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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
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Commission File Number 000-23377
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INTERVEST BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation)
ONE ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934
Class A Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes XX No.
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes _ No X.
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On the close of business on June 30, 2004, there were 5,663,075 shares of the
Registrant's Class A common stock and 385,000 shares of its Class B common stock
issued and outstanding.
The aggregate market value of 3,066,178 shares of the Registrant's Class A
common stock on the close of business June 30, 2004, which excludes 2,596,897
shares held by affiliates as a group, was $51,971,717. This value is based on
the average bid and asked price of $16.95 per share on June 30, 2004 of the
Class A common stock on the NASDAQ Small Cap Market. All of the Class B stock is
held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
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ITEM 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . . . 15
ITEM 4A Executive Officers and Other Key Employees. . . . . . . . . . . 15
PART II
ITEM 5 Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . 16
ITEM 6 Selected Consolidated Financial and Other Data . . . . . . . . . 18
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 19
ITEM7A Quantitative and Qualitative Disclosures About Market Risk . . . 38
ITEM 8 Financial Statements and Supplementary Data. . . . . . . . . . . 38
ITEM 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . 70
ITEM 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . 70
ITEM 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . 70
PART III
ITEM 10 Directors and Executive Officers . . . . . . . . . . . . . . . 70
ITEM 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . 70
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Transactions . . . . . . . . . . . . . 70
ITEM 13 Certain Relationships and Related Transactions . . . . . . . . 70
ITEM 14 Principal Accountant Fees and Services . . . . . . . . . . . . 70
PART IV
ITEM 15 Exhibits and Financial Statements Schedules. . . . . . . . . . 71
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
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. The factors below are among those that
could cause actual results to differ materially from the forward-looking
statements.
Risk Factors
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The Company's business is affected by a number of factors, including but not
limited to the impact of: interest rates; loan demand; loan concentrations, loan
prepayments, ability to raise funds for investment; competition; general or
local economic conditions; credit risk and the related adequacy of the allowance
for loan losses; terrorist acts; natural disasters; armed conflicts; regulatory
supervision and regulation; dependence on key personnel; and voting control.
These factors together with other matters are described in this Form 10-K.
Intervest Bancshares Corporation
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Intervest Bancshares Corporation is a registered financial holding company (the
"Holding Company") incorporated in 1993 under the laws of the State of Delaware
and its Class A common stock is listed on the NASDAQ SmallCap Market (Symbol:
IBCA).
At December 31, 2004, the Holding Company owned 100% of the outstanding capital
stock 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 offices of the Holding Company,
Intervest Mortgage Corporation, Intervest Securities Corporation and the Bank's
headquarters and full-service banking office are located on the entire fourth
floor of One Rockefeller Plaza in New York City, New York, 10020-2002 and its
main telephone number is 212-218-2800 At December 31, 2004, the Holding Company
also owned 100% of the outstanding capital stock of Intervest Statutory Trust I,
II, III and IV, all of which are unconsolidated entities as required by SFAS
Interpretation No. 46-R, "Consolidation of Variable Interest Entities," (FIN
46-R).
At December 31, 2004, the Company had total assets of $1,316,751,000, cash and
security investments of $278,579,000, net loans of $1,015,396,000, deposits of
$993,872,000, borrowed funds and related interest payable of $202,682,000, and
stockholders' equity of $90,094,000, compared to total assets of $911,523,000,
cash and security investments of $220,026,000, net loans of $671,125,000,
deposits of $675,513,000, borrowed funds and related interest payable of
$140,383,000, and stockholders' equity of $75,385,000 at December 31, 2003.
The Holding Company's primary business is the operation of its subsidiaries. It
does not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the Holding
Company has issued debentures to raise funds for working capital purposes. The
Holding Company is subject to examination and regulation by the Federal Reserve
Board (FRB).
Intervest National Bank
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Intervest National Bank is a nationally chartered bank that has its headquarters
and full-service banking office at One Rockefeller Plaza, 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, 2004, the Bank had total assets of $1,183,509,000, cash and
security investments of $269,816,000, net loans of $900,798,000, deposits of
$1,007,862,000, borrowed funds and related interest payable of $36,263,000, and
stockholder's equity of $111,343,000, compared to total assets of $789,567,000,
cash and
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security investments of $212,293,000, net loans of $566,226,000, deposits of
$697,279,000 and stockholder's equity of $73,907,000, at December 31, 2003.
The Bank's primary business consists of multifamily residential and commercial
real estate lending. It also 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 used to originate loans and to purchase investment
securities.
The revenues of the Bank are primarily derived from interest and fees received
from originating loans, and from interest and dividends earned on securities and
other short-term investments. The principal sources of funds for the Bank's
lending activities are deposits, repayment of loans, maturities and calls of
securities and cash flow generated from operations. The Bank's principal
expenses are interest paid on deposits and operating and general and
administrative expenses.
Deposit flows and the rates paid thereon are influenced by interest rates on
competing investments available to depositors and general market rates of
interest. Lending activities are affected by the demand for real estate and
other types of loans, interest rates at which such loans may be offered and
other factors affecting the availability of funds to lend. The Bank faces strong
competition in the attraction of deposits and in the origination of loans. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC)
to the extent permitted by law.
As is the case with banking institutions generally, the Bank's operations are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of banking regulatory agencies, including the FRB and FDIC.
The Bank is also subject to the supervision, regulation and examination of the
Office of the Comptroller of the Currency of the United States of America (OCC).
Intervest Mortgage Corporation
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Intervest Mortgage Corporation is in the business of investing in mortgage loans
on commercial and multifamily residential properties. Intervest Mortgage
Corporation also makes loans on other types of properties, may resell mortgages
and provides mortgage loan origination services to the Bank. Intervest Mortgage
Corporation issues debentures to provide funding for its mortgage investing.
Intervest Mortgage Corporation has two wholly owned subsidiaries, Intervest
Distribution Corporation (which performs record-keeping functions for Intervest
Mortgage Corporation) and Intervest Realty Servicing Corporation (which
performs certain mortgage servicing activities).
At December 31, 2004, Intervest Mortgage Corporation had total assets of
$122,451,000, cash and short-term investments of $17,151,000, net loans of
$100,520,000, debentures and related interest payable of $97,069,000, and
stockholder's equity of $23,527,000, compared to total assets of $119,578,000,
cash and short-term investments of $25,801,000, net loans of $89,307,000,
debentures and related interest payable of $99,402,000, and stockholder's equity
of $18,173,000, at December 31, 2003.
Intervest Mortgage Corporation's business is significantly influenced by the
movement of interest rates, general 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, the amount of which is eliminated in the Company's consolidated
financial statements.
Intervest Securities Corporation
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Intervest Securities Corporation is a broker/dealer and a NASD and SIPC member
firm who's business activities to date have been insignificant and 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.
In June 2003, the Holding Company acquired all of the outstanding capital stock
of Intervest Securities Corporation in exchange for 30,000 shares of its Class B
common stock that was newly issued for this transaction.
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Intervest Securities Corporation's total assets consisted of approximately
$218,000 of cash at the time of acquisition. Prior to the acquisition, Intervest
Securities Corporation was an affiliated entity in that it was wholly owned by
the spouse of the Chairman of the Holding Company. At December 31, 2004,
Intervest Securities Corporation had total assets of $484,000 (consisting mostly
of cash) and its stockholder's equity amounted to $481,000, compared to $455,000
of cash and stockholder's equity of $459,000 at December 31, 2003.
Intervest Statutory Trusts
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Intervest Statutory Trust I, II, III and IV were formed in December 2001,
September 2003, March 2004 and September 2004, respectively. Each was formed for
the sole purpose of issuing and administering $15,000,000 of Trust Preferred
Securities for a total of $60,000,000. The trusts do not conduct any trade or
business. See note 9 to the consolidated financial statements in this report for
a further discussion of the trusts.
