================================================================================
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, 2002
Commission File Number 000-23377
INTERVEST BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3699013
- ----------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
-------------------------------------------------------
(Address of principal executive offices)
(212) 218-2800
-------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)
of the Securities Exchange Act of 1934
None
----------------------
(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
-----------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes XX No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes _ No_.
As of February 25, 2003 there were 4,348,087 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 1,765,437 shares of the
Registrant's Class A common stock on February 25, 2003, which excludes 2,582,650
shares held by affiliates as a group, was $19,137,337. This value is based on
the average bid and asked price of $10.84 per share on February 25, 2003 of the
Class A common stock on the NASDAQ Small Cap Market.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
================================================================================
Intervest Bancshares Corporation and Subsidiaries
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Page
----
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
Item 14 Controls and Procedures............................................ 66
PART IV
Item 15 Exhibits, Financial Statements Schedules and Reports on Form 8-K... 66
Signatures ................................................................. 68
Certification .............................................................. 69
1
PART I
Item 1. Description of Business
General
Private Securities Litigation Reform Act Safe Harbor Statement
- --------------------------------------------------------------
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
- --------------------------------
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 is listed on the NASDAQ SmallCap Market (Symbol: IBCA). At
December 31, 2002, the Holding Company owned 100% of the outstanding capital
stock of Intervest National Bank (the "Bank"), Intervest Mortgage Corporation
(whose name was changed from Intervest Corporation of New York in 2002) 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 that date) was
merged into Intervest National 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 were
combined and recorded at their historical cost amounts.
At December 31, 2002, the Company had total assets of $685,979,000, cash and
security investments of $179,651,000, net loans of $489,912,000, deposits of
$505,958,000, debentures and related interest payable of $113,302,000, and
stockholders' equity of $53,126,000, compared to total assets of $512,622,000,
cash and security investments of $130,662,000, 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 at December 31, 2001.
The Holding Company's primary business is the operation of its subsidiaries. It
does not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the Holding
Company has sold debentures to raise funds for working capital purposes. The
Holding Company is subject to examination and regulation by the Federal Reserve
Board.
In December 2002, Intervest Bancshares Corporation entered into an agreement to
acquire Intervest Securities Corporation, an affiliated entity that is a
broker/dealer registered in nine states and is an NASD and SIPC member firm.
Intervest Securities Corporation participates as a selected dealer from time to
time in offerings of debt securities of the Company, primarily those of
Intervest Mortgage Corporation. Pursuant to this agreement, Intervest Bancshares
Corporation will acquire all of the capital stock of Intervest Securities
Corporation for 30,000 shares of its Class B common stock that will be newly
issued for this transaction. At December 31, 2002, Intervest Securities
Corporation's net assets amounted to approximately $200,000 and consisted of
cash. The transaction is subject to the approval of both the NASD and the
Federal Reserve Bank of New York (FRB) and is expected to close in the first
quarter of 2003. Intervest Securities Corporation will become a wholly owned
subsidiary of Intervest Bancshares Corporation. In connection with this
transaction, Intervest Bancshares Corporation filed an election with and was
approved by the FRB to become a financial holding company under Regulation Y
effective January 23, 2003. The Company has also previously announced that it
2
intends to explore further growth through the acquisition of other banks or
thrifts. It will consider acquisition of banks/thrifts with operations
compatible with its own, with a view towards consolidating selected lines of
business, operations and support functions in order to achieve economies of
scale, greater efficiency and operational consistency. The Company anticipates
that any such banks/thrifts would be located in the eastern United States. The
Company emphasizes that it has not entered into any agreements or identified any
institutions for acquisition and there can be no assurances that any such
acquisitions will be successfully completed.
Intervest National Bank
- -----------------------
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.
At December 31, 2002, the Bank had total assets of $581,435,000, cash and
security investments of $163,167,000, net loans of $407,128,000, deposits of
$517,209,000 and stockholder's equity of $51,936,000, compared to total assets
of $421,152,000, cash and security investments of $116,387,000, net loans of
$296,255,000, deposits of $365,978,000 and stockholder's equity of $46,749,000,
at December 31, 2001.
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 and attracts 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 Mortgage Corporation
- ------------------------------
Intervest Mortgage Corporation 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 Mortgage Corporation is located at 10 Rockefeller
Plaza in New York City.
Intervest Mortgage Corporation was acquired by the Holding Company on March 10,
2000. In the acquisition, all of the outstanding capital stock of Intervest
Mortgage Corporation was acquired in exchange for 1,250,000 shares of the
3
Holding Company's Class A common stock. Former shareholders of Intervest
Mortgage Corporation are officers and directors of Intervest Mortgage
Corporation 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 were combined and recorded at
their historical cost amounts.
At December 31, 2002, Intervest Mortgage Corporation had total assets of
$97,311,000, net loans of $73,499,000, debentures and related interest payable
of $84,751,000, and stockholder's equity of $11,413,000, compared to 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, at December 31,
2001.
Intervest Mortgage Corporation'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
- ---------------------------
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 Mortgage Corporation's lending activities have been concentrated in
the New York City metropolitan region. It also makes loans in other states,
including Connecticut, Florida, Georgia, Maryland, 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
4
its 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.
In making its investments, Intervest Mortgage Corporation also experiences
significant competition from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, real estate investment trusts,
limited partnerships and other lenders and investors 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 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 Mortgage Corporation 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 and limits as to loan-to-value
ratios. Intervest Mortgage Corporation also does not have a Loan Committee or a
formal loan approval process.
At December 31, 2002, the Company did not have any nonaccrual or impaired loans.
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. In the
second quarter of 2002, the property collateralizing this loan was acquired
through foreclosure and transferred to Foreclosed Real Estate at estimated fair
value less estimated selling costs. A loan charge off of $150,000 was recorded
against the allowance for loan loss reserves in connection with this transfer.
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 include loans to businesses originated for working
capital needs. Consumer loans include those for the purchase of automobiles,
boats, home improvements and investments. At December 31, 2002, the Company's
loan portfolio, net of deferred fees, amounted to $489,912,000, compared to
$368,526,000 at December 31, 2001.
5
Commercial and Multifamily Real Estate Mortgage Lending
- -------------------------------------------------------
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.
Mortgage loans on commercial and multifamily properties are normally originated
for terms of no more than 20 years, many with variable interest rates that are
based on the prime rate. Additionally, many loans have an interest rate floor
which resets upward along with any increase in the loan's interest rate. This
feature reduces the loan's interest rate exposure to declining interest rates.
Mortgage loans on commercial and multifamily properties typically provide for
periodic payments of interest and principal during the term of the mortgage,
with the remaining principal balance and any accrued interest due at the
maturity date. The majority of the 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.
Commercial Lending
- ------------------
The Bank offers a variety of commercial loan services including term loans,
lines of credit and equipment financing. Short-to-medium term commercial loans,
both collateralized and uncollateralized, are made available to businesses for
working capital 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
- ----------------
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
- --------------------------------
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 collateral performed
by an appraiser approved by the Company. In addition, the Company analyzes
relevant real property and financial factors, which in certain cases may
6
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.
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 properties acquired through foreclosure) 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 $145,694,000 at December 31, 2002, compared
to $99,157,000 at December 31, 2001. Securities available for sale amounted
$6,192,000 at December 31, 2001. There were no securities classified as
available for sale at December 31, 2002.
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 funds
resulting from deposit-gathering activities, normal cash flow from operations
and sales of debentures. Cash and short-term investments at December 31, 2002
amounted to $30,849,000, compared to $24,409,000 at December 31, 2001.
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, 2002,
consolidated deposit liabilities totaled $505,958,000, compared to $362,437,000
at December 31, 2001.
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, 2002 and 2001, 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, 2002 or 2001.
Intervest Mortgage Corporation'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, 2002, Intervest Mortgage
Corporation had debentures outstanding of $74,000,000, compared to $63,000,000
at December 31, 2001. The Holding Company has also sold debentures for working
capital purposes. The Holding Company's debentures outstanding totaled
$10,430,000 at December 31, 2002 and December 31, 2001.
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
to third party investors in the aggregate principal amount of $15,000,000,
referred to in this report as the Capital Securities. The net proceeds from the
sale, as well as the initial capital contribution of $464,000 from the Holding
Company, were reinvested by the Trust into the Holding Company in exchange for
$15,464,000 of the Holding Company's 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, 2002, the Company employed 57 full-time equivalent employees.
The Company provides various benefit plans, including group life, health and a
401(k) Plan. The employees are not covered by a collective bargaining agreement
and the Company considers 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
Mortgage Corporation files state income tax returns in various other 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
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
8
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. In
2002, due to its asset size, the Bank no longer qualifies for this method and
began using the direct write-off method in computing its bad debt deduction for
tax purposes.
Investment in Subsidiaries
The following table provides information regarding the Holding Company's
subsidiaries:
At December 31, 2002
-------------------- Subsidiaries
($ in thousands) % of Equity in Earnings for the
Voting Total Underlying Year Ended December 31,
Subsidiary Stock Investment Net Assets 2002 2001 2000
- ------------------------------ ----- ---------- ---------- ---- ---- -----
Intervest National Bank 100% $51,936 $51,936 $6,459 $3,404 $2,619
Intervest Mortgage Corporation 100% $11,413 $11,413 $1,567 $ 577 $ 129
Intervest Statutory Trust I 100% $ 464 $ 464 $ - $ - $ -
Effective December 2001, the Bank began paying a monthly dividend of $125,000,
or $1,500,000 annually, 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 Mortgage Corporation 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
- -------------------------------
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. The Holding Company has also been approved by the FRB to become a
financial holding company.
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,
2002, the Company's consolidated ratio of total capital to risk-weighted assets
was 13.06% and its risk-based Tier 1 capital ratio was 12.21%. At December 31,
2001, the same ratios were 14.11% and 12.89%, respectively. The guidelines also
require a ratio of Tier 1 capital to adjusted total average assets of not less
9
than 3%. The Company's consolidated leverage ratio at December 31, 2002 and
2001, was 9.88% and 10.67%, 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 and
Regulation W thereunder, which govern certain transactions, such as loans,
extensions of credit, investments and purchases of assets between member banks
and their affiliates, including their parent holding companies. These
restrictions limit the transfer of funds to the Holding Company in the form of
loans, extensions of credit, investment or purchases of assets ("Transfers"),
and they require that the Bank's transactions with the Holding Company be on
terms no less favorable to the Bank than comparable transactions between the
Bank and unrelated third parties. Transfers by the Bank to the Holding Company
are limited in amount to 10% of the Bank's capital and surplus, and transfers to
all affiliates are limited in the aggregate to 20% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are also subject to
various collateral requirements. These regulations and restrictions may limit
the Holding Company's ability to obtain funds from the Bank for its cash needs,
including funds for acquisitions, and the payment of dividends, interest and
operating expenses.
The Bank is prohibited from engaging in certain tying arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services. For example, the Bank may not generally require a customer to obtain
other services from the Bank or the Holding Company, and may not require the
customer to promise not to obtain other services from a competitor as a
condition to an extension of credit. The Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons. Extensions of credit (i) must be made on substantially the same
terms (including interest rates and collateral) as, and following credit
underwriting procedures that are not less stringent than those prevailing at the
time for, comparable transactions with persons not covered above and who are not
employees and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. In addition, extensions of credit to such
persons beyond limits set by FRB regulations must be approved by the Board of
10
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, 2002 and 2001,
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 $0.0168 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
the performance of financial institutions. The Bank has received an
"outstanding" rating in its most recent CRA examination.
The federal regulators have adopted regulations and examination procedures
promoting the safety and soundness of individual institutions by specifically
addressing, among other things: (i) internal controls; information systems and
11
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. The
Gramm-Leach-Bliley Act amended the BHCA and expanded the permissible activities
of certain qualifying bank holding companies, known as financial holding
companies. In addition to engaging in banking and activities closely related to
banking, as determined by the FRB by regulation or order, financial holding
companies may engage in activities that are financial in nature or incidental to
financial activities that are complementary to a financial activity and do not
pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally. Under the Gramm-Leach-Bliley Act, all
financial institutions, including the Company and the Bank, were required to
develop privacy policies, restrict the sharing of non-public customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect customer data from unauthorized access.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001 (adopted as Title III of the USA PATRIOT Act), all financial
institutions are subject to additional requirements to collect customer
information, monitor transactions and report certain information to U.S. law
enforcement agencies concerning customers and their transactions. In general,
accounts maintained by or on behalf of "non-United States persons," as defined
in the Act, are subject to particular scrutiny. Correspondent accounts for or on
behalf of foreign banks with profiles that raise money-laundering concerns are
subject to even greater scrutiny, and correspondent accounts for or on behalf of
foreign banks with no physical presence in any country are barred altogether.
Additional requirements are imposed by this Act on financial institutions, all
with a view towards encouraging information sharing among financial
institutions, regulators and law enforcement agencies. Financial institutions
are also required to adopt and implement "anti-money-laundering programs."
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
12
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 Mortgage Corporation is located
in leased premises (of approximately 5,000 sq. ft.) on the tenth floor of 10
Rockefeller Plaza, New York, N.Y, 10020. The lease expires in September 2004.
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. In
2002, the Bank acquired property across from its Court Street branch office in
Florida. This property, which has an office building that contains approximately
1,400 sq.ft. and is leased to one commercial tenant, was purchased primarily to
provide additional parking for the Court Street branch.
Item 3. Legal Proceedings
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as 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, 2002, 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 84, 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
13
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
Mortgage Corporation.
Lowell S. Dansker, age 52, serves as a Director, President and
Treasurer of Intervest Bancshares Corporation and has served in such capacities
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 Mortgage
Corporation.
Lawrence G. Bergman, age 58, serves as a Director, Vice President and
Secretary of Intervest Bancshares Corporation and has served in such capacities
since 1993. Mr. Bergman received a Bachelor of Science degree and a Master of
Engineering (Electrical) degree from Cornell University and a Master of Science
in Engineering and a Ph.D. degree from The Johns Hopkins University. Mr. Bergman
also serves as a Director and a member of the Loan Committee of Intervest
National Bank. He is also a Director, Vice-President and Secretary of Intervest
Mortgage Corporation.
