ITEM 1. BUSINESS
GENERAL
Private Securities Litigation Reform Act Safe Harbor Statement - --------------------------------------------------------------
The Company is making this statement in order to satisfy the "Safe Harbor" provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this report on Form 10-K that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements.
Business Overview - -----------------
The Company's primary business segment is banking and real estate lending. The Company's lending activities are comprised almost entirely of originating for its loan portfolio mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mix-used properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). These loans have an average life of approximately three years. The Company tends to lend in areas that are in the process of being revitalized, with a concentration of loans on properties located in New York State and the State of Florida. A significant portion of the residential properties are located in New York City and are subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents. The Company's business is affected by a number of factors that are discussed herein in the section entitled "Item 1A
ITEM 1A. RISK FACTORS
References in this section to "we," "us," "our," the "holding company," and "Intervest" refer to Intervest Bancshares Corporation and its consolidated subsidiaries, unless otherwise specified. References to the "bank" and our "mortgage lending subsidiary" refer to our principal operating subsidiaries, Intervest National Bank and Intervest Mortgage Corporation, respectively.
The following risk factors contain important information about us and our business and should be read in their entirety. Additional risks and uncertainties not known to us or that we now believe to be not material could also impair our business. If any of the following risks actually occur, our business, results of operations and financial condition could suffer significantly. As a result, the market price of our common stock could decline and you could lose all of your investment.
WE DEPEND ON OUR EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES TO IMPLEMENT OUR BUSINESS STRATEGY AND OUR BUSINESS MAY SUFFER IF WE LOSE THEIR SERVICES.
Our success is largely dependent on the business expertise and relationships of a small number of our executive officers and other key employees. Our chairman and chief executive officer, who has been and remains instrumental to our success, is 87 years of age. If the services of any of our executive officers or other key employees were to become unavailable for any reason, the growth, performance and operation of our company and its subsidiaries might be adversely affected because of their skills and knowledge of the markets in which we operate, years of real estate lending experience and the difficulty of promptly finding qualified replacement personnel. As a result, our ability to successfully grow our business will depend, in part, on our ability to attract and retain additional qualified officers and employees.
OUR LOANS ARE HIGHLY CONCENTRATED IN COMMERCIAL REAL ESTATE AND MULTIFAMILY MORTGAGE LOANS, INCREASING THE RISK ASSOCIATED WITH OUR LOAN PORTFOLIO.
Nearly all (99.9%) of our loan portfolio is comprised of commercial real estate and multifamily mortgage loans, including loans on substantially vacant properties and vacant land. This concentration increases the risk associated with our loan portfolio. Commercial real estate and multifamily loans are generally considered riskier than many other kinds of loans, like single family residential real estate loans, since these loans tend to involve larger loan balances to single borrowers and repayment of loans secured by income-producing property is typically dependent upon the successful operation of the underlying real estate. Additionally, loans on vacant land typically do not have income streams and depend upon other sources of cash flow from the borrower for repayment. Our average real estate loan size was $2.6 million at December 31, 2005 and we expect that it will continue to increase in the future. Regardless of the underwriting criteria we utilize, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market and economic conditions affecting the value of our loan collateral and problems affecting the credit and business of our borrowers.
AN ECONOMIC DOWNTURN IN NEW YORK OR FLORIDA COULD HINDER OUR ABILITY TO OPERATE PROFITABLY AND HAVE AN ADVERSE IMPACT ON OUR OPERATIONS.
The properties collateralizing our mortgage loans are heavily concentrated in New York City and Florida, our two primary lending market areas. Accordingly, our business and operations are vulnerable to downturns in the economies of those geographic areas. At December 31, 2005, mortgages representing approximately 65% and 24% of the principal balance of our total loan portfolio were on properties located in New York State and Florida, respectively. A large number of the loans in New York are secured by properties located in Manhattan, Brooklyn and the Bronx. A large number of the loans in Florida are secured by properties located in Clearwater, Tampa, Fort Lauderdale, Miami, Orlando and St. Petersburg. The concentration of our loans in these areas subjects us to risk that a downturn in the economy or recession in those areas could result in a decrease in loan originations and increases in delinquencies and foreclosures, which would more greatly affect us than if our lending were more geographically diversified. Many of the properties located in the New York City area underlying our mortgage loans are subject to rent control and rent stabilization laws, which limit the ability of property owners to increase rents, which may in turn limit the borrowers' ability to repay those mortgage loans. In addition, since a large portion of our portfolio is secured by properties located in Florida, the occurrence of a natural disaster, such as a
hurricane, could result in a decline in loan originations, a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us in that state. We may suffer losses if there is a decline in the value of the properties underlying our mortgage loans which would have an adverse impact on our operations.
OUR HISTORICAL LEVELS OF BALANCE SHEET GROWTH AND FINANCIAL PERFORMANCE TRENDS MAY NOT CONTINUE IF OUR GROWTH STRATEGY IS NOT SUCCESSFUL.
A key component of our business strategy has been and will continue to be our growth, including the attraction of additional deposits and the origination of additional loans. Our ability to sustain continued growth depends upon several factors outside of our control, including economic conditions generally and in our market areas in particular, as well as interest rate trends. We can provide no assurance that we will continue to be successful in increasing the volume of our loans and deposits at acceptable risk and asset quality levels and upon acceptable terms, while managing the costs and implementation risks associated with this growth strategy. There can be no assurance that further expansion will be profitable or that we will continue to be able to sustain our historical rate of growth, either through internal growth or through other expansion of our banking markets. In addition, we have relied historically on a relatively small number of key executives in relation to the size of our company, and there can be no assurance that we will be able to manage anticipated future growth without additional management staff. Our growth strategy may also limit short-term increases in our profitability, as we dedicate resources to the building of our infrastructure.
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL SUFFER IF WE DO NOT CONTINUALLY IDENTIFY AND INVEST IN MORTGAGE LOANS OR OTHER INSTRUMENTS WITH RATES OF RETURN ABOVE OUR COST OF FUNDS.
Our profitability depends primarily on the generation of net interest income which is dependent on the interest rate spread, which is the difference between yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities. As a result, our success, in large part, depends on our ability to invest a substantial percentage of our assets in mortgage loans with rates of return that exceed our cost of funds. We may also experience lower rates of return from the investment of our assets, including but not limited to proceeds from the prepayment of loans, in liquid assets such as government securities and overnight funds, which would have a material adverse effect on our business, financial condition or results of operations. Our net interest margin has ranged from a low of 2.34% for 2000 to a high of 2.90% for 2003, and was 2.70% for the year ended December 31, 2005.
CHANGES IN INTEREST RATES COULD ADVERSELY IMPACT OUR EARNINGS.
Like many financial institutions, we are subject to the risk of fluctuations in interest rates. A significant change in interest rates could have a material adverse effect on our net income. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurance of our ability to maintain a consistent positive interest rate spread between the yield earned on our interest-earning assets and the rates paid on our interest-bearing liabilities. There can be no assurances that a sudden and substantial increase in interest rates may not adversely impact our earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. For a further discussion on interest rate risk, see the sections entitled "Asset and Liability Management" in this report on Form 10-K.
IF THE PROPERTIES UNDERLYING MANY OF OUR MORTGAGE LOANS LOSE VALUE, WE MAY SUFFER LOAN LOSSES.
Our ability to recover our investment in mortgage loans is solely or primarily dependent on the market value of the properties underlying our mortgage loans because many of our mortgages that we have originated, or will originate in the future, are nonrecourse or limited recourse. Under the terms of nonrecourse mortgages, the owner of the property subject to the mortgage has no personal obligation to repay the mortgage note which the mortgage secures. In some circumstances, we may have limited recourse against the owner with respect to liabilities related to tenant security deposits, proceeds from insurance policies, losses arising under environmental laws and/or losses resulting from waste or acts of malfeasance. In addition, our losses in connection with delinquent and foreclosed loans may be more pronounced because most of our loans do not require repayment of a substantial part of the original principal amount until maturity, and if borrowers default on their balloon payments or if we have a junior
lien position, it may have a material adverse effect on our business, financial condition and results of operations. Additionally, since we tend to lend in areas that are in the process of being revitalized, properties securing our loans in these revitalizing neighborhoods may be more susceptible to fluctuations in property values than in more established areas. In the event we are required to foreclose on a property securing one of our mortgage loans or otherwise pursue our remedies in order to protect our investment, there can be no assurance that we will recover funds in an amount equal to our projected return on our investment or in an amount sufficient to prevent a loss to us due to prevailing economic conditions, real estate values and other factors associated with the ownership of real property. As a result, the market value of the real estate or other collateral underlying our loans may not, at any given time, be sufficient to satisfy the outstanding principal amount of the loans.
WE MAY HAVE HIGHER LOAN LOSSES THAN WE HAVE ALLOWED FOR, IN WHICH CASE OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED.
We maintain an allowance for loan losses in order to mitigate the effect of possible losses inherent in our loan portfolio. There is a risk that we may experience losses which could exceed the allowance for loan losses we have set aside. In determining the size of the allowance, our management makes various assumptions and judgments about the collectibility of our loan portfolio, which are discussed in the section "Critical Accounting Policies" in this report on Form 10-K. If our assumptions and judgments prove to be incorrect or federal regulators require us to increase our provision for loan losses or recognize loan chargeoffs, we may have to increase our allowance for loan losses or loan chargeoffs which could have an adverse effect on our operating results and financial condition. There can be no assurances that our allowance for loan losses will be adequate to protect us against loan losses that we may incur.
