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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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Commission File Number 000-23377
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INTERVEST BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
10 ROCKEFELLER PLAZA, SUITE 1015
NEW YORK, NEW YORK 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934
Class A Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes XX No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes No X.
-- --
On the close of business on June 30, 2003, there were 4,359,235 shares of the
Registrant's Class A common stock and 385,000 shares of its Class B common stock
issued and outstanding.
The aggregate market value of 1,771,785 shares of the Registrant's Class A
common stock on the close of business June 30, 2003, which excludes 2,587,450
shares held by affiliates as a group, was $21,792,956. This value is based on
the average bid and asked price of $12.30 per share on June 30, 2003 of the
Class A common stock on the NASDAQ Small Cap Market.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
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ITEM 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 13
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . 14
ITEM 4A Executive Officers and Other Key Employees . . . . . . . . . 14
PART II
ITEM 5 Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. . . . . . . . . . . . . . . 15
ITEM 6 Selected Consolidated Financial and Other Data. . . . . . . . 17
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . 18
ITEM7A Quantitative and Qualitative Disclosures About Market Risk. . 36
ITEM 8 Financial Statements and Supplementary Data . . . . . . . . . 37
ITEM 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . 68
ITEM 9A Controls and Procedures. . . . . . . . . . . . . . . . . . . 68
PART III
ITEM 10 Directors and Executive Officers . . . . . . . . . . . . . . 68
ITEM 11 Executive Compensation . . . . . . . . . . . . . . . . . . . 68
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . 68
ITEM 13 Certain Relationships and Related Transactions . . . . . . . 68
ITEM 14 Principal Accountant Fees and Services . . . . . . . . . . . 68
PART IV
ITEM 15 Exhibits, Financial Statements Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 68
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
1
PART I
ITEM 1. 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
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Intervest Bancshares Corporation is a registered financial holding company (the
"Holding Company") incorporated in 1993 under the laws of the State of Delaware.
Its principal office is located at 10 Rockefeller Plaza, Suite 1015, New York,
NY 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, 2003, the Holding Company owned 100% of the outstanding capital
stock of Intervest National Bank (the "Bank"), Intervest Mortgage Corporation,
Intervest Securities Corporation, Intervest Statutory Trust I and Intervest
Statutory Trust II (hereafter referred to collectively as the "Company," on a
consolidated basis). The Company expects to be moving from its present New York
locations to the entire fourth floor of One Rockefeller Plaza in New York City
in the second quarter of 2004.
At December 31, 2003, the Company had total assets of $910,595,000, cash and
security investments of $220,026,000, net loans of $671,125,000, deposits of
$675,513,000, borrowed funds and related interest payable of $139,455,000, and
stockholders' equity of $75,385,000, compared to 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, borrowed funds and related interest payable of
$113,568,000, and stockholders' equity of $53,126,000 at December 31, 2002.
The Holding Company's primary business is the operation of its subsidiaries. It
does not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the Holding
Company has issued debentures to raise funds for working capital purposes. The
Holding Company is subject to examination and regulation by the Federal Reserve
Board (FRB).
Intervest National Bank
- -----------------------
Intervest National Bank is a nationally chartered bank that has its headquarters
and full-service banking office at One Rockefeller Plaza, Suite 300, 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, 2003, the Bank had total assets of $789,567,000, cash and
security investments of $212,293,000, net loans of $566,226,000, deposits of
$697,279,000 and stockholder's equity of $73,907,000, compared to 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,
at December 31, 2002.
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 attracts deposit customers from within as well
as outside its primary market areas. The deposits, together
2
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 operations. The Bank's principal
expenses are interest paid on deposits and operating and general and
administrative expenses.
Deposit flows and the rates paid thereon are influenced by interest rates on
competing investments available to depositors and general market rates of
interest. Lending activities are affected by the demand for real estate and
other types of loans, interest rates at which such loans may be offered and
other factors affecting the availability of funds to lend. The Bank faces strong
competition in the attraction of deposits and in the origination of loans. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC)
to the extent permitted by law.
As is the case with banking institutions generally, the Bank's operations are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of banking regulatory agencies, including the FRB and FDIC.
The Bank is also subject to the supervision, regulation and examination of the
Office of the Comptroller of the Currency of the United States of America (OCC).
Intervest Mortgage Corporation
- ------------------------------
Intervest Mortgage Corporation is located at 10 Rockefeller Plaza in New York
City. It 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 issues debentures to provide funding for its business.
At December 31, 2003, Intervest Mortgage Corporation had total assets of
$119,578,000, cash and short-term investments of $25,801,000, net loans of
$89,307,000, debentures and related interest payable of $99,402,000, and
stockholder's equity of $18,173,000, compared to total assets of $97,311,000,
cash and short-term investments of $19,946,000, net loans of $73,499,000,
debentures and related interest payable of $84,751,000, and stockholder's equity
of $11,413,000, at December 31, 2002.
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 Securities Corporation
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Intervest Securities Corporation is a broker/dealer and a NASD and SIPC member
firm located at 10 Rockefeller Plaza, Suite 1015, in New York City. It
participates as a selected dealer from time to time in offerings of debt
securities of the Company, primarily those of Intervest Mortgage Corporation. On
June 2, 2003, the Holding Company acquired all of the outstanding capital stock
of Intervest Securities Corporation in exchange for 30,000 shares of its Class B
common stock that was newly issued for this transaction. Intervest Securities
Corporation's total assets consisted of approximately $218,000 of cash at the
time of acquisition. Prior to the acquisition, Intervest Securities Corporation
was an affiliated entity in that it was wholly owned by the spouse of the
Chairman of the Holding Company. At December 31, 2003, Intervest Securities
Corporation had total assets of $455,000 consisting of cash and its
stockholder's equity amounted to $459,000.
Intervest Statutory Trust I and Intervest Statutory Trust II
- --------------------------------------------------------------------
Intervest Statutory Trust I was formed in December 2001 and Intervest Statutory
Trust II was formed in September 2003. Each was formed for the sole purpose of
issuing and administering $15,000,000 of Trust Preferred Securities for a total
of $30,000,000. The Trusts do not conduct any trade or business. The Financial
Accounting Standards Board has issued new accounting guidelines for special
purpose entities, such as the Trusts, which will result in the
3
deconsolidation of the Trusts from the Company's financials statements beginning
in 2004. See note 1 to the consolidated financial statements in this report for
a further discussion.
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 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. Most of these competitors also have significantly
greater financial and marketing resources. 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.
LENDING ACTIVITIES
The Company's lending activities emphasize the origination of loans on
commercial and multifamily real estate properties. Single-family residential
mortgage lending has not been emphasized. The Bank also offers commercial
4
and consumer loans. At December 31, 2003, the Company's loan portfolio, net of
deferred fees, amounted to $671,125,000, compared to $489,912,000 at December
31, 2002.
The Bank's lending activities are conducted pursuant to written policies and
defined lending limits. In originating loans, the Bank places emphasis on the
borrower's ability to generate cash flow to support its debt obligations and
other cash related expenses. Depending on their type and size, certain loans
must be reviewed and approved by the Bank's Loan Committee comprised of certain
members of the Board of Directors prior to being originated. As part of its
written policies for real estate loans, loan-to-value ratios (the ratio that the
original principal amount of the loan bears to the lower of the purchase price
or appraised value of the property securing the loan at the time of origination)
on new loans originated by the Bank typically do not exceed 80%, and debt
service coverage ratios on new loans typically are not less than 1.2x.
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 or limits as to loan-to-value and
debt service coverage ratios. It also does not have a Loan Committee or a formal
loan approval process. Its real estate mortgage loans consist of first mortgage,
junior mortgage and wraparound mortgage loans. Junior and wraparound mortgages
normally have greater risks than first mortgages.
Real Estate Mortgage Lending
- -------------------------------
Nearly all of the Company's loan portfolio is comprised of loans secured by
commercial and multifamily real estate, including rental and cooperative
apartment buildings, office buildings, mix-used properties, shopping centers and
vacant land.
Commercial and multifamily mortgage lending generally involves greater risk than
1-4 family residential lending. Such lending typically involves larger loan
balances to single borrowers and repayment of loans secured by income producing
properties is typically dependent upon the successful operation of the
underlying real estate. From time to time, the Company may originate loans on
vacant land.
Mortgage loans on commercial and multifamily properties are normally originated
for terms of no more than 20 years, many with variable interest rates that are
based on the prime rate. Additionally, many loans have an interest rate floor
which resets upward along with any increase in the loan's interest rate. This
feature reduces the loan's interest rate exposure to declining interest rates.
Mortgage loans on commercial and multifamily properties typically provide for
periodic payments of interest and principal during the term of the mortgage,
with the remaining principal balance and any accrued interest due at the
maturity date. The majority of the mortgage loans originated by the Company
provide for balloon payments at maturity, which means that a substantial part or
the entire original principal amount is due in one lump sum payment at maturity.
If the net revenue from the property is not sufficient to make all debt service
payments due on the mortgage or, if at maturity or the due date of any balloon
payment, the owner of the property fails to raise the 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.
5
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
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.
ASSET QUALITY
After a loan is originated, the Company makes ongoing reviews of loans so as to
monitor documentation and valuations of collateral with the objective of quickly
identifying, evaluating and initiating corrective actions for problem loans.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities. The Company's loan portfolio has historically
been concentrated in commercial real estate and multifamily mortgage loans,
which represented 97% of the total loan portfolio at December 31, 2003. The
properties underlying the Company's mortgages are also concentrated in New York
State (64%) and the State of Florida (28%). Many of the New York properties are
located in New York City and are subject to rent control and rent stabilization
laws, which limit the ability of the property owners to increase rents. Credit
risk, which represents the possibility of the Company not recovering amounts due
from its borrowers, is significantly 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.
Additionally, terrorist acts, such as those that occurred on September 11, 2001,
and armed conflicts, such as the recent Gulf War, may have an adverse impact on
economic conditions.
At December 31, 2003, the Company had two real estate loans with an aggregate
principal balance of $8,474,000 on nonaccrual status. These loans were
considered impaired under the criteria of SFAS No.114. The Company's recorded
investment in these loans totaled $8,499,000. The Company believes the estimated
fair value of each of the underlying properties (which are located in New York
City) is greater than its recorded investment. As a result, there was no
specific valuation allowance maintained. During March 2004, the aforementioned
loans were brought current and returned to an accrual status. At December 31,
2003 and 2002, there were no other loans classified as nonaccrual, impaired or
ninety days past due and still accruing interest.
At year-end 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 through foreclosure. In the second quarter of
6
2003, the property was sold for net proceeds of approximately $1,030,000
(consisting of cash, after selling costs, of $150,000 and a mortgage of $880,000
provided by the Bank).
From 1999 to 2003, the Company experienced only one loss from its lending
activities amounting to $201,000, which related to the aforementioned foreclosed
real estate and was comprised of a $150,000 loan chargeoff and a $51,000 loss
from the sale of that property. There can be no assurance however, that a
downturn in real estate values or local economic conditions, as well as other
factors, would not have an adverse impact on the Company's asset quality and
future level of nonperforming assets, chargeoffs and profitability.
REAL ESTATE INVESTING ACTIVITIES
The Company may periodically purchase equity interests in real property or it
may acquire such an equity interest pursuant to a foreclosure 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.
INVESTMENT ACTIVITIES
The Company's investment policy is designed to provide and maintain liquidity,
without incurring undue interest and credit risk. The Company has historically
purchased securities that are issued directly by the U.S. government or one of
its agencies which have a significantly lower credit risk than the Company's
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 additional flexibility
for implementing asset and liability management strategies. The Company does not
engage in trading activities. Securities held to maturity totaled $152,823,000
at December 31, 2003, compared to $145,694,000 at December 31, 2002. There were
no securities classified as available for sale at December 31, 2003 or 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) 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, 2003 amounted to
$64,128,000, compared to $30,849,000 at December 31, 2002.
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, 2003,
consolidated deposit liabilities totaled $675,513,000, compared to $505,958,000
at December 31, 2002.
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, loan
7
demand, growth goals, capital levels and federal regulations. Maturity terms,
service fees and withdrawal penalties on deposit products are reviewed and
established by the Bank on a periodic basis.
The Bank offers internet banking services, ATM services with access to local,
state and national networks, wire transfers, direct deposit of payroll and
social security checks and automated drafts for various accounts. In addition,
the Bank offers safe deposit boxes to its customers in Florida. The Bank
periodically reviews the scope of the banking products and services it offers
consistent with market opportunities and available resources.
The Bank purchases federal funds from time to time to manage its liquidity
needs. The Bank has agreements with correspondent banks whereby it may borrow on
an overnight, unsecured basis of up to $16,000,000. As a member of the FHLB and
the FRB, the Bank can borrow from these institutions on a secured basis that
amounted to approximately $145,000,000 at December 31, 2003. At December 31,
2003 and 2002, there were no outstanding borrowings under any of these lines and
such funding has not been emphasized to date.
Intervest Mortgage Corporation's principal sources of funds consist of
borrowings (through the issuance of its debentures), mortgage repayments and
cash flow generated from operations. From time to time, it has received capital
contributions from the Holding Company. At December 31, 2003, Intervest Mortgage
Corporation had debentures outstanding of $87,350,000, compared to $74,000,000
at December 31, 2002.
The Holding Company has also issued debentures for working capital purposes. The
Holding Company's debentures outstanding totaled $7,340,000 at December 31,
2003, compared to $10,430,000 December 31, 2002. In addition, the Holding
Company, through its wholly owned subsidiaries Intervest Statutory Trust I and
Intervest Statutory Trust II, has issued Trust Preferred Securities (Capital
Securities) totaling $30,000,000 to date.
EMPLOYEES
At December 31, 2003, the Company employed 61 full-time equivalent employees,
compared to 57 at year-end 2002. The Company provides various benefit plans,
including group life, health and a 401(k) Plan. The employees are not covered by
a collective bargaining agreement and the Company believes employee relations
are good.
FEDERAL AND STATE TAXATION
The Company and its subsidiaries file a consolidated federal income tax return
and combined state and city income tax returns in New York. The Company also
files a franchise tax return in Delaware. The Bank files a state income tax
return in Florida. All the returns are filed on a calendar year basis.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur. In accordance with an income tax
sharing agreement, income tax charges or credits are, for financial reporting
purposes, allocated 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
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
8
years, or a "grandfathered" base year reserve, if larger. In 2002, due to its
asset size, the Bank no longer qualified for this method and began using the
direct write-off method in computing its bad debt deduction for tax purposes.
INVESTMENT IN SUBSIDIARIES
The following table provides information regarding the Holding Company's
subsidiaries:
At December 31, 2003
--------------------------------- Subsidiaries
($in thousands % of Equity in Earnings (loss) for the
Voting Total Underlying Year Ended December 31,
Subsidiary Stock Investment Net Assets 2003 2002 2001
- -------------------------------- ------- ----------- ----------- ------ ------ ------
Intervest National Bank 100% $ 73,907 $ 73,907 $8,667 $6,459 $3,404
Intervest Mortgage Corporation 100% $ 18,173 $ 18,173 $1,759 $1,567 $ 577
Intervest Securities Corporation 100% $ 459 $ 459 $ (6) $ - $ -
Intervest Statutory Trust I 100% $ 464 $ 464 $ - $ - $ -
Intervest Statutory Trust II 100% $ 464 $ 464 $ - $ - $ -
The Bank pays a monthly dividend 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. Such dividends paid in 2003, 2002 and 2001
to the Holding Company amounted to $1,695,000, $1,500,000 and $125,000,
respectively.
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 financial holding company registered under the Bank Holding Company Act of
1956 (BHCA), the Holding Company is subject to the regulation and supervision of
the FRB, and is required to file with the FRB periodic reports and other
information regarding its business operations and those of its subsidiaries.
The Holding Company is required to obtain the prior approval of the FRB before
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a bank or bank holding company. The FRB 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,
2003, the Company's consolidated ratio of total capital to risk-weighted assets
was 14.84% and its risk-based Tier 1 capital ratio was 13.28%. At December 31,
2002, the same ratios were 13.06% and 12.21%, respectively. The guidelines also
require a ratio of Tier 1 capital to adjusted total average assets of not less
than 3%. The Company's consolidated leverage ratio at December 31, 2003 and
2002, was 11.31% and 9.88%, 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
9
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
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.
10
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, 2003 and 2002,
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 $0.0152 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
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.
11
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."
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
implementing legislative reforms intended to address corporate and accounting
fraud. In addition to establishing a new accounting oversight board, which will
enforce auditing, quality control and independence standards, the bill restricts
provision of both auditing and consulting services by accounting firms. To
ensure auditor independence, any non-audit services being provided to an audit
client will require pre-approval by the company's audit committee. In addition,
audit partners must be rotated. The Act requires chief executive and chief
financial officers, or their equivalent, to certify to the accuracy of reports
filed with the SEC, subject to civil and criminal penalties. In addition, under
the Act, legal counsel will be required to report evidence of material violation
of the securities laws or a breach of fiduciary duty by a company to its chief
executive officer and, if such officer does not appropriately respond, to report
such evidence to the audit committee of the board or the board itself.
Executives are also prohibited from trading during retirement plan "blackout"
periods, and loans to executives are restricted. The Act accelerates the time
frame for disclosures by public companies and directors and executive officers
must also provide information for most changes in ownership of company
securities within two business days of the change. The Act also prohibits any
officer or director or any other person other their direction from taking any
action to fraudulently induce, coerce, manipulate or mislead any independent
public or certified accountant engaged in the audit of the company's financial
statements for the purpose of rendering the financial statement's materially
misleading. The
12
Act also required the SEC to prescribe rules requiring the inclusion of an
internal report and assessment by management in the annual report to
shareholders.
Additional legislative and regulatory proposals have been made and others can be
expected. These include proposals designed to improve the overall 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 is affected not only by general economic
conditions, but also by the monetary policies of the FRB. Changes in the
discount rate on member bank borrowing, availability of borrowing at the
"discount window," open market operations, the imposition of changes in reserve
requirements against member banks' deposits and assets of foreign branches and
the imposition of and changes in reserve requirements against certain borrowings
by banks and their affiliates are some of the instruments of monetary policy
available to the FRB. These monetary policies are used in varying combinations
to influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the FRB have had a significant effect on the
operating results of commercial banks and are expected to continue to do so in
the future. The monetary policies of these agencies are influenced by various
factors, including inflation, unemployment, short-term and long-term changes in
the international trade balance and in the fiscal policies of the United States
Government. Future monetary policies and the effect of such policies on the
future business and earnings of the Company cannot be predicted.