Keith A. Olsen, age 49, serves as President of the Florida Division and
as a Director of Intervest National Bank and has served in such capacities since
July 2001. Prior to that, Mr. Olsen was the President of Intervest Bank from
1994 until it merged into Intervest National Bank in July 2001. Prior to that,
he was Senior Vice President of Intervest Bank since 1991. Mr. Olsen received an
Associates degree from St. Petersburg Junior College and a Bachelors degree in
Business Administration and Finance from the University of Florida, Gainesville.
He is also a graduate of the Florida School of Banking of the University of
Florida, Gainesville, the National School of Real Estate Finance of Ohio State
University and the Graduate School of Banking of the South of Louisiana State
University. Mr. Olsen has been in banking for more than 15 years and has served
as a senior bank officer for more than 10 years.
Raymond C. Sullivan, age 56, serves as President and as a Director of
Intervest National Bank and has served in such capacities since April 1999.
Prior to that, Mr. Sullivan was an employee of Intervest Bancshares Corporation
from March 1998 to March 1999. Mr. Sullivan received an MBA degree from Fordham
University, an M.S. degree from City College of New York and a B.A. degree from
St. Francis College. Mr. Sullivan also has a Certificate in Advanced Graduate
Study in Accounting from Pace University and is a graduate of the National
School of Finance and Management. Mr. Sullivan has over 27 years of banking
experience. Prior to joining the Company, Mr. Sullivan was the Operations
Manager of the New York Agency Office of Banco Mercantile, C.A. from 1994 to
1997, a Senior Associate at LoBue Associates, Inc. from 1992 to 1993, and an
Executive Vice President, Chief Operations Officer and Director of Central
Federal Savings Bank from 1985 to 1992.
John J. Arvonio, age 40, serves as Senior Vice President, Chief
Financial Officer and Secretary of Intervest National Bank and has served in
such capacities since September 2000. Prior to that, Mr. Arvonio served as Vice
President, Controller and Secretary of Intervest National Bank 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 14 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
from 1989 to 1992, and a Senior Auditor for Ernst & Young from 1985 to 1989.
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 quoted on the NASDAQ SmallCap
Market under the symbol: IBCA. There is no public-trading market for the Holding
Company's Class B common stock.
At December 31, 2002, there were 4,348,087 and 355,000 shares of Class A and
Class B common stock outstanding, respectively. At December 31, 2002, there were
approximately 800 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, 2002, there were four holders
of record of Class B common stock.
The high and low sales prices, which represent actual sales transactions as
reported by the NASDAQ, for the Class A common stock by calendar quarter for
2002 and 2001 are as follows:
2002 2001
---- ----
High Low High Low
First quarter $ 9.99 $ 7.20 $ 6.50 $ 3.75
Second quarter $11.05 $ 8.79 $ 7.28 $ 5.30
Third quarter $11.50 $ 7.46 $ 7.75 $ 5.25
Fourth quarter $11.25 $ 8.99 $ 8.65 $ 6.25
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 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 data) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Condition Data:
Total assets .......................................... $ 685,979 $ 512,622 $ 416,927 $ 340,481 $ 300,080
Cash and cash equivalents ............................. 30,849 24,409 42,938 32,095 40,977
Securities available for sale ......................... - 6,192 74,789 - -
Securities held to maturity, net ...................... 145,694 99,157 20,970 83,132 82,338
Loans receivable, net of deferred fees ................ 489,912 368,526 266,326 212,937 164,986
Deposits .............................................. 505,958 362,437 300,241 201,080 170,420
Federal funds purchased ............................... - - - 6,955 -
Debentures and related accrued interest payable ....... 113,302 99,910 72,813 92,422 93,090
Stockholders' equity .................................. 53,126 40,395 36,228 33,604 31,112
Nonaccrual loans ...................................... - 1,243 - - -
Foreclosed real estate ................................ 1,081 - - - -
Allowance for loan loss reserves ...................... 4,611 3,380 2,768 2,493 1,662
Loan chargeoffs ....................................... 150 - - - -
Loan recoveries ....................................... 107 - - 1 10
- ------------------------------------------------------------------------------------------------------------------------------------
Operations Data:
Interest and dividend income .......................... $ 43,479 $ 35,462 $ 31,908 $ 25,501 $ 24,647
Interest expense ...................................... 26,325 24,714 23,325 18,419 17,669
--------------------------------------------------------------------------
Net interest and dividend income ...................... 17,154 10,748 8,583 7,082 6,978
Provision for loan loss reserves ...................... 1,274 612 275 830 479
--------------------------------------------------------------------------
Net interest and dividend income after
provision for loan loss reserves ................. 15,880 10,136 8,308 6,252 6,499
Noninterest income .................................... 2,218 1,655 983 900 700
Noninterest expenses .................................. 6,479 5,303 4,568 4,059 3,077
--------------------------------------------------------------------------
Earnings before income taxes, extraordinary item
and change in accounting principle ............... 11,619 6,488 4,723 3,093 4,122
Provision for income taxes ............................ 4,713 2,710 1,909 1,198 1,740
--------------------------------------------------------------------------
Earnings before extraordinary item and
change in accounting principle ................... 6,906 3,778 2,814 1,895 2,382
Extraordinary item, net of tax (1) .................... - - (206) - -
Cumulative effect of accounting change, net of tax (2) - - - (128) -
--------------------------------------------------------------------------
Net earnings .......................................... $ 6,906 $ 3,778 $ 2,608 $ 1,767 $ 2,382
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Basic earnings per share .............................. $ 1.71 $ 0.97 $ 0.67 $ 0.47 $ 0.64
Diluted earnings per share ............................ 1.37 0.97 0.67 0.44 0.54
Common book value per share ........................... 11.30 10.36 9.29 8.76 8.33
Dividends per share ................................... - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Other Data and Ratios:
Common shares outstanding ............................. 4,703,087 3,899,629 3,899,629 3,836,879 3,734,515
Average common shares used to calculate:
Basic earnings per share ......................... 4,043,619 3,899,629 3,884,560 3,760,293 3,707,113
Diluted earnings per share ....................... 5,348,121 3,899,629 3,884,560 4,020,118 4,723,516
Adjusted net earnings for diluted earnings per share .. $ 7,342 $ 3,778 $ 2,608 $ 1,767 $ 2,554
Full-service banking offices .......................... 6 6 6 6 5
Return on average assets .............................. 1.13% 0.85% 0.69% 0.57% 0.87%
Return on average equity .............................. 15.56% 9.94% 7.48% 5.48% 8.05%
Loans, net of unearned income to deposits ............. 96.83% 101.7% 88.70% 105.90% 96.81%
Allowance for loan losses to total net loans .......... 0.94% 0.92% 1.04% 1.17% 1.01%
Average stockholders' equity to average total assets .. 7.27% 8.50% 9.18% 10.37% 10.82%
Stockholders' equity to total assets .................. 7.74% 7.88% 8.69% 9.87% 10.37%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(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."
</FN>
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 Mortgage Corporation (formerly known as 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 individually 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.
The 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 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 were 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 Pinellas County, Florida - four in Clearwater and one in
South Pasadena. The Bank conducts a personalized commercial and consumer banking
business and attracts deposits from the areas served by its banking offices. It
also provides internet banking services through its web site:
www.intervestnatbank.com, which can attract deposit customers from outside its
primary market areas. The deposits, together with funds derived from other
sources, are used to originate a variety of real estate, commercial and consumer
loans and to purchase investment securities. The Bank emphasizes multifamily and
commercial real estate lending.
Intervest Mortgage Corporation is a mortgage investment company 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. Its wholly
owned subsidiaries, Intervest Distribution Corporation and Intervest Realty
Servicing Corporation are nonoperating entities that provide administrative
services to Intervest Mortgage Corporation. In March 2000, the Holding Company
acquired all the outstanding capital stock of Intervest Mortgage Corporation in
exchange for 1,250,000 shares of the Holding Company's Class A common stock. As
a result of the acquisition, Intervest Mortgage Corporation became a wholly
owned subsidiary of the Holding Company. Former shareholders of Intervest
Mortgage Corporation are officers and directors of both the Holding Company and
Intervest Mortgage Corporation. 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 discussion entitled
"Debentures Payable and Accrued Interest Payable on Debentures" that follows
later in this report for a further discussion.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, 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,
17
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. Since the properties underlying the Company's mortgages
are concentrated in the New York City area and the State of Florida, the
economic conditions in those areas can also have an impact on the Company's
operations.
Comparison of Results of Operations for the Years Ended December 31, 2002 and
2001.
General
- -------
Consolidated net earnings for 2002 increased 83% to $6,906,000, or $1.37 per
fully diluted share, from $3,778,000, or $0.97 per fully diluted share, for
2001. Net earnings for 2002 represent the highest level of earnings reported by
the Company since its inception in 1993. The growth in earnings was due to a
$6,406,000 increase in net interest and dividend income and a $563,000 increase
in noninterest income, partially offset by a $2,003,000 increase in the
provision for income taxes, a $1,176,000 increase in noninterest expenses, and a
$662,000 increase in the provision for loan loss reserves. The fully diluted
earnings per share computation in 2002 included a higher number of common shares
resulting from common stock warrants and convertible debentures outstanding that
became dilutive during the year. Return on average assets and equity increased
to 1.13% and 15.56%, respectively, for 2002, up from 0.85% and 9.94% for 2001.
Selected information regarding results of operations for 2002 follows:
Intervest Intervest Intervest Inter-
National Mortgage Statutory Holding Company
($ in thousands) Bank Corporation Trust I Company Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 34,197 $ 8,420 $ 1,527 $ 988 $ (1,653) $ 43,479
Interest expense 17,514 6,288 1,481 2,695 (1,653) 26,325
-------------------------------------------------------------------------------
Net interest and dividend income expense 16,683 2,132 46 (1,707) - 17,154
Provision (credit) for loan loss reserves 1,193 83 - (2) - 1,274
Noninterest income 1,723 2,057 - 205 (1,767) 2,218
Noninterest expenses 6,324 1,332 46 544 (1,767) 6,479
-------------------------------------------------------------------------------
Earnings (loss) before taxes 10,889 2,774 - (2,044) - 11,619
Provision (credit) for income taxes 4,430 1,207 - (924) - 4,713
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 6,459 $ 1,567 $ - $ (1,120) $ - $ 6,906
- ------------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (paid) received (1) $ (1,500) $ - $ - $ 1,500 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The Bank pays a monthly dividend of $125,000 to the Holding Company in
order to provide funds for the debt service on the Junior
Debentures-Capital Securities, the amount of which is included in the
interest expense line in the table. The proceeds of the capital securities
were contributed to the Bank as capital in December 2001.
</FN>
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 $17,154,000 in 2002, from
$10,748,000 in 2001. The increase was attributable to growth of $160,969,000 in
average interest-earning assets and an increase in the net interest margin from
2.47% in 2001, to 2.88% in 2002. The growth in average earning assets was due to
$124,093,000 in new mortgage loans and a net increase in security and other
short-term investments aggregating $36,876,000. These increases were funded by
$125,002,000 of deposit growth, $27,875,000 of additional borrowed funds and a
$6,395,000 increase in stockholders' equity.
The increase in the margin was due to the cost of funds decreasing at a faster
pace than the yield earned on interest-earning assets in a declining interest
rate environment. The yield on interest-earning assets decreased 86 basis points
to 7.29% in 2002 due to lower rates on new mortgage loans originated,
prepayments of higher-yielding loans and lower yields earned on security and
other short-term investments (including the effect of early calls of security
investments by the issuers with the resulting proceeds being invested in lower
yielding securities). The cost of funds decreased 146 basis points to 4.81% in
2002, primarily due to lower rates paid on deposit accounts and rate decreases
18
on floating-rate debentures. The floating-rate debentures are indexed to the
JPMorgan Chase Bank prime rate, which decreased by a total of 525 basis points
from January 2001 to December 2002.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2002 and 2001. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived mainly from daily balances. Net interest margin is computed by dividing
net interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
--------------------------------
2002 2001
------------------------------- --------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $439,241 $39,273 8.94% $315,148 $30,187 9.58%
Securities 142,840 3,964 2.78 75,117 3,423 4.56
Other interest-earning assets 14,001 242 1.73 44,848 1,852 4.13
------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 596,082 $43,479 7.29% 435,113 $35,462 8.15%
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,586 11,973
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $610,668 $447,086
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 9,521 $ 221 2.32% $ 8,089 $ 238 2.94%
Savings deposits 29,221 762 2.61 19,629 778 3.96
Money market deposits 119,582 3,082 2.58 65,581 2,640 4.03
Certificates of deposit 282,720 13,304 4.71 222,743 13,423 6.03
- ------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 441,044 17,369 3.94 316,042 17,079 5.40
- ------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased 116 2 1.87 - - -
Debentures and accrued interest payable 90,777 7,440 8.20 77,671 7,577 9.76
Junior debentures - capital securities 15,000 1,497 9.98 586 58 9.90
Note payable 239 17 7.00 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 106,132 8,956 8.44 78,257 7,635 9.76
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 547,176 $26,325 4.81% 394,299 $24,714 6.27%
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,277 6,338
Noninterest-bearing liabilities 13,831 8,460
Stockholders' equity 44,384 37,989
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $610,668 $447,086
- ------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $17,154 2.48% $10,748 1.88%
- ------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 48,906 2.88% $ 40,814 2.47%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09x 1.10x
- ------------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 1.13% 0.85%
Return on average equity 15.56% 9.94%
Noninterest expense to average assets 1.06% 1.19%
Efficiency ratio (1) 33.45% 42.76%
Average stockholders' equity to average assets 7.27% 8.50%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Defined as noninterest expenses (excluding the provision for loan losses)
as a % of net interest and dividend income plus noninterest income.
</FN>
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).
