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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, 2001
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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
of incorporation) identification no.)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(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 _____ .
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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. [X]
As of February 4, 2002 there were 3,544,629 shares of the Registrant's Class A
common stock and 355,000 shares of the Registrant's Class B common stock issued
and outstanding. The aggregate market value of 1,202,729 shares of the
Registrant's Class A common stock on February 4, 2002, which excludes 2,341,900
shares held by affiliates as a group, was $11,498,000 This value is based on the
average bid and asked prices of $9.56 per share on February 4, 2002 of the Class
A common stock on the NASDAQ Small Cap Market.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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Intervest Bancshares Corporation and Subsidiaries
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Page
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Item 1 Description of Business .............................................2
Item 2 Description of Properties...........................................12
Item 3 Legal Proceedings...................................................13
Item 4 Submission of Matters to a Vote of Security Holders.................13
Item 4A Executive Officers and Other Key Employees..........................13
PART II
Item 5 Market for Common Equity and Related Stockholder Matters............15
Item 6 Selected Consolidated Financial and Other Data......................16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................17
Item7A Quantitative and Qualitative Disclosures About Market Risk..........34
Item 8 Financial Statements and Supplementary Data.........................34
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............................66
PART III
Item 10 Directors and Executive Officers....................................66
Item 11 Executive Compensation..............................................66
Item 12 Security Ownership of Certain Beneficial Owners and Management......66
Item 13 Certain Relationships and Related Transactions......................66
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K....66
Signatures...................................................................68
1
PART I
Item 1. Description of Business
General
Private Securities Litigation Reform Act Safe Harbor Statement
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The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-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 following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions; the
development of an interest rate environment that may adversely affect the
Company's interest rate spread, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting banks and bank holding companies.
Intervest Bancshares Corporation
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Intervest Bancshares Corporation is a registered bank holding company (the
"Holding Company") incorporated in 1993 under the laws of the State of Delaware.
Its principal office is located at 10 Rockefeller Plaza, Suite 1015, New York,
New York 10020, and its telephone number is 212-218-2800. The Holding Company's
Class A common stock was approved for listing on the NASDAQ SmallCap Market
(Symbol: IBCA) in November 1997. Prior to then, there had been no established
trading market for the securities of the Holding Company. At December 31, 2001,
the Holding Company owned 100% of the outstanding capital stock of Intervest
National Bank, Intervest Corporation of New York and Intervest Statutory Trust I
(hereafter referred to collectively as the "Company," on a consolidated basis).
On July 20, 2001, Intervest Bank (the Holding Company's other wholly owned
banking subsidiary prior to this date) merged into Intervest National Bank. The
merger was accounted for at historical cost similar to the pooling-of-interests
method of accounting. Under this method of accounting, the recorded assets,
liabilities, shareholders' equity, income and expenses of both banks are
combined and recorded at their historical cost amounts. Hereafter, Intervest
National Bank may be referred to as the "Bank."
At December 31, 2001, the Company had total assets of $512,622,000, net loans of
$368,526,000, deposits of $362,437,000, debentures and related interest payable
of $99,910,000, and stockholders' equity of $40,395,000, compared to total
assets of $416,927,000, net loans of $266,326,000, deposits of $300,241,000,
debentures and related interest payable of $72,813,000, and stockholders' equity
of $36,228,000 at December 31, 2000.
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 sells 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, 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.
2
At December 31, 2001, the Bank had total assets of $421,152,000, net loans of
$296,255,000, deposits of $365,978,000, and stockholder's equity of $46,749,000,
compared to total assets of $335,788,000, net loans of $208,399,000, deposits of
$302,072,000 and stockholder's equity of $27,606,000, at December 31, 2000.
The Bank provides a wide range of banking services to small and middle-market
businesses and individuals. It conducts a personalized commercial and consumer
banking business, which consists of attracting deposits from the areas served by
its banking offices. The Bank also provides internet banking through its web
site: www.intervestnatbank.com, which can attract 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 a variety of real estate,
commercial and consumer loans and to purchase investment securities. The Bank
emphasizes multifamily residential and commercial real estate lending and also
offers commercial and consumer loans.
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 operating activities. 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).
In June 2001, the OCC terminated a Memorandum of Understanding with the Bank
that was in effect since June 2000. The memorandum was a formal written
agreement whereby, among other things, the Bank had been required to review,
revise, develop and implement various policies and procedures with respect to
its lending and credit underwriting. Management implemented various actions in
order for the Bank to be in full compliance with the memorandum.
Intervest Corporation of New York
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Intervest Corporation of New York is in the business of investing primarily in
commercial and multifamily real estate mortgage loans on income producing
properties, such as office and commercial properties and multifamily residential
apartment buildings. It also makes loans on other types of properties and may
resell mortgages. Intervest Corporation of New York is located at 10 Rockefeller
Plaza in New York City.
Intervest Corporation of New York was acquired on March 10, 2000, by the Holding
Company. In the acquisition, all the outstanding capital stock of Intervest
Corporation of New York was acquired in exchange for 1,250,000 shares of the
Holding Company's Class A common stock. Former shareholders of Intervest
Corporation of New York are officers and directors of Intervest Corporation of
New York and the Holding Company. The acquisition was accounted for at
historical cost similar to the pooling-of-interests method of accounting. Under
this method of accounting, the recorded assets, liabilities, shareholders'
equity, income and expenses of both companies are combined and recorded at their
historical cost amounts.
At December 31, 2001, Intervest Corporation of New York had total assets of
$83,083,000, net loans of $62,665,000, debentures and related interest payable
of $72,113,000, and stockholder's equity of $9,847,000, compared to total assets
of $74,860,000, net loans of $51,992,000, debentures and related interest
payable of $64,347,000, and stockholder's equity of $9,269,000, at December 31,
2000.
3
Intervest Corporation of New York's operations are significantly influenced by
the movement of interest rates and by general economic conditions, particularly
those in the New York City metropolitan area where most of the properties that
secure its mortgage loans are concentrated.
Intervest Statutory Trust I
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Intervest Statutory Trust I was formed in December 2001 in connection with the
issuance of $15,000,000 of capital securities. It is not authorized and does not
conduct any trade or business, and was formed for the sole purpose of the
issuance, sale and administration of the capital securities. See note 9 to the
consolidated financial statements for further discussion of the capital
securities.
Market Area
The primary market area of the Bank's 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 deposit gathering and lending markets are concentrated in the communities
surrounding its offices. Management believes that all 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 Corporation of New York's lending activities have been concentrated in
the New York City metropolitan region. It also makes loans in other states,
including Connecticut, Florida, New Jersey, North Carolina, Pennsylvania,
Virginia and Washington D.C.
Competition
The deregulation of the banking industry and the widespread enactment of state
laws that permit multi-bank holding companies, as well as an increasing level of
interstate banking, have created a highly competitive environment for commercial
banking. In one or more aspects of its business, the Bank competes with other
commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries. Most of these competitors, some
of which are affiliated with large bank holding companies, have substantially
greater resources and lending limits, and may offer services that the Bank does
not currently provide. In addition, many of the Bank's non-bank competitors are
not subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks.
Competition among financial institutions is based upon interest rates offered on
deposit accounts, interest rates charged on loans and other credit and service
charges, the quality and scope of the services rendered, the convenience of
banking facilities and, in the case of loans to commercial borrowers, relative
lending limits. Management believes that a community bank is better positioned
to establish personalized banking relationships with both commercial customers
and individual households. The Bank's community commitment and involvement in
their primary market areas, as well as its commitment to quality and
personalized banking services are factors that contribute to the Bank's
competitiveness. Management believes a locally-based bank is often perceived by
the local business community as possessing a clearer understanding of local
commerce and their needs. Consequently, management believes that the Bank can
compete successfully in its primary market areas by making prudent lending
decisions quickly and more efficiently than its competitors, without
compromising asset quality or profitability, although no assurances can be given
that such factors will assure success. In addition, management believes a
personalized service approach enables the Bank to attract and retain core
deposits.
4
In making its investments, Intervest Corporation of New York 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 engaged in purchasing
mortgages or making real property investments with investment objectives similar
in whole or part to its own. An increase in the general availability of funds
may increase competition in the making of investments in mortgages and real
property, and may reduce the yields available therefrom.
Asset Quality
The Bank seeks to maintain a high level of asset quality when considering
investments in securities and the originations of loans. 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. The Bank's lending
activities are conducted pursuant to written policies and defined lending
limits. Depending on their type and size, certain loans must be reviewed and
approved by a Loan Committee comprised of certain members of the Board of
Directors prior to being originated. As part of its loan portfolio management
strategy, 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%. In addition, physical inspections of
properties being considered for mortgage loans are made as part of the approval
process.
The Bank's Loan Committee, as well as its senior management and lending
officers, concentrate their efforts and resources on loan review and
underwriting procedures. Internal controls include ongoing reviews of loans made
to monitor documentation and ensure the existence and valuations of collateral.
The Bank also has in place a review process with the objective of quickly
identifying, evaluating and initiating necessary corrective actions for any
problem loans.
Intervest Corporation of New York does not have formal policies regarding the
percentage of its assets that may be invested in any single mortgage, the type
of mortgage loans and investments it can make, the geographic location of
properties collateralizing those mortgages, limits as to loan-to-value ratios
and the loan approval process.
At December 31, 2001, the Bank had one commercial real estate loan with a
principal balance of $1,243,000 classified as nonperforming and impaired. The
Company did not have any nonperforming assets or impaired loans at any time
during 2000 or 1999. There can be no assurance that a downturn in real estate
values, as well as other economic factors, would not have an adverse impact on
the Company's future level of nonperforming assets and profitability.
Lending Activities
The Company's lending activities include real estate loans and commercial and
consumer loans. Real estate loans include primarily the origination of loans for
commercial and multifamily properties. While the Bank's lending activities
include single-family residential mortgages, such lending has not been
emphasized. Commercial loans are originated for working capital funding.
Consumer loans include those for the purchase of automobiles, boats, home
improvements and investments. At December 31, 2001, the Company's net loan
portfolio amounted to $368,526,000, compared to $266,326,000 at December 31,
2000.
Commercial and Multifamily Real Estate Mortgage Lending
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Almost all of the Company's current loan portfolio is comprised of loans secured
by commercial and multifamily real estate, including rental and cooperative
apartment buildings, office buildings and shopping centers.
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.
5
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 periods of 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 mortgages owned 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 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 or otherwise.
Commercial Lending
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The Bank offers a variety of commercial loan services including term loans,
lines of credit and equipment financing. Short-to-medium term commercial loans,
both collateralized and uncollateralized, are made available to businesses for
working capital needs (including those secured by inventory, receivables and
other assets), business expansion (including acquisitions of real estate and
improvements), and the purchase of equipment and machinery. Commercial loans are
typically underwritten on the basis of the borrower's ability to make repayment
from the cash flow of their 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 the loans may depreciate over time,
cannot be appraised with as much precision as residential real estate, and may
fluctuate in value based on the success of the business.
Consumer Lending
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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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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 properties being considered for mortgage loans;
mortgage title insurance; hazard insurance; and an appraisal of the property
securing the loan to determine the property's adequacy as security 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.
6
Real Estate Investing Activities
The Company, from time to time, may purchase equity interests in real property
or it may acquire such an equity interest pursuant to a foreclosure upon a
mortgage in the normal course of business. With respect to such equity interests
in real estate, the Company may acquire 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 managed income-producing property, its management
has had substantial experience in the acquisition and management of properties
and, in particular, multifamily residential properties.
Investment Activities
The Bank's investment policies and strategies are reviewed and approved by its
Board of Directors and Investment Committee. The Company has historically
purchased securities that are issued directly by the U.S. government or one of
its agencies. Accordingly, the Company's investments in securities carry a
significantly lower credit risk than its loan portfolio. To manage interest rate
risk, the Company normally purchases securities that have adjustable rates or
securities with fixed rates that have short- to intermediate-maturity terms.
From time to time, a securities available-for-sale portfolio may be maintained
to provide flexibility for implementing asset and liability management
strategies. The Company does not engage in trading activities.
Securities held to maturity totaled $99,157,000 at December 31, 2001, compared
to $20,970,000 at December 31, 2000. On December 31, 2000, Intervest Bank
transferred U.S. government agency securities with an estimated fair value of
$74,789,000 from the held-to-maturity to the available-for-sale portfolio.
Securities available for sale amounted to $6,192,000 at December 31, 2001,
compared to $74,789,000 at December 31, 2000. The decrease was due to early
redemptions by various agencies brought about from the steady decline in market
interest rates during 2001.
The Company also invests in various money market instruments, including
overnight and term federal funds, short-term bank commercial paper and
certificate of deposits. These instruments are used to temporarily invest
available funds resulting from deposit-gathering activities and normal cash flow
from operations. Cash and short-term investments at December 31, 2001 amounted
to $24,409,000, compared to $42,938,000 at December 31, 2000.
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 received capital contributions from the Holding Company.
Deposit accounts are solicited from individuals, small businesses and
professional firms located throughout the Bank's primary market areas through
the offering of a broad variety of deposit services. The Bank also uses its web
site on the internet: www.intervestnatbank.com, which attracts deposit customers
from both within and outside its primary market areas. At December 31, 2001,
consolidated deposit liabilities totaled $362,437,000, compared to $300,241,000
at December 31, 2000.
Deposit services include the following: certificates of deposit (including
denominations of $100,000 or more); individual retirement accounts (IRAs); other
time deposits; checking and other demand deposit accounts; negotiable order of
withdrawal (NOW) accounts; savings accounts; and money market accounts. 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 also considers the Bank's liquidity requirements, 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.
7
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 available resources.
The Bank purchases federal funds from time to time to manage its liquidity
needs. At December 31, 2001 and 2000, there were no such funds outstanding, and
such funding has not been emphasized. The Bank has agreements with correspondent
banks whereby it may borrow up to $8,000,000 on an unsecured basis. There were
no outstanding borrowings under these agreements at December 31, 2001 or 2000.
Intervest Corporation of New York's principal sources of funds consist of
borrowings (through the sale of its debentures), mortgage repayments and cash
flow generated from operations. At December 31, 2001, Intervest Corporation of
New York had debentures outstanding of $63,000,000, compared to $57,150,000 at
December 31, 2000. The Holding Company has also sold debentures for working
capital purposes. The Holding Company's debentures outstanding totaled
$10,430,000 at December 31, 2001, and $6,930,000 at December 31, 2000.
On December 18, 2001, the Holding Company's wholly-owned subsidiary, Intervest
Statutory Trust I, sold 9.875% Trust Preferred Securities due December 18, 2031
in the aggregate principal amount of $15,000,000, referred to in this report as
the Capital Securities. The net proceeds from the sale were paid to the Holding
Company in exchange for $15,000,000 of its 9.875% Junior Subordinated Debentures
(the "Junior Subordinated Debentures") due December 18, 2031. The Holding
Company then invested $15,000,000 as a capital contribution in the Bank. The
sole asset of the Trust, the obligor on the Capital Securities, is the Junior
Subordinated Debentures.
For a further discussion of all the debentures, including conversion prices and
redemption premiums, see note 7 and note 9 to the consolidated financial
statements.
Employees
At December 31, 2001, the Company employed 53 full-time equivalent employees.
The employees are not covered by a collective bargaining agreement and the
Company believes its 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 state income tax return in New Jersey and a franchise tax return in
Delaware. The Bank also files a state income tax return in Florida. Intervest
Corporation of New York files state income tax returns in various states. 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 to the Holding Company and its subsidiaries on the basis of
their respective taxable income or taxable loss 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
8
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. `
Investment in Subsidiaries
At December 31, 2001
-------------------- Subsidiaries
($ in thousands) % of Equity in Earnings for the
Voting Total Underlying Year Ended December 31,
Subsidiary Stock Investment Net Assets 2001 2000 1999
- ---------- ----- ---------- ---------- ---- ---- ----
Intervest National Bank 100% $46,749 $46,749 $3,404 $2,619 $1,135
Intervest Corporation of New York 100% $ 9,847 $ 9,847 $ 577 $ 129 $ 572
Intervest Statutory Trust I 100% $ 464 $ 464 $ - $ - $ -
Effective December 2001, the Bank began paying a monthly dividend of $125,000 to
the Holding Company in order to provide funds for the debt service on the
Capital Securities (the proceeds of which were contributed to the Bank as
capital). In 2000, Intervest Corporation of New York paid a $3,000,000 dividend
to the Holding Company, which was reinvested in the Bank as a capital
contribution.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both federal
and state laws and regulations that are intended to protect depositors. 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
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As a bank holding company registered under the Bank Holding Company Act of 1956
(BHCA), the Holding Company is subject to the regulation and supervision of the
FRB. The Holding Company is required to file with the FRB periodic reports and
other information regarding its business operations and those of its
subsidiaries. Under the BHCA, the Holding Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the FRB determines to be so closely related to banking or
managing or controlling banks as to be properly incident thereto.
As a bank holding company, the Holding Company is required to obtain the prior
approval of the FRB before acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a bank or bank holding company. The FRB
will not approve any acquisition, merger or consolidation that would have a
substantial anti-competitive result, unless the anti-competitive effects of the
proposed transaction are outweighed by a greater public interest in meeting the
needs and convenience of the public. The FRB also considers managerial, capital
and other financial factors in acting on acquisition or merger applications. A
bank holding company may not engage in, or acquire direct or indirect control of
more than 5% of the voting shares of any company engaged in any non-banking
activity, unless such activity has been determined by the FRB to be closely
related to banking or managing banks. The FRB has identified by regulation
various non-banking activities in which a bank holding company may engage with
notice to, or prior approval by, the FRB.
