io                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   (Mark One)
                                   FORM 10-KSB

               X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
             THE SECURITIES AND EXCHANGE ACT OF 1934 (Fee required)

For the fiscal year ended                                 Commission File Number
December 31, 1997                                                      000-23377
-------------------------                                 ----------------------

                        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