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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
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Commission File Number 000-23377
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INTERVEST BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation)
ONE ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934
Class A Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes XX No.
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes _ No X.
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On the close of business on June 30, 2004, there were 5,663,075 shares of the
Registrant's Class A common stock and 385,000 shares of its Class B common stock
issued and outstanding.
The aggregate market value of 3,066,178 shares of the Registrant's Class A
common stock on the close of business June 30, 2004, which excludes 2,596,897
shares held by affiliates as a group, was $51,971,717. This value is based on
the average bid and asked price of $16.95 per share on June 30, 2004 of the
Class A common stock on the NASDAQ Small Cap Market. All of the Class B stock is
held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
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ITEM 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . . . 15
ITEM 4A Executive Officers and Other Key Employees. . . . . . . . . . . 15
PART II
ITEM 5 Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . 16
ITEM 6 Selected Consolidated Financial and Other Data . . . . . . . . . 18
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 19
ITEM7A Quantitative and Qualitative Disclosures About Market Risk . . . 38
ITEM 8 Financial Statements and Supplementary Data. . . . . . . . . . . 38
ITEM 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . 70
ITEM 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . 70
ITEM 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . 70
PART III
ITEM 10 Directors and Executive Officers . . . . . . . . . . . . . . . 70
ITEM 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . 70
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Transactions . . . . . . . . . . . . . 70
ITEM 13 Certain Relationships and Related Transactions . . . . . . . . 70
ITEM 14 Principal Accountant Fees and Services . . . . . . . . . . . . 70
PART IV
ITEM 15 Exhibits and Financial Statements Schedules. . . . . . . . . . 71
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
1
PART I
ITEM 1. BUSINESS
GENERAL
Private Securities Litigation Reform Act Safe Harbor Statement
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The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-K that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The factors below are among those that
could cause actual results to differ materially from the forward-looking
statements.
Risk Factors
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The Company's business is affected by a number of factors, including but not
limited to the impact of: interest rates; loan demand; loan concentrations, loan
prepayments, ability to raise funds for investment; competition; general or
local economic conditions; credit risk and the related adequacy of the allowance
for loan losses; terrorist acts; natural disasters; armed conflicts; regulatory
supervision and regulation; dependence on key personnel; and voting control.
These factors together with other matters are described in this Form 10-K.
Intervest Bancshares Corporation
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Intervest Bancshares Corporation is a registered financial holding company (the
"Holding Company") incorporated in 1993 under the laws of the State of Delaware
and its Class A common stock is listed on the NASDAQ SmallCap Market (Symbol:
IBCA).
At December 31, 2004, the Holding Company owned 100% of the outstanding capital
stock of Intervest National Bank (the "Bank"), Intervest Mortgage Corporation
and Intervest Securities Corporation, hereafter referred to collectively as the
"Company," on a consolidated basis. The offices of the Holding Company,
Intervest Mortgage Corporation, Intervest Securities Corporation and the Bank's
headquarters and full-service banking office are located on the entire fourth
floor of One Rockefeller Plaza in New York City, New York, 10020-2002 and its
main telephone number is 212-218-2800 At December 31, 2004, the Holding Company
also owned 100% of the outstanding capital stock of Intervest Statutory Trust I,
II, III and IV, all of which are unconsolidated entities as required by SFAS
Interpretation No. 46-R, "Consolidation of Variable Interest Entities," (FIN
46-R).
At December 31, 2004, the Company had total assets of $1,316,751,000, cash and
security investments of $278,579,000, net loans of $1,015,396,000, deposits of
$993,872,000, borrowed funds and related interest payable of $202,682,000, and
stockholders' equity of $90,094,000, compared to total assets of $911,523,000,
cash and security investments of $220,026,000, net loans of $671,125,000,
deposits of $675,513,000, borrowed funds and related interest payable of
$140,383,000, and stockholders' equity of $75,385,000 at December 31, 2003.
The Holding Company's primary business is the operation of its subsidiaries. It
does not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the Holding
Company has issued debentures to raise funds for working capital purposes. The
Holding Company is subject to examination and regulation by the Federal Reserve
Board (FRB).
Intervest National Bank
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Intervest National Bank is a nationally chartered bank that has its headquarters
and full-service banking office at One Rockefeller Plaza, Suite 400, in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena.
At December 31, 2004, the Bank had total assets of $1,183,509,000, cash and
security investments of $269,816,000, net loans of $900,798,000, deposits of
$1,007,862,000, borrowed funds and related interest payable of $36,263,000, and
stockholder's equity of $111,343,000, compared to total assets of $789,567,000,
cash and
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security investments of $212,293,000, net loans of $566,226,000, deposits of
$697,279,000 and stockholder's equity of $73,907,000, at December 31, 2003.
The Bank's primary business consists of multifamily residential and commercial
real estate lending. It also provides a variety of personalized commercial and
consumer banking services to small and middle-market businesses and individuals.
The Bank attracts deposits from the areas served by its banking offices. The
Bank also provides internet banking through its web site:
www.intervestnatbank.com, which attracts deposit customers from within as well
as outside its primary market areas. The deposits, together with funds derived
from other sources, are used to originate loans and to purchase investment
securities.
The revenues of the Bank are primarily derived from interest and fees received
from originating loans, and from interest and dividends earned on securities and
other short-term investments. The principal sources of funds for the Bank's
lending activities are deposits, repayment of loans, maturities and calls of
securities and cash flow generated from operations. The Bank's principal
expenses are interest paid on deposits and operating and general and
administrative expenses.
Deposit flows and the rates paid thereon are influenced by interest rates on
competing investments available to depositors and general market rates of
interest. Lending activities are affected by the demand for real estate and
other types of loans, interest rates at which such loans may be offered and
other factors affecting the availability of funds to lend. The Bank faces strong
competition in the attraction of deposits and in the origination of loans. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC)
to the extent permitted by law.
As is the case with banking institutions generally, the Bank's operations are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of banking regulatory agencies, including the FRB and FDIC.
The Bank is also subject to the supervision, regulation and examination of the
Office of the Comptroller of the Currency of the United States of America (OCC).
Intervest Mortgage Corporation
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Intervest Mortgage Corporation is in the business of investing in mortgage loans
on commercial and multifamily residential properties. Intervest Mortgage
Corporation also makes loans on other types of properties, may resell mortgages
and provides mortgage loan origination services to the Bank. Intervest Mortgage
Corporation issues debentures to provide funding for its mortgage investing.
Intervest Mortgage Corporation has two wholly owned subsidiaries, Intervest
Distribution Corporation (which performs record-keeping functions for Intervest
Mortgage Corporation) and Intervest Realty Servicing Corporation (which
performs certain mortgage servicing activities).
At December 31, 2004, Intervest Mortgage Corporation had total assets of
$122,451,000, cash and short-term investments of $17,151,000, net loans of
$100,520,000, debentures and related interest payable of $97,069,000, and
stockholder's equity of $23,527,000, compared to total assets of $119,578,000,
cash and short-term investments of $25,801,000, net loans of $89,307,000,
debentures and related interest payable of $99,402,000, and stockholder's equity
of $18,173,000, at December 31, 2003.
Intervest Mortgage Corporation's business is significantly influenced by the
movement of interest rates, general economic conditions, particularly those in
the New York City metropolitan area where most of the properties that secure its
mortgage loans are concentrated, and by the volume of origination services it
provides to the Bank, whose business is also affected by similar factors.
Intervest Mortgage Corporation receives a fee from the Bank for the origination
services, the amount of which is eliminated in the Company's consolidated
financial statements.
Intervest Securities Corporation
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Intervest Securities Corporation is a broker/dealer and a NASD and SIPC member
firm who's business activities to date have been insignificant and its revenues
have been derived from participating as a selected dealer from time to time in
offerings of debt securities of the Company, primarily those of Intervest
Mortgage Corporation.
In June 2003, the Holding Company acquired all of the outstanding capital stock
of Intervest Securities Corporation in exchange for 30,000 shares of its Class B
common stock that was newly issued for this transaction.
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Intervest Securities Corporation's total assets consisted of approximately
$218,000 of cash at the time of acquisition. Prior to the acquisition, Intervest
Securities Corporation was an affiliated entity in that it was wholly owned by
the spouse of the Chairman of the Holding Company. At December 31, 2004,
Intervest Securities Corporation had total assets of $484,000 (consisting mostly
of cash) and its stockholder's equity amounted to $481,000, compared to $455,000
of cash and stockholder's equity of $459,000 at December 31, 2003.
Intervest Statutory Trusts
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Intervest Statutory Trust I, II, III and IV were formed in December 2001,
September 2003, March 2004 and September 2004, respectively. Each was formed for
the sole purpose of issuing and administering $15,000,000 of Trust Preferred
Securities for a total of $60,000,000. The trusts do not conduct any trade or
business. See note 9 to the consolidated financial statements in this report for
a further discussion of the trusts.
MARKET AREA
The Bank's primary market area for its New York office is considered to be the
New York City metropolitan region, and Manhattan in particular. The primary
market area of the Bank's Florida offices is considered to be Pinellas County,
which is the most populous county in the Tampa Bay area of Florida. The area has
many more seasonal residents. The Tampa Bay area is located on the West Coast of
Florida, midway up the Florida peninsula. The major cities in the area are Tampa
(Hillsborough County) and St. Petersburg and Clearwater (Pinellas County).
The Bank's primary deposit gathering and lending markets are concentrated in the
communities surrounding its offices. Management believes that all of the Bank's
offices are located in areas serving small and mid-sized businesses and serving
middle and upper income communities. The Bank's deposit-gathering market also
includes its web site on the internet: www.intervestnatbank.com, which attracts
deposit customers from both within and outside the Bank's primary market areas.
Intervest Mortgage Corporation's lending activities have also been concentrated
in the New York City metropolitan region. Both the Bank and Intervest Mortgage
Corporation originate loans on properties in other states, including Alabama,
Connecticut, Florida, Georgia, Indiana, Kentucky, Massachusetts, Maryland, New
Jersey, North Carolina, Ohio, Pennsylvania, Virginia and Washington D.C.
COMPETITION
In one or more aspects of its business, the Bank competes with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking companies, and
other financial intermediaries. Most of these competitors, some of which are
affiliated with large financial holding companies, have substantially greater
financial and marketing resources and lending limits, and may offer services
that the Bank does not currently provide. In addition, many of the Bank's
non-bank competitors are not subject to the same extensive federal regulations
that govern financial holding companies and federally insured banks. Competition
among financial institutions is based upon interest rates offered on deposit
accounts, interest rates charged on loans and other credit and service charges,
the quality and scope of the services rendered, the convenience of banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. An increase in the general availability of funds may increase
competition in the origination of mortgage loans and may reduce the yields
available therefrom.
In making its mortgage investments, Intervest Mortgage Corporation also
experiences significant competition from banks, insurance companies, savings and
loan associations, mortgage bankers, pension funds, real estate investment
trusts, limited partnerships and other lenders and investors. Most of these
competitors also have significantly greater financial and marketing resources.
In addition, certain entities owned or controlled by the principals of the
Company are engaged in limited real estate lending activities involving
properties that are similar to those underlying the Company's mortgage loans and
in that regard, are also competing with the Company.
4
LENDING ACTIVITIES
The volume of the Company's loan originations is dependent on the interest rates
it charges on loans, customer demand for loans, the supply of money available
for lending purposes, the rates offered by its competitors and the terms and
credit risks associated with the loans. The Company's lending activities
emphasize the origination of loans on commercial and multifamily real estate
properties. The Bank also offers single-family residential mortgage loans,
commercial loans and consumer loans, none of which have been emphasized. At
December 31, 2004, the Company's loan portfolio, net of deferred fees, amounted
to $1,015,396,000, compared to $671,125,000 at December 31, 2003.
The Bank's lending activities are conducted pursuant to written policies and
defined lending limits. In originating loans, the Bank places emphasis on the
borrower's ability to generate cash flow to support its debt obligations and
other cash related expenses. Generally, all loans must be reviewed and approved
by the Bank's Loan Committee comprised of certain members of the Board of
Directors prior to being originated. As part of its written policies for real
estate loans, loan-to-value ratios (the ratio that the original principal amount
of the loan bears to the lower of the purchase price or appraised value of the
property securing the loan at the time of origination) on new loans originated
by the Bank typically do not exceed 80%. Debt service coverage ratios (the ratio
of the net operating income generated by the property securing the loan to the
required debt service) on new loans typically are not less than 1.2 times. As a
national bank, the Bank may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of the Bank's unimpaired capital and
surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are secured by
readily-marketable collateral.
Intervest Mortgage Corporation does not have formal policies regarding the
percentage of its assets that may be invested in any single or type of mortgage
loan, the geographic location of properties collateralizing those mortgages or
limits to amounts to any one borrower, loan-to-value ratios and debt service
coverage ratios. It also does not have a Loan Committee or a formal loan
approval process. Its real estate mortgage loans consist of first mortgage loans
and junior mortgage loans. Junior mortgages normally have greater risks than
first mortgages. The Company also considers the borrower's experience in owning
or managing similar properties and its lending experience with the borrower when
originating loans.
Real Estate Mortgage Lending
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At December 31, 2004, nearly all of the Company's loan portfolio is comprised of
504 loans, or $1,024,323,000, that are secured by commercial and multifamily
real estate (including rental and cooperative apartment buildings, office
buildings, mix-used properties, shopping centers, hotels, industrial properties
and vacant land) with an average principal size of $2,032,000. The portfolio has
40 loans of $5,000,000 or more that aggregate $302,291,000, with the largest
loan amounting to $14,895,000.
Commercial and multifamily mortgage lending generally involves greater risk than
1-4 family residential lending. Such lending typically involves larger loan
balances to single borrowers and repayment of loans secured by income producing
properties is typically dependent upon the successful operation of the
underlying real estate. From time to time, the Company may originate loans on
vacant land which typically do not have income streams.
Mortgage loans on commercial and multifamily properties are normally originated
for terms of no more than 20 years, many with variable interest rates that are
based on the prime rate. Additionally, many loans have an interest rate floor
which resets upward along with any increase in the loan's interest rate. This
feature reduces the loan's interest rate exposure to declining interest rates.
Mortgage loans on commercial and multifamily properties typically provide for
periodic payments of interest and principal during the term of the mortgage,
with the remaining principal balance and any accrued interest due at the
maturity date. The majority of the mortgage loans originated by the Company
provide for balloon payments at maturity, which means that a substantial part or
the entire original principal amount is due in one lump sum payment at maturity.
If the net revenue from the property is not sufficient to make all debt service
payments due on the mortgage or, if at maturity or the due date of any balloon
payment, the owner of the property fails to raise the
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funds (by refinancing, sale or otherwise) to make the lump sum payment, the
Company could sustain a loss on its investment in the mortgage loan. The
Company's mortgage loans are generally not personal obligations of the borrower
and are not insured or guaranteed by governmental agencies.
Commercial Lending
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The Bank offers commercial loan services including term loans, lines of credit
and equipment financing. Short-to-medium term commercial loans, both
collateralized and uncollateralized, are made available to businesses for
working capital needs (including those secured by inventory, receivables and
other assets), business expansion (including acquisitions of real estate and
improvements), and the purchase of equipment and machinery. Commercial loans
are typically underwritten on the basis that repayment will come from the cash
flow of the business and are generally collateralized as discussed above. 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 these 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.
Consumer Lending
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The Bank offers consumer loans including those for: the purchase of automobiles,
recreation vehicles and boats; second mortgages; home improvements; home equity
lines of credit; and personal loans (both collateralized and uncollateralized).
Consumer loans typically have a shorter term and carry higher interest rates
than other types of loans. In addition, consumer loans have 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 the loan from personal
income sources, since the collateral may be of reduced value at the time of
collection.
Loan Solicitation and Processing
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The Company's loan originations are derived from the following: advertising in
newspapers and trade journals; referrals from mortgage brokers; existing
customers and borrowers; walk-in customers; and through direct solicitation by
the Company's officers.
The Company's underwriting procedures normally require the following: physical
inspections by management of the properties being considered for mortgage loans;
mortgage title insurance; hazard insurance; environmental surveys; and an
appraisal of the property securing the loan to determine the property's adequacy
as collateral performed by an appraiser approved by the Company. In addition,
the Company analyzes relevant real property and financial factors, which in
certain cases may include: the condition and use of the subject property; the
property's income-producing capacity; and the quality, experience and
creditworthiness of the property's owner. For commercial and consumer loans,
upon receipt of a loan application from a prospective borrower, a credit report
and other verifications are obtained to substantiate specific information
relating to the applicant's employment income and credit standing.
The Bank has a servicing agreement with Intervest Mortgage Corporation to
provide the Bank with mortgage loan origination services. The services include:
the identification of potential properties and borrowers; the inspection of
properties constituting collateral for such loans; the negotiation of the terms
and conditions of such loans in accordance with the Bank's underwriting
standards; preparing commitment letters; and coordinating the loan closing
process. The services are performed by Intervest Mortgage Corporation's
personnel and the expenses associated with the services are borne by Intervest
Mortgage Corporation. The agreement renews each January 1 unless terminated by
either party. The Bank paid $4,262,000, $2,343,000 and $1,597,000 in 2004, 2003
and 2002, respectively, to Intervest Mortgage Corporation in connection with
this servicing agreement, all of which is eliminated in the Company's
consolidated financial statements.
Loan Origination, Loan Fees and Prepayment Income From the Early Repayment of
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Loans.
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The Company normally charges loan origination fees on nearly all of the mortgage
loans it originates based on a percentage of the principal amount. These fees
are normally comprised of a fee that is received from the borrower at the time
the loan is originated and another similar fee that is contractually due when
the loan is repaid. The total fee, net of related direct loan origination costs,
is deferred and amortized over the contractual life of the loan as an
6
adjustment to the loan's yield. At December 31, 2004, the Company had
$11,347,000 of net deferred loan fees and $8,208,000 of loan fees receivable.
The Company also earns fees from the servicing of its loans.
Many of the Company's mortgage loans include provisions relating to prepayment
and others prohibit prepayment of indebtedness entirely. When a mortgage loan is
repaid prior to maturity, the Company may recognize prepayment income, which
consists largely of the recognition of unearned fees associated with such loans
at the time of payoff and the receipt of additional prepayment fees and interest
in certain cases. The amount and timing of, as well as income from loan
prepayments, if any, cannot be predicted and can fluctuate significantly.
Normally, the number of instances of prepayment of mortgage loans tends to
increase during periods of declining interest rates and tends to decrease during
periods of increasing interest rates. The Company earned prepayment income from
the early repayment of loans of $3,546,000 in 2004, $2,317,000 in 2003 and
$1,435,000 in 2002.
ASSET QUALITY
After a loan is originated, the Company makes ongoing reviews of loans in order
to monitor documentation and valuations of collateral with the objective of
quickly identifying, evaluating and initiating corrective actions if necessary.
All loans are subject to the risk of default, otherwise known as credit risk,
which represents the possibility of the Company not recovering amounts due from
its borrowers. A borrower's ability to make payments due under a mortgage loan
is related to the Company's underwriting standards and is dependent upon the
risks associated with real estate investments in general, including: general or
local economic conditions in the areas the properties are located, neighborhood
values, interest rates, real estate tax rates, operating expenses of the
mortgaged properties, supply of and demand for rental units, supply of and
demand for properties, ability to obtain and maintain adequate occupancy of the
properties, zoning laws, governmental rules, regulations and fiscal policies.
Additionally, terrorist acts, such as those that occurred on September 11, 2001,
armed conflicts, such as the war on terrorism, and natural disasters, such as
hurricanes, may have an adverse impact on economic conditions. Economic
conditions affect the market value of the underlying collateral as well as the
levels of occupancy of income-producing properties.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities. The Company's loan portfolio has historically
been concentrated in commercial real estate and multifamily mortgage loans
(including land loans), which represented 99.8% of the total loan portfolio at
December 31, 2004. The properties underlying the Company's mortgages are also
concentrated in New York State (71%) and the State of Florida (19%). Many of the
New York properties are located in New York City and are subject to rent control
and rent stabilization laws, which limit the ability of the property owners to
increase rents.
Loans are placed on nonaccrual status when principal or interest becomes 90 days
or more past due unless the loan is well secured and in the process of
collection. At December 31, 2004, $4,607,000 of loans were on a nonaccrual
status, compared to $8,474,000 at December 31, 2003. These loans were considered
impaired under the criteria of SFAS No.114 but no valuation allowance was
maintained at any time since the Company believes that the estimated fair value
of the underlying properties exceeded its recorded investment. At December 31,
2004 and 2003, there were no other loans classified as nonaccrual, impaired or
ninety days past due and still accruing interest. At December 31, 2004, the
allowance for loan losses amounted to $11,106,000, compared to $6,580,000 at
December 31, 2003.
In the last five years, the Company experienced only one loss from its lending
activities amounting to $201,000 (which was related to one commercial real
estate property located in the State of Florida that was acquired by the Bank
through foreclosure in 2002). The loss was comprised of a $150,000 loan
chargeoff and a $51,000 loss from the subsequent sale of that property. There
can be no assurance however, that a downturn in real estate values or local
economic conditions, as well as other factors, would not have an adverse impact
on the Company's asset quality and future level of nonperforming assets,
chargeoffs and profitability.
REAL ESTATE INVESTING ACTIVITIES
The Company may periodically purchase equity interests in real property or it
may acquire such an equity interest pursuant to a foreclosure of a mortgage in
the normal course of business. As a result, the Company may acquire
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and retain title to properties either directly or through a subsidiary. While no
such transactions are presently pending, the Company would consider the
expansion of its business through investments in or acquisitions of other
companies engaged in real estate or mortgage business activities. While the
Company has not previously made acquisitions of real property (other than
purchases in connection with the operation of its offices or properties acquired
through foreclosure), its management has had substantial experience in the
acquisition and management of properties.
INVESTMENT ACTIVITIES
The Company's investment policy is designed to provide and maintain liquidity,
without incurring undue interest and credit risk. The Company has historically
purchased securities that are issued directly by the U.S. government or one of
its agencies. These securities have a significantly lower credit risk than the
Company's loan portfolio as well as lower yields. To manage interest rate risk,
the Company normally purchases securities that have adjustable rates or
securities with fixed rates that have short- to intermediate-maturity terms.
From time to time, a securities available-for-sale portfolio may be maintained
to provide additional flexibility for implementing asset and liability
management strategies. The Company does not engage in trading activities.
Securities held to maturity totaled $248,888,000 at December 31, 2004, compared
to $152,823,000 at December 31, 2003. There were no securities classified as
available for sale at December 31, 2004 or 2003.
The Company also invests in various money market instruments (including
overnight and term federal funds, short-term bank commercial paper and
certificate of deposits) to temporarily invest funds resulting from
deposit-gathering activities, normal cash flow from operations and sales of
debentures. Cash and short-term investments at December 31, 2004 amounted to
$24,599,000, compared to $64,128,000 at December 31, 2003.
SOURCES OF FUNDS
The Bank's primary sources of funds consist of the following: retail deposits
obtained through its branch offices and through the mail; amortization,
satisfactions and repayments of loans; maturities and calls of securities; and
cash generated by operating activities. In addition, the Bank has from time to
time borrowed funds on a short-term basis from FHLB and the federal funds market
to manage its liquidity needs. The Bank has also received capital contributions
from the Holding Company.
The Bank's deposit accounts are solicited from individuals, small businesses and
professional firms located throughout the Bank's primary market areas through
the offering of a variety of deposit services. The Bank also uses its web site
on the internet: www.intervestnatbank.com to attract deposit customers from both
within and outside its primary market areas. The Bank believes it does not have
a concentration of deposits from any one source and that a large portion of its
depositors are residents in the Bank's primary market areas. The Bank also does
not currently accept brokered deposits. At December 31, 2004, consolidated
deposit liabilities totaled $993,872,000, compared to $675,513,000 at December
31, 2003.
The Bank's deposit services include the following: certificates of deposit
(including denominations of $100,000 or more); individual retirement accounts
(IRAs); checking and other demand deposit accounts; negotiable order of
withdrawal (NOW) accounts; savings accounts; and money market accounts. Interest
rates offered by the Bank on deposit accounts are normally competitive with
those in the principal market areas of the Bank. In addition, the determination
of rates and terms on deposit accounts takes into account the Bank's liquidity
requirements, loan demand, growth goals, capital levels and federal regulations.
Maturity terms, service fees and withdrawal penalties on deposit products are
reviewed and established by the Bank on a periodic basis.
The Bank offers internet banking services, ATM services with access to local,
state and national networks, wire transfers, direct deposit of payroll and
social security checks and automated drafts for various accounts. In addition,
the Bank offers safe deposit boxes to its customers in Florida. The Bank
periodically reviews the scope of the banking products and services it offers
consistent with market opportunities and its available resources.
At December 31, 2004, the Bank had agreements with correspondent banks whereby
it may borrow on an overnight, unsecured basis up to $16,000,000. As a member of
the FHLB and the FRB, the Bank can borrow from
8
these institutions on a secured basis up to approximately $203,000,000 at
December 31, 2004. There were $36,000,000 of FHLB short-term borrowings
outstanding at December 31, 2004.
Intervest Mortgage Corporation's principal sources of funds for investing
consist of borrowings (through the issuance of its debentures), mortgage
repayments and cash flow generated from operations. From time to time, it has
also received capital contributions from the Holding Company. At December 31,
2004, Intervest Mortgage Corporation had debentures outstanding of $88,850,000,
compared to $87,350,000 at December 31, 2003.