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,
2001, the Company's consolidated ratio of total capital to risk-weighted assets
9
was 14.11% and its risk-based Tier 1 capital ratio was 12.89%. At December 31,
2000, the Company's consolidated ratio of total capital to risk-weighted assets
was 12.63% and its risk-based Tier 1 capital ratio was 11.72%. 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, 2001 and
2000, was 10.67% and 8.75%, respectively.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The FRB guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. In addition, the regulations of the FRB provide that concentration of
credit risk and certain risk arising from nontraditional activities, as well as
an institution's ability to manage these risks, are important factors to be
taken into account by regulatory agencies in assessing an organization's overall
capital adequacy.
The FRB and the other federal banking agencies have adopted amendments to their
risk-based capital regulations to provide for the consideration of interest rate
risk in the agency's determination of a banking institution's capital adequacy.
The amendments require such institutions to effectively measure and monitor
their interest rate risk and to maintain capital adequate for that risk.
Bank Regulation
- ---------------
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 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.
Such statutes and regulations relate to required reserves against deposits,
investments, loans, mergers and consolidations, issuance of securities, payment
of dividends, establishment of branches, and other aspects of the Bank's
operations. Various consumer laws and regulations also affect the operations of
the Bank, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, and fair credit reporting.
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act, which
governs certain transactions, such as loans, extensions of credit, investments
and purchases of assets between member banks and their affiliates, including
their parent holding companies. These restrictions limit the transfer of funds
to the Holding Company 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
10
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, 2001 and 2000,
the Bank met the definition of a well-capitalized institution.
The deposits of the Bank are insured by the FDIC through the Bank Insurance Fund
(the "BIF") to the extent provided by law. Under the FDIC's risk-based insurance
system, BIF-insured institutions are currently assessed premiums of between zero
and $0.27 per $100 of eligible deposits, depending upon the institutions capital
position and other supervisory factors. 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 $0.0182 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 institutions
normal market area. Under these regulations, well-capitalized institutions may
accept, renew or rollover such deposits without restriction, while adequately
capitalized institutions may accept, renew or rollover such deposits with a
waiver from the FDIC (subject to certain restrictions on payment of rates).
Undercapitalized institutions may not accept, renew or rollover such deposits.
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
11
the performance of financial institutions. The Bank has received a
"satisfactory" rating in its most recent CRA examination.
The federal regulators have adopted regulations and examination procedures
promoting the safety and soundness of individual institutions by specifically
addressing, among other things: (i) internal controls; information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate exposure; (v) asset growth; (vi) ratio of classified assets to
capital; (vii) minimum earnings; and (viii) compensation and benefits standards
for management officials.
The FRB, OCC and other federal banking agencies have broad enforcement powers,
including the power to terminate deposit insurance, and impose substantial fines
and other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could subject the Holding Company or its banking subsidiary, as well as
officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially civil monetary
penalties.
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. Additional
legislative and regulatory proposals have been made and others can be expected.
These include proposals designed to improve the overall the 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
- ------------------------------------
The commercial banking business in which the Company engages is affected not
only by general economic conditions, but also by the monetary policies of the
FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the "discount window," open market operations, the imposition of
changes in reserve requirements against member banks' deposits and assets of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to continue to do so in the future. The monetary policies of these
agencies are influenced by various factors, including inflation, unemployment,
short-term and long-term changes in the international trade balance and in the
fiscal policies of the United States Government. Future monetary policies and
the effect of such policies on the future business and earnings of the Company
cannot be predicted.
Item 2. Description of Properties
The office of the Holding Company and Intervest Corporation of New York is
located in leased premises (of approximately 4,000 sq. ft.) on the tenth floor
of 10 Rockefeller Plaza, New York, N.Y, 10020. The lease expires in September
2004.
12
The Bank's headquarters and banking office is located in leased premises on the
third floor of One Rockefeller Plaza, New York, N.Y, 10020. The office consists
of approximately 7,000 sq. ft. and has been leased through May 2008. The Bank's
principal office in Florida is located at 625 Court Street, Clearwater, Florida,
33756. In addition, the Bank operates an additional four branch offices; three
of which are in Clearwater, Florida, at 1875 Belcher Road North, 2175 Nursery
Road and 2575 Ulmerton Road, and one is at 6750 Gulfport Blvd, South Pasadena,
Florida. With the exception of the Belcher Road office, which is leased through
June 2007, the Bank owns all its offices in Florida.
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.
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 claims to enforce
liens, claims involving the making and servicing of mortgage loans, and other
issues incident to the Company's business. Management does not believe that
there is any pending or threatened proceeding against the Company, which, if
determined adversely, would have a material effect on the business, results of
operations, or financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 2001, 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 83, serves as Chairman of the Board of Directors and
Executive Vice President of Intervest Bancshares Corporation. He has served as
Executive Vice President since 1994 and as Chairman of the Board since 1996. Mr.
Dansker received a Bachelor of Science degree from the New York University
School of Commerce, Accounts and Finance, a Law degree from the New York
University School of Law, and is admitted to practice as an attorney in the
State of New York. Mr. Dansker also serves as Chairman of the Board of Directors
and Chairman of the Loan Committee of Intervest National Bank. He is also
Chairman of the Board of Directors and Executive Vice President of Intervest
Corporation of New York.
Lowell S. Dansker, age 51, serves as a Director, President and Treasurer of
Intervest Bancshares Corporation and has served in that capacity since 1993. 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 Chief Executive Officer, Director and a
member of the Loan Committee of Intervest National Bank. He is also a Director,
President and Treasurer of Intervest Corporation of New York.
Lawrence G. Bergman, age 57, serves as a Director, Vice President and
Secretary of Intervest Bancshares Corporation and has served in that capacity
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. He is also a Director, Vice-President and Secretary of Intervest
13
Corporation of New York.
Keith A. Olsen, age 48, serves as President of the Florida Division and
Director of Intervest National Bank and has served in such capacity 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 15 years and has served
as a senior bank officer for more than 10 years.
Raymond C. Sullivan, age 55, serves as President and Director of Intervest
National Bank and has served in that capacity 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.
John J. Arvonio, age 39, serves as Senior Vice President, Chief Financial
Officer and Secretary of Intervest National Bank and has served in such capacity
since September 2000. Prior to that, Mr. Arvonio served as Vice President,
Controller and Secretary of Intervest National Bank since April 1999. Prior to
that, Mr. Arvonio was an employee of Intervest Bancshares Corporation from April
1998 to March 1999. Mr. Arvonio received a B.B.A. degree from Iona College and
is a Certified Public Accountant. Mr. Arvonio has over 13 years of banking
experience. Prior to joining the Company, Mr. Arvonio served as Second Vice
President, Technical Advisor and Assistant Controller for The Greater New York
Savings Bank from 1992 to 1997. Prior to that, Mr. Arvonio was a Manager of
Financial Reporting for the Leasing and Investment Banking Divisions of
Citibank.
14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market for Securities
The Holding Company's Class A common stock is traded over the counter and quoted
on the NASDAQ SmallCap Market under the symbol: IBCA. At December 31, 2001,
there were 3,544,629 and 355,000 shares of Class A and Class B common stock
outstanding, respectively. There were approximately 700 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, 2001, there were four holders of record of Class B common stock. There is no
public-trading market for the Class B common stock.
The high and low sales prices listed below represent actual sales transactions
as reported by the NASDAQ for the Class A common stock by calendar quarter for
2001 and 2000 are as follows:
2001 2000
---- ----
High Low High Low
----------------- -------------------
First quarter $ 6.50 $ 3.75 $ 7.00 $ 5.50
Second quarter $ 7.28 $ 5.30 $ 8.00 $ 4.75
Third quarter $ 7.75 $ 5.25 $ 7.00 $ 4.75
Fourth quarter $ 8.65 $ 6.25 $ 5.50 $ 3.38
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 and financial condition.
There are also various legal limitations with respect to the Bank's financing or
otherwise supplying funds to the Holding Company. In particular, under federal
banking law, the Bank may not declare a dividend that exceeds undivided profits.
In addition, the approval of the FRB 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.
15
Item 6. Selected Consolidated Financial and Other Data
- ------------------------------------------------------------------------------------------------------------------------------------
At or For The Year Ended December 31,
----------- ------------ ------------ ----------- -----------
($ in thousands, except per share amounts) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Condition Data:
Total assets..................................................... $512,622 $416,927 $340,481 $300,080 $245,262
Cash and cash equivalents........................................ 24,409 42,938 32,095 40,977 24,043
Securities available for sale.................................... 6,192 74,789 - - -
Securities held to maturity, net................................. 99,157 20,970 83,132 82,338 58,821
Loans receivable, net............................................ 368,526 266,326 212,937 164,986 150,832
Deposits......................................................... 362,437 300,241 201,080 170,420 130,412
Federal funds purchased.......................................... - - 6,955 - -
Debentures and related accrued interest payable.................. 99,910 72,813 92,422 93,090 82,966
Stockholders' equity............................................. 40,395 36,228 33,604 31,112 28,142
Nonaccrual loans................................................. 1,243 - - - -
Allowance for loan loss reserves................................. 3,380 2,768 2,493 1,662 1,173
Loan chargeoffs.................................................. - - - - -
Loan recoveries.................................................. - - 1 10 10
- ------------------------------------------------------------------------------------------------------------------------------------
Operations Data:
Interest and dividend income..................................... $ 35,462 $ 31,908 $ 25,501 $ 24,647 $ 19,807
Interest expense................................................. 24,714 23,325 18,419 17,669 15,008
-----------------------------------------------------------------
Net interest and dividend income................................. 10,748 8,583 7,082 6,978 4,799
Provision for loan loss reserves................................. 612 275 830 479 352
-----------------------------------------------------------------
Net interest and dividend income after
provision for loan loss reserves............................ 10,136 8,308 6,252 6,499 4,447
Noninterest income............................................... 1,655 983 900 700 382
Noninterest expenses............................................. 5,303 4,568 4,059 3,077 2,679
-----------------------------------------------------------------
Earnings before income taxes, extraordinary item
and change in accounting principle.......................... 6,488 4,723 3,093 4,122 2,150
Provision for income taxes....................................... 2,710 1,909 1,198 1,740 860
-----------------------------------------------------------------
Earnings before extraordinary item and
change in accounting principle.............................. 3,778 2,814 1,895 2,382 1,290
Extraordinary item, net of tax (1)............................... - (206) - - -
Cumulative effect of accounting change, net of tax (2)........... - - (128) - -
-----------------------------------------------------------------
Net earnings..................................................... $ 3,778 $ 2,608 $ 1,767 $ 2,382 $ 1,290
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Basic earnings per share......................................... $ 0.97 $ 0.67 $ 0.47 $ 0.64 $ 0.44
Diluted earnings per share....................................... 0.97 0.67 0.44 0.54 0.39
Common book value per share...................................... 10.36 9.29 8.76 8.33 7.66
Dividends per share.............................................. - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Other Data and Ratios:
Common shares outstanding........................................ 3,899,629 3,899,629 3,836,879 3,734,515 3,674,415
Average common shares used to calculate:
Basic earnings per share.................................... 3,899,629 3,884,560 3,760,293 3,707,113 2,962,292
Diluted earnings per share.................................. 3,899,629 3,884,560 4,020,118 4,723,516 3,322,459
Adjusted net earnings for diluted earnings per share........... $ 3,778 $ 2,608 $ 1,767 $2,554 $ 1,290
Full-service banking offices..................................... 6 6 6 5 5
Return on average assets......................................... 0.85% 0.69% 0.57% 0.87% 0.59%
Return on average equity......................................... 9.94% 7.48% 5.48% 8.05% 6.00%
Loans, net of unearned income to deposits..................... 101.7% 88.70% 105.90% 96.81% 115.66%
Allowance for loan losses to total net loans..................... 0.92% 1.04% 1.17% 1.01% 0.78%
Average stockholders' equity to average total assets........... 8.50% 9.18% 10.37% 10.82% 9.86%
Stockholders' equity to total assets............................. 7.88% 8.69% 9.87% 10.37% 11.47%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents a charge, net of taxes, from the early retirement of debentures.
(2) Represents a charge, net of taxes, from the adoption of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities."
16
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 included in this report on Form 10-K.
Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest
National Bank, Intervest Corporation of New York and Intervest Statutory Trust I
(hereafter referred to collectively as the "Company" on a consolidated basis).
Intervest Bancshares Corporation and Intervest National Bank may be referred to
as the "Holding Company" and the "Bank," respectively.
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. The Holding Company also sells
debentures to raise funds for working capital purposes.
Intervest National Bank is a nationally chartered, full-service commercial bank
that opened for business on April 1, 1999. On July 20, 2001, Intervest Bank (the
Holding Company's other wholly owned banking subsidiary prior to this date)
merged into Intervest National Bank. Intervest Bank was a Florida state
chartered commercial bank. The merger was accounted for at historical cost
similar to the pooling-of-interests method of accounting. Under this method of
accounting, the recorded assets, liabilities, shareholders' equity, income and
expenses of both banks are combined and recorded at their historical cost
amounts. Intervest National Bank has its headquarters and full-service banking
office in Rockefeller Center, in New York City, and a total of five full-service
banking offices in Clearwater and Pinellas County, Florida. The Bank conducts a
personalized commercial and consumer banking business, which consists of
attracting 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 a variety of real estate, commercial and consumer
17
loans and to purchase investment securities. The Bank emphasizes multifamily and
commercial real estate lending.
Intervest Corporation of New York is also located in Rockefeller Center in New
York City and is in the business of originating and acquiring commercial and
multifamily loans. On March 10, 2000, the Holding Company acquired all the
outstanding capital stock of Intervest Corporation of New York in exchange for
1,250,000 shares of the Holding Company's Class A common stock. As a result of
the acquisition, Intervest Corporation of New York became a wholly owned
subsidiary of the Holding Company. Former shareholders of Intervest Corporation
of New York are officers and directors of both the Holding Company and Intervest
Corporation of New York. The acquisition was also accounted for at historical
cost similar to the pooling-of-interests method of accounting.
Intervest Statutory Trust I was formed in December 2001 in connection with the
issuance of $15,000,000 of Capital Securities. See the section entitled
"Debentures Payable and Accrued Interest Payable on Debentures" for further
discussion.
The Company's profitability depends primarily on net interest income, which is
the difference between interest income generated from its interest-earning
assets less the interest expense incurred on 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, the provision for loan loss reserves, and its effective
income tax rate. Noninterest income consists primarily of loan and other banking
fees. Noninterest expense consists of compensation and benefits, occupancy and
equipment related expenses, data processing expenses, advertising expense,
deposit insurance premiums and other operating expenses. The Company's
profitability is also significantly affected by general economic and competitive
conditions, changes in market interest rates, government policies and actions of
regulatory authorities.
Comparison of Results of Operations for the Years Ended December 31, 2001 and
2000.
General
- -------
Consolidated net earnings for the full year 2001 increased 45% to $3,778,000, or
$0.97 per fully diluted share, from $2,608,000, or $0.67 per fully diluted
share, for 2000. Net earnings for 2001 represent the highest level of earnings
reported by the Company since its inception in 1993. The growth was due to an
increase of $2,165,000 in net interest and dividend income and an increase of
$672,000 in noninterest income. These items were partially offset by an $801,000
increase in the provision for income taxes, a $735,000 increase in noninterest
expense, and a $337,000 increase in the provision for loan losses. Results for
2000 included an extraordinary charge, net of taxes, of $206,000, in connection
with the early retirement of various debentures.
Selected information regarding results of operations for the Holding Company and
its subsidiaries for 2001 follows:
Intervest Intervest Inter-
Holding National Corporation company
($ in thousands) Company (1) Bank of New York Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 818 $27,126 $ 7,624 $ (106) $ 35,462
Interest expense 1,124 17,185 6,511 (106) 24,714
------------------------------------------------------------------------
Net interest and dividend (expense) income (306) 9,941 1,113 - 10,748
Provision for loan loss reserves 19 575 18 - 612
Noninterest income 176 925 1,152 (598) 1,655
Noninterest expenses 226 4,500 1,175 (598) 5,303
------------------------------------------------------------------------
(Loss) earnings before taxes (375) 5,791 1,072 - 6,488
(Credit) provision for income taxes (172) 2,387 495 - 2,710
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings $ (203) $ 3,404 $ 577 $ - $ 3,778
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes the net activity of Intervest Statutory Trust I.
18
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 to $10,748,000 in 2001, from
$8,583,000 in 2000. The improvement was attributable to growth in the Company's
balance sheet and a higher net interest margin. The average loan portfolio
increased by $64,207,000 during 2001, funded by a similar increase in average
deposits. The net interest margin increased to 2.47% in 2001, from 2.34% in 2000
due to the Company's cost of funds decreasing at a faster pace than the yield on
its interest-earning assets.
The Company's yield on interest-earning assets decreased 53 basis points to
8.15% in 2001 due to the steady decline in market interest rates resulting from
the Federal Reserve Board decreasing the federal funds target rate on 11
occasions during 2001 for a total of 475 basis points. The lower rate
environment resulted in originations of new loans with lower rates than the
average yield of the loan portfolio in 2000, prepayments of higher-yielding
loans, early calls of security investments by the issuers with the resulting
proceeds being invested in lower yielding securities, and lower rates earned on
overnight and short-term investments.