MARKET AREA
The Bank's primary market area for its New York office is considered to be the
New York City metropolitan region, and Manhattan in particular. The primary
market area of the Bank's Florida offices is considered to be Pinellas County,
which is the most populous county in the Tampa Bay area of Florida. The area has
many more seasonal residents. The Tampa Bay area is located on the West Coast of
Florida, midway up the Florida peninsula. The major cities in the area are Tampa
(Hillsborough County) and St. Petersburg and Clearwater (Pinellas County).
The Bank's primary deposit gathering and lending markets are concentrated in the
communities surrounding its offices. 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, New
Jersey, North Carolina, Ohio, Pennsylvania, Virginia and Washington D.C.
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
non-bank 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.
4
LENDING ACTIVITIES
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 loans on commercial and multifamily real estate
properties. The Bank also offers single-family residential mortgage loans,
commercial loans and consumer loans, none of which have been emphasized. At
December 31, 2004, the Company's loan portfolio, net of deferred fees, amounted
to $1,015,396,000, compared to $671,125,000 at December 31, 2003.
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 must be reviewed and approved
by the Bank's Loan Committee comprised of certain members of the Board of
Directors prior to being originated. As part of its written policies for real
estate loans, loan-to-value ratios (the ratio that the original principal amount
of the loan bears to the lower of the purchase price or appraised value of the
property securing the loan at the time of origination) on new loans originated
by the Bank typically do not exceed 80%. 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. 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 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. Its real estate mortgage loans consist of first mortgage loans
and junior mortgage loans. Junior mortgages normally have greater risks than
first mortgages. The Company also considers the borrower's experience in owning
or managing similar properties and its lending experience with the borrower when
originating loans.
Real Estate Mortgage Lending
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At December 31, 2004, nearly all of the Company's loan portfolio is comprised of
504 loans, or $1,024,323,000, that are secured by commercial and multifamily
real estate (including rental and cooperative apartment buildings, office
buildings, mix-used properties, shopping centers, hotels, industrial properties
and vacant land) with an average principal size of $2,032,000. The portfolio has
40 loans of $5,000,000 or more that aggregate $302,291,000, with the largest
loan amounting to $14,895,000.
Commercial and multifamily mortgage lending generally involves greater risk than
1-4 family residential lending. Such lending typically involves larger loan
balances to single borrowers and repayment of loans secured by income producing
properties is typically dependent upon the successful operation of the
underlying real estate. From time to time, the Company may originate loans on
vacant land which typically do not have income streams.
Mortgage loans on commercial and multifamily properties are normally originated
for terms of no more than 20 years, many with variable interest rates that are
based on the prime rate. Additionally, many loans have an interest rate floor
which resets upward along with any increase in the loan's interest rate. This
feature reduces the loan's interest rate exposure to declining interest rates.
Mortgage loans on commercial and multifamily properties typically provide for
periodic payments of interest and principal during the term of the mortgage,
with the remaining principal balance and any accrued interest due at the
maturity date. The majority of the mortgage loans originated by the Company
provide for balloon payments at maturity, which means that a substantial part or
the entire original principal amount is due in one lump sum payment at maturity.
If the net revenue from the property is not sufficient to make all debt service
payments due on the mortgage or, if at maturity or the due date of any balloon
payment, the owner of the property fails to raise the
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funds (by refinancing, sale or otherwise) to make the lump sum payment, the
Company could sustain a loss on its investment in the mortgage loan. The
Company's mortgage loans are generally not personal obligations of the borrower
and are not insured or guaranteed by governmental agencies.
Commercial Lending
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The Bank offers commercial loan services including term loans, lines of credit
and equipment financing. Short-to-medium term commercial loans, both
collateralized and uncollateralized, are made available to businesses for
working capital needs (including those secured by inventory, receivables and
other assets), business expansion (including acquisitions of real estate and
improvements), and the purchase of equipment and machinery. Commercial loans
are typically underwritten on the basis that repayment will come from the cash
flow of the business and are generally collateralized as discussed above. As a
result, the availability of funds for the repayment of commercial loans may be
substantially dependent on the success of the business itself. Further, the
collateral underlying these loans may depreciate over time, cannot be appraised
with as much precision as real estate, and may fluctuate in value based on the
success of the business.
Consumer Lending
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The Bank offers consumer loans including those for: the purchase of automobiles,
recreation vehicles and boats; second mortgages; home improvements; home equity
lines of credit; and personal loans (both collateralized and uncollateralized).
Consumer loans typically have a shorter term and carry higher interest rates
than other types of loans. In addition, consumer loans have additional risks of
collectability when compared to traditional types of loans granted by commercial
banks such as residential mortgage loans. In many instances, the Bank is
required to rely on the borrower's ability to repay the loan from personal
income sources, since the collateral may be of reduced value at the time of
collection.
Loan Solicitation and Processing
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The Company's loan originations are derived from the following: advertising in
newspapers and trade journals; referrals from mortgage brokers; existing
customers and borrowers; walk-in customers; and through direct solicitation by
the Company's officers.
The Company's underwriting procedures normally require the following: physical
inspections by management of the properties being considered for mortgage loans;
mortgage title insurance; hazard insurance; environmental surveys; and an
appraisal of the property securing the loan to determine the property's adequacy
as collateral performed by an appraiser approved by the Company. In addition,
the Company analyzes relevant real property and financial factors, which in
certain cases may include: the condition and use of the subject property; the
property's income-producing capacity; and the quality, experience and
creditworthiness of the property's owner. For commercial and consumer loans,
upon receipt of a loan application from a prospective borrower, a credit report
and other verifications are obtained to substantiate specific information
relating to the applicant's employment income and credit standing.
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 agreement renews each January 1 unless terminated by
either party. The Bank paid $4,262,000, $2,343,000 and $1,597,000 in 2004, 2003
and 2002, respectively, to Intervest Mortgage Corporation in connection with
this servicing agreement, all of which is eliminated in the Company's
consolidated financial statements.
Loan Origination, Loan Fees and Prepayment Income From the Early Repayment of
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Loans.
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The Company normally charges loan origination fees on nearly all of the mortgage
loans it originates based on a percentage of the principal amount. 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 fee, net of related direct loan origination costs,
is deferred and amortized over the contractual life of the loan as an
6
adjustment to the loan's yield. At December 31, 2004, the Company had
$11,347,000 of net deferred loan fees and $8,208,000 of loan fees receivable.
The Company also earns fees 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 largely 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 $3,546,000 in 2004, $2,317,000 in 2003 and
$1,435,000 in 2002.
ASSET QUALITY
After a loan is originated, the Company makes ongoing reviews of loans in order
to monitor documentation and valuations of collateral with the objective of
quickly identifying, evaluating and initiating corrective actions if necessary.
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 related to the Company's underwriting standards and is dependent upon the
risks associated with real estate investments in general, including: general or
local economic conditions in the areas the properties are located, neighborhood
values, interest rates, real estate tax rates, operating expenses of the
mortgaged properties, supply of and demand for rental units, supply of and
demand for properties, ability to obtain and maintain adequate occupancy of the
properties, zoning laws, governmental rules, regulations and fiscal policies.
Additionally, terrorist acts, such as those that occurred on September 11, 2001,
armed conflicts, such as the war on terrorism, and natural disasters, such as
hurricanes, may have an adverse impact on economic conditions. Economic
conditions affect the market value of the underlying collateral as well as the
levels of occupancy of income-producing properties.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities. The Company's loan portfolio has historically
been concentrated in commercial real estate and multifamily mortgage loans
(including land loans), which represented 99.8% of the total loan portfolio at
December 31, 2004. The properties underlying the Company's mortgages are also
concentrated in New York State (71%) and the State of Florida (19%). Many of the
New York properties are located in New York City and are subject to rent control
and rent stabilization laws, which limit the ability of the property owners to
increase rents.