The Holding Company's principal sources of funds consist of dividends from the
Bank to service Trust Preferred Securities, interest income from investments,
management fees from its subsidiaries and principal and interest repayments from
its limited portfolio of mortgage loans. The Holding Company has also issued
debentures for working capital purposes. The Holding Company's debentures
outstanding totaled $5,580,000 at December 31, 2004, compared to $7,340,000 at
December 31, 2003. In addition, the Holding Company, through its wholly owned
subsidiaries (Intervest Statutory Trust I, II, III and IV) has issued Trust
Preferred Securities totaling $60,000,000.
EMPLOYEES
At December 31, 2004, the Company employed 64 full-time equivalent employees,
compared to 61 at year-end 2003. The Company provides various benefit plans,
including group life, health and a 401(k) Plan. The employees are not covered by
a collective bargaining agreement and the Company believes employee relations
are good.
FEDERAL AND STATE TAXATION
The Company and its subsidiaries file a consolidated federal income tax return
and combined state and city income tax returns in New York. The Company also
files a franchise tax return in Delaware. The Bank files a state income tax
return in Florida. All the returns are filed on a calendar year basis.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur. In accordance with an income tax
sharing agreement, income tax charges or credits are for financial reporting
purposes allocated among the Holding Company and its subsidiaries on the basis
of their respective taxable income or taxable loss that is included in the
consolidated income tax return.
Banks and bank holding companies are subject to federal and state income taxes
in the same manner as other corporations. Florida taxes banks under the same
provisions as other corporations, while New York State and New York City taxable
income is calculated under applicable sections of the Internal Revenue Code of
1986, as amended (the "Code"), with some modifications required by state law.
Although the Bank's federal income tax liability is determined under provisions
of the Code, which is applicable to all taxpayers, Sections 581 through 597 of
the Code apply specifically to financial institutions. The two primary areas in
which the treatment of financial institutions differs from the treatment of
other corporations under the Code are in the areas of bond gains and losses and
bad debt deductions. Bond gains and losses generated from the sale or exchange
of portfolio instruments are generally treated for financial institutions as
ordinary gains and losses as opposed to capital gains and losses for other
corporations, as the Code considers bond portfolios held by banks to be
inventory in a trade or business rather than capital assets. Banks are allowed a
statutory method for calculating a reserve for bad debt deductions. Based on its
asset size, a bank is permitted to maintain a bad debt reserve calculated on an
experience method, based on chargeoffs and recoveries for the current and
preceding five years, or a "grandfathered" base year reserve, if larger.
Commencing in 2002, due to its asset size, the Bank no longer qualified for this
method and began using the direct write-off method in computing its bad debt
deduction for tax purposes.
As a Delaware corporation not earning income in Delaware, the Company is exempt
from Delaware corporate income tax but is required to file an annual report with
and pay an annual franchise tax to the State of Delaware. The tax is imposed as
a percentage of the capital base of the Company and is reported in other
expenses on the Company's consolidated statement of earnings.
9
INVESTMENT IN SUBSIDIARIES
The following table provides information regarding the Holding Company's
subsidiaries:
At December 31, 2004 Subsidiaries
-------------------------------------
($ in thousands) % of Equity in Earnings (loss) for the
Voting Total Underlying Year Ended December 31,
Subsidiary Stock Investment Net Assets 2004 2003 2002
- ----------------------- ----------- ----------- ----------- ----------- ------------ -----------
Intervest National Bank 100% $ 111,343 $ 111,343 $ 10,865 $ 8,667 $ 6,459
Intervest Mortgage Corporation 100% $ 23,527 $ 23,527 $ 2,354 $ 1,759 $ 1,567
Intervest Securities Corporation 100% $ 481 $ 481 $ 22 $ (6) $ -
Intervest Statutory Trust I to IV 100% $ 1,856 $ 1,856 $ - $ - $ -
SUPERVISION AND REGULATION
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Any change in the applicable law or
regulation may have a material effect on the business and prospects of the
Holding Company and its subsidiaries.
Bank Holding Company Regulation
- -------------------------------
As a financial holding company registered under the Bank Holding Company Act of
1956 (BHCA), the Holding Company is subject to the regulation and supervision of
the FRB, and is required to file with the FRB periodic reports and other
information regarding its business operations and those of its subsidiaries.
The Holding Company is required to obtain the prior approval of the FRB before
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a bank or bank holding company. The FRB has identified by regulation
various non-banking activities in which a bank holding company may engage with
notice to, or prior approval by, the FRB.
The FRB monitors the capital adequacy of bank holding companies and uses
risk-based capital adequacy guidelines to evaluate bank holding companies on a
consolidated basis. The guidelines require a ratio of Tier 1 or Core Capital, as
defined in the guidelines, to total risk-weighted assets of at least 4% and a
ratio of total capital to risk-weighted assets of at least 8%. At December 31,
2004, the Company's consolidated ratio of total capital to risk-weighted assets
was 14.23% and its risk-based Tier 1 capital ratio was 10.49%. The guidelines
also require a ratio of Tier 1 capital to adjusted total average assets of not
less than 3%. The Company's consolidated leverage ratio at December 31, 2004 was
9.03%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The FRB guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. In addition, the regulations of the FRB provide that concentration of
interest rate risk, credit risk and certain risk arising from nontraditional
activities, as well as an institution's ability to effectively measure and
manage these risks, are important factors to be taken into account by regulatory
agencies in assessing an organization's overall capital adequacy.
The Company is also under the jurisdiction of the Securities and Exchange
Commission (SEC) and various state securities commissions for matters related to
the offering and sale of its securities, and is subject to the SEC rules and
regulations relating to periodic reporting, reporting to shareholders, proxy
solicitation and insider trading.
Bank Regulation
- ---------------
The Bank is a nationally chartered banking corporation subject to supervision,
examination and regulation of the FRB, FDIC and OCC. These regulators have the
power to: enjoin "unsafe or unsound practices;" require affirmative action to
correct any conditions resulting from any violation or practice; issue an
administrative order
10
that can be judicially enforced; direct an increase in capital; restrict the
growth of a bank; assess civil monetary penalties; and remove officers and
directors.
The operations of the Bank are subject to numerous statutes and regulations
regarding required reserves against deposits, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends, establishment of
branches, and other aspects of the Bank's operations. Various consumer laws and
regulations also affect the operations of the Bank, including state usury laws,
laws relating to fiduciaries, consumer credit and equal credit, and fair credit
reporting.
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and
Regulation W thereunder, which govern certain transactions, such as loans,
extensions of credit, investments and purchases of assets between member banks
and their affiliates, including their parent holding companies. These
restrictions limit the transfer of funds to the Holding Company in the form of
loans, extensions of credit, investment or purchases of assets ("Transfers"),
and they require that the Bank's transactions with the Holding Company be on
terms no less favorable to the Bank than comparable transactions between the
Bank and unrelated third parties. Transfers by the Bank to the Holding Company
are limited in amount to 10% of the Bank's capital and surplus, and transfers to
all affiliates are limited in the aggregate to 20% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are also subject to
various collateral requirements. These regulations and restrictions may limit
the Holding Company's ability to obtain funds from the Bank for its cash needs,
including funds for acquisitions, and the payment of dividends, interest and
operating expenses.
The Bank is prohibited from engaging in certain tying arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services. For example, the Bank may not generally require a customer to obtain
other services from the Bank or the Holding Company, and may not require the
customer to promise not to obtain other services from a competitor as a
condition to an extension of credit. The Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons. Extensions of credit (i) must be made on substantially the same
terms (including interest rates and collateral) as, and following credit
underwriting procedures that are not less stringent than those prevailing at the
time for, comparable transactions with persons not covered above and who are not
employees and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. In addition, extensions of credit to such
persons beyond limits set by FRB regulations must be approved by the Board of
Directors. The Bank is also subject to certain lending limits and restrictions
on overdrafts to such persons. A violation of these restrictions may result in
the assessment of substantial civil monetary penalties on the Bank or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of the Bank or the imposition of a cease and desist order.
Applicable law provides the federal banking agencies with broad powers to take
prompt corrective action to resolve problems of insured depository institutions.
The extent of those powers depends upon whether the institution in question is
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." Under federal regulations,
a bank is considered "well capitalized" if it has (i) a total risk-based capital
ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based
capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or
3% or greater in the case of a bank with a composite CAMELS rating of 1). A bank
is considered (a) "undercapitalized " if it has (i) a total risk-based capital
ratio of less than 8%, (ii) a Tier 1 risk-based capitalized ratio of less than
4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with
a composite CAMELS rating of 1); (b) "significantly undercapitalized" if a bank
has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1
risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than
3%, and (c) "critically undercapitalized" if a bank has a ratio of tangible
equity to total assets equal to or less than 2%. At December 31, 2004 and 2003,
the Bank met the definition of a well-capitalized institution.
11
The deposits of the Bank are insured by the FDIC through the Bank Insurance Fund
(the "BIF") to the extent provided by law. Under the FDIC's risk-based
insurance system, BIF-insured institutions are currently assessed premiums of
between zero and $0.27 per $100 of eligible deposits, depending upon the
institution's capital position and other supervisory factors. Legislation also
provides for assessments against BIF- insured institutions that will be used to
pay certain financing corporation ("FICO") obligations. In addition to any BIF
insurance assessments, BIF-insured banks are expected to make payments for the
FICO obligations currently equal to an estimated $0.0146 per $100 of eligible
deposits each year. The assessment is determined quarterly.
Regulations promulgated by the FDIC pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("1991 Banking Law") place limitations on
the ability of certain insured depository institutions to accept, renew or
rollover deposits by offering rates of interest which are significantly higher
than the prevailing rates of interest on deposits offered by other depository
institutions having the same type of charter in such depository institution's
normal market area. Under these regulations, well-capitalized institutions may
accept, renew or rollover such deposits without restriction, while adequately
capitalized institutions may accept, renew or rollover such deposits with a
waiver from the FDIC (subject to certain restrictions on payment of rates).
Undercapitalized institutions may not accept, renew or rollover such deposits.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of Default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance. The
Federal Community Reinvestment Act of 1977 ("CRA"), among other things, allows
regulators to withhold approval of an acquisition or the establishment of a
branch unless the applicant has performed satisfactorily under the CRA.
Satisfactory performance means adequately meeting the credit needs of the
communities the institution serves, including low and moderate income areas. The
applicable federal regulators now regularly conduct CRA examinations to assess
the performance of financial institutions. The Bank received an "outstanding"
rating in its most recent CRA examination.
The federal regulators have adopted regulations and examination procedures
promoting the safety and soundness of individual institutions by specifically
addressing, among other things: (i) internal controls; information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate exposure; (v) asset growth; (vi) ratio of classified assets to
capital; (vii) minimum earnings; and (viii) compensation and benefits standards
for management officials.
The FRB, OCC and other federal banking agencies have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines and
other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could potentially subject the Holding Company or its banking subsidiary, as well
as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and civil monetary penalties.
Interstate Banking and Other Recent Legislation
- -----------------------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
facilitates the interstate expansion and consolidation of banking organizations
by permitting bank holding companies that are adequately capitalized and managed
to acquire banks located in states outside their home states regardless of
whether such acquisitions are authorized under the law of the host state. The
Act also permits interstate mergers of banks, with some limitations and the
establishment of new branches on an interstate basis provided that such action
is authorized by the law of the host state. The Gramm-Leach-Bliley Act of 1999
permits banks, securities firms and insurance companies to affiliate under a
common holding company structure. In addition to allowing new forms of
financial services combinations, this Act clarifies how financial services
conglomerates will be regulated by the different federal and state regulators.
The Gramm-Leach-Bliley Act amended the BHCA and expanded the permissible
activities of certain qualifying bank holding companies, known as financial
holding companies. In addition to engaging in
12
banking and activities closely related to banking, as determined by the FRB by
regulation or order, financial holding companies may engage in activities that
are financial in nature or incidental to financial activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally. Under the Gramm-Leach-Bliley Act, all financial institutions,
including the Company and the Bank, were required to develop privacy policies,
restrict the sharing of non-public customer data with nonaffiliated parties at
the customer's request, and establish procedures and practices to protect
customer data from unauthorized access.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001 (adopted as Title III of the USA PATRIOT Act), all financial
institutions are subject to additional requirements to collect customer
information, monitor transactions and report certain information to U.S. law
enforcement agencies concerning customers and their transactions. In general,
accounts maintained by or on behalf of "non-United States persons," as defined
in the Act, are subject to particular scrutiny. Correspondent accounts for or
on behalf of foreign banks with profiles that raise money-laundering concerns
are subject to even greater scrutiny, and correspondent accounts for or on
behalf of foreign banks with no physical presence in any country are barred
altogether. Additional requirements are imposed by this Act on financial
institutions, all with a view towards encouraging information sharing among
financial institutions, regulators and law enforcement agencies. Financial
institutions are also required to adopt and implement "anti-money-laundering
programs."
The Sarbanes-Oxley Act of 2002 implements legislative reforms intended to
address corporate and accounting fraud. In addition to establishing a new
accounting oversight board to enforce auditing, quality control and independence
standards, the bill restricts auditing and consulting services by accounting
firms. To ensure auditor independence, any non-audit services being provided to
an audit client will require pre-approval by a company's audit committee. In
addition, audit partners must be rotated. The Act requires chief executive and
chief financial officers, or their equivalent, to certify to the accuracy of
reports filed with the SEC, subject to civil and criminal penalties. In
addition, under the Act, legal counsel will be required to report evidence of
material violation of the securities laws or a breach of fiduciary duty by a
company to its chief executive officer and, if such officer does not
appropriately respond, to report such evidence to the audit committee of the
board or the board itself. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to executives are restricted. The
Act accelerates the time frame for disclosures by public companies, and
directors and executive officers must also provide information for most changes
in ownership of company securities within two business days of the change. The
Act also prohibits any officer or director or any other person under their
direction from taking any action to fraudulently induce, coerce, manipulate or
mislead any independent public or certified accountant engaged in the audit of a
company's financial statements for the purpose of rendering the financial
statement's materially misleading. The Act also required the SEC to prescribe
rules requiring the inclusion of an internal report and assessment by management
in the annual report to shareholders.
Additional legislative and regulatory proposals have been made and others can be
expected. These include proposals designed to improve the overall financial
stability of the United States banking system, and to provide for other changes
in the bank regulatory structure, including proposals to reduce regulatory
burdens on banking organizations and to expand the nature of products and
services banks and bank holding companies may offer. It is not possible to
predict whether or in what form these proposals may be adopted in the future
and, if adopted, what their effect will be on the Company.
Monetary Policy and Economic Control
- ------------------------------------
Commercial banking is affected not only by general economic conditions, but also
by the monetary policies of the FRB. Changes in the discount rate on member bank
borrowing, availability of borrowing at the "discount window," open market
operations, the imposition of changes in reserve requirements against member
banks' deposits and assets of foreign branches and the imposition of and changes
in reserve requirements against certain borrowings by banks and their affiliates
are some of the instruments of monetary policy available to the FRB. These
monetary policies are used in varying combinations to influence overall growth
and distributions of bank loans, investments and deposits, and this use may
affect interest rates charged on loans or paid on deposits. The monetary
policies of
13
the FRB, which have a significant effect on the operating results of commercial
banks, are influenced by various factors, including inflation, unemployment,
short-term and long-term changes in the international trade balance and in the
fiscal policies of the United States Government. Future monetary policies and
the effect of such policies on the future business and earnings of the Company
cannot be predicted.
Non-Bank Subsidiaries
- ---------------------
Intervest Mortgage Corporation is subject to regulation by the FRB. Intervest
Securities Corporation is regulated by the SEC, the National Association of
Securities Dealers, Inc., or "NASD," and state securities regulators.
DEPENDENCE ON KEY PERSONNEL
The Company and its subsidiaries are dependent upon the services of their
principal officers. If the services of any of these persons were to become
unavailable for any reason, the operation of the Company and its subsidiaries
might be adversely affected in a material manner. The Company and/or its
subsidiaries have written employment agreements with its principal executive
officers. Neither the Company nor any of its subsidiaries, however, maintains
key man life insurance policies on executives and they do not have any immediate
plans to obtain such policies. The Company's business is impacted by its ability
to attract and retain qualified officers and employees.
VOTING CONTROL
The three original shareholders of the Company and two related parties own a
significant percentage of the issued and outstanding shares of Class A Common
Stock, and all of the issued and outstanding shares of Class B Common Stock of
the Company. The shares of Class B Common Stock, as a separate class, are
entitled to elect two-thirds of the directors of the Company. As a result,
voting control continues to rest with these persons.
ITEM 2. PROPERTIES
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest
Securities Corporation and the Bank's headquarters and full-service banking
office are located in leased premises (of approximately 21,500 sq. ft.) on the
entire fourth floor of One Rockefeller Plaza in New York City, New York, 10020.
The Bank occupies approximately one-half of this space. The lease expires in
March 2014. The Bank's principal office in Florida is located at 625 Court
Street, Clearwater, Florida, 33756. In addition, the Bank operates four other
branch offices; three of which are in Clearwater, Florida, at 1875 Belcher Road
North, 2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750 Gulfport
Blvd, South Pasadena, Florida. With the exception of the Belcher Road office,
which is leased through June 2007, the Bank owns all its offices in Florida. All
of these leases contain operating escalation clauses related to taxes and
operating costs based upon various criteria and are accounted for as operating
leases.
The Bank's office at 625 Court Street consists of a two-story building
containing approximately 22,000 sq. ft. The Bank occupies the ground floor
(approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial
tenant. The branch office at 1875 Belcher Road is a two-story building in which
the Bank leases approximately 5,100 sq. ft. on the ground floor. The branch
office at 2175 Nursery Road is a one-story building containing approximately
2,700 sq. ft., which is entirely occupied by the Bank. The branch office at 2575
Ulmerton Road is a three-story building containing approximately 17,000 sq. ft.
The Bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the
upper floors to commercial tenants. The branch office at 6750 Gulfport Blvd. is
a one-story building containing approximately 2,800 sq. ft., which is entirely
occupied by the Bank. In addition, each of the Bank's Florida offices include
drive-through teller facilities. The Bank also owns a two-story building located
on property contiguous to its Court Street office in Florida. The building
contains approximately 12,000 sq. ft. and is leased to commercial tenants. The
Bank also owns property across from its Court Street branch office in Florida.
which consists of an office building that contains approximately 1,400 sq.ft.
that is leased to one commercial tenant. This property provides additional
parking for the Court Street branch.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Management does not believe that there is any pending or threatened
14
proceeding against the Company, which, if determined adversely, would have a
material effect on the business, results of operations, or financial position of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 2004, to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
JEROME DANSKER, age 86, serves as Chairman of the Board of Directors and Chief
Executive Officer of Intervest Bancshares Corporation and has served in such
capacities since 1996 and 2004, respectively. Mr. Dansker received a Bachelor of
Science degree from the New York University School of Commerce, Accounts and
Finance, a Law degree from the New York University School of Law, and is
admitted to practice as an attorney in the State of New York. Mr. Dansker also
serves as Chairman of the Board of Directors and Loan Committee of Intervest
National Bank, Chairman of the Board of Directors and Executive Vice President
of Intervest Mortgage Corporation, and Chairman of the Board of Directors of
Intervest Securities Corporation.
LOWELL S. DANSKER, age 54, serves as Vice Chairman of the Board of Directors,
and as President and Treasurer of Intervest Bancshares Corporation and has
served in such capacities since October 2003 and 1993, respectively. Mr. Dansker
received a Bachelor of Science in Business Administration from Babson College, a
Law degree from the University of Akron School of Law, and is admitted to
practice as an attorney in New York, Ohio, Florida and the District of Columbia.
Mr. Dansker also serves as Vice Chairman of the Board of Directors, Chief
Executive Officer and a member of the Loan Committee of Intervest National Bank,
Vice Chairman of the Board of Directors, President and Treasurer of Intervest
Mortgage Corporation, and Vice Chairman of the Board of Directors and Chief
Executive Officer of Intervest Securities Corporation.
LAWRENCE G. BERGMAN, age 60, serves as a Director, Vice President and Secretary
of Intervest Bancshares Corporation and has served in such capacities since
1993. Mr. Bergman received a Bachelor of Science degree and a Master of
Engineering (Electrical) degree from Cornell University and a Master of Science
in Engineering and a Ph.D. degree from The Johns Hopkins University. Mr. Bergman
also serves as a Director and a member of the Loan Committee of Intervest
National Bank, Director, Vice-President and Secretary of Intervest Mortgage
Corporation, and Director, Vice-President and Secretary of Intervest Securities
Corporation.
KEITH A. OLSEN, age 51, serves as President of the Florida Division and as a
Director of Intervest National Bank and has served in such capacities since July
2001. Prior to that, Mr. Olsen was the President of Intervest Bank from 1994
until it merged into Intervest National Bank in July 2001. Prior to that, he was
Senior Vice President of Intervest Bank since 1991. Mr. Olsen received an
Associates degree from St. Petersburg Junior College and a Bachelors degree in
Business Administration and Finance from the University of Florida, Gainesville.
He is also a graduate of the Florida School of Banking of the University of
Florida, Gainesville, the National School of Real Estate Finance of Ohio State
University and the Graduate School of Banking of the South of Louisiana State
University. Mr. Olsen has been in banking for more than 30 years and has served
as a senior bank officer for more than 20 years.
RAYMOND C. SULLIVAN, age 58, serves as President and as a Director of Intervest
National Bank and has served in such capacities since April 1999. Prior to that,
Mr. Sullivan was an employee of Intervest Bancshares Corporation from March 1998
to March 1999. Mr. Sullivan received an MBA degree from Fordham University, an
M.S. degree from City College of New York and a B.A. degree from St. Francis
College. Mr. Sullivan also has a Certificate in Advanced Graduate Study in
Accounting from Pace University and is a graduate of the National School of
Finance and Management. Mr. Sullivan has over 27 years of banking experience.
Prior to joining the Company, Mr. Sullivan was the Operations Manager of the New
York Agency Office of Banco Mercantile, C.A. from 1994 to 1997, a Senior
Associate at LoBue Associates, Inc. from 1992 to 1993, and an Executive Vice
President, Chief Operations Officer and Director of Central Federal Savings Bank
from 1985 to 1992.
15
JOHN J. ARVONIO, age 42, serves as Senior Vice President, Chief Financial
Officer and Secretary of Intervest National Bank and has served in such
capacities since September 2000. Prior to that, Mr. Arvonio served as Vice
President, Controller and Secretary of Intervest National Bank from April 1999
to August 2000 and as an employee of Intervest Bancshares Corporation from April
1998 to March 1999. Mr. Arvonio also has been a registered representative of
Intervest Securities Corporation since December 2003. Mr. Arvonio received a
B.B.A. degree from Iona College and is a Certified Public Accountant. Mr.
Arvonio has over 15 years of banking experience. Prior to joining the Company,
Mr. Arvonio served as Second Vice President Accounting Policy, and Technical
Advisor to the Controller for The Greater New York Savings Bank from 1992 to
1997. Prior to that, Mr. Arvonio was a Manager of Financial Reporting for the
Leasing and Investment Banking Divisions of Citibank from 1989 to 1992, and a
Senior Auditor for Ernst & Young from 1985 to 1989.
JOHN H. HOFFMANN, age 53, serves as Vice President and Controller of Intervest
Mortgage Corporation and has served in such capacities since August 2002 and
October 2000, respectively. Mr. Hoffmann received a B.B.A. degree from
Susquehanna University and is a Certified Public Accountant. Mr. Hoffmann has
over 20 years of banking experience. Prior to joining the Company, Mr. Hoffmann
served as Accounting Manager for Smart World Technologies from 1998 to 2000 and
as Vice President of Mortgage Accounting for The Greater New York Savings Bank
from 1987 to 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET FOR SECURITIES
The Holding Company's Class A common stock is quoted on the NASDAQ SmallCap
Market under the symbol: IBCA. There is no public-trading market for the Holding
Company's Class B common stock. At December 31, 2004, there were 5,886,433 and
385,000 shares of Class A and Class B common stock outstanding, respectively. At
December 31, 2004, there were approximately 1,200 holders of record of the Class
A common stock, which includes persons or entities that hold their stock in
nominee form or in street name through various brokerage firms. At December 31,
2004, there were five holders of record of Class B common stock.
The high and low sales prices, which represent actual sales transactions as
reported by the NASDAQ, for the Class A common stock by calendar quarter for
2004 and 2003 are as follows:
2004 2003
---- ----
High Low High Low
-------------- --------------
First quarter $18.48 $14.42 $11.48 $10.05
Second quarter $17.76 $14.75 $12.77 $10.38
Third quarter $17.15 $14.45 $13.75 $12.05
Fourth quarter $19.74 $16.50 $15.48 $12.86
DIVIDENDS
Class A and Class B common stockholders are entitled to receive dividends when
and if declared by the Board of Directors out of funds legally available for
such purposes. The Holding Company has not paid any dividends on its capital
stock and currently is not contemplating the payment of a dividend.
The Holding Company's ability to pay dividends is generally limited to earnings
from the prior year, although retained earnings and dividends from its
subsidiaries may also be used to pay dividends under certain circumstances. The
primary source of funds for dividends payable by the Holding Company to its
shareholders is the dividends received from its subsidiaries. The payment of
dividends by a subsidiary to the Holding Company is determined by the
subsidiary's Board of Directors and is dependent upon a number of factors,
including the subsidiary's capital requirements, regulatory limitations, results
of operations, financial condition and any restrictions arising from outstanding
indentures.
16
The Bank pays a monthly dividend to the Holding Company in order to provide
funds for the debt service on the Trust Preferred Securities, the proceeds of
which were contributed to the Bank as capital. Dividends paid in 2004, 2003 and
2002 amounted to $3,429,000, $1,695,000 and $1,500,000, respectively.
