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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended DECEMBER 31, 2005
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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
of incorporation) Identification No.)
ONE ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices including Zip Code)
(212) 218-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934
None
----------------------
(Title of class)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934
CLASS A COMMON STOCK, PAR VALUE $1.00 PER SHARE
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act:
Yes No XX.
-- --
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act: Yes No XX
-- --
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes XX No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a nonaccelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Check one:
Large accelerated filer Accelerated filer Nonaccelerated filer XX
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes No XX.
-- --
The aggregate market value of 3,352,954 shares of the Registrant's Class A
common stock on the close of business June 30, 2005, which excludes 2,541,547
shares held by affiliates as a group, was $61,023,763. This value is based on
the average bid and asked price of $18.20 per share on June 30, 2005 of the
Class A common stock on the NASDAQ. All of the Class B common stock is held by
affiliates.
On the close of business on June 30, 2005, there were 5,894,501 shares of the
Registrant's Class A common stock and 385,000 shares of its Class B common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
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ITEM 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 1B Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . 26
ITEM 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . . . 27
Executive Officers and Other Key Employees . . . . . . . . . . . 27
PART II
ITEM 5 Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . 29
ITEM 6 Selected Consolidated Financial and Other Data . . . . . . . . . 30
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 31
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk . . . 52
ITEM 8 Financial Statements and Supplementary Data. . . . . . . . . . . 52
ITEM 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . 80
ITEM 9A Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 80
ITEM 9B Other Information. . . . . . . . . . . . . . . . . . . . . . . . 80
PART III
ITEM 10 Directors and Executive Officers . . . . . . . . . . . . . . . . 80
ITEM 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . 80
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Transactions . . . . . . . . . . . . . 80
ITEM 13 Certain Relationships and Related Transactions . . . . . . . . . 80
ITEM 14 Principal Accounting Fees and Services . . . . . . . . . . . . . 81
PART IV
ITEM 15 Exhibits and Financial Statements Schedules. . . . . . . . . . . 81
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
1
PART I
ITEM 1. BUSINESS
GENERAL
Private Securities Litigation Reform Act Safe Harbor Statement
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The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-K that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements.
Business Overview
- -----------------
The Company's primary business segment is banking and real estate lending. The
Company's lending activities are comprised almost entirely of originating for
its loan portfolio 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 Company's business is
affected by a number of factors that are discussed herein in the section
entitled "Item 1A Risk Factors."
Intervest Bancshares Corporation
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Intervest Bancshares Corporation (the "Holding Company") is a registered
financial holding company incorporated in 1993 under the laws of the State of
Delaware and its Class A common stock is listed on the NASDAQ National Market
(Symbol: IBCA). The 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.
The Holding Company is the parent company of Intervest National Bank (the
"Bank"), Intervest Mortgage Corporation and Intervest Securities Corporation,
hereafter referred to collectively as the "Company" on a consolidated basis. The
Holding Company owns 100% of the outstanding capital stock of each of these
entities. The Holding Company also owns 100% of the outstanding capital stock
of Intervest Statutory Trust I, II, III and IV, all of which are unconsolidated
entities for financial statement purposes as required by Financial Accounting
Standards Board (FASB) Interpretation No. 46-R, "Consolidation of Variable
Interest Entities."
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest
Securities Corporation and the Bank's headquarters and full-service banking
office are located on the entire fourth floor of One Rockefeller Plaza in New
York City, New York, 10020-2002. The main telephone number is 212-218-2800.
The Holding Company's primary business is the ownership and 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 Holding Company is subject to examination and regulation
by the Federal Reserve Board (FRB).
At December 31, 2005, the Company had total assets of $1.7 billion, cash and
security investments of $313.5 million, net loans of $1.4 billion, deposits of
$1.4 billion, borrowed funds and related interest payable of $155.7 million, and
stockholders' equity of $136.2 million, compared to total assets of $1.3
billion, cash and security investments of $278.6 million, net loans of $1.0
billion, deposits of $993.9 million, borrowed funds and related interest payable
of $202.7 million, and stockholders' equity of $90.1 million at December 31,
2004.
2
Intervest National Bank
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The Bank is a nationally chartered bank that has its headquarters and
full-service banking office at One Rockefeller Plaza, Suite 400, in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena.
At December 31, 2005, the Bank had total assets of $1.6 billion, cash and
security investments of $309.4 million, net loans of $1.3 billion, deposits of
$1.4 billion, borrowed funds and related interest payable of $0.2 million, and
stockholder's equity of $156.8 million, compared to total assets of $1.2
billion, cash and security investments of $269.8 million, net loans of $900.8
million, deposits of $1.0 billion, borrowed funds and related interest payable
of $36.3 million and stockholder's equity of $111.3 million at December 31,
2004.
The Bank provides a variety of personalized commercial and consumer banking
services to small and middle-market businesses and individuals. The Bank
attracts deposits from the areas served by its banking offices. The Bank also
provides internet banking through its web site: www.intervestnatbank.com, which
attracts deposit customers from within as well as outside its primary market
areas. The deposits, together with funds derived from other sources, are 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 in this report.
The Bank's revenues are primarily derived from interest and fees received from
originating loans, and from interest and dividends earned on securities and
other short-term investments. The principal sources of funds for the Bank's
lending activities are deposits, repayment of loans, maturities and calls of
securities and cash flow generated from operations. The Bank's principal
expenses are interest paid on deposits and operating and general and
administrative expenses.
The Bank's deposit flows and the rates paid thereon are influenced by interest
rates on competing investments available to depositors and general market rates
of interest. The Bank's lending activities are affected by the interest rates it
charges on loans, customer demand for loans, the supply of money available for
lending purposes, the rates offered by its competitors and the terms and credit
risks associated with the loans. The Bank faces strong competition in the
attraction of deposits and in the origination of loans. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation (FDIC) to the extent
permitted by law.
The Bank's operations are significantly influenced by general and local economic
conditions, particularly those in the New York City metropolitan area and the
State of Florida where most of the properties that secure its mortgage loans are
concentrated, and by related monetary and fiscal policies of banking regulatory
agencies, including the FRB and FDIC. The Bank is also subject to the
supervision, regulation and examination of the Office of the Comptroller of the
Currency of the United States of America (OCC).
The Bank has an agreement that expires in 2014 with Fidelity Information
Services, a division of Fidelity National Financial, to provide the Bank with
its core data processing using the Kirchman Bankway software, a product of the
Kirchman Corporation, which is a division of Metavante Corporation. Management
believes that these entities will continue to be able to provide data processing
services to support the Bank's current and future needs.
Intervest Mortgage Corporation
- ------------------------------
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.
At December 31, 2005, Intervest Mortgage Corporation had total assets of $115.8
million, cash and short-term investments of $27.9 million, net loans of $82.5
million, debentures and related interest payable of $87.4 million, and
stockholder's equity of $26.6 million, compared to total assets of $122.5
million, cash and short-term investments of $17.2 million, net loans of $100.5
million, debentures and related interest payable of $97.1 million and
stockholder's equity of $23.5 million, at December 31, 2004.
3
Intervest Mortgage Corporation's business is significantly influenced by the
movement of interest rates, general and local economic conditions, particularly
those in the New York City metropolitan area where most of the properties that
secure its mortgage loans are concentrated, and by the volume of origination
services it provides to the Bank, whose business is also affected by similar
factors. Intervest Mortgage Corporation receives a fee from the Bank for the
origination services it provides to the Bank, the amount of which is eliminated
in the Company's consolidated financial statements. As the Bank's mortgage loan
portfolio has grown, service fee income from the Bank has comprised an
increasing percentage of Intervest Mortgage Corporation's income.
Intervest Securities Corporation
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Intervest Securities Corporation is a broker/dealer and a member of the National
Association of Securities Dealers (NASD). The business activities of Intervest
Securities Corporation have not, to date, been material. Its revenues have been
derived from participating as a selected dealer from time to time in offerings
of debt securities of the Company, primarily those of Intervest Mortgage
Corporation. At December 31, 2005, Intervest Securities Corporation had total
assets of $0.5 million and its stockholder's equity amounted to $0.5 million.
Intervest Statutory Trusts
- --------------------------
Intervest Statutory Trust I, II, III and IV were formed for the sole purpose of
issuing and administering trust preferred securities. Intervest Statutory Trust
I, II, III and IV issued in December 2001, September 2003, March 2004 and
September 2004, respectively, $15.0 million of trust preferred securities for a
total of $60.0 million. The trusts do not conduct any trade or business. See
note 9 to the consolidated financial statements included in this report for a
further discussion of the trusts.
BUSINESS STRATEGY
Management is committed to the continued growth of the Company through the
continued origination of multifamily residential and commercial real estate
loans. The Company expects primarily to utilize the relationships it has
developed both with its borrowers and with the brokers with whom it has done
business as a source of new loans. Management believes that its ability to
rapidly and efficiently process and close loans gives the Company a competitive
advantage. While the Company's primary lending activities have been in the
commercial and multifamily real estate areas, management will also explore
opportunities to diversify revenues, including the possible sale of
participations in the Company's loans to third parties, while retaining the
servicing of such loans. Management will also evaluate the possibility of growth
and expansion through acquisitions both within and outside the Company's primary
market areas.
MARKET AREA
The Bank's primary deposit gathering and lending markets are concentrated in the
communities surrounding its offices. The Bank's primary market area for its New
York office is considered to be the New York metropolitan area, consisting of
the five boroughs of New York City and the areas surrounding New York City. The
primary market area of the Bank's Florida offices is considered to be Pinellas
County, which is the most populous county in the Tampa Bay area of Florida.
Additionally, the area has many seasonal residents. The Tampa Bay area is
located on the West Coast of Florida, midway up the Florida peninsula. The major
cities in the area are Tampa (Hillsborough County) and St. Petersburg and
Clearwater (Pinellas County). Management believes that all of the Bank's offices
are located in areas serving small and mid-sized businesses and serving middle
and upper income communities. The Bank's deposit-gathering market also includes
its web site on the internet: www.intervestnatbank.com, which attracts deposit
customers from both within and outside the Bank's primary market areas.
Intervest Mortgage Corporation's lending activities have also been concentrated
in the New York City metropolitan region. Both the Bank and Intervest Mortgage
Corporation originate loans on properties in other states, including Alabama,
Connecticut, Florida, Georgia, Indiana, Kentucky, Massachusetts, Maryland,
Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Virginia and
Washington D.C.
4
The properties securing the Company's mortgage loans may be located in sections
of the cities in its market area that are being revitalized or redeveloped. A
large number of the loans in New York are secured by properties located in
Manhattan, Brooklyn and the Bronx. A large number of the loans in Florida are
secured by properties located in Clearwater, Tampa, Fort Lauderdale, Miami,
Orlando and St. Petersburg.
COMPETITION
In one or more aspects of its business, the Bank competes with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking companies, and
other financial intermediaries. Most of these competitors, some of which are
affiliated with large financial holding companies, have substantially greater
financial and marketing resources and lending limits, and may offer services
that the Bank does not currently provide. In addition, many of the Bank's
nonbank competitors are not subject to the same extensive federal regulations
that govern financial holding companies and federally insured banks. Competition
among financial institutions is based upon interest rates offered on deposit
accounts, interest rates charged on loans and other credit and service charges,
the quality and scope of the services rendered, the convenience of banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. An increase in the general availability of funds may increase
competition in the origination of mortgage loans and may reduce the yields
available therefrom.
In making its mortgage investments, Intervest Mortgage Corporation also
experiences significant competition from banks, insurance companies, savings and
loan associations, mortgage bankers, pension funds, real estate investment
trusts, limited partnerships and other lenders and investors. Most of these
competitors also have significantly greater financial and marketing resources.
In addition, certain entities owned or controlled by the principals of the
Company are engaged in limited real estate lending activities involving
properties that are similar to those underlying the Company's mortgage loans and
in that regard, are also competing with the Company.
LENDING ACTIVITIES
General
- -------
The volume of the Company's loan originations is dependent on the interest rates
it charges on loans, customer demand for loans, the supply of money available
for lending purposes, the rates offered by its competitors and the terms and
credit risks associated with the loans. The Company's lending activities
emphasize the origination of first and second mortgage loans secured by
commercial and multifamily real estate properties. The Company's senior
management team has substantial experience in commercial and multifamily real
estate lending. To a very limited extent, the Bank also offers single-family
residential mortgage loans, commercial loans and consumer loans. To date such
lending has not been emphasized by the Bank and its current portfolio of such
loans is insignificant. The Bank does not expect to become active in such
lending.
The Bank's lending activities are conducted pursuant to written policies and
defined lending limits. In originating loans, the Bank places emphasis on the
borrower's ability to generate cash flow to support its debt obligations and
other cash related expenses. Generally, all loans originated by the Bank must be
reviewed and approved by the Bank's Loan Committee, which is currently comprised
of four members of the Board of Directors, three of which are also executive
officers and major stockholders of the Holding Company. As a national bank, the
Bank may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of the Bank's unimpaired capital and surplus.
Additional amounts may be loaned, not in excess of 10% of unimpaired capital and
surplus, if such loans or extensions of credit are secured by readily-marketable
collateral.
Intervest Mortgage Corporation is not a bank and is therefore not subject to the
same degree of regulation as applies to the Bank. It does not have formal
policies regarding the percentage of its assets that may be invested in any
single or type of mortgage loan, the geographic location of properties
collateralizing those mortgages or limits to amounts to any one borrower,
loan-to-value ratios and debt service coverage ratios. It also does not have a
loan committee or a formal loan approval process. With respect to loans
originated by Intervest Mortgage Corporation,
5
all underwriting and lending decisions are made by the executive officers of the
Holding Company. Its real estate mortgage loans consist of first mortgage loans
and junior mortgage loans. Junior mortgages normally have greater risks than
first mortgages. Like the Bank, Intervest Mortgage Corporation also considers
the borrower's experience in owning or managing similar properties and its
lending experience with the borrower when originating loans. The Holding Company
has also, from time to time, made a limited amount of mortgage loans.
At December 31, 2005, nearly all 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). At December 31,
2005, such loans consisted of 529 loans with an aggregate principal balance of
$1.4 billion and an average principal size of $2.6 million. Loans with principal
balances of $5.0 million or more aggregated to 69 loans or $639.3 million, with
the largest loan amounting to $20.0 million.
The following table sets forth information regarding the Company's loan
portfolio:
At December 31,
---------------
($ in thousands) 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Commercial real estate loans $ 735,650 $ 601,512 $344,071 $275,096 $183,167
Residential multifamily loans 538,760 403,613 310,650 214,515 182,569
Land development and other land loans 105,251 19,198 20,526 1,890 2,485
Residential 1-4 family loans 100 984 1,628 1,953 2,404
Commercial business loans 1,089 1,215 1,662 1,608 1,363
Consumer loans 194 221 319 240 286
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Loans receivable 1,381,044 1,026,743 678,856 495,302 372,274
Deferred loan fees (13,058) (11,347) (7,731) (5,390) (3,748)
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Loans receivable, net of deferred fees 1,367,986 1,015,396 671,125 489,912 368,526
Allowance for loan losses (15,181) (11,106) (6,580) (4,611) (3,380)
- -------------------------------------------------------------------------------------------------------
Loans receivable, net (1) $1,352,805 $1,004,290 $664,545 $485,301 $365,146
- -------------------------------------------------------------------------------------------------------
Loans included above that were
on a nonaccrual status at year end (2) $ 750 $ 4,607 $ 8,474 $ - $ 1,243
- -------------------------------------------------------------------------------------------------------
Accruing loans included above which are
contractually past due 90 days or more (2) $ 2,649 $ - $ - $ - $ -
Interest income not recorded on loans that
were on nonaccrual status during the year $ 75 $ 236 $ 339 $ 29 $ 51
- -------------------------------------------------------------------------------------------------------
<FN>
(1) During the periods presented, there were no "troubled debt restructurings" as defined in SFAS No.
15, or known information about possible credit problems of borrowers which would cause management
to have serious doubts as to the ability of such borrowers to comply with the present loan
repayment terms.
(2) Represents multifamily and commercial real estate loans.
The following table sets forth the scheduled contractual principal repayments of
the loan portfolio by type:
At December 31, 2005
--------------------
Due Within Due Over One Due Over
($ in thousands) One Year to Five Years (1) Five Years (1) Total
- ----------------------------------------------------------------------------------------------------
Commercial real estate loans $ 224,666 $ 405,113 $ 105,871 $ 735,650
Residential multifamily loans 127,440 363,981 47,339 538,760
Land development and other land loans 66,773 36,418 2,060 105,251
Residential 1-4 family loans - - 100 100
Commercial business loans 773 316 - 1,089
Consumer loans 97 77 20 194
- ----------------------------------------------------------------------------------------------------
Total $ 419,749 $ 805,905 $ 155,390 $1,381,044
- ----------------------------------------------------------------------------------------------------
<FN>
(1) At December 31, 2005, $654 million of loans with adjustable rates and $307 million of loans
with fixed rates were due after one year.
6
The following table sets forth the types of properties securing the mortgage
loan portfolio at December 31, 2005:
($ in thousands) Amount
-----------------------------------------------------
Commercial Real Estate:
Retail stores $ 266,965
Office buildings 198,326
Industrial/warehouse 134,817
Hotels 80,665
Mobile home parks 26,173
Parking lots/garages 8,367
Other 20,337
Residential Multifamily (5 or more units) 536,624
Residential All Other 2,236
Vacant Land 105,251
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Total $1,379,761
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The following table sets forth the scheduled contractual principal repayments of
the loan portfolio in the aggregate:
At December 31,
---------------
($ in thousands) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------
Within one year $ 419,749 $ 227,889 $133,137 $103,398 $ 85,447
Over one to five years 805,905 645,050 430,783 305,013 221,435
Over five years 155,390 153,804 114,936 86,891 65,392
- --------------------------------------------------------------------------------
$1,381,044 $1,026,743 $678,856 $495,302 $372,274
- --------------------------------------------------------------------------------
The following table sets forth the activity in the Company's loan portfolio in
the aggregate:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Loans receivable, net, at beginning of year $1,004,290 $ 664,545 $ 485,301 $ 365,146 $263,558
Loans originated 706,672 626,252 378,630 233,689 195,754
Principal repayments (352,371) (278,365) (195,076) (110,661) (91,785)
Recoveries - - - (107) -
Chargeoffs - - - 150 -
Increase in deferred loan fees (1,711) (3,616) (2,341) (1,642) (1,769)
Provision for loan losses (4,075) (4,526) (1,969) (1,274) (612)
- ---------------------------------------------------------------------------------------------------------
Loans receivable, net, at end of year $1,352,805 $1,004,290 $ 664,545 $ 485,301 $365,146
- ---------------------------------------------------------------------------------------------------------
The following table sets forth the geographic distribution of the loan portfolio
at December 31 as follows:
2005 2004 2003 2002 2001
------------------ ------------------ ---------------- ---------------- ----------------
% of % of % of % of % of
($ in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
- -----------------------------------------------------------------------------------------------------------------------
New York $ 896,746 65% $ 729,301 71% $435,790 64% $278,280 56% $192,256 52%
Florida 323,764 24 198,823 19 189,802 28 184,257 37 145,660 39
Connecticut & New Jersey 84,373 6 51,186 5 39,681 6 21,991 5 24,875 7
All Other 76,161 5 47,433 5 13,583 2 10,774 2 9,483 2
- -----------------------------------------------------------------------------------------------------------------------
$1,381,044 100% $1,026,743 100% $678,856 100% $495,302 100% $372,274 100%
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Mortgage Lending
- -------------------------------
Commercial and multifamily real estate lending is 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. In addition, loans on substantially vacant
properties and vacant land typically have limited or no income streams and
depend upon other sources of cash flow from the borrower for repayment.
Mortgage loans on commercial and multifamily properties typically provide for
periodic payments of interest and principal during the term of the mortgage,
with the remaining principal balance and any accrued interest due at the
maturity date. The majority of the mortgage loans originated by the Company
provide for balloon payments at maturity, which means that a substantial part or
the entire original principal amount is due in one lump sum
7
payment at maturity. If the net revenue from the property is not sufficient to
make all debt service payments due on the mortgage or, if at maturity or the due
date of any balloon payment, the owner of the property fails to raise the funds
(by refinancing, sale or otherwise) to make the lump sum payment, the Company
could sustain a loss on its investment in the mortgage loan.
The Company's mortgage loans on commercial and multifamily real estate
properties are normally originated for terms of no more than 10 years, with the
entire portfolio having an average life of approximately three years. Many of
the loans have variable interest rates that are based on the prime rate. In
addition, the 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 of the resulting proceeds.
As part of the Bank's written policies for real estate loans, loan-to-value
ratios (the ratio that the original principal amount of the loan bears to the
lower of the purchase price or appraised value of the property securing the loan
at the time of origination) on new loans originated by the Bank typically do not
exceed 80%. Debt service coverage ratios (the ratio of the net operating income
generated by the property securing the loan to the required debt service) on new
loans typically are not less than 1.2 times. However, the Bank has increasingly
originated and expects to continue to originate mortgage loans on substantially
vacant properties and vacant land for which there is limited or no cash flow
being generated by the operation of the underlying real estate.
While the Company may require guarantees from the principals of its borrowers,
loans are often made on a limited recourse basis. The Company does have some
nonrecourse loans in its loan portfolio. Under the terms of nonrecourse
mortgages, the owner of the property subject to the mortgage has no personal
obligation to pay the mortgage note which the mortgage secures. Therefore, in
the event of a default, the Company's ability to recover its investment is
solely dependent upon the value of the mortgaged property. The Company's
mortgage loans are also not insured or guaranteed by governmental agencies.
Intervest Mortgage Corporation's loan portfolio includes junior mortgages, which
at December 31, 2005 amounted to 36 junior mortgages, which constituted
approximately 34%, or $28.2 million, of the aggregate principal amount of its
loan portfolio. Junior mortgages are subordinate in right of repayment to the
senior mortgage on the property. As a result, in the event of a default on a
senior mortgage secured by the property, the holder of the senior mortgage may
independently commence foreclosure proceedings. In such an event, a junior
mortgage holder must often cure the default in order to prevent foreclosure. If
there is a foreclosure on the senior mortgage, the owner of the junior mortgage
is only entitled to share in liquidation proceeds after all amounts due to
senior lienholders have been fully paid. Actual proceeds available for
distribution upon foreclosure may not be sufficient to pay all sums due on the
senior mortgage, other senior liens and the junior mortgage, and the costs and
fees associated with the foreclosure proceedings. At December 31, 2005, nearly
all of the junior mortgages held by Intervest Mortgage Corporation were on
properties where the Bank holds the senior mortgage.
Loan Solicitation and Processing
- -----------------------------------
The Company's loan originations are derived primarily from referrals from
mortgage brokers and existing customers and borrowers and, to a lesser extent,
from direct solicitation by its officers, advertising in newspapers and trade
journals, and walk-in customers. The mortgage brokers receive a fee from the
borrower upon the funding of the loans by the Company. Historically, mortgage
brokers have been the source of substantially all of the multi-family
residential and commercial real estate loans originated by the Company.
The underwriting procedures for the Company normally require the following:
physical inspections of the properties being considered for mortgage loans;
mortgage title insurance; fire and casualty insurance and environmental surveys.
In addition, the Bank requires an appraisal of the property securing the loan to
determine the property's adequacy as collateral performed by an appraiser
approved by the Bank. Intervest Mortgage Corporation does not have an appraisal
requirement and often appraisals are not obtained. Analyses are also
8
performed for relevant real property and financial factors, which may include:
the condition and use of the subject property; the property's income-producing
capacity; and the quality, experience and creditworthiness of the property's
owner. For commercial and consumer loans, upon receipt of a loan application
from a prospective borrower, a credit report and other verifications are
obtained to substantiate specific information relating to the applicant's
employment income and credit standing.
The Bank has a servicing agreement with Intervest Mortgage Corporation whereby
Intervest Mortgage Corporation provides the Bank with mortgage loan origination
services 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. The agreement renews each January 1 unless terminated by either
party. The Bank paid $5.1 million, $4.3 million and $2.3 million in 2005, 2004
and 2003, respectively, to Intervest Mortgage Corporation in connection with
this servicing agreement, all of which is eliminated in the Company's
consolidated financial statements. As a result of this agreement, origination
services for the entire Company are furnished by the same staff.
Loan Origination, Loan Fees and Prepayment Income From the Early Repayment of
- --------------------------------------------------------------------------------
Loans.
- ------
The Company normally charges loan origination fees on the mortgage loans it
originates based on a percentage of the principal amount of the loan. These fees
are normally comprised of a fee that is received from the borrower at the time
the loan is originated and another similar fee that is contractually due when
the loan is repaid. The total fees, net of related direct loan origination
costs, are deferred and amortized over the contractual life of the loan as an
adjustment to the loan's yield. At December 31, 2005, the Company had $13.1
million of net unearned loan fees and $10.9 million of loan fees receivable. The
Company also earns other fee income from the servicing of its loans.
Many of the Company's mortgage loans include provisions relating to prepayment
and others prohibit prepayment of indebtedness entirely. When a mortgage loan is
repaid prior to maturity, the Company may recognize prepayment income, which
consists of the recognition of unearned fees associated with such loans at the
time of payoff and the receipt of additional prepayment fees and interest in
certain cases. The amount and timing of, as well as income from loan
prepayments, if any, cannot be predicted and can fluctuate significantly.
Normally, the number of instances of prepayment of mortgage loans tends to
increase during periods of declining interest rates and tends to decrease during
periods of increasing interest rates. The Company earned prepayment income from
the early repayment of loans of $5.1 million in 2005, $3.5 million in 2004 and
$2.3 million in 2003.
Temporary Investments in Loans and Loan Participations
- ------------------------------------------------------------
From time to time, Intervest Mortgage Corporation may originate a real estate
mortgage loan in its own name and temporarily hold such loan in its portfolio
for a short period, subsequently transferring the loan to the Bank at cost. In
addition, from time to time, the Holding Company or Intervest Mortgage
Corporation may purchase a participation in a real estate mortgage loan
originated by the Bank. All participations are purchased at face value and the
interest of the participant in the collateral securing the loan is pari passu
with the Bank. The above transactions are undertaken to provide the Bank
additional flexibility in originating loans.
REAL ESTATE INVESTING ACTIVITIES
The Company may purchase equity interests in real property or acquire such
equity interests pursuant to a foreclosure of a mortgage in the normal course of
business, as a result of which the Company may acquire and retain title to
properties either directly or through a subsidiary. Except for any pending
foreclosures, no such transactions are presently pending. The Company would also
consider the expansion of its business through investments in or acquisitions of
other companies engaged in real estate or mortgage business activities. Although
the Company has not previously made acquisitions of real property (other than
purchases in connection with the operation of the bank's offices or properties
acquired through foreclosure), senior management has had substantial experience
in the acquisition and management of properties.
9
ASSET QUALITY
The Company considers asset quality to be of primary importance to its business
and has procedures in place designed to mitigate the risks associated with its
lending activities. After a loan is originated, various steps are undertaken
(such as a physical inspection of the subject property on an annual basis and
periodic reviews of loan files in order to monitor loan documentation and the
value of the property securing the loan) with the objective of quickly
identifying, evaluating and initiating corrective actions if necessary. The
Company also engages in the constant monitoring of the payment status of its
outstanding loans and pursues a timely follow-up on any delinquencies, including
initiating collection procedures when necessary. Late fees are assessed on
delinquent loan payments.