The Company's cost of funds decreased 77 basis points to 6.27% in 2001 also due
to the lower rate environment, which resulted in lower rates paid on deposit
accounts and variable-rate debentures indexed to the prime rate.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2001 and 2000. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived mainly from daily balances. Net interest margin is computed by dividing
net interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
--------------------------------
2001 2000
----------------------------------- ------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $315,148 $30,187 9.58% $250,941 $24,923 9.93%
Securities 75,117 3,423 4.56 101,532 6,056 5.96
Other interest-earning assets 44,848 1,852 4.13 14,925 929 6.22
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 435,113 $35,462 8.15% 367,398 $31,908 8.68%
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 11,973 12,257
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $447,086 $379,655
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 8,089 $ 238 2.94% $ 7,611 $ 232 3.05%
Savings deposits 19,629 778 3.96 17,070 897 5.25
Money market deposits 65,581 2,640 4.03 52,182 2,832 5.43
Certificates of deposit 222,743 13,423 6.03 175,552 10,892 6.20
---------------------------------------------------------------------------
Total deposit accounts 316,042 17,079 5.40 252,415 14,853 5.88
Federal funds purchased - - - 2,544 150 5.90
Debentures and accrued interest payable 78,257 7,635 9.76 76,546 8,322 10.87
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 394,299 $ 24,714 6.27% 331,505 $23,325 7.04%
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,338 5,696
Noninterest-bearing liabilities 8,460 7,599
Stockholders' equity 37,989 34,855
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 447,086 $379,655
- -------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 10,748 1.88% $ 8,583 1.64%
- -------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 40,814 2.47% $ 35,893 2.34%
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.11x
- -------------------------------------------------------------------------------------------------------------------------------
19
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).
For the Year Ended December 31, 2001 vs. 2000
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- -----------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ (886) $ 6,377 $ (227) $ 5,264
Securities (1,429) (1,576) 372 (2,633)
Other interest-earning assets (313) 1,863 (627) 923
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets (2,628) 6,664 (482) 3,554
- -----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (8) 15 (1) 6
Savings deposits (220) 134 (33) (119)
Money market deposits (731) 727 (188) (192)
Certificates of deposit (313) 2,928 (84) 2,531
---------------------------------------------------
Total deposit accounts (1,272) 3,804 (306) 2,226
Federal funds purchased (150) (150) 150 (150)
Debentures and accrued interest payable (854) 186 (19) (687)
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (2,276) 3,840 (175) 1,389
- -----------------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (352) $ 2,824 $ (307) $ 2,165
- -----------------------------------------------------------------------------------------------------------------
Provision for Loan Loss Reserves
- --------------------------------
The provision for loan loss reserves is based on management's ongoing assessment
of the adequacy of the allowance for loan loss reserves, which takes into
consideration a number of factors, including the level of outstanding loans. See
the section "Comparison of Financial Condition at December 31, 2001 and 2000,"
for a discussion of these factors. The provision amounted to $612,000 in 2001,
compared to $275,000 in 2000. The increase was primarily due to the growth in
the loan portfolio.
Noninterest Income
- ------------------
Noninterest income, which is comprised mainly of fees from customer service
charges and income from mortgage lending activities, increased to $1,655,000 in
2001, from $983,000 in 2000. The increase was due to a higher level of income
($631,000) from the early repayment of loans, which consists of the recognition
of unearned fees and discounts associated with such loans and the receipt of
prepayment penalties in certain cases. 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, although the
amount and timing of prepayments, if any, cannot be predicted. Many of the
Company's mortgage loans include prepayment provisions, and others prohibit
prepayment of indebtedness entirely.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $5,303,000 in 2001, from $4,568,000 in 2000.
Expenses for the 2001 period include approximately $150,000 of nonrecurring
expenses associated with the merger of Intervest Bank into Intervest National
Bank. Expenses for the 2000 period include approximately $210,000 of
nonrecurring expenses (consisting of $51,000 of attorney fees, consulting fees
20
and printing costs, and $159,000 of stock compensation) associated with the
acquisition of Intervest Corporation of New York.
Absent the aforementioned expenses, noninterest expenses totaled $5,153,000 in
2001, compared to $4,358,000 in 2000. The increase was due to a $382,000
increase in compensation and benefits (of which $254,000 was the result of
salary increases, additional staff and increased benefit expenses, and the
remainder due to a lower amount of SFAS No. 91 deferred origination costs), a
$212,000 increase in data processing expenses (due to Intervest National Bank's
growth in assets) and a $87,000 increase in occupancy expenses (due to higher
taxes and other charges), and a $145,000 increase in all other noninterest
expenses (primarily due to $40,000 of higher FDIC insurance premiums and
increases in general insurance, telephone and director expenses aggregating
$47,000). These increases were partially offset by lower advertising expenses
and professional fees aggregating $28,000.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $2,710,000 in 2001, from $1,909,000
in 2000, largely due to higher pre-tax earnings. The Company's effective tax
rate (inclusive of state and local taxes) amounted to 41.8% in 2001, compared to
40.4% in 2000. The increase in the effective tax rate was primarily due to
higher earnings generated from the Company's New York operations, which is taxed
at a higher rate than Florida.
Extraordinary Item
- ------------------
In 2000, Intervest Corporation of New York redeemed debentures totaling
$24,000,000 in principal prior to maturity for the outstanding principal amount
plus accrued interest aggregating $3,970,000. In connection with these
redemptions, $382,000 of unamortized deferred debenture offering costs was
charged to expense and reported as an extraordinary charge, net of a tax benefit
of $176,000, in the consolidated statement of earnings for the year ended
December 31, 2000.
Comparison of Results of Operations for the Years Ended December 31, 2000 and
1999.
General
- -------
Consolidated net earnings for 2000 increased to $2,608,000, or $0.67 per fully
diluted share, from $1,767,000, or $0.44 per fully diluted share in 1999, or a
48% year-to-year increase. The growth in earnings was primarily due to a
$1,501,000 increase in net interest and dividend income and a $555,000 decrease
in the provision for loan loss reserves. These items were partially offset by a
$711,000 increase in the provision for income taxes, an increase in operating
expenses of $299,000 resulting largely from a full year of operations of the
Bank's New York office (which opened on April 1, 1999), and approximately
$210,000 of nonrecurring expenses associated with the acquisition of Intervest
Corporation of New York in March of 2000.
Selected information regarding results of operations for the Holding Company and
its subsidiaries for 2000 follows:
Intervest Intervest Inter-
Holding National Corporation company
($ in thousands) Company Bank of New York Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 672 $ 22,982 $ 8,519 $ (265) $ 31,908
Interest expense 686 15,268 7,636 (265) 23,325
-------------------------------------------------------------------
Net interest and dividend (expense) income (14) 7,714 883 - 8,583
Provision for loan loss reserves 17 258 - - 275
Noninterest income 165 479 563 (224) 983
Noninterest expenses 405 3,564 823 (224) 4,568
-------------------------------------------------------------------
(Loss) earnings before taxes and extraordinary item (271) 4,371 623 - 4,723
(Credit) provision for income taxes (131) 1,752 288 - 1,909
Extraordinary item, net of tax - - (206) - (206)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings $(140) $ 2,619 $ 129 - $ 2,608
- ------------------------------------------------------------------------------------------------------------------------------------
21
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 to $8,583,000 in 2000, from $7,082,000 in 1999.
The improvement was attributable to a $74,961,000 increase in the average loan
portfolio, partially offset by a decline in the Company's interest rate spread
from 1.69% to 1.64%. The growth in the loan portfolio was funded primarily by a
$78,008,000 increase in average deposits.
The Company's cost of funds increased 16 basis points to 7.04% in 2000 due to
the rising interest rate environment, as evidenced by the Federal Reserve Board
increasing the federal funds target rate on six occasions between June 1999 and
June 2000, for a total of 175 basis points. This resulted in higher rates paid
for deposit accounts and floating-rate debentures, as well as an increase in
depositors' preference for certificates of deposit accounts, which normally have
higher rates than savings and money market accounts.
The Company's yield on earning assets in 2000 increased 11 basis point to 8.68%
due to higher yields earned on investment securities and other short-term
investments, partially offset by a decline in the yield on the loan portfolio.
Despite the higher rate environment, the average yield on the loan portfolio
declined to 9.93% from 10.68%, due to competitive lending conditions (which
resulted in originations of new loans with lower rates than the average yield of
the portfolio in 1999, as well as prepayments of higher-yielding loans). The
effect of the preceding was partially offset by rate increases on floating-rate
loans.
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 2000 and 1999. 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 mainly 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,
--------------------------------
2000 1999
----------------------------------- ------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $ 250,941 $ 24,923 9.93% $175,980 $ 18,794 10.68%
Securities 101,532 6,056 5.96 108,336 6,123 5.65
Other interest-earning assets 14,925 929 6.22 13,089 584 4.46
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 367,398 $ 31,908 8.68% 297,405 $ 25,501 8.57%
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 12,257 13,610
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 379,655 $ 311,015
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 7,611 $ 232 3.05% $ 7,687 $ 238 3.10%
Savings deposits 17,070 897 5.25 25,160 1,059 4.21
Money market deposits 52,182 2,832 5.43 42,078 1,882 4.47
Certificates of deposit 175,552 10,892 6.20 99,482 5,524 5.55
--------------------------------------------------------------------------
Total deposit accounts 252,415 14,853 5.88 174,407 8,703 4.99
Federal funds purchased 2,544 150 5.90 517 29 5.61
Debentures and accrued interest payable 76,546 8,322 10.87 92,888 9,687 10.43
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 331,505 $ 23,325 7.04% 267,812 $ 18,419 6.88%
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,696 4,436
Noninterest-bearing liabilities 7,599 6,529
Stockholders' equity 34,855 32,238
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 379,655 $ 311,015
- -------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 8,583 1.64% $ 7,082 1.69%
- -------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 35,893 2.34% $ 29,593 2.38%
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11x 1.11x
- -------------------------------------------------------------------------------------------------------------------------------
22
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).
For the Year Ended December 31, 2000 vs. 1999
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ (1,320) $ 8,006 $ (557) $ 6,129
Securities 336 (384) (19) (67)
Other interest-earning assets 230 82 33 345
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (754) 7,704 (543) 6,407
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (4) (2) - (6)
Savings deposits 262 (341) (83) (162)
Money market deposits 404 452 94 950
Certificates of deposit 647 4,222 499 5,368
------------------------------------------------------------
Total deposit accounts 1,309 4,331 510 6,150
Federal funds purchased 1 114 6 121
Debentures and accrued interest payable 409 (1,704) (70) (1,365)
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,719 2,741 446 4,906
- -------------------------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (2,473) $ 4,963 $ (989) $ 1,501
- -------------------------------------------------------------------------------------------------------------------------
Provision for Loan Loss Reserves
- --------------------------------
The provision for loan loss reserves is based on management's ongoing assessment
of the adequacy of the allowance for loan loss reserves, which takes into
consideration a number of factors, including the level of outstanding loans. See
the section "Comparison of Financial Condition at December 31, 2001 and 2000,"
for a discussion of these factors. The provision amounted to $275,000 in 2000,
compared to $830,000 in 1999. The 1999 provision included an initial provision
of $444,000 recorded by the Bank in conjunction with approximately $42,000,000
of new loan originations generated by its New York office in 1999.
Noninterest Income
- ------------------
Noninterest income, which is comprised mainly of fees from customer service
charges and income from mortgage lending activities, increased to $983,000 in
2000, from $900,000 in 1999. The increase was due to a higher level of income
from the early repayment of loans, which consists of the recognition of unearned
fees and discounts associated with such loans and the receipt of prepayment
penalties in certain cases. 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, although the amount and
timing of prepayments, if any cannot be predicted. Many of the Company's
mortgage loans include prepayment provisions, and others prohibit prepayment of
indebtedness entirely.
23
Noninterest Expenses
- --------------------
Noninterest expenses increased to $4,568,000 in 2000, from $4,059,000 in 1999.
The increase was due to approximately $210,000 of nonrecurring expenses
(consisting of $51,000 of attorney fees, consulting fees and printing costs, and
$159,000 of stock compensation) associated with the acquisition of Intervest
Corporation of New York. The remaining $299,000 increase was due to higher
compensation, occupancy and equipment expenses resulting from a full year of
operations of the Bank's New York office in 2000, compared to nine months of
operations in 1999.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $1,909,000 in 2000, from $1,198,000
in 1999, due to higher pre-tax earnings. The Company's effective tax rate
(inclusive of state and local taxes) amounted to 40.4% in 2000, compared to
38.7% in 1999. The increase in the effective tax rate was primarily due to
higher earnings generated from the Company's New York operations, which is taxed
at a higher rate than Florida.
Extraordinary Item
- ------------------
In 2000, Intervest Corporation of New York redeemed debentures totaling
$24,000,000 in principal prior to maturity for the outstanding principal amount
plus accrued interest aggregating $3,970,000. In connection with these
redemptions, $382,000 of unamortized deferred debenture offering costs was
charged to expense and reported as an extraordinary charge, net of a tax benefit
of $176,000, in the consolidated statement of earnings for the year ended
December 31, 2000.
Cumulative Effect of Change in Accounting Principle
- ---------------------------------------------------
The change in accounting principle represents the required adoption of the
AICPA's Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," which applies to all companies except as provided for therein. The
SOP requires that all start-up costs (except for those that are capitalizable
under other generally accepted accounting principles) be expensed as incurred
for financial statement purposes effective January 1, 1999. Previously, a
portion of start-up costs were generally capitalized and amortized over a period
of time. The adoption of this statement resulted in the immediate expensing on
January 1, 1999 of $193,000 in start-up costs incurred through December 31, 1998
in connection with organizing Intervest National Bank. A deferred tax benefit of
$65,000 was recorded in conjunction with this charge.
Comparison of Financial Condition at December 31, 2001 and December 31, 2000.
Overview
- --------
Total assets at December 31, 2001 increased to $512,622,000, from $416,927,000
at December 31, 2000. The increase was reflected in the growth in mortgage
loans. Total liabilities at December 31, 2001 increased to $472,227,000, from
$380,699,000 at December 31, 2000, due to growth in deposit accounts and an
increase in debentures payable. Stockholders' equity increased to $40,395,000 at
December 31, 2001, from $36,228,000 at year-end 2000, due almost entirely to
earnings for 2001. Book value per common share increased to $10.36 per share at
December 31, 2001, from $9.29 at December 31, 2000.
24
Selected balance sheet information for the Holding Company and its subsidiaries
as of December 31, 2001 follows:
Intervest Intervest Intervest Inter-
($ in thousands) Holding National Corporation Statutory Company
Company Bank of New York Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 861 $ 10,134 $ 16,752 $ - $ (3,338) $ 24,409
Time deposits with banks - 250 - - - 250
Securities available for sale - 6,192 - - - 6,192
Securities held to maturity, net - 99,157 - 15,464 (15,464) 99,157
Federal Reserve Bank stock - 654 - - - 654
Loans receivable, net of deferred fees 9,606 296,255 62,665 - - 368,526
Allowance for loan loss reserves (48) (3,314) (18) - - (3,380)
Investment in subsidiaries 57,060 - - - (57,060) -
All other assets 1,347 11,824 3,684 - (41) 16,814
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $68,826 $421,152 $ 83,083 $ 15,464 $(75,903) $ 512,622
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $365,978 $ - $ - $ (3,541) $ 362,437
Debentures payable 25,894 - 63,000 - (15,464) 73,430
Debentures payable - capital securities - - - 15,000 - 15,000
Accrued interest payable on debentures 2,367 - 9,113 - - 11,480
All other liabilities 170 8,425 1,123 - 162 9,880
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 28,431 374,403 73,236 15,000 (18,843) 472,227
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 40,395 46,749 9,847 464 (57,060) 40,395
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $68,826 $421,152 $ 83,083 $ 15,464 $(75,903) $ 512,622
- ------------------------------------------------------------------------------------------------------------------------------------
A comparison of the Company's consolidated balance sheet as of December 31,
2001 and 2000 follows:
At December 31, 2001 At December 31, 2000
-------------------- --------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 24,409 4.8% $ 42,938 10.3%
Time deposits with banks 250 0.1 - -
Securities available for sale at estimated fair value 6,192 1.2 74,789 17.9
Securities held to maturity, net 99,157 19.3 20,970 5.0
Federal Reserve Bank stock 654 0.1 605 0.2
Loans receivable, net of deferred fees and loan loss reserves 365,146 71.2 263,558 63.2
All other assets 16,814 3.3 14,067 3.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 512,622 100.0% $ 416,927 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ 362,437 70.7% $ 300,241 72.0%
Debentures payable 73,430 14.3 64,080 15.4
Debentures payable - capital securities 15,000 2.9 - -
Accrued interest payable on debentures 11,480 2.3 8,733 2.1
All other liabilities 9,880 1.9 7,645 1.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 472,227 92.1 380,699 91.3
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 40,395 7.9 36,228 8.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 512,622 100.0% $ 416,927 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents decreased to $24,409,000 at December 31, 2001, from
$42,938,000 at December 31, 2000, due to a lower level of federal funds and
short-term commercial paper investments outstanding. Cash and cash equivalents
include federal funds and interest-bearing and noninterest-bearing cash balances
with banks, and other short-term investments that have original maturities of
three months or less. These 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.
Securities Available for Sale and Held to Maturity
- --------------------------------------------------
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 [such as the
Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC)]. The Company's security investments have lower yields than its loan
portfolio. To manage interest rate risk, the Company normally purchases
25
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.
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. On December 31,
2000, Intervest Bank transferred U.S. government agency securities with an
estimated fair value of $74,789,000 from the held-to-maturity to the
available-for-sale portfolio. Securities available for sale decreased to
$6,192,000 at December 31, 2001, from $74,789,000 at December 31, 2000. The
decrease was due to early redemptions by various agencies brought about from the
steady decline in market interest rates during 2001. The resulting proceeds from
the redemptions were used to partially fund new mortgage loan originations and
the remainder was reinvested in shorter-term U.S. government agency securities
classified as held to maturity. There were no sales of securities during 2001,
2000 and 1999, and no transfers of securities to the available-for-sale
portfolio in 2001.