19
For the Year Ended December 31, 2002 vs. 2001
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ (2,017) $ 11,886 $ (783) $ 9,086
Securities (1,337) 3,086 (1,208) 541
Other interest-earning assets (1,076) (1,274) 740 (1,610)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (4,430) 13,698 (1,251) 8,017
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (50) 42 (9) (17)
Savings deposits (267) 380 (129) (16)
Money market deposits (951) 2,174 (781) 442
Certificates of deposit (2,940) 3,614 (793) (119)
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts (4,208) 6,210 (1,712) 290
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased - - 2 2
Debentures and related interest payable (1,212) 1,279 (204) (137)
Junior debentures - capital securities - 1,427 12 1,439
Note payable - - 17 17
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds (1,212) 2,706 (173) 1,321
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (5,420) 8,916 (1,885) 1,611
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ 990 $ 4,782 $ 634 $ 6,406
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Loss Reserves
- --------------------------------
The provision for loan losses was $1,274,000 in 2002, compared to $612,000 in
2001. The provision 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 discussion
entitled "Comparison of Financial Condition at December 31, 2002 and 2001" that
follows later in this report for a further discussion of these factors. The
higher provision was largely a function of loan growth (of $123,028,000 in 2002
versus $103,969,00 in 2001) as well as an increase in the Bank's internal
reserve percentages used in calculating the allowance.
Noninterest Income
- ------------------
Noninterest income includes fees from customer service charges, income from
mortgage lending activities (which consists mostly of fees from expired loan
commitments and loan servicing, maintenance and inspections charges), and income
from the early repayment of mortgage loans (which consists largely of the
recognition of unearned fees associated with such loans at the time of payoff
and the receipt of prepayment penalties in certain cases).
Noninterest income increased to $2,218,000 in 2002, from $1,655,000 in 2001. The
increase was due to higher income ($286,000) from the prepayment of mortgage
loans and increases in fees earned on expired loan commitments and loan service
charge income aggregating $144,000. In addition, in the fourth quarter of 2002,
the Bank sold securities available for sale totaling $3,500,000 and recognized a
net gain of $120,000.
The amount and timing of, as well as income from, loan prepayments, if any,
cannot be predicted and can fluctuate significantly. Normally, the number of
instances of prepayment of mortgage loans tends to increase during periods of
declining interest rates and tends to decrease during periods of increasing
interest rates. Many of the Company's mortgage loans include prepayment
provisions, and others prohibit prepayment of indebtedness entirely.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $6,479,000 in 2002, from $5,153,000 in 2001,
excluding approximately $150,000 of nonrecurring expenses in 2001 associated
with the merger of Intervest Bank into Intervest National Bank. The resulting
increase of $1,326,000 was largely due to a $565,000 increase in compensation
and benefits, a $235,000 increase in data processing expenses, a $141,000
increase in occupancy and equipment expenses, a $100,000 increase in operational
charges, a $44,000 increase in advertising expenses and the addition of $114,000
of net expenses in 2002 associated with foreclosed real estate. Foreclosed real
estate expenses, net of any rental income, consist mostly of real estate taxes,
insurance, utilities, maintenance, professional fees and other charges required
to protect the Company's interest in the property acquired through foreclosure.
20
The increase in compensation and benefits expense was due to the following:
$306,000 from additional staff, salary increases and a higher cost of employee
benefits; bonus payments aggregating $150,000 to the Chairman of the Company;
and $109,000 of compensation expense associated with certain common stock
warrants held by employees. In 2001, the Holding Company modified the terms of
its Class A common stock warrants outstanding that were granted to employees by
reducing the exercise price per share to $10.01 (from a range of $12.50 to
$16.00 per share) commencing January 1, 2002 and extending the expiration date
to December 31, 2002. In September 2002, the warrants were modified further by
extending the expiration date to December 31, 2003. With respect to these
warrants, which total 138,500 shares of Class A common stock, compensation
expense is being recorded in the consolidated statements of earnings with the
corresponding credit to paid in capital in accordance with variable rate
accounting as prescribed in APB Opinion No. 25 and related interpretations.
Future compensation expense related to the modified warrants will fluctuate up
or down (but not less than $73,000 recorded through the date of the second
modification) until December 31, 2003 and will be a function of the Company's
Class A common stock price and number of warrants outstanding and exercised.
The increase in data processing expenses was due to growth in the Bank's assets.
The Bank engages a third-party servicer for its main data processing and the fee
is a function of the Bank's total assets, which increased to $581,435,000 at
December 31, 2002, from $421,152,000 at December 31, 2001.
The increase in occupancy and equipment expenses was primarily due to increased
depreciation expense and higher real estate taxes and maintenance charges,
including insurance and security protection expenses. The increase in
operational charges was a direct function of growth in the Bank's transactional
deposit accounts. The increase in advertising expenses was due to additional
advertising to support loan and deposit growth.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $4,713,000 in 2002, from $2,710,000
in 2001, due to higher pre-tax earnings. The Company's effective tax rate
(inclusive of state and local taxes) amounted to 40.6% in 2002, compared to
41.8% in 2001. The decrease in the effective rate was largely due to a lower New
York State tax rate.
Comparison of Results of Operations for the Years Ended December 31, 2001 and
2000.
General
- -------
Consolidated net earnings for 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. 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 $206,000, in connection with the early retirement of various
debentures.
Selected information regarding results of operations for 2001 follows:
Intervest Intervest Inter-
National Mortgage Holding Company
($ in thousands) Bank Corporation Company (1) Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 27,126 $ 7,624 $ 818 $ (106) $ 35,462
Interest expense 17,185 6,511 1,124 (106) 24,714
-----------------------------------------------------------------------
Net interest and dividend income (expense) 9,941 1,113 (306) - 10,748
Provision for loan loss reserves 575 18 19 - 612
Noninterest income 925 1,152 176 (598) 1,655
Noninterest expenses 4,500 1,175 226 (598) 5,303
-----------------------------------------------------------------------
Earnings (loss) before taxes 5,791 1,072 (375) - 6,488
Provision (credit) for income taxes 2,387 495 (172) - 2,710
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 3,404 $ 577 $ (203) $ - $ 3,778
- ------------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (paid) received (2) $ (125) $ - $ 125 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes the net activity of Intervest Statutory Trust I from December 18
to December 31, 2001.
(2) The Bank pays a monthly dividend of $125,000 to the Holding Company in
order to provide funds for the debt service on the Junior
Debentures-Capital Securities, the amount of which is included in the
interest expense line in the table. The proceeds of the capital securities
were contributed to the Bank as capital in December 2001.
</FN>
21
Net Interest and Dividend Income
- --------------------------------
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 balance
sheet and a higher net interest margin. Average loans increased by $64,207,000
during 2001, funded by a similar increase in average deposits. The net interest
margin increased to 2.47% in 2001, from 2.34% in 2000 due to the cost of funds
decreasing at a faster pace than the yield on interest-earning assets.
The yield on interest-earning assets decreased 53 basis points to 8.15% in 2001
due to the steady decline in market interest rates resulting from the Federal
Reserve Board decreasing the federal funds target rate on 11 occasions during
2001 for a total of 475 basis points. The lower rate environment resulted in
originations of new loans with lower rates than the average yield of the loan
portfolio in 2000, prepayments of higher-yielding loans, early calls of security
investments by the issuers with the resulting proceeds being invested in lower
yielding securities, and lower rates earned on overnight and short-term
investments. The cost of funds decreased 77 basis points to 6.27% in 2001 also
due to the lower rate environment, which resulted in lower rates paid on deposit
accounts and variable-rate debentures indexed to the prime rate.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2001 and 2000. For a further description of
the table, see the section "Comparison of Results of Operations for the Years
Ended December 31, 2002 and 2001".
For the Year Ended December 31,
--------------------------------
2001 2000
------------------------------- -------------------------------
Average Interest Yield/ Average Interest Yield/
($ 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
- ------------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 0.85% 0.69%
Return on average equity 9.94% 7.48%
Noninterest expense to average assets 1.19% 1.20%
Efficiency ratio (1) 42.76% 47.75%
Average stockholders' equity to average assets 8.50% 9.18%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Defined as noninterest expenses (excluding the provision for loan losses)
as a % of net interest and dividend income plus noninterest income.
</FN>
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, 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 amounted to $612,000 in 2001, compared to $275,000 in 2000. 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 discussion entitled "Comparison of Financial Condition at December 31, 2002
and 2001" that follows later in this report for a further discussion of these
factors. The higher provision for 2001 was due to net loan growth (which
amounted to $103,969,000 in 2001, versus $53,623,000 in 2000).
Noninterest Income
- ------------------
Noninterest income 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 mortgage loans. See the section "Comparison of Results of Operations for the
Years Ended December 31, 2002 and 2001" for a description of noninterest income.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $5,303,000 in 2001, from $4,568,000 in 2000.
Expenses for 2001 included approximately $150,000 of nonrecurring expenses
associated with the merger of Intervest Bank into Intervest National Bank.
Expenses for the 2000 period included 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 Mortgage Corporation.
Absent the aforementioned expenses, noninterest expenses totaled $5,153,000 in
2001, compared to $4,358,000 in 2000. The increase was due to the following: 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); 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.
23
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 Mortgage Corporation redeemed debentures totaling $24,000,000
in principal prior to maturity for the outstanding principal plus accrued
interest totaling $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 Financial Condition at December 31, 2002 and December 31, 2001.
Overview
- --------
Total assets at December 31, 2002 increased to $685,979,000, from $512,622,000
at December 31, 2001. Total liabilities at December 31, 2002 increased to
$632,853,000, from $472,227,000 at December 31, 2001, and stockholders' equity
increased to $53,126,000 at December 31, 2002, from $40,395,000 at year-end
2001. Book value per common share increased to $11.30 per share at December 31,
2002, from $10.36 at December 31, 2001.
Selected balance sheet information as of December 31, 2002 follows:
Intervest Intervest Intervest Inter-
National Mortgage Statutory Holding Company
($ in thousands) Bank Corporation Trust I Company Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 16,365 $ 17,946 $ - $ 7,487 $ (10,949) $ 30,849
Time deposits with banks - 2,000 - - - 2,000
Securities held to maturity, net 145,694 - 15,464 - (15,464) 145,694
Federal Reserve Bank stock 1,108 - - - - 1,108
Loans receivable, net of deferred fees 407,128 73,499 - 9,285 - 489,912
Allowance for loan loss reserves (4,464) (101) - (46) - (4,611)
Investment in subsidiaries - - - 63,813 (63,813) -
Foreclosed real estate 1,081 - - - - 1,081
All other assets 14,523 3,967 59 1,751 (354) 19,946
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 581,435 $ 97,311 $ 15,523 $ 82,290 $ (90,580) $ 685,979
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ 517,209 $ - $ - $ - $ (11,251) $ 505,958
Subordinated debentures payable - 74,000 - 25,894 (15,464) 84,430
Junior debentures payable-capital securities - - 15,000 - - 15,000
Note payable 266 - - - - 266
Accrued interest payable on all debentures - 10,751 57 3,123 (59) 13,872
All other liabilities 12,024 1,147 2 147 7 13,327
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 529,499 85,898 15,059 29,164 (26,767) 632,853
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 51,936 11,413 464 53,126 (63,813) 53,126
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 581,435 $ 97,311 $ 15,523 $ 82,290 $ (90,580) $ 685,979
- ------------------------------------------------------------------------------------------------------------------------------------
24
A comparison of the Company's consolidated balance sheet as of December 31, 2002
and 2001 follows:
At December 31, 2002 At December 31, 2001
----------------------- ------------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 30,849 4.4% $ 24,409 4.8%
Time deposits with banks 2,000 0.3 250 0.1
Securities available for sale at estimated fair value - - 6,192 1.2
Securities held to maturity, net 145,694 21.2 99,157 19.3
Federal Reserve Bank stock 1,108 0.2 654 0.1
Loans receivable, net of deferred fees and loan loss reserves 485,301 70.7 365,146 71.2
Foreclosed real estate 1,081 0.2 - -
All other assets 19,946 3.0 16,814 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $685,979 100.0% $512,622 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $505,958 73.8% $362,437 70.7%
Subordinated debentures payable 84,430 12.3 73,430 14.3
Junior debentures payable-capital securities 15,000 2.2 15,000 2.9
Note payable 266 0.1 - -
Accrued interest payable on all debentures 13,872 2.0 11,480 2.3
All other liabilities 13,327 1.9 9,880 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 632,853 92.3 472,227 92.1
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 53,126 7.7 40,395 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $685,979 100.0% $512,622 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents increased to $30,849,000 at December 31, 2002, from
$24,409,000 at December 31, 2001, due to a higher level of overnight federal
fund investments and noninterest-earning balances due from banks. Cash and cash
equivalents include federal funds sold and interest-bearing and
noninterest-bearing cash balances with banks, and other short-term investments
that have original maturities of three months or less. The short-term
investments are normally comprised of commercial paper issued by large
commercial banks, certificates of deposit and U.S. government securities. The
level of cash and cash equivalents fluctuates based on various factors,
including liquidity needs, loan demand, deposit flows, calls of securities,
repayments of borrowed funds and alternative investment opportunities.
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
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. There were no
securities classified as available for sale at December 31, 2002, compared to
$6,192,000 at December 31, 2001. The decline in the portfolio was due to the
sale of $3,500,000 of securities, and the remainder was due to early calls and
maturities during the year. A net gain of $120,000 was realized on the sale of
securities.
At December 31, 2001, the portfolio had an unrealized gain, net of tax, of
$111,000. 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.
25
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 $145,694,000 at December 31, 2002, compared to $99,157,000 at
December 31, 2001. The increase was due to new purchases exceeding maturities
and calls of securities during the year. At December 31, 2002, the portfolio
consisted of short-term debt obligations of FNMA, FHLB, FHLMC and FFCB with a
weighted-average yield of 2.39% and a weighted-average remaining maturity of 1.6
years. The securities are fixed rate or have predetermined scheduled rate
increases, and some have call features that allow the issuer to call the
security before its stated maturity without penalty. At December 31, 2002 and
2001, the portfolio's estimated fair value was $146,560,000 and $99,404,000,
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
$1,108,000 at December 31, 2002 and $654,000 at December 31, 2001, fluctuates
based on the Bank's capital level.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Loss Reserves
- ---------------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan loss reserves,
increased to $485,301,000 at December 31, 2002, from $365,146,000 at December
31, 2001. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments. At
December 31, 2002, the loan portfolio consisted of $134,360,000 of fixed-rate
loans and $360,942,000 of adjustable-rate loans. The loan portfolio has
historically been concentrated in commercial real estate and multifamily
mortgage loans. Such loans represented 99% of the total loan portfolio at
December 31, 2002 and 2001. Loan concentrations are defined as amounts loaned to
a number of borrowers engaged in similar activities, which would cause the loans
to be similarly impacted by economic or other conditions. Credit risk, which
represents the possibility of the Company not recovering amounts due from its
borrowers, is significantly related to local economic conditions in the areas
the properties are located, as well as the Company's underwriting standards.
