequacy of the allowance for loan losses to
also identify and value impaired loans in accordance with guidance in the
Statements. The adoption of the Statements did not have any material effect on
the results of operations for the years ended December 31, 1997 and 1996.
Management considers a variety of factors in determining whether a loan
is impaired, including (i) any notice from the borrower that the borrower will
be unable to repay all principal and interest amounts contractually due under
the loan agreement, (ii) any delinquency in the principal and interest payments
other than minimum delays or shortfalls in payments, and (iii) other information
known by management which would indicate that full repayment of the principal
and interest is not probable. In evaluating loans for impairment, management
22
<PAGE>
generally considers delinquencies of 60 days or less to be minimum delays, and
accordingly does not consider such delinquent loans to be impaired in the
absence of other indications of impairment.
Management evaluates smaller balance, homogeneous loans for impairment
and adequacy of allowance for loan losses collectively, and evaluates other
loans for impairment individually, on a loan-by-loan basis. The Company
evaluates the consumer loan portfolio which are smaller homogeneous loans for
impairment on an aggregate basis, and utilizes its own historical charge-off
experience, as well as the charge-off experience of its peer group and industry
statistics to evaluate the adequacy of the allowance for loan losses. For all
commercial, commercial real estate and residential mortgage loans, the Company
evaluates loans for impairment on a loan-by-loan basis.
The Company evaluates all nonaccrual loans as well as any accruing
loans exhibiting collateral or other credit deficiencies for impairment. With
respect to impaired, collateral-dependent loans, any portion of the recorded
investment in the loan that exceeds the fair value of the collateral is charged
off.
For impairment recognized in accordance with SFAS 114 and 118, the
entire change in the present value of expected cash flows, or the entire change
in estimated fair value of collateral for collateral dependent loans is reported
as a provision for loan losses in the same manner in which impairment initially
was recognized or as a reduction in the amount of the provision that otherwise
would be reported.
The Company had no impaired loans at December 31, 1997 or 1996. The
average recorded investment in impaired loans during 1996 was$31,000. There were
no impaired loans identified during 1997. No interest income on impaired loans
was recognized in 1996.
Loans are reported at the principal amount outstanding net of the
allowance for loan losses and unamortized premiums, discounts and deferred loan
origination fees and costs.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against the allowance for
loan losses when management believes that the collectability of the principal is
unlikely. Subsequent recoveries are added to the allowance. The allowance is an
amount that management believes will be adequate to absorb possible losses
inherent in existing loans and loan commitments, based on evaluations of
collectability and prior loss experience. Management evaluates the adequacy of
the allowance monthly, or more frequently if considered necessary. The
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, loan concentrations,
specific problem loans and commitments, and current and anticipated economic
conditions that may affect the borrower's ability to repay.
Management continues to actively monitor the Bank's asset quality and
to charge-off loans against the allowance for loan losses when appropriate or to
provide specific loss allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the initial determinations. The Bank's allowance at December 31, 1996 was
$811,000, and the Bank increased its allowance for loan losses to $1,173,000 as
of December 31, 1997, consistent with the increase in the loan portfolio,
reflecting management's intent to maintain reserves at a level management
believes to be adequate. See "Investment Considerations and Risk
Factors--Adequacy of Allowance for Loan Losses."
23
<PAGE>
The following table sets forth information with respect to activity in
the Bank's allowance for loan losses during the periods indicated:
Year Ended Year Ended
December 31, December 31,
1997 1996
---- ----
(Dollars in thousands)
Average loans outstanding, net $ 68,711 $ 49,266
-------- --------
Allowance at beginning of year 811 593
-------- --------
Charge-offs:
Real estate loans -- 62
Commercial loans -- --
Consumer loans -- 3
-------- --------
Total loans charged-off -- 65
-------- --------
Recoveries 10 33
-------- --------
Net recoveries (charge-offs) 10 (32)
-------- --------
Provision for loan losses charged
to operating expenses 352 250
-------- --------
Allowance at end of year $ 1,173 $ 811
======== ========
Ratio of net charge-offs to
average loans outstanding -- .001
======== ========
Ratio of allowance for loan losses
to period-end total loans .015 .013
======== ========
Ratio of allowance for loan losses
to nonperforming loans -- --
======== ========
Period end total loans $ 77,226 $ 60,653
======== ========
24
<PAGE>
The following table presents information regarding the Company's total
allowance for losses as well as the allocation of such amounts to the various
categories of loans:
At December 31, 1997 At December 31, 1996
-------------------- --------------------
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Commercial loans $ 50 4.3% $ 82 5.8%
Commercial real estate loans 1,071 91.3 677 89.4
Residential real estate loans 48 4.1 50 4.6
Consumer loans and other 4 .3 2 .2
------ ----- ------ -----
Total allowance for
loan losses $1,173 100% $ 811 100.0%
====== ===== ====== =====
The allowance for loan losses represented 1.5% of the total loans
outstanding at December 31, 1997, compared with 1.3% at December 31, 1996.
Securities
The following table sets forth the carrying value of the Bank's
securities portfolio as of the dates indicated:
At December 31,
---------------
1997 1996
---- ----
(in thousands)
Securities held to maturity:
U.S. Treasury securities $ 4,027 $ 1,499
Other U.S. Government and
agency securities 54,794 33,008
------- -------
$58,821 $34,507
======= =======
25
<PAGE>
The following table sets forth, by maturity distribution, certain
information pertaining to the securities held-to maturity portfolio as follows:
<TABLE>
<CAPTION>
One Year After One Year After Five Years
Or Less to Five Years to Ten Years Total
------------------- ------------------ ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
December 31, 1997:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 1,996 6.10 $ 2,031 6.03% $---- ---% $ 4,027 6.06%
Other U.S. Government
agency securities 11,173 6.08 30,859 6.23 12,762 6.46 54,794 6.28
------ ---- ------ ---- ------ ---- ------ ----
Total $13,169 6.08% $32,890 6.21% $12,762 6.46% $ 58,821 6.24%
======= ==== ======= ==== ======= ==== ======== ====
December 31, 1996:
U.S. Treasury Securities $ 500 6.04% $ 999 6.17% $----- ----% $ 1,499 6.12%
Other U.S. Government
agency securities 8,142 5.97 22,856 6.16 2,010 6.33 33,008 6.12
----- ---- ------ ---- ----- ---- ------ ----
Total $ 8,642 5.97 $23,855 6.16% $ 2,010 6.33% $ 34,507 6.12%
======= ==== ======= ==== ======= ==== ======== ====
</TABLE>
Deposit Activities
Deposits are the major source of the Bank's funds for lending and other
investment purposes. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by
the Bank on a periodic basis. The determination of rates and terms is predicated
on funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
Regulations promulgated by the FDIC pursuant to the Federal Deposit
Insurance Company Improvement Act of 1991 ("1991 Banking Law") place limitations
on the ability of certain insured depository institutions to accept, renew, or
rollover deposits by offering rates of interest which are significantly higher
than the prevailing rates of interest on deposits offered by other insured
depository institutions having the same type of charter in such depository
institution's normal market area. Under these regulations, "well capitalized"
depository institutions may accept, renew, or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates), and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definitions adopted by the
agencies to implement the corrective action provisions of the 1991 Banking Law."
See "Supervision and Regulation--Impact of the 1991 Banking Law." At December
31, 1997, the Bank met the definition of a "well capitalized" depository
institution.
26
<PAGE>
The following table shows the distribution of, and certain other
information relating to, the Bank's deposit accounts by type:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
----------------------------- -------------------------
% of % of
Amount Deposits Amount Deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $3,490 2.7% $2,401 2.6%
NOW deposits 4,290 3.3 4,536 4.9
Money market deposits 17,180 13.1 7,507 8.0
Savings deposits 12,829 9.7 4,742 5.0
------ ----- ----- ---
Subtotal 37,789 28.8 19,186 20.5
------ ---- ------ ----
Certificate of deposits:
4.00%-4.99% 30 --- 1,682 1.8
5.00%-5.99% 69,855 53.3 53,507 57.3
6.00%-6.99% 16,882 12.9 13,307 14.2
7.00%-7.99% 6,611 5.0 5,765 6.2
------- ----- ------ ----
Total certificates
of deposit (1) 93,378 71.2 74,261 79.5
------ ---- ------ ----
Total deposit $131,167 100.00% $93,447 100.0%
======== ======= ======= ======
- - -------------------------
</TABLE>
(1) Includes individual retirement accounts ("IRAs") totaling $7,136,000 and
$5,569,000 at December 31, 1997 and 1996 respectively, all of which are
in the form of certificates of deposit.
27
<PAGE>
The following table shows the average amount of and the average rate
paid on each of the following deposit account categories during the periods
indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
------------ ------------
1997 1996
Average Average Average Average
Balance Yield Balance Yield
------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Money market
& NOW $18,087 4.51% $8,432 3.68%
Savings deposit 9,128 4.89 1,470 4.22
Certificates of deposit 81,167 5.71 59,437 5.67
------ ---- ------ ----
Total deposits $108,382 5.44% $69,339 5.40%
======== ===== ======= =====
</TABLE>
The Bank does not have a concentration of deposits from any one source,
the loss of which would have a material adverse effect on the business of either
the Bank or the Company. Management believes that substantially all of the
Bank's depositors are residents in its primary market area. The Bank currently
does not accept brokered deposits.
28
<PAGE>
The following tables presents by various interest rate categories the
amounts of certificates of deposit at December 31, 1997 and 1996 which mature
during the periods indicated:
<TABLE>
<CAPTION>
Year Ending December 31,
-------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 & thereafter Total
---- ---- ---- ---- ----------------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
4.00%-4.99% $ 30 ---- ---- ---- ---- 30
5.00%-5.99% 46,513 13,955 4,149 1,873 3,365 69,855
6.00%-6.99% 349 791 656 7,389 7,697 16,882
7.00%-7.99% 62 1,808 4,641 100 ---- 6,611
-------- ----- ----- ------ ------- ------
Total certificates of deposit $46,954 16,554 9,446 9,362 11,062 93,378
======= ====== ===== ===== ====== ======
Year Ending December 31,
-----------------------------------------------------------------------------
1997 1998 1999 2000 2001 Total
---- ---- ---- ---- ---- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
4.00%-4.99% $ 1,636 46 --- --- --- 1,682
5.00%-5.99% 36,664 10,477 620 3,741 2,005 53,507
6.00%-6.99% 4,545 404 803 465 7,090 13,307
7.00%-7.99% --- 62 1,831 3,631 241 5,765
------- ------- ----- ----- ------ ------
Total certificates of deposit $42,845 10,989 3,254 7,837 9,336 74,261
======= ====== ===== ===== ===== ======
</TABLE>
29
<PAGE>
Jumbo certificates ($100,000 and over) mature as follows:
<TABLE>
<CAPTION>
At December 31, At December 31,
--------------- ---------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Due three months or less $1,554 $733
Due over three months to six months 1,149 2,136
Due over six months to one year 1,787 2,566
Due over one year 5,016 1,826
------ -----
$9,506 $7,261
====== ======
</TABLE>
The following table sets forth the net deposit flows of the Bank during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended
---------- ----------
December 31, 1997 December 31, 1996
(in thousands)
Net increase (decrease) before
<S> <C> <C>
interest credited $32,164 $31,168
Net interest credited 5,556 $ 3,678
------ -------
Net deposit increase $37,720 34,846
======= ======
</TABLE>
Liquidity and Capital Resources
- - -------------------------------
The Company's principal sources of funds are those generated by the
Bank. The Bank's principal sources of funds are deposits, principal and interest
payments on loans, maturities and interest on securities, and capital
contributions from the Company. The Company's cash flow is affected by its
operations, investing activities, and financing activities. Net cash provided
from operations primarily results from net earnings adjusted for noncash
accounting entries.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance- sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
30
<PAGE>
As of December 31, 1997, the most recent notification from the State and
Federal regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
<TABLE>
<CAPTION>
To be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital
(to Risk Weighted Assets) $9,420 10.53% $7,157 8.00% $8,948 10.00%
Tier I Capital
(to Risk Weighted Assets) 9,125 10.20% 3,578 4.00 5,367 6.00%
Tier I Capital
(to Average Assets) 9,125 6.85% 5,328 4.00 6,660 5.00%
As of December 31, 1996:
Total capital
(to Risk Weighted Assets) $8,051 11.90% $5,412 8.00% $6,765 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,240 10.70% 2,706 4.00% 4,059 6.0%
Tier I Capital
(to Average Assets) 7,240 7.48% 3,871 4.00% 4,839 5.0%
</TABLE>
The Company continues to explore a variety of alternatives related to
the expansion of its business, including both branch expansions in and near the
Bank's existing markets, as well as the acquisition or de novo chartering of an
additional bank outside the Bank's existing market. While management believes
that its current capital is adequate to finance any expansion opportunities it
may pursue in the near term, the Company will consider activities designed to
raise additional capital. In that regard, management believes that additional
capital is the key to any expansion program and, to this end, it will
continually assess the need for capital, both at the Bank and the Company
levels. If it is determined that additional capital is necessary to support the
operations of the Company or the Bank or to support any expansion or acquisition
activities, transactions to obtain additional funds will be considered by the
Company. In 1997, the Company completed the 1997 Offering, resulting in gross
proceeds of $7,475,000.
Future Accounting Matters
- - -------------------------
Financial Accounting Standards 130 - Reporting Comprehensive Income
establishes standards for reporting comprehensive income. The Standard defines
comprehensive income as the change in equity of an enterprise except those
resulting from stockholder transactions. All components of comprehensive income
are required to be reported in a new financial statement that is displayed with
equal prominence as existing financial statements. The Company will be required
to adopt this Standard effective January 1, 1998. As the Statement addresses
reporting and presentation issues only, there will be no impact on operating
results from the adoption of this Standard.
31
<PAGE>
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
will be required to adopt this Standard effective January 1, 1998. As the
Standard addresses reporting and disclosure issues only, there will be no impact
on operating results from adoption of this Standard.
Impact of Inflation and Changing Prices
- - ---------------------------------------
The financial statements and related financial data concerning the
Company presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operations of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant impact on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
Market Risk
- - -----------
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure. The measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified. Disclosures about the fair value
of financial instruments, which reflect changes in market prices and rates, can
be found in Note 7 of Notes to Consolidated Financial Statements.
The Company's primary objective in managing interest-rate risk is to
minimize the adverse impact of changes in interest rates on the Bank's net
interest income and capital, while adjusting the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
Year 2000 Compliance
- - --------------------
The Bank has an ongoing program designed to ensure that its operational
and financial systems will continue to function properly on and after the year
2000, free of software failures due to processing errors arising from
calculations using the year 2000 date. The Bank does not expect to incur any
significant expenditures over the next three years on its program to redevelop,
replace, or repair its computer applications to make them "year 2000 compliant."
While the Bank believes it is doing everything technologically possible to
assure year 2000 compliance, it is to some extent dependent upon vendor
cooperation. The Bank is requiring its computer system and software vendors to
represent that the products provided are, or will be, year 2000 compliant, and
has planned a program of testing for compliance. It is recognized that any year
2000 compliance failures could result in additional expense to the Bank.
32
<PAGE>
Item 7. Financial Statements
The following financial statements are included herein:
Intervest Bancshares Corporation and Subsidiary
- - -----------------------------------------------
Independent Auditors' Report - page 34
Consolidated Balance Sheets as of December 31, 1997 and 1996 - page 35
Consolidated Statements of Earnings for the Years Ended December 31, 1997 and
1996 - page 36
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997 and 1996 - page 37
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and
1996 - page 38
Notes to Consolidated Financial Statements - pages 39-57
All schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
Financial Statements and related Notes.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
33
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
a. Directors. The information required by this item is contained in the
section entitled "Election of Directors" in the Company's Proxy Statement for
its 1998 Annual Meeting (the "Proxy Statement") and is incorporated herein by
reference.
b. Executive Officer. All of the executive officers of the Company also
serve as directors and the information required by this item is incorporated by
reference from the section of the Proxy Statement entitled "Election of
Directors."
c. Compliance with Section 16(a). Information contained in the section
of the Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" is incorporated herein by reference.
Item 10. Executive Compensation
The information contained in the section entitled "Executive
Compensation" of the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy Statement is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the section entitled "Certain Relationships
and Related Transactions" in the Proxy Statement is incorporated herein by
reference.
<TABLE>
<CAPTION>
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein:
Exhibit Number Description of Exhibit
- - -------------- ----------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company, incorporated
by reference from Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (No. 333-33419), filed with the
Commission on September 22, 1997 (the "Registration Statement"),
wherein such document is identified as Exhibit 3.1.
3.2 Bylaws of the Company, incorporated by reference from the
Registration Statement, wherein such document is identified as
Exhibit 3.2.
4.1 Form of Certificate for Shares of Class A Common Stock,
incorporated by reference from the Company's Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 (No.
33-82246), filed with the Commission on September 15, 1994.
58
<PAGE>
4.2 Form of Certificate for Shares of Class B Common Stock,
incorporated by reference from Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 (No. 33-82246), filed with the
Commission on September 15, 1994.
4.3 Form of Warrant issued to Mr. Jerome Dansker, incorporated by
reference from the Company's Report on Form 10-K for the year
ended December 31, 1995, wherein such document is identified as
Exhibit 4.2.
4.4 Form of Warrant for Class A Common Stock, incorporated by
reference from the Registration Statement, wherein such document
is identified as Exhibit 4.3.
4.5 Form of Warrant Agreement between the Company and the Bank
of New York, incorporated by reference from the Registration
Statement, wherein such document is identified as Exhibit 4.4.
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
59
<PAGE>
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
March, 1998.
INTERVEST BANCSHARES CORPORATION
(Registrant)
By:/S/Lowell S. Dansker, President
--------------------------------
Lowell S. Dansker, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/S/Lawrence G. Bergman Vice President 3/24/98
- - ---------------------------
Lawrence G. Bergman Secretary and Director
/S/Michael A. Callen Director 3/25/98
- - ---------------------------
Michael A. Callen
/S/Jerome Dansker Chairman of the Board, 3/24/98
- - ---------------------------
Jerome Dansker Executive Vice President, Director
/S/Lowell S. Dansker President, Treasurer and 3/24/98
- - ---------------------------
Lowell S. Dansker Director (Principal Executive),
Financial and Accounting Officer)
/S/Milton F. Gidge Director 3/25/98
- - ---------------------------
Milton F. Gidge
/S/William F. Holly Director 3/23/98
- - ---------------------------
William F. Holly
/S/Edward J. Merz Director 3/25/98
- - ---------------------------
Edward J. Merz
/S/David J. Willmott Director 3/25/98
- - ---------------------------
David J. Willmott
/S/WESLEY T. WOOD Director 3/25/98
- - ---------------------------
Wesley T. Wood
</TABLE>
60
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
New York, New York
Audited Consolidated Financial Statements
December 31, 1997 and 1996 and
for the Years then Ended
(Together with Independent Auditors' Report)
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of Intervest
Bancshares Corporation and Subsidiary (the "Company") at December 31, 1997 and
1996 and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
January 23, 1998
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
<S> <C> <C>
Assets 1997 1996
---- ----
Cash and due from banks.......................................................... $ 1,738 2,318
Federal funds sold............................................................... 162 3,452
Short-term investments........................................................... 7,276 550
--------- --------
Total cash and cash equivalents........................................... 9,176 6,320
Interest-bearing deposits with banks............................................. 99 99
Securities held to maturity...................................................... 58,821 34,507
Loans receivable, net of allowance for loan losses of $1,173
in 1997 and $811 in 1996...................................................... 75,652 59,499
Accrued interest receivable...................................................... 1,327 842
Premises and equipment, net...................................................... 4,877 2,940
Restricted securities, Federal Reserve Bank stock, at cost ...................... 233 203
Foreclosed real estate........................................................... - 185
Deferred income tax asset........................................................ 485 526
Other assets ............................................................... 85 75
---------- ---------
$ 150,755 105,196
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits............................................................... 3,490 2,401
Savings and NOW deposits...................................................... 17,119 9,278
Money-market deposits......................................................... 17,180 7,507
Time deposits................................................................. 93,378 74,261
-------- -------
Total deposits............................................................ 131,167 93,447
Other liabilities............................................................. 1,947 1,676
-------- --------
Total liabilities......................................................... 133,114 95,123
------- -------
Minority interest................................................................ 21 326
---------- ---------
Commitments (Notes 4 and 7)
Stockholders' Equity:
Preferred stock, 300,000 shares authorized, issued none....................... - -
Class A common stock - $1 par value, 7,500,000 shares
authorized; 2,124,415 and 900,000 shares issued
and outstanding in 1997 and 1996............................................ 2,124 900
Class B common stock - $1 par value, 700,000 shares
authorized; 300,000 and 200,000 shares issued
and outstanding in 1997 and 1996............................................ 300 200
Additional paid-in capital.................................................... 13,360 7,655
Retained earnings............................................................. 1,836 992
-------- ---------
Total stockholders' equity................................................ 17,620 9,747
------- --------
$ 150,755 105,196
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable.............................................................. $ 6,415 4,624
Securities held to maturity................................................... 2,632 1,514
Other interest earning assets................................................. 300 243
----------- -----------
Total interest income..................................................... 9,347 6,381
Interest expense on deposits..................................................... 5,894 3,745
---------- ----------
Net interest income....................................................... 3,453 2,636
Provision for loan losses........................................................ 352 250
----------- -----------
Net interest income after
provision for loan losses............................................... 3,101 2,386
---------- ----------
Noninterest income:
Customer service charges...................................................... 121 89
Other... ............................................................... 15 17
------------ -----------
Total noninterest income.................................................. 136 106
----------- -----------
Noninterest expenses:
Salaries and employee benefits................................................ 907 739
Occupancy and equipment....................................................... 406 342
Advertising and promotion..................................................... 40 9
Professional fees............................................................. 48 57
State assessment.............................................................. 26 19
Audit and accounting.......................................................... 48 27
Data processing............................................................... 21 9
Deposit insurance premiums.................................................... 12 2
General insurance............................................................. 31 31
Stationery, printing and supplies............................................. 83 51
Other ............................................................... 282 246
Minority interest in subsidiary............................................... 2 19
------------ ------------
Total noninterest expenses................................................ 1,906 1,551
---------- ----------
Earnings before income taxes..................................................... 1,331 941
Income taxes.............................................................. 487 383
----------- -----------
Net earnings ............................................................... $ 844 558
=========== ===========
Basic earnings per share......................................................... $ .49 .34
============ ============
Diluted earnings per share....................................................... $ .41 .34
============ ============
Weighted-average number of shares
outstanding for basic earnings per share...................................... 1,712,292 1,650,000
========= =========
Weighted-average number of shares
outstanding for diluted earnings per share.................................... 2,072,459 1,650,000
========= =========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Shares of
Class A Class A Class B Additional Total
Common Common Common Paid-In Retained Stockholders'
Stock Stock Stock Capital Earnings Equity
----- ----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995......................... 900,000 $ 900 200 7,655 434 9,189
Net earnings.................... - - - - 558 558
------------ ------- ---- ------ ----- ------
Balance at December 31,
1996 ....................... 900,000 900 200 7,655 992 9,747
Effect of 1.5 for 1 stock
split ....................... 450,000 450 100 (550) - -
Proceeds from 747,500 shares
of stock issued, net of stock
issuance cost of $755........ 747,500 748 - 5,972 - 6,720
Net earnings.................... - - - - 844 844
Issuance of common stock
in exchange for common
stock of minority
stockholders of
subsidiary................... 26,915 26 - 283 - 309
--------- ------ ---- ------- ------- -------
Balance at December 31,
1997 ........................ 2,124,415 $ 2,124 300 13,360 1,836 17,620
========= ===== === ====== ===== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................................................... $ 844 558
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation................................................................ 260 176
Provision for deferred income taxes......................................... 41 67
(Increase) decrease in other assets......................................... (10) 35
Increase in other liabilities............................................... 275 850
Increase in accrued interest receivable..................................... (485) (199)
Net amortization of fees, premiums and discounts............................ 19 271
Provision for loan losses................................................... 352 250
------- -------
Net cash provided by operating activities.............................. 1,296 2,008
------ ------
Cash flows from investing activities:
Purchase of securities held to maturity............................................ (44,450) (30,025)
Maturities of securities held to maturity.......................................... 20,175 15,050
Net purchases of premises and equipment............................................ (2,197) (667)
Net increase in loans.............................................................. (16,563) (23,642)
Proceeds from sale of foreclosed real estate....................................... 185 -
Purchase of Federal Reserve Bank stock............................................. (30) -
Maturity of interest-bearing deposits.............................................. - 199
--------- -------
Net cash used in investing activities.................................. (42,880) (39,085)
------ ------
Cash flows from financing activities:
Net increase in demand, savings, NOW and
money market deposits.......................................................... 18,603 9,639
Net increase in time deposits...................................................... 19,117 25,207
Proceeds from issuance of common stock, net of stock issuance costs................ 6,720 -
------- -------
Net cash provided by financing activities.............................. 44,440 34,846
------ ------
Net increase (decrease) in cash and cash equivalents................... 2,856 (2,231)
Cash and cash equivalents at beginning of year.......................................... 6,320 8,551
------ ------
Cash and cash equivalents at end of year................................................ $ 9,176 6,320
====== ======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest............................................................... $ 5,832 3,678
====== ======
Income taxes........................................................... $ 700 17
======= =======
Noncash transactions:
Reclassification of loans to foreclosed real estate.................... $ - 185
========= =======
Issuance of common stock in exchange of common
stock of minority stockholders of subsidiary....................... $ 309 -
====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997 and 1996
(1) Description of Business and Summary of Significant Accounting Policies
General. Intervest Bancshares Corporation (the "Holding Company") was
incorporated on February 5, 1993. The Holding Company owned 99.78% and
95.76% at December 31, 1997 and 1996, respectively, of the outstanding
common stock of Intervest Bank (the "Bank") (collectively the
"Company"). The Bank is a Florida state-chartered bank, is insured by
the Federal Deposit Insurance Corporation and is a member of the
Federal Reserve Bank. The Holding Company's primary business is the
operation of the Bank. The Bank provides a wide range of banking
services to small and middle-market businesses and individuals through
its five banking offices located in Pinellas County, Florida.
The principal executive offices of the Bank are located at 625 Court
Street, Clearwater, Florida. In addition, the Bank has four branch
offices, three in Clearwater, Florida located at (i) 2575 Ulmerton
Road; (ii) 2175 Nursery Road; and (iii) 1875 Belcher Road and one in
South Pasadena, Florida at 6750 Gulfport Boulevard.
Basis of Presentation. The accompanying consolidated financial statements
of the Company include the accounts of the Holding Company and the
Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices
within the banking industry. The following summarizes the more
significant of these policies and practices.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Securities Held to Maturity. United States government treasury and agency
securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest
income using the interest method over the period to maturity.
Loans Receivable. Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
(continued)
6
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Loans Receivable, Continued. The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair
value at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in the consolidated
statement of earnings.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
Premises and Equipment. Land is carried at cost. Premises, furniture and
fixtures and equipment are carried at cost, less accumulated
depreciation computed by the straight-line method.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement 123")
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(Opinion 25). The Company has elected to follow Opinion 25 and related
interpretations in accounting for its stock-based compensation which is
in the form of stock warrants. Statement 123 requires the disclosure of
proforma net earnings and earnings per share determined as if the
Company accounted for its stock warrants under the fair value method of
that Statement.
Off-Balance-Sheet Financial Instruments. In the ordinary course of business
the Company has entered into off-balance-sheet financial instruments
consisting of commitment to extend credit, unused lines of credit and
stand-by-letters of credit. Such financial instruments are recorded in
the consolidated financial statements when they are funded or related
fees are incurred or received.