Non-Bank Subsidiaries.
- -----------------------
The Company's non-banking subsidiary, Intervest Mortgage Corporation, is also
subject to regulation by the FRB. Intervest Securities Corporation is regulated
by the Securities and Exchange Commission, or "SEC", the National Association of
Securities Dealers, Inc., or "NASD," and state securities regulators.
ITEM 2. PROPERTIES
The office of the Holding Company, Intervest Mortgage Corporation and Intervest
Securities 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 the lease expires
in May 2008.
In October 2003, the Holding Company entered into a new lease for the entire
fourth floor (consisting of approximately 21,400 square feet) of One Rockefeller
Plaza, New York, N.Y, 10020 through March 2014. The Holding Company, the Bank's
headquarters and banking office, Intervest Mortgage Corporation and Intervest
Securities Corporation will be moving from their present locations to the fourth
floor upon completion of renovations, with the Bank expected to occupy one-half
of this space. Upon relocation, the Bank's current lease of the third floor of
One Rockefeller Plaza will be canceled, while the current lease for the tenth
floor of 10 Rockefeller plaza will continue to run until it expires in September
2004, or earlier if such space is rented by the landlord prior thereto. All the
leases contain operating escalation clauses related to taxes and operating costs
based upon various criteria and are accounted for as operating leases.
The Bank's principal office in Florida is located at 625 Court Street,
Clearwater, Florida, 33756. In addition, the Bank operates four other branch
offices; three of which are in Clearwater, Florida, at 1875 Belcher Road North,
2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750 Gulfport Blvd,
South Pasadena, Florida. With the exception of the Belcher Road office, which is
leased through June 2007, the Bank owns all its offices in Florida.
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
13
tenant. The branch office at 1875 Belcher Road is a two-story building in which
the Bank leases approximately 5,100 sq. ft. on the ground floor. The branch
office at 2175 Nursery Road is a one-story building containing approximately
2,700 sq. ft., which is entirely occupied by the Bank. The branch office at 2575
Ulmerton Road is a three-story building containing approximately 17,000 sq. ft.
The Bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the
upper floors to commercial tenants. The branch office at 6750 Gulfport Blvd. is
a one-story building containing approximately 2,800 sq. ft., which is entirely
occupied by the Bank. In addition, each of the Bank's Florida offices include
drive-through teller facilities. The Bank also owns a two-story building located
on property contiguous to its Court Street office in Florida. The building
contains approximately 12,000 sq. ft. and is leased to commercial tenants. The
Bank also owns property across from its Court Street branch office in Florida.
which consists of an office building that contains approximately 1,400 sq.ft.
that is leased to one commercial tenant. This property provides additional
parking for the Court Street branch.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Management does not believe that there is any pending or threatened
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, 2003, 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 85, serves as Chairman of the Board of Directors and
Executive Vice President of Intervest Bancshares Corporation since 1996 and
1994, respectively. Mr. Dansker received a Bachelor of Science degree from the
New York University School of Commerce, Accounts and Finance, a Law degree from
the New York University School of Law, and is admitted to practice as an
attorney in the State of New York. Mr. Dansker also serves as Chairman of the
Board of Directors and Loan Committee of Intervest National Bank, Chairman of
the Board of Directors and Executive Vice President of Intervest Mortgage
Corporation, and Chairman of the Board of Directors of Intervest Securities
Corporation.
LOWELL S. DANSKER, age 53, serves as Vice Chairman of the Board of Directors,
and as President and Treasurer of Intervest Bancshares Corporation since October
2003 and 1993, respectively. Mr. Dansker received a Bachelor of Science in
Business Administration from Babson College, a Law degree from the University of
Akron School of Law, and is admitted to practice as an attorney in New York,
Ohio, Florida and the District of Columbia. Mr. Dansker also serves as Vice
Chairman of the Board of Directors, Chief Executive Officer and a member of the
Loan Committee of Intervest National Bank, Vice Chairman of the Board of
Directors, President and Treasurer of Intervest Mortgage Corporation, and Vice
Chairman of the Board of Directors and Chief Executive Officer of Intervest
Securities Corporation.
LAWRENCE G. BERGMAN, age 59, serves as a Director, Vice President and Secretary
of Intervest Bancshares Corporation since 1993. Mr. Bergman received a Bachelor
of Science degree and a Master of Engineering (Electrical) degree from Cornell
University and a Master of Science in Engineering and a Ph.D. degree from The
Johns Hopkins University. Mr. Bergman also serves as a Director and a member of
the Loan Committee of Intervest National Bank, Director, Vice-President and
Secretary of Intervest Mortgage Corporation, and Director and Vice-President of
Intervest Securities Corporation.
KEITH A. OLSEN, age 50, 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
14
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 57, 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 41, 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
and as an employee of Intervest Bancshares Corporation from April 1998 to March
1999. Mr. Arvonio also is a registered representative of Intervest Securities
Corporation since December 2003. Mr. Arvonio received a B.B.A. degree from Iona
College and is a Certified Public Accountant. Mr. Arvonio has over 15 years of
banking experience. Prior to joining the Company, Mr. Arvonio served as Second
Vice President, 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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET FOR SECURITIES
The Holding Company's Class A common stock is quoted on the NASDAQ SmallCap
Market under the symbol: IBCA. There is no public-trading market for the Holding
Company's Class B common stock. At December 31, 2003, there were 5,603,377 and
385,000 shares of Class A and Class B common stock outstanding, respectively. At
December 31, 2003, there were approximately 1,200 holders of record of the Class
A common stock, which includes persons or entities that hold their stock in
nominee form or in street name through various brokerage firms. At December 31,
2003, there were five holders of record of Class B common stock.
The high and low sales prices, which represent actual sales transactions as
reported by the NASDAQ, for the Class A common stock by calendar quarter for
2003 and 2002 are as follows:
2003 2002
---- ----
High Low High Low
-------------- -------------
First quarter $11.48 $10.05 $ 9.99 $7.20
Second quarter $12.77 $10.38 $11.05 $8.79
Third quarter $13.75 $12.05 $11.50 $7.46
Fourth quarter $15.48 $12.86 $11.25 $8.99
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
15
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.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- -----------------------------------------------------------------------------------------------------------------------------
At or For The Year Ended December 31,
---------------------------------------------------------------
($in thousands, except per share data) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 910,595 $ 685,979 $ 512,622 $ 416,927 $ 340,481
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 64,128 $ 30,849 $ 24,409 $ 42,938 $ 32,095
Securities available for sale. . . . . . . . . . . . . . . . $ - $ - $ 6,192 $ 74,789 $ -
Securities held to maturity, net . . . . . . . . . . . . . . $ 152,823 $ 145,694 $ 99,157 $ 20,970 $ 83,132
Loans receivable, net of deferred fees . . . . . . . . . . . $ 671,125 $ 489,912 $ 368,526 $ 266,326 $ 212,937
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . $ 675,513 $ 505,958 $ 362,437 $ 300,241 $ 201,080
Borrowed funds and related accrued interest payable. . . . . $ 139,455 $ 113,568 $ 99,910 $ 72,813 $ 99,377
Stockholders' equity . . . . . . . . . . . . . . . . . . . . $ 75,385 $ 53,126 $ 40,395 $ 36,228 $ 33,604
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . $ 8,474 $ - $ 1,243 $ - $ -
Foreclosed real estate . . . . . . . . . . . . . . . . . . . $ - $ 1,081 $ - $ - $ -
Allowance for loan losses. . . . . . . . . . . . . . . . . . $ 6,580 $ 4,611 $ 3,380 $ 2,768 $ 2,493
Loan chargeoffs. . . . . . . . . . . . . . . . . . . . . . . $ - $ 150 $ - $ - $ -
Loan recoveries. . . . . . . . . . . . . . . . . . . . . . . $ - $ 107 $ - $ - $ 1
- -----------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA:
Interest and dividend income . . . . . . . . . . . . . . . . $ 50,464 $ 43,479 $ 35,462 $ 31,908 $ 25,501
Interest expense . . . . . . . . . . . . . . . . . . . . . . 28,564 26,325 24,714 23,325 18,419
---------------------------------------------------------------
Net interest and dividend income . . . . . . . . . . . . . . 21,900 17,154 10,748 8,583 7,082
Provision for loan losses. . . . . . . . . . . . . . . . . . 1,969 1,274 612 275 830
---------------------------------------------------------------
Net interest and dividend income after
provision for loan losses . . . . . . . . . . . . . . . 19,931 15,880 10,136 8,308 6,252
Noninterest income . . . . . . . . . . . . . . . . . . . . . 3,321 2,218 1,655 983 900
Noninterest expenses . . . . . . . . . . . . . . . . . . . . 7,259 6,479 5,303 4,568 4,059
---------------------------------------------------------------
Earnings before income taxes, extraordinary item
and change in accounting principle. . . . . . . . . . . 15,993 11,619 6,488 4,723 3,093
Provision for income taxes . . . . . . . . . . . . . . . . . 6,873 4,713 2,710 1,909 1,198
---------------------------------------------------------------
Earnings before extraordinary item and
change in accounting principle. . . . . . . . . . . . . 9,120 6,906 3,778 2,814 1,895
Extraordinary item, net of tax (1) . . . . . . . . . . . . . - - - (206) -
Cumulative effect of accounting change, net of tax (2) . . . - - - - (128)
---------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 9,120 $ 6,906 $ 3,778 $ 2,608 $ 1,767
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (3):
Basic earnings per share . . . . . . . . . . . . . . . . . . $ 1.85 $ 1.71 $ 0.97 $ 0.67 $ 0.47
Diluted earnings per share . . . . . . . . . . . . . . . . . $ 1.53 $ 1.37 $ 0.97 $ 0.67 $ 0.44
Book value per share . . . . . . . . . . . . . . . . . . . . $ 12.59 $ 11.30 $ 10.36 $ 9.29 $ 8.76
Market price per share . . . . . . . . . . . . . . . . . . . $ 14.65 $ 10.80 $ 7.40 $ 3.75 $ 6.25
- -----------------------------------------------------------------------------------------------------------------------------
OTHER DATA AND RATIOS:
Common shares outstanding. . . . . . . . . . . . . . . . . . 5,988,377 4,703,087 3,899,629 3,899,629 3,836,879
Average common shares used to calculate:
Basic earnings per share. . . . . . . . . . . . . . . . 4,938,995 4,043,619 3,899,629 3,884,560 3,760,293
Diluted earnings per share. . . . . . . . . . . . . . . 6,257,720 5,348,121 3,899,629 3,884,560 4,020,118
Adjusted net earnings for diluted earnings per share . . . . $ 9,572 $ 7,342 $ 3,778 $ 2,608 $ 1,767
Full-service banking offices . . . . . . . . . . . . . . . . 6 6 6 6 6
Net interest margin. . . . . . . . . . . . . . . . . . . . . 2.90% 2.88% 2.47% 2.34% 2.38%
Return on average assets . . . . . . . . . . . . . . . . . . 1.19% 1.13% 0.85% 0.69% 0.57%
Return on average equity . . . . . . . . . . . . . . . . . . 15.34% 15.56% 9.94% 7.48% 5.48%
Loans, net of unearned income to deposits. . . . . . . . . . 99.35% 96.83% 101.7% 88.70% 105.90%
Allowance for loan losses to total net loans . . . . . . . . 0.98% 0.94% 0.92% 1.04% 1.17%
Average stockholders' equity to average total assets . . . . 7.74% 7.27% 8.50% 9.18% 10.37%
Stockholders' equity to total assets . . . . . . . . . . . . 8.28% 7.74% 7.88% 8.69% 9.87%
- -----------------------------------------------------------------------------------------------------------------------------
<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."
(3) The Company has never paid common dividends.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations that follows should be read in conjunction with the consolidated
financial statements and notes thereto included in this report on Form 10-K.
Intervest Bancshares Corporation has five wholly owned subsidiaries - Intervest
National Bank, Intervest Mortgage Corporation, Intervest Securities Corporation,
Intervest Statutory Trust I and Intervest Statutory Trust II (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 Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan losses and income tax expense.
Noninterest income consists mostly of loan and other banking fees as well as
income from loan prepayments. The amount and timing of, as well as income from,
loan prepayments, if any, cannot be predicted and can fluctuate significantly.
Normally, the number of instances of prepayment of mortgage loans tends to
increase during periods of declining interest rates and tends to decrease during
periods of increasing interest rates. Many of the Company's mortgage loans
include prepayment provisions, and others prohibit prepayment of indebtedness
entirely. Noninterest expense consists of compensation and benefits expense,
occupancy and equipment expenses, data processing expenses, advertising expense,
professional fees, insurance expense and other operating expenses.
The Company's profitability is significantly affected by general economic and
competitive conditions, changes in market interest rates, government policies
and actions of regulatory authorities. The Company's loan portfolio has
historically been concentrated in commercial real estate and multifamily
mortgage loans, which represented 97% of the total loan portfolio at December
31, 2003. The properties underlying the Company's mortgages are also
concentrated in New York State (64%) and the State of Florida (28%). Many of the
New York properties are located in New York City and are subject to rent control
and rent stabilization laws, which limit the ability of the property owners to
increase rents. Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly 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. Additionally, terrorist acts, such as those that occurred on
September 11, 2001, and armed conflicts, such as the recent Gulf War, may have
an adverse impact on economic conditions.
The Company has also previously announced that it intends to explore further
growth through the acquisition of other banks or thrifts with operations
compatible with its own and 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 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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND DECEMBER 31, 2002.
Overview
- --------
Total assets at December 31, 2003 increased to $910,595,000, from $685,979,000
at December 31, 2002. Total liabilities at December 31, 2003 increased to
$835,210,000, from $632,853,000 at December 31, 2002, and stockholders' equity
increased to $75,385,000 at December 31, 2003, from $53,126,000 at year-end
2002. Book value per common share increased to $12.59 per share at December 31,
2003, from $11.30 at December 31, 2002.
18
Selected balance sheet information as of December 31, 2003 follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($in thousands) Company Bank Corp Trusts Corp Amts (1)
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 2,968 $ 56,395 $ 25,801 $ - $ 455 $ (21,491)
Security investments - 155,898 - 30,928 - (30,928)
Loans receivable, net of deferred fees 15,592 566,226 89,307 - - -
Allowance for loan losses (78) (6,310) (192) - - -
Investment in subsidiaries 93,467 - - - - (93,467)
All other assets 4,235 17,358 4,662 100 - (331)
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 116,184 $ 789,567 $ 119,578 $ 31,028 $ 455 $(146,217)
- ------------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 697,279 $ - $ - $ - $ (21,766)
Borrowed funds and interest payable 40,729 255 99,402 30,097 - (31,028)
All other liabilities 70 18,126 2,003 3 (4) 44
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 40,799 715,660 101,405 30,100 (4) (52,750)
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 75,385 73,907 18,173 928 459 (93,467)
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 116,184 $ 789,567 $ 119,578 $ 31,028 $ 455 $(146,217)
- ------------------------------------------------------------------------------------------------------------------------
($in thousands) Combined
- -------------------------------------------------------
Cash and cash equivalents $ 64,128
Security investments 155,898
Loans receivable, net of deferred fees 671,125
Allowance for loan losses ( 6,580)
Investment in subsidiaries -
All other assets 26,024
- -------------------------------------------------------
Total assets $ 910,595
- -------------------------------------------------------
Deposits $ 675,513
Borrowed funds and interest payable 139,455
All other liabilities 20,242
- -------------------------------------------------------
Total liabilities 835,210
- -------------------------------------------------------
Stockholders' equity 75,385
- -------------------------------------------------------
Total liabilities and stockholders' equity $ 910,595
- -------------------------------------------------------
<FN>
(1) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise largely from intercompany deposit accounts,
investments and borrowed funds
A comparison of the Company's consolidated balance sheet as of December 31, 2003
and 2002 follows:
At December 31, 2003 At December 31, 2002
------------------------ ------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- -------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and time deposits with banks $ 64,128 7.0% $ 32,849 4.8%
Security investments 155,898 17.1 146,802 21.4
Loans receivable, net of deferred fees and loan loss allowance 664,545 73.0 485,301 70.7
All other assets 26,024 2.9 21,027 3.1
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 910,595 100.0% $ 685,979 100.0%
- -------------------------------------------------------------------------------------------------------------------
Deposits $ 675,513 74.2% $ 505,958 73.8%
Borrowed funds and interest payable 139,455 15.3 113,568 16.6
All other liabilities 20,242 2.2 13,327 1.9
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 835,210 91.7 632,853 92.3
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity 75,385 8.3 53,126 7.7
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 910,595 100.0% $ 685,979 100.0%
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents and Time Deposits with Banks
- --------------------------------------------------------------
Cash and cash equivalents increased to $64,128,000 at December 31, 2003, from
$30,849,000 at December 31, 2002, primarily due to a higher level of overnight
federal fund investments The increase reflected the temporary investment of
deposit inflows during December 2003. A significant portion of these funds is
expected to fund new loans. Time deposits (greater than 3 month maturities) with
banks amounted to $2,000,000 at December 31, 2002, compared to none outstanding
at year-end 2003 due to the maturity of the deposit during 2003.
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.
Security Investments
- ---------------------
The Company invests in securities after satisfying its liquidity objectives and
lending commitments. The Company has historically only purchased debt securities
that are issued by the U.S. government or one of its agencies. The
19
Company's investment policy is designed to provide and maintain liquidity,
without incurring undue interest and credit risk. The Company's security
investments have lower yields than its loan portfolio. To manage interest rate
risk, the Company normally purchases securities that have adjustable rates or
securities with fixed rates that have short to intermediate maturity terms. The
Company does not engage in trading activities.
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, 2003 or 2002.