At December 31, 2001, the available-for-sale portfolio consisted of fixed-rate
debt obligations of FNMA and FHLB with a weighted-average yield of 5.59% and
maturing at various times through 2003. At December 31, 2001, the portfolio had
an unrealized gain, net of tax, of $111,000, compared to a net unrealized loss
of $252,000 at December 31, 2000. Unrealized gains and losses on securities
available for sale, net of income taxes, are reported as a separate component of
comprehensive income and included in stockholders' equity.
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 $99,157,000 at December 31, 2001, compared to $20,970,000 at
December 31, 2000. The increase was due to purchases exceeding maturities during
the year. At December 31, 2001, the portfolio consisted of short-term debt
obligations of FNMA, FHLB, FHLMC and FFCB with a weighted-average yield of
approximately 2.89% and a weighted average term of approximately one year. The
securities are predominately fixed rate and some have call features, which allow
the issuer to call the security before its stated maturity without penalty. At
December 31, 2001 and 2000, the portfolio's estimated fair value was $99,404,000
and $20,978,000, respectively.
Federal Reserve Bank Stock
- --------------------------
In order for the Bank to be a member of the Federal Reserve Banking System, the
Bank maintains an investment in the capital stock of the Federal Reserve Bank,
which pays a dividend that is currently 6%. The investment, which amounted to
$654,000 at December 31, 2001 and $605,000 at December 31, 2000, fluctuates
based on the Bank's capital level.
Loans Receivable, Net of Deferred Fees and Loan Loss Reserves
- --------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan loss reserves,
increased to $365,146,000 at December 31, 2001, from $263,558,000 at December
31, 2000. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments. At
December 31, 2001, the loan portfolio consisted of $94,084,000 of fixed-rate
loans and $278,190,000 of adjustable-rate loans. At December 31, 2001 and 2000,
the loan portfolio was concentrated in commercial real estate and multifamily
mortgage loans. Such loans represented 99% and 98% of the total loan portfolio
in 2001 and 2000, respectively. Loan concentrations are defined as amounts
loaned to a number of borrowers engaged in similar activities, which would cause
the loans to be similarly impacted by economic or other conditions. Credit risk,
which represents the possibility of the Company not recovering amounts due from
its borrowers, is significantly related to local economic conditions in the
areas the properties are located, as well as the Company's underwriting
standards. Economic conditions affect the market value of the underlying
collateral as well as the levels of occupancy of income-producing properties
(such as office buildings, shopping centers and rental and cooperative apartment
buildings).
The following table sets forth information concerning the loan portfolio:
26
At December 31, 2001 At December 31, 2000
-------------------- --------------------
# of % of # of % of
($ in thousands) Loans Amount Total Loans Amount Total
- ----------------------------------------------------------------------------------------------------------------------
Residential multifamily loans 153 $182,569 49.0% 137 $144,916 54.0%
Commercial real estate loans 142 185,652 49.9 124 118,368 44.1
Residential 1-4 family loans 33 2,404 0.6 39 3,034 1.1
Commercial loans 26 1,363 0.4 39 1,781 0.7
Consumer loans 15 286 0.1 18 206 0.1
- ----------------------------------------------------------------------------------------------------------------------
Total gross loans receivable 369 372,274 100.0% 357 268,305 100.0%
Deferred loan fees (3,748) (1,979)
- ----------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees 368,526 266,326
Allowance for loan loss reserves (3,380) (2,768)
- ----------------------------------------------------------------------------------------------------------------------
Loans receivable, net $365,146 $263,558
- ----------------------------------------------------------------------------------------------------------------------
The following table sets forth the scheduled contractual principal repayments of
the loan portfolio:
At December 31,
($ in thousands) 2001 2000
- --------------------------------------------------------------------------------
Within one year $ 85,447 $ 120,258
Over one to five years 221,435 107,490
Over five years 65,392 40,557
- --------------------------------------------------------------------------------
$372,274 $ 268,305
- --------------------------------------------------------------------------------
At December 31, 2001, $220,776,000 of loans with adjustable rates and
$66,051,000 of loans with fixed rates were due after one year.
The following table sets forth the activity in the loan portfolio:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000
- --------------------------------------------------------------------------------
Loans receivable, net, at beginning of year $263,558 $210,444
Loans originated 195,754 124,669
Principal repayments (91,785) (71,046)
Increase in deferred loan fees (1,769) (234)
Increase in allowance for loan loss reserves (612) (275)
- --------------------------------------------------------------------------------
Loans receivable, net, at end of year $365,146 $263,558
- --------------------------------------------------------------------------------
Nonaccrual Loans and Allowance for Loan Loss Reserves
- -----------------------------------------------------
Loans are placed on nonaccrual status when principal or interest becomes 90 days
or more past due. Accrued interest receivable previously recognized is reversed
when a loan is placed on nonaccrual status. Amortization of net deferred fee
income is discontinued for loans placed on nonaccrual status. Interest payments
received on loans in nonaccrual status are recognized as income on a cash basis
unless future collections of principal are doubtful, in which case the payments
received are applied as a reduction of principal. Loans remain on nonaccrual
status until principal and interest payments are current.
The allowance for loan loss reserves 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 necessary with consideration given to: the nature and
volume of the loan portfolio; overall portfolio quality; loan concentrations;
specific problem loans and commitments and estimates of fair value thereof;
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's perception of the current and
anticipated economic conditions in the Company's lending areas. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan loss reserves, future
27
adjustments may be necessary if economic conditions, or other factors, differ
from those assumed in the determination of the level of the allowance.
In addition, SFAS No. 114 specifies the manner in which the portion of the
allowance for loan loss reserves related to impaired loans is computed. A loan
is normally deemed impaired when, based upon current information and events, it
is probable 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 loss reserves and a charge through the provision for loan
loss reserves. 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 net
carrying amount of an impaired loan does not at any time exceed the recorded
investment in the loan.
The Company considers a variety of factors in determining whether a loan is
impaired, including (i) any notice from the borrower that the borrower will be
unable to repay all principal 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, except for smaller balance homogeneous loans, such as
consumer loans, whose evaluation for impairment is done on an aggregate basis.
For consumer loans, historical charge-off experience as well as the charge off
experience of peer groups and industry statistics are used to evaluate the
adequacy of the allowance for loan loss reserves. The Company's regulators, as
an integral part of their examination process, periodically review the allowance
for loan loss reserves. Accordingly, the Company may be required to take certain
chargeoffs and/or recognize additions to the allowance based on the regulators'
judgment concerning information available to them during their examination.
At December 31, 2001, one commercial real estate loan with a principal balance
of $1,243,000 was on a nonaccrual status and considered impaired under the
criteria of SFAS No.114. Interest that was not accrued on this loan under its
contractual terms amounted to $51,000 in 2001. The average balance of impaired
loans for 2001 was approximately $104,000. At December 31, 2001, there was no
valuation allowance recorded for impaired loans. There were no nonaccrual or
impaired loans during 2000 and 1999.
At December 31, 2001, the allowance for loan loss reserves increased to
$3,380,000, from $2,768,000 at December 31, 2000, due to the growth in the loan
portfolio. At December 31, 2001 and 2000, the allowance for loan loss reserves
was predominately allocated to commercial real estate and multifamily loans.
The following table sets forth information with respect to the allowance for
loan loss reserves:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000
- --------------------------------------------------------------------------------
Allowance at beginning of year $ 2,768 $ 2,493
Provision charged to operations 612 275
- --------------------------------------------------------------------------------
Allowance at end of year $ 3,380 $ 2,768
- --------------------------------------------------------------------------------
Ratio of allowance to total loans,
net of deferred fees 0.92% 1.04%
Total loans, net of deferred fees
at year end $ 368,526 $ 266,326
Average loans outstanding during the year $ 315,148 $ 250,941
- --------------------------------------------------------------------------------
28
Foreclosed Real Estate
- ----------------------
During 2001 and 2000, the Company did not have any foreclosed real estate.
All Other Assets
- ----------------
The following table sets forth the composition of all other assets:
At December 31,
----------------
($ in thousands) 2001 2000
- ----------------------------------------------------------------------------
Accrued interest receivable $3,202 $2,961
Loans fee receivable 2,679 1,276
Premises and equipment, net 6,042 5,731
Deferred income tax asset 1,236 1,105
Deferred debenture offering costs, net 3,396 2,835
All other 259 159
- ----------------------------------------------------------------------------
$16,814 $14,067
- ----------------------------------------------------------------------------
Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received.
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. The increase
was due to an increase in mortgage loan originations.
Premises and equipment is detailed in note 5 to the consolidated financial
statements.
The deferred income tax asset relates primarily to the unrealized tax benefit on
the Company's allowance for loan loss reserves, depreciation, and organizational
start-up costs. These charges have been expensed for financial statement
purposes, but are not all currently deductible for income tax purposes. The
ultimate realization of the deferred tax asset is dependent upon the generation
of sufficient taxable income by the Company during the periods in which these
temporary differences become deductible for tax purposes. 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 is not
maintained.
Deferred debenture offering costs consist primarily of underwriters' commissions
and are amortized over the terms of the debentures. The increase was due to
additional costs incurred with the sale of new debentures in 2001, partially
offset by normal amortization.
Deposits
- --------
Consolidated deposit liabilities increased to $362,437,000 at December 31, 2001,
from $300,241,000 at December 31, 2000. At December 31, 2001, certificate of
deposit accounts totaled $241,465,000 and demand deposit, savings, NOW and money
market accounts aggregated $120,972,000. The same categories of deposit accounts
totaled $217,656,000 and $82,585,000, respectively, at December 31, 2000.
Certificate of deposit accounts represented 67% of total deposits at December
31, 2001, compared to 73% at year-end 2000.
Management believes that the Bank does not have a concentration of deposits from
any one source and that a large portion of its depositors are residents in the
Bank's primary market areas (although there has been growth in deposits from
outside the primary areas resulting from the Bank's deposit-gathering activities
through its web site on the internet: www.intervestnatbank.com). The Bank does
not accept brokered deposits.
29
The following table sets forth the distribution of deposit accounts by type:
At December 31, 2001 At December 31, 2000
-------------------- ---------------------
($ in thousands) Amount % of Total Amount % of Total
- -----------------------------------------------------------------------------------------------
Demand deposits $ 5,550 1.5% $ 5,035 1.7%
Interest checking deposits 10,204 2.8 9,188 3.1
Savings deposits 24,624 6.8 15,743 5.2
Money market deposits 80,594 22.2 52,619 17.5
Certificates of deposit 241,465 66.7 217,656 72.5
- -----------------------------------------------------------------------------------------------
Total deposit accounts (1) $362,437 100.0% $300,241 100.0%
- -----------------------------------------------------------------------------------------------
(1) Includes individual retirement accounts totaling $28,193,000 and $22,307,000
at December 31, 2001 and 2000, respectively, nearly all of which
are certificates of deposit.
The following table sets forth certificates of deposits by maturity for the
periods indicated:
At December 31, 2001 At December 31, 2000
-------------------- ----------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
- -----------------------------------------------------------------------------------------------
Within one year $144,739 5.00% $133,433 6.44%
Over one to two years 45,512 4.95 47,878 6.65
Over two to three years 14,954 5.82 8,274 6.23
Over three to four years 16,903 6.84 9,359 6.37
Over four years 19,357 5.61 18,712 6.88
- -----------------------------------------------------------------------------------------------
$241,465 5.22% $217,656 6.51%
- -----------------------------------------------------------------------------------------------
The following table sets forth the maturities of certificates of deposit in
denominations of $100,000 or more:
At December 31,
---------------
($ in thousands) 2001 2000
- --------------------------------------------------------------------------------
Due within three months or less $10,332 $14,088
Due over three months to six months 4,483 5,175
Due over six months to one year 18,401 11,179
Due over one year 20,529 18,432
- --------------------------------------------------------------------------------
$53,745 $48,874
- --------------------------------------------------------------------------------
As a percentage of total deposits 14.8% 16.3%
- --------------------------------------------------------------------------------
The following table sets forth net deposit flows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000
- --------------------------------------------------------------------------------
Net increase before interest credited $45,078 $84,289
Net interest credited 17,118 14,872
- --------------------------------------------------------------------------------
Net deposit increase $62,196 $99,161
- --------------------------------------------------------------------------------
Federal Funds Purchased
- -----------------------
Periodically, the Bank purchases federal funds to manage its liquidity needs. At
December 31, 2001 and 2000, there were no funds outstanding. The Bank has not
emphasized these types of borrowings.
Debentures Payable and Accrued Interest Payable on Debentures
- -------------------------------------------------------------
At December 31, 2001, debentures payable amounted to $73,430,000, compared to
$64,080,000 at year-end 2000. The increase was due to the sale of additional
debentures by Intervest Corporation of New York totaling $7,250,000 (as part of
its normal funding of its operations to originate and purchase commercial and
multifamily mortgage loans) and the sale of $3,500,000 of debentures by the
Holding Company for working capital purposes. The sale of these debentures was
partially offset by the maturity on January 1, 2001, of $1,400,000 of Intervest
Corporation of New York's debentures. The sale of debentures, after
underwriter's commissions and other issuance costs, resulted in net proceeds of
$6,670,000 for Intervest Corporation of New York and $3,260,000 for the Holding
Company.
30
At December 31, 2001, Intervest Corporation of New York had $63,000,000
principal amount of debentures payable outstanding and the Holding Company had
$10,430,000 principal amount of debentures payable outstanding, of which
$6,930,000 were convertible into the Holding Company's Class A common stock.
On December 18, 2001, the Holding Company's wholly-owned subsidiary, Intervest
Statutory Trust I, sold 9.875% Trust Preferred Securities due December 18, 2031
in the aggregate principal amount of $15,000,000, hereafter referred to as the
"Capital Securities". The net proceeds from the sale were paid to the Holding
Company in exchange for $15,000,000 of its 9.875% Junior Subordinated Debentures
(the "Junior Subordinated Debentures") due December 18, 2031. The Holding
Company then invested the $15,000,000 as a capital contribution in the Bank. The
sole asset of the Trust, the obligor on the Capital Securities, is the Junior
Subordinated Debentures.
At December 31, 2001, accrued interest payable on all debentures amounted to
$11,480,000, compared to $8,733,000 at year-end 2000. Nearly all of the accrued
interest payable at December 31, 2001 is due and payable at the maturity of
various debentures. For a further discussion of all the debentures, including
conversion prices and redemption premiums, see notes 7 and 9 to the consolidated
financial statements.
All Other Liabilities
The following table shows the composition of all other liabilities:
At December 31,
($ in thousands)
2001 2000
--------------------------------------------------------------------
Mortgage escrow funds payable $4,253 $3,397
Official checks outstanding 3,219 2,281
Accrued interest payable on deposits 817 856
Income taxes payable 772 403
All other 819 708
--------------------------------------------------------------------
$9,880 $7,645
--------------------------------------------------------------------
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted by the Company to third parties. The
increase reflects the timing of payments to taxing authorities as well as the
growth in the loan portfolio. The level of official checks outstanding varies
and fluctuates based on banking activity. The level of income taxes payable
fluctuates based on the Company's earnings, effective tax rate and timing of tax
payments.
Stockholders' Equity
- --------------------
Stockholders' equity increased to $40,395,000 at December 31, 2001, from
$36,228,000 at December 31, 2000. The increase was due to net earnings of
$3,778,000 and a $363,000 increase in unrealized gains, net of tax, on
securities available for sale.
Asset and Liability Management
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. 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 the Company's net interest
income and capital. This strategy is overseen in part through the direction of
the Asset and Liability Committee ("ALCO") of the Board of Directors of the
Bank, which establishes policies and monitors results to control interest rate
sensitivity.
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 a one-year time period. A gap is
31
considered positive when the amount of interest rate-sensitive assets exceeds
the amount of interest rate-sensitive liabilities. Conversely, a gap is
considered negative when the opposite is true.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to adversely affect net interest income. If the
repricing of the Company's assets and liabilities were equally flexible and
moved concurrently, the impact of any increase or decrease in interest rates on
net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates 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 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.
For purposes of creating the gap analysis that follows, deposits with no stated
maturities are treated as readily accessible accounts. Given this assumption,
the Company's one-year interest rate sensitivity gap was a positive 6.20% at
December 31, 2001, compared to a negative 3.0% at December 31, 2000. However, if
those deposits were treated differently, then the interest-rate sensitivity gap
would 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 (rather than 100%), the Company's one-year interest-rate
sensitivity gap would have been a positive 23.1% at year-end 2001, compared to a
positive 11.0% at year-end 2000.
The Company has a "floor," or minimum rate, on many of its floating-rate loans.
The floor for each specific loan is determined in relation to the prevailing
market rates on the date of origination and most adjust upwards in the event of
increases in the loan's interest rate.
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 following table summarizes information relating to the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
2001, that are scheduled to mature or reprice within the periods shown.