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, 2004, $4,607,000 of loans were on a nonaccrual
status, compared to $8,474,000 at December 31, 2003. 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,
2004 and 2003, there were no other loans classified as nonaccrual, impaired or
ninety days past due and still accruing interest. At December 31, 2004, the
allowance for loan losses amounted to $11,106,000, compared to $6,580,000 at
December 31, 2003.
In the last five years, the Company experienced only one loss from its lending
activities amounting to $201,000 (which was related to one commercial real
estate property located in the State of Florida that was acquired by the Bank
through foreclosure in 2002). The loss was comprised of a $150,000 loan
chargeoff and a $51,000 loss from the subsequent sale of that property. There
can be no assurance however, that a downturn in real estate values or local
economic conditions, as well as other factors, would not have an adverse impact
on the Company's asset quality and future level of nonperforming assets,
chargeoffs and profitability.
REAL ESTATE INVESTING ACTIVITIES
The Company may periodically purchase equity interests in real property or it
may acquire such an equity interest pursuant to a foreclosure of a mortgage in
the normal course of business. As a result, the Company may acquire
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and retain title to properties either directly or through a subsidiary. While no
such transactions are presently pending, the Company would consider the
expansion of its business through investments in or acquisitions of other
companies engaged in real estate or mortgage business activities. While the
Company has not previously made acquisitions of real property (other than
purchases in connection with the operation of its offices or properties acquired
through foreclosure), its management has had substantial experience in the
acquisition and management of properties.
INVESTMENT ACTIVITIES
The Company's investment policy is designed to provide and maintain liquidity,
without incurring undue interest and credit risk. The Company has historically
purchased securities that are issued directly by the U.S. government or one of
its agencies. These securities have a significantly lower credit risk than the
Company's loan portfolio as well as lower yields. To manage interest rate risk,
the Company normally purchases securities that have adjustable rates or
securities with fixed rates that have short- to intermediate-maturity terms.
From time to time, a securities available-for-sale portfolio may be maintained
to provide additional flexibility for implementing asset and liability
management strategies. The Company does not engage in trading activities.
Securities held to maturity totaled $248,888,000 at December 31, 2004, compared
to $152,823,000 at December 31, 2003. There were no securities classified as
available for sale at December 31, 2004 or 2003.
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, 2004 amounted to
$24,599,000, compared to $64,128,000 at December 31, 2003.
SOURCES OF FUNDS
The Bank's primary sources of funds consist of the following: retail deposits
obtained through its branch offices and through the mail; amortization,
satisfactions and repayments of loans; maturities and calls of securities; and
cash generated by operating activities. In addition, the Bank has from time to
time borrowed funds on a short-term basis from 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 also does
not currently accept brokered deposits. At December 31, 2004, consolidated
deposit liabilities totaled $993,872,000, compared to $675,513,000 at December
31, 2003.
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.
At December 31, 2004, the Bank had agreements with correspondent banks whereby
it may borrow on an overnight, unsecured basis up to $16,000,000. As a member of
the FHLB and the FRB, the Bank can borrow from
8
these institutions on a secured basis up to approximately $203,000,000 at
December 31, 2004. There were $36,000,000 of FHLB short-term borrowings
outstanding at December 31, 2004.
Intervest Mortgage Corporation's principal sources of funds for investing
consist of borrowings (through the issuance of its debentures), mortgage
repayments and cash flow generated from operations. From time to time, it has
also received capital contributions from the Holding Company. At December 31,
2004, Intervest Mortgage Corporation had debentures outstanding of $88,850,000,
compared to $87,350,000 at December 31, 2003.
The Holding Company's principal sources of funds consist of dividends from the
Bank to service Trust Preferred Securities, interest income from investments,
management fees from its subsidiaries and principal and interest repayments from
its limited portfolio of mortgage loans. The Holding Company has also issued
debentures for working capital purposes. The Holding Company's debentures
outstanding totaled $5,580,000 at December 31, 2004, compared to $7,340,000 at
December 31, 2003. In addition, the Holding Company, through its wholly owned
subsidiaries (Intervest Statutory Trust I, II, III and IV) has issued Trust
Preferred Securities totaling $60,000,000.
EMPLOYEES
At December 31, 2004, the Company employed 64 full-time equivalent employees,
compared to 61 at year-end 2003. The Company provides various benefit plans,
including group life, health and a 401(k) Plan. The employees are not covered by
a collective bargaining agreement and the Company believes employee relations
are good.
FEDERAL AND STATE TAXATION
The Company and its subsidiaries file a consolidated federal income tax return
and combined state and city income tax returns in New York. The Company also
files a franchise tax return in Delaware. The Bank files a state income tax
return in Florida. All the returns are filed on a calendar year basis.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur. In accordance with an income tax
sharing agreement, income tax charges or credits are for financial reporting
purposes allocated 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 the same manner as other corporations. Florida taxes banks under the same
provisions as other corporations, while New York State and New York City taxable
income is calculated under applicable sections of the Internal Revenue Code of
1986, as amended (the "Code"), with some modifications required by state law.
Although the Bank's federal income tax liability is determined under provisions
of the Code, which is applicable to all taxpayers, Sections 581 through 597 of
the Code apply specifically to financial institutions. The two primary areas in
which the treatment of financial institutions differs from the treatment of
other corporations under the Code are in the areas of bond gains and losses and
bad debt deductions. Bond gains and losses generated from the sale or exchange
of portfolio instruments are generally treated for financial institutions as
ordinary gains and losses as opposed to capital gains and losses for other
corporations, as the Code considers bond portfolios held by banks to be
inventory in a trade or business rather than capital assets. Banks are allowed a
statutory method for calculating a reserve for bad debt deductions. Based on its
asset size, a bank is permitted to maintain a bad debt reserve calculated on an
experience method, based on chargeoffs and recoveries for the current and
preceding five 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.
9
INVESTMENT IN SUBSIDIARIES
The following table provides information regarding the Holding Company's
subsidiaries:
At December 31, 2004 Subsidiaries
-------------------------------------
($ in thousands) % of Equity in Earnings (loss) for the
Voting Total Underlying Year Ended December 31,
Subsidiary Stock Investment Net Assets 2004 2003 2002
- ----------------------- ----------- ----------- ----------- ----------- ------------ -----------
Intervest National Bank 100% $ 111,343 $ 111,343 $ 10,865 $ 8,667 $ 6,459
Intervest Mortgage Corporation 100% $ 23,527 $ 23,527 $ 2,354 $ 1,759 $ 1,567
Intervest Securities Corporation 100% $ 481 $ 481 $ 22 $ (6) $ -
Intervest Statutory Trust I to IV 100% $ 1,856 $ 1,856 $ - $ - $ -
SUPERVISION AND REGULATION
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Any change in the applicable law or
regulation may have a material effect on the business and prospects of the
Holding Company and its subsidiaries.
Bank Holding Company Regulation
- -------------------------------
As a financial holding company registered under the Bank Holding Company Act of
1956 (BHCA), the Holding Company is subject to the regulation and supervision of
the FRB, and is required to file with the FRB periodic reports and other
information regarding its business operations and those of its subsidiaries.
The Holding Company is required to obtain the prior approval of the FRB before
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a bank or bank holding company. The FRB has identified by regulation
various non-banking activities in which a bank holding company may engage with
notice to, or prior approval by, the FRB.