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 and armed
conflicts, such as the war on terrorism, and natural disasters, such as
hurricanes, may have an adverse impact on economic conditions. Economic
conditions affect the market value of the mortgaged properties underlying the
Company's loans as well as the levels of rent and occupancy of income-producing
properties.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities or on properties located in a particular
geographic area. The Company's loan portfolio has historically been concentrated
in commercial real estate and multifamily mortgage loans (including land loans),
which represented 99.9% of the total loan portfolio at December 31, 2005. The
properties underlying the Company's mortgage loans are also concentrated in two
states, New York and Florida, or 65% and 24%, respectively, of the total dollar
amount of loans outstanding at December 31, 2005. Many of the properties in New
York State 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. As such, these properties, are not affected by the general movement of
real estate values in the same manner as other income-producing properties. Many
of the properties securing the Company's loans are located in sections of the
cities in its market areas that are being revitalized or redeveloped.
Loans are placed on nonaccrual status when principal or interest becomes 90 days
or more past due unless the loan is well secured and in the process of
collection. At December 31, 2005, $0.7 million of loans were on a nonaccrual
status, compared to $4.6 million at December 31, 2004. These loans were
considered impaired under the criteria of SFAS No.114 but no valuation allowance
was maintained at any time since the Company believes that the estimated fair
value of the underlying properties exceeded its recorded investment. At December
31, 2005 and 2004, there were no other impaired loans. With respect to two loans
on nonaccual status at December 31, 2005, the borrower declared bankruptcy and
the Bankruptcy Trustee has sold the properties collateralizing the loans. The
proceeds of the sale are sufficient to provide for repayment of the Company's
recorded investment and the Company is taking appropriate action to obtain the
proceeds from the Bankruptcy Trustee.
At December 31, 2005, there were $2.6 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. During January 2006, one of those loans
amounting to $1.1 million was repaid in full. Based upon discussions with the
remaining borrowers, it is anticipated that the remaining loans will be repaid
in full or refinanced in the near term. There were no loans classified as such
at December 31, 2004. At December 31, 2005, the allowance for loan losses
amounted to $15.2 million, compared to $11.1 million at December 31, 2004.
In the last five years, the Company has experienced only one loan chargeoff from
its lending activities amounting to $150,000 that was related to a commercial
real estate property located in Florida that was acquired by the Bank through
foreclosure. There can be no assurance however, that a downturn in real estate
values and local economic conditions, as well as other factors such as those
discussed above, would not have an adverse impact on the Company's asset quality
and future level of nonperforming assets, chargeoffs and profitability.
10
The following table sets forth information regarding the activity in the
allowance for loan losses:
At December 31,
---------------
($ in thousands) 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Allowance at beginning of year (1) $ 11,106 $ 6,580 $ 4,611 $ 3,380 $ 2,768
Provision charged to operations 4,075 4,526 1,969 1,274 612
Chargeoffs - commercial real estate loan (2) - - - (150) -
Recoveries - commercial real estate loan (3) - - - 107 -
---------------------------------------------------------
Net chargeoffs - - - (43) -
- -------------------------------------------------------------------------------------------------------
Allowance at end of year (1) $ 15,181 $ 11,106 $ 6,580 $ 4,611 $ 3,380
- -------------------------------------------------------------------------------------------------------
Total loans, net of deferred fees $1,367,986 $1,015,396 $671,125 $489,912 $368,526
Average loans outstanding during the year $1,206,089 $ 867,724 $585,556 $439,241 $315,148
Ratio of allowance to net loans receivable 1.11% 1.09% 0.98% 0.94% 0.92%
Ratio of net chargeoffs to average loans - - - - -
- -------------------------------------------------------------------------------------------------------
<FN>
(1) Nearly all the allowance for loan losses is allocated to real estate loans.
(2) The amount for 2002 represents a chargeoff taken in connection with the transfer of a
nonperforming loan to foreclosed real estate.
(3) The amount for 2002 represents proceeds received from the sale of collateral from a loan that
was charged off prior to 1997.
INVESTMENT ACTIVITIES
The Company invests in securities after satisfying its liquidity objectives and
lending commitments. The Company's investment policy is designed to provide and
maintain liquidity, without incurring undue interest rate risk and credit risk.
As a result, the Company has historically purchased securities that are issued
directly by the U.S. government or one of its agencies that have adjustable
rates or that have fixed rates with short- to intermediate-maturity terms. Such
securities have a significantly lower credit risk than the Company's loan
portfolio as well as lower yields. The Company's goal is to maintain a
securities portfolio with a short weighted-average life (one to five years),
which allows for the resulting cash flows to either be reinvested in securities
at current market interest rates, used to fund loan growth or pay off short-term
borrowings as needed. Securities as to which the Company has the intent and
ability to hold to maturity are classified as held to maturity and carried at
amortized cost.
The table that follows depicts the amortized cost (carrying value), contractual
maturities and weighted-average yields regarding the Bank's portfolio of
securities held to maturity. The table excludes FHLB and FRB stock investments
required by the Bank in order to be a member of the FHLB and FRB.
Due Due Due
--- --- ---
One Year After One Year to After Five Years to
-------- ----------------- -------------------
or Less Five Years Ten Years Total
------- ---------- --------- -----
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
($in thousands) Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------------
At December 31, 2005:
- ---------------------
U.S. government agencies $ 124,413 2.71% $ 127,095 3.79% $ - - % $ 251,508 3.26%
At December 31, 2004:
- ---------------------
U.S. government agencies $ 84,586 1.81% $ 164,302 2.59% $ - - % $ 248,888 2.33%
At December 31, 2003:
- ---------------------
U.S. government agencies $ 70,026 1.68% $ 82,797 1.81% $ - - % $ 152,823 1.75%
At December 31, 2002:
- ---------------------
U.S. government agencies $ 75,566 2.52% $ 70,128 2.25% $ - - % $ 145,694 2.39%
At December 31, 2001:
- ---------------------
U.S. government agencies $ 79,411 2.85% $ 19,746 3.02% $ - - % $ 99,157 2.89%
- -----------------------------------------------------------------------------------------------------------------
From time to time, a securities available-for-sale portfolio may be maintained
by the Bank for securities that are held for indefinite periods of time for use
by management as part of its asset/liability management strategy, or that may be
sold in response to changes in interest rates or other factors. These securities
are classified as available for sale and are carried at estimated fair value.
The Bank has not had any securities classified as available for sale since 2002.
The Company does not engage in trading activities.
11
The Company also invests in various money market instruments (including
overnight and term federal funds, short-term bank commercial paper and
certificate of deposits) to temporarily invest funds resulting from
deposit-gathering activities, normal cash flow from operations and sales of
debentures. Cash and short-term investments at December 31, 2005 amounted to
$56.7 million compared to $24.6 million at December 31, 2004.
SOURCES OF FUNDS
The Bank's primary sources of funds consist of the following: retail deposits
obtained through its branch offices and through the mail, principal repayments
from loans; maturities and calls of securities; and cash generated by operating
activities. In addition, the Bank has from time to time borrowed funds on a
short-term basis from the FHLB and the federal funds market to manage its
liquidity needs. The Bank has also received capital contributions from the
Holding Company.
The Bank's deposit accounts are solicited from individuals, small businesses and
professional firms located throughout the Bank's primary market areas through
the offering of a variety of deposit services. The Bank also uses its web site
on the internet: www.intervestnatbank.com to attract deposit customers from both
within and outside its primary market areas. The Bank believes it does not have
a concentration of deposits from any one source and that a large portion of its
depositors are residents in the Bank's primary market areas.
The Bank has and expects to continue to rely heavily on certificates of deposit
(time deposits) as a source of funds. Total deposits amounted to $1.4 billion at
December 31, 2005 and time deposits represented 81%, or $1.1 billion, of those
deposits. Additionally, time deposits of $100,000 or more at December 31, 2005
totaled $371.8 million and included $40.5 million of brokered deposits. The Bank
began accepting brokered deposits as another source of funds beginning in June
2005. Brokered deposits are sold by an investment firm, which is paid a fee by
the Bank for placing the deposit. The Bank must maintain its status as
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.
The Bank's deposit services include the following: certificates of deposit
(including denominations of $100,000 or more); individual retirement accounts
(IRAs); checking and other demand deposit accounts; negotiable order of
withdrawal (NOW) accounts; savings accounts; and money market accounts. Interest
rates offered by the Bank on deposit accounts are normally competitive with
those in the principal market areas of the Bank. In addition, the determination
of rates and terms on deposit accounts takes into account the Bank's liquidity
requirements, loan demand, growth goals, capital levels and federal regulations.
Maturity terms, service fees and withdrawal penalties on deposit products are
reviewed and established by the Bank on a periodic basis.
The Bank offers internet banking services, ATM services with access to local,
state and national networks, wire transfers, direct deposit of payroll and
social security checks and automated drafts for various accounts. In addition,
the Bank offers safe deposit boxes to its customers in Florida. The Bank
periodically reviews the scope of the banking products and services it offers
consistent with market opportunities and its available resources.
The following table sets forth the distribution of deposit accounts by type:
At December 31,
---------------
2005 2004 2003 2002 2001
------------------- ----------------- ----------------- ----------------- -----------------
% of % of % of % of % of
($ in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
- -------------------------------------------------------------------------------------------------------------------------
Demand $ 9,188 0.7% $ 6,142 0.6% $ 6,210 0.9% $ 5,924 1.2% $ 5,550 1.5%
Interest checking 7,202 0.5 15,051 1.5 9,146 1.4 10,584 2.1 10,204 2.8
Savings 17,351 1.3 27,359 2.8 30,784 4.6 30,174 6.0 24,624 6.8
Money Markets 223,075 16.2 200,549 20.2 162,214 24.0 134,293 26.5 80,594 22.2
Certificates of deposit 1,118,514 81.3 744,771 74.9 467,159 69.1 324,983 64.2 241,465 66.7
- -------------------------------------------------------------------------------------------------------------------------
$1,375,330 100.0% $993,872 100.0% $675,513 100.0% $505,958 100.0% $362,437 100.0%
- -------------------------------------------------------------------------------------------------------------------------
12
At December 31, 2005, 2004, 2003, 2002 and 2001, individual retirement account
deposits totaled $163.2 million, $113.3 million, $74.2 million, $53.3 million
and $28.2 million respectively, nearly all of which were certificates of
deposit.
The following table sets forth total deposits by office:
At December 31,
---------------
($ in thousands) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------
New York Main Office $ 712,181 $497,717 $347,088 $233,312 $132,107
Florida Offices 663,149 496,155 328,425 272,646 230,330
- --------------------------------------------------------------------------------
$1,375,330 $993,872 $675,513 $505,958 $362,437
- --------------------------------------------------------------------------------
The following table sets forth certificate of deposits by maturity:
At December 31,
---------------
2005 2004 2003 2002 2001
------------------- ----------------- ----------------- ----------------- -----------------
Wtd- Wtd- Wtd- Wtd- Wtd-
Avg Avg Avg Avg Avg
Stated Stated Stated Stated Stated
($ in thousands) Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------
Within one year $ 381,968 3.77% $269,553 2.84% $182,693 2.75% $122,890 3.51% $144,739 5.00%
Over one to two years 259,698 4.30 119,780 3.43 90,936 3.64 57,895 4.18 45,512 4.95
Over two to three years 126,546 4.13 134,409 4.48 30,094 4.43 31,281 5.53 14,954 5.82
Over three to four years 160,344 4.43 75,317 4.06 89,085 4.83 17,730 5.32 16,903 6.84
Over four years 189,958 4.69 145,712 4.48 74,351 4.20 95,187 4.92 19,357 5.61
- --------------------------------------------------------------------------------------------------------------------------
$1,118,514 4.18% $744,771 3.68% $467,159 3.66% $324,983 4.33% $241,465 5.22%
- --------------------------------------------------------------------------------------------------------------------------
The following table sets forth the maturities of certificates of deposit in
denominations of $100,000 or more:
At December 31,
---------------
($ in thousands) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------
Due within three months or less $ 30,165 $ 15,761 $ 7,514 $ 7,508 $10,332
Due over three months to six months 25,109 24,450 7,446 6,122 4,483
Due over six months to one year 65,077 40,351 31,459 13,033 18,401
Due over one year 251,403 135,314 76,644 46,209 20,529
- -----------------------------------------------------------------------------------------
Total $371,754 $215,876 $123,063 $72,872 $53,745
- -----------------------------------------------------------------------------------------
As a percentage of total deposits 27.0% 21.7% 18.2% 14.4% 14.8%
- -----------------------------------------------------------------------------------------
The following table sets forth net deposit flows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------
Net increase before interest credited $338,053 $292,667 $151,138 $126,230 $45,078
Net interest credited 43,405 25,692 18,417 17,291 17,118
- ---------------------------------------------------------------------------------------
Net deposit increase $381,458 $318,359 $169,555 $143,521 $62,196
- ---------------------------------------------------------------------------------------
From time to time, the Bank may borrow funds on an overnight or short-term basis
to manage its liquidity needs. At December 31, 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 could
also borrow from these institutions on a secured basis. At December 31, 2005,
the Bank had available collateral consisting of investment securities to support
total borrowings of $243 million from the FHLB and FRB. At December 31, 2005,
there were no outstanding borrowings from any of these sources.
The following is a summary of certain information regarding short-term
borrowings in the aggregate:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
- ------------------------------------------------------------------------------------------
Balance at period end $ - $ 36,000 $ -
Maximum amount outstanding at any month end $ 17,000 $ 36,000 $ -
Average outstanding balance for the period $ 4,871 $ 1,914 $ -
Weighted-average interest rate paid for the period 2.85% 2.08% -%
Weighted-average interest rate at period end -% 2.56% -%
- ------------------------------------------------------------------------------------------
13
Intervest Mortgage Corporation's principal sources of funds for investing
consist of borrowings (through the issuance of its debentures to the public),
mortgage repayments and cash flow generated from operations, including fee
income received from the Bank for loan origination services performed for the
Bank. From time to time, it has also received capital contributions from the
Holding Company.
The Holding Company's principal sources of funds has 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; the issuance of trust
preferred securities through its wholly owned business trusts; and the direct
issuance of other subordinated debentures to the public.
The following table summarizes debentures and related accrued interest payable
outstanding:
At December 31,
----------------
($ in thousands) 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Intervest Mortgage Corporation:
Subordinated debentures $82,750 $88,850 $87,350 $74,000 $63,000
Accrued interest payable - debentures 4,699 8,219 12,052 10,751 9,113
- ------------------------------------------------------------------------------------------------------------------
$87,449 $97,069 $99,402 $84,751 $72,113
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate paid for the year 8.30% 7.94% 7.75% 8.09% 9.92%
- ------------------------------------------------------------------------------------------------------------------
Holding Company:
Subordinated debentures $ 2,500 $ 2,500 $ 2,500 $ 3,500 $ 3,500
Subordinated debentures - convertible into Class A common stock 2,140 3,080 4,840 6,930 6,930
Subordinated debentures - trust preferred securities 61,856 61,856 30,928 15,464 15,464
Accrued interest payable - debentures 1,551 1,914 2,461 3,123 2,367
- ------------------------------------------------------------------------------------------------------------------
$68,047 $69,350 $40,729 $29,017 $28,261
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate paid for the year 7.25% 7.61% 9.13% 9.46% 8.93%
- ------------------------------------------------------------------------------------------------------------------
EMPLOYEES
At December 31, 2005, the Company employed 69 full-time equivalent employees,
compared to 64 at December 31, 2004. The Company provides various benefit plans,
including group life, health and a 401(k) Plan. None of the Company's employees
are covered by a collective bargaining agreement and the Company believes
employee relations are good.
FEDERAL AND STATE TAXATION
The Holding Company and its subsidiaries file a consolidated federal income tax
return and combined state and city income tax returns in New York. The Company
also files a franchise tax return in Delaware. The Bank files a state income tax
return in Florida. All the returns are filed on a calendar year basis.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur. In accordance with an income tax
sharing agreement, income tax charges or credits are for financial reporting
purposes allocated among the Holding Company and its subsidiaries on the basis
of their respective taxable income or taxable loss that is included in the
consolidated income tax return.
Banks and bank holding companies are subject to federal and state income taxes
in essentially the same manner as other corporations. Florida taxes banks under
the same provisions as other corporations, while New York State and New York
City taxable income is calculated under applicable sections of the Internal
Revenue Code of 1986, as amended (the "Code"), with some modifications required
by state law.
Although the Bank's federal income tax liability is determined under provisions
of the Code, which is applicable to all taxpayers, Sections 581 through 597 of
the Code apply specifically to financial institutions. The two primary areas in
which the treatment of financial institutions differs from the treatment of
other corporations under the Code are in the areas of bond gains and losses and
bad debt deductions. Bond gains and losses generated from the
14
sale or exchange of portfolio instruments are generally treated for financial
institutions as ordinary gains and losses as opposed to capital gains and losses
for other corporations, as the Code considers bond portfolios held by banks to
be inventory in a trade or business rather than capital assets. Banks are
allowed a statutory method for calculating a reserve for bad debt deductions.
Based on its asset size, a bank is permitted to maintain a bad debt reserve
calculated on an experience method, based on chargeoffs and recoveries for the
current and preceding five years, or a "grandfathered" base year reserve, if
larger. Commencing in 2002, due to its asset size, the Bank no longer qualified
for this method and began using the direct write-off method in computing its bad
debt deduction for tax purposes.
As a Delaware corporation not earning income in Delaware, the Company is exempt
from Delaware corporate income tax but is required to file an annual report with
and pay an annual franchise tax to the State of Delaware. The tax is imposed as
a percentage of the capital base of the Company and is reported in other
expenses on the Company's consolidated statement of earnings.
INVESTMENT IN SUBSIDIARIES
The following table provides information regarding the Holding Company's
subsidiaries:
At December 31, 2005
($ in thousands) ------------------------------------ Subsidiaries
Voting Equity in Earnings (loss) for the
% of Total Underlying Year Ended December 31,
Subsidiary Stock Investment Net Assets 2005 2004 2003
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Intervest National Bank 100% $ 156,842 $ 156,842 $ 17,355 $ 10,865 $ 8,667
Intervest Mortgage Corporation 100% $ 26,616 $ 26,616 $ 3,089 $ 2,354 $ 1,759
Intervest Securities Corporation 100% $ 505 $ 505 $ 24 $ 22 $ (6)
Intervest Statutory Trust I,II,III,IV 100% $ 1,856 $ 1,856 $ - $ - $ -
SUPERVISION AND REGULATION
The supervision and regulation of bank or financial holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC, and the banking system as a whole, and not for the
protection of the bank or financial holding company stockholders or creditors.
The banking agencies have broad enforcement power over banks and financial
holding companies, including the power to impose substantial fines and other
penalties for violations of laws and regulations.
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Any change in the applicable law or
regulation may have a material effect on the business and prospects of the
Holding Company and its subsidiaries.
Bank Holding Company Regulation- Intervest Bancshares Corporation
- -----------------------------------------------------------------------
The Holding Company is a bank holding company that has elected to be treated as
a financial holding company under the Gramm-Leach Bliley Financial Services
Modernization Act of 1999, referred to as the Modernization Act. The Holding
Company is subject to supervision, regulation and examination by the Board of
Governors of the Federal Reserve System, referred to as the FRB. The
Modernization Act, the Bank Holding Company Act of 1956, as amended, referred to
as the BHCA, and other federal laws subject financial and bank holding companies
to particular restrictions on the types of activities in which they may engage,
and to a broad range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and regulations.
Scope of Permissible Activities. Under the BHCA, a bank holding company
generally may not, subject to certain exceptions, engage in, or acquire or
control, directly or indirectly, voting securities or assets of any company that
is engaged in activities other than those of banking, managing or controlling
banks or certain activities that the FRB determines to be closely related to
banking, managing and controlling banks as to the proper incident thereto. In
approving acquisitions or the addition of activities, the FRB considers whether
the acquisition or the additional activities can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition and gains in efficiency, that outweigh such possible adverse effects
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
15
However, the Modernization Act permits bank holding companies to become
financial holding companies and thereby engage in, or acquire shares of any
company engaged in, activities that are financial in nature or incidental to
financial activities. "Financial in nature" activities include, among other
matters, securities underwriting, dealings in or making a market in securities
and insurance underwriting and agency activities.
A bank holding company may become a financial holding company under the
Modernization Act if each of the depository institutions controlled by it is
"well-capitalized," is and remains well managed and has at least a satisfactory
rating under the Community Reinvestment Act. In addition, a bank holding
company must have an effective election filed with the FRB to become a financial
holding company. A bank holding company that falls out of compliance with some
of these requirements may be required to cease engaging in some of its
activities.
The FRB serves as the "umbrella" regulator for financial holding companies and
has the power to examine new activities, regulate and supervise activities that
are financial in nature or determined to be incidental to such financial
activities. Accordingly, activities of subsidiaries of a financial holding
company are regulated by the agency or authorities with the most experience
regulating that activity as it is conducted in a financial holding company.
Source of Strength for Subsidiaries. Under the Regulation Y, a bank holding
company must serve as a source of financial and managerial strength for its
subsidiary banks and must not conduct its operations in an unsafe or unsound
manner. If the FRB believes that an activity of a bank holding company or
control of a nonbank subsidiary constitutes a serious risk to the financial
safety, soundness or stability of a subsidiary bank or the bank holding company
and is inconsistent with sound banking practices, the FRB may require that the
bank holding company terminate the activity or terminate its control of the
subsidiary engaging in that activity.
Mergers and Acquisitions by Bank Holding Companies. Subject to certain
exceptions, the BHCA requires every bank holding company to obtain the prior
approval of the FRB before the bank holding company may merge or consolidate
with another bank holding company, acquire all or substantially all of the
assets of any bank, or, direct or indirect, ownership or control of any voting
securities of any bank or bank holding company, if after such acquisition the
bank holding company would control, directly or indirectly, more than 5% of the
voting securities of such bank or bank holding company. In approving bank
acquisitions by bank holding companies, the FRB is required to consider the
financial and managerial resources and future prospects of the bank holding
company and the banks concerned, the convenience and needs of the communities to
be served, and various competitive factors.
Anti-Tying Restrictions. Subject to certain exceptions, a bank holding company
and its subsidiaries are prohibited from engaging in certain tying arrangements
in connection with any extension of credit, lease or sale of property or
furnishing of services.
Capital Adequacy. The FRB has promulgated capital adequacy guidelines for all
bank holding companies with consolidated assets in excess of $150 million. The
FRB's capital adequacy guidelines are based upon a risk-based capital
determination, whereby a bank holding company's capital adequacy is determined
by assigning different categories of assets and off-balance sheet items to broad
risk categories.
The guidelines divide the qualifying total capital of a bank holding company
into Tier I capital elements (core capital elements) and Tier 2 capital elements
(supplementary capital elements). Tier I capital consists primarily of, subject
to certain limitations, common stock, noncumulative perpetual preferred stock,
minority interests in consolidated subsidiaries and qualifying trust preferred
securities; goodwill and certain other intangibles are excluded from Tier I
capital. Tier 2 capital may consist of, subject to certain limitations, an
amount equal to the allowance for loan and lease losses, limited other types of
preferred stock not included in Tier I capital, hybrid capital instruments and
term subordinated debt. The Tier I capital must comprise at least 50% of the
qualifying total capital categories.
Every bank holding company has to achieve and maintain a minimum Tier I capital
ratio of at least 4% and a minimum total capital ratio of at least 8% of
weighted-risk assets. In addition, bank holding companies are required to
maintain a minimum ratio of Tier 1 capital to average total consolidated assets
(leverage capital ratio) of at least 3% for strong banks and bank holding
companies and a minimum leverage ratio of at least 4% for all other bank
16
holding companies. As of December 31, 2005, the Holding Company's Tier I capital
ratio and total capital were 12.39% and 14.42%, respectively, and its leverage
capital ratio was 10.85%.
Dividends. As a holding company that does not, as an entity, currently engage
in separate business activities of a material nature, the Holding Company's
ability to pay cash dividends depends upon the cash dividends and management
fees received from Intervest National Bank and management fees received from
Intervest Mortgage Corporation. The Holding Company must first pay its operating
and interest expenses from funds it receives from its subsidiaries. As a result,
stockholders may receive cash dividends from the Holding Company only to the
extent that funds are available after payment of the aforementioned expenses.
In addition, the FRB generally prohibits a bank holding company from paying cash
dividends except out of its net income, provided that the prospective rate of
earnings retention appears consistent with the bank holding company's capital
needs, asset quality and overall financial condition.
Control Acquisitions. The Bank Control Act prohibits a person or group of
persons from acquiring "control" of a bank holding company unless the FRB has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the FRB, the acquisition of 10% or more of a class of
voting securities of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as us, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
such company.
In addition, any entity is required to obtain the approval of the FRB before
acquiring 25% (5% in the case of an acquirer that is a bank holding company) or
more of our outstanding voting securities.
Enforcement Authority. The FRB may impose civil or criminal penalties or may
institute a cease-and-desist proceeding, in accordance with the Financial
Institutions Supervisory Act of 1966, as amended, for the violation of
applicable laws and regulations.
The Holding Company is also under the jurisdiction of the Securities and
Exchange Commission (SEC) and various state securities commissions for matters
related to the offering and sale of its securities, and is subject to the SEC
rules and regulations relating to periodic reporting, reporting to shareholders,
proxy solicitation and insider trading.
Bank Regulation - Intervest National Bank
- ----------------------------------------------
Intervest National Bank is a nationally chartered banking association, the
deposits of which are insured up to applicable limits by the Bank Insurance Fund
of the FDIC. The Bank is subject to the examination by the OCC, as the Bank's
primary regulator, and, by virtue of the insurance of the Bank's deposits, it is
also subject to the supervision and regulation of the FDIC. Because the Bank is
a member of the Federal Reserve System, it is subject to regulation pursuant to
the Federal Reserve Act. In addition, because the FRB regulates the Holding
Company, as described above, the FRB also has supervisory authority, which
directly affects the Bank.
Transactions with Affiliates. Under Section 23A of the Federal Reserve Act,
subject to certain exemptions, the Bank may engage in a transaction with an
affiliate, including, but not limited to, a loan or extension of credit to the
affiliate, a purchase of or an investment in securities issued by the affiliate,
a purchase of assets from the affiliate or the issuance of a guarantee or letter
of credit on behalf of an affiliate, only if the aggregate amount of the
transactions with one affiliate or with all affiliates does not exceed 10% or
20%, respectively, of the capital stock and surplus of the Bank. The Bank is
also generally prohibited from purchasing a low-quality asset from an affiliate.
Any transaction between the Bank and an affiliate must be on terms and
conditions that are consistent with safe and sound banking practices. Each loan
or extension of credit to, or guarantee, acceptance, or letter of credit issued
on behalf of, an affiliate by the Bank must be secured at the time of the
transaction by certain collateral, as specified in Section 23A of the Federal
Reserve Act.
Under Section 23B of the Federal Reserve Act, the Bank can engage in
transactions with affiliates only on terms and under circumstances, including
credit standards, that are substantially the same, or at least as favorable to
the Bank, as those prevailing at the time for comparable transactions with
nonaffiliated companies, or, in the absence of comparable transactions, on terms
and under circumstances, including credit standards, that in good faith would be
offered to nonaffiliated companies. The term "affiliate" with respect to the
Bank includes any company that controls the Bank and any other company that is
controlled by the company that
17
controls the Bank (i.e., the term affiliate includes the Holding Company and its
subsidiaries).
Loans to Insiders. Under Regulation O, the Bank is prohibited from extending
credit to its executive officers, directors, principal shareholders and their
related interests, collectively referred to as "insiders," unless the extension
of credit is made on substantially the same terms and in accordance with
underwriting procedures that are not less stringent than those prevailing at the
time for comparable transactions with unrelated persons. Regulation O also sets
limits on the amount of the loan extended to insiders and stipulates what types
of loans should be reported to and/or approved by the Bank's board of directors.