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 $152,823,000 at December 31, 2003, compared to $145,694,000
at December 31, 2002. The increase was due to new purchases exceeding maturities
and calls of securities during the year. At December 31, 2003, the portfolio
consisted of short-term debt obligations of the Federal Home Loan Bank, Federal
Farm Credit Bank, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation and Student Loan Marketing Association with a
weighted-average yield of 1.75% and a weighted-average remaining maturity of 1.7
years, compared to 2.39% and 1.6 years, respectively, at December 31, 2002. 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, 2003 and 2002, the portfolio's
estimated fair value was $152,995,000 and $146,560,000, respectively.
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in
their capital stock of $1,384,000 and $1,691,000, respectively. The FRB stock
currently pays a dividend of 6%, while the FHLB stock dividend was suspended in
September 2003 and then re-instituted in the first quarter of 2004 at a rate of
1.45%. The total investment, which amounted to $3,075,000 at December 31, 2003,
compared to $1,108,000 at December 31, 2002, fluctuates based on specific
factors (the Bank's capital level for the FRB and the Bank's loans for the
FHLB). The Bank became a member of the FHLB during the second quarter of 2003.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Losses
- ------------------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan losses,
increased to $664,545,000 at December 31, 2003, from $485,301,000 at December
31, 2002. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments.
The following table sets forth information concerning the loan portfolio:
At December 31, 2003 At December 31, 2002
--------------------------- ------------------------
# of % of # of % of
($in thousands) Loans Amount Total Loans Amount Total
- ---------------------------------------------------------------------------------------------
Commercial real estate loans 184 $344,071 50.7% 162 $275,096 55.5%
Residential multifamily loans 210 310,650 45.8 168 214,515 43.3
Land development and other land loans 6 20,526 3.0 3 1,890 0.4
Residential 1-4 family loans 26 1,628 0.2 28 1,953 0.4
Commercial loans 28 1,662 0.2 27 1,608 0.3
Consumer loans 16 319 0.1 16 240 0.1
- ---------------------------------------------------------------------------------------------
Total gross loans receivable 470 678,856 100.0% 404 495,302 100.0%
Deferred loan fees (7,731) (5,390)
- ---------------------------------------------------------------------------------------------
Loans, net of deferred fees 671,125 489,912
Allowance for loan losses (6,580) (4,611)
- ---------------------------------------------------------------------------------------------
Loans receivable, net $664,545 $485,301
- ---------------------------------------------------------------------------------------------
20
The following table sets forth the scheduled contractual principal repayments of
the loan portfolio:
At December 31,
------------------
($in thousands) 2003 2002
-------------------------------------------------------------
Within one year $133,137 $103,398
Over one to five years (1) 430,783 305,013
Over five years (1) 114,936 86,891
-------------------------------------------------------------
$678,856 $495,302
-------------------------------------------------------------
(1) At December 31, 2003, $401,692,000 of loans with adjustable rates and
$144,027,000 of loans with fixed rates were due after one year.
The following table sets forth the activity in the loan portfolio:
For the Year Ended December 31,
---------------------------------
($in thousands) 2003 2002 2001
-------------------------------------------------------------------------------
Loans receivable, net, at beginning of year $ 485,301 $ 365,146 $263,558
Loans originated 378,630 233,689 195,754
Principal repayments (195,076) (110,661) (91,785)
Recoveries - (107) -
Chargeoffs - 150 -
Increase in deferred loan fees (2,341) (1,642) (1,769)
Provision for loan losses (1,969) (1,274) (612)
-------------------------------------------------------------------------------
Loans receivable, net, at end of year $ 664,545 $ 485,301 $365,146
-------------------------------------------------------------------------------
At December 31, 2003, two real estate loans with an aggregate principal balance
of $8,474,000 were on nonaccrual status. These loans were considered impaired
under the criteria of SFAS No.114 and the Company's recorded investment in these
loans totaled $8,499,000. The Company believes the estimated fair value of each
of the underlying properties (which are located in New York City) is greater
than its recorded investment. As a result, there was no specific valuation
allowance maintained. During March 2004, the aforementioned loans were brought
current and returned to an accrual status. At December 31, 2003 and 2002, there
were no other loans classified as nonaccrual, impaired or ninety days past due
and still accruing interest.
Allowance for Loan Losses
- ----------------------------
At December 31, 2003, the allowance for loan losses increased to $6,580,000 from
$4,611,000 at December 31, 2002 and represented 0.98% of total loans (net of
deferred fees) outstanding at December 31, 2003, compared to 0.94% at December
31, 2002. The increase in the allowance was due to provisions aggregating
$1,969,000 resulting from loan growth of $183,554,000. At December 31, 2003 and
2002, the allowance for loan losses was almost all allocated to commercial real
estate, multifamily and land loans.
The following table sets forth information with respect to the allowance for
loan losses:
For the Year Ended December 31,
-------------------------------
($in thousands) 2003 2002 2001
-----------------------------------------------------------------------------------------
Allowance at beginning of year $ 4.611 $ 3,380 $ 2,768
Provision charged to operations 1,969 1,274 612
Chargeoffs - (150) -
Recoveries - 107 -
-----------------------------------------------------------------------------------------
Allowance at end of year $ 6,580 $ 4,611 $ 3,380
-----------------------------------------------------------------------------------------
Ratio of allowance to total loans, net of deferred fees 0.98% 0.94% 0.92%
Total loans, net of deferred fees at year end $671,125 $489,912 $368,526
Average loans outstanding during the year $585,556 $439,241 $315,148
-----------------------------------------------------------------------------------------
The allowance for loan losses is established through a provision charged to
operations. Loans are charged against the allowance when management believes
that the collectability of the principal is unlikely. Subsequent recoveries are
added to the allowance. The adequacy of the allowance is evaluated monthly or
more frequently when necessary with consideration given to: the nature and
volume of the loan portfolio; overall portfolio quality; loan concentrations;
specific problem loans and commitments and estimates of fair value thereof;
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's perception
21
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 losses, 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 losses related to impaired loans is computed. A loan is
normally deemed impaired when, based upon current information and events, it is
probable that the Company will be unable to collect both full principal and
interest due according to the contractual terms of the loan agreement.
Impairment for larger balance loans such as commercial real estate and
multifamily loans are measured based on: the present value of expected future
cash flows, discounted at the loan's effective interest rate; or the observable
market price of the loan; or the estimated fair value of the loan's collateral,
if payment of the principal and interest is dependent upon the collateral. When
the fair value of the property is less than the recorded investment in the loan,
this deficiency is recognized as a valuation allowance within the overall
allowance for loan losses and a charge through the provision for loan losses.
The Company's policy is to charge off any portion of the recorded investment in
the loan that exceeds the fair value of the collateral.
The Company considers a variety of factors in determining whether a loan is
impaired, including (i) any notice from the borrower that the borrower will be
unable to repay all principal and interest amounts contractually due under the
loan agreement, (ii) any delinquency in the principal and/or interest payments
other than minimum delays or shortfalls in payments, and (iii) other information
known by management that would indicate the full repayment of principal and
interest is not probable. In evaluating loans for impairment, management
generally considers delinquencies of 60 days or less to be minimum delays, and
accordingly does not consider such delinquent loans to be impaired in the
absence of other indications. Impaired loans normally consist of loans on
nonaccrual status. Generally, all loans are evaluated for impairment on a
loan-by-loan basis.
Finally, the Company's regulators, as an integral part of their examination
process, periodically review the allowance for loan losses. Accordingly, the
Company may be required to take certain chargeoffs and/or recognize additions to
the allowance based on the regulators' judgment concerning information available
to them during their examination.
All Other Assets
- ------------------
The following table sets forth the composition of the caption "All other assets"
in the table on page 19:
At December 31,
-----------------
($in thousands) 2003 2002
---------------------------------------------------------
Accrued interest receivable $ 4,995 $ 4,263
Loans fee receivable 5,622 3,706
Premises and equipment, net 5,752 6,098
Foreclosed real estate - 1,081
Deferred income tax asset 2,960 1,997
Deferred debenture offering costs, net 4,023 3,498
All other 2,672 384
---------------------------------------------------------
$26,024 $21,027
---------------------------------------------------------
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 decreased due to depreciation and
amortization, partially offset by net additions of $222,000.
22
Foreclosed real estate at December 31, 2002 represented one commercial real
estate property located in the State of Florida with a carrying value of
$1,081,000. In the second quarter of 2003, the Bank sold this property for net
proceeds of approximately $1,030,000 (consisting of cash, after selling costs,
of $150,000 and a mortgage of $880,000 provided by the Bank). The net loss of
$51,000 from the sale was included in noninterest expenses (foreclosed real
estate expense) in the consolidated statement of earnings.
Deferred income tax asset relates primarily to the unrealized tax benefit on the
Company's allowance for loan losses. The allowance has been expensed for
financial statement purposes but it is currently deductible for income 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
$1,163,000 from Intervest Mortgage Corporation's issuance of its Series 1/21/03
and 7/25/03 debentures, $85,000 incurred by Intervest Mortgage Corporation
through December 31, 2003 on a new series that was issued in January 2004 and
$446,000 incurred by the Holding Company in connection with the issuance of
Capital Securities. These items were partially offset by normal amortization.
The increase in all other assets was due to the recording of a receivable of
$2,535,000 from the exercise of common stock warrants at year-end 2003. The
proceeds were received in January 2004.
Deposits
- --------
Deposits increased to $675,513,000 at December 31, 2003, from $505,958,000 at
December 31, 2002, reflecting increases in money market and certificate of
deposit accounts of $27,921,000 and $142,176,000, respectively. Management
believes that the Bank does not have a concentration of deposits from any one
source and that a large portion of its depositors are residents in the Bank's
primary market areas (although there has been growth in deposits from outside
the primary areas resulting from the Bank's deposit-gathering activities through
its web site on the internet: www.intervestnatbank.com). The Bank also does not
accept brokered deposits.
The following table sets forth the distribution of deposit accounts by type:
At December 31, 2003 At December 31, 2002
---------------------- ----------------------
($in thousands) Amount % of Total Amount % of Total
---------------------------------------------------------------------------
Demand deposits $ 6,210 1.0% $ 5,924 1.2%
Interest checking deposits 9,146 1.4 10,584 2.1
Savings deposits 30,784 4.5 30,174 6.0
Money market deposits 162,214 24.0 134,293 26.5
Certificates of deposit 467,159 69.1 324,983 64.2
---------------------------------------------------------------------------
Total deposit accounts (1) $675,513 100.0% $505,958 100.0%
---------------------------------------------------------------------------
(1) Includes individual retirement accounts totaling $74,170,000 and
$53,340,000 at December 31, 2003 and 2002, respectively, nearly
all of which are certificates of deposit.
The following table sets forth certificate of deposits by maturity for the
periods indicated:
At December 31, 2003 At December 31, 2002
---------------------- ----------------------
Wtd-Avg Wtd-Avg
($in thousands) Amount Stated Rate Amount Stated Rate
-------------------------------------------------------------------------
Within one year $182,693 2.75% $122,890 3.51%
Over one to two years 90,936 3.64 57,895 4.18
Over two to three years 30,094 4.43 31,281 5.53
Over three to four years 89,085 4.83 17,730 5.32
Over four years 74,351 4.20 95,187 4.92
-------------------------------------------------------------------------
$467,159 3.66% $324,983 4.33%
-------------------------------------------------------------------------
23
The following table sets forth the maturities of certificates of deposit in
denominations of $100,000 or more:
At December 31,
-------------------
($in thousands) 2003 2002
---------------------------------------------------------
Due within three months or less $ 7,514 $ 7,508
Due over three months to six months 7,446 6,122
Due over six months to one year 31,459 13,033
Due over one year 76,644 46,209
---------------------------------------------------------
$123,063 $72,872
---------------------------------------------------------
As a percentage of total deposits 18.2% 14.4%
---------------------------------------------------------
The following table sets forth net deposit flows:
For the Year Ended December 31,
---------------------------
($in thousands) 2003 2002 2001
-------------------------------------------------------------------
Net increase before interest credited $151,138 $126,230 $45,078
Net interest credited 18,417 17,291 17,118
-------------------------------------------------------------------
Net deposit increase $169,555 $143,521 $62,196
-------------------------------------------------------------------
Borrowed Funds and Interest Payable
- ---------------------------------------
The following table summarizes borrowed funds and interest payable:
At December 31, 2003 At December 31, 2002
--------------------- ---------------------
Accrued Accrued
($in thousands) Principal Interest Principal Interest
----------------------------------------------------------------------------------------------
Debentures - Intervest Mortgage Corporation $ 87,350 $ 12,052 $ 74,000 $ 10,751
Debentures - Holding Company 7,340 2,361 10,430 3,064
Capital Securities - Intervest Statutory Trusts 30,000 97 15,000 57
Mortgage note payable - Intervest National Bank 255 - 266 -
----------------------------------------------------------------------------------------------
$ 124,945 $ 14,510 $ 99,696 $ 13,872
----------------------------------------------------------------------------------------------
Intervest Mortgage Corporation had $87,350,000 of debentures outstanding at
December 31, 2003, compared to $74,000,000 at December 31, 2002. The increase
was due to the issuance of its Series 1/21/03 and 7/25/03 debentures totaling
$16,000,000 (with fixed rates of interest ranging from 6.5% to 7.25% and
maturing at various times through October 1, 2010) as part of its normal funding
of its mortgage loan originations. The new debentures were partially offset by
the repayment of $1,400,000 of its Series 11/10/98 debentures that matured on
January 1, 2003 and the early redemption on November 1, 2003 of $1,250,000 of
its Series 9/18/00 debentures due January 1, 2004. Proceeds from the issuance of
debentures, after underwriter's commissions and other issuance costs, amounted
to $14,826,000. In January 2004, Intervest Mortgage Corporation completed the
issuance of its Series 11/28/03 debentures in the aggregate principal amount of
$10,000,000. Intervest Mortgage Corporation intends to file an offering to issue
additional subordinated debentures. It is anticipated that debentures in an
aggregate principal amount of up to $11,500,000 will be issued in the second
quarter of 2004.
The Holding Company had $7,340,000 of debentures outstanding at December 31,
2003, compared to $10,430,000 at December 31, 2002. The decrease was due to the
early redemption on November 1, 2003 of $1,000,000 of its Series 12/15/00
non-convertible debentures due April 1, 2004 and the conversion of its
convertible debentures in the aggregate principal amount of $2,090,000 into
shares of Class A common stock at the election of the debenture holders at a
conversion price of $10.01 per share. At December 31, 2003, convertible
debentures outstanding totaled $4,840,000 and are convertible along with accrued
interest into its Class A common stock at the following conversion prices per
share: $12.00 in 2004; $14.00 in 2005; $16.00 in 2006; $18.00 in 2007 and $20.00
from January 1 through April 1, 2008.
Intervest Statutory Trust I and Intervest Statutory Trust II have Capital
Securities outstanding aggregating $30,000,000 at December 31, 2003, compared to
$15,000,000 at December 31, 2002. These securities qualify as regulatory
capital. The increase was due the issuance of an additional $15,000,000 of
Capital Securities. The Holding Company has invested the $30,000,000 at various
times as capital contributions to the Bank.
24
Accrued interest payable on borrowed funds amounted to $14,510,000 at year-end
2003, compared to $13,872,000 at year-end 2002. The increase was due to accruals
less repayments of interest, as well as a decrease of $1,010,000 resulting from
the conversion of convertible debentures. Nearly all of the accrued interest
payable is due and payable at the maturity of various debentures. For a further
discussion of the debentures and Capital Securities, including redemption
premiums, see notes 7 and 9 to the consolidated financial statements in this
report.
Intervest National Bank has a mortgage note payable outstanding totaling
$255,000 at December 31, 2003, compared to $266,000 at December 31, 2002, issued
in connection with the Bank's purchase in 2002 of property that is located
across from its Court Street branch office in Florida. The note matures in
February of 2017 and requires monthly payments of principal and interest at 7%
per annum.
All Other Liabilities
- -----------------------
The table below sets forth the composition of the caption "All other
liabilities" in the table on page 19 as follows:
At December 31,
----------------
($in thousands) 2003 2002
-------------------------------------------------------
Mortgage escrow funds payable 10,540 5,894
Official checks outstanding 6,122 4,373
Accrued interest payable on deposits 1,080 895
Income taxes payable 807 526
All other 1,693 1,639
-------------------------------------------------------
$20,242 $13,327
-------------------------------------------------------
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted to third parties. The increase reflected
the growth in the loan portfolio as well as the timing of payments to taxing
authorities. Official checks outstanding varies and fluctuates based on banking
activity. Accrued interest payable on deposits fluctuates based on total
deposits and timing of interest payments. Income taxes payable fluctuates based
on the Company's earnings, effective tax rate and timing of tax payments. All
other is comprised mainly of accrued expenses as well as fees received on loan
commitments that have not yet been funded.
Stockholders' Equity
- ---------------------
Stockholders' equity increased to $75,385,000 from $53,126,000 at year-end 2002
as follows:
($in thousands) Amount Shares
---------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2002 $53,126 4,703,087
Net earnings for the year 9,120 -
Class A common stock warrants exercised 9,466 945,717
Convertible debentures converted at election of debenture holders 3,014 309,573
Class B common stock issued to purchase Intervest Securities Corporation 215 30,000
Compensation expense on warrants held by employee and directors (1) 444 -
---------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2003 $75,385 5,988,377
---------------------------------------------------------------------------------------------
<FN>
(1) For discussion of compensation related to stock warrants, see note 14 to the
consolidated financial statements in this report.
LIQUIDITY
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of: retail deposits obtained through the Bank's branch offices
and through the mail; amortization, satisfactions and repayments of loans; the
maturities and calls of securities; issuance of debentures; borrowings 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. The Company believes that it can fund its
contractual obligations from the aforementioned sources of funds. As a member
of the FHLB and the FRB, the Bank can borrow from these institutions on a
secured basis of up to $145,000,000 in aggregate at December 31, 2003 based on
available collateral. The Bank also has agreements with correspondent banks
whereby it can borrow on an overnight, unsecured basis of up to $16,000,000. On
March 17, 2004, the Holding Company completed the issuance of an additional $15
million of trust preferred capital securities.