Economic conditions affect the market value of the underlying collateral as well
as the levels of occupancy of income-producing properties (such as office
buildings, shopping centers and rental and cooperative apartment buildings).
The following table sets forth information concerning the loan portfolio:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
# of % of # of % of
($ in thousands) Loans Amount Total Loans Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate loans 162 $ 275,096 55.5% 139 $ 183,167 49.2%
Residential multifamily loans 168 214,515 43.3 153 182,569 49.0
Land development and other land loans 3 1,890 0.4 3 2,485 0.7
Residential 1-4 family loans 28 1,953 0.4 33 2,404 0.6
Commercial loans 27 1,608 0.3 26 1,363 0.4
Consumer loans 16 240 0.1 15 286 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total gross loans receivable 404 495,302 100.0% 369 372,274 100.0%
Deferred loan fees (5,390) (3,748)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees 489,912 368,526
Allowance for loan loss reserves (4,611) (3,380)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 485,301 $ 365,146
- ------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the scheduled contractual principal repayments of
the loan portfolio:
At December 31,
---------------
($ in thousands)
2002 2001
------------------------------------------------------------------
Within one year $103,398 $ 85,447
Over one to five years 305,013 221,435
Over five years 86,891 65,392
------------------------------------------------------------------
$495,302 $372,274
------------------------------------------------------------------
26
At December 31, 2002, $308,393,000 of loans with adjustable rates and
$83,511,000 of loans with fixed rates were due after one year.
The following table sets forth the activity in the loan portfolio:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001
---------------------------------------------------------------------------
Loans receivable, net, at beginning of year $365,146 $263,558
Loans originated 233,689 195,754
Principal repayments (110,661) (91,785)
Recoveries (107) -
Chargeoffs 150 -
Increase in deferred loan fees (1,642) (1,769)
Provision for loan loss reserves (1,274) (612)
---------------------------------------------------------------------------
Loans receivable, net, at end of year $485,301 $365,146
---------------------------------------------------------------------------
Nonaccrual and Impaired Loans
- -----------------------------
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.
At December 31, 2002, there were no nonaccrual or impaired loans. 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. At December 31, 2001, there was no valuation allowance recorded for this
impaired loan.
In the second quarter of 2002, the property collateralizing the impaired loan
was acquired through foreclosure and transferred to Foreclosed Real Estate at
estimated fair value less estimated selling costs. A loan charge off of $150,000
was recorded against the allowance for loan loss reserves in connection with
this transfer. Interest that was not accrued on this loan under its contractual
terms amounted to $29,000 in 2002 and $51,000 in 2001.
Allowance for Loan Loss Reserves
- --------------------------------
At December 31, 2002, the allowance for loan loss reserves increased to
$4,611,000, from $3,380,000 at December 31, 2001. The increase was largely a
function of loan growth (of $123,028,000 in 2002, versus $103,969,00 in 2001) as
well as an increase in the internal reserve percentages used by the Company in
calculating the allowance. At December 31, 2002 and 2001, the allowance for loan
loss reserves was predominately allocated to commercial real estate, multifamily
and land loans.
The following table sets forth information with respect to the allowance for
loan loss reserves:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001
--------------------------------------------------------------------------------------------
Allowance at beginning of year $ 3,380 $ 2,768
Provision charged to operations 1,274 612
Chargeoffs (150) -
Recoveries 107 -
--------------------------------------------------------------------------------------------
Allowance at end of year $ 4,611 $ 3,380
--------------------------------------------------------------------------------------------
Ratio of allowance to total loans, net of deferred fees 0.94% 0.92%
Total loans, net of deferred fees at year end $489,912 $368,526
Average loans outstanding during the year $439,241 $315,148
--------------------------------------------------------------------------------------------
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
27
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
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 chargeoff
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.
Foreclosed Real Estate
- ----------------------
At December 31, 2002, foreclosed real estate amounted to $1,081,000 and
represented one commercial real estate property located in the State of Florida
that was acquired by the Bank as discussed previously. The property is actively
being marketed for sale. Foreclosed real estate is carried at the lower of the
new cost basis or estimated fair value less estimated selling costs. Revenue and
expenses from operations and changes in the valuation allowance of the property
are included in the consolidated statements of earnings. In 2001, the Company
had no foreclosed real estate.
All Other Assets
- ----------------
The following table sets forth the composition of all other assets:
At December 31,
---------------
($ in thousands) 2002 2001
------------------------------------------------------------------------
Accrued interest receivable $ 4,263 $ 3,202
Loans fee receivable 3,706 2,679
Premises and equipment, net 6,098 6,042
Deferred income tax asset 1,997 1,236
Deferred debenture offering costs, net 3,498 3,396
All other 384 259
------------------------------------------------------------------------
$19,946 $16,814
------------------------------------------------------------------------
28
Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received. The increase was due to the growth in these assets.
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. Such amounts are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan as a yield
adjustment. The increase was due to an increase in mortgage loan originations.
Premises and equipment is detailed in note 5 to the consolidated financial
statements. Premises and equipment increased due to purchases exceeding normal
amortization and depreciation during the year. In 2002, the Bank purchased a
property that is across from its Court Street branch office in Florida at a cost
of $350,000. This property was purchased primarily to provide additional parking
for the branch.
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 ($1,021,000) incurred with the sale of new debentures in 2002
by Intervest Mortgage Corporation, partially offset by normal amortization.
Deposits
- --------
Consolidated deposit liabilities increased to $505,958,000 at December 31, 2002,
from $362,437,000 at December 31, 2001, reflecting growth in deposit accounts
during the year. Management believes that the Bank does not have a concentration
of deposits from any one source and that a large portion of its depositors are
residents in the Bank's primary market areas (although there has been growth in
deposits from outside the primary areas resulting from the Bank's
deposit-gathering activities through its web site on the internet:
www.intervestnatbank.com). The Bank does not accept brokered deposits.
The following table sets forth the distribution of deposit accounts by type:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
------------------------------------------------------------------------------------
Demand deposits $ 5,924 1.2% $ 5,550 1.5%
Interest checking deposits 10,584 2.1 10,204 2.8
Savings deposits 30,174 6.0 24,624 6.8
Money market deposits 134,293 26.5 80,594 22.2
Certificates of deposit 324,983 64.2 241,465 66.7
------------------------------------------------------------------------------------
Total deposit accounts (1) $505,958 100.0% $362,437 100.0%
------------------------------------------------------------------------------------
<FN>
(1) Includes individual retirement accounts totaling $53,340,000 and
$28,193,000 at December 31, 2002 and 2001, respectively, nearly all of
which are certificates of deposit.
</FN>
The following table sets forth certificate of deposits by maturity for the
periods indicated:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
------------------------------------------------------------------------------------
Within one year $122,890 3.51% $144,739 5.00%
Over one to two years 57,895 4.18 45,512 4.95
Over two to three years 31,281 5.53 14,954 5.82
Over three to four years 17,730 5.32 16,903 6.84
Over four years 95,187 4.92 19,357 5.61
------------------------------------------------------------------------------------
$324,983 4.33% $241,465 5.22%
------------------------------------------------------------------------------------
29
The following table sets forth the maturities of certificates of deposit in
denominations of $100,000 or more:
At December 31,
---------------
($ in thousands) 2002 2001
----------------------------------------------------------------------------
Due within three months or less $7,508 $10,332
Due over three months to six months 6,122 4,483
Due over six months to one year 13,033 18,401
Due over one year 46,209 20,529
----------------------------------------------------------------------------
$72,872 $53,745
----------------------------------------------------------------------------
As a percentage of total deposits 14.4% 14.8%
----------------------------------------------------------------------------
The following table sets forth net deposit flows:
For the Year Ended
------------------
December 31,
------------
($ in thousands) 2002 2001
----------------------------------------------------------------------------
Net increase before interest credited $126,230 $45,078
Net interest credited 17,291 17,118
----------------------------------------------------------------------------
Net deposit increase $143,521 $62,196
----------------------------------------------------------------------------
Federal Funds Purchased
- -----------------------
Periodically, the Bank purchases federal funds to manage its liquidity needs. At
December 31, 2002 and 2001, there were no funds outstanding. The Bank did not
emphasize these types of borrowings in 2002 and 2001.
Debentures Payable and Accrued Interest Payable on Debentures
- -------------------------------------------------------------
At December 31, 2002, debentures payable amounted to $84,430,000, compared to
$73,430,000 at year-end 2001. The increase was due to the sale of additional
debentures by Intervest Mortgage Corporation (Series 1/17/02 and 8/05/02
totaling $13,500,000 in principal amount and maturing at various times through
January 1, 2010) as part of its normal funding of its mortgage loan
originations, partially offset by the repayment of $2,500,000 of its Series
06/28/99 debentures. The sale of the debentures, after underwriter's commissions
and other issuance costs, resulted in net proceeds of approximately $12,500,000.
At December 31, 2002, Intervest Mortgage Corporation had $74,000,000 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 at a current
conversion price of $10.01 per share.
At December 31, 2002 and 2001, the Holding Company, through its wholly owned
subsidiary Intervest Statutory Trust I, has Trust Preferred Securities (Junior
Debentures Payable) outstanding totaling $15,000,000 that qualify as regulatory
capital. On December 18, 2001, 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, in addition to the initial capital contribution of $464,000 from
the Holding Company to the Trust, were reinvested into the Holding Company in
exchange for $15,464,000 of the Holding Company's 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, 2002, accrued interest payable on all debentures amounted to
$13,872,000, compared to $11,480,000 at year-end 2001. Nearly all of the accrued
interest payable at December 31, 2002 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.
Note Payable
- ------------
In connection with the purchase of property by the Bank that is across from its
Court Street branch office in Florida as described previously, the Bank issued a
note payable to the seller for $275,000. The note matures in February of 2017
and calls for monthly payments of principal and interest at 7% per annum.
30
All Other Liabilities
- ---------------------
The following table shows the composition of all other liabilities:
At December 31,
---------------
($ in thousands) 2002 2001
------------------------------------------------------------------------
Mortgage escrow funds payable $5,894 $4,253
Official checks outstanding 4,373 3,219
Accrued interest payable on deposits 895 817
Income taxes payable 526 772
All other 1,639 819
------------------------------------------------------------------------
$13,327 $9,880
------------------------------------------------------------------------
Mortgage escrow funds payable represent advancepayments 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. All other is comprised mainly of accrued expenses and fees received on
loan commitments that have not yet been funded.
Stockholders' Equity
- --------------------
Stockholders' equity increased to $53,126,000 at December 31, 2002, from
$40,395,000 at December 31, 2001. The increase was due to the following: net
earnings of $6,906,000; the issuance of 803,458 shares of Class A common stock
upon the exercise of common stock warrants for total proceeds, including related
tax benefits, of $5,801,000; and the recording of $109,000 of net compensation
expense related to stock warrants held by employees and directors; partially
offset by a $111,000 decrease in unrealized gains, net of tax, on securities
available for sale. For additional discussion of employee stock warrants, see
the section "Comparison of Results of Operations for the Years Ended December
31, 2002 and 2001."
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; borrowings in the
federal funds market 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, 2002, the Company's total commitment to lend aggregated
$70,044,000. 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, 2002 or 2001.
Intervest Mortgage Corporation filed a registration statement in late 2002
relating to the issuance of additional subordinated debentures in the aggregate
amount of up to $7,500,000. These debentures are expected to be issued in the
first quarter of 2003.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. The FDIC Improvement Act of 1991, among other
things, established five capital categories ranging from well capitalized to
critically undercapitalized. Such classifications are used by the FDIC and other
bank regulatory agencies to determine various matters, including prompt
corrective action and each institution's FDIC deposit insurance premium
assessments. The capital categories involve quantitative measures of a bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
the regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements.
The Bank is required to maintain, for regulatory compliance and reporting
purposes, regulatory defined minimum Tier 1 leverage and Tier 1 and total
risk-based capital ratio levels of at least 4%, 4% and 8%, respectively. At
31
December 31, 2002 and 2001, management believes that the Bank met its capital
adequacy requirements. The Bank is a well-capitalized institution as defined in
the regulations, which require minimum Tier 1 leverage and Tier 1 and total
risk-based ratios of 5%, 6% and 10%, respectively. Management believes that
there are no current conditions or events outstanding which would change the
Bank's designation as a well-capitalized institution.
Information regarding the Bank's regulatory capital and related ratios is
summarized below:
At December 31,
---------------
($ in thousands) 2002 2001
-----------------------------------------------------------------------------------------------------
Tier 1 Capital:
Stockholder's equity $ 51,936 $ 46,749
Disallowed portion of deferred tax asset (1,623) (946)
Unrealized gain on debt securities, net of tax - (111)
-----------------------------------------------------------------------------------------------------
Total Tier 1 capital 50,313 45,692
-----------------------------------------------------------------------------------------------------
Tier 2 Capital:
Allowable portion of allowance for loan loss reserves 4,464 3,314
-----------------------------------------------------------------------------------------------------
Total risk-based capital $ 54,777 $ 49,006
-----------------------------------------------------------------------------------------------------
Net risk-weighted assets $450,599 $326,030
Average assets for regulatory purposes $569,204 $402,124
Tier 1 capital to average assets 8.84% 11.36%
Tier 1 capital to risk-weighted assets 11.17% 14.01%
Total capital to risk-weighted assets 12.16% 15.03%
-----------------------------------------------------------------------------------------------------
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 one-year. A gap is considered positive
when the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. Conversely, a gap is considered negative when the
opposite is true.
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
32
their debts also may decrease in the event of an interest-rate increase, and the
behavior of depositors may be different than those assumed in the gap analysis.
The Company's one-year positive interest rate sensitivity gap was 15.7% at
December 31, 2002, compared to 6.20% at December 31, 2001. The increase was
primarily due to an increase in variable rate loans funded by an increase in
certificate of deposits with a term of over one year. For purposes of computing
the gap, 100% of deposits with no stated maturities are treated as readily
accessible accounts. However, if such deposits were treated differently, then
the 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, the one-year gap would have been a positive 34.8% at
year-end 2002, compared to a positive 23.1% at year-end 2001.