There are also various legal limitations with respect to the Bank supplying
funds to the Holding Company. In particular, under federal banking law, the Bank
may not declare a dividend that exceeds undivided profits. In addition, the
approval of the FRB and OCC is required if the total amount of all dividends
declared in any calendar year exceeds the Bank's net profits for that year,
combined with its retained net profits for the preceding two years. The FRB also
has the authority to limit further the payment of dividends by the Bank under
certain circumstances. In addition, federal banking laws prohibit or restrict
the Bank from extending credit to the Holding Company under certain
circumstances.
The FRB and OCC have established certain financial and capital requirements that
affect the ability of banks to pay dividends and also have the general authority
to prohibit banks from engaging in unsafe or unsound practices in conducting
business. Depending upon the financial condition of the Bank, the payment of
cash dividends could be deemed to constitute such an unsafe or unsound practice.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to commit resources to support
each such bank. Consistent with this policy, the FRB has stated that, as a
matter of prudent banking, a bank holding company generally should not pay cash
dividends unless the available net earnings of the bank holding company is
sufficient to fully fund the dividends, and the prospective rate of earnings
retention appears to be consistent with a holding company's capital needs, asset
quality and overall financial condition.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ------------------------------------------------------------------------------------------------------------------------
At or For The Year Ended December 31,
($ in thousands, except per share data) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA:
Total assets (1). . . . . . . . . . . . . . . . . . . . $1,316,751 $ 911,523 $ 686,443 $ 513,086 $ 416,927
Cash and cash equivalents . . . . . . . . . . . . . . . $ 24,599 $ 64,128 $ 30,849 $ 24,409 $ 42,938
Securities available for sale . . . . . . . . . . . . . $ - $ - $ - $ 6,192 $ 74,789
Securities held to maturity, net. . . . . . . . . . . . $ 248,888 $ 152,823 $ 145,694 $ 99,157 $ 20,970
Loans receivable, net of deferred fees. . . . . . . . . $1,015,396 $ 671,125 $ 489,912 $ 368,526 $ 266,326
Deposits. . . . . . . . . . . . . . . . . . . . . . . . $ 993,872 $ 675,513 $ 505,958 $ 362,437 $ 300,241
Borrowed funds and related accrued interest payable (1) $ 202,682 $ 140,383 $ 114,032 $ 100,374 $ 72,813
Stockholders' equity. . . . . . . . . . . . . . . . . . $ 90,094 $ 75,385 $ 53,126 $ 40,395 $ 36,228
Nonaccrual loans. . . . . . . . . . . . . . . . . . . . $ 4,607 $ 8,474 $ - $ 1,243 $ -
Foreclosed real estate . . . . . . . . . $ - $ - $ 1,081 $ - $ -
Allowance for loan losses . . . . . . . . . . . . . . . $ 11,106 $ 6,580 $ 4,611 $ 3,380 $ 2,768
Loan chargeoffs .. . . . . . . . . . . $ - $ - $ 150 $ - $ -
Loan recoveries . . . . . . . . . . . . . . . . . . . . $ - $ - $ 107 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA:
Interest and dividend income .. . . . . . . $ 66,549 $ 50,464 $ 43,479 $ 35,462 $ 31,908
Interest expense (2). . . . . . . . . . . . . . . . . . 38,683 28,564 26,325 24,714 23,707
---------------------------------------------------------------
Net interest and dividend income. . . . . . . . . . . . 27,866 21,900 17,154 10,748 8,201
Provision for loan losses . . . . . . . . . . . . . . . 4,526 1,969 1,274 612 275
---------------------------------------------------------------
Net interest and dividend income after
provision for loan losses . . . . . . . . . . . . . . 23,340 19,931 15,880 10,136 7,926
Noninterest income. . . . . . . . . . . . . . . . . . . 5,140 3,321 2,218 1,655 983
Noninterest expenses . . . . . . . . . . 8,251 7,259 6,479 5,303 4,568
---------------------------------------------------------------
Earnings before income taxes. . . . . . . . . . . . . . 20,229 15,993 11,619 6,488 4,341
Provision for income taxes (2). . . . . . . . . . . . . 8,776 6,873 4,713 2,710 1,733
---------------------------------------------------------------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 11,453 $ 9,120 $ 6,906 $ 3,778 $ 2,608
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (3):
Basic earnings per share. . . . . . . . . . . . . . . . $ 1.89 $ 1.85 $ 1.71 $ 0.97 $ 0.67
Diluted earnings per share . . . . . . . . $ 1.71 $ 1.53 $ 1.37 $ 0.97 $ 0.67
Book value per share . . . . . . . . . . $ 14.37 $ 12.59 $ 11.30 $ 10.36 $ 9.29
Market price per share. . . . . . . . . . . . . . . . . $ 19.74 $ 14.65 $ 10.80 $ 7.40 $ 3.75
- ------------------------------------------------------------------------------------------------------------------------
OTHER DATA AND RATIOS:
Common shares outstanding . . . . . . . . . . . . . . . 6,271,433 5,988,377 4,703,087 3,899,629 3,899,629
Common stock warrants outstanding .. . . . . . 696,465 738,975 1,750,010 2,650,218 2,650,218
Average common shares used to calculate:
Basic earnings per share. . . . . . . . . . . . . . . 6,068,755 4,938,995 4,043,619 3,899,629 3,884,560
Diluted earnings per share. . . . . . . . . . . . . . 6,828,176 6,257,720 5,348,121 3,899,629 3,884,560
Adjusted net earnings for diluted earnings per share. . $ 11,707 $ 9,572 $ 7,342 $ 3,778 $ 2,608
Net interest margin . . . . . . . . . . . . . . . . . . 2.52% 2.90% 2.88% 2.47% 2.34%
Return on average assets. . . . . . . . . . . . . . . . 1.02% 1.19% 1.13% 0.85% 0.69%
Return on average equity. . . . . . . . . . . . . . . . 14.14% 15.34% 15.56% 9.94% 7.48%
Loans, net of unearned income to deposits . . . . . . . 102% 99% 97% 102% 89%
Loans, net of unearned income to deposits (Bank Only) . 86% 79% 76% 79% 67%
Efficiency ratio. . . . . . . . . . . . . . . . . . . . 25% 29% 33% 43% 50%
Allowance for loan losses to total net loans. . . . . . 1.09% 0.98% 0.94% 0.92% 1.04%
Average stockholders' equity to average total assets. . 7.23% 7.74% 7.27% 8.50% 9.18%
Stockholders' equity to total assets. . . . . . . . . . 6.84% 8.28% 7.74% 7.88% 8.69%
- ------------------------------------------------------------------------------------------------------------------------
(1) Amounts at December 31, 2003 and prior have been adjusted where applicable from those previously reported for
the effect of adopting FASB Interpretation No. 46-R, "Consolidation of Variable Interest Entities".
(2) A charge of $206,000, net of taxes, from the early retirement of debentures that was previously reported in 2000 as
an extraordinary item has been reclassified (a $382,000 increase to interest expense and a $176,000 decrease to the
provision for income taxes) to give effect to SFAS No. 145," Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS Statement No. 13, and Technical Corrections."
(3) The Company has never paid common dividends.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations that follows should be read in conjunction with the consolidated
financial statements and notes thereto included in this report on Form 10-K.
Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest
National Bank, Intervest Mortgage Corporation and Intervest Securities
Corporation (hereafter referred to collectively as the "Company" on a
consolidated basis). Intervest Bancshares Corporation and Intervest National
Bank may be referred to individually as the "Holding Company" and the "Bank,"
respectively. Intervest Bancshares Corporation also has four wholly owned
unconsolidated subsidiaries, Intervest Statutory Trust I, II, III and IV. For a
discussion of the Company's business, see Item 1 "Business" in Part I of this
report.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan losses and income tax expense.
Noninterest income consists mostly of loan and other banking fees as well as
income from loan prepayments. The amount and timing of, as well as income from,
loan prepayments, if any, cannot be predicted and can fluctuate significantly.
Normally, the number of instances of prepayment of mortgage loans tends to
increase during periods of declining interest rates and tends to decrease during
periods of increasing interest rates. Many of the Company's mortgage loans
include provisions relating to prepayment and others prohibit prepayment of
indebtedness entirely. Noninterest expense consists of compensation and benefits
expense, occupancy and equipment expenses, data processing expenses, advertising
expense, professional fees, insurance expense and other operating expenses.
The Company's profitability is significantly affected by general economic and
competitive conditions, changes in market interest rates, government policies
and actions of regulatory authorities. The Company's loan portfolio has
historically been concentrated in commercial real estate and multifamily
mortgage loans, which represented 99.8% of the total loan portfolio at December
31, 2004. The properties underlying the Company's mortgages are also
concentrated in New York State (71%) and the State of Florida (19%). Many of the
New York properties are located in New York City and are subject to rent control
and rent stabilization laws, which limit the ability of the property owners to
increase rents. Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly impacted by local
economic conditions in the areas the properties are located, as well as the
Company's underwriting standards. Economic conditions affect the market value of
the underlying collateral as well as the levels of occupancy of income-producing
properties. Additionally, terrorist acts, such as those that occurred on
September 11, 2001, armed conflicts, such as the war on terrorism, and natural
disasters, such as hurricanes, may have an adverse impact on economic
conditions.
CRITICAL ACCOUNTING POLICIES
An accounting policy is deemed to be "critical" if it is important to a
company's results of operations and financial condition, and requires
significant judgment and estimates on the part of management in its application.
The preparation of financial statements and related disclosures in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect certain amounts reported in the financial
statements and related disclosures. Actual results could differ from these
estimates and assumptions. The Company believes that the estimates and
assumptions used in connection with the amounts reported in its financial
statements and related disclosures are reasonable and made in good faith. The
Company believes that currently its most critical accounting policy relates to
the determination of its allowance for loan losses, which is discussed in more
detail in the section entitled "Allowance for Loan Losses." For a summary of all
of the Company's significant accounting policies, see note 1 to the consolidated
financial statements.
19
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND DECEMBER 31, 2003.
Overview
- --------
Total assets at December 31, 2004 increased to $1,316,751,000, from $911,523,000
at December 31, 2003. Total liabilities at December 31, 2004 increased to
$1,226,657,000, from $836,138,000 at December 31, 2003, and stockholders' equity
increased to $90,094,000 at December 31, 2004, from $75,385,000 at year-end
2003. Book value per common share increased to $14.37 per share at December 31,
2004, from $12.59 at December 31, 2003.
Selected balance sheet information as of December 31, 2004 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Company
($in thousands) Holding Company Bank Corp. Corp. Amts (1) Combined
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 4,862 $ 15,836 $ 17,151 $ 476 $ (13,726) $ 24,599
Security investments - 253,980 - - - 253,980
Loans receivable, net of deferred fees 14,078 900,798 100,520 - - 1,015,396
Allowance for loan losses (85) (10,689) (332) - - (11,106)
Investment in consolidated subsidiaries 135,351 - - - (135,351) -
All other assets 5,316 23,584 5,112 8 (138) 33,882
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 159,522 $1,183,509 $ 122,451 $ 484 $(149,215) $1,316,751
- -------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $1,007,862 $ - $ - $ (13,990) $ 993,872
Borrowed funds and related interest payable 69,350 36,263 97,069 - - 202,682
All other liabilities 78 28,041 1,855 3 126 30,103
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 69,428 1,072,166 98,924 3 (13,864) 1,226,657
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 90,094 111,343 23,527 481 (135,351) 90,094
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 159,522 $1,183,509 $ 122,451 $ 484 $(149,215) $1,316,751
- -------------------------------------------------------------------------------------------------------------------------------
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely from
intercompany deposit accounts and investments in subsidiaries.
A comparison of the Company's consolidated balance sheet as of December 31, 2004
and 2003 follows:
At December 31, 2004 At December 31, 2003
---------------------------- ----------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 24,599 1.9% $ 64,128 7.0%
Security investments 253,980 19.3 155,898 17.1
Loans receivable, net of deferred fees and loan loss allowance 1,004,290 76.3 664,545 72.9
All other assets 33,882 2.5 26,952 3.0
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,316,751 100.0% $ 911,523 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $ 993,872 75.5% $ 675,513 74.1%
Borrowed funds and related interest payable 202,682 15.4 140,383 15.4
All other liabilities 30,103 2.2 20,242 2.2
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,226,657 93.1 836,138 91.7
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 90,094 6.9 75,385 8.3
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,316,751 100.0% $ 911,523 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents decreased to $24,599,000 at December 31, 2004, from
$64,128,000 at December 31, 2003, primarily due to a lower level of overnight
federal fund investments. The decrease reflected the deployment of a portion of
those funds into loans and securities. Cash and cash equivalents include federal
funds sold and interest-bearing and noninterest-bearing cash balances with
banks, and other short-term investments that have original maturities of three
months or less. The short-term investments are normally comprised of commercial
paper issued by large commercial banks, certificates of deposit and U.S.
government securities. The level of cash and cash equivalents fluctuates based
on various factors, including liquidity needs, loan demand, deposit flows, calls
of securities, repayments of borrowed funds and alternative investment
opportunities.
20
Security Investments
- --------------------
The Company invests in securities after satisfying its liquidity objectives and
lending commitments. The Company has historically only purchased debt securities
that are issued by the U.S. government or one of its agencies. The Company's
investment policy is designed to provide and maintain liquidity, without
incurring undue interest and credit risk. The Company's security investments
have lower yields than its loan portfolio. To manage interest rate risk, the
Company normally purchases securities that have adjustable rates or securities
with fixed rates that have short to intermediate maturity terms. The Company
does not engage in trading activities. The Company continues to invest in
short-term (1-5 year) U.S government agency debt obligations to emphasize
liquidity and to target Intervest National Bank's loan-to-deposit ratio at
approximately 80%.
Securities that are held for indefinite periods of time which management intends
to use as part of its asset/liability management strategy, or that may be sold
in response to changes in interest rates or other factors, are classified as
available for sale and are carried at estimated fair value. There were no
securities classified as available for sale at December 31, 2004 or 2003.
Securities for which the Company has the intent and ability to hold to maturity
are classified as held to maturity and carried at amortized cost. Such
securities totaled $248,888,000 at December 31, 2004, compared to $152,823,000
at December 31, 2003. The increase was due to new purchases exceeding maturities
and calls of securities during the year. At December 31, 2004, the portfolio
consisted of short-term debt obligations of the Federal Home Loan Bank, Federal
Farm Credit Bank, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation with a weighted-average yield of 2.33% and a
weighted-average remaining maturity of 1.4 years, compared to 1.75% and 1.1
years, respectively, at December 31, 2003. The securities are fixed rate or have
predetermined scheduled rate increases, and some have call features that allow
the issuer to call the security before its stated maturity without penalty. At
December 31, 2004 and 2003, the portfolio's estimated fair value was
$247,211,000 and $152,995,000, respectively.
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in
their capital stock of $2,464,000 and $2,628,000, respectively, at December 31,
2004. The FRB stock currently pays a dividend of 6%, while the FHLB stock
dividend fluctuates and most recently was 3%. The total investment, which
amounted to $5,092,000 at December 31, 2004, compared to $3,075,000 at December
31, 2003, fluctuates based on the Bank's capital level for the FRB and the
Bank's loans and borrowings for the FHLB.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Losses
- --------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan losses,
increased to $1,004,290,000 at December 31, 2004, from $664,545,000 at December
31, 2003. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments.
The following table sets forth information concerning the loan portfolio:
At December 31, 2004 At December 31, 2003
-------------------- --------------------
# of % of # of % of
($ in thousands) Loans Amount Total Loans Amount Total
- -------------------------------------------------------------------------------------------------------------
Commercial real estate loans 244 $ 601,512 58.6% 184 $ 344,071 50.7%
Residential multifamily loans 249 403,613 39.3 210 310,650 45.8
Land development and other land loans 11 19,198 1.9 6 20,526 3.0
Residential 1-4 family loans 4 984 0.1 26 1,628 0.2
Commercial loans 23 1,215 0.1 28 1,662 0.2
Consumer loans 12 221 - 16 319 0.1
- -------------------------------------------------------------------------------------------------------------
Total gross loans receivable 543 1,026,743 100.0% 470 678,856 100.0%
Deferred loan fees (11,347) (7,731)
- -------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees 1,015,396 671,125
Allowance for loan losses (11,106) (6,580)
- -------------------------------------------------------------------------------------------------------------
Loans receivable, net $1,004,290 $ 664,545
- -------------------------------------------------------------------------------------------------------------
21
Nearly all of the Company's loan portfolio is comprised of 504 loans, or
$1,024,323,000, that are secured by commercial and multifamily real estate,
including rental and cooperative apartment buildings, office buildings, mix-used
properties, shopping centers, industrial properties and vacant land. These loans
have an average principal size of $2,032,000. The portfolio has 40 loans of
$5,000,000 or more that aggregate $302,291,000, with the largest loan amounting
to $14,895,000.
The following table sets forth the scheduled contractual principal repayments of
the loan portfolio:
At December 31,
---------------
($ in thousands) 2004 2003
------------------------------------------------
Within one year $ 227,889 $133,137
Over one to five years (1) 645,050 430,783
Over five years (1) 153,804 114,936
------------------------------------------------
$1,026,743 $678,856
------------------------------------------------
(1) At December 31, 2004, $485,706,000 of loans with adjustable rates and
$313,148,000 of loans with fixed rates were due after one year.
The following table sets forth the activity in the loan portfolio:
For the Year Ended December 31,
---------------------------------
($ in thousands) 2004 2003 2002
--------------------------------------------------------------------------------
Loans receivable, net, at beginning of year $ 664,545 $ 485,301 $ 365,146
Loans originated 626,252 378,630 233,689
Principal repayments (278,365) (195,076) (110,661)
Recoveries - - (107)
Chargeoffs - - 150
Increase in deferred loan fees (3,616) (2,341) (1,642)
Provision for loan losses (4,526) (1,969) (1,274)
--------------------------------------------------------------------------------
Loans receivable, net, at end of year $ 1,004,290 $ 664,545 $ 485,301
--------------------------------------------------------------------------------
At December 31, 2004, $4,607,000 of loans were on a nonaccrual status, compared
to $8,474,000 at December 31, 2003. These loans were considered impaired under
the criteria of SFAS No.114, but no valuation allowance was maintained at any
time since the Company believes that the estimated fair value of the underlying
properties exceeded the Company's recorded investment. At December 31, 2004 and
2003, there were no other impaired loans or loans ninety days past due and still
accruing interest.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses increased to $11,106,000 at December 31, 2004,
from $6,580,000 at December 31, 2003 and represented 1.09% of total loans (net
of deferred fees) outstanding at December 31, 2004, compared to 0.98% at
December 31, 2003. The increase in the allowance was due to provisions totaling
$4,526,000 resulting from loan growth and a decrease in the credit grade of two
loans during the year. At December 31, 2004 and 2003, the allowance was almost
all allocated to commercial real estate loans, multifamily loans and land loans.
The following table sets forth information with respect to the allowance for
loan losses:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003 2002
------------------------------------------------------------------------------------------
Allowance at beginning of year $ 6,580 $4,611 $ 3,380
Provision charged to operations 4,526 1,969 1,274
Chargeoffs - - (150)
Recoveries - - 107
------------------------------------------------------------------------------------------
Allowance at end of year $ 11,106 $ 6,580 $ 4,611
------------------------------------------------------------------------------------------
Ratio of allowance to total loans, net of deferred fees 1.09% 0.98% 0.94%
Total loans, net of deferred fees at year end $1,015,396 $671,125 $489,912
Average loans outstanding during the year $ 867,724 $585,556 $439,241
------------------------------------------------------------------------------------------
The allowance for loan losses is established through a provision charged to
operations. Loans are charged against the allowance when management believes
that the collectability of the principal is unlikely. Subsequent recoveries are
added to the allowance. The adequacy of the allowance is evaluated monthly or
more frequently when
22
necessary with consideration given to: the nature and size of the loan
portfolio; overall portfolio quality; loan concentrations; specific problem
loans and commitments and estimates of fair value thereof; historical chargeoffs
and recoveries; adverse situations which may affect the borrowers' ability to
repay; and management's perception of the current and anticipated economic
conditions in the Company's lending areas. For calculation purposes, the
allowance for loan losses is comprised of an unallocated portion (which is
derived from an estimated loss factor ranging from 0.30% to 1.35% multiplied by
the principal amount of loans rated acceptable and higher percentages for loans
that are assigned a credit grade of special mention or lower) and, from time to
time, an allocated (or specific) portion on certain loans (particularly for
loans that have been identified as being impaired as discussed below). 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, or other factors, differ from those
previously assumed in the determination of the level of the allowance.
In addition, SFAS No. 114 specifies the manner in which the portion of the
allowance for loan losses related to impaired loans is computed. A loan is
normally deemed impaired when, based upon current information and events, it is
probable that the Company will be unable to collect both full principal and
interest due according to the contractual terms of the loan agreement.
Impairment for larger balance loans such as commercial real estate and
multifamily loans are measured based on: the present value of expected future
cash flows, discounted at the loan's effective interest rate; or the observable
market price of the loan; or the estimated fair value of the loan's collateral,
if payment of the principal and interest is dependent upon the collateral. When
the fair value of the property is less than the recorded investment in the loan,
this deficiency is recognized as a valuation allowance within the overall
allowance for loan losses and a charge through the provision for loan losses.
The Company's policy is to charge off any portion of the recorded investment in
the loan that exceeds the fair value of the collateral.
The Company considers a variety of factors in determining whether a loan is
impaired, including (i) any notice from the borrower that the borrower will be
unable to repay all principal and interest amounts contractually due under the
loan agreement, (ii) any delinquency in the principal and/or interest payments
other than minimum delays or shortfalls in payments, and (iii) other information
known by management that would indicate the full repayment of principal and
interest is not probable. In evaluating loans for impairment, management
generally considers delinquencies of 60 days or less to be minimum delays, and
accordingly does not consider such delinquent loans to be impaired in the
absence of other indications. Impaired loans normally consist of loans on
nonaccrual status. Generally, all loans are evaluated for impairment on a
loan-by-loan basis.
Finally, the Company's regulators, as an integral part of their examination
process, periodically review the allowance for loan losses. Accordingly, the
Company may be required to take certain chargeoffs and/or recognize additions to
the allowance based on the regulators' judgment concerning information available
to them during their examination.
All Other Assets
- ----------------
The following table sets forth the composition of the caption "All other assets"
in the table on page 20:
At December 31,
-----------------
($ in thousands) 2004 2003
---------------------------------------------------------------
Accrued interest receivable $ 6,699 $ 4,995
Loan fees receivable 8,208 5,622
Premises and equipment, net 6,636 5,752
Deferred income tax asset 5,095 2,960
Deferred debenture offering costs, net 4,929 4,023
Investment in unconsolidated subsidiaries 1,856 928
All other assets 459 2,672
---------------------------------------------------------------
$ 33,882 $ 26,952
---------------------------------------------------------------
Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received. The increase was due to the growth in these assets.
23
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. Such amounts are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan as a yield
adjustment. The increase was due to an increase in mortgage loan originations.
Premises and equipment, which is detailed in note 5 to the consolidated
financial statements, increased due to net additions of $1,477,000 (almost all
of which were leasehold improvements associated with new office space),
partially offset by depreciation and amortization.
The deferred income tax asset relates primarily to the unrealized tax benefit on
the Company's allowance for loan losses. The allowance has been expensed for
financial statement purposes but it is currently not deductible for income tax
purposes until actual losses are incurred. The increase in the deferred tax
asset is a function of the increase in the allowance for loan losses during the
period.
The deferred debenture offering costs consist primarily of underwriters'
commissions and are amortized over the terms of the debentures. The increase was
due to a total of $2,217,000 of costs associated with issuing new debentures,
partially offset by normal amortization during the period.
The investment in unconsolidated subsidiaries consists of the Holding Company's
$464,000 common stock investment in each of its unconsolidated subsidiaries,
Intervest Statutory Trust I, II, II and IV.
The decrease in all other assets was due to the receipt of $2,535,000 in January
2004 from the exercise of common stock warrants at year-end 2003, the amount of
which was recorded as a receivable at December 31, 2003.
Deposits
- --------
Deposits increased to $993,872,000 at December 31, 2004, from $675,513,000 at
December 31, 2003, reflecting increases in money market and certificate of
deposit accounts of $38,335,000 and $277,612,000, respectively.
The following table sets forth the distribution of deposit accounts by type:
At December 31, 2004 At December 31, 2003
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
-----------------------------------------------------------------------------------
Demand deposits $ 6,142 0.6% $ 6,210 1.0%
Interest checking deposits 15,051 1.5 9,146 1.4
Savings deposits 27,359 2.8 30,784 4.5
Money market deposits 200,549 20.2 162,214 24.0
Certificates of deposit 744,771 74.9 467,159 69.1
-----------------------------------------------------------------------------------
Total deposit accounts (1) $ 993,872 100.0% $ 675,513 100.0%
-----------------------------------------------------------------------------------
(1) Includes individual retirement accounts totaling $113,266,000 and $74,170,000 at
December 31, 2004 and 2003, respectively, nearly all of which are certificates of
deposit.