Reserve Requirements. Pursuant to Regulation D, the Bank must hold a percentage
of certain types of deposits as reserves in the form of vault cash, as a deposit
in a Federal Reserve Bank or as a deposit in a pass-through account at a
correspondent institution. For net transaction accounts in 2006, the first $7.8
million will be exempt from reserve requirements. A 3% reserve ratio will be
assessed on net transaction accounts over $7.8 million up to and including $48.3
million, and a 10% reserve ratio will be assessed on net transaction accounts in
excess of $48.3 million.
Dividends. All dividends paid by the Bank are paid to the Holding Company as the
sole shareholder of the Bank. The general dividend policy of the Bank is to pay
dividends at levels consistent with maintaining liquidity and preserving
applicable capital ratios and debt servicing obligations. Under the National
Bank Act and the OCC regulations, the Bank's board of directors may declare
dividends to be paid out of the Bank's undivided profits. However, until the
capital surplus equals or exceeds the capital stock of the Bank, no dividends
can be declared unless, in the case of a quarterly or semiannual dividend, the
Bank transfers 10% of its net income for the preceding two quarters to capital
surplus, and in the case of an annual dividend, the Bank transfers 10% of its
net income for the preceding four quarters to capital surplus. In addition, no
dividends may be paid without the OCC's approval if the total amount of all
dividends, including the proposed dividend, declared by the Bank in any calendar
year exceeds the total of the Bank's retained net income of that year to date,
combined with its retained net income of the preceding two years. Also, the
Bank may not declare or pay any dividends if, after making the dividend, the
Bank will be "undercapitalized" and no cash dividend may be paid by the Bank if
it is in default of any deposit insurance assessment due to the FDIC.
Capital Adequacy. In general, the capital adequacy regulations which apply to
national banks, such as the bank, are similar to the FRB guidelines, which are
discussed above, promulgated with respect to bank holding companies. Under the
OCC regulations and guidelines, all banks must maintain a minimum ratio of total
capital (after deductions) to risk-weighted assets of 8%, total assets leverage
ratio (i.e., Tier 1 capital in an amount equal to at least 3% of adjusted total
assets) and Tier 1 leverage ratio. For all but the most highly rated banks, the
minimum Tier 1 leverage ratio is 4%. The Bank's Tier 1 leverage capital ratio
at December 31, 2005 was 10.04%.
Prompt Corrective Action. Banks are subject to restrictions on their activities
depending on their level of capital. The OCC "prompt corrective action"
regulations divide banks into five different categories, depending on their
level of capital: (i) a well-capitalized bank; (ii) an adequately capitalized
bank; (iii) an undercapitalized bank; (iv) a significantly undercapitalized
bank; and (v) a critically undercapitalized bank.
Under these regulations, a bank is deemed to be "well-capitalized" if it has a
total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio
of 6% or more and a leverage ratio of 5% or more, and if the bank is not subject
to an order or capital directive to meet and maintain a specific capital level.
A bank is deemed to be "adequately capitalized" if it has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and
a leverage ratio of 4% or more (unless the bank is rated 1 in its most recent
examination, in which instance it must maintain a leverage ratio of 3% or more)
and does not meet the definition of a well-capitalized bank. A bank is deemed to
be "undercapitalized" if it has a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of
less than 4% or 3% or less than 3%, as applicable. A bank is deemed to be
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio of less than 3%. A bank is deemed to be "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2%. In addition, the
18
OCC may reclassify a well-capitalized bank as adequately capitalized and may
require an adequately capitalized or an undercapitalized bank to comply with
certain supervisory actions, except that the OCC may not reclassify a
significantly undercapitalized bank as a critically undercapitalized bank, if
the OCC has determined that the bank is in unsafe or unsound condition or that
the bank has not corrected a less-than-satisfactory rating for any of the
categories of asset quality, management, earnings or liquidity. At December 31,
2005, the Bank met the definition of a well-capitalized institution.
If a bank is classified as undercapitalized, significantly undercapitalized or
critically undercapitalized, it is required to submit a capital restoration plan
to the OCC and becomes subject to certain requirements restricting the bank's
payment of capital distributions, management fees and compensation of senior
executive officers of the bank, requiring that the OCC monitor the condition of
the bank, restricting the growth of the bank's assets, requiring prior approval
of certain expansion proposals and restricting the activities of the bank.
Deposit Insurance Assessments. The Bank's deposits are insured up to applicable
limits through the Bank Insurance Fund of the FDIC (the "BIF"). The Bank, along
with other depository institutions, must pay a semiannual assessment, determined
in accordance with the FDIC regulations, to maintain the reserve ratio of the
deposit insurance fund at the designated reserve ratio. The FDIC established a
risk-based assessment system to calculate the depository institution's
assessment. The FDIC determines the assessment rate on the basis of the bank's
assessment risk classification composed of capital factors and supervisory risk
factors. Depository institutions are assigned to one of the following three
capital groups in connection with their capital factors: group 1 -
well-capitalized, group 2 - adequately capitalized and group 3 -
undercapitalized. Depository institutions are also divided into three
supervisory subgroups: (i) subgroup A, which consists of financially sound
institutions with only a few minor weaknesses, (ii) subgroup B, which consists
of institutions that demonstrate weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased risk of
loss to the insurance fund, and (iii) subgroup C, which consists of institutions
that pose a substantial probability of loss to the insurance fund unless
effective corrective action is taken. Under the FDIC's risk-based insurance
system, BIF-insured institutions are currently assessed premiums of between zero
and $0.27 per $100 of eligible deposits, depending upon the institution's
capital position and other supervisory factors. Legislation also provides for
assessments against BIF insured institutions that will be used to pay certain
financing corporation ("FICO") obligations. In addition to any BIF insurance
assessments, BIF-insured banks are expected to make payments for the FICO
obligations currently equal to an estimated $0.0134 per $100 of eligible
deposits each year. The assessment is determined quarterly.
Community Reinvestment. Under the Community Reinvestment Act of 1977, referred
to as the CRA, and regulations promulgated under the CRA, the bank should have a
record of helping to meet the credit needs of its local communities, including
low- and moderate-income neighborhoods, consistent with the safe and sound
operations of the bank, and the FDIC will take such record into account in
considering certain bank's applications. The FDIC applies the lending,
investment and service tests to assess the bank's CRA performance and assigns to
a bank a rating of "outstanding," "satisfactory," "needs to improve," or
"substantial noncompliance" on the basis of the bank's performance under these
tests. All banks are required to publicly disclose their CRA performance
ratings.
Enforcement Authority. The FDIC and other federal banking agencies have broad
enforcement powers, including, but not limited to, the power to terminate
deposit insurance, impose substantial fines and other civil and criminal
penalties.
Regulation of Lending Activity. In addition to the laws and regulations
discussed above, the Bank is also subject to certain consumer laws and
regulations, including, but not limited to, the Truth in Lending Act, the Real
Estate Settlement Procedures Act, the Equal Credit Opportunity Act of 1974, and
their associated Regulations Z, X and B, respectively.
Monetary Policy and Economic Control. Commercial banking is affected not only by
general economic conditions, but also by the monetary policies of the FRB.
Changes in the discount rate on member bank borrowing, availability of borrowing
at the "discount window," open market operations, the imposition of changes in
reserve
19
requirements against member banks' deposits and assets of foreign branches and
the imposition of and changes in reserve requirements against certain borrowings
by banks and their affiliates are some of the instruments of monetary policy
available to the FRB. These monetary policies are used in varying combinations
to influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the FRB, which have a significant effect on
the operating results of commercial banks, are influenced by various factors,
including inflation, unemployment, short-term and long-term changes in the
international trade balance and in the fiscal policies of the United States
Government. Future monetary policies and the effect of such policies on the
future business and earnings of the Company cannot be predicted.
Other Regulation - Mortgage Lending
- ---------------------------------------
Investment in mortgages on real properties presently may be affected by
government regulation in several ways. Residential properties may be subject to
rent control and rent stabilization laws. As a consequence, the owner of the
property may be restricted in its ability to raise the rents on apartments. If
real estate taxes, fuel costs and maintenance of and repairs to the property
were to increase substantially, and such increases are not offset by increases
in rental income, the ability of the owner of the property to make the payments
due on the mortgage as and when they are due might be adversely affected.
Laws and regulations relating to asbestos have been adopted in many
jurisdictions, including New York City, which require that whenever any work is
undertaken in a property in an area in which asbestos is present, the asbestos
must be removed or encapsulated in accordance with such applicable local and
federal laws and regulations. The cost of asbestos removal or encapsulation may
be substantial, and if there were not sufficient cash flow from the property,
after debt service on mortgages, to fund the required work, and the owner of the
property fails to fund such work from other sources, the value of the property
could be adversely affected, with consequent impairment of the security for the
mortgage.
Laws regulating the storage, disposal and clean up of hazardous or toxic
substances at real property have been adopted at the federal, state and local
levels. Such laws may impose a lien on the real property superior to any
mortgages on the property. In the event such a lien were imposed on any
property which serves as security for a mortgage owned by the Company, the
security for such mortgage could be impaired.
The lending business of the Company is regulated by federal, state and, in
certain cases, local laws, including, but not limited to, the Equal Credit
Opportunity Act of 1974 and Regulation B. The Equal Credit Opportunity Act and
Regulation B prohibit creditors from discriminating against applicants on the
basis of race, color, religion, national origin, sex, age or marital status.
Regulation B also restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires lenders
to advise applicants of the reasons for any credit denial. Equal Credit
Opportunity Act violations can also result in fines, penalties and other
remedies.
The Company is also subject to various other federal, state and local laws,
rules and regulations governing, among other things, the licensing of mortgage
lenders and servicers. The Company must comply with procedures mandated for
mortgage lenders and servicers, and must provide disclosures to certain
borrowers. Failure to comply with these laws, as well as with the laws described
above, may result in civil and criminal liability, termination or suspension of
licenses, rights of rescission for mortgage loans, lawsuits and/or
administrative enforcement actions.
NonBank Subsidiaries
- ---------------------
All of the Company's subsidiaries, including Intervest Mortgage Corporation and
Intervest Securities Corporation, as subsidiaries of a holding company, are
subject to regulation by the FRB. Intervest Securities Corporation, as a
registered broker-dealer and member firm of the NASD, is also subject to
regulation by both the SEC and the NASD. It is also subject, in connection with
its activities in various states, to the supervision and regulation by various
state securities regulators.
Interstate Banking and Other Recent Legislation
- ----------------------------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
facilitates the interstate expansion and consolidation of banking organizations
by permitting bank holding companies that are adequately capitalized and
20
managed to acquire banks located in states outside their home states regardless
of whether such acquisitions are authorized under the law of the host state. The
Act also permits interstate mergers of banks, with some limitations and the
establishment of new branches on an interstate basis provided that such action
is authorized by the law of the host state. The Gramm-Leach-Bliley Act of 1999
permits banks, securities firms and insurance companies to affiliate under a
common holding company structure. In addition to allowing new forms of financial
services combinations, this Act clarifies how financial services conglomerates
will be regulated by the different federal and state regulators. The
Gramm-Leach-Bliley Act amended the BHCA and expanded the permissible activities
of certain qualifying bank holding companies, known as financial holding
companies. In addition to engaging in banking and activities closely related to
banking, as determined by the FRB by regulation or order, financial holding
companies may engage in activities that are financial in nature or incidental to
financial activities that are complementary to a financial activity and do not
pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally. Under the Gramm-Leach-Bliley Act, all
financial institutions, including the Company and the Bank, were required to
develop privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect customer data from unauthorized access.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001 (adopted as Title III of the USA PATRIOT Act), all financial
institutions are subject to additional requirements to collect customer
information, monitor transactions and report certain information to U.S. law
enforcement agencies concerning customers and their transactions. In general,
accounts maintained by or on behalf of "non-United States persons," as defined
in the Act, are subject to particular scrutiny. Correspondent accounts for or
on behalf of foreign banks with profiles that raise money-laundering concerns
are subject to even greater scrutiny, and correspondent accounts for or on
behalf of foreign banks with no physical presence in any country are barred
altogether. Additional requirements are imposed by this Act on financial
institutions, all with a view towards encouraging information sharing among
financial institutions, regulators and law enforcement agencies. Financial
institutions are also required to adopt and implement "anti-money-laundering
programs."
The Sarbanes-Oxley Act of 2002 implements legislative reforms intended to
address corporate and accounting fraud. In addition to establishing a new
accounting oversight board to enforce auditing, quality control and independence
standards, the bill restricts auditing and consulting services by accounting
firms. To ensure auditor independence, any nonaudit services being provided to
an audit client will require pre-approval by a company's audit committee. In
addition, audit partners must be rotated. The Act requires chief executive and
chief financial officers, or their equivalent, to certify to the accuracy of
reports filed with the SEC, subject to civil and criminal penalties. In
addition, under the Act, legal counsel will be required to report evidence of
material violation of the securities laws or a breach of fiduciary duty by a
company to its chief executive officer and, if such officer does not
appropriately respond, to report such evidence to the audit committee of the
board or the board itself. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to executives are restricted. The
Act accelerates the time frame for disclosures by public companies, and
directors and executive officers must also provide information for most changes
in ownership of company securities within two business days of the change. The
Act also prohibits any officer or director or any other person under their
direction from taking any action to fraudulently induce, coerce, manipulate or
mislead any independent public or certified accountant engaged in the audit of a
company's financial statements for the purpose of rendering the financial
statement's materially misleading. The Act also required the SEC to prescribe
rules requiring the inclusion of an internal report and assessment by management
in the annual report to shareholders.
Additional legislative and regulatory proposals have been made and others can be
expected. These include proposals designed to improve the overall financial
stability of the United States banking system, and to provide for other changes
in the bank regulatory structure, including proposals to reduce regulatory
burdens on banking organizations and to expand the nature of products and
services banks and bank holding companies may offer. It is not possible to
predict whether or in what form these proposals may be adopted in the future
and, if adopted, what their effect will be on the Company.
21
ITEM 1A. RISK FACTORS
References in this section to "we," "us," "our," the "holding company," and
"Intervest" refer to Intervest Bancshares Corporation and its consolidated
subsidiaries, unless otherwise specified. References to the "bank" and our
"mortgage lending subsidiary" refer to our principal operating subsidiaries,
Intervest National Bank and Intervest Mortgage Corporation, respectively.
The following risk factors contain important information about us and our
business and should be read in their entirety. Additional risks and
uncertainties not known to us or that we now believe to be not material could
also impair our business. If any of the following risks actually occur, our
business, results of operations and financial condition could suffer
significantly. As a result, the market price of our common stock could decline
and you could lose all of your investment.
WE DEPEND ON OUR EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES TO IMPLEMENT OUR
BUSINESS STRATEGY AND OUR BUSINESS MAY SUFFER IF WE LOSE THEIR SERVICES.
Our success is largely dependent on the business expertise and relationships of
a small number of our executive officers and other key employees. Our chairman
and chief executive officer, who has been and remains instrumental to our
success, is 87 years of age. If the services of any of our executive officers or
other key employees were to become unavailable for any reason, the growth,
performance and operation of our company and its subsidiaries might be adversely
affected because of their skills and knowledge of the markets in which we
operate, years of real estate lending experience and the difficulty of promptly
finding qualified replacement personnel. As a result, our ability to
successfully grow our business will depend, in part, on our ability to attract
and retain additional qualified officers and employees.
OUR LOANS ARE HIGHLY CONCENTRATED IN COMMERCIAL REAL ESTATE AND MULTIFAMILY
MORTGAGE LOANS, INCREASING THE RISK ASSOCIATED WITH OUR LOAN PORTFOLIO.
Nearly all (99.9%) of our loan portfolio is comprised of commercial real estate
and multifamily mortgage loans, including loans on substantially vacant
properties and vacant land. This concentration increases the risk associated
with our loan portfolio. Commercial real estate and multifamily loans are
generally considered riskier than many other kinds of loans, like single family
residential real estate loans, since these loans tend to involve larger loan
balances to single borrowers and repayment of loans secured by income-producing
property is typically dependent upon the successful operation of the underlying
real estate. Additionally, loans on vacant land typically do not have income
streams and depend upon other sources of cash flow from the borrower for
repayment. Our average real estate loan size was $2.6 million at December 31,
2005 and we expect that it will continue to increase in the future. Regardless
of the underwriting criteria we utilize, losses may be experienced as a result
of various factors beyond our control, including, among other things, changes in
market and economic conditions affecting the value of our loan collateral and
problems affecting the credit and business of our borrowers.
AN ECONOMIC DOWNTURN IN NEW YORK OR FLORIDA COULD HINDER OUR ABILITY TO OPERATE
PROFITABLY AND HAVE AN ADVERSE IMPACT ON OUR OPERATIONS.
The properties collateralizing our mortgage loans are heavily concentrated in
New York City and Florida, our two primary lending market areas. Accordingly,
our business and operations are vulnerable to downturns in the economies of
those geographic areas. At December 31, 2005, mortgages representing
approximately 65% and 24% of the principal balance of our total loan portfolio
were on properties located in New York State and Florida, respectively. A large
number of the loans in New York are secured by properties located in Manhattan,
Brooklyn and the Bronx. A large number of the loans in Florida are secured by
properties located in Clearwater, Tampa, Fort Lauderdale, Miami, Orlando and St.
Petersburg. The concentration of our loans in these areas subjects us to risk
that a downturn in the economy or recession in those areas could result in a
decrease in loan originations and increases in delinquencies and foreclosures,
which would more greatly affect us than if our lending were more geographically
diversified. Many of the properties located in the New York City area underlying
our mortgage loans are subject to rent control and rent stabilization laws,
which limit the ability of property owners to increase rents, which may in turn
limit the borrowers' ability to repay those mortgage loans. In addition, since a
large portion of our portfolio is secured by properties located in Florida, the
occurrence of a natural disaster, such as a
22
hurricane, could result in a decline in loan originations, a decline in the
value or destruction of mortgaged properties and an increase in the risk of
delinquencies, foreclosures or loss on loans originated by us in that state. We
may suffer losses if there is a decline in the value of the properties
underlying our mortgage loans which would have an adverse impact on our
operations.
OUR HISTORICAL LEVELS OF BALANCE SHEET GROWTH AND FINANCIAL PERFORMANCE TRENDS
MAY NOT CONTINUE IF OUR GROWTH STRATEGY IS NOT SUCCESSFUL.
A key component of our business strategy has been and will continue to be our
growth, including the attraction of additional deposits and the origination of
additional loans. Our ability to sustain continued growth depends upon several
factors outside of our control, including economic conditions generally and in
our market areas in particular, as well as interest rate trends. We can provide
no assurance that we will continue to be successful in increasing the volume of
our loans and deposits at acceptable risk and asset quality levels and upon
acceptable terms, while managing the costs and implementation risks associated
with this growth strategy. There can be no assurance that further expansion will
be profitable or that we will continue to be able to sustain our historical rate
of growth, either through internal growth or through other expansion of our
banking markets. In addition, we have relied historically on a relatively small
number of key executives in relation to the size of our company, and there can
be no assurance that we will be able to manage anticipated future growth without
additional management staff. Our growth strategy may also limit short-term
increases in our profitability, as we dedicate resources to the building of our
infrastructure.
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL SUFFER IF WE DO
NOT CONTINUALLY IDENTIFY AND INVEST IN MORTGAGE LOANS OR OTHER INSTRUMENTS WITH
RATES OF RETURN ABOVE OUR COST OF FUNDS.
Our profitability depends primarily on the generation of net interest income
which is dependent on the interest rate spread, which is the difference between
yields earned on our interest-earning assets and the rates paid on our
interest-bearing liabilities. As a result, our success, in large part, depends
on our ability to invest a substantial percentage of our assets in mortgage
loans with rates of return that exceed our cost of funds. We may also experience
lower rates of return from the investment of our assets, including but not
limited to proceeds from the prepayment of loans, in liquid assets such as
government securities and overnight funds, which would have a material adverse
effect on our business, financial condition or results of operations. Our net
interest margin has ranged from a low of 2.34% for 2000 to a high of 2.90% for
2003, and was 2.70% for the year ended December 31, 2005.
CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR EARNINGS.
Like many financial institutions, we are subject to the risk of fluctuations in
interest rates. A significant change in interest rates could have a material
adverse effect on our net income. Fluctuations in interest rates are not
predictable or controllable and, therefore, there can be no assurance of our
ability to maintain a consistent positive interest rate spread between the yield
earned on our interest-earning assets and the rates paid on our interest-bearing
liabilities. There can be no assurances that a sudden and substantial increase
in interest rates may not adversely impact our 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. For a further discussion on interest
rate risk, see the sections entitled "Asset and Liability Management" in this
report on Form 10-K.
IF THE PROPERTIES UNDERLYING MANY OF OUR MORTGAGE LOANS LOSE VALUE, WE MAY
SUFFER LOAN LOSSES.
Our ability to recover our investment in mortgage loans is solely or primarily
dependent on the market value of the properties underlying our mortgage loans
because many of our mortgages that we have originated, or will originate in the
future, are nonrecourse or limited recourse. Under the terms of nonrecourse
mortgages, the owner of the property subject to the mortgage has no personal
obligation to repay the mortgage note which the mortgage secures. In some
circumstances, we may have limited recourse against the owner with respect to
liabilities related to tenant security deposits, proceeds from insurance
policies, losses arising under environmental laws and/or losses resulting from
waste or acts of malfeasance. In addition, our losses in connection with
delinquent and foreclosed loans may be more pronounced because most of our loans
do not require repayment of a substantial part of the original principal amount
until maturity, and if borrowers default on their balloon payments or if we have
a junior
23
lien position, it may have a material adverse effect on our business, financial
condition and results of operations. Additionally, since we tend to lend in
areas that are in the process of being revitalized, properties securing our
loans in these revitalizing neighborhoods may be more susceptible to
fluctuations in property values than in more established areas. In the event we
are required to foreclose on a property securing one of our mortgage loans or
otherwise pursue our remedies in order to protect our investment, there can be
no assurance that we will recover funds in an amount equal to our projected
return on our investment or in an amount sufficient to prevent a loss to us due
to prevailing economic conditions, real estate values and other factors
associated with the ownership of real property. As a result, the market value of
the real estate or other collateral underlying our loans may not, at any given
time, be sufficient to satisfy the outstanding principal amount of the loans.
WE MAY HAVE HIGHER LOAN LOSSES THAN WE HAVE ALLOWED FOR, IN WHICH CASE OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED.
We maintain an allowance for loan losses in order to mitigate the effect of
possible losses inherent in our loan portfolio. There is a risk that we may
experience losses which could exceed the allowance for loan losses we have set
aside. In determining the size of the allowance, our management makes various
assumptions and judgments about the collectibility of our loan portfolio, which
are discussed in the section "Critical Accounting Policies" in this report on
Form 10-K. If our assumptions and judgments prove to be incorrect or federal
regulators require us to increase our provision for loan losses or recognize
loan chargeoffs, we may have to increase our allowance for loan losses or loan
chargeoffs which could have an adverse effect on our operating results and
financial condition. There can be no assurances that our allowance for loan
losses will be adequate to protect us against loan losses that we may incur.
WE ARE A HIGHLY LEVERAGED COMPANY AND OUR INDEBTEDNESS COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION AND PREVENT US FROM CONTINUING TO GROW OUR BALANCE
SHEET.
At December 31, 2005, our borrowed funds (exclusive of deposits) and related
interest payable was approximately $155.7 million. This level of indebtedness
could make it difficult for us to satisfy all of our obligations to the holders
of our debt and could limit our ability to obtain additional debt financing to
fund our working capital requirements. In addition, the indentures underlying
the subordinated debentures of our mortgage lending subsidiary contain financial
and other restrictive covenants that may limit its ability to incur additional
indebtedness. Our mortgage lending subsidiary 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.
The inability to incur additional indebtedness could adversely affect our
business and financial condition by, among other things, limiting our
flexibility in planning for, or reacting to, changes in our industry; placing us
at a competitive disadvantage with respect to our competitors who may operate on
a less leveraged basis. As a result, this may make us more vulnerable to
changes in economic conditions and require us to dedicate a substantial portion
of our cash flow from operations to the repayment of our indebtedness, which
would reduce the funds available for other purposes which, in turn, could have a
negative impact on our profitability and our stock price.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY AND GOVERNMENT REGULATIONS
SIGNIFICANTLY AFFECT OUR BUSINESS.
The banking industry is extensively regulated. Banking regulations are intended
primarily to protect depositors, consumers and the Bank Insurance Fund of the
Federal Deposit Insurance Corporation, referred to in this report as the FDIC,
and not stockholders. We are subject to regulation and supervision by the Board
of Governors of the Federal Reserve System, or Federal Reserve Board, referred
to in this report as the FRB, and the bank is subject to regulation and
supervision by the Office of the Comptroller of the Currency, referred to in
this report as the OCC. Regulatory requirements affect our lending practices,
capital structure, investment practices, dividend policy and growth. The bank
regulatory agencies have broad authority to prevent or remedy unsafe or unsound
practices or violations of law. We are subject to regulatory capital
requirements, and a failure to meet minimum capital requirements or to comply
with other regulations could result in actions by regulators that could
adversely affect our ability to pay dividends or otherwise adversely impact our
operations. In addition, changes in law, regulations and regulatory practices
affecting the banking industry may limit the manner in which we may conduct our
business.
24
WE DEPEND ON BROKERS AND OTHER SOURCES FOR OUR MORTGAGE LENDING ACTIVITIES AND
ANY REDUCTION IN REFERRALS COULD LIMIT OUR ABILITY TO GROW.
We rely significantly on referrals from mortgage brokers for our loan
originations. Our ability to maintain our history of growth may depend, in part,
on our ability to continue to attract referrals from mortgage brokers. If those
referrals were to decline or did not continue to expand, there can be no
assurances that other sources of loan originations would be available to assure
our ability to maintain a level of growth consistent with our historical
performance.
SINCE WE ENGAGE IN COLLATERAL-BASED LENDING AND MAY BE FORCED TO FORECLOSE ON
THE COLLATERAL PROPERTY AND OWN THE UNDERLYING REAL ESTATE, WE MAY BE SUBJECT TO
THE INCREASED COSTS ASSOCIATED WITH THE OWNERSHIP OF REAL PROPERTY WHICH COULD
ADVERSELY AFFECT OUR OPERATING RESULTS.
Since we are primarily a collateral-based lender, we may have to foreclose on
the collateral property to protect our investment and may thereafter own and
operate such property, in which case we are exposed to the risks inherent in the
ownership of real estate. The amount that we, as a mortgagee, may realize after
a default, is dependent upon factors outside of our control, including, but not
limited to: general or local economic conditions; neighborhood values; interest
rates; real estate tax rates; operating expenses of the mortgaged properties;
supply of and demand for rental units or properties; ability to obtain and
maintain adequate occupancy of the properties; zoning laws; governmental rules,
regulations and fiscal policies; and acts of God. Certain expenditures
associated with the ownership of real estate, principally real estate taxes and
maintenance costs, may adversely affect the income from the real estate.
Therefore, the cost of operating a real property may exceed the rental income
earned from such property, and we may have to advance funds in order to protect
our investment or we may be required to dispose of the real property at a loss.
The foregoing expenditures and costs could adversely affect our operating
results, resulting in reduced levels of profitability.