FairValues of Financial Instruments. The following methods and assumptions
were used by the Company in estimating fair values of financial
instruments:
Cash and Cash Equivalents and Interest-Bearing Deposits with Banks. The
carrying amounts of cash and interest-bearing deposits with banks
approximate their fair value.
Securities Held to Maturity. Fair values for securities held to
maturity are based on quoted market prices.
(continued)
7
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
FairValues of Financial Instruments, Continued. Federal Reserve Bank
Stock. Book value for these securities approximates fair value.
Loans Receivable. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for fixed-rate mortgage (e.g. one-to-four
family residential), commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Deposit Liabilities. The fair values disclosed for demand, NOW,
money-market and savings deposits are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Accrued Interest. The carrying amounts of accrued interest approximate
their fair values.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Advertising. The Company expenses all advertising as incurred.
Earnings Per Share. Earnings per share ("EPS") of common stock has been
computed on the basis of the weighted-average number of shares of
common stock outstanding. Prior to the public stock offering in
November, 1997, there was no public market for the Company's common
stock. For purposes of calculating diluted EPS the $10 stock offering
price is assumed to be the market price for the entire year ended
December 31, 1997. For 1997, outstanding warrants are considered
dilutive securities for purposes of calculating diluted EPS which is
computed using the treasury stock method. Such warrants were not
considered dilutive in 1996. The following table presents the
calculations of EPS (See Note 16) ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
<S> <C> <C> <C>
Net earnings available to common stockholders............. $ 844 1,712,292 $ .49
===
Effect of dilutive securities-
Incremental shares from assumed conversion
of warrants ........................................... 360,167
----------
Diluted EPS:
Net earnings available to common stockholders
and assumed conversions................................. $ 844 2,072,459 $ .41
=== ========= ===
</TABLE>
(continued)
8
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Earnings Per Share, Continued. Warrants to purchase 1,528,665 and 150,000
shares of Class A and Class B common stock at $6.67 per share were
assumed to be exercised on January 1, 1997 and June 1, 1997,
respectively. Warrants to purchase 989,083 shares of Class A common
stock at $10.00 per share are not included in the computation of
diluted EPS because the warrants' exercise price approximated the
market price of the stock. None of the above warrants have been
exercised as of December 31, 1997.
Reclassifications. Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 presentation.
Future Accounting Requirements. Financial Accounting Standards 130 -
Reporting Comprehensive Income establishes standards for reporting
comprehensive income. The Standard defines comprehensive income as the
change in equity of an enterprise except those resulting from
stockholder transactions. All components of comprehensive income are
required to be reported in a new financial statement that is displayed
with equal prominence as existing financial statements. The Company
will be required to adopt this Standard effective January 1, 1998. As
the Statement addresses reporting and presentation issues only, there
will be no impact on operating results from the adoption of this
Standard.
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company will be required to adopt this Standard
effective January 1, 1998. As the Standard addresses reporting and
disclosure issues only, there will be no impact on operating results
from adoption of this Standard.
(continued)
9
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Securities Held to Maturity
Debtsecurities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and
their approximate fair values are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities............. $ 4,027 15 - 4,042
U.S. Government and
agency securities................ 54,794 64 64 54,794
------ -- --- ------
Total............................ $ 58,821 79 64 58,836
====== == === ======
December 31, 1996:
U.S. Treasury securities............. 1,499 7 - 1,506
U.S. Government and
agency securities................ 33,008 44 105 32,947
------ -- --- ------
Total............................ $ 34,507 51 105 34,453
====== == === ======
</TABLE>
There were no sales of securities during the years ended December 31, 1997
or 1996.
The scheduled maturities of securities held to maturity at December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less................................................... $ 13,169 13,186
Due after one year through five years..................................... 32,890 32,896
Due after five years through ten years.................................... 12,762 12,754
------ ------
Total ............................................................. $ 58,821 58,836
====== ======
</TABLE>
(continued)
10
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable
The components of loans in the consolidated balance sheets are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Commercial loans........................................................ $ 3,281 3,514
Commercial real estate.................................................. 70,533 54,198
Residential real estate................................................. 3,150 2,784
Consumer loans.......................................................... 262 157
-------- --------
77,226 60,653
Deferred loan fees...................................................... (401) (343)
Allowance for loan losses............................................... (1,173) (811)
------ ------
$ 75,652 59,499
====== ======
</TABLE>
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year.............................................. $ 811 593
----- ---
Loans charged-off......................................................... - (65)
Recoveries................................................................ 10 33
------ ---
Net................................................................... 10 (32)
------ ---
Provision for loan losses................................................. 352 250
----- ---
Balance at end of year.................................................... $ 1,173 811
===== ===
</TABLE>
The Company had no impaired loans at December 31, 1997 or 1996. The average
recorded investment in impaired loans during the year ended December
31, 1996 was $31,000. There were no impaired loans identified during
1997. No interest income was recognized on impaired loans during 1996.
(continued)
11
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment
Premises and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Land................................................................. $ 915 729
Bank buildings....................................................... 3,570 1,926
Leasehold improvements............................................... 162 61
Furniture and fixtures and equipment................................. 1,203 565
----- -----
Total, at cost.................................................... 5,850 3,281
Less accumulated depreciation and amortization....................... (973) (341)
------ -----
Net book value.................................................... $ 4,877 2,940
===== =====
</TABLE>
The Bank leases its Belcher Road office. The lease is accounted for as an
operating lease and will expire on October 31, 2007. The lease
agreement contains escalation clauses based upon the consumer price
index and contains annual adjustments up to a maximum of 3% based upon
the previous year's rental. Rental expense was $125,000 and $163,000
for the years ended December 31, 1997 and 1996, respectively.
Approximate future minimum annual rental payments under this
noncancellable lease at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998.......................................................................... $ 94
1999.......................................................................... 96
2000.......................................................................... 99
2001.......................................................................... 102
2002.......................................................................... 106
Thereafter.................................................................... 514
------
Total......................................................................... $ 1,011
=====
</TABLE>
(continued)
12
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
The Company leases a portion of their office space in the branch office
located on Ulmerton Road and beginning in September, 1997, office space
at the new main office on Court Street, to other companies. Such leases
begin to expire in 1998. Rental income during the years ended December
31, 1997 and 1996 totaled approximately $195,000 and $159,000,
respectively. Approximate future minimum lease income under these
leases at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C> <C>
1998................................................................................. $ 343
1999................................................................................. 275
2000................................................................................. 271
2001................................................................................. 211
2002................................................................................. 190
Thereafter........................................................................... 792
------
Total................................................................................ $ 2,082
=====
</TABLE>
This table gives no effect to the future rental value of office space
subsequent to lease expiration dates.
(5) Deposits
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000, was approximately $9,506,000 and $7,261,000 at December
31, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998................................................................................. $ 46,954
1999................................................................................. 16,554
2000................................................................................. 9,446
2001................................................................................. 9,362
2002 and thereafter.................................................................. 11,062
------
Total................................................................................ $ 93,378
======
</TABLE>
(continued)
13
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Other Borrowings
The Company has agreements with correspondent banks whereby the Company may
borrow up to $1,000,000 on an overnight basis under a repurchase
agreement and up to $3,457,000 in federal funds. There were no
borrowings under these agreements at December 31, 1997 or 1996.
(7) Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit
and standby letters of credit and may involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheet. The contract amounts of
these instruments reflect the extent of involvement the Company has in
these financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
(continued)
14
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Financial Instruments, Continued
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 9,176 9,176 6,320 6,320
Securities held to maturity............................. 58,821 58,836 34,507 34,453
Loans receivable, net................................... 75,652 75,658 59,499 59,692
Accrued interest receivable............................. 1,327 1,327 842 842
Federal Reserve Bank stock.............................. 233 233 203 203
Interest-bearing deposits with bank..................... 99 99 99 99
Financial liabilities-
Deposit liabilities..................................... 131,167 131,491 93,447 93,713
</TABLE>
A summary of the notional amounts of the Company's financial instruments,
which approximate fair value, with off balance sheet risk at December
31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Unfunded loan commitments at variable rates............................... $ 2,950
=====
Available lines of credit................................................. $ 527
=====
Standby letters of credit................................................. $ 100
=====
</TABLE>
(8) Credit Risk
The Company grants a majority of its loans to borrowers throughout the
State of Florida. Although the Company has a diversified loan
portfolio, a significant portion of its borrowers' ability to honor
their contracts is dependent upon the economy of the State of Florida.
In addition, at December 31, 1997, the Company's loan portfolio
contained a concentration of credit risk in retail shopping centers,
apartment buildings and office buildings totaling $55,707,000.
(continued)
15
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997: Current Deferred Total
----------------------------- ------- -------- -----
<S> <C> <C> <C>
Federal....................................................... $ 377 35 412
State......................................................... 69 6 75
---- --- ---
Total..................................................... $ 446 41 487
=== == ===
Year Ended December 31, 1996:
Federal....................................................... 244 63 307
State......................................................... 72 4 76
--- --- ---
Total..................................................... $ 316 67 383
=== == ===
</TABLE>
The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Tax provision at statutory rate............................................ 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes..................................................... 3.8 8.1
Other.................................................................. (1.2) (1.4)
---- ----
Income tax provision ...................................................... 36.6% 40.7%
==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets relate to the following (in
thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
Net deferred tax assets:
<S> <C> <C>
Allowance for loan losses............................................. $ 298 185
Depreciation.......................................................... (19) (20)
Deferred loan fees.................................................... 13 19
Net operating loss carryforward....................................... 186 311
Other................................................................. 7 31
----- ---
Net deferred tax assets........................................... $ 485 526
=== ===
</TABLE>
(continued)
16
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
At December 31, 1997, the Company has the following net operating loss
carryforwards relating to the operations of the Bank for federal income
tax purposes available to offset future federal taxable income (in
thousands):
<TABLE>
<CAPTION>
Expiration
----------
<S> <C> <C>
2006..................................................................... $ 194
2007..................................................................... 297
2008..................................................................... 3
----
$ 494
</TABLE>
The net operating loss carryforwards are subject to an annual limitation of
$332,000 due to the ownership change of the Bank when the Holding
Company purchased its controlling ownership interest.
(10) Related Parties
The Bank has entered into loan transactions with certain of its directors
and their related entities. The activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year............................................ $ 2,941 1,484
Additions............................................................... 510 1,570
Repayments.............................................................. (209) (113)
----- ------
Balance at end of year.................................................. $ 3,242 2,941
===== =====
</TABLE>
Thereare no loans to directors or officers of the Holding Company,
Intervest Bancshares Corporation.
(11) Employee Stock Option Plan of the Bank
Priorto 1993, an officer of the Bank had been granted options to acquire
11,000 shares of the Bank's common stock. These options were to expire
on December 31, 2001, and were exercisable at $5 per share. All such
options were exchanged for warrants of the Holding Company by the
officer during 1997. In 1997 the option plan was terminated.
(continued)
17
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Profit Sharing Plan
The Bank sponsors a profit sharing plan established in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The profit
sharing plan is available to all employees electing to participate
after meeting certain length-of-service requirements. The Bank's
contributions to the profit sharing plan are discretionary and are
determined annually. Expense relating to the Bank's contributions to
the profit sharing plan included in the accompanying consolidated
financial statements was $21,377 and $12,181 for the years ended
December 31, 1997 and 1996, respectively.
(13) Common Stock Warrants of the Bank
In 1995, Intervest Bancshares Corporation purchased 200,000 shares of the
Bank's common stock at $5 per share and received warrants to purchase
an additional 200,000 shares of common stock at $5 par value. In June,
1997, Intervest Bancshares Corporation exercised the warrants and
purchased 200,000 shares of the Bank's common stock.
(14) Stockholders' Equity
The Bank, as a state-chartered bank, is limited in the amount of cash
dividends that may be paid. The amount of cash dividends that may be
paid is based on the Bank's net earnings of the current year combined
with the Bank's retained net earnings of the preceding two years, as
defined by state banking regulations. However, for any dividend
declaration, the Bank must consider additional factors such as the
amount of current period net earnings, liquidity, asset quality,
capital adequacy and economic conditions. It is likely that these
factors would further limit the amount of dividends which the Bank
could declare. In addition, bank regulators have the authority to
prohibit banks from paying dividends if they deem such payment to be an
unsafe or unsound practice. The ability of the Holding Company to pay
dividends could be affected by the amount of dividends the Bank is able
to pay to the Holding Company.
(15) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
(continued)
18
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters, Continued
As of December 31, 1997, the most recent notification from the State and
Federal regulators categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk- based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Bank's category. The Bank's actual
capital amounts and ratios are also presented in the table (dollars in
thousands).
<TABLE>
<CAPTION>
For Well
For Capital Capitalized
Actual Adequacy Purposes: Purposes:
----------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total capital (to Risk
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets)............... $ 9,420 10.53% $ 7,157 8.00% $ 8,948 10.00%
Tier I Capital (to Risk
Weighted Assets)............... 9,125 10.20 3,578 4.00 5,367 6.00
Tier I Capital
(to Average Assets)............ 9,125 6.85 5,328 4.00 6,660 5.00
As of December 31, 1996:
Total capital (to Risk
Weighted Assets)............... 8,051 11.90 5,412 8.00 6,765 10.0
Tier I Capital (to Risk
Weighted Assets)............... 7,240 10.70 2,706 4.00 4,059 6.0
Tier I Capital
(to Average Assets)............ 7,240 7.48 3,871 4.00 4,839 5.0
</TABLE>
(16) Capital Stock
Bothclasses of common stock have equal voting rights as to all matters,
except that, so long as at least 50,000 shares of Class B Common Stock
remain issued and outstanding the holders of the outstanding shares of
Class B Common Stock are entitled to vote for the election of
two-thirds of the directors (rounded to the nearest whole number) and
the holders of the outstanding shares of Class A Common Stock are
entitled to vote for the remaining directors of the Company. No
dividends may be declared or paid with respect to shares of Class B
Common Stock until January 1, 2000, after which time the holders of
Class A Common Stock and Class B Common Stock will share ratably in
dividends. The shares of Class B Common Stock are convertible, on a
share-for-share basis, into Class A Common Stock at any time after
January 1, 2000.
(continued)
19
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Capital Stock, Continued
On September 19, 1997, the Holding Company's charter was amended to
increase the authorized number of shares of Class A common stock to
7,500,000, Class B common stock to 700,000 and preferred stock to
300,000.
In addition, on September 18, 1997, the Board of Directors of the Holding
Company declared a 1.5 for 1 Class A and Class B common stock split
payable on September 19, 1997 to stockholders of record on September
19, 1997. All per share amounts reflect the effect of these stock
splits.
(17) Common Stock Warrants
The Company has outstanding warrants which entitle the registered holders
thereof to purchase one share of common stock for each issued warrant.
All warrants were exercisable when issued. These warrants have been
issued in connection with public stock offerings, to directors and
employees of the Bank and directors of the Holding Company and to
outside third parties for performance of services. A summary of stock
warrant transactions follows ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Exercise Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class A Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995....... 1,288,500 $ 6.67 $ 6.67 $ 8,594 5.4 years
Warrants granted...................... 240,165 6.67 6.67 1,602 5.1 years
--------- ------
Outstanding at December 31, 1996...... 1,528,665 6.67 6.67 10,196 5.4 years
Warrants granted...................... 949,183 10.00 10.00 9,492 2.0 years(1)
Warrants granted...................... 16,500 10.00 10.00 165 4.0 years
---------- -------
Outstanding at December 31, 1997...... 2,494,348 $ 6.67-10.00 $ 7.96 19,853 4.1 years
========= ========== ==== ====== =========
</TABLE>
- - -------------------------------------
(1) These warrants entitle the holder to purchase one share of Class A
common stock at a price of $10.00 per share through December 31, 1999;
$11.50 per share from January 1, 2000 through December 31, 2000; $12.50 per
share from January 1, 2001 through December 31, 2001 and $13.50 per share
from January 1, 2002 through December 31, 2002. For purposes of the above
table it is assumed that these warrants will be exercised on December 31,
1999.
(continued)
20
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) Common Stock Warrants, Continued
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Option Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class B Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995
and 1996........................... - - - - -
Warrants granted........................ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
------- -----
Outstanding at December 31, 1997........ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
======= ==== ==== ===== =========
</TABLE>
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for
stock-based employee compensation plans. As permitted by this
Statement, the Company has elected to continue utilizing the intrinsic
value method of accounting defined in APB Opinion No. 25. Due to the
exercise price of the warrants issued to employees and directors of the
Bank, directors of the Holding Company and to outside third parties for
performance of services being greater than or approximating the market
value of the common stock at the date of grant, no compensation expense
has been recognized in the consolidated statements of earnings.
In order to calculate the fair value of the warrants issued to employees
and directors of the Bank, directors of the Holding Company and to
outside third parties for the performance of services, it was assumed
that the risk-free interest rate was 6.0%, there would be no dividends
paid by the Company over the exercise period, the expected life of the
warrants would be the entire exercise period, except for warrants
issued in 1997 that have increasing option prices which is the end of
the initial exercise period, and stock volatility would be zero due to
the lack of an active market for the stock. The following information
pertains to the fair value of the such warrants granted to purchase
common stock in 1996 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
Weighted-average grant date fair value of warrants
<S> <C> <C>
issued during the year.................................................... $ 622 470
=== ===
Proforma net earnings.......................................................... $ 222 88
=== ===
Proforma basic earnings per share.............................................. $ .13 .05
=== ===
</TABLE>
(continued)
21
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information
The Holding Company's financial information is as follows (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets
At December 31,
---------------
1997 1996
---- ----
Assets
<S> <C> <C>
Cash..................................................................... $ 223 698
Short-term securities.................................................... 7,276 550
------ ------
Cash and cash equivalents............................................ 7,499 1,248
Loans receivable......................................................... 752 1,230
Investment in subsidiary................................................. 9,399 7,340
Organizational costs, net................................................ 2 32
Other assets............................................................. 23 17
-------- ------
Total assets......................................................... $ 17,675 9,867
====== =====
Liabilities and Stockholders' Equity
Liabilities.............................................................. 55 120
Stockholders' equity..................................................... 17,620 9,747
------ -----
Total liabilities and stockholders' equity........................... $ 17,675 9,867
====== =====
Condensed Statements of Earnings
For the Year Ended
December 31,
------------
1997 1996
---- ----
Revenues..................................................................... $ 264 325
Expenses..................................................................... 172 224
--- ---
Earnings before earnings of subsidiary.................................. 92 101
Earnings of subsidiary.................................................. 752 457
--- ---
Net earnings............................................................ $ 844 558
=== ===
</TABLE>
(continued)
22
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings.......................................................... $ 844 558
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiary.................................................... (752) (457)
Net decrease in organizational costs.............................. 30 29
Other............................................................. (69) 72
------ ------
Net cash provided by operating activities..................... 53 202
------ -----
Cash flows used in investing activities -
Net decrease (increase) in loans...................................... 478 (62)
------ -----
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 6,720 -
Purchase of common stock of subsidiary................................ (1,000) (40)
----- -----
Net cash provided by (used in) financing
activities.................................................. 5,720 (40)
----- -----
Net increase in cash and cash equivalents.................................. 6,251 100
Cash and cash equivalents at beginning of
the year.............................................................. 1,248 1,148
----- -----
Cash and cash equivalents at end of year................................... $ 7,499 1,248
===== =====
</TABLE>
(continued)
23
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(19) Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data follows ($ in thousands, except per
share figures):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 2,085 2,219 2,337 2,706
Interest expense......................................... 1,309 1,379 1,480 1,726
----- ----- ----- -----
Net interest income...................................... 776 840 857 980
Provision for loan losses................................ 92 92 82 86
------- ------ ------ ------
Net interest income after provision
for loan losses....................................... 684 748 775 894
Noninterest income....................................... 31 37 28 40
Noninterest expense...................................... 461 479 467 499
------ ------ ----- -----
Earnings before income taxes............................. 254 306 336 435
Income taxes............................................. 94 119 121 153
------ ----- ----- -----
Net earnings ............................................ $ 160 187 215 282
===== ===== ===== =====
Basic earnings per share................................. $ .10 .11 .13 .15
===== ===== ====== =====
Diluted earnings per share............................... $ .09 .09 .11 .12
===== ===== ====== =====
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income.......................................... $ 1,377 1,480 1,637 1,887
Interest expense......................................... 788 840 975 1,142
------ ----- ----- -----
Net interest income...................................... 589 640 662 745
Provision for loan losses................................ 73 55 62 60
------ ----- ----- ------
Net interest income after provision
for loan losses....................................... 516 585 600 685
Noninterest income....................................... 30 48 24 4
Noninterest expense...................................... 361 404 374 412
------ ----- ----- ------
Earnings before income taxes............................. 185 229 250 277
Income taxes............................................. 75 97 101 110
------ ------ ----- -----
Net earnings ............................................ $ 110 132 149 167
===== ====== ===== =====
Basic earnings per share................................. $ .07 .08 .09 .10
====== ====== ===== ======
Diluted earnings per share............................... $ .07 .08 .09 .10
====== ====== ===== ======
</TABLE>
24
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of Intervest
Bancshares Corporation and Subsidiary (the "Company") at December 31, 1997 and
1996 and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
HACKER, JOHNSON, COHEN & GRIEB PA
Tampa, Florida
January 23, 1998
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
<S> <C> <C>
Assets 1997 1996
---- ----
Cash and due from banks.......................................................... $ 1,738 2,318
Federal funds sold............................................................... 162 3,452
Short-term investments........................................................... 7,276 550
--------- --------
Total cash and cash equivalents........................................... 9,176 6,320
Interest-bearing deposits with banks............................................. 99 99
Securities held to maturity...................................................... 58,821 34,507
Loans receivable, net of allowance for loan losses of $1,173
in 1997 and $811 in 1996...................................................... 75,652 59,499
Accrued interest receivable...................................................... 1,327 842
Premises and equipment, net...................................................... 4,877 2,940
Restricted securities, Federal Reserve Bank stock, at cost ...................... 233 203
Foreclosed real estate........................................................... - 185
Deferred income tax asset........................................................ 485 526
Other assets ............................................................... 85 75
---------- ---------
$ 150,755 105,196
======= =======
Liabilities and Stockholders' Equity
Liabilities:
Demand deposits............................................................... 3,490 2,401
Savings and NOW deposits...................................................... 17,119 9,278
Money-market deposits......................................................... 17,180 7,507
Time deposits................................................................. 93,378 74,261
-------- -------
Total deposits............................................................ 131,167 93,447
Other liabilities............................................................. 1,947 1,676
-------- --------
Total liabilities......................................................... 133,114 95,123
------- -------
Minority interest................................................................ 21 326
---------- ---------
Commitments (Notes 4 and 7)
Stockholders' Equity:
Preferred stock, 300,000 shares authorized, issued none....................... - -
Class A common stock - $1 par value, 7,500,000 shares
authorized; 2,124,415 and 900,000 shares issued
and outstanding in 1997 and 1996............................................ 2,124 900
Class B common stock - $1 par value, 700,000 shares
authorized; 300,000 and 200,000 shares issued
and outstanding in 1997 and 1996............................................ 300 200
Additional paid-in capital.................................................... 13,360 7,655
Retained earnings............................................................. 1,836 992
-------- ---------
Total stockholders' equity................................................ 17,620 9,747
------- --------
$ 150,755 105,196
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
($ in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable.............................................................. $ 6,415 4,624
Securities held to maturity................................................... 2,632 1,514
Other interest earning assets................................................. 300 243
----------- -----------
Total interest income..................................................... 9,347 6,381
Interest expense on deposits..................................................... 5,894 3,745
---------- ----------
Net interest income....................................................... 3,453 2,636
Provision for loan losses........................................................ 352 250
----------- -----------
Net interest income after
provision for loan losses............................................... 3,101 2,386
---------- ----------
Noninterest income:
Customer service charges...................................................... 121 89
Other... ............................................................... 15 17
------------ -----------
Total noninterest income.................................................. 136 106
----------- -----------
Noninterest expenses:
Salaries and employee benefits................................................ 907 739
Occupancy and equipment....................................................... 406 342
Advertising and promotion..................................................... 40 9
Professional fees............................................................. 48 57
State assessment.............................................................. 26 19
Audit and accounting.......................................................... 48 27
Data processing............................................................... 21 9
Deposit insurance premiums.................................................... 12 2
General insurance............................................................. 31 31
Stationery, printing and supplies............................................. 83 51
Other ............................................................... 282 246
Minority interest in subsidiary............................................... 2 19
------------ ------------
Total noninterest expenses................................................ 1,906 1,551
---------- ----------
Earnings before income taxes..................................................... 1,331 941
Income taxes.............................................................. 487 383
----------- -----------
Net earnings ............................................................... $ 844 558
=========== ===========
Basic earnings per share......................................................... $ .49 .34
============ ============
Diluted earnings per share....................................................... $ .41 .34
============ ============
Weighted-average number of shares
outstanding for basic earnings per share...................................... 1,712,292 1,650,000
========= =========
Weighted-average number of shares
outstanding for diluted earnings per share.................................... 2,072,459 1,650,000
========= =========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Shares of
Class A Class A Class B Additional Total
Common Common Common Paid-In Retained Stockholders'
Stock Stock Stock Capital Earnings Equity
----- ----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995......................... 900,000 $ 900 200 7,655 434 9,189
Net earnings.................... - - - - 558 558
------------ ------- ---- ------ ----- ------
Balance at December 31,
1996 ....................... 900,000 900 200 7,655 992 9,747
Effect of 1.5 for 1 stock
split ....................... 450,000 450 100 (550) - -
Proceeds from 747,500 shares
of stock issued, net of stock
issuance cost of $755........ 747,500 748 - 5,972 - 6,720
Net earnings.................... - - - - 844 844
Issuance of common stock
in exchange for common
stock of minority
stockholders of
subsidiary................... 26,915 26 - 283 - 309
--------- ------ ---- ------- ------- -------
Balance at December 31,
1997 ........................ 2,124,415 $ 2,124 300 13,360 1,836 17,620
========= ===== === ====== ===== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................................................... $ 844 558
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation................................................................ 260 176
Provision for deferred income taxes......................................... 41 67
(Increase) decrease in other assets......................................... (10) 35
Increase in other liabilities............................................... 275 850
Increase in accrued interest receivable..................................... (485) (199)
Net amortization of fees, premiums and discounts............................ 19 271
Provision for loan losses................................................... 352 250
------- -------
Net cash provided by operating activities.............................. 1,296 2,008
------ ------
Cash flows from investing activities:
Purchase of securities held to maturity............................................ (44,450) (30,025)
Maturities of securities held to maturity.......................................... 20,175 15,050
Net purchases of premises and equipment............................................ (2,197) (667)
Net increase in loans.............................................................. (16,563) (23,642)
Proceeds from sale of foreclosed real estate....................................... 185 -
Purchase of Federal Reserve Bank stock............................................. (30) -
Maturity of interest-bearing deposits.............................................. - 199
--------- -------
Net cash used in investing activities.................................. (42,880) (39,085)
------ ------
Cash flows from financing activities:
Net increase in demand, savings, NOW and
money market deposits.......................................................... 18,603 9,639
Net increase in time deposits...................................................... 19,117 25,207
Proceeds from issuance of common stock, net of stock issuance costs................ 6,720 -
------- -------
Net cash provided by financing activities.............................. 44,440 34,846
------ ------
Net increase (decrease) in cash and cash equivalents................... 2,856 (2,231)
Cash and cash equivalents at beginning of year.......................................... 6,320 8,551
------ ------
Cash and cash equivalents at end of year................................................ $ 9,176 6,320
====== ======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest............................................................... $ 5,832 3,678
====== ======
Income taxes........................................................... $ 700 17
======= =======
Noncash transactions:
Reclassification of loans to foreclosed real estate.................... $ - 185
========= =======
Issuance of common stock in exchange of common
stock of minority stockholders of subsidiary....................... $ 309 -
====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997 and 1996
(1) Description of Business and Summary of Significant Accounting Policies
General. Intervest Bancshares Corporation (the "Holding Company") was
incorporated on February 5, 1993. The Holding Company owned 99.78% and
95.76% at December 31, 1997 and 1996, respectively, of the outstanding
common stock of Intervest Bank (the "Bank") (collectively the
"Company"). The Bank is a Florida state-chartered bank, is insured by
the Federal Deposit Insurance Corporation and is a member of the
Federal Reserve Bank. The Holding Company's primary business is the
operation of the Bank. The Bank provides a wide range of banking
services to small and middle-market businesses and individuals through
its five banking offices located in Pinellas County, Florida.