The following table sets forth certificate of deposits by maturity for the
periods indicated:
At December 31, 2004 December 31, 2003
-------------------- -----------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
-------------------------------------------------------------------------------
Within one year $ 269,553 2.84% $ 182,693 2.75%
Over one to two years 119,780 3.43 90,936 3.64
Over two to three years 134,409 4.48 30,094 4.43
Over three to four years 75,317 4.06 89,085 4.83
Over four years 145,712 4.48 74,351 4.20
--------------------------------------------------------------------------------
$ 744,771 3.68% $ 467,159 3.66%
--------------------------------------------------------------------------------
24
The following table sets forth the maturities of certificates of deposit in
denominations of $100,000 or more:
At December 31,
---------------
($ in thousands) 2004 2003
---------------------------------------------------------
Due within three months or less $ 15,761 $ 7,514
Due over three months to six months 24,450 7,446
Due over six months to one year 40,351 31,459
Due over one year 135,314 76,644
---------------------------------------------------------
$215,876 $123,063
---------------------------------------------------------
As a percentage of total deposits 21.7% 18.2%
---------------------------------------------------------
The following table sets forth net deposit flows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003 2002
-------------------------------------------------------------------------------
Net increase before interest credited $ 292,667 $ 151,138 $ 126,230
Net interest credited 25,692 18,417 17,291
-------------------------------------------------------------------------------
Net deposit increase $ 318,359 $ 169,555 $ 143,521
-------------------------------------------------------------------------------
Borrowed Funds and Related Interest Payable
- -------------------------------------------
The following table summarizes borrowed funds and related interest payable:
At December 31, 2004 At December 31, 2003
-------------------- --------------------
Accrued Accrued
($ in thousands) Principal Interest Principal Interest
---------------------------------------------------------------------------------------------
Debentures - Intervest Mortgage Corporation $ 88,850 $ 8,219 $ 87,350 $ 12,052
Debentures - Holding Company 5,580 1,749 7,340 2,361
Debentures - Capital Securities - Holding Company 61,856 165 30,928 97
FHLB advances - Intervest National Bank 36,000 21 - -
Mortgage note payable - Intervest National Bank 242 - 255 -
---------------------------------------------------------------------------------------------
$ 192,528 $ 10,154 $ 125,873 $ 14,510
---------------------------------------------------------------------------------------------
Intervest Mortgage Corporation had $88,850,000 of debentures outstanding at
December 31, 2004, compared to $87,350,000 at December 31, 2003. The slight
increase was due to the issuance of Series 11/28/03 and 6/7/04 debentures
totaling $21,500,000 (with fixed rates ranging from 6.25% to 6.75% and maturing
at various times through January 1, 2012), largely offset by the repayments of
Series 5/12/95 6.00% (prime based) debentures due April 1, 2004 ($9,000,000 of
principal and $2,749,000 of accrued interest), Series 6/28/99 8.50% debentures
due July 1, 2004 ($2,000,000 of principal and $980,000), and Series 10/19/95
6.25% (prime based) debentures due October 1, 2004 ($9,000,000 of principal and
$2,244,000 of accrued interest). Proceeds from the issuance of debentures, after
underwriter's commissions and other issuance costs, amounted to $19,924,000.
Intervest Mortgage Corporation has filed a registration statement related to an
offering of additional debentures. It is anticipated that debentures in an
aggregate principal amount of up to $14,000,000 will be issued in the first
quarter of 2005.
The Holding Company had a total of $67,436,000 of debentures outstanding at
December 31, 2004, compared to $38,268,000 at December 31, 2003. The increase
was due to the issuance of a total of $30,928,000 of its debentures to its
wholly owned unconsolidated subsidiaries, Intervest Statutory III and IV,
partially offset by the conversion of its convertible debentures. In 2004,
$2,883,000 of convertible debentures ($1,760,000 of principal and $1,123,000 of
accrued related interest) were converted into shares of Class A common stock at
the election of the debenture holders.
The Bank from time to time may borrow funds on an overnight or short-term basis
to manage its liquidity needs. At December 31, 2004, the Bank had $36,000,000
of FHLB borrowings outstanding, of which $19,000,000 were due in January 2005
and $17,000,000 in February 2005. These borrowings were repaid through deposit
inflows. The Bank also has a mortgage note payable outstanding amounting to
$242,000 at December 31, 2004, compared to $255,000 at December 31, 2003. The
note was issued in connection with the Bank's purchase in 2002 of property that
is located across from its Court Street branch office in Florida.
25
Accrued interest payable on borrowed funds amounted to $10,154,000 at year-end
2004, compared to $14,510,000 at year-end 2003. The decrease was due to
repayments of interest as well as the decrease resulting from the conversion of
debentures, partially offset by new accruals. A large portion of the accrued
interest payable is due and payable at the maturity of various debentures. For a
further discussion of borrowed funds, see notes 7 and 9 to the consolidated
financial statements in this report.
All Other Liabilities
- ---------------------
The table below sets forth the composition of the caption "All other
liabilities" in the table on page 20 as follows:
At December 31,
---------------
($ in thousands) 2004 2003
--------------------------------------------------------
Mortgage escrow funds payable $ 14,533 $ 10,540
Official checks outstanding 12,061 6,122
Accrued interest payable on deposits 1,718 1,080
Income taxes payable 81 807
All other liabilities 1,710 1,693
--------------------------------------------------------
$ 30,103 $ 20,242
--------------------------------------------------------
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted to third parties. The increase reflected
the growth in the loan portfolio. Official checks outstanding varies and
fluctuates based on banking activity. Accrued interest payable on deposits
fluctuates based on total deposits and timing of interest payments. Income taxes
payable fluctuates based on the Company's earnings, effective tax rate and
timing of tax payments. All other is comprised mainly of accrued expenses, as
well as fees received on loan commitments that have not yet been funded.
Stockholders' Equity
- --------------------
Stockholders' equity increased to $90,094,000 from $75,385,000 at year-end 2003
as follows:
($in thousands) Amount Shares Per Share
--------------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2003 $75,385 5,988,377 $ 12.59
Net earnings for the year 11,453 - -
Class A common stock warrants exercised 426 42,510 10.01
Convertible debentures converted at election of debenture holders 2,821 240,546 11.73
Compensation expense on warrants held by the Chairman (1) 9 - -
--------------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2004 $90,094 6,271,433 $ 14.37
--------------------------------------------------------------------------------------------------
(1) For discussion of compensation related to stock warrants, see note 14 to the consolidated
financial statements in this report.
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. For a
further discussion of these financial instruments, see note 19 to the
consolidated financial statements in this report.
LIQUIDITY
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of: retail deposits obtained through the Bank's branch offices
and through the mail; amortization, satisfactions and repayments of loans; the
maturities and calls of securities; issuance of debentures; borrowings from the
federal funds market, FHLB advances and cash provided by operating activities.
For additional information concerning the Company's cash flows, see the
consolidated statements of cash flows included in this report.
The Company believes that it can fund its contractual obligations (a detail of
which follows) from the aforementioned sources of funds. At December 31, 2004,
the Bank has agreements with correspondent banks whereby it may borrow up to an
additional $16,000,000 of federal funds on an unsecured basis. In addition, as a
member of the FHLB and the FRB, the Bank can also borrow from these institutions
on a secured basis that aggregated approximately $203,000,000 based on available
collateral at December 31, 2004.
26
CONTRACTUAL OBLIGATIONS
The table below summarizes the Company's contractual obligations as of December
31, 2004.
Due In
--------------------------------------
2006 and 2008 and 2010 and
($ in thousands) Total 2005 2007 2009 Later
- ------------------------------------------------------------------------------------------------------
Subordinated debentures and mortgage note payable $ 94,672 $ 29,116 $ 17,291 $ 25,635 $ 22,630
Subordinated debentures - capital securities 61,856 - - - 61,856
FHLB advances 36,000 36,000 - - -
Accrued interest payable on all borrowed funds 10,154 5,445 1,960 2,538 211
Deposits with no stated maturities 249,101 249,101 - - -
Deposits with stated maturities 744,771 269,553 254,189 204,100 16,929
Operating lease payments 8,243 907 1,763 1,734 3,839
Unfunded loan commitments (1) 159,697 154,085 5,612 - -
Available lines of credit (1) 789 789 - - -
Standby letters of credit (1) 750 750 - - -
- ------------------------------------------------------------------------------------------------------
$1,366,033 $745,746 $280,815 $234,007 $105,465
- ------------------------------------------------------------------------------------------------------
(1) Since some of the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements. The FDIC and
other bank regulatory agencies use five capital categories ranging from well
capitalized to critically undercapitalized to determine various matters,
including prompt corrective action and each institution's FDIC deposit insurance
premiums. These categories involve quantitative measures of a bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by the
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements.
The Bank is required to maintain regulatory defined minimum Tier 1 leverage and
Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%,
respectively. At December 31, 2004 and 2003, management believes the Bank met
its capital adequacy requirements and is a well-capitalized institution as
defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and
total risk-based ratios of 5%, 6% and 10%, respectively. Management believes
that there are no current conditions or events that would change the Bank's
designation as a well-capitalized institution.
Information regarding the Bank's regulatory capital and related ratios is
summarized as follows:
At December 31,
---------------
($ in thousands) 2004 2003
-------------------------------------------------------------------------------------------
Tier 1 Capital: Stockholder's equity $ 111,343 $ 73,907
Disallowed portion of deferred tax asset (4,619) (2,508)
----------------------
106,724 71,399
Tier 2 Capital: Allowable portion of allowance for loan losses 10,689 6,310
-------------------------------------------------------------------------------------------
Total risk-based capital $ 117,413 $ 77,709
-------------------------------------------------------------------------------------------
Net risk-weighted assets $ 971,823 $620,155
Average assets for regulatory purposes $1,140,624 $739,234
-------------------------------------------------------------------------------------------
Tier 1 capital to average assets 9.36% 9.66%
Tier 1 capital to risk-weighted assets 10.98% 11.51%
Total capital to risk-weighted assets 12.08% 12.53%
-------------------------------------------------------------------------------------------
The Holding Company on a consolidated basis is subject to minimum regulatory
capital requirements administered by the FRB. These guidelines require a ratio
of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted
assets of at least 4% and a ratio of total capital to risk-weighted assets of at
least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted
total average assets of not less than 3%. At December 31, 2004 and 2003,
management believes that the Holding Company met its capital adequacy
requirements.
27
Information regarding the Holding Company's regulatory capital and related
ratios is summarized below:
At December 31,
---------------
($ in thousands) 2004 2003
----------------------------------------------------------------------------------------------------
Tier 1 Capital: Stockholder's equity $ 90,094 $ 75,385
Capital Securities limited to 25% of core capital 30,032 25,122
----------------------
Total core capital elements 120,126 100,507
Disallowed portion of deferred tax asset (5,095) (2,936)
----------------------------------------------------------------------------------------------------
Total Tier 1 Capital 115,031 97,571
----------------------------------------------------------------------------------------------------
Tier 2 Capital : Excess Capital Securities 29,968 4,878
Allowable portion of allowance for loan losses 11,106 6,580
----------------------------------------------------------------------------------------------------
Total Tier 2 Capital 41,074 11,458
----------------------------------------------------------------------------------------------------
Total risk-based capital $ 156,105 $109,029
----------------------------------------------------------------------------------------------------
Net risk-weighted assets $1,096,711 $734,839
Average assets for regulatory purposes $1,273,770 $862,873
----------------------------------------------------------------------------------------------------
Tier 1 capital to average assets 9.03% 11.31%
Tier 1 capital to risk-weighted assets 10.49% 13.28%
Total capital to risk-weighted assets 14.23% 14.84%
----------------------------------------------------------------------------------------------------
On January 1 2004, the Company adopted FIN 46-R, "Consolidation of Variable
Interest Entities," which requires bank holding companies that have used
controlled business trusts to raise financing by issuing trust preferred
securities to deconsolidate their investments in those trusts. For a further
discussion of FIN 46-R and the regulatory implications, see the section entitled
"Recent Accounting and Regulatory Developments" in note 1 to the consolidated
financial statements.
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital
Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net
capital of $5,000. At December 31, 2004 and 2003, Intervest Securities
Corporation's net capital was $481,000 and $459,000, respectively.
ASSET AND LIABILITY MANAGEMENT
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company does note engage in trading
or hedging activities, nor does it invest in interest rate derivatives or enter
into interest rate swaps. The primary objective of the Company's
asset/liability management strategy is to limit, within established guidelines,
the adverse impact of changes in interest rates on its net interest income and
capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. An asset
or liability is normally considered to be interest-rate sensitive if it will
reprice or mature within one year or less. The interest-rate sensitivity gap is
the difference between interest-earning assets and interest-bearing liabilities
scheduled to mature or reprice within one-year. A gap is considered positive
when the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. Conversely, a gap is considered negative when the
opposite is true.
In a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to increase net
interest income. In a period of falling interest rates, a negative gap would
tend to increase net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of the Company's assets
and liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates for the
following reasons. Income associated with interest-earning assets and costs
associated with interest-bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in market rates. In addition,
certain assets, such as adjustable-rate mortgage loans, may have
28
features generally referred to as "interest rate caps or collars," which limit
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, asset prepayment and early deposit
withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest-rate increase, and the
behavior of depositors may be different than those assumed in the gap analysis.
The Company's one-year positive interest rate sensitivity gap remained
relatively unchanged at $114,022,000, or 8.7% of total assets, at December 31,
2004, compared to $118,124,000, or 13.0% at December 31, 2003. For purposes of
computing the gap, all deposits with no stated maturities are treated as readily
accessible accounts. However, if such deposits were treated differently, the
one-year gap would then change. The behavior of core depositors may not
necessarily result in the immediate withdrawal of funds in the event deposit
rates offered by the Bank did not change as quickly and uniformly as changes in
general market rates. For example, if only 25% of deposits with no stated
maturity were assumed to be readily accessible, the one-year gap would have been
a positive 22.5% at year-end 2004, compared to a positive 29.6% at year-end
2003.
Many of the Company's floating-rate loans have a "floor," or minimum rate, that
is determined in relation to prevailing market rates on the date of origination.
This floor only adjusts upwards in the event of increases in the loan's interest
rate. This feature reduces the effect on interest income of a falling rate
environment because the interest rates on such loans do not reset downward.
Notwithstanding all of the above, there can be no assurances that a sudden and
substantial increase in interest rates may not adversely impact the Company's
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
The table below summarizes interest-earning assets and interest-bearing
liabilities as of December 31, 2004, that are scheduled to mature or reprice
within the periods shown.
0-3 4-12 Over 1-4 Over 4
--------- --------- ---------- ---------
($in thousands) Months Months Years Years Total
----------------------------------------------------------------------------------------------------
Loans (1) $281,578 $283,239 $ 305,890 $156,036 $1,026,743
Securities held to maturity (2) 34,343 82,716 130,712 1,117 248,888
Short-term investments 12,573 - - - 12,573
FRB and FHLB stock 2,628 - - 2,464 5,092
----------------------------------------------------------------------------------------------------
Total rate-sensitive assets $331,122 $365,955 $ 436,602 $159,617 $1,293,296
----------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 15,051 $ - $ - $ - $ 15,051
Savings deposits 27,359 - - - 27,359
Money market deposits 200,549 - - - 200,549
Certificates of deposit 57,327 212,225 329,506 145,713 744,771
----------------------------------------------------------------------------------------------------
Total deposits 300,286 212,225 329,506 145,713 987,730
----------------------------------------------------------------------------------------------------
FHLB advances 36,000 - - - 36,000
Debentures and mortgage note payable (1) 26,100 3,000 49,794 77,634 156,528
Accrued interest on all borrowed funds (1) 5,327 117 4,322 388 10,154
----------------------------------------------------------------------------------------------------
Total borrowed funds 67,427 3,117 54,116 78,022 202,682
----------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $367,713 $215,342 $ 383,622 $223,735 $1,190,412
----------------------------------------------------------------------------------------------------
GAP (repricing differences) $(36,591) $150,613 $ 52,980 $(64,118) $ 102,884
----------------------------------------------------------------------------------------------------
Cumulative GAP $(36,591) $114,022 $ 167,002 $102,884 $ 102,884
----------------------------------------------------------------------------------------------------
Cumulative GAP to total assets -2.8% 8.7% 12.7% 7.8% 7.8%
----------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the gap table above:
(1) Floating-rate loans and debentures payable are included in the period in which their interest
rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate loans
and debentures payable are scheduled, including repayments, according to their contractual
maturities. Deferred loan fees are excluded from this analysis; (2) securities are scheduled
according to the earlier of their contractual maturity or the date in which the interest rate is
scheduled to increase. The effects of possible prepayments that may result from the issuer's right
to call a security before its contractual maturity date are not considered; (3) interest checking,
savings and money market deposits are regarded as ready accessible withdrawable accounts; and
certificates of deposit are scheduled through their maturity dates.
29
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
2003.
General
- -------
Consolidated net earnings for 2004 increased by $2,333,000, or 26%, to
$11,453,000, or $1.71 per diluted share, from $9,120,000, or $1.53 per diluted
share, reported in 2003. The $2,333,000 increase in earnings was due to growth
in net interest and dividend income of $5,966,000 and an increase of $1,819,000
in noninterest income. These revenue increases were partially offset by a
$2,557,000 increase in the provision for loan losses, a $1,903,000 increase in
income tax expense and a $992,000 increase in noninterest expenses. The
Company's return on average assets and equity was 1.02% and 14.14%,
respectively, in 2004, compared to 1.19% and 15.34% in 2003, and its efficiency
ratio (which is a measure of its ability to control expenses as a percentage of
its revenues) stood at 25% for 2004.
Selected information regarding results of operations by entity for 2004 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($in thousands) Bank Corp. Corp. Company Amts (2) Combined
- ------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 55,770 $ 9,896 $ 6 $ 1,087 $ (210) $ 66,549
Interest expense 26,597 7,945 - 4,351 (210) 38,683
----------------------------------------------------------------------
Net interest and dividend income 29,173 1,951 6 (3,264) - 27,866
Provision for loan losses 4,379 140 - 7 - 4,526
Noninterest income 4,272 4,915 119 389 (4,555) 5,140
Noninterest expenses 9,935 2,347 84 440 (4,555) 8,251
----------------------------------------------------------------------
Earnings before taxes 19,131 4,379 41 (3,322) - 20,229
Provision for income taxes 8,266 2,025 19 (1,534) - 8,776
- ------------------------------------------------------------------------------------------------------------------
Net earnings $ 10,865 $ 2,354 $ 22 $ (1,788) $ - $ 11,453
- ------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (3,429) - - 3,429 $ - -
- ------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 7,436 $ 2,354 $ 22 $ 1,641 $ 11,453
- ------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany
dividends for 2003 $ 6,972 $ 1,759 $ (6) $ 395 $ - $ 9,120
- ------------------------------------------------------------------------------------------------------------------
(1) Dividends to the Holding Company provide funds for the debt service on the Capital Securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise
from intercompany deposit accounts and management and service agreements.
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased by $5,966,000 to $27,866,000 in 2004,
from $21,900,000 in 2003. The improvement was attributable to a $350,742,000
increase in average interest-earning assets resulting from continued growth in
loans of $282,168,000 and a higher level of security and short-term investments
aggregating $68,574,000. The growth in average assets was funded by $287,439,000
of new deposits, $34,429,000 of additional borrowed funds and a $21,553,000
increase in stockholders' equity (resulting from earnings and the issuance of
shares upon the exercise of common stock warrants and conversion of convertible
debentures).
The Company's net interest margin decreased to 2.52% in 2004 from 2.90% in 2003.
The decrease was due to the Company's yield on interest-earning assets
decreasing at a faster pace than its cost of funds. In a low interest rate
environment, the yield on interest-earning assets decreased 67 basis points to
6.02% in 2004 due to lower rates on new mortgage loans originated and
prepayments of higher-yielding loans. The cost of funds decreased 33 basis
points to 3.84% in 2004 due to lower rates paid on deposit accounts and the
addition of new debentures with lower rates than existing ones, partially offset
by rate increases on floating-rate debentures. These floating-rate debentures
are indexed to the JPMorgan Chase Bank prime rate, which increased by a total of
125 basis points from year-end 2003.
30
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2004 and 2003. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
-------------------------------
2004 2003
-------------------------------- ------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $ 867,724 $ 61,928 7.14% $585,556 $ 47,223 8.06%
Securities 207,557 4,259 2.05 143,766 2,965 2.06
Other interest-earning assets 29,766 362 1.22 24,983 276 1.10
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,105,047 $ 66,549 6.02% 754,305 $ 50,464 6.69%
- -------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,505 13,686
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,120,552 $767,991
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 12,052 $ 187 1.55% $ 11,120 $ 182 1.64%
Savings deposits 30,803 550 1.79 31,782 601 1.89
Money market deposits 191,495 3,583 1.87 146,509 2,763 1.89
Certificates of deposit 612,735 22,010 3.59 370,235 14,891 4.02
- -------------------------------------------------------------------------------------------------------------------
Total deposit accounts 847,085 26,330 3.11 559,646 18,437 3.29
- -------------------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances 1,914 40 2.09 - - -
Debentures and accrued interest payable 109,697 8,801 8.02 105,347 8,316 7.89
Debentures - capital securities 47,533 3,495 7.35 19,356 1,793 9.26
Mortgage note payable 249 17 7.00 261 18 7.00
- -------------------------------------------------------------------------------------------------------------------
Total borrowed funds 159,393 12,353 7.75 124,964 10,127 8.10
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,006,478 $ 38,683 3.84% 684,610 $ 28,564 4.17%
- -------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,599 5,666
Noninterest-bearing liabilities 26,471 18,264
Stockholders' equity 81,004 59,451
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,120,552 $767,991
- -------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 27,866 2.18% $ 21,900 2.52%
- -------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 98,569 2.52% $ 69,695 2.90%
- -------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.10x
- -------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 1.02% 1.19%
Return on average equity 14.14% 15.34%
Noninterest expense to average assets 0.74% 0.95%
Efficiency ratio (2) 25.00% 28.78%
Average stockholders' equity to average assets 7.23% 7.74%
- -------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans.
(2) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and
dividend income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
31
For the Year Ended December 31, 2004 vs. 2003
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volum e Total
------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ (5,387) $ 22,743 $ (2,651) $ 14,705
Securities (14) 1,314 (6) 1,294
Other interest-earning assets 30 53 3 86
------------------------------------------------------------------------------------------------------
Total interest-earning assets (5,371) 24,110 (2,654) 16,085
------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (10) 15 - 5
Savings deposits (32) (19) - (51)
Money market deposits (29) 850 (1) 820
Certificates of deposit (1,592) 9,749 (1,038) 7,119
------------------------------------------------------------------------------------------------------
Total deposit accounts (1,663) 10,595 (1,039) 7,893
------------------------------------------------------------------------------------------------------
Total borrowed funds (233) 2,951 (492) 2,226
------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1,896) 13,546 (1,531) 10,119
------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (3,475) $ 10,564 $ (1,123) $ 5,966
------------------------------------------------------------------------------------------------------
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $4,526,000 in 2004 from $1,969,000 in
2003. The higher provision was a function of loan growth, which amounted to
$347,887,000 in 2004 versus $183,554,000 in 2003, as well as a decrease in the
credit grade of two loans during the third quarter of 2004.
Noninterest Income
- ------------------
Noninterest income increased by $1,819,000 to $5,140,000 in 2004 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003
-----------------------------------------------------------------------------------------
Customer service fees $ 252 $ 187
Income from mortgage lending activities (1) 1,221 824
Income from the early repayment of mortgage loans (2) 3,546 2,317
Commissions and fees 119 38
Gain (loss) from early call of investment securities (3) 2 (51)
All other noninterest income - 6
-----------------------------------------------------------------------------------------
$ 5,140 $ 3,321
-----------------------------------------------------------------------------------------
(1) Consists mostly of fees from expired loan commitments and loan
servicing, maintenance and inspections charges.
(2) Consists of the recognition of any unearned fees at the time of payoff
and the receipt of prepayment income in certain cases.
(3) Consists of the recognition of any unamortized premium or discount at
time of call.
The increase of $1,819,000 was primarily due to higher income of $1,229,000 from
the prepayment of mortgage loans, a $321,000 increase in loan service charges
and $76,000 of additional fee income from loan commitments that expired and were
not funded.
Noninterest Expenses
- --------------------
Noninterest expenses increased by $992,000 to $8,251,000 in 2004 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003
----------------------------------------------------------------------
Salaries and employee benefits $ 4,046 $ 3,655
Occupancy and equipment, net 1,659 1,270
Data processing 428 533
Professional fees and services 411 364
Stationery, printing and supplies 180 152
Postage and delivery 111 101
FDIC and general insurance 264 225
Director and committee fees 397 229
Advertising and promotion 110 35
All other expenses 645 695
----------------------------------------------------------------------
$ 8,251 $ 7,259
----------------------------------------------------------------------
32
Salaries and employee benefits expense increased due to the following: $589,000
from salary increases, a higher cost of employee benefits and additional staff;
$350,000 from bonus payments to certain executives of the Company in connection
with the sale of capital securities and leasing of new space; and $41,000 of
additional commission expense. The increases were partially offset by a $435,000
decrease in compensation from common stock warrants and a $154,000 decrease in
compensation resulting from a higher level of SFAS No. 91 direct fee income (due
to more loan originations). The Company had 64 fulltime employees at December
31, 2004 versus 61 at December 31, 2003. See note 14 to the consolidated
financial statements in this report for additional information on common stock
warrants.
Occupancy and equipment expense increased due to the leasing of larger office
space. In May, Intervest Bancshares Corporation and its wholly owned
subsidiaries, Intervest National Bank (New York office), Intervest Mortgage
Corporation and Intervest Securities Corporation, completed their move to newly
constructed offices on the entire fourth floor at One Rockefeller Plaza in New
York City. Intervest Mortgage Corporation's lease obligation of approximately
$22,000 per month on its former space at 10 Rockefeller Plaza expired in
September 2004.
Professional fees and services, stationery, printing and supplies, postage and
delivery, and FDIC and general insurance expenses increased largely due to the
Company's growth.