The FRB monitors the capital adequacy of bank holding companies and uses
risk-based capital adequacy guidelines to evaluate bank holding companies on a
consolidated basis. The guidelines require a ratio of Tier 1 or Core Capital, as
defined in the guidelines, to total risk-weighted assets of at least 4% and a
ratio of total capital to risk-weighted assets of at least 8%. At December 31,
2004, the Company's consolidated ratio of total capital to risk-weighted assets
was 14.23% and its risk-based Tier 1 capital ratio was 10.49%. The guidelines
also require a ratio of Tier 1 capital to adjusted total average assets of not
less than 3%. The Company's consolidated leverage ratio at December 31, 2004 was
9.03%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The FRB guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. In addition, the regulations of the FRB provide that concentration of
interest rate risk, credit risk and certain risk arising from nontraditional
activities, as well as an institution's ability to effectively measure and
manage these risks, are important factors to be taken into account by regulatory
agencies in assessing an organization's overall capital adequacy.
The 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
- ---------------
The Bank is a nationally chartered banking corporation subject to supervision,
examination and regulation of the FRB, FDIC and OCC. These regulators have the
power to: enjoin "unsafe or unsound practices;" require affirmative action to
correct any conditions resulting from any violation or practice; issue an
administrative order
10
that can be judicially enforced; direct an increase in capital; restrict the
growth of a bank; assess civil monetary penalties; and remove officers and
directors.
The operations of the Bank are subject to numerous statutes and regulations
regarding required reserves against deposits, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends, establishment of
branches, and other aspects of the Bank's operations. Various consumer laws and
regulations also affect the operations of the Bank, including state usury laws,
laws relating to fiduciaries, consumer credit and equal credit, and fair credit
reporting.
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and
Regulation W thereunder, which govern certain transactions, such as loans,
extensions of credit, investments and purchases of assets between member banks
and their affiliates, including their parent holding companies. These
restrictions limit the transfer of funds to the Holding Company in the form of
loans, extensions of credit, investment or purchases of assets ("Transfers"),
and they require that the Bank's transactions with the Holding Company be on
terms no less favorable to the Bank than comparable transactions between the
Bank and unrelated third parties. Transfers by the Bank to the Holding Company
are limited in amount to 10% of the Bank's capital and surplus, and transfers to
all affiliates are limited in the aggregate to 20% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are also subject to
various collateral requirements. These regulations and restrictions may limit
the Holding Company's ability to obtain funds from the Bank for its cash needs,
including funds for acquisitions, and the payment of dividends, interest and
operating expenses.
The Bank is prohibited from engaging in certain tying arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services. For example, the Bank may not generally require a customer to obtain
other services from the Bank or the Holding Company, and may not require the
customer to promise not to obtain other services from a competitor as a
condition to an extension of credit. The Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons. Extensions of credit (i) must be made on substantially the same
terms (including interest rates and collateral) as, and following credit
underwriting procedures that are not less stringent than those prevailing at the
time for, comparable transactions with persons not covered above and who are not
employees and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. In addition, extensions of credit to such
persons beyond limits set by FRB regulations must be approved by the Board of
Directors. The Bank is also subject to certain lending limits and restrictions
on overdrafts to such persons. A violation of these restrictions may result in
the assessment of substantial civil monetary penalties on the Bank or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of the Bank or the imposition of a cease and desist order.
Applicable law provides the federal banking agencies with broad powers to take
prompt corrective action to resolve problems of insured depository institutions.
The extent of those powers depends upon whether the institution in question is
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." Under federal regulations,
a bank is considered "well capitalized" if it has (i) a total risk-based capital
ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based
capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or
3% or greater in the case of a bank with a composite CAMELS rating of 1). A bank
is considered (a) "undercapitalized " if it has (i) a total risk-based capital
ratio of less than 8%, (ii) a Tier 1 risk-based capitalized ratio of less than
4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with
a composite CAMELS rating of 1); (b) "significantly undercapitalized" if a bank
has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1
risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than
3%, and (c) "critically undercapitalized" if a bank has a ratio of tangible
equity to total assets equal to or less than 2%. At December 31, 2004 and 2003,
the Bank met the definition of a well-capitalized institution.
11
The deposits of the Bank are insured by the FDIC through the Bank Insurance Fund
(the "BIF") to the extent provided by law. Under the FDIC's risk-based
insurance system, BIF-insured institutions are currently assessed premiums of
between zero and $0.27 per $100 of eligible deposits, depending upon the
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 $0.0146 per $100 of eligible
deposits each year. The assessment is determined quarterly.
Regulations promulgated by the FDIC pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("1991 Banking Law") place limitations on
the ability of certain insured depository institutions to accept, renew or
rollover deposits by offering rates of interest which are significantly higher
than the prevailing rates of interest on deposits offered by other depository
institutions having the same type of charter in such depository institution's
normal market area. Under these regulations, well-capitalized institutions may
accept, renew or rollover such deposits without restriction, while adequately
capitalized institutions may accept, renew or rollover such deposits with a
waiver from the FDIC (subject to certain restrictions on payment of rates).
Undercapitalized institutions may not accept, renew or rollover such deposits.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of Default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance. The
Federal Community Reinvestment Act of 1977 ("CRA"), among other things, allows
regulators to withhold approval of an acquisition or the establishment of a
branch unless the applicant has performed satisfactorily under the CRA.
Satisfactory performance means adequately meeting the credit needs of the
communities the institution serves, including low and moderate income areas. The
applicable federal regulators now regularly conduct CRA examinations to assess
the performance of financial institutions. The Bank received an "outstanding"
rating in its most recent CRA examination.
The federal regulators have adopted regulations and examination procedures
promoting the safety and soundness of individual institutions by specifically
addressing, among other things: (i) internal controls; information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate exposure; (v) asset growth; (vi) ratio of classified assets to
capital; (vii) minimum earnings; and (viii) compensation and benefits standards
for management officials.
The FRB, OCC and other federal banking agencies have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines and
other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could potentially subject the Holding Company or its banking subsidiary, as well
as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and civil monetary penalties.
Interstate Banking and Other Recent Legislation
- -----------------------------------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
facilitates the interstate expansion and consolidation of banking organizations
by permitting bank holding companies that are adequately capitalized and managed
to acquire banks located in states outside their home states regardless of
whether such acquisitions are authorized under the law of the host state. The
Act also permits interstate mergers of banks, with some limitations and the
establishment of new branches on an interstate basis provided that such action
is authorized by the law of the host state. The Gramm-Leach-Bliley Act of 1999
permits banks, securities firms and insurance companies to affiliate under a
common holding company structure. In addition to allowing new forms of
financial services combinations, this Act clarifies how financial services
conglomerates will be regulated by the different federal and state regulators.
The Gramm-Leach-Bliley Act amended the BHCA and expanded the permissible
activities of certain qualifying bank holding companies, known as financial
holding companies. In addition to engaging in
12
banking and activities closely related to banking, as determined by the FRB by
regulation or order, financial holding companies may engage in activities that
are financial in nature or incidental to financial activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally. Under the Gramm-Leach-Bliley Act, all financial institutions,
including the Company and the Bank, were required to develop privacy policies,
restrict the sharing of non-public customer data with nonaffiliated parties at
the customer's request, and establish procedures and practices to protect
customer data from unauthorized access.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001 (adopted as Title III of the USA PATRIOT Act), all financial
institutions are subject to additional requirements to collect customer
information, monitor transactions and report certain information to U.S. law
enforcement agencies concerning customers and their transactions. In general,
accounts maintained by or on behalf of "non-United States persons," as defined
in the Act, are subject to particular scrutiny. Correspondent accounts for or
on behalf of foreign banks with profiles that raise money-laundering concerns
are subject to even greater scrutiny, and correspondent accounts for or on
behalf of foreign banks with no physical presence in any country are barred
altogether. Additional requirements are imposed by this Act on financial
institutions, all with a view towards encouraging information sharing among
financial institutions, regulators and law enforcement agencies. Financial
institutions are also required to adopt and implement "anti-money-laundering
programs."
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 non-audit 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.
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 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
13
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.
