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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From to
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Commission file number 000-23377
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INTERVEST BANCSHARES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3699013
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
ONE ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices) (Zip Code)
(212) 218-2800
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
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 past 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO XX.
-- --
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
YES NO XX.
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
----------------------------------------------- --------------------------------------------
Class A Common Stock, $1.00 par value per share 7,362,577 outstanding as of October 31, 2005
----------------------------------------------- --------------------------------------------
Class B Common Stock, $1.00 par value per share 385,000 outstanding as of October 31, 2005
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 2005 (Unaudited) and December 31, 2004 . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2005 and 2004 . . . . . . 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine-Months Ended September 30, 2005 and 2004. . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2005 and 2004. . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . 7
Review by Independent Registered Public Accounting Firm. . . . . . . . . . . . . 17
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . 37
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . 37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. . . . . . 37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . . . 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . 37
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Intervest Bancshares Corporation and subsidiaries (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-Q that are not statements of historical fact may include
forward-looking statements that involve a number of risks and uncertainties.
Such forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting the Company and are subject to
uncertainties and factors relating to the Company's operations and economic
environment, all of which are difficult to predict and many of which are beyond
the control of the Company, that could cause actual results of the Company to
differ materially from those matters expressed in or implied by forward-looking
statements. The factors below are among those that could cause actual results to
differ materially from the forward-looking statements.
RISK FACTORS
The Company's business is affected by a number of factors, including but not
limited to the impact of: interest rates; loan demand; loan concentrations; loan
prepayments; dependence on brokers and other sources for new loan referrals,
ability to raise funds for investment; competition; general or local economic
conditions; credit risk and the related adequacy of the allowance for loan
losses; terrorist acts; natural disasters; armed conflicts; environmental
liabilities, regulatory supervision and regulation and costs thereof;
2
dependence on a limited number of key personnel; and voting control held by a
limited number of stockholders who are also executive officers and directors.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
($ in thousands, except par value) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited)
Cash and due from banks $ 10,681 $ 12,026
Federal funds sold 21,057 9,948
Commercial paper and other short-term investments 11,285 2,625
-------------------------------
Total cash and cash equivalents 43,023 24,599
Securities held to maturity, net (estimated fair value of $235,155 and $247,211, respectively) 237,724 248,888
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 6,118 5,092
Loans receivable (net of allowance for loan losses of $14,394 and $11,106, respectively) 1,304,761 1,004,290
Accrued interest receivable 6,786 6,699
Loan fees receivable 10,535 8,208
Premises and equipment, net 6,534 6,636
Deferred income tax asset 6,596 5,095
Deferred debenture offering costs, net 5,852 4,929
Other assets 2,916 2,315
===============================================================================================================================
TOTAL ASSETS $ 1,630,845 $ 1,316,751
===============================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 5,596 $ 6,142
Interest-bearing deposit accounts:
Checking (NOW) accounts 8,183 15,051
Savings accounts 23,497 27,359
Money market accounts 214,536 200,549
Certificate of deposit accounts 1,050,497 744,771
-------------------------------
Total deposit accounts 1,302,309 993,872
Borrowed Funds:
Federal Home Loan Bank advances - 36,000
Subordinated debentures 91,070 94,430
Subordinated debentures - capital securities 61,856 61,856
Accrued interest payable on all borrowed funds 7,332 10,154
Mortgage note payable 233 242
-------------------------------
Total borrowed funds 160,491 202,682
Accrued interest payable on deposits 2,783 1,718
Mortgage escrow funds payable 27,010 14,533
Official checks outstanding 5,463 12,061
Other liabilities 3,582 1,791
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,501,638 1,226,657
- -------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
7,354,903 and 5,886,433 shares issued and outstanding, respectively) 7,355 5,886
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 shares issued and outstanding) 385 385
Additional paid-in-capital, common 64,268 38,961
Retained earnings 57,199 44,862
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 129,207 90,094
===============================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,630,845 $ 1,316,751
===============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------
($ in thousands, except per share data) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 23,569 $ 16,428 $ 63,180 $ 44,677
Securities 1,895 1,137 5,181 2,701
Other interest-earning assets 297 90 664 261
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TOTAL INTEREST AND DIVIDEND INCOME 25,761 17,655 69,025 47,639
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 12,029 7,158 31,443 18,376
Subordinated debentures 1,973 2,291 6,036 6,622
Subordinated debentures - capital securities 1,089 883 3,268 2,405
Other borrowed funds 15 16 142 26
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TOTAL INTEREST EXPENSE 15,106 10,348 40,889 27,429
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NET INTEREST AND DIVIDEND INCOME 10,655 7,307 28,136 20,210
Provision for loan losses 1,803 1,067 3,288 3,428
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NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 8,852 6,240 24,848 16,782
- --------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 105 44 260 178
Income from mortgage lending activities 304 430 754 1,034
Income from the early repayment of mortgage loans 1,348 940 3,570 2,830
Commissions and fees 56 63 115 119
Gain (loss) from early call of investment securities - - 1 (3)
- --------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 1,813 1,477 4,700 4,158
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NONINTEREST EXPENSES
Salaries and employee benefits 1,336 1,004 4,003 2,906
Occupancy and equipment, net 395 463 1,109 1,288
Data processing 156 131 438 387
Professional fees and services 172 100 578 298
Stationery, printing and supplies 52 47 161 137
Postage and delivery 31 32 96 86
FDIC and general insurance 82 64 238 191
Director and committee fees 141 88 394 260
Advertising and promotion 52 46 149 81
All other 149 166 523 470
- --------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 2,566 2,141 7,689 6,104
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,099 5,576 21,859 14,836
Provision for income taxes 3,533 2,424 9,522 6,444
==============================================================================================================
NET EARNINGS $ 4,566 $ 3,152 $ 12,337 $ 8,392
==============================================================================================================
BASIC EARNINGS PER SHARE $ 0.66 $ 0.52 $ 1.90 $ 1.39
DILUTED EARNINGS PER SHARE $ 0.61 $ 0.47 $ 1.76 $ 1.25
CASH DIVIDENDS PER SHARE $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2005 2004
---------------------------------------
($ thousands) SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of period 5,886,433 $ 5,886 5,603,377 $ 5,603
Issuance of shares upon the exercise of warrants - - 42,510 43
Issuance of shares upon the conversion of debentures 32,002 32 17,188 17
Issuance of shares in public offering 1,436,468 1,437 - -
- -----------------------------------------------------------------------------------------------------------
Balance at end of period 7,354,903 7,355 5,663,075 5,663
- -----------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
- -----------------------------------------------------------------------------------------------------------
Balance at beginning and end of period 385,000 385 385,000 385
- -----------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 38,961 35,988
Compensation related to vesting of certain Class B stock warrants - 9
Issuance of shares upon the exercise of warrants - 383
Issuance of shares upon the conversion of debentures 409 181
Issuance of shares in public offering 24,898 -
- -----------------------------------------------------------------------------------------------------------
Balance at end of period 64,268 36,561
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RETAINED EARNINGS
Balance at beginning of period 44,862 33,409
Net earnings for the period 12,337 8,392
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Balance at end of period 57,199 41,801
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TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD 7,739,903 $129,207 6,048,075 $84,410
===========================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
------------------------
($ in thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 12,337 $ 8,392
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 415 459
Provision for loan losses 3,288 3,428
Deferred income tax benefit (1,501) (1,604)
Amortization of deferred debenture offering costs 890 941
Compensation expense related to common stock warrants - 9
Amortization of premiums (accretion) of discounts and deferred loan fees, net (5,305) (1,566)
Net decrease in accrued interest payable on debentures (2,613) (1,231)
Net decrease in official checks outstanding (6,598) (1,876)
Net increase in loan fees receivable (2,327) (1,934)
Net change in all other assets and liabilities 10,256 4,713
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,842 9,731
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Maturities and calls of securities held to maturity 62,820 66,650
Purchases of securities held to maturity (52,360) (170,849)
Net increase in loans receivable (305,859) (271,042)
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock (1,026) (1,567)
Purchases of premises and equipment, net (313) (1,671)
Investment in unconsolidated subsidiaries - (928)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (296,738) (379,407)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 308,437 300,879
Net increase in mortgage escrow funds payable 12,477 9,630
Net decrease in FHLB advances (36,000) -
Principal repayments of debentures and mortgage note payable (29,109) (11,009)
Gross proceeds from issuance of debentures 26,000 52,428
Debenture issuance costs (1,820) (2,203)
Proceeds from issuance of common stock 28,370 2,961
Common stock issuance costs (2,035) -
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 306,320 352,686
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 18,424 (16,990)
Cash and cash equivalents at beginning of period 24,599 64,128
========================================================================================================
Cash and cash equivalents at end of period $ 43,023 $ 47,138
========================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 41,547 $ 27,927
Income taxes 9,860 8,628
Noncash activities:
Conversion of debentures and accrued interest into Class A common stock 441 203
- --------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
6
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for
information derived from the 2004 audited consolidated financial statements and
notes thereto. The condensed consolidated financial statements in this report
should be read in conjunction with the 2004 audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
The financial statements include the accounts of Intervest Bancshares
Corporation (a financial holding company referred to by itself as the "Holding
Company") and its three subsidiaries, Intervest National Bank (referred to as
the "Bank"), Intervest Mortgage Corporation and Intervest Securities
Corporation. All the entities are referred to collectively as the "Company" on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated in consolidation. Intervest Statutory Trust I, II, III and IV
are wholly owned subsidiaries of the Holding Company that are unconsolidated
entities as required by Financial Accounting Standards Board (FASB)
Interpretation No. 46-R, "Consolidation of Variable Interest Entities."
Certain reclassifications have been made to prior period amounts to conform to
the current periods' 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.
Management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities and disclosure of contingent liabilities
as of the date of the consolidated financial statements, and revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In the opinion of
management, all material adjustments necessary for a fair presentation of
financial condition and results of operations for the interim periods presented
in this report have been made. These adjustments are of a normal recurring
nature. The results of operations for the interim periods are not necessarily
indicative of results that may be expected for the entire year or any other
interim period.
NOTE 2 - DESCRIPTION OF BUSINESS
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest
Securities Corporation and the Bank's headquarters and full-service banking
office are located on the entire fourth floor of One Rockefeller Plaza in New
York City, New York, 10020-2002, and the main telephone number is 212-218-2800.
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, including the participation in
loans originated by the Bank. From time to time, the Holding Company also issues
debt and equity securities to raise funds for working capital purposes.
The Company's primary business segment is banking and real estate lending. The
Company's lending activities is comprised almost entirely of mortgage loans
secured by commercial and multifamily real estate properties (including rental
and cooperative/condominium apartment buildings, office buildings, mix-used
properties, shopping centers, hotels, restaurants, industrial properties,
parking lots/garages and vacant land). These loans have an average life of
approximately three years. The Company tends to lend in areas that are in the
process of being revitalized, with a concentration of loans on properties
located in New York State and the State of Florida. A significant portion of the
residential 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.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Plaza in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank conducts a
personalized commercial and consumer banking business and attracts deposits from
the areas served by its banking offices. The Bank 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 mainly used to originate mortgage
loans secured by commercial and multifamily real estate properties and to
purchase investment securities. The information on the aforementioned web site
is not and should not be considered part of this report and is not incorporated
by reference.
7
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - DESCRIPTION OF BUSINESS - CONTINUED
Intervest Mortgage Corporation's business focuses on the origination of first
mortgage and junior mortgage loans secured by commercial and multifamily real
estate properties. It also provides loan origination services to the Bank.
Intervest Mortgage Corporation funds its lending business through the issuance
of subordinated debentures in public offerings. It currently has one active
wholly owned subsidiary, Intervest Realty Servicing Corporation, which is
engaged in certain mortgage servicing activities.
Intervest Securities Corporation is a broker/dealer and a member of the National
Association of Securities Dealers (NASD) whose business activities to date have
not been material. Its only revenues have been derived from participating as a
selected dealer from time to time in offerings of debt securities of the
Company, primarily those of Intervest Mortgage Corporation.
Intervest Statutory Trust I, II, III and IV issued in December 2001, September
2003, March 2004 and September 2004, $15.0 million, respectively, of trust
preferred securities for a total of $60.0 million. Each trust was formed for the
sole purpose of issuing and administering the trust preferred securities. The
trusts do not conduct any trade or business. For a further discussion, see note
8.