25
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
The Company currently does not have any non-consolidated special purpose
arrangements. The Company is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. For a further discussion of these financial instruments, see note 19
to the consolidated financial statements in this report.
CONTRACTUAL OBLIGATIONS
The table below summarizes the Company's contractual obligations as of December
31, 2003.
Due In
---------------------------------------
2005 and 2007 and 2009 and
($in thousands) Total 2004 2006 2008 Later
- ------------------------------------------------------------------------------------------------------
Subordinated debentures and mortgage note payable $ 94,945 $ 20,013 $ 39,385 $ 21,387 $ 14,160
Subordinated debentures - capital securities 30,000 - - - 30,000
Accrued interest payable on all debentures 14,510 6,808 4,707 2,838 157
Deposits with no stated maturities 208,354 208,354 - - -
Deposits with stated maturities 467,159 182,693 121,030 152,667 10,769
Operating lease payments 9,245 1,002 1,818 1,708 4,717
Unfunded loan commitments (1) 123,791 122,109 1,682 - -
Available lines of credit (1) 825 825 - - -
Standby letters of credit (1) 100 - 100 - -
- ------------------------------------------------------------------------------------------------------
$ 948,929 $541,804 $168,722 $ 178,600 $ 59,803
- ------------------------------------------------------------------------------------------------------
<FN>
(1) Since some of the commitments are expected to expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements. The FDIC and
other bank regulatory agencies use five capital categories ranging from well
capitalized to critically undercapitalized to determine various matters,
including prompt corrective action and each institution's FDIC deposit insurance
premiums. These categories involve quantitative measures of a bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by the
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements.
The Bank is required to maintain regulatory defined minimum Tier 1 leverage and
Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%,
respectively. At December 31, 2003 and 2002, management believes the Bank met
its capital adequacy requirements and is a well-capitalized institution as
defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and
total risk-based ratios of 5%, 6% and 10%, respectively. Management believes
that there are no current conditions or events 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 as follows:
At December 31,
--------------------
($in thousands) 2003 2002
------------------------------------------------------------------------------------------
Tier 1 Capital: Stockholder's equity $ 73,907 $ 51,936
Disallowed portion of deferred tax asset (2,508) (1,623)
--------------------
71,399 50,313
Tier 2 Capital: Allowable portion of allowance for loan losses 6,310 4,464
------------------------------------------------------------------------------------------
Total risk-based capital $ 77,709 $ 54,777
------------------------------------------------------------------------------------------
Net risk-weighted assets $620,155 $450,599
Average assets for regulatory purposes $739,234 $569,204
------------------------------------------------------------------------------------------
Tier 1 capital to average assets 9.66% 8.84%
Tier 1 capital to risk-weighted assets 11.51% 11.17%
Total capital to risk-weighted assets 12.53% 12.16%
------------------------------------------------------------------------------------------
26
The Holding Company on a consolidated basis is subject to minimum regulatory
capital requirements administered by the FRB. These guidelines require a ratio
of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted
assets of at least 4% and a ratio of total capital to risk-weighted assets of at
least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted
total average assets of not less than 3%. At December 31, 2003 and 2002,
management believes that the Holding Company met its capital adequacy
requirements.
Information regarding the Holding Company's regulatory capital and related
ratios is summarized below:
At December 31,
--------------------
($in thousands) 2003 2002
-----------------------------------------------------------------------------------------
Tier 1 Capital: Stockholder's equity $ 75,385 $ 53,126
Capital Securities limited to 25% of core capital 25,122 15,000
--------------------
Total core capital elements 100,507 68,126
Disallowed portion of deferred tax asset (2,936) (1,973)
-----------------------------------------------------------------------------------------
Total Tier 1 Capital 97,571 66,153
-----------------------------------------------------------------------------------------
Tier 2 Capital : Excess Capital Securities 4,878 -
Allowable portion of allowance for loan losses 6,580 4,611
-----------------------------------------------------------------------------------------
Total Tier 2 Capital 11,458 4,611
-----------------------------------------------------------------------------------------
Total risk-based capital $109,029 $ 70,764
-----------------------------------------------------------------------------------------
Net risk-weighted assets $734,839 $541,776
Average assets for regulatory purposes $862,873 $669,693
-----------------------------------------------------------------------------------------
Tier 1 capital to average assets 11.31% 9.88%
Tier 1 capital to risk-weighted assets 13.28% 12.21%
Total capital to risk-weighted assets 14.84% 13.06%
-----------------------------------------------------------------------------------------
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital
Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net
capital of $5,000. At December 31, 2003 and 2002, Intervest Securities
Corporation's net capital was $459,000 and $208,000, respectively.
ASSET AND LIABILITY MANAGEMENT
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The 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.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. An asset
or liability is normally considered to be interest-rate sensitive if it will
reprice or mature within one year or less. The interest-rate sensitivity gap is
the difference between interest-earning assets and interest-bearing liabilities
scheduled to mature or reprice within one-year. A gap is considered positive
when the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. Conversely, a gap is considered negative when the
opposite is true.
In a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to increase net
interest income. In a period of falling interest rates, a negative gap would
tend to increase net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of the Company's assets
and liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates for the
following reasons. Income associated with interest-earning assets and costs
associated with interest-bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in market rates. In addition,
certain assets, such as adjustable-rate mortgage loans, may have features
generally referred to as "interest rate caps or collars," which limit changes in
interest rates on a short-term
27
basis and over the life of the asset. In the event of a change in interest
rates, asset prepayment and early deposit withdrawal levels also could deviate
significantly from those assumed in calculating the interest-rate gap. The
ability of many borrowers to service their debts also may decrease in the event
of an interest-rate increase, and the behavior of depositors may be different
than those assumed in the gap analysis.
The Company's one-year positive interest rate sensitivity gap remained
relatively unchanged at $118,124,000, or 13.0% of total assets, at December 31,
2003, compared to $107,681,000, or 15.7% at December 31, 2002. For purposes of
computing the gap, all deposits with no stated maturities are treated as readily
accessible accounts. However, if such deposits were treated differently, then
the gap would change. The behavior of core depositors may not necessarily result
in the immediate withdrawal of funds in the event deposit rates offered by the
Bank did not change as quickly and uniformly as changes in general market rates.
For example, if only 25% of deposits with no stated maturity were assumed to be
readily accessible, the one-year gap would have been a positive 29.6% at
year-end 2003, compared to a positive 34.8% at year-end 2002.
Many of the Company's floating-rate loans have a "floor," or minimum rate, that
is determined in relation to prevailing market rates on the date of origination.
This floor only adjusts upwards in the event of increases in the loan's interest
rate. This feature reduces the effect on interest income of a falling rate
environment because the interest rates on such loans do not reset downward.
Notwithstanding all of the above, there can be no assurances that a sudden and
substantial increase in interest rates may not adversely impact the Company's
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
The table below summarizes interest-earning assets and interest-bearing
liabilities as of December 31, 2003, that are scheduled to mature or reprice
within the periods shown.
0-3 4-12 Over 1-4 Over 4
--------- --------- ---------- ---------
($in thousands) Months Months Years Years Total
- --------------------------------------------------------------------------------------------------
Loans (1) $203,097 $217,979 $ 173,273 $ 84,507 $678,856
Securities held to maturity (2) 20,360 56,654 75,809 - 152,823
Short-term investments 55,295 - - - 55,295
FRB and FHLB stock 1,691 - - 1,384 3,075
- --------------------------------------------------------------------------------------------------
Total rate-sensitive assets $280,443 $274,633 $ 249,082 $ 85,891 $890,049
- --------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 9,146 $ - $ - $ - $ 9,146
Savings deposits 30,784 - - - 30,784
Money market deposits 162,214 - - - 162,214
Certificates of deposit 33,558 149,135 210,115 74,351 467,159
- --------------------------------------------------------------------------------------------------
Total deposits 235,702 149,135 210,115 74,351 669,303
- --------------------------------------------------------------------------------------------------
Debentures and mortgage note payable (1) 41,500 2,000 20,850 30,595 94,945
Debentures payable- capital securities (1) - - - 30,000 30,000
Accrued interest on all debentures 7,659 956 2,966 2,929 14,510
- --------------------------------------------------------------------------------------------------
Total borrowed funds 49,159 2,956 23,816 63,524 139,455
- --------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $284,861 $152,091 $ 233,931 $137,875 $808,758
- --------------------------------------------------------------------------------------------------
GAP (repricing differences) $ (4,418) $122,542 $ 15,151 $(51,984) $ 81,291
- --------------------------------------------------------------------------------------------------
Cumulative GAP $ (4,418) $118,124 $ 133,275 $ 81,291 $ 81,291
- --------------------------------------------------------------------------------------------------
Cumulative GAP to total assets -0.5% 13.0% 14.6% 8.9% 8.9%
- --------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the gap table above:
(1) Floating-rate loans and debentures payable are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they mature. Fixed-rate loans and debentures payable are
scheduled, including repayments, according to their contractual maturities.
Deferred loan fees are excluded from this analysis; (2) securities are scheduled
according to the earlier of their contractual maturity or the date in which the
interest rate is scheduled to increase. The effects of possible prepayments that
may result from the issuer's right to call a security before its contractual
maturity date are not considered; (3) interest checking, savings and money
market deposits are regarded as ready accessible withdrawable accounts; and
certificates of deposit are scheduled through their maturity dates.
28
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002.
General
- -------
Consolidated net earnings for 2003 increased 32% to $9,120,000, or $1.53 per
fully diluted share, from $6,906,000, or $1.37 per fully diluted share, for
2002. Net earnings for 2003 represent the highest level of earnings reported by
the Company since its inception in 1993. The growth in earnings was due to a
$4,746,000 increase in net interest and dividend income and a $1,103,000
increase in noninterest income, partially offset by a $2,160,000 increase in the
provision for income taxes, a $780,000 increase in noninterest expenses, and a
$695,000 increase in the provision for loan losses.
The diluted per share computation for 2003 included a higher number of common
shares outstanding resulting from the exercise of common stock warrants,
conversion of debentures and a higher stock price. Return on average assets and
equity was 1.19% and 15.34%, respectively, for 2003, compared to 1.13% and
15.56% for 2002.
Selected information regarding results of operations by entity for 2003 follows:
Intervest Intervest Intervest Intervest Inter-
National Mortgage Statutory Securities Holding Company
($in thousands) Bank Corp Trusts Corp (2) Company Amts (3) Combined
- ---------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 40,232 $ 9,269 $ 1,829 $ 3 $ 1,125 $ (1,994) $ 50,464
Interest expense 18,620 7,140 1,774 - 3,024 (1,994) 28,564
----------------------------------------------------------------------------------
Net interest and dividend income 21,612 2,129 55 3 (1,899) - 21,900
Provision for loan losses 1,846 91 - - 32 - 1,969
Noninterest income 2,687 2,799 - 38 346 (2,549) 3,321
Noninterest expenses 7,372 1,582 55 51 748 (2,549) 7,259
----------------------------------------------------------------------------------
Earnings before taxes 15,081 3,255 - (10) (2,333) - 15,993
Provision for income taxes 6,414 1,496 - (4) (1,033) - 6,873
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 8,667 $ 1,759 $ - $ (6) $ (1,300) $ - $ 9,120
- ---------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (1,695) $ - $ - $ - $ 1,695 $ - $ -
Net earnings for 2002 $ 6,459 $ 1,567 $ - $ - $ (1,120) $ - $ 6,906
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company provide funds for the debt service on the Capital Securities which is
included in interest expense.
(2) Results are from date of acquisition, June 2, 2003 through December 31, 2003.
(3) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise
from intercompany deposit accounts, investments, borrowed funds and management and service agreements.
Net Interest and Dividend Income
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased $4,746,000 to $21,900,000 in 2003,
from $17,154,000 in 2002. The increase was attributable to growth of
$158,223,000 in average interest-earning assets and a slightly higher net
interest margin. The growth in assets is reflected in new mortgage loans of
$146,315,000 and new security and short-term investments aggregating
$11,908,000. The growth in assets was funded primarily by $118,602,000 of
interest-bearing deposits, $18,832,000 of additional borrowed funds and a
$15,067,000 increase in stockholders' equity.
The Company's net interest margin increased to 2.90% in 2003 from 2.88% in 2002.
The increase was due to the Company's cost of funds decreasing at a faster pace
than its yield on interest-earning assets in a declining interest rate
environment. The yield on interest-earning assets decreased 60 basis points (bp)
to 6.69% in 2003 primarily due to lower rates on new mortgage loans originated,
prepayments of higher-yielding loans and lower yields earned on security and
other short-term investments (including the effect of early calls of securities
with the resulting proceeds being invested in lower yielding securities). The
cost of funds decreased 64 bp to 4.17% in 2003 largely due to lower rates paid
on deposit accounts and $41,500,000 of floating-rate debentures. The debentures
are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of
25 bp from year-end 2002.
29
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2003 and 2002. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
-------------------------------
2003 2002
-------------------------------- ------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $585,556 $ 47,223 8.06% $439,241 $ 39,273 8.94%
Securities 143,766 2,965 2.06 142,840 3,964 2.78
Other interest-earning assets 24,983 276 1.10 14,001 242 1.73
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 754,305 $ 50,464 6.69% 596,082 $ 43,479 7.29%
- -------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 13,686 14,586
- -------------------------------------------------------------------------------------------------------------------
Total assets $767,991 $610,668
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 11,120 $ 182 1.64% $ 9,521 $ 221 2.32%
Savings deposits 31,782 601 1.89 29,221 762 2.61
Money market deposits 146,509 2,763 1.89 119,582 3,082 2.58
Certificates of deposit 370,235 14,891 4.02 282,720 13,304 4.71
- -------------------------------------------------------------------------------------------------------------------
Total deposit accounts 559,646 18,437 3.29 441,044 17,369 3.94
- -------------------------------------------------------------------------------------------------------------------
Federal funds purchased - - - 116 2 1.87
Debentures and accrued interest payable 105,347 8,316 7.89 90,777 7,440 8.20
Debentures - capital securities 19,356 1,793 9.26 15,000 1,497 9.98
Mortgage note payable 261 18 7.00 239 17 7.00
- -------------------------------------------------------------------------------------------------------------------
Total borrowed funds 124,964 10,127 8.10 106,132 8,956 8.44
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 684,610 $ 28,564 4.17% 547,176 $ 26,325 4.81%
- -------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,666 5,277
Noninterest-bearing liabilities 18,264 13,831
Stockholders' equity 59,451 44,384
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $767,991 $610,668
- -------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 21,900 2.52% $ 17,154 2.48%
- -------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 69,695 2.90% $ 48,906 2.88%
- -------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.09x
- -------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 1.19% 1.13%
Return on average equity 15.34% 15.56%
Noninterest expense to average assets 0.95% 1.06%
Efficiency ratio (2) 28.78% 33.45%
Average stockholders' equity to average assets 7.74% 7.27%
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes nonaccrual loans.
(2) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and
dividend income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
30
For the Year Ended December 31, 2003 vs. 2002
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($in thousands) Rate Volume Rate/Volume Total
- --------------------------------------------------------------------------------------
Interest-earning assets:
Loans $(3,850) $13,082 $ (1,282) $7,950
Securities (1,018) 26 (7) (999)
Other interest-earning assets (87) 190 (69) 34
- --------------------------------------------------------------------------------------
Total interest-earning assets (4,955) 13,298 (1,358) 6,985
- --------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (65) 37 (11) (39)
Savings deposits (209) 67 (19) (161)
Money market deposits (827) 694 (186) (319)
Certificates of deposit (1,933) 4,118 (598) 1,587
- --------------------------------------------------------------------------------------
Total deposit accounts (3,034) 4,916 (814) 1,068
- --------------------------------------------------------------------------------------
Total borrowed funds (384) 1,629 (73) 1,172
- --------------------------------------------------------------------------------------
Total interest-bearing liabilities (3,418) 6,545 (887) 2,240
- --------------------------------------------------------------------------------------
Net change in interest and dividend income $(1,537) $ 6,753 $ (471) $4,745
- --------------------------------------------------------------------------------------
Provision for Loan Losses
- ----------------------------
The provision for loan losses increased to $1,969,000 in 2003 from $1,274,000 in
2002 and is based on management's ongoing assessment of the adequacy of the
allowance for loan losses that takes into consideration a number of factors. See
the caption "Allowance for Loan Losses" in the section entitled "Comparison of
Financial Condition at December 31, 2003 and 2002" in this report for a
discussion of these factors. The higher provision was a function of loan growth
($183,554,000 in 2003 versus $123,028,000 in 2002).
Noninterest Income
- -------------------
Noninterest income increased $1,103,000 to $3,321,000 in 2003 and is summarized
as follows:
For the Year Ended December 31,
-------------------------------
($in thousands) 2003 2002
- -------------------------------------------------------------------------------------
Customer service fees $ 187 $ 171
Income from mortgage lending activities (1) 824 485
Income from the early repayment of mortgage loans (2) 2,317 1,435
Gain from the sale of securities available for sale - 120
Commissions and fees 38 -
(Loss) gain from early call of investment securities (51) 7
All other noninterest income 6 -
- -------------------------------------------------------------------------------------
$ 3,321 $ 2,218
- -------------------------------------------------------------------------------------
<FN>
(1) Consists mostly of fees from expired loan commitments and loan
servicing, maintenance and inspections charges.
(2) Consists of the recognition of any unearned fees at the time of payoff
and the receipt of prepayment penalties in certain cases.
The increase of $1,103,000 was due to higher income of $882,000 from the
prepayment of mortgage loans and increases in fees earned on expired loan
commitments and loan service charge income aggregating $339,000. These items
were partially offset by a gain of $120,000 from the sale of securities in 2002.
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.