The principal executive offices of the Bank are located at 625 Court
Street, Clearwater, Florida. In addition, the Bank has four branch
offices, three in Clearwater, Florida located at (i) 2575 Ulmerton
Road; (ii) 2175 Nursery Road; and (iii) 1875 Belcher Road and one in
South Pasadena, Florida at 6750 Gulfport Boulevard.
Basis of Presentation. The accompanying consolidated financial statements
of the Company include the accounts of the Holding Company and the
Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices
within the banking industry. The following summarizes the more
significant of these policies and practices.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Securities Held to Maturity. United States government treasury and agency
securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest
income using the interest method over the period to maturity.
Loans Receivable. Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
(continued)
6
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Loans Receivable, Continued. The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair
value at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in the consolidated
statement of earnings.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
Premises and Equipment. Land is carried at cost. Premises, furniture and
fixtures and equipment are carried at cost, less accumulated
depreciation computed by the straight-line method.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement 123")
establishes a "fair value" based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(Opinion 25). The Company has elected to follow Opinion 25 and related
interpretations in accounting for its stock-based compensation which is
in the form of stock warrants. Statement 123 requires the disclosure of
proforma net earnings and earnings per share determined as if the
Company accounted for its stock warrants under the fair value method of
that Statement.
Off-Balance-Sheet Financial Instruments. In the ordinary course of business
the Company has entered into off-balance-sheet financial instruments
consisting of commitment to extend credit, unused lines of credit and
stand-by-letters of credit. Such financial instruments are recorded in
the consolidated financial statements when they are funded or related
fees are incurred or received.
FairValues of Financial Instruments. The following methods and assumptions
were used by the Company in estimating fair values of financial
instruments:
Cash and Cash Equivalents and Interest-Bearing Deposits with Banks. The
carrying amounts of cash and interest-bearing deposits with banks
approximate their fair value.
Securities Held to Maturity. Fair values for securities held to
maturity are based on quoted market prices.
(continued)
7
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
FairValues of Financial Instruments, Continued. Federal Reserve Bank
Stock. Book value for these securities approximates fair value.
Loans Receivable. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for fixed-rate mortgage (e.g. one-to-four
family residential), commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Deposit Liabilities. The fair values disclosed for demand, NOW,
money-market and savings deposits are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Accrued Interest. The carrying amounts of accrued interest approximate
their fair values.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Advertising. The Company expenses all advertising as incurred.
Earnings Per Share. Earnings per share ("EPS") of common stock has been
computed on the basis of the weighted-average number of shares of
common stock outstanding. Prior to the public stock offering in
November, 1997, there was no public market for the Company's common
stock. For purposes of calculating diluted EPS the $10 stock offering
price is assumed to be the market price for the entire year ended
December 31, 1997. For 1997, outstanding warrants are considered
dilutive securities for purposes of calculating diluted EPS which is
computed using the treasury stock method. Such warrants were not
considered dilutive in 1996. The following table presents the
calculations of EPS (See Note 16) ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
<S> <C> <C> <C>
Net earnings available to common stockholders............. $ 844 1,712,292 $ .49
===
Effect of dilutive securities-
Incremental shares from assumed conversion
of warrants ........................................... 360,167
----------
Diluted EPS:
Net earnings available to common stockholders
and assumed conversions................................. $ 844 2,072,459 $ .41
=== ========= ===
</TABLE>
(continued)
8
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Description of Business and Summary of Significant Accounting Policies,
Continued
Earnings Per Share, Continued. Warrants to purchase 1,528,665 and 150,000
shares of Class A and Class B common stock at $6.67 per share were
assumed to be exercised on January 1, 1997 and June 1, 1997,
respectively. Warrants to purchase 989,083 shares of Class A common
stock at $10.00 per share are not included in the computation of
diluted EPS because the warrants' exercise price approximated the
market price of the stock. None of the above warrants have been
exercised as of December 31, 1997.
Reclassifications. Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 presentation.
Future Accounting Requirements. Financial Accounting Standards 130 -
Reporting Comprehensive Income establishes standards for reporting
comprehensive income. The Standard defines comprehensive income as the
change in equity of an enterprise except those resulting from
stockholder transactions. All components of comprehensive income are
required to be reported in a new financial statement that is displayed
with equal prominence as existing financial statements. The Company
will be required to adopt this Standard effective January 1, 1998. As
the Statement addresses reporting and presentation issues only, there
will be no impact on operating results from the adoption of this
Standard.
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company will be required to adopt this Standard
effective January 1, 1998. As the Standard addresses reporting and
disclosure issues only, there will be no impact on operating results
from adoption of this Standard.
(continued)
9
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Securities Held to Maturity
Debtsecurities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and
their approximate fair values are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities............. $ 4,027 15 - 4,042
U.S. Government and
agency securities................ 54,794 64 64 54,794
------ -- --- ------
Total............................ $ 58,821 79 64 58,836
====== == === ======
December 31, 1996:
U.S. Treasury securities............. 1,499 7 - 1,506
U.S. Government and
agency securities................ 33,008 44 105 32,947
------ -- --- ------
Total............................ $ 34,507 51 105 34,453
====== == === ======
</TABLE>
There were no sales of securities during the years ended December 31, 1997
or 1996.
The scheduled maturities of securities held to maturity at December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less................................................... $ 13,169 13,186
Due after one year through five years..................................... 32,890 32,896
Due after five years through ten years.................................... 12,762 12,754
------ ------
Total ............................................................. $ 58,821 58,836
====== ======
</TABLE>
(continued)
10
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable
The components of loans in the consolidated balance sheets are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Commercial loans........................................................ $ 3,281 3,514
Commercial real estate.................................................. 70,533 54,198
Residential real estate................................................. 3,150 2,784
Consumer loans.......................................................... 262 157
-------- --------
77,226 60,653
Deferred loan fees...................................................... (401) (343)
Allowance for loan losses............................................... (1,173) (811)
------ ------
$ 75,652 59,499
====== ======
</TABLE>
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year.............................................. $ 811 593
----- ---
Loans charged-off......................................................... - (65)
Recoveries................................................................ 10 33
------ ---
Net................................................................... 10 (32)
------ ---
Provision for loan losses................................................. 352 250
----- ---
Balance at end of year.................................................... $ 1,173 811
===== ===
</TABLE>
The Company had no impaired loans at December 31, 1997 or 1996. The average
recorded investment in impaired loans during the year ended December
31, 1996 was $31,000. There were no impaired loans identified during
1997. No interest income was recognized on impaired loans during 1996.
(continued)
11
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment
Premises and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Land................................................................. $ 915 729
Bank buildings....................................................... 3,570 1,926
Leasehold improvements............................................... 162 61
Furniture and fixtures and equipment................................. 1,203 565
----- -----
Total, at cost.................................................... 5,850 3,281
Less accumulated depreciation and amortization....................... (973) (341)
------ -----
Net book value.................................................... $ 4,877 2,940
===== =====
</TABLE>
The Bank leases its Belcher Road office. The lease is accounted for as an
operating lease and will expire on October 31, 2007. The lease
agreement contains escalation clauses based upon the consumer price
index and contains annual adjustments up to a maximum of 3% based upon
the previous year's rental. Rental expense was $125,000 and $163,000
for the years ended December 31, 1997 and 1996, respectively.
Approximate future minimum annual rental payments under this
noncancellable lease at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998.......................................................................... $ 94
1999.......................................................................... 96
2000.......................................................................... 99
2001.......................................................................... 102
2002.......................................................................... 106
Thereafter.................................................................... 514
------
Total......................................................................... $ 1,011
=====
</TABLE>
(continued)
12
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Premises and Equipment, Continued
The Company leases a portion of their office space in the branch office
located on Ulmerton Road and beginning in September, 1997, office space
at the new main office on Court Street, to other companies. Such leases
begin to expire in 1998. Rental income during the years ended December
31, 1997 and 1996 totaled approximately $195,000 and $159,000,
respectively. Approximate future minimum lease income under these
leases at December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C> <C>
1998................................................................................. $ 343
1999................................................................................. 275
2000................................................................................. 271
2001................................................................................. 211
2002................................................................................. 190
Thereafter........................................................................... 792
------
Total................................................................................ $ 2,082
=====
</TABLE>
This table gives no effect to the future rental value of office space
subsequent to lease expiration dates.
(5) Deposits
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000, was approximately $9,506,000 and $7,261,000 at December
31, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C> <C>
1998................................................................................. $ 46,954
1999................................................................................. 16,554
2000................................................................................. 9,446
2001................................................................................. 9,362
2002 and thereafter.................................................................. 11,062
------
Total................................................................................ $ 93,378
======
</TABLE>
(continued)
13
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Other Borrowings
The Company has agreements with correspondent banks whereby the Company may
borrow up to $1,000,000 on an overnight basis under a repurchase
agreement and up to $3,457,000 in federal funds. There were no
borrowings under these agreements at December 31, 1997 or 1996.
(7) Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit
and standby letters of credit and may involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheet. The contract amounts of
these instruments reflect the extent of involvement the Company has in
these financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
(continued)
14
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Financial Instruments, Continued
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 9,176 9,176 6,320 6,320
Securities held to maturity............................. 58,821 58,836 34,507 34,453
Loans receivable, net................................... 75,652 75,658 59,499 59,692
Accrued interest receivable............................. 1,327 1,327 842 842
Federal Reserve Bank stock.............................. 233 233 203 203
Interest-bearing deposits with bank..................... 99 99 99 99
Financial liabilities-
Deposit liabilities..................................... 131,167 131,491 93,447 93,713
</TABLE>
A summary of the notional amounts of the Company's financial instruments,
which approximate fair value, with off balance sheet risk at December
31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Unfunded loan commitments at variable rates............................... $ 2,950
=====
Available lines of credit................................................. $ 527
=====
Standby letters of credit................................................. $ 100
=====
</TABLE>
(8) Credit Risk
The Company grants a majority of its loans to borrowers throughout the
State of Florida. Although the Company has a diversified loan
portfolio, a significant portion of its borrowers' ability to honor
their contracts is dependent upon the economy of the State of Florida.
In addition, at December 31, 1997, the Company's loan portfolio
contained a concentration of credit risk in retail shopping centers,
apartment buildings and office buildings totaling $55,707,000.
(continued)
15
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997: Current Deferred Total
----------------------------- ------- -------- -----
<S> <C> <C> <C>
Federal....................................................... $ 377 35 412
State......................................................... 69 6 75
---- --- ---
Total..................................................... $ 446 41 487
=== == ===
Year Ended December 31, 1996:
Federal....................................................... 244 63 307
State......................................................... 72 4 76
--- --- ---
Total..................................................... $ 316 67 383
=== == ===
</TABLE>
The reasons for the differences between the statutory Federal income tax
rate and the effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Tax provision at statutory rate............................................ 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes..................................................... 3.8 8.1
Other.................................................................. (1.2) (1.4)
---- ----
Income tax provision ...................................................... 36.6% 40.7%
==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets relate to the following (in
thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996
---- ----
Net deferred tax assets:
<S> <C> <C>
Allowance for loan losses............................................. $ 298 185
Depreciation.......................................................... (19) (20)
Deferred loan fees.................................................... 13 19
Net operating loss carryforward....................................... 186 311
Other................................................................. 7 31
----- ---
Net deferred tax assets........................................... $ 485 526
=== ===
</TABLE>
(continued)
16
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
At December 31, 1997, the Company has the following net operating loss
carryforwards relating to the operations of the Bank for federal income
tax purposes available to offset future federal taxable income (in
thousands):
<TABLE>
<CAPTION>
Expiration
----------
<S> <C> <C>
2006..................................................................... $ 194
2007..................................................................... 297
2008..................................................................... 3
----
$ 494
</TABLE>
The net operating loss carryforwards are subject to an annual limitation of
$332,000 due to the ownership change of the Bank when the Holding
Company purchased its controlling ownership interest.
(10) Related Parties
The Bank has entered into loan transactions with certain of its directors
and their related entities. The activity is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year............................................ $ 2,941 1,484
Additions............................................................... 510 1,570
Repayments.............................................................. (209) (113)
----- ------
Balance at end of year.................................................. $ 3,242 2,941
===== =====
</TABLE>
Thereare no loans to directors or officers of the Holding Company,
Intervest Bancshares Corporation.
(11) Employee Stock Option Plan of the Bank
Priorto 1993, an officer of the Bank had been granted options to acquire
11,000 shares of the Bank's common stock. These options were to expire
on December 31, 2001, and were exercisable at $5 per share. All such
options were exchanged for warrants of the Holding Company by the
officer during 1997. In 1997 the option plan was terminated.
(continued)
17
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Profit Sharing Plan
The Bank sponsors a profit sharing plan established in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The profit
sharing plan is available to all employees electing to participate
after meeting certain length-of-service requirements. The Bank's
contributions to the profit sharing plan are discretionary and are
determined annually. Expense relating to the Bank's contributions to
the profit sharing plan included in the accompanying consolidated
financial statements was $21,377 and $12,181 for the years ended
December 31, 1997 and 1996, respectively.
(13) Common Stock Warrants of the Bank
In 1995, Intervest Bancshares Corporation purchased 200,000 shares of the
Bank's common stock at $5 per share and received warrants to purchase
an additional 200,000 shares of common stock at $5 par value. In June,
1997, Intervest Bancshares Corporation exercised the warrants and
purchased 200,000 shares of the Bank's common stock.
(14) Stockholders' Equity
The Bank, as a state-chartered bank, is limited in the amount of cash
dividends that may be paid. The amount of cash dividends that may be
paid is based on the Bank's net earnings of the current year combined
with the Bank's retained net earnings of the preceding two years, as
defined by state banking regulations. However, for any dividend
declaration, the Bank must consider additional factors such as the
amount of current period net earnings, liquidity, asset quality,
capital adequacy and economic conditions. It is likely that these
factors would further limit the amount of dividends which the Bank
could declare. In addition, bank regulators have the authority to
prohibit banks from paying dividends if they deem such payment to be an
unsafe or unsound practice. The ability of the Holding Company to pay
dividends could be affected by the amount of dividends the Bank is able
to pay to the Holding Company.
(15) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
(continued)
18
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters, Continued
As of December 31, 1997, the most recent notification from the State and
Federal regulators categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk- based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the Bank's category. The Bank's actual
capital amounts and ratios are also presented in the table (dollars in
thousands).
<TABLE>
<CAPTION>
For Well
For Capital Capitalized
Actual Adequacy Purposes: Purposes:
----------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total capital (to Risk
<S> <C> <C> <C> <C> <C> <C>
Weighted Assets)............... $ 9,420 10.53% $ 7,157 8.00% $ 8,948 10.00%
Tier I Capital (to Risk
Weighted Assets)............... 9,125 10.20 3,578 4.00 5,367 6.00
Tier I Capital
(to Average Assets)............ 9,125 6.85 5,328 4.00 6,660 5.00
As of December 31, 1996:
Total capital (to Risk
Weighted Assets)............... 8,051 11.90 5,412 8.00 6,765 10.0
Tier I Capital (to Risk
Weighted Assets)............... 7,240 10.70 2,706 4.00 4,059 6.0
Tier I Capital
(to Average Assets)............ 7,240 7.48 3,871 4.00 4,839 5.0
</TABLE>
(16) Capital Stock
Bothclasses of common stock have equal voting rights as to all matters,
except that, so long as at least 50,000 shares of Class B Common Stock
remain issued and outstanding the holders of the outstanding shares of
Class B Common Stock are entitled to vote for the election of
two-thirds of the directors (rounded to the nearest whole number) and
the holders of the outstanding shares of Class A Common Stock are
entitled to vote for the remaining directors of the Company. No
dividends may be declared or paid with respect to shares of Class B
Common Stock until January 1, 2000, after which time the holders of
Class A Common Stock and Class B Common Stock will share ratably in
dividends. The shares of Class B Common Stock are convertible, on a
share-for-share basis, into Class A Common Stock at any time after
January 1, 2000.
(continued)
19
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Capital Stock, Continued
On September 19, 1997, the Holding Company's charter was amended to
increase the authorized number of shares of Class A common stock to
7,500,000, Class B common stock to 700,000 and preferred stock to
300,000.
In addition, on September 18, 1997, the Board of Directors of the Holding
Company declared a 1.5 for 1 Class A and Class B common stock split
payable on September 19, 1997 to stockholders of record on September
19, 1997. All per share amounts reflect the effect of these stock
splits.
(17) Common Stock Warrants
The Company has outstanding warrants which entitle the registered holders
thereof to purchase one share of common stock for each issued warrant.
All warrants were exercisable when issued. These warrants have been
issued in connection with public stock offerings, to directors and
employees of the Bank and directors of the Holding Company and to
outside third parties for performance of services. A summary of stock
warrant transactions follows ($ in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Exercise Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class A Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995....... 1,288,500 $ 6.67 $ 6.67 $ 8,594 5.4 years
Warrants granted...................... 240,165 6.67 6.67 1,602 5.1 years
--------- ------
Outstanding at December 31, 1996...... 1,528,665 6.67 6.67 10,196 5.4 years
Warrants granted...................... 949,183 10.00 10.00 9,492 2.0 years(1)
Warrants granted...................... 16,500 10.00 10.00 165 4.0 years
---------- -------
Outstanding at December 31, 1997...... 2,494,348 $ 6.67-10.00 $ 7.96 19,853 4.1 years
========= ========== ==== ====== =========
</TABLE>
- - -------------------------------------
(1) These warrants entitle the holder to purchase one share of Class A
common stock at a price of $10.00 per share through December 31, 1999;
$11.50 per share from January 1, 2000 through December 31, 2000; $12.50 per
share from January 1, 2001 through December 31, 2001 and $13.50 per share
from January 1, 2002 through December 31, 2002. For purposes of the above
table it is assumed that these warrants will be exercised on December 31,
1999.
(continued)
20
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) Common Stock Warrants, Continued
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Contractual
Option Per Aggregate Life At
Number of Price Per Warrant Warrant December 31,
Class B Common Stock Warrants: Warrants Warrant Price Price 1997
-------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31,1995
and 1996........................... - - - - -
Warrants granted........................ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
------- -----
Outstanding at December 31, 1997........ 150,000 $ 6.67 $ 6.67 $ 1,001 9.0 years
======= ==== ==== ===== =========
</TABLE>
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for
stock-based employee compensation plans. As permitted by this
Statement, the Company has elected to continue utilizing the intrinsic
value method of accounting defined in APB Opinion No. 25. Due to the
exercise price of the warrants issued to employees and directors of the
Bank, directors of the Holding Company and to outside third parties for
performance of services being greater than or approximating the market
value of the common stock at the date of grant, no compensation expense
has been recognized in the consolidated statements of earnings.
In order to calculate the fair value of the warrants issued to employees
and directors of the Bank, directors of the Holding Company and to
outside third parties for the performance of services, it was assumed
that the risk-free interest rate was 6.0%, there would be no dividends
paid by the Company over the exercise period, the expected life of the
warrants would be the entire exercise period, except for warrants
issued in 1997 that have increasing option prices which is the end of
the initial exercise period, and stock volatility would be zero due to
the lack of an active market for the stock. The following information
pertains to the fair value of the such warrants granted to purchase
common stock in 1996 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
Weighted-average grant date fair value of warrants
<S> <C> <C>
issued during the year.................................................... $ 622 470
=== ===
Proforma net earnings.......................................................... $ 222 88
=== ===
Proforma basic earnings per share.............................................. $ .13 .05
=== ===
</TABLE>
(continued)
21
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information
The Holding Company's financial information is as follows (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets
At December 31,
---------------
1997 1996
---- ----
Assets
<S> <C> <C>
Cash..................................................................... $ 223 698
Short-term securities.................................................... 7,276 550
------ ------
Cash and cash equivalents............................................ 7,499 1,248
Loans receivable......................................................... 752 1,230
Investment in subsidiary................................................. 9,399 7,340
Organizational costs, net................................................ 2 32
Other assets............................................................. 23 17
-------- ------
Total assets......................................................... $ 17,675 9,867
====== =====
Liabilities and Stockholders' Equity
Liabilities.............................................................. 55 120
Stockholders' equity..................................................... 17,620 9,747
------ -----
Total liabilities and stockholders' equity........................... $ 17,675 9,867
====== =====
Condensed Statements of Earnings
For the Year Ended
December 31,
------------
1997 1996
---- ----
Revenues..................................................................... $ 264 325
Expenses..................................................................... 172 224
--- ---
Earnings before earnings of subsidiary.................................. 92 101
Earnings of subsidiary.................................................. 752 457
--- ---
Net earnings............................................................ $ 844 558
=== ===
</TABLE>
(continued)
22
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Holding Company Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings.......................................................... $ 844 558
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiary.................................................... (752) (457)
Net decrease in organizational costs.............................. 30 29
Other............................................................. (69) 72
------ ------
Net cash provided by operating activities..................... 53 202
------ -----
Cash flows used in investing activities -
Net decrease (increase) in loans...................................... 478 (62)
------ -----
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 6,720 -
Purchase of common stock of subsidiary................................ (1,000) (40)
----- -----
Net cash provided by (used in) financing
activities.................................................. 5,720 (40)
----- -----
Net increase in cash and cash equivalents.................................. 6,251 100
Cash and cash equivalents at beginning of
the year.............................................................. 1,248 1,148
----- -----
Cash and cash equivalents at end of year................................... $ 7,499 1,248
===== =====
</TABLE>
(continued)
23
<PAGE>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(19) Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data follows ($ in thousands, except per
share figures):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 2,085 2,219 2,337 2,706
Interest expense......................................... 1,309 1,379 1,480 1,726
----- ----- ----- -----
Net interest income...................................... 776 840 857 980
Provision for loan losses................................ 92 92 82 86
------- ------ ------ ------
Net interest income after provision
for loan losses....................................... 684 748 775 894
Noninterest income....................................... 31 37 28 40
Noninterest expense...................................... 461 479 467 499
------ ------ ----- -----
Earnings before income taxes............................. 254 306 336 435
Income taxes............................................. 94 119 121 153
------ ----- ----- -----
Net earnings ............................................ $ 160 187 215 282
===== ===== ===== =====
Basic earnings per share................................. $ .10 .11 .13 .15
===== ===== ====== =====
Diluted earnings per share............................... $ .09 .09 .11 .12
===== ===== ====== =====
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income.......................................... $ 1,377 1,480 1,637 1,887
Interest expense......................................... 788 840 975 1,142
------ ----- ----- -----
Net interest income...................................... 589 640 662 745
Provision for loan losses................................ 73 55 62 60
------ ----- ----- ------
Net interest income after provision
for loan losses....................................... 516 585 600 685
Noninterest income....................................... 30 48 24 4
Noninterest expense...................................... 361 404 374 412
------ ----- ----- ------
Earnings before income taxes............................. 185 229 250 277
Income taxes............................................. 75 97 101 110
------ ------ ----- -----
Net earnings ............................................ $ 110 132 149 167
===== ====== ===== =====
Basic earnings per share................................. $ .07 .08 .09 .10
====== ====== ===== ======
Diluted earnings per share............................... $ .07 .08 .09 .10
====== ====== ===== ======
</TABLE>
24
<TABLE>
<S> <C>
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END DEC-31-1997
PERIOD-END DEC-31-1997
CASH 1,738
INT-BEARING-DEPOSITS 99
FED-FUNDS-SOLD 162
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 0
INVESTMENTS-CARRYING 66,097
INVESTMENTS-MARKET 66,112
LOANS 76,825
ALLOWANCE 1,173
TOTAL-ASSETS 150,755
DEPOSITS 131,167
SHORT-TERM 0
LIABILITIES-OTHER 1,968
LONG-TERM 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 2,424
OTHER-SE 15,196
TOTAL-LIABILITIES-AND-EQUITY 150,755
INTEREST-LOAN 6,415
INTEREST-INVEST 2,632
INTEREST-OTHER 300
INTEREST-TOTAL 9,347
INTEREST-DEPOSIT 5,894
INTEREST-EXPENSE 5,894
INTEREST-INCOME-NET 3,453
LOAN-LOSSES 352
SECURITIES-GAINS 0
EXPENSE-OTHER 1,906
INCOME-PRETAX 1,331
INCOME-PRE-EXTRAORDINARY 844
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 844
EPS-PRIMARY .49
EPS-DILUTED .41
YIELD-ACTUAL 2.92
LOANS-NON 0
LOANS-PAST 0
LOANS-TROUBLED 0
LOANS-PROBLEM 0
ALLOWANCE-OPEN 811
CHARGE-OFFS 0
RECOVERIES 10
ALLOWANCE-CLOSE 1,173
ALLOWANCE-DOMESTIC 0
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 1,173
</TABLE>
<PAGE>
ANNEX D - INTERVEST BANCSHARES CORPORATION REPORT ON FORM 10-Q
<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission File No. 000-23377
INTERVEST BANCSHARES CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3699013
- - ---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
----------------------------------------
(Address of principal executive offices)
(212) 218-2800
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: YES XX NO .