NOTE 3 - SECURITIES
The carrying value (amortized cost) and estimated fair value of securities held
to maturity are as follows:
Gross Gross Estimated Wtd-Avg
----- ----- --------- -------
Amortized Unrealized Unrealized Fair Wtd-Avg Remaining
--------- ---------- ---------- ---- ------- ---------
($ in thousands) Cost Gains Losses Value Yield Maturity
- ---------------------------------------------------------------------------------------------------
At September 30, 2005 $ 237,724 $ - $ 2,569 $ 235,155 2.91% 1.1 Years
At December 31, 2004 $ 248,888 $ 12 $ 1,689 $ 247,211 2.33% 1.4 Years
- ---------------------------------------------------------------------------------------------------
All the securities at September 30, 2005 and December 31, 2004 were debt
obligations of U.S. government corporations or sponsored agencies (FHLB, FNMA,
FHLMC, SLMA or FFCB) and were held by the Bank. The securities have fixed rates
or have predetermined scheduled rate increases, and some have call features that
allow the issuer to call the security at par before its stated maturity without
penalty.
At September 30, 2005, the portfolio consisted of 155 securities all of which
had an unrealized loss. Substantially all of the unrealized losses were for a
continuous period of more than 12 months. Management believes that the cause of
these unrealized losses is directly related to changes in market interest rates.
In general, as interest rates rise, the fair value of fixed rate securities will
decrease; as interest rates fall, their fair value will increase.
Management views the unrealized losses noted above to be temporary based on the
impact of interest rates, the very short maturities of the investments and their
high credit quality. In addition, the Bank has the ability and intent to hold
its investments for a period of time sufficient for the fair value of the
securities to recover. Management evaluates securities for other-than-temporary
impairment at least on a quarterly basis, and more frequently when economic or
market concerns warrant such evaluation.
The amortized cost and estimated fair value of securities held to maturity by
remaining term to contractual maturity is as follows:
($ in thousands) Amortized Cost Estimated Fair Value Average Yield
----------------------------------------------------------------------------------------------
At September 30, 2005:
Due in one year or less $ 124,213 $ 123,291 2.57%
Due after one year through five years 113,511 111,864 3.27%
----------------------------------------------------------------------------------------------
$ 237,724 $ 235,155 2.91%
----------------------------------------------------------------------------------------------
($ in thousands) Amortized Cost Estimated Fair Value Average Yield
----------------------------------------------------------------------------------------------
At December 31, 2004:
Due in one year or less $ 84,586 $ 84,235 1.81%
Due after one year through five years 164,302 162,976 2.59%
----------------------------------------------------------------------------------------------
$ 248,888 $ 247,211 2.33%
----------------------------------------------------------------------------------------------
There were no securities classified as available for sale or any sales of
securities during the reporting periods.
8
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
At September 30, 2005 At December 31, 2004
--------------------- --------------------
($ in thousands) # of Loans Amount # of Loans Amount
-----------------------------------------------------------------------------------------
Commercial real estate loans 268 $ 699,944 244 $ 601,512
Residential multifamily loans 247 532,816 249 403,613
Land development and other land loans 28 97,764 11 19,198
Residential 1-4 family loans 3 484 4 984
Commercial business loans 21 986 23 1,215
Consumer loans 16 608 12 221
-----------------------------------------------------------------------------------------
Loans receivable 583 1,332,602 543 1,026,743
-----------------------------------------------------------------------------------------
Deferred loan fees (13,447) (11,347)
-----------------------------------------------------------------------------------------
Loans receivable, net of deferred fees 1,319,155 1,015,396
-----------------------------------------------------------------------------------------
Allowance for loan losses (14,394) (11,106)
-----------------------------------------------------------------------------------------
Loans receivable, net $1,304,761 $1,004,290
-----------------------------------------------------------------------------------------
At September 30, 2005, $0.7 million of loans were on nonaccrual status, compared
to $4.6 million at December 31, 2004. Such loans were considered impaired under
the criteria of Statement of Financial Accounting Standards (SFAS) No. 114, but
no valuation allowance was maintained at any time since the Company believes
that the estimated fair value of the underlying properties exceeded the
Company's recorded investment. In April 2005, the property collateralizing a
nonaccrual loan with a principal balance of $3.9 million was sold at foreclosure
to a third party. The loan was repaid in full and the Bank recovered all amounts
due thereunder. At September 30, 2005 and December 31, 2004, there were no other
impaired loans. At September 30, 2005, there were $2.7 million of loans ninety
days past due and still accruing interest since they were deemed by management
to be well secured and in the process of collection. There were no such loans at
December 31, 2004.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $19,000 for the quarter ended September 30, 2005
and $55,000 for the nine-months ended September 30, 2005, compared to $140,000
for the quarter and nine-months ended September 30, 2004. The average balance of
nonaccrual loans for the quarter and nine-months ended September 30, 2005 and
2004 was $0.8 million and $2.1 million for the 2005 periods, and $2.2 million
and $2.6 million for the 2004 periods, respectively.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Quarter Ended September 30, Nine-Months Ended September 30,
-------------------------------- --------------------------------
($ in thousands) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------
Balance at beginning of period $ 12,591 $ 8,941 $ 11,106 $ 6,580
Provision charged to operations 1,803 1,067 3,288 3,428
- ----------------------------------------------------------------------------------------------------
Balance at end of period $ 14,394 $ 10,008 $ 14,394 $ 10,008
- ----------------------------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
At September 30, 2005 At December 31, 2004
------------------------ ----------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
---------------------------------------------------------------------------
Within one year $ 338,774 3.44% $269,553 2.84%
Over one to two years 225,223 4.22 119,780 3.43
Over two to three years 117,125 4.13 134,409 4.48
Over three to four years 178,138 4.35 75,317 4.06
Over four years 191,237 4.65 145,712 4.48
---------------------------------------------------------------------------
$1,050,497 4.06% $744,771 3.68%
---------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $344.2 million and
$215.9 million at September 30, 2005 and December 31, 2004, respectively. At
September 30, 2005, certificate of deposit accounts of $100,000 or more by
remaining maturity were as follows: due within one year $107.2 million; over one
to two years $79.9 million; over two to three years $35.6 million; over three to
four years $57.6 million; and over four years $63.9 million.
9
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures by series and mortgage note payable are summarized as
follows:
At September 30, At December 31,
($ in thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------
INTERVEST MORTGAGE CORPORATION:
Series 05/10/96 - interest at 2% above prime (1) - due April 1, 2005 $ - $ 10,000
Series 10/15/96 - interest at 2% above prime (1) - due October 1, 2005 - 5,500
Series 04/30/97 - interest at 1% above prime (1) - due October 1, 2005 - 8,000
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 - 2,600
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
Series 09/18/00 - interest at 8 1/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 - 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 - 1,250
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 1,500 1,500
Series 01/21/03 - interest at 7% fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 2,500
Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4% fixed - due April 1, 2007 2,000 2,000
Series 11/28/03 - interest at 6 1/2% fixed - due April 1, 2009 3,500 3,500
Series 11/28/03 - interest at 6 3/4% fixed - due April 1, 2011 4,500 4,500
Series 06/07/04 - interest at 6 1/4% fixed - due January 1, 2008 2,500 2,500
Series 06/07/04 - interest at 6 1/2% fixed - due January 1, 2010 4,000 4,000
Series 06/07/04 - interest at 6 3/4% fixed - due January 1, 2012 5,000 5,000
Series 03/21/05 - interest at 6 1/4% fixed - due April 1, 2009 3,000 -
Series 03/21/05 - interest at 6 1/2% fixed - due April 1, 2011 4,500 -
Series 03/21/05 - interest at 7% fixed - due April 1, 2013 6.500 -
Series 08/12/05 - interest at 6 1/4% fixed - due October 1, 2009 2,000 -
Series 08/12/05 - interest at 6 1/2% fixed - due October 1, 2011 4,000 -
Series 08/12/05 - interest at 7% fixed - due October 1, 2013 6,000 -
------------------------------------
85,750 88,850
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 2,820 3,080
Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 1,250 1,250
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250
------------------------------------
5,320 5,580
INTERVEST NATIONAL BANK:
Mortgage note payable (2) - interest at 7% fixed - due February 1, 2017 233 242
- --------------------------------------------------------------------------------------------------------------
$ 91,303 $ 94,672
- --------------------------------------------------------------------------------------------------------------
(1) Prime represents prime rate of JPMorganChase Bank, which was 6.75% at
September 30, 2005 and 5.25% at December 31, 2004.
(2) The note cannot be prepaid except during the last year of its term.
During 2005, Intervest Mortgage Corporation repaid the following debentures:
- - Series 11/10/98 on January 1 were repaid for $2.6 million of principal and
$1.9 million of accrued interest;
- - Series 5/10/96 and 8/01/01 on April 1 were repaid for $11.75 million of
principal and $2.3 million of accrued interest;
- - Series 10/15/96 and Series 1/17/02 on August 1 were repaid early for $6.75
million of principal and $0.1 million of accrued interest; and
- - Series 4/30/97 on September 1 were repaid early for $8.0 million of
principal and $0.1 million of accrued interest.
During 2005, Intervest Mortgage Corporation issued the following debentures:
- - Series 3/21/05 in April for $14.0 million of principal for net proceeds,
after offering costs, of $13.0 million; and
- - Series 8/12/05 in September for $12.0 million of principal for net
proceeds, after offering costs, of $11.1 million.
10
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
Interest is paid quarterly on Intervest Mortgage Corporation's debentures except
for the following: all of Series 6/28/99 and 9/18/00; $0.6 million of Series
8/01/01; $0.3 million of Series 1/17/02; $1.5 million of Series 8/05/02; $1.8
million of Series 11/28/03; $1.9 million of Series 6/7/04; $1.9 million of
Series 3/21/05; and $1.8 million of Series 8/12/05, all of which accrue and
compound interest quarterly, with such interest due and payable at maturity.
The holders of Intervest Mortgage Corporation's Series 6/28/99, 9/18/00 and
1/17/02 through 8/12/05 debentures can require Intervest Mortgage Corporation,
on a first come basis during a specified time, to repurchase the debentures for
face amount plus accrued interest once each year (beginning January 1, 2006 for
Series 8/05/02, July 1, 2006 for Series 1/21/03, October 1, 2006 for Series
7/25/03, January 1, 2007 for Series 11/28/03, January 1, 2008 for Series 6/7/04,
April 1, 2009 for Series 3/21/05 and October 1, 2009 for Series 8/12/05).
However, in no calendar year can the required purchases be more than $100,000 in
principal amount of each maturity, in each series of debentures, on a
non-cumulative basis.
Intervest Mortgage Corporation's debentures may be redeemed at its option at any
time, in whole or in part, for face value, except for Series 3/21/05 and Series
8/12/05, which would be at a premium of 1% if they were redeemed prior to
October 1, 2006 and April 1, 2007, respectively. 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 convertible
along with accrued interest at the option of the holders at any time prior to
April 1, 2008 into shares of its Class A common stock at the following
conversion prices per share: $14.00 in 2005; $16.00 in 2006; $18.00 in 2007 and
$20.00 from January 1, 2008 through April 1, 2008. The Holding Company has the
right to establish conversion prices that are less than those set forth above
for such periods as it may determine. For the nine-months ended September 30,
2005, $441,000 of debentures ($260,000 of principal and $188,000 of accrued
interest less $7,000 of deferred debenture offering costs) were converted into
shares of Class A common stock at $14.00 per share.
At September 30, 2005, interest accrued and compounded quarterly on $2.2 million
of the Holding Company's convertible debentures at the rate of 8% per annum,
while $0.6 million of the convertible debentures pay interest quarterly at the
rate of 8% per annum. All accrued interest of $1.8 million is due and payable at
maturity whether by acceleration, redemption or otherwise. Any convertible
debenture holder may, on or before July 1 of each year, elect to be paid all
accrued interest and to thereafter receive regular quarterly payments of
interest. The Holding Company may redeem any of its debentures, in whole or in
part, at any time for face value.