Non-Bank Subsidiaries
- ---------------------
Intervest Mortgage Corporation is subject to regulation by the FRB. Intervest
Securities Corporation is regulated by the SEC, the National Association of
Securities Dealers, Inc., or "NASD," and state securities regulators.
DEPENDENCE ON KEY PERSONNEL
The Company and its subsidiaries are dependent upon the services of their
principal officers. If the services of any of these persons were to become
unavailable for any reason, the operation of the Company and its subsidiaries
might be adversely affected in a material manner. The Company and/or its
subsidiaries have written employment agreements with its principal executive
officers. Neither the Company nor any of its subsidiaries, however, maintains
key man life insurance policies on executives and they do not have any immediate
plans to obtain such policies. The Company's business is impacted by its ability
to attract and retain qualified officers and employees.
VOTING CONTROL
The three original shareholders of the Company and two related parties own a
significant percentage of the issued and outstanding shares of Class A Common
Stock, and all of the issued and outstanding shares of Class B Common Stock of
the Company. The shares of Class B Common Stock, as a separate class, are
entitled to elect two-thirds of the directors of the Company. As a result,
voting control continues to rest with these persons.
ITEM 2. PROPERTIES
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 (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 expires in
March 2014. 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. All
of these leases contain operating escalation clauses related to taxes and
operating costs based upon various criteria and are accounted for as operating
leases.
The Bank's office at 625 Court Street consists of a two-story building
containing approximately 22,000 sq. ft. The Bank occupies the ground floor
(approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial
tenant. The branch office at 1875 Belcher Road is a two-story building in which
the Bank leases approximately 5,100 sq. ft. on the ground floor. The branch
office at 2175 Nursery Road is a one-story building containing approximately
2,700 sq. ft., which is entirely occupied by the Bank. The branch office at 2575
Ulmerton Road is a three-story building containing approximately 17,000 sq. ft.
The Bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the
upper floors to commercial tenants. The branch office at 6750 Gulfport Blvd. is
a one-story building containing approximately 2,800 sq. ft., which is entirely
occupied by the Bank. In addition, each of the Bank's Florida offices include
drive-through teller facilities. The Bank also owns a two-story building located
on property contiguous to its Court Street office in Florida. The building
contains approximately 12,000 sq. ft. and is leased to commercial tenants. 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
14
proceeding against the Company, which, if determined adversely, would have a
material effect on the business, results of operations, or financial position of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 2004, to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
JEROME DANSKER, age 86, 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. Mr. Dansker received a Bachelor of
Science degree from the New York University School of Commerce, Accounts and
Finance, a Law degree from the New York University School of Law, and is
admitted to practice as an attorney in the State of New York. Mr. Dansker also
serves as Chairman of the Board of Directors and Loan Committee of Intervest
National Bank, Chairman of the Board of Directors and Executive Vice President
of Intervest Mortgage Corporation, and Chairman of the Board of Directors of
Intervest Securities Corporation.
LOWELL S. DANSKER, age 54, serves as Vice Chairman of the Board of Directors,
and as President and Treasurer of Intervest Bancshares Corporation and has
served in such capacities since October 2003 and 1993, respectively. Mr. Dansker
received a Bachelor of Science in Business Administration from Babson College, a
Law degree from the University of Akron School of Law, and is admitted to
practice as an attorney in New York, Ohio, Florida and the District of Columbia.
Mr. Dansker also serves as Vice Chairman of the Board of Directors, Chief
Executive Officer and a member of the Loan Committee of Intervest National Bank,
Vice Chairman of the Board of Directors, President and Treasurer of Intervest
Mortgage Corporation, and Vice Chairman of the Board of Directors and Chief
Executive Officer of Intervest Securities Corporation.
LAWRENCE G. BERGMAN, age 60, serves as a Director, Vice President and Secretary
of Intervest Bancshares Corporation and has served in such capacities since
1993. Mr. Bergman received a Bachelor of Science degree and a Master of
Engineering (Electrical) degree from Cornell University and a Master of Science
in Engineering and a Ph.D. degree from The Johns Hopkins University. Mr. Bergman
also serves as a Director and a member of the Loan Committee of Intervest
National Bank, Director, Vice-President and Secretary of Intervest Mortgage
Corporation, and Director, Vice-President and Secretary of Intervest Securities
Corporation.
KEITH A. OLSEN, age 51, serves as President of the Florida Division and as a
Director of Intervest National Bank and has served in such capacities since July
2001. Prior to that, Mr. Olsen was the President of Intervest Bank from 1994
until it merged into Intervest National Bank in July 2001. Prior to that, he was
Senior Vice President of Intervest Bank since 1991. Mr. Olsen received an
Associates degree from St. Petersburg Junior College and a Bachelors degree in
Business Administration and Finance from the University of Florida, Gainesville.
He is also a graduate of the Florida School of Banking of the University of
Florida, Gainesville, the National School of Real Estate Finance of Ohio State
University and the Graduate School of Banking of the South of Louisiana State
University. Mr. Olsen has been in banking for more than 30 years and has served
as a senior bank officer for more than 20 years.
RAYMOND C. SULLIVAN, age 58, serves as President and as a Director of Intervest
National Bank and has served in such capacities since April 1999. Prior to that,
Mr. Sullivan was an employee of Intervest Bancshares Corporation from March 1998
to March 1999. Mr. Sullivan received an MBA degree from Fordham University, an
M.S. degree from City College of New York and a B.A. degree from St. Francis
College. Mr. Sullivan also has a Certificate in Advanced Graduate Study in
Accounting from Pace University and is a graduate of the National School of
Finance and Management. Mr. Sullivan has over 27 years of banking experience.
Prior to joining the Company, Mr. Sullivan was the Operations Manager of the New
York Agency Office of Banco Mercantile, C.A. from 1994 to 1997, a Senior
Associate at LoBue Associates, Inc. from 1992 to 1993, and an Executive Vice
President, Chief Operations Officer and Director of Central Federal Savings Bank
from 1985 to 1992.
15
JOHN J. ARVONIO, age 42, serves as Senior Vice President, Chief Financial
Officer and Secretary of Intervest National Bank and has served in such
capacities since September 2000. Prior to that, Mr. Arvonio served as Vice
President, Controller and Secretary of Intervest National Bank from April 1999
to August 2000 and as an employee of Intervest Bancshares Corporation from April
1998 to March 1999. Mr. Arvonio also has been a registered representative of
Intervest Securities Corporation since December 2003. Mr. Arvonio received a
B.B.A. degree from Iona College and is a Certified Public Accountant. Mr.
Arvonio has over 15 years of banking experience. Prior to joining the Company,
Mr. Arvonio served as Second Vice President 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.
JOHN H. HOFFMANN, age 53, serves as Vice President and Controller of Intervest
Mortgage Corporation and has served in such capacities since August 2002 and
October 2000, respectively. Mr. Hoffmann received a B.B.A. degree from
Susquehanna University and is a Certified Public Accountant. Mr. Hoffmann has
over 20 years of banking experience. Prior to joining the Company, Mr. Hoffmann
served as Accounting Manager for Smart World Technologies from 1998 to 2000 and
as Vice President of Mortgage Accounting for The Greater New York Savings Bank
from 1987 to 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET FOR SECURITIES
The Holding Company's Class A common stock is quoted on the NASDAQ SmallCap
Market under the symbol: IBCA. There is no public-trading market for the Holding
Company's Class B common stock. At December 31, 2004, there were 5,886,433 and
385,000 shares of Class A and Class B common stock outstanding, respectively. At
December 31, 2004, there were approximately 1,200 holders of record of the Class
A common stock, which includes persons or entities that hold their stock in
nominee form or in street name through various brokerage firms. At December 31,
2004, there were five holders of record of Class B common stock.