WE ARE A HIGHLY LEVERAGED COMPANY AND OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT US FROM CONTINUING TO GROW OUR BALANCE SHEET.
At December 31, 2005, our borrowed funds (exclusive of deposits) and related interest payable was approximately $155.7 million. This level of indebtedness could make it difficult for us to satisfy all of our obligations to the holders of our debt and could limit our ability to obtain additional debt financing to fund our working capital requirements. In addition, the indentures underlying the subordinated debentures of our mortgage lending subsidiary contain financial and other restrictive covenants that may limit its ability to incur additional indebtedness. Our mortgage lending subsidiary has and expects to continue to rely on the issuance of its subordinated debentures in registered, best efforts offerings to the public as a source of funds to support its loan originations. The inability to incur additional indebtedness could adversely affect our business and financial condition by, among other things, limiting our flexibility in planning for, or reacting to, changes in our industry; placing us at a competitive disadvantage with respect to our competitors who may operate on a less leveraged basis. As a result, this may make us more vulnerable to changes in economic conditions and require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, which would reduce the funds available for other purposes which, in turn, could have a negative impact on our profitability and our stock price.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY AND GOVERNMENT REGULATIONS SIGNIFICANTLY AFFECT OUR BUSINESS.
The banking industry is extensively regulated. Banking regulations are intended primarily to protect depositors, consumers and the Bank Insurance Fund of the Federal Deposit Insurance Corporation, referred to in this report as the FDIC, and not stockholders. We are subject to regulation and supervision by the Board of Governors of the Federal Reserve System, or Federal Reserve Board, referred to in this report as the FRB, and the bank is subject to regulation and supervision by the Office of the Comptroller of the Currency, referred to in this report as the OCC. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. The bank regulatory agencies have broad authority to prevent or remedy unsafe or unsound practices or violations of law. We are subject to regulatory capital requirements, and a failure to meet minimum capital requirements or to comply with other regulations could result in actions by regulators that could adversely affect our ability to pay dividends or otherwise adversely impact our operations. In addition, changes in law, regulations and regulatory practices affecting the banking industry may limit the manner in which we may conduct our business.
WE DEPEND ON BROKERS AND OTHER SOURCES FOR OUR MORTGAGE LENDING ACTIVITIES AND ANY REDUCTION IN REFERRALS COULD LIMIT OUR ABILITY TO GROW.
We rely significantly on referrals from mortgage brokers for our loan originations. Our ability to maintain our history of growth may depend, in part, on our ability to continue to attract referrals from mortgage brokers. If those referrals were to decline or did not continue to expand, there can be no assurances that other sources of loan originations would be available to assure our ability to maintain a level of growth consistent with our historical performance.
SINCE WE ENGAGE IN COLLATERAL-BASED LENDING AND MAY BE FORCED TO FORECLOSE ON THE COLLATERAL PROPERTY AND OWN THE UNDERLYING REAL ESTATE, WE MAY BE SUBJECT TO THE INCREASED COSTS ASSOCIATED WITH THE OWNERSHIP OF REAL PROPERTY WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Since we are primarily a collateral-based lender, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default, is dependent upon factors outside of our control, including, but not limited to: general or local economic conditions; neighborhood values; interest rates; real estate tax rates; operating expenses of the mortgaged properties; supply of and demand for rental units or properties; ability to obtain and maintain adequate occupancy of the properties; zoning laws; governmental rules, regulations and fiscal policies; and acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating a real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect our operating results, resulting in reduced levels of profitability.
THE EMPLOYMENT AGREEMENTS OF CERTAIN OF OUR EXECUTIVE OFFICERS PERMIT THEM TO ENGAGE IN ACTIVITIES THAT MAY BE CONSIDERED TO BE COMPETING WITH OUR SUBSIDIARIES, WHICH MAY HAVE AN ADVERSE EFFECT ON THE BUSINESS OF OUR SUBSIDIARIES.
The long-term employment agreements between us or our subsidiaries and certain of our executive officers expressly permit them to engage in outside activities, including activities competitive with our subsidiaries. This may have an adverse effect on the business and financial condition of our subsidiaries.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD.
The requirements of Section 404 of the Sarbanes Oxley Act and Securities and Exchange Commission rules and regulations require an annual management report on the Company's internal controls over financial reporting, including, among other matters, management's assessment of the effectiveness of the Company's internal control over financial reporting, and an attestation report by the Company's independent registered public accounting firm addressing these assessments. Beginning with the Company's annual report for the year ending December 31, 2006, the Company will have to include in its annual report on Form 10-K filed with the Securities and Exchange Commission a report of management regarding the Company's internal controls over financial reporting in accordance with the above requirements. In this regard, the Company has begun a process to document and evaluate its internal control over financial reporting in order to satisfy these requirements. The process includes dedicating internal resources toward the adoption of a detailed work plan and will also involve the retention of outside consultants. This process is designed to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes, where appropriate, and (iii) verify through testing that controls are functioning as documented. To date, the Company has identified certain deficiencies in the design and operating effectiveness of its internal control over financial reporting, and it believes that they have been corrected or are in the process of being corrected. Although this process is not completed, management is not aware of any "significant deficiencies" or "material weaknesses" in the Company's internal controls over financial reporting, as defined in applicable Securities and Exchange Commission rules and regulations. If we fail to identify and correct any significant deficiencies in the design or operating effectiveness of our internal control over financial reporting we may not be able to report our financial results with the desired degree of accuracy or to prevent fraud.
ENVIRONMENTAL LIABILITY ASSOCIATED WITH COMMERCIAL LENDING COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In the course of our business, we may acquire, through foreclosure, properties securing loans that are in default. There is a risk that hazardous substances could be discovered on those properties. In this event, we may be required to remove the substances from and remediate the properties at our cost and expense. The cost of removal and environmental remediation could be substantial. We may not have adequate remedies against the owners of the properties or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our business, financial condition and operating results.
WE FACE STRONG COMPETITION IN OUR MARKET AREAS, WHICH MAY LIMIT OUR GROWTH AND PROFITABILITY.
Our market areas, which primarily consist of the New York City area and the Tampa Bay area of Florida, are very competitive, and the level of competition facing us may increase further, which may limit our growth and profitability. We experience competition in both lending and attracting deposits from other banks and nonbanks located within and outside our market areas, some of which are significantly larger institutions or institutions with greater resources, lower cost of funds or a more established market presence. Nonbank competitors for deposits and deposit-type accounts include savings associations, credit unions, securities firms, money market funds, life insurance companies and the mutual funds industry. For loans, we encounter competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, credit card companies, credit unions, pension funds and securities firms.
TERRORIST ACTS AND ARMED CONFLICTS MAY ADVERSELY AFFECT OUR BUSINESS.
Terrorist acts as well as the war on terrorism may have an adverse impact on our results of operations and on the economy in general. Since the properties underlying a high concentration of our mortgage loans are located in New York City, we may be more vulnerable to the adverse impact of such occurrences than other institutions.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
The office of the Holding Company and the offices of Intervest Mortgage Corporation, Intervest Securities Corporation and the Bank's headquarters and full-service banking office are located in leased premises (of approximately 21,500 sq. ft.) on the entire fourth floor of One Rockefeller Plaza in New York City, New York, 10020. The Bank occupies approximately one-half of this space. The lease, which expires in March 2014, contains operating escalation clauses related to real estate taxes and operating costs based upon various criteria and is accounted for as an operating lease.
The Bank's principal office in Florida is located at 625 Court Street, Clearwater, Florida, 33756. In addition, the Bank operates four other branch offices; three of which are in Clearwater, Florida, at 1875 Belcher Road North, 2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750 Gulfport Blvd, South Pasadena, Florida. With the exception of the Belcher Road office, which is leased through June 2007, the Bank owns all its offices in Florida. The Belcher Road office lease contains operating escalation clauses related to real estate taxes and operating costs based upon various criteria and is accounted for as an operating lease.