Data processing expense decreased due to lower fees incurred by the Bank despite
an increase in its assets. The Bank renegotiated its data processing contract
during late 2003 by extending the expiration date to 2010 and reducing the
processing fee to a fixed amount until its assets reach $1.1 billion. Thereafter
the fee becomes variable and is calculated based on total assets. Previously,
the data processing fee was entirely variable and a function of the Bank's total
assets.
Director and committee fees increased due to higher fees paid to directors for
each board and committee meeting attended. The fees were increased in June 2003
and October 2004.
Advertising expense increased due to additional advertising to support loan and
deposit growth.
All other expenses were lower due to a decrease of $49,000 in losses from
transactional accounts and a decrease in foreclosed real estate expenses of
$64,000, partial offset by increased travel, telephone and franchise tax
expense.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased by $1,903,000 to $8,776,000 in 2004,
from $6,873,000 in 2003, due to higher pre-tax income. The Company's effective
tax rate (inclusive of state and local taxes) amounted to 43.4% in 2004,
compared to 43.0% in 2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002.
General
- -------
Consolidated net earnings for 2003 increased 32% to $9,120,000, or $1.53 per
fully diluted share, from $6,906,000, or $1.37 per fully diluted share, for
2002. The growth in earnings was due to a $4,746,000 increase in net interest
and dividend income and a $1,103,000 increase in noninterest income, partially
offset by a $2,160,000 increase in the provision for income taxes, a $780,000
increase in noninterest expenses, and a $695,000 increase in the provision for
loan losses.
The diluted per share computation for 2003 included a higher number of common
shares outstanding resulting from the exercise of common stock warrants,
conversion of debentures and a higher stock price. Return on average assets and
equity was 1.19% and 15.34%, respectively, for 2003, compared to 1.13% and
15.56% for 2002.
33
Selected information regarding results of operations by entity for 2003 follows:
Intervest Intervest Inter-
Intervest National Mortgage Securities Holding Company
($in thousands) Bank Corp Corp (2) Company Amts (3) Combined
- ---------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 40,232 $ 9,269 $ 3 $ 1,125 $ (165) $ 50,464
Interest expense 18,620 7,140 - 3,024 (220) 28,564
-------------------------------------------------------------------------------
Net interest and dividend income 21,612 2,129 3 (1,899) 55 21,900
Provision for loan losses 1,846 91 - 32 - 1,969
Noninterest income 2,687 2,799 38 346 (2,549) 3,321
Noninterest expenses 7,372 1,582 51 748 (2,494) 7,259
-------------------------------------------------------------------------------
Earnings before taxes 15,081 3,255 (10) (2,333) - 15,993
Provision for income taxes 6,414 1,496 (4) (1,033) - 6,873
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 8,667 $ 1,759 $ (6) $ (1,300) $ - $ 9,120
- ---------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (1,695) - - 1,695 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 6,972 $ 1,759 $ (6) $ 395 $ - $ 9,120
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany
dividends for 2002 $ 4,959 $ 1,567 $ - $ 380 $ - $ 6,906
- ---------------------------------------------------------------------------------------------------------------------------
(1) Dividends to the Holding Company provide funds for the debt service on
the Capital Securities, which is included in the Holding Company's interest
expense.
(2) Results are from date of acquisition, June 2, 2003 through December 31,
2003.
(3) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise from intercompany deposit accounts and
management and service agreements.
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased by $4,746,000 to $21,900,000 in 2003,
from $17,154,000 in 2002. The increase was attributable to growth of
$158,223,000 in average interest-earning assets and a slightly higher net
interest margin. The growth in assets is reflected in new mortgage loans of
$146,315,000 and new security and short-term investments aggregating
$11,908,000. The growth in assets was funded primarily by $118,602,000 of
interest-bearing deposits, $18,832,000 of additional borrowed funds and a
$15,067,000 increase in stockholders' equity (resulting from earnings and the
issuance of shares upon the exercise of common stock warrants and conversion of
convertible debentures).
The Company's net interest margin increased to 2.90% in 2003 from 2.88% in 2002.
The increase was due to the Company's cost of funds decreasing at a faster pace
than its yield on interest-earning assets in a declining interest rate
environment. The yield on interest-earning assets decreased 60 basis points to
6.69% in 2003 primarily due to lower rates on new mortgage loans originated,
prepayments of higher-yielding loans and lower yields earned on security and
other short-term investments (including the effect of early calls of securities
with the resulting proceeds being invested in lower yielding securities). The
cost of funds decreased 64 basis points to 4.17% in 2003 largely due to lower
rates paid on deposit accounts and $41,500,000 of floating-rate debentures. The
debentures are indexed to the JPMorgan Chase Bank prime rate, which decreased by
a total of 25 basis points from year-end 2002.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2003 and 2002. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
34
For the Year Ended December 31,
-------------------------------
2003 2002
---------------------------------- -----------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $ 585,556 $ 47,223 8.06% $ 439,241 $ 39,273 8.94%
Securities 143,766 2,965 2.06 142,840 3,964 2.78
Other interest-earning assets 24,983 276 1.10 14,001 242 1.73
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 754,305 $ 50,464 6.69% 596,082 $ 43,479 7.29%
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 13,686 14,586
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 767,991 $ 610,668
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 11,120 $ 182 1.64% $ 9,521 $ 221 2.32%
Savings deposits 31,782 601 1.89 29,221 762 2.61
Money market deposits 146,509 2,763 1.89 119,582 3,082 2.58
Certificates of deposit 370,235 14,891 4.02 282,720 13,304 4.71
- ---------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 559,646 18,437 3.29 441,044 17,369 3.94
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds purchased - - - 116 2 1.87
Debentures and accrued interest payable 105,347 8,316 7.89 90,777 7,440 8.20
Debentures - capital securities 19,356 1,793 9.26 15,000 1,497 9.98
Mortgage note payable 261 18 7.00 239 17 7.00
- ---------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 124,964 10,127 8.10 106,132 8,956 8.44
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 684,610 $ 28,564 4.17% 547,176 $ 26,325 4.81%
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,666 5,277
Noninterest-bearing liabilities 18,264 13,831
Stockholders' equity 59,451 44,384
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 767,991 $ 610,668
- ---------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 21,900 2.52% $ 17,154 2.48%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 69,695 2.90% $ 48,906 2.88%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.09x
- ---------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 1.19% 1.13%
Return on average equity 15.34% 15.56%
Noninterest expense to average assets 0.95% 1.06%
Efficiency ratio (2) 28.78% 33.45%
Average stockholders' equity to average assets 7.74% 7.27%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans.
(2) Defined as noninterest expenses (excluding the provision for loan losses) as
a percentage of net interest and dividend income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
35
For the Year Ended December 31, 2003 vs. 2002
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
-----------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ (3,850) $ 13,082 $ (1,282) $ 7,950
Securities (1,018) 26 (7) (999)
Other interest-earning assets (87) 190 (69) 34
-----------------------------------------------------------------------------------------------------
Total interest-earning assets (4,955) 13,298 (1,358) 6,985
-----------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (65) 37 (11) (39)
Savings deposits (209) 67 (19) (161)
Money market deposits (827) 694 (186) (319)
Certificates of deposit (1,933) 4,118 (598) 1,587
-----------------------------------------------------------------------------------------------------
Total deposit accounts (3,034) 4,916 (814) 1,068
-----------------------------------------------------------------------------------------------------
Total borrowed funds (384) 1,629 (73) 1,172
-----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (3,418) 6,545 (887) 2,240
-----------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (1,537) $ 6,753 $ (471) $ 4,745
-----------------------------------------------------------------------------------------------------
Provision for Loan Losses
- -------------------------
The provision for loan losses increased to $1,969,000 in 2003 from $1,274,000 in
2002. The higher provision was a function of loan growth ($183,554,000 in 2003
versus $123,028,000 in 2002).
Noninterest Income
- ------------------
Noninterest income increased by $1,103,000 to $3,321,000 in 2003 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2003 2002
----------------------------------------------------------------------------------------
Customer service fees $ 187 $ 171
Income from mortgage lending activities (1) 824 485
Income from the early repayment of mortgage loans (2) 2,317 1,435
Gain from the sale of securities available for sale - 120
Commissions and fees 38 -
(Loss) gain from early call of investment securities (3) (51) 7
All other noninterest income 6 -
----------------------------------------------------------------------------------------
$ 3,321 $ 2,218
----------------------------------------------------------------------------------------
(1) Consists mostly of fees from expired loan commitments and loan
servicing, maintenance and inspections charges.
(2) Consists of the recognition of any unearned fees at the time of payoff
and the receipt of prepayment income in certain cases.
(3) Consists of the recognition of any unamortized premium or discount at
time of call.
The increase of $1,103,000 was due to higher income of $882,000 from the
prepayment of mortgage loans and increases in fees earned on expired loan
commitments and loan service charge income aggregating $339,000. These items
were partially offset by a gain of $120,000 from the sale of securities in 2002.
Noninterest Expenses
- --------------------
Noninterest expenses increased by $780,000 to $7,259,000 in 2003 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2003 2002
------------------------------------------------------------------
Salaries and employee benefits $ 3,655 $ 3,016
Occupancy and equipment, net 1,270 1,318
Data processing 533 564
Professional fees and services 364 350
Stationery, printing and supplies 152 141
Postage and delivery 101 93
FDIC and general insurance 225 179
Director and committee fees 229 95
Advertising and promotion 35 69
All other expenses 695 654
------------------------------------------------------------------
$ 7,259 $ 6,479
------------------------------------------------------------------
36
Salaries and employee benefits expense increased due to the following: $613,000
from additional staff (61 employees at year-end 2003 versus 56 at year-end
2002), salary increases and a higher cost of employee benefits; and $309,000
from common stock warrants. These items were partially offset by a $133,000
increase in SFAS No. 91 direct fee income (due to more loan originations as well
as a higher amount recognized per loan) and bonus payments totaling $150,000 to
the Chairman of the Company in 2002 that did not recur in 2003. See note 14 to
the consolidated financial statements in this report for additional information
on common stock warrants.
Occupancy and equipment expense was lower due to an increase in sublease rental
income ($40,000) from the Bank's Florida branches as well as depreciation
expense ($50,000) recorded in 2002 in connection with the disposal of various
equipment by the Bank that did not recur in 2003. These items were partially
offset by rent expense incurred by Intervest Mortgage Corporation from leasing
additional space in 2003.
Data processing expense decreased slightly to lower fees incurred by the Bank
despite an increase in its assets. The Bank renegotiated its data processing
contract during late 2003 by extending the expiration date to 2010 and reducing
the processing fee to a fixed amount until its assets reach $1.1 billion.
Thereafter the fee becomes variable and is calculated based on total assets.
Previously, the data processing fee was entirely variable and a function of the
Bank's total assets.
Professional fees and services, stationery, printing and supplies, and postage
and delivery expenses increased largely due to the Company's growth.
FDIC and general insurance expense increased due to higher FDIC premiums (due to
deposit growth) and general insurance premiums (due to rate increases).
Director and committee fees increased due to higher fees paid to directors for
each board and committee meeting attended. The fees were increased in June 2003.
Advertising and promotion expense decreased due to less advertising for loans
and deposits.
All other expenses were higher primarily due to an increase in operational
losses of $23,000 (resulting from growth in transactional deposit accounts).
Provision for Income Taxes
- --------------------------
The provision for income taxes increased by $2,160,000 to $6,873,000 in 2003,
from $4,713,000 in 2002, due to higher pre-tax income. The Company's effective
tax rate (inclusive of state and local taxes) amounted to 43.0% in 2003,
compared to 40.6% in 2002. The higher rate is due to a larger portion of
consolidated taxable income being generated from New York operations, which has
a higher income tax rate than Florida.
RECENT ACCOUNTING PRONOUNCEMENTS
See note 1 to the consolidated financial statements for a discussion of this
topic.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning the Company
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, 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. Virtually all of the
assets and liabilities of the Company are monetary in nature. As a result,
changes in interest rates have a more significant impact on the performance of
the Company than do the effects of changes in the general rate of inflation and
in prices. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit-taking activities, and the issuance of
its debentures. The Company has not engaged in and accordingly has no risk
related to trading accounts, commodities, interest rate hedges or foreign
exchange. The measurement of market risk associated with financial instruments
is meaningful only when all related and offsetting on-and off-balance sheet
transactions are aggregated, and the resulting net positions are identified.
Disclosures about the fair value of financial instruments as of December 31,
2004 and 2003, which reflect changes in market prices and rates, can be found in
note 20 to the consolidated financial statements.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within established guidelines, the adverse impact of changes in interest rates
on the Company's net interest income and capital. For a further discussion, see
the section entitled "Asset and Liability Management" in Item 7 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
herein:
- - Report of Independent Registered Public Accounting Firm - Hacker, Johnson &
Smith, P.A., P.C. (PAGE 40)
- - Report of Independent Registered Public Accounting Firm - Eisner LLP
(PAGE 41)
- - Consolidated Balance Sheets at December 31, 2004 and 2003 (PAGE 42)
- - Consolidated Statements of Earnings for the Years Ended December 31, 2004,
2003 and 2002 (PAGE 43)
- - Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2004, 2003 and 2002 (PAGE 44)
- - Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2004, 2003 and 2002 (PAGE 45)
- - Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
2003 and 2002 (PAGE 46)
- - Notes to the Consolidated Financial Statements (PAGES 47 TO 69)
SUPPLEMENTARY DATA
Securities Held to Maturity
- ---------------------------
The following table sets forth information regarding securities held to
maturity:
After One Year to After Five Years to
----------------- -------------------
One Year or Less Five Years Ten Years Total
---------------- ---------- --------- -----
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
($ in thousands) Value Yield Value Yield Value Yield Value Yield
- ------------------------------------------------------------------------------------------------------------
At December 31, 2004:
- ---------------------
U.S. government agencies $ 84,586 1.81% $164,302 2.59% $ - - % $248,888 2.33%
At December 31, 2003:
- ---------------------
U.S. government agencies $ 70,026 1.68% $ 82,797 1.81% $ - - % $152,823 1.75%
At December 31, 2002:
- ---------------------
U.S. government agencies $ 75,566 2.52% $ 70,128 2.25% $ - - % $145,694 2.39%
- ------------------------------------------------------------------------------------------------------------
38
SUPPLEMENTARY DATA, CONTINUED
Loans and Allowance for Loan Losses
- -----------------------------------
The following table sets forth information regarding loans receivable at
December 31:
2004 2003 2002 2001 2000
----------- ---------- ---------- ---------- ----------
Carrying Carrying Carrying Carrying Carrying
($in thousands) value value value value value
- ----------------------------------------------------------------------------------------------------------
Commercial real estate and multifamily loans $1,005,125 $ 654,721 $ 489,611 $ 365,736 $ 260,753
Land development and other land loans 19,198 20,526 1,890 2,485 2,531
Residential 1-4 family loans 984 1,628 1,953 2,404 3,034
Commercial business loans 1,215 1,662 1,608 1,363 1,781
Consumer loans 221 319 240 286 206
-----------------------------------------------------------
Loans receivable 1,026,743 678,856 495,302 372,274 268,305
Deferred loan fees (11,347) (7,731) (5,390) (3,748) (1,979)
-----------------------------------------------------------
Loans receivable, net of deferred fees 1,015,396 671,125 489,912 368,526 266,326
Allowance for loan losses (11,106) (6,580) (4,611) (3,380) (2,768)
- ----------------------------------------------------------------------------------------------------------
Loans receivable, net $1,004,290 $ 664,545 $ 485,301 $ 365,146 $ 263,558
- ----------------------------------------------------------------------------------------------------------
Loans included above that were
on a nonaccrual status at year end $ 4,607 $ 8,474 $ - $ 1,243 $ -
- ----------------------------------------------------------------------------------------------------------
The following table sets forth information regarding the allowance for loan
losses at December 31:
($in thousands) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 6,580 $ 4,611 $ 3,380 $ 2,768 $ 2,493
Provision charged to operations 4,526 1,969 1,274 612 275
Chargeoffs - - (150) - -
Recoveries - - 107 - -
- ----------------------------------------------------------------------------------------------------
Allowance at end of year $ 11,106 $ 6,580 $ 4,611 $ 3,380 $ 2,768
- ----------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $1,015,396 $671,125 $489,912 $368,526 $266,326
Average loans outstanding during the year $ 867,724 $585,556 $439,241 $315,148 $250,941
Ratio of allowance to net loans receivable 1.09% 0.98% 0.94% 0.92% 1.04%
- ----------------------------------------------------------------------------------------------------
Other financial statement schedules and inapplicable periods with respect to
schedules listed above are omitted because the conditions requiring their filing
do not exist or the information required thereby is included in the consolidated
financial statements filed, including the notes thereto.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 Subsidiaries (the "Company") as of December 31, 2004
and 2003 and the related consolidated statements of earnings, comprehensive
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 2004. 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 were furnished the reports of the other auditor on their audits of the
consolidated financial statements of Intervest Mortgage Corporation, whose total
assets as of December 31, 2004 and 2003, constituted 8.6% and 11.1% of the
related consolidated totals, respectively, and whose net interest income,
noninterest income and net earnings, constituted 7.0%, 14.3% and 20.6%,
respectively in 2004, 9.7%, 14.8% and 19.3%, respectively in 2003 and 12.4%,
21.9% and 22.7%, respectively in 2002, of the related consolidated totals. Our
opinion, insofar as it relates to the amounts included in the consolidated
totals, are based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of another independent
registered public accounting firm, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company at December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2004 in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the accompanying consolidated financial statements, in
2004, the Company adopted Financial Accounting Standards Board Interpretation
No. 46 "Consolidation of Variable Interest Entities" as revised in December
2003. In accordance with this Interpretation, Intervest Statutory Trusts I, II,
III and IV are not consolidated in the financial statements of the Company. The
Company has also elected to adopt this Interpretation on a retroactive basis.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ---------------------------------------------
Hacker, Johnson & Smith, P.A., P.C.
Tampa, Florida
March 11, 2005
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have audited the consolidated balance sheets of Intervest Mortgage
Corporation and subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 2004
(all of which are not presented separately herein). 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above fairly present, in
all material respects, the consolidated financial position of Intervest Mortgage
Corporation and subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004 in conformity with U.S.
generally accepted accounting principles.
/s/ Eisner LLP
- ----------------
Eisner LLP
New York, New York
February 10, 2005
41
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
---------------------
($in thousands, except par value) 2004 2003
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 12,026 $ 8,833
Federal funds sold 9,948 36,816
Commercial paper and other short-term investments 2,625 18,479
---------------------
Total cash and cash equivalents 24,599 64,128
Securities held to maturity, net 248,888 152,823
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 5,092 3,075
Loans receivable (net of allowance for loan losses of $11,106 and $6,580, respectively) 1,004,290 664,545
Accrued interest receivable 6,699 4,995
Loan fees receivable 8,208 5,622
Premises and equipment, net 6,636 5,752
Deferred income tax asset 5,095 2,960
Deferred debenture offering costs, net 4,929 4,023
Other assets 2,315 3,600
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,316,751 $ 911,523
- --------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 6,142 $ 6,210
Interest-bearing deposit accounts:
Checking (NOW) accounts 15,051 9,146
Savings accounts 27,359 30,784
Money market accounts 200,549 162,214
Certificate of deposit accounts 744,771 467,159
---------------------
Total deposit accounts 993,872 675,513
Borrowed funds:
Federal Home Loan Bank advances 36,000 -
Subordinated debentures 94,430 94,690
Subordinated debentures - capital securities 61,856 30,928
Accrued interest payable on all borrowed funds 10,154 14,510
Mortgage note payable 242 255
---------------------
Total borrowed funds 202,682 140,383
Accrued interest payable on deposits 1,718 1,080
Mortgage escrow funds payable 14,533 10,540
Official checks outstanding 12,061 6,122
Other liabilities 1,791 2,500
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,226,657 836,138
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 5, 17 and 19)
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
5,886,433 and 5,603,377shares issued and outstanding, respectively) 5,886 5,603
Class B common stock ($1.00 par value, 700,000 shares authorized,
and 385,000 shares issued and outstanding) 385 385
Additional paid-in-capital, common 38,961 35,988
Retained earnings 44,862 33,409
- --------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 90,094 75,385
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,316,751 $ 911,523
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
-------------------------------
($in thousands, except per share data) 2004 2003 2002
- --------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 61,928 $ 47,223 $ 39,273
Securities 4,259 2,965 3,964
Other interest-earning assets 362 276 242
- --------------------------------------------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME 66,549 50,464 43,479
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 26,330 18,437 17,369
Subordinated debentures 8,801 8,316 7,440
Subordinated debentures - capital securities 3,495 1,793 1,497
Other borrowed funds 57 18 19
- --------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 38,683 28,564 26,325
- --------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME 27,866 21,900 17,154
Provision for loan losses 4,526 1,969 1,274
- --------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 23,340 19,931 15,880
- --------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 252 187 171
Income from mortgage lending activities 1,221 824 485
Income from the early repayment of mortgage loans 3,546 2,317 1,435
Commissions and fees 119 38 -
Gain from the sales of securities available for sale - - 120
Gain (loss) from early call of investment securities 2 (51) 7
All other - 6 -
- --------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 5,140 3,321 2,218
- --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 4,046 3,655 3,016
Occupancy and equipment, net 1,659 1,270 1,318
Data processing 428 533 564
Professional fees and services 411 364 350
Stationery, printing and supplies 180 152 141
Postage and delivery 111 101 93
FDIC and general insurance 264 225 179
Director and committee fees 397 229 95
Advertising and promotion 110 35 69
All other 645 695 654
- --------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 8,251 7,259 6,479
- --------------------------------------------------------------------------------------------------
Earnings before income taxes 20,229 15,993 11,619
Provision for income taxes 8,776 6,873 4,713
- --------------------------------------------------------------------------------------------------
NET EARNINGS $ 11,453 $ 9,120 $ 6,906
- --------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.89 $ 1.85 $ 1.71
DILUTED EARNINGS PER SHARE $ 1.71 $ 1.53 $ 1.37
DIVIDENDS PER SHARE $ - $ - $ -
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-------------------------------
($in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET EARNINGS $ 11,453 $ 9,120 $ 6,906
- --------------------------------------------------------------------------------------------------
Net unrealized holding losses on available-for-sale securities - - (72)
Reclassification adjustment for gains realized in earnings - - (120)
-------------------------------
Net unrealized losses on available-for-sale securities - - (192)
Credit for income taxes related to unrealized losses
on available-for-sale securities - - 81
-------------------------------
Other comprehensive loss, net of tax - - (111)
- --------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME, NET OF TAX $ 11,453 $ 9,120 $ 6,795
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
-------------------------------
($in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of year $ 5,603 $ 4,348 $ 3,545
Issuance of 42,510, 945,717 and 803,458 shares upon the exercise of warrants 43 946 803
Issuance of 240,546 and 309,573 shares upon the conversion of debentures 240 309 -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 5,886 5,603 4,348
- --------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of year 385 355 355
Issuance of 30,000 shares to acquire Intervest Securities Corporation - 30 -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 385 385 355
- --------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of year 35,988 24,134 19,001
Compensation related to vesting of certain Class B stock warrants 9 26 26
Compensation related to the modification of certain Class A stock warrants - 418 109
Issuance of 30,000 shares of Class B stock to acquire
Intervest Securities Corporation - 185 -
Issuance of 42,510, 945,717 and 803,458 shares of Class A stock upon the
exercise of Class A stock warrants, inclusive of tax benefits 383 8,520 4,998
Issuance of 240,546 and 309,573 shares of Class A stock
upon the conversion of debentures 2,581 2,705 -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 38,961 35,988 24,134
- --------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 33,409 24,289 17,383
Net earnings for the year 11,453 9,120 6,906
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 44,862 33,409 24,289
- --------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year - - 111
Net change in accumulated other comprehensive income, net - - (111)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year - - -
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
TOTAL STOCKHOLDERS' EQUITY AT END OF YEAR $ 90,094 $ 75,385 $ 53,126
==============================================================================================================
See accompanying notes to consolidated financial statements.