32
($ in thousands) 0-3 4-12 Over 1-4 Over 4
--- ---- -------- ------
Months Months Years Years Total
- -------------------------------------------------------------------------------------------------------
Loans (1) $105,489 $130,060 $106,885 $ 29,840 $372,274
Securities held to maturity (2) 17,965 66,446 14,746 - 99,157
Short-term investments 13,350 - - - 13,350
Federal funds sold 6,345 - - - 6,345
Securities available for sale (2) - 2,500 3,500 - 6,000
Federal Reserve Bank stock - - - 654 654
Interest-earning time deposits 100 150 - - 250
- -------------------------------------------------------------------------------------------------------
Total rate-sensitive assets $143,249 $199,156 $125,131 $ 30,494 $498,030
- -------------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 10,204 $ - $ - $ - $ 10,204
Savings deposits 24,624 - - 24,624
Money market deposits 80,594 - - - 80,594
Certificates of deposit 41,073 103,666 77,369 19,357 241,465
------------------------------------------------------------
Total deposits 156,495 103,666 77,369 19,357 356,887
Debentures payable 41,500 2,500 10,000 19,430 73,430
Debentures payable- capital securities - - - 15,000 15,000
Accrued interest on all debentures 5,922 584 1,841 3,133 11,480
- -------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $203,917 $106,750 $ 89,210 $ 56,920 $456,797
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
GAP (repricing differences) $(60,668) $ 92,406 $ 35,921 $(26,426) $ 41,233
- -------------------------------------------------------------------------------------------------------
Cumulative GAP $(60,668) $ 31,738 $ 67,659 $ 41,233 $ 41,233
- -------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets
-11.8% 6.2% 13.2% 8.0% 8.0%
- -------------------------------------------------------------------------------------------------------
<FN>
Significant assumptions used in preparing the table above:
(1) Adjustable-rate loans are included in the period in which their interest
rates are next scheduled to adjust rather than in the period in which the loans
mature. Fixed-rate loans are scheduled, including repayments, according to their
contractual maturities; (2) securities are scheduled according to their
contractual maturity dates, which does not take into consideration the effects
of possible prepayments that may result from the issuer's right to call a
security before its contractual maturity date. Additionally, unrealized gains
and losses on securities available for sale are ignored for this analysis; (3)
money market, NOW and savings deposits are regarded as ready accessible
withdrawable accounts; and certificates of deposit are scheduled through their
maturity dates.
</FN>
Liquidity and Capital Resources
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment 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; sales of debentures 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.
At December 31, 2001, the Company's total commitment to lend aggregated
$27,205,000. The Company believes that it can fund such commitments from the
aforementioned sources of funds. The Bank has agreements with correspondent
banks whereby it may borrow up to $8,000,000 on an unsecured basis. There were
no outstanding borrowings under these agreements at December 31, 2001 or 2000.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. The FDIC Improvement Act of 1991, among other
things, established five capital categories ranging from well capitalized to
critically undercapitalized. Such classifications are used by the FDIC and other
bank regulatory agencies to determine various matters, including prompt
corrective action and each institution's FDIC deposit insurance premium
assessments. The capital categories involve quantitative measures of a bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
the regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements.
33
The Bank is required to maintain, for regulatory compliance and reporting
purposes, regulatory defined minimum Tier 1 leverage and Tier 1 and total
risk-based capital ratio levels of at least 4%, 4% and 8%, respectively. At
December 31, 2001 and 2000, management believes that the Bank met its capital
adequacy requirements. The Bank 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 outstanding which would change the
Bank's designation as a well-capitalized institution.
In June 2001, the OCC terminated a Memorandum of Understanding with the Bank
that was in effect since June 2000. The memorandum was a formal written
agreement whereby, among other things, the Bank had been required to review,
revise, develop and implement various policies and procedures with respect to
its lending and credit underwriting. Management implemented various actions in
order for the Bank to be in full compliance with the memorandum.
Information regarding the Bank's regulatory capital and related ratios is
summarized below:
At December 31,
($ in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------
Tier 1 Capital:
Stockholder's equity $ 46,749 $ 27,606
Disallowed portion of deferred tax asset (946) (777)
Unrealized (gain) loss on debt securities, net of tax (111) 252
- ----------------------------------------------------------------------------------------------------
Total Tier 1 capital 45,692 27,081
- ----------------------------------------------------------------------------------------------------
Tier 2 Capital:
Allowable portion of allowance for loan loss reserves 3,314 2,650
- ----------------------------------------------------------------------------------------------------
Total risk-based capital $ 49,006 $ 29,731
- ----------------------------------------------------------------------------------------------------
Net risk-weighted assets $326,030 $238,133
Average assets for regulatory purposes $402,124 $327,648
Tier 1 capital to average assets
11.36% 8.27%
Tier 1 capital to risk-weighted assets
14.01% 11.37%
Total capital to risk-weighted assets
15.03% 12.49%
- ----------------------------------------------------------------------------------------------------
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
changes in prices. Interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services.
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 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, 2001 and 2000, which reflect changes in
market prices and rates, can be found in note 20 to the consolidated financial
statements.
34
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 "Asset and Liability Management."
Item 8. Financial Statements and Supplementary Data
Financial Statements
The following consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries are included herein:
- - Independent Auditors' Report - Hacker, Johnson & Smith PA (page 36)
- - Independent Auditors' Report - Richard A. Eisner & Company, LLP (page 37)
Consolidated Balance Sheets at December 31, 2001 and 2000 (page 38)
- - Consolidated Statements of Earnings for the Years Ended December 31, 2001,
2000 and 1999 (page 39)
- - Consolidated Statements of Comprehensive Income for the Years Ended December
31, 2001, 2000 and 1999 (page 40)
- - Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999 (page 41)
- - Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999 (page 42) - Notes to the Consolidated Financial Statements
(pages 43 to 65)
Supplementary Data
Securities Available for Sale
- -----------------------------
The following table sets forth, by maturity distribution, information pertaining
to securities available for sale:
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, 2001:
- ---------------------
U.S. government agencies $2,571 5.78% $ 3,621 5.46% $ - -% $ 6,192 5.59%
At December 31, 2000:
- ---------------------
U.S. government agencies $ 998 5.42% $63,809 5.70% $9,982 6.56% $74,789 5.81%
35
Supplementary Data, Continued
Securities Held to Maturity
- ---------------------------
The following table sets forth, by maturity distribution, information pertaining
to securities held to maturity:
After One Year to After Five Years to
One Year or Less Five Years Ten Years Total
---------------- ---------- --------- -----
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
($ in thousands) Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 2001:
- ---------------------
U.S. government agencies $79,411 2.85% $19,746 3.02% $ - -% $99,157 2.89%
At December 31, 2000:
- ---------------------
U.S. government agencies $20,970 6.52% $ - -% $ - -% $20,970 6.52%
At December 31, 1999:
- ---------------------
U.S. government agencies $ 7,907 5.72% $58,013 5.65% $17,212 6.36% $83,132 5.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Loans and Allowance for Loan Loss Reserves
- ------------------------------------------
The following table sets forth information with respect to loans receivable at
December 31:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Carrying Carrying Carrying Carrying Carrying
($ in thousands) Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------
Commercial real estate and multifamily loans $368,221 $263,284 $210,022 $160,610 $146,375
Residential 1-4 family loans 2,404 3,034 2,311 2,627 3,162
Construction loans - - - - 158
Commercial business loans 1,363 1,781 2,107 2,875 2,641
Consumer loans 286 206 242 184 92
-----------------------------------------------------------------
Loans receivable 372,274 268,305 214,682 166,296 152,428
Deferred loan fees (3,748) (1,979) (1,745) (1,310) (1,596)
-----------------------------------------------------------------
Loans receivable, net of deferred fees 368,526 266,326 212,937 164,986 150,832
Allowance for loan loss reserves (3,380) (2,768) (2,493) (1,662) (1,173)
- ------------------------------------------------------------------------------------------------------------------
Loans receivable, net $365,146 $263,558 $210,444 $163,324 $149,659
- ------------------------------------------------------------------------------------------------------------------
Loans included above that were
on a nonaccrual status at year end $ 1,243 $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------
The following table sets forth information with respect to the allowance for
loan loss reserves at December 31:
($ in thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------------------- -------------- -----------------------------------
Allowance at beginning of year $ 2,768 $ 2,493 $ 1,662 $ 1,173 $ 811
Provision charged to operations 612 275 830 479 352
Chargeoffs - - - - -
Recoveries - - 1 10 10
- ------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 3,380 $ 2,768 $ 2,493 $ 1,662 $ 1,173
- ------------------------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $368,526 $266,326 $212,937 $164,986 $150,832
Average loans outstanding during the year $315,148 $250,941 $175,980 $170,675 $141,612
Ratio of allowance to net loans receivable 0.92% 1.04% 1.17% 1.01% 0.78%
- ------------------------------------------------------------------------------------------------------------------
Other financial statement schedules and inapplicable periods with respect to
schedules listed above are omitted because the conditions requiring their filing
do not exist or the information required thereby is included in the financial
statements filed, including the notes thereto.
36
Independent Auditors' Report
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of December
31, 2001 and 2000 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, 2001. 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 did not audit the financial statements of Intervest Corporation of
New York, whose total assets as of December 31, 2001 and 2000, constituted 15.6%
and 17.8% of the related consolidated totals, respectively, and whose net
interest income, noninterest income and net earnings for the years ended
December 31, 2001, 2000 and 1999, constituted 10.4%, 42.5% and 15.3%,
respectively in 2001, 10.3%, 48.6% and 5.0%, respectively in 2000 and 21.2%,
49.3% and 32.4%, respectively in 1999, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion insofar as it relates to the amounts included in the
consolidated totals, are based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Hacker, Johnson & Smith PA
- ------------------------------
Hacker, Johnson & Smith PA
Tampa, Florida
January 21, 2002
37
Independent Auditors' Report
Board of Directors and Stockholder
Intervest Corporation of New York
New York, New York:
We have audited the consolidated balance sheets of Intervest
Corporation of New York and Subsidiaries (the "Company") at December 31, 2001
and 2000 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, 2001 (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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
fairly present, in all material respects, the financial position of the Company
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ Richard A. Eisner & Company, LLP
- ------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
January 21, 2002
38
Intervest Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
At December 31,
--------------------------
($ in thousands, except par value) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 4,714 $ 5,016
Federal funds sold 6,345 20,268
Commercial paper 12,400 17,125
Other short-term investments 950 529
--------------------------
Total cash and cash equivalents 24,409 42,938
Time deposits with banks 250 -
Securities available for sale at estimated fair value 6,192 74,789
Securities held to maturity, net 99,157 20,970
Federal Reserve Bank stock, at cost 654 605
Loans receivable (net of allowance for loan losses of $3,380 in 2001 and $2,768 in 2000) 365,146 263,558
Accrued interest receivable 3,202 2,961
Premises and equipment, net 6,042 5,731
Deferred income tax asset 1,236 1,105
Deferred debenture offering costs 3,396 2,835
Other assets 2,938 1,435
- ---------------------------------------------------------------------------------------------------------------------
Total assets $512,622 $416,927
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 5,550 $ 5,035
Interest-bearing deposit accounts:
Checking (NOW) accounts 10,204 9,188
Savings accounts 24,624 15,743
Money market accounts 80,594 52,619
Certificate of deposit accounts 241,465 217,656
--------------------------
Total deposit accounts 362,437 300,241
Subordinated debentures payable 73,430 64,080
Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 -
Accrued interest payable on debentures 11,480 8,733
Accrued interest payable on deposits 817 856
Mortgage escrow funds payable 4,253 3,397
Official checks outstanding 3,219 2,281
Other liabilities 1,591 1,111
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 472,227 380,699
- ---------------------------------------------------------------------------------------------------------------------
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,
3,544,629 shares issued and outstanding) 3,545 3,545
Class B common stock ($1.00 par value, 700,000 shares authorized,
355,000 shares issued and outstanding) 355 355
Additional paid-in-capital, common 19,001 18,975
Retained earnings 17,383 13,605
Accumulated other comprehensive income (loss):
Net unrealized gain (loss) on securities available for sale, net of tax 111 (252)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 40,395 36,228
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $512,622 $416,927
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Earnings
Year Ended December 31,
---------------------------------------
($ in thousands, except per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 30,187 $ 24,923 $ 18,794
Securities 3,423 6,056 6,123
Other interest-earning assets 1,852 929 584
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 35,462 31,908 25,501
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 17,079 14,853 8,703
Federal funds purchased - 150 29
Debentures payable 7,635 8,322 9,687
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 24,714 23,325 18,419
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 10,748 8,583 7,082
Provision for loan loss reserves 612 275 830
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan loss reserves 10,136 8,308 6,252
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 159 139 140
Income from mortgage lending activities 1,490 809 744
All other 6 35 16
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,655 983 900
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 2,451 2,228 1,915
Occupancy and equipment, net 1,177 1,090 963
Data processing 329 117 35
Advertising and promotion 25 35 142
Professional fees and services 341 410 258
Stationery, printing and supplies 137 140 165
All other 843 548 581
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 5,303 4,568 4,059
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, extraordinary item and change in accounting principle 6,488 4,723 3,093
Provision for income taxes 2,710 1,909 1,198
--------------------------------------
Earnings before extraordinary item and change in accounting principle 3,778 2,814 1,895
Extraordinary item, net of tax (note 7) - (206) -
Cumulative effect of change in accounting principle, net of tax (note 1) - - (128)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3,778 $ 2,608 $ 1,767
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Earnings before extraordinary item and change in accounting principle $ 0.97 $ 0.72 $ 0.50
Extraordinary item, net of tax - (0.05) -
Cumulative effect of change in accounting principle, net of tax - - (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 0.97 $ 0.67 $ 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Earnings before extraordinary item and change in accounting principle $ 0.97 $ 0.72 $ 0.47
Extraordinary item, net of tax - (0.05) -
Cumulative effect of change in accounting principle, net of tax - - (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 0.97 $ 0.67 $ 0.44
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended December 31,
---------------------------------------
($ in thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 3,778 $ 2,608 $ 1,767
-----------------------------------
Net unrealized gains (losses) on securities available for sale 596 (405) -
Provision for income taxes related to unrealized gains (losses)
on securities available for sale (233) 153 -
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 363 (252) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income, net of tax $ 4,141 $ 2,356 $ 1,767
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Year Ended December 31,
---------------------------------------
($ in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of year $3,545 $3,532 $3,434
Issuance of 510 shares in exchange for common stock of minority stockholders - - 1
Issuance of 7,554 shares upon the conversion of debentures - - 7
Issuance of 12,750 and 89,300 shares in 2000 and 1999, respectively,
upon the exercise of warrants - 13 90
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 3,545 3,545 3,532
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of year 355 305 300
Issuance of 5,000 shares upon the exercise of warrants - - 5
Issuance of 50,000 shares of restricted stock compensation - 50 -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 355 355 305
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of year 18,975 18,770 18,148
Issuance of 510 shares in exchange for common stock of minority stockholders - - 6
Issuance of 7,554 shares upon the conversion of debentures,
net of issuance costs - - 56
Compensation related to issuance of Class B stock warrants 26 26 26
Issuance of 50,000 shares of restricted Class B stock compensation - 109 -
Issuance of 12,750 and 94,300 shares in 2000 and 1999, respectively, upon
exercise of stock warrants, inclusive of tax benefits - 70 534
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 19,001 18,975 18,770
- --------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 13,605 10,997 9,230
Net earnings for the year 3,778 2,608 1,767
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 17,383 13,605 10,997
- --------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year (252) - -
Net change in accumulated other comprehensive income (loss), net 363 (252) -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 111 (252) -
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity at end of year $40,395 $36,228 $33,604
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------------
($ in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 3,778 $ 2,608 $ 1,767
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 505 433 416
Provision for loan loss reserves 612 275 830
Deferred income tax benefit (364) (16) (327)
Amortization of deferred debenture offering costs 753 1,136 943
Compensation expense from awards of common stock and warrants 26 185 26
Amortization of premiums, fees and discounts, net (1,823) (1,814) (1,000)
Net increase in accrued interest payable on debentures 2,747 641 2,302
Net increase in official checks outstanding 938 460 249
Net change in all other assets and liabilities 2,118 1,912 1,240
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,290 5,820 6,446
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in interest-earning time deposits with banks (250) - 99
Maturities and calls of securities available for sale 69,194 - -
Maturities and calls of securities held to maturity 35,996 26,393 32,556
Purchases of securities held to maturity (114,013) (39,160) (33,278)
Net increase in loans receivable (103,969) (53,623) (48,386)
Purchases of Federal Reserve Bank stock, net (49) (97) (275)
Purchases of premises and equipment, net (816) (301) (1,362)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (113,907) (66,788) (50,646)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 38,387 4,299 6,904
Net increase in certificates of deposit 23,809 94,862 23,761
Net increase in mortgage escrow funds payable 856 22 470
(Repayments of) proceeds from federal funds purchased, net - (6,955) 6,955
Proceeds from sale of debentures, net of issuance costs 24,436 3,500 6,606
Principal repayments of debentures (1,400) (24,000) (10,000)
Net proceeds from issuance of common stock, net of issuance costs - 83 622
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 86,088 71,811 35,318
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (18,529) 10,843 (8,882)
Cash and cash equivalents at beginning of year 42,938 32,095 40,977
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,409 $ 42,938 $ 32,095
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES Cash paid during the year for:
Interest $ 21,253 $ 21,532 $ 15,074
Income taxes 2,704 1,004 1,989
Noncash activities:
Transfers of securities from held-to-maturity to available-for-sale - 74,789 -
Accumulated other comprehensive income (loss) - change in unrealized gain
(loss) on securities available for sale, net of tax 363 (252) -
Conversion of debentures into Class A common stock - - 70
Issuance of common stock in exchange for common stock of minority
stockholders - - 7
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Intervest Bancshares Corporation (the "Holding Company") was
incorporated in 1993 and is headquartered in Rockefeller Center in New
York City. Its wholly owned subsidiaries are Intervest National Bank, a
nationally chartered bank, Intervest Corporation of New York, a
mortgage investment company, and Intervest Statutory Trust I, a special
purpose finance subsidiary. The Holding Company's primary business is
the ownership of its subsidiaries. On July 20, 2001, Intervest Bank
(the Holding Company's other wholly owned banking subsidiary prior to
this date) merged into Intervest National Bank. Intervest Bank was a
Florida state chartered commercial bank. The merger was treated as a
reorganization and accounted for at historical cost similar to the
pooling-of-interests method of accounting. Under this method of
accounting, the recorded assets, liabilities, shareholders' equity,
income and expenses of both banks are combined and recorded at their
historical cost amounts. Hereafter, Intervest National Bank may be
referred to as the "Bank" and all the entities are referred to
collectively as the "Company," on a consolidated basis.