The Bank's office at 625 Court Street consists of a two-story building containing approximately 22,000 sq. ft. The Bank occupies the ground floor (approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial tenant. The branch office at 1875 Belcher Road is a two-story building in which the Bank leases approximately 5,100 sq. ft. on the ground floor. The branch office at 2175 Nursery Road is a one-story building containing approximately 2,700 sq. ft., which is entirely occupied by the Bank. The branch office at 2575 Ulmerton Road is a three-story building containing approximately 17,000 sq. ft. The Bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the upper floors to various commercial tenants. The branch office at 6750 Gulfport Blvd. is a one-story building containing approximately 2,800 sq. ft., which is entirely occupied by the Bank. In addition, each of the Bank's Florida offices include drive-through teller facilities and Automated Teller Machines (ATMs). The Bank also owns a two-story building located on property contiguous to its Court Street office in Florida. The building contains approximately 12,000 sq. ft. and is leased to commercial tenants. The Bank also owns property across from its Court Street branch office in Florida. which consists of an office building that contains approximately 1,400 sq.ft. that is leased to one commercial tenant. This property provides additional parking for the Court Street branch.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as foreclosure proceedings. Management does not believe that there is any pending or threatened proceeding against the Company, which, if determined adversely, would have a material effect on the Company's results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2005, to a vote of security holders of the Company, through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
JOHN J. ARVONIO, age 43, serves as Chief Accounting Officer of Intervest Bancshares Corporation and as Senior Vice President, Chief Financial Officer and Secretary of Intervest National Bank. Mr. Arvonio has served in such capacities since December 2005 and September 2000, respectively. Prior to that, Mr. Arvonio served as Vice President, Controller and Secretary of Intervest National Bank from April 1999 to August 2000 and as an employee of Intervest Bancshares Corporation from April 1998 to March 1999. Mr. Arvonio has also been a registered representative of Intervest Securities Corporation since December 2003. Mr. Arvonio received a Bachelor of Business Administration degree from Iona College and is a certified public accountant. Mr. Arvonio has more than 16 years of banking experience. Prior to joining the Company, Mr. Arvonio served as Second Vice President Accounting Policy, and Technical Advisor to the Controller for The Greater New York Savings Bank from 1992 to 1997. Prior to that, Mr. Arvonio was a Manager of Financial Reporting for the Leasing and Investment Banking Divisions of Citibank from 1989 to 1992, and a Senior Auditor for Ernst & Young from 1985 to 1989.
LAWRENCE G. BERGMAN, age 61, serves as a Director, Vice President and Secretary of Intervest Bancshares Corporation and has served in such capacities since incorporation in 1993. Mr. Bergman received a Bachelor of Science degree and a Master of Engineering (Electrical) degree from Cornell University and a Master of Science in Engineering and a Ph.D. degree from The Johns Hopkins University. Mr. Bergman also serves as a Director and a member of the Loan Committee of Intervest National Bank, Director, Vice President and Secretary of Intervest Mortgage Corporation, and Director, Vice President and Secretary of Intervest Securities Corporation. Mr. Bergman also serves as an Administrator of Intervest Statutory Trust I, II, III and IV.
JEROME DANSKER, age 87, serves as Chairman of the Board of Directors and Chief Executive Officer of Intervest Bancshares Corporation and has served in such capacities since 1996 and 2004, respectively, and has been a director since incorporation in 1993. Mr. Dansker received a Bachelor of Science degree from the New York University School of Commerce, Accounts and Finance, and a Law degree from the New York University School of Law. Mr. Dansker also serves as Chairman of the Board of Directors and Loan Committee of Intervest National Bank, Chairman of the Board of Directors and Executive Vice President of Intervest Mortgage Corporation, and Chairman of the Board of Directors of Intervest Securities Corporation. Mr. Dansker also serves as an Administrator of Intervest Statutory Trust I, II, III and IV.
LOWELL S. DANSKER, age 55, serves as Vice Chairman of the Board of Directors, President and Treasurer of Intervest Bancshares Corporation and has served in such capacities, except for Vice Chairman, since incorporation in 1993. He has served as Vice Chairman since October 2003. Mr. Dansker received a Bachelor of Science in Business Administration from Babson College and a Law degree from the University of Akron School of Law. Mr. Dansker also serves as: Vice Chairman of the Board of Directors, Chief Executive Officer and a member of the Loan Committee of Intervest National Bank; Vice Chairman of the Board of Directors, President and Treasurer of Intervest Mortgage Corporation; Vice Chairman of the Board of Directors and Chief Executive Officer and Registered Principal of Intervest Securities Corporation; and as an Administrator of Intervest Statutory Trust I, II, III and IV.
STEPHEN A. HELMAN, age 66, serves as a Director, and as Vice President and Assistant Secretary of the Company and has served in such capacities since December 2003 and February 2006 respectively. Mr. Helman received a Bachelor of Arts degree from the University of Rochester and a law degree from Columbia University. Mr. Helman has been an attorney practicing for more than 25 years. Mr. Helman is also a Vice President and Director of Intervest National Bank and a Vice President, Assistant Secretary and Director of Intervest Mortgage Corporation.
JOHN H. HOFFMANN, age 54, serves as Vice President and Controller of Intervest Mortgage Corporation and has served in such capacities since August 2002 and October 2002, respectively. Mr. Hoffmann received a Bachelor of Business Administration degree from Susquehanna University and is a certified public accountant. Mr. Hoffmann has more than 21 years of banking experience. Prior to joining the Company, Mr. Hoffmann served as Accounting Manager for Smart World Technologies, an Internet service provider, from 1998 to 2000 and as Vice President of Mortgage Accounting for The Greater New York Savings Bank from 1987 to 1997.
KEITH A. OLSEN, age 52, serves as a Director and as President of the Florida Division of Intervest National Bank and has served in such capacities since July 2001. Prior to that, Mr. Olsen was the President of Intervest Bank from 1994 until it merged into Intervest National Bank in July 2001. Mr. Olsen also served as Senior Vice President of Intervest Bank from 1991 to 2001. Mr. Olsen received an Associates degree from St. Petersburg Junior College and a Bachelors degree in Business Administration and Finance from the University of Florida, Gainesville. He is also a graduate of the Florida School of Banking of the University of Florida, Gainesville, the National School of Real Estate Finance of Ohio State University and the Graduate School of Banking of the South of Louisiana State University. Mr. Olsen has been in banking for more than 30 years and has served as a senior bank officer for more than 20 years.
RAYMOND C. SULLIVAN, age 59, serves as a Director and as President of Intervest National Bank and has served in such capacities since April 1999. Prior to that, Mr. Sullivan was an employee of Intervest Bancshares Corporation from March 1998 to March 1999. Mr. Sullivan received a Bachelor of Arts degree from St. Francis College, a Master of Business Administration degree from Fordham University, and a Master of Science degree from City College of New York. Mr. Sullivan also has a Certificate in Advanced Graduate Study in Accounting from Pace
University and is a graduate of the National School of Finance and Management. Mr. Sullivan has more than 28 years of banking experience. Prior to joining the Company, Mr. Sullivan was the Operations Manager of the New York Agency Office of Banco Mercantile, C.A. from 1994 to 1997; a Senior Associate at LoBue Associates, Inc. from 1992 to 1993; and Executive Vice President, Chief Operations Officer and a director of Central Federal Savings Bank from 1985 to 1992.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR SECURITIES
The Holding Company's Class A common stock is listed for trading on the NASDAQ National Market under the symbol "IBCA." Until June 27, 2005, the Holding Company's Class A common stock traded on the NASDAQ SmallCap Market. There is no public-trading market for the Holding Company's Class B common stock. At December 31, 2005, there were 7,438,058 and 385,000 shares of Class A and Class B common stock outstanding, respectively. At December 31, 2005, there were approximately 2,300 holders of record of the Class A common stock, which includes persons or entities that hold their stock in nominee form or in street name through various brokerage firms. At December 31, 2005, there were four holders of record of Class B common stock.
The last reported sales price of our Class A common stock on December 29, 2005 was $24.04 per share. The following table shows the high and low bid prices per share for Class A common stock by calendar quarter for the periods indicated. The quotations set forth below reflect inter-dealer quotations that do not include retail markups, markdowns or commissions and may not represent actual transactions.
DIVIDENDS
Class A and Class B common stockholders are entitled to receive cash dividends when and if declared by the Board of Directors out of funds legally available for such purposes. The Holding Company has not paid any cash or stock dividends on its capital stock and currently is not contemplating the payment of any cash or stock dividend.
The Holding Company's ability to pay cash dividends is limited to an amount equal to the surplus which represents the excess of its net assets over paid-in-capital or, if there is no surplus, net earnings for the current and/or immediately preceding fiscal year. The primary source of funds for cash dividends payable by the Holding Company to its shareholders is the cash dividends received from its subsidiaries. The payment of cash dividends by a subsidiary to the Holding Company is determined by that subsidiary's Board of Directors and is dependent upon a number of factors, including the subsidiary's capital requirements, applicable regulatory limitations, results of operations, financial condition and any restrictions arising from outstanding indentures.
The Holding Company's ability to pay cash dividends is further impacted by the funding requirements of a total of $60 million of trust preferred securities issued by Intervest Statutory Trusts I, II, III and IV, all of the common stock of which is owned by the Holding Company. These statutory trusts were formed for the sole purpose of issuing trust preferred securities.
The Bank pays a monthly dividend to the Holding Company in order to provide funds for the debt service on the trust preferred securities, the proceeds of which were contributed to the Bank as capital. Dividends paid by the Bank to the Holding Company in 2005, 2004 and 2003 amounted to $4.4 million, $3.4 million and $1.7 million respectively.
For a further discussion of legal limitations with regard to the payment of dividends, see the section "Supervision and Regulation" included in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis of financial condition and results of operations that follows should be read in conjunction with the consolidated financial statements and notes thereto included in this report on Form 10-K.
Intervest Bancshares Corporation has three wholly owned consolidated subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and Intervest Securities Corporation (hereafter referred to collectively as the "Company" on a consolidated basis). Intervest Bancshares Corporation and Intervest National Bank may be referred to individually as the "Holding Company" and the "Bank," respectively. Intervest Bancshares Corporation also has four wholly owned unconsolidated subsidiaries, Intervest Statutory Trust I, II, III and IV, which were formed in connection with the issuance of trust preferred securities. For a discussion of the Company's business, see the section entitled "Item 1 Business" in this report.