31
Noninterest Expenses
- ---------------------
Noninterest expenses increased $780,000 to $7,259,000 in 2003 and is summarized
as follows:
For the Year Ended December 31,
-----------------------------------
($in thousands) 2003 2002
- -----------------------------------------------------------------------
Salaries and employee benefits $ 3,655 $ 3,016
Occupancy and equipment, net 1,270 1,318
Data processing 533 564
Advertising and promotion 35 69
Professional fees and services 364 350
Stationery, printing and supplies 152 141
Postage and delivery 101 93
FDIC and general insurance 225 179
All other 924 749
- -----------------------------------------------------------------------
$ 7,259 $ 6,479
- -----------------------------------------------------------------------
Salaries and employee benefits expense increased due to the following: $613,000
from additional staff (61 employees at year-end 2003 versus 56 at year-end
2002), salary increases and a higher cost of employee benefits; and $309,000
from common stock warrants held by employees and directors. These items were
partially offset by a $133,000 increase in SFAS No. 91 direct fee income (due to
more loan originations as well as a higher amount recognized per loan) and bonus
payments totaling $150,000 to the Chairman of the Company in 2002 that did not
recur in 2003. See note 14 to the consolidated financial statements in this
report for additional information on common stock warrants.
Occupancy and equipment expenses was lower due to an increase in sublease rental
income ($40,000) from the Bank's Florida branches as well as depreciation
expense ($50,000) recorded in 2002 in connection with the disposal of various
equipment by the Bank that did not recur in 2003. These items were partially
offset by rent expense incurred by Intervest Mortgage Corporation from leasing
additional space in 2003.
Data processing expenses decreased slightly from 2002. In December 2003, the
Bank renegotiated its data processing contract by extending the expiration date
to 2010 and reducing the processing fee to a fixed amount until its assets reach
$1.1 billion and thereafter the fee is calculated based on total assets.
Previously, the data processing fee was variable and function of the Bank's
total assets.
Advertising and promotion expenses decreased due to less advertising for loans
and deposits. FDIC and general insurance expense increased due to higher FDIC
premiums (due to deposit growth) and general insurance premiums (due to rate
increases).
All other expenses were higher primarily due to increases in director expense of
$134,000 (resulting from higher director and committee fees per meeting
beginning June 2003) and operational losses of $23,000 (resulting from growth in
transactional deposit accounts).
Provision for Income Taxes
- -----------------------------
The provision for income taxes increased $2,160,000 to $6,873,000 in 2003, from
$4,713,000 in 2002, due to higher pre-tax income. The Company's effective tax
rate (inclusive of state and local taxes) amounted to 43.0% in 2003, compared to
40.6% in 2002. The higher rate is due to a larger portion of consolidated
taxable income being generated from New York operations, which has a higher
income tax rate than Florida.
32
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 represented 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
$662,000 increase in the provision for loan losses. The fully diluted earnings
per share computation in 2002 included a higher number of common shares
resulting from common stock warrants and convertible debentures outstanding that
became dilutive during the year. Return on average assets and equity increased
to 1.13% and 15.56%, respectively, for 2002, up from 0.85% and 9.94% for 2001.
Selected information regarding results of operations for 2002 follows:
Intervest Intervest Intervest Inter-
National Mortgage Statutory Holding Company
($in thousands) Bank Corporation Trust I Company Amts (2) Combined
- -----------------------------------------------------------------------------------------------------------------
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 16,683 2,132 46 (1,707) - 17,154
Provision for loan losses 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 before taxes 10,889 2,774 - (2,044) - 11,619
Provision for income taxes 4,430 1,207 - (924) - 4,713
- -----------------------------------------------------------------------------------------------------------------
Net earnings $ 6,459 $ 1,567 $ - $ (1,120) $ - $ 6,906
- -----------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) $ (1,500) $ - $ - $ 1,500 $ - $ -
Net earnings for 2001 $ 3,404 $ 577 $ - $ (203) $ - $ 3,778
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company provide funds for the debt service on the Capital Securities which is
included in interest expense.
(2) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts
arise from intercompany deposit accounts, investments, borrowed funds and management and service agreements.
Net Interest and Dividend Income
- ------------------------------------
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 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 $6,395,000
increase in stockholders' equity.
The increase in the margin was due to the cost of funds decreasing at a faster
pace than the yield earned on interest-earning assets in a declining interest
rate environment. The yield on interest-earning assets decreased 86 basis points
to 7.29% in 2002 due to lower rates on new mortgage loans originated,
prepayments of higher-yielding loans and lower yields earned on security and
other short-term investments (including the effect of early calls of securities
with the resulting proceeds being invested in lower yielding securities). The
cost of funds decreased 146 basis points to 4.81% in 2002, primarily due to
lower rates paid on deposit accounts and rate decreases on floating-rate
debentures. The floating-rate debentures are indexed to the JPMorgan Chase Bank
prime rate, which decreased by a total of 525 basis points from January 2001 to
December 2002.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2002 and 2001. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived mainly from daily balances. Net interest margin is computed by dividing
net interest and dividend income by the average of total interest-earning assets
during each year.
33
For the Year Ended December 31,
-------------------------------
2002 2001
------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -----------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $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
Debentures - capital securities 15,000 1,497 9.98 586 58 9.90
Mortgage 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 (2) 33.45% 42.76%
Average stockholders' equity to average assets 7.27% 8.50%
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes nonaccrual loans.
(2) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and
dividend income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
34
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
- ----------------------------------------------------------------------------------------
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 Losses
- ----------------------------
The provision for loan losses increased to $1,274,000 in 2002 from $612,000 in
2001 due largely to loan growth (of $123,028,000 in 2002 versus $103,969,000 in
2001), as well as an increase in the Bank's internal reserve percentages used in
calculating the allowance.
Noninterest Income
- -------------------
Noninterest income increased $563,000 to $2,218,000 in 2002 and is summarized as
follows:
For the Year Ended December 31,
-------------------------------
($in thousands) 2002 2001
-------------------------------------------------------------------------------
Customer service fees $ 171 $ 159
Income from mortgage lending activities (1) 485 341
Income from the early repayment of mortgage loans (2) 1,435 1,149
Gain form the sale of securities available for sale 120 -
Gain from early call of investment securities 7 6
-------------------------------------------------------------------------------
$2,218 $1,655
-------------------------------------------------------------------------------
<FN>
(1) Consists mostly of fees from expired loan commitments and loan
servicing, maintenance and inspections charges.
(2) Consists of the recognition of any unearned fees at the time of payoff
and the receipt of prepayment penalties in certain cases.
The increase of $563,000 was due to higher income of $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 2002, the
Bank sold securities available for sale totaling $3,500,000 and recognized a
gain of $120,000.
Noninterest Expenses
- ---------------------
Noninterest expenses increased $1,176,000 to $6,479,000 in 2002 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($in thousands) 2002 2001
------------------------------------------------------------
Salaries and employee benefits $3,016 $2,451
Occupancy and equipment, net 1,318 1,177
Data processing 564 329
Advertising and promotion 69 25
Professional fees and services 350 341
Stationery, printing and supplies 141 137
FDIC and general insurance 179 177
Postage and delivery 93 91
All other 749 575
------------------------------------------------------------
$6,479 $5,303
------------------------------------------------------------
35
Salaries and employee benefits expense increased 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 from common stock warrants held by employees and
directors. See note 14 to the consolidated financial statements in this report
for information on common stock warrants.
Occupancy and equipment expenses increased primarily due to increased
depreciation expense and higher real estate taxes and maintenance charges,
including insurance and security protection expenses.
Data processing expenses increased due to growth in the Bank's assets. The Bank
engages a third-party servicer for its 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. Advertising expenses increased due
to additional advertising to support loan and deposit growth.
All other expenses was higher primarily due to the following: an increase in
operational losses of $100,000 (which was a direct function of growth in the
Bank's transactional deposit accounts); the addition of $114,000 of net expenses
associated with foreclosed real estate (which consist, net of any rental income,
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); and increases in telephone expense
($22,000); franchise taxes ($36,000); and registrar fees ($20,000). These
increases were partially offset by approximately $150,000 of expenses in 2001
associated with the merger of Intervest Bank into Intervest National Bank that
did not recur in 2002.
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.
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, 2003 and 2002, 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."
36
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 39)
- - Independent Auditors' Report - Eisner LLP (PAGE 40)
- - Consolidated Balance Sheets at December 31, 2003 and 2002 (PAGE 41)
- - Consolidated Statements of Earnings for the Years Ended December 31, 2003,
2002 and 2001 (PAGE 42)
- - Consolidated Statements of Comprehensive Income for the Years Ended December
31, 2003, 2002 and 2001 (PAGE 43)
- - Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001 (PAGE 44)
- - Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001 (PAGE 45)
- - Notes to the Consolidated Financial Statements (PAGES 46 TO 67)
SUPPLEMENTARY DATA
Securities Available for Sale
- --------------------------------
The following table sets forth information regarding securities available for
sale:
After One Year to After Five Years to
----------------- -------------------
One Year or Less Five Years Ten Years Total
----------------- ----------------- ----------------- -----------------
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
($in thousands) Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------
At December 31, 2001:
- ---------------------
U.S. government agencies $ 2,571 5.78% $ 3,621 5.46% $ - - % $ 6,192 5.59%
- -----------------------------------------------------------------------------------------------------
There were no securities available for sale at December 31, 2003 and 2002.
Securities Held to Maturity
- ------------------------------
The following table sets forth information regarding securities held to
maturity:
After One Year to After Five Years to
----------------- -------------------
One Year or Less Five Years Ten Years Total
----------------- ----------------- ----------------- -----------------
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
($in thousands) Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------
At December 31, 2003:
- ---------------------
U.S. government agencies $ 70,026 1.68% $ 82,797 1.81% $ - - % $ 152,823 1.75%
At December 31, 2002:
- ---------------------
U.S. government agencies $ 75,566 2.52% $ 70,128 2.25% $ - - % $ 145,694 2.39%
At December 31, 2001:
- ---------------------
U.S. government agencies $ 79,411 2.85% $ 19,746 3.02% $ - - % $ 99,157 2.89%
- -----------------------------------------------------------------------------------------------------
37
SUPPLEMENTARY DATA, CONTINUED
Loans and Allowance for Loan Losses
- ----------------------------------------
The following table sets forth information regarding loans receivable at
December 31:
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Carrying Carrying Carrying Carrying Carrying
($in thousands) value value value value value
- ---------------------------------------------------------------------------------------------------------
Commercial real estate and multifamily loans $ 654,721 $ 489,611 $ 365,736 $ 260,753 $ 207,521
Land development and other land loans 20,526 1,890 2,485 2,531 2,501
Residential 1-4 family loans 1,628 1,953 2,404 3,034 2,311
Commercial business loans 1,662 1,608 1,363 1,781 2,107
Consumer loans 319 240 286 206 242
----------------------------------------------------------
Loans receivable 678,856 495,302 372,274 268,305 214,682
Deferred loan fees (7,731) (5,390) (3,748) (1,979) (1,745)
----------------------------------------------------------
Loans receivable, net of deferred fees 671,125 489,912 368,526 266,326 212,937
Allowance for loan losses (6,580) (4,611) (3,380) (2,768) (2,493)
- ---------------------------------------------------------------------------------------------------------
Loans receivable, net $ 664,545 $ 485,301 $ 365,146 $ 263,558 $ 210,444
- ---------------------------------------------------------------------------------------------------------
Loans included above that were
on a nonaccrual status at year end $ 8,474 $ - $ 1,243 $ - $ -
- ---------------------------------------------------------------------------------------------------------
The following table sets forth information regarding the allowance for loan
losses at December 31:
($in thousands) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 4,611 $ 3,380 $ 2,768 $ 2,493 $ 1,662
Provision charged to operations 1,969 1,274 612 275 830
Chargeoffs - (150) - - -
Recoveries - 107 - - 1
- --------------------------------------------------------------------------------------------------
Allowance at end of year $ 6,580 $ 4,611 $ 3,380 $ 2,768 $ 2,493
- --------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $671,125 $489,912 $368,526 $266,326 $212,937
Average loans outstanding during the year $585,556 $439,241 $315,148 $250,941 $175,980
Ratio of allowance to net loans receivable 0.98% 0.94% 0.92% 1.04% 1.17%
- --------------------------------------------------------------------------------------------------
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.
38
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, 2003 and 2002 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, 2003. 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 whose total assets as of December 31, 2003 and 2002,
constituted 11.1% and 13.6% of the related consolidated totals, respectively,
and whose net interest income, noninterest income and net earnings, constituted
9.7%, 14.8% and 19.3%, respectively in 2003, 12.4%, 21.9% and 22.7%,
respectively in 2002 and 10.4%, 42.5% and 15.3%, respectively in 2001, 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, 2003
and 2002, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2003 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
February 6, 2004
With respect to Note 3
March 16, 2004
39
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 and Subsidiaries as of December 31, 2003 and 2002 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, 2003
(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 financial statements referred to above fairly
present, in all material respects, the consolidated financial position of
Intervest Mortgage Corporation and subsidiaries as of December 31, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Eisner LLP
- ----------------
Eisner LLP
New York, New York
February 3, 2004
With respect to Note 3
March 16, 2004
40
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
---------------
($ in thousands, except par value) 2003 2002
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 8,833 $ 10,351
Federal funds sold 36,816 9,114
Commercial paper 5,580 7,950
Other short-term investments 12,899 3,434
-------- ---------
Total cash and cash equivalents 64,128 30,849
Time deposits with banks - 2,000
Securities held to maturity, net 152,823 145,694
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 3,075 1,108
Loans receivable (net of allowance for loan losses of $6,580 and $4,611, respectively) 664,545 485,301
Accrued interest receivable 4,995 4,263
Loan fees receivable 5,622 3,706
Premises and equipment, net 5,752 6,098
Foreclosed real estate - 1,081
Deferred income tax asset 2,960 1,997
Deferred debenture offering costs, net 4,023 3,498
Other assets 2,672 384
===========================================================================================================
TOTAL ASSETS $910,595 $ 685,979
===========================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 6,210 $ 5,924
Interest-bearing deposit accounts:
Checking (NOW) accounts 9,146 10,584
Savings accounts 30,784 30,174
Money market accounts 162,214 134,293
Certificate of deposit accounts 467,159 324,983
-------- ---------
Total deposit accounts 675,513 505,958
Subordinated debentures 94,690 84,430
Subordinated debentures - capital securities 30,000 15,000
Accrued interest payable on all debentures 14,510 13,872
Mortgage note payable 255 266
Accrued interest payable on deposits 1,080 895
Mortgage escrow funds payable 10,540 5,894
Official checks outstanding 6,122 4,373
Other liabilities 2,500 2,165
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 835,210 632,853
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 5, 17 and 19)
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
5,603,377 and 4,348,087 shares issued and outstanding, respectively) 5,603 4,348
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 and 355,000 shares issued and outstanding, respectively) 385 355
Additional paid-in-capital, common 35,988 24,134
Retained earnings 33,409 24,289
- -----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 75,385 53,126
===========================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $910,595 $ 685,979
===========================================================================================================
See accompanying notes to consolidated financial statements.
41
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
-------------------------------
($ in thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 47,223 $ 39,273 $ 30,187
Securities 2,965 3,964 3,423
Other interest-earning assets 276 242 1,852
- --------------------------------------------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME 50,464 43,479 35,462
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 18,437 17,369 17,079
Subordinated debentures 8,316 7,440 7,577
Subordinated debentures - capital securities 1,793 1,497 58
Mortgage note payable 18 17 -
Federal funds purchased - 2 -
- --------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 28,564 26,325 24,714
- --------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME 21,900 17,154 10,748
Provision for loan losses 1,969 1,274 612
- --------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 19,931 15,880 10,136
- --------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 187 171 159
Income from mortgage lending activities 824 485 341
Income from the early repayment of mortgage loans 2,317 1,435 1,149
Commissions and fees 38 - -
Gain from the sales of securities available for sale - 120 -
(Loss) gain from early call of investment securities (51) 7 4
All other 6 - 2
- --------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 3,321 2,218 1,655
- --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 3,655 3,016 2,451
Occupancy and equipment, net 1,270 1,318 1,177
Data processing 533 564 329
Advertising and promotion 35 69 25
Professional fees and services 364 350 341
Stationery, printing and supplies 152 141 137
Postage and delivery 101 93 91
FDIC and general insurance 225 179 177
All other 924 749 575
- --------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 7,259 6,479 5,303
- --------------------------------------------------------------------------------------------------
Earnings before income taxes 15,993 11,619 6,488
Provision for income taxes 6,873 4,713 2,710
==================================================================================================
NET EARNINGS $ 9,120 $ 6,906 $ 3,778
==================================================================================================
BASIC EARNINGS PER SHARE $ 1.85 $ 1.71 $ 0.97
DILUTED EARNINGS PER SHARE $ 1.53 $ 1.37 $ 0.97
DIVIDENDS PER SHARE $ - $ - $ -
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
($ in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 9,120 $ 6,906 $ 3,778
- -------------------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains on available-for-sale securities - (72) 596
Reclassification adjustment for gains realized in earnings - (120) -
--------------------------------
Net unrealized (losses) gains on available-for-sale securities - (192) 596
Credit (provision) for income taxes related to unrealized (losses) gains
on available-for-sale securities - 81 (233)
- -------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax - (111) 363
=============================================================================================================
TOTAL COMPREHENSIVE INCOME, NET OF TAX $ 9,120 $ 6,795 $ 4,141
=============================================================================================================
See accompanying notes to consolidated financial statements.
43
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
--------------------------------
($ in thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of year $ 4,348 $ 3,545 $ 3,545
Issuance of 945,717 and 803,458 shares in 2003 and 2002, respectively,
upon the exercise of warrants 946 803 -
Issuance of 309,573 shares upon the conversion of debentures 309 - -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 5,603 4,348 3,545
- ---------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of year 355 355 355
Issuance of 30,000 shares to acquire Intervest Securities Corporation 30 - -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 385 355 355
- ---------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of year 24,134 19,001 18,975
Compensation related to vesting of certain Class B stock warrants 26 26 26
Compensation related to certain Class A stock warrants modified 418 109 -
Issuance of 30,000 shares of Class B stock to acquire
Intervest Securities Corporation 185 - -
Issuance of 945,717 and 803,458 shares in 2003 and 2002, respectively,
upon the exercise of stock warrants, inclusive of tax benefits 8,520 4,998 -
Issuance of 309,573 shares of Class A stock upon the
conversion of debentures 2,705 - -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 35,988 24,134 19,001
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 24,289 17,383 13,605
Net earnings for the year 9,120 6,906 3,778
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 33,409 24,289 17,383
- ---------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year - 111 (252)
Net change in accumulated other comprehensive income, net - (111) 363
- ---------------------------------------------------------------------------------------------------------
Balance at end of year - - 111
- ---------------------------------------------------------------------------------------------------------
=========================================================================================================
TOTAL STOCKHOLDERS' EQUITY AT END OF YEAR $ 75,385 $ 53,126 $ 40,395
=========================================================================================================
See accompanying notes to consolidated financial statements.