45
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
($in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 11,453 $ 9,120 $ 6,906
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 593 568 606
Provision for loan losses 4,526 1,969 1,274
Deferred income tax benefit (2,135) (963) (681)
Amortization of deferred debenture offering costs 1,249 1,084 919
Compensation expense related to common stock warrants 9 444 135
Amortization of premiums (accretion) of discounts and deferred loan fees, net (3,539) (1,610) (588)
Gain from sales of securities available for sale - - (120)
Net loss from sale of foreclosed real estate - 51 -
Net (decrease) increase in accrued interest payable on debentures (3,254) 1,648 2,392
Net increase in official checks outstanding 5,939 1,749 1,154
Net increase in loan fees receivable 2,586 1,916 1,027
Net change in all other assets and liabilities 2,051 2,951 1,775
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,478 18,927 14,799
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease (increase) in interest-earning time deposits with banks - 2,000 (1,750)
Maturities and calls of securities available for sale - - 2,500
Sales of securities available for sale - - 3,620
Maturities and calls of securities held to maturity 88,880 117,755 104,785
Purchases of securities held to maturity (187,089) (127,221) (153,335)
Net increase in loans receivable (347,887) (182,674) (124,271)
Sale of foreclosed real estate - 150 -
Cash acquired through acquisition of Intervest Securities Corporation - 218 -
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock (2,017) (1,967) (454)
Purchases of premises and equipment, net (1,477) (222) (387)
Investment in unconsolidated subsidiaries (928) (464) -
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (450,518) (192,425) (169,292)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 318,359 169,555 143,521
Net increase in mortgage escrow funds payable 3,993 4,646 1,641
Net increase in FHLB advances 36,000 - -
Principal repayments of debentures and mortgage note payable (20,013) (3,661) (2,509)
Gross proceeds from issuance of debentures 52,428 31,000 13,500
Debentures issuance costs (2,217) (1,694) (1,021)
Proceeds from issuance of common stock 2,961 6,931 5,801
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 391,511 206,777 160,933
- ------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (39,529) 33,279 6,440
Cash and cash equivalents at beginning of year 64,128 30,849 24,409
========================================================================================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,599 $ 64,128 $ 30,849
========================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $ 40,050 $ 25,647 $ 22,936
Cash paid during the year for income taxes 11,637 7,557 5,301
Transfer of loan to foreclosed real estate, net of chargeoff - - 1,081
Loan to finance sale of foreclosed real estate - 880 -
Purchase of premises with mortgage note payable - - 275
Conversion of debentures and accrued interest into Class A common stock 2,821 3,015 -
Issue Class B common stock to purchase Intervest Securities Corporation - 215 -
Accumulated other comprehensive income - change in unrealized
loss on securities available for sale, net of tax - - (111)
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
46
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
Intervest Bancshares Corporation is a registered financial holding
company referred to by itself as the "Holding Company." Its subsidiaries
are: Intervest National Bank (the "Bank"); Intervest Mortgage Corporation;
and Intervest Securities Corporation. The entities are referred to
collectively as the "Company" on a consolidated basis. The Holding
Company's primary business is the operation of its subsidiaries. It does
not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the
Holding Company also issues debt securities to raise funds for working
capital purposes. The Company's primary business segment is banking and
real estate lending.
Intervest Statutory Trust I, II, III and IV are wholly owned
subsidiaries of the Holding Company that are unconsolidated entities as
required by FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," as revised in December 2003. FIN 46-R requires bank holding
companies that have used controlled business trusts to raise financing by
issuing trust preferred securities to deconsolidate their investments in
those trusts. On January 1, 2004, the Company adopted FIN 46-R and
deconsolidated Intervest Statutory Trust I and II, which were formed prior
to FIN 46-R. The deconsolidation increased both the Company's total assets
and borrowed funds previously reported at December 31, 2003 by $928,000,
but had no effect on net income, stockholders' equity and regulatory
capital.
The offices of the Holding Company, Intervest Mortgage Corporation,
Intervest Securities Corporation and the Bank's headquarters and
full-service banking office are located on the entire fourth floor of One
Rockefeller Plaza in New York City, New York, 10020-2002.
The Bank is a nationally chartered, full-service commercial bank that
has its headquarters and full-service banking office in Rockefeller Plaza
in New York City, and a total of five full-service banking offices in
Pinellas County, Florida - four in Clearwater and one in South Pasadena.
The Bank conducts a personalized commercial and consumer banking business
and attracts deposits from the areas served by its banking offices. It also
provides internet banking services through its web site:
www.intervestnatbank.com, which can attract deposit customers from outside
its primary market areas. The deposits, together with funds derived from
other sources, are used to originate real estate, commercial and consumer
loans and to purchase investment securities. The Bank emphasizes
multifamily and commercial real estate lending.
Intervest Mortgage Corporation is a mortgage investment company
engaged in the real estate business, including the origination and purchase
of real estate mortgage loans, consisting of first mortgage and junior
mortgage loans. Intervest Mortgage Corporation also provides loan
origination services to the Bank. Intervest Mortgage Corporation has two
wholly owned subsidiaries, Intervest Distribution Corporation and Intervest
Realty Servicing Corporation that provide administrative services to
Intervest Mortgage Corporation. Intervest Mortgage Corporation issues
debentures to provide funding for its lending business. Intervest Mortgage
Corporation's mortgage loans are comprised of multifamily and commercial
real estate loans.
Intervest Securities Corporation is a broker/dealer and a NASD and
SIPC member firm whose business activities to date have been insignificant
and its only revenues have been derived from participating as a selected
dealer from time to time in offerings of debt securities of the Company,
primarily those of Intervest Mortgage Corporation. Intervest Securities
Corporation was acquired by the Holding Company in June 2003 as discussed
in note 22 herein.
Intervest Statutory Trust I, II, III and IV were formed in December
2001, September 2003, March 2004 and September 2004, respectively. Each was
formed for the sole purpose of issuing and administering capital securities
as discussed in note 9 herein. The Trusts do not conduct any trade or
business.
47
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the
Holding Company and its subsidiaries - the Bank, Intervest Mortgage
Corporation and Intervest Securities Corporation. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior year amounts to
conform to the current year's presentation. The accounting and reporting
policies of the Company conform to U.S. generally accepted accounting
principles and to general practices within the banking industry.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent liabilities, as of
the date of the consolidated financial statements, and revenues and
expenses during the reporting periods. Actual results could differ from
those estimates. Estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
real estate acquired through foreclosure and the estimated fair values of
the Company's financial instruments.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash
equivalents include federal funds sold (generally sold for one-day periods)
and commercial paper and other short-term investments that have maturities
of three months or less from the time of purchase.
SECURITIES
Securities for which the Company has the ability and intent to hold
until maturity are classified as securities held to maturity and are
carried at cost, adjusted for accretion of discounts and amortization of
premiums, which are recognized into interest income using the interest
method over the period to maturity. Securities that are held for indefinite
periods of time which management intends to use as part of its
asset/liability management strategy, or that may be sold in response to
changes in interest rates or other factors, are classified as available for
sale and are carried at fair value. Unrealized gains and losses on
securities available for sale, net of related income taxes, are reported as
a separate component of comprehensive income. Realized gains and losses
from sales of securities are determined using the specific identification
method. The Company does not acquire securities for the purpose of engaging
in trading activities.
LOANS RECEIVABLE
Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or satisfaction are carried at their
outstanding principal net of chargeoffs, the allowance for loan losses,
unamortized discounts and deferred loan fees or costs. Loan origination and
commitment fees, net of certain costs, are deferred and amortized to
interest income as an adjustment to the yield of the related loans over the
contractual life of the loans using the interest method. When a loan is
paid off or sold, or if a commitment expires unexercised, any unamortized
net deferred amount is credited or charged to earnings accordingly.
Loans are placed on nonaccrual status when principal or interest
becomes 90 days or more past due unless the loan is well secured and in the
process of collection. Accrued interest receivable previously recognized is
reversed when a loan is placed on nonaccrual status. Amortization of net
deferred fee income is discontinued for loans placed on nonaccrual status.
Interest payments received on loans in nonaccrual status are recognized as
income on a cash basis unless future collections of principal are doubtful,
in which case the payments received are applied as a reduction of
principal. Loans remain on nonaccrual status until principal and interest
payments are current.
48
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is netted against loans receivable and
is increased by provisions charged to operations and decreased by
chargeoffs (net of recoveries). The adequacy of the allowance is evaluated
monthly with consideration given to: the nature and volume of the loan
portfolio; overall portfolio quality; loan concentrations; specific problem
loans and commitments and estimates of fair value thereof; historical
chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's perception of the current and
anticipated economic conditions in the Company's lending areas. In
addition, Statement of Financial Accounting Standards (SFAS) No. 114
specifies the manner in which the portion of the allowance for loan losses
is computed related to certain loans that are impaired. A loan is normally
deemed impaired when, based upon current information and events, it is
probable the Company will be unable to collect both principal and interest
due according to the contractual terms of the loan agreement. Impaired
loans normally consist of loans on nonaccrual status. Interest income on
impaired loans is recognized on a cash basis. Impairment for commercial
real estate and residential loans is measured based on: the present value
of expected future cash flows, discounted at the loan's effective interest
rate; or the observable market price of the loan; or the estimated fair
value of the loan's collateral, if payment of the principal and interest is
dependent upon the collateral. When the fair value of the property is less
than the recorded investment in the loan, this deficiency is recognized as
a valuation allowance within the overall allowance for loan losses and a
charge through the provision for loan losses. The Company charges off any
portion of the recorded investment in the loan that exceeds the fair value
of the collateral. The net carrying amount of an impaired loan does not at
any time exceed the recorded investment in the loan.
Lastly, the Company's regulators, as an integral part of their
examination process, periodically review the allowance for loan losses.
Accordingly, the Company may be required to take certain chargeoffs and/or
recognize additions to the allowance based on the regulators' judgment
concerning information available to them during their examination.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized using the straight-line method over the terms of
the related leases, or the useful life of the asset, whichever is shorter.
Maintenance, repairs and minor improvements are expensed as incurred, while
major improvements are capitalized.
DEFERRED DEBENTURE OFFERING COSTS
Costs relating to offerings of debentures are amortized over the terms
of the debentures. The costs consist primarily of underwriters'
commissions. Accumulated amortization amounted to $4,360,000 at December
31, 2004 and $4,794,000 at December 31, 2003.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold. Upon foreclosure of the property, the related
loan is transferred from the loan portfolio to foreclosed real estate at
the lower of the loan's carrying value at the date of transfer, or
estimated fair value of the property less estimated selling costs. Such
amount becomes the new cost basis of the property. Adjustments made to the
carrying value at the time of transfer are charged to the allowance for
loan losses. After foreclosure, management periodically performs market
valuations and the real estate is carried at the lower of cost or estimated
fair value less estimated selling costs. Revenue and expenses from
operations and changes in the valuation allowance of the property are
included in the consolidated statements of earnings.
49
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
STOCK-BASED COMPENSATION
The Company follows APB No.25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for compensation
related to its stock warrants. Under APB No. 25, if the exercise price of
the Company's stock warrants issued to employees or directors equals the
market price of the underlying stock on the date of the grant or
modification, no compensation expense is recognized. SFAS No.123,
"Accounting for Stock-Based Compensation," as amended by SFAS No.148
"Accounting for Stock-Based Compensation Transition and Disclosure,"
collectively "SFAS No.123," requires pro forma disclosures of net earnings
and earnings per share determined as if the Company accounted for its stock
warrants under the fair value method. Had compensation expense been
determined based on estimated fair value, the Company's net earnings and
earnings per share would have not have been materially different than those
reported.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded if it is more likely than not
that some portion or all of the deferred tax assets will not be realized
based on a review of available evidence.
EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding. Diluted EPS
is calculated by dividing adjusted net earnings by the weighted-average
number of shares of common stock and dilutive potential common stock shares
that may be outstanding in the future. Potential common stock shares
consist of outstanding dilutive common stock warrants (which are computed
using the "treasury stock method") and convertible debentures (computed
using the "if converted method"). Diluted EPS considers the potential
dilution that could occur if the Company's outstanding stock warrants and
convertible debentures were converted into common stock that then shared in
the Company's earnings (as adjusted for interest expense that would no
longer occur if the debentures were converted).
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net earnings. However, certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
stockholders' equity section of the consolidated balance sheet, such items
along with net earnings, are components of comprehensive income.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into
off-balance sheet financial instruments consisting of commitments to extend
credit, unused lines of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they
are funded or related fees are incurred or received.
50
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS
ACCOUNTING FOR LOAN COMMITMENTS. In March 2004, the SEC issued Staff
Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" (SAB 105). SAB 105 provides recognition guidance for entities
that issue loan commitments that are required to be accounted for as
derivative instruments. Currently, loan commitments that the Company enters
into would not be required to be accounted for as derivative instruments
under SAB 105.
IMPAIRMENT. Emerging Issues Task Force Issue No. 3-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 3-1") was issued and became effective March 31, 2004. This EITF
provides guidance for determining the meaning of "other-than-temporarily
impaired" and its application to certain debt and equity securities within
the scope of SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities," and investments accounted for under the cost method.
The guidance requires that investments which have declined in value due to
credit concerns or solely due to changes in interest rates must be recorded
as other-than-temporarily impaired unless the Company can assert and
demonstrate its intention to hold the security for a period of time
sufficient to allow for a recovery of fair value up to or beyond the cost
of the investment which might mean maturity. This issue also requires
disclosures assessing the ability and intent to hold investments in
instances in which an investor determines that an investment with a fair
value less than cost is not other-than-temporarily impaired. On September
30, 2004, the Financial Accounting Standards Board decided to delay the
effective date for the measurement and recognition guidance contained in
Issue 03-1. This delay does not suspend the requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. The disclosure guidance in Issue 3-1 was not delayed.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. On January 1 2004, the
Company adopted FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," as revised in December 2003 ("FIN 46-R"). FIN 46-R
changes the method of determining whether certain entities should be
included in the Company's financial statements. An entity is subject to FIN
46-R and is called a variable interest entity ("VIE") if it has (1) equity
that is insufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or (2) equity
investors that cannot make significant decisions about the entity's
operations, or that do not absorb the expected losses or receive the
expected returns of the entity. A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that has a majority
of the expected losses or a majority of the expected residual returns or
both. FIN 46-R requires bank holding companies that have used controlled
business trusts to raise financing by issuing trust preferred securities to
deconsolidate their investments in those trusts.
The adoption of FIN 46-R resulted in the deconsolidation of Intervest
Statutory Trust I and II (both formed prior to FIN 46-R), which increased
both the Company's total assets and borrowed funds previously reported at
December 31, 2003 by $928,000, but had no effect on its net income,
stockholders' equity and regulatory capital.
In response to FIN 46-R, the Federal Reserve on March 1, 2005 issued a
final rule that would retain trust preferred securities in the Tier 1
capital of bank holding companies (BHC), but with stricter quantitative
limits and clearer qualitative standards. The new rule provides a
transition period for BHCs to meet the new, stricter limitations within
regulatory capital by allowing the limits on restricted core capital
elements to become fully effective as of March 31, 2009.
51
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS, CONTINUED
Until March 31, 2009, BHCs generally must comply with the current Tier
1 capital limits. That is, BHCs generally should calculate their Tier 1
capital on a basis that limits the aggregate amount of qualifying
cumulative perpetual preferred stock and qualifying trust preferred
securities to 25 percent of the sum of qualifying common stockholder's
equity, qualifying noncumulative and cumulative perpetual preferred stock
(including related surplus), qualifying minority interest in the equity
accounts of consolidated subsidiaries, and qualifying trust preferred
securities. Amounts of qualifying cumulative perpetual preferred stock and
qualifying trust preferred securities in excess of this limit may be
included in Tier 2 capital.
Beginning March 31, 2009, qualifying cumulative perpetual preferred
stock and trust preferred securities, as well as certain types of minority
interest, are limited to 25 percent of the sum of core capital elements net
of goodwill. The Holding Company currently does not have any goodwill.
Beginning March 31, 2009, the excess amounts of restricted core
capital elements in the form of qualifying trust preferred securities
included in Tier 2 capital are limited to 50 percent of Tier 1 capital (net
of goodwill). Amounts in excess of this limit will still be taken into
account in the overall assessment of an organization's funding and
financial condition. The final rule also provides that in the last five
years before the underlying subordinated note matures, the associated trust
preferred securities must be treated as limited-life preferred stock. Thus,
in the last five years of the life of the note, the outstanding amount of
trust preferred securities will be excluded from Tier 1 capital and
included in Tier 2 capital, subject, together with subordinated debt and
other limited-life preferred stock, to a limit of 50 percent of Tier 1
capital. During this period, the trust preferred securities will be
amortized out of Tier 2 capital by one-fifth of the original amount (less
redemptions) each year and excluded totally from Tier 2 capital during the
last year of life of the underlying note.
As of December 31, 2004, assuming the Company no longer included its
trust preferred securities in Tier 1 Capital, the Company would still
exceed the well capitalized threshold under the regulatory framework for
prompt corrective action.
SHARE-BASED COMPENSATION. In December 2004, the FASB issued SFAS No.
123 (revised 2004), "Share-Based Payment," SFAS No. 123-R. SFAS No. 123-R
requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to
employees, but expresses no preference for a type of valuation model. SFAS
No. 123-R eliminates the intrinsic value-based method prescribed by APB No.
25, "Accounting for Stock Issued to Employees", and related
interpretations, that the Company currently uses. The Company is required
to adopt the new statement in the third quarter of 2005 and the new
statement will impact its financial statements if and when any new stock
warrants and/or options are issued in the future.
CERTAIN LOANS AND DEBT SECURITIES ACQUIRED IN A TRANSFER. In December
2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, "Accounting for Certain Loans and Debt
Securities Acquired in a Transfer" (SOP 03-3). SOP 03-3 addresses
accounting for differences between contractual cash flows expected to be
collected and an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in
part, to credit quality. SOP 03-3 also prohibits "carrying over" or
creation of valuation allowances in the initial accounting of all loans
acquired in a transfer that are within the scope of SOP 03-3. The
prohibition of the valuation allowance carryover applies to the purchase of
an individual loan, a pool of loans, a group of loans, and loans acquired
in a purchase business combination. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. The Company
does not anticipate that the adoption of SOP 03-3 will have a material
impact on its financial condition or result of operations.
52
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS, CONTINUED
NONMONETARY ASSETS. In December 2004, the FASB issued SFAS No. 153,
"Exchanges of Nonmonetary Assets-an Amendment to APB opinion No. 29." This
Statement addresses the measurement of exchanges of nonmonetary assets. The
statement is effective for fiscal periods beginning after June 15, 2005.
Management believes this Statement will not have a material effect on the
Company's financial statements.
2. SECURITIES
The carrying value (amortized cost) and estimated fair value of
securities held to maturity are as follows:
Gross Gross Estimated Wtd-Avg
----------- ----------- ---------- ---------
Amortized Unrealized Unrealized Fair Wtd-Avg Remaining
---------- ----------- ----------- ---------- --------
($in thousands) Cost Gains Losses Value Yield Maturity
- --------------------------------------------------------------------------------------------
At December 31, 2004 $ 248,888 $ 12 $ 1,689 $ 247,211 2.33% 1.4 Years
At December 31, 2003 $ 152,823 $ 278 $ 106 $ 152,995 1.75% 1.1 Years
- --------------------------------------------------------------------------------------------
All the securities at December 31, 2004 and 2003 were debt obligations
of either the FHLB, FNMA, FHLMC, SLMA or FFCB. The securities have fixed
rates or have predetermined scheduled rate increases, and some have call
features that allow the issuer to call the security before its stated
maturity without penalty.
At December 31, 2004, the portfolio consisted of 177 securities of
which 173 had an unrealized loss. Substantially all of the unrealized
losses were for a continuous period of less than 12 months. Management
believes that the cause of the unrealized losses is directly related to
changes in interest rates. In general, as interest rates rise, the fair
value of fixed rate securities will decrease; as interest rates fall, their
fair value will increase.
The Company views the unrealized losses noted above to be temporary
based on the impact of interest rates, the very short life of the
investments and their high credit quality. In addition, the Company has the
ability and intent to hold its investments for a period of time sufficient
for the fair value of the securities to recover. Management evaluates
securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.
The amortized cost and estimated fair value of securities held to
maturity at December 31, 2004, by remaining term to contractual maturity is
as follows:
($in thousands) Amortized Cost Estimated Fair Value Average Yield
- ----------------------------------------------------------------------------------------------
Due in one year or less $ 84,586 $ 84,235 1.81%
Due after one year through five years 164,302 162,976 2.59%
- ----------------------------------------------------------------------------------------------
$ 248,888 $ 247,211 2.33%
- ----------------------------------------------------------------------------------------------
The Company did not have any securities classified as available for
sale during 2004 and 2003. In 2002, there were sales of $3,500,000 of
securities available for sale and gross realized gains amounted to
$120,000. There were no sales of securities in 2004 or 2003.
53
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE
Loans receivable is as follows:
At Decem ber 31, 2004 At December 31, 2003
-------------------------- --------------------------
($in thousands) # of Loans Amount # of Loans Amount
- -----------------------------------------------------------------------------------------------
Commercial real estate loans 244 $ 601,512 184 $ 344,071
Residential multifamily loans 249 403,613 210 310,650
Land development and other land loans 11 19,198 6 20,526
Residential 1-4 family loans 4 984 26 1,628
Commercial business loans 23 1,215 28 1,662
Consumer loans 12 221 16 319
- -----------------------------------------------------------------------------------------------
Loans receivable 543 1,026,743 470 678,856
- -----------------------------------------------------------------------------------------------
Deferred loan fees (11,347) (7,731)
- -----------------------------------------------------------------------------------------------
Loans receivable, net of deferred fees 1,015,396 671,125
- -----------------------------------------------------------------------------------------------
Allowance for loan losses (11,106) (6,580)
- -----------------------------------------------------------------------------------------------
Loans receivable, net $ 1,004,290 $ 664,545
- -----------------------------------------------------------------------------------------------
At December 31, 2004, $4,607,000 of loans were on a nonaccrual status,
compared to $8,474,000 at December 31, 2003. These loans were considered
impaired under the criteria of SFAS No.114. but no valuation allowance was
maintained at any time since the Company believes that the estimated fair
value of the underlying properties exceeded the Company's recorded
investment.
At December 31, 2004 and 2003, there were no other loans classified as
nonaccrual, impaired or ninety days past due and still accruing interest.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $236,000 in 2004, $339,000 in 2003 and
$29,000 in 2002. The average balance of nonaccrual (impaired) loans for
2004, 2003 and 2002 was $3,162,000, $4,568,000 and $310,000, respectively.
Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly related to
local economic conditions in the areas the properties are located, as well
as the Company's underwriting standards. Economic conditions affect the
market value of the underlying collateral as well as the levels of
occupancy of income-producing properties (such as office buildings,
shopping centers and rental and cooperative apartment buildings).
The geographic distribution of the loan portfolio is as follows:
At December 31, 2004 At December 31, 2003
------------------------ ------------------------
($in thousands) Amount % of Total Amount % of Total
- -------------------------------------------------------------------------------
New York $ 729,301 71.0% $ 435,790 64.2%
Florida 198,823 19.4 189,802 28.0
Connecticut and New Jersey 51,186 5.0 39,681 5.8
All other 47,433 4.6 13,583 2.0
- -------------------------------------------------------------------------------
$ 1,026,743 100.0% $ 678,856 100.0%
- -------------------------------------------------------------------------------
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
For the Year Ended December 31,
---------------------------------------
($in thousands) 2004 2003 2002
- -------------------------------------------------------------------------
Allowance at beginning of year $ 6,580 $ 4,611 $ 3,380
Provision charged to operations 4,526 1,969 1,274
Chargeoffs (1) - - (150)
Recoveries (2) - - 107
- -------------------------------------------------------------------------
Allowance at end of year $ 11,106 $ 6,580 $ 4,611
- -------------------------------------------------------------------------------
(1) Represents a chargeoff taken in connection with the transfer of a
nonperforming loan to foreclosed real estate.
(2) Represents proceeds received from the sale of collateral from a loan
that was charged off prior to 1997.
54
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT, LEASE COMMITMENTS AND RENTAL EXPENSE
Premises and equipment is as follows:
At December 31,
---------------------
($in thousands) 2004 2003
- ---------------------------------------------------------------------
Land $ 1,516 $ 1,516
Buildings 4,979 4,913
Leasehold improvements 1,355 346
Furniture, fixtures and equipment 2,276 2,137
- ---------------------------------------------------------------------
Total cost 10,126 8,912
- ---------------------------------------------------------------------
Less accumulated deprecation and amortization (3,490) (3,160)
- ---------------------------------------------------------------------
Net book value $ 6,636 $ 5,752
- ---------------------------------------------------------------------
The offices of the Holding Company, Intervest Mortgage Corporation,
Intervest Securities Corporation and the Bank's headquarters and
full-service banking office are located in leased premises on the entire
fourth floor of One Rockefeller Plaza in New York City. In addition, the
Bank leases its Belcher Road office in Clearwater, Florida. The leases
expire in March 2014 and June 2007, respectively. The Bank owns all of its
remaining offices in Florida. Both leases contain operating escalation
clauses related to taxes and operating costs based upon various criteria
and are accounted for as operating leases. Total future minimum annual
lease payments due under these non-cancelable leases as of December 31,
2004 are as follows: $907,000 in 2005; $911,000 in 2006; $852,000 in 2007;
$856,000 in 2008; $878,000 in 2009; and $3,839,000 thereafter for an
aggregate amount of $8,243,000. Rent expense aggregated $986,000 in 2004,
$654,000 in 2003 and $618,000 in 2002.
The Bank leases certain of the space in its office buildings in
Florida that is not used for banking operations to other companies under
leases that expire at various times through October 2009. Future lease
rental income due under these non-cancelable subleases as of December 31,
2004 are as follows: $489,000 in 2005; $380,000 in 2006; $213,000 in 2007;
$45,000 in 2008; and $24,000 in 2009 for an aggregate amount of $1,151,000.
Lease rental income aggregated $498,000 in 2004, $462,000 in 2003 and
$421,000 in 2002.
6. DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
At December 31, 2004 At December 31, 2003
------------------------ ------------------------
Wtd-Avg Wtd-Avg
($in thousands) Amount Stated Rate Amount Stated Rate
- -----------------------------------------------------------------------------
Within one year $ 269,553 2.84% $ 182,693 2.75%
Over one to two years 119,780 3.43 90,936 3.64
Over two to three years 134,409 4.48 30,094 4.43
Over three to four years 75,317 4.06 89,085 4.83
Over four years 145,712 4.48 74,351 4.20
- -----------------------------------------------------------------------------
$ 744,771 3.68% $ 467,159 3.66%
- -----------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled
$215,876,000 and $123,063,000 at December 31, 2004 and 2003, respectively.
At December 31, 2004, certificate of deposit accounts of $100,000 or more
by remaining maturity were as follows: due within one year $80,561,000;
over one to two years $28,555,000; over two to three years $40,084,000;
over three to four years $19,840,000; and over four years $46,836,000.