The Company's principal revenues are derived from interest, dividends and fees earned on its interest-earning assets, which are comprised of mortgage loans, securities and other short-term investments. The Company's principal expenses consist of interest paid on its interest-bearing liabilities, which are comprised of deposits, debentures and other short-term borrowings, and its operating and general expenses.
The Company's profitability depends primarily on its net interest income, which is the difference between interest income generated from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities. Net interest income is dependent upon the interest-rate spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest-rate spread will generate net interest income. The interest-rate spread is impacted by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest income and expenses, provision for loan losses and income tax expense. Noninterest income consists mostly of loan and other banking fees as well as income from loan prepayments. When a mortgage loan is repaid prior to maturity, the Company may recognize prepayment income, which consists of the recognition of unearned fees associated with such loans at the time of payoff and the receipt of additional prepayment fees and interest in certain cases. The amount of income from loan prepayments can fluctuate significantly and cannot be predicted. Normally, the number of instances of prepayment of mortgage loans tends to increase during periods of declining interest rates and tends to decrease during periods of increasing interest rates. Many of the Company's mortgage loans include provisions relating to prepayment and others prohibit prepayment of indebtedness entirely. Noninterest expense consists of compensation and benefits expense, occupancy and equipment expenses, data processing expenses, advertising expense, professional fees, insurance expense and other operating expenses. The Company's profitability is also significantly affected by general and local economic conditions, competition, changes in market interest rates, government policies and actions of regulatory authorities.
Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mix-used properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). These loans have an average life of approximately three years. The Company tends to lend in areas that are in the process of being revitalized, with a concentration of loans on properties located in New York State and the State of Florida. A significant portion of the residential properties are located in New York City and are subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents.
All loans are subject to the risk of default, otherwise known as credit risk, which represents the possibility of the Company not recovering amounts due from its borrowers. A borrower's ability to make payments due under a mortgage loan is dependent upon the risks associated with real estate investments in general, including the following: general or local economic conditions in the areas the properties are located, neighborhood values, interest rates, real estate tax rates, operating expenses of the mortgaged properties, supply of and demand for rental units, supply of and demand for properties, ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental rules, regulations and fiscal policies. Additionally, terrorist acts and armed conflicts,
such as the war on terrorism, and natural disasters, such as hurricanes, may have an adverse impact on economic conditions. Economic conditions affect the market value of the mortgaged properties underlying the Company's loans as well as the levels of rent and occupancy of income-producing properties.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements and the information included in Management's Discussion and Analysis herein is governed by policies that are based on accounting principles generally accepted in the United States (GAAP) and general practices within the banking industry. The financial information contained in the Company's financial statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact its transactions could change. Among the more significant policies of the Company are those that govern accounting for loans and the allowance for loan losses. For a summary of all of the Company's significant accounting policies, see note 1 to the consolidated financial statements included in this report.
An accounting policy is deemed to be "critical" if it is important to a company's results of operations and financial condition, and requires significant judgment and estimates on the part of management in its application. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and related disclosures. Actual results could differ from these estimates and assumptions. The Company believes that the estimates and assumptions used in connection with the amounts reported in its financial statements and related disclosures are reasonable and made in good faith.
The Company believes that currently its only significant critical accounting policy relates to the determination of the allowance for loan losses. The allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period requiring management to make assumptions about future losses on loans. The impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which could negatively affect the Company's earnings and financial position.
The allowance for loan losses reflects management's judgment as to the estimated losses that may result from defaults in the loan portfolio. The allowance for loan losses is established through a provision charged to operations. Loans are charged against the allowance when management believes that the collection of the principal is unlikely. Subsequent recoveries are added to the allowance.
The adequacy of the Company's allowance for loan losses is evaluated monthly or more frequently when necessary with consideration given to the following factors: (i) the size of the loan portfolio, which continues to experience rapid growth and an increase in individual loan balances; (ii) the nature of the loan portfolio, which is concentrated on commercial and multifamily real estate properties, including loans on substantially vacant properties and vacant land, all of which are generally considered to have more credit risk than 1-4 family residential lending because these loans tend to involve larger loan balances to single borrowers and their repayment is typically dependent upon the successful operation of the underlying real estate for income-producing properties, while loans on vacant land typically do not have income streams and depend upon other sources of cash flow from the borrower for repayment; (iii) specific problem loans, including loans on nonaccrual status, and estimates of fair value of the underlying properties; (iv) historical chargeoffs and recoveries; (v) adverse situations which may affect the borrowers' ability to repay; and (vi) management's perception of the current and anticipated economic conditions in the Company's lending areas, which are concentrated in New York and Florida. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions, or other factors, differ from those previously assumed in the determination of the level of the allowance.
For calculation purposes, the allowance for loan losses is comprised of an unallocated portion (which is derived from an estimated loss factor currently ranging from 0.30% to 1.35% multiplied by the principal amount of loans rated acceptable, and higher percentages for loans that are assigned a credit grade of special mention or lower) and,
from time to time, an allocated (or specific) portion on certain loans, particularly for loans that have been identified as being impaired.
Statement of Financial Accounting Standards (SFAS) No. 114 specifies the manner in which the portion of the allowance for loan losses related to impaired loans is computed. A loan is normally deemed impaired when, based upon current information and events, it is probable that we will be unable to collect both full principal and interest due according to the contractual terms of the loan agreement. Impairment for larger balance loans such as commercial real estate and multifamily loans are measured based on: the present value of expected future cash flows, discounted at the loan's effective interest rate; or the observable market price of the loan; or the estimated fair value of the loan's collateral, if payment of the principal and interest is dependent upon the collateral. When the fair value of the property is less than the recorded investment in the loan, this deficiency is recognized as a valuation allowance within the overall allowance for loan losses and a charge through the provision for loan losses. The Company's policy is to charge off any portion of the recorded investment in the loan that exceeds the fair value of the collateral. The Company considers a variety of factors in determining whether a loan is impaired, including (i) any notice from the borrower that the borrower will be unable to repay all principal and interest amounts contractually due under the loan agreement, (ii) any delinquency in the principal and/or interest payments other than minimum delays or shortfalls in payments, and (iii) other information known by management that would indicate the full repayment of principal and interest is not probable. In evaluating loans for impairment, management generally considers delinquencies of 60 days or less to be minimum delays, and accordingly does not consider such delinquent loans to be impaired in the absence of other indications. Impaired loans normally consist of loans on nonaccrual status. Generally, all loans are evaluated for impairment on a loan-by-loan basis.
Finally, the Company's regulators, as an integral part of their examination process, periodically review the allowance for loan losses. Accordingly, the Company may be required to take certain chargeoffs and/or recognize additions to the allowance based on the regulators' judgment concerning information available to them during their examination.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2005 AND DECEMBER 31, 2004.
Overview - --------
Total assets at December 31, 2005 increased to $1.7 billion from $1.3 billion at December 31, 2004. Total liabilities at December 31, 2005 increased to $1.6 billion from $1.2 billion at December 31, 2004, and stockholders' equity increased to $136.2 million at December 31, 2005, from $90.1 million at December 31, 2004. Book value per common share increased to $17.41 at December 31, 2005, from $14.37 at December 31, 2004.
Selected balance sheet information by entity as of December 31, 2005 follows:
A comparison of the Company's consolidated balance sheets follows:
Cash and Cash Equivalents - ----------------------------
Cash and cash equivalents increased to $56.7 million at December 31, 2005, from $24.6 million at December 31, 2004, due to a higher level of overnight federal fund investments. The increase reflected the temporary investment of deposit inflows, a portion of which is expected to fund new loans. Cash and cash equivalents include federal funds sold and interest-bearing and noninterest-bearing cash balances with banks, and other short-term investments that have original maturities of three months or less. The short-term investments are normally comprised of commercial paper and certificates of deposit issued by large commercial banks and U.S. government securities. The level of cash and cash equivalents fluctuates based on various factors, including liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities.
Security Investments - ---------------------
Securities as to which the Company has the intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Currently, only the Bank holds such security investments, which increased to $251.5 million at December 31, 2005, from $248.9 million at December 31, 2004. The increase reflected new purchases exceeding maturities and calls during the period. The Bank continues to invest in short-term (up to 5 year maturities) U.S. government agency debt obligations to emphasize liquidity and currently targets its loan-to-deposit ratio at approximately 85%.
At December 31, 2005, the portfolio consisted of short-term debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation with a weighted-average yield of 3.26% and a weighted-average remaining maturity of 1.1 years, compared to 2.33% and 1.4 years, respectively, at December 31, 2004. The securities are fixed rate or have predetermined scheduled rate increases, and some have call features that allow the issuer to call the security before its stated maturity without penalty. At December 31, 2005 and 2004, the portfolio's estimated fair value was $249.1 million and $247.2 million, respectively.