THE EMPLOYMENT AGREEMENTS OF CERTAIN OF OUR EXECUTIVE OFFICERS PERMIT THEM TO
ENGAGE IN ACTIVITIES THAT MAY BE CONSIDERED TO BE COMPETING WITH OUR
SUBSIDIARIES, WHICH MAY HAVE AN ADVERSE EFFECT ON THE BUSINESS OF OUR
SUBSIDIARIES.
The long-term employment agreements between us or our subsidiaries and certain
of our executive officers expressly permit them to engage in outside activities,
including activities competitive with our subsidiaries. This may have an
adverse effect on the business and financial condition of our subsidiaries.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL OVER FINANCIAL
REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR
PREVENT FRAUD.
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 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 internal controls over financial
reporting, as defined in applicable Securities and Exchange Commission rules and
regulations. If we fail to identify and correct any significant deficiencies in
the design or operating effectiveness of our internal control over financial
reporting we may not be able to report our financial results with the desired
degree of accuracy or to prevent fraud.
25
ENVIRONMENTAL LIABILITY ASSOCIATED WITH COMMERCIAL LENDING COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In the course of our business, we may acquire, through foreclosure, properties
securing loans that are in default. There is a risk that hazardous substances
could be discovered on those properties. In this event, we may be required to
remove the substances from and remediate the properties at our cost and expense.
The cost of removal and environmental remediation could be substantial. We may
not have adequate remedies against the owners of the properties or other
responsible parties and could find it difficult or impossible to sell the
affected properties. These events could have an adverse effect on our business,
financial condition and operating results.
WE FACE STRONG COMPETITION IN OUR MARKET AREAS, WHICH MAY LIMIT OUR GROWTH AND
PROFITABILITY.
Our market areas, which primarily consist of the New York City area and the
Tampa Bay area of Florida, are very competitive, and the level of competition
facing us may increase further, which may limit our growth and profitability. We
experience competition in both lending and attracting deposits from other banks
and nonbanks located within and outside our market areas, some of which are
significantly larger institutions or institutions with greater resources, lower
cost of funds or a more established market presence. Nonbank competitors for
deposits and deposit-type accounts include savings associations, credit unions,
securities firms, money market funds, life insurance companies and the mutual
funds industry. For loans, we encounter competition from other banks, savings
associations, finance companies, mortgage bankers and brokers, insurance
companies, credit card companies, credit unions, pension funds and securities
firms.
TERRORIST ACTS AND ARMED CONFLICTS MAY ADVERSELY AFFECT OUR BUSINESS.
Terrorist acts as well as the war on terrorism may have an adverse impact on our
results of operations and on the economy in general. Since the properties
underlying a high concentration of our mortgage loans are located in New York
City, we may be more vulnerable to the adverse impact of such occurrences than
other institutions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
26
ITEM 2. PROPERTIES
The office of the Holding Company and the offices of Intervest Mortgage
Corporation, Intervest Securities Corporation and the Bank's headquarters and
full-service banking office are located in leased premises (of approximately
21,500 sq. ft.) on the entire fourth floor of One Rockefeller Plaza in New York
City, New York, 10020. The Bank occupies approximately one-half of this space.
The lease, which expires in March 2014, contains operating escalation clauses
related to real estate taxes and operating costs based upon various criteria and
is accounted for as an operating lease.
The Bank's principal office in Florida is located at 625 Court Street,
Clearwater, Florida, 33756. In addition, the Bank operates four other branch
offices; three of which are in Clearwater, Florida, at 1875 Belcher Road North,
2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750 Gulfport Blvd,
South Pasadena, Florida. With the exception of the Belcher Road office, which is
leased through June 2007, the Bank owns all its offices in Florida. The Belcher
Road office lease contains operating escalation clauses related to real estate
taxes and operating costs based upon various criteria and is accounted for as an
operating lease.
The Bank's office at 625 Court Street consists of a two-story building
containing approximately 22,000 sq. ft. The Bank occupies the ground floor
(approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial
tenant. The branch office at 1875 Belcher Road is a two-story building in which
the Bank leases approximately 5,100 sq. ft. on the ground floor. The branch
office at 2175 Nursery Road is a one-story building containing approximately
2,700 sq. ft., which is entirely occupied by the Bank. The branch office at 2575
Ulmerton Road is a three-story building containing approximately 17,000 sq. ft.
The Bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the
upper floors to various commercial tenants. The branch office at 6750 Gulfport
Blvd. is a one-story building containing approximately 2,800 sq. ft., which is
entirely occupied by the Bank. In addition, each of the Bank's Florida offices
include drive-through teller facilities and Automated Teller Machines (ATMs).
The Bank also owns a two-story building located on property contiguous to its
Court Street office in Florida. The building contains approximately 12,000 sq.
ft. and is leased to commercial tenants. The Bank also owns property across from
its Court Street branch office in Florida. which consists of an office building
that contains approximately 1,400 sq.ft. that is leased to one commercial
tenant. This property provides additional parking for the Court Street branch.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Management does not believe that there is any pending or threatened
proceeding against the Company, which, if determined adversely, would have a
material effect on the Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 2005, to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
JOHN J. ARVONIO, age 43, serves as Chief Accounting Officer of Intervest
Bancshares Corporation and as Senior Vice President, Chief Financial Officer and
Secretary of Intervest National Bank. Mr. Arvonio has served in such capacities
since December 2005 and September 2000, respectively. Prior to that, Mr. Arvonio
served as Vice President, Controller and Secretary of Intervest National Bank
from April 1999 to August 2000 and as an employee of Intervest Bancshares
Corporation from April 1998 to March 1999. Mr. Arvonio has also been a
registered representative of Intervest Securities Corporation since December
2003. Mr. Arvonio received a Bachelor of Business Administration degree from
Iona College and is a certified public accountant. Mr. Arvonio has more than 16
years of banking experience. Prior to joining the Company, Mr. Arvonio served as
Second Vice President Accounting Policy, and Technical Advisor to the Controller
for The Greater New York Savings Bank from 1992 to 1997. Prior to that, Mr.
Arvonio was a Manager of Financial Reporting for the Leasing and Investment
Banking Divisions of Citibank from 1989 to 1992, and a Senior Auditor for Ernst
& Young from 1985 to 1989.
27
LAWRENCE G. BERGMAN, age 61, serves as a Director, Vice President and Secretary
of Intervest Bancshares Corporation and has served in such capacities since
incorporation in 1993. Mr. Bergman received a Bachelor of Science degree and a
Master of Engineering (Electrical) degree from Cornell University and a Master
of Science in Engineering and a Ph.D. degree from The Johns Hopkins University.
Mr. Bergman also serves as a Director and a member of the Loan Committee of
Intervest National Bank, Director, Vice President and Secretary of Intervest
Mortgage Corporation, and Director, Vice President and Secretary of Intervest
Securities Corporation. Mr. Bergman also serves as an Administrator of Intervest
Statutory Trust I, II, III and IV.
JEROME DANSKER, age 87, serves as Chairman of the Board of Directors and Chief
Executive Officer of Intervest Bancshares Corporation and has served in such
capacities since 1996 and 2004, respectively, and has been a director since
incorporation in 1993. Mr. Dansker received a Bachelor of Science degree from
the New York University School of Commerce, Accounts and Finance, and a Law
degree from the New York University School of Law. Mr. Dansker also serves as
Chairman of the Board of Directors and Loan Committee of Intervest National
Bank, Chairman of the Board of Directors and Executive Vice President of
Intervest Mortgage Corporation, and Chairman of the Board of Directors of
Intervest Securities Corporation. Mr. Dansker also serves as an Administrator of
Intervest Statutory Trust I, II, III and IV.
LOWELL S. DANSKER, age 55, serves as Vice Chairman of the Board of Directors,
President and Treasurer of Intervest Bancshares Corporation and has served in
such capacities, except for Vice Chairman, since incorporation in 1993. He has
served as Vice Chairman since October 2003. Mr. Dansker received a Bachelor of
Science in Business Administration from Babson College and a Law degree from the
University of Akron School of Law. Mr. Dansker also serves as: Vice Chairman of
the Board of Directors, Chief Executive Officer and a member of the Loan
Committee of Intervest National Bank; Vice Chairman of the Board of Directors,
President and Treasurer of Intervest Mortgage Corporation; Vice Chairman of the
Board of Directors and Chief Executive Officer and Registered Principal of
Intervest Securities Corporation; and as an Administrator of Intervest Statutory
Trust I, II, III and IV.
STEPHEN A. HELMAN, age 66, serves as a Director, and as Vice President and
Assistant Secretary of the Company and has served in such capacities since
December 2003 and February 2006 respectively. Mr. Helman received a Bachelor of
Arts degree from the University of Rochester and a law degree from Columbia
University. Mr. Helman has been an attorney practicing for more than 25 years.
Mr. Helman is also a Vice President and Director of Intervest National Bank and
a Vice President, Assistant Secretary and Director of Intervest Mortgage
Corporation.
JOHN H. HOFFMANN, age 54, serves as Vice President and Controller of Intervest
Mortgage Corporation and has served in such capacities since August 2002 and
October 2002, respectively. Mr. Hoffmann received a Bachelor of Business
Administration degree from Susquehanna University and is a certified public
accountant. Mr. Hoffmann has more than 21 years of banking experience. Prior to
joining the Company, Mr. Hoffmann served as Accounting Manager for Smart World
Technologies, an Internet service provider, from 1998 to 2000 and as Vice
President of Mortgage Accounting for The Greater New York Savings Bank from 1987
to 1997.
KEITH A. OLSEN, age 52, serves as a Director and as President of the Florida
Division of Intervest National Bank and has served in such capacities since July
2001. Prior to that, Mr. Olsen was the President of Intervest Bank from 1994
until it merged into Intervest National Bank in July 2001. Mr. Olsen also served
as Senior Vice President of Intervest Bank from 1991 to 2001. Mr. Olsen received
an Associates degree from St. Petersburg Junior College and a Bachelors degree
in Business Administration and Finance from the University of Florida,
Gainesville. He is also a graduate of the Florida School of Banking of the
University of Florida, Gainesville, the National School of Real Estate Finance
of Ohio State University and the Graduate School of Banking of the South of
Louisiana State University. Mr. Olsen has been in banking for more than 30 years
and has served as a senior bank officer for more than 20 years.
RAYMOND C. SULLIVAN, age 59, serves as a Director and as President of Intervest
National Bank and has served in such capacities since April 1999. Prior to that,
Mr. Sullivan was an employee of Intervest Bancshares Corporation from March 1998
to March 1999. Mr. Sullivan received a Bachelor of Arts degree from St. Francis
College, a Master of Business Administration degree from Fordham University, and
a Master of Science degree from City College of New York. Mr. Sullivan also has
a Certificate in Advanced Graduate Study in Accounting from Pace
28
University and is a graduate of the National School of Finance and Management.
Mr. Sullivan has more than 28 years of banking experience. Prior to joining the
Company, Mr. Sullivan was the Operations Manager of the New York Agency Office
of Banco Mercantile, C.A. from 1994 to 1997; a Senior Associate at LoBue
Associates, Inc. from 1992 to 1993; and Executive Vice President, Chief
Operations Officer and a director of Central Federal Savings Bank from 1985 to
1992.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET FOR SECURITIES
The Holding Company's Class A common stock is listed for trading on the NASDAQ
National Market under the symbol "IBCA." Until June 27, 2005, the Holding
Company's Class A common stock traded on the NASDAQ SmallCap Market. There is no
public-trading market for the Holding Company's Class B common stock. At
December 31, 2005, there were 7,438,058 and 385,000 shares of Class A and Class
B common stock outstanding, respectively. At December 31, 2005, there were
approximately 2,300 holders of record of the Class A common stock, which
includes persons or entities that hold their stock in nominee form or in street
name through various brokerage firms. At December 31, 2005, there were four
holders of record of Class B common stock.
The last reported sales price of our Class A common stock on December 29, 2005
was $24.04 per share. The following table shows the high and low bid prices per
share for Class A common stock by calendar quarter for the periods indicated.
The quotations set forth below reflect inter-dealer quotations that do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
2005 2004
---- ----
High Low High Low
-------------- --------------
First quarter $20.15 $17.51 $18.48 $14.42
Second quarter $19.25 $17.25 $17.76 $14.75
Third quarter $23.26 $17.80 $17.15 $14.45
Fourth quarter $27.40 $18.97 $19.74 $16.50
DIVIDENDS
Class A and Class B common stockholders are entitled to receive cash dividends
when and if declared by the Board of Directors out of funds legally available
for such purposes. The Holding Company has not paid any cash or stock dividends
on its capital stock and currently is not contemplating the payment of any cash
or stock dividend.
The Holding Company's ability to pay cash dividends is limited to an amount
equal to the surplus which represents the excess of its net assets over
paid-in-capital or, if there is no surplus, net earnings for the current and/or
immediately preceding fiscal year. The primary source of funds for cash
dividends payable by the Holding Company to its shareholders is the cash
dividends received from its subsidiaries. The payment of cash dividends by a
subsidiary to the Holding Company is determined by that subsidiary's Board of
Directors and is dependent upon a number of factors, including the subsidiary's
capital requirements, applicable regulatory limitations, results of operations,
financial condition and any restrictions arising from outstanding indentures.
The Holding Company's ability to pay cash dividends is further impacted by the
funding requirements of a total of $60 million of trust preferred securities
issued by Intervest Statutory Trusts I, II, III and IV, all of the common stock
of which is owned by the Holding Company. These statutory trusts were formed for
the sole purpose of issuing trust preferred securities.
The Bank pays a monthly dividend to the Holding Company in order to provide
funds for the debt service on the trust preferred securities, the proceeds of
which were contributed to the Bank as capital. Dividends paid by the Bank to the
Holding Company in 2005, 2004 and 2003 amounted to $4.4 million, $3.4 million
and $1.7 million respectively.
For a further discussion of legal limitations with regard to the payment of
dividends, see the section "Supervision and Regulation" included in this report.
29
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ------------------------------------------------------------------------------------------------------------------------
At or For The Year Ended December 31,
---------------------------------------------------------------
($ in thousands, except per share data) 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA:
Total assets. . . . . . . . . . . . . . . . . . . . . . $1,706,423 $1,316,751 $ 911,523 $ 686,443 $ 513,086
Cash and cash equivalents . . . . . . . . . . . . . . . $ 56,716 $ 24,599 $ 64,128 $ 30,849 $ 24,409
Securities available for sale . . . . . . . . . . . . . $ - $ - $ - $ - $ 6,192
Securities held to maturity, net. . . . . . . . . . . . $ 251,508 $ 248,888 $ 152,823 $ 145,694 $ 99,157
Loans receivable, net of deferred fees. . . . . . . . . $1,367,986 $1,015,396 $ 671,125 $ 489,912 $ 368,526
Deposits. . . . . . . . . . . . . . . . . . . . . . . . $1,375,330 $ 993,872 $ 675,513 $ 505,958 $ 362,437
Borrowed funds and related accrued interest payable (1) $ 155,725 $ 202,682 $ 140,383 $ 114,032 $ 100,374
Stockholders' equity. . . . . . . . . . . . . . . . . . $ 136,178 $ 90,094 $ 75,385 $ 53,126 $ 40,395
Nonaccrual loans. . . . . . . . . . . . . . . . . . . . $ 750 $ 4,607 $ 8,474 $ - $ 1,243
Foreclosed real estate. . . . . . . . . . . . . . . . . $ - $ - $ - $ 1,081 $ -
Allowance for loan losses . . . . . . . . . . . . . . . $ 15,181 $ 11,106 $ 6,580 $ 4,611 $ 3,380
Loan chargeoffs . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ 150 $ -
Loan recoveries . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ 107 $ -
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA:
Interest and dividend income. . . . . . . . . . . . . . $ 97,881 $ 66,549 $ 50,464 $ 43,479 $ 35,462
Interest expense. . . . . . . . . . . . . . . . . . . . 57,447 38,683 28,564 26,325 24,714
---------------------------------------------------------------
Net interest and dividend income. . . . . . . . . . . . 40,434 27,866 21,900 17,154 10,748
Provision for loan losses . . . . . . . . . . . . . . . 4,075 4,526 1,969 1,274 612
---------------------------------------------------------------
Net interest and dividend income after
provision for loan losses . . . . . . . . . . . . . . 36,359 23,340 19,931 15,880 10,136
Noninterest income. . . . . . . . . . . . . . . . . . . 6,594 5,140 3,321 2,218 1,655
Noninterest expenses. . . . . . . . . . . . . . . . . . 10,703 8,251 7,259 6,479 5,303
---------------------------------------------------------------
Earnings before income taxes. . . . . . . . . . . . . . 32,250 20,229 15,993 11,619 6,488
Provision for income taxes. . . . . . . . . . . . . . . 14,066 8,776 6,873 4,713 2,710
---------------------------------------------------------------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 18,184 $ 11,453 $ 9,120 $ 6,906 $ 3,778
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (2):
Basic earnings per share. . . . . . . . . . . . . . . . $ 2.65 $ 1.89 $ 1.85 $ 1.71 $ 0.97
Diluted earnings per share. . . . . . . . . . . . . . . $ 2.47 $ 1.71 $ 1.53 $ 1.37 $ 0.97
Book value per share. . . . . . . . . . . . . . . . . . $ 17.41 $ 14.37 $ 12.59 $ 11.30 $ 10.36
Market price per share. . . . . . . . . . . . . . . . . $ 24.04 $ 19.74 $ 14.65 $ 10.80 $ 7.40
- ------------------------------------------------------------------------------------------------------------------------
OTHER DATA AND RATIOS:
Total Class A and B common stock outstanding. . . . . . 7,823,058 6,271,433 5,988,377 4,703,087 3,899,629
Total Class A and B common stock warrants outstanding . 696,465 696,465 738,975 1,750,010 2,650,218
Average common shares used to calculate:
Basic earnings per share. . . . . . . . . . . . . . . 6,861,667 6,068,755 4,938,995 4,043,619 3,899,629
Diluted earnings per share. . . . . . . . . . . . . . 7,449,658 6,828,176 6,257,720 5,348,121 3,899,629
Adjusted net earnings for diluted earnings per share. . $ 18,399 $ 11,707 $ 9,572 $ 7,342 $ 3,778
Net interest margin . . . . . . . . . . . . . . . . . . 2.70% 2.52% 2.90% 2.88% 2.47%
Return on average assets. . . . . . . . . . . . . . . . 1.20% 1.02% 1.19% 1.13% 0.85%
Return on average equity. . . . . . . . . . . . . . . . 16.91% 14.14% 15.34% 15.56% 9.94%
Noninterest income to average assets. . . . . . . . . . 0.44% 0.46% 0.43% 0.36% 0.37%
Noninterest expenses to average assets. . . . . . . . . 0.71% 0.74% 0.95% 1.06% 1.19%
Total nonperforming assets to total assets. . . . . . . 0.04% 0.35% 0.93% 0.16% 0.24%
Total nonperforming loans to total loans. . . . . . . . 0.05% 0.45% 1.26% 0.00% 0.34%
Loans, net of unearned income to deposits . . . . . . . 99% 102% 99% 97% 102%
Loans, net of unearned income to deposits (bank only) . 88% 86% 79% 76% 79%
Allowance for loan losses to total net loans. . . . . . 1.11% 1.09% 0.98% 0.94% 0.92%
Allowance for loan losses to nonperforming assets . . . 2024% 241% 78% 427% 272%
Efficiency ratio. . . . . . . . . . . . . . . . . . . . 23% 25% 29% 33% 43%
Average stockholders' equity to average total assets. . 7.11% 7.23% 7.74% 7.27% 8.50%
Stockholders' equity to total assets. . . . . . . . . . 7.98% 6.84% 8.27% 7.74% 7.87%
Tier 1 capital to average assets. . . . . . . . . . . . 10.85% 9.03% 11.31% 9.88% 10.67%
Tier 1 capital to risk weighted assets. . . . . . . . . 12.39% 10.49% 13.28% 12.21% 12.89%
Total capital to risk weighted assets . . . . . . . . . 14.42% 14.23% 14.84% 13.06% 14.11%
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes trust preferred securities of $61,856, $61,856, $30,928, $15,464 and $15,464 at December 31, 2005,
2004, 2003, 2002, 2001, respectively.
(2) The Company has never paid any dividends whether in cash or otherwise on its Class A or Class B common stock.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis of financial condition and results of
operations that follows should be read in conjunction with the consolidated
financial statements and notes thereto included in this report on Form 10-K.
Intervest Bancshares Corporation has three wholly owned 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 the section entitled
"Item 1 Business" 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 and local economic conditions, competition, changes in
market interest rates, government policies and actions of regulatory
authorities.
Nearly all (99.9%) 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 and armed
conflicts,
31
such as the war on terrorism, and natural disasters, such as hurricanes, may
have an adverse impact on economic conditions. Economic conditions affect the
market value of the mortgaged properties underlying the Company's loans as well
as the levels of rent and 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 included in this report.
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 is a critical accounting estimate because it is highly
susceptible to change from period to period requiring management to make
assumptions about future losses on loans. The impact of a sudden large loss
could deplete the allowance and potentially require increased provisions to
replenish the allowance, which could negatively affect the Company's earnings
and financial position.
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 collection 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, including loans on nonaccrual status, 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,
32
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 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 DECEMBER 31, 2005 AND DECEMBER 31, 2004.
Overview
- --------
Total assets at December 31, 2005 increased to $1.7 billion from $1.3 billion at
December 31, 2004. Total liabilities at December 31, 2005 increased to $1.6
billion from $1.2 billion at December 31, 2004, and stockholders' equity
increased to $136.2 million at December 31, 2005, from $90.1 million at December
31, 2004. Book value per common share increased to $17.41 at December 31, 2005,
from $14.37 at December 31, 2004.
Selected balance sheet information by entity as of December 31, 2005 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($ in thousands) Company Bank Corp. Corp. Amts (1) Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 4,242 $ 52,692 $ 27,893 $ 500 $ (28,611) $ 56,716
Security investments - 256,749 - - - 256,749
Loans receivable, net of deferred fees 11,464 1,274,058 82,464 - - 1,367,986
Allowance for loan losses (85) (14,846) (250) - - (15,181)
Investment in consolidated subsidiaries 183,963 - - - (183,963) -
All other assets 4,803 29,740 5,702 11 (103) 40,153
- --------------------------------------------------------------------------------------------------------------------------
Total assets $204,387 $1,598,393 $ 115,809 $ 511 $(212,677) $ 1,706,423
- --------------------------------------------------------------------------------------------------------------------------
Deposits $ - $1,403,969 $ - $ - $ (28,639) $ 1,375,330
Borrowed funds and related interest payable 68,047 229 87,449 - - 155,725
All other liabilities 162 37,353 1,744 6 (75) 39,190
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 68,209 1,441,551 89,193 6 (28,714) 1,570,245
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 136,178 156,842 26,616 505 (183,963) 136,178
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $204,387 $1,598,393 $ 115,809 $ 511 $(212,677) $ 1,706,423
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely
from intercompany deposit accounts and investments in subsidiaries.
33
A comparison of the Company's consolidated balance sheets follows:
At December 31, 2005 At December 31, 2004
-------------------- --------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 56,716 3.3% $ 24,599 1.9%
Security investments 256,749 15.0 253,980 19.3
Loans receivable, net of deferred fees and loan loss allowance 1,352,805 79.3 1,004,290 76.3
All other assets 40,153 2.4 33,882 2.5
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,706,423 100.0% $ 1,316,751 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $ 1,375,330 80.6% $ 993,872 75.5%
Borrowed funds and related interest payable 155,725 9.1 202,682 15.4
All other liabilities 39,190 2.3 30,103 2.3
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,570,245 92.0 1,226,657 93.2
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 136,178 8.0 90,094 6.8
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,706,423 100.0% $ 1,316,751 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
- ----------------------------
Cash and cash equivalents increased to $56.7 million at December 31, 2005, from
$24.6 million at December 31, 2004, due to a higher level of overnight federal
fund investments. The increase reflected the temporary investment of deposit
inflows, a portion of which is expected to fund new loans. Cash and cash
equivalents include federal funds sold and interest-bearing and
noninterest-bearing cash balances with banks, and other short-term investments
that have original maturities of three months or less. The short-term
investments are normally comprised of commercial paper and certificates of
deposit issued by large commercial banks and U.S. government securities. The
level of cash and cash equivalents fluctuates based on various factors,
including liquidity needs, loan demand, deposit flows, calls of securities,
repayments of borrowed funds and alternative investment opportunities.
Security Investments
- ---------------------
Securities as to 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 increased to
$251.5 million at December 31, 2005, from $248.9 million at December 31, 2004.
The increase reflected new purchases exceeding maturities and calls 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 currently
targets its loan-to-deposit ratio at approximately 85%.
At December 31, 2005, the portfolio consisted of short-term debt obligations of
the Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation with a weighted-average
yield of 3.26% and a weighted-average remaining maturity of 1.1 years, compared
to 2.33% and 1.4 years, respectively, at December 31, 2004. The securities are
fixed rate or have predetermined scheduled rate increases, and some have call
features that allow the issuer to call the security before its stated maturity
without penalty. At December 31, 2005 and 2004, the portfolio's estimated fair
value was $249.1 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 maintained an investment in
their capital stock of $3.4 million and $1.8 million, respectively, at December
31, 2005. The FRB stock currently pays a dividend of 6%, while the FHLB stock
dividend fluctuates and most recently was 5.11%. The total investment, which
amounted to $5.2 million at December 31, 2005, compared to $5.1 million at
December 31, 2004, fluctuates based on the Bank's capital level for the FRB
stock and the Bank's loans and 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 $1.4 billion at December 31, 2005 from $1.0 billion at December 31,
2004. The growth reflected new mortgage loan originations secured by
34
commercial and multifamily real estate exceeding principal repayments. New loan
originations totaled $707 million in 2005, compared to $626 million in 2004.
Nearly all (99.9%) 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). At December 31, 2005, such
loans consisted of 529 loans with an aggregate principal balance of $1.4 billion
and an average principal size of $2.6 million. Loans with principal balances of
$5.0 million or more aggregated to 69 loans or $639.3 million, with the largest
loan amounting to $20.0 million.
At December 31, 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 at December 31, 2004 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. With respect to two
loans on nonaccual status at December 31, 2005, the borrower declared bankruptcy
and the Bankruptcy Trustee has sold the properties collateralizing the loans.
The proceeds of the sale are sufficient to provide for repayment of the
Company's recorded investment and the Company is taking appropriate action to
obtain the proceeds from the Bankruptcy Trustee. 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 December 31,
2005 and December 31, 2004, there were no other impaired loans.
At December 31, 2005, there were $2.6 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. During January 2006, one loan
in the amount of $1.1 million that was ninety days past due and still accruing
was repaid in full. Based upon discussions with the remaining borrowers, it is
anticipated that the remaining loans will be 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.
Allowance for Loan Losses
- ----------------------------
At December 31, 2005, the allowance for loan losses amounted to $15.2 million,
compared to $11.1 million at December 31, 2004. The allowance represented 1.11%
of total loans (net of deferred fees) outstanding at December 31, 2005 and 1.09%
at December 31, 2004. The increase in the allowance was due to provisions
aggregating $4.1 million during 2005 resulting largely from loan growth (which
amounted to $354 million from December 31, 2004). For a further discussion of
the criteria the Company uses to determine the adequacy of the allowance, see
the section entitled "Critical Accounting Policies" included in this report.