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
- - -------------------- -------------------
Class A Common Stock, 2,271,879 Outstanding
$1.00 par value per share at October 31, 1999
- - ------------------------- -------------------
Class B Common Stock, 305,000 Outstanding
$1.00 par value per share at October 31, 1999
- - ------------------------- -------------------
================================================================================
<PAGE>
<TABLE>
<CAPTION>
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-QSB
September 30, 1999
TABLE OF CONTENTS
<S> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 (Unaudited) and December 31, 1998 ............................. 1
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarter and Nine-Months Ended September 30, 1999 and 1998 ...................... 2
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine-Months Ended September 30, 1999 and 1998.................................. 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 1999 and 1998.................................. 4
Notes to Condensed Consolidated Financial Statements (Unaudited) ......................... 5
Item 2. Management's Discussion and Analysis or Plan of Operation ....................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 18
Item 2. Changes in Securities and Use of Proceeds........................................ 18
Item 3. Defaults Upon Senior Securities.................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders.............................. 18
Item 5. Other Information............................................................... 18
Item 6. Exhibits and Reports on Form 8-K................................................. 18
Signatures................................................................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
- - -----------------------------
ITEM 1. Financial Statements
- - ----------------------------
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
($ in thousands, except par value) 1999 1998
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,210 $ 2,876
Federal funds sold 15,343 6,473
Short-term investments 288 4,123
---------- ----------
Total cash and cash equivalents 18,841 13,472
Interest-bearing deposits with banks 100 199
Securities held to maturity, net
(estimated fair value of $78,744 and $82,173 respectively) 80,168 82,338
Restricted security, Federal Reserve Bank stock, at cost 508 233
Loans receivable (net of allowance for loan loss reserves of
($2,268 and $1,662, respectively) 121,067 96,074
Accrued interest receivable 1,801 1,800
Premises and equipment, net 5,698 4,917
Deferred income tax asset 721 579
Other assets 1,252 910
- - --------------------------------------------------------------------------------------------------------------------------
Total assets $230,156 $200,522
- - --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand deposits $ 3,464 $ 3,027
NOW deposits 7,943 7,955
Savings deposits 21,951 26,823
Money-market deposits 59,227 33,629
Time deposits 104,766 99,033
---------- ----------
Total deposits 197,351 170,467
Convertible debentures 6,930 7,000
Accrued interest on convertible debentures 738 299
Mortgage escrow funds 2,491 870
Official checks outstanding 1,108 1,572
Other liabilities 1,111 747
- - --------------------------------------------------------------------------------------------------------------------------
Total liabilities 209,729 180,955
- - --------------------------------------------------------------------------------------------------------------------------
Minority interest 18 23
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 7,500,000 shares authorized,
(2,194,379 and 2,184,515 shares issued and outstanding respectively) 2,194 2,184
Class B common stock ($1.00 par value, 700,000 shares authorized,
(305,000 and 300,000 shares issued and outstanding respectively) 305 300
Additional paid-in-capital, common 13,909 13,789
Retained earnings 4,001 3,271
- - --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,409 19,544
- - --------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and stockholders' equity $230,156 $200,522
- - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
For the For the
Quarter Ended Nine-Months Ended
September 30, September 30,
---------------- -----------------
($ in thousands, except per share data) 1999 1998 1999 1998
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $2,396 $2,260 $ 6,580 $6,010
Securities 1,193 1,037 3,674 3,075
Other interest-earning assets 150 123 350 302
- - --------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 3,739 3,420 10,604 9,387
- - --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,192 2,042 6,181 5,838
Convertible debentures and federal funds purchased 163 150 482 167
- - --------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,355 2,192 6,663 6,005
- - --------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 1,384 1,228 3,941 3,382
Provision for loan loss reserves 270 127 605 357
- - --------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income
after provision for loan loss reserves 1,114 1,101 3,336 3,025
- - --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 34 44 100 100
Income from mortgage activities 94 24 250 115
All other - 3 1 6
- - --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 128 71 351 221
- - --------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 395 264 1,114 784
Occupancy and equipment, net 231 120 552 324
Advertising and promotion 6 10 17 22
Professional fees and services 60 43 163 164
Stationery, printing and supplies 25 21 107 77
All other 98 60 332 183
- - --------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 815 518 2,285 1,554
- - --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes & change in accounting principle 427 654 1,402 1,692
Provision for income taxes 149 261 544 666
Cumulative effect of change in accounting principle (note 6) - - (128) -
- - --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 278 $ 393 $ 730 $1,026
- - --------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Earnings before change in accounting principle $ 0.11 $ 0.16 $ 0.34 $ 0.42
Cumulative effect of change in accounting principle - - (0.05) -
- - --------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 0.11 $ 0.16 $ 0.29 $ 0.42
- - --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Earnings before change in accounting principle $ 0.10 $ 0.13 $ 0.29 $ 0.32
Cumulative effect of change in accounting principle - - (0.04) -
- - --------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 0.10 $ 0.13 $ 0.25 $ 0.32
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
For the Nine-Months Ended
($ in thousands) September 30,
-------------------------
1999 1998
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A COMMON STOCK
Balance at beginning of period $ 2,184 $ 2,124
Issuance of 510 shares in exchange for common stock of minority stockholders of Intervest Bank 1 -
Issuance of 7,554 shares upon the conversion of debentures 7 -
Issuance of 1,800 and 40,300 shares, respectively, upon exercise of warrants 2 41
- - ------------------------------------------------------------------------------------------------------------------------
Balance at end of period 2,194 2,165
- - ------------------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of period 300 300
Issuance of 5,000 shares upon the exercise of warrants 5 -
- - ------------------------------------------------------------------------------------------------------------------------
Balance at end of period 305 300
- - ------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 13,789 13,360
Issuance of 510 shares in exchange for common stock of minority stockholders of Intervest Bank 6 -
Issuance of 7,554 shares upon the conversion of debentures, net of issuance costs 56 -
Compensation related to issuance of Class B stock warrants 19 36
Issuance of 5,000 shares upon exercise of Class B stock warrants 28 -
Issuance of 1,800 and 40,300 shares, respectively, upon exercise of Class A Stock Warrants 11 240
- - ------------------------------------------------------------------------------------------------------------------------
Balance at end of period 13,909 13,636
- - ------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 3,271 1,836
Net earnings for the period 730 1,026
- - ------------------------------------------------------------------------------------------------------------------------
Balance at end of period 4,001 2,862
- - ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity at end of period $20,409 $18,963
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine-Months Ended
September 30,
-------------------------
($ in thousands) 1999 1998
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 730 $ 1,026
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 300 121
Provision for loan loss reserves 605 357
Deferred income tax benefit (142) (11)
Interest expense on debentures 473 167
Gain on sale of mortgage loans (56) -
Compensation expense related to Class B stock warrants 19 36
Amortization of premiums, fees and discounts, net (94) (71)
Increase in accrued interest receivable and other assets (324) (428)
Decrease in official checks outstanding (464) (28)
Increase in other liabilities 631 150
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,678 1,319
- - ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease (increase) in interest-earning deposits with banks 99 (100)
Maturities and calls of securities held to maturity 27,556 32,826
Purchases of securities held to maturity (25,427) (37,841)
Sales of mortgage loans 5,660 -
Originations of loans receivable, net of principal repayments (31,393) (22,947)
Purchases of Federal Reserve Bank stock, net of redemptions (275) -
Purchases of premises and equipment, net (1,081) (291)
- - ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (24,861) (28,353)
- - ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money-market deposits 21,151 12,095
Net increase in time deposits 5,733 11,794
Net increase in mortgage escrow funds 1,621 1,868
Proceeds from Federal funds purchased 1,325 1,160
Repayments of Federal funds purchased (1,325) (1,160)
Proceeds from sale of convertible debentures, net of issuance costs - 6,523
Proceeds from issuance of common stock, net of issuance costs 47 281
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,552 32,561
- - ------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5,369 5,527
Cash and cash equivalents at beginning of period 13,472 9,176
- - ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,841 $ 14,703
- - ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 6,204 $ 5,758
Income taxes 819 510
Noncash financing activities:
Issuance of common stock to minority stockholders of Intervest Bank 7 -
Conversion of convertible debentures into common stock 70 -
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Note 1 - General
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for the
information derived from the audited Consolidated Balance Sheet as of December
31, 1998. The consolidated financial statements include the accounts of
Intervest Bancshares Corporation, a bank holding company (the "Holding
Company"), and its subsidiaries, Intervest Bank and Intervest National Bank (the
"Banks"). The Holding Company and the Banks are hereafter referred to as the
"Company" on a consolidated basis. The Holding Company's primary business
activity is the ownership of the Banks. The financial statements in this report
should be read in conjunction with the consolidated financial statements and
related notes thereto included in the Company's Annual Report to Stockholders on
Form 10-KSB for the year ended December 31, 1998.
Intervest National Bank received its national charter from the Office of the
Comptroller of the Currency and opened for business on April 1, 1999. Intervest
National Bank is a full-service commercial bank with one banking office located
at One Rockefeller Plaza, Suite 300, New York, New York, 10020 and its telephone
number is (212) 218-8383. Intervest Bank is a Florida state-chartered commercial
bank with four banking offices in Clearwater, Florida and one in South Pasadena,
Florida. The principal executive offices of Intervest Bank are located at 625
Court Street, Clearwater, Florida, 33756 and its telephone number is (727)
442-2551.
The Banks primarily focus on providing personalized banking services to
businesses and individuals within their respective market areas. The Banks
originate commercial and multifamily real estate loans and to a lesser extent,
commercial loans to businesses and consumer loans. Intervest National Bank also
provides internet banking at its web site www.intervestnatbank.com.
The following table provides selected information regarding the Holding Company
and the Banks at September 30, 1999.
<TABLE>
<CAPTION>
Intervest
Holding Intervest National
Company Bank Bank Consolidated
($ in thousands)
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $28,116 $189,462 $35,458 $230,156
Total cash and cash equivalents 2,115 12,949 5,916 18,841
Total securities held to maturity, net - 77,241 2,927 80,168
Total loans, net of unearned fees and loan loss reserves 4,623 91,611 24,833 121,067
Total deposits - 173,142 26,355 197,351
Total convertible debentures 6,930 - - 6,930
Total stockholders' equity 20,409 12,250 8,509 20,409
Number of full-service branches - 5 1 6
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All material intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, all material adjustments necessary
for a fair presentation of financial condition and results of operations for the
interim periods presented in this report have been made. These adjustments are
of a normal recurring nature. The results of operations for the interim periods
are not necessarily indicative of results that may be expected for the entire
year or any other interim period. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts to conform to the current periods' presentation.
5
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Note 2 - Loan Impairment and Credit Losses
The Company monitors its loan portfolio to determine the appropriate level of
the allowance for loan loss reserves based on various factors. These factors
include: the type and level of loans outstanding, volume of loan originations;
overall portfolio quality; loan concentrations; specific problem loans,
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's assessment of the current and
anticipated economic conditions in the Company's lending regions.
No loans were classified as nonaccrual or impaired during the 1999 and 1998
reporting periods in this report.
The table below summarizes the activity in the allowance for loan loss reserves
for the periods indicated:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended For the Nine-Months
September 30, Ended September 30,
--------------------- -------------------
($ in thousands) 1999 1998 1999 1998
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $1,997 $1,405 $1,662 $1,173
Provision for loan losses charged to operations 270 127 605 357
Recoveries 1 - 1 2
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $2,268 $1,532 $2,268 $1,532
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 3 - Convertible Debentures
During 1999, convertible debentures in the aggregate principal amount of
$70,000, plus accrued interest, were converted into shares of Class A common
stock at the election of the debenture holders. The conversion price was $10 per
share and 7,554 shares of Class A common stock were issued in connection with
the conversions.
Note 4 - 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
outstanding and dilutive potential common stock shares that may be outstanding
in the future. Potential common stock shares may arise from outstanding dilutive
common stock warrants (as computed by the "treasury stock method") and
convertible debentures (as computed by 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 adjusted earnings (as adjusted for
interest expense, net of taxes, that would no longer occur if the debentures
were converted).
Net earnings applicable to common stock and the weighted-average number of
common shares used for basic and diluted earnings per share computations are
summarized in the table that follows:
6
<PAGE>
<TABLE>
<CAPTION>
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Quarter Ended For the Nine-Months Ended
September 30, September 30,
----------------------------------------------------
1999 1998 1999 1998
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings:
Earnings before change in accounting principle $ 278,000 $ 393,000 $ 858,000 $1,026,000
Cumulative effect of change in accounting principle - - (128,000) -
- - -------------------------------------------------------------------------------------------------------------------------------
Net earnings $278,000 $393,000 $730,000 $1,026,000
- - -------------------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 2,498,734 2,463,107 2,494,410 2,448,241
Per share amounts:
Earnings before change in accounting principle $0.11 $0.16 $0.34 $0.42
Cumulative effect of change in accounting principle - - (0.05) -
- - -------------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share $0.11 $0.16 $0.29 $0.42
- - -------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
- - -------------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings (1) $278,000 $393,000 $730,000 $1,026,000
- - -------------------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding for dilution:
Shares outstanding 2,498,734 2,463,107 2,494,410 2,448,241
Potential dilutive shares resulting from conversion of warrants 219,860 487,711 455,035 737,825
Potential dilutive shares resulting from conversion of debentures (1) - - - -
----------------------------------------------------
Total average number of common shares outstanding used for dilution 2,718,594 2,950,818 2,949,445 3,186,066
----------------------------------------------------
Per share amount:
Earnings before change in accounting principle $0.10 $0.13 $0.29 $0.32
Cumulative effect of change in accounting principle - - (0.04) -
- - -------------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per share $0.10 $0.13 $0.25 $0.32
- - -------------------------------------------------------------------------------------------------------------------------------
(1) The convertible debentures were not dilutive and their impact was
excluded from the EPS computations.
</TABLE>
Note 5 - Regulatory Capital
The Banks are required to maintain certain minimum regulatory capital
requirements. The following is a summary at September 30, 1999 of those
regulatory capital requirements and the actual capital of each bank on a
percentage basis:
<TABLE>
<CAPTION>
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------ ----------- ----------------
<S> <C> <C> <C>
Intervest Bank
Total capital to risk-weighted assets 11.59% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 10.33% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 6.48% 4.00% 5.00%
Intervest National Bank
Total capital to risk-weighted assets 30.96% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 30.00% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 34.59% 4.00% 5.00%
</TABLE>
7
<PAGE>
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
- - --------------------------------------------------------------------------------
Note 6 - Cumulative Effect of Change in Accounting Principle
On January 1, 1999, the Company adopted as required the AICPA's Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." The SOP
requires that all start-up costs (except for those that are capitalizable under
other generally accepted accounting principles) be expensed as incurred for
financial statement purposes effective January 1, 1999. Previously, a portion of
start-up costs were generally capitalized and amortized over a period of time.
The adoption of this statement resulted in a net charge of $128,000 on January
1, 1999. The charge represents the expensing, net of a tax benefit, of
cumulative start-up costs that had been incurred through December 31, 1998 in
connection with organizing Intervest National Bank.
Note 7 - Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 delays SFAS No. 133' s effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company is not a party to any derivative instruments or hedging activities,
and does not expect the aforementioned Statements of Financial Accounting
Standards on Derivative Instruments and Hedging Activities to have any impact on
the Company's financial statements when adopted.
Note 8 - Subsequent Event
The Company announced on October 18, 1999 that it has agreed to acquire
Intervest Corporation of New York, a company with assets of approximately
$95,000,000 consisting primarily of a portfolio of mortgages on improved real
property. The combined total assets of the two companies at September 30, 1999
would have been approximately $325,000,000.
The two companies are related in that the same persons serve on their boards and
the holders of all of the shares of Intervest Corporation of New York also own
approximately 48% of the voting shares of the Company.
In the merger, which was approved by both Boards of Directors, Intervest
Corporation of New York shareholders will receive an aggregate of 1,250,000
shares of the Company's Class A common stock in exchange for all Intervest
Corporation of New York's common stock. The merger, which is subject to
regulatory approvals, as well as approval by the shareholders of the Company, is
expected to close before the end of the year.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation
General
- - -------
Intervest Bancshares Corporation is the Holding Company for Intervest National
Bank in New York City, New York and Intervest Bank in Clearwater, Florida.
Hereafter, all the entities are referred to as the "Company" on a consolidated
basis.
The Company reported earnings for the third quarter of 1999 of $278,000,
compared to earnings of $186,000 in the second quarter of 1999 and $393,000 in
the third quarter of 1998. Diluted earnings per share amounted to $0.10 in the
third quarter of 1999, compared to $0.07 in the second quarter of 1999 and $0.13
per share in the third quarter of 1998. Earnings for the first nine months of
1999 were $730,000, or $0.25 per diluted share, compared to $1,026,000, or $0.32
per diluted share, for the same period of 1998.
Earnings for the third quarter of 1999 increased $92,000 over the second quarter
of 1999, reflecting growth in the Company's loan portfolio, as well as improving
results from Intervest National Bank, which opened for business on April 1,
1999. At September 30, 1999, Intervest National Bank had total assets, loans and
deposits of approximately $35,000,000, $25,000,000 and $26,000,000,
respectively, more than double the amounts reported at June 30, 1999.
Results for the third quarter and nine months of 1999 were lower than the same
periods of 1998 due to operating and start-up expenses associated with the
opening of Intervest National Bank in April of 1999. In addition, on January 1,
1999, the Company adopted the AICPA's Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." The SOP requires that all
start-up costs be expensed as incurred for financial statement purposes
effective January 1, 1999. The adoption of this statement resulted in a charge,
net of a tax benefit, of $128,000 on January 1, 1999. The charge represented
cumulative start-up costs incurred through December 31, 1998, associated with
organizing Intervest National Bank.
Excluding Intervest National Bank's operations and the cumulative effect of
adopting the new accounting standard, the Company's consolidated net earnings
would have increased to $404,000 in the 1999 third quarter, from $393,000 in the
same period of 1998. Similarly, net earnings for the first nine months of 1999
would have increased to $1,221,000, from $1,026,000 in the same period of 1998.
The Company also announced on October 18, 1999 that it has agreed to acquire
Intervest Corporation of New York, a company with assets of approximately
$95,000,000, consisting primarily of a portfolio of mortgages on improved real
property. The combined total assets of the two companies at September 30, 1999
would be approximately $325,000,000. The two companies are related in that the
same persons serve on their boards and the holders of all of the shares of
Intervest Corporation of New York also own approximately 48% of the voting
shares of the Company. In the merger, which was approved by both Boards of
Directors, Intervest Corporation of New York shareholders will receive an
aggregate of 1,250,000 shares of the Company's Class A common stock in exchange
for all Intervest Corporation of New York's common stock. The merger, which is
subject to regulatory approvals, as well as approval by the shareholders of the
Company, is expected to close before the end of the year.
9
<PAGE>
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
-----------------------------------------------------------------------------
Overview
- - --------
The following table shows selected ratios of the Company at the end of or for
the period indicated:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------
At or For the At or For the
Quarter Ended Nine Months Ended
September 30, September 30,
- - ---------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stockholders' equity to total assets 8.87% 10.24% 8.87% 10.24%
Average stockholders' equity to average assets 9.53% 10.33% 9.86% 9.87%
Return on average assets (1) 0.52% 0.87% 0.48% 0.81%
Return on average equity (1) 5.49% 8.39% 4.86% 7.49%
Average interest-earning assets to
interest-bearing liabilities 1.10x 1.11x 1.11x 1.11x
Net interest margin (1) 2.73% 2.83% 2.70% 2.78%
Noninterest expenses to average assets (1) 1.53% 1.14% 1.50% 1.22%
- - ---------------------------------------------------------------------------------------------------------------------
(1) Ratios have been annualized.
</TABLE>
Total assets at September 30, 1999 increased 15% to $230,156,000, from
$200,522,000 at December 31, 1998, primarily reflecting increases in loans
receivable and cash and cash equivalents. These increases were partially offset
by a decline in securities held to maturity.
Total liabilities at September 30, 1999 increased to $209,747,000, from
$180,978,000 at December 31, 1998, or 16%, reflecting growth in deposit
accounts. Stockholders' equity grew 4% to $20,409,000 at September 30, 1999,
from $19,544,000 at year-end 1998. Book value per common share also improved to
$8.17 per share at September 30, 1999, from $7.87 at December 31, 1998.
The Company's balance sheets at the dates indicated were comprised of the
following:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
At September 30, 1999 At December 31, 1998
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 18,841 8.2% $ 13,472 6.7%
Securities held to maturity, net 80,168 34.8 82,338 41.1
Loans receivable, net 121,067 52.6 96,074 47.9
All other assets 10,080 4.4 8,638 4.3
- - ------------------------------------------------------------------------------------------------------------------------------
Total assets $230,156 100.0% $200,522 100.0%
- - ------------------------------------------------------------------------------------------------------------------------------
Deposits $197,351 85.7 $170,467 85.0%
Convertible debentures 6,930 3.0 7,000 3.5
Accrued interest payable on debentures 738 0.3 299 0.2
All other liabilities 4,728 2.1 3,212 1.6
- - ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 209,747 91.1 180,978 90.3
- - ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 20,409 8.9 19,544 9.7
- - ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $230,156 100.0% $200,522 100.0%
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash and Cash Equivalents
- - -------------------------
Cash and cash equivalents increased due to higher investments in overnight Fed
funds. Excess cash has been invested short-term in anticipation of funding loan
commitments in the fourth quarter of 1999.
10
<PAGE>
Securities Held to Maturity
- - ---------------------------
Securities held to maturity declined due to net maturities and calls of U.S.
government agency securities. At September 30, 1999, the securities portfolio
consisted of fixed-rate debt obligations of the Federal Home Loan Bank, Federal
Farm Credit Bank, Federal National Mortgage Association, and US Treasury
securities. Most of the securities allow the issuer the right to call or prepay
its obligation without prepayment penalty.
Loans Receivable
- - ----------------
Loans receivable increased primarily due to new commercial and multifamily real
estate loan originations exceeding principal repayments. At September 30, 1999
and December 31, 1998, the Company did not have any loans on a nonaccrual status
or classified as impaired.
Allowance for Loan Loss Reserves
- - --------------------------------
The Company monitors its loan portfolio to determine the appropriate level of
the allowance for loan loss reserves based on various factors. These factors
include: the type and level of loans outstanding, volume of loan originations;
overall portfolio quality; loan concentrations; specific problem loans,
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's assessment of the current and
anticipated economic conditions in the Company's lending regions.
At September 30, 1999, the allowance amounted to $2,268,000, compared to
$1,662,000 at year-end 1998. The allowance for loan loss reserves represented
1.84% of total loans outstanding at September 30, 1999, compared to 1.70% at
December 31, 1998. The increase in the allowance primarily reflected the
increased volume of new loan originations.
All Other Assets
- - ----------------
All other assets increased primarily due to purchases ($1,081,000) of fixed
assets mostly by Intervest National Bank, and a higher level of deferred tax
benefits ($142,000) generated largely by start-up costs that were expensed by
Intervest National Bank for financial statement purposes.
Deposit Liabilities
- - -------------------
Deposit liabilities increased from $170,467,000 at year-end 1998, to
$197,351,000 at September 30, 1999. The increase was attributable to the opening
of Intervest National Bank on April 1, 1999, whose deposit accounts grew to
$26,355,000 at September 30, 1999.
At September 30, 1999, the Company's time deposit accounts totaled $104,766,000
and its demand deposit, savings, NOW and money-market accounts aggregated
$92,585,000. The same categories of deposit accounts totaled $99,033,000 and
$71,434,000, respectively, at December 31, 1998. Time deposits represented 53%
of total deposits at September 30, 1999, compared to 58% at year-end 1998.
11
<PAGE>
Convertible Debentures
- - ----------------------
During 1999, convertible debentures (the Debentures) in the aggregate principal
amount of $70,000 plus accrued interest were converted into shares of Class A
common stock at the election of the Debenture holders.
The Holding Company's 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. Interest on the
debentures accrues and compounds quarterly and 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. At September 30, 1999, accrued interest on the Debentures totaled
$738,000.
All Other Liabilities
- - ---------------------
All other liabilities increased as a result of the Company holding a greater
amount of mortgage escrow funds. Mortgage escrow funds represent advance
payments made by borrowers for taxes and insurance that are remitted by the
Company to third parties. The increase reflects the timing of payments to taxing
authorities as well as the growth in the loan portfolio.
Stockholders' Equity and Regulatory Capital
- - -------------------------------------------
Stockholders' equity increased almost entirely as a result of net earnings of
$730,000 and the issuance of 14,864 shares of common stock, which resulted, net
of issuance costs, in a $116,000 aggregate increase in stockholders' equity. The
shares were issued as follows: 7,554 shares of Class A common stock upon the
conversion of convertible debentures; 1,800 shares of Class A common stock upon
the exercise of Class A warrants, 510 shares of Class A common stock in exchange
for the shares of minority shareholders of Intervest Bank, and 5,000 shares of
Class B common stock upon the exercise of Class B stock warrants.
Intervest Bank and Intervest National Bank are both well-capitalized
institutions as defined by FDIC regulations. See note 5 to the condensed
consolidated financial statements in this report for further information and
their respective capital ratios.
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 Banks'
offices; satisfactions and repayments of loans; the maturities and calls of
securities; and cash provided by operating activities. From time-to-time, the
Company may also borrow funds through the Fed funds market or sale of
debentures. For information about the cash flows from the Company's operating,
investing and financing activities, see the condensed consolidated statements of
cash flows on page 4 of this report. At September 30, 1999, the Company's total
commitment to lend aggregated approximately $19,000,000. Based on its cash flow
projections, the Company believes that it can fund all of its outstanding
commitments from the aforementioned sources of funds.
12
<PAGE>
Interest Rate Risk
------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The principal objective of the Company's
asset/liability management strategy is to minimize its exposure to changes in
interest rates. The Company uses "gap analysis," which measures the difference
between interest-earning assets and interest-bearing liabilities that mature or
reprice within a given time period, to monitor its interest rate sensitivity. At
September 30, 1999, the Company's one-year negative interest-rate sensitivity
gap was $84,470,000, or 36.7% of total assets, compared to $73,637,000, or
36.7%, at December 31, 1998. In computing the gap, the Company treats its
interest checking, money market and savings deposit accounts as immediately
repricing. For a further discussion of interest rate risk and gap analysis,
including all of the assumptions used in developing the Company's one-year gap
position, see the Company's 1998 Annual Report on Form 10-KSB, pages 26 and 27.
Year 2000 Compliance
--------------------
The Year 2000 issue is the result of computer programs that 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 Company has completed its testing phase of mission critical systems and has
determined that these systems are Year 2000 compliant. With regards to
non-mission critical internal systems, the Company has or is in the process of
replacing those systems that tested as being noncompliant. Additionally, the
Company has contingency plans that provide for processing its data from
alternative sites.
The Company also recognizes the importance of its borrowers rectifying any Year
2000 problems in a timely manner to avoid deterioration of the loan portfolio
solely due to this issue. In this regard, the Company has identified material
relationships and questionnaires have been completed to assess the inherent
risks. The Company will work on a one-on-one basis with any borrower who has
been identified as having high Year 2000 risk exposure.
Notwithstanding the above, there can be no assurances that all hardware and
software that the Company uses will function properly on and after January 1,
2000, or that its borrowers and vendors will perform according to their
representations, or that other third parties may cause adverse effects because
of the Year 2000 issue.
Accordingly, there can be no assurance that the failure of others to address the
Year 2000 issue or that the resulting effects will not have an adverse impact on
the Company's business, financial condition, and results of operations. It is
anticipated that the Banks' deposit customers will have increased demands for
cash in the latter part of 1999 and correspondingly, the Banks will maintain
adequate liquidity levels to meet any increased demand.
13
<PAGE>
Comparison of Results of Operations
for the Quarters Ended September 30, 1999 and 1998
--------------------------------------------------
Overview
- - --------
The Company reported net earnings for the third quarter of 1999 of $278,000,
compared to $393,000 for the third quarter of 1998. Diluted earnings per share
amounted to $0.10, compared to $0.13 per diluted share in the third quarter of
1998. The decline in earnings was primarily due to a $297,000 increase in
noninterest expenses and a $143,000 increase in the provision for loan loss
reserves. These items were partially offset by an increase in net interest and
dividend income of $156,000 and a $112,000 decline in the provision for income
taxes.