44
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
($ in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 9,120 $ 6,906 $ 3,778
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 568 606 505
Provision for loan losses 1,969 1,274 612
Deferred income tax benefit (963) (681) (364)
Amortization of deferred debenture offering costs 1,084 919 753
Compensation expense related to common warrants 444 135 26
Amortization of premiums, fees and discounts, net (1,610) (588) (1,823)
Gain from sales of securities available for sale - (120) -
Net loss from sale of foreclosed real estate 51 - -
Net increase in accrued interest payable on debentures 1,648 2,392 2,747
Net increase in official checks outstanding 1,749 1,154 938
Net change in all other assets and liabilities 4,403 2,802 2,118
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,463 14,799 9,290
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease (increase) in interest-earning time deposits with banks 2,000 (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 117,755 104,785 35,996
Purchases of securities held to maturity (127,221) (153,335) (114,013)
Net increase in loans receivable (182,674) (124,271) (103,969)
Sale of foreclosed real estate 150 - -
Cash acquired through acquisition of Intervest Securities Corporation 218 - -
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (1,967) (454) (49)
Purchases of premises and equipment, net (222) (387) (816)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (191,961) (169,292) (113,907)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 169,555 143,521 62,196
Net increase in mortgage escrow funds payable 4,646 1,641 856
Principal repayments of debentures and mortgage note payable (3,661) (2,509) (1,400)
Gross proceeds from issuance of debentures 31,000 13,500 25,750
Debentures issuance costs (1,694) (1,021) (1,314)
Proceeds from issuance of common stock 6,931 5,801 -
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 206,777 160,933 86,088
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 33,279 6,440 (18,529)
Cash and cash equivalents at beginning of year 30,849 24,409 42,938
========================================================================================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 64,128 $ 30,849 $ 24,409
========================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $ 25,647 $ 22,936 $ 21,253
Cash paid during the year for income taxes 7,557 5,301 2,704
Transfer of loan to foreclosed real estate, net of chargeoff - 1,081 -
Loan to finance sale of foreclosed real estate 880 -
Purchase of premises with mortgage note payable - 275 -
Conversion of debentures and accrued interest into Class A common stock 3,015 - -
Issue Class B common stock to purchase Intervest Securities Corporation 215
Accumulated other comprehensive income - change in unrealized
(loss) gain on securities available for sale, net of tax - (111) 363
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
45
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Intervest Bancshares Corporation is a registered financial holding company
referred to by itself as the "Holding Company." Its subsidiaries are:
Intervest National Bank (the "Bank"); Intervest Mortgage Corporation;
Intervest Securities Corporation; Intervest Statutory Trust I and Intervest
Statutory Trust II. The entities are referred to collectively as the
"Company" on a consolidated basis.
The Holding Company is located at 10 Rockefeller Plaza in New York City and
its primary business is the operation of its subsidiaries. It does not
engage in any other substantial business activities other than a limited
amount of real estate mortgage lending. From time to time, the Holding
Company also issues debt securities to raise funds for working capital
purposes. The Company's business segment is banking.
The Bank is a nationally chartered, full-service commercial 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.
The Bank conducts a personalized commercial and consumer banking business
and attracts deposits from the areas served by its banking offices. It also
provides internet banking services through its web site:
www.intervestnatbank.com, which can attract deposit customers from outside
its primary market areas. The deposits, together with funds derived from
other sources, are used to originate real estate, commercial and consumer
loans and to purchase investment securities. The Bank emphasizes
multifamily and commercial real estate lending.
Intervest Mortgage Corporation is a mortgage investment company also
located at 10 Rockefeller Plaza 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 provide
administrative services to Intervest Mortgage Corporation. Intervest
Mortgage Corporation issues debentures to provide funding for its business.
Intervest Securities Corporation is a broker/dealer and a NASD and SIPC
member firm located at 10 Rockefeller Plaza in New York City. It
participates as a selected dealer from time to time in offerings of debt
securities of the Company, primarily those of Intervest Mortgage
Corporation. On June 2, 2003, the Holding Company acquired all of the
outstanding capital stock of Intervest Securities Corporation in exchange
for 30,000 shares of its Class B common stock that was newly issued for
this transaction. Intervest Securities Corporation's total assets consisted
of approximately $218,000 of cash at the time of acquisition. Prior to the
acquisition, Intervest Securities Corporation was an affiliated entity in
that it was wholly owned by the spouse of the Chairman of the Holding
Company. The acquisition was accounted for at historical cost and
accordingly, the recorded assets, liabilities and shareholders' equity of
both companies were combined and recorded at their historical cost amounts.
No restatements of the Company's prior period consolidated financial
statements in this report have been made because the financial results of
Intervest Securities Corporation were diminimus.
Intervest Statutory Trust I was formed in December 2001 and Intervest
Statutory Trust II was formed in September 2003. Each was formed for the
sole purpose of issuing and administering $15,000,000 of capital securities
for a total of $30,000,000 as more fully described in note 9. The Trusts do
not conduct any trade or business.
The Company expects to be moving from its present New York locations to the
entire fourth floor of One Rockefeller Plaza in New York City in the second
quarter of 2004.
46
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Holding
Company and its subsidiaries. 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 losses and the need for a
valuation allowance for deferred tax assets and real estate acquired
through foreclosure.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash equivalents
include federal funds sold (generally sold for one-day periods) and
commercial paper and other short-term investments that have maturities of
three months or less from the time of purchase.
SECURITIES
Securities for which the Company has the ability and intent to hold until
maturity are classified as securities held to maturity and are carried at
cost, adjusted for accretion of discounts and amortization of premiums,
which are recognized into interest income using the interest method over
the period to maturity. Securities that are held for indefinite periods of
time which management intends to use as part of its asset/liability
management strategy, or that may be sold in response to changes in interest
rates or other factors, are classified as available for sale and are
carried at fair value. Unrealized gains and losses on securities available
for sale, net of related income taxes, are reported as a separate component
of comprehensive income. Realized gains and losses from sales of securities
are determined using the specific identification method. The Company does
not acquire securities for the purpose of engaging in trading activities.
LOANS RECEIVABLE
Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or satisfaction are carried at their
outstanding principal net of chargeoffs, the allowance for loan losses,
unamortized discounts and deferred loan fees or costs. Loan origination and
commitment fees, net of certain costs, are deferred and amortized to
interest income as an adjustment to the yield of the related loans over the
contractual life of the loans using the interest method. When a loan is
paid off or sold, or if a commitment expires unexercised, any unamortized
net deferred amount is credited or charged to earnings accordingly.
Loans are placed on nonaccrual status when principal or interest becomes 90
days or more past due unless the loan is well secured and in the process of
collection. Accrued interest receivable previously recognized is reversed
when a loan is placed on nonaccrual status. Amortization of net deferred
fee income is discontinued for loans placed on nonaccrual status. Interest
payments received on loans in nonaccrual status are recognized as income on
a cash basis unless future collections of principal are doubtful, in which
case the payments received are applied as a reduction of principal. Loans
remain on nonaccrual status until principal and interest payments are
current.
47
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is netted against loans receivable and is
increased by provisions charged to operations and decreased by chargeoffs
(net of recoveries). The adequacy of the allowance is evaluated monthly
with consideration given to: the nature and volume of the loan portfolio;
overall portfolio quality; loan concentrations; specific problem loans and
commitments and estimates of fair value thereof; historical chargeoffs and
recoveries; adverse situations which may affect the borrowers' ability to
repay; and management's perception of the current and anticipated economic
conditions in the Company's lending areas. In addition, Statement of
Financial Accounting Standards (SFAS) No. 114 specifies the manner in which
the portion of the allowance for loan losses is computed related to certain
loans that are impaired. A loan is normally deemed impaired when, based
upon current information and events, it is probable the Company will be
unable to collect both principal and interest due according to the
contractual terms of the loan agreement. Impaired loans normally consist of
loans on nonaccrual status. Interest income on impaired loans is recognized
on a cash basis. Impairment for commercial real estate and residential
loans is measured based on: the present value of expected future cash
flows, discounted at the loan's effective interest rate; or the observable
market price of the loan; or the estimated fair value of the loan's
collateral, if payment of the principal and interest is dependent upon the
collateral. When the fair value of the property is less than the recorded
investment in the loan, this deficiency is recognized as a valuation
allowance within the overall allowance for loan losses and a charge through
the provision for loan losses. The Company charges off any portion of the
recorded investment in the loan that exceeds the fair value of the
collateral. The net carrying amount of an impaired loan does not at any
time exceed the recorded investment in the loan.
Lastly, the Company's regulators, as an integral part of their examination
process, periodically review the allowance for loan losses. Accordingly,
the Company may be required to take certain chargeoffs and/or recognize
additions to the allowance based on the regulators' judgment concerning
information available to them during their examination.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
over the estimated useful life of the asset. Leasehold improvements are
amortized using the straight-line method over the terms of the related
leases, or the useful life of the asset, whichever is shorter. Maintenance,
repairs and minor improvements are expensed as incurred, while major
improvements are capitalized.
DEFERRED DEBENTURE OFFERING COSTS
Costs relating to offerings of debentures are amortized over the terms of
the debentures. The costs consist primarily of underwriters' commissions.
Accumulated amortization amounted to $4,794,000 at December 31, 2003 and
$3,793,000 at December 31, 2002.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold. Upon foreclosure of the property, the related loan is
transferred from the loan portfolio to foreclosed real estate at the lower
of the loan's carrying value at the date of transfer, or estimated fair
value of the property less estimated selling costs. Such amount becomes the
new cost basis of the property. Adjustments made to the carrying value at
the time of transfer are charged to the allowance for loan losses. After
foreclosure, management periodically performs market valuations and the
real estate is carried at the lower of cost or estimated fair value less
estimated selling costs. Revenue and expenses from operations and changes
in the valuation allowance of the property are included in the consolidated
statements of earnings.
48
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
STOCK-BASED COMPENSATION
The Company follows APB No. 25, "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its stock-based compensation,
which has been 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. Had compensation expense been determined based on
the estimated fair value of the warrants at the grant or modification date
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net earnings and earnings per share would have not have been
materially different than those reported.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded if it is more likely than not
that some portion or all of the deferred tax assets will not be realized
based on a review of available evidence.
EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average
number of shares of common stock outstanding. Diluted EPS is calculated by
dividing adjusted net earnings by the weighted-average number of shares of
common stock and dilutive potential common stock shares that may be
outstanding in the future. Potential common stock shares consist of
outstanding dilutive common stock warrants (which are computed using the
"treasury stock method") and convertible debentures (computed using the "if
converted method"). Diluted EPS considers the potential dilution that could
occur if the Company's outstanding stock warrants and convertible
debentures were converted into common stock that then shared in the
Company's earnings (as adjusted for interest expense that would no longer
occur if the debentures were converted).
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net earnings. However, certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
stockholders' equity section of the consolidated balance sheet, such items
along with net earnings, are components of comprehensive income.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit,
unused lines of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded
or related fees are incurred or received.
49
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
RECENT ACCOUNTING DEVELOPMENTS
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. On
January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which 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 had no impact on the Company's consolidated
financial statements.
ACCOUNTING FOR GUARANTEES. On January 1, 2003, the Company adopted FASB
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 are to applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN
45 had no impact on the Company's consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. In January 2003, the FASB
released Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). FIN 46, as revised in December 2003, changes the
method of determining whether certain entities should be included in the
Company's financial statements. An entity is subject to FIN 46 and is
called a variable interest entity ("VIE") if it has (1) equity that is
insufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or (2) equity
investors that cannot make significant decisions about the entity's
operations, or that do not absorb the expected losses or receive the
expected returns of the entity. A VIE is consolidated by its primary
beneficiary, which is the party involved with the VIE that has a majority
of the expected losses or a majority of the expected residual returns or
both.
FIN 46 requires bank holding companies that have used controlled business
trusts to raise financing by issuing trust preferred securities (Capital
Securities), to deconsolidate their investments in those trusts. The
Company will be required to adopt FIN 46 in the first quarter of 2004.
Deconsolidation would increase the Company's total assets and borrowed
funds each by $968,000 upon adoption reflecting the investments in the
Trusts, which will no longer be eliminated in consolidation.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to
include the trust preferred securities (Capital Securities) in Tier I
capital for regulatory capital purposes until further notice. The Federal
Reserve intends to review the regulatory implications of any accounting
treatment changes and, if necessary, provide further appropriate guidance.
However, there can be no assurance that the Federal Reserve will continue
to allow institutions to include trust preferred securities in Tier I
capital for regulatory capital purposes. As of December 31, 2003, assuming
the Company was not allowed to include the Capital Securities issued by
Intervest Statutory Trust I and Intervest Statutory Trust II, the Company
would still exceed the regulatory threshold for capital adequacy.
50
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
RECENT ACCOUNTING DEVELOPMENTS, CONTINUED
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In April
2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In particular, SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS 149 had no impact on the
Company's consolidated financial statements.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003. However, the effective date of
the statement's provisions related to the classification and measurement of
certain mandatorily redeemable noncontrolling interests has been deferred
indefinitely by the FASB, pending further Board action. The adoption of
SFAS 150 had no impact on the Company's consolidated financial statements.
2. SECURITIES
The Company did not have any securities classified as available for sale at
December 31, 2003 or 2002. In 2002, there were sales of $3,500,000 of
securities available for sale and gross realized gains amounted to
$120,000. There were no sales of securities in 2003 or 2001.
The carrying value (amortized cost) and estimated fair value of securities
held to maturity are as follows:
Gross Gross Estimated
----------- ----------- ----------
Amortized Unrealized Unrealized Fair
---------- ----------- ----------- ----------
($ in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------
U.S. government agency securities:
At December 31, 2003 $ 152,823 $ 278 $ 106 $ 152,995
At December 31, 2002 $ 145,694 $ 881 $ 15 $ 146,560
- -------------------------------------------------------------------------------------
Securities held to maturity consist of debt obligations of the Federal Home
Loan Bank, Federal National Mortgage Association, Federal Home Loan
Mortgage Corporation, Federal Farm Credit Bank and Student Loan Marketing
Association. At December 31, 2003 and 2002, the weighted-average yield and
remaining maturity of the portfolio was 1.75% and 1.7 years, and 2.39% and
1.6 years, respectively. The securities have fixed rates or have
predetermined scheduled rate increases, and some have call features that
allow the issuer to call the security before its stated maturity without
penalty.
The amortized cost and estimated fair value of securities held to maturity
at December 31, 2003, by remaining term to contractual maturity is as
follows:
Estimated
----------
Amortized Fair Average
---------- ---------- --------
($ in thousands) Cost Value Yield
- --------------------------------------------------------------------------------
Due in one year or less $ 70,026 $ 70,171 1.68%
Due after one year through five years 82,797 82,824 1.81%
- --------------------------------------------------------------------------------
$ 152,823 $ 152,995 1.75%
- --------------------------------------------------------------------------------
51
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE
Loans receivable is as follows:
At December 31, 2003 At December 31, 2002
----------------------- --------------------------
($ in thousands) # of Loans Amount # of Loans Amount
- --------------------------------------------------------------------------------------------
Commercial real estate loans 184 $ 344,071 162 $ 275,096
Residential multifamily loans 210 310,650 168 214,515
Land development and other land loans 6 20,526 3 1,890
Residential 1-4 family loans 26 1,628 28 1,953
Commercial business loans 28 1,662 27 1,608
Consumer loans 16 319 16 240
- --------------------------------------------------------------------------------------------
Loans receivable 470 678,856 404 495,302
- --------------------------------------------------------------------------------------------
Deferred loan fees (7,731) (5,390)
Allowance for loan losses (6,580) (4,611)
- --------------------------------------------------------------------------------------------
Loans receivable, net $ 664,545 $ 485,301
- --------------------------------------------------------------------------------------------
At December 31, 2003, two real estate loans with an aggregate principal
balance of $8,474,000 were on nonaccrual status. These loans were
considered impaired under the criteria of SFAS No.114. The Company's
recorded investment in these loans totaled $8,499,000. The Company believes
the estimated fair value of each of the underlying properties (which are
located in New York City) is greater than its recorded investment. As a
result, there was no specific valuation allowance maintained. During March
2004, the aforementioned loans were brought current and returned to an
accrual status. At December 31, 2003 and 2002, there were no other loans
classified as nonaccrual, impaired or ninety days past due and still
accruing interest. Interest income that was not recorded on nonaccrual
loans under their contractual terms amounted to $339,000 in 2003, 29,000 in
2002 and $51,000 in 2001. The average balance of nonaccrual (impaired)
loans for 2003, 2002 and 2001 was $4,568,000, $310,000 and $204,000,
respectively.
Credit risk, which represents the possibility of the Company not recovering
amounts due from its borrowers, is significantly related to local economic
conditions in the areas the properties are located, as well as the
Company's underwriting standards. Economic conditions affect the market
value of the underlying collateral as well as the levels of occupancy of
income-producing properties (such as office buildings, shopping centers and
rental and cooperative apartment buildings).
The geographic distribution of the loan portfolio is as follows:
At December 31, 2003 At December 31, 2002
------------------------ -------------------------
($ in thousands) Amount % of Total Amount % of Total
- --------------------------------------------------------------------------------
New York $ 435,790 64.2% $ 278,280 56.2%
Florida 189,802 28.0 184,257 37.2
Connecticut and New Jersey 39,681 5.8 21,991 4.4
All other 13,583 2.0 10,774 2.2
- --------------------------------------------------------------------------------
$ 678,856 100.0% $ 495,302 100.0%
- --------------------------------------------------------------------------------
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
For the Year Ended December 31,
---------------------------------------
($ in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Allowance at beginning of year $ 4,611 $ 3,380 $ 2,768
Provision charged to operations 1,969 1,274 612
Chargeoffs (1) - (150) -
Recoveries (2) - 107 -
- --------------------------------------------------------------------------------
Allowance at end of year $ 6,580 $ 4,611 $ 3,380
- --------------------------------------------------------------------------------
(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.