The Company has a "floor," or minimum rate, on many of its floating-rate loans
that is determined in relation to prevailing market rates on the date of
origination. This floor only adjusts upwards in the event of increases in the
loan's interest rate. This feature reduces the effect on interest income in a
falling rate environment. 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 the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 2002, that are scheduled to
mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4
--- ---- -------- ------
($ in thousands) Months Months Years Years Total
------------------------------------------------------------------------------------------------------------
Loans (1) $139,843 $211,299 $122,427 $ 21,733 $495,302
Securities held to maturity (2) 16,237 66,128 63,329 - 145,694
Short-term investments 20,498 - - - 20,498
Federal Reserve Bank stock - - - 1,108 1,108
Interest-earning time deposits - 2,000 - - 2,000
------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets $176,578 $279,427 $185,756 $ 22,841 $664,602
------------------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $10,584 $ - $ - $ - $ 10,584
Savings deposits 30,174 - - - 30,174
Money market deposits 134,293 - - - 134,293
Certificates of deposit 35,163 87,727 106,906 95,187 324,983
----------------------------------------------------------------
Total deposits 210,214 87,727 106,906 95,187 500,034
Debentures payable 42,900 - 16,100 25,430 84,430
Debentures payable- capital securities - - - 15,000 15,000
Accrued interest on all debentures 7,426 57 3,020 3,369 13,872
Note payable - - - 266 266
------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $260,540 $ 87,784 $126,026 $ 139,252 $613,602
------------------------------------------------------------------------------------------------------------
GAP (repricing differences) $(83,962) $191,643 $ 59,730 $(116,411) $51,000
------------------------------------------------------------------------------------------------------------
Cumulative GAP $(83,962) $107,681 $167,411 $ 51,000 $51,000
------------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets -12.2% 15.7% 24.4% 7.4% 7.4%
------------------------------------------------------------------------------------------------------------
<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 the earlier of their contractual maturity or
the date in which the interest rate is scheduled to increase. The
effects of possible prepayments that may result from the issuer's right
to call a security before its contractual maturity date are not
considered. (3) interest checking, savings and money market deposits
are regarded as ready accessible withdrawable accounts; and
certificates of deposit are scheduled through their maturity dates.
</FN>
33
Recent Accounting Pronouncements
See note 1 to the consolidated financial statements for a discussion of this
topic.
Impact of Inflation and Changing Prices
The financial statements and related financial data concerning the Company
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on the operations of
the Company is reflected in increased operating costs. Virtually all of the
assets and liabilities of the Company are monetary in nature. As a result,
changes in interest rates have a more significant impact on the performance of
the Company than do the effects of changes in the general rate of inflation and
in prices. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
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, 2002 and 2001, which reflect changes in
market prices and rates, can be found in note 20 to the consolidated financial
statements.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within established guidelines, the adverse impact of changes in interest rates
on the Company's net interest income and capital. For a further discussion, see
the section "Asset and Liability Management."
Item 8. Financial Statements and Supplementary Data
Financial Statements
The following consolidated financial statements of the Company are included
herein:
- - Independent Auditors' Report - Hacker, Johnson & Smith, P.A., P.C. (page 36)
- - Independent Auditors' Report - Eisner LLP (page 37)
- - Consolidated Balance Sheets at December 31, 2002 and 2001 (page 38)
- - Consolidated Statements of Earnings for the Years Ended December 31, 2002,
2001 and 2000 (page 39)
- - Consolidated Statements of Comprehensive Income for the Years Ended December
31, 2002, 2001 and 2000 (page 40)
- - Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000 (page 41)
- - Consolidated Statements of Cash Flows for the Years Ended December 31, 2002,
2001 and 2000 (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, 2002:
U.S. government agencies $ - -% $ - -% $ - -% $ - -%
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% $74,789 5.81%
- -------------------------------------------------------------------------------------------------------------------------
34
Supplementary Data, Continued
Securities Held to Maturity
- ---------------------------
The following table sets forth, by maturity distribution, information pertaining
to securities held to maturity:
After One Year to After Five Years to
----------------- -------------------
One Year or Less Five Years Ten Years Total
------------------ ---------- --------- -----
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
($ in thousands) Value Yield Value Yield Value Yield Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002:
- ---------------------
U.S. government agencies $ 75,566 2.52% $ 70,128 2.25% $ - -% $ 145,694 2.39%
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%
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and Allowance for Loan Loss Reserves
- ------------------------------------------
The following table sets forth information with respect to loans receivable at
December 31:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Carrying Carrying Carrying Carrying Carrying
($ in thousands) value value value value value
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate and multifamily loans $ 489,611 $ 365,736 $ 260,753 $ 207,521 $ 160,610
Land development and other land loans 1,890 2,485 2,531 2,501 -
Residential 1-4 family loans 1,953 2,404 3,034 2,311 2,627
Commercial business loans 1,608 1,363 1,781 2,107 2,875
Consumer loans 240 286 206 242 184
----------------------------------------------------------------------
Loans receivable 495,302 372,274 268,305 214,682 166,296
Deferred loan fees (5,390) (3,748) (1,979) (1,745) (1,310)
----------------------------------------------------------------------
Loans receivable, net of deferred fees 489,912 368,526 266,326 212,937 164,986
Allowance for loan loss reserves (4,611) (3,380) (2,768) (2,493) (1,662)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 485,301 $ 365,146 $ 263,558 $ 210,444 $ 163,324
- ------------------------------------------------------------------------------------------------------------------------------------
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) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 3,380 $ 2,768 $ 2,493 $ 1,662 $ 1,173
Provision charged to operations 1,274 612 275 830 479
Chargeoffs (150) - - - -
Recoveries 107 - - 1 10
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 4,611 $ 3,380 $ 2,768 $ 2,493 $ 1,662
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $ 489,912 $ 368,526 $ 266,326 $ 212,937 $ 164,986
Average loans outstanding during the year $ 439,241 $ 315,148 $ 250,941 $ 175,980 $ 170,675
Ratio of allowance to net loans receivable 0.94% 0.92% 1.04% 1.17% 1.01%
- ------------------------------------------------------------------------------------------------------------------------------------
Other financial statement schedules and inapplicable periods with respect to
schedules listed above are omitted because the conditions requiring their filing
do not exist or the information required thereby is included in the consolidated
financial statements filed, including the notes thereto.
35
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, 2002
and 2001 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, 2002. 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 consolidated financial statements of Intervest
Mortgage Corporation (formerly known as Intervest Corporation of New York),
whose total assets as of December 31, 2002 and 2001, constituted 13.6% and 15.6%
of the related consolidated totals, respectively, and whose net interest income,
noninterest income and net earnings for the years ended December 31, 2002, 2001
and 2000, constituted 12.4%, 21.9% and 22.7%, respectively in 2002, 10.4%, 42.5%
and 15.3%, respectively in 2001 and 10.3%, 48.6% and 5.0%, respectively in 2000,
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, 2002
and 2001, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ---------------------------------------
Hacker, Johnson & Smith, P.A., P.C.
Tampa, Florida
January 24, 2003
36
Independent Auditors' Report
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have audited the consolidated balance sheets of Intervest Mortgage
Corporation (formerly known as Intervest Corporation of New York) and
Subsidiaries (the "Company") at December 31, 2002 and 2001 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, 2002
(all of which are not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Eisner LLP
- --------------
Eisner LLP
New York, New York
January 23, 2003
37
Intervest Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
At December 31,
------------ -------------
($ in thousands, except par value) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 10,351 $ 4,714
Federal funds sold 9,114 6,345
Commercial paper and other short-term investments 11,384 13,350
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 30,849 24,409
Time deposits with banks 2,000 250
Securities available for sale at estimated fair value - 6,192
Securities held to maturity, net 145,694 99,157
Federal Reserve Bank stock, at cost 1,108 654
Loans receivable (net of allowance for loan losses of $4,611 in 2002 and $3,380 in 2001) 485,301 365,146
Accrued interest receivable 4,263 3,202
Loan fees receivable 3,706 2,679
Premises and equipment, net 6,098 6,042
Foreclosed real estate 1,081 -
Deferred income tax asset 1,997 1,236
Deferred debenture offering costs, net 3,498 3,396
Other assets 384 259
====================================================================================================================================
Total assets $685,979 $512,622
====================================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 5,924 $ 5,550
Interest-bearing deposit accounts:
Checking (NOW) accounts 10,584 10,204
Savings accounts 30,174 24,624
Money market accounts 134,293 80,594
Certificate of deposit accounts 324,983 241,465
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 505,958 362,437
Subordinated debentures payable 84,430 73,430
Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000
Note payable 266 -
Accrued interest payable on all debentures 13,872 11,480
Accrued interest payable on deposits 895 817
Mortgage escrow funds payable 5,894 4,253
Official checks outstanding 4,373 3,219
Other liabilities 2,165 1,591
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 632,853 472,227
- ------------------------------------------------------------------------------------------------------------------------------------
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,
4,348,087 and 3,544,629 shares issued and outstanding, respectively) 4,348 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 24,134 19,001
Retained earnings 24,289 17,383
Accumulated other comprehensive income -
Net unrealized gain on securities available for sale, net of tax - 111
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 53,126 40,395
====================================================================================================================================
Total liabilities and stockholders' equity $685,979 $512,622
====================================================================================================================================
See accompanying notes to consolidated financial statements.
38
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Earnings
Year Ended December 31,
---------------------------------------
($ in thousands, except per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 39,273 $ 30,187 $ 24,923
Securities 3,964 3,423 6,056
Other interest-earning assets 242 1,852 929
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 43,479 35,462 31,908
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 17,369 17,079 14,853
Subordinated debentures 7,440 7,577 8,322
Junior debentures - capital securities 1,497 58 -
Note payable 17 - -
Federal funds purchased 2 - 150
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 26,325 24,714 23,325
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 17,154 10,748 8,583
Provision for loan loss reserves 1,274 612 275
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan loss reserves 15,880 10,136 8,308
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 171 159 139
Income from mortgage lending activities 485 341 291
Income from the early repayment of mortgage loans 1,435 1,149 518
Gain from the sales of securities available for sale 120 - -
All other 7 6 35
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,218 1,655 983
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 3,016 2,451 2,228
Occupancy and equipment, net 1,318 1,177 1,090
Data processing 564 329 117
Advertising and promotion 69 25 35
Professional fees and services 350 341 410
Stationery, printing and supplies 141 137 140
FDIC and general insurance 179 177 117
Postage and delivery 93 91 92
All other 749 575 339
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 6,479 5,303 4,568
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and extraordinary item 11,619 6,488 4,723
Provision for income taxes 4,713 2,710 1,909
--------------------------------
Earnings before extraordinary item 6,906 3,778 2,814
Extraordinary item, net of tax (note 7) - - (206)
===================================================================================================================================
Net earnings $ 6,906 $ 3,778 $ 2,608
===================================================================================================================================
Basic earnings per share:
Earnings before extraordinary item $ 1.71 $ 0.97 $ 0.72
Extraordinary item, net of tax - - (0.05)
===================================================================================================================================
Net earnings per share $ 1.71 $ 0.97 $ 0.67
===================================================================================================================================
Diluted earnings per share:
Earnings before extraordinary item $ 1.37 $ 0.97 $ 0.72
Extraordinary item, net of tax - - (0.05)
===================================================================================================================================
Net earnings per share $ 1.37 $ 0.97 $ 0.67
===================================================================================================================================
See accompanying notes to consolidated financial statements
39
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended December 31,
---------------------------------------
($ in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,906 $ 3,778 $ 2,608
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains on available-for-sale securities (72) 596 (405)
Reclassification adjustment for gains realized in earnings (120) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized (losses) gains on available-for-sale securities (192) 596 (405)
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes related to unrealized (losses) gains
on available-for-sale securities 81 (233) 153
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income , net of tax (111) 363 (252)
===================================================================================================================================
Total comprehensive income, net of tax $ 6,795 $ 4,141 $ 2,356
===================================================================================================================================
See accompanying notes to consolidated financial statements.
40
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Year Ended December 31,
----------------------------------------
($ in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of year $ 3,545 $ 3,545 $ 3,532
Issuance of 803,458 and 12,750 shares in 2002 and 2000, respectively,
upon the exercise of warrants 803 - 13
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 4,348 3,545 3,545
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of year 355 355 305
Issuance of 50,000 shares of restricted stock compensation - - 50
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 355 355 355
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of year 19,001 18,975 18,770
Compensation related to vesting of certain Class B stock warrants 26 26 26
Compensation related to certain Class A stock warrants modified 109 - -
Issuance of 50,000 shares of restricted Class B stock compensation - - 109
Issuance of 803,458 and 12,750 shares in 2002 and 2000, respectively, upon
the exercise of stock warrants, inclusive of tax benefits 4,998 - 70
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 24,134 19,001 18,975
- -----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 17,383 13,605 10,997
Net earnings for the year 6,906 3,778 2,608
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 24,289 17,383 13,605
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year 111 (252) -
Net change in accumulated other comprehensive income (loss), net (111) 363 (252)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year - 111 (252)
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
Total stockholders' equity at end of year $ 53,126 $ 40,395 $ 36,228
===================================================================================================================================
See accompanying notes to consolidated financial statements
41
Intervest Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------
($ in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 6,906 $ 3,778 $ 2,608
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 606 505 433
Provision for loan loss reserves 1,274 612 275
Deferred income tax benefit (681) (364) (16)
Amortization of deferred debenture offering costs 919 753 1,136
Compensation expense related to common stock and warrants 135 26 185
Amortization of premiums, fees and discounts, net (588) (1,823) (1,814)
Gain from sales of securities available for sale (120) - -
Net increase in accrued interest payable on debentures 2,392 2,747 641
Net increase in official checks outstanding 1,154 938 460
Net change in all other assets and liabilities, net 2,802 2,118 1,912
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,799 9,290 5,820
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in interest-earning time deposits with banks (1,750) (250) -
Maturities and calls of securities available for sale 2,500 69,194 -
Sales of securities available for sale 3,620 - -
Maturities and calls of securities held to maturity 104,785 35,996 26,393
Purchases of securities held to maturity (153,335) (114,013) (39,160)
Net increase in loans receivable (124,271) (103,969) (53,623)
Purchases of Federal Reserve Bank stock, net (454) (49) (97)
Purchases of premises and equipment, net (387) (816) (301)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (169,292) (113,907) (66,788)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 60,003 38,387 4,299
Net increase in certificates of deposit 83,518 23,809 94,862
Net increase in mortgage escrow funds payable 1,641 856 22
Principal repayments of federal funds purchased, net - - (6,955)
Principal repayments of debentures (2,500) (1,400) (24,000)
Principal repayments of note payable (9) - -
Proceeds from issuance of debentures, net of issuance costs 12,479 24,436 3,500
Proceeds from issuance of common stock, net of issuance costs 5,801 - 83
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 160,933 86,088 71,811
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,440 (18,529) 10,843
Cash and cash equivalents at beginning of year 24,409 42,938 32,095
===================================================================================================================================
Cash and cash equivalents at end of year $ 30,849 $ 24,409 $ 42,938
===================================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 22,936 $ 21,253 $ 21,532
Income taxes 5,301 2,704 1,004
Noncash activities:
Transfer of loans to foreclosed real estate, net of chargeoffs 1,081 - -
Purchase of premises with note payable 275 - -
Transfers of securities from held-to-maturity to available-for-sale - - 74,789
Accumulated other comprehensive income (loss) - change in unrealized (loss)
gain on securities available for sale, net of tax (111) 363 (252)
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
42
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 Mortgage Corporation (whose name was changed from
Intervest Corporation of New York in 2002), 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. In
July 2001, Intervest Bank (a Florida state chartered commercial bank and
the Holding Company's other wholly owned banking subsidiary prior to that
date) was merged into Intervest National 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, the recorded
assets, liabilities, shareholders' equity, income and expenses of both
banks were combined and recorded at their historical cost amounts.