Scheduled contractual maturities as of September 30, 2005 were as follows:
($ in thousands) Principal Accrued Interest
-----------------------------------------------------------------------------------
For the period October 1, 2005 to December 31, 2005 $ 4 $ 1,137
For the year ended December 31, 2006 10,264 2,198
For the year ended December 31, 2007 7,015 175
For the year ended December 31, 2008 16,836 2,608
For the year ended December 31, 2009 13,517 256
Thereafter 43,667 422
-----------------------------------------------------------------------------------
$ 91,303 $ 6,796
-----------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as trust preferred securities) are
summarized as follows:
At September 30, 2005 At December 31, 2004
--------------------- ---------------------
Accrued Accrued
($ in thousands) Principal Interest Principal Interest
- ---------------------------------------------------------------------------------------------------------
Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 441 $ 15,464 $ 59
Capital Securities II - debentures due September 17, 2033 15,464 35 15,464 41
Capital Securities III - debentures due March 17, 2034 15,464 31 15,464 36
Capital Securities IV - debentures due September 20, 2034 15,464 29 15,464 29
- ---------------------------------------------------------------------------------------------------------
$ 61,856 $ 536 $ 61,856 $ 165
- ---------------------------------------------------------------------------------------------------------
11
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
The Capital Securities are obligations of the Holding Company's wholly owned
statutory business trusts, Intervest Statutory Trust I, II, III and IV. Each
Trust was formed with a capital contribution of $464,000 from the Holding
Company and for the sole purpose of issuing and administering the Capital
Securities. The proceeds from the issuance of the Capital Securities together
with the capital contribution for each Trust were used to acquire the Holding
Company's Junior Subordinated Debentures that are due concurrently with the
Capital Securities. The Capital Securities, net of the Company's capital
contributions totaling $1.9 million, qualify as regulatory capital.
The sole assets of the Trusts, the obligors on the Capital Securities, are the
Junior Subordinated Debentures. In addition, for each Trust, the Holding Company
has guaranteed the payment of distributions on, payments on any redemptions of,
and any liquidation distribution with respect to the Capital Securities.
Issuance costs of $0.5 million, $0.4 million, $0.4 million and $0.2 million
associated with Capital Securities I, II, III and IV, respectively, have been
capitalized by the Holding Company and are being amortized over the life of the
securities using the straight-line method.
Interest payments on the Junior Subordinated Debentures (and the corresponding
distributions on the Capital Securities) are payable in arrears as follows:
Capital Securities I - semi-annually at the fixed rate of 9.875% per annum;
Capital Securities II - quarterly at the fixed rate of 6.75% per annum until
September 17, 2008 and thereafter at the rate of 2.95% over 3 month libor;
Capital Securities III - quarterly at the fixed rate of 5.88% per annum until
March 17, 2009 and thereafter at the rate of 2.79% over 3 month libor; and
Capital Securities IV - quarterly at the fixed rate of 6.20% per annum until
September 20, 2009 and thereafter at the rate of 2.40% over 3 month libor.
Interest payments may be deferred at any time and from time to time during the
term of the Junior Subordinated Debentures at the election of the Holding
Company for up to 20 consecutive quarterly periods, or 5 years. There is no
limitation on the number of extension periods the Holding Company may elect;
provided, however, no deferral period may extend beyond the maturity date of the
Junior Subordinated Debentures. During an interest deferral period, interest
will continue to accrue on the Junior Subordinated Debentures and interest on
such accrued interest will accrue at an annual rate equal to the interest rate
in effect for such deferral period, compounded quarterly from the date such
interest would have been payable were it not deferred. At the end of the
deferral period, the Holding Company will be obligated to pay all interest then
accrued and unpaid.
All of the Capital Securities are subject to mandatory redemption as follows:
(i) in whole, but not in part, upon repayment of the Junior Subordinated
Debentures at stated maturity or earlier, at the option of the Holding Company,
within 90 days following the occurrence and continuation of certain changes in
the tax or capital treatment of the Capital Securities, or a change in law such
that the Trust would be considered an investment company, contemporaneously with
the redemption by the Holding Company of the Junior Subordinated Debentures; and
(ii) in whole or in part at any time on or after December 18, 2006 for Capital
Securities I, September 17, 2008 for Capital Securities II, March 17, 2009 for
Capital Securities III, and September 20, 2009 for Capital Securities IV
contemporaneously with the optional redemption by the Holding Company of the
Junior Subordinated Debentures in whole or in part. Any redemption would be
subject to the receipt of regulatory approvals.
NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT
From time to time, the Bank may borrow funds on an overnight or short-term basis
to manage its liquidity needs. At September 30, 2005, the Bank had agreements
with correspondent banks whereby it could borrow up to $16 million on an
unsecured basis.
In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and
the Federal Reserve Bank of New York (FRB), the Bank can also borrow from these
institutions on a secured basis. At September 30, 2005, the Bank had available
collateral consisting of investment securities to support total borrowings of
$229 million from the FHLB and FRB. At September 30, 2005, there were no
outstanding borrowings from any of the aforementioned sources.
12
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT, CONTINUED
The following is a summary of certain information regarding short-term
borrowings in the aggregate:
Quarter Ended Nine-Months Ended
September 30, September 30,
--------------------------------------------------
($ in thousands) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
Balance at period end $ - $ - $ - $ -
Maximum amount outstanding at any month end $ 3,000 $ 16,000 $ 17,000 $ 16,000
Average outstanding balance for the period $ 1,108 $ 3,089 $ 6,234 $ 1,165
Weighted-average interest rate paid for the period 3.94% 1.55% 2.79% 1.49%
Weighted-average interest rate at period end -% -% -% -%
- -------------------------------------------------------------------------------------------------------
NOTE 10 - COMMON STOCK WARRANTS
The Holding Company had 696,465 common stock warrants outstanding that entitle
its holder, the Chairman of the Board of the Company, to purchase one share of
Class A or Class B common stock as the case may be for each warrant. All
warrants are currently exercisable.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant
-------------------------- Wtd-Avg
Class A Common Stock Warrants: $ 6.67 Exercise Price
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2004 and September 30, 2005 501,465 $ 6.67
Remaining contractual life in years at September 30, 2005 1.3
- -------------------------------------------------------------------------------------------------------
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class B Common Stock Warrants: $ 6.67 $ 10.00 Warrants Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2004 and September 30, 2005 145,000 50,000 195,000 $ 7.52
Remaining contractual life in years at September 30, 2005 2.3 2.3 2.3
- -------------------------------------------------------------------------------------------------------------------
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. Compensation expense recorded in connection with common stock warrants
amounted to $9,000 for the nine-months ended September 30, 2004. There was no
such compensation for the quarterly period ended September 30, 2004 and for the
quarterly and nine-month periods of 2005.
NOTE 11 - EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average number
of shares of common stock outstanding. Diluted EPS is calculated by dividing
adjusted net earnings by the weighted-average number of shares of common stock
and dilutive potential common stock shares that may be outstanding in the
future.
Potential common stock shares consist of shares that may arise from outstanding
dilutive common stock warrants (the number of which is computed using the
"treasury stock method") and from outstanding convertible debentures (the number
of which is computed using the "if converted method"). Diluted EPS considers the
potential dilution that could occur if the Company's outstanding common stock
warrants and convertible debentures were converted into common stock that then
shared in the Company's earnings (as adjusted for interest expense, net of
taxes, that would no longer occur if the debentures were converted).
13
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED
- --------------------------------------------------------------------------------
NOTE 11 - EARNINGS PER SHARE (EPS), CONTINUED
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are summarized
in the table that follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
----------------------------------------------
($ in thousands, except share and per share amounts) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net earnings applicable to common stockholders $ 4,566 $ 3,152 $ 12,337 $ 8,392
Average number of common shares outstanding 6,967,473 6,048,075 6,508,297 6,046,339
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.66 $ 0.52 $ 1.90 $ 1.39
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net earnings applicable to common stockholders $ 4,566 $ 3,152 $ 12,337 $ 8,392
Adjustment to net earnings from assumed conversion of debentures (1) 55 83 165 247
----------------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 4,621 $ 3,235 $ 12,502 $ 8,639
----------------------------------------------
Average number of common shares outstanding:
Common shares outstanding 6,967,473 6,048,075 6,508,297 6,046,339
Potential dilutive shares resulting from exercise of warrants (2) 269,754 243,435 259,052 247,974
Potential dilutive shares resulting from conversion of debentures (3) 335,664 605,217 339,191 603,071
----------------------------------------------
Total average number of common shares outstanding used for dilution 7,572,891 6,896,727 7,106,540 6,897,384
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.61 $ 0.47 $ 1.76 $ 1.25
- -----------------------------------------------------------------------------------------------------------------------
(1) Represents interest expense on dilutive convertible debentures, net of
taxes, that would not occur if they were assumed converted.
(2) All outstanding warrants were considered for the EPS computations.
(3) Convertible debentures (principal and accrued interest) outstanding at
September 30, 2005 and 2004 totaling $4.6 million and $7.3 million,
respectively, were convertible into common stock at a price of $14.00 per
share in 2005 and $12.00 per share in 2004 and resulted in additional
common shares (based on average balances outstanding).
NOTE 12 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments are in the form of commitments to extend credit, unused lines
of credit and standby letters of credit, and may involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated financial statements. The Company's maximum exposure to credit
risk is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination clauses
and normally require payment of fees. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the counterparty. Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The contractual amounts of off-balance sheet financial instruments is summarized
as follows:
At September 30, At December 31,
----------------- ----------------
($ in thousands) 2005 2004
---------------------------------------------------------------
Unfunded loan commitments $ 163,544 $ 159,697
Available lines of credit 809 789
Standby letters of credit 138 750
---------------------------------------------------------------
$ 164,491 $ 161,236
---------------------------------------------------------------
Management is not aware of any trends, known demands, commitments or
uncertainties which are expected to have a material impact on future operating
results, liquidity or capital resources.
14
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY CAPITAL
The Bank and the Holding Company are required to maintain regulatory defined
minimum Tier 1 leverage and Tier 1 and total risk-based capital ratios.
Management believes that the Bank and the Holding Company are in compliance with
their capital adequacy requirements. Management is not aware of any conditions
or events outstanding which would change the Bank's designation as a
well-capitalized institution.
At September 30, 2005, the actual capital of the Bank on a percentage basis was
as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ -----------------
Total capital to risk-weighted assets 12.72% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.65% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 10.61% 4.00% 5.00%
At September 30, 2005, the actual capital of the Company (consolidated) on a
percentage basis was as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ ----------------
Total capital to risk-weighted assets 14.42% 8.00% NA
Tier 1 capital to risk-weighted assets 12.21% 4.00% NA
Tier 1 capital to total average assets - leverage ratio 11.07% 4.00% NA
The Federal Reserve on March 1, 2005 issued a final rule that allows trust
preferred securities to continue to be included in the Tier 1 capital of bank
holding companies, but with stricter quantitative limits and clearer qualitative
standards. The new rule provides a transition period for bank holding companies
to meet the new, stricter limitations by allowing the limits on restricted core
capital elements to become fully effective as of March 31, 2009. For a further
discussion of these regulatory implications, see the section entitled "Recent
Accounting and Regulatory Developments" in note 1 to consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
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 September 30, 2005, Intervest Securities Corporation's net
capital was $505,000.
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," SFAS No. 123-R. SFAS No. 123-R requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and directors, but expresses no
preference for a type of valuation model. SFAS No. 123-R eliminates the
intrinsic value-based method that the Company currently uses.
In March 2005, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 107 (SAB No.107) to provide guidance on SFAS No. 123-R.
SAB No. 107 provides the staff's view regarding the valuation of share-based
payment arrangements for public companies. In particular, this SAB provides
guidance related to share-based payment transactions with non-employees, the
transition from non public to public entity status, valuation methods (including
assumptions such as expected volatility and expected term), the accounting for
certain redeemable financial instruments issued under share-based payment
arrangements, the classification of compensation expense, non-GAAP financial
measures, first time adoption of SFAS No. 123 R, the modification of employee
share options prior to the adoption of SFAS No. 123 R and disclosure in
Management's Discussion and Analysis subsequent to adoption of SFAS No. 123 R.
SAB No. 107 is effective March 29, 2005.
In April 2005 the U.S. Securities and Exchange Commission announced a deferral
of the effective date of SFAS No. 123-R for calendar year companies until the
beginning of 2006. The Company's financial statements will be prepared in
accordance with this new standard if and when the Company issues any new stock
warrants and/or options to employees or directors in the future. The amount of
any impact cannot be determined at this juncture.