The high and low sales prices, which represent actual sales transactions as
reported by the NASDAQ, for the Class A common stock by calendar quarter for
2004 and 2003 are as follows:
2004 2003
---- ----
High Low High Low
-------------- --------------
First quarter $18.48 $14.42 $11.48 $10.05
Second quarter $17.76 $14.75 $12.77 $10.38
Third quarter $17.15 $14.45 $13.75 $12.05
Fourth quarter $19.74 $16.50 $15.48 $12.86
DIVIDENDS
Class A and Class B common stockholders are entitled to receive dividends when
and if declared by the Board of Directors out of funds legally available for
such purposes. The Holding Company has not paid any dividends on its capital
stock and currently is not contemplating the payment of a dividend.
The Holding Company's ability to pay dividends is generally limited to earnings
from the prior year, although retained earnings and dividends from its
subsidiaries may also be used to pay dividends under certain circumstances. The
primary source of funds for dividends payable by the Holding Company to its
shareholders is the dividends received from its subsidiaries. The payment of
dividends by a subsidiary to the Holding Company is determined by the
subsidiary's Board of Directors and is dependent upon a number of factors,
including the subsidiary's capital requirements, regulatory limitations, results
of operations, financial condition and any restrictions arising from outstanding
indentures.
16
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 in 2004, 2003 and
2002 amounted to $3,429,000, $1,695,000 and $1,500,000, respectively.
There are also various legal limitations with respect to the Bank supplying
funds to the Holding Company. In particular, under federal banking law, the Bank
may not declare a dividend that exceeds undivided profits. In addition, the
approval of the FRB and OCC is required if the total amount of all dividends
declared in any calendar year exceeds the Bank's net profits for that year,
combined with its retained net profits for the preceding two years. The FRB also
has the authority to limit further the payment of dividends by the Bank under
certain circumstances. In addition, federal banking laws prohibit or restrict
the Bank from extending credit to the Holding Company under certain
circumstances.
The FRB and OCC have established certain financial and capital requirements that
affect the ability of banks to pay dividends and also have the general authority
to prohibit banks from engaging in unsafe or unsound practices in conducting
business. Depending upon the financial condition of the Bank, the payment of
cash dividends could be deemed to constitute such an unsafe or unsound practice.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to commit resources to support
each such bank. Consistent with this policy, the FRB has stated that, as a
matter of prudent banking, a bank holding company generally should not pay cash
dividends unless the available net earnings of the bank holding company is
sufficient to fully fund the dividends, and the prospective rate of earnings
retention appears to be consistent with a holding company's capital needs, asset
quality and overall financial condition.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ------------------------------------------------------------------------------------------------------------------------
At or For The Year Ended December 31,
($ in thousands, except per share data) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA:
Total assets (1). . . . . . . . . . . . . . . . . . . . $1,316,751 $ 911,523 $ 686,443 $ 513,086 $ 416,927
Cash and cash equivalents . . . . . . . . . . . . . . . $ 24,599 $ 64,128 $ 30,849 $ 24,409 $ 42,938
Securities available for sale . . . . . . . . . . . . . $ - $ - $ - $ 6,192 $ 74,789
Securities held to maturity, net. . . . . . . . . . . . $ 248,888 $ 152,823 $ 145,694 $ 99,157 $ 20,970
Loans receivable, net of deferred fees. . . . . . . . . $1,015,396 $ 671,125 $ 489,912 $ 368,526 $ 266,326
Deposits. . . . . . . . . . . . . . . . . . . . . . . . $ 993,872 $ 675,513 $ 505,958 $ 362,437 $ 300,241
Borrowed funds and related accrued interest payable (1) $ 202,682 $ 140,383 $ 114,032 $ 100,374 $ 72,813
Stockholders' equity. . . . . . . . . . . . . . . . . . $ 90,094 $ 75,385 $ 53,126 $ 40,395 $ 36,228
Nonaccrual loans. . . . . . . . . . . . . . . . . . . . $ 4,607 $ 8,474 $ - $ 1,243 $ -
Foreclosed real estate . . . . . . . . . $ - $ - $ 1,081 $ - $ -
Allowance for loan losses . . . . . . . . . . . . . . . $ 11,106 $ 6,580 $ 4,611 $ 3,380 $ 2,768
Loan chargeoffs .. . . . . . . . . . . $ - $ - $ 150 $ - $ -
Loan recoveries . . . . . . . . . . . . . . . . . . . . $ - $ - $ 107 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA:
Interest and dividend income .. . . . . . . $ 66,549 $ 50,464 $ 43,479 $ 35,462 $ 31,908
Interest expense (2). . . . . . . . . . . . . . . . . . 38,683 28,564 26,325 24,714 23,707
---------------------------------------------------------------
Net interest and dividend income. . . . . . . . . . . . 27,866 21,900 17,154 10,748 8,201
Provision for loan losses . . . . . . . . . . . . . . . 4,526 1,969 1,274 612 275
---------------------------------------------------------------
Net interest and dividend income after
provision for loan losses . . . . . . . . . . . . . . 23,340 19,931 15,880 10,136 7,926
Noninterest income. . . . . . . . . . . . . . . . . . . 5,140 3,321 2,218 1,655 983
Noninterest expenses . . . . . . . . . . 8,251 7,259 6,479 5,303 4,568
---------------------------------------------------------------
Earnings before income taxes. . . . . . . . . . . . . . 20,229 15,993 11,619 6,488 4,341
Provision for income taxes (2). . . . . . . . . . . . . 8,776 6,873 4,713 2,710 1,733
---------------------------------------------------------------
Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 11,453 $ 9,120 $ 6,906 $ 3,778 $ 2,608
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (3):
Basic earnings per share. . . . . . . . . . . . . . . . $ 1.89 $ 1.85 $ 1.71 $ 0.97 $ 0.67
Diluted earnings per share . . . . . . . . $ 1.71 $ 1.53 $ 1.37 $ 0.97 $ 0.67
Book value per share . . . . . . . . . . $ 14.37 $ 12.59 $ 11.30 $ 10.36 $ 9.29
Market price per share. . . . . . . . . . . . . . . . . $ 19.74 $ 14.65 $ 10.80 $ 7.40 $ 3.75
- ------------------------------------------------------------------------------------------------------------------------
OTHER DATA AND RATIOS:
Common shares outstanding . . . . . . . . . . . . . . . 6,271,433 5,988,377 4,703,087 3,899,629 3,899,629
Common stock warrants outstanding .. . . . . . 696,465 738,975 1,750,010 2,650,218 2,650,218
Average common shares used to calculate:
Basic earnings per share. . . . . . . . . . . . . . . 6,068,755 4,938,995 4,043,619 3,899,629 3,884,560
Diluted earnings per share. . . . . . . . . . . . . . 6,828,176 6,257,720 5,348,121 3,899,629 3,884,560
Adjusted net earnings for diluted earnings per share. . $ 11,707 $ 9,572 $ 7,342 $ 3,778 $ 2,608
Net interest margin . . . . . . . . . . . . . . . . . . 2.52% 2.90% 2.88% 2.47% 2.34%
Return on average assets. . . . . . . . . . . . . . . . 1.02% 1.19% 1.13% 0.85% 0.69%
Return on average equity. . . . . . . . . . . . . . . . 14.14% 15.34% 15.56% 9.94% 7.48%
Loans, net of unearned income to deposits . . . . . . . 102% 99% 97% 102% 89%
Loans, net of unearned income to deposits (Bank Only) . 86% 79% 76% 79% 67%
Efficiency ratio. . . . . . . . . . . . . . . . . . . . 25% 29% 33% 43% 50%
Allowance for loan losses to total net loans. . . . . . 1.09% 0.98% 0.94% 0.92% 1.04%
Average stockholders' equity to average total assets. . 7.23% 7.74% 7.27% 8.50% 9.18%
Stockholders' equity to total assets. . . . . . . . . . 6.84% 8.28% 7.74% 7.88% 8.69%
- ------------------------------------------------------------------------------------------------------------------------
(1) Amounts at December 31, 2003 and prior have been adjusted where applicable from those previously reported for
the effect of adopting FASB Interpretation No. 46-R, "Consolidation of Variable Interest Entities".