Hereafter, Intervest National Bank is referred to as the "Bank" and all the
entities are referred to collectively as the "Company" on a consolidated
basis.
The 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 Pinellas County, Florida - four in Clearwater and one in
South Pasadena. 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 Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation, are
located in Rockefeller Center in New York City. Intervest Mortgage
Corporation 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 Mortgage
Corporation was acquired by the Holding Company in March 2000. In the
acquisition, all of the outstanding capital stock of Intervest Mortgage
Corporation was acquired in exchange for 1,250,000 shares of the Holding
Company's Class A common stock. Former shareholders of Intervest Mortgage
Corporation are officers and directors of Intervest Mortgage Corporation
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. Estimates that
are particularly susceptible to significant change relate to the
determination of the allowance for loan loss reserves and the valuation
allowances for deferred tax assets and real estate acquired through
foreclosures.
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash equivalents
include federal funds sold (generally sold for one-day periods) and
commercial paper and other short-term investments that have maturities of
three months or less from the time of purchase.
43
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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. The Company does
not acquire securities for the purpose of engaging in trading activities.
Loans Receivable
Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or satisfaction are carried at their
outstanding principal net of chargeoffs, the allowance for loan 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 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.
44
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 $3,793,000 at December 31, 2002 and
$3,042,000 at December 31, 2001.
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 statements 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," as amended by SFAS No.148 "Accounting for
Stock-Based Compensation Transition and Disclosure," collectively "SFAS
No.123," requires pro forma disclosures of net earnings and earnings per
share determined as if the Company accounted for its stock warrants under
the fair value method.
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.
45
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 consolidated balance sheet, such items along with net
earnings, are components of comprehensive income.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit,
unused lines of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded
or related fees are incurred or received.
Start-Up Costs
The Company follows the AICPA's Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities," which requires all
start-up costs (except for those that are capitalizable under other
accounting principles generally accepted in the United States of America)
to be expensed as incurred for financial statement purposes.
Recent Accounting Pronouncements
Accounting for Business Combinations. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," SFAS 141 addresses the
accounting and reporting for business combinations and requires that all
business combinations initiated after June 30, 2001 be accounted for using
the purchase method of accounting and prohibits the use of
pooling-of-interests method of accounting. Pooling transactions initiated
prior to that date were not affected. SFAS 141 also requires identifiable
intangible assets acquired in a business combination to be recognized as an
asset apart from goodwill if they meet certain criteria. The adoption of
this statement had no effect on the Company's consolidated financial
statements.
Accounting for Goodwill and Other Intangible Assets. The Company adopted
SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002.
SFAS 142 addresses the initial recognition and measurement of intangible
assets acquired individually or with a group of other assets not
constituting a business combination. Under SFAS 142, all goodwill and
identifiable intangible assets recognized as having an indefinite useful
life, including those acquired before its effective date, are not amortized
but, assessed for impairment at least annually. Intangible assets, having a
finite life, are separately recognized and amortized over their estimated
useful lives. Intangible assets with finite useful lives will continue to
be reviewed for impairment in accordance with previous pronouncements. The
Company does not have goodwill or other intangible assets and as a result,
the adoption of this statement had no effect on its consolidated financial
statements.
46
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Recent Accounting Pronouncements, Continued
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 adoption of this statement
had no effect on the Company's consolidated financial statements.
Accounting for the Extinguishment of Debt and Other Technical Amendments.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," among other items,
addresses income statement classification of gains or losses from
extinguishment. Previously, under Statement 4, all gains and losses from
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. This
Statement eliminates Statement 4 and requires gains and losses from
extinguishment of debt to be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30. Applying the provisions of Opinion
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item. This statement is
effective for financial statements issued on or after May 15, 2002. The
adoption of this statement had no effect on the Company's consolidated
financial statements.
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities,"
addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The new statement requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. Under Issue 94-3, a liability
for an exit cost as defined therein was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of this statement is not expected to have any effect
on the Company's consolidated financial statements.
Accounting for Acquisitions of Certain Financial Institutions. SFAS No.
147, "Acquisitions of Certain Financial Institutions - an amendment of SFAS
No. 72 and 144 and FASB Interpretation No. 9," removes acquisitions of
financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement 72 to recognize (and subsequently amortize) any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset no longer applies to acquisitions within the scope of this Statement.
In addition, the statement amends No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets. Consequently, those intangible assets are
subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that statement 144
requires for other long-lived assets that are held and used. The provisions
of this statement are effective as of October 1, 2002. The adoption of this
statement had no effect on the Company's consolidated financial statements.
47
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies,
Continued
Recent Accounting Pronouncements, Continued
Accounting for Guarantees. In November 2002, the FASB issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," ("FIN 45"), which
expands previously issued accounting guidance and disclosure requirements
for certain guarantees. FIN 45 requires the Company to recognize an initial
liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 is not expected to
have any effect on the Company's consolidated financial statements.
2. Securities
The carrying value (estimated fair value) and amortized cost of securities
available for sale as of December 31, 2001 is as follows:
Gross Gross
----- -----
Amortized Unrealized Unrealized Carrying
--------- ---------- ---------- --------
($ in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. government agency securities $6,000 $192 $ - $6,192
- --------------------------------------------------------------------------------
There were sales of $3,500,000 of securities in 2002 and gross realized
gains amounted to $120,000. There were no sales of securities in 2001 or
2000. 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) with a weighted-average yield
and remaining maturity of 5.59% and 1.4 years, respectively. There were no
transfers of securities to the available-for-sale portfolio in 2002 or
2001. On December 31, 2000, $75,194,000 of securities held-to-maturity
(with an estimated fair value of $74,789,000) were transferred to the
available-for-sale portfolio. This transfer consisted of U.S. government
agency securities with some having call features, which allow the issuer to
call the security before its stated maturity without penalty. In 2001,
nearly all of these securities were called by the issuers due to declining
interest rates.
The carrying value (amortized cost) and estimated fair value of securities
held to maturity is as follows:
Gross Gross Estimated
----- ----- ---------
Amortized Unrealized Unrealized Fair
--------- ---------- ---------- ----
($ in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
At December 31, 2002:
U.S. government agency securities $145,694 $881 $15 $146,560
- --------------------------------------------------------------------------------
At December 31, 2001:
U.S. government agency securities $99,157 $355 $108 $99,404
- --------------------------------------------------------------------------------
Securities held to maturity consist of debt obligations of the FHLB, FNMA,
Federal Home Loan Mortgage Corp. (FHLMC) and Federal Farm Credit Bank
(FFCB). At December 31, 2002 and 2001, the weighted-average yield and
remaining maturity of the portfolio was 2.39% and 1.6 years, and 2.89% and
1.1 years, respectively. The securities are fixed rate or have
predetermined scheduled rate increases, and some have call features that
allow the issuer to call the security before its stated maturity without
penalty.
The amortized cost and estimated fair value of securities held to maturity
at December 31, 2002, by remaining term to contractual maturity is as
follows:
Estimated
---------
Amortized Fair
--------- ----
($ in thousands) Cost Value
- -------------------------------------------------------------------------------
Due in one year or less $75,566 $76,078
Due after one year through five years 70,128 70,482
- -------------------------------------------------------------------------------
$145,694 $146,560
- -------------------------------------------------------------------------------
48
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
3. Loans Receivable
Loans receivable is as follows:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
($ in thousands) # of Loans Amount # of Loans Amount
- ---------------------------------------------------------------------------------------
Commercial real estate loans 162 $ 275,096 139 $ 183,167
Residential multifamily loans 168 214,515 153 182,569
Land development and other land loans 3 1,890 3 2,485
Residential 1-4 family loans 28 1,953 33 2,404
Commercial business loans 27 1,608 26 1,363
Consumer loans 16 240 15 286
- ---------------------------------------------------------------------------------------
Loans receivable 404 495,302 369 372,274
- ---------------------------------------------------------------------------------------
Deferred loan fees (5,390) (3,748)
Allowance for loan loss reserves (4,611) (3,380)
- ---------------------------------------------------------------------------------------
Loans receivable, net $ 485,301 $ 365,146
- ---------------------------------------------------------------------------------------
At December 31, 2002, there were no nonaccrual or impaired loans. At
December 31, 2001, one commercial real estate loan with a principal balance
of $1,243,000 was on nonaccrual status and considered impaired under the
criteria of SFAS No.114. There was no valuation allowance recorded for this
impaired loan. Interest income that was not recorded from this loan under
its contractual terms amounted to $29,000 in 2002 and $51,000 in 2001. The
average balance of this impaired loan for 2002 and 2001 was approximately
$310,000 and $104,000, respectively. There were no nonaccrual or impaired
loans in 2000. At December 31, 2002 and 2001, there were no loans which
were ninety days past due and still accruing interest.
Credit risk, which represents the possibility of the Company not recovering
amounts due from its borrowers, is significantly related to local economic
conditions in the areas the properties are located, as well as the
Company's underwriting standards. Economic conditions affect the market
value of the underlying collateral as well as the levels of occupancy of
income-producing properties (such as office buildings, shopping centers and
rental and cooperative apartment buildings).
The geographic distribution of the loan portfolio is as follows:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
- ---------------------------------------------------------------------------------------------
New York $278,280 56.2% $192,256 51.7%
Florida 184,257 37.2 145,660 39.1
Connecticut and New Jersey 21,991 4.4 24,875 6.7
All other 10,774 2.2 9,483 2.5
- ---------------------------------------------------------------------------------------------
$495,302 100.0% $372,274 100.0%
- ---------------------------------------------------------------------------------------------
4. Allowance for Loan Loss Reserves
Activity in the allowance for loan loss reserves is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Allowance at beginning of year $ 3,380 $ 2,768 $ 2,493
Provision charged to operations 1,274 612 275
Chargeoffs (1) (150) - -
Recoveries (2) 107 - -
- --------------------------------------------------------------------------------
Allowance at end of year $ 4,611 $ 3,380 $ 2,768
- --------------------------------------------------------------------------------
(1) Represents a chargeoff taken in connection with the transfer of a
nonperforming loan to foreclosed real estate.
(2) Represents proceeds received from the sale of collateral from a loan that
was charged off prior to 1997.
49
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
5. Premises and Equipment, Lease Commitments and Rental Expense
Premises and equipment is as follows:
At December 31,
---------------
($ in thousands) 2002 2001
- --------------------------------------------------------------------------------
Land $ 1,516 $ 1,264
Buildings 4,810 4,575
Leasehold improvements 335 335
Furniture, fixtures and equipment 2,435 2,414
- --------------------------------------------------------------------------------
Total cost 9,096 8,588
- --------------------------------------------------------------------------------
Less accumulated deprecation and amortization (2,998) (2,546)
- --------------------------------------------------------------------------------
Net book value $ 6,098 $ 6,042
- --------------------------------------------------------------------------------
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 Mortgage Corporation 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, 2002 were as follows:
$602,000 in 2003; $574,000 in 2004; $400,000 in 2005; $404,000 in 2006;
$345,000 in 2007; and $261,000 thereafter for an aggregate amount of
$2,586,000. Rent expense aggregated $618,000 in 2002, $554,000 in 2001 and
$522,000 in 2000.
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, 2002 were
as follows: $447,000 in 2003; $432,000 in 2004; $388,000 in 2005; $314,000
in 2006; and $128,000 in 2007 for an aggregate amount of $1,709,000.
Sublease rental income aggregated $421,000 in 2002, $388,000 in 2001 and
$340,000 in 2000.
6. Deposits
Scheduled maturities of certificates of deposit accounts are as follows:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
- --------------------------------------------------------------------------------
Within one year $122,890 3.51% $144,739 5.00%
Over one to two years 57,895 4.18 45,512 4.95
Over two to three years 31,281 5.53 14,954 5.82
Over three to four years 17,730 5.32 16,903 6.84
Over four years 95,187 4.92 19,357 5.61
- --------------------------------------------------------------------------------
$324,983 4.33% $241,465 5.22%
- --------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $72,872,000 and
$53,745,000 at December 31, 2002 and 2001, respectively. At December 31,
2002, certificate of deposit accounts of $100,000 or more by remaining
maturity were as follows: due within one year $26,663,000; over one to two
years $11,299,000, over two to three years $6,964,000; over three to four
years $3,859,000; and over four years $24,087,000.
Interest expense on deposits is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Interest checking accounts $ 221 $ 238 $ 232
Savings accounts 762 778 897
Money market accounts 3,082 2,640 2,832
Certificates of deposit accounts 13,304 13,423 10,892
- --------------------------------------------------------------------------------
$17,369 $17,079 $14,853
- --------------------------------------------------------------------------------
50
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
7. Note Payable, Debentures Payable and Extraordinary Item
In connection with the purchase of property by the Bank that is across from
its Court Street branch office in Florida, the Bank issued a note payable
to the seller for $275,000. The note matures in February of 2017 and calls
for monthly payments of principal and interest at 7% per annum. The note
cannot be prepaid except during the last year of its term.