15
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED
On May 30, 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections." This statement requires entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods'
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, Accounting Changes, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period's net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
"retrospective application" of an accounting principle and the "restatement" of
financial statements to reflect the correction of an error. Another significant
change in practice under SFAS No. 154 will be that if an entity changes its
method of depreciation, amortization, or depletion for long-lived, non-financial
assets, the change must be accounted for as a change in accounting estimate.
Under APB Opinion No. 20, such a change would have been reported as a change in
accounting principle.
SFAS No. 154 applies to accounting changes and error corrections that are made
in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements, including those
that are in a transition phase as of the effective date of this Statement.
16
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hacker, Johnson & Smith, P.A., P.C., the Company's independent registered
public accounting firm, has made a limited review of the financial data as of
September 30, 2005 and for the three- and nine-month periods ended September 30,
2005 and 2004 presented in this document, in accordance with the standards
established by the Public Company Accounting Oversight Board. As part of Hacker,
Johnson & Smith, P.A., P.C.'s review, Eisner, LLP was relied upon for their
limited review of Intervest Mortgage Corporation, a wholly owned subsidiary of
the Company.
The reports of Hacker, Johnson & Smith, P.A., P.C. and Eisner, LLP
furnished pursuant to Article 10 of Regulation S-X are included herein.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of
September 30, 2005 and the related condensed consolidated statements of earnings
for the three-month and nine-month periods ended September 30, 2005 and 2004,
and the related condensed consolidated statements of changes in stockholders'
equity and cash flows for the nine-month periods ended September 30, 2005 and
2004. These interim financial statements are the responsibility of the Company's
management.
We were furnished the reports of the other independent registered public
accounting firm on their reviews of the interim financial information of
Intervest Mortgage Corporation, whose total assets as of September 30, 2005
constituted 5.9% of the related consolidated total, and whose net interest
income, noninterest income and net earnings for the three-month and nine-month
periods then ended, constituted 8.9%, 11.5%, and 19.6%; and 7.5%, 12.0% and
18.1%, respectively, and whose net interest income, noninterest income and net
earnings for the three- and nine-month periods ended September 30, 2004,
constituted 6.9%, 10.4%, and 20.4%; and 6.4%, 14.3% and 19.8%, respectively, of
the related consolidated totals.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews and the reports of the other independent registered public
accounting firm, we are not aware of any material modifications that should be
made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board, the consolidated balance sheet of the
Company as of December 31, 2004, and the related consolidated statements of
earnings, comprehensive income, changes in stockholders' equity and cash flows
for the year then ended (not presented herein); and in our report dated March
11, 2005, we, based on our audit and the report of the other independent
registered public accounting firm, expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2004 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ----------------------------------------
HACKER, JOHNSON & SMITH, P.A.,P.C.
Tampa, Florida
October 26, 2005
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest Mortgage
Corporation and Subsidiaries (the "Company") as of September 30, 2005 and the
related condensed consolidated statements of operations for each of the
three-month and nine-month periods ended September 30, 2005 and 2004, and the
related condensed consolidated statements of changes in stockholder's equity and
cash flows for the nine-months ended September 30, 2005 and 2004 (all of which
are not presented separately herein). These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated interim financial statements (not
presented separately herein) referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2004 and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the year then
ended (all of which are not presented separately herein), and in our report
dated February 10, 2005, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the condensed consolidated balance sheet as of December 31, 2004 (not presented
separately herein) is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ Eisner, LLP
- ----------------
EISNER,LLP
New York, New York
October 26, 2005
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
--------
Intervest Bancshares Corporation has three wholly owned consolidated
subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and
Intervest Securities Corporation (hereafter referred to collectively as the
"Company" on a consolidated basis). Intervest Bancshares Corporation and
Intervest National Bank may be referred to individually as the "Holding Company"
and the "Bank," respectively. Intervest Bancshares Corporation also has four
wholly owned unconsolidated subsidiaries, Intervest Statutory Trust I, II, III
and IV, which were formed in connection with the issuance of trust preferred
securities. For a discussion of the Company's business, see note 2 to the
condensed consolidated financial statements in this report.
The Company's principal revenues are derived from interest, dividends and fees
earned on its interest-earning assets, which are comprised of mortgage loans,
securities and other short-term investments. The Company's principal expenses
consist of interest paid on its interest-bearing liabilities, which are
comprised of deposits, debentures and other short-term borrowings, and its
operating and general expenses.
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. When a mortgage loan is repaid prior to maturity,
the Company may recognize prepayment income, which consists of the recognition
of unearned fees associated with such loans at the time of payoff and the
receipt of additional prepayment fees and interest in certain cases. The amount
of income from loan prepayments can fluctuate significantly and cannot be
predicted. Normally, the number of instances of prepayment of mortgage loans
tends to increase during periods of declining interest rates and tends to
decrease during periods of increasing interest rates. Many of the Company's
mortgage loans include provisions relating to prepayment and others prohibit
prepayment of indebtedness entirely. Noninterest expense consists of
compensation and benefits expense, occupancy and equipment expenses, data
processing expenses, advertising expense, professional fees, insurance expense
and other operating expenses. The Company's profitability is also significantly
affected by general economic and competitive conditions, changes in market
interest rates, government policies and actions of regulatory authorities.
Nearly all (99.8%) of the Company's loan portfolio is concentrated in mortgage
loans secured by commercial and multifamily real estate properties (including
rental and cooperative/condominium apartment buildings, office buildings,
mix-used properties, shopping centers, hotels, restaurants, industrial
properties, parking lots/garages and vacant land). These loans have an average
life of approximately three years. The Company tends to lend in areas that are
in the process of being revitalized, with a concentration of loans on properties
located in New York State and the State of Florida. A significant portion of the
residential 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.
All loans are subject to the risk of default, otherwise known as credit risk,
which represents the possibility of the Company not recovering amounts due from
its borrowers. A borrower's ability to make payments due under a mortgage loan
is dependent upon the risks associated with real estate investments in general,
including the following: general or local economic conditions in the areas the
properties are located, neighborhood values, interest rates, real estate tax
rates, operating expenses of the mortgaged properties, supply of and demand for
rental units, supply of and demand for properties, ability to obtain and
maintain adequate occupancy of the properties, zoning laws, governmental rules,
regulations and fiscal policies. Additionally, terrorist acts, such as those
that occurred on September 11, 2001, armed conflicts, such as the war on
terrorism, and natural disasters, such as hurricanes, may have an adverse impact
on economic conditions. Economic conditions affect the market value of
20
the mortgaged properties underlying the Company's loans as well as the levels of
occupancy of income-producing properties.
CRITICAL ACCOUNTING POLICIES
----------------------------
The preparation of the Company's consolidated financial statements and the
information included in Management's Discussion and Analysis herein is governed
by policies that are based on accounting principles generally accepted in the
United States (GAAP) and general practices within the banking industry. The
financial information contained in the Company's financial statements is, to a
significant extent, based on measures of the financial effects of transactions
and events that have already occurred. A variety of factors could affect the
ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset or relieving a liability. In addition, GAAP itself
may change from one previously acceptable method to another method. Although the
economics of the Company's transactions would be the same, the timing of events
that would impact its transactions could change. Among the more significant
policies of the Company are those that govern accounting for loans and the
allowance for loan losses. For a summary of all of the Company's significant
accounting policies, see note 1 to the consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
An accounting policy is deemed to be "critical" if it is important to a
company's results of operations and financial condition, and requires
significant judgment and estimates on the part of management in its application.
The preparation of financial statements and related disclosures in conformity
with GAAP requires management to make estimates and assumptions that affect
certain amounts reported in the financial statements and related disclosures.
Actual results could differ from these estimates and assumptions. The Company
believes that the estimates and assumptions used in connection with the amounts
reported in its financial statements and related disclosures are reasonable and
made in good faith.
The Company believes that currently its only significant critical accounting
policy relates to the determination of the allowance for loan losses. The
allowance for loan losses reflects management's judgment as to the estimated
losses that may result from defaults in the loan portfolio. 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 Company's allowance for loan losses is evaluated monthly or
more frequently when necessary with consideration given to the following
factors: (i) the size of the loan portfolio, which continues to experience rapid
growth and an increase in individual loan balances; (ii) the nature of the loan
portfolio, which is concentrated on commercial and multifamily real estate
properties, including loans on substantially vacant properties and vacant land,
all of which are generally considered to have more credit risk than 1-4 family
residential lending because these loans tend to involve larger loan balances to
single borrowers and their repayment is typically dependent upon the successful
operation of the underlying real estate for income-producing properties, while
loans on vacant land typically do not have income streams and depend upon other
sources of cash flow from the borrower for repayment; (iii) specific problem
loans, such as loans on nonaccrual status, and loan commitments and estimates of
fair value of the underlying properties; (iv) historical chargeoffs and
recoveries; (v) adverse situations which may affect the borrowers' ability to
repay; and (vi) management's perception of the current and anticipated economic
conditions in the Company's lending areas, which are concentrated in New York
and Florida. Although management believes it uses the best information available
to make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions, or other factors, differ
from those previously assumed in the determination of the level of the
allowance.
For calculation purposes, the allowance for loan losses is comprised of an
unallocated portion (which is derived from an estimated loss factor currently
ranging from 0.30% to 1.35% multiplied by the principal amount of loans rated
acceptable, and higher percentages for loans that are assigned a credit grade of
special mention or lower) and, from time to time, an allocated (or specific)
portion on certain loans, particularly for loans that have been identified as
being impaired.
Statement of Financial Accounting Standards (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 we 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
21
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.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
-----------------------------------------------------------------------------
OVERVIEW
- --------
Total assets at September 30, 2005 increased to $1.6 billion, from $1.3 billon
at December 31, 2004. Total liabilities at September 30, 2005 increased to $1.5
billion, from $1.2 billion at December 31, 2004, and stockholders' equity
increased to $129.2 million at September 30, 2005, from $90.1 million at
December 31, 2004. Book value per common share increased to $16.69 at September
30, 2005, from $14.37 at December 31, 2004.
Selected balance sheet information as of September 30, 2005 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($ in thousands) Company Bank Corp. Corp. Amounts (1) Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 3,073 $ 30,173 $ 33,341 $ 543 $ (24,107) $ 43,023
Security investments - 243,842 - - - 243,842
Loans receivable, net of deferred fees 12,427 1,227,509 79,219 - - 1,319,155
Allowance for loan losses (85) (14,069) (240) - - (14,394)
Investment in consolidated subsidiaries 178,632 - - - (178,632) -
All other assets 4,997 28,158 6,061 3 - 39,219
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $199,044 $1,515,613 $ 118,381 $ 546 $ (202,739) $ 1,630,845
- ----------------------------------------------------------------------------------------------------------------------------
Deposits $ - $1,326,513 $ - $ - $ (24,204) $ 1,302,309
Borrowed funds and related interest payable 69,519 233 90,739 - - 160,491
All other liabilities 318 36,501 1,881 41 97 38,838
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 69,837 1,363,247 92,620 41 (24,107) 1,501,638
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 129,207 152,366 25,761 505 (178,632) 129,207
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $199,044 $1,515,613 $ 118,381 $ 546 $ (202,739) $ 1,630,845
- ----------------------------------------------------------------------------------------------------------------------------
(1) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise largely from intercompany deposit
accounts and investments.
A comparison of selected balance sheet information as of September 30, 2005 and
December 31, 2004 follows:
At September 30, 2005 At December 31, 2004
---------------------------- ----------------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 43,023 2.6% $ 24,599 1.9%
Security investments 243,842 15.0 253,980 19.3
Loans receivable, net of deferred fees and loan loss allowance 1,304,761 80.0 1,004,290 76.3
All other assets 39,219 2.4 33,882 2.5
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,630,845 100.0% $ 1,316,751 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $ 1,302,309 79.9% $ 993,872 75.5%
Borrowed funds and related interest payable 160,491 9.8 202,682 15.4
All other liabilities 38,838 2.4 30,103 2.2
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,501,638 92.1 1,226,657 93.1
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 129,207 7.9 90,094 6.9
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,630,845 100.0% $ 1,316,751 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
22
CASH AND CASH EQUIVALENTS
- ----------------------------
Cash and cash equivalents increased to $43.0 million at September 30, 2005, from
$24.6 million at December 31, 2004. The level of cash and cash equivalents
fluctuates based on various factors, including liquidity needs, loan demand,
deposit flows, calls and maturities of securities, repayments of borrowed funds
and alternative investment opportunities. The increase reflected the temporary
investment into overnight federal funds of deposit inflows as well as the
proceeds from the issuance of stock during September. A portion of these funds
is expected to fund new loans.