Interest expense on deposits is as follows:
For the Year Ended December 31,
-------------------------------------
($in thousands) 2004 2003 2002
- ------------------------------------------------------------------------
Interest checking accounts $ 187 $ 182 $ 221
Savings accounts 550 601 762
Money market accounts 3,583 2,763 3,082
Certificates of deposit accounts 22,010 14,891 13,304
- ------------------------------------------------------------------------
$ 26,330 $ 18,437 $ 17,369
- ------------------------------------------------------------------------
55
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures and mortgage note payable are summarized as
follows:
At December 31,
-------------------
($in thousands) 2004 2003
- ----------------------------------------------------------------------------------------------
INTERVEST MORTGAGE CORPORATION (1) :
Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ - $ 9,000
Series 10/19/95 - interest at 2% above prime - due October 1, 2004 - 9,000
Series 05/10/96 - interest at 2% above prime - due April 1, 2005 10,000 10,000
Series 10/15/96 - interest at 2% above prime - due October 1, 2005 5,500 5,500
Series 04/30/97 - interest at 1% above prime - due October 1, 2005 8,000 8,000
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 8 1/2% fixed - due July 1, 2004 - 2,000
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
Series 09/18/00 - interest at 8 1/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 1,250
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/4 % fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 7 1/2 % fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4 % fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4 % fixed - due July 1, 2006 1,500 1,500
Series 01/21/03 - interest at 7% fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4 % fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2 % fixed - due October 1, 2006 2,500 2,500
Series 07/25/03 - interest at 6 3/4 % fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7% fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4 % fixed - due April 1, 2007 2,000 -
Series 11/28/03 - interest at 6 1/2 % fixed - due April 1, 2009 3,500 -
Series 11/28/03 - interest at 6 3/4 % fixed - due April 1, 2011 4,500 -
Series 06/07/04 - interest at 6 1/4 % fixed - due January 1, 2008 2,500 -
Series 06/07/04 - interest at 6 1/2 % fixed - due January 1, 2010 4,000 -
Series 06/07/04 - interest at 6 3/4 % fixed - due January 1, 2012 5,000 -
-------------------
88,850 87,350
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 3,080 4,840
Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 1,250 1,250
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250
-------------------
5,580 7,340
INTERVEST NATIONAL BANK:
Mortgage note payable (2) - interest at 7% fixed - due February 1, 2017 242 255
- ----------------------------------------------------------------------------------------------
$ 94,672 $ 94,945
- ----------------------------------------------------------------------------------------------
(1) Prime represents prime rate of JPMorganChase Bank, which was
5.25% at December 31, 2004 and 4.00% at December 31, 2003. The
floating-rate debentures have a maximum interest rate of 12%.
(2) The note cannot be prepaid except during the last year of its
term.
In January 2004, Intervest Mortgage Corporation issued $10,000,000 of
its Series 11/28/03 debentures for net proceeds, after offering costs, of
$9,252,000. In July 2004, Intervest Mortgage Corporation issued $11,500,000
of its Series 6/7/04 debentures for net proceeds, after offering costs, of
$10,672,000.
56
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
In 2004, Intervest Mortgage Corporation redeemed the following
debentures: Series 5/12/95 due April 1, 2004 for $9,000,000 of principal
and $2,749,000 of accrued interest; Series 6/28/99 debentures due July 1,
2004 for $2,000,000 of principal and $980,000 of accrued interest; and
Series 10/19/95 debentures due October 1, 2004 for $9,000,000 of principal
and $2,244,000 of accrued interest.
Interest is paid quarterly on Intervest Mortgage Corporation's
debentures except for: $1,980,000 of Series 5/10/96; all of Series
11/10/98, 6/28/99, 9/18/00; $770,000 of Series 8/01/01; $270,000 of Series
1/17/02; $1,520,000 of Series 8/05/02; $1,750,000 of Series 11/28/03; and
$1,910,000 of Series 6/7/04, all of which accrue and compound interest
quarterly, with such interest due and payable at maturity.
The holders of Intervest Mortgage Corporation's Series 11/10/98
through 9/18/00 and Series 1/17/02 through 6/7/04 debentures can require
Intervest Mortgage Corporation to repurchase the debentures for face amount
plus accrued interest each year (beginning October 1, 2005 for Series
1/17/02, January 1, 2006 for Series 8/05/02, July 1, 2006 for Series
1/21/03, October 1, 2006 for Series 7/25/03, January 1, 2007 for Series
11/28/03 and January 1, 2008 for Series 6/7/04). However, in no calendar
year can the required purchases be more than $100,000 in principal amount
of each maturity, in each series of debentures, on a non-cumulative basis.
Intervest Mortgage Corporation's debentures may be redeemed at its
option at any time, in whole or in part, for face value, except for Series
6/7/04, which would be at a premium of 1% if it were redeemed prior to July
1, 2005. All the debentures are unsecured and subordinate to all present
and future senior indebtedness, as defined in the indenture related to each
debenture.
Intervest Mortgage Corporation has filed a registration statement
related to an offering of additional debentures. It is anticipated that
debentures in an aggregate principal amount of up to $14,000,000 will be
issued in the first quarter of 2005.
The Holding Company's Series 5/14/98 subordinated debentures are
convertible along with accrued interest at the option of the holders at any
time prior to April 1, 2008 into shares of its Class A common stock at the
following conversion prices per share: $14.00 in 2005; $16.00 in 2006;
$18.00 in 2007 and $20.00 from January 1, 2008 through April 1, 2008. The
Holding Company has the right to establish conversion prices that are less
than those set forth above for such periods as it may determine. In 2004,
$2,883,000 of debentures ($1,760,000 of principal and $1,123,000 of accrued
interest) were converted into shares of Class A common stock at $12.00 per
share. In 2003, $3,100,000 of debentures ($2,090,000 of principal and
$1,010,000 of accrued interest) were converted into shares of Class A
common stock at $10.01 per share.
At December 31, 2004, interest accrues and compounds quarterly on
$2,480,000 of the convertible debentures at the rate of 8% per annum, while
$600,000 of the debentures pay interest quarterly at the rate of 8% per
annum. All accrued interest of $1,694,000 is due and payable at maturity
whether by acceleration, redemption or otherwise. Any convertible debenture
holder may, on or before July 1 of each year, elect to be paid all accrued
interest and to thereafter receive regular payments of interest quarterly.
The Holding Company may redeem any of its debentures, in whole or in part,
at any time for face value.
Scheduled contractual maturities of as of December 31, 2004 are as
follows:
($in thousands) Principal Accrued Interest
- --------------------------------------------------------------------
For the year ended December 31, 2005 $ 29,116 $ 5,259
For the year ended December 31, 2006 10,269 1,833
For the year ended December 31, 2007 7,022 127
For the year ended December 31, 2008 17,105 2,362
For the year ended December 31, 2009 8,530 176
Thereafter 22,630 211
- --------------------------------------------------------------------
$ 94,672 $ 9,968
- --------------------------------------------------------------------
57
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
8. FEDERAL FUNDS PURCHASED, FEDERAL HOME LOAN BANK ADVANCES AND LINES OF
CREDIT
From time to time, the Bank may borrow funds on an overnight or
short-term basis to manage its liquidity needs. At December 31, 2004, the
Bank has agreements with correspondent banks whereby it may borrow up to
$16,000,000 of federal funds on an unsecured basis. In addition, as a
member of the Federal Home Loan Bank of New York (FHLB) and the Federal
Reserve Bank of New York (FRB), the Bank can also borrow from these
institutions on a secured basis that aggregated approximately $203,000,000
based on available collateral at December 31, 2004.
The following is a summary of certain information regarding short-term
borrowings in the aggregate:
($in thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Balance at year end (1) $36,000 $ - $ -
Maximum amount outstanding at any month end $36,000 $ - $ -
Average outstanding balance for the year $ 1,914 $ - $ 116
Weighted-average interest rate paid for the year 2.08% -% 1.87%
Weighted-average interest rate at year end 2.56% -% -%
- -------------------------------------------------------------------------------
(1) The balance at year-end 2004 represents FHLB advances of $19,000,000
due in January 2005 and $17,000,000 in February 2005.
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as Trust Preferred
Securities) are summarized as follows:
At December 31, 2004 At December 31, 2003
------------------------- ------------------------
Accrued Accrued
($in thousands) Principal Interest Principal Interest
- ---------------------------------------------------------------------------------------------------------------
Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 59 $ 15,464 $ 58
Capital Securities II - debentures due September 17, 2033 15,464 41 15,464 39
Capital Securities III - debentures due March 17, 2034 15,464 36 - -
Capital Securities IV - debentures due September 20, 2034 15,464 29 - -
- ---------------------------------------------------------------------------------------------------------------
$ 61,856 $ 165 $ 30,928 $ 97
- ---------------------------------------------------------------------------------------------------------------
The Capital Securities are obligations of the Holding Company's wholly
owned statutory business trusts, Intervest Statutory Trust I, II, III and
IV. Each Trust was formed with a capital contribution of $464,000 from the
Holding Company and for the sole purpose of issuing and administering the
Capital Securities. The proceeds from the issuance of the Capital
Securities together with the capital contribution for each Trust were used
to acquire the Holding Company's Junior Subordinated Debentures that are
due concurrently with the Capital Securities. The Capital Securities
qualify as regulatory capital (see note 1 herein).
The sole assets of the Trusts, the obligors on the Capital Securities,
are the Junior Subordinated Debentures. In addition, for each Trust, the
Holding Company has guaranteed the payment of distributions on, payments on
any redemptions of, and any liquidation distribution with respect to the
Capital Securities. Issuance costs of $469,000, $444,000, $444,000 and
$220,000 associated with Capital Securities I, II, III and IV,
respectively, have been capitalized by the Holding Company and are being
amortized over the life of the securities using the straight-line method.
Interest payments on the Junior Subordinated Debentures (and the
corresponding distributions on the Capital Securities) are payable in
arrears as follows: Capital Securities I - semi-annually at the fixed rate
of 9.875% per annum; Capital Securities II - quarterly at the fixed rate of
6.75% per annum until September 17, 2008 and thereafter at the rate of
2.95% over 3 month libor; Capital Securities III - quarterly at the fixed
rate of 5.88% per annum until March 17, 2009 and thereafter at the rate of
2.79% over 3 month libor; and Capital Securities IV - quarterly at the
fixed rate of 6.20% per annum until September 20, 2009 and thereafter at
the rate of 2.40% over 3 month libor.
58
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
Interest payments may be deferred at any time and from time to time
during the term of the Junior Subordinated Debentures at the election of
the Company for up to 20 consecutive quarterly periods (5 years). There is
no limitation on the number of extension periods the Company may elect;
provided, however, no deferral period may extend beyond the maturity date
of the Junior Subordinated Debentures. During an interest deferral period,
interest will continue to accrue on the Junior Subordinated Debentures and
interest on such accrued interest will accrue at an annual rate equal to
the interest rate in effect for such deferral period, compounded quarterly
from the date such interest would have been payable were it not deferred.
At the end of the deferral period, the Company will be obligated to pay all
interest then accrued and unpaid.
All of the Capital Securities are subject to mandatory redemption as
follows: (i) in whole, but not in part, upon repayment of the Junior
Subordinated Debentures at stated maturity or earlier, at the option of the
Holding Company, within 90 days following the occurrence and continuation
of certain changes in the tax or capital treatment of the Capital
Securities, or a change in law such that the Trust would be considered an
investment company, contemporaneously with the redemption by the Holding
Company of the Junior Subordinated Debentures; and (ii) in whole or in part
at any time on or after December 18, 2006 for Capital Securities I,
September 17, 2008 for Capital Securities II, March 17, 2009 for Capital
Securities III, and September 20, 2009 for Capital Securities IV
contemporaneously with the optional redemption by the Holding Company of
the Junior Subordinated Debentures in whole or in part. Any redemption
would be subject to the receipt of regulatory approvals.
10. STOCKHOLDERS' EQUITY
The Holding Company's Board of Directors is authorized to issue up to
300,000 shares of preferred stock of the Holding Company without
stockholder approval. The powers, preferences and rights, and the
qualifications, limitations, and restrictions thereof on any series of
preferred stock issued is determined by the Board of Directors. There is no
preferred stock issued and outstanding.
Class A and B common stock have equal voting rights as to all matters,
except that, so long as at least 50,000 shares of Class B common stock
remain issued and outstanding, the holders of the outstanding shares of
Class B common stock are entitled to vote for the election of two-thirds of
the Board of Directors (rounded up to the nearest whole number), and the
holders of the outstanding shares of Class A common stock are entitled to
vote for the remaining Directors of the Holding Company. The shares of
Class B common stock are convertible, on a share-for-share basis, into
Class A common stock at any time.
11. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required under Federal Reserve Board regulations to
maintain reserves, generally consisting of cash or noninterest-earning
accounts, against its transaction accounts. At December 31, 2004 and 2003,
balances maintained as reserves were approximately $1,190,000 and $691,000,
respectively.
As a member of the Federal Reserve Banking and Federal Home Loan
Banking systems, the Bank must maintain an investment in the capital stock
of the FRB and FHLB. At December 31, 2004 and 2003, the total investment,
which earns a dividend, aggregated $5,092,000 and $3,075,000. At December
31, 2004 and 2003, U.S. government agency securities with a carrying value
of $82,218,000 and $5,835,000, respectively, were pledged against various
lines of credit.
The payment of dividends by the Holding Company to its shareholders
and the payment of dividends by the Holding Company's subsidiaries to the
Holding Company itself are subject to various regulatory restrictions, as
well as restrictions that may arise from outstanding indentures. These
restrictions take into consideration various factors such as whether there
are sufficient net earnings, as defined, liquidity, asset quality, capital
adequacy and economic conditions. The holders of Class A common stock and
Class B common stock share ratably in any dividend. The Holding Company has
not paid any dividends on its capital stock and currently is not
contemplating the payment of a dividend.
59
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
12. PROFIT SHARING PLANS
The Company sponsors tax-qualified, profit sharing plans in accordance
with the provisions of Section 401(k) of the Internal Revenue Code, whereby
eligible employees meeting certain length-of-service requirements may make
tax-deferred contributions up to certain limits. The Company makes
discretionary matching contributions up to 3% of employee compensation,
which vest to the employees over a period of time. Total cash contributions
to the plans included in the consolidated statements of earnings aggregated
$68,000, $55,000 and $47,000 in 2004, 2003 and 2002, respectively.
13. RELATED PARTY TRANSACTIONS
The Bank has deposit accounts from affiliated companies, directors,
executive officers and members of their immediate families and related
business interests of approximately $32,000,000 at December 31, 2004 and
$35,000,000 at December 31, 2003. There are no loans to any directors or
executive officers of the Holding Company or its subsidiaries.
The Company paid fees of approximately $177,000 in 2004, $262,000 in
2003 and $157,000 in 2002 for legal services rendered by a law firm, a
principal of which is a director of the Company. The Company paid
commissions and fees in connection with the placement of debentures of
approximately $680,000 in 2004, $531,000 in 2003 and $515,000 in 2002 to a
broker/dealer, a principal of which is a director of the Company.
14. COMMON STOCK WARRANTS
At December 31, 2004, the Holding Company had 696,465 common stock
warrants outstanding that entitle its holder, the Chairman of the Holding
Company, to purchase one share of common stock for each warrant. All
warrants are currently exercisable.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant Total Wtd-Avg
-------------------------------
CLASS A COMMON STOCK WARRANTS: $6.67 $10.01 Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 1,370,815 1,084,403 2,455,218 $ 9.42
Exercised in 2002 (772,600) (30,858) (803,458) $ 9.88
Expired in 2002 (96,750) - (96,750) $ 6.67
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 501,465 1,053,545 1,555,010 $ 8.93
- -------------------------------------------------------------------------------------------------------
Exercised in 2003 - (945,717) (945,717) $ 10.01
Expired in 2003 - (65,318) (65,318) $ 10.01
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 (1) 501,465 42,510 543,975 $ 6.93
- -------------------------------------------------------------------------------------------------------
Exercised in 2004 - (42,510) (42,510) $ 10.01
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2004 501,465 - 501,465 $ 6.67
- -------------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2004 2.1 - 2.1
- ------------------------------------------------------------------------------------------------------------------------
(1) The holders of the 42,510 warrants outstanding at December 31, 2003
presented these warrants to the Company for exercise prior to the
expiration date of December 31, 2003. The resulting shares were issued in
January 2004.
Exercise Price Per Warrant Total Wtd-Avg
--------------------------
CLASS B COMMON STOCK WARRANTS: $ 6.67 $ 10.00 Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002, 2003 and 2004 145,000 50,000 195,000 $ 7.52
- -------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2004 3.1 3.1 3.1
- ------------------------------------------------------------------------------------------------------------------
The Company elects to use the intrinsic value-based method prescribed
under APB Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock warrants. Under this method, compensation expense
related to stock warrants granted to employees is the excess, if any, of
the market price of the stock as of the grant or modification date over the
exercise price of the warrant.
60
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
14. COMMON STOCK WARRANTS, CONTINUED
For warrants granted to employees whose exercise price was reduced to
$10.01 effective January 1, 2002 and whose expiration date was extended in
2002, compensation expense was recorded under variable rate accounting as
prescribed by APB 25 and related interpretations. For these warrants, which
originally totaled 138,500, compensation expense was recorded in salaries
and employee benefits expense with a corresponding credit to paid in
capital in the consolidated financial statements.
Compensation expense recorded in connection with common stock warrants
is summarized as follows:
For the Year Ended December 31,
-------------------------------------
($in thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
Compensation expense recorded in connection with vesting
of Class B common stock warrants during the period $ 9 $ 26 $ 26
Compensation expense recorded in connection with
Class A common stock warrants whose terms were modified - 418 109
- ---------------------------------------------------------------------------------------------------
$ 9 $ 444 $ 135
- ---------------------------------------------------------------------------------------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," SFAS No. 123-R). SFAS No. 123-R requires companies
to recognize in the income statement the grant-date fair value of stock
options and other equity-based compensation issued to employees and
directors, but expresses no preference for a type of valuation model. SFAS
No. 123-R eliminates the intrinsic value-based method that the Company
currently uses. The Company is required to adopt the new statement in the
third quarter of 2005 and the new statement will impact its financial
statements if and when any new stock warrants and/or options are issued in
the future.
15. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income
tax return and combined state and city income tax returns in New York. The
Company also files a franchise tax return in Delaware. The Bank files a
state income tax return in Florida. All returns are filed on a calendar
year basis.
At December 31, 2004 and 2003, the Company had a net deferred tax
asset of $5,095,000 and $2,960,000, respectively. The asset relates to the
unrealized benefit for net temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases that will result in future tax deductions. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized based on available evidence. Management
believes that it is more likely than not that the Company's deferred tax
asset will be realized and accordingly, a valuation allowance for deferred
tax assets was not maintained at any time .
Allocation of federal, state and local income taxes between current
and deferred portions is as follows:
($in thousands) Current Deferred Total
- ------------------------------------------------------------
Year Ended December 31, 2004:
- ------------------------------
Federal $ 7,707 $ (1,742) $5,965
State and Local 3,204 (393) 2,811
- ------------------------------------------------------------
$ 10,911 $ (2,135) $8,776
- ------------------------------------------------------------
Year Ended December 31, 2003:
- ------------------------------
Federal $ 5,576 $ (782) $4,794
State and Local 2,260 (181) 2,079
- ------------------------------------------------------------
$ 7,836 $ (963) $6,873
- ------------------------------------------------------------
Year Ended December 31, 2002:
- ------------------------------
Federal $ 4,004 $ (547) $3,457
State and Local 1,390 (134) 1,256
- ------------------------------------------------------------
$ 5,394 $ (681) $4,713
- ------------------------------------------------------------
61
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
15. INCOME TAXES, CONTINUED
The components of the deferred tax benefit are as follows:
For the Year Ended December 31,
----------------------------------------
($in thousands) 2004 2003 2002
- -------------------------------------------------------------------------
Allowance for loan losses $ (2,073) $ (896) $ (623)
Organization and startup costs 11 29 28
Stock-based compensation (4) 45 (62)
Depreciation (88) (65) (41)
Deferred income 19 (75) 13
All other - (1) 4
- -------------------------------------------------------------------------
$ (2,135) $ (963) $ (681)
- -------------------------------------------------------------------------
The tax effects of the temporary differences that give rise to the
deferred tax asset are as follows:
At December 31,
-------------------
($in thousands) 2004 2003
- ----------------------------------------------------
Allowance for loan losses $ 4,541 $ 2,468
Organization and startup costs - 11
Stock-based compensation 77 73
Depreciation 267 179
Deferred income 200 219
All other 10 10
- ----------------------------------------------------
Total deferred tax asset $ 5,095 $ 2,960
- ----------------------------------------------------
The reconciliation between the statutory federal income tax rate and
the Company's effective tax rate (including state and local taxes) is as
follows:
For the Year Ended December 31,
-------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------
Tax provision at statutory rate 35.0% 35.0% 34.0%
Increase in taxes resulting from:
State and local income taxes, net of federal benefit 8.4 8.2 6.6
Other - (0.2) -
- -------------------------------------------------------------------------------------------
43.4% 43.0% 40.6%
- -------------------------------------------------------------------------------------------
16. EARNINGS PER SHARE
Net earnings applicable to common stock and the weighted-average
number of shares used for basic and diluted earnings per share computations
are as follows:
For the Year Ended December 31,
-------------------------------------
($in thousands, except share and per share amounts) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $ 11,453 $ 9,120 $ 6,906
Average number of common shares outstanding 6,068,755 4,938,995 4,043,619
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share amount $ 1.89 $ 1.85 $ 1.71
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $ 11,453 $ 9,120 $ 6,906
Adjustment to net earnings from assumed conversion of debentures 254 452 436
-------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 11,707 $ 9,572 $ 7,342
-------------------------------------
Average number of common shares outstanding:
Common shares outstanding 6,068,755 4,938,995 4,043,619
Potential dilutive shares resulting from exercise of warrants 255,171 356,339 313,519
Potential dilutive shares resulting from conversion of debentures 504,250 962,386 990,983
-------------------------------------
Total average number of common shares outstanding used for dilution 6,828,176 6,257,720 5,348,121
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per share amount $ 1.71 $ 1.53 $ 1.37
- -------------------------------------------------------------------------------------------------------------
62
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
16. EARNINGS PER SHARE, CONTINUED
All warrants and convertible debentures outstanding were considered in
the computation of diluted EPS because they were dilutive.
17. CONTINGENCIES
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Management does not believe that there is any pending or
threatened proceeding against the Company which, if determined adversely,
would have a material effect on the business, results of operations,
financial position or liquidity of the Company.
18. REGULATORY CAPITAL
The Holding Company is subject to regulation, examination and
supervision by the FRB. The Bank is also subject to regulation, examination
and supervision by the Federal Deposit Insurance Corporation (FDIC) and the
Office of the Comptroller of the Currency of the United States of America
(OCC). Intervest Securities Corporation is subject to regulation,
examination and supervision by the U.S. Securities and Exchange Commission
(SEC) and the National Association of Securities Dealers (NASD).
The Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet them can initiate certain mandatory and possibly
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. These capital amounts are also subject to
qualitative judgement by the regulators about components, risk weighting
and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies. Quantitative measures established by the regulations to ensure
capital adequacy require the Company and the Bank to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to average assets, as defined by the regulations.
Management believes, as of December 31, 2004 and 2003, that the
Company and the Bank met all capital adequacy requirements to which they
are subject. As of December 31, 2004, the most recent notification from the
regulators categorized the Bank as a well-capitalized institution under the
regulatory framework for prompt corrective action, which requires minimum
Tier 1 leverage and Tier 1 and total risk-based capital ratios of 5%, 6%
and 10%, respectively. Management believes that there are no current
conditions or events outstanding that would change the designation from
well capitalized.
Intervest Securities Corporation is subject to the SEC's Uniform Net
Capital Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of
minimum net capital of $5,000. At December 31, 2004 and 2003, Intervest
Securities Corporation's net capital was $481,000 and $459,000,
respectively.
On January 1 2004, the Company adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46-R"), as revised in
December 2003. FIN 46-R changes the method of determining whether certain
entities should be included in the Company's financial statements. It
requires bank holding companies that have used controlled business trusts
to raise financing by issuing trust preferred securities to deconsolidate
their investments in those trusts. For a further discussion of FIN 46-R and
its regulatory implications, see the section entitled "Recent Accounting
and Regulatory Developments" in note 1 herein.
63
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
18. REGULATORY CAPITAL, CONTINUED
The table that follows presents information regarding the Company's
and the Bank's capital adequacy.