All Other Assets
- ------------------
The following below sets forth the composition of the caption "All other
assets:"
At December 31,
---------------
($ in thousands) 2005 2004
---------------------------------------------------------------------
Accrued interest receivable $ 7,706 $ 6,699
Loan fees receivable 10,941 8,208
Premises and equipment, net 6,421 6,636
Deferred income tax asset 6,988 5,095
Deferred debenture offering costs, net 5,610 4,929
Investment in unconsolidated subsidiaries 1,856 1,856
All other 631 459
---------------------------------------------------------------------
$ 40,153 $ 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 $1.0 million from December 31, 2004 was due
to the growth in all of these assets.
35
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 $2.7 million from December 31, 2004 was due to the
increase in the loan portfolio.
Premises and equipment decreased by $0.2 million from December 31, 2004 as net
purchases of $0.3 million during the period were more than offset by normal
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 $1.9 million from December 31, 2004 is primarily 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 $0.7
million from December 31, 2004 was due to $1.9 million of additional costs
incurred in connection with the issuance of new debentures, partially offset by
normal 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.
Deposits
- --------
Deposits increased to $1.4 billion at December 31, 2005, from $993.9 million at
December 31, 2004, reflecting an increase in certificate of deposit accounts of
$373.7 million and a net increase in checking, savings and money market accounts
totaling $7.8 million. At December 31, 2005, certificate of deposit accounts
totaled $1.1 billion, and checking, savings and money market accounts aggregated
$256.8 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 deposits at December 31, 2005 and 75% at
December 31, 2004. In June 2005, the Bank began accepting brokered deposits as
another source of funds. Such accounts totaled $40.5 million at December 31,
2005.
Borrowed Funds and Related Interest Payable
- ------------------------------------------------
The following table summarizes borrowed funds and related interest payable:
At December 31, 2005 At December 31, 2004
---------------------- ----------------------
Accrued Accrued
($ in thousands) Principal Interest Principal Interest
--------------------------------------------------------------------------------------------------
Debentures - Intervest Mortgage Corporation $ 82,750 $ 4,699 $ 88,850 $ 8,219
Debentures - Holding Company 4,640 1,397 5,580 1,749
Debentures - Capital Securities - Holding Company 61,856 154 61,856 165
FHLB advances - Intervest National Bank - - 36,000 21
Mortgage note payable - Intervest National Bank 229 - 242 -
--------------------------------------------------------------------------------------------------
$ 149,475 $ 6,250 $ 192,528 $ 10,154
--------------------------------------------------------------------------------------------------
Intervest Mortgage Corporation's debentures outstanding decreased due to
repayments exceeding new issues.
The Holding Company's debentures outstanding decreased due to the conversion
into common stock of its convertible debentures. In 2005, $1.6 million of
convertible debentures ($0.9 million of principal and $0.7 million of related
accrued interest payable) were converted into shares of the Holding Company's
Class A common stock at the election of the debenture holders.
The Bank from time to time may borrow funds on an overnight or short-term basis
to manage its liquidity needs. At December 31, 2004, the Bank had $36 million
of FHLB borrowings outstanding, of which $19 million was repaid in January 2005
and $17 million was repaid in February 2005 through deposit inflows.
36
The Bank also has a mortgage note payable outstanding amounting to $0.2 million
at December 31, 2005 and 2004. The note was issued in connection with the Bank's
purchase in 2002 of property that is located across from its Court Street branch
office in Florida.
Accrued interest payable on borrowed funds amounted to $6.3 million at December
31 2005, compared to $10.2 million at December 31, 2004. The decrease was due to
repayments of interest as well as the decrease resulting from the conversion of
debentures, partially offset by new accruals. A large portion of the accrued
interest payable is due and payable at the maturity of various debentures. For a
further discussion of borrowed funds, see notes 7 and 9 to the consolidated
financial statements included in this report, as well as the section "Liquidity
and Capital Resources."
All Other Liabilities
- -----------------------
The following table sets forth the composition of the caption "All other
liabilities:"
At December 31,
---------------
($ in thousands) 2005 2004
----------------------------------------------------------------
Mortgage escrow funds payable $ 20,302 $ 14,533
Official checks outstanding 11,689 12,061
Accrued interest payable on deposits 3,232 1,718
Income taxes payable 1,643 81
All other liabilities 2,324 1,710
----------------------------------------------------------------
$ 39,190 $ 30,103
----------------------------------------------------------------
Mortgage escrow funds payable represent advance payments made to the Company by
borrowers for property taxes and insurance that are remitted by the Company to
third parties. The increase of $5.8 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 $1.5 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.
Stockholders' Equity
- ---------------------
Stockholders' equity increased to $136.2 million from $90.1 million at December
31, 2004 as follows:
Per
($ in thousands) Amount Shares Share
-----------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2004 $ 90,094 6,271,433 $14.37
Net earnings for the year 18,184 - -
Class A common stock issued in public offering 26,311 1,436,468 18.32
Convertible debentures converted at election of debenture holders 1,589 115,157 13.80
-----------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2005 $136,178 7,823,058 $17.41
-----------------------------------------------------------------------------------------------
The Holding Company completed in August 2005 a public offering of 1,250,000
shares of its Class A Common Stock for $19.75 per share and in September 2005
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.
37
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
2004.
Overview
- --------
Consolidated net earnings for the year ended December 31, 2005 increased by $6.7
million, or 59%, to $18.2 million, or $2.47 per diluted share, from $11.5
million, or $1.71 per diluted share, reported in 2004. The $6.7 million increase
in earnings was due to growth in net interest and dividend income of $12.6
million, an increase of $1.5 million in noninterest income and a decrease in the
provision for loan losses of $0.4 million. These improvements were partially
offset by a $5.3 million increase in income tax expense and a $2.5 million
increase in noninterest expenses. The Company's return on average assets and
equity improved to 1.20% and 16.91%, respectively, in 2005, from 1.02% and
14.14% in 2004, and its efficiency ratio (which is a measure of its ability to
control expenses as a percentage of its revenues) continues to be favorable and
improved to 23% in 2005 from 25% in 2004.
Selected information regarding results of operations by entity for 2005 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($ in thousands) Bank Corp. Corp. Company Amts (2) Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 87,257 $ 10,197 $ 13 $ 931 $ (517) $ 97,881
Interest expense 45,591 7,370 - 5,003 (517) 57,447
--------------------------------------------------------------------------
Net interest and dividend income 41,666 2,827 13 (4,072) - 40,434
Provision for loan losses 4,157 (82) - - - 4,075
Noninterest income 5,524 6,008 115 520 (5,573) 6,594
Noninterest expenses 12,329 3,172 83 692 (5,573) 10,703
--------------------------------------------------------------------------
Earnings before taxes 30,704 5,745 45 (4,244) - 32,250
Provision for income taxes 13,349 2,656 21 (1,960) - 14,066
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 17,355 $ 3,089 $ 24 $ (2,284) $ - $ 18,184
- ----------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (4,356) - - 4,356 $ - -
- ----------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 12,999 $ 3,089 $ 24 $ 2,072 $ - $ 18,184
- ----------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany
dividends for 2004 $ 7,436 $ 2,354 $ 22 $ 1,641 $ - $ 11,453
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company provide funds for the debt service on the Capital Securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise
from intercompany deposit accounts and management and service agreements.
Net Interest and Dividend Income
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased by $12.6 million to $40.4 million in
2005, from $27.8 million in 2004. The improvement was attributable to a $392.8
million increase in average interest-earning assets resulting from continued
growth in loans of $338.4 million and a higher level of security and short-term
investments aggregating to $54.4 million. The growth in average assets was
funded by $354.7 million of additional interest-bearing deposits, $3.6 million
of additional borrowed funds and a $26.5 million increase in stockholders'
equity (resulting from earnings and the issuance of shares in a public offering
and from the conversion of convertible debentures).
The Company's net interest margin increased to 2.70% in 2005 from 2.52% in 2004.
The higher margin was due to the Company's yield on interest-earning assets
increasing at a faster pace than its cost of funds. In a steadily rising
interest rate environment in 2005, the yield on the Company's interest-earning
assets increased 51 basis points to 6.53% in 2005, primarily due to higher
yields on new mortgage loans originated, an increase in yields earned on
variable-rate loans indexed to the prime rate, and higher yields earned on
security and other short-term investments. The cost of funds also increased by
37 basis points to 4.21% in 2005 due to higher rates paid on deposit accounts.
38
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2005 and 2004. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
-------------------------------
2005 2004
------------------------------------ ------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $1,206,089 $ 89,590 7.43% $ 867,724 $ 61,928 7.14%
Securities 258,906 7,229 2.79 207,557 4,259 2.05
Other interest-earning assets 32,865 1,062 3.23 29,766 362 1.22
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,497,860 $ 97,881 6.53% 1,105,047 $ 66,549 6.02%
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,906 15,505
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $1,512,766 $1,120,552
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 10,636 $ 166 1.56% $ 12,052 $ 187 1.55%
Savings deposits 22,397 536 2.39 30,803 550 1.79
Money market deposits 202,618 5,947 2.94 191,495 3,583 1.87
Certificates of deposit 966,128 38,270 3.96 612,735 22,010 3.59
- -----------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 1,201,779 44,919 3.74 847,085 26,330 3.11
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances 4,871 139 2.85 1,914 40 2.09
Debentures and accrued interest payable 96,007 8,014 8.35 109,697 8,801 8.02
Debentures - capital securities 61,856 4,359 7.05 47,533 3,495 7.35
Mortgage note payable 236 16 6.99 249 17 7.00
- -----------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 162,970 12,528 7.69 159,393 12,353 7.75
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,364,749 $ 57,447 4.21% 1,006,478 $ 38,683 3.84%
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,335 6,599
Noninterest-bearing liabilities 34,162 26,471
Stockholders' equity 107,520 81,004
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,512,766 $1,120,552
- -----------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 40,434 2.32% $ 27,866 2.18%
- -----------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 133,111 2.70% $ 98,569 2.52%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.10x
- -----------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 1.20% 1.02%
Return on average equity 16.91% 14.14%
Noninterest expense to average assets 0.71% 0.74%
Efficiency ratio (2) 23% 25%
Average stockholders' equity to average assets 7.11% 7.23%
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes nonaccrual loans.
(2) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and dividend
income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
39
For the Year Ended December 31, 2005 vs. 2004
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- -------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 2,516 $ 24,159 $ 987 $ 27,662
Securities 1,536 1,053 381 2,970
Other interest-earning assets 598 38 64 700
- -------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,650 25,250 1,432 31,332
- -------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits 1 (22) - (21)
Savings deposits 185 (150) (49) (14)
Money market deposits 2,049 208 107 2,364
Certificates of deposit 2,267 12,687 1,306 16,260
- -------------------------------------------------------------------------------------------------------
Total deposit accounts 4,502 12,723 1,364 18,589
- -------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances 15 62 22 99
Debentures and accrued interest payable 362 (1,098) (51) (787)
Debentures - capital securities (143) 1,040 (33) 864
Mortgage note payable - (1) - (1)
- -------------------------------------------------------------------------------------------------------
Total borrowed funds 234 3 (62) 175
- -------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,736 12,726 1,302 18,764
- -------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (86) $ 12,524 $ 130 $ 12,568
- -------------------------------------------------------------------------------------------------------
Provision for Loan Losses
- ----------------------------
The provision for loan losses decreased by $0.4 million to $4.1 million in 2005,
from $4.5 million in 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, partially offset by an increase
in the amount of loan growth. Total loans grew by $354.3 million in 2005,
compared to $347.9 million in 2004.
Noninterest Income
- -------------------
Noninterest income increased by $1.5 million to $6.6 million in 2005 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004
-----------------------------------------------------------------------------------------
Customer service fees $ 334 $ 252
Income from mortgage lending activities (1) 1,082 1,221
Income from the early repayment of mortgage loans (2) 5,062 3,546
Commissions and fees 115 119
Gain from early call of investment securities (3) 1 2
-----------------------------------------------------------------------------------------
$ 6,594 $ 5,140
-----------------------------------------------------------------------------------------
<FN>
(1) Consists mostly of fees from expired loan commitments and loan servicing,
maintenance and inspections charges.
(2) 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.
(3) Consists of the recognition of any unamortized premium or discount at time of call.
Noninterest income increased due to a $1.5 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 $0.1 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. 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 $2.5 million to $10.7 million in 2005 and are
summarized as follows:
40
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004
---------------------------------------------------------------------------
Salaries and employee benefits $ 5,726 $ 4,046
Occupancy and equipment, net 1,487 1,659
Data processing 605 428
Professional fees and services 773 411
Stationery, printing and supplies 211 180
Postage and delivery 129 111
FDIC and general insurance 324 264
Director and committee fees 527 397
Advertising and promotion 225 110
All other expenses 696 645
---------------------------------------------------------------------------
$ 10,703 $ 8,251
---------------------------------------------------------------------------
Salaries and employee benefits expense increased primarily due to salary
increases, a higher cost of employee benefits and additional staff aggregating
$0.8 million, and a $0.8 million increase in bonus payments to certain
executives of the Company in connection with capital raising activities. The
Company had 69 fulltime employees at December 31, 2005 versus 64 at December 31,
2004.
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 and an increase
in sublease income from the Bank's Florida offices. These items were partially
offset by increased rent on the Company's new larger office space at One
Rockefeller Plaza.
Data processing expense increased primarily due to the growth in the Bank's
assets.
Professional fees expense increased due to the growth in the Company's assets as
well as additional accruals (of $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. Stationery, printing and supplies, postage and delivery, and
FDIC and general insurance expenses increased primarily due to the Company's
growth as well as a rate increase for general insurance.
All other expense increased primarily 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.
Provision for Income Taxes
- -----------------------------
The provision for income taxes increased by $5.3 million to $14.1 million in
2005, from $8.8 million in 2004, due to higher pre-tax income. The Company's
effective tax rate (inclusive of state and local taxes) amounted to 43.6% in
2005, compared to 43.4% in 2004.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
2003.
Overview
- --------
Consolidated net earnings for the year ended December 31, 2004 increased by $2.3
million, or 26%, to $11.5 million, or $1.71 per diluted share, from $9.1
million, or $1.53 per diluted share, reported in 2003. The $2.3 million increase
in earnings was due to growth in net interest and dividend income of $6.0
million and an increase of $1.8 million in noninterest income. These revenue
increases were partially offset by a $2.6 million increase in the provision for
loan losses, a $1.9 million increase in income tax expense and a $1.0 million
increase in noninterest expenses. The Company's return on average assets and
equity was 1.02% and 14.14%, respectively, in 2004, compared to 1.19% and 15.34%
in 2003, and its efficiency ratio (which is a measure of the Company's ability
to control expenses as a percentage of its revenues) stood at 25% for 2004.
41
Selected information regarding results of operations by entity for 2004 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($ in thousands) Bank Corp. Corp. Company Amts (2) Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 55,770 $ 9,896 $ 6 $ 1,087 $ (210) $ 66,549
Interest expense 26,597 7,945 - 4,351 (210) 38,683
- ---------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 29,173 1,951 6 (3,264) - 27,866
Provision for loan losses 4,379 140 - 7 - 4,526
Noninterest income 4,272 4,915 119 389 (4,555) 5,140
Noninterest expenses 9,935 2,347 84 440 (4,555) 8,251
- ---------------------------------------------------------------------------------------------------------------------
Earnings before taxes 19,131 4,379 41 (3,322) - 20,229
Provision for income taxes 8,266 2,025 19 (1,534) - 8,776
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 10,865 $ 2,354 $ 22 $ (1,788) $ - $ 11,453
- ---------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (3,429) - - 3,429 - -
- ---------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 7,436 $ 2,354 $ 22 $ 1,641 $ - $ 11,453
- ---------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany
dividends for 2003 $ 6,972 $ 1,759 $ (6) $ 395 $ - $ 9,120
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company provide funds for the debt service on the Capital Securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise
from intercompany deposit accounts and management and service agreements.
Net Interest and Dividend Income
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased by $6.0 million to $27.9 million in
2004, from $21.9 million in 2003. The improvement was attributable to a $350.7
million increase in average interest-earning assets resulting from continued
growth in loans of $282.2 million and a higher level of security and short-term
investments which totaled $68.6 million. The growth in average assets was funded
by $287.4 million of new deposits, $34.4 million of additional borrowed funds
and a $21.6 million increase in stockholders' equity (resulting from earnings
and the issuance of shares upon the exercise of Class A common stock warrants
and conversion of convertible debentures).
The Company's net interest margin decreased to 2.52% in 2004 from 2.90% in 2003.
The decrease was due to the Company's yield on interest-earning assets
decreasing at a faster pace than its cost of funds. In a low interest rate
environment, the yield on interest-earning assets decreased 67 basis points to
6.02% in 2004 due to lower rates on new mortgage loans originated and
prepayments of higher-yielding loans. The cost of funds decreased 33 basis
points to 3.84% in 2004 due to lower rates paid on deposit accounts and the
addition of new debentures with lower rates than existing ones, partially offset
by rate increases on floating-rate debentures. These floating-rate debentures
are indexed to the JPMorgan Chase Bank prime rate, which increased by a total of
125 basis points from year-end 2003.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2004 and 2003. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
42
For the Year Ended December 31,
-------------------------------
2004 2003
----------------------------------- -------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans (1) $ 867,724 $ 61,928 7.14% $ 585,556 $ 47,223 8.06%
Securities 207,557 4,259 2.05 143,766 2,965 2.06
Other interest-earning assets 29,766 362 1.22 24,983 276 1.10
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,105,047 $ 66,549 6.02% 754,305 $ 50,464 6.69%
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,505 13,686
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $1,120,552 $ 767,991
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 12,052 $ 187 1.55% $ 11,120 $ 182 1.64%
Savings deposits 30,803 550 1.79 31,782 601 1.89
Money market deposits 191,495 3,583 1.87 146,509 2,763 1.89
Certificates of deposit 612,735 22,010 3.59 370,235 14,891 4.02
- -----------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 847,085 26,330 3.11 559,646 18,437 3.29
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances 1,914 40 2.09 - - -
Debentures and accrued interest payable 109,697 8,801 8.02 105,347 8,316 7.89
Debentures - capital securities 47,533 3,495 7.35 19,356 1,793 9.26
Mortgage note payable 249 17 7.00 261 18 7.00
- -----------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 159,393 12,353 7.75 124,964 10,127 8.10
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,006,478 $ 38,683 3.84% 684,610 $ 28,564 4.17%
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,599 5,666
Noninterest-bearing liabilities 26,471 18,264
Stockholders' equity 81,004 59,451
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,120,552 $ 767,991
- -----------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 27,866 2.18% $ 21,900 2.52%
- -----------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 98,569 2.52% $ 69,695 2.90%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10x 1.10x
- -----------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets 1.02% 1.19%
Return on average equity 14.14% 15.34%
Noninterest expense to average assets 0.74% 0.95%
Efficiency ratio (2) 25% 29%
Average stockholders' equity to average assets 7.23% 7.74%
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes nonaccrual loans.
(2) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and dividend
income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
43
For the Year Ended December 31, 2004 vs. 2003
---------------------------------------------
Increase (Decrease) Due To Change In:
-------------------------------------
($ in thousands) Rate Volume Rate/Volume Total
- -------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ (5,387) $ 22,743 $ (2,651) $ 14,705
Securities (14) 1,314 (6) 1,294
Other interest-earning assets 30 53 3 86
- -------------------------------------------------------------------------------------------------------
Total interest-earning assets (5,371) 24,110 (2,654) 16,085
- -------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits (10) 15 - 5
Savings deposits (32) (19) - (51)
Money market deposits (29) 850 (1) 820
Certificates of deposit (1,592) 9,749 (1,038) 7,119
- -------------------------------------------------------------------------------------------------------
Total deposit accounts (1,663) 10,595 (1,039) 7,893
- -------------------------------------------------------------------------------------------------------
Federal funds purchased and FHLB advances - - 40 40
Debentures and accrued interest payable 137 343 5 485
Debentures - capital securities (370) 2,609 (537) 1,702
Mortgage note payable - (1) - (1)
- -------------------------------------------------------------------------------------------------------
Total borrowed funds (233) 2,951 (492) 2,226
- -------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1,896) 13,546 (1,531) 10,119
- -------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (3,475) $ 10,564 $ (1,123) $ 5,966
- -------------------------------------------------------------------------------------------------------
Provision for Loan Losses
- ----------------------------
The provision for loan losses increased to $4.5 million in 2004 from $2.0
million in 2003. The higher provision was a function of loan growth, which
amounted to $347.9 million in 2004 compared to $183.6 million in 2003, as well
as a decrease in the credit grade of two loans during the third quarter of 2004.
Noninterest Income
- -------------------
Noninterest income increased by $1.8 million to $5.1 million in 2004 and is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003
---------------------------------------------------------------------------------------------
Customer service fees $ 252 $ 187
Income from mortgage lending activities (1) 1,221 824
Income from the early repayment of mortgage loans (2) 3,546 2,317
Commissions and fees 119 38
Gain (loss) from early call of investment securities (3) 2 (51)
All other noninterest income - 6
---------------------------------------------------------------------------------------------
$ 5,140 $ 3,321
---------------------------------------------------------------------------------------------
<FN>
(1) Consists mostly of fees from expired loan commitments and loan servicing,
Maintenance and inspections charges.
(2) 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.
(3) Consists of the recognition of any unamortized premium or discount at time of call.
Noninterest income increased primarily due to higher income of $1.2 million from
the prepayment of mortgage loans, a $0.3 million increase in loan service
charges and $0.1 million of additional fee income from loan commitments that
expired and were not funded.
Noninterest Expenses
- ---------------------
Noninterest expenses increased by $1.0 million to $8.3 million in 2004 and is
summarized as follows:
44
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003
----------------------------------------------------------------------
Salaries and employee benefits $ 4,046 $ 3,655
Occupancy and equipment, net 1,659 1,270
Data processing 428 533
Professional fees and services 411 364
Stationery, printing and supplies 180 152
Postage and delivery 111 101
FDIC and general insurance 264 225
Director and committee fees 397 229
Advertising and promotion 110 35
All other expenses 645 695
----------------------------------------------------------------------
$ 8,251 $ 7,259
----------------------------------------------------------------------
Salaries and employee benefits expense increased due to the following: $0.6
million from salary increases, a higher cost of employee benefits and additional
staff; $0.4 million from bonus payments to certain executives of the Company in
connection with the sale of capital securities and leasing of new space; and
$41,000 of additional commission expense. The increases were partially offset by
a $0.4 million decrease in compensation from common stock warrants and a $0.2
million decrease in compensation resulting from a higher level of SFAS No. 91
direct fee income (due to more loan originations). The Company had 64 fulltime
employees at December 31, 2004 versus 61 at December 31, 2003. See note 14 to
the consolidated financial statements included in this report for additional
information on common stock warrants.
Occupancy and equipment expense increased due to the leasing of larger office
space. In May 2004, Intervest Bancshares Corporation, Intervest National Bank's
New York office, Intervest Mortgage Corporation and Intervest Securities
Corporation moved into newly constructed offices on the entire fourth floor at
One Rockefeller Plaza in New York City. Intervest Mortgage Corporation's lease
obligation of approximately $22,000 per month on its former space at 10
Rockefeller Plaza expired in September 2004.
Data processing expense decreased due to lower fees incurred by the Bank despite
an increase in its assets. The Bank renegotiated its data processing contract
during late 2003 by extending the expiration date to 2010 and reducing the
processing fee to a fixed amount until its assets reach $1.1 billion. Thereafter
the fee becomes variable and is calculated based on total assets. Previously,
the data processing fee was entirely variable and a function of the Bank's total
assets.
Professional fees and services, stationery, printing and supplies, postage and
delivery, and FDIC and general insurance expenses increased largely due to the
Company's growth.
Director and committee fees increased due to higher fees paid to directors for
each board and committee meeting attended. The fees were increased in June 2003
and October 2004.
Advertising expense increased due to additional advertising to support loan and
deposit growth.
All other expenses were lower due to a decrease of $49,000 in losses from
transactional accounts and a decrease in foreclosed real estate expenses of
$64,000, partial offset by increased travel, telephone and franchise tax
expense.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased by $1.9 million to $8.8 million in
2004, from $6.9 million in 2003, due to higher pre-tax income. The Company's
effective tax rate (inclusive of state and local taxes) amounted to 43.4% in
2004, compared to 43.0% in 2003.
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. For a
further discussion of these financial instruments, see note 19 to the
consolidated financial statements included in this report.
45
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; principal repayments of loans; 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 $1.4 billion at
December 31, 2005 and time deposits represented 81%, or $1.1 billion, of those
deposits. Additionally, time deposits of $100,000 or more at December 31, 2005
totaled $371.8 million and included $40.5 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 2005. At December 31, 2005,
the Bank had $382.0 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 December 31, 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 2005, the Bank
borrowed a total of $60.4 million of short-term FHLB advances and overnight
federal funds purchases and repaid a total of $96.4 million for a net decrease
of $36.0 million from short-term borrowings outstanding at December 31, 2004. At
December 31, 2005, there were no outstanding borrowings from any of the
aforementioned sources. At December 31, 2005, the Bank had available collateral
consisting of investment securities to support total borrowings of $243 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
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.
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 consolidated financial statements included in this
report, at December 31, 2005, $82.8 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 July 1, 2006 to October 1, 2013. During 2005, Intervest Mortgage
Corporation repaid various debentures for a total of $37.2 million
46
($32.1 million of principal and $5.1 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 December
31, 2005, Intervest Mortgage Corporation had $8.8 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 the first quarter of
2006, Intervest Mortgage Corporation anticipates filing a registration statement
with the SEC related to a public offering of additional debentures of up to $16
million in aggregate principal amount.
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.
At December 31, 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
2005 a public offering of 1,250,000 shares of its Class A common stock for
$19.75 per share and in September 2005 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
December 31, 2005, approximately $45.4 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.
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 9 of the notes to the consolidated financial statements
included in this report.
At December 31, 2005, the Company's total commitments to lend aggregated to
$102.4 million. Although there is no certainty, management anticipates that the
majority of these loan commitments will be funded over the next 12 months. If
all these commitments were to close, they would be funded by the sources of
funds described above.
The Company considers its current liquidity and sources of funds sufficient to
satisfy its outstanding lending commitments and its maturing liabilities.
Management is not aware of any trends, known demand, commitments or
uncertainties which are expected to have a material impact on future operating
results, liquidity or capital resources.
47
CONTRACTUAL OBLIGATIONS
The table below summarizes the Company's contractual obligations as of December
31, 2005.
Due In
-----------------------------------------
2007 and 2009 and 2011 and
($ in thousands) Total 2006 2008 2010 Later
- ---------------------------------------------------------------------------------------------------------
Subordinated debentures and mortgage note payable $ 87,619 $ 7,264 $ 23,171 $ 26,536 $ 30,648
Subordinated debentures - capital securities 61,856 - - - 61,856
Accrued interest payable on all borrowed funds 6,096 2,828 2,455 532 281
Deposits with no stated maturities 256,816 256,816 - - -
Deposits with stated maturities 1,118,514 381,968 386,244 323,074 27,228
Operating lease payments 7,336 911 1,708 1,755 2,962
Unfunded loan commitments (1) 101,597 97,057 4,540 - -
Available lines of credit (1) 737 737 - - -
Standby letters of credit (1) 100 100 - - -
- ---------------------------------------------------------------------------------------------------------
$1,640,671 $747,681 $ 418,118 $ 351,897 $ 122,975
- ---------------------------------------------------------------------------------------------------------
<FN>
(1) Since some of the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements. The 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 result in certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements.