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of New York (FHLB), the Bank maintained an investment in their capital stock of $3.4 million and $1.8 million, respectively, at December 31, 2005. The FRB stock currently pays a dividend of 6%, while the FHLB stock dividend fluctuates and most recently was 5.11%. The total investment, which amounted to $5.2 million at December 31, 2005, compared to $5.1 million at December 31, 2004, fluctuates based on the Bank's capital level for the FRB stock and the Bank's loans and borrowings for the FHLB stock.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Losses - ------------------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan losses, increased to $1.4 billion at December 31, 2005 from $1.0 billion at December 31, 2004. The growth reflected new mortgage loan originations secured by
commercial and multifamily real estate exceeding principal repayments. New loan originations totaled $707 million in 2005, compared to $626 million in 2004.
Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mix-used properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). At December 31, 2005, such loans consisted of 529 loans with an aggregate principal balance of $1.4 billion and an average principal size of $2.6 million. Loans with principal balances of $5.0 million or more aggregated to 69 loans or $639.3 million, with the largest loan amounting to $20.0 million.
At December 31, 2005, $0.7 million of loans were on nonaccrual status, compared to $4.6 million at December 31, 2004. In April 2005, the property collateralizing a nonaccrual loan at December 31, 2004 with a principal balance of $3.9 million was sold at foreclosure to a third party. The loan was paid in full and the Bank recovered all amounts due thereunder. With respect to two loans on nonaccual status at December 31, 2005, the borrower declared bankruptcy and the Bankruptcy Trustee has sold the properties collateralizing the loans. The proceeds of the sale are sufficient to provide for repayment of the Company's recorded investment and the Company is taking appropriate action to obtain the proceeds from the Bankruptcy Trustee. Nonaccrual loans are considered impaired under the criteria of SFAS No. 114, but no valuation allowance was maintained at any time since the Company believes that the estimated fair value of the underlying properties exceeded its recorded investment. At December 31, 2005 and December 31, 2004, there were no other impaired loans.
At December 31, 2005, there were $2.6 million of loans ninety days past due and still accruing interest because they were deemed by management to be well secured and in the process of collection. Such amount represented three loans that are past their maturity date, but in each case the borrower continues to make monthly payments of interest and principal. During January 2006, one loan in the amount of $1.1 million that was ninety days past due and still accruing was repaid in full. Based upon discussions with the remaining borrowers, it is anticipated that the remaining loans will be repaid in full or refinanced in the near term. There were no loans ninety days past due and still accruing interest at December 31, 2004.
Allowance for Loan Losses - ----------------------------
At December 31, 2005, the allowance for loan losses amounted to $15.2 million, compared to $11.1 million at December 31, 2004. The allowance represented 1.11% of total loans (net of deferred fees) outstanding at December 31, 2005 and 1.09% at December 31, 2004. The increase in the allowance was due to provisions aggregating $4.1 million during 2005 resulting largely from loan growth (which amounted to $354 million from December 31, 2004). For a further discussion of the criteria the Company uses to determine the adequacy of the allowance, see the section entitled "Critical Accounting Policies" included in this report.
All Other Assets - ------------------
The following below sets forth the composition of the caption "All other assets:"
Accrued interest receivable fluctuates based on the amount of loans, investments and other interest-earning assets outstanding and the timing of interest payments received. The increase of $1.0 million from December 31, 2004 was due to the growth in all of these assets.
Loan fees receivable are fees due to the Company in accordance with the terms of mortgage loans. Such amounts are generally due upon the full repayment of the loan. This fee is recorded as deferred income at the time a loan is originated and is then amortized to interest income over the life of the loan as a yield adjustment. The increase of $2.7 million from December 31, 2004 was due to the increase in the loan portfolio.
Premises and equipment decreased by $0.2 million from December 31, 2004 as net purchases of $0.3 million during the period were more than offset by normal depreciation and amortization.
The deferred income tax asset relates primarily to the unrealized tax benefit on the Company's allowance for loan losses. The allowance has been expensed for financial statement purposes but it is currently not deductible for income tax purposes until actual loan chargeoffs are incurred. The increase in the deferred tax asset of $1.9 million from December 31, 2004 is primarily a function of the increase in the allowance for loan losses during the period.
Deferred debenture offering costs consist primarily of underwriters' commissions and are amortized over the terms of the debentures. The net increase of $0.7 million from December 31, 2004 was due to $1.9 million of additional costs incurred in connection with the issuance of new debentures, partially offset by normal amortization during the period.
The investment in unconsolidated subsidiaries consists of the Holding Company's total common stock investment in Intervest Statutory Trust I, II, III and IV.
Deposits - --------
Deposits increased to $1.4 billion at December 31, 2005, from $993.9 million at December 31, 2004, reflecting an increase in certificate of deposit accounts of $373.7 million and a net increase in checking, savings and money market accounts totaling $7.8 million. At December 31, 2005, certificate of deposit accounts totaled $1.1 billion, and checking, savings and money market accounts aggregated $256.8 million. The same categories of deposit accounts totaled $744.8 million and $249.1 million, respectively, at December 31, 2004. Certificate of deposit accounts represented 81% of total deposits at December 31, 2005 and 75% at December 31, 2004. In June 2005, the Bank began accepting brokered deposits as another source of funds. Such accounts totaled $40.5 million at December 31, 2005.
Borrowed Funds and Related Interest Payable - ------------------------------------------------
The following table summarizes borrowed funds and related interest payable:
Intervest Mortgage Corporation's debentures outstanding decreased due to repayments exceeding new issues.
The Holding Company's debentures outstanding decreased due to the conversion into common stock of its convertible debentures. In 2005, $1.6 million of convertible debentures ($0.9 million of principal and $0.7 million of related accrued interest payable) were converted into shares of the Holding Company's Class A common stock at the election of the debenture holders.
The Bank from time to time may borrow funds on an overnight or short-term basis to manage its liquidity needs. At December 31, 2004, the Bank had $36 million of FHLB borrowings outstanding, of which $19 million was repaid in January 2005 and $17 million was repaid in February 2005 through deposit inflows.
The Bank also has a mortgage note payable outstanding amounting to $0.2 million at December 31, 2005 and 2004. The note was issued in connection with the Bank's purchase in 2002 of property that is located across from its Court Street branch office in Florida.
Accrued interest payable on borrowed funds amounted to $6.3 million at December 31 2005, compared to $10.2 million at December 31, 2004. The decrease was due to repayments of interest as well as the decrease resulting from the conversion of debentures, partially offset by new accruals. A large portion of the accrued interest payable is due and payable at the maturity of various debentures. For a further discussion of borrowed funds, see notes 7 and 9 to the consolidated financial statements included in this report, as well as the section "Liquidity and Capital Resources."
All Other Liabilities - -----------------------
The following table sets forth the composition of the caption "All other liabilities:"
Mortgage escrow funds payable represent advance payments made to the Company by borrowers for property taxes and insurance that are remitted by the Company to third parties. The increase of $5.8 million from December 31, 2004 reflected the growth in the loan portfolio as well as the timing of tax payments.
Official checks outstanding vary and fluctuate based on banking activity. Accrued interest payable on deposits fluctuates based on total deposits and timing of interest payments. The increase of $1.5 million in accrued interest payable from December 31, 2004 reflected the growth in deposits. Income taxes payable fluctuates based on the Company's earnings, effective tax rate and timing of tax payments.
All other liabilities are comprised mainly of accrued expenses and fees received on loan commitments that have not yet been funded. The increase of $0.6 million from December 31, 2004 reflected a higher level of accrued expenses.
Stockholders' Equity - ---------------------
Stockholders' equity increased to $136.2 million from $90.1 million at December 31, 2004 as follows:
The Holding Company completed in August 2005 a public offering of 1,250,000 shares of its Class A Common Stock for $19.75 per share and in September 2005 issued an additional 186,468 shares of Class A common stock for $19.75 per share in connection with the exercise by the underwriters of an option to purchase additional shares to cover over-allotments. The issuance of these shares, after underwriting commissions and expenses, resulted in $26.3 million of additional capital for the Company.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004.
Overview - --------
Consolidated net earnings for the year ended December 31, 2005 increased by $6.7 million, or 59%, to $18.2 million, or $2.47 per diluted share, from $11.5 million, or $1.71 per diluted share, reported in 2004. The $6.7 million increase in earnings was due to growth in net interest and dividend income of $12.6 million, an increase of $1.5 million in noninterest income and a decrease in the provision for loan losses of $0.4 million. These improvements were partially offset by a $5.3 million increase in income tax expense and a $2.5 million increase in noninterest expenses. The Company's return on average assets and equity improved to 1.20% and 16.91%, respectively, in 2005, from 1.02% and 14.14% in 2004, and its efficiency ratio (which is a measure of its ability to control expenses as a percentage of its revenues) continues to be favorable and improved to 23% in 2005 from 25% in 2004.
Selected information regarding results of operations by entity for 2005 follows:
Net Interest and Dividend Income - ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and is influenced primarily by the amount, distribution and repricing characteristics of its interest-earning assets and interest-bearing liabilities as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased by $12.6 million to $40.4 million in 2005, from $27.8 million in 2004. The improvement was attributable to a $392.8 million increase in average interest-earning assets resulting from continued growth in loans of $338.4 million and a higher level of security and short-term investments aggregating to $54.4 million. The growth in average assets was funded by $354.7 million of additional interest-bearing deposits, $3.6 million of additional borrowed funds and a $26.5 million increase in stockholders' equity (resulting from earnings and the issuance of shares in a public offering and from the conversion of convertible debentures).