Net Interest and Dividend Income
- - --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates. The table
that follows sets forth information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of annualized income/expense for each period
divided by average interest-earning assets/interest-bearing liabilities during
each period. Certain yields and rates shown are adjusted for related fee income
or expense. Average balances are derived from daily balances. Net interest
margin is computed by dividing annualized net interest and dividend income by
the average of total interest-earning assets during each period.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
------------------------------------------------------------------------
September 30, 1999 September 30, 1998
------------------------------- --------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $108,769 $2,396 8.81% $ 97,782 $2,260 9.25%
Securities 82,371 1,193 5.79 66,464 1,037 6.24
Other interest-earning assets 12,041 150 4.98% 9,214 123 5.34
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 203,181 $3,739 7.36% 173,460 $3,420 7.89%
- - -----------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 9,545 7,952
- - -----------------------------------------------------------------------------------------------------------------------------
Total assets $212,726 $181,412
- - -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Checking deposits $ 7,380 $ 56 3.04% $ 5,785 $ 54 3.74%
Savings deposits 23,363 243 4.16 16,842 207 4.93
Money Market deposits 50,419 568 4.51 23,507 289 4.93
Time deposits 95,864 1,325 5.53 103,123 1,492 5.80
------------------------------------------------------------------------
Total deposit accounts 177,026 2,192 4.95 149,257 2,042 5.47
------------------------------------------------------------------------
Federal funds purchased 214 3 4.77 - - -
Convertible debentures and accrued interest 7,579 160 8.45 7,062 150 8.50
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 184,819 $2,355 5.10% 156,319 $2,192 5.61%
- - -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 3,685 2,984
Noninterest-bearing liabilities 3,959 3,362
Stockholders' equity 20,263 18,747
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $212,726 $181,412
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $1,384 2.26% $1,228 2.28%
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 18,362 2.73% $ 17,141 2.83%
- - -----------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.11x
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Net interest and dividend income increased to $1,384,000 in the third quarter of
1999, from $1,228,000 in the 1998 third quarter. The increase was due to growth
in the Company's balance sheet. The Company's net interest margin declined to
2.73%, from 2.83%. The decline in the interest rate margin was due to the yield
on the Company's earning assets declining at a slightly faster pace than the
cost of its funds as well as a slight decline in the ratio of earning-assets to
interest-bearing liabilities.
The Company's yield on earning assets declined by 53 basis points due to several
factors: an increase in the percentage of earning assets held as securities and
short-term investments (securities and short-term investments have lower yields
than the Company's loan portfolio); calls of higher-yielding U.S government
agency securities with the resulting proceeds being invested in securities with
lower rates; and originations of new loans at lower rates and prepayments of
higher-yielding loans caused by the very competitive lending environment.
The Company's cost of funds declined by 51 basis points due to lower rates paid
on deposit accounts as well as a change in the mix of deposits. Lower-cost
deposits held in checking, savings and money-market accounts increased while the
level of time deposits declined.
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 $270,000 in the third quarter of 1999, compared to $127,000 in the third
quarter of 1998. See page 11 under the Caption for "Allowance for loan Loss
Reserves" for additional discussion of the reserves.
Noninterest Income
- - ------------------
Total noninterest income increased to $128,000 in the 1999 third quarter, from
$71,000 in the third quarter of 1998, reflecting an increase in loan fee income
from mortgage lending activities. Such fees include loan application fees and
loan service and maintenance charges.
Noninterest Expenses
- - --------------------
Total noninterest expenses increased 57% to $815,000 in the third quarter of
1999, from $518,000 in the third quarter of 1998. The increase was almost
entirely due to the opening of Intervest National Bank on April 1, 1999, which
required the addition of employees and increased occupancy and equipment
expenses.
Provision for Income Taxes
- - --------------------------
The provision for income taxes amounted to $149,000 in the third quarter of
1999, compared to $261,000 in the same period of 1998. The Company's effective
tax rate (inclusive of state and local taxes) amounted to 34.9% in the 1999
period, compared to 39.9% in the 1998 period. The decline in the effective tax
rate reflects increased deferred tax benefits generated from Intervest National
Bank's operations.
15
<PAGE>
Comparison of Results of Operations
for the Nine-Months Ended September 30, 1999 and 1998
-----------------------------------------------------
Overview
- - --------
The Company's earnings for the nine-months ended September 30, 1999 were
$730,000, or $0.25 per diluted share, compared to $1,026,000, or $0.32 per
diluted share for the same period of 1998. The decline in earnings was primarily
due to a $731,000 increase in noninterest expenses and a $248,000 increase in
the provision for loan loss reserves. These items were partially offset by a
$559,000 increase in net interest and dividend income and a $130,000 increase in
noninterest income. Results for the nine-months ended September 30, 1999 also
included a one-time net charge of $128,000 related to the Company's required
adoption, on January 1, 1999, of the AICPA's Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities."
Net Interest and Dividend Income
- - --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates. The table
that follows, for the nine-month periods ended September 30, 1999 and 1998, sets
forth the same information that is described above the table on page 14.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
For the Nine-Months Ended
----------------------------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 100,111 $6,580 8.76% $ 87,762 $6,010 9.13%
Securities 84,301 3,674 5.81 66,577 3,075 6.16
Other interest-earning assets 10,044 350 4.65 7,642 302 5.27
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 194,456 $10,604 7.27% 161,981 $9,387 7.73%
- - ----------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 8,645 7,678
- - ----------------------------------------------------------------------------------------------------------------------------
Total assets $203,101 $169,659
- - ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW deposits $ 7,516 $ 174 3.09% $ 5,286 $ 146 3.69%
Savings deposits 25,396 786 4.13 15,703 572 4.87
Money-market deposits 41,621 1,366 4.38 21,037 767 4.87
Time deposits 93,408 3,855 5.50 101,193 4,352 5.75
----------------------------------------------------------------------
Total deposit accounts 167,941 6,181 4.91 143,219 5,837 5.45
----------------------------------------------------------------------
Federal funds purchased 218 9 5.23 26 1 5.13
Convertible debentures and accrued interest 7,467 473 8.45 2,619 167 8.50
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 175,626 $6,663 5.06% 145,864 $6,005 5.49%
- - ----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 4,023 3,085
Noninterest-bearing liabilities 3,431 2,442
Stockholders' equity 20,021 18,268
- - ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $203,101 $169,659
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $3,941 2.21% $3,382 2.24%
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 18,830 2.70% $ 16,117 2.78%
- - ----------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11x 1.11x
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Net interest and dividend income increased to $3,941,000 in the nine-month
period ended September 30, 1999, from $3,382,000 in the same period of 1998. The
increase was due to growth in the Company's balance sheet. The Company's net
interest margin declined slightly to 2.70%, from the 2.78% in the same period of
1998. The decline in the margin was essentially due to the same factors
discussed in the comparison of the quarter ended September 30, 1999 versus
September 30, 1998.
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 $605,000 for the nine-months ended September 30, 1999, compared to $357,000
for the same period of 1998. See page 11 under the Caption for "Allowance for
Loan Loss Reserves" for additional discussion of the reserves.
Noninterest Income
- - ------------------
Total noninterest income increased to $351,000 in the nine-months ended
September 30, 1999, from $221,000 for the same period of 1998. The increase was
due to higher fee income from mortgage lending activities. Such fees include
loan application fees and loan service and maintenance charges.
Additionally, noninterest income for the 1999 period included a $56,000 gain
(representing the balance of unearned income) from the sale of four multifamily
real estate loans (with an aggregate principal balance of $5,604,000) by the
Holding Company. The sale was made in order to increase the Holding Company's
liquidity for funding Intervest National Bank's initial capital on April 1,
1999. The loans were sold to Intervest Corporation of New York, a related party,
at estimated fair value.
Noninterest Expenses
- - --------------------
Total noninterest expenses increased 47% to $2,285,000 in the nine-month period
ended September 30, 1999, from $1,554,000 in the same period of 1998. The
increase was almost entirely due to the opening of Intervest National Bank on
April 1, 1999, which required the addition of employees and increased occupancy
and equipment expenses.
Provision for Income Taxes
- - --------------------------
The provision for income taxes amounted to $544,000 in the nine-month period
ended September 30, 1999, compared to $666,000 in the same period of 1998. The
Company's effective tax rate (inclusive of state and local taxes) amounted to
38.8% in the 1999 period, compared to 39.3% in the 1998 period.
Cumulative Effect of Change in Accounting Principle
- - ---------------------------------------------------
The cumulative effect of the change in accounting principle represents the
required adoption, on January 1, 1999, of the AICPA's Statement of Position
(SOP) 98-5, "Reporting on the Costs of Start-Up Activities," which applies to
all companies except as provided for therein. The SOP requires that all start-up
costs (except for those that are capitalizable under other generally accepted
accounting principles) be expensed as incurred for financial statement purposes
effective January 1, 1999. Previously, a portion of start-up costs were
generally capitalized and amortized over a period of time. The adoption of this
statement resulted in the immediate expensing on January 1, 1999 of $193,000 in
start-up costs incurred through December 31, 1998 in connection with organizing
Intervest National Bank. A deferred tax benefit of $65,000 was recorded in
conjunction with this charge.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index (numbered in accordance with Item 601 of Regulation S-B)
27 - Financial Data Schedule (For SEC Purposes only)
(b) No Reports on Form 8-K were filed during the quarter ended September
30, 1999.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
Date: November 9, 1999 By: /s/ Lowell S. Dansker
----------------------------
Lowell S. Dansker,
President and Treasurer
(Chief Financial Officer)
Date: November 9, 1999 By: /s/ Lawrence G. Bergman
------------------------------
Lawrence G. Bergman,
Vice President and Secretary
18
<PAGE>
<TABLE>
<S> <C>
PERIOD-TYPE 9-MOS
FISCAL-YEAR-END DEC-31-1999
PERIOD-END SEP-30-1999
CASH 3,210
INT-BEARING-DEPOSITS 388
FED-FUNDS-SOLD 15,343
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 0
INVESTMENTS-CARRYING 80,168
INVESTMENTS-MARKET 78,744
LOANS 123,335
ALLOWANCE 2,268
TOTAL-ASSET 230,156
DEPOSITS 197,351
SHORT-TERM 0
LIABILITIES-OTHER 5,466
LONG-TERM 6,930
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 2,499
OTHER-SE 17,910
TOTAL-LIABILITIES-AND-EQUITY 230,156
INTEREST-LOAN 6,580
INTEREST-INVEST 3,674
INTEREST-OTHER 350
INTEREST-TOTAL 10,604
INTEREST-DEPOSIT 6,181
INTEREST-EXPENSE 6,663
INTEREST-INCOME-NET 3,941
LOAN-LOSSES 605
SECURITIES-GAINS 0
EXPENSE-OTHER 2,285
INCOME-PRETAX 1,402
INCOME-PRE-EXTRAORDINARY 1,402
EXTRAORDINARY 0
CHANGES (128)
NET-INCOME 730
EPS-BASIC .29
EPS-DILUTED .25
YIELD-ACTUAL 7.27
LOANS-NON 0
LOANS-PAST 0
LOANS-TROUBLED 0
LOANS-PROBLEM 0
ALLOWANCE-OPEN 1,662
CHARGE-OFFS 0
RECOVERIES 1
ALLOWANCE-CLOSE 2,268
ALLOWANCE-DOMESTIC 2,268
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 0
</TABLE>
<PAGE>
ANNEX E - INTERVEST CORPORATION OF NEW YORK REPORT ON FORM 10-K
<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
---
OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from .......................................
to ........................................
Commission File Number
33-22976-NY
INTERVEST CORPORATION OF NEW YORK
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-3415815
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Rockefeller Plaza, New York, New York 10020-1903
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 757-7300
-----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----------------
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
----------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation SK is not contained herein, and will not be contained, to the best
of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III to this Form 10-K or any amendment to this
Form 10-K (X) .
As of February 28, 1998 there were 31.84 shares of the Registrant's common stock
outstanding.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I
Pages
<S> <C> <C>
Item 1 Description of Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for the Registrant's Shares and Related Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk 13
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial 28
Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant 28
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial Owners and Management 30
Item 13 Certain Relationships and Related Transactions 30
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 30
SIGNATURES 33
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 34
15(d) of the Act.
</TABLE>
2
<PAGE>
PART I
Item 1. Description of Business
Intervest Corporation of New York (the "Company") was formed in April 1987 by
Lowell S. Dansker, Lawrence G. Bergman and Helene D. Bergman for the purpose of
engaging in the real estate business, including the acquisition and purchase of
real estate mortgage loans.
The principal offices of the Company are located at 10 Rockefeller Plaza, Suite
1015, New York, New York 10020-1903, and its telephone number is 212-757-7300.
The Company presently has no employees; and only one of its officers serves with
compensation. It presently owns mortgages on real estate, and intends to acquire
and originate additional mortgages on real estate. The Company may in the future
engage in any aspect of the real estate and mortgage finance business.
The Company also has two wholly-owned subsidiaries.
Present Business
The Company owns a portfolio of mortgages on improved real property. The
aggregate outstanding principal balance at December 31, 1997 due on such
mortgages is approximately $75,202,000 ($74,316,000 after adjusting for a
discount of $886,000). The company has in the past and may in the future own
"wraparound mortgages" under which the principal amount of and debt service on
one or more senior mortgages is included within the principal amount of and debt
service on the wraparound mortgage. The holder of the wraparound mortgage is
required to pay the obligations due under such senior mortgages from the
payments which it receives on the wraparound mortgage.
For financial statement reporting purposes, all mortgages contributed or sold to
the Company by affiliates have been recorded at the historical cost of the
affiliate. The historical cost of the mortgage loans which originated in
connection with the sale of real estate includes a discount to reflect an
appropriate market interest rate at the date of origination.
Five mortgages owned by the Company are senior mortgages on net leased, single
tenant, free standing commercial properties, thirty-one are senior mortgages on
multifamily residential apartment buildings, five are junior mortgages on
multifamily residential apartment buildings, one is a senior mortgage on land,
three are senior mortgages on commercial buildings and two are participations in
first mortgages on commercial properties.
Twenty-eight of the residential properties are located in New York City, two are
located in suburbs of New York City, four are located in the State of New
Jersey, one is located in the State of Pennsylvania and one is located in the
State of Florida. One of the Company's mortgages is a blanket mortgage covering
several residential properties located in Philadelphia, Pennsylvania. Two of the
residential properties are owned by cooperative corporations (a form of
owner-occupied apartment ownership in New York City). Thirty-four of the
residential properties are rental properties, nine of which have commercial
space (stores) on the ground floor. Twenty-nine of the Company's mortgages on
these properties are first mortgages, and five are junior mortgages. Two of the
mortgages are participations in first mortgages on commercial properties in
Florida. One of the mortgages is a first mortgage on land located in the State
of Florida.
3
<PAGE>
Future Business Operations
The Company plans to engage in the real estate business, including the
acquisition and origination of additional mortgages in the future. Such
additional mortgages may be purchased from affiliates of the Company or from
unaffiliated parties. It is anticipated that such mortgages will be acquired or
originated using the proceeds of offerings of the Company's debt securities
and/or internally generated funds.
The Company intends to continue to originate new mortgages, to acquire existing
mortgages, and to acquire equity interests in real property. In originating new
mortgages, the Company intends to act as a lender of money to owners of equity
interests in real property. The Company acquired certain existing mortgages from
mortgagees after it commenced business and intends to acquire additional
existing mortgages from mortgagees in the future. The Company does not presently
own any equity interests in real property nor has it acquired such an equity
interest in real property since the date it commenced business. However, the
Company may purchase equity interests in real property in the future or it may
acquire such an equity interest pursuant to a foreclosure upon a mortgage held
by it.
The Company's mortgage loans may include: (i) first mortgage loans; (ii) junior
mortgage loans; and (iii) wraparound mortgage loans.
The Company's mortgage loans will generally be secured by income-producing
properties. In determining whether to make mortgage loans, the Company will
analyze relevant real property and financial factors which may in certain cases
include such factors as the condition and use of the subject property, its
income-producing capacity and the quality, experience and creditworthiness of
the owner of the property. The Company's mortgage loans will generally not be
personal obligations of the borrower and will not be insured or guaranteed by
governmental agencies or otherwise. The Company may make both long- and
short-term mortgage loans. The Company anticipates that generally its mortgage
loans will provide for balloon payments due at the time of their maturity.
With respect to the acquisition of equity interests in real estate, the Company
may acquire and retain title to properties or, may, directly or through a
subsidiary, retain an interest in a partnership formed to acquire and hold title
to real property.
While no such transactions are presently pending, the Company would, in
appropriate circumstances, consider the expansion of its business through
investments in or acquisitions of other companies engaged in real estate or
mortgage business activities.
Real Estate Investment Policies
While the Company has not previously made acquisitions of real property or
managed income-producing property, its management has had substantial experience
in the acquisition and management of properties and, in particular, multifamily
residential properties. The executive officers of the Company have been actively
involved in such activities for many years. (See "Item 10").
Real property that may be acquired will be selected by management of the
Company. The Board of Directors of the Company has not adopted any formal
policies regarding the percentage of the Company's assets that may be invested
in any single property, or in any type of property, or regarding the geographic
location of properties that may be acquired. No vote of any securities holders
of the Company is necessary for any investment in real estate.
The Company anticipates that any equity interests it may acquire will be in
commercial, income-producing properties, primarily multifamily residential
properties located in the New York metropolitan area. The acquisition of real
estate may be financed in reliance upon working capital, mortgage financing or a
combination of both. It is anticipated that properties selected for acquisition
would have potential for appreciation in value.
4
<PAGE>
While such properties would typically generate cash flow from rentals, it is
anticipated that income from properties will generally be reinvested in capital
improvements to the properties.
While the Company would maintain close supervision over any properties that it
may own, independent managing agents may be engaged when deemed appropriate by
management. All such properties would, as a matter of policy, be covered by
property insurance in amounts deemed adequate in the opinion of management.
Mortgage Investment Policy
Future investments in mortgages will be selected by management of the Company.
The Board of Directors of the Company has not adopted any formal policy
regarding the percentage of the Company's assets which may be invested in any
single mortgage, or in any type of mortgage investment, or regarding the
geographic location of properties on which the mortgages owned by the Company
are liens. However, it is the present intention of the management of the Company
to maintain the diversification of the portfolio of mortgages owned by the
Company. No vote of any security holders of the Company is necessary for any
investment in a mortgage.
The Company anticipates that it will acquire or originate senior and junior
mortgages, primarily on multifamily residential properties located in the New
York metropolitan area. The Company anticipates that the amount of each mortgage
it may acquire in the future will not exceed 85% of the fair market value of the
property securing such mortgage. Such mortgages generally will not be insured by
the Federal Housing Administration or guaranteed by the Veterans Administration
or otherwise guaranteed or insured in any way. The Company requires that all
mortgaged properties be covered by property insurance in amounts deemed adequate
in the opinion of management. The Company also acquires or originates mortgages
which are liens on other types of properties, including commercial and office
properties, and may resell mortgages.
Temporary Investment by Affiliates on Behalf of the Company
An affiliate of the Company may make a mortgage loan or purchase a mortgage in
its own name and temporarily hold such investment for the purpose of
facilitating the making of an investment of the Company, provided that any such
investment is acquired by the Company at a cost no greater than the cost of such
investment to the affiliate plus carrying costs and provided there is no other
benefit to the affiliate arising out of such transaction.
Certain Characteristics of the Company's Mortgage Investments
Mortgages typically provide for periodic payments of interest and, in some
cases, principal during the term of the mortgage, with the remaining principal
balance and any accrued interest due at the maturity date. The majority of the
mortgages owned by the Company provide for balloon payments at maturity, which
means that a substantial part or all of the original principal of the mortgage
is due in one lump sum payment at maturity. The property on which the mortgage
is a lien provides the security for the mortgage. If the net revenue from the
property is not sufficient to make all debt service payments due on mortgages on
the property, or if at maturity or the due date of any balloon payment the owner
of the property fails to raise the funds to make the payment (by refinancing,
sale or otherwise), the Company could sustain a loss on its investment in the
mortgage. To the extent that the aggregate net revenues from the Company's
mortgage investments are insufficient to provide funds equal to the payments due
under the Company's debt obligations, then the Company would be required to
utilize its working capital for such purposes or otherwise obtain the necessary
funds from outside sources. No assurance can be given that such funds would be
available to the Company.
With respect to any wraparound mortgages which may be originated by the Company
in the future, such wraparound mortgages are generally negotiated and structured
on an individual, case by case basis, and may be structured to include any or
all of the following provisions:
5
<PAGE>
(i) The Company may lend money to a real property owner who would be
obligated to repay the senior underlying mortgage debt as well as the new
wraparound indebtedness owed to the Company.
(ii) The Company may legally assume the obligation to make the payments
due on the senior underlying mortgage debt.
(iii) The real property owner-debtor may agree to make payments to the
Company in satisfaction of both the senior underlying mortgage debt and the new
wraparound indebtedness owed to the Company.
(iv) The Company may receive a mortgage on the real property to secure
repayment of the total amount of indebtedness (wraparound indebtedness and the
senior underlying mortgage indebtedness).
The mortgages owned by the Company that are junior mortgages are
subordinate in right of payment to senior mortgages on the various properties.
In all cases, in the opinion of management, the current value of the underlying
property collateralizing the mortgage loan is in excess of the stated amount of
the mortgage loan. Therefore, in the opinion of management of the Company, each
property on which a mortgage owned by the Company is a lien constitutes adequate
collateral for the related mortgage loan. Accordingly, in the event the owner of
a property fails to make required debt service payments, management believes
that, based upon current value, upon a foreclosure of the mortgage and sale of
the property, the Company would recover its entire investment. However, there
can be no assurance that the current value of the underlying property will be
maintained.
Loan Loss Experience
For financial reporting purposes, the Company considers a loan as delinquent or
non-performing when it is contractually past due 90 days or more as to principal
or interest payments. To date, the Company has only experienced a single default
or delinquency in its mortgage portfolio. It is pursuing foreclosure proceedings
with respect to a single mortgage, the principal balance of which is $1,583,700.
The Company evaluates its portfolio of mortgage loans on an individual basis,
comparing the amount at which the investment is carried to its estimated net
realizable value. Since the Company has experienced only a single default or
delinquency, no allowance for loan losses is presently maintained.
Tax Accounting Treatment of Payments Received on Mortgages
The Company derives substantially all of its cash flow from debt service
payments which it receives on mortgages owned by it. The tax accounting
treatment of such debt service payments, as income or return of capital, depends
on the particular mortgage. In the case of mortgages which pay interest only,
the entire debt service payment prior to maturity received by the Company is
treated as income and the repayment of principal is generally considered a
return of capital. In the case of mortgages which include amortization of
principal in the debt service payment received by the Company, the amount
representing amortization of principal is generally treated as a return of
capital for tax accounting purposes. However, the Company will report $199,000
of additional taxable income upon the collection of $830,000 of principal
applicable to five mortgages due to deferrals of taxable income in connection
with prior real estate transactions.
Financial Accounting Treatment of Payments Received on Mortgages
For financial reporting purposes, the Company's basis in mortgages originated in
connection with real estate sale transactions is less than the face amount
outstanding. This difference is attributable to discounts recorded by the
Company to reflect a market rate of interest at the date the loans were
originated. These discounts will be amortized over the lives of the mortgages.
6
<PAGE>
Effect of Government Regulation
Investment in mortgages on real properties presently may be impacted by
government regulation in several ways. Residential properties may be subject to
rent control and rent stabilization laws. As a consequence, the owner of the
property may be restricted in its ability to raise the rents on apartments. If
real estate taxes, fuel costs and maintenance of and repairs to the property
were to increase substantially, and such increases are not offset by increases
in rental income, the ability of the owner of the property to make the payments
due on the mortgage as and when they are due might be adversely affected.
Laws and regulations relating to asbestos have been adopted in many
jurisdictions, including New York City, which require that whenever any work is
undertaken in a property in an area in which asbestos is present, the asbestos
must be removed or encapsulated in accordance with such applicable local and
federal laws and regulations. The cost of asbestos removal or encapsulation may
be substantial, and if there were not sufficient cash flow from the property,
after debt service on mortgages, to fund the required work, and the owner of the
property fails to fund such work from other sources, the value of the property
could be adversely affected, with consequent impairment of the security for the
mortgage.
Laws regulating the storage, disposal and clean up of hazardous or toxic
substances at real property have been adopted at the federal, state and local
levels. Such laws may impose a lien on the real property superior to any
mortgages on the property. In the event such a lien were imposed on any property
which serves as security for a mortgage owned by the Company, the security for
such mortgage could be impaired.
Item 2. Properties
None.
Item 3. Legal Proceedings
Except with respect to foreclosure proceedings related to one of its mortgages,
the Company is not engaged in any litigation, nor does it presently know of any
threatened or pending litigation in which it is contemplated that the Company
will be made a party.
Item 4. Submission of Matters to a Vote of Security Holders
None.
7
<PAGE>
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
There is no established trading market for the Company's shares of common stock.
As of February 28, 1998, there were three recordholders of the Company's shares
of common stock. In the two most recent fiscal years, no cash dividends were
declared or paid with respect to the Company's common stock.
8
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
Income Statement Data
Year Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ----------- ----------- --------
Revenue
<S> <C> <C> <C> <C> <C>
Interest income.............. $10,088,000 $ 9,497,000 $ 7,984,000 $ 6,368,000 $ 4,337,000
Other income 428,000 372,000 332,000 283,000 802,000
Gain on early repayment of
discounted mortgage receivable 215,000 282,000 82,000 17,000 18,000
----------- ----------- ----------- ----------- -----------
$10,731,000 $10,151,000 $8,398,000 $6,668,000 $5,157,000
----------- ----------- ---------- ---------- ----------
Expenses
Interest......................... $ 8,181,000 $7,053,000 $6,227,000 $4,591,000 $3,415,000
General and administrative 773,000 948,000 657,000 483,000 188,000
Amortization of deferred
bond offering costs....... 958,000 869,000 748,000 655,000 529,000
----------- ---------- ---------- ---------- ----------
$9,912,000 $8,870,000 $7,632,000 $5,729,000 $4,132,000
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes $ 819,000 $1,281,000 $ 766,000 $ 939,000 $1,025,000
Provision for Income Taxes 373,000 584,000 324,000 403,000 480,000
----------- ----------- ---------- ---------- ----------
Net Income...................... $ 446,000 $ 697,000 $ 442,000 $ 536,000 $ 545,000
=========== =========== ========== ========== ==========
Ratio of Earnings to Fixed
Charges (1)................... 1.1 1.2 1.1 1.2 1.3
-----------
</TABLE>
(1) The actual ratio of earnings to fixed charges has been computed by
dividing earnings (before state and federal taxes and fixed charges) by
fixed charges. Fixed charges consist of interest incurred during the
period and amortization of deferred debenture offering costs.
<TABLE>
<CAPTION>
Balance Sheet Data
December 31
1997 1996 1995 1994 1993
------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Mortgages receivable.......... $74,316,000 $69,699,000 $55,146,000 $56,666,000 $41,521,000
Total assets...................... 95,571,000 92,223,000 77,579,000 64,745,000 54,650,000
Long term obligations......... 82,966,000 79,006,000 66,850,000 54,427,000 45,239,000
Stockholders' equity........... 10,521,000 10,075,000 9,378,000 8,936,000 8,400,000
</TABLE>
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources:
The Company is engaged in the real estate business, including the origination
and purchase of real estate mortgage loans, consisting of first mortgage, junior
mortgage and wraparound mortgage loans. The Company's current investment policy
emphasizes the investment in mortgage loans on income producing properties. The
majority of the Company's loans are expected to mature within approximately five
years.
The Company's liquidity is managed to ensure that sufficient funds are available
to meet maturities of borrowings or to make other investments, taking into
account anticipated cash flows and available sources of funds. The Company's
principal sources of funds have consisted of borrowings (principally through the
issuance of its subordinated debentures), mortgage repayments and cash flow from
ongoing operations. Total stockholders' equity at December 31, 1997 was
$10,521,000. The Company considers its current liquidity and additional sources
of funds sufficient to satisfy its outstanding commitments and its maturing
liabilities.
Results of Operations:
Year Ended December 31, 1997 and 1996
Interest Income for 1997 was $10,088,000 as compared to $9,497,000 for 1996. The
increase of $591,000 resulted mainly from an increase in mortgages receivable.
Interest paid by the Company on most of its debentures, as well as the interest
earned on many of its mortgages, is keyed to the prime rate, which was 8 1/4% at
December 31, 1996, and increased to 8 1/2% on March 26, 1997.
Interest expense for the 1997 period was $8,181,000 as compared to $7,053,000
for the 1996 period. The increase of $1,128,000 resulted mainly from an increase
in long term obligations.