The Bank is required to maintain regulatory defined minimum Tier 1 leverage and
Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%,
respectively. At December 31, 2005 and 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 December 31,
---------------
($ in thousands) 2005 2004
--------------------------------------------------------------------------
Tier 1 Capital $ 156,842 $ 106,724
Tier 2 Capital 14,846 10,689
--------------------------------------------------------------------------
Total risk-based capital $ 171,688 $ 117,413
--------------------------------------------------------------------------
Net risk-weighted assets $1,362,728 $ 971,823
Average assets for regulatory purposes $1,562,779 $1,140,624
--------------------------------------------------------------------------
Tier 1 capital to average assets 10.04% 9.36%
Tier 1 capital to risk-weighted assets 11.51% 10.98%
Total capital to risk-weighted assets 12.60% 12.08%
--------------------------------------------------------------------------
The Holding Company on a consolidated basis is subject to minimum regulatory
capital requirements administered by the FRB. These guidelines require a ratio
of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted
assets of at least 4% and a ratio of total capital to risk-weighted assets of at
least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted
total average assets of not less than 3%. At December 31, 2005 and 2004,
management believes that the Holding Company met its capital adequacy
requirements.
48
Information regarding the Holding Company's regulatory capital and related
ratios is summarized below:
At December 31,
---------------
($ in thousands) 2005 2004
---------------------------------------------------------------------------
Tier 1 Capital (1) $ 181,571 $ 115,031
Tier 2 Capital (1) 29,788 41,074
---------------------------------------------------------------------------
Total risk-based capital $ 211,359 $ 156,105
---------------------------------------------------------------------------
Net risk-weighted assets $1,466,027 $1,096,711
Average assets for regulatory purposes $1,673,832 $1,273,770
---------------------------------------------------------------------------
Tier 1 capital to average assets 10.85% 9.03%
Tier 1 capital to risk-weighted assets 12.39% 10.49%
Total capital to risk-weighted assets 14.42% 14.23%
---------------------------------------------------------------------------
<FN>
(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 December 31,
2005 and December 31, 2004, $45.4 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. The inclusion of
these securities in Tier 1 capital is limited to 25% of core capital
elements, as defined in the FDIC regulations
The Federal Reserve on March 1, 2005 issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies (BHC), but
with stricter quantitative limits and clearer qualitative standards. The new
rule provides a transition period for BHCs to meet the new, stricter limitations
within regulatory capital by allowing the limits on restricted core capital
elements to become fully effective as of March 31, 2009.
Until March 31, 2009, BHCs generally must comply with the current Tier 1 capital
limits. That is, BHCs generally should calculate their Tier 1 capital on a basis
that limits the aggregate amount of qualifying cumulative perpetual preferred
stock and qualifying trust preferred securities to 25 percent of the sum of
qualifying common stockholder's equity, qualifying noncumulative and cumulative
perpetual preferred stock (including related surplus), qualifying minority
interest in the equity accounts of consolidated subsidiaries, and qualifying
trust preferred securities. Amounts of qualifying cumulative perpetual preferred
stock and qualifying trust preferred securities in excess of this limit may be
included in Tier 2 capital.
Beginning March 31, 2009, qualifying cumulative perpetual preferred stock and
trust preferred securities, as well as certain types of minority interest, are
limited to 25 percent of the sum of core capital elements net of goodwill. The
Holding Company currently does not have any goodwill.
Beginning March 31, 2009, the excess amounts of restricted core capital elements
in the form of qualifying trust preferred securities included in Tier 2 capital
are limited to 50 percent of Tier 1 capital (net of goodwill). Amounts in excess
of this limit will still be taken into account in the overall assessment of an
organization's funding and financial condition. The final rule also provides
that in the last five years before the underlying subordinated note matures, the
associated trust preferred securities must be treated as limited-life preferred
stock. Thus, in the last five years of the life of the note, the outstanding
amount of trust preferred securities will be excluded from Tier 1 capital and
included in Tier 2 capital, subject, together with subordinated debt and other
limited-life preferred stock, to a limit of 50 percent of Tier 1 capital. During
this period, the trust preferred securities will be amortized out of Tier 2
capital by one-fifth of the original amount (less redemptions) each year and
excluded totally from Tier 2 capital during the last year of life of the
underlying note.
As of December 31, 2005, assuming the Company no longer included its trust
preferred securities in Tier 1 Capital, the Company would still exceed the well
capitalized threshold under the regulatory framework for prompt corrective
action.
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital
Rule which requires the maintenance of minimum net capital of $5,000. At
December 31, 2005 and 2004, Intervest Securities Corporation's net capital was
$0.5 million.
49
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 rates. In addition,
certain assets, such as adjustable-rate mortgage loans, may have features
generally referred to in the industry as "interest rate caps and floors," 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
$498.7 million , or 29.2% of total assets, at December 31, 2005, from $114.0
million, or 8.7% at December 31, 2004. The increase in the positive gap
primarily reflects an increase in loans that reprice or mature within one year
funded by time deposits with terms of more than one year. For purposes of
computing the gap, all deposits with no stated maturities are treated as readily
accessible accounts. However, if such deposits were treated differently, the
one-year gap would then change. The behavior of core depositors may not
necessarily result in the immediate withdrawal of funds in the event deposit
rates offered by the Bank did not change as quickly and uniformly as changes in
general market rates. For example, if only 25% of deposits with no stated
maturity were assumed to be readily accessible, the one-year gap would have been
a positive 40.1% at December 31, 2005, compared to a positive 22.5 % at December
31, 2004.
Many of the Company's floating-rate loans have a "floor," or minimum rate, that
is determined in relation to prevailing market rates on the date of origination.
This floor only adjusts upwards in the event of increases in the loan's interest
rate. This feature reduces the unfavorable effect on interest income of a
falling rate environment because the interest rates on such loans do not reset
downward. However, the Company may nonetheless experience loan prepayments, the
amount of which cannot be predicted, and reinvestment risk associated with the
resulting proceeds.
Notwithstanding all of the above, there can be no assurances that a sudden and
substantial increase in interest rates may not adversely impact the Company's
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
50
The table below summarizes interest-earning assets and interest-bearing
liabilities as of December 31, 2005, that are scheduled to mature or reprice
within the periods shown.
0-3 4-12 Over 1-4 Over 4
($ in thousands) Months Months Years Years Total
- -------------------------------------------------------------------------------------------------------
Loans (1) $ 549,600 $ 370,277 $ 384,893 $ 76,274 $1,381,044
Securities held to maturity (2) 63,437 108,317 79,754 - 251,508
Short-term investments 45,121 - - - 45,121
FRB and FHLB stock 1,803 - - 3,438 5,241
- -------------------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 659,961 $ 478,594 $ 464,647 $ 79,712 $1,682,914
- -------------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 7,202 $ - $ - $ - $ 7,202
Savings deposits 17,351 - - - 17,351
Money market deposits 223,075 - - - 223,075
Certificates of deposit 97,265 284,702 546,589 189,958 1,118,514
- -------------------------------------------------------------------------------------------------------
Total deposits 344,893 284,702 546,589 189,958 1,366,142
- -------------------------------------------------------------------------------------------------------
Debentures and mortgage note payable (1) - 7,250 83,032 59,193 149,475
Accrued interest on all borrowed funds (1) 1,385 1,597 2,745 523 6,250
- -------------------------------------------------------------------------------------------------------
Total borrowed funds 1,385 8,847 85,777 59,716 155,725
- -------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 346,278 $ 293,549 $ 632,366 $ 249,674 $1,521,867
- -------------------------------------------------------------------------------------------------------
GAP (repricing differences) $ 313,683 $ 185,045 $(167,719) $(169,962) $ 161,047
- -------------------------------------------------------------------------------------------------------
Cumulative GAP $ 313,683 $ 498,728 $ 331,009 $ 161,047 $ 161,047
- -------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 18.4% 29.2% 19.4% 9.4% 9.4%
- -------------------------------------------------------------------------------------------------------
<FN>
Significant assumptions used in preparing the gap table above:
(1) Floating-rate loans and debentures payable are included in the period in which their interest
rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate
loans and debentures payable are
scheduled, including repayments, according to their contractual maturities. Deferred loan fees
are excluded from this analysis.
(2) Securities are scheduled according to the earlier of their contractual maturity or the date in
which the interest rate is scheduled to increase. The effects of possible prepayments that may result
from the issuer's right to call a security before its contractual maturity date are not considered.
(3) Interest checking, savings and money market deposits are regarded as 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 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
51
"significant deficiencies" or "material weaknesses" in the Company's internal
controls over financial reporting, as defined in applicable Securities and
Exchange Commission rules and regulations.
RECENT ACCOUNTING PRONOUNCEMENTS
See note 1 to the consolidated financial statements included in this report for
a discussion of this topic.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning the Company
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on the operations of
the Company is reflected in increased operating costs. Virtually all of the
assets and liabilities of the Company are monetary in nature. As a result,
changes in interest rates have a more significant impact on the performance of
the Company than do the effects of changes in the general rate of inflation and
in prices. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit-taking activities, and the issuance of
its debentures. The Company has not engaged in and accordingly has no risk
related to trading accounts, commodities, interest rate hedges or foreign
exchange. The measurement of market risk associated with financial instruments
is meaningful only when all related and offsetting on-and off-balance sheet
transactions are aggregated, and the resulting net positions are identified.
Disclosures about the fair value of financial instruments as of December 31,
2005 and 2004, which reflect changes in market prices and rates, can be found in
note 20 to the consolidated financial statements included in this report.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within established guidelines, the adverse impact of changes in interest rates
on the Company's net interest income and capital. For a further discussion, see
the section entitled "Asset and Liability Management" in Item 7 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
herein:
- - Report of Independent Registered Public Accounting Firm - Hacker, Johnson &
Smith, P.A., P.C. (PAGE 53)
- - Consolidated Balance Sheets at December 31, 2005 and 2004 (PAGE 54)
- - Consolidated Statements of Earnings for the Years Ended December 31, 2005,
2004 and 2003 (PAGE 55)
- - Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2005, 2004 and 2003 (PAGE 56)
- - Consolidated Statements of Cash Flows for the Years Ended December 31,
2005, 2004 and 2003 (PAGE 57)
- - Notes to the Consolidated Financial Statements (PAGES 58 TO 79)
SUPPLEMENTARY DATA
Other financial statement schedules and inapplicable periods with respect to
schedules listed above are omitted because the conditions requiring their filing
do not exist or the information required thereby is included in the consolidated
financial statements filed, including the notes thereto.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of Intervest
Bancshares Corporation and Subsidiaries (the "Company") as of December 31, 2005
and 2004 and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 2005 and 2004, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2005 in
conformity with generally accepted accounting principles in the United States of
America.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ---------------------------------------
Hacker, Johnson & Smith, P.A., P.C.
Tampa, Florida
February 3, 2006
53
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
----------------------
($ in thousands, except par value) 2005 2004
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 11,595 $ 12,026
Federal funds sold 42,675 9,948
Commercial paper and other short-term investments 2,446 2,625
----------------------
Total cash and cash equivalents 56,716 24,599
Securities held to maturity, net 251,508 248,888
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 5,241 5,092
Loans receivable (net of allowance for loan losses of $15,181 and $11,106, respectively) 1,352,805 1,004,290
Accrued interest receivable 7,706 6,699
Loan fees receivable 10,941 8,208
Premises and equipment, net 6,421 6,636
Deferred income tax asset 6,988 5,095
Deferred debenture offering costs, net 5,610 4,929
Other assets 2,487 2,315
================================================================================================================
TOTAL ASSETS $1,706,423 $1,316,751
================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 9,188 $ 6,142
Interest-bearing deposit accounts:
Checking (NOW) accounts 7,202 15,051
Savings accounts 17,351 27,359
Money market accounts 223,075 200,549
Certificate of deposit accounts 1,118,514 744,771
----------------------
Total deposit accounts 1,375,330 993,872
Borrowed Funds:
Federal Home Loan Bank advances - 36,000
Subordinated debentures 87,390 94,430
Subordinated debentures - capital securities 61,856 61,856
Accrued interest payable on all borrowed funds 6,250 10,154
Mortgage note payable 229 242
----------------------
Total borrowed funds 155,725 202,682
Accrued interest payable on deposits 3,232 1,718
Mortgage escrow funds payable 20,302 14,533
Official checks outstanding 11,689 12,061
Other liabilities 3,967 1,791
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,570,245 1,226,657
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 5, 9, 17 and 19)
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
7,438,058 and 5,886,433 shares issued and outstanding, respectively) 7,438 5,886
Class B common stock ($1.00 par value, 700,000 shares authorized,
and 385,000 shares issued and outstanding) 385 385
Additional paid-in-capital, common 65,309 38,961
Retained earnings 63,046 44,862
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 136,178 90,094
================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,706,423 $1,316,751
================================================================================================================
See accompanying notes to consolidated financial statements.
54
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
-----------------------------
($ in thousands, except per share data) 2005 2004 2003
- ------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 89,590 $ 61,928 $ 47,223
Securities 7,229 4,259 2,965
Other interest-earning assets 1,062 362 276
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME 97,881 66,549 50,464
- ------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 44,919 26,330 18,437
Subordinated debentures 8,014 8,801 8,316
Subordinated debentures - capital securities 4,359 3,495 1,793
Other borrowed funds 155 57 18
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 57,447 38,683 28,564
- ------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME 40,434 27,866 21,900
Provision for loan losses 4,075 4,526 1,969
- ------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 36,359 23,340 19,931
- ------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 334 252 187
Income from mortgage lending activities 1,082 1,221 824
Income from the early repayment of mortgage loans 5,062 3,546 2,317
Commissions and fees 115 119 38
Gain (loss) from early call of investment securities 1 2 (51)
All other - - 6
- ------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 6,594 5,140 3,321
- ------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 5,726 4,046 3,655
Occupancy and equipment, net 1,487 1,659 1,270
Data processing 605 428 533
Professional fees and services 773 411 364
Stationery, printing and supplies 211 180 152
Postage and delivery 129 111 101
FDIC and general insurance 324 264 225
Director and committee fees 527 397 229
Advertising and promotion 225 110 35
All other 696 645 695
- ------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 10,703 8,251 7,259
- ------------------------------------------------------------------------------------------------
Earnings before income taxes 32,250 20,229 15,993
Provision for income taxes 14,066 8,776 6,873
================================================================================================
NET EARNINGS $ 18,184 $ 11,453 $ 9,120
================================================================================================
BASIC EARNINGS PER SHARE $ 2.65 $ 1.89 $ 1.85
DILUTED EARNINGS PER SHARE $ 2.47 $ 1.71 $ 1.53
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
55
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
----------------------------------
($ in thousands) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of year $ 5,886 $ 5,603 $ 4,348
Issuance of 42,510 shares and 945,717 shares upon the exercise of warrants - 43 946
Issuance of 115,157 shares, 240,546 shares and 309,573 shares
upon the conversion of debentures 115 240 309
Issuance of 1,436,468 shares in public offering 1,437 - -
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 7,438 5,886 5,603
- -------------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK
Balance at beginning of year 385 385 355
Issuance of 30,000 shares to acquire Intervest Securities Corporation - - 30
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 385 385 385
- -------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of year 38,961 35,988 24,134
Compensation related to vesting of certain Class B stock warrants - 9 26
Compensation related to the modification of certain Class A stock warrants - - 418
Issuance of 30,000 shares of Class B stock to acquire
Intervest Securities Corporation - - 185
Issuance of 42,510 shares and 945,717 shares of Class A stock upon the
exercise of Class A stock warrants, inclusive of tax benefits - 383 8,520
Issuance of 115,157 shares, 240,546 shares and 309,573 shares of Class A stock
upon the conversion of debentures 1,474 2,581 2,705
Issuance of 1,436,468 shares in public offering 24,874 - -
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 65,309 38,961 35,988
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 44,862 33,409 24,289
Net earnings for the year 18,184 11,453 9,120
- -------------------------------------------------------------------------------------------------------------------
Balance at end of year 63,046 44,862 33,409
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AT END OF YEAR $ 136,178 $ 90,094 $ 75,385
- -------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF SHARES OUTSTANDING
Total Class A and Class B shares outstanding at beginning of year 6,271,433 5,988,377 4,703,087
Issuance of shares upon the exercise of warrants - 42,510 945,717
Issuance of shares upon the conversion of debentures 115,157 240,546 309,573
Issuance of shares in public offering 1,436,468 - -
Issuance of shares to acquire Intervest Securities Corporation - - 30,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL CLASS A AND CLASS B SHARES OUTSTANDING AT END OF YEAR 7,823,058 6,271,433 5,988,377
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
56
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
($ in thousands) 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 18,184 $ 11,453 $ 9,120
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 551 593 568
Provision for loan losses 4,075 4,526 1,969
Deferred income tax benefit (1,893) (2,135) (963)
Amortization of deferred debenture offering costs 1,173 1,249 1,084
Compensation expense related to common stock warrants - 9 444
Amortization of premiums (accretion) of discounts and deferred loan fees, net (7,903) (3,539) (1,610)
Net loss from sale of foreclosed real estate - - 51
Net (decrease) increase in accrued interest payable on debentures (3,210) (3,254) 1,648
Net (decrease) increase in official checks outstanding (372) 5,939 1,749
Net increase in loan fees receivable (2,733) (2,586) (1,916)
Net change in all other assets and liabilities 12,862 7,223 6,783
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,734 19,478 18,927
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease in interest-earning time deposits with banks - - 2,000
Maturities and calls of securities held to maturity 92,058 88,880 117,755
Purchases of securities held to maturity (95,436) (187,089) (127,221)
Net increase in loans receivable (354,301) (347,887) (182,674)
Sale of foreclosed real estate - - 150
Cash acquired through acquisition of Intervest Securities Corporation - - 218
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (149) (2,017) (1,967)
Purchases of premises and equipment, net (336) (1,477) (222)
Investment in unconsolidated subsidiaries - (928) (464)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (358,164) (450,518) (192,425)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 381,458 318,359 169,555
Net increase in mortgage escrow funds payable 5,769 3,993 4,646
Net (decrease) increase in FHLB advances (36,000) 36,000 -
Principal repayments of debentures and mortgage note payable (32,113) (20,013) (3,661)
Gross proceeds from issuance of debentures 26,000 52,428 31,000
Debentures issuance costs (1,878) (2,217) (1,694)
Gross proceeds from issuance of common stock 28,370 2,961 6,931
Common stock issuance costs (2,059) - -
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 369,547 391,511 206,777
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 32,117 (39,529) 33,279
Cash and cash equivalents at beginning of year 24,599 64,128 30,849
========================================================================================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 56,716 $ 24,599 $ 64,128
========================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $ 57,970 $ 40,050 $ 25,647
Cash paid during the year for income taxes 14,397 11,637 7,557
Loan to finance sale of foreclosed real estate - - 880
Conversion of debentures and accrued interest payable into Class A common stock 1,589 2,821 3,015
Issue Class B common stock to purchase Intervest Securities Corporation - - 215
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
57
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Intervest Bancshares Corporation is a registered financial holding company
referred to by itself as the "Holding Company." Its wholly owned
consolidated subsidiaries are: Intervest National Bank (the "Bank");
Intervest Mortgage Corporation; and Intervest Securities Corporation. All
the entities are referred to collectively as the "Company" on a
consolidated basis. The Holding Company's primary business is the ownership
and 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 offices of the
Holding Company, Intervest Mortgage Corporation, Intervest Securities
Corporation and the Bank's headquarters and full-service banking office are
located on the entire fourth floor of One Rockefeller Plaza in New York
City, New York, 10020-2002.
The Company's primary business segment is banking and real estate lending.
The Company's lending activities are comprised almost entirely of
origination for its loan portfolio 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.
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 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." 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 9 herein.
58
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Holding
Company and its subsidiaries - Intervest National Bank, Intervest Mortgage
Corporation and Intervest Securities Corporation. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior year amounts to conform
to the current year's presentation. The accounting and reporting policies
of the Company conform to United States generally accepted accounting
principles and to general practices within the banking industry.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent liabilities, as of the
date of the consolidated financial statements, and revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and the
estimated fair values of financial instruments.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash equivalents
include federal funds sold (generally sold for one-day periods) and
commercial paper and other short-term investments that have maturities of
three months or less from the time of purchase.
SECURITIES
Securities that the Company has the ability and intent to hold until
maturity are classified as securities held to maturity and are carried at
cost, adjusted for accretion of discounts and amortization of premiums,
which are recognized into interest income using the interest method over
the period to maturity. Securities that are held for indefinite periods of
time which management intends to use as part of its asset/liability
management strategy, or that may be sold in response to changes in interest
rates or other factors, are classified as available for sale and are
carried at fair value. Unrealized gains and losses on securities available
for sale, net of related income taxes, are reported as a separate component
of comprehensive income. Realized gains and losses from sales of securities
are determined using the specific identification method. The Company does
not acquire securities for the purpose of engaging in trading activities.
LOANS RECEIVABLE
Loans that the Company has the intent and ability to hold for the
foreseeable future or until maturity or satisfaction are carried at their
outstanding principal net of chargeoffs, the allowance for loan losses,
unamortized discounts and deferred loan fees or costs. Loan origination and
commitment fees, net of certain costs, are deferred and amortized to
interest income as an adjustment to the yield of the related loans over the
contractual life of the loans using the interest method. When a loan is
paid off or sold, or if a commitment expires unexercised, any unamortized
net deferred amount is credited or charged to earnings accordingly.
Loans are placed on nonaccrual status when principal or interest becomes 90
days or more past due unless the loan is well secured and in the process of
collection. Accrued interest receivable previously recognized is reversed
when a loan is placed on nonaccrual status. Amortization of net deferred
fee income is discontinued for loans placed on nonaccrual status. Interest
payments received on loans in nonaccrual status are recognized as income on
a cash basis unless future collections of principal are doubtful, in which
case the payments received are applied as a reduction of principal. Loans
remain on nonaccrual status until principal and interest payments are
current.
59
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is netted against loans receivable and is
increased by provisions charged to operations and decreased by chargeoffs
(net of recoveries). The adequacy of the allowance is evaluated monthly
with consideration given to: the nature and size of the loan portfolio;
overall portfolio quality; loan concentrations; specific problem loans and
estimates of fair value thereof; historical chargeoffs and recoveries;
adverse situations which may affect the borrowers' ability to repay; and
management's perception of the current and anticipated economic conditions
in the Company's lending areas. In addition, Statement of Financial
Accounting Standards (SFAS) No. 114 specifies the manner in which the
portion of the allowance for loan losses is computed related to certain
loans that are impaired. A loan is normally deemed impaired when, based
upon current information and events, it is probable the Company will be
unable to collect both principal and interest due according to the
contractual terms of the loan agreement. Impaired loans normally consist of
loans on nonaccrual status. Interest income on impaired loans is recognized
on a cash basis. Impairment for commercial real estate and multifamily
loans is measured based on: the present value of expected future cash
flows, discounted at the loan's effective interest rate; or the observable
market price of the loan; or the estimated fair value of the loan's
collateral, if payment of the principal and interest is dependent upon the
collateral. When the fair value of the property is less than the recorded
investment in the loan, this deficiency is recognized as a valuation
allowance within the overall allowance for loan losses and a charge through
the provision for loan losses. The Company charges off any portion of the
recorded investment in the loan that exceeds the fair value of the
collateral. The net carrying amount of an impaired loan does not at any
time exceed the recorded investment in the loan.
Lastly, the Company's regulators, as an integral part of their examination
process, periodically review the allowance for loan losses. Accordingly,
the Company may be required to take certain chargeoffs and/or recognize
additions to the allowance based on the regulators' judgment concerning
information available to them during their examination.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
over the estimated useful life of the asset. Leasehold improvements are
amortized using the straight-line method over the terms of the related
leases, or the useful life of the asset, whichever is shorter. Maintenance,
repairs and minor improvements are expensed as incurred, while major
improvements are capitalized.
DEFERRED DEBENTURE OFFERING COSTS
Costs relating to offerings of debentures are amortized over the terms of
the debentures. The costs consist primarily of underwriters' commissions.
Accumulated amortization amounted to $3.0 million at December 31, 2005 and
$4.4 million at December 31, 2004.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold. Upon foreclosure of the property, the related loan is
transferred from the loan portfolio to foreclosed real estate at the lower
of the loan's carrying value at the date of transfer, or estimated fair
value of the property less estimated selling costs. Such amount becomes the
new cost basis of the property. Adjustments made to the carrying value at
the time of transfer are charged to the allowance for loan losses. After
foreclosure, management periodically performs market valuations and the
real estate is carried at the lower of cost or estimated fair value less
estimated selling costs. Revenue and expenses from operations and changes
in the valuation allowance of the property are included in the consolidated
statements of earnings.
60
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
STOCK-BASED COMPENSATION
The Company used Accounting Principles Board (APB) No.25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for
compensation related to its stock warrants in 2005, 2004 and 2003. Under
APB No. 25, if the exercise price of the Company's stock warrants issued to
employees or directors equals the market price of the underlying stock on
the date of the grant or modification, no compensation expense is
recognized. SFAS No.123, "Accounting for Stock-Based Compensation," as
amended by SFAS No.148 "Accounting for Stock-Based Compensation Transition
and Disclosure," collectively "SFAS No.123," requires pro forma disclosures
of net earnings and earnings per share determined as if the Company
accounted for its stock warrants under the fair value method. Had
compensation expense been determined based on estimated fair value, the
Company's net earnings and earnings per share would have not have been
materially different than those reported. As discussed under the caption
"Recent Accounting and Regulatory Developments," on January 1, 2006, the
Company adopted SFAS No. 123-R "Share-Based Payment," which replaces the
existing SFAS 123 and supersedes APB 25.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded if it is more likely than not
that some portion or all of the deferred tax assets will not be realized
based on a review of available evidence.
EARNINGS PER SHARE (EPS)
Basic and diluted EPS are calculated in accordance with SFAS No. 128,
"Earnings per Share." 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).
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net earnings. However, certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
stockholders' equity section of the consolidated balance sheet, such items
along with net earnings, are components of comprehensive income.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit,
unused lines of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded
or related fees are incurred or received.
61
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS
SHARE-BASED COMPENSATION. In December 2004, the FASB issued SFAS No. 123
(Revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the
existing SFAS 123 and supersedes APB No. 25. SFAS 123-R requires companies
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
123-R is effective for interim and annual reporting periods beginning on
January 1, 2006. Accordingly, the Company's financial statements will be
prepared in accordance with this new standard beginning on January 1, 2006
if and when the Company issues any new stock warrants and/or options to
employees or directors in the future. SFAS 123-R does not impact any of the
Company's outstanding warrants at December 31, 2005, all of which are
vested and were issued prior to this new standard.
ACCOUNTING CHANGES AND ERROR CORRECTIONS. In May 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. 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.
CERTAIN LOANS AND DEBT SECURITIES ACQUIRED IN A TRANSFER. In December 2003,
the American Institute of Certified Public Accountants issued Statement of
Position 03-3, "Accounting for Certain Loans and Debt Securities Acquired
in a Transfer" (SOP 03-3). SOP 03-3 addresses accounting for differences
between contractual cash flows expected to be collected and an investor's
initial investment in loans or debt securities acquired in a transfer if
those differences are attributable, at least in part, to credit quality.
SOP 03-3 also prohibits "carrying over" or creation of valuation allowances
in the initial accounting of all loans acquired in a transfer that are
within the scope of SOP 03-3. The prohibition of the valuation allowance
carryover applies to the purchase of an individual loan, a pool of loans, a
group of loans, and loans acquired in a purchase business combination. SOP
03-3 was effective for loans acquired in fiscal years beginning after
December 15, 2004. The adoption of SOP 03-3 did not impact the Company's
financial condition or result of operations.