52
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT, LEASE COMMITMENTS AND RENTAL EXPENSE
Premises and equipment is as follows:
At December 31,
---------------------
($ in thousands) 2003 2002
- ---------------------------------------------------------------------
Land $ 1,516 $ 1,516
Buildings 4,913 4,810
Leasehold improvements 346 335
Furniture, fixtures and equipment 2,137 2,435
- ---------------------------------------------------------------------
Total cost 8,912 9,096
- ---------------------------------------------------------------------
Less accumulated deprecation and amortization (3,160) (2,998)
- ---------------------------------------------------------------------
Net book value $ 5,752 $ 6,098
- ---------------------------------------------------------------------
The office of the Holding Company, Intervest Mortgage Corporation and
Intervest Securities Corporation is located in leased premises on the tenth
floor of 10 Rockefeller Plaza in New York City. The Bank's headquarters and
branch office is located in leased premises on the third floor of One
Rockefeller Plaza in New York City. In addition, the Bank leases its
Belcher Road office in Clearwater, Florida. The leases expire in September
2004, May 2008 and June 2007, respectively. The Bank owns all of its
remaining offices in Florida. In October 2003, the Holding Company leased
the entire fourth floor of One Rockefeller Plaza through March 2014. The
Holding Company, the Bank's headquarters and branch office, Intervest
Mortgage Corporation and Intervest Securities Corporation will be moving
from their present locations to the fourth floor upon completion of
renovations, with the Bank expected to occupy one-half of this space. Upon
relocation, the Bank's current lease of the third floor will be canceled,
while the current lease for the tenth floor of 10 Rockefeller plaza will
continue to run until it expires in September 2004, or earlier if such
space is rented by the landlord prior thereto. All the leases contain
operating escalation clauses related to taxes and operating costs based
upon various criteria and are accounted for as operating leases.
Future minimum annual lease rental payments due under noncancellable
operating leases as of December 31, 2003 are as follows: $1,002,000 in
2004; $907,000 in 2005; $911,000 in 2006; $852,000 in 2007; $856,000 in
2008; and $4,717,000 thereafter for an aggregate amount of $9,245,000. Rent
expense aggregated $654,000 in 2003, $618,000 in 2002 and $554,000 in 2001.
The Bank leases certain of the space in its office buildings in Florida
that is not used for banking operations to other companies under leases
that expire at various times through July 2008. Future lease rental income
due under such leases as of December 31, 2003 are as follows: $477,000 in
2004; $435,000 in 2005; $358,000 in 2006; $188,000 in 2007; and $17,000 in
2008 for an aggregate amount of $1,475,000. Lease rental income aggregated
$462,000 in 2003, $421,000 in 2002 and $388,000 in 2001.
6. DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
At December 31, 2003 At December 31, 2002
------------------------- --------------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
- --------------------------------------------------------------------------------
Within one year $ 182,693 2.75% $ 122,890 3.51%
Over one to two years 90,936 3.64 57,895 4.18
Over two to three years 30,094 4.43 31,281 5.53
Over three to four years 89,085 4.83 17,730 5.32
Over four years 74,351 4.20 95,187 4.92
- --------------------------------------------------------------------------------
$ 467,159 3.66% $ 324,983 4.33%
- --------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $123,063,000
and $72,872,000 at December 31, 2003 and 2002, respectively. At December
31, 2003, certificate of deposit accounts of $100,000 or more by remaining
maturity were as follows: due within one year $46,419,000; over one to two
years $25,252,000, over two to three years $7,516,000; over three to four
years $23,721,000; and over four years $20,155,000.
53
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
6. DEPOSITS, CONTINUED
Interest expense on deposits is as follows:
For the Year Ended December 31,
--------------------------------------
($ in thousands) 2003 2002 2001
- -------------------------------------------------------------------------
Interest checking accounts $ 182 $ 221 $ 238
Savings accounts 601 762 778
Money market accounts 2,763 3,082 2,640
Certificates of deposit accounts 14,891 13,304 13,423
- -------------------------------------------------------------------------
$ 18,437 $ 17,369 $ 17,079
- -------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures and mortgage note payable are summarized as
follows:
At December 31,
-------------------
($ in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------
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
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 8 1/2% fixed - due July 1, 2004 2,000 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
Series 09/18/00 - interest at 8 1/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 1,250
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 1,500 -
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 -
Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 -
Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 -
Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 -
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 -
-------------------
87,350 74,000
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 4,840 6,930
Series 12/15/00 - interest at 8% fixed - due April 1, 2004 - 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
-------------------
7,340 10,430
INTERVEST NATIONAL BANK:
Mortgage note payable - interest at 7% fixed - due February 1, 2017 255 266
- ----------------------------------------------------------------------------------------------
$ 94,945 $ 84,696
- ----------------------------------------------------------------------------------------------
<FN>
(1) Prime represents prime rate of JPMorganChase Bank, which was 4.00% on
December 31, 2003 and 4.25% on December 31, 2002.
54
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
In January 2004, Intervest Mortgage Corporation issued Series 11/28/03
debentures totaling $10,000,000 in principal amount, of which $1,750,000
accrue and pay interest quarterly and $8,250,000 accrue and compound
interest quarterly until maturity.
In 2003, Intervest Mortgage Corporation issued Series 1/21/03 and 7/25/03
debentures totaling $16,000,000 in principal amount. The sales, after
underwriter's commissions and other issuance costs, resulted in net
proceeds of $14,826,000. In 2003, Intervest Mortgage Corporation's Series
11/10/98 debentures maturing on January 1, 2003 were redeemed for principal
of $1,400,000 and accrued interest of $570,000, and Series 9/18/00
debentures maturing on January 1, 2004 were redeemed on November 1, 2003
for principal of $1,250,000 and accrued interest of $335,000.
Intervest Mortgage Corporation's floating-rate Series 5/12/95 through
4/30/97 debentures have a maximum interest rate of 12%. Interest on an
aggregate of $6,330,000 of these debentures at December 31, 2003 is accrued
and compounded quarterly, and is due and payable at maturity. The payment
of interest on the remaining debentures in this Series is made quarterly.
Additionally, any debenture holder 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, 9/18/00,
$770,000 of Series 8/01/01, $270,000 of Series 1/17/02 and $1,520,000 of
Series 8/05/02 debentures accrue and compound interest quarterly, with such
interest due and payable at maturity. Interest is paid quarterly on the
remaining debentures in Series 8/01/01, 1/17/02, 8/5/02 and all debentures
in Series 1/21/03 and 7/25/03. The holders of Series 11/10/98, 6/28/99,
9/18/00, 01/17/02, 08/05/02, 1/21/03, 7/25/03 and 11/28/03 debentures can
require Intervest Mortgage Corporation to repurchase the debentures for
face amount plus accrued interest each year (beginning October 1, 2005 for
Series 01/17/02, January 1, 2006 for Series 08/05/02, July 1, 2006 for
Series 1/21/03, October 1, 2006 for Series 7/25/03 and April 1, 2007 for
Series 11/28/03) 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.
At any time, all of Intervest Mortgage Corporation's debentures may be
redeemed at its option, in whole or in part, for face value, except for
Series 1/21/03, 7/25/03 and 11/28/03. Redemptions would be a premium of 1%
if the redemption is prior to April 1, 2004 for Series 01/21/03, prior to
July 1, 2004 for Series 07/25/03 and prior to January 1, 2005 for Series
11/28/03. 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 its Class A common stock at the following conversion prices per
share: $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 2003, $3,100,000 of
debentures ($2,090,000 of principal and $1,010,000 of accrued interest)
were converted into shares of Class A common stock at $10.01 per share.
Interest accrues and compounds each calendar quarter on $4,170,000 of the
convertible debentures at the rate of 8% per annum, while $670,000 of the
debentures pay interest each calendar quarter at the rate of 8% per annum.
All accrued interest is due and payable at maturity whether by
acceleration, redemption or otherwise. Any convertible debenture holder
may, on or before July 1 of each year elect to be paid all accrued interest
and to thereafter receive payments of interest quarterly. All of the
Holding Company's debentures may be redeemed, in whole or in part, at any
time at the option of the Holding Company for face value.
The mortgage note payable cannot be prepaid except during the last year of
its term.
55
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
Scheduled contractual maturities as of December 31, 2003 are as follows:
($ in thousands) Principal Accrued Interest
- -------------------------------------------------------------------------
For the year ended December 31, 2004 $ 20,013 $ 6,711
For the year ended December 31, 2005 29,116 3,325
For the year ended December 31, 2006 10,269 1,382
For the year ended December 31, 2007 5,022 66
For the year ended December 31, 2008 16,365 2,772
Thereafter 14,160 157
- -------------------------------------------------------------------------
$ 94,945 $ 14,413
- -------------------------------------------------------------------------
8. FEDERAL FUNDS PURCHASED AND LINES OF CREDIT
From time to time, the Bank may borrow funds on an overnight or short-term
basis to manage its liquidity needs. The Bank has agreements with
correspondent banks whereby it may borrow up to $16,000,000 on an unsecured
basis. As a member of the Federal Home Loan Bank of New York and the
Federal Reserve Bank of New York, the Bank also has the ability to borrow
from these institutions on a secured basis that amounted to approximately
$145,000,000 at December 31, 2003 based on available collateral. At
December 31, 2003 and 2002, there were no outstanding borrowings under any
of these lines.
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Intervest Statutory Trust I was formed in December 2001 for the sole
purpose of issuing and administering 9.875% Trust Preferred Securities due
December 18, 2031 in the aggregate principal amount of $15,000,000,
hereafter referred to as "Capital Securities I". 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 due December 18, 2031. Intervest Statutory Trust II
was formed in September 2003 for the sole purpose of issuing and
administering 6.75% Trust Preferred Securities due September 17, 2033 in
the aggregate principal amount of $15,000,000, hereafter referred to as the
"Capital Securities II". 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 6.75% Junior Subordinated Debentures due September
17, 2033.
The sole assets of the Trusts, the obligors on the Capital Securities, are
the Junior Subordinated Debentures. In addition, for each Trust, the
Holding Company has guaranteed the payment of distributions on, payments on
any redemptions of, and any liquidation distribution with respect to the
Capital Securities. Cash distributions are payable semi-annually in arrears
at the fixed rate of 9.875% per annum on December 18 and June 18 of each
year for the Capital Securities I and the 9.875% Junior Subordinated
Debentures. For the Capital Securities II and the 6.75% Junior Subordinated
Debentures, cash distributions are payable quarterly in arrears on March
17, June 17, September 17 and December 17 of each year based on a fixed
rate of 6.75% per annum for the first five years, and thereafter at the
rate of 2.95% over 3 month libor until maturity. Issuance costs of $469,000
associated with Capital Securities I and $444,000 for Capital Securities II
have been capitalized by the Holding Company and are being amortized over
the life of the securities.
All of 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 for Capital Securities I and September 17, 2008 for Capital Securities
II contemporaneously with the optional redemption by the Holding Company of
the Junior Subordinated Debentures in whole or in part.
56
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Holding Company (i) on or after December 18, 2006 for the
9.875% Junior Subordinated Debentures and on or after September 17, 2008
for the 6.75% Junior Subordinated Debentures, 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, 2003 and 2002, 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.
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, 2003 and 2002, balances
maintained as reserves were approximately $691,000 and $470,000,
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, 2003 and 2002, such investment, which earns a dividend, aggregated
$1,384,000 and $1,108,000, respectively. As a member of the Federal Home
Loan Banking system, the Bank must maintain an investment in the capital
stock of the Federal Home Loan Bank. At December 31, 2003, such investment,
which currently earns a dividend, aggregated $1,691,000. The Bank became a
member of the Federal Home Loan Bank of New York in 2003.
At December 31, 2003 and 2002, U.S. government agency securities with a
carrying value of $5,835,000 and $7,081,000, 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
$55,000, $47,000 and $37,000 in 2003, 2002 and 2001, respectively.
57
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
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 $35,000,000 at December 31, 2003 and
$19,000,000 at December 31, 2002. There are no loans to any directors or
executive officers of the Holding Company or its subsidiaries.
The Company paid fees of approximately $262,000 in 2003, $157,000 in 2002
and $219,000 in 2001 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
$531,000 in 2003, $515,000 in 2002 and $301,000 in 2001 to a broker/dealer,
a principal of which is a director of the Company.
14. COMMON STOCK WARRANTS
The Holding Company's common stock warrants outstanding 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. 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.
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) Warrants Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 and 2001 1,370,815 1,084,403 2,455,218 $ 9.42
Exercised in 2002 (772,600) (30,858) (803,458) $ 9.88
Expired in 2002 (96,750) - (96,750) $ 6.67
- -----------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 501,465 1,053,545 1,555,010 $ 8.93
- -----------------------------------------------------------------------------------------------------
Exercised in 2003 - 945,717 945,717 $ 10.01
Expired in 2003 - 65,318 65,318 $ 10.01
- -----------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 501,465 42,510 543,975 $ 6.93
- -----------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2003 3.1 - 2.8
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) The holders of the 42,510 warrants outstanding at December 31, 2003
presented these warrants to the Company for exercise prior to the expiration
date of December 31, 2003. The resulting shares were issued in January 2004. For
purposes of this schedule, they are shown as outstanding at December 31, 2003.
Exercise Price Per Warrant
------------------------------- Total Wtd-Avg
CLASS B COMMON STOCK WARRANTS: $ 6.67 $ 10.00 (1) Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001, 2002 and 2003 145,000 50,000 195,000 $ 7.52
- -------------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2003 4.1 4.1 4.1
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) At December 31, 2003, 42,600 of these warrants were immediately exercisable.
An additional 7,400 warrants vest and become exercisable on April 27th of 2004.
These warrants, which expire on January 31, 2008, become fully vested earlier
upon certain conditions.
58
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
14. COMMON STOCK WARRANTS, CONTINUED
The Company elects to use the intrinsic value-based method prescribed under
APB Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock warrants. Under this method, compensation expense
related to stock warrants granted to employees is the excess, if any, of
the market price of the stock as of the grant or modification date over the
exercise price of the warrant.
For warrants granted to employees whose exercise price was reduced to
$10.01 effective January 1, 2002 and whose expiration date was extended in
2002, compensation expense was recorded under variable rate accounting as
prescribed by APB 25 and related interpretations. For these warrants, which
originally totaled 138,500, compensation expense was recorded in salaries
and employee benefits expense with a corresponding credit to paid in
capital in the consolidated financial statements.
Compensation expense recorded in connection with warrants is summarized as
follows:
For the Year Ended December 31,
--------------------------------------
($ in thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Compensation expense recorded in connection with vesting
of Class B warrants during the period $ 26 $ 26 $ 25
Compensation expense recorded in connection with
Class A common stock warrants whose terms were modified 418 109 -
- ----------------------------------------------------------------------------------------------------
$ 444 $ 135 $ 25
- ----------------------------------------------------------------------------------------------------
15. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return and combined state and city income tax returns in New York. The
Company also files a franchise tax return in Delaware. The Bank files a
state income tax return in Florida. All returns are filed on a calendar
year basis.
At December 31, 2003 and 2002, the Company had a net deferred tax asset of
$2,960,000 and $1,997,000, respectively. The asset relates to the
unrealized benefit for net temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases that will result in future tax deductions. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized based on available evidence. Management
believes that it is more likely than not that the Company's deferred tax
asset will be realized and accordingly, a valuation allowance for deferred
tax assets was not maintained at any time during 2003, 2002 or 2001.
Allocation of federal, state and local income taxes between current and
deferred portions is as follows:
($ in thousands) Current Deferred Total
- ------------------------------------------------------------
Year Ended December 31, 2003:
- ------------------------------
Federal $ 5,576 $ (782) $4,794
State and Local 2,260 (181) 2,079
- ------------------------------------------------------------
$ 7,836 $ (963) $6,873
- ------------------------------------------------------------
Year Ended December 31, 2002:
- ------------------------------
Federal $ 4,004 $ (547) $3,457
State and Local 1,390 (134) 1,256
- ------------------------------------------------------------
$ 5,394 $ (681) $4,713
- ------------------------------------------------------------
Year Ended December 31, 2001:
- ------------------------------
Federal $ 2,265 $ (284) $1,981
State and Local 809 (80) 729
- ------------------------------------------------------------
$ 3,074 $ (364) $2,710
- ------------------------------------------------------------
59
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
15. INCOME TAXES, CONTINUED
The components of the deferred tax benefit are as follows:
For the Year Ended December 31,
-----------------------------------------
($ in thousands) 2003 2002 2001
- --------------------------------------------------------------------------
Allowance for loan losses $ (896) $ (623) $ (220)
Organization and startup costs 29 28 41
Stock-based compensation 45 (62) (12)
Depreciation (65) (41) (18)
Deferred income (75) 13 (157)
All other (1) 4 2
- --------------------------------------------------------------------------
$ (963) $ (681) $ (364)
- --------------------------------------------------------------------------
The tax effects of the temporary differences that give rise to the deferred
tax asset are as follows:
At December 31,
-------------------
($ in thousands) 2003 2002
- ----------------------------------------------------
Allowance for loan losses $ 2,468 $ 1,572
Organization and startup costs 11 40
Stock-based compensation 73 118
Depreciation 179 114
Deferred income 219 144
All other 10 9
- ----------------------------------------------------
Total deferred tax asset $ 2,960 $ 1,997
- ----------------------------------------------------
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,
----------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------
Tax provision at statutory rate 35.0% 34.0% 34.0%
Increase in taxes resulting from:
State and local income taxes, net of federal benefit 8.2 6.6 7.6
Other (0.2) - 0.2
- --------------------------------------------------------------------------------------------
43.0% 40.6% 41.8%
- --------------------------------------------------------------------------------------------
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) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $ 9,120 $ 6,906 $ 3,778
Average number of common shares outstanding 4,938,995 4,043,619 3,899,629
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share amount $ 1.85 $ 1.71 $ 0.97
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $ 9,120 $ 6,906 $ 3,778
Adjustment to net earnings from assumed conversion of debentures 452 436 -
--------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 9,572 $ 7,342 $ 3,778
--------------------------------------
Average number of common shares outstanding:
Common shares outstanding 4,938,995 4,043,619 3,899,629
Potential dilutive shares resulting from exercise of warrants 356,339 313,519 -
Potential dilutive shares resulting from conversion of debentures 962,386 990,983 -
--------------------------------------
Total average number of common shares outstanding used for dilution 6,257,720 5,348,121 3,899,629
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share amount $ 1.53 $ 1.37 $ 0.97
- ----------------------------------------------------------------------------------------------------------------
60
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
16. EARNINGS PER SHARE, CONTINUED
In 2003 and 2002, all warrants and convertible debentures outstanding were
considered in the computation of diluted EPS because they were dilutive. In
2001, 2,650,218 warrants with exercise prices ranging from $6.67 to $16.00
were not considered in the computations of diluted EPS for 2001 because the
warrants' exercise price per share exceeded the average market price of
Class A common stock during 2001 and as a result, they were not dilutive.