General and administrative expenses for 1997 was $773,000 as compared to
$948,000 for 1996. The decrease of $175,000 resulted mainly from lower
management fees and payroll expenses.
The provision for income taxes are $373,000 and $584,000 for 1997 and 1996,
respectively. These provisions represent 46% of pretax income for each period.
Year Ended December 31, 1996 and 1995
Interest income for 1996 was $9,497,000 as compared to $7,984,000 for 1995. The
increase of $1,513,000 resulted mainly from an increase in mortgages receivable,
offset in part by a decrease in interest rates subsequent to July 1995. Interest
paid by the Company on most of its debentures, as well as the interest earned on
many of its mortgages, is keyed to the prime rate, which was 8 1/2% at December
31, 1995, and decreased to 8 1/4% on February 1, 1996.
Interest expense for the 1996 period was $7,053,000 as compared to $6,227,000
for the 1995 period. The increase of $826,000 resulted mainly from an increase
in long term obligations, offset in part by a decrease in interest rates
subsequent to July 1995.
General and administrative expenses for 1996 was $948,000 as compared to
$657,000 for 1995. The increase of $291,000 resulted mainly from the payment of
an officer's salary and increased advertising expenses.
The provision for income taxes are $584,000 and $324,000 for 1996 and 1995,
respectively. These provisions represent 46% and 42% of pretax income for each
period.
10
<PAGE>
Since the Company intends to continue to expand its asset base, including its
mortgage portfolio, it is anticipated that its interest income will continue to
grow. To the extent that such growth is funded in reliance upon long-term
obligations, interest expense will likewise increase. The size of any such
increase will, of course, depend upon the principal amounts of the additional
assets or liabilities, as well as interest rates.
Since the Company is engaged in the real estate business, its results of
operations are affected by general economic trends in real estate markets, as
well as by trends in the general economy and the movement of interest rates.
Since the properties underlying the Company's mortgages are concentrated in the
New York City area, the economic condition in that area can also have an impact
on the Company's operations.
The number of instances of prepayment of mortgage loans tends to increase during
periods of declining interest rates and tends to decrease during periods of
increasing interest rates. Certain of the Company's mortgages include prepayment
provisions, and others prohibit prepayment of indebtedness entirely. In any
event, the Company believes that it would be able to reinvest the proceeds of
any prepayments of mortgage loans in comparable mortgages so that prepayments
would not have any materially adverse effect on the Company's business.
The rental housing market in New York City remains stable and the Company
expects that such properties will continue to appreciate in value with little or
no reduction in occupancy rates. The Company's mortgage portfolio is composed
predominantly of mortgages on multi-family residential properties, most of which
are subject to applicable rent control and rent stabilization statutes and
regulations. In both cases, any increases in rent are subject to specific
limitations. As such, properties of the nature of those constituting the most
significant portion of the Company's mortgage portfolio are not affected by the
general movement of real estate values in the same manner as other
income-producing properties.
The Company's mortgages are generally acquired or originated for investment and
not for resale in the secondary market, and it is, in general, the Company's
intention to hold such mortgages to maturity. The Company's mortgage loans
generally do not meet the criteria set forth by relevant federal agencies, and
as a result are not readily marketable in the secondary market.
Impact of Inflation:
The Company may lend at fixed interest rates that exceed the rates applicable,
from time to time, to the Debentures payable by the Company. Under such
circumstances inflation has not had a material effect on the Company's
continuing operations. Should inflation result in rising interest rates, the
Company would have to devote a higher percentage of the interest payments it
receives from its fixed rate mortgages to meet the interest payments due on the
Debentures. The extent to which the Company may be required to allocate the
interest payments it receives to the payment of the interest due on the
Debentures as a result of increasing interest rates is limited because the
interest payable on both principal and accrued interest on the Debentures may
not exceed a certain maximum percent per annum. Should the Company be required
to pay the maximum interest payable on the Debentures, the Company may be
required to use its working capital for purposes of interest payments.
Business:
The Company is engaged in the real estate business and has historically invested
primarily in real estate mortgage loans secured by income producing real
property. Such transactions typically require an understanding of the underlying
real estate transaction and rapid processing and funding as a principal basis
for competing in the making of these loans. The Company does not finance new
construction.
At December 31, 1997, 59% of the outstanding principal amount of the Company's
loans (net of discounts) were secured by properties located in the greater New
York metropolitan area. The balance of the Company's loans are secured by
properties located in Florida, Georgia, New Jersey, upstate New York,
Pennsylvania and Virginia.
11
<PAGE>
Certain of the Company's real estate mortgage loans bear interest at a fixed
rate. The balance of such loans bear interest at fluctuating rates. As of
December 31, 1997, approximately 36% of the Company's mortgage portfolio was
comprised of fixed rate mortgages. Interest on the loans is usually payable
monthly.
At December 31, 1997, the Company's portfolio consisted of 47 real estate
mortgage loans totaling $75,202,000 in the aggregate face principal amount
($74,316,000 in carrying amount for financial reporting purposes, the difference
representing unearned discounts). Of the principal amount of real estate loans
outstanding at December 31, 1997, 91% represent first mortgage loans and 9%
represent junior mortgage loans.
The Company may also, from time to time, acquire interests in real property,
including fee interests.
Investment Policy-Operations:
The Company's current investment policy related to mortgages emphasizes
investments in real estate mortgages secured by income producing real property,
located primarily in the greater New York metropolitan area.
The properties to be mortgaged are personally inspected by management and
mortgage loans are made only on those properties where management is
knowledgeable as to operating income and expense. The Company generally relies
upon its management in connection with the valuation of properties. From time to
time, however, it may engage independent appraisers and other agents to assist
in determining the value of income-producing properties underlying mortgages, in
which case the costs associated with such services are generally paid by the
mortgagor.
The Company's current investment policy related to real estate acquisitions
emphasizes investments in income-producing properties located primarily in the
New York metropolitan area.
Current Loan Status:
At December 31, 1997, the Company had 47 real estate loans in its portfolio,
totaling $75,202,000 (face amount) in aggregate principal amount. Interest rates
on the mortgage portfolio range between 6% and 23% per annum. Certain mortgages
have been discounted utilizing rates between 9% and 17% per annum.
Certain information concerning the Company's mortgage loans outstanding at
December 31, 1997 is set forth below:
<TABLE>
<CAPTION>
Carrying
Amount of No. of
Mortgage Prior Liens Loans
-------- ----------- -----
<S> <C> <C> <C>
First Mortgage Loans................................ $67,782,000 $ 0 42
Junior Mortgages..................................... 6,534,000 14,539,000 5
----------- ----------- --
$74,316,000 $14,539,000 47
=========== =========== ==
</TABLE>
The historical cost of the mortgage loans which originated in connection with
the sale of real estate includes a discount to reflect an appropriate market
interest rate at the date of origination.
12
<PAGE>
Competition:
The Company competes for acceptable investments with real estate investment
trusts, commercial banks, insurance companies, savings and loan associations,
pension funds and mortgage banking firms, many of which have greater resources
with which to compete for desirable mortgage loans.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data Pages
- - ---- -- ------------------------------------------- -----
<S> <C>
Report of Independent Auditors .................................................................................... 14
Consolidated Balance Sheets as of December 31, 1997 and 1996....................................................... 15
Consolidated Statements of Operations and Retained Earnings
for the Years Ended December 31, 1997, 1996 and 1995......................................................... 16
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995......................... 17
Notes to Financial Statements...................................................................................... 18
Schedule IV -- Mortgage Loans on Real Estate -- December 31, 1997.................................................. 25
</TABLE>
Other financial statement schedules and inapplicable periods with respect to
schedules listed above are omitted because the conditions requiring their filing
do not exist or the information required thereby is included in the financial
statements filed, including the notes thereto.
13
<PAGE>
Richard A. Eisner & Company, LLP
Accountants and Consultants
- - --------------------------------------------------------------------------------
AUDITORS' REPORT
Board of Directors and Stockholders
Intervest Corporation of New York
New York, New York
We have audited the accompanying consolidated balance sheets of Intervest
Corporation of New York and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations and retained earnings and cash
flows for each of the years in the three-year period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and related schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and related schedule 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 financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Intervest Corporation
of New York and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
January 23, 1998
<PAGE>
INTERVEST CORPORATION OF NEW YORK
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31,
-------- ---
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $15,596,000 $16,911,000
Mortgages receivable, including
due from affiliates of $6,250,000
in 1997 and 1996 (Notes B, D and E) 74,316,000 69,699,000
Deferred debenture offering costs,
net of accumulated amortization
o$2,675,000 and $2,262,000 (Note B) 4,270,000 4,475,000
Other assets (Note G) 1,389,000 1,138,000
----------- -----------
$95,571,000 $92,223,000
=========== ===========
LIABILITIES:
Accounts
accounts payable and accrued expenses $ 114,000 $ 406,000
Mortgage escrow deposits 1,617,000 2,356,000
Subordinated debentures payable (Note C) 78,000,000 75,500,000
Debenture interest payable at maturity (Note C) 4,966,000 3,506,000
Deferred mortgage interest and fees 353,000 380,000
----------- -----------
85,050,000 82,148,000
----------- -----------
Commitments and other matters (Note F)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized
200 shares; issued and outstanding 32 shares 2,000,000 2,000,000
Additional paid-in capital 3,509,000 3,509,000
Retained earnings 5,012,000 4,566,000
----------- -----------
10,521,000 10,075,000
----------- -----------
$95,571,000 $92,223,000
=========== ===========
</TABLE>
15
<PAGE>
INTERVEST CORPORATION OF NEW YORK
<TABLE>
<CAPTION>
Consolidated Statements of Operations and Retained Earnings
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue: Interest income:
Affiliates $ 693,000 $ 693,000 $ 985,000
Others 9,395,000 8,804,000 6,999,000
----------- ----------- -----------
10,088,000 9,497,000 7,984,000
Other income (Note E) 428,000 372,000 332,000
Gain on early repayment of discounted mortgages receivable (Note D) 215,000 282,000 82,000
----------- ----------- -----------
10,731,000 10,151,000 8,398,000
----------- ----------- -----------
Expenses:
Interest 8,181,000 7,053,000 6,227,000
General and administrative (Note E) 773,000 948,000 657,000
Amortization of deferred debenture offering costs (Note B) 958,000 869,000 748,000
----------- ----------- -----------
9,912,000 8,870,000 7,632,000
----------- ----------- -----------
Income before income taxes 819,000 1,281,000 766,000
Provision for income taxes (Note G) 373,000 584,000 324,000
----------- ----------- -----------
Net income 446,000 697,000 442,000
Retained earnings - beginning of year 4,566,000 3,869,000 3,427,000
----------- ----------- -----------
Retained earnings - end of year $ 5,012,000 $ 4,566,000 $ 3,869,000
=========== =========== ===========
</TABLE>
16
<PAGE>
INTERVEST CORPORATION OF NEW YORK
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 446,000 $ 697,000 $ 442,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of discount on mortgages receivable (435,000) (421,000) (255,000)
Amortization of deferred debenture offering costs 958,000 869,000 748,000
Gain on early repayment of discounted mortgages (215,000) (282,000) (82,000)
Changes in:
Other assets (251,000) (240,000) (109,000)
Accounts payable and accrued expenses (292,000) 342,000 4,000
Mortgage escrow deposits (739,000) 1,335,000 11,000
Debenture interest payable at maturity 1,460,000 1,374,000 (1,356,000)
Deferred mortgage interest and fees (27,000) 114,000 (46,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 905,000 3,788,000 (643,000)
------------ ------------ ------------
Cash flows from investing activities:
Collection of mortgages receivable 25,464,000 20,924,000 18,981,000
Mortgages receivable acquired (29,431,000) (34,774,000) (17,124,000)
Principal payments of mortgages payable (18,000) (21,000)
Purchase of governmental obligations 985,000
------------ ------------ ------------
Net cash (used in) provided by investing activities (3,967,000) (13,868,000) 2,821,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from subordinated debenture offerings 8,500,000 17,000,000 20,000,000
Payment of debenture offering costs (753,000) (1,479,000) (1,784,000)
Redemption of subordinated debentures (6,000,000) (6,200,000) (6,200,000)
------------ ------------ ------------
Net cash provided by financing activities 1,747,000 9,321,000 12,016,000
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (1,315,000) (759,000) 14,194,000
Cash and cash equivalents at beginning of year 16,911,000 17,670,000 3,476,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 15,596,000 $ 16,911,000 $ 17,670,000
============ ============ ============
</TABLE>
17
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note A - The Company
Intervest Corporation of New York (the "Company") was formed by Lowell S.
Dansker, Lawrence G. Bergman and Helene D. Bergman for the purpose of engaging
in the real estate business, including the origination and purchase of real
estate mortgage loans.
Note B - Significant Accounting Policies
[1] Consolidation policy:
The financial statements include the accounts of all subsidiaries.
Material intercompany items are eliminated in consolidation.
[2] Mortgage loans:
Loans are stated at their outstanding principal balances, net of any
deferred fees or costs on originated loans and unamortized discounts on
purchased loans. Interest income is accrued on the unpaid principal
balance. Discounts are amortized to income over the life of the related
receivables using the constant interest method. Loan origination fees
net of certain direct origination costs are deferred and recognized as
an adjustment of the yield of the related loans.
[3] Allowance for losses:
An allowance for loss related to loans that are impaired is based on
discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral. Management's periodic evaluation
of the need for, or adequacy of, the allowance is based on the
Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated value of
the underlying collateral and other relevant factors. This evaluation
is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on
any impaired loans that may be susceptible to significant change. For
financial reporting purposes mortgages are deemed to be delinquent when
payment of either principal or interest is more than 90 days past due.
[4] Deferred debenture offering costs:
Costs relating to offerings of debentures are amortized over the terms
of the debentures based on serial maturities. Deferred debenture
offering costs consist primarily of underwriters' commissions.
18
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note B - Significant Accounting Policies (continued)
[5] Statement of cash flows:
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three
months or less to be cash equivalents. Interest and income taxes were
paid as follows:
Year Ended
December 31, Interest Income Taxes
- - ------------ -------- ------------
1997 $6,721,000 $ 827,000
1996 5,679,000 196,000
1995 7,584,000 331,000
[6] Estimated fair value of financial instruments:
The Company considers the carrying amounts presented for mortgages
receivable and subordinated debentures payable on the consolidated
balance sheets to be reasonable approximations of fair value. The
Company's variable or floating interest rates on large portions of its
receivables and payables approximate those which would prevail in
current market transactions. Considerable judgement is necessarily
required in interpreting market data to develop the estimates of fair
value, and accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market
transaction.
[7] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
[8] Concentration of credit risk:
(a) The Company places its temporary cash investments with higher
credit-quality financial institutions, including a bank owned by
the shareholders of the Company and in governmental obligations.
Such investments are generally in excess of the FDIC insurance
limit. The Company has not experienced any losses from such
investments.
(b) The Company's mortgage portfolio is composed predominantly of
mortgages on multi-family residential properties in the New York
City area, most of which are subject to applicable rent control
and rent stabilization statutes and regulations. In both cases,
any increases in rent are subject to specific limitations. As
such, properties of the nature of those constituting the most
significant portion of the Company's mortgage portfolio are not
affected by the general movement of real estate values in the
same manner as other income-producing properties. The rental
housing market in New York City remains stable and the Company
expects that such properties will continue to appreciate in value
with little or no reduction in occupancy rates.
19
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note C - Subordinated Debentures Payable
The Company's Registered Floating Rate Redeemable Debentures consist of the
following:
December 31,
-------------------
1997 1996
---- ----
Series 10/4/89, interest at 1% above prime $ 2,000,000
Series 3/28/90, interest at 1% above prime 2,000,000
Series 5/13/91, interest at 2% above prime $ 6,000,000 6,000,000
Series 2/20/92, interest at 2% above prime 4,500,000 4,500,000
Series 6/29/92, interest at 2% above prime 7,000,000 7,000,000
Series 9/13/93, interest at 2% above prime 8,000,000 8,000,000
Series 1/28/94, interest at 2% above prime 4,500,000 4,500,000
Series 10/28/94, interest at 2% above prime 4,500,000 4,500,000
Series 5/12/95, interest at 1% above prime 1,000,000
Series 5/12/95, interest at 2% above prime 9,000,000 9,000,000
Series 10/19/95, interest at 1% above prime 1,000,000
Series 10/19/95, interest at 2% above prime 9,000,000 9,000,000
Series 5/10/96, interest at 1% above prime 1,000,000 1,000,000
Series 5/10/96, interest at 2% above prime 10,000,000 10,000,000
Series 10/15/96, interest at 1% above prime 500,000 500,000
Series 10/15/96, interest at 2% above prime 5,500,000 5,500,000
Series 4/30/97, interest at 9% 500,000
Series 4/30/97, interest at 1% above prime 8,000,000
----------- -----------
$78,000,000 $75,500,000
=========== ===========
"Prime" refers to the prime rate of Chase Manhattan Bank.
Prime was 8 1/2% on December 31, 1997. Minimum interest is 9 1/2% and maximum
interest is 15% on Series 5/13/91. Series 2/20/92 has minimum interest of 8% and
maximum interest of 14%, Series 6/29/92 has maximum interest of 14%, Series
9/13/93, 1/28/94, 10/28/94, 5/12/95, 10/19/95, 5/10/96, 10/15/96 and 4/30/97 due
October 1, 2005 have maximum interest of 12%, and Series 4/30/97 due July 1,
1999 has interest of 9%.
Payment of interest on an aggregate of $13,790,000 of debentures is deferred
until maturity and earns interest at prime. Any debenture holder who has
deferred receipt of interest may at any time elect to receive the deferred
interest and subsequently receive regular payments of interest.
The debentures may be redeemed, in whole or in part, at any time at the option
of the Company. For debentures issued after 1996, redemption would generally be
at a premium of 1% or 2% if the redemption is prior to 1999.
The debentures are unsecured and subordinate to all present and future senior
indebtedness, as defined.
20
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note C - Subordinated Debentures Payable (continued)
Maturities of debentures are summarized as follows:
Year Ending
December 31,
------------
1998 $ 1,000,000
1999 11,500,000
2000 7,000,000
2001 8,000,000
2002 4,500,000
Thereafter until 2005 46,000,000
----------
$78,000,000
===========
Note D - Mortgages Receivable
Information as to mortgages receivable is summarized as follows:
December 31,
--------------------------
1997 1996
---- ----
First mortgages $68,668,000 $62,914,000
Junior mortgages 6,534,000 7,687,000
----------- -----------
75,202,000 70,601,000
Less unearned discount 886,000 902,000
----------- -----------
$74,316,000 $69,699,000
=========== ===========
Interest rates on mortgages range from 6% to 23%. Certain mortgages have been
discounted utilizing rates ranging from 12% to 17%.
During 1996 and 1997 certain mortgages were paid in full prior to their maturity
date. This resulted in the recognition of a gain, which represents the balance
of the unamortized discount applicable to these mortgages.
Maturities of mortgages receivable are summarized as follows:
Year Ending
December 31,
------------
1998 $27,171,000
1999 23,088,000
2000 4,535,000
2001 790,000
2002 951,000
Thereafter until 2015 18,667,000
-----------
$75,202,000
===========
21
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note D - Mortgages Receivable (continued)
The Company evaluates its portfolio of mortgage loans on an individual basis,
comparing the amount at which the investment is carried to its estimated net
realizable value. At the respective balance sheet dates, no allowances were
required, although as of December 31, 1997, one mortgage with a carrying value
of $1,584,000 is delinquent. The Company is in the process of foreclosing on the
related property, the fair value of which exceeds the carrying value of this
loan.
Note E - Related Party Transactions
During 1995 affiliates sold, to unrelated third parties, properties subject to
mortgages held by the Company. In connection with those sales, the Company's
mortgages in the original aggregate amount of $6,958,000 was refinanced and the
Company received new first mortgages totaling $9,670,000.
Other income includes fees of $6,000 , $8,000 and $42,000 from affiliates in
1997, 1996, and 1995, respectively.
The Company utilizes personnel and other facilities of affiliated entities and
is charged service fees for general and administrative expenses for placing
mortgages, servicing mortgages and distributing debenture interest checks. Such
fees amounted to $264,000, $367,000 and $342,000 in 1997, 1996 and 1995,
respectively. Management believes these service fees are reasonable.
The Company participates with Intervest Bank in two mortgages. The balance of
the Company's participation in these mortgages was $1,309,919 at December 31,
1997. The shareholders of the Company are officers, directors and shareholders
of the Parent of Intervest Bank.
Note F - Commitments
[1] Office lease:
The Company occupies its office space under a lease which terminates on
September 30, 2004. In addition to minimum rents the Company is required to pay
its proportionate share of increases in the building's real estate taxes and
costs of operation and maintenance as additional rent. Rent expense amounted to
$176,000, $180,000 and $177,000 for 1997, 1996 and 1995, respectively.
Future minimum rents under the lease are as follows:
Year Ending
December 31,
------------
1998 $ 174,902
1999 174,902
2000 179,133
2001 191,828
2002 191,828
Thereafter 335,699
----------
$1,248,292
==========
The Company shares this space with affiliates who were charged rent of
$64,000, $63,000 and $77,000 in 1997, 1996 and 1995, respectively.
22
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note F - Commitments (continued)
[2] Employment agreement:
Effective as of July 1, 1995, the Company entered into an employment
agreement with its Executive Vice President, who is related to the
stockholders, for a term of ten years at an annual salary in the
present amount of $140,450, which is subject to increase annually by
six percent or by the percentage increase in the consumer price index,
if higher. In the event of the executive's death or disability,
one-half of this amount will continue to be paid for a term as defined
in the agreement.
Note G - Income Taxes
The Company has provided for income taxes in the periods presented based on the
federal, state and city tax rates in effect for these periods.
The provision for income taxes consists of the following components:
Year Ended
December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Current taxes:
Federal $ 242,000 $ 324,000 $ 143,000
State and local 164,000 216,000 102,000
Deferred taxes:
Federal (20,000) 26,000 46,000
State and local (13,000) 18,000 33,000
--------- --------- ---------
$ 373,000 $ 584,000 $ 324,000
========= ========= =========
Temporary differences exist between financial accounting and tax reporting which
result in a net deferred tax asset, included in other assets, as follows:
Year Ended
December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Debenture underwriting commissions $ 9,000 $ 19,000 $ 32,000
Deferred fees and interest 49,500 58,000 68,000
Discount on mortgages receivable (18,500) (70,000) (49,000)
-------- -------- --------
$ 40,000 $ 7,000 $ 51,000
======== ======== ========
23
<PAGE>
INTERVEST CORPORATION OF NEW YORK
Notes to Financial Statements
Note G - Income Taxes (continued)
The amounts of income taxes provided varied from the amounts which would be
"expected" to be provided at the statutory federal income tax rates in effect
for the following reasons:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax computed based upon the statutory
federal tax rate $ 278,000 $ 435,000 $ 260,000
State and local income tax, net of federal
income tax benefit 101,000 158,000 98,000
Nontaxable income (10,000) (9,000) (10,000)
Other 4,000 (24,000)
--------- --------- ---------
$ 373,000 $ 584,000 $ 324,000
========= ========= =========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
INTERVEST CORPORATION OF NEW YORK
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
EFFECTIVE ACTUAL FINAL
INTEREST INTEREST MATURITY
DESCRIPTION RATE RATE DATE PERIODIC PAYMENT TERMS
- - ------------------------------ ---- ---- -------- --------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL FIRST MORTGAGES:
OFFICE BUILDINGS:
NEW CITY, NEW YORK 12.25% 6.20% 12/08/10 PRINCIPAL AND INTEREST ANNUALLY
SHOPPING CENTERS:
STONY BROOK, NEW YORK 14.20 12.50 (B) 01/30/99 (C)
HENRIETTA, NEW YORK 14.30 12.50 (B) 12/04/98 (C)
MANUFACTURING BUILDING:
CORONA, NEW YORK 13.90 12.50 (B) 10/15/99 (C)
RESTAURANTS:
MANASSAS, VIRGINIA 12.375 6.50 12/01/05 PRINCIPAL AND INTEREST ANNUALLY
IRONDEQUOIT, NEW YORK 12.50 7.20 12/01/12 PRINCIPAL AND INTEREST ANNUALLY
DECATUR AND JONESBORO, GEORGIA 13.00 8.50 04/01/13 (C)
PARTICIPATIONS:
BROOKSVILLE, FLORIDA 12.25 12.25 10/18/99
DUNEDIN, FLORIDA 8.875 8.875 05/12/12
RESIDENTIAL FIRST MORTGAGES:
CO-OPERATIVE APARTMENT BUILDINGS:
NEW YORK, NEW YORK 11.51 11.51 07/31/99 (C)
NEW YORK, NEW YORK 9.00 9.00 11/01/99 (C)
RENTAL APARTMENT BUILDINGS:
BRONX, NEW YORK 9.00 9.00 (A) 07/01/06 (C)
BRONX, NEW YORK 11.00 11.00 11/01/12 (C)
BRONX, NEW YORK 12.75 12.75 08/01/12 (C)
NEW YORK, NEW YORK 10.00 10.00 10/01/00 (D)
BROOKLYN, NEW YORK 14.00 12.50 (B) 12/03/98 (C)
BROOKLYN, NEW YORK 14.50 12.50 (B) 06/26/98 (C)
BRONX, NEW YORK 13.75 13.75 06/01/10 (C)
BRONX, NEW YORK 12.75 12.75 01/01/11 (C)
BRONX, NEW YORK 12.50 12.50 (A) 08/01/10 (C)
BRONX, NEW YORK 12.00 12.00 (A) 09/30/99 (C)
BRONX, NEW YORK 13.75 13.75 (A) 06/01/13 (C)
BRONX, NEW YORK 10.00 10.00 11/01/15 (C)
BROOKLYN, NEW YORK 14.80 12.50 (B) 04/11/99 (C)
BRONX, NEW YORK 13.00 13.00 (A) 01/01/10 (C)
NEW YORK, NEW YORK 10.00 10.00 10/01/00 (D)
BRONX, NEW YORK 12.75 12.75 11/01/11 (C)
NEW YORK, NEW YORK 11.00 10.00 03/15/10 (C)
NEW YORK, NEW YORK 11.00 10.00 03/15/10 (C)
RESIDENTIAL FIRST MORTGAGES,
RENTAL APARTMENT BUILDINGS: (CONTINUED)
BRONX, NEW YORK 13.57 13.57 (A) 11/01/13 (C)
NEW YORK, NEW YORK 10.00 10.00 10/01/00 (D)
NEW YORK, NEW YORK 11.00 11.00 03/01/99 (D)
NEW YORK, NEW YORK 16.40 14.50 (B) 09/25/98 (C)
EAST WINDSOR, NEW JERSEY 16.90 14.50 (B) 02/04/98 (C)
PINE HILL, NEW JERSEY 16.20 14.50 (B) 05/01/99 (C)
PHILADELPHIA, PENNSYLVANIA 16.10 14.50 (B) 06/12/99 (C)
PASSAIC, NEW JERSEY 14.32 12.50 (B) 11/03/98 (C)
ELLENVILLE, NEW YORK 11.50 11.50 07/10/99 (C)
NEWARK, NEW JERSEY 11.71 10.00 (B) 12/30/98 (C)
ST. PETERSBURG, FLORIDA 9.00 8.50 (B) 12/31/00 (C)
<PAGE>
FIRST MORTGAGES ON LAND:
OSCEOLA COUNTY, FLORIDA 07/10/97
RESIDENTIAL SECOND MORTGAGES,
RENTAL APARTMENT BUILDINGS:
NEW YORK, NEW YORK 12.00 12.00 02/01/99 (D)
NEW YORK, NEW YORK 11.00 11.00 DUE ON DEMAND (D)
NEW YORK, NEW YORK 10.50 10.50 (B) 02/01/98 (D)
NEW ROCHELLE, NEW YORK 11.50 11.50 (B) DUE ON DEMAND (D)
ROCKVILLE CENTRE, NEW YORK 23.00 23.00 04/06/98 (D)
(A) INTEREST PAYMENTS ARE FIXED. INTEREST RATE SHOWN IS APPROXIMATE.