SECURITY INVESTMENTS
- ---------------------
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. Currently,
only the Bank holds such security investments, which decreased to $237.7 million
at September 30, 2005, from $248.9 million at December 31, 2004. The decrease
reflected maturities exceeding new purchases during the period. The Bank
continues to invest in short-term (up to 5 year maturities) U.S. government
agency debt obligations to emphasize liquidity and to currently target its
loan-to-deposit ratio at approximately 85%. The investment portfolio at
September 30, 2005 had a weighted-average remaining maturity of 1.1 years and a
yield of 2.91%, compared to 1.4 years and a yield of 2.33% at December 31, 2004.
At September 30, 2005 and December 31, 2004, the portfolio's estimated fair
value was $235.2 million and $247.2 million, 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. The Bank's total investment in the FRB and FHLB stock
increased to $6.1 million at September 30, 2005, from 5.1 million December 31,
2004. The total investment fluctuates based on the Bank's capital level for the
FRB stock and the Bank's loans and outstanding FHLB borrowings for the FHLB
stock.
LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan losses,
increased to $1.3 billion at September 30, 2005 from $1.0 billion at December
31, 2004. The growth reflected new mortgage loan originations secured by
commercial and multifamily real estate exceeding principal repayments. New loan
originations totaled $220.7 million and $545.3 million in the third quarter and
first nine months of 2005, respectively, compared to $139.0 million and $477.6
million in the third quarter and first nine months of 2004, respectively.
Nearly all (99.8%) of the Company's loan portfolio is concentrated in mortgage
loans (with an average life of approximately 3 years) secured by commercial and
multifamily real estate properties (including rental and cooperative/condominium
apartment buildings, office buildings, mix-used properties, shopping centers,
hotels, restaurants, industrial properties, parking lots/garages and vacant
land). At September 30, 2005, such loans consist of 543 loans with an aggregate
principal balance of $1.3 billion and an average principal size of $2.4 million.
Loans with principal balances of $5.0 million or more aggregated to 62 loans or
$551.2 million, with the largest loan amounting to $18.7 million.
At September 30, 2005, $0.7 million of loans were on nonaccrual status, compared
to $4.6 million at December 31, 2004. In April 2005, the property
collateralizing a nonaccrual loan with a principal balance of $3.9 million was
sold at foreclosure to a third party. The loan was paid in full and the Bank
recovered all amounts due thereunder. Nonaccrual loans are considered impaired
under the criteria of SFAS No. 114, but no valuation allowance was maintained at
any time since the Company believes that the estimated fair value of the
underlying properties exceeded its recorded investment. At September 30, 2005
and December 31, 2004, there were no other impaired loans.
At September 30, 2005, there were $2.7 million of loans ninety days past due and
still accruing interest because they were deemed by management to be well
secured and in the process of collection. Such amount represented three loans
that are past their maturity date, but in each case the borrower continues to
make monthly payments of interest and principal. Based upon discussions with
these borrowers, it is anticipated that these loans will repaid in full or
refinanced in the near term. There were no loans ninety days past due and still
accruing interest at December 31, 2004.
23
At September 30, 2005, the allowance for loan losses amounted to $14.4 million,
compared to $11.1 million at December 31, 2004. The allowance represented 1.09%
of total loans (net of deferred fees) outstanding at September 30, 2005 and
December 31, 2004. The increase in the allowance was due to provisions
aggregating $3.3 million during the period resulting largely from loan growth
(which amounted to $305.9 million from December 31, 2004), partially offset by
the favorable impact from the satisfaction of the $3.9 million nonaccrual loan
noted above. For a further discussion of the criteria the Company uses to
determine the adequacy of the allowance, see the section entitled "Critical
Accounting Policies" included in this report.
ALL OTHER ASSETS
- ------------------
The following table sets forth the composition of the caption "All other assets"
as follows:
At September 30, At December 31,
----------------- ----------------
($ in thousands) 2005 2004
-------------------------------------------------------------------------------
Accrued interest receivable $ 6,786 $ 6,699
Loan fees receivable 10,535 8,208
Premises and equipment, net 6,534 6,636
Deferred income tax asset 6,596 5,095
Deferred debenture offering costs, net 5,852 4,929
Investment in unconsolidated subsidiaries 1,856 1,856
All other 1,060 459
-------------------------------------------------------------------------------
$ 39,219 $ 33,882
-------------------------------------------------------------------------------
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 of $0.1 million from December 31, 2004 was due
to the growth in all of 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 of $2.3 million from December 31, 2004 was due to the
increase in the loan portfolio.
Premises and equipment decreased by $0.1 million from December 31, 2004 as net
purchases of $0.3 million during the period were more than offset by
depreciation and amortization.
The deferred income tax asset relates primarily to the unrealized tax benefit on
the Company's allowance for loan losses. The allowance has been expensed for
financial statement purposes but it is currently not deductible for income tax
purposes until actual loan chargeoffs are incurred. The increase in the deferred
tax asset of $1.5 million from December 31, 2004 is a function of the increase
in the allowance for loan losses during the period.
Deferred debenture offering costs consist primarily of underwriters' commissions
and are amortized over the terms of the debentures. The net increase of $0.9
million from December 31, 2004 was due to $1.8 million of additional costs
incurred in connection with the issuance of new debentures, partially offset by
$0.9 million of amortization during the period.
The investment in unconsolidated subsidiaries consists of the Holding Company's
total common stock investment in Intervest Statutory Trust I, II, III and IV.
All other assets increased by $0.6 million from December 31, 2004 primarily due
to $0.3 million of debenture proceeds receivable at September 30, 2005, which
was collected in full in October 2005.
DEPOSITS
- --------
Deposits increased to $1.3 billion at September 30, 2005, from $993.9 million at
December 31, 2004, reflecting increases in certificate of deposit accounts of
$305.7 million and an increase in checking, savings and money market accounts
totaling $2.7 million.
At September 30, 2005, certificate of deposit accounts totaled $1.0 billion, and
checking, savings and money market accounts aggregated $251.8 million. The same
categories of deposit accounts totaled $744.8 million and $249.1 million,
respectively, at December 31, 2004. Certificate of deposit accounts represented
81% of total
24
deposits at September 30, 2005 and 75% at December 31, 2004. In September 2005,
the Bank began accepting brokered deposits as another source of funds. Such
accounts totaled $36.6 million at September 30, 2005.
BORROWED FUNDS AND RELATED INTEREST PAYABLE
- -------------------------------------------
At September 30, 2005, borrowed funds and related interest payable decreased to
$160.5 million, from $202.7 million at December 31, 2004. The decrease was due
to the full repayment of $36.0 million of short-term FHLB borrowings by the
Bank, and a net decrease of $6.3 million of Intervest Mortgage Corporation's
outstanding debentures and related accrued interest payable resulting from
repayments exceeding new issues during the period.
ALL OTHER LIABILITIES
- -----------------------
The table below sets forth the composition of the caption "All other
liabilities" as follows:
At September 30, At December 31,
----------------- ----------------
($ in thousands) 2005 2004
--------------------------------------------------------------------------
Mortgage escrow funds payable $ 27,010 $ 14,533
Official checks outstanding 5,463 12,061
Accrued interest payable on deposits 2,783 1,718
Income taxes payable 1,244 81
All other 2,338 1,710
--------------------------------------------------------------------------
$ 38,838 $ 30,103
--------------------------------------------------------------------------
Mortgage escrow funds payable represent advance payments made to the Company by
borrowers for taxes and insurance that are remitted by the Company to third
parties. The increase of $12.5 million from December 31, 2004 reflected the
growth in the loan portfolio as well as the timing of tax payments.
Official checks outstanding vary and fluctuate based on banking activity.
Accrued interest payable on deposits fluctuates based on total deposits and
timing of interest payments. The increase of $1.1 million in accrued interest
payable from December 31, 2004 reflected the growth in deposits. Income taxes
payable fluctuates based on the Company's earnings, effective tax rate and
timing of tax payments.
All other liabilities are comprised mainly of accrued expenses and fees received
on loan commitments that have not yet been funded. The increase of $0.6 million
from December 31, 2004 reflected a higher level of accrued expenses and fees
received on loan commitments that have not yet been funded.
STOCKHOLDERS' EQUITY
- ---------------------
Stockholders' equity increased to $129.2 million at September 30, 2005, from
$90.1 million at December 31, 2004 as follows:
($ in thousands) Amount Shares
-------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2004 $ 90,094 6,271,433
Net earnings for the period 12,337 -
Class A common stock issued in public offering, net of issuance costs 26,335 1,436,468
Convertible debentures converted at election of debenture holders 441 32,002
-------------------------------------------------------------------------------------------
Stockholders' equity at September 30, 2005 $129,207 7,739,903
-------------------------------------------------------------------------------------------
The Holding Company completed in August a public offering of 1,250,000 shares of
its Class A Common Stock for $19.75 per share and in September issued an
additional 186,468 shares of Class A common stock for $19.75 per share in
connection with the exercise by the underwriters of an option to purchase
additional shares to cover over-allotments. The issuance of these shares, after
underwriting commissions and expenses, resulted in $26.3 million of additional
capital for the Company.
25
COMPARISON OF RESULTS OF OPERATIONS
-----------------------------------
FOR THE QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------
OVERVIEW
- --------
Consolidated net earnings for the third quarter of 2005 increased by 45% to $4.6
million or $0.61 per diluted share, from $3.2 million or $0.47 per diluted share
reported in the third quarter of 2004. The increase was due to continued growth
in the Company's lending activities.
The $1.4 million increase in consolidated earnings reflected a $3.3 million
increase in net interest and dividend income and a $0.3 million increase in
noninterest income, partially offset by a $1.1 million increase in income tax
expense, a $0.7 million increase in the provision for loan losses and a $0.4
million increase in noninterest expenses.
The Company's return on average assets and equity increased to 1.17% and 16.32%,
respectively, in the 2005 quarter, from 1.05% and 15.32% in the 2004 quarter.
The Company's efficiency ratio, which is a measure of its ability to control
expenses as a percentage of its revenues, continues to be favorable and improved
to 21% for the third quarter of 2005, from 24% in the 2004 quarter.
Selected information regarding results of operations for the third quarter of
2005 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($ in thousands) Bank Corp. Corp. Company Amounts (2) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 22,873 $ 2,762 $ 3 $ 223 $ (100) $ 25,761
Interest expense 12,144 1,810 - 1,252 (100) 15,106
-----------------------------------------------------------------------------
Net interest and dividend income 10,729 952 3 (1,029) - 10,655
Provision for loan losses 1,850 (47) - - - 1,803
Noninterest income 1,495 1,411 56 166 (1,315) 1,813
Noninterest expenses 2,949 746 35 151 (1,315) 2,566
-----------------------------------------------------------------------------
Earnings before taxes 7,425 1,664 24 (1,014) - 8,099
Provision for income taxes 3,222 769 11 (469) - 3,533
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,203 $ 895 $ 13 $ (545) $ - $ 4,566
- -------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (1,089) - - 1,089 - -
- -------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 3,114 $ 895 $ 13 $ 544 $ - $ 4,566
- -------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2004 $ 2,072 $ 644 $ 16 $ 420 $ - $ 3,152
- -------------------------------------------------------------------------------------------------------------------------
(1) Dividends to the Holding Company from the Bank provide funds for the debt
service on the subordinated debentures-capital securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise from intercompany deposit accounts and
management and service agreements.
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $10.6 million in the third quarter
of 2005, from $7.3 million in the third quarter of 2004. The improvement was
attributable to a $358.7 million increase in average interest-earning assets
resulting from continued growth in loans of $304.0 million and a higher level of
security and short-term investments aggregating $54.7 million. The growth in
average assets was funded by $333.6 million of additional interest-bearing
deposits and a $29.6 million increase in stockholders' equity.
The Company's net interest margin increased to 2.74% in the third quarter of
2005, from 2.46% in the third quarter of 2004. The higher margin was due to the
Company's yield on interest-earning assets increasing at a faster pace than its
cost of funds.