ACCOUNTING FOR LOAN COMMITMENTS. In March 2005, the SEC issued Staff
Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" (SAB 105). SAB 105 provides recognition guidance for entities
that issue loan commitments that are required to be accounted for as
derivative instruments. Currently, loan commitments that the Company enters
into would not be required to be accounted for as derivative instruments
under SAB 105.
62
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
2. SECURITIES
The carrying value (amortized cost) and estimated fair value of securities
held to maturity are as follows:
Gross Gross Estimated Wtd-Avg
Amortized Unrealized Unrealized Fair Wtd-Avg Remaining
($ in thousands) Cost Gains Losses Value Yield Maturity
--------------------------------------------------------------------------------------------
At December 31, 2005 $ 251,508 $ 14 $ 2,434 $ 249,088 3.26% 1.1 Years
At December 31, 2004 $ 248,888 $ 12 $ 1,689 $ 247,211 2.33% 1.4 Years
--------------------------------------------------------------------------------------------
All the securities at December 31, 2005 and 2004 were debt obligations of
U.S. government corporations or sponsored agencies (FHLB, FNMA, FHLMC, 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 December 31, 2005, the portfolio consisted of 159 securities, of which
150 had an unrealized loss. Substantially all of the losses were for a
continuous period of more than 12 months. Management believes that the
cause of the unrealized losses is directly related to changes in interest
rates. In general, as interest rates rise, the fair value of fixed rate
securities will decrease; as interest rates fall, their fair value will
increase.
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 December 31, 2005:
Due in one year or less $ 124,413 $ 123,345 2.71%
Due after one year through five years 127,095 125,743 3.79%
----------------------------------------------------------------------------------------------
$ 251,508 $ 249,088 3.26%
----------------------------------------------------------------------------------------------
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 and no sales of
securities during 2005, 2004 and 2003.
3. LOANS RECEIVABLE
Loans receivable is as follows:
At December 31, 2005 At December 31, 2004
-------------------- --------------------
($ in thousands) # of Loans Amount # of Loans Amount
-----------------------------------------------------------------------------------------
Commercial real estate loans 264 $ 735,650 244 $ 601,512
Residential multifamily loans 234 538,760 249 403,613
Land development and other land loans 31 105,251 11 19,198
Residential 1-4 family loans 3 100 4 984
Commercial business loans 22 1,089 23 1,215
Consumer loans 10 194 12 221
-----------------------------------------------------------------------------------------
Loans receivable 564 1,381,044 543 1,026,743
-----------------------------------------------------------------------------------------
Deferred loan fees (13,058) (11,347)
-----------------------------------------------------------------------------------------
Loans receivable, net of deferred fees 1,367,986 1,015,396
-----------------------------------------------------------------------------------------
Allowance for loan losses (15,181) (11,106)
-----------------------------------------------------------------------------------------
Loans receivable, net $1,352,805 $1,004,290
-----------------------------------------------------------------------------------------
63
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE, CONTINUED
At December 31, 2005, $0.7 million of loans were on a nonaccrual status,
compared to $4.6 million at December 31, 2004. These loans were considered
impaired under the criteria of SFAS No.114. but no valuation allowance was
maintained at any time since the Company believes that the estimated fair
value of the underlying properties exceeded the Company's recorded
investment. In April 2005, the property collateralizing a loan classified
as nonaccrual at December 31, 2004 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 December 31, 2005 and
2004, there were no other loans classified as nonaccrual or impaired.
At December 31, 2005, there were $2.6 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 loans classified as
such at December 31, 2004.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $0.1 million in 2005, $0.2 million in 2004
and $0.3 million in 2003. The average balance of nonaccrual (impaired)
loans for 2005, 2004 and 2003 was $3.8 million, $3.2 million and $4.6
million, respectively.
Credit risk represents the possibility of the Company not recovering
amounts due from its borrowers and is significantly related to local
economic conditions in the areas the properties are located. Economic
conditions affect the market value of the underlying collateral as well as
the levels of rent and occupancy of income-producing properties (such as
office buildings, shopping centers and rental and cooperative apartment
buildings).
The geographic distribution of the loan portfolio is as follows:
At December 31, 2005 At December 31, 2004
-------------------- --------------------
($ in thousands) Amount % of Total Amount % of Total
-----------------------------------------------------------------------------
New York $ 896,746 64.9% $ 729,301 71.0%
Florida 323,764 23.5 198,823 19.4
Connecticut and New Jersey 84,373 6.1 51,186 5.0
All other 76,161 5.5 47,433 4.6
-----------------------------------------------------------------------------
$1,381,044 100.0% $1,026,743 100.0%
-----------------------------------------------------------------------------
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
--------------------------------------------------------------------------
Allowance at beginning of year $ 11,106 $ 6,580 $ 4,611
Provision charged to operations 4,075 4,526 1,969
--------------------------------------------------------------------------
Allowance at end of year $ 15,181 $ 11,106 $ 6,580
--------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT, LEASE COMMITMENTS AND RENTAL EXPENSE
Premises and equipment is as follows:
At December 31,
---------------
($ in thousands) 2005 2004
--------------------------------------------------------------------
Land $ 1,516 $ 1,516
Buildings 5,002 4,979
Leasehold improvements 1,356 1,355
Furniture, fixtures and equipment 2,282 2,276
--------------------------------------------------------------------
Total cost 10,156 10,126
--------------------------------------------------------------------
Less accumulated deprecation and amortization (3,735) (3,490)
--------------------------------------------------------------------
Net book value $ 6,421 $ 6,636
--------------------------------------------------------------------
64
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT, LEASE COMMITMENTS AND RENTAL EXPENSE, CONTINUED
Depreciation and amortization of premises and equipment, reflected as a
component of noninterest expense in the consolidated statements of
earnings, was $0.6 million for 2005, 2004 and 2003.
The offices of the Holding Company, Intervest Mortgage Corporation,
Intervest Securities Corporation and the Bank's headquarters and
full-service banking office are located in leased premises on the entire
fourth floor of One Rockefeller Plaza in New York City. In addition, the
Bank leases its Belcher Road office in Clearwater, Florida. Both leases
contain operating escalation clauses related to taxes and operating costs
based upon various criteria and are accounted for as operating leases, and
they expire in March 2014 and June 2007, respectively. The Bank owns all of
its remaining offices in Florida and also leases a portion of the space in
its office buildings in Florida that is not used for banking operations to
other companies under leases that expire at various times through October
2009.
Future minimum annual lease payments (expense) and sublease income due
under non-cancelable leases as of December 31, 2005 are as follows:
Minimum Rentals
---------------
($ in thousands) Lease Expense Sublease Income
-----------------------------------------------------------
In 2006 $ 911 $ 426
In 2007 852 247
In 2008 856 45
In 2009 877 24
In 2010 878 -
Thereafter 2,962 -
-----------------------------------------------------------
$ 7,336 $ 742
-----------------------------------------------------------
Rent expense under operating leases aggregated $0.9 million in 2005, $1.0
million in 2004 and $0.7 million in 2003. Lease rental income aggregated
$0.6 million in 2005 and $0.5 million in 2004 and 2003.
6. DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
At December 31, 2005 At December 31, 2004
-------------------- --------------------
Wtd-Avg Wtd-Avg
($ in thousands) Amount Stated Rate Amount Stated Rate
---------------------------------------------------------------------------------
Within one year $ 381,968 3.77% $ 269,553 2.84%
Over one to two years 259,698 4.30 119,780 3.43
Over two to three years 126,546 4.13 134,409 4.48
Over three to four years 160,344 4.43 75,317 4.06
Over four years 189,958 4.69 145,712 4.48
---------------------------------------------------------------------------------
$ 1,118,514 4.18% $ 744,771 3.68%
---------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $371.8 million
and $215.9 million at December 31, 2005 and 2004, respectively. At December
31, 2005, certificate of deposit accounts of $100,000 or more by remaining
maturity were as follows: due within one year $120.4 million; over one to
two years $100.0 million; over two to three years $33.7 million; over three
to four years $53.1 million; and over four years $64.6 million.
Interest expense on deposits is as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
---------------------------------------------------------------------------
Interest checking accounts $ 166 $ 187 $ 182
Savings accounts 536 550 601
Money market accounts 5,947 3,583 2,763
Certificates of deposit accounts 38,270 22,010 14,891
---------------------------------------------------------------------------
$ 44,919 $ 26,330 $ 18,437
---------------------------------------------------------------------------
65
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures and mortgage note payable outstanding are
summarized as follows:
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
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
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 -
--------------------
82,750 88,850
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 2,140 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
4,640 5,580
--------------------
INTERVEST NATIONAL BANK:
Mortgage note payable (2) - interest at 7% fixed - due February 1, 2017 229 242
------------------------------------------------------------------------------------------------
$ 87,619 $ 94,672
------------------------------------------------------------------------------------------------
<FN>
(1) Prime represents prime rate of JPMorganChase Bank, which was 7.25% and 5.25% at December 31,
2005 and 2004, respectively. (2) The note cannot be prepaid except during the last year of its
term.
Scheduled contractual maturities as of December 31, 2005 are as follows:
($ in thousands) Principal Accrued Interest
-------------------------------------------------------
In 2006 $ 7,264 $ 2,828
In 2007 7,015 192
In 2008 16,156 2,263
In 2009 13,517 290
In 2010 13,019 242
Thereafter 30,648 281
-------------------------------------------------------
$ 87,619 $ 6,096
-------------------------------------------------------
66
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
Intervest Mortgage Corporation repaid and issued the following debentures
in 2005:
Series 11/10/98 matured on 1/01/05 and were repaid for $2.6 million of
principal and $1.8 million of accrued interest;
Series 05/10/96 matured on 4/01/05 and were repaid for $10.0 million
of principal and $2.2 million of accrued interest;
Series 08/01/01 matured on 4/01/05 and were repaid for $1.75 million
of principal and $0.1 million of accrued interest;
Series 10/15/96 due 10/01/05 were repaid early on 8/1/05 for $5.5
million of principal and $0.1 million of accrued interest;
Series 01/17/02 due 10/01/05 were repaid early on 8/1/05 for $1.25
million of principal and $0.1 million of accrued interest;
Series 04/30/97 due 10/01/05 were repaid early on 9/1/05 for $8.0
million of principal and $0.1 million of accrued interest;
Series 09/18/00 due 1/1/06 were repaid early on 12/1/05 for $1.25
million of principal and $0.6 million of accrued interest;
Series 08/05/02 due 1/1/06 were repaid early on 12/1/05 for $1.75
million of principal and $0.1 million of accrued interest;
Series 03/21/05 issued in April for $14.0 million of principal for net
proceeds, after offering costs, of $13.0 million; and
Series 08/12/05 issued in September for $12.0 million of principal for
net proceeds, after offering costs, of $11.1 million.
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; $1.1 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: $16.00 in 2006; $18.00 in 2007 and
$20.00 from January 1, 2008 through April 1, 2008. The Holding Company has
the right to establish conversion prices that are less than those set forth
above for such periods as it may determine. In 2005, $1.6 million of
debentures ($0.9 million of principal and $0.7 million of accrued interest)
were converted into shares of Class A common stock at $14.00 per share.
At December 31, 2005, interest accrued and compounded quarterly on $1.6
million of the Holding Company's convertible debentures at the rate of 8%
per annum, while $0.5 million of the convertible debentures pay interest
quarterly at the rate of 8% per annum. All accrued interest of $1.3 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.
67
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
8. 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 December 31, 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 December 31, 2005, the Bank had available collateral consisting of
investment securities to support total borrowings of $243 million from the
FHLB and FRB. At December 31, 2005, there were no outstanding borrowings
from any of the aforementioned sources.
The following is a summary of certain information regarding short-term
borrowings in the aggregate:
($ in thousands) 2005 2004 2003
-------------------------------------------------------------------------------
Balance at year end $ - $36,000 $ -
Maximum amount outstanding at any month end $17,000 $36,000 $ -
Average outstanding balance for the year $ 4,871 $ 1,914 $ -
Weighted-average interest rate paid for the year 2.85% 2.08% -%
Weighted-average interest rate at year end -% 2.56% -%
-------------------------------------------------------------------------------
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as Trust Preferred Securities) are
summarized as follows:
At December 31, 2005 At December 31, 2004
-------------------- --------------------
Accrued Accrued
($ in thousands) Principal Interest Principal Interest
- -----------------------------------------------------------------------------------------------------------
Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 59 $ 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 $ 154 $ 61,856 $ 165
- -----------------------------------------------------------------------------------------------------------
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 for
inclusion in 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.
68
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
Interest payments may be deferred at any time and from time to time during
the term of the Junior Subordinated Debentures at the election of the
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.
10. STOCKHOLDERS' EQUITY
The Holding Company's Board of Directors is authorized to issue up to
300,000 shares of preferred stock of the Holding Company without
stockholder approval. The powers, preferences and rights, and the
qualifications, limitations, and restrictions thereof on any series of
preferred stock issued is determined by the Board of Directors. There is no
preferred stock issued and outstanding. Class A and B common stock have
equal voting rights as to all matters, except that, so long as at least
50,000 shares of Class B common stock remain issued and outstanding, the
holders of the outstanding shares of Class B common stock are entitled to
vote for the election of two-thirds of the Board of Directors (rounded up
to the nearest whole number), and the holders of the outstanding shares of
Class A common stock are entitled to vote for the remaining Directors of
the Holding Company. The shares of Class B common stock are convertible, on
a share-for-share basis, into Class A common stock at any time.
11. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required under Federal Reserve Board regulations to maintain
reserves, generally consisting of cash or noninterest-earning accounts,
against its transaction accounts. At December 31, 2005 and 2004, balances
maintained as reserves were approximately $1.1 million and $1.2 million,
respectively.
As a member of the Federal Reserve Banking and Federal Home Loan Banking
systems, the Bank must maintain an investment in the capital stock of the
FRB and FHLB. At December 31, 2005 and 2004, the total investment, which
earns a dividend, aggregated $5.2 million and $5.1 million. At December 31,
2005 and 2004, U.S. government agency securities with a carrying value of
$72.1 million and $82.2 million, respectively, were pledged against various
lines of credit.
The payment of dividends by the Holding Company to its shareholders and the
payment of dividends by the Holding Company's subsidiaries to the Holding
Company itself are subject to various regulatory restrictions, as well as
restrictions that may arise from outstanding indentures. These restrictions
take into consideration various factors such as whether there are
sufficient net earnings, as defined, liquidity, asset quality, capital
adequacy and economic conditions. The holders of Class A common stock and
Class B common stock share ratably in any dividend. The Holding Company has
not paid any dividends on its capital stock and currently is not
contemplating the payment of a dividend.
69
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
12. PROFIT SHARING PLANS
The Company sponsors tax-qualified, profit sharing plans in accordance with
the provisions of Section 401(k) of the Internal Revenue Code, whereby
eligible employees meeting certain length-of-service requirements may make
tax-deferred contributions up to certain limits. The Company makes
discretionary matching contributions up to 3% of employee compensation,
which vest to the employees over a period of time. Total cash contributions
to the plans included in the consolidated statements of earnings aggregated
$72,000, $68,000 and $55,000 in 2005, 2004 and 2003, respectively.
13. RELATED PARTY TRANSACTIONS
At December 31, 2005 and 2004, consolidated deposits included deposit
accounts from affiliated companies, directors, executive officers and
members of their immediate families and related business interests of
approximately $24 million and $18 million, respectively. There are no loans
to any directors or executive officers of the Holding Company or its
subsidiaries.
The Company paid fees of approximately $0.2 million in 2005, $0.2 million
in 2004 and $0.3 million in 2003 for legal services rendered by a law firm,
a principal of which is a director of the Company. Intervest Mortgage
Corporation paid commissions and fees in connection with the placement of
debentures of approximately $0.9 million in 2005, $0.7 million in 2004 and
$0.5 million in 2003 to a broker/dealer, a principal of which is a director
of the Company. The Bank paid commissions to the same broker/dealer of
approximately of $22,000 in 2005, $69,000 in 2004 and $53,000 in 2003 in
connection with the purchase of investment securities.
14. COMMON STOCK WARRANTS
The Holding Company had 696,465 common stock warrants outstanding at
December 31, 2005 and 2004, 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 vested and
currently exercisable.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class A Common Stock Warrants: $6.67 $10.01 Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 501,465 1,053,545 1,555,010 $ 8.93
- -------------------------------------------------------------------------------------------------------------
Exercised in 2003 - (945,717) (945,717) $ 10.01
Expired in 2003 - (65,318) (65,318) $ 10.01
- -------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 (1) 501,465 42,510 543,975 $ 6.93
- -------------------------------------------------------------------------------------------------------------
Exercised in 2004 - (42,510) (42,510) $ 10.01
- -------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2004 and 2005 501,465 - 501,465 $ 6.67
- -------------------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2005 1.1 - 1.1
- ------------------------------------------------------------------------------------------------------------------------------
(1) The holders of the 42,510 warrants outstanding at December 31, 2003 presented these warrants to the Company for
exercise prior to the expiration date of December 31, 2003. The resulting shares were issued in January 2004.
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
CLASS B COMMON STOCK WARRANTS: $6.67 $10.00 Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003, 2004 and 2005 145,000 50,000 195,000 $ 7.52
- ------------------------------------------------------------------------------------------------------------
Remaining contractual life in years at December 31, 2005 2.1 2.1 2.1
- ------------------------------------------------------------------------------------------------------------------------------
For the reporting periods of this report, the Company elected 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.
70
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
14. COMMON STOCK WARRANTS, CONTINUED
For warrants granted to employees whose exercise price was reduced to
$10.01 effective January 1, 2002 and whose expiration date was extended in
2002, compensation expense was recorded under variable rate accounting as
prescribed by APB No. 25 and related interpretations. For these warrants,
which originally totaled 138,500, compensation expense was recorded in
salaries and employee benefits expense with a corresponding credit to paid
in capital in the consolidated financial statements.
Compensation expense recorded in connection with common stock warrants is
summarized as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
---------------------------------------------------------------------------------------------------
Compensation expense recorded in connection with vesting
of Class B common stock warrants during the period $ - $ 9 $ 26
Compensation expense recorded in connection with
Class A common stock warrants whose terms were modified - - 418
---------------------------------------------------------------------------------------------------
$ - $ 9 $ 444
---------------------------------------------------------------------------------------------------
On January 1, 2006, the Company adopted SFAS No. 123-R, "Share-Based
Payment" replaces SFAS 123 and supersedes APB No. 25. SFAS 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.
Accordingly, the new standard will apply to new stock warrants and/or
options issued to employees or directors in the future. SFAS 123-R does not
impact any of the Company's outstanding warrants at December 31, 2005, all
of which are vested and were issued prior to this new standard.
15. INCOME TAXES
The Holding Company and its subsidiaries file a consolidated federal income
tax return and combined state and city income tax returns in New York. The
Holding Company also files a franchise tax return in Delaware and the Bank
files a state income tax return in Florida. All returns are filed on a
calendar year basis.
At December 31, 2005 and 2004, the Company had a net deferred tax asset
amounting to $7.0 million and $5.1 million, respectively. The asset relates
to the unrealized benefit for net temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases that will result in future tax deductions. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized based on available evidence. Management
concluded that a valuation allowance for deferred tax assets was not
necessary at any time during the reporting periods.
Allocation of federal, state and local income taxes between current and
deferred portions is as follows:
($ in thousands) Current Deferred Total
-------------------------------------------------------------
Year Ended December 31, 2005:
-----------------------------
Federal $ 11,122 $ (1,547) $ 9,575
State and Local 4,837 (346) 4,491
-------------------------------------------------------------
$ 15,959 $ (1,893) $14,066
-------------------------------------------------------------
Year Ended December 31, 2004:
-----------------------------
Federal $ 7,707 $ (1,742) $ 5,965
State and Local 3,204 (393) 2,811
-------------------------------------------------------------
$ 10,911 $ (2,135) $ 8,776
-------------------------------------------------------------
Year Ended December 31, 2003:
-----------------------------
Federal $ 5,576 $ (782) $ 4,794
State and Local 2,260 (181) 2,079
-------------------------------------------------------------
$ 7,836 $ (963) $ 6,873
-------------------------------------------------------------
71
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
15. INCOME TAXES, CONTINUED
The components of the deferred tax benefit are as follows:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
----------------------------------------------------------------------------
Allowance for loan losses $ (1,939) $ (2,073) $ (896)
Organization and startup costs - 11 29
Deferred compensation (175) (4) 45
Depreciation 165 (88) (65)
Deferred income 56 19 (75)
All other - - (1)
----------------------------------------------------------------------------
$ (1,893) $ (2,135) $ (963)
----------------------------------------------------------------------------
The tax effects of the temporary differences that give rise to the deferred
tax asset are as follows:
At December 31,
---------------
($ in thousands) 2005 2004
------------------------------------------------
Allowance for loan losses $ 6,480 $ 4,541
Deferred compensation 252 77
Depreciation 102 267
Deferred income 144 200
All other 10 10
------------------------------------------------
Total deferred tax asset $ 6,988 $ 5,095
------------------------------------------------
The reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate (including state and local taxes) is as
follows:
For the Year Ended December 31,
-------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------
Tax provision at statutory rate 35.0% 35.0% 35.0%
Increase in taxes resulting from:
State and local income taxes, net of federal benefit 8.6 8.4 8.2
other - - (0.2)
------------------------------------------------------------------------------------------------
43.6% 43.4% 43.0%
------------------------------------------------------------------------------------------------
16. EARNINGS PER SHARE
The following table reflects the reconciliation of the basic EPS
computation to the diluted EPS computation:
For the Year Ended December 31,
-------------------------------
($ in thousands, except share and per share amounts) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net earnings applicable to common stockholders $ 18,184 $ 11,453 $ 9,120
Weighted-average number of common shares outstanding 6,861,887 6,068,755 4,938,995
- -------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 2.65 $ 1.89 $ 1.85
- -------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net earnings applicable to common stockholders $ 18,184 $ 11,453 $ 9,120
Adjustment to net earnings from assumed conversion of debentures 215 254 452
----------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 18,399 $ 11,707 $ 9,572
----------------------------------------
Weighted-Average number of common shares outstanding:
Common shares outstanding 6,861,887 6,068,755 4,938,995
Potential dilutive shares resulting from exercise of warrants (1) 266,668 255,171 356,339
Potential dilutive shares resulting from conversion of debentures (1) 321,103 504,250 962,386
----------------------------------------
Total average number of common shares outstanding used for dilution 7,449,658 6,828,176 6,257,720
- -------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 2.47 $ 1.71 $ 1.53
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) All warrants and convertible debentures outstanding were considered in the computation of diluted EPS because
they were dilutive.
72
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
17. CONTINGENCIES
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Based on review and consultation with legal counsel,
management does not believe that there is any pending or threatened
proceeding against the Company which, if determined adversely, would have a
material effect on the business, results of operations, financial position
or liquidity of the Company.
18. REGULATORY CAPITAL
The Holding Company is subject to regulation, examination and supervision
by the FRB. The Bank is also subject to regulation, examination and
supervision by the Federal Deposit Insurance Corporation (FDIC) and the
Office of the Comptroller of the Currency of the United States of America
(OCC). Intervest Securities Corporation is subject to regulation,
examination and supervision by the U.S. Securities and Exchange Commission
(SEC) and the National Association of Securities Dealers (NASD).
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet them can initiate certain mandatory and possibly
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. These capital amounts are also subject to
qualitative judgement by the regulators about components, risk weighting
and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies. Quantitative measures established by the regulations to ensure
capital adequacy require the Company and the Bank to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to average assets, as defined by the regulations.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies (BHC),
but with stricter quantitative limits and clearer qualitative standards.
The new rule provides a transition period for BHCs to meet the new,
stricter limitations within regulatory capital by allowing the limits on
restricted core capital elements to become fully effective as of March 31,
2009. Until March 31, 2009, BHCs generally must comply with the current
Tier 1 capital limits.
Management believes, as of December 31, 2005 and 2004, that the Company and
the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2005, the most recent notification from the Bank's
regulators categorized the Bank as a well-capitalized institution under the
regulatory framework for prompt corrective action, which requires minimum
Tier 1 leverage and Tier 1 and total risk-based capital ratios of 5%, 6%
and 10%, respectively. Management is not aware of any current conditions or
events outstanding that would change the designation from well capitalized.
Intervest Securities Corporation is subject to the SEC's Uniform Net
Capital Rule, which requires the maintenance of minimum net capital of
$5,000. At December 31, 2005 and 2004, Intervest Securities Corporation's
net capital was $0.5 million.
73
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
18. REGULATORY CAPITAL, CONTINUED
The table that follows presents information regarding the Company's and the
Bank's capital adequacy.
Minimum to Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Action Provisions
------ ------------ -----------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------------------
Consolidated as of December 31, 2005:
-------------------------------------
Total capital to risk-weighted assets $211,359 14.42% $117,282 8.00% NA NA
Tier 1 capital to risk-weighted assets $181,571 12.39% $ 58,641 4.00% NA NA
Tier 1 capital to average assets $181,571 10.85% $ 66,953 4.00% NA NA
Consolidated as of December 31, 2004:
-------------------------------------
Total capital to risk-weighted assets $156,105 14.23% $ 87,737 8.00% NA NA
Tier 1 capital to risk-weighted assets $115,031 10.49% $ 43,868 4.00% NA NA
Tier 1 capital to average assets $115,031 9.03% $ 50,951 4.00% NA NA
Intervest National Bank at December 31, 2005:
---------------------------------------------
Total capital to risk-weighted assets $171,688 12.60% $109,018 8.00% $136,273 10.00%
Tier 1 capital to risk-weighted assets $156,842 11.51% $ 54,509 4.00% $ 81,764 6.00%
Tier 1 capital to average assets $156,842 10.04% $ 62,511 4.00% $ 78,139 5.00%
Intervest National Bank at December 31, 2004:
---------------------------------------------
Total capital to risk-weighted assets $117,413 12.08% $ 77,746 8.00% $ 97,182 10.00%
Tier 1 capital to risk-weighted assets $106,724 10.98% $ 38,873 4.00% $ 58,309 6.00%
Tier 1 capital to average assets $106,724 9.36% $ 45,625 4.00% $ 57,031 5.00%
----------------------------------------------------------------------------------------------------------
19. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These instruments are in the form of commitments to extend
credit, unused lines of credit and standby letters of credit, and may
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the 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 the Company's off-balance sheet financial
instruments are as follows:
At December 31,
---------------
($ in thousands) 2005 2004
-----------------------------------------------------
Unfunded loan commitments $ 101,597 $ 159,697
Available lines of credit 737 789
Standby letters of credit 100 750
-----------------------------------------------------
$ 102,434 $ 161,236
-----------------------------------------------------
74
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments are as follows:
At December 31, 2005 At December 31, 2004
-------------------- --------------------
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
---------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 56,716 $ 56,716 $ 24,599 $ 24,599
Securities held to maturity, net 251,508 249,088 248,888 247,211
FRB and FHLB stock 5,241 5,241 5,092 5,092
Loans receivable, net 1,352,805 1,355,504 1,004,290 1,011,559
Accrued interest receivable 7,706 7,706 6,699 6,699
Financial Liabilities:
Deposit liabilities 1,375,330 1,366,539 993,872 997,939
Borrowed funds plus accrued interest payable 155,725 156,615 202,682 204,578
Accrued interest payable on deposits 3,232 3,232 1,718 1,718
Off-Balance Sheet Instruments:
Commitments to lend 794 794 920 920
---------------------------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time based on
available information. Where available, quoted market prices are used.