(B) INTEREST AT FLUCTUATING RATE BASED ON BANK PRIME RATE.
(C) PRINCIPAL AND INTEREST MONTHLY.
(D) INTEREST ONLY, PRINCIPAL AT MATURITY.
(E) NO PREPAYMENT PERMITTED.
(F) NONE
(G) $750,000 OF PARTICIPATION OF MORTGAGE WAS SOLD IN 1996.
(H) $1,250,000 OF PARTICIPATION OF MORTGAGE WAS SOLD IN 1996.
(I) THE CARRYING AMOUNT OF MORTGAGES APPROXIMATES COST FOR INCOME TAX PURPOSES.
<PAGE>
INTERVEST CORPORATION OF NEW YORK
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
FACE CARRYING
PRIOR AMOUNT OF AMOUNT OF PREPAYMENT PENALTY/
DESCRIPTION LIENS MORTGAGES MORTGAGES OTHER FEES
- - ----------------------------- --------- ------------ -------------- --------------------------------------------
COMMERCIAL FIRST MORTGAGES:
OFFICE BUILDINGS:
<S> <C> <C> <C> <C> <C> <C>
NEW CITY, NEW YORK $300,000 $143,000 (F)
SHOPPING CENTERS:
STONY BROOK, NEW YORK 4,394,000 (G) 3,568,000 ONE MONTH'S INTEREST
HENRIETTA, NEW YORK 4,100,000 4,043,000 NOT PREPAYABLE PRIOR TO 10/04/1998;
THEN ONE MONTH'S INTEREST
MANUFACTURING BUILDING:
CORONA, NEW YORK 425,000 417,000 ONE MONTH'S INTEREST
RESTAURANTS:
MANASSAS, VIRGINIA 300,000 122,000 0.5%
IRONDEQUOIT, NEW YORK 340,000 192,000 1%
DECATUR AND JONESBORO, GEORGIA 583,000 373,000 (F)
PARTICIPATIONS:
BROOKSVILLE, FLORIDA 900,000 900,000 (F)
DUNEDIN, FLORIDA 750,000 410,000 (F)
RESIDENTIAL FIRST MORTGAGES:
CO-OPERATIVE APARTMENT BUILDINGS:
NEW YORK, NEW YORK 950,000 940,000 (E)
NEW YORK, NEW YORK 367,000 306,000 (E)
RENTAL APARTMENT BUILDINGS:
BRONX, NEW YORK 895,000 744,000 NOT PREPAYABLE UNTIL 1/1/2000.
BRONX, NEW YORK 2,445,000 2,187,000 NOT PREPAYABLE UNTIL 2/2003.
BRONX, NEW YORK 900,000 900,000 NOT PREPAYABLE UNTIL BALANCE UNDER $200,000,
2% FEE ON UNPAID BALANCE.
NEW YORK, NEW YORK 265,000 265,000 (F)
BROOKLYN, NEW YORK 2,500,000 2,470,000 NOT PREPAYABLE PRIOR TO 06/05/1998;
THEN ONE MONTH'S INTEREST
BROOKLYN, NEW YORK 7,100,000 (H) 5,746,000 NOT PREPAYABLE PRIOR TO 03/27/1998;
THEN ONE MONTH'S INTEREST
BRONX, NEW YORK 2,850,000 2,687,000 NOT PREPAYABLE UNTIL 3/1/2004.
BRONX, NEW YORK 1,175,000 1,138,000 (E)
BRONX, NEW YORK 1,045,000 971,000 NOT PREPAYABLE UNTIL BALANCE UNDER $200,000.
BRONX, NEW YORK 670,000 619,000 (F)
BRONX, NEW YORK 2,000,000 1,906,000 (E)
BRONX, NEW YORK 1,260,000 1,175,000 NOT PREPAYABLE UNTIL 3/1999.
BROOKLYN, NEW YORK 1,150,000 1,131,000 NOT PREPAYABLE PRIOR TO 10/11/1998;
BRONX, NEW YORK 1,650,000 1,576,000 NOT PREPAYABLE UNTIL 10/1/2000.
NEW YORK, NEW YORK 1,445,000 1,445,000 (F)
BRONX, NEW YORK 1,850,000 1,824,000 NOT PREPAYABLE UNTIL 1/1/2003.
NEW YORK, NEW YORK 1,150,000 1,020,000 (F)
NEW YORK, NEW YORK 300,000 272,000 (F)
<PAGE>
RESIDENTIAL FIRST MORTGAGES,
RENTAL APARTMENT BUILDINGS: (CONTINUED)
BRONX, NEW YORK 4,510,000 4,510,000 (E)
NEW YORK, NEW YORK 425,000 425,000 (F)
NEW YORK, NEW YORK 1,100,000 1,100,000 (F)
NEW YORK, NEW YORK 2,700,000 2,587,000 ONE MONTH'S INTEREST
EAST WINDSOR, NEW JERSEY 1,200,000 1,185,000 ONE MONTH'S INTEREST
PINE HILL, NEW JERSEY 7,200,000 6,950,000 1% FEE.
PHILADELPHIA, PENNSYLVANIA 3,800,000 5,476,000 1% FEE.
PASSAIC, NEW JERSEY 925,000 904,000 NOT PREPAYABLE PRIOR TO 10/01/98;
THEN ONE MONTH'S INTEREST
ELLENVILLE, NEW YORK 950,000 913,000 (F)
NEWARK, NEW JERSEY 1,000,000 985,000 NOT PREPAYABLE PRIOR TO 10/01/98;
THEN 1% FEE.
ST. PETERSBURG, FLORIDA 1,775,000 1,674,000 (F)
FIRST MORTGAGES ON LAND:
OSCEOLA COUNTY, FLORIDA 07/10/97 1,600,000 1,583,000 1% FEE.
RESIDENTIAL SECOND MORTGAGES,
RENTAL APARTMENT BUILDINGS:
NEW YORK, NEW YORK 4,760,000 1,050,000 1,050,000 (F)
NEW YORK, NEW YORK 5,593,000 3,300,000 3,300,000 (F)
NEW YORK, NEW YORK 2,318,000 1,400,000 1,400,000 (F)
NEW ROCHELLE, NEW YORK 1,300,000 500,000 500,000 (F)
ROCKVILLE CENTRE, NEW YORK 568,000 300,000 284,000 1% FEE
----------- ----------- -----------
$14,539,000 $77,794,000 $74,316,000
=========== =========== ===========
(A) INTEREST PAYMENTS ARE FIXED. INTEREST RATE SHOWN IS APPROXIMATE.
(B) INTEREST AT FLUCTUATING RATE BASED ON BANK PRIME RATE.
(C) PRINCIPAL AND INTEREST MONTHLY.
(D) INTEREST ONLY, PRINCIPAL AT MATURITY.
(E) NO PREPAYMENT PERMITTED.
(F) NONE
(G) $750,000 OF PARTICIPATION OF MORTGAGE WAS SOLD IN 1996.
(H) $1,250,000 OF PARTICIPATION OF MORTGAGE WAS SOLD IN 1996.
(I) THE CARRYING AMOUNT OF MORTGAGES APPROXIMATES COST FOR INCOME TAX PURPOSES.
</TABLE>
<PAGE>
INTERVEST CORPORATION OF NEW YORK
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE--Continued
The following summary reconciles mortgages receivable at their carrying values
Year Ended December 31
----------------------
1997 1996 1995
------------ ------------ ------------
Balance at beginning of period $69,699,000 $55,146,000 $56,666,000
Additions during period:
Mortgages acquired 29,431,000 34,774,000 17,124,000
------------ ------------ ------------
99,130,000 89,920,000 73,790,000
Deductions during period:
Collections of principal, net
of amortization of discounts 24,814,000 20,221,000 18,664,000
------------ ------------ ------------
BALANCE AT CLOSE OF PERIOD $74,316,000 $69,699,000 $55,146,000
============ ============ ============
27
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The current directors and executive officers of the Company are as follows:
Lawrence G. Bergman, age 53, serves as a Director, and as Vice President and
Secretary of the Company and has served in such capacities since the Company was
organized. Mr. Bergman received a Bachelor of Science degree and a Master of
Engineering (Electrical) degree from Cornell University, and a Master of Science
in Engineering and a Ph.D degree from The Johns Hopkins University. Mr. Bergman
is also a Director, Vice- President and Secretary of Intervest Bancshares
Corporation, and Co-Chairman of the Board of Directors and a member of the Loan
Committee of Intervest Bank. During the past five years, Mr. Bergman has been
actively involved in the ownership and operation fo real estate and mortgages
through certain family-owned entities.
Michael A. Callen, age 57, serves as a Director of the Company, and has served
in such capacity since October, 1992. Mr. Callen received a Bachelor of Arts
degree from the University of Wisconsin in Economics and Russian. Mr. Callen is
Senior Advisor, The National Commercial Bank, Jeddah, Saudi Arabia and prior to
1993 was a Director and Sector Executive at Citicorp/Citibank , responsible for
corporate banking activities in North America, Europe and Japan. Mr. Callen is a
Director of Intervest Bancshares Corporation and a Director of AMBAC, Inc.
Jean Dansker, age 76, serves as Vice President of the Company and has served in
such capacity since June, 1996. Mrs. Dansker received a Bachelor of Arts degree
from Brooklyn College in Economics. Mrs. Dansker has been an active investor in
real estate and mortgages for more than five years.
Jerome Dansker, age 79, serves as a Director and as Executive Vice President of
the Company, and has served in such capacity since November, 1993. Mr. Dansker
became Chairman of the Board of Directors in June, 1996. Mr. Dansker received a
Bachelor of Science degree from the New York University School of Commerce,
Accounts and Finance, a law degree from the New York University School of Law,
and is admitted to practice as an attorney in the State of New York. Mr. Dansker
is a Director, Chairman of the Board and Executive Vice President of Intervest
Bancshares Corporation. He is also a Director and Chairman of the Loan Committee
of Intervest Bank. During the past five years, Mr. Dansker has been actively
involved in the ownership and operation of real estate and mortgages through
certainfamily-owned entities.
Lowell S. Dansker, age 47, serves as a Director, and as President and Treasurer
of the Company, and has served in such capacities since the Company was
organized. Mr. Dansker received a Bachelor of Science in Business Administration
from Babson College, a law degree from the University of Akron School of Law,
and is admitted to practice as an attorney in New York, Ohio, Florida and the
District of Columbia. Mr. Dansker is also a Director, President and Treasurer of
Intervest Bancshares Corporation, an affiliated bank holding company and
Co-Chairman of the Board of Directors and a member of the Loan Committee of
Intervest Bank, a Florida state-chartered bank which is majority owned by
Intervest Bancshares Corporation. During the past five years, Mr. Dansker has
been actively involved in the ownership and operation of real estate and
mortgages through certain family-owned entities.
Milton F. Gidge, age 68, serves as a Director of the Company, and has served in
such capacity since December, 1988. Mr. Gidge received a Bachelor of Business
Administration degree in Accounting from Adelphi University and a Masters Degree
in Banking and Finance from New York University. Mr. Gidge retired in 1994 and,
prior to his retirment, was a Director and Chairman-Credit Policy of Lincoln
Savings Bank, F.S.B. (headquartered in New York City). He is also a Director of
28
<PAGE>
Intervest Bancshares Corporation, Interboro Mutual Indemnity Insurance Company
and Vicon Industries, Inc. Mr. Gidge was an officer of Lincoln Savings Bank,
F.S.B. for more than five years.
William F. Holly, age 69, serves as a Director of the Company and has served in
such capacity since December, 1990. Mr. Holly received a Bachelor of Arts degree
in Economics from Alfred University. Mr. Holly is Chairman of the Board and
Chief Executive Officer of Sage, Rutty & Co., Inc., members of the Boston Stock
Exchange, with offices in Rochester, New York and Canandaigua, New York, and is
also a Director of Intervest Bancshares Corporation and a Trustee of Alfred
University. Mr. Holly has been an officer and director of Sage, Rutty & Co.,
Inc. for more than five years.
David J. Willmott, age 59, serves as a Director of the Company, and has served
in such capacity since June, 1989. Mr. Willmott is a graduate of Becker Junior
College and attended New York University Extension and Long Island University
Extension of Southampton College. Mr. Willmott is the Editor and Publisher of
Suffolk Life Newspapers, which he founded more than 25 years ago. Mr. Willmott
is also a Director of Intervest Bancshares Corporation.
Wesley T. Wood, age 55, serves as a Director of the Company, and has served in
such capacity since April, 1992. Mr. Wood received a Bachelor of Science degree
from New York University, School of Commerce. Mr. Wood is President of Marketing
Capital Corporation, an international marketing consulting and investment firm
which he founded in 1973. He is also a Director of Intervest Bancshares
Corporation, a Director of the Center of Direct Marketing at New York
University, a member of the Marketing Committee at Fairfield University in
Connecticut, and a Trustee of St. Dominics in Oyster Bay, New York.
All of the directors of the Company have been elected to serve as directors
until the next annual meeting of the Company's shareholders. Each of the
officers of the Company has been elected to serve as an officer until the next
annual meeting of the Company's directors.
Mr. Bergman's wife is the sister of Lowell S. Dansker and Jerome Dansker is the
father of Lowell S. Dansker and Mrs. Bergman. Jean Dansker is the wife of Jerome
Dansker and the mother of Lowell S. Dansker and Mrs. Bergman.
Item 11. Executive Compensation
Prior to July 1, 1995, no compensation was paid to or accrued by the Company for
any executive officer or director of the Company (other than fees paid to
directors for attending Board meetings). Each of the directors receives a fee of
$250 for each meeting of the Board of Directors he attends. Effective as of July
1, 1995, the Company entered into an employment agreement with Mr. Jerome
Dansker, its Executive vice President. The agreement is for a term of ten years
and provides for the payment of an annual salary in the present amount of
$140,450 which is subject to increase annually by six percent or by the
percentage increase in the consumer price index, if higher. The agreement also
provides for monthly expense account payments, the use of a car and medical
benefits. In the event of Mr. Dansker's death or disability, monthly payments of
one-half of the amount which otherwise would have been paid to Mr. Dansker will
continue until the greater of (i) the balance of the term of employment, and
(ii) three years.
29
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 28, 1998, information concerning
the ownership of the outstanding common stock of the Company, all of which is
beneficially owned by the three individuals listed below:
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership Percent of Class
- - ------------------------------------ ----------------------------------------- ----------------
<S> <C> <C>
Lowell S. Dansker..................... 15.92 shares (1) 50.0%
360 West 55th Street
New York, New York 10019
Lawrence G. Bergman................ 3.79 shares 11.9%
201 East 62nd Street,
New York, New York 10021
Helene D. Bergman................... 12.13 shares (2) 38.1%
------------ ------
201 East 62nd Street,
New York, New York 10021
Total Outstanding............................ 31.84 shares 100.0%
============= ======
</TABLE>
(1) Of the 15.92 shares beneficially owned by Mr. Dansker, 0.40 shares are owned
by Mr. Dansker as custodian for his two children under the Uniform Gifts to
Minors Act of the State of New York.
(2) Of the 12.13 shares beneficially owned by Mrs. Bergman, 0.40 shares are
owned by her as custodian for her two children under the Uniform Gifts to Minors
Act of the State of New York.
Item 13. Certain Relationships and Related Transactions
During 1995, Capital Holding Company and New York Properties Trust sold to third
parties four properties subject to mortgages held by the Company. In connection
with those sales the Company's mortgages were refinanced and the Company
acquired first mortgages totaling $9,670,000.
An annual mortgage servicing fee which is based on certain percentage of the
face amount of mortgages receivable is paid by the Company monthly to Capital
Holding Company, an affiliate of the Company. The services provided to the
Company by Capital Holding Company in consideration for such mortgage servicing
fee include (i) the collection of mortgages receivable, (ii) the payment of
mortgages payable, (iii) the payment of property taxes for the mortgaged
premises after receipt of such tax payments from mortgagors and (iv) the payment
of property insurance premiums for the mortgaged properties after receipt of
such insurance payments from mortgagors. For the fiscal year ended December 31,
1997, the amount of the mortgage servicing fee paid by the Company was $264,000.
Mr. William F. Holly, who is a director of the Company, also serves as Chairman
of the Board and Chief Executive Officer of Sage, Rutty & Co., Inc., which firm
has acted as an underwriter in connection with the Company's offerings of
debentures, including the offering of debentures conducted during fiscal 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
See Item 8 "Financial Statements and Supplementary Data"
(a) (2) Financial Statement Schedules: IV - Mortgage Loans on Real Estate
30
<PAGE>
All other schedules have been omitted because they are
inapplicable, not required, or the information is included in the
Financial Statements or Notes thereto.
(a) (3) Exhibits:
3.1 Certificate of Incorporation of the Company, incorporated by reference
to the Company's Registration Statement on Form S-18 (File No. 33-27404-NY),
declared effective on May 12, 1989.
3.2 By-laws of the Company, incorporated by reference to the Company's
Registration Statement on Form S-11 (File No. 33-39971), declared effective on
May 13, 1991.
4.1 Form of Indenture between the Company and First American Bank of
Georgia, as trustee, dated as of October 15, 1989, incorporated by reference to
the Company's Registration Statement on Form S-11 (No. 33- 30758), declared
effective on October 4, 1989.
4.2 Form of Indenture between the Company and First American Bank of
Georgia, as trustee, dated as of April 15, 1990, incorporated by reference to
the Company's Registration Statement on Form S-11 (No. 33- 33500), declared
effective on March 28, 1990.
4.3 Form of Indenture between the Company and First American Bank of
Georgia, as trustee, dated as of June 1, 1991, incorporated by reference to the
Company's Registration Statement on Form S-11 (No. 33- 39971), declared
effective on May 13, 1991.
4.4 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of March 1, 1992, incorporated by reference to the Company's
Registration Statement on Form S-11 (File No. 33-44085), declared effective on
February 20, 1992.
4.5 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of July 1, 1992, incorporated by reference to the Company's
Registration Statement on Form S-11 (File No. 33-47801), declared effective on
June 29, 1992.
4.6 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of September, 15, 1993, incorporated by reference to the
Company's Registration Statement on Form S-11 (File No.
33-65812), declared effective on September 13, 1993.
4.7 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of February 1, 1994, incorporated by reference to the
Company's Registration Statement on Form S-11 (File No. 33-73108), declared
effective on January 28, 1994.
4.8 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of November 1, 1994, incorporated by reference to the
Company's Registration Statement on Form-S11 (File No.
33-84812), declared effective on October 28, 1994.
4.9 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of June 1, 1995, incorporated by reference to the Company's
Registration Statement on Form-S11 (File No. 33-90596) declared effective on May
12, 1995.
4.10 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of November 1, 1995, incorporated by reference to the
Company's Registration Statement on Form S-11 (File No.
33-96662), declared effective on October 19, 1995.
31
<PAGE>
4.11 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of June 1, 1996, incorporated by reference to the Company's
Registration Statement on Form S-11 (File No. 333-2459), declared effective on
May 10, 1996.
4.12 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of November 1, 1996, incorporated by reference to the
Company's Registration Statement on Form S-11 (File No.
333-11413), declared effective on October 15, 1996.
4.13 Form of Indenture between the Company and The Bank of New York, as
trustee, dated as of May 1, 1997, incorporated by reference to the Company's
Registration Statement on Form S-11 (File No. 333-23093), declared effective on
April 30, 1997.
4.14 Agreements of Resignation, Appointment and Acceptance dated as of
April 30, 1992, by and among the Company, First American Bank of Georgia, N.A.
and The Bank of New York, incorporated by reference to the Company's annual
report on Form 10K for the year ended December 31, 1992 wherein such documents
were filed as exhibit 4.8.
10.0 Employment Agreement between the Company and Jerome Dansker dated as
of July 1, 1995, incorporated by reference to the Company's Registration
Statement on Form S-11 (File #33-96662), declared effective on October 19, 1995.
22. List of Subsidiaries.
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
32
<PAGE>
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERVEST CORPORATION OF NEW YORK
Dated: March 27, 1998 By: /S/ Lowell S. Dansker
---------------------
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 dates indicated.
Signatures
- - ----------
President
(Principal Executive Officer),
/S/ Lowell S. Dansker Treasurer (Principal Financial
Lowell S. Dansker Officer and Principal Accounting
Dated: March 27, 1998 Officer) and Director
/S/ Lawrence G. Bergman Vice President
Lawrence G. Bergman Secretary and Director
Dated: March 27, 1998
Director
Michael A. Callen
Dated: March , 1998
/S/ Jerome Dansker Director, Executive Vice President
Jerome Dansker
Dated: March 27, 1998
Director
Milton F. Gidge
Dated: March , 1998
/S/ William F. Holly Director
William F. Holly
Dated: March 27, 1998
Director
David J. Willmott
Dated: March , 1998
/S/ Wesley T. Wood Director
Wesley T. Wood
Dated: March 27, 1998
33
<PAGE>
Supplemental Information to be Furnished with Reports Filled Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act:
Registrant does not distribute annual proxy statements to holders of its
Debentures. The annual report to holders of its Debentures has not as yet been
distributed.
When the annual report has been distributed to the holders of Debentures, four
copies will be sent to the Commission.
34
<PAGE>
DESCRIPTION EXHIBIT 27 - FINANCIAL DATA SCHEDULE
LEGEND
this schedule contains information extracted from form 10-K december 31, 1997,
and is qualified in its entirety by reference such financial statements.
LEGEND
MULTIPLIER 1,000
<TABLE>
<S> <C>
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END DEC-31-1997
PERIOD-END DEC-30-1997
CASH 15,596
SECURITIES 0
RECEIVABLES 74,316
ALLOWANCES 0
INVENTORY 0
CURRENT-ASSETS 0
PP&E 0
DEPRECIATION 0
TOTAL-ASSETS 95,571
CURRENT-LIABILITIES 0
BONDS 78,000
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 2,000
OTHER-SE 8,521
TOTAL-LIABILITY-AND-EQUITY 95,571
SALES 0
TOTAL-REVENUES 10,731
CGS 0
TOTAL-COSTS 0
OTHER-EXPENSES 1,731
LOSS-PROVISION 0
INTEREST-EXPENSE 8,181
INCOME-PRETAX 819
INCOME-TAX 373
INCOME-CONTINUING 0
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 446
EPS-PRIMARY 0
EPS-DILUTED 0
</TABLE>
<PAGE>
Exhibit 22
Subsidiaries
State of
Name Incorporation
---- -------------
Intervest Distribution Corporation New York
Intervest Realty Servicing Corporation New York
35
<PAGE>
ANNEX F - INTERVEST CORPORATION OF NEW YORK REPORT ON FORM 10-Q
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-22976-NY
INTERVEST CORPORATION OF NEW YORK
- - --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-3415815
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Rockefeller Plaza, New York, New York 10020-1903
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212)218-2800
- - --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at September 30, 1999
--------------------- ---------------------------------
Common Stock: No Par Value 31.84 Shares
Class B Stock: No Par Value 15.89 Shares
1
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Results for the three months and for the nine months ended September 30, 1999
and 1998 include, in the opinion of management, all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the results
for such interim periods. Results for the three months and for the nine months
ended September 30, 1999 and 1998 are not necessarily indicative of the results
for the full years.
2
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $41,630,000 $27,426,000
Mortgages receivable, including due from affiliates
of $500,000 in 1998 (notes 2,4 and 5) 52,353,000 67,533,000
Deferred debenture offering costs, net of accumulated
amortization of $3,529,000 and $3,482,000 (Note 2) 3,462,000 3,646,000
Other assets (Note 7) 1,102,000 1,282,000
-------------- -------------
TOTAL ASSETS $98,547,000 $99,887,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 112,000 $ 169,000
Mortgage escrow deposits 1,978,000 2,035,000
Subordinated debentures payable (Note 3) 77,400,000 80,300,000
Debenture interest payable at maturity (Note 3) 6,602,000 5,491,000
Deferred mortgage interest and fees 276,000 324,000
------------- -------------
TOTAL LIABILITIES 86,368,000 88,319,000
----------- -----------
Commitments and other matters (Note 6)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 200 shares;
issued and outstanding 32 shares 2,000,000 2,000,000
Class B stock, no par value; authorized 100 shares;
issued and outstanding 16 shares 100,000 100,000
Additional paid-in capital 3,509,000 3,509,000
Retained earnings 6,570,000 5,959,000
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 12,179,000 11,568,000
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,547,000 $99,887,000
=========== ===========
</TABLE>
See notes to financial statements
3
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUE
Interest income
<S> <C> <C> <C> <C>
Affiliates $ 4,000 $ 219,000 $ 29,000 $ 606,000
Others 2,582,000 2,551,000 7,688,000 7,777,000
--------- ---------- --------- ---------
2,586,000 2,770,000 7,717,000 8,383,000
Other income (Note 5) 322,000 227,000 663,000 527,000
Gain on early repayment of discounted
mortgages receivable (Note 4) 67,000 142,000 369,000 279,000
----------- ---------- ---------- ----------
2,975,000 3,139,000 8,749,000 9,189,000
--------- --------- --------- ---------
EXPENSES
Interest 2,044,000 2,147,000 6,121,000 6,416,000
General and administrative (Note 5) 280,000 206,000 820,000 570,000
Amortization of deferred debenture
offering costs (Note 2) 225,000 223,000 678,000 671,000
Depreciation expense 1,000 3,000
------------ ---------------- ------------
2,550,000 2,576,000 7,622,000 7,657,000
--------- --------- --------- ---------
Income before income taxes 425,000 563,000 1,127,000 1,532,000
Provision for income taxes (Note 7) 195,000 259,000 516,000 703,000
---------- ---------- ------------ -----------
NET INCOME 230,000 304,000 611,000 829,000
Retained earnings - beginning 6,340,000 5,537,000 5,959,000 5,012,000
----------- ----------- ----------- -----------
RETAINED EARNINGS - END $6,570,000 $5,841,000 $6,570,000 $5,841,000
========== ========== ========== ==========
</TABLE>
See notes to financial statements
4
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $611,000 $829,000
Adjustments to reconcile net income to net
Cash provided by operating activities:
Amortization of discount on mortgages receivable (250,000) (442,000)
Amortization of deferred debenture offering costs 678,000 671,000
Gain on early repayment of discounted mortgages (369,000) (279,000)
Changes in operating assets and liabilities:
Other assets 180,000 17,000
Accounts payable and accrued liabilities (57,000) 277,000
Mortgage escrow deposits (57,000) 500,000
Debenture interest payable at maturity 1,111,000 987,000
Deferred mortgage interest and fees (48,000) (42,000)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,799,000 2,518,000
---------- ---------
INVESTING ACTIVITIES
Collection of mortgages receivable 37,807,000 35,132,000
Mortgages receivable acquired
Properties owned by affiliates (2,000,000)
Properties owned by others (22,008,000) (33,918,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 15,799,000 (786,000)
------------ --------------
FINANCING ACTIVITIES
Proceeds from issuance of Class B Stock 100,000
Proceeds from subordinated debenture offerings 7,100,000
Payment of debenture offering costs (494,000)
Principal payments of subordinated debentures (10,000,000) (1,000,000)
--------------- -------------
NET CASH (USED IN) FINANCING ACTIVITIES (3,394,000) (900,000)
---------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 14,204,000 832,000
Cash and cash equivalents at beginning of period 27,426,000 15,596,000
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $41,630,000 $16,428,000
=========== ===========
</TABLE>
See notes to financial statements
5
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 1) - The Company:
Intervest Corporation of New York (the "Company") was formed by Lowell S.