26
In a rising rate environment, the yield on interest-earning assets increased 69
basis points to 6.63% in the 2005 quarter due to higher yields on new mortgage
loans originated, an increase in yields earned on variable rate loans indexed to
the prime rate, and higher yields earned on security and other short-term
investments. The cost of funds also increased by 46 basis points to 4.26% in the
2005 quarter due to higher rates paid on deposit accounts.
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
--------------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------------
September 30, 2005 September 30, 2004
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate (2) Balance Inc./Exp. Rate (2)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $1,246,341 $ 23,569 7.50% $ 942,342 $ 16,428 6.94%
Securities 260,272 1,895 2.89 216,463 1,137 2.09
Other interest-earning assets 35,441 297 3.32 24,566 90 1.46
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,542,054 $ 25,761 6.63% 1,183,371 $ 17,655 5.94%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,715 15,204
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,556,769 $1,198,575
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 9,855 $ 36 1.45% $ 12,271 $ 48 1.56%
Savings deposits 23,597 153 2.57 31,572 142 1.79
Money market deposits 201,607 1,576 3.10 204,139 982 1.91
Certificates of deposit 1,014,414 10,264 4.01 667,933 5,986 3.57
- -----------------------------------------------------------------------------------------------------------------------
Total deposit accounts 1,249,473 12,029 3.82 915,915 7,158 3.11
- -----------------------------------------------------------------------------------------------------------------------
Fed funds purchased and FHLB Advances 1,108 11 3.94 3,089 12 1.55
Debentures and related interest payable 93,283 1,973 8.39 114,654 2,291 7.95
Debentures - capital securities 61,856 1,089 6.98 48,241 883 7.28
Mortgage note payable 235 4 7.01 247 4 7.01
- -----------------------------------------------------------------------------------------------------------------------
Total borrowed funds 156,482 3,077 7.80 166,231 3,190 7.64
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,405,955 $ 15,106 4.26% 1,082,146 $ 10,348 3.80%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,910 6,868
Noninterest-bearing liabilities 32,971 27,256
Stockholders' equity 111,933 82,305
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,556,769 $1,198,575
- -----------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 10,655 2.37% $ 7,307 2.14%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 136,099 2.74% $ 101,225 2.46%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10 1.09
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.17% 1.05%
Return on average equity (2) 16.32% 15.32%
Noninterest expense to average assets (2) 0.66% 0.71%
Efficiency ratio (3) 21% 24%
Average stockholders' equity to average assets 7.19% 6.87%
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans.
(2) Annualized.
(3) Defined as noninterest expenses (excluding the provision for loan losses)
as a percentage of net interest and dividend income plus noninterest
income.
27
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
For the Quarter Ended September 30, 2005 vs 2004
----------------------------------------------------------
Increase (Decrease) Due To Change In:
----------------------------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
--------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 1,319 $ 5,274 $ 548 $ 7,141
Securities 433 229 96 758
Other interest-earning assets 114 40 53 207
--------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,866 5,543 697 8,106
--------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (3) (9) - (12)
Savings deposits 62 (36) (15) 11
Money market deposits 607 (12) (1) 594
Certificates of deposit 735 3,092 451 4,278
--------------------------------------------------------------------------------------------------------
Total deposit accounts 1,401 3,035 435 4,871
--------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances 18 (8) (11) (1)
Debentures and accrued interest payable 126 (425) (19) (318)
Debentures - capital securities (36) 248 (6) 206
Mortgage note payable - - - -
--------------------------------------------------------------------------------------------------------
Total borrowed funds 108 (185) (36) (113)
--------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,509 2,850 399 4,758
--------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ 357 $ 2,693 $ 298 $ 3,348
--------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses increased by $0.7 million to $1.8 million in the
third quarter of 2005, from $1.1 million in the third quarter of 2004. The
higher provision was due to an increase in the amount of loan growth. Total
loans grew by $146.5 million in the 2005 period, compared to $62.2 million in
the 2004 period.
NONINTEREST INCOME
- -------------------
Noninterest income increased by $0.3 million to $1.8 million in the third
quarter of 2005, from $1.5 million in the third quarter of 2004. The higher
income was primarily due to a $0.4 million increase in income from the
prepayment of mortgage loans. Income from the prepayment of mortgage loans
consists of the recognition of unearned fees associated with such loans at the
time of payoff and the receipt of prepayment penalties and interest in certain
cases. The Company's income from loan prepayments, which fluctuates and cannot
be predicted, tends to increase during periods of declining interest rates and
tends to decrease during periods of increasing interest rates.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased by $0.4 million to $2.5 million in the third
quarter of 2005, from $2.1 million in the third quarter of 2004. The increase
was primarily due to increases in salary and employee benefits expense of $0.3
million and professional fees expense of $0.1 million, partially offset by a
$0.1 million decrease in occupancy and equipment expense.
Salaries and employee benefits expense increased due to salary increases, a
higher cost of employee benefits and additional staff aggregating $0.3 million.
The Company had 68 fulltime employees at September 30, 2005, compared to 66 at
September 30, 2004.
Professional fees expense increased due to the growth in the Company's assets as
well as additional accruals for consulting expense associated with the ongoing
compliance with the Sarbanes Oxley requirements for internal controls.
Occupancy and equipment expense decreased due to a decrease in rent expense
resulting from the termination in September 2004 of Intervest Mortgage
Corporation's lease on its former space at 10 Rockefeller Plaza.
28
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased by $1.1 million to $3.5 million in the
third quarter of 2005, from $2.4 million in the third quarter of 2004, due to an
increase in pre-tax income. The Company's effective tax rate (inclusive of
state and local taxes) amounted to 43.6% in the 2005 period, compared to 43.5%
in the 2004 period.
COMPARISON OF RESULTS OF OPERATIONS
-----------------------------------
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
-----------------------------------------------------
OVERVIEW
- --------
Consolidated net earnings for the first nine months of 2005 increased by $3.9
million, or 47%, to $12.3 million, or $1.76 per diluted share, from $8.4 million
or $1.25 per diluted share reported in the same period of 2004. The increase was
due to continued growth in the Company's lending activities. Net earnings
increased by $3.9 million due to a $7.9 million increase in net interest and
dividend income and a $0.5 million increase in noninterest income, partially
offset primarily by a $3.1 million increase in income tax expense and a $1.6
million increase in noninterest expenses.
The Company's return on average assets and equity was 1.13% and 16.53%,
respectively, in the first nine months of 2005, compared to 1.05% and 14.08% in
the first nine months of 2004. The Company's efficiency ratio, which is a
measure of its ability to control expenses as a percentage of its revenues,
continues to be favorable and improved to 23% for the first nine months of 2005,
from 25% in the first nine months of 2004.
Selected information regarding results of operations for the first nine months
of 2005 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($ in thousands) Bank Corp. Corp. Company Amounts (2) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 60,944 $ 7,650 $ 9 $ 717 $ (295) $ 69,025
Interest expense 31,880 5,546 - 3,758 (295) 40,889
-----------------------------------------------------------------------------
Net interest and dividend income 29,064 2,104 9 (3,041) - 28,136
Provision for loan losses 3,380 (92) - - - 3,288
Noninterest income 3,969 4,275 115 391 (4,050) 4,700
Noninterest expenses 8,815 2,315 79 530 (4,050) 7,689
-----------------------------------------------------------------------------
Earnings before taxes 20,838 4,156 45 (3,180) - 21,859
Provision for income taxes 9,048 1,922 21 (1,469) - 9,522
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 11,790 $ 2,234 $ 24 $ (1,711) $ - $ 12,337
- -------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (3,267) - - 3,267 - -
- -------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 8,523 $ 2,234 $ 24 $ 1,556 $ - $ 12,337
- -------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2004 $ 5,568 $ 1,659 $ 24 $ 1,141 $ - $ 8,392
- -------------------------------------------------------------------------------------------------------------------------
(1) Dividends to the Holding Company from the Bank provide funds for the debt
service on the subordinated debentures-capital securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise from intercompany deposit accounts and
management and service agreements.
NET INTEREST AND DIVIDEND INCOME
- --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $28.1 million in the first nine
months of 2005, from $20.2 million in the first nine months of 2004. The
improvement was attributable to a $391.9 million increase in average
interest-earning assets resulting from continued growth in loans of $322.1
million and a higher level of security and short-term investments aggregating
$69.7 million. The growth in average assets was funded by $355.4 million of
additional interest-bearing deposits, $9.2 million of additional borrowed funds
and a $20.0 increase in stockholders' equity.
The Company's net interest margin increased slightly to 2.61% in the first nine
months of 2005, from 2.57% in the first nine months of 2004. The higher margin
was due to the Company's yield on interest-earning assets increasing at a faster
pace than its cost of funds.
29
In a rising rate environment, the yield on interest-earning assets increased 34
basis points to 6.39% in the first nine months of 2005 primarily due to higher
yields on new mortgage loans originated, an increase in yields earned on
variable rate loans indexed to the prime rate, and higher yields earned on
security and other short-term investments. The cost of funds also increased by
31 basis points to 4.14% in the first nine months of 2005 primarily due to
higher rates paid on deposit accounts.
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
--------------------------------------------------------------------
Nine-Months Ended
--------------------------------------------------------------------
September 30, 2005 September 30, 2004
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate (2) Balance Inc./Exp. Rate (2)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $1,153,425 $ 63,180 7.32% $ 831,281 $ 44,677 7.18%
Securities 259,572 5,181 2.67 187,761 2,701 1.92
Other interest-earning assets 30,569 664 2.90 32,672 261 1.07
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,443,566 $ 69,025 6.39% 1,051,714 $ 47,639 6.05%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,921 15,684
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,458,487 $1,067,398
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 11,408 $ 130 1.52% $ 10,891 $ 126 1.55%
Savings deposits 23,547 405 2.30 31,467 421 1.79
Money market deposits 195,714 3,943 2.69 187,058 2,561 1.83
Certificates of deposit 926,087 26,965 3.89 571,917 15,268 3.57
- -----------------------------------------------------------------------------------------------------------------------
Total deposit accounts 1,156,756 31,443 3.63 801,333 18,376 3.06
- -----------------------------------------------------------------------------------------------------------------------
Fed funds purchased and FHLB Advances 6,234 130 2.79 1,165 13 1.49
Debentures and related interest payable 96,066 6,036 8.40 111,043 6,622 7.97
Debentures - capital securities 61,856 3,268 7.06 42,723 2,405 7.52
Mortgage note payable 238 12 7.00 251 13 7.00
- -----------------------------------------------------------------------------------------------------------------------
Total borrowed funds 164,394 9,446 7.68 155,182 9,053 7.79
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,321,150 $ 40,889 4.14% 956,515 $ 27,429 3.83%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,942 6,630
Noninterest-bearing liabilities 31,904 24,791
Stockholders' equity 99,491 79,462
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,458,487 $1,067,398
- -----------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 28,136 2.25% $ 20,210 2.22%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 122,416 2.61% $ 95,199 2.57%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09 1.10
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.13% 1.05%
Return on average equity (2) 16.53% 14.08%
Noninterest expense to average assets (2) 0.70% 0.76%
Efficiency ratio (3) 23% 25%
Average stockholders' equity to average assets 6.82% 7.44%
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans.
(2) Annualized.
(3) Defined as noninterest expenses (excluding the provision for loan losses)
as a percentage of net interest and dividend income plus noninterest
income.
30
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
For the Nine-Months Ended September 30, 2005 vs 2004
----------------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
--------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 873 $ 17,347 $ 283 $ 18,503
Securities 1,056 1,034 390 2,480
Other interest-earning assets 448 (17) (28) 403
--------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,377 18,364 645 21,386
--------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (2) 6 - 4
Savings deposits 120 (106) (30) (16)
Money market deposits 1,207 119 56 1,382
Certificates of deposit 1,373 9,483 841 11,697
--------------------------------------------------------------------------------------------------------
Total deposit accounts 2,698 9,502 867 13,067
--------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances 11 57 49 117
Debentures and accrued interest payable 358 (895) (49) (586)
Debentures - capital securities (147) 1,066 (56) 863
Mortgage note payable - (1) - (1)
--------------------------------------------------------------------------------------------------------
Total borrowed funds 222 227 (56) 393
--------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,920 9,729 811 13,460
--------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (543) $ 8,635 $ (166) $ 7,926
--------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses decreased by $0.1 million to $3.3 million in the
first nine months of 2005, from $3.4 million in the first nine months of 2004.