Debentures payable is as follows:
At December 31,
---------------
($ in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
INTERVEST MORTGAGE CORPORATION (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 1/2% 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
Series 06/28/99 - interest at 8 1/2% 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 8 1/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 -
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 -
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 -
Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 -
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 -
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 -
--------------------
74,000 63,000
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 1,000
Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 1,250 1,250
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250
--------------------
10,430 10,430
- ------------------------------------------------------------------------------------------------------------------------------------
$84,430 $73,430
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents prime rate of JPMorganChase Bank, which was 4.25% on December
31, 2002 and 4.75% on December 31, 2001.
</FN>
Intervest Mortgage Corporation filed a registration statement in late 2002
relating to the issuance of additional subordinated debentures in the
aggregate amount of up to $7,500,000. These debentures are expected to be
issued in the first quarter of 2003.
In 2000, Intervest Mortgage Corporation's Series 6/29/92, 9/13/93, 1/28/94
and 10/28/94 debentures totaling $24,000,000 were redeemed prior to
maturity for principal 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.
51
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
7. Note Payable, Debentures Payable and Extraordinary Item, Continued
In 2002, Intervest Mortgage Corporation sold Series 1/17/02 and 8/05/02
debentures totaling $13,500,000 in principal amount. The sales, after
underwriter's commissions and other issuance costs, resulted in net
proceeds of $12,490,000. Intervest Mortgage Corporation's Series 06/28/99
debentures maturing on July 1, 2002 were redeemed on April 1, 2002 for
principal of $2,500,000 and accrued interest of $586,000.
Intervest Mortgage Corporation'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 $6,350,000 of these debentures at December
31, 2002 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.
Intervest Mortgage Corporation's Series 11/10/98, 6/28/99, 09/18/00,
$770,000 of Series 08/01/01, $270,000 of Series 01/17/02 and $1,520,000 of
Series 08/05/02 debentures accrue and compound interest quarterly, with
such interest due and payable at maturity. The payment of interest on the
remaining debentures is made quarterly. The holders of Series 11/10/98,
6/28/99, 9/18/00, 01/17/02 and 08/05/02 debentures can require Intervest
Mortgage Corporation to repurchase the debentures for face amount plus
accrued interest each year (beginning January 1, 2004 for Series 09/18/00,
October 1, 2005 for Series 01/17/02 and January 1, 2006 for Series
08/05/02) provided, however, in no calendar year will Intervest Mortgage
Corporation be required to purchase more than $100,000 in principal amount
of each maturity, in each series of debentures, on a non-cumulative basis.
All of Intervest Mortgage Corporation's debentures may be redeemed, in
whole or in part, at any time at the option of Intervest Mortgage
Corporation, for face value, except for Series 01/17/02 and 08/05/02
debentures, which would be at a premium of 1% if the redemption is prior to
April 1, 2003 for Series 01/17/02 and prior to October 1, 2003 for Series
08/05/02. All the debentures are unsecured and subordinate to all present
and future senior indebtedness, as defined in the indenture related to each
debenture.
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 2003;
$12.00 in 2004; $14.00 in 2005; $16.00 in 2006; $18.00 in 2007 and $20.00
from January 1, 2008 through April 1, 2008. The Holding Company has the
right to establish conversion prices that are less than those set forth
above for such periods as it may determine. In January 1999 and October
2001, the conversion prices were adjusted downward from those set at the
original offering date to the current prices indicated above. Interest
accrues and compounds each calendar quarter at 8%. All accrued interest is
due and payable at maturity whether by acceleration, redemption or
otherwise. Any convertible debenture holder may, on or before July 1 of
each year commencing July 1, 2003, elect to be paid all accrued interest
and to thereafter receive payments of interest quarterly. The Holding
Company's debentures may be redeemed, in whole or in part, at any time at
the option of the Holding Company for face value.
Scheduled contractual maturities of all debentures as of December 31, 2002
is as follows:
($ in thousands) Principal Accrued Interest
- --------------------------------------------------------------------------------
For the year ended December 31, 2003 $1,400 $1,613
For the year ended December 31, 2004 22,250 5,094
For the year ended December 31, 2005 29,100 2,769
For the year ended December 31, 2006 6,250 969
For the year ended December 31, 2007 5,000 34
Thereafter 20,430 3,336
- --------------------------------------------------------------------------------
$84,430 $13,815
- --------------------------------------------------------------------------------
52
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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, 2002 and 2001, there were no such funds
outstanding. During 2002, 2001 and 2000, 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 and it can borrow from
the Federal Reserve Bank of New York on a secured basis. There were no
outstanding borrowings under these agreements at December 31, 2002 or 2001.
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, in addition to the initial capital contribution of $464,000 from
the Holding Company to the Trust, were reinvested into the Holding Company
in exchange for $15,464,000 of the Holding Company's 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. Issuance costs of
$469,000 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, 2002 and 2001, 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.
53
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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, 2002 and 2001, balances
maintained as reserves were approximately $470,000 and $400,000,
respectively.
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, 2002 and 2001, such investment, which earns a dividend, aggregated
$1,108,000 and $654,000, respectively. At December 31, 2002 and 2001, U.S.
government agency securities with a carrying value of $7,081,000 and
$7,127,000, respectively, 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,
which vest to the employees over a period of time. Total cash contributions
to the plans included in the consolidated statements of earnings aggregated
$47,000, $37,000 and $26,000 for 2002, 2001 and 2000, respectively.
13. Related Party Transactions
The Bank has deposit accounts from affiliated companies, directors,
executive officers and members of their immediate families and related
business interests of approximately $19,000,000 at December 31, 2002 and
$8,400,000 at December 31, 2001. There are no loans to any directors or
executive officers of the Holding Company or its subsidiaries.
The Company paid commissions and fees in connection with the placement of
debentures of approximately $58,000 in 2002, $15,000 in 2001 and $34,000 in
2000 to Intervest Securities Corporation, an affiliate of the Company. See
note 22 for a further discussion regarding Intervest Securities
Corporation.
The Company paid fees of approximately $157,000 in 2002, $219,000 in 2001
and $100,000 in 2000 for legal services rendered by a law firm, a principal
of which is a director of the Company. The Company paid commissions and
fees in connection with the placement of debentures of approximately
$515,000 in 2002, $301,000 in 2001 and $246,000 in 2000 to an investment
firm, a principal of which is a director of the Company.
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. The 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. In 2001, the Holding
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 original expiration date
of December 31, 2002. In 2002, the $10.01 per share warrants were further
modified by extending their expiration date to December 31, 2003.
54
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 $10.01(1) $10.01(1) Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------
Exercised in 2002 (772,600) (30,858) - (803,458) $ 9.88
Expired in 2002 (96,750) - - (96,750) $ 6.67
- --------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 501,465 931,545 122,000 1,555,010 $ 8.93
- --------------------------------------------------------------------------------------------------------------
Remaining contractual life in years
at December 31, 2002 (2) 4.1 1.0 1.0 2.0
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The exercise price per warrant was reduced to $10.01 per share in 2001.
(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, 2000, 2001 and 2002 145,000 50,000 195,000 $ 7.52
- -----------------------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2002 5.1 5.1 5.1
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) At December 31, 2002, 35,500 of these warrants were immediately exercisable.
An additional 7,100 warrants vest and become exercisable on April 27th of 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.
</FN>
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 granted to employees 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 25, approximately
$26,000 of compensation expense was included in salaries and employee
benefits expense for 2002, 2001 and 2000, respectively, in connection with
Class B warrants granted in 1998 at $10.00 per share. For warrants granted
to employees whose exercise price was reduced to $10.01 effective January
1, 2002 and whose expiration date was extended in 2002, compensation
expense of $109,000 was recorded in 2002 under variable rate accounting as
prescribed under APB 25. No other compensation expense was recorded related
to the remaining stock warrants granted because their exercise prices were
the same or greater than the market price of the common shares at the date
of grant or modification.
Had compensation expense been determined based on the estimated fair value
of the warrants at the grant date in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts as
follows:
For the Year Ended December 31,
($ in thousands, except per share amounts) 2002 2001 2000
- --------------------------------------------------------------------------------
Reported net earnings $6,906 $3,778 $2,608
Pro forma net earnings $6,883 $3,755 $2,585
Reported basic earnings per share $1.71 $0.97 $0.67
Pro forma basic earnings per share $1.70 $0.96 $0.66
Reported diluted earnings per share $1.37 $0.97 $0.67
Pro forma diluted earnings per share $1.37 $0.96 $0.66
- --------------------------------------------------------------------------------
55
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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 Mortgage Corporation files state income tax returns in
various other states. All the returns are filed on a calendar year basis.
At December 31, 2002 and 2001, the Company had a net deferred tax asset of
$1,997,000 and $1,236,000, respectively. The asset relates to the
unrealized benefit for net temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases that will result in future tax deductions. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of such assets is
dependent upon the generation of sufficient taxable income during the
periods in which those temporary differences reverse. Management believes
that it is more likely than not that the Company's deferred tax asset will
be realized and accordingly, a valuation allowance for deferred tax assets
was not maintained at any time during 2002, 2001 or 2000.
The total tax provision (benefit) is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Provision for income taxes $4,713 $2,710 $1,909
Benefit from extraordinary item - - (176)
- --------------------------------------------------------------------------------
$4,713 $2,710 $1,733
- --------------------------------------------------------------------------------
Allocation of federal, state and local income taxes between current and
deferred portions is as follows:
($ in thousands) Current Deferred Total
- --------------------------------------------------------------------------------
Year Ended December 31, 2002:
Federal $4,004 $(547) $3,457
State and Local 1,390 (134) 1,256
- --------------------------------------------------------------------------------
$5,394 $(681) $4,713
- --------------------------------------------------------------------------------
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) $1,733
- --------------------------------------------------------------------------------
The components of the deferred tax benefit is as follows:
For the Year Ended December 31,
($ in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Allowance for loan loss reserves $(623) $(220) $ 16
Organization and startup costs 28 41 (10)
Stock-based compensation (62) (12) (17)
Depreciation (41) (18) (33)
Deferred income 13 (157) -
All other 4 2 28
- --------------------------------------------------------------------------------
$(681) $(364) $ (16)
- --------------------------------------------------------------------------------
56
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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) 2002 2001
- --------------------------------------------------------------------------------
Allowance for loan loss reserves $1,572 $ 949
Unrealized net gain on securities available for sale - (80)
Organization and startup costs 40 68
Stock-based compensation 118 56
Depreciation 114 73
Deferred income 144 157
All other 9 13
- --------------------------------------------------------------------------------
Total deferred tax asset $1,997 $1,236
- --------------------------------------------------------------------------------
The reconciliation between the statutory federal income tax rate and the
Company's effective tax rate (including state and local taxes) is as
follows:
For the Year Ended December 31,
2002 2001 2000
- --------------------------------------------------------------------------------
Tax provision at statutory rate 34.0% 34.0% 34.0%
Increase in taxes resulting from:
State and local income taxes, net of federal benefit 6.6 7.6 6.4
Other - 0.2 -
- --------------------------------------------------------------------------------
40.6% 41.8% 40.4%
- --------------------------------------------------------------------------------
16. Earnings Per Share
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are as
follows:
For the Year Ended December 31,
($ in thousands, except share and per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $6,906 $3,778 $2,608
Average number of common shares outstanding 4,043,619 3,899,629 3,884,560
- ------------------------------------------------------------------------------------------------------------
Basic earnings per share amount $1.71 $0.97 $0.67
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $6,906 $3,778 $2,608
Adjustment to net earnings from assumed conversion of debentures 436 - -
-------------------------------------
Adjusted net earnings for diluted earnings per share computation $7,342 $3,778 $2,608
-------------------------------------
Average number of common shares outstanding:
Common shares outstanding 4,043,619 3,899,629 3,884,560
Potential dilutive shares resulting from exercise of warrants 313,519 - -
Potential dilutive shares resulting from conversion of debentures 990,983 - -
-------------------------------------
Total average number of common shares outstanding used for dilution 5,348,121 3,899,629 3,884,560
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per share amount $1.37 $0.97 $0.67
- ------------------------------------------------------------------------------------------------------------
In 2001 and 2000, 2,650,218 warrants with exercise prices ranging from
$6.67 to $16.00 in 2001 and $6.67 to $15.00 in 2000 were not considered in
the computations of diluted EPS because their exercise price per share
exceeded the average market price of Class A common stock during those
years and as a result, they were not dilutive. Convertible debentures with
principal and accrued interest totaling $9,164,000 at December 31, 2001 and
$8,466,000 at December 31, 2000, and convertible at $14.00 per share in
2001 and $12.50 per share in 2000 into Class A common stock were not
considered in the diluted EPS computations for those years because they
were not dilutive. In 2002, all warrants and convertible debentures
outstanding were considered in the computation of diluted EPS.
57
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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, 2002 and 2001, that the Company and
the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2002, 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 presents information regarding the Company's and the
Bank's capital adequacy.
58
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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, 2002:
Total capital to risk-weighted assets $70,764 13.06% $43,342 8.00% NA NA
Tier 1 capital to risk-weighted assets $66,153 12.21% $21,671 4.00% NA NA
Tier 1 capital to average assets $66,153 9.88% $26,788 4.00% NA NA
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
Intervest National Bank at December 31, 2002:
Total capital to risk-weighted assets $54,777 12.16% $36,048 8.00% $45,060 10.00%
Tier 1 capital to risk-weighted assets $50,313 11.17% $18,024 4.00% $27,036 6.00%
Tier 1 capital to average assets $50,313 8.84% $22,768 4.00% $28,460 5.00%
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%
- ------------------------------------------------------------------------------------------------------------------
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.