However, a significant portion of the Company's financial instruments, such
as mortgage loans, do not have an active marketplace in which they can be
readily sold or purchased to determine fair value. Consequently, fair value
estimates for such instruments are based on assumptions made by management
that include the instrument's credit risk characteristics and future
estimated cash flows and prevailing interest rates. As a result, these fair
value estimates are subjective in nature, involve uncertainties and matters
of significant judgment and therefore, cannot be determined with precision.
Accordingly, changes in any of management's assumptions could cause the
fair value estimates to deviate substantially. The fair value estimates
also do not reflect any additional premium or discount that could result
from offering for sale, at one time, the Company's entire holdings of a
particular financial instrument, nor estimated transaction costs.
Further, the tax ramifications related to the realization of unrealized
gains and losses can have a significant effect on and have not been
considered in the fair value estimates. Finally, fair value estimates do
not attempt to estimate the value of anticipated future business, the
Company's customer relationships, branch network, and the value of assets
and liabilities that are not considered financial instruments, such as core
deposit intangibles and premises and equipment.
The following methods and assumptions were used to estimate the fair value
of financial instruments:
SECURITIES. The estimated fair value of securities held to maturity is
based on quoted market prices. The estimated fair value of the FRB and FHLB
stock approximates carrying value since the securities do not present
credit concerns and are redeemable at cost.
LOANS RECEIVABLE. The estimated fair value of loans is based on a
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
Management can make no assurance that its perception and quantification of
credit risk would be viewed in the same manner as that of a potential
investor. Therefore, changes in any of management's assumptions could cause
the fair value estimates of loans to deviate substantially.
DEPOSITS. The estimated fair value of deposits with no stated maturity,
such as savings, money market, checking and noninterest-bearing demand
deposit accounts approximates carrying value. The estimated fair value of
certificates of deposit are based on the discounted value of their
contractual cash flows. The discount rate used in the present value
computation was estimated by comparison to current interest rates offered
by the Bank for certificates of deposit with similar remaining maturities.
75
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
BORROWED FUNDS AND ACCRUED INTEREST PAYABLE. The estimated fair value of
borrowed funds and related accrued interest payable is based on a
discounted cash flow analysis. The discount rate used in the present value
computation was estimated by comparison to what management believes to be
the Company's incremental borrowing rate for similar arrangements.
ALL OTHER FINANCIAL ASSETS AND LIABILITIES. The estimated fair value of
cash and cash equivalents, accrued interest receivable and accrued interest
payable on deposits approximates their carrying values since these
instruments are payable on demand or have short-term maturities.
OFF-BALANCE SHEET INSTRUMENTS. The carrying amounts of commitments to lend
approximated estimated fair value. The fair value of commitments to lend is
based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counter party's
credit standing.
21. BUSINESS SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." An operating segment is
defined therein as a component of an enterprise that engages in business
activities from which it may earn revenues and incur expenses whose
separate financial information is available and is evaluated regularly by
the Company's chief operating decision makers to perform resource
allocations and performance assessments.
The Company's primary business is banking and real estate lending as more
fully described in note 1 herein. The Company's day-to-day operating
decisions are normally made by the members of its Executive Committee of
the Board of Directors, which is comprised of the Chairman, Vice Chairman
and Vice President of the Company. The Executive Committee generally uses
revenue and earnings performance of each segment to determine operating,
strategic and resource allocation decisions.
The accounting policies of the segments identified below are the same as
those described in the summary of significant accounting policies. The
revenues and net earnings of the segments are not necessarily indicative of
the amounts which would be achieved if each of the segments were a separate
company.
The following table presents certain information regarding the Company's
operations by business segment:
Revenues, Net of Interest Expense Net Earnings (Loss) Total Assets
--------------------------------- ------------------- ------------
($ in thousands) 2005 2004 2003 2005 2004 2003 2005 2004
---------------------------------------------------------------------------------------------------------------------------
Intervest National Bank (1) $ 42,834 $ 30,016 $ 22,604 $ 12,999 $ 7,436 $ 6,972 $1,598,393 $1,183,509
Intervest Mortgage Corp. 8,835 6,866 4,928 3,089 2,354 1,759 115,809 122,451
Intervest Securities Corp. 128 125 41 24 22 (6) 511 484
Holding Company (1) 804 554 142 2,072 1,641 395 204,387 159,522
Intersegment (2) (5,573) (4,555) (2,494) - - - (212,677) (149,215)
---------------------------------------------------------------------------------------------------------------------------
Consolidated $ 47,028 $ 33,006 $ 25,221 $ 18,184 $ 11,453 $ 9,120 $1,706,423 $1,316,751
---------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Revenues, net of interest expense and net earnings amounts are shown after intercompany dividends of $4.4 million in
2005, $3.4 million in 2004 and $1.7 million in 2003 that were paid by the Bank to the Holding Company for debt service on
trust preferred securities, the proceeds of which are invested in the capital of the Bank.
(2) Intersegment revenues, net of interest expense, arise from intercompany management and loan origination service
agreements. All significant intercompany balances and transactions are eliminated in consolidation. The Bank has a
servicing agreement with Intervest Mortgage Corporation to provide the Bank with mortgage loan origination services. The
services include: the identification of potential properties and borrowers; the inspection of properties constituting
collateral for such loans; the negotiation of the terms and conditions of such loans in accordance with the Bank's
underwriting standards; preparing commitment letters; and coordinating the loan closing process. The services are performed
by Intervest Mortgage Corporation's personnel and the expenses associated with the services are borne by Intervest Mortgage
Corporation. The Bank paid $5.1 million, $4.3 million and $2.3 million in 2005, 2004 and 2003, respectively, to Intervest
Mortgage Corporation in connection with this servicing agreement. The Holding Company receives management fees from the
Bank and Intervest Mortgage Corporation as a result of providing services to these subsidiaries related to corporate
finance and planning and intercompany administration, and to act as a liaison for the Company in various corporate matters.
Management fees amounted to $0.5 million, $0.4 million and $0.2 million in 2005, 2004 and 2003, respectively.
76
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
22. HOLDING COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
At December 31,
---------------
($ in thousands) 2005 2004
---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 76 $ 74
Short-term investments 4,166 4,788
--------------------
Total cash and cash equivalents 4,242 4,862
Loans receivable, net (net of allowance for loan losses of $85 and $85, respectively) 11,379 13,993
Investment in consolidated subsidiaries 183,963 135,351
Investment in unconsolidated subsidiaries - Intervest Statutory Trusts I, II, III and IV 1,856 1,856
Deferred debenture offering costs, net of amortization 1,526 1,658
Premises and equipment, net 1,010 1,132
All other assets 411 670
---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 204,387 $ 159,522
---------------------------------------------------------------------------------------------------------------
LIABILITIES
Debentures payable $ 4,640 $ 5,580
Debentures payable - capital securities 61,856 61,856
Accrued interest payable on all debentures 1,551 1,914
All other liabilities 162 78
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 68,209 69,428
---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common equity 136,178 90,094
---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 136,178 90,094
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 204,387 $ 159,522
---------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF EARNINGS
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------
Interest income $ 931 $ 1,087 $ 1,125
Dividend income from subsidiary (1) 4,356 3,429 1,695
Interest expense 5,003 4,351 3,024
-------------------------------------------
Net interest and dividend income (expense) 284 165 (204)
Provision for loan losses - 7 32
Noninterest income 520 389 346
Noninterest expenses 692 440 748
-------------------------------------------
Income (loss) before income taxes 112 107 (638)
Credit for income taxes (2) (1,960) (1,534) (1,033)
-------------------------------------------
Net earnings before earnings of subsidiaries 2,072 1,641 395
Equity in undistributed earnings of Intervest National Bank 12,999 7,436 6,972
Equity in undistributed earnings of Intervest Mortgage Corporation 3,089 2,354 1,759
Equity in undistributed earnings (loss) of Intervest Securities Corporation 24 22 (6)
-------------------------------------------------------------------------------------------------------------------------
NET CONSOLIDATED EARNINGS $ 18,184 $ 11,453 $ 9,120
-------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represent dividends paid to the Holding Company from the Bank to provide funds for the debt service on the
debentures payable - capital securities. This debt service is included in the Holding Company's interest expense.
The proceeds from the capital securities are invested in the capital of the Bank.
(2) Dividends from subsidiaries are eliminated in consolidation and are not included in the Holding Company's pre-tax
income for purposes of computing income taxes.
77
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
22. HOLDING COMPANY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-------------------------------
($ in thousands) 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 18,184 $ 11,453 $ 9,120
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Equity in earnings of subsidiaries (20,468) (13,241) (10,420)
Cash dividends received from subsidiary 4,356 3,429 1,695
Provision for loan losses - 7 32
Depreciation and amortization 122 86 1
Amortization of deferred debenture costs 108 115 131
Amortization of deferred loan fees, net (21) (35) (50)
Deferred income tax expense (benefit) 182 (3) 38
Compensation expense from awards/modifications of stock warrants - 9 444
Increase in accrued interest payable on debentures 310 576 347
Change in all other assets and liabilities, net 185 (97) 93
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,958 2,299 1,431
-------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in subsidiaries, net (32,500) (33,928) (20,715)
Cash acquired through acquisition of Intervest Securities Corporation - - 218
Purchase of equipment and leasehold improvements - (1,206) (11)
Loan principal repayments and (originations), net 2,619 1,519 (6,316)
-------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (29,881) (33,615) (26,824)
-------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in mortgage escrow funds payable (8) (16) (75)
Gross proceeds from issuance of debentures - 30,928 15,464
Debenture offering costs - (663) (446)
Principal repayments of debentures - - (1,000)
Proceeds from issuance of common stock upon the exercise
of stock warrants - 2,961 6,931
Proceeds from issuance of common stock in public offering 28,370 - -
Common stock issuance costs (2,059) - -
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,303 33,210 20,874
-------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (620) 1,894 (4,519)
Cash and cash equivalents at beginning of year 4,862 2,968 7,487
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,242 $ 4,862 $ 2,968
-------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the year for:
Interest $ 4,585 $ 3,658 $ 2,545
Income taxes (2,245) (1,621) (1,136)
Noncash transactions:
Conversion of debentures into Class A common stock:
Principal converted 940 1,760 2,090
Accrued interest converted 673 1,123 1,009
Unamortized debenture offering costs converted (24) (62) (84)
Class B stock issued to acquire Intervest Securities Corporation - - 215
-------------------------------------------------------------------------------------------------------------------
78
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following information is as of or for the period ended:
2005
----
First Second Third Fourth
($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 20,568 $ 22,696 $ 25,761 $ 28,856
Interest expense 12,283 13,500 15,106 16,558
--------------------------------------------------
Net interest and dividend income 8,285 9,196 10,655 12,298
Provision for loan losses 1,033 452 1,803 787
--------------------------------------------------
Net interest and dividend income after provision for loan losses 7,252 8,744 8,852 11,511
Noninterest income 878 2,009 1,813 1,894
Noninterest expenses 2,374 2,749 2,566 3,014
--------------------------------------------------
Earnings before income taxes 5,756 8,004 8,099 10,391
Provision for income taxes 2,508 3,481 3,533 4,544
---------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 3,248 $ 4,523 $ 4,566 $ 5,847
---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ .52 $ .72 $ .66 $ .75
DILUTED EARNINGS PER SHARE: $ .48 $ .67 $ .61 $ .71
---------------------------------------------------------------------------------------------------------------------
Return on average assets 0.94% 1.26% 1.17% 1.40%
Return on average equity 14.25% 19.01% 16.32% 17.81%
Total assets $1,427,439 $1,511,604 $1,630,845 $1,706,423
Total cash and investment securities $ 309,193 $ 312,810 $ 286,865 $ 313,465
Total loans, net of unearned fees $1,095,161 $1,174,107 $1,319,155 $1,367,986
Total deposits $1,123,657 $1,217,506 $1,302,309 $1,375,330
Total borrowed funds and related interest payable $ 177,995 $ 163,021 $ 160,491 $ 155,725
Total stockholders' equity $ 93,376 $ 97,975 $ 129,207 $ 136,178
---------------------------------------------------------------------------------------------------------------------
2004
----
First Second Third Fourth
($in thousands, except per share amounts) Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 14,593 $ 15,391 $ 17,655 $ 18,910
Interest expense 8,215 8,866 10,348 11,254
--------------------------------------------------
Net interest and dividend income 6,378 6,525 7,307 7,656
Provision for loan losses 1,077 1,284 1,067 1,098
--------------------------------------------------
Net interest and dividend income after provision for loan losses 5,301 5,241 6,240 6,558
Noninterest income 1,456 1,225 1,477 982
Noninterest expenses 1,918 2,045 2,141 2,147
--------------------------------------------------
Earnings before income taxes 4,839 4,421 5,576 5,393
Provision for income taxes 2,104 1,916 2,424 2,332
---------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 2,735 $ 2,505 $ 3,152 $ 3,061
---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE: $ .45 $ .42 $ .52 $ .50
DILUTED EARNINGS PER SHARE: $ .41 $ .37 $ .47 $ .46
---------------------------------------------------------------------------------------------------------------------
Return on average assets 1.15% 0.95% 1.05% 0.96%
Return on average equity 14.32% 12.58% 15.32% 14.30%
Total assets $ 993,010 $1,119,266 $1,269,256 $1,316,751
Total cash and investment securities $ 210,747 $ 220,653 $ 307,120 $ 278,579
Total loans, net of unearned fees $ 763,108 $ 877,296 $ 939,001 $1,015,396
Total deposits $ 737,150 $ 852,852 $ 976,392 $ 993,872
Total borrowed funds and related interest payable $ 155,034 $ 155,640 $ 180,368 $ 202,682
Total stockholders' equity $ 78,751 $ 81,259 $ 84,410 $ 90,094
---------------------------------------------------------------------------------------------------------------------
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In 2005, the Company's subsidiary, Invervest Mortgage Corporation, replaced its
independent accountants with the Company's independent accountants. There were
no disagreements with the prior accountants. The information required by this
item is contained in the Company's definitive proxy statement for its 2006
Annual Meeting (the "Proxy Statement") under the section entitled "Independent
Public Accountants" and is incorporated herein by reference.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal
Executive and Financial Officers, the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, the Principal Executive and Financial Officers
have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the
Company files or 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 December 31, 2005.
ITEM 9B. OTHER INFORMATION
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS. The information required by this item is contained under the
section entitled "Proposal One: Election of Directors" of the Proxy Statement
and is incorporated herein by reference.
EXECUTIVE OFFICERS. The information required by this item is set forth at
the end of Part I of this report under the caption "Executive Officers and Other
Key Employees."
COMPLIANCE WITH SECTION 16(A). The information required by this item is
contained under the section entitled "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement is incorporated herein
by reference.
AUDIT COMMITTEE FINANCIAL EXPERT. The information required by this item
regarding the audit committee of the Company's Board of Directors, including
information regarding audit committee financial experts serving on the audit
committee is contained in the section of the Proxy Statement entitled "Corporate
Governance Principles and Board Matters" and is incorporated herein by
reference.
CODE OF BUSINESS CONDUCT AND ETHICS. The Company has a written code of
business conduct and ethics that applies to its directors, officers and
employees, and also has a written code of ethics for its principal executive and
financial officers. The Company's Audit Committee has procedures for the
submission of complaints or concerns regarding financial statement disclosures
and other matters. A copy of these documents are attached as exhibits to the
Company's Report on Form 10-K for the year ended December 31, 2004, wherein such
documents are identified as Exhibit 14.1, 14.2 and 14.3. A copy of these
documents will be furnished upon request and without charge to beneficial
holders of the Class A common stock of the Company. Written requests should be
directed to: Intervest Bancshares Corporation, Attention: Secretary, One
Rockefeller Plaza, Suite 400, New York, New York 10020.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the section entitled
"Executive Compensation" of the Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER TRANSACTIONS
The information required by this item is contained in the sections entitled
"Security Ownership of Certain Beneficial Owners and Management" and "Equity
Compensation Plan Information" of the Proxy Statement and are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section entitled
"Certain Relationships and Related Transactions" of the Proxy Statement and is
incorporated herein by reference.
80
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is contained in the section entitled
"Independent Public Accountants" of the Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS: See Item 8 "Financial Statements and
Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES: See Item 8 "Financial Statements and
Supplementary Data"
(3) EXHIBITS: The following exhibits are filed herein as part of this Form
10-K:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
2.1 * Agreement and Plan of Merger dated as of November 1, 1999 by and among Intervest
Bancshares Corporation, ICNY Acquisition Corporation and Intervest Corporation of New
York, incorporated by reference to the Company's definitive proxy statement for the special
meeting of shareholders to be held March 10, 2000, wherein such document is identified as
"Annex A."
2.2 * Stock Purchase Agreement dated as of December 18, 2002, by and between Intervest
Bancshares Corporation and Jean Dansker regarding the purchase and sale of the issued and
outstanding shares of Intervest Securities Corporation, incorporated by reference to the
Registration Statement on Form S-1 filed on July 8, 2005 (the "S-1"), wherein such
document is identified as Exhibit 2.2.
3.1 * Restated Certificate of Incorporation of the Company, incorporated by reference to the S-1,
wherein such document is identified as Exhibit 3.1.
3.2 * Bylaws of the Company as amended, incorporated by reference to the Company's report on
Form 8-K dated June 23, 2005, wherein such document is identified as Exhibit 3.1.
4.1 * Form of Certificate for Shares of Class A common stock, incorporated by reference to the
Company's Pre-Effective Amendment No.1 to the Registration Statement on Form SB-2 (No.
33-82246), filed on September 15, 1994, (the "SB-2"), wherein such document is identified
as Exhibit 4.1
4.2 * Form of Certificate for Shares of Class B common stock, incorporated by reference to the
SB-2, wherein such document is identified as Exhibit 4.2.
4.3 * Form of Warrant for Class B Common Stock issued to Mr. Jerome Dansker, incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1995, wherein such document is identified as Exhibit 4.2.
4.4 * Form of Warrant for Class A Common Stock, incorporated by reference to the SB-2, wherein
such document is identified as Exhibit 4.3.
4.5 * Form of Warrant Agreement between the Company and the Bank of New York, incorporated
by reference to the SB-2, wherein such document is identified as Exhibit 4.4.
4.6 * Form of Indenture between the Company and the Bank of New York, as Trustee,
incorporated by reference to the Company's Registration Statement on Form SB-2 filed on
April 15, 1998 (the "1998 SB-2").
4.7 * Form of Indenture between the Company and the Bank of New York, as Trustee, dated
January 1, 2001, incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, wherein such document is identified as Exhibit 4.7.
4.8 * Form of Indenture between the Company, as Issuer, and State Street Bank and Trust
Company, as Trustee, dated as of December 18, 2001, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, wherein
such document is identified as Exhibit 4.8.
81
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
4.9 * Form of Indenture between the Company, as Issuer, and U.S Bank National Association, as
Trustee, dated as of September 17, 2003, incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003, wherein such document is
identified as Exhibit 4.9.
4.10 * Form of Indenture between the Company, as Issuer, and U.S Bank National Association, as
Trustee, dated as of March 17, 2004, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004, wherein such document is
identified as Exhibit 4.10.
4.11 * Form of Indenture between the Company, as Issuer, and Wilmington Trust Company, as
Trustee, dated as of September 20, 2004, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, wherein such
document is identified as Exhibit 4.11.
4.12 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of November 1, 1996, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-11413, filed on
September 5, 1996, wherein such document is identified as Exhibit 4.1.
4.13 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of May 1, 1997, incorporated by reference to Intervest Mortgage
Corporation's Registration Statement on Form S-11, File No. 333-23093, filed on March 11,
1997, wherein such document is identified as Exhibit 4.1.
4.14 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of December 1, 1998, incorporated by reference to Intervest
Mortgage Corporation's Annual Report on Form 10-K for the year ended December 31,
1998, wherein such document is identified as Exhibit 4.1.
4.15 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of July 1, 1999 incorporated by reference to Intervest Mortgage
Corporation's Registration Statement on Form S-11, File No. 333-78135, filed on May 10,
1999, wherein such document is identified as Exhibit 4.1.
4.16 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of September 15, 2000, incorporated by reference to Intervest
Mortgage Corporation's Annual Report on Form 10-K for the year ended December 31,
2000, wherein such document is identified as Exhibit 4.16.
4.17 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of August 1, 2001, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-57324, filed on
March 20, 2001, wherein such document is identified as Exhibit 4.1.
4.18 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of February 1, 2002, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-73580, filed on
November 16, 2001, wherein such document is identified as Exhibit 4.1.
4.19 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of August 1, 2002, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-90346, filed on
June 12, 2002, wherein such document is identified as Exhibit 4.1.
82
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
4.20 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of January 1, 2003, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-101722, filed on
December 9, 2002, wherein such document is identified as Exhibit 4.1.
4.21 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of August 1, 2003, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-105199, filed
with the SEC on May 13, 2003, wherein such document is identified as Exhibit 4.1.
4.22 * Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New
York, as Trustee, dated as of December 1, 2003, incorporated by reference to Intervest
Mortgage Corporation's Registration Statement on Form S-11, File No. 333-109128, filed
with the SEC on September 25, 2003, wherein such document is identified as Exhibit 4.1.
4.23 * Form of Indenture between the Company's subsidiary, Intervest Mortgage Corporation, and
The Bank of New York dated as of June 1, 2004, incorporated by reference to Intervest
Mortgage Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30,
2004, wherein such document is identified as Exhibit 4.23.
4.24 * Form of Indenture between the Company's subsidiary, Intervest Mortgage Corporation, and
The Bank of New York dated as of April 1, 2005, incorporated by reference to Intervest
Mortgage Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31,
2005, wherein such document is identified as Exhibit 4.0.
4.25 * Form of Indenture between the Company's subsidiary, Intervest Mortgage Corporation, and
The Bank of New York incorporated by reference to Intervest Mortgage Corporation's
Registration Statement on Form S-11 dated June 14, 2005, wherein such document is
identified as Exhibit 4.1.
10.1 +* Employment and Supplemental Benefits Agreement between the Company and Jerome
Dansker dated as of July 1, 2004, incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended September 30, 2004, wherein such document is identified
as Exhibit 10.0.
10.2 +* Employment and Supplemental Benefits Agreement between the Company and Lowell S.
Dansker dated as of July 1, 2004, incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended September 30, 2004, wherein such document is identified
as Exhibit 10.1.
10.3 +* Employment and Supplemental Benefits Agreement between the Company and Lawrence G.
Bergman dated as of July 1, 2004, incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended September 30, 2004, wherein such document is identified
as Exhibit 10.2.
10.4 +* Employment Agreement between Intervest National Bank and Keith A. Olsen dated as of
November 9, 2004, incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.3.
10.5 +* Employment Agreement between Intervest National Bank and Raymond C. Sullivan dated as
of November 10, 2004, incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.4.
10.6 +* Employment Agreement between Intervest National Bank and John J. Arvonio dated as of
November 10, 2004, incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended September 30, 2004, wherein such document is identified as Exhibit 10.5.
10.7 * Mortgage Servicing Agreement dated as of April 1, 2002, as supplemented on October 21,
2004 for the purpose of clarification of the intent of the original agreement between the
Company's subsidiaries, Intervest Mortgage Corporation and Intervest National Bank,
incorporated by reference to Intervest Mortgage Corporation's quarterly report on Form 10-Q
for the quarter ended September 30, 2004, wherein such document is identified as Exhibit
10.1.
83
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.8 +* Employment Agreement Intervest Mortgage Corporation and John H. Hoffmann dated as of
November 10, 2004, incorporated by reference to Intervest Mortgage Corporation's quarterly
report on Form 10-Q for the quarter ended September 30, 2004, wherein such document is
identified as Exhibit 10.2.
10.9 +* Employment Agreement between Intervest Mortgage Corporation and Jerome Dansker,
dated as of July 1, 1995, incorporated by reference to Intervest Mortgage Corporation's
Registration Statement on Form S-11, File No. 33-96662, filed on September 7, 1995,
wherein such document is identified as Exhibit 10.2.
10.10 +* Amendment to Employment Agreement between Intervest Mortgage Corporation and Jerome
Dansker, dated August 3, 1998, incorporated by reference to Intervest Mortgage
Corporation's Annual Report on Form 10-K for the year ended December 31, 1998, wherein
such document is identified as Exhibit 10.1.
10.11 +* Amendment to Employment Agreement between Intervest Mortgage Corporation and Jerome
Dansker, dated as of July 1, 2004, incorporated by reference to Intervest Mortgage
Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004,
wherein such document is identified as Exhibit 10.0.
12.0 ** Computation of ratios of earnings to fixed charges.
14.1 * Code of Business Conduct, incorporated by reference to the Company's Report on Form 10-
K for the year ended December 31, 2004, wherein such document is identified as Exhibit
14.1.
14.2 * Code of Ethics, incorporated by reference to the Company's Report on Form 10-K for the
year ended December 31, 2004, wherein such document is identified as Exhibit 14.2.
14.3 * Procedures for Submissions Regarding Questionable Accounting, Internal Accounting
Controls and Auditing Matters, incorporated by reference to the Company's Report on Form
10-K for the year ended December 31, 2004, wherein such document is identified as Exhibit
14.3.
21.0 ** Subsidiaries
31.0 ** Certification of the principal executive officer pursuant to Section 302 of The Sarbanes-Oxley
Act of 2002.
31.1 ** Certification of the principal financial officer pursuant to Section 302 of The Sarbanes-Oxley
Act of 2002.
32.0 ** Certification of the principal executive and financial officers pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
- ---------------------------------------
* Previously filed.
** Filed herewith.
+ Denotes management contract or compensatory plan or arrangement.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the date indicated.
INTERVEST BANCSHARES CORPORATION
(Registrant)
By: /s/ Lowell S. Dansker Date: February 23, 2006
----------------------------- ----------------------
Lowell S. Dansker,
Vice Chairman, President and Treasurer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER:
(PRINCIPAL EXECUTIVE OFFICER):
By: /s/ Jerome Dansker Date: February 23, 2006
----------------------------- ----------------------
Jerome Dansker
VICE CHAIRMAN, PRESIDENT AND TREASURER:
(PRINCIPAL FINANCIAL OFFICER):
By: /s/ Lowell S. Dansker Date: February 23, 2006
----------------------------- ----------------------
Lowell S. Dansker,
CHIEF ACCOUNTING OFFICER:
(PRINCIPAL ACCOUNTING OFFICER):
By: /s/ John J. Arvonio Date: February 23, 2006
----------------------------- ----------------------
John J. Arvonio
VICE PRESIDENT, SECRETARY AND DIRECTOR:
By: /s/ Lawrence G. Bergman Date: February 23, 2006
----------------------------- ----------------------
Lawrence G. Bergman
VICE PRESIDENT AND DIRECTOR:
By: /s/ Stephen A. Helman Date: February 23, 2006
----------------------------- ----------------------
Stephen A. Helman
DIRECTORS:
By: /s/ Michael A. Callen Date: February 23, 2006
----------------------------- ----------------------
Michael A. Callen
By: /s/ Paul R. DeRosa Date: February 23, 2006
----------------------------- ----------------------
Paul R. DeRosa
By: /s/ Wayne F. Holly Date: February 23, 2006
----------------------------- ----------------------
Wayne F. Holly
By: /s/ Lawton Swan, III Date: February 23, 2006
----------------------------- ----------------------
Lawton Swan, III
By: /s/ Thomas E. Willett Date: February 23, 2006
----------------------------- ----------------------
Thomas E. Willett
By: /s/ David J. Willmott Date: February 23, 2006
----------------------------- ----------------------
David J. Willmott
By: /s/ Wesley T. Wood Date: February 23, 2006
----------------------------- ----------------------
Wesley T. Wood
85