Convertible debentures with principal and accrued interest totaling
$9,164,000 at December 31, 2001 and convertible at $14.00 per share into
Class A common stock were not considered in the diluted EPS computations
for 2001 because they were not dilutive.
17. CONTINGENCIES
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Management does not believe that there is any pending or
threatened proceeding against the Company which, if determined adversely,
would have a material effect on the business, results of operations,
financial position or liquidity of the Company.
18. REGULATORY CAPITAL
The Holding Company is subject to regulation, examination and supervision
by the Federal Reserve Bank (FRB). The Bank is also subject to regulation,
examination and supervision by the Federal Deposit Insurance Corporation
(FDIC) and the Office of the Comptroller of the Currency of the United
States of America (OCC). Intervest Securities Corporation is subject to
regulation, examination and supervision by the U.S. Securities and Exchange
Commission (SEC) and the National Association of Securities Dealers (NASD).
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet them can initiate certain mandatory and possibly
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. These capital amounts are also subject to
qualitative judgement by the regulators about components, risk weighting
and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies. Quantitative measures established by the regulations to ensure
capital adequacy require the Company and the Bank to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to average assets, as defined by the regulations.
Management believes, as of December 31, 2003 and 2002, that the Company and
the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2003, 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.
61
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
18. REGULATORY CAPITAL, CONTINUED
The table that follows presents information regarding the Company's and the
Bank's capital adequacy.
Minimum to Be Well
------------------
Capitalized Under
-----------------
Minimum Capital Prompt Corrective
--------------- -----------------
Actual Requirements Action Provisions
------ ------------ -----------------
($in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
Consolidated as of December 31, 2003:
- ------------------------------------------
Total capital to risk-weighted assets $109,029 14.84% $ 58,787 8.00% NA NA
Tier 1 capital to risk-weighted assets $ 97,571 13.28% $ 29,394 4.00% NA NA
Tier 1 capital to average assets $ 97,571 11.31% $ 34,515 4.00% NA NA
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
Intervest National Bank at December 31,2003:
- ------------------------------------------
Total capital to risk-weighted assets $ 77,709 12.53% $ 49,612 8.00% $ 62,016 10.00%
Tier 1 capital to risk-weighted assets $ 71,399 11.51% $ 24,806 4.00% $ 37,209 6.00%
Tier 1 capital to average assets $ 71,399 9.66% $ 29,569 4.00% $ 36,962 5.00%
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 Securities Corporation is subject to the SEC's Uniform Net
Capital Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of
minimum net capital of $5,000. At December 31, 2003 and 2002, Intervest
Securities Corporation's net capital was $459,000 and $208,000,
respectively.
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 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
Company's maximum exposure to credit risk is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
making commitments as it does for on-balance sheet instruments. Commitments
to extend credit are agreements to lend funds to a customer as long as
there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination
clauses and may require payment of fees.
Since some of the commitments are expected to expire without being drawn
upon, the total commitment amount does not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary 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.
62
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
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) 2003 2002
- ------------------------------------------------
Unfunded loan commitments $123,791 $ 68,244
Available lines of credit 825 533
Standby letters of credit 100 1,267
- ------------------------------------------------
$124,716 $ 70,044
- ------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments are as follows:
At December 31, 2003 At December 31, 2002
------------------------ ------------------------
Carrying Fair Carrying Fair
($in thousands) Value Value Value Value
- -----------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 64,128 $ 64,128 $ 30,849 $ 30,849
Time deposits with banks - - 2,000 2,000
Securities held to maturity, net 152,823 152,995 145,694 146,560
FRB and FHLB stock 3,075 3,075 1,108 1,108
Loans receivable, net 664,545 700,855 485,301 497,664
Accrued interest receivable 4,995 4,995 4,263 4,263
Financial Liabilities:
Deposit liabilities 675,513 687,135 505,958 515,018
Debentures payable plus accrued interest 139,200 143,667 113,302 115,992
Mortgage note payable 255 272 266 278
Accrued interest payable on deposits 1,080 1,080 895 895
Off -Balance Sheet Instruments:
Commitments to lend 868 868 415 415
- -----------------------------------------------------------------------------------------------
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.
63
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Further, the tax ramifications related to the realization of unrealized
gains and losses can have a significant effect on and have not been
considered in the fair value estimates. Finally, fair value estimates do
not attempt to estimate the value of anticipated future business, the
Company's customer relationships, branch network, and the value of assets
and liabilities that are not considered financial instruments, such as core
deposit intangibles and premises and equipment.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
SECURITIES. The estimated fair value of securities held to maturity is
based on quoted market prices. The estimated fair value of the Federal
Reserve Bank and Federal Home Loan Bank stock approximates fair value since
the securities do not present credit concerns and are redeemable at cost.
LOANS RECEIVABLE. The estimated fair value of loans is based on a
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
Management can make no assurance that its perception and quantification of
credit risk would be viewed in the same manner as that of a potential
investor. Therefore, changes in any of management's assumptions could cause
the fair value estimates of loans to deviate substantially.
DEPOSITS. The estimated fair value of deposits with no stated maturity,
such as savings, money market, checking and noninterest-bearing demand
deposit accounts approximates carrying value. The estimated fair value of
certificates of deposit are based on the discounted value of their
contractual cash flows. The discount rate used in the present value
computation was estimated by comparison to current interest rates offered
by the Bank for certificates of deposit with similar remaining maturities.
DEBENTURES, MORTGAGE NOTE PAYABLE AND ACCRUED INTEREST PAYABLE. The
estimated fair value of debentures and related accrued interest payable as
well as the mortgage 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 on deposits approximates their
carrying values since these instruments are payable on demand or have
short-term maturities.
OFF-BALANCE SHEET INSTRUMENTS. The carrying amounts of commitments to lend
approximated estimated fair value. The fair value of commitments to lend is
based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counter party's
credit standing.
21. ACQUISITION OF INTERVEST SECURITIES CORPORATION
On June 2, 2003, the Holding Company acquired all of the outstanding
capital stock of Intervest Securities Corporation in exchange for 30,000
shares of its Class B common stock that was newly issued for this
transaction. Intervest Securities Corporation's total assets consisted of
approximately $218,000 of cash at the time of acquisition. Prior to the
acquisition, Intervest Securities Corporation was an affiliated entity in
that it was wholly owned by the spouse of the Chairman of the Holding
Company. Intervest Securities Corporation is a broker/dealer and a NASD and
SIPC member firm located at 10 Rockefeller Plaza in New York City and it
participates as a selected dealer from time to time in offerings of debt
securities of the Company, primarily those of Intervest Mortgage
Corporation.
The acquisition was accounted for at historical cost and accordingly, the
recorded assets, liabilities and shareholders' equity of both companies
were combined and recorded at their historical cost amounts. No
restatements of the Company's prior period consolidated financial
statements in this report have been made because the financial results of
Intervest Securities Corporation were diminimus.
64
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
22. HOLDING COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
At December 31,
-------------------
($ in thousands) 2003 2002
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 286 $ 229
Short-term investments 2,682 7,258
--------------------
Total cash and cash equivalents 2,968 7,487
Loans receivable, net (net of allowance for loan losses
of $78 and $47 at December 31, 2003 and 2002) 15,514 9,239
Investment in subsidiaries 93,467 63,813
Deferred debenture offering costs, net of amortization 1,172 942
Stock proceeds receivable from warrant conversions 2,535 -
All other assets 528 809
- --------------------------------------------------------------------------------
TOTAL ASSETS $116,184 $ 82,290
- --------------------------------------------------------------------------------
LIABILITIES
Debentures payable $ 38,268 $ 25,894
Accrued interest payable on debentures 2,461 3,123
All other liabilities 70 147
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 40,799 29,164
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common equity 75,385 53,126
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 75,385 53,126
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $116,184 $ 82,290
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF EARNINGS
For the Year Ended December 31,
------------------------------------------
($ in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------
Interest income $ 1,125 $ 988 $ 818
Interest expense 3,024 2,695 1,124
------------------------------------------
Net interest expense (1,899) (1,707) (306)
Provision (credit) for loan losses 32 (2) 19
Noninterest income 346 205 176
Noninterest expenses 748 544 226
------------------------------------------
Loss before income taxes (2,333) (2,044) (375)
Credit for income taxes (1,033) (924) (172)
------------------------------------------
Net loss before earnings of subsidiaries (1,300) (1,120) (203)
Equity in earnings of Intervest National Bank 8,667 6,459 3,404
Equity in earnings of Intervest Mortgage Corporation 1,759 1,567 577
Equity in net loss of Intervest Securities Corporation (6) - -
- --------------------------------------------------------------------------------------------------
NET EARNINGS $ 9,120 $ 6,906 $ 3,778
- --------------------------------------------------------------------------------------------------
Cash dividends received from subsidiaries $ 1,695 $ 1,500 $ 125
65
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
22. HOLDING COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-----------------------------------------
($ in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 9,120 $ 6,906 $ 3,778
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in earnings of subsidiaries (10,420) (8,026) (3,981)
Cash dividends received from subsidiaries 1,695 1,500 125
Provision (credit) for loan losses 32 (2) 19
Deferred income tax expense (benefit) 38 (55) (16)
Compensation expense from awards/modifications of stock warrants 444 135 26
Increase in accrued interest payable on debentures 347 756 831
Change in all other assets and liabilities, net 175 (365) 81
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,431 849 863
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in subsidiaries, net (20,715) (338) (15,500)
Cash acquired through acquisition of Intervest Securities Corporation 218 - -
Purchase of equipment and leasehold improvements (11) (2) -
Loan originations and principal repayments, net (6,316) 389 (3,738)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (26,824) 49 (19,238)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in mortgage escrow funds payable (75) (64) (11)
Gross proceeds from issuance of debentures 15,464 - 18,500
Debenture offering costs (446) (9) (700)
Principal repayments of debentures (1,000) - -
Proceeds from issuance of common stock upon the exercise
of stock warrants 6,931 5,801 -
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,874 5,728 17,789
- -----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,519) 6,626 (586)
Cash and cash equivalents at beginning of year 7,487 861 1,447
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,968 $ 7,487 $ 861
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the year for:
Interest $ 2,545 $ 1,825 $ 202
Income taxes (1,136) (617) (139)
Noncash transactions:
Conversion of debentures into Class A common stock:
Principal converted 2,090 - -
Accrued interest converted 1,009 - -
Unamortized debenture offering costs converted (84) - -
Class B stock issued to acquire Intervest Securities Corporation 215 - -
Accumulated other comprehensive income, change in
subsidiary's unrealized (loss) gain on securities available for
sale, net of tax - (111) 363
- -----------------------------------------------------------------------------------------------------------------
66
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following information is as of or for the period ended:
2003
-----
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 11,625 $ 12,470 $ 12,845 $ 13,524
Interest expense 6,788 6,964 7,079 7,733
------------------------------------------
Net interest and dividend income 4,837 5,506 5,766 5,791
Provision for loan losses 344 430 602 593
------------------------------------------
Net interest and dividend income after provision for loan losses 4,493 5,076 5,164 5,198
Noninterest income 329 1,176 1,038 778
Noninterest expenses 1,784 1,879 1,812 1,784
------------------------------------------
Earnings before income taxes 3,038 4,373 4,390 4,192
Provision for income taxes 1,237 1,807 1,859 1,970
- -------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 1,801 $ 2,566 $ 2,531 $ 2,222
- -------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ .38 $ .55 $ .52 $ .41
DILUTED EARNINGS PER SHARE: $ .32 $ .45 $ .42 $ .35
- -------------------------------------------------------------------------------------------------------------
Return on average assets 1.03% 1.40% 1.32% 1.03%
Return on average equity 13.40% 18.33% 16.76% 13.17%
Total assets $727,945 $749,777 $822,900 $910,595
Total cash and investment securities $178,087 $158,043 $174,664 $220,026
Total loans, net of unearned fees $532,592 $575,975 $631,361 $671,125
Total deposits $538,098 $553,388 $594,832 $675,513
Total borrowed funds and related interest payable $120,138 $120,524 $144,363 $139,455
Total stockholders' equity $ 55,000 $ 58,009 $ 63,745 $ 75,385
- -------------------------------------------------------------------------------------------------------------
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 losses 346 426 192 310
------------------------------------------
Net interest and dividend income after provision for loan losses 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
- -------------------------------------------------------------------------------------------------------------
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. 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 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 2004 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. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information contained in the section entitled "Independent Public
Accountants" of the Proxy Statement is incorporated herein by reference.
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:
68
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ------------------------
2.0 Agreement and Plan of Merger dated as of November 1, 1999 by and among
Intervest Bancshares Corporation, ICNY Acquisition Corporation and
Intervest Corporation of New York, incorporated by reference to the
Company's definitive proxy statement for the special meeting of
shareholders to be held March 10, 2000, wherein such document is identified
as "Annex A."
3.1 Restated Certificate of Incorporation of the Company, incorporated by
reference to Amendment No.1 to the Company's Registration Statement on Form
SB-2 (No 333-33419, the "Registration Statement"), filed with the
Securities and Exchange Commission (the "Commission") on September 22,
1997, wherein such document is identified as Exhibit 3.1.
3.2 Bylaws of the Company, incorporated by reference to the Registration
Statement, wherein such document is identified as Exhibit 3.1.
4.1 Form of Certificate for Shares of Class A common stock, incorporated by
reference to the Company's Pre-Effective Amendment No.1 to the Registration
Statement on Form SB-2 (No. 33-82246), filed with the Commission on
September 15, 1994.
4.2 Form of Certificate for Shares of Class B common stock, incorporated by
reference to the Company's Pre-Effective Amendment No.1 to the Registration
Statement on Form SB-2 (No. 33-82246), filed with the Commission on
September 15, 1994.
4.3 Form of Warrant issued to Mr. Jerome Dansker, incorporated by reference to
the Company's Report on Form 10-K for the year ended December 31, 1995,
wherein such document is identified as Exhibit 4.2.
4.4 Form of Warrant for Class A common stock, incorporated by reference to the
Registration Statement, wherein such document is identified as Exhibit 4.3.
4.5 Form of Warrant Agreement between the Company and the Bank of New York,
incorporated by reference to the Registration Statement, wherein such
document is identified as Exhibit 4.4.
4.6 Form of Indenture between the Company and the Bank of New York, as Trustee,
incorporated by reference to the Company's Registration Statement on Form
SB-2 (333-50113) filed with the Commission on April 15,1998.
4.7 Form of Indenture between the Company and the Bank of New York, as Trustee,
dated January 1, 2001, incorporated by reference to the Company's Report on
Form 10-K for the year ended December 31, 2000, wherein such document is
identified as Exhibit 4.7.
4.8 Form of Indenture between the Company, as Issuer, and State Street Bank and
Trust Company, as Trustee, dated as of December 18, 2001, incorporated by
reference to the Company's Report on Form 10-K for the year ended December
31, 2001, wherein such document is identified as Exhibit 4.8.
4.9 Form of Indenture between the Company, as Issuer, and U.S Bank National
Association, as Trustee, dated as of September 17, 2003.
12 Computation of ratios of earnings to fixed charges.
21 Subsidiaries
31 Certification of the principal executive and financial officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.
32 Certification of the principal executive and financial officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
(b) A current report on Form 8-K dated January 20, 2004 was filed by
the registrant to provide, under Item 12, its quarterly earnings release for the
period ended December 31, 2003.
69
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, 2004
------------------------- --------------------
Lowell S. Dansker, Vice Chairman and 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 AND EXECUTIVE VICE PRESIDENT:
By: /s/ Jerome Dansker Date: February 26, 2004
------------------------- --------------------
Jerome Dansker
VICE CHAIRMAN, PRESIDENT AND TREASURER
(PRINCIPAL EXECUTIVE, FINANCIAL AND ACCOUNTING OFFICER):
By: /s/ Lowell S. Dansker Date: February 26, 2004
------------------------- --------------------
Lowell S. Dansker
VICE PRESIDENT, SECRETARY AND DIRECTOR:
By: /s/ Lawrence G. Bergman Date: February 26, 2004
-------------------------- --------------------
Lawrence G. Bergman
DIRECTORS:
By: /s/ Michael A. Callen Date: February 26, 2004
------------------------- --------------------
Michael A. Callen
By: /s/ Paul Derosa Date: February 26, 2004
------------------------- --------------------
Paul Derosa
By: /s/ Stephen A. Helman Date: February 26, 2004
------------------------- --------------------
Stephen A. Helman
By: /s/ Wayne F. Holly Date: February 26, 2004
------------------------- --------------------
Wayne F. Holly
By: /s/ Lawton Swan, III Date: February 26, 2004
------------------------- --------------------
Lawton Swan, III
By: /s/ Thomas E. Willett Date: February 26, 2004
------------------------- --------------------
Thomas E. Willett
By: /s/ David J. Willmott Date: February 26, 2004
------------------------- --------------------
David J. Willmott
By: /s/ Wesley T. Wood Date: February 26, 2004
------------------------- --------------------
Wesley T. Wood
70