Intervest National Bank has its headquarters and full-service banking
office in Rockefeller Center in New York City, and a total of five
full-service banking offices in Clearwater and Pinellas County,
Florida. The Bank conducts a full-service commercial banking business,
which consists of attracting deposits from the general public and
investing those funds, together with other sources of funds, primarily
through the origination of commercial and multifamily real estate
loans, and through the purchase of security investments.
Intervest Corporation of New York and its wholly owned subsidiaries,
Intervest Distribution Corporation and Intervest Realty Servicing
Corporation, is located in Rockefeller Center in New York City. It is
engaged in the real estate business, including the origination and
purchase of real estate mortgage loans, consisting of first mortgage,
junior mortgage and wraparound mortgage loans. Intervest Corporation of
New York was acquired on March 10, 2000, by the Holding Company. In the
acquisition, all the outstanding capital stock of Intervest Corporation
of New York was acquired in exchange for 1,250,000 shares of the
Holding Company's Class A common stock. Former shareholders of
Intervest Corporation of New York are officers and directors of
Intervest Corporation of New York and the Holding Company. The
acquisition was also accounted for at historical cost similar to the
pooling-of-interests method of accounting.
Intervest Statutory Trust I was formed in December 2001 for the sole
purpose of issuing $15,000,000 of Capital Securities as more fully
described in note 9.
Principles of Consolidation, Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of the
Holding Company and its subsidiaries. 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 accounting principles
generally accepted in the United States of America and to general
practices within the banking industry. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent liabilities, as of the date of the
financial statements and revenues and expenses during the reporting
periods. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
loss reserves and deferred income tax assets.
Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include
federal funds sold and short-term investments. Federal funds are
generally sold for one-day periods and short-term investments have
maturities of three months or less from the time of purchase.
44
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
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.
Loans Receivable
Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or satisfaction are carried at
their outstanding principal net of chargeoffs, the allowance for loan
loss reserves, unamortized discounts and deferred loan 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. Accrued interest receivable
previously recognized is reversed when a loan is placed on nonaccrual
status. Amortization of net deferred fee income is discontinued for
loans placed on nonaccrual status. Interest payments received on loans
in nonaccrual status are recognized as income on a cash basis unless
future collections of principal are doubtful, in which case the
payments received are applied as a reduction of principal. Loans remain
on nonaccrual status until principal and interest payments are current.
Allowance for Loan Loss Reserves
The allowance for loan loss reserves is netted against loans receivable
and is increased by provisions charged to operations and decreased by
chargeoffs (net of recoveries). The adequacy of the allowance is
evaluated monthly with consideration given to: the nature and volume of
the loan portfolio; overall portfolio quality; loan concentrations;
specific problem loans and commitments and estimates of fair value
thereof; historical chargeoffs and recoveries; adverse situations which
may affect the borrowers' ability to repay; and management's perception
of the current and anticipated economic conditions in the Company's
lending areas. In addition, Statement of Financial Accounting Standards
(SFAS) No. 114 specifies the manner in which the portion of the
allowance for loan loss reserves is computed related to certain loans
that are impaired. A loan is normally deemed impaired when, based upon
current information and events, it is probable the Company will be
unable to collect both principal and interest due according to the
contractual terms of the loan agreement. Impaired loans normally
consist of loans on nonaccrual status. Interest income on impaired
loans is recognized on a cash basis. Impairment for commercial real
estate and residential loans is measured based on: the present value of
expected future cash flows, discounted at the loan's effective interest
rate; or the observable market price of the loan; or the estimated fair
value of the loan's collateral, if payment of the principal and
interest is dependent upon the collateral. When the fair value of the
property is less than the recorded investment in the loan, this
deficiency is recognized as a valuation allowance within the overall
allowance for loan loss reserves and a charge through the provision for
loan losses. The Company normally charges off any portion of the
recorded investment in the loan that exceeds the fair value of the
collateral. The net carrying amount of an impaired loan does not at any
time exceed the recorded investment in the loan.
45
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Allowance for Loan Loss Reserves, Continued
Lastly, the Company's regulators, as an integral part of their
examination process, periodically review the allowance for loan loss
reserves. Accordingly, the Company may be required to take certain
chargeoffs and/or recognize additions to the allowance based on the
regulators' judgment concerning information available to them during
their examination.
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 $3,042,000 at
December 31, 2001 and $2,331,000 at December 31, 2000.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold. Upon foreclosure of the property, the
related loan is transferred from the loan portfolio to foreclosed real
estate at the lower of the loan's carrying value at the date of
transfer, or estimated fair value of the property less estimated
selling costs. Such amount becomes the new cost basis of the property.
Adjustments made to the carrying value at the time of transfer are
charged to the allowance for loan loss reserves. After foreclosure,
management periodically performs market valuations and the real estate
is carried at the lower of cost or estimated fair value less estimated
selling costs. Revenue and expenses from operations and changes in the
valuation allowance of the property are included in the consolidated
statement of earnings.
Stock-Based Compensation
The Company follows APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
stock-based compensation, which is generally in the form of stock
warrants. SFAS No. 123, "Accounting for Stock-Based Compensation,"
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.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the year in which those temporary differences are expected to be
recovered or settled. 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.
46
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Earnings Per Share (EPS)
Basic EPS is calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding. Diluted
EPS is calculated by dividing adjusted net earnings by the
weighted-average number of shares of common stock and dilutive
potential common stock shares that may be outstanding in the future.
Potential common stock shares consist of outstanding dilutive common
stock warrants (which are computed using the "treasury stock method")
and convertible debentures (computed using the "if converted method").
Diluted EPS considers the potential dilution that could occur if the
Company's outstanding stock warrants and convertible debentures were
converted into common stock that then shared in the Company's earnings
(as adjusted for interest expense that would no longer occur if the
debentures were converted).
Comprehensive Income
The Company follows SFAS No. 130, "Reporting 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 equity section of the 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 consolidated financial statements when
they are funded or related fees are incurred or received.
Start-Up Costs
The Company follows the AICPA's Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." The SOP requires that
all start-up costs (except for those that are capitalizable under other
accounting principles generally accepted in the United States of
America) be expensed as incurred for financial statement purposes
effective January 1, 1999. Previously, a portion of start-up costs were
generally capitalized and amortized over a period of time. The adoption
of this statement by the Company on January 1, 1999 resulted in a net
charge of $128,000. The charge represents the expensing, net of a tax
benefit, of cumulative start-up costs that had been incurred through
December 31, 1998 in connection with organizing Intervest National
Bank.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities,"
requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains and losses resulting from
changes in the values of those derivatives would be accounted for
depending on the uses of the derivatives and whether they qualify for
hedge accounting. The adoption of this statement had no effect on the
Company's financial statements.
47
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Recent Accounting Pronouncements, Continued
Accounting for Business Combinations. SFAS No. 141, "Business
Combinations," addresses financial accounting and reporting for
business combinations and supersedes APB No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in
the scope of this statement are to be accounted for using one method,
the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001. The adoption of
this statement had no effect on the Company's financial statements
Accounting for Goodwill and Other Intangible Assets. SFAS No. 142,
"Goodwill and Other Intangible Assets," addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
supersedes APB No. 17, "Intangible Assets." It addresses how intangible
assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted
for in financial statements upon their acquisition. This statement also
addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial
statements. The provisions of this statement are required to be applied
starting with fiscal years beginning after December 15, 2001, or
earlier upon certain circumstances. The adoption of this statement will
not have any impact on the Company's financial statements.
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions of APB No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions," for the disposal of a segment of a business (as
previously defined therein). The provisions of this statement are
effective for financial statements issued for fiscal years beginning
after December 15, 2001. The adoption of this statement will not have
any impact on the Company's financial statements.
48
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2. Securities
The carrying value (estimated fair value) and amortized cost of
securities available for sale is as follows:
Gross Gross
----- -----
Amortized Unrealized Unrealized Carrying
--------- ---------- ---------- --------
($ in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
At December 31, 2001:
U.S. government agency securities $ 6,000 $192 $ - $ 6,192
- ------------------------------------------------------------------------------------------------------
At December 31, 2000:
U.S. government agency securities $75,194 $ - $405 $74,789
- ------------------------------------------------------------------------------------------------------
On December 31, 2000, $75,194,000 of securities held-to-maturity
(consisting of U.S. government agency securities with an estimated fair
value of $74,789,000) were transferred to the available for sale
portfolio by Intervest Bank. There were no transfers of securities to
the available-for-sale portfolio in 2001 or 1999, and there were no
sales of securities in 2001, 2000 or 1999. During 2001, nearly all of
the securities in the available-for-sale portfolio were called by the
issuers without prepayment penalty. The early calls were brought about
by the decline in market interest rates during 2001. At December 31,
2001, the available-for-sale portfolio consisted of fixed-rate debt
obligations of the Federal Home Loan Bank (FHLB) and Federal National
Mortgage Association (FNMA). The weighted-average yield of the
portfolio was 5.59% at December 31, 2001 and 5.81% at December 31,
2000.
The amortized cost and carrying value (estimated fair value) of
securities available for sale at December 31, 2001, by remaining term
to contractual maturity is as follows:
Amortized Carrying
--------- --------
($ in thousands) Cost Value
- ---------------------------------------------------------------------------------------------------
Due in one year or less $2,500 $2,571
Due after one year through five years 3,500 3,621
- ---------------------------------------------------------------------------------------------------
$6,000 $6,192
- ---------------------------------------------------------------------------------------------------
The carrying value (amortized cost) and estimated fair value of
securities held to maturity is as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
($ in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
At December 31, 2001:
U.S. government agency securities $99,157 $355 $108 $99,404
- -----------------------------------------------------------------------------------------------------
At December 31, 2000:
U.S. government agency securities $20,970 $ 8 $ - $20,978
- -----------------------------------------------------------------------------------------------------
At December 31, 2001, securities held to maturity consisted of debt
obligations of the FHLB, FNMA, the Federal Home Loan Mortgage Corp.
(FHLMC) and the Federal Farm Credit Bank (FFCB) The weighted-average
yield of the portfolio was 2.89% at December 31, 2001 and 6.52% at
December 31, 2000. At December 31, 2001, the securities are
predominately fixed rate and some have call features, which allow the
issuer to call the security before its stated maturity without penalty.
The amortized cost and estimated fair value of securities held to
maturity at December 31, 2001, by remaining term to contractual
maturity is as follows:
Estimated
Amortized Fair
($ in thousands) Cost Value
- --------------------------------------------------------------------------------------------
Due in one year or less $ 9,411 $79,738
Due after one year through five years 19,746 19,666
- --------------------------------------------------------------------------------------------
$99,157 $99,404
- --------------------------------------------------------------------------------------------
49
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
3. Loans Receivable
Loans receivable is as follows:
At December 31, 2001 At December 31, 2000
-------------------- --------------------
($ in thousands) # of Loans Amount # of Loans Amount
---------------------------------------------------------------------------------------------------
Residential multifamily loans 153 $182,569 137 $144,916
Commercial real estate loans 142 185,652 124 118,368
Residential 1-4 family loans 33 2,404 39 3,034
Commercial business loans 26 1,363 39 1,781
Consumer loans 15 286 18 206
---------------------------------------------------------------------------------------------------
Loans receivable 369 372,274 357 268,305
---------------------------------------------------------------------------------------------------
Deferred loan fees
(3,748) (1,979)
Allowance for loan loss reserves
(3,380) (2,768)
---------------------------------------------------------------------------------------------------
Loans receivable, net $365,146 $263,558
---------------------------------------------------------------------------------------------------
At December 31, 2001, a commercial real estate loan with a principal
balance of $1,243,000 was on nonaccrual status and consider impaired
under the criteria of SFAS No.114. Interest that was not accrued on
this loan under its contractual terms amounted to $51,000 in 2001. The
average balance of impaired loans for 2001 was approximately $104,000.
At December 31, 2001, there was no valuation allowance recorded for
this impaired loan. There were no nonaccrual or impaired loans during
2000 or 1999.
Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly related to
local economic conditions in the areas the properties are located, as
well as the Company's underwriting standards. Economic conditions
affect the market value of the underlying collateral as well as the
levels of occupancy of income-producing properties (such as office
buildings, shopping centers and rental and cooperative apartment
buildings).
The geographic distribution of the loan portfolio is as follows:
At December 31, 2001 At December 31, 2000
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
-------------------------------------------------------------------------------------
New York $192,256 51.7% $134,905 50.3%
Florida 145,660 39.1 125,350 46.7
Connecticut and New Jersey 24,875 6.7 5,263 2.0
All other 9,483 2.5 2,787 1.0
-------------------------------------------------------------------------------------
$372,274 100.0% $268,305 100.0%
-------------------------------------------------------------------------------------
4. Allowance for Loan Loss Reserves
Activity in the allowance for loan loss reserves is as follows:
For the Year Ended December 31,
---------------------------------
($ in thousands) 2001 2000 1999
------------------------------------------------------------------------------------------
Allowance at beginning of year $2,768 $2,493 $1,662
Provision charged to operations 612 275 830
Recoveries - - 1
------------------------------------------------------------------------------------------
Allowance at end of year $3,380 $2,768 $2,493
------------------------------------------------------------------------------------------
50
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
5. Premises and Equipment, Lease Commitments and Rental Expense
Premises and equipment is as follows:
At December 31,
---------------
($ in thousands)
2001 2000
-----------------------------------------------------------------------
Land $1,264 $1,264
Buildings 4,575 4,294
Leasehold improvements 335 324
Furniture, fixtures and equipment 2,414 1,889
-----------------------------------------------------------------------
Total cost 8,588 7,771
-----------------------------------------------------------------------
Less accumulated deprecation and amortization (2,546) (2,040)
-----------------------------------------------------------------------
Net book value $6,042 $5,731
-----------------------------------------------------------------------
The Bank leases its headquarters and branch office at Rockefeller
Center in New York City, and its branch office at Belcher Road in
Clearwater, Florida. Intervest Corporation of New York also leases its
office at Rockefeller Center in New York City. All the leases contain
operating escalation clauses related to taxes and operating costs based
upon various criteria and are accounted for as operating leases
expiring in May 2008, June 2007, and September 2004, respectively. All
other offices are owned by the Bank.
Total future minimum annual lease rental payments due under these
noncancellable operating leases as of December 31, 2001 were as
follows: $554,000 in 2002; $558,000 in 2003; $541,000 in 2004; $400,000
in 2005; $403,000 in 2006; and $607,000 thereafter for an aggregate
amount of $3,063,000. Rent expense aggregated $554,000 in 2001,
$522,000 in 2000 and $461,000 in 1999.
The Bank subleases certain of its offices in Florida to other companies
under leases that expire at various times through August 2007. Total
future sublease rental income due under such leases as of December 31,
2001 were as follows: $452,000 in 2002; $422,000 in 2003; $399,000 in
2004; $355,000 in 2005; $287,000 in 2006; and $120,000 thereafter for
an aggregate amount of $2,035,000. Sublease rental income aggregated
$388,000 in 2001, 340,000 in 2000 and $338,000 in 1999.
6. Deposits
Scheduled maturities of certificates of deposit accounts are as
follows:
At December 31, 2001 At December 31, 2000
-------------------- --------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
--------------------------------------------------------------------------------------
Within one year $144,739 5.00% $133,433 6.44%
Over one to two years 45,512 4.95 47,878 6.65
Over two to three years 14,954 5.82 8,274 6.23
Over three to four years 16,903 6.84 9,359 6.37
Over four years 19,357 5.61 18,712 6.88
--------------------------------------------------------------------------------------
$241,465 5.22% $217,656 6.51%
--------------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $53,745,000
and $48,874,000 at December 31, 2001 and 2000, respectively. At
December 31, 2001, certificate of deposit accounts of $100,000 or more
by remaining maturity were as follows: due within one year $33,216,000;
over one to two years $9,201,000, over two to three years $3,211,000;
over three to four years $3,992,000; and over four years $4,125,000.
51
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
6. Deposits, Continued
Interest expense on deposits is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000 1999
---------------------------------------------------------------------------------------------------
Interest checking accounts $ 238 $ 232 $ 238
Savings accounts 778 897 1,059
Money market accounts 2,640 2,832 1,882
Certificates of deposit accounts 13,423 10,892 5,524
---------------------------------------------------------------------------------------------------
$17,079 $14,853 $ 8,703
---------------------------------------------------------------------------------------------------
7. Debentures Payable and Extraordinary Item
Debentures payable is as follows:
At December 31,
---------------
($ in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------
INTERVEST CORPORATION OF NEW YORK (1):
Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ 9,000 $ 9,000
Series 10/19/95 - interest at 2% above prime - due October 1, 2004 9,000 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 8% fixed - due January 1, 2001 - 1,400
Series 11/10/98 - interest at 81/2% fixed - due January 1, 2003 1,400 1,400
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 8% fixed - due July 1, 2002 2,500 2,500
Series 06/28/99 - interest at 81/2% fixed - due July 1, 2004 2,000 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% fixed - due January 1, 2004 1,250 1,250
Series 09/18/00 - interest at 81/2% 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 71/2% fixed - due April 1, 2005 1,750 -
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 -
Series 08/01/01 - interest at 81/2% fixed - due April 1, 2009 2,750 -
----------------------
63,000 57,150
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 6,930 6,930
Series 12/15/00 - interest at 8% fixed - due April 1, 2004 1,000 -
Series 12/15/00 - interest at 81/2% fixed - due April 1, 2006 1,250 -
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 -
----------------------
10,430 6,930
-----------------------------------------------------------------------------------------------------
$73,430 $64,080
-----------------------------------------------------------------------------------------------------
<FN>
(1) Prime refers to the prime rate of JPMorganChase Bank, which was
4.75% on December 31, 2001 and 9.50% on December 31, 2000.