The Company's net interest margin increased to 2.70% in 2005 from 2.52% in 2004. The higher margin was due to the Company's yield on interest-earning assets increasing at a faster pace than its cost of funds. In a steadily rising interest rate environment in 2005, the yield on the Company's interest-earning assets increased 51 basis points to 6.53% in 2005, primarily due to higher yields on new mortgage loans originated, an increase in yields earned on variable-rate loans indexed to the prime rate, and higher yields earned on security and other short-term investments. The cost of funds also increased by 37 basis points to 4.21% in 2005 due to higher rates paid on deposit accounts.
The following table provides information on average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for 2005 and 2004. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each year divided by average interest-earning assets/interest-bearing liabilities during each year. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each year.
The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).
Provision for Loan Losses - ----------------------------
The provision for loan losses decreased by $0.4 million to $4.1 million in 2005, from $4.5 million in 2004. The lower provision was a function of the favorable impact (of approximately $0.6 million) from the satisfaction of a $3.9 million nonaccrual loan in the second quarter of 2005, partially offset by an increase in the amount of loan growth. Total loans grew by $354.3 million in 2005, compared to $347.9 million in 2004.
Noninterest Income - -------------------
Noninterest income increased by $1.5 million to $6.6 million in 2005 and is summarized as follows:
Noninterest income increased due to a $1.5 million increase in income from the prepayment of mortgage loans and a $0.1 million increase in fees from early deposit withdrawals, partially offset by a $0.1 million decrease in fees earned from expired loan commitments that were not funded. The prepayment income for the 2005 period included $0.6 million from the early satisfaction of the nonaccrual loan noted above. The Company's income from loan prepayments, which fluctuates and cannot be predicted, tends to increase during periods of declining interest rates and tends to decrease during periods of increasing interest rates.
Noninterest Expenses - ---------------------
Noninterest expenses increased by $2.5 million to $10.7 million in 2005 and are summarized as follows:
Salaries and employee benefits expense increased primarily due to salary increases, a higher cost of employee benefits and additional staff aggregating $0.8 million, and a $0.8 million increase in bonus payments to certain executives of the Company in connection with capital raising activities. The Company had 69 fulltime employees at December 31, 2005 versus 64 at December 31, 2004.
Occupancy and equipment expense decreased due to a decrease in rent expense resulting from the termination in September 2004 of Intervest Mortgage Corporation's lease on its former space at 10 Rockefeller Plaza and an increase in sublease income from the Bank's Florida offices. These items were partially offset by increased rent on the Company's new larger office space at One Rockefeller Plaza.
Data processing expense increased primarily due to the growth in the Bank's assets.
Professional fees expense increased due to the growth in the Company's assets as well as additional accruals (of $0.2 million) for consulting expense associated with the ongoing compliance with the Sarbanes Oxley requirements for internal controls.
Director and committee fees expense increased due to higher fees paid to directors for each board and committee meeting attended. The fees were increased for board and committee meetings in October 2004 and an additional increase was made in June 2005 for audit committee meetings.
Advertising expense increased due to additional advertising to support loan and deposit growth. Stationery, printing and supplies, postage and delivery, and FDIC and general insurance expenses increased primarily due to the Company's growth as well as a rate increase for general insurance.
All other expense increased primarily due to the payment of a Nasdaq National Market entry fee. The Company's Class A common stock began trading on the Nasdaq National Market on June 27, 2005. Previously, the stock had traded on the Nasdaq SmallCap Market.
Provision for Income Taxes - -----------------------------
The provision for income taxes increased by $5.3 million to $14.1 million in 2005, from $8.8 million in 2004, due to higher pre-tax income. The Company's effective tax rate (inclusive of state and local taxes) amounted to 43.6% in 2005, compared to 43.4% in 2004.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003.
Overview - --------
Consolidated net earnings for the year ended December 31, 2004 increased by $2.3 million, or 26%, to $11.5 million, or $1.71 per diluted share, from $9.1 million, or $1.53 per diluted share, reported in 2003. The $2.3 million increase in earnings was due to growth in net interest and dividend income of $6.0 million and an increase of $1.8 million in noninterest income. These revenue increases were partially offset by a $2.6 million increase in the provision for loan losses, a $1.9 million increase in income tax expense and a $1.0 million increase in noninterest expenses. The Company's return on average assets and equity was 1.02% and 14.14%, respectively, in 2004, compared to 1.19% and 15.34% in 2003, and its efficiency ratio (which is a measure of the Company's ability to control expenses as a percentage of its revenues) stood at 25% for 2004.
Selected information regarding results of operations by entity for 2004 follows:
Net Interest and Dividend Income - ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and is influenced primarily by the amount, distribution and repricing characteristics of its interest-earning assets and interest-bearing liabilities as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased by $6.0 million to $27.9 million in 2004, from $21.9 million in 2003. The improvement was attributable to a $350.7 million increase in average interest-earning assets resulting from continued growth in loans of $282.2 million and a higher level of security and short-term investments which totaled $68.6 million. The growth in average assets was funded by $287.4 million of new deposits, $34.4 million of additional borrowed funds and a $21.6 million increase in stockholders' equity (resulting from earnings and the issuance of shares upon the exercise of Class A common stock warrants and conversion of convertible debentures).
The Company's net interest margin decreased to 2.52% in 2004 from 2.90% in 2003. The decrease was due to the Company's yield on interest-earning assets decreasing at a faster pace than its cost of funds. In a low interest rate environment, the yield on interest-earning assets decreased 67 basis points to 6.02% in 2004 due to lower rates on new mortgage loans originated and prepayments of higher-yielding loans. The cost of funds decreased 33 basis points to 3.84% in 2004 due to lower rates paid on deposit accounts and the addition of new debentures with lower rates than existing ones, partially offset by rate increases on floating-rate debentures. These floating-rate debentures are indexed to the JPMorgan Chase Bank prime rate, which increased by a total of 125 basis points from year-end 2003.
The following table provides information on average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for 2004 and 2003. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each year divided by average interest-earning assets/interest-bearing liabilities during each year. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each year.
The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).
Provision for Loan Losses - ----------------------------
The provision for loan losses increased to $4.5 million in 2004 from $2.0 million in 2003. The higher provision was a function of loan growth, which amounted to $347.9 million in 2004 compared to $183.6 million in 2003, as well as a decrease in the credit grade of two loans during the third quarter of 2004.
Noninterest Income - -------------------
Noninterest income increased by $1.8 million to $5.1 million in 2004 and is summarized as follows:
Noninterest income increased primarily due to higher income of $1.2 million from the prepayment of mortgage loans, a $0.3 million increase in loan service charges and $0.1 million of additional fee income from loan commitments that expired and were not funded.
Noninterest Expenses - ---------------------
Noninterest expenses increased by $1.0 million to $8.3 million in 2004 and is summarized as follows:
Salaries and employee benefits expense increased due to the following: $0.6 million from salary increases, a higher cost of employee benefits and additional staff; $0.4 million from bonus payments to certain executives of the Company in connection with the sale of capital securities and leasing of new space; and $41,000 of additional commission expense. The increases were partially offset by a $0.4 million decrease in compensation from common stock warrants and a $0.2 million decrease in compensation resulting from a higher level of SFAS No. 91 direct fee income (due to more loan originations). The Company had 64 fulltime employees at December 31, 2004 versus 61 at December 31, 2003. See note 14 to the consolidated financial statements included in this report for additional information on common stock warrants.
Occupancy and equipment expense increased due to the leasing of larger office space. In May 2004, Intervest Bancshares Corporation, Intervest National Bank's New York office, Intervest Mortgage Corporation and Intervest Securities Corporation moved into newly constructed offices on the entire fourth floor at One Rockefeller Plaza in New York City. Intervest Mortgage Corporation's lease obligation of approximately $22,000 per month on its former space at 10 Rockefeller Plaza expired in September 2004.
Data processing expense decreased due to lower fees incurred by the Bank despite an increase in its assets. The Bank renegotiated its data processing contract during late 2003 by extending the expiration date to 2010 and reducing the processing fee to a fixed amount until its assets reach $1.1 billion. Thereafter the fee becomes variable and is calculated based on total assets. Previously, the data processing fee was entirely variable and a function of the Bank's total assets.
Professional fees and services, stationery, printing and supplies, postage and delivery, and FDIC and general insurance expenses increased largely due to the Company's growth.
Director and committee fees increased due to higher fees paid to directors for each board and committee meeting attended. The fees were increased in June 2003 and October 2004.
Advertising expense increased due to additional advertising to support loan and deposit growth.
All other expenses were lower due to a decrease of $49,000 in losses from transactional accounts and a decrease in foreclosed real estate expenses of $64,000, partial offset by increased travel, telephone and franchise tax expense.
Provision for Income Taxes - --------------------------
The provision for income taxes increased by $1.9 million to $8.8 million in 2004, from $6.9 million in 2003, due to higher pre-tax income. The Company's effective tax rate (inclusive of state and local taxes) amounted to 43.4% in 2004, compared to 43.0% in 2003.