The lower provision was a function of the favorable impact (of approximately
$0.6 million) from the satisfaction of a $3.9 million nonaccrual loan in the
second quarter of 2005, largely offset by an increase in the amount of loan
growth. Total loans grew by $305.9 million in the 2005 period, compared to
$271.0 million in the 2004 period.
NONINTEREST INCOME
- -------------------
Noninterest income increased by $0.5 million to $4.7 million in the first nine
months of 2005, from $4.2 million in the first nine months of 2004. The higher
income was due to a $0.7 million increase in income from the prepayment of
mortgage loans and a $0.1 million increase in fees from early deposit
withdrawals, partially offset by a $0.3 million decrease in fees earned from
expired loan commitments that were not funded. The prepayment income for the
2005 period included $0.6 million from the early satisfaction of the nonaccrual
loan noted above. See the section entitled "Comparison of Results of Operations
for the Quarters Ended September 30, 2005 and 2004" for a discussion of the
effects of rising and falling interest rates on prepayment income.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased by $1.6 million to $7.7 million in the first nine
months of 2005, from $6.1 million in the first nine months of 2004. The increase
was primarily due to increases in the following: salary and employee benefits
expense of $1.1 million; professional fees expense of $0.3 million; director and
committee fees expense of $0.1 million, advertising expense of $0.1 million and
all other expenses of $0.1 million. These increases were partially offset by a
$0.2 million decrease in occupancy and equipment expense.
Salaries and employee benefits expense increased primarily due to salary
increases, a higher cost of employee benefits and additional staff aggregating
$0.6 million, and a $0.4 million increase in bonus payments to certain
executives of the Company. The Company had 68 fulltime employees at September
30, 2005, compared to 66 at September 30, 2004.
31
Professional fees expense increased due to the growth in the Company's assets as
well as additional accruals ($0.2 million) for consulting expense associated
with the ongoing compliance with the Sarbanes Oxley requirements for internal
controls.
Director and committee fees expense increased due to higher fees paid to
directors for each board and committee meeting attended. The fees were increased
for board and committee meetings in October 2004 and an additional increase was
made in June 2005 for audit committee meetings.
Advertising expense increased due to additional advertising to support loan and
deposit growth. All other expense increased due to the payment of a Nasdaq
National Market entry fee. The Company's Class A common stock began trading on
the Nasdaq National Market on June 27, 2005. Previously, the stock had traded on
the Nasdaq SmallCap Market.
Occupancy and equipment expense decreased due to a decrease in rent expense
resulting from the termination in September 2004 of Intervest Mortgage
Corporation's lease on its former space at 10 Rockefeller Plaza, a lower level
of depreciation expense, and an increase in sublease income from the Bank's
Florida offices.
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased by $3.1 million to $9.5 million in the
first nine months of 2005, from $6.4 million in the first nine months of 2004,
due to an increase in pre-tax income. The Company's effective tax rate
(inclusive of state and local taxes) amounted to 43.6% in the 2005 period,
compared to 43.4% in the 2004 period.
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
--------------------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. For a
further discussion of these financial instruments, see note 12 to the condensed
consolidated financial statements in this report.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of the following: retail deposits obtained through the Bank's
branch offices and through the mail; satisfactions and principal repayments of
loans; the maturities and calls of securities; issuance of debentures;
borrowings from the federal funds market and through FHLB advances; and cash
flow provided by operating activities. For additional detail concerning the
Company's cash flows, see the condensed consolidated statements of cash flows
included in this report.
The Bank has and expects to continue to rely heavily on certificates of deposit
(time deposits) as a source of funds. Total deposits amounted to $1.3 billion at
September 30, 2005 and time deposits represented 81%, or $1.1 billion, of those
deposits. Additionally, time deposits of $100,000 or more at September 30, 2005
totaled $344.2 million and included $36.6 million of brokered deposits. The Bank
began accepting brokered deposits as another source of funds beginning in June
2005. The Bank must maintain its status as a well-capitalized insured depository
institution in order to solicit and accept, renew or roll over any brokered
deposit without restriction. Time deposits are the only deposit accounts offered
by the Bank that have stated maturity dates. These deposits are generally
considered to be rate sensitive and have a higher cost than deposits with no
stated maturities, such as checking, savings and money market accounts. The Bank
needs to pay competitive interest rates to attract and retain time deposits to
fund its loan originations. In addition, the Bank has and expects to continue to
rely on capital contributions from the Holding Company to increase its capital
to support its rapid asset growth. The Holding Company made a total of $32.5
million of capital contributions to the Bank during the first nine months of
2005. At September 30, 2005, the Bank had $369.5 million of time deposits
maturing by December 31, 2006. The Bank expects that a substantial portion of
these deposits will be renewed and stay with the Bank.
The Bank, from time to time, may borrow funds on an overnight or short-term
basis to manage its liquidity needs. At September 30, 2005, the Bank had
agreements with correspondent banks whereby it could borrow up to $16 million on
an unsecured basis. In addition, as a member of the FHLB and FRB, the Bank can
also borrow from these institutions on a secured basis. During the first nine
months of 2005, the Bank borrowed a total of $46.4 million of short-term FHLB
advances and overnight federal funds purchases and repaid a total of $82.4
million for a net decrease of $36.0 million from short-term borrowings
outstanding at December 31, 2004. At September 30,
32
2005, there were no outstanding borrowings from any of the aforementioned
sources. At September 30, 2005, the Bank had available collateral consisting of
investment securities to support total borrowings of $229 million from the FHLB
and FRB.
Intervest Mortgage Corporation has and expects to continue to rely on the
issuance of its subordinated debentures in registered, best efforts offerings to
the public as a source of funds to support its loan originations. In addition,
as the Bank's mortgage loan portfolio has grown, service fee income received by
Intervest Mortgage Corporation from the Bank has comprised an increasing
percentage of Intervest Mortgage Corporation's cash flow. The Bank has a
servicing agreement with Intervest Mortgage Corporation whereby Intervest
Mortgage Corporation provides the Bank with mortgage loan origination services
in exchange for a monthly fee that is based on loan origination volumes. The
services include the identification of potential properties and borrowers; the
inspection of properties constituting collateral for such loans; the negotiation
of the terms and conditions of such loans in accordance with the Bank's
underwriting standards; and coordinating the preparation of commitment letters
and the loan closing process. The services are performed by Intervest Mortgage
Corporation's personnel and the related expenses are borne by Intervest Mortgage
Corporation. In addition, from time to time, Intervest Mortgage Corporation has
also received capital contributions from the Holding Company.
The future growth of Intervest Mortgage Corporation's lending business is
dependent on its continuing ability to sell its debentures with interest rates
that would result in a positive interest rate spread, which is the difference
between yields earned on its loans and the rates paid on its debentures.
As detailed in note 7 to the condensed consolidated financial statements in this
report, at September 30, 2005, $85.8 million in aggregate principal amount of
Intervest Mortgage Corporation's subordinated debentures were outstanding with
fixed interest rates that range from 6.25% to 9.00% per annum and maturities
that range from January 1, 2006 to October 1, 2013. During the first nine months
of 2005, Intervest Mortgage Corporation repaid various debentures for a total of
$33.5 million ($29.1 million of principal and $4.4 million of related accrued
interest payable), and issued new debentures with an aggregate principal amount
of $26.0 million for net proceeds, after offering costs, of $24.1 million. At
September 30, 2005, Intervest Mortgage Corporation had $12.3 million of
debentures and related accrued interest payable maturing by December 31, 2006,
which are expected to be repaid from cash flow generated from maturities of
existing mortgage loans, ongoing operations and cash on hand. In October 2005,
Intervest Mortgage Corporation notified holders of its Series 9/18/00 and
Series 8/5/02 debentures due to mature on January 1, 2005 that these debentures
will be redeemed on December 1, 2005. Total interest and principal of $3,786,000
will be disbursed from cash on hand.
The Holding Company's sources of funds and capital to date have been derived
from the following: interest income from a limited portfolio of mortgage loans
and short-term investments; monthly dividends from the Bank to service interest
expense on trust preferred securities; monthly management fees from Intervest
Mortgage Corporation and the Bank for providing these subsidiaries with certain
administrative services; the issuance of its common stock through public
offerings, exercise of outstanding common stock warrants and conversion of
outstanding convertible debentures; the issuance of trust preferred securities
through its wholly owned business trusts; and the direct issuance of other
subordinated debentures to the public. These sources of funds are expected to
continue to be available to the Holding Company. At September 30, 2005, the
Holding Company had $1.3 million of debentures and related accrued interest
payable maturing by December 31, 2006, which are expected to be repaid from cash
on hand. The Holding Company completed in August a public offering of 1,250,000
shares of its Class A common stock for $19.75 per share and in September issued
an additional 186,468 shares of Class A common stock for $19.75 per share in
connection with the exercise by the underwriters of an option to purchase
additional shares to cover over-allotments. The issuance of these shares, after
underwriting commissions and expenses, resulted in $26.3 million of additional
capital for the Company.
The Holding Company, through its wholly owned business trusts Intervest
Statutory Trust I, II, III and IV, issued in December 2001, September 2003,
March 2004 and September 2004, $15.0 million, respectively, of trust preferred
securities for a total of $60 million at both fixed and variable rates of
interest that mature in 2031 or later. The total proceeds from these securities
have been invested in the Bank at various times through capital contributions.
The Holding Company is required to make interest payments on the principal of
those securities, which currently amount to $4.4 million annually. The Bank
provides funds to Holding Company in the form of dividends for this purpose. At
September 30, 2005, $43.1 million of the trust preferred securities qualified as
regulatory Tier 1 capital and the remainder qualified as Tier 2 capital in the
Holding Company's computation of regulatory capital.
33
Additional information concerning outstanding time deposits, debentures and
trust preferred securities, including interest rates and maturity dates can be
found in notes 6, 7 and 8 of the notes to the condensed consolidated financial
statements included in this report.
At September 30, 2005, total commitments to lend aggregated to $164.5 million.
Although there is no certainty, management anticipates the majority of these
loan commitments will fund over the next 12 months. If all these commitments
were to close, they would be funded by the sources of funds described above. The
Company considers its current liquidity and sources of funds sufficient to
satisfy its outstanding lending commitments and its maturing liabilities.
Management is not aware of any trends, known demand, commitments or
uncertainties which are expected to have a material impact on future operating
results, liquidity or capital resources.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements. The Federal
Deposit Insurance Corporation (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 September 30, 2005 and December 31, 2004, 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 is not aware of any conditions or events that would change the Bank's
designation as a well-capitalized institution.
Information regarding the Bank's regulatory capital and related ratios is
summarized as follows:
At September 30, At December 31,
------------------ -----------------
($ in thousands) 2005 2004
------------------------------------------------------------------------------
Tier 1 Capital $ 152,366 $ 106,724
Tier 2 Capital 14,069 10,689
------------------------------------------------------------------------------
Total risk-based capital $ 166,435 $ 117,413
------------------------------------------------------------------------------
Net risk-weighted assets $ 1,307,947 $ 971,823
Average assets for regulatory purposes $ 1,436,027 $ 1,140,624
------------------------------------------------------------------------------
Tier 1 capital to average assets 10.61% 9.36%
Tier 1 capital to risk-weighted assets 11.65% 10.98%
Total capital to risk-weighted assets 12.72% 12.08%
------------------------------------------------------------------------------
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 September 30, 2005 and December 31,
2004, 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 September 30, At December 31,
------------------ -----------------
($ in thousands) 2005 2004
------------------------------------------------------------------------------
Tier 1 Capital (1) $ 172,276 $ 115,031
Tier 2 Capital (1) 31,325 41,074
------------------------------------------------------------------------------
Total risk-based capital $ 203,601 $ 156,105
------------------------------------------------------------------------------
Net risk-weighted assets $ 1,411,500 $ 1,096,711
Average assets for regulatory purposes $ 1,556,769 $ 1,273,770
------------------------------------------------------------------------------
Tier 1 capital to average assets 11.07% 9.03%
Tier 1 capital to risk-weighted assets 12.21% 10.49%
Total capital to risk-weighted assets 14.42% 14.23%
------------------------------------------------------------------------------
34
(1) There are $60 million of qualifying capital securities outstanding
(total debentures of $61.9 million issued to Statutory Trust I, II, III and
IV by the Holding Company less the Holding Company's investments in those
trusts aggregating $1.9 million). At September 30, 2005 and December 31,
2004, $43.1 million and $30.0 million of those securities, respectively,
was included in Tier 1 Capital, and the remaining portion was included in
Tier 2 Capital.