</FN>
In 2000, Intervest Corporation of New York's Series 6/29/92, 9/13/93,
1/28/94 and 10/28/94 debentures totaling $24,000,000 in principal were
redeemed prior to maturity for the outstanding principal amount plus
accrued interest aggregating $3,970,000. In connection with these early
redemptions, $382,000 of unamortized deferred debenture offering costs
was charged to expense and reported as an extraordinary charge, net of
a tax benefit of $176,000, in the consolidated statement of earnings
for the year ended December 31, 2000.
52
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
7. Debentures Payable and Extraordinary Item, Continued
Intervest Corporation of New York's floating-rate Series 5/12/95,
10/19/95, 5/10/96, 10/15/96 and 4/30/97 debentures have a maximum
interest rate of 12%. Interest on an aggregate of $6,400,000 of these
debentures is accrued and compounded quarterly, and is due and payable
at maturity. The payment of interest on the remaining debentures is
made quarterly. Any debenture holder in the aforementioned Series whose
interest accrues and is due at maturity may at any time elect to
receive the accrued interest and subsequently receive regular payments
of interest.
All of Intervest Corporation of New York's Series 11/10/98, 6/28/99,
09/18/00 and $770,000 of Series 08/01/01 debentures accrue and compound
interest quarterly, with such interest due and payable at maturity. The
holders of Series 11/10/98, 6/28/99 and 9/18/00 debentures can require
Intervest Corporation of New York to repurchase the debentures for face
amount plus accrued interest each year (beginning July 1, 2002 for the
Series 6/28/99 and January 1, 2004 for the Series 9/18/00) provided,
however that in no calendar year will Intervest Corporation of New York
be required to purchase more than $100,000 in principal amount of each
maturity of debentures, on a non-cumulative basis.
All of Intervest Corporation of New York's debentures may be redeemed,
in whole or in part, at any time at the option of Intervest Corporation
of New York, for face value, except for Series 08/01/01 debentures,
which would be at a premium of 1% if the redemption is prior to October
1, 2002. All the debentures are unsecured and subordinate to all
present and future senior indebtedness, as defined.
The Holding Company's Series 5/14/98 subordinated debentures are due
July 1, 2008 and are convertible at the option of the holders at any
time prior to April 1, 2008, unless previously redeemed by the Holding
Company, into shares of Class A common stock of the Holding Company at
the following conversion prices per share effective January 1, 2002:
$10.01 in 2002 and 2003; $12.00 in 2004; $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. On January 13, 1999 and October 4, 2002, the conversion
prices were adjusted downward from those set at the original offering
date to the prices shown above. During 1999, debentures in the
aggregate principal amount of $70,000, plus accrued interest, were
converted into shares of Class A common stock at the election of the
debenture holders. The conversion price was $10 per share, which
resulted in 7,554 shares of Class A common stock being issued in
connection with the conversions. Interest accrues and compounds each
calendar quarter at 8%. All accrued interest is due and payable at
maturity whether by acceleration, redemption or otherwise. Any
convertible debenture holder may, on or before July 1 of each year
commencing July 1, 2003, elect to be paid all accrued interest and to
thereafter receive payments of interest quarterly.
The Holding Company's debentures may be redeemed, in whole or in part,
at any time at the option of the Holding Company, for face value,
except for Series 08/01/01 debentures, which would be at a premium of
1% if the redemption is prior to April 1, 2002.
Scheduled contractual maturities of all debentures as of December 31,
2001 is as follows:
($ in thousands) Principal Accrued Interest
---------------------------------------------------------------------------------------------------
For the year ended December 31, 2002 $ 2,500 $ 1,461
For the year ended December 31, 2003 1,400 411
For the year ended December 31, 2004 22,250 4,303
For the year ended December 31, 2005 27,850 2,252
For the year ended December 31, 2006 4,500 607
Thereafter 14,930 2,388
---------------------------------------------------------------------------------------------------
$73,430 $11,422
---------------------------------------------------------------------------------------------------
53
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
8. Federal Funds Purchased and Lines of Credit
From time to time, the Bank purchases overnight federal funds to manage
its liquidity needs. At December 31, 2001 and 2000, there were no such
funds outstanding. During 2001, 2000 and 1999, federal fund purchased
were not significant. The Bank has agreements with correspondent banks
whereby it may borrow up to $8,000,000 on an unsecured basis. There
were no outstanding borrowings under these agreements at December 31,
2001 or 2000.
9. Guaranteed Preferred Beneficial Interest in Junior Subordinated
Debentures
On December 18, 2001, the Holding Company's wholly-owned subsidiary,
Intervest Statutory Trust I, sold 9.875% Trust Preferred Securities due
December 18, 2031 in the aggregate principal amount of $15,000,000,
hereafter referred to as the "Capital Securities". The net proceeds
from the sale were paid to the Holding Company in exchange for
$15,000,000 of its 9.875% Junior Subordinated Debentures (the "Junior
Subordinated Debentures") due December 18, 2031. The Holding Company
then invested $15,000,000 as a capital contribution in the Bank. The
sole asset of the Trust, the obligor on the Capital Securities, is the
Junior Subordinated Debentures.
The Holding Company has guaranteed the Trust's payment of distributions
on, payments on any redemptions of, and any liquidation distribution
with respect to, the Capital Securities. Cash distributions on both the
Capital Securities and the Junior Subordinated Debentures are payable
semi-annually in arrears on December 18 and June 18 of each year. At
December 31, 2001, $58,000 of distributions was accrued and included in
accrued interest payable on debentures in the consolidated balance
sheet. Issuance costs of $451,000 associated with the Capital
Securities have been capitalized by the Holding Company and are being
amortized over the life of the securities.
The Capital Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated
Debentures at stated maturity or, at the option of the Holding Company,
their earlier redemption in whole upon the occurrence of certain
changes in the tax treatment or capital treatment of the Capital
Securities, or a change in the law such that the Trust would be
considered an investment company and (ii) in whole or in part at any
time on or after December 18, 2006 contemporaneously with the optional
redemption by the Holding Company of the Junior Subordinated Debentures
in whole or inpart. The Junior Subordinated Debentures are redeemable
prior to maturity at the option of the Holding Company (i) on or after
December 18, 2006, in whole at any time or in part from time to time,
or (ii) in whole, but not in part, at any time within 90 days following
the occurrence and continuation of certain changes in the tax treatment
or capital treatment of the Capital Securities, or a change in law such
that the Trust would be considered an investment company. Any
redemption would need prior 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. At
December 31, 2001 and 2000, there was no preferred stock issued and
outstanding.
Class A and B common stock have equal voting rights as to all matters,
except that, so long as at least 50,000 shares of Class B common stock
remain issued and outstanding, the holders of the outstanding shares of
Class B common stock are entitled to vote for the election of
two-thirds of the Board of Directors (rounded 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.
54
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
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, 2001 and
2000, balances maintained as reserves were not significant.
As a member of the Federal Reserve Banking system, the Bank must
maintain an investment in the capital stock of the Federal Reserve
Bank. At December 31, 2001 and 2000, such investment, which earns a
dividend, aggregated $654,000 and $605,000, respectively. At December
31, 2001, U.S. government agency securities with a carrying value of
$7,127,000 were pledged against various deposit accounts and 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 is subject to various regulatory restrictions.
These restrictions take into consideration various factors such as
whether there are sufficient net earnings, as defined, liquidity, asset
quality, capital adequacy and economic conditions. 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.
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. Total cash contributions to the plans included
in the consolidated statements of earnings aggregated $37,000, $26,000
and $25,000 for 2001, 2000 and 1999, respectively.
13. Related Party Transactions
The Bank has deposit accounts from directors, executive officers and
members of their immediate families and related business interests of
approximately $8,412.000 at December 31, 2001 and $3,967,000 at
December 31, 2000. Intervest Securities Corporation, an affiliate of
the Company, received commissions and fees aggregating $15,000 in 2001,
$34,000 in 2000 and $35,700 in 1999, in connection with the placement
of debentures. There are no loans to any directors or officers of the
Holding Company or its subsidiaries.
14. Common Stock Warrants
The Holding Company has common stock warrants outstanding that entitle
the registered holders thereof to purchase one share of common stock
for each warrant. All warrants are exercisable when issued, except for
certain Class B common stock warrants issued in 1998. The Holding
Company's warrants have been issued in connection with public stock
offerings, to directors and employees of the Company and to outside
third parties for performance of services.
During 2001, the Company modified the terms of its Class A and Class B
warrants as follows: the expiration date of all warrants exercisable at
$6.67 per share were extended one year beyond their original expiration
dates effective October 4, 2001, and the exercise price of certain
Class A warrants (exercisable at $12.50 and $16.00 per share as of
December 31, 2001) were reduced to $10.01 per share commencing January
1, 2002 until their expiration date of December 31, 2002.
55
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
14. Common Stock Warrants, Continued
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class A Common Stock Warrants: $6.67 $12.50 (1) $16.00 (1) Warrants Exercise Price
---------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,472,565 961,703 122,000 2,556,268 $ 8.27
Granted in 1999 - 1,000 - 1,000 $10.00
Exercised in 1999 (89,000) (300) - (89,300) $ 6.68
-----------------------------------------------------
Outstanding at December 31, 1999 1,383,565 962,403 122,000 2,467,968 $ 8.33
Exercised in 2000 (12,750) - - (12,750) $ 6.67
------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000
and 2001 1,370,815 962,403 122,000 2,455,218 $ 9.42
---------------------------------------------------------------------------------------------------------------------
Remaining contractual life in years
at December 31, 2001 2.5(2) 1.0 1.0 1.8
---------------------------------------------------------------------------------------------------------------------
<FN>
(1) The exercise price per warrant decreases to $10.01 per share in
2002.
(2) The Holding Company may, at its sole discretion, set an earlier
expiration date.
</FN>
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class B Common Stock Warrants: $6.67 $10.00 (1) Warrants Exercise Price
----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 150,000 50,000 200,000 $ 7.50
Exercised in 1999 (5,000) - (5,000) $ 6.67
----------------------------------------------------------------------------------------------
Outstanding at December 31, 1999, 2000 and 2001 145,000 50,000 195,000 $ 7.52
----------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2001 6.1 6.1 6.1
----------------------------------------------------------------------------------------------------------------
(1) At December 31, 2001, 28,400 of these warrants were immediately
exercisable. An additional 7,100 warrants vest and become exercisable
on each April 27th of 2002, 2003, and the remaining 7,400 on April 27,
2004. The warrants, which expire on January 31, 2008, become fully
vested earlier upon certain conditions.
The Company uses the intrinsic value-based method prescribed under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock warrants. Under this method, compensation
expense related to stock warrants is the excess, if any, of the market
price of the stock as of the grant or modification date or over the
exercise price of the warrant. In accordance with APB Opinion No. 25,
approximately $26,000 of compensation expense was included in salaries
and employee benefits expense for 2001, 2000 and 1999, respectively, in
connection with Class B warrants (exercise price $10.00) granted in
1998. No other compensation expense was recorded related to the
remaining stock warrants granted because their exercise prices were the
same or greater than the market price of the common shares at the date
of grant or modification (in the case of those warrants whose
expiration dates were extended in 2001). For those warrants whose
exercise price was reduced to $10.01 effective January 1, 2002, future
compensation expense will be recorded under variable rate accounting as
prescribed under APB Opinion No.25.
Had compensation expense been determined based on the estimated fair
value of the warrants at the grant date in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net
earnings and earnings per share would have been reduced to the pro
forma amounts as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands, except per share amounts) 2001 2000 1999
- --------------------------------------------------------------------------------------------------
Reported net earnings $3,778 $2,608 $1,767
Pro forma net earnings $3,755 $2,585 $1,744
Reported basic earnings per share $ 0.97 $ 0.67 $ 0.47
Pro forma basic earnings per share $ 0.96 $ 0.66 $ 0.46
Reported diluted earnings per share $ 0.97 $ 0.67 $ 0.44
Pro forma diluted earnings per share $ 0.96 $ 0.66 $ 0.43
- --------------------------------------------------------------------------------------------------
56
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
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 state income tax return in New Jersey and a
franchise tax return in Delaware. The Bank also files a state income
tax return in Florida. Intervest Corporation of New York files state
income tax returns in various states. All the returns are filed on a
calendar year basis.
At December 31, 2001 and 2000, the Company had a net deferred tax asset
of $1,236,000 and $1,105,000, respectively. The asset relates to the
unrealized benefit for: net temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases that will result in future tax deductions. In
assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of such assets is dependent upon the generation of
sufficient taxable income during the periods in which those temporary
differences reverse. Management believes that it is more likely than
not that the Company's deferred tax asset will be realized and
accordingly, a valuation allowance for deferred tax assets was not
maintained at any time during 2001, 2000 or 1999.
The total tax provision (benefit) is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000 1999
----------------------------------------------------------------------------------
Provision for income taxes $2,710 $1,909 $1,198
Benefit from change in accounting principle - - (65)
Benefit from extraordinary item - (176) -
----------------------------------------------------------------------------------
$2,710 $1,733 $1,133
----------------------------------------------------------------------------------
Allocation of federal, state and local income taxes between current and
deferred portions is as follows:
($ in thousands) Current Deferred Total
--------------------------------------------------------------------------------
Year Ended December 31, 2001:
Federal $2,265 $(284) $1,981
State and Local 809 (80) 729
--------------------------------------------------------------------------------
$3,074 $(364) $2,710
--------------------------------------------------------------------------------
Year Ended December 31, 2000:
Federal $1,350 $ (10) $1,340
State and Local 399 (6) 393
--------------------------------------------------------------------------------
$1,749 $ (16) $1,733
--------------------------------------------------------------------------------
Year Ended December 31, 1999:
Federal $1,123 $(263) $ 860
State and Local 337 (64) 273
--------------------------------------------------------------------------------
$1,460 $(327) $1,133
--------------------------------------------------------------------------------
The components of the deferred tax benefit is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000 1999
---------------------------------------------------------------------------------
Allowance for loan loss reserves $(220) $ 16 $(262)
Organization and startup costs 41 (10) (99)
Stock-based compensation (12) (17) (12)
Depreciation (18) (33) (3)
Net operating loss carryforwards - - 61
Deferred income (157) - -
All other 2 28 (12)
---------------------------------------------------------------------------------
$(364) $(16) $(327)
---------------------------------------------------------------------------------
57
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
15. Income Taxes, Continued
The tax effects of the temporary differences that give rise to the
deferred tax asset are as follows:
At December 31,
---------------
($ in thousands) 2001 2000
-------------------------------------------------------------------------------------
Allowance for loan loss reserves $ 949 $ 729
Unrealized net (gain) loss on securities available for sale (80) 153
Organization and startup costs 68 109
Stock-based compensation 56 44
Depreciation 73 55
Deferred income 157 -
All other 13 15
-------------------------------------------------------------------------------------
Total deferred tax asset $1,236 $1,105
-------------------------------------------------------------------------------------
The reconciliation between the statutory federal income tax rate and
the Company's effective tax rate (including state and local taxes) is
as follows:
For the Year Ended December 31,
-------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------
Tax provision at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal benefit 7.6 6.4 6.3
Other 0.2 - (1.6)
------------------------------------------------------------------------------------------
41.8% 40.4% 38.7%
------------------------------------------------------------------------------------------
16. Earnings Per Share
Net earnings applicable to common stock and the weighted-average number
of shares used for basic and diluted earnings per share computations
are as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands, except share and per share amounts) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $3,778 $2,608 $1,767
Average number of common shares outstanding 3,899,629 3,884,560 3,760,293
----------------------------------------------------------------------------------------------------------------
Basic earnings per share amount $0.97 $0.67 $0.47
----------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $3,778 $2,608 $1,767
Adjustment to net earnings from assumed conversion of debentures - - -
-----------------------------------------
Adjusted net earnings for diluted earnings per share computation $3,778 $2,608 $1,767
-----------------------------------------
Average number of common shares outstanding:
Common shares outstanding 3,899,629 3,884,560 3,760,293
Potential dilutive shares resulting from exercise of warrants - - 259,825
Potential dilutive shares resulting from conversion of debentures - - -
-----------------------------------------
Total average number of common shares outstanding used for dilution 3,899,629 3,884,560 4,020,118
----------------------------------------------------------------------------------------------------------------
Diluted earnings per share amount $0.97 $0.67 $0.44
----------------------------------------------------------------------------------------------------------------
In 2001 and 2000, no common stock warrants were considered in the
computations of diluted EPS because their exercise price per share
exceeded the average market price of Class A common stock during the
year and as a result, they were not dilutive. In 1999, 1,134,000
warrants with exercise prices ranging from $10.00 to $14.00 were not
considered because they also were not dilutive. Additionally,
convertible debentures totaling $6,930,000 and convertible (at $14.00
per share in 2001, $12.50 per share in 2000 and $10.00 per share in
1999) into Class A common stock were excluded from all diluted EPS
computations because they were not dilutive.