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. For a further discussion of these financial instruments, see note 19 to the consolidated financial statements included in this report.
LIQUIDITY AND CAPITAL RESOURCES
The Company manages its liquidity position on a daily basis to assure that funds are available to meet operations, loan and investment commitments, deposit withdrawals and the repayment of borrowed funds. The Company's primary sources of funds consist of the following: retail deposits obtained through the Bank's branch offices and through the mail; principal repayments of loans; maturities and calls of securities; issuance of debentures; borrowings from the federal funds market and through FHLB advances; and cash flow provided by operating activities. For additional detail concerning the Company's cash flows, see the condensed consolidated statements of cash flows included in this report.
The Bank has and expects to continue to rely heavily on certificates of deposit (time deposits) as a source of funds. Total deposits amounted to $1.4 billion at December 31, 2005 and time deposits represented 81%, or $1.1 billion, of those deposits. Additionally, time deposits of $100,000 or more at December 31, 2005 totaled $371.8 million and included $40.5 million of brokered deposits. The Bank began accepting brokered deposits as another source of funds beginning in June 2005. The Bank must maintain its status as a well-capitalized insured depository institution in order to solicit and accept, renew or roll over any brokered deposit without restriction. Time deposits are the only deposit accounts offered by the Bank that have stated maturity dates. These deposits are generally considered to be rate sensitive and have a higher cost than deposits with no stated maturities, such as checking, savings and money market accounts. The Bank needs to pay competitive interest rates to attract and retain time deposits to fund its loan originations. In addition, the Bank has and expects to continue to rely on capital contributions from the Holding Company to increase its capital to support its rapid asset growth. The Holding Company made a total of $32.5 million of capital contributions to the Bank during 2005. At December 31, 2005, the Bank had $382.0 million of time deposits maturing by December 31, 2006. The Bank expects that a substantial portion of these deposits will be renewed and stay with the Bank.
The Bank, from time to time, may borrow funds on an overnight or short-term basis to manage its liquidity needs. At December 31, 2005, the Bank had agreements with correspondent banks whereby it could borrow up to $16 million on an unsecured basis. In addition, as a member of the FHLB and FRB, the Bank can also borrow from these institutions on a secured basis. During 2005, the Bank borrowed a total of $60.4 million of short-term FHLB advances and overnight federal funds purchases and repaid a total of $96.4 million for a net decrease of $36.0 million from short-term borrowings outstanding at December 31, 2004. At December 31, 2005, there were no outstanding borrowings from any of the aforementioned sources. At December 31, 2005, the Bank had available collateral consisting of investment securities to support total borrowings of $243 million from the FHLB and FRB.
Intervest Mortgage Corporation has and expects to continue to rely on the issuance of its subordinated debentures in registered, best efforts offerings to the public as a source of funds to support its loan originations. In addition, as the Bank's mortgage loan portfolio has grown, service fee income received by Intervest Mortgage Corporation from the Bank has comprised an increasing percentage of Intervest Mortgage Corporation's cash flow. The Bank has a servicing agreement with Intervest Mortgage Corporation whereby Intervest Mortgage Corporation provides the Bank with mortgage loan origination services for a monthly fee that is based on loan origination volumes. The services include the identification of potential properties and borrowers; the inspection of properties constituting collateral for such loans; the negotiation of the terms and conditions of such loans in accordance with the Bank's underwriting standards; and coordinating the preparation of commitment letters and the loan closing process. The services are performed by Intervest Mortgage Corporation's personnel and the related expenses are borne by Intervest Mortgage Corporation. In addition, from time to time, Intervest Mortgage Corporation has also received capital contributions from the Holding Company.
Intervest Mortgage Corporation's lending business is dependent on its continuing ability to sell its debentures with interest rates that would result in a positive interest rate spread, which is the difference between yields earned on its loans and the rates paid on its debentures.
As detailed in note 7 to the consolidated financial statements included in this report, at December 31, 2005, $82.8 million in aggregate principal amount of Intervest Mortgage Corporation's subordinated debentures were outstanding with fixed interest rates that range from 6.25% to 9.00% per annum and maturities that range from July 1, 2006 to October 1, 2013. During 2005, Intervest Mortgage Corporation repaid various debentures for a total of $37.2 million
($32.1 million of principal and $5.1 million of related accrued interest payable), and issued new debentures with an aggregate principal amount of $26.0 million for net proceeds, after offering costs, of $24.1 million. At December 31, 2005, Intervest Mortgage Corporation had $8.8 million of debentures and related accrued interest payable maturing by December 31, 2006, which are expected to be repaid from cash flow generated from maturities of existing mortgage loans, ongoing operations and cash on hand. In the first quarter of 2006, Intervest Mortgage Corporation anticipates filing a registration statement with the SEC related to a public offering of additional debentures of up to $16 million in aggregate principal amount.
The Holding Company's sources of funds and capital to date have been derived from the following: interest income from a limited portfolio of mortgage loans and short-term investments; monthly dividends from the Bank to service interest expense on trust preferred securities; monthly management fees from Intervest Mortgage Corporation and the Bank for providing these subsidiaries with certain administrative services; the issuance of its common stock through public offerings, exercise of outstanding common stock warrants and conversion of outstanding convertible debentures; the issuance of trust preferred securities through its wholly owned business trusts; and the direct issuance of other subordinated debentures to the public.
At December 31, 2005, the Holding Company had $1.3 million of debentures and related accrued interest payable maturing by December 31, 2006, which are expected to be repaid from cash on hand. The Holding Company completed in August 2005 a public offering of 1,250,000 shares of its Class A common stock for $19.75 per share and in September 2005 issued an additional 186,468 shares of Class A common stock for $19.75 per share in connection with the exercise by the underwriters of an option to purchase additional shares to cover over-allotments. The issuance of these shares, after underwriting commissions and expenses, resulted in $26.3 million of additional capital for the Company.
The Holding Company, through its wholly owned business trusts Intervest Statutory Trust I, II, III and IV, issued in December 2001, September 2003, March 2004 and September 2004, $15.0 million, respectively, of trust preferred securities for a total of $60 million at both fixed and variable rates of interest that mature in 2031 or later. The total proceeds from these securities have been invested in the Bank at various times through capital contributions. The Holding Company is required to make interest payments on the principal of those securities, which currently amount to $4.4 million annually. The Bank provides funds to Holding Company in the form of dividends for this purpose. At December 31, 2005, approximately $45.4 million of the trust preferred securities qualified as regulatory Tier 1 capital and the remainder qualified as Tier 2 capital in the Holding Company's computation of regulatory capital.
Additional information concerning outstanding time deposits, debentures and trust preferred securities, including interest rates and maturity dates can be found in notes 6, 7 and 9 of the notes to the consolidated financial statements included in this report.
At December 31, 2005, the Company's total commitments to lend aggregated to $102.4 million. Although there is no certainty, management anticipates that the majority of these loan commitments will be funded over the next 12 months. If all these commitments were to close, they would be funded by the sources of funds described above.
The Company considers its current liquidity and sources of funds sufficient to satisfy its outstanding lending commitments and its maturing liabilities. Management is not aware of any trends, known demand, commitments or uncertainties which are expected to have a material impact on future operating results, liquidity or capital resources.
CONTRACTUAL OBLIGATIONS
The table below summarizes the Company's contractual obligations as of December 31, 2005.
REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements. The Federal Deposit Insurance Corporation (FDIC) and other bank regulatory agencies use five capital categories ranging from well capitalized to critically undercapitalized to determine various matters, including prompt corrective action and each institution's FDIC deposit insurance premiums. These categories involve quantitative measures of a bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.
The Bank is required to maintain regulatory defined minimum Tier 1 leverage and Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%, respectively. At December 31, 2005 and 2004, management believes the Bank met its capital adequacy requirements and is a well-capitalized institution as defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management is not aware of any conditions or events that would change the Bank's designation as a well-capitalized institution.
Information regarding the Bank's regulatory capital and related ratios is summarized as follows:
The Holding Company on a consolidated basis is subject to minimum regulatory capital requirements administered by the FRB. These guidelines require a ratio of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted total average assets of not less than 3%. At December 31, 2005 and 2004, management believes that the Holding Company met its capital adequacy requirements.
Information regarding the Holding Company's regulatory capital and related ratios is summarized below:
The Federal Reserve on March 1, 2005 issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies (BHC), but with stricter quantitative limits and clearer qualitative standards. The new rule provides a transition period for BHCs to meet the new, stricter limitations within regulatory capital by allowing the limits on restricted core capital elements to become fully effective as of March 31, 2009.
Until March 31, 2009, BHCs generally must comply with the current Tier 1 capital limits. That is, BHCs generally should calculate their Tier 1 capital on a basis that limits the aggregate amount of qualifying cumulative perpetual preferred stock and qualifying trust preferred securities to 25 percent of the sum of qualifying common stockholder's equity, qualifying noncumulative and cumulative perpetual preferred stock (including related surplus), qualifying minority interest in the equity accounts of consolidated subsidiaries, and qualifying trust preferred securities. Amounts of qualifying cumulative perpetual preferred stock and qualifying trust preferred securities in excess of this limit may be included in Tier 2 capital.