(2) A charge of $206,000, net of taxes, from the early retirement of debentures that was previously reported in 2000 as
an extraordinary item has been reclassified (a $382,000 increase to interest expense and a $176,000 decrease to the
provision for income taxes) to give effect to SFAS No. 145," Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS Statement No. 13, and Technical Corrections."
(3) The Company has never paid common dividends.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations that follows should be read in conjunction with the consolidated
financial statements and notes thereto included in this report on Form 10-K.
Intervest Bancshares Corporation has three wholly owned 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. For a
discussion of the Company's business, see Item 1 "Business" in Part I of this
report.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan losses and income tax expense.
Noninterest income consists mostly of loan and other banking fees as well as
income from loan prepayments. The amount and timing of, as well as income from,
loan prepayments, if any, cannot be predicted and can fluctuate significantly.
Normally, the number of instances of prepayment of mortgage loans tends to
increase during periods of declining interest rates and tends to decrease during
periods of increasing interest rates. Many of the Company's mortgage loans
include 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 significantly affected by general economic and
competitive conditions, changes in market interest rates, government policies
and actions of regulatory authorities. The Company's loan portfolio has
historically been concentrated in commercial real estate and multifamily
mortgage loans, which represented 99.8% of the total loan portfolio at December
31, 2004. The properties underlying the Company's mortgages are also
concentrated in New York State (71%) and the State of Florida (19%). Many of the
New York properties are located in New York City and are subject to rent control
and rent stabilization laws, which limit the ability of the property owners to
increase rents. Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly impacted by local
economic conditions in the areas the properties are located, as well as the
Company's underwriting standards. Economic conditions affect the market value of
the underlying collateral as well as the levels of occupancy of income-producing
properties. Additionally, terrorist acts, such as those that occurred on
September 11, 2001, armed conflicts, such as the war on terrorism, and natural
disasters, such as hurricanes, may have an adverse impact on economic
conditions.
CRITICAL ACCOUNTING POLICIES
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 U.S. generally accepted accounting principles 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 most critical accounting policy relates to
the determination of its allowance for loan losses, which is discussed in more
detail in the section entitled "Allowance for Loan Losses." For a summary of all
of the Company's significant accounting policies, see note 1 to the consolidated
financial statements.
19
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND DECEMBER 31, 2003.
Overview
- --------
Total assets at December 31, 2004 increased to $1,316,751,000, from $911,523,000
at December 31, 2003. Total liabilities at December 31, 2004 increased to
$1,226,657,000, from $836,138,000 at December 31, 2003, and stockholders' equity
increased to $90,094,000 at December 31, 2004, from $75,385,000 at year-end
2003. Book value per common share increased to $14.37 per share at December 31,
2004, from $12.59 at December 31, 2003.
Selected balance sheet information as of December 31, 2004 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Company
($in thousands) Holding Company Bank Corp. Corp. Amts (1) Combined
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 4,862 $ 15,836 $ 17,151 $ 476 $ (13,726) $ 24,599
Security investments - 253,980 - - - 253,980
Loans receivable, net of deferred fees 14,078 900,798 100,520 - - 1,015,396
Allowance for loan losses (85) (10,689) (332) - - (11,106)
Investment in consolidated subsidiaries 135,351 - - - (135,351) -
All other assets 5,316 23,584 5,112 8 (138) 33,882
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 159,522 $1,183,509 $ 122,451 $ 484 $(149,215) $1,316,751
- -------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $1,007,862 $ - $ - $ (13,990) $ 993,872
Borrowed funds and related interest payable 69,350 36,263 97,069 - - 202,682
All other liabilities 78 28,041 1,855 3 126 30,103
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 69,428 1,072,166 98,924 3 (13,864) 1,226,657
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 90,094 111,343 23,527 481 (135,351) 90,094
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 159,522 $1,183,509 $ 122,451 $ 484 $(149,215) $1,316,751
- -------------------------------------------------------------------------------------------------------------------------------
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely from
intercompany deposit accounts and investments in subsidiaries.
A comparison of the Company's consolidated balance sheet as of December 31, 2004
and 2003 follows:
At December 31, 2004 At December 31, 2003
---------------------------- ----------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 24,599 1.9% $ 64,128 7.0%
Security investments 253,980 19.3 155,898 17.1
Loans receivable, net of deferred fees and loan loss allowance 1,004,290 76.3 664,545 72.9
All other assets 33,882 2.5 26,952 3.0
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,316,751 100.0% $ 911,523 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $ 993,872 75.5% $ 675,513 74.1%
Borrowed funds and related interest payable 202,682 15.4 140,383 15.4
All other liabilities 30,103 2.2 20,242 2.2
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,226,657 93.1 836,138 91.7
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 90,094 6.9 75,385 8.3
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,316,751 100.0% $ 911,523 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents decreased to $24,599,000 at December 31, 2004, from
$64,128,000 at December 31, 2003, primarily due to a lower level of overnight
federal fund investments. The decrease reflected the deployment of a portion of
those funds into loans and securities. Cash and cash equivalents include federal
funds sold and interest-bearing and noninterest-bearing cash balances with
banks, and other short-term investments that have original maturities of three
months or less. The short-term investments are normally comprised of commercial
paper issued by large commercial banks, certificates of deposit and U.S.
government securities. The level of cash and cash equivalents fluctuates based
on various factors, including liquidity needs, loan demand, deposit flows, calls
of securities, repayments of borrowed funds and alternative investment
opportunities.
20
Security Investments
- --------------------
The Company invests in securities after satisfying its liquidity objectives and
lending commitments. The Company has historically only purchased debt securities
that are issued by the U.S. government or one of its agencies. The Company's
investment policy is designed to provide and maintain liquidity, without
incurring undue interest and credit risk. The Company's security investments
have lower yields than its loan portfolio. To manage interest rate risk, the
Company normally purchases securities that have adjustable rates or securities
with fixed rates that have short to intermediate maturity terms. The Company
does not engage in trading activities. The Company continues to invest in
short-term (1-5 year) U.S government agency debt obligations to emphasize
liquidity and to target Intervest National Bank's loan-to-deposit ratio at
approximately 80%.
Securities that are held for indefinite periods of time which management intends
to use as part of its asset/liability management strategy, or that may be sold
in response to changes in interest rates or other factors, are classified as
available for sale and are carried at estimated fair value. There were no
securities classified as available for sale at December 31, 2004 or 2003.
Securities for which the Company has the intent and ability to hold to maturity
are classified as held to maturity and carried at amortized cost. Such
securities totaled $248,888,000 at December 31, 2004, compared to $152,823,000
at December 31, 2003. The increase was due to new purchases exceeding maturities
and calls of securities during the year. At December 31, 2004, 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 2.33% and a
weighted-average remaining maturity of 1.4 years, compared to 1.75% and 1.1
years, respectively, at December 31, 2003. 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, 2004 and 2003, the portfolio's estimated fair value was
$247,211,000 and $152,995,000, respectively.
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in
their capital stock of $2,464,000 and $2,628,000, respectively, at December 31,
2004. The FRB stock currently pays a dividend of 6%, while the FHLB stock
dividend fluctuates and most recently was 3%. The total investment, which
amounted to $5,092,000 at December 31, 2004, compared to $3,075,000 at December
31, 2003, fluctuates based on the Bank's capital level for the FRB and the
Bank's loans and borrowings for the FHLB.