58
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
17. Contingencies
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to
enforce liens, claims involving the making and servicing of mortgage
loans, and other issues incident to the Company's business. Management
does not believe that there is any pending or threatened proceeding
against the Company which, if determined adversely, would have a
material effect on the business, results of operations, or financial
position of the Company.
18. Regulatory Matters
The Company is subject to regulation, examination and supervision by
the Federal Reserve Bank. The Bank is also subject to regulation,
examination and supervision by the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency of the
United States of America ("OCC").
The Company (on a consolidated basis) and the Bank is subject to
various regulatory capital requirements administered by the federal
banking agencies. Failure to meet capital requirements 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, 2001 and 2000, that the Company
and the Bank met all capital adequacy requirements to which they are
subject. As of December 31, 2001, 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.
In June 2001, the OCC terminated a Memorandum of Understanding with the
Bank that was in effect since June 2000. The memorandum was a formal
written agreement whereby, among other things, the Bank had been
required to review, revise, develop and implement various policies and
procedures with respect to its lending and credit underwriting.
Management implemented various actions in order for the Bank to be in
full compliance with the memorandum.
The table that follows present information regarding the Company's and
the Bank's capital adequacy.
59
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
18. Regulatory Matters, Continued
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, 2001:
-------------------------------------
Total capital to risk-weighted assets $57,457 14.11% $32,581 8.00% NA NA
Tier 1 capital to risk-weighted assets $52,505 12.89% $16,291 4.00% NA NA
Tier 1 capital to average assets $52,505 10.67% $19,692 4.00% NA NA
Consolidated as of December 31, 2000:
-------------------------------------
Total capital to risk-weighted assets $38,382 12.63% $24,309 8.00% NA NA
Tier 1 capital to risk-weighted assets $35,614 11.72% $12,155 4.00% NA NA
Tier 1 capital to average assets $35,614 8.75% $16,275 4.00% NA NA
Intervest National Bank at December 31, 2001:
---------------------------------------------
Total capital to risk-weighted assets $49,006 15.03% $26,082 8.00% $32,603 10.00%
Tier 1 capital to risk-weighted assets $45,692 14.01% $13,041 4.00% $19,562 6.00%
Tier 1 capital to average assets $45,692 11.36% $16,085 4.00% $20,106 5.00%
Intervest National Bank at December 31, 2000:
---------------------------------------------
Total capital to risk-weighted assets $29,731 12.49% $19,051 8.00% $23,813 10.00%
Tier 1 capital to risk-weighted assets $27,081 11.37% $9,525 4.00% $14,288 6.00%
Tier 1 capital to average assets $27,081 8.27% $13,106 4.00% $16,382 5.00%
----------------------------------------------------------------------------------------------------------------
19. Off-Balance Sheet Financial Instruments
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments are in the form of
commitments to extend credit, 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 consolidated balance sheets. The contract amounts of these
instruments reflect the extent of involvement the Company has in these
financial instruments. The Company's exposure to credit loss in the
event of nonperformance by the other party to the off-balance sheet
financial instruments is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend funds to a customer
as long as there is no violation of any condition established in the
contract. Such commitments generally have fixed expiration dates or
other termination clauses and may require payment of fees. Since some
of the commitments are expected to expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
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.
60
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
19. Off-Balance Sheet Financial Instruments, Continued
The notional amounts of the Company's off-balance sheet financial
instruments is as follows:
At December 31,
---------------
($ in thousands) 2001 2000
---------------------------------------------------------------------
Unfunded loan commitments $26,375 $17,310
Available lines of credit 663 560
Standby letters of credit 167 167
---------------------------------------------------------------------
$27,205 $18,037
---------------------------------------------------------------------
20. Estimated Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time based on
available information about each financial instrument. Where available,
quoted market prices are used. However, a significant portion of the
Company's financial instruments, such as commercial real estate and
multifamily loans, do not have an active marketplace in which they can
be readily sold or purchased to determine fair value. Consequently,
fair value estimates for such instruments are based on assumptions made
by management that include the financial instrument's credit risk
characteristics and future estimated cash flows and prevailing interest
rates. As a result, these fair value estimates are subjective in
nature, involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Accordingly, changes in
any of management's assumptions could cause the fair value estimates to
deviate substantially. The fair value estimates also do not reflect any
additional premium or discount that could result from offering for
sale, at one time, the Company's entire holdings of a particular
financial instrument, nor estimated transaction costs. Further, the tax
ramifications related to the realization of unrealized gains and losses
can have a significant effect on and have not been considered in the
fair value estimates. Finally, fair value estimates do not attempt to
estimate the value of anticipated future business, the Company's
customer relationships, branch network, and the value of assets and
liabilities that are not considered financial instruments, such as core
deposit intangibles and premises and equipment.
The carrying and estimated fair values of the Company's financial
instruments are as follows:
At December 31, 2001 At December 31, 2000
-------------------- --------------------
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
----------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $24,409 $24,409 $42,938 $42,938
Time deposits with banks 250 250 - -
Securities available for sale, net 6,192 6,192 74,789 74,789
Securities held to maturity, net 99,157 99,404 20,970 20,978
Federal Reserve Bank stock 654 654 605 605
Loans receivable, net 365,146 378,962 263,558 265,068
Accrued interest receivable 3,202 3,202 2,961 2,961
Financial Liabilities:
Deposit liabilities 362,437 368,597 300,241 300,775
Debentures payable plus accrued interest 99,910 101,264 72,813 72,813
Accrued interest payable 817 817 856 856
Off -Balance Sheet Instruments:
Commitments to lend 180 180 114 114
----------------------------------------------------------------------------------------------
61
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
20. Estimated Fair Value of Financial Instruments, Continued
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Securities. The estimated fair value of securities available for sale
and held to maturity are based on quoted market prices. The estimated
fair value of the Federal Reserve Bank stock approximates fair value
since the security does not present credit concerns and is 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.
Debentures and Accrued Interest Payable. The estimated fair value of
debentures 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. For 2000, management believes that the incremental
borrowing rate approximated the then current rates for each of the
borrowings.
All Other Financial Assets and Liabilities. The estimated fair value of
cash and cash equivalents, time deposits with banks, accrued interest
receivable and accrued interest payable 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.
62
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
21. Holding Company Financial Information
Condensed Balance Sheets
At December 31,
---------------
($ in thousands) 2001 2000
----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 77 $ 19
Short-term investments 784 1,428
----------------------
Total cash and cash equivalents 861 1,447
Loans receivable, net (net of allowance for loan loss reserves
of $49 and $30 at December 31, 2001 and 2000) 9,557 5,905
Investment in subsidiaries 57,060 36,875
Deferred debenture offering costs 1,047 438
All other assets 301 211
----------------------------------------------------------------------------------------------
Total assets $68,826 $44,876
----------------------------------------------------------------------------------------------
LIABILITIES
Debentures payable $25,894 $6,930
Accrued interest payable on debentures 2,367 1,536
All other liabilities 170 182
----------------------------------------------------------------------------------------------
Total liabilities 28,431 8,648
----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common equity 40,395 36,228
----------------------------------------------------------------------------------------------
Total stockholders' equity 40,395 36,228
----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $68,826 $44,876
----------------------------------------------------------------------------------------------
Condensed Statements of Earnings
For the Year Ended December 31,
-------------------------------
($ in thousands) 2001 2000 1999
---------------------------------------------------------------------------------------------
Interest income $ 818 $ 672 $ 744
Interest expense 1,124 686 637
---------------------------------
Net interest (expense) income (306) (14) 107
Provision (credit) for loan loss reserves 19 17 (42)
Noninterest income 176 165 161
Noninterest expenses 226 405 197
---------------------------------
(Loss) earnings before income taxes (375) (271) 113
(Credit) provision for income taxes (172) (131) 53
---------------------------------
Net (loss) earnings before earnings of subsidiaries (203) (140) 60
Equity in earnings of Intervest National Bank 3,404 2,619 1,135
Equity in earnings of Intervest Corporation of New York 577 129 572
---------------------------------------------------------------------------------------------
Net earnings $3,778 $2,608 $1,767
---------------------------------------------------------------------------------------------
Cash dividends received from subsidiaries $ 125 $3,000 $ -
63
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
21. Holding Company Financial Information, Continued
Condensed Statements of Cash Flows
For the Year Ended December 31,
($ in thousands) 2001 2000 1999
----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 3,778 $ 2,608 $ 1,767
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Equity in earnings of subsidiaries (3,981) (2,748) (1,707)
Provision (credit) for loan loss reserves 19 17 (42)
Deferred income tax (benefit) expense (16) (41) 7
Compensation expense from awards of Class B stock and warrants 26 185 26
Increase in accrued interest payable on debentures 831 644 637
Change in all other assets and liabilities, net 81 24 135
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 738 689 823
----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease in interest-earning time deposits with banks - - 100
Investment in subsidiaries, net (15,500) (4,000) (9,018)
Cash dividends received from subsidiaries 125 3,000 -
Sale of loans to subsidiaries - - 5,604
Loan originations and principal repayments, net (3,738) (3,368) 2,761
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,113) (4,368) (553)
----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in mortgage escrow funds payable (11) 157 (173)
Proceeds from sale of debentures, net of issuance costs 17,800 - -
Proceeds from issuance of common stock upon the exercise
of stock warrants, net of issuance costs - 83 622
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,789 240 449
----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (586) (3,439) 719
Cash and cash equivalents at beginning of year 1,447 4,886 4,167
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 861 $ 1,447 $ 4,886
----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the year for:
Interest $ 202 $ - $ -
Income taxes (139) (110) 142
Noncash transactions:
Accumulated other comprehensive income, change in
subsidiary's unrealized gain (loss) on securities available for
sale, net of tax 363 (252) -
Conversion of debentures into Class A common stock - - 70
Issuance of common stock in exchange for common
stock of minority stockholders of Subsidiary - - 7
----------------------------------------------------------------------------------------------------------
64
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
22. Acquisition of Intervest Corporation of New York
On March 10, 2000, the Holding Company acquired all the outstanding
capital stock of Intervest Corporation of New York in exchange for
1,250,000 shares of the Holding Company's Class A common stock. As a
result of the acquisition, Intervest Corporation of New York became a
wholly owned subsidiary of the Holding Company. Former shareholders of
Intervest Corporation of New York are officers and directors of both
the Holding Company and Intervest Corporation of New York (ICNY).
In connection with the acquisition, the Holding Company incurred
approximately $210,000 in expenses related to legal and consulting
fees, printing and stock compensation expense. The Board of Directors
and the Holding Company's shareholders approved a grant of 50,000
shares of Class B common stock to the Chairman of the Holding Company
for his services with respect to the development, structuring and other
activities associated with the merger. This resulted in $159,000 of
compensation expense being recorded, which is included in the
consolidated statement of earnings for 2000.
A summary of the Company's consolidated statement of earnings for 2000
follows:
Excluding As
($ in thousands) ICNY Reported
---------------------------------------------------------------------------------------------------
Interest and dividend income $23,389 $31,908
Interest expense 15,689 23,325
-------------------------
Net interest and dividend income 7,700 8,583
Provision for loan loss reserves 275 275
-------------------------
Net interest and dividend income after provision for loan loss reserves 7,425 8,308
Noninterest income 505 983
Noninterest expenses 3,830 4,568
-------------------------
Earnings before taxes and extraordinary item 4,100 4,723
Provision for income taxes 1,621 1,909
Extraordinary item, net of tax - (206)
---------------------------------------------------------------------------------------------------
Net earnings $2,479 $2,608
---------------------------------------------------------------------------------------------------
The amounts reported in the table above are after elimination of
intercompany revenue and expense.
A pro forma summary of the Company's consolidated statement of earnings
for 1999 follows indicated:
Originally Historical Pro Forma
($ in thousands) Reported ICNY Adjustments Adjusted
--------------------------------------------------------------------------------------------------------------------
Interest and dividend income $15,058 $10,552 $ (109)(a) $25,501
Interest expense 9,478 9,050 (109)(a) 18,419
--------------------------------------------------
Net interest and dividend income 5,580 1,502 - 7,082
Provision for loan loss reserves 830 - - 830
--------------------------------------------------
Net interest and dividend income
after provision for loan loss reserves 4,750 1,502 - 6,252
Noninterest income 456 444 - 900
Noninterest expenses 3,165 894 - 4,059
--------------------------------------------------
Earnings before taxes and change in accounting principle 2,041 1,052 - 3,093
Provision for income taxes 718 480 - 1,198
Cumulative effect of change in accounting principle, net of tax (128) - - (128)
--------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,195 $ 572 $ - $ 1,767
--------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.48 - - $ 0.47
Diluted earnings per share $ 0.43 - - $ 0.44
Average number of common shares outstanding - Basic 2,510,293 - 1,250,000 3,760,293
Average number of common shares outstanding - Diluted 2,770,118 - 1,250,000 4,020,118
--------------------------------------------------------------------------------------------------------------------
<FN>
(a) Represents the elimination of certain intercompany interest income
and expense.
</FN>
65
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
23. Quarterly Financial Data (Unaudited)
The condensed consolidated statements of earnings by quarter are as
follows:
For the Year Ended December 31, 2001
------------------------------------
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------
Interest and dividend income $8,684 $8,404 $8,950 $9,424
Interest expense 6,621 6,055 6,014 6,024
----------------------------------------
Net interest and dividend income 2,063 2,349 2,936 3,400
Provision for loan loss reserves - 100 264 248
----------------------------------------
Net interest and dividend income after provision for loan loss reserves 2,063 2,249 2,672 3,152
Noninterest income 224 570 237 624
Noninterest expenses 1,324 1,329 1,313 1,337
----------------------------------------
Earnings before income taxes 963 1,490 1,596 2,439
Provision for income taxes 382 612 667 1,049
-------------------------------------------------------------------------------------------------------------------
Net earnings $ 581 $ 878 $ 929 $1,390
-------------------------------------------------------------------------------------------------------------------
Basic earnings per share: $ .15 $ .23 $ .24 $ .35
Diluted earnings per share: $ .15 $ .23 $ .24 $ .35
-------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2000
------------------------------------
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------
Interest and dividend income $7,256 $7,658 $8,324 $8,670
Interest expense 5,412 5,552 5,943 6,418
----------------------------------------
Net interest and dividend income 1,844 2,106 2,381 2,252
Provision (credit) for loan loss reserves 155 90 47 (17)
----------------------------------------
Net interest and dividend income
after provision (credit) for loan loss reserves 1,689 2,016 2,334 2,269
Noninterest income 162 178 338 305
Noninterest expenses 1,251 1,130 1,081 1,106
----------------------------------------
Earnings before income taxes and extraordinary item 600 1,064 1,591 1,468
Provision for income taxes 210 427 662 610
Extraordinary item, net of tax - (206) - -
-------------------------------------------------------------------------------------------------------------------
Net earnings $ 390 $ 431 $ 929 $ 858
-------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Earnings before extraordinary item $ .10 $ .16 $ .24 $ .22
Extraordinary item, net of tax - (.05) - -
-------------------------------------------------------------------------------------------------------------------
Net earnings per share $ .10 $ .11 $ .24 $ .22
-------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Earnings before extraordinary item $ .10 $ .16 $ .24 $ .22
Extraordinary item, net of tax - (.05) - -
-------------------------------------------------------------------------------------------------------------------
Net earnings per share $ .10 $ .11 $ .24 $ .22
-------------------------------------------------------------------------------------------------------------------
66
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers
a. Directors. The information required by this item is contained under the
section entitled "Election of Directors" in the Company's Proxy Statement
for its 2002 Annual Meeting (the "Proxy Statement") and is incorporated
herein by reference.
b. Executive Officers. The information required by this item is set forth in
Part I of this report under the caption Item 4A "Executive Officers and
Other Key Employees."
c. Compliance with Section 16(a). Information contained in the section of the
Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" is incorporated herein by reference.
Item 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
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(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.
67
Exhibit No. Description of Exhibit
- ----------- ----------------------
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 of Connecticut,
NA, as Trustee, dated as of December 18, 2001,
related to the Company's Junior Subordinated
Deferrable Interest Debentures.
12 Statement re: computation of ratios of earnings to
fixed charges.
21 Subsidiaries
23.1 Consent of Independent Accountants.
23.2 Consent of Independent Accountants.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
68
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: February 27, 2002
-------------------------------- --------------------------
Lowell S. Dansker, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Chairman of the Board, Executive Vice President and Director:
By: /s/ Jerome Dansker Date: February 27, 2002
----------------------------------------- --------------------------
Jerome Dansker
President, Treasurer and Director
(Principal Executive, Financial and Accounting Officer):
By: /s/ Lowell S. Dansker Date: February 27, 2002
------------------------------- --------------------------
Lowell S. Dansker
Vice President, Secretary and Director:
By: /s/ Lawrence G. Bergman Date: February 27, 2002
----------------------------------------- --------------------------
Lawrence G. Bergman
Directors:
By: /s/ Michael A. Callen Date: February 27, 2002
-------------------------------- --------------------------
Michael A. Callen
By: /s/ Wayne F. Holly Date: February 27, 2002
---------------------------------------- --------------------------
Wayne F. Holly
By: /s/ Edward J. Merz Date: February 27, 2002
---------------------------------------- --------------------------
Edward J. Merz
By: /s/ Lawton Swan, III Date: February 27, 2002
-------------------------------- --------------------------
Lawton Swan, III
By: /s/ Thomas E. Willett Date: February 27, 2002
-------------------------------- --------------------------
Thomas E. Willett
By: /s/ David J. Willmott Date: February 27, 2002
-------------------------------- --------------------------
David J. Willmott
By: /s/ Wesley T. Wood Date: February 27, 2002
---------------------------------------- --------------------------
Wesley T. Wood
69