59
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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) 2002 2001
- --------------------------------------------------------------------------------
Unfunded loan commitments $68,244 $26,375
Available lines of credit 533 663
Standby letters of credit 1,267 167
- --------------------------------------------------------------------------------
$70,044 $27,205
- --------------------------------------------------------------------------------
20. Estimated Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time based on
available information about each financial instrument. Where available,
quoted market prices are used. However, a significant portion of the
Company's financial instruments, such as commercial real estate and
multifamily loans, do not have an active marketplace in which they can be
readily sold or purchased to determine fair value. Consequently, fair value
estimates for such instruments are based on assumptions made by management
that include the financial instrument's credit risk characteristics and
future estimated cash flows and prevailing interest rates. As a result,
these fair value estimates are subjective in nature, involve uncertainties
and matters of significant judgment and therefore, cannot be determined
with precision. Accordingly, changes in any of management's assumptions
could cause the fair value estimates to deviate substantially. The fair
value estimates also do not reflect any additional premium or discount that
could result from offering for sale, at one time, the Company's entire
holdings of a particular financial instrument, nor estimated transaction
costs. Further, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on and have not
been considered in the fair value estimates. Finally, fair value estimates
do not attempt to estimate the value of anticipated future business, the
Company's customer relationships, branch network, and the value of assets
and liabilities that are not considered financial instruments, such as core
deposit intangibles and premises and equipment.
The carrying and estimated fair values of the Company's financial
instruments are as follows:
At December 31, 2002 At December 31, 2001
-------------------- --------------------
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
- -------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $30,849 $30,849 $24,409 $24,409
Time deposits with banks 2,000 2,000 250 250
Securities available for sale, net - - 6,192 6,192
Securities held to maturity, net 145,694 146,560 99,157 99,404
Federal Reserve Bank stock 1,108 1,108 654 654
Loans receivable, net 485,301 497,664 365,146 378,962
Accrued interest receivable 4,263 4,263 3,202 3,202
Financial Liabilities:
Deposit liabilities 505,958 515,018 362,437 368,597
Debentures payable plus accrued interest 113,302 115,992 99,910 101,264
Note payable 266 278 - -
Accrued interest payable 895 895 817 817
Off -Balance Sheet Instruments:
Commitments to lend 415 415 180 180
- -------------------------------------------------------------------------------------------------
60
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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, Note Payable and Accrued Interest Payable. The estimated fair
value of debentures and related accrued interest payable as well as the
note payable is based on a discounted cash flow analysis. The discount rate
used in the present value computation was estimated by comparison to what
management believes to be the Company's incremental borrowing rate for
similar arrangements.
All Other Financial Assets and Liabilities. The estimated fair value of
cash and cash equivalents, 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.
61
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
21. Holding Company Financial Information
Condensed Balance Sheets
At December 31,
---------------
($ in thousands) 2002 2001
- -------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 229 $ 77
Short-term investments 7,258 784
---------------------
Total cash and cash equivalents 7,487 861
Loans receivable, net (net of allowance for loan loss reserves
of $47 and $49 at December 31, 2002 and 2001) 9,239 9,557
Investment in subsidiaries 63,813 57,060
Deferred debenture offering costs, net of amortization 942 1,047
All other assets 809 301
- -------------------------------------------------------------------------------------
Total assets $82,290 $68,826
- -------------------------------------------------------------------------------------
LIABILITIES
Debentures payable $25,894 $25,894
Accrued interest payable on debentures 3,123 2,367
All other liabilities 147 170
- -------------------------------------------------------------------------------------
Total liabilities 29,164 28,431
- -------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common equity 53,126 40,395
- -------------------------------------------------------------------------------------
Total stockholders' equity 53,126 40,395
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $82,290 $68,826
- -------------------------------------------------------------------------------------
Condensed Statements of Earnings
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------
Interest income $ 988 $ 818 $ 672
Interest expense 2,695 1,124 686
------- ------- -------
Net interest income (1,707) (306) (14)
(Credit) provision for loan loss reserves (2) 19 17
Noninterest income 205 176 165
Noninterest expenses 544 226 405
------- ------- -------
Loss before income taxes (2,044) (375) (271)
Credit for income taxes (924) (172) (131)
------- ------- -------
Net loss before earnings of subsidiaries (1,120) (203) (140)
Equity in earnings of Intervest National Bank 6,459 3,404 2,619
Equity in earnings of Intervest Mortgage Corporation 1,567 577 129
- ---------------------------------------------------- ------- ------- -------
Net earnings $ 6,906 $ 3,778 $ 2,608
- ---------------------------------------------------- ------- ------- -------
Cash dividends received from subsidiaries $ 1,500 $ 125 $ 3,000
62
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
21. Holding Company Financial Information, Continued
Condensed Statements of Cash Flows
For the Year Ended December 31,
-------------------------------
($ in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 6,906 $ 3,778 $ 2,608
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Equity in earnings of subsidiaries (8,026) (3,981) (2,748)
Cash dividends received from subsidiaries 1,500 125 3,000
(Credit) provision for loan loss reserves (2) 19 17
Deferred income tax benefit (55) (16) (41)
Compensation expense from awards/modifications of stock warrants 135 26 185
Increase in accrued interest payable on debentures 756 831 644
Change in all other assets and liabilities, net (365) 81 24
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 849 863 3,689
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in subsidiaries, net (338) (15,500) (4,000)
Purchase of equipment (2) - -
Loan originations and principal repayments, net 389 (3,738) (3,368)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 49 (19,238) (7,368)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in mortgage escrow funds payable (64) (11) 157
Proceeds from sale of debentures, net of issuance costs (9) 17,800 -
Proceeds from issuance of common stock upon the exercise of stock
warrants, inclusive of income tax benefits 5,801 - 83
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,728 17,789 240
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,626 (586) (3,439)
Cash and cash equivalents at beginning of year 861 1,447 4,886
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,487 $ 861 $ 1,447
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES Cash paid (received) during the year for:
Interest $ 1,825 $ 202 $ -
Income taxes (617) (139) (110)
Noncash transactions:
Accumulated other comprehensive income, change in
subsidiary's unrealized (loss) gain on securities available
for sale, net of tax (111) 363 (252)
- ------------------------------------------------------------------------------------------------------------------------------------
63
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
22. Acquisitions
Acquisition of Intervest Securities Corporation
In December 2002, the Holding Company entered into an agreement to acquire
Intervest Securities Corporation ("ISC"), an affiliated entity that is a
broker/dealer registered in nine states and is an NASD and SIPC member
firm. ISC participates as a selected dealer from time to time in offerings
of debt securities of the Company, primarily those of Intervest Mortgage
Corporation. Pursuant to this agreement, the Holding Company will acquire
all of the capital stock of ISC for 30,000 shares of its Class B common
stock that will be newly issued for this transaction. At December 31, 2002,
ISC's net assets amounted to approximately $200,000 and consisted of cash.
The transaction is subject to the approval of both the NASD and the Federal
Reserve Bank of New York (FRB) and is expected to close in the first
quarter of 2003. ISC will become a wholly owned subsidiary of the Holding
Company. In connection with this transaction, The Holding Company filed an
election with and was approved by the FRB to become a financial holding
company under Regulation Y effective January 23, 2003.
Acquisition of Intervest Mortgage Corporation
On March 10, 2000, the Holding Company acquired all of the outstanding
capital stock of Intervest Mortgage Corporation ("IMC") in exchange for
1,250,000 shares of the Holding Company's Class A common stock. As a result
of the acquisition, IMC became a wholly owned subsidiary of the Holding
Company. Former shareholders of IMC are officers and directors of both the
Holding Company and IMC.
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 $159,000 of compensation expense being
recorded in the consolidated statement of earnings for 2000.
A summary of the Company's consolidated statement of earnings for 2000
follows:
Excluding As
($ in thousands) IMC 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 $2,608
- ------------------------------------------------------------------------------------------------------
The amounts reported in the table above are after elimination of intercompany
revenue and expense.
64
Intervest Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
23. Selected Quarterly Financial Data (Unaudited)
The following information is as of or for the period ended:
2002
----
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
Interest and dividend income $9,711 $11,008 $11,396 $11,364
Interest expense 6,073 6,530 6,857 6,865
-------------------------------------------
Net interest and dividend income 3,638 4,478 4,539 4,499
Provision for loan loss reserves 346 426 192 310
-------------------------------------------
Net interest and dividend income after provision for loan loss reserves 3,292 4,052 4,347 4,189
Noninterest income 274 378 736 830
Noninterest expenses 1,462 1,680 1,594 1,743
-------------------------------------------
Earnings before income taxes 2,104 2,750 3,489 3,276
Provision for income taxes 856 1,106 1,385 1,366
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $1,248 $1,644 $2,104 $1,910
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share: $ .32 $ .42 $ .52 $ .45
Diluted earnings per share: $ .30 $ .33 $ .41 $ .37
- -----------------------------------------------------------------------------------------------------------------------
Return on average assets 0.95% 1.10% 1.30% 1.14%
Return on average equity 12.23% 15.42% 18.57% 15.71%
Total assets $563,970 $628,157 $661,721 $685,979
Total cash and investment securities $144,193 $161,935 $190,799 $179,651
Total loans, net of unearned fees $405,055 $449,771 $454,391 $489,912
Total deposits $404,019 $465,753 $486,623 $505,958
Total borrowed funds and related interest payable $106,929 $104,246 $113,082 $113,568
Total stockholders' equity $41,699 $44,155 $47,118 $53,126
- -----------------------------------------------------------------------------------------------------------------------
2001
----
First Second Third Fourth
($ 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
- -----------------------------------------------------------------------------------------------------------------------
Return on average assets 0.54% 0.83% 0.84% 1.13%
Return on average equity 6.31% 9.38% 9.68% 14.05%
Total assets $423,081 $423,186 $475,716 $512,622
Total cash and investment securities $135,460 $99,102 $112,676 $130,662
Total loans, net of unearned fees $276,701 $313,070 $350,126 $368,526
Total deposits $301,824 $297,010 $341,725 $362,437
Total borrowed funds and related interest payable $75,466 $76,111 $84,110 $99,910
Total stockholders' equity $37,126 $38,042 $39,027 $40,395
- -----------------------------------------------------------------------------------------------------------------------
65
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 2003 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.
Item 14. Controls and Procedures
a) Evaluation of disclosure controls and procedures. The Company maintains
-------------------------------------------------
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the Chief Executive
and Chief Financial Officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
b) Changes in internal controls. The Company made no significant changes in
-----------------------------
its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive and Chief Financial Officer.
PART IV
Item 15. 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:
66
Exhibit No. Description of Exhibit
2.0 Agreement and Plan of Merger dated as of November 1, 1999 by
and among Intervest Bancshares Corporation, ICNY Acquisition
Corporation and Intervest Corporation of New York,
incorporated by reference to the Company's definitive proxy
statement for the special meeting of shareholders to be held
March 10, 2000, wherein such document is identified as
"Annex A."
3.1 Restated Certificate of Incorporation of the Company,
incorporated by reference to Amendment No.1 to the Company's
Registration Statement on Form SB-2 (No 333-33419, the
"Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") on September 22,
1997, wherein such document is identified as Exhibit 3.1.
3.2 Bylaws of the Company, incorporated by reference to the
Registration Statement, wherein such document is identified
as Exhibit 3.1.
4.1 Form of Certificate for Shares of Class A common stock,
incorporated by reference to the Company's Pre-Effective
Amendment No.1 to the Registration Statement on Form SB-2
(No. 33-82246), filed with the Commission on September 15,
1994.
4.2 Form of Certificate for Shares of Class B common stock,
incorporated by reference to the Company's Pre-Effective
Amendment No.1 to the Registration Statement on Form SB-2
(No. 33-82246), filed with the Commission on September 15,
1994.
4.3 Form of Warrant issued to Mr. Jerome Dansker, incorporated
by reference to the Company's Report on Form 10-K for the
year ended December 31, 1995, wherein such document is
identified as Exhibit 4.2.
4.4 Form of Warrant for Class A common stock, incorporated by
reference to the Registration Statement, wherein such
document is identified as Exhibit 4.3.
4.5 Form of Warrant Agreement between the Company and the Bank
of New York, incorporated by reference to the Registration
Statement, wherein such document is identified as Exhibit
4.4.
4.6 Form of Indenture between the Company and the Bank of New
York, as Trustee, incorporated by reference to the Company's
Registration Statement on Form SB-2 (333-50113) filed with
the Commission on April 15,1998.
4.7 Form of Indenture between the Company and the Bank of New
York, as Trustee, dated January 1, 2001, incorporated by
reference to the Company's Report on Form 10-K for the year
ended December 31, 2000, wherein such document is identified
as Exhibit 4.7.
4.8 Form of Indenture between the Company, as Issuer, and State
Street Bank and Trust Company of Connecticut, NA, as
Trustee, dated as of December 18, 2001, incorporated by
reference to the Company's Report on Form 10-K for the year
ended December 31, 2001, wherein such document is identified
as Exhibit 4.8.
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.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
67
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 26, 2003
-------------------------------- -----------------
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 26, 2003
----------------------------------------- -----------------
Jerome Dansker
President, Treasurer and Director
(Principal Executive, Financial and Accounting Officer):
By: /s/ Lowell S. Dansker Date:February 26, 2003
------------------------------- -----------------
Lowell S. Dansker
Vice President, Secretary and Director:
By: /s/ Lawrence G. Bergman Date:February 26, 2003
----------------------------------------- -----------------
Lawrence G. Bergman
Directors:
By: /s/ Michael A. Callen Date:February 26, 2003
-------------------------------- -----------------
Michael A. Callen
By: /s/ Paul Derosa Date:February 26, 2003
-------------------------------- -----------------
Paul Derosa
By: /s/ Wayne F. Holly Date:February 26, 2003
---------------------------------------- -----------------
Wayne F. Holly
By: /s/ Lawton Swan, III Date:February 26, 2003
-------------------------------- -----------------
Lawton Swan, III
By: /s/ Thomas E. Willett Date:February 26, 2003
-------------------------------- -----------------
Thomas E. Willett
By: /s/ David J. Willmott Date:February 26, 2003
-------------------------------- -----------------
David J. Willmott
By: /s/ Wesley T. Wood Date:February 26, 2003
---------------------------------------- -----------------
Wesley T. Wood
68
Certification of the Principal Executive and Financial Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
As adopted Pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002
I, Lowell S. Dansker, as the principal executive and principal financial
officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"),
certify, that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Company and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on
my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the Audit Committee of the Company's Board of Directors:
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to the
date of my most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ Lowell S. Dansker
---------------------
Lowell S. Dansker, President and Treasurer
(Principal Executive and Financial Officer)
February 26, 2003
69