Dansker, Lawrence G. Bergman and Helene D. Bergman for the purpose of engaging
in the real estate business, including the acquisition and purchase of real
estate mortgage loans.
(NOTE 2) - Significant Accounting Policies:
(a) Consolidation Policy:
The financial statements include the accounts of all
subsidiaries. Material inter-company items are eliminated in consolidation.
(b) Mortgage Loans:
Loans are stated at their outstanding principal balances, net
of any deferred fees or costs on originated loans and unamortized discounts on
purchased loans. Interest income is accrued on the unpaid principal balance.
Discounts are amortized to income over the life of the related receivables using
the constant interest method. Loan origination fees net of certain direct
origination costs are deferred and recognized as an adjustment of the yield of
the related loans.
(c) Allowance for losses:
An allowance for loss related to loans that are impaired is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral. Management's periodic evaluation of the
need for, or adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of the underlying collateral and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on any impaired loans that may be susceptible to significant change.
For financial reporting purposes mortgages are deemed to be delinquent when
payment of either principal or interest is more than 90 days past due.
(d) Deferred debenture offering costs:
Costs relating to offerings of debentures are amortized over
the terms of the debentures based on serial maturities. Deferred debenture
offering costs consist primarily of underwriter's commissions.
6
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 2) - Significant Accounting Policies: (continued)
(e) Statement of cash flows:
For purposes of the statement of cash flows, the Company
considers all highly liquid instruments purchased with an original maturity of
three months or less to be cash equivalents. Interest and income taxes were paid
as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Interest Income Taxes
------------------------------- -------- ------------
<S> <C> <C> <C>
1999..................................... $5,011,000 $ 624,000
1998..................................... 5,430,000 417,000
</TABLE>
(f) Estimated fair value of financial instruments:
The Company considers the carrying amounts presented for
mortgages receivable and subordinated debentures payable on the consolidated
balance sheets to be reasonable approximations of fair value. The Company's
variable or floating interest rates on large portions of its receivables and
payables approximate those which would prevail in current market transactions.
Considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value, and accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market transaction.
(g) Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(h) Concentration of credit risk:
(1) The Company places its temporary cash investments with
higher credit-quality financial institutions, including banks, which are
affiliated with the Company and in governmental obligations. Such investments
are generally in excess of the FDIC insurance limit. The Company has not
experienced any losses from such investments.
7
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 2) - Significant Accounting Policies: (continued)
(2) The Company's mortgage portfolio is composed predominantly
of mortgages on multi-family residential properties in the New York City area,
most of which are subject to applicable rent control and rent stabilization
statutes and regulations. In both cases, any increases in rent are subject to
specific limitations. As such, properties of the nature of those constituting
the most significant portion of the Company's mortgage portfolio are not
affected by the general movement of real estate values in the same manner as
other income-producing properties, although there can be no assurances that this
will continue, the rental housing market in New York City remains stable.
(NOTE 3) - Subordinated Debentures Payable:
The Company's Registered Floating Rate Redeemable Debentures consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Series 5/13/91, interest at 2% above prime.................. $ 0 $5,000,000
Series 2/20/92, interest at 2% above prime.................. 0 4,500,000
Series 6/29/92, interest at 2% above prime.................. 7,000,000 7,000,000
Series 9/13/93, interest at 2% above prime.................. 8,000,000 8,000,000
Series 1/28/94, interest at 2% above prime.................. 4,500,000 4,500,000
Series 10/28/94, interest at 2% above prime................. 4,500,000 4,500,000
Series 5/12/95, interest at 2% above prime.................. 9,000,000 9,000,000
Series 10/19/95, interest at 2% above prime................. 9,000,000 9,000,000
Series 5/10/96, interest at 2% above prime.................. 10,000,000 10,000,000
Series 10/15/96, interest at 2% above prime................. 5,500,000 5,500,000
Series 4/30/97, interest at 9%.............................. 0 500,000
Series 4/30/97, interest at 1% above prime.................. 8,000,000 8,000,000
Series 11/10/98, interest at 8%............................. 1,400,000 1,400,000
Series 11/10/98, interest at 8 1/2%......................... 1,400,000 1,400,000
Series 11/10/98, interest at 9%............................. 2,600,000 2,000,000
Series 6/28/99, interest at 8%.............................. 2,500,000 0
Series 6/28/99, interest at 8 1/2%.......................... 2,000,000 0
Series 6/28/99, interest at 9%.............................. 2,000,000 0
------------- -------------------
$77,400,000 $80,300,000
</TABLE>
"Prime" refers to the prime rate of Chase Manhattan Bank.
8
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 3) - Subordinated Debentures Payable (continued):
Prime was 8 1/4% on September 30, 1999 and 7 3/4% on December 31, 1998. Series
6/29/92 has maximum interest of 14% and Series 9/13/93, 1/28/94, 10/28/94,
5/12/95, 10/19/95, 5/10/96, 10/15/96 and 4/30/97 due October 1, 2005 have
maximum interest of 12%.
Payment of interest on an aggregate of $22,410,000 of debentures is deferred
until maturity and such deferred interest earns interest. Any debenture holder
who has deferred receipt of interest may at any time elect to receive the
deferred interest and subsequently receive regular payments of interest, except
holders of Series 11/10/98 and Series 6/28/99.
The debentures may be redeemed, in whole or in part, at any time at the option
of the Company. For debentures issued after 1996, redemption would generally be
at a premium of 1% or 2% if the redemption is prior to 2000. Series 11/10/98 and
Series 6/28/99 debenture holders can require the Company to repurchase up to
$100,000 principal amount of debentures plus accrued interest each year after
January 1, 2000 and July 1, 2002, respectively.
The debentures are unsecured and subordinated to all present and future senior
indebtedness, as defined.
Maturities of debentures are summarized as follows:
<TABLE>
<CAPTION>
Year Ending December 31, September 30, 1999
------------------------ ------------------
<S> <C> <C>
1999................................................. $ 0
2000................................................. 7,000,000
2001................................................. 9,400,000
2002................................................. 7,000,000
2003................................................. 5,900,000
Thereafter until 2005................................. 48,100,000
-----------
Total................................................. $77,400,000
===========
</TABLE>
9
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 4) - Mortgages Receivable:
Information as to mortgages receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
First Mortgages................................ $47,127,000 $67,574,000
Junior Mortgages............................. 5,680,000 500,000
----------- ------------
52,807,000 68,074,000
Less Unearned Discount...................... 454,000 541,000
-------------- --------------
Total.......................................... $52,353,000 $67,533,000
=========== ===========
</TABLE>
Interest rates on mortgages range from 6% to 24%. Certain mortgages have been
discounted utilizing rates ranging from 8% to 14%.
During the first nine months of 1999 and 1998, certain mortgages were paid in
full prior to their maturity date. This resulted in the recognition of a gain,
which represents the balance of the unamortized discount applicable to these
mortgages.
Annual maturities of mortgages receivable during the next five years are
summarized as follows:
<TABLE>
<CAPTION>
Year Ending December 31, September 30, 1999
------------------------ ------------------
<S> <C> <C>
1999.................................................. $ 9,113,000
2000.................................................. 14,907,000
2001................................................. 8,775,000
2002................................................. 2,270,000
2003................................................. 1,935,000
Thereafter until 2015................................. 15,807,000
------------
Total.................................................. $52,807,000
============
</TABLE>
The Company evaluates its portfolio of mortgage loans on an individual basis,
comparing the amount at which the investment is carried to its estimated net
realizable value. At the respective balance sheet dates, no allowances were
required.
(NOTE 5) - Related Party Transactions:
During the first nine months of 1999, the Company acquired first mortgages in
the aggregate principal amount of $5,629,000 from Intervest Bancshares
Corporation, an affiliate of the Company.
Other income includes fees of $135,000 and $4,000 from affiliates for the nine
months ended September 30, 1999 and 1998, respectively.
10
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 5) - Related Party Transactions: (continued)
The Company utilized personnel and other facilities of affiliated entities and
was charged service fees for general and administrative expenses for placing
mortgages, servicing mortgages and distributing debenture interest checks. Such
fees amounted to $224,000 for the nine months ended September 30, 1998.
Management believes these service fees are reasonable. Effective January 1,
1999, personnel performing the services became employees of the Company and
accordingly, the affliated entities discontinued charging service fees to the
Company.
The Company participates with Intervest Bank in one mortgage. The balance of the
Company's participation in the mortgage was $272,000 and $237,000 at September
30, 1999 and December 31, 1998, respectively. The stockholders of the Company
are officers, directors and stockholders of the parent of Intervest Bank.
(NOTE 6) - Commitments:
(a) Office lease:
The Company occupies its office space under a lease, which terminates on
September 30, 2004. In addition to minimum rents the Company is required to pay
its proportionate share of increases in the building's real estate taxes and
costs of operation and maintenance as additional rent. Rent expense amounted to
$133,000 for both nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Future minimum rents under the lease are as follows:
Year Ending December 31 September 30,1999
----------------------- -----------------
<S> <C> <C>
1999....................................................... $ 43,726
2000....................................................... 179,134
2001....................................................... 191,828
2002....................................................... 191,828
2003....................................................... 191,828
Thereafter................................................. 143,871
Total........................................................ $942,215
</TABLE>
(b) Employment agreement:
Effective as of July 1, 1995, the Company entered into an employment agreement
with its Executive Vice President for a term of ten years at an annual salary in
the present amount of $157,810, which is subject to increase annually by six
percent or by the percentage increase in the consumer price index, if higher. In
the event of the executive's death or disability, one-half of this amount will
continue to be paid for a term as defined in the agreement.
Effective August 3, 1998, the Company modified the employment agreement to
provide for additional compensation of $1,000 per month for each $10,000,000 of
gross assets of the Company in excess of $100,000,000.
11
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine month Periods
Ended September 30, 1999 and 1998)
(Note 7) - Income Taxes:
The Company has provided for income taxes in the periods presented based on the
federal, state and city tax rates in effect for these periods.
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
Current taxes:
<S> <C> <C>
Federal................................................. $308,000 $418,000
State and local....................................... 205,000 278,000
Deferred taxes:
Federal............................................ 2,000 4,000
State and local.................................. 1,000 3,000
------------ -----------
Total tax provision.................................. $516,000 $703,000
======== ========
</TABLE>
Temporary differences exist between financial accounting and tax reporting,
which result in a net deferred asset, included in other assets, as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Debenture underwriting commissions................... $ 0 $ 3,000
Deferred fees and interest 44,000 45,000
Discount on mortgages receivable (17,000) (18,000)
-------- --------
Total $ 27,000 $ 30,000
=========== ========
</TABLE>
12
<PAGE>
INTERVEST CORPORATION OF NEW YORK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with Respect to the Nine Month Periods
Ended September 30, 1999 and 1998)
(NOTE 7) - Income Taxes: (continued)
The amounts of income taxes provided varied from the amounts which would be
"expected" to be provided at the statutory federal income tax rates in effect
for the following reasons:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Tax computed based upon the statutory federal tax rate............... $383,000 $521,000
State and local income tax, net of federal income tax benefit........ 137,000 186,000
Non-taxable income .................................................. (8,000) (4,000)
Other................................................................ 4,000
---------- --------
Total .............................................................. $516,000 $703,000
========== ========
</TABLE>
(NOTE 8) - Subsequent Event
On October 18, 1999, Intervest Bancshares Corporation, an affiliate of the
Company, agreed to acquire the Company. Shareholders of the Company are officers
of Intervest Bancshares Corporation and serve on the boards of both companies.
In the merger, which was approved by both Boards of Directors, the Company will
receive an aggregate of 1,250,000 shares of Class A common stock of Intervest
Bancshares Corporation in exchange of all common stock of the Company. The
merger, which is subject to regulatory approvals, as well as approval by
shareholders of Intervest Bancshares Corporation, is expected to be closed
before the end of this year.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources:
The Company is engaged in the real estate business, including the origination
and purchase of real estate mortgage loans, consisting of first mortgage, junior
mortgage and wraparound mortgage loans. The Company's current investment policy
emphasizes the investment in mortgage loans on income producing properties. The
majority of the Company's loans are expected to mature within approximately five
years.
The Company's liquidity is managed to ensure that sufficient funds are available
to meet maturities of borrowings or to make other investments, taking into
account anticipated cash flows and available sources of funds. The Company's
principal sources of funds have consisted of borrowings (principally through the
issuance of its subordinated debentures), mortgage repayments and cash flow from
ongoing operations. Total stockholder's equity at September 30, 1999 was
$12,179,000, compared with $11,568,000 at December 31, 1998. The Company
considers its current liquidity and additional sources of funds sufficient to
satisfy its outstanding commitments and its maturing liabilities.
On August 5, 1999, the Company completed the sale of a $6,500,000 of Floating
Rate Redeemable Subordinated Debentures.
On October 18, 1999, Intervest Bancshares Corporation, an affiliate of the
Company, agreed to acquire the Company. Shareholders of the Company are officers
of Intervest Bancshares Corporation and serve on the boards of both companies.
In the merger, which was approved by both Boards of Directors, the Company will
receive an aggregate of 1,250,000 shares of Class A common stock of Intervest
Bancshares Corporation in exchange of all common stock of the Company. The
merger, which is subject to regulatory approvals, as well as approval by
shareholders of Intervest Bancshares Corporation, is expected to be closed
before the end of this year.
Results of Operations:
Three Months Ended September 30, 1999 and 1998
For the three months ended September 30, 1999 interest income was $2,586,000 as
compared to $2,770,000 for the same period a year ago. The decrease of $184,000
resulted primarily from a decrease in mortgages receivable from $75,823,000 at
September 30, 1998 to $52,353,000 at September 30, 1999 and lower interest rates
on certain mortgages.
Other income for the 1999 period was $322,000 as compared to $227,000 for the
1998 period. The increase of $95,000 resulted mainly from an increase in
mortgage fees, offset in part by a decrease in prepayment premiums.
Interest expense for the 1999 period was $2,044,000 as compared to $2,147,000
for the 1998 period. The decrease of $103,000 resulted mainly from lower
interest rates on debentures issued since November 1998.
General and administrative expenses for 1999 period was $280,000 as compared to
$206,000 for 1998. The increase of $74,000 resulted mainly from increases in
payroll expenses, offset in part by the elimination of management fees.
The provision for income taxes are $195,000 and $259,000 for three months ended
September 30, 1999 and 1998, respectively. These provisions represent 46% of
pretax income for each period.
14
<PAGE>
Nine Months Ended September 30, 1999 and 1998
For the nine months ended September 30, 1999 interest income was $7,717,000 as
compared to $8,383,000 for the same period a year ago. The decrease of $666,000
resulted mainly from a decrease in mortgages receivable, and lower interest
rates on certain mortgages.
Other income for the 1999 period was $663,000 as compared to $527,000 for the
1998 period. The increase of $136,000 resulted mainly from an increase in
mortgage fees, offset in part by a decrease in prepayment premiums.
Interest expense for the 1999 period was $6,121,000 as compared to $6,416,000
for the 1998 period. The decrease of $295,000 resulted mainly from lower
interest rates on debentures issued since November 1998.
General and administrative expenses for the 1999 period was $820,000 as compared
to $570,000 for 1998. The increase of $250,000 resulted mainly from increases in
payroll and advertising expenses offset in part by the elimination of management
fees.
The provision for income taxes are $516,000 and $703,000 for nine months ended
September 30, 1999 and 1998, respectively. These provisions represent 46% of
pretax income for each period.
Since the Company intends to continue to expand its asset base, including its
mortgage portfolio, it is anticipated that its interest income will continue to
grow. To the extent that such growth is funded in reliance upon long-term
obligations, such as the Debentures, interest expense will likewise increase.
Such increase will depend upon the principal amounts of the additional assets or
liabilities, as well as interest rates.
The Company is engaged in the real estate business and its results of operations
are affected by general economic trends in real estate markets, as well as by
trends in the general economy and the movement of interest rates. Since the
properties underlying the Company's mortgages are concentrated in the New York
City area, the economic condition in that area can also have an impact on the
Company's operations.
The number of instances of prepayment of mortgage loans tends to increase during
periods of declining interest rates and tends to decrease during periods of
increasing interest rates. Certain of the Company's mortgages include prepayment
provisions, and others prohibit prepayment of indebtedness entirely. In any
event, the Company believes that it would reinvest the proceeds of any
prepayments of mortgage loans in new mortgages consistent with its mortgage
investment policy.
The rental housing market in New York City remains stable and the Company
expects that such properties will continue to appreciate in value with little or
no reduction in occupancy rates. The Company's mortgage portfolio is composed
predominantly of mortgages on multi-family residential properties, most of which
are subject to applicable rent control and rent stabilization statutes and
regulations. In both cases, any increases in rent are subject to specific
limitations. As such, properties of the nature of those constituting the most
significant portion of the Company's mortgage portfolio are not affected by the
general movement of real estate values in the same manner as other
income-producing properties.
Business:
The Company is engaged in the real estate business and has historically invested
primarily in real estate mortgage loans secured by income producing real
property. It is anticipated that a substantial portion of the loans to be made
by the Company will be loans with terms of approximately five years. Such
transactions typically require an understanding of the underlying real estate
transaction and rapid processing and funding as a principal basis for competing
in the making of these loans. The Company does not finance new construction.
15
<PAGE>
At September 30, 1999, 66% of the outstanding principal amount of the Company's
loans (net of discounts) were secured by properties located in the greater New
York metropolitan area. The balance of the Company's loans are secured by
properties located in Connecticut, Florida, Georgia, Maryland, New Jersey,
suburbs of New York City, North Carolina, Pennsylvania and Virginia.
Certain of the Company's real estate mortgage loans bear interest at a fixed
rate. The balance of such loans bear interest at fluctuating rates. Interest on
the loans is usually payable monthly.
The Company may also, from time to time, acquire interests in real property,
including fee interests.
Investment Policy-Operations:
The Company's current investment policy related to mortgages emphasizes
investments in short-term real estate mortgages secured by income producing real
property, located primarily in the greater New York metropolitan area.
The properties to be mortgaged are personally inspected by management and
mortgage loans are made only on those properties where management is
knowledgeable as to operating income and expense. The Company generally relies
upon its management in connection with the valuation of properties. From time to
time, however, it may engage independent appraisers and other agents to assist
in determining the value of income-producing properties underlying mortgages, in
which case the costs associated with such services are generally paid by the
mortgagor.
Current Loan Status:
At September 30, 1999, the Company had 43 real estate mortgage loans in its
portfolio, totaling $52,807,000 (face amount) in aggregate principal amount.
Interest rates on the mortgage portfolio range between 6% and 24% per annum.
Certain mortgages have been discounted utilizing rates between 8% and 14% per
annum.
Certain information concerning the Company's mortgage loans outstanding at
September 30, 1999 is set forth below:
<TABLE>
<CAPTION>
Carrying
Amount of
Mortgage No. of
Loans Prior Liens Loans
----- ----------- -----
<S> <C> <C> <C>
First Mortgage Loans................................ $46,673,000 $ 0 38
Junior Mortgages................................... 5,680,000 35,389,000 5
----------- ----------- --
Total............................................... $52,353,000 $35,389,000 43
=========== =========== ==
</TABLE>
The historical cost of the mortgage loans, which originated in connection with
the sale of real estate includes a discount to reflect an appropriate market
interest rate at the date of origination.
16
<PAGE>
Year 2000 Readiness Disclosure:
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's operations are real estate related and are handled by desktop
computer processing. Such processing utilizes third-party software. Software
that is used to process the Company's general ledger, general cash
disbursements, cash receipts and loan accounting is Year 2000 compliant.
Incidental calculations are performed on spreadsheets, which are not date
dependent. The Company's ability to produce revenues is also not dependent upon
computer systems.
The Company also has subordinated debentures for which the Company relies on a
third-party vendor to provide registrar and trustee services. Such vendor has
informed the Company that it has completed its testing phase of mission-critical
systems, and has determined that these systems are year 2000 compliant. In
connection with the debentures, the Company utilizes third-party software to
generate checks for the payment of interest to the debenture holders. The Year
2000 compliant version of this software has been installed and tested.
Notwithstanding the above, there can be no assurance that all hardware and
software that the Company uses will function properly on and after January 1,
2000, or that its vendors will perform according to their representations, or
that other third parties may cause adverse effects because of the Year 2000
issue. Therefore, there can be no assurance that the failure of others to
address the Year 2000 issue will not have a material adverse effect on the
Company's business, financial condition, and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - the following exhibit is filed herewith
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during this quarter
18
<PAGE>
SIGNATURES
PURSUANT to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERVEST CORPORATION OF NEW YORK
(Registrant)
Dated: November 9, 1999 /s/Lowell S. Dansker
--------------------
Lowell S. Dansker, President
(Principal Executive Officer),
Treasurer (Principal Financial Officer
and Principal Accounting Officer)
and Director
Dated: November 9, 1999 /S/Lawrence G. Bergman
----------------------
Lawrence G. Bergman,
Vice President, Secretary
and Director
19
<PAGE>
This schedule contains information extracted from Form 10-Q at September 30,
1999, and is qualified in its entirety by reference to such financial
statements.
MULTIPLIER 1,000
<TABLE>
<S> <C>
PERIOD-TYPE 3-MOS
FISCAL-YEAR-END DEC-31-1999
PERIOD-END SEP-30-1999
CASH 41,630
SECURITIES 0
RECEIVABLES 52,353
ALLOWANCES 0
INVENTORY 0
CURRENT-ASSETS 0
PP&E 62
DEPRECIATION 3
TOTAL-ASSETS 98,587
CURRENT-LIABILITIES 0
BONDS 77,400
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 2,100
OTHER-SE 10,079
TOTAL-LIABILITY-AND-EQUITY 98,547
SALES 0
TOTAL-REVENUES 8,749
CGS 0
TOTAL-COSTS 0
OTHER-EXPENSES 823
LOSS-PROVISION 0
INTEREST-EXPENSE 6,799
INCOME-PRETAX 1,127
INCOME-TAX 516
INCOME-CONTINUING 0
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 611
EPS-BASIC 0
EPS-DILUTED 0
</TABLE>
PROXY CLASS A
INTERVEST BANCSHARES CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
Special Meeting of Shareholders On March 10, 2000
The undersigned, revoking any proxy heretofore given, hereby
constitutes and appoints Lawrence G. Bergman, Jerome Dansker and Lowell S.
Dansker, or any of them, proxies of the undersigned, each with full power of
substitution, to vote all shares of Class A Common Stock of INTERVEST BANCSHARES
CORPORATION (the "Company") which the undersigned is entitled to vote at the
Special Meeting of Shareholders to be held Friday, March, 10, 2000 at 9:00 A.M.
local time (the "Special Meeting"), and at any adjournment or postponement
thereof, as hereinafter specified with respect to the following proposals, more
fully described in the Notice of and Proxy Statement for the Special Meeting,
receipt of which is hereby acknowledged. The Board of Directors recommends a
vote FOR all of the proposals set forth below.
1. Proposal to Adopt the Agreement and Plan of Merger whereby Intervest
Corporation of New York will be merged into a subsidiary of Intervest
Bancshares Corporation.
FOR AGAINST ABSTAIN
|_| |_| |_|
2. Proposal to amend the Certificate of Incorporation to increase the
number of authorized shares of Class A Common Stock from 7,500,000 to
9,500,000
FOR AGAINST ABSTAIN
|_| |_| |_|
3. Proposal to grant a stock option for 50,000 shares of Class B Common
Stock to the Chairman of the Board of Directors
FOR AGAINST ABSTAIN
|_| |_| |_|
4. In their discretion, upon any other business which may properly come
before the Special Meeting or any adjournment or postponement thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE PROPOSAL SET FORTH
HEREIN UNLESS A CONTRARY CHOICE IS SPECIFIED. SAID PROXIES WILL USE THEIR
DISCRETION WITH RESPECT TO ANY OTHER MATTERS WHICH PROPERLY COME BEFORE THE
SPECIAL MEETING OR ANY ADJOURNMENT THEREOF.
Signature __________________________ Date ____________
Signature __________________________ Date_____________
Note: (Please sign exactly as name appears hereon. For joint accounts, each
joint owner should sign. Executors, administrators, trustees, etc. should so
indicate when signing).
COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
PROXY CLASS B
INTERVEST BANCSHARES CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
Special Meeting of Shareholders On March 10, 2000
The undersigned, revoking any proxy heretofore given, hereby
constitutes and appoints Lawrence G. Bergman, Jerome Dansker and Lowell S.
Dansker, or any of them, proxies of the undersigned, each with full power of
substitution, to vote all shares of Class A Common Stock of INTERVEST BANCSHARES
CORPORATION (the "Company") which the undersigned is entitled to vote at the
Special Meeting of Shareholders to be held Friday, March, 10, 2000 at 9:00 A.M.
local time (the "Special Meeting"), and at any adjournment or postponement
thereof, as hereinafter specified with respect to the following proposals, more
fully described in the Notice of and Proxy Statement for the Special Meeting,
receipt of which is hereby acknowledged. The Board of Directors recommends a
vote FOR all of the proposals set forth below.
1. Proposal to Adopt the Agreement and Plan of Merger whereby Intervest
Corporation of New York will be merged into a subsidiary of Intervest
Bancshares Corporation.
FOR AGAINST ABSTAIN
|_| |_| |_|
2. Proposal to amend the Certificate of Incorporation to increase the
number of authorized shares of Class A Common Stock from 7,500,000 to
9,500,000
FOR AGAINST ABSTAIN
|_| |_| |_|
3. Proposal to grant a stock option for 50,000 shares of Class B Common
Stock to the Chairman of the Board of Directors
FOR AGAINST ABSTAIN
|_| |_| |_|
4. In their discretion, upon any other business which may properly come
before the Special Meeting or any adjournment or postponement thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE PROPOSAL SET FORTH
HEREIN UNLESS A CONTRARY CHOICE IS SPECIFIED. SAID PROXIES WILL USE THEIR
DISCRETION WITH RESPECT TO ANY OTHER MATTERS WHICH PROPERLY COME BEFORE THE
SPECIAL MEETING OR ANY ADJOURNMENT THEREOF.
Signature __________________________ Date ____________
Signature __________________________ Date_____________
Note: (Please sign exactly as name appears hereon. For joint accounts, each
joint owner should sign. Executors, administrators, trustees, etc. should so
indicate when signing).
COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
INTERVEST BANCSHARES CORPORATION
(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, par value $1.00 per share of Intervest
Bancshares Corporation ("Bancshares Common Stock"); Common
Stock and Class B Stock of Intervest Corporation of New York
("ICNY Stock").
(2) Aggregate number of securities to which transaction applies:
1,250,000 shares of Bancshares Common Stock for 47.73 shares
of ICNY Stock.
<PAGE>
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: The amount on
which the filing fee of $2,435.80 is calculated was determined
pursuant to Rule 0-11(a)(4) and (c) of the Securities Exchange
Act, as amended, by multiplying 1/50th of 1% by $12,179,000,
reflecting the book value of the ICNY Stock at September 30,
1999, which is the consideration to be received by the
acquiring corporation in the transaction.
(4) Proposed maximum aggregate value of transaction: $12,179,000
(5) Total fee paid : $2,435.80
|X| Fee paid previously with preliminary materials
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by Registration
Statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: _____________________________________
(2) Form, Schedule or Registration Statement No.: _______________
(3) Filing Party: _______________________________________________
(4) Date Filed: _________________________________________________