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 $1,004,290,000 at December 31, 2004, from $664,545,000 at December
31, 2003. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments.
The following table sets forth information concerning the loan portfolio:
At December 31, 2004 At December 31, 2003
-------------------- --------------------
# of % of # of % of
($ in thousands) Loans Amount Total Loans Amount Total
- -------------------------------------------------------------------------------------------------------------
Commercial real estate loans 244 $ 601,512 58.6% 184 $ 344,071 50.7%
Residential multifamily loans 249 403,613 39.3 210 310,650 45.8
Land development and other land loans 11 19,198 1.9 6 20,526 3.0
Residential 1-4 family loans 4 984 0.1 26 1,628 0.2
Commercial loans 23 1,215 0.1 28 1,662 0.2
Consumer loans 12 221 - 16 319 0.1
- -------------------------------------------------------------------------------------------------------------
Total gross loans receivable 543 1,026,743 100.0% 470 678,856 100.0%
Deferred loan fees (11,347) (7,731)
- -------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees 1,015,396 671,125
Allowance for loan losses (11,106) (6,580)
- -------------------------------------------------------------------------------------------------------------
Loans receivable, net $1,004,290 $ 664,545
- -------------------------------------------------------------------------------------------------------------
21
Nearly all of the Company's loan portfolio is comprised of 504 loans, or
$1,024,323,000, that are secured by commercial and multifamily real estate,
including rental and cooperative apartment buildings, office buildings, mix-used
properties, shopping centers, industrial properties and vacant land. These loans
have an average principal size of $2,032,000. The portfolio has 40 loans of
$5,000,000 or more that aggregate $302,291,000, with the largest loan amounting
to $14,895,000.
The following table sets forth the scheduled contractual principal repayments of
the loan portfolio:
At December 31,
---------------
($ in thousands) 2004 2003
------------------------------------------------
Within one year $ 227,889 $133,137
Over one to five years (1) 645,050 430,783
Over five years (1) 153,804 114,936
------------------------------------------------
$1,026,743 $678,856
------------------------------------------------
(1) At December 31, 2004, $485,706,000 of loans with adjustable rates and
$313,148,000 of loans with fixed rates were due after one year.
The following table sets forth the activity in the loan portfolio:
For the Year Ended December 31,
---------------------------------
($ in thousands) 2004 2003 2002
--------------------------------------------------------------------------------
Loans receivable, net, at beginning of year $ 664,545 $ 485,301 $ 365,146
Loans originated 626,252 378,630 233,689
Principal repayments (278,365) (195,076) (110,661)
Recoveries - - (107)
Chargeoffs - - 150
Increase in deferred loan fees (3,616) (2,341) (1,642)
Provision for loan losses (4,526) (1,969) (1,274)
--------------------------------------------------------------------------------
Loans receivable, net, at end of year $ 1,004,290 $ 664,545 $ 485,301
--------------------------------------------------------------------------------
At December 31, 2004, $4,607,000 of loans were on a nonaccrual status, compared
to $8,474,000 at December 31, 2003. 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. At December 31, 2004 and
2003, there were no other impaired loans or loans ninety days past due and still
accruing interest.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses increased to $11,106,000 at December 31, 2004,
from $6,580,000 at December 31, 2003 and represented 1.09% of total loans (net
of deferred fees) outstanding at December 31, 2004, compared to 0.98% at
December 31, 2003. The increase in the allowance was due to provisions totaling
$4,526,000 resulting from loan growth and a decrease in the credit grade of two
loans during the year. At December 31, 2004 and 2003, the allowance was almost
all allocated to commercial real estate loans, multifamily loans and land loans.
The following table sets forth information with respect to the allowance for
loan losses:
For the Year Ended December 31,
-------------------------------
($ in thousands) 2004 2003 2002
------------------------------------------------------------------------------------------
Allowance at beginning of year $ 6,580 $4,611 $ 3,380
Provision charged to operations 4,526 1,969 1,274
Chargeoffs - - (150)
Recoveries - - 107
------------------------------------------------------------------------------------------
Allowance at end of year $ 11,106 $ 6,580 $ 4,611
------------------------------------------------------------------------------------------
Ratio of allowance to total loans, net of deferred fees 1.09% 0.98% 0.94%
Total loans, net of deferred fees at year end $1,015,396 $671,125 $489,912
Average loans outstanding during the year $ 867,724 $585,556 $439,241
------------------------------------------------------------------------------------------
The allowance for loan losses is established through a provision charged to
operations. Loans are charged against the allowance when management believes
that the collectability of the principal is unlikely. Subsequent recoveries are
added to the allowance. The adequacy of the allowance is evaluated monthly or
more frequently when
22
necessary with consideration given to: the nature and size of the loan
portfolio; overall portfolio quality; loan concentrations; specific problem
loans and commitments and estimates of fair value thereof; historical chargeoffs
and recoveries; adverse situations which may affect the borrowers' ability to
repay; and management's perception of the current and anticipated economic
conditions in the Company's lending areas. For calculation purposes, the
allowance for loan losses is comprised of an unallocated portion (which is
derived from an estimated loss factor ranging from 0.30% to 1.35% multiplied by
the principal amount of loans rated acceptable and higher percentages for loans
that are assigned a credit grade of special mention or lower) and, from time to
time, an allocated (or specific) portion on certain loans (particularly for
loans that have been identified as being impaired as discussed below). 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.
In addition, SFAS No. 114 specifies the manner in which the portion of the
allowance for loan losses related to impaired loans is computed. A loan is
normally deemed impaired when, based upon current information and events, it is
probable that the Company will be unable to collect both full principal and
interest due according to the contractual terms of the loan agreement.
Impairment for larger balance loans such as commercial real estate and
multifamily loans are measured based on: the present value of expected future
cash flows, discounted at the loan's effective interest rate; or the observable
market price of the loan; or the estimated fair value of the loan's collateral,
if payment of the principal and interest is dependent upon the collateral. When
the fair value of the property is less than the recorded investment in the loan,
this deficiency is recognized as a valuation allowance within the overall
allowance for loan losses and a charge through the provision for loan losses.
The Company's policy is to charge off any portion of the recorded investment in
the loan that exceeds the fair value of the collateral.
The Company considers a variety of factors in determining whether a loan is
impaired, including (i) any notice from the borrower that the borrower will be
unable to repay all principal and interest amounts contractually due under the
loan agreement, (ii) any delinquency in the principal and/or interest payments
other than minimum delays or shortfalls in payments, and (iii) other information
known by management that would indicate the full repayment of principal and
interest is not probable. In evaluating loans for impairment, management
generally considers delinquencies of 60 days or less to be minimum delays, and
accordingly does not consider such delinquent loans to be impaired in the
absence of other indications. Impaired loans normally consist of loans on
nonaccrual status. Generally, all loans are evaluated for impairment on a
loan-by-loan basis.
Finally, the Company's regulators, as an integral part of their examination
process, periodically review the allowance for loan losses. Accordingly, the
Company may be required to take certain chargeoffs and/or recognize additions to
the allowance based on the regulators' judgment concerning information available
to them during their examination.
All Other Assets
- ----------------
The following table sets forth the composition of the caption "All other assets"
in the table on page 20:
At December 31,
-----------------
($ in thousands) 2004 2003
---------------------------------------------------------------
Accrued interest receivable $ 6,699 $ 4,995
Loan fees receivable 8,208 5,622
Premises and equipment, net 6,636 5,752
Deferred income tax asset 5,095 2,960
Deferred debenture offering costs, net 4,929 4,023
Investment in unconsolidated subsidiaries 1,856 928
All other assets 459 2,672
---------------------------------------------------------------
$ 33,882 $ 26,952
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Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received. The increase was due to the growth in these assets.
23
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. Such amounts are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan as a yield
adjustment. The increase was due to an increase in mortgage l