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 September 30, 2005 and December 31, 2004, Intervest
Securities Corporation's net capital was $0.5 million.
The Federal Reserve Bank on March 1, 2005 issued a final rule that allows trust
preferred securities to continue to be included in the Tier 1 capital of bank
holding companies (BHC), but with stricter quantitative limits and clearer
qualitative standards. The new rule provides a transition period for BHCs to
meet the new, stricter limitations within regulatory capital by allowing the
limits on restricted core capital elements to become fully effective as of March
31, 2009. For a further discussion of these regulatory implications, see the
section entitled "Recent Accounting and Regulatory Developments" in note 1 to
the consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004.
ASSET AND LIABILITY MANAGEMENT
------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company does not engage in trading
or hedging activities, nor does it invest in interest rate derivatives or enter
into interest rate swaps. The primary objective of the Company's asset/liability
management strategy is to limit, within established guidelines, the adverse
impact of changes in interest rates on its net interest income and capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. An asset
or liability is normally considered to be interest-rate sensitive if it will
reprice or mature within one year or less. The interest-rate sensitivity gap is
the difference between interest-earning assets and interest-bearing liabilities
scheduled to mature or reprice within one-year. A gap is considered positive
when the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. Conversely, a gap is considered negative when the
opposite is true.
In a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to increase net
interest income. In a period of falling interest rates, a negative gap would
tend to increase net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of the Company's assets
and liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates for the
following reasons. Income associated with interest-earning assets and costs
associated with interest-bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in market interest rates. In
addition, certain assets, such as adjustable-rate mortgage loans, may have
features generally referred to as "interest rate caps or collars," which limit
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, asset prepayment and early deposit
withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest-rate increase, and the
behavior of depositors may be different than those assumed in the gap analysis.
The Company's one-year positive interest rate sensitivity gap increased to
$461.3 million , or 28.3% of total assets, at September 30, 2005, from $114.0
million, or 8.7% at December 31, 2004. The increase in the positive gap
primarily reflects an increase in loans that reprice or mature within one year
funded by time deposits with terms of more than one year. For purposes of
computing the gap, all deposits with no stated maturities are treated as readily
accessible accounts. However, if such deposits were treated differently, the
one-year gap would then change. The
35
behavior of core depositors may not necessarily result in the immediate
withdrawal of funds in the event deposit rates offered by the Bank did not
change as quickly and uniformly as changes in general market rates. For example,
if only 25% of deposits with no stated maturity were assumed to be readily
accessible, the one-year gap would have been a positive 39.6% at September 30,
2005, compared to a positive 22.5 % at December 31, 2004.
Many of the Company's floating-rate loans have a "floor," or minimum rate, that
is determined in relation to prevailing market rates on the date of origination.
This floor only adjusts upwards in the event of increases in the loan's interest
rate. This feature reduces the effect on interest income of a falling rate
environment because the interest rates on such loans do not reset downward.
However, the Company may nonetheless experience loan prepayments, the amount of
which cannot be predicted, and reinvestment risk associated with the resulting
proceeds.
Notwithstanding all of the above, there can be no assurances that a sudden and
substantial increase in interest rates may not adversely impact the Company's
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
The table that follows summarizes interest-earning assets and interest-bearing
liabilities as of September 30, 2005, that are scheduled to mature or reprice
within the periods shown.
0-3 4-12 Over 1-4 Over 4
--- ---- -------- ------
($ in thousands) Months Months Years Years Total
- -----------------------------------------------------------------------------------------------------
Loans (1) $530,896 $341,472 $ 386,565 $ 73,669 $1,332,602
Securities held to maturity (2) 39,450 110,240 88,034 - 237,724
Short-term investments 32,342 - - - 32,342
FRB and FHLB stock 3,519 - - 2,599 6,118
- -----------------------------------------------------------------------------------------------------
Total rate-sensitive assets $606,207 $451,712 $ 474,599 $ 76,268 $1,608,786
- -----------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 8,183 $ - $ - $ - $ 8,183
Savings deposits 23,497 - - - 23,497
Money market deposits 214,536 - - - 214,536
Certificates of deposit 75,802 262,972 520,486 191,237 1,050,497
- -----------------------------------------------------------------------------------------------------
Total deposits 322,018 262,972 520,486 191,237 1,296,713
- -----------------------------------------------------------------------------------------------------
Debentures and mortgage note payable (1) - 7,750 81,962 63,447 153,159
Accrued interest on all borrowed funds (1) 1,672 2,198 3,013 449 7,332
- -----------------------------------------------------------------------------------------------------
Total borrowed funds 1,672 9,948 84,975 63,896 160,491
- -----------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $323,690 $272,920 $ 605,461 $ 255,133 $1,457,204
- -----------------------------------------------------------------------------------------------------
GAP (repricing differences) $282,517 $178,792 $(130,862) $(178,865) $ 151,582
- -----------------------------------------------------------------------------------------------------
Cumulative GAP $282,517 $461,309 $ 330,447 $ 151,582 $ 151,582
- -----------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 17.3% 28.3% 20.3% 9.3% 9.3%
- -----------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the preceding gap table follow:
(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
readily accessible withdrawable accounts; and certificates of deposit are
scheduled through their maturity dates.
SARBANES OXLEY ACT OF 2002
--------------------------
The requirements of Section 404 of the Sarbanes Oxley Act and Securities and
Exchange Commission rules and regulations require an annual management report on
the Company's internal controls over financial reporting, including, among other
matters, management's assessment of the effectiveness of the Company's internal
control over financial reporting, and an attestation report by the Company's
independent registered public accounting firm addressing these assessments.
Beginning with the Company's annual report for the year ending December 31,
2006, the Company will have to include in its annual report on Form 10-K filed
with the Securities and Exchange Commission a report of
36
management regarding the Company's internal controls over financial reporting in
accordance with the above requirements.
In this regard, the Company has begun a process to document and evaluate its
internal control over financial reporting in order to satisfy these
requirements. The process includes dedicating internal resources toward the
adoption of a detailed work plan and will also involve the retention of outside
consultants.
This process is designed to (i) assess and document the adequacy of internal
control over financial reporting, (ii) take steps to improve control processes,
where appropriate, and (iii) verify through testing that controls are
functioning as documented. To date, the Company has identified certain
deficiencies in the design and operating effectiveness of its internal control
over financial reporting, and it believes that they have been corrected or are
in the process of being corrected. Although this process is not completed,
management is not aware of any "significant deficiencies" or "material
weaknesses" in the Company's internals control over financial reporting, as
defined in applicable Securities and Exchange Commission rules and regulations.
ITEM 3. 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 has not engaged in and accordingly has no risk
related to trading accounts, commodities, foreign exchange, hedging activities,
interest rate derivatives or interest rate swaps. 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 measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance sheet transactions are aggregated, and
the resulting net positions are identified. Disclosures about the fair value of
financial instruments as of December 31, 2004, which reflect changes in market
prices and rates, can be found in note 20 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. Management believes that there have been no significant
changes in the Company's market risk exposure since December 31, 2004.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within its established guidelines, the adverse impact of changes in interest
rates on the Company's net interest income and capital. For a further
discussion, see the section entitled "Asset and Liability Management" under Item
2 of this report.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal
Executive and Financial Officers, the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, the Principal Executive and Financial Officers
have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the
Company files or furnishes under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations, and are operating in an effective manner.
The Company made no significant changes in its internal controls over financial
reporting or in other factors that could significantly affect these controls
subsequent to September 30, 2005.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. OTHER INFORMATION
On October 27, 2005, the Board of Directors of the registrant approved cash
incentive awards to the following executive officers in the following amounts:
Jerome Dansker - $201,000; Lowell S. Dansker - $146,000; and Lawrence G. Bergman
- - $56,000. The expense of the incentive awards will be allocated among the
Company's subsidiaries. In addition, the Board of Directors extended, for an
additional one-year term expiring on December 31, 2006, the employment
agreements between Intervest National Bank and the following officers of
Intervest National Bank, and at the following annual salaries: Raymond Sullivan
($180,000); Keith Olsen ($220,000); and John Arvonio ($180,000). The Company
also extended the employment agreement between Intervest Mortgage Corporation
and John Hoffmann for an additional one-year term at an annual salary of
$115,000. The Company also approved the payment of bonuses to those officers as
follows: Raymond Sullivan - $10,000; Keith Olsen - $10,000; John Arvonio -
$10,000; and John Hoffmann - $10,000.
On September 27, 2005, Intervest Mortgage Corporation (the Company's wholly
owned subsidiary and hereafter referred to as "Intervest") issued subordinated
debentures in the aggregate principal amount of $12.0 million maturing as
follows; $2.0 million on October 1, 2009, $4.0 million on October 1, 2011, and
$6.0 million on October 1, 2013 (collectively, the "Debentures"). The Debentures
were issued under an Indenture, dated as of September 1, 2005, between Intervest
and The Bank of New York, as Trustee (the "Indenture"). The Debentures are
general unsecured obligations of Intervest, and will be subordinated in payment
of principal and interest to all senior indebtedness of Intervest, as defined in
the Indenture.
Intervest may, at its option, at any time call all or any part of the Debentures
(including all or any part of the Debentures of any maturity) for payment, and
redeem the same at any time prior to the maturity thereof. The redemption price
for Debentures will be face amount plus a 1% premium if the date of
redemption is prior to April 1, 2007, or face amount if the date of redemption
is on or after April 1, 2007. In all cases, the Debenture holder will also
receive interest accrued to the date of redemption.
The Debentures were offered by Sage Rutty & Co., Inc. (the "Underwriter').
Intervest paid to the Underwriter a commission equal to 3% of the purchase price
of Debentures due October 1, 2009, 5% of the purchase price of Debentures due
October 1, 2011, and 7% of the purchase price of Debentures due October 1, 2013,
which are sold by the Underwriter or participating broker/dealers. In addition,
Intervest paid the Underwriter a fee equal to of 1% of the aggregate gross
amount of Debentures due October 1, 2009, and 1% of Debentures due October 1,
2011 and October 1, 2013 sold in the offering, and will pay the costs and
expenses of Underwriter's counsel associated with the offering of the
Debentures.
Interest on the Debentures will be paid or will accrue on the first day of each
calendar quarter at the following annual interest rates: 6.25% for Debentures
maturing October 1, 2009, 6.5% for Debentures maturing October 1, 2011 and 7.0%
for Debentures maturing October 1, 2013. If the purchaser has elected to have
interest accrue, then, in addition to interest accruing on the principal
balance, interest will accrue each calendar quarter on the balance of the
accrued interest as of the last day of the preceding quarter at the same
interest rate, with all accrued interest payable at maturity. In either event,
the entire principal amount of each Debenture is payable at maturity.
A holder of Debentures will have the right, commencing in 2009, to require the
Company to purchase his or her Debentures for the face amount, together with any
accrued but unpaid interest through the Repurchase Date (as hereafter defined).
However, the Company will not, in any calendar year, be required to purchase
more than $100,000 in aggregate principal amount of each maturity of Debentures,
on a non-cumulative basis. Any such repurchases will be made only once each
calendar year, on October 1 of each year (the "Repurchase Date"), commencing
October 1, 2009. In addition, the Indenture contains customary events of
default, the occurrence of any of which could lead to an acceleration of
Intervest's obligations under the Debentures.
38
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report.
31.0 Certification of the principal executive officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
31.1 Certification of the principal financial officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
32.0 Certification of the principal executive and financial officers pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements 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.
INTERVEST BANCSHARES CORPORATION
Date: October 27, 2005 By: /s/ Jerome Dansker
-----------------------
Jerome Dansker, Chairman and Executive Vice President
(Principal Executive Officer)
Date: October 27, 2005 By: /s/ Lowell S. Dansker
--------------------------
Lowell S. Dansker, Vice Chairman, President
and Treasurer
(Principal Financial Officer)
39