Minimum to Be Well
------------------
Capitalized Under
------------------
Minimum Capital Prompt Corrective
--------------- ------------------
Actual Requirements Action Provisions
------------ ------------------
($in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
Consolidated as of December 31, 2004:
- ----------------------------------------------
Total capital to risk-weighted assets $156,105 14.23% $87,737 8.00% NA NA
Tier 1 capital to risk-weighted assets $115,031 10.49% $43,868 4.00% NA NA
Tier 1 capital to average assets $115,031 9.03% $50,951 4.00% NA NA
Consolidated as of December 31, 2003:
- ----------------------------------------------
Total capital to risk-weighted assets $109,029 14.84% $58,787 8.00% NA NA
Tier 1 capital to risk-weighted assets $ 97,571 13.28% $29,394 4.00% NA NA
Tier 1 capital to average assets $ 97,571 11.31% $34,515 4.00% NA NA
Intervest National Bank at December 31, 2004:
- ----------------------------------------------
Total capital to risk-weighted assets $117,413 12.08% $77,746 8.00% $ 97,182 10.00%
Tier 1 capital to risk-weighted assets $106,724 10.98% $38,873 4.00% $ 58,309 6.00%
Tier 1 capital to average assets $106,724 9.36% $45,625 4.00% $ 57,031 5.00%
Intervest National Bank at December 31, 2003:
- ----------------------------------------------
Total capital to risk-weighted assets $ 77,709 12.53% $49,612 8.00% $ 62,016 10.00%
Tier 1 capital to risk-weighted assets $ 71,399 11.51% $24,806 4.00% $ 37,209 6.00%
Tier 1 capital to average assets $ 71,399 9.66% $29,569 4.00% $ 36,962 5.00%
- -------------------------------------------------------------------------------------------------------------
19. OFF-BALANCE SHEET 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 instruments are in the form of commitments to extend
credit, unused lines of credit and standby letters of credit, and may
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the financial statements. The Company's
maximum exposure to credit risk is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Commitments to
extend credit are agreements to lend funds to a customer as long as there
is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination
clauses and may require payment of fees. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary 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. Management is not aware of any
trends, known demand, commitments or uncertainties which are expected to
have a material impact on future operating results, liquidity or capital
resources.
The contractual amounts of the Company's off-balance sheet financial
instruments is as follows:
At December 31,
-------------------
($in thousands) 2004 2003
- -----------------------------------------------
Unfunded loan commitments $159,697 $ 123,791
Available lines of credit 789 825
Standby letters of credit 750 100
- -----------------------------------------------
$161,236 $ 124,716
- -----------------------------------------------
64
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments are as follows:
At December 31, 2004 At December 31, 2003
------------------------- ------------------------
Carrying Fair Carrying Fair
($in thousands) Value Value Value Value
- ----------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 24,599 $ 24,599 $ 64,128 $ 64,128
Securities held to maturity, net 248,888 247,211 152,823 152,995
FRB and FHLB stock 5,092 5,092 3,075 3,075
Loans receivable, net 1,004,290 1,011,559 664,545 700,855
Accrued interest receivable 6,699 6,699 4,995 4,995
Financial Liabilities:
Deposit liabilities 993,872 997,939 675,513 687,135
Borrowed funds plus accrued interest payable 202,682 204,578 139,455 143,939
Accrued interest payable on deposits 1,718 1,718 1,080 1,080
Off -Balance Sheet Instruments:
Commitments to lend 920 920 868 868
- ----------------------------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time based on
available information. Where available, quoted market prices are used.
However, a significant portion of the Company's financial instruments, such
as mortgage loans, do not have an active marketplace in which they can be
readily sold or purchased to determine fair value. Consequently, fair value
estimates for such instruments are based on assumptions made by management
that include the instrument's credit risk characteristics and future
estimated cash flows and prevailing interest rates. As a result, these fair
value estimates are subjective in nature, involve uncertainties and matters
of significant judgment and therefore, cannot be determined with precision.
Accordingly, changes in any of management's assumptions could cause the
fair value estimates to deviate substantially. The fair value estimates
also do not reflect any additional premium or discount that could result
from offering for sale, at one time, the Company's entire holdings of a
particular financial instrument, nor estimated transaction costs.
Further, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on and have not
been considered in the fair value estimates. Finally, fair value estimates
do not attempt to estimate the value of anticipated future business, the
Company's customer relationships, branch network, and the value of assets
and liabilities that are not considered financial instruments, such as core
deposit intangibles and premises and equipment.
The following methods and assumptions were used to estimate the fair
value of financial instruments:
SECURITIES. The estimated fair value of securities held to maturity is
based on quoted market prices. The estimated fair value of the FRB and FHLB
stock approximates carrying value since the securities do not present
credit concerns and are redeemable at cost.
LOANS RECEIVABLE. The estimated fair value of loans is based on a
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
Management can make no assurance that its perception and quantification of
credit risk would be viewed in the same manner as that of a potential
investor. Therefore, changes in any of management's assumptions could cause
the fair value estimates of loans to deviate substantially.
DEPOSITS. The estimated fair value of deposits with no stated
maturity, such as savings, money market, checking and noninterest-bearing
demand deposit accounts approximates carrying value. The estimated fair
value of certificates of deposit are based on the discounted value of their
contractual cash flows. The discount rate used in the present value
computation was estimated by comparison to current interest rates offered
by the Bank for certificates of deposit with similar remaining maturities.
65
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
BORROWED FUNDS AND ACCRUED INTEREST PAYABLE. The estimated fair value
of borrowed funds and related accrued interest payable is based on a
discounted cash flow analysis. The discount rate used in the present value
computation was estimated by comparison to what management believes to be
the Company's incremental borrowing rate for similar arrangements.
ALL OTHER FINANCIAL ASSETS AND LIABILITIES. The estimated fair value
of cash and cash equivalents, accrued interest receivable and accrued
interest payable on deposits approximates their carrying values since these
instruments are payable on demand or have short-term maturities.
OFF-BALANCE SHEET INSTRUMENTS. The carrying amounts of commitments to
lend approximated estimated fair value. The fair value of commitments to
lend is based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the counter
party's credit standing.
21. BUSINESS SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". An operating segment is
defined as a component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses whose separate financial
information is available and is evaluated regularly by the Company's chief
operating decision makers to perform resource allocations and performance
assessments.
The Company is a registered financial holding company whose primary
business is banking and real estate lending as described in note 1 herein.
The Company's day-to-day operating decisions are normally made by the
members of its Executive Committee of the Board of Directors, which is
comprised of the Chairman, Vice Chairman and Vice President of the Company.
The Executive Committee generally uses revenue and earnings performance of
each segment to determine operating, strategic and resource allocation
decisions.
The following table presents certain information regarding the
Company's operations by business segment:
Revenues, Net of Interest Expense Net Earnings (Loss) Total Assets
------------------------------------------- --------------------------- -----------------------
($in thousands) 2004 2003 2002 2004 2003 2002 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Banking (1) $ 30,016 $ 22,604 $ 16,906 $ 7,436 $6,972 $ 4,959 $1,183,509 $ 789,567
Non-Bank Mortgage
Investments 6,866 4,928 4,189 2,354 1,759 1,567 122,451 119,578
Broker/dealer 125 41 - 22 (6) - 484 455
Holding Company (1) 554 142 (2) 1,641 395 380 159,522 116,184
Intersegment (2) (4,555) (2,494) (1,721) - - - (149,215) (114,261)
- ----------------------------------------------------------------------------------------------------------------------
Consolidated $ 33,006 $ 25,221 $ 19,372 $11,453 $9,120 $ 6,906 $1,316,751 $ 911,523
- ----------------------------------------------------------------------------------------------------------------------
(1) For purposes of this table, revenues, net of interest expense and net
earnings (loss) amounts are shown after intercompany dividends of
$3,429,000 in 2004, $1,695,000 in 2003 and $1,500,000 in 2002 that were
paid by the Bank to the Holding Company for debt service on trust preferred
securities, the proceeds of which are invested in the capital of the Bank.
(2) Intersegment revenues, net of interest expense, arise from
intercompany management and loan origination service agreements. All
significant intercompany balances and transactions are eliminated in
consolidation.
22. ACQUISITION OF INTERVEST SECURITIES CORPORATION
In June 2003, the Holding Company acquired all of the outstanding
capital stock of Intervest Securities Corporation (ISC) in exchange for
30,000 shares of its Class B common stock that was newly issued for this
transaction. ISC's total assets consisted of approximately $218,000 of cash
at the time of acquisition. Prior to the acquisition, ISC was an affiliated
entity in that it was wholly owned by the spouse of the Chairman of the
Holding Company. The acquisition was accounted for at historical cost and
accordingly, the recorded assets, liabilities and shareholders' equity of
both companies were combined and recorded at their historical cost amounts.
No restatements of the Company's prior period-consolidated financial
statements in this report have been made because the financial results of
ISC were diminimus.
66
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
23. HOLDING COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
At December 31,
-------------------
($in thousands) 2004 2003
- ----------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 74 $ 286
Short-term investments 4,788 2,682
-------------------
Total cash and cash equivalents 4,862 2,968
Loans receivable, net (net of allowance for loan losses
of $85 and $78 at December 31, 2004 and 2003) 13,993 15,514
Investment in consolidated subsidiaries 135,351 92,539
Investment in unconsolidated subsidiaries - Statutory Trusts 1,856 928
Deferred debenture offering costs, net of amortization 1,658 1,172
Stock proceeds receivable from warrant conversions - 2,535
Premises and equipment, net 1,132 12
All other assets 670 516
- ----------------------------------------------------------------------------------
TOTAL ASSETS $159,522 $ 116,184
- ----------------------------------------------------------------------------------
LIABILITIES
Debentures payable $ 5,580 $ 7,340
Debentures payable - capital securities 61,856 30,928
Accrued interest payable on all debentures 1,914 2,461
All other liabilities 78 70
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES 69,428 40,799
- ----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common equity 90,094 75,385
- ----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 90,094 75,385
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $159,522 $ 116,184
- ----------------------------------------------------------------------------------
CONDENSED STATEMENTS OF EARNINGS
For the Year Ended December 31,
----------------------------------------
($in thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Interest income $ 1,087 $ 1,125 $ 988
Dividend income from subsidiary (1) 3,429 1,695 1,500
Interest expense 4,351 3,024 2,695
----------------------------------------
Net interest and dividend income (expense) 165 (204) (207)
Provision (credit) for loan losses 7 32 (2)
Noninterest income 389 346 205
Noninterest expenses 440 748 544
----------------------------------------
Income (loss) before income taxes 107 (638) (544)
Credit for income taxes (2) (1,534) (1,033) (924)
----------------------------------------
Net earnings before earnings of subsidiaries 1,641 395 380
Equity in undistributed earnings of Intervest National Bank 7,436 6,972 4,959
Equity in undistributed earnings of Intervest Mortgage Corporation 2,354 1,759 1,567
Equity in undistributed earnings (loss) of Intervest Securities Corporation 22 (6) -
- ----------------------------------------------------------------------------------------------------------------------
NET CONSOLIDATED EARNINGS $ 11,453 $ 9,120 $ 6,906
- ----------------------------------------------------------------------------------------------------------------------
(1) Represent dividends to the Holding Company from the Bank to provide
funds for the debt service on the debentures payable - capital securities.
This debt service is included in the Holding Company's interest expense.
The proceeds from the capital securities are invested in the capital of the
Bank.
(2) Dividends from subsidiaries are eliminated in consolidation and are
not included in the Holding Company's pre -tax income for purposes of
computing income taxes.
67
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
23. HOLDING COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-------------------------------
($in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 11,453 $ 9,120 $ 6,906
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in earnings of subsidiaries (13,241) (10,420) (8,026)
Cash dividends received from subsidiary 3,429 1,695 1,500
Provision (credit) for loan losses 7 32 (2)
Depreciation and amortization 86 1 1
Amortization of deferred debenture costs 115 131 114
Amortization of deferred loan fees, net (35) (50) (69)
Deferred income tax (benefit) expense (3) 38 (55)
Compensation expense from awards/modifications of stock warrants 9 444 135
Increase in accrued interest payable on debentures 576 347 756
Change in all other assets and liabilities, net (97) 93 (411)
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,299 1,431 849
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in subsidiaries, net (33,928) (20,715) (338)
Cash acquired through acquisition of Intervest Securities Corporation - 218 -
Purchase of equipment and leasehold improvements (1,206) (11) (2)
Loan principal repayments and (originations), net 1,519 (6,316) 389
- ------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (33,615) (26,824) 49
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in mortgage escrow funds payable (16) (75) (64)
Gross proceeds from issuance of debentures 30,928 15,464 -
Debenture offering costs (663) (446) (9)
Principal repayments of debentures - (1,000) -
Proceeds from issuance of common stock upon the exercise
of stock warrants 2,961 6,931 5,801
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 33,210 20,874 5,728
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,894 (4,519) 6,626
Cash and cash equivalents at beginning of year 2,968 7,487 861
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,862 $ 2,968 $ 7,487
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the year for:
Interest $ 3,658 $ 2,545 $ 1,825
Income taxes (1,621) (1,136) (617)
Noncash transactions:
Conversion of debentures into Class A common stock:
Principal converted 1,760 2,090 -
Accrued interest converted 1,123 1,009 -
Unamortized debenture offering costs converted (62) (84) -
Class B stock issued to acquire Intervest Securities Corporation - 215 -
Accumulated other comprehensive income, change in subsidiary's
unrealized loss on securities available for sale, net of tax - - (111)
- ------------------------------------------------------------------------------------------------------
68
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following information is as of or for the period ended:
2004
----
First Second Third Fourth
($in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 14,593 $ 15,391 $ 17,655 $ 18,910
Interest expense 8,215 8,866 10,348 11,254
------------------------------------------------
Net interest and dividend income 6,378 6,525 7,307 7,656
Provision for loan losses 1,077 1,284 1,067 1,098
------------------------------------------------
Net interest and dividend income after provision for loan losses 5,301 5,241 6,240 6,558
Noninterest income 1,456 1,225 1,477 982
Noninterest expenses 1,918 2,045 2,141 2,147
------------------------------------------------
Earnings before income taxes 4,839 4,421 5,576 5,393
Provision for income taxes 2,104 1,916 2,424 2,332
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 2,735 $ 2,505 $ 3,152 $ 3,061
- -------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ .45 $ .42 $ .52 $ .50
DILUTED EARNINGS PER SHARE: $ .41 $ .37 $ .47 $ .46
- -------------------------------------------------------------------------------------------------------------------
Return on average assets 1.15% 0.95% 1.05% 0.96%
Return on average equity 14.32% 12.58% 15.32% 14.30%
Total assets $993,010 $1,119,266 $1,269,256 $1,316,751
Total cash and investment securities $210,747 $ 220,653 $ 307,120 $ 278,579
Total loans, net of unearned fees $763,108 $ 877,296 $ 939,001 $1,015,396
Total deposits $737,150 $ 852,852 $ 976,392 $ 993,872
Total borrowed funds and related interest payable $155,034 $ 155,640 $ 180,368 $ 202,682
Total stockholders' equity $ 78,751 $ 81,259 $ 84,410 $ 90,094
- -------------------------------------------------------------------------------------------------------------------
2003
----
First Second Third Fourth
($in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 11,625 $ 12,470 $ 12,845 $ 13,524
Interest expense 6,788 6,964 7,079 7,733
------------------------------------------
Net interest and dividend income 4,837 5,506 5,766 5,791
Provision for loan losses 344 430 602 593
------------------------------------------
Net interest and dividend income after provision for loan losses 4,493 5,076 5,164 5,198
Noninterest income 329 1,176 1,038 778
Noninterest expenses 1,784 1,879 1,812 1,784
------------------------------------------
Earnings before income taxes 3,038 4,373 4,390 4,192
Provision for income taxes 1,237 1,807 1,859 1,970
- -------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 1,801 $ 2,566 $ 2,531 $ 2,222
- -------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ .38 $ .55 $ .52 $ .41
DILUTED EARNINGS PER SHARE: $ .32 $ .45 $ .42 $ .35
- -------------------------------------------------------------------------------------------------------------
Return on average assets 1.03% 1.40% 1.32% 1.03%
Return on average equity 13.40% 18.33% 16.76% 13.17%
Total assets $728,409 $750,241 $823,828 $911,523
Total cash and investment securities $178,087 $158,043 $174,664 $220,026
Total loans, net of unearned fees $532,592 $575,975 $631,361 $671,125
Total deposits $538,098 $553,388 $594,832 $675,513
Total borrowed funds and related interest payable $120,602 $120,988 $145,291 $140,383
Total stockholders' equity $ 55,000 $ 58,009 $ 63,745 $ 75,385
- -------------------------------------------------------------------------------------------------------------
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal
Executive and Financial Officers, the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, the Principal Executive and Financial Officers
have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and regulations, and are operating in an effective manner. The
Company made no significant changes in its internal controls or in other factors
that could significantly affect these controls subsequent to December 31, 2004.
ITEM 9B. OTHER INFORMATION
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS. The information required by this item is contained under the
section entitled "Proposal One: Election of Directors" in the Company's Proxy
Statement for its 2005 Annual Meeting (the "Proxy Statement") and is
incorporated herein by reference.
EXECUTIVE OFFICERS. The information required by this item is set forth in
Item 4A of Part I of this report under the caption "Executive Officers and Other
Key Employees."
COMPLIANCE WITH SECTION 16(A). The information required by this item is
contained under the section entitled "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement and is incorporated
herein by reference.
AUDIT COMMITTEE FINANCIAL EXPERT. Information regarding the audit
committee of the Company's Board of Directors, including information regarding
audit committee financial experts serving on the audit committee is contained in
the section of the Proxy Statement entitled "Corporate Governance Principles and
Board Matters" and is incorporated herein by reference.
CODE OF BUSINESS CONDUCT AND ETHICS. The Company has adopted a written
code of business conduct and ethics that applies to its directors, officers and
employees. In addition, the Company's Audit Committee has also adopted
procedures for the submission of complaints or concerns regarding financial
statement disclosures and other matters. A copy of these documents are attached
as Exhibits to this annual report on Form 10-K. Additionally, a copy of any of
these documents will be furnished upon request and without charge to beneficial
holders of the Class A Common Stock of the Company. Written requests should be
directed to: Intervest Bancshares Corporation, Attention: Secretary, One
Rockefeller Plaza, Suite 400, New York, New York 10020.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section entitled "Executive Compensation" of
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER TRANSACTIONS
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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section entitled "Certain Relationships and
Related Transactions" of the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the section entitled "Independent Public
Accountants" of the Proxy Statement is incorporated herein by reference.
70
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS: See Item 8 "Financial Statements and
Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES: See Item 8 "Financial Statements
and Supplementary Data"
(3) EXHIBITS: The following exhibits are filed herein as part of
this Form 10-K:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
2.0 Agreement and Plan of Merger dated as of November 1, 1999 by and among Intervest Bancshares
Corporation, ICNY Acquisition Corporation and Intervest Corporation of New York, incorporated by
reference to the Company's definitive proxy statement for the special meeting of shareholders to be held
March 10, 2000, wherein such document is identified as "Annex A."
3.1 Restated Certificate of Incorporation of the Company, incorporated by reference to Amendment No.1 to the
Company's Registration Statement on Form SB-2 (No 333-33419, the "Registration Statement"), filed with
the Securities and Exchange Commission (the "Commission") on September 22, 1997, wherein such
document is identified as Exhibit 3.1.
3.2 Bylaws of the Company, incorporated by reference to the Registration Statement, wherein such document is
identified as Exhibit 3.1.
4.1 Form of Certificate for Shares of Class A common stock, incorporated by reference to the Company's Pre-
Effective Amendment No.1 to the Registration Statement on Form SB-2 (No. 33-82246), filed with the
Commission on September 15, 1994.
4.2 Form of Certificate for Shares of Class B common stock, incorporated by reference to the Company's Pre-
Effective Amendment No.1 to the Registration Statement on Form SB-2 (No. 33-82246), filed with the
Commission on September 15, 1994.
4.3 Form of Warrant issued to Mr. Jerome Dansker, incorporated by reference to the Company's Report on
Form 10-K for the year ended December 31, 1995, wherein such document is identified as Exhibit 4.2.
4.4 Form of Warrant for Class A common stock, incorporated by reference to the Registration Statement,
wherein such document is identified as Exhibit 4.3.
4.5 Form of Warrant Agreement between the Company and the Bank of New York, incorporated by reference
to the Registration Statement, wherein such document is identified as Exhibit 4.4.
4.6 Form of Indenture between the Company and the Bank of New York, as Trustee, incorporated by reference
to the Company's Registration Statement on Form SB-2 (333-50113) filed with the Commission on April
15,1998.
4.7 Form of Indenture between the Company and the Bank of New York, as Trustee, dated January 1, 2001,
incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 2000,
wherein such document is identified as Exhibit 4.7.
4.8 Form of Indenture between the Company, as Issuer, and State Street Bank and Trust Company, as Trustee,
dated as of December 18, 2001, incorporated by reference to the Company's Report on Form 10-K for the
year ended December 31, 2001, wherein such document is identified as Exhibit 4.8.
4.9 Form of Indenture between the Company, as Issuer, and U.S Bank National Association, as Trustee, dated
as of September 17, 2003, incorporated by reference to the Company's Report on Form 10-K for the year
ended December 31, 2003, wherein such document is identified as Exhibit 4.9.
4.10 Form of Indenture between the Company, as Issuer, and U.S Bank National Association, as Trustee,
dated as of March 17, 2004, incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 2004, wherein such document is identified as Exhibit 4.10.
71
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
4.11 Form of Indenture between the Company, as Issuer, and Wilmington Trust Company, as Trustee,
dated as of September 20, 2004, incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended September 30, 2004, wherein such document is identified as Exhibit 4.11.
4.12 Form of Indenture between the Company's subsidiary, Intervest Mortgage Corporation, and The Bank of
New York dated as of June 1, 2004, incorporated by reference to Intervest Mortgage Corporation's
quarterly report on Form 10-Q filed for the quarter ended September 30, 2004, wherein such document is
identified as Exhibit 4.23.
10.0 Employment and Supplemental Benefits Agreement between the Company and Jerome Dansker dated as
of July 1, 2004, incorporated by reference to the Company's Report on Form 10-Q for the quarter ended
September 30, 2004, wherein such document is identified as Exhibit 10.0.
10.1 Employment and Supplemental Benefits Agreement between the Company and Lowell S. Dansker dated
as of July 1, 2004, incorporated by reference to the Company's Report on Form 10-Q for the quarter
ended September 30, 2004, wherein such document is identified as Exhibit 10.1.
10.2 Employment and Supplemental Benefits Agreement between the Company and Lawrence G. Bergman
dated as of July 1, 2004, incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.2.
10.3 Employment Agreement between Intervest National Bank, the Company's subsidiary and Keith A. Olsen
dated as of November 9, 2004, incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.3.
10.4 Employment Agreement between Intervest National Bank, the Company's subsidiary and Raymond C.
Sullivan dated as of November 10, 2004, incorporated by reference to the Company's Report on Form
10-Q for the quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.4.
10.5 Employment Agreement between Intervest National Bank, the Company's subsidiary and John J.
Arvonio dated as of November 10, 2004, incorporated by reference to the Company's Report on Form
10-Q for the quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.5.
10.6 Mortgage Servicing Agreement dated as of April 1, 2002, as supplemented on October 21, 2004 for the
purpose of clarification of the intent of the original agreement between the Company's subsidiaries,
Intervest Mortgage Corporation and Intervest National Bank, incorporated by reference to Intervest
Mortgage Corporation's quarterly report on Form 10-Q for the quarter ended September 30, 2004,
wherein such document is identified as Exhibit 10.1.
10.7 Employment Agreement between the Company's subsidiary, Intervest Mortgage Corporation and
John H. Hoffmann dated as of November 10, 2004, incorporated by reference to Intervest Mortgage
Corporation's quarterly report on Form 10-Q for the quarter ended September 30, 2004, wherein such
document is identified as Exhibit 10.2.
10.8 Amendment to Employment Agreement between the Company's subsidiary, Intervest Mortgage
Corporation and Jerome Dansker dated as of July 1, 2004, incorporated by reference to Intervest
Mortgage Corporation's quarterly report on Form 10-Q for the quarter ended September 30, 2004,
wherein such document is identified as Exhibit 10.0.
12.0 Computation of ratios of earnings to fixed charges.
14.1 Code of Business Conduct
14.2 Code of Ethics
72
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
14.3 Procedures for Submissions Regarding Questionable Accounting, Internal Accounting Controls and
Auditing Matters
21.0 Subsidiaries
31.0 Certification of the principal executive officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.1 Certification of the principal financial officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.0 Certification of the principal executive and financial officers pursuant to Section 906 of The Sarbanes-
-Oxley Act of 2002.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the date indicated.
INTERVEST BANCSHARES CORPORATION
(Registrant)
By: /s/ Lowell S. Dansker Date: March 11, 2005
- --------------------------------------------- --------------------
Lowell S. Dansker, Vice Chairman,
President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER:
(PRINCIPAL EXECUTIVE OFFICER):
By: /s/ Jerome Dansker Date: March 11, 2005
- --------------------------------------------- --------------------
Jerome Dansker
VICE CHAIRMAN, PRESIDENT AND TREASURER:
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER):
By: /s/ Lowell S. Dansker Date: March 11, 2005
- --------------------------------------------- --------------------
Lowell S. Dansker
VICE PRESIDENT, SECRETARY AND DIRECTOR:
By: /s/ Lawrence G. Bergman Date: March 11, 2005
- --------------------------------------------- --------------------
Lawrence G. Bergman
DIRECTORS:
By: /s/ Michael A. Callen Date: March 11, 2005
- --------------------------------------------- --------------------
Michael A. Callen
By: /s/ Paul R. DeRosa Date: March 11, 2005
- --------------------------------------------- --------------------
Paul R. DeRosa
By: /s/ Stephen A. Helman Date: March 11, 2005
- --------------------------------------------- --------------------
Stephen A. Helman
By: /s/ Wayne F. Holly Date: March 11, 2005
- --------------------------------------------- --------------------
Wayne F. Holly
By: /s/ Lawton Swan, III Date: March 11, 2005
- --------------------------------------------- --------------------
Lawton Swan, III
By: /s/ Thomas E. Willett Date: March 11, 2005
- --------------------------------------------- --------------------
Thomas E. Willett
By: /s/ David J. Willmott Date: March 11, 2005
- --------------------------------------------- --------------------
David J. Willmott
By: /s/ Wesley T. Wood Date: March 11, 2005
- --------------------------------------------- --------------------
Wesley T. Wood
74