Beginning March 31, 2009, qualifying cumulative perpetual preferred stock and trust preferred securities, as well as certain types of minority interest, are limited to 25 percent of the sum of core capital elements net of goodwill. The Holding Company currently does not have any goodwill.
Beginning March 31, 2009, the excess amounts of restricted core capital elements in the form of qualifying trust preferred securities included in Tier 2 capital are limited to 50 percent of Tier 1 capital (net of goodwill). Amounts in excess of this limit will still be taken into account in the overall assessment of an organization's funding and financial condition. The final rule also provides that in the last five years before the underlying subordinated note matures, the associated trust preferred securities must be treated as limited-life preferred stock. Thus, in the last five years of the life of the note, the outstanding amount of trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital, subject, together with subordinated debt and other limited-life preferred stock, to a limit of 50 percent of Tier 1 capital. During this period, the trust preferred securities will be amortized out of Tier 2 capital by one-fifth of the original amount (less redemptions) each year and excluded totally from Tier 2 capital during the last year of life of the underlying note.
As of December 31, 2005, assuming the Company no longer included its trust preferred securities in Tier 1 Capital, the Company would still exceed the well capitalized threshold under the regulatory framework for prompt corrective action.
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital Rule which requires the maintenance of minimum net capital of $5,000. At December 31, 2005 and 2004, Intervest Securities Corporation's net capital was $0.5 million.
ASSET AND LIABILITY MANAGEMENT
Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The Company does not engage in trading or hedging activities, nor does it invest in interest rate derivatives or enter into interest rate swaps. The primary objective of the Company's asset/liability management strategy is to limit, within established guidelines, the adverse impact of changes in interest rates on its net interest income and capital.
The Company uses "gap analysis," which measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period, to monitor its interest rate sensitivity. An asset or liability is normally considered to be interest-rate sensitive if it will reprice or mature within one year or less. The interest-rate sensitivity gap is the difference between interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within one-year. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. Conversely, a gap is considered negative when the opposite is true.
In a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to increase net interest income. In a period of falling interest rates, a negative gap would tend to increase net interest income, while a positive gap would tend to adversely affect net interest income. If the repricing of the Company's assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates for the following reasons. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in market rates. In addition, certain assets, such as adjustable-rate mortgage loans, may have features generally referred to in the industry as "interest rate caps and floors," which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, asset prepayment and early deposit withdrawal levels also could deviate significantly from those assumed in calculating the interest-rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest-rate increase, and the behavior of depositors may be different than those assumed in the gap analysis.
The Company's one-year positive interest rate sensitivity gap increased to $498.7 million , or 29.2% of total assets, at December 31, 2005, from $114.0 million, or 8.7% at December 31, 2004. The increase in the positive gap primarily reflects an increase in loans that reprice or mature within one year funded by time deposits with terms of more than one year. For purposes of computing the gap, all deposits with no stated maturities are treated as readily accessible accounts. However, if such deposits were treated differently, the one-year gap would then change. The behavior of core depositors may not necessarily result in the immediate withdrawal of funds in the event deposit rates offered by the Bank did not change as quickly and uniformly as changes in general market rates. For example, if only 25% of deposits with no stated maturity were assumed to be readily accessible, the one-year gap would have been a positive 40.1% at December 31, 2005, compared to a positive 22.5 % at December 31, 2004.
Many of the Company's floating-rate loans have a "floor," or minimum rate, that is determined in relation to prevailing market rates on the date of origination. This floor only adjusts upwards in the event of increases in the loan's interest rate. This feature reduces the unfavorable effect on interest income of a falling rate environment because the interest rates on such loans do not reset downward. However, the Company may nonetheless experience loan prepayments, the amount of which cannot be predicted, and reinvestment risk associated with the resulting proceeds.
Notwithstanding all of the above, there can be no assurances that a sudden and substantial increase in interest rates may not adversely impact the Company's earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.
The table below summarizes interest-earning assets and interest-bearing liabilities as of December 31, 2005, that are scheduled to mature or reprice within the periods shown.
SARBANES OXLEY ACT OF 2002
The requirements of Section 404 of the Sarbanes Oxley Act and Securities and Exchange Commission rules and regulations require an annual management report on the Company's internal controls over financial reporting, including, among other matters, management's assessment of the effectiveness of the Company's internal control over financial reporting, and an attestation report by the Company's independent registered public accounting firm addressing these assessments.
Beginning with the Company's annual report for the year ending December 31, 2006, the Company will have to include in its annual report on Form 10-K filed with the Securities and Exchange Commission a report of management regarding the Company's internal controls over financial reporting in accordance with the above requirements.
In this regard, the Company has begun a process to document and evaluate its internal control over financial reporting in order to satisfy these requirements. The process includes dedicating internal resources toward the adoption of a detailed work plan and will also involve the retention of outside consultants.
This process is designed to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes, where appropriate, and (iii) verify through testing that controls are functioning as documented. To date, the Company has identified certain deficiencies in the design and operating effectiveness of its internal control over financial reporting, and it believes that they have been corrected or are in the process of being corrected. Although this process is not completed, management is not aware of any
"significant deficiencies" or "material weaknesses" in the Company's internal controls over financial reporting, as defined in applicable Securities and Exchange Commission rules and regulations.
RECENT ACCOUNTING PRONOUNCEMENTS
See note 1 to the consolidated financial statements included in this report for a discussion of this topic.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning the Company presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Virtually all of the assets and liabilities of the Company are monetary in nature. As a result, changes in interest rates have a more significant impact on the performance of the Company than do the effects of changes in the general rate of inflation and in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities, and the issuance of its debentures. The Company has not engaged in and accordingly has no risk related to trading accounts, commodities, interest rate hedges or foreign exchange. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments as of December 31, 2005 and 2004, which reflect changes in market prices and rates, can be found in note 20 to the consolidated financial statements included in this report.
Management actively monitors and manages the Company's interest rate risk exposure. The primary objective in managing interest rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. For a further discussion, see the section entitled "Asset and Liability Management" in Item 7 of this report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included herein:
- - Report of Independent Registered Public Accounting Firm - Hacker, Johnson & Smith, P.A., P.C. (PAGE 53) - - Consolidated Balance Sheets at December 31, 2005 and 2004 (PAGE 54) - - Consolidated Statements of Earnings for the Years Ended December 31, 2005, 2004 and 2003 (PAGE 55) - - Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003 (PAGE 56) - - Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 (PAGE 57) - - Notes to the Consolidated Financial Statements (PAGES 58 TO 79)
SUPPLEMENTARY DATA
Other financial statement schedules and inapplicable periods with respect to schedules listed above are omitted because the conditions requiring their filing do not exist or the information required thereby is included in the consolidated financial statements filed, including the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders Intervest Bancshares Corporation New York, New York:
We have audited the accompanying consolidated balance sheets of Intervest Bancshares Corporation and Subsidiaries (the "Company") as of December 31, 2005 and 2004 and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with generally accepted accounting principles in the United States of America.
/s/ Hacker, Johnson & Smith, P.A., P.C. - --------------------------------------- Hacker, Johnson & Smith, P.A., P.C. Tampa, Florida February 3, 2006
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Intervest Bancshares Corporation is a registered financial holding company referred to by itself as the "Holding Company." Its wholly owned consolidated subsidiaries are: Intervest National Bank (the "Bank"); Intervest Mortgage Corporation; and Intervest Securities Corporation. All the entities are referred to collectively as the "Company" on a consolidated basis. The Holding Company's primary business is the ownership and operation of its subsidiaries. It does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending, including the participation in loans originated by the Bank. From time to time, the Holding Company also issues debt and equity securities to raise funds for working capital purposes. The offices of the Holding Company, Intervest Mortgage Corporation, Intervest Securities Corporation and the Bank's headquarters and full-service banking office are located on the entire fourth floor of One Rockefeller Plaza in New York City, New York, 10020-2002.
The Company's primary business segment is banking and real estate lending. The Company's lending activities are comprised almost entirely of origination for its loan portfolio mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mix-used properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). These loans have an average life of approximately three years. The Company tends to lend in areas that are in the process of being revitalized, with a concentration of loans on properties located in New York State and the State of Florida. A significant portion of the residential properties are located in New York City and are subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents.
The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Plaza in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank conducts a personalized commercial and consumer banking business and attracts deposits from the areas served by its banking offices. The Bank also provides internet banking services through its web site: www.intervestnatbank.com, which can attract deposit customers from outside its primary market areas. The deposits, together with funds derived from other sources, are mainly used to originate mortgage loans secured by commercial and multifamily real estate properties and to purchase investment securities. The information on the aforementioned web site is not and should not be considered part of this report and is not incorporated by reference.
Intervest Mortgage Corporation's business focuses on the origination of first mortgage and junior mortgage loans secured by commercial and multifamily real estate properties. It also provides loan origination services to the Bank. Intervest Mortgage Corporation funds its lending business through the issuance of subordinated debentures in public offerings. It currently has one active wholly owned subsidiary, Intervest Realty Servicing Corporation, which is engaged in certain mortgage servicing activities.
Intervest Securities Corporation is a broker/dealer and a member of the National Association of Securities Dealers (NASD) whose business activities to date have not been material. Its only revenues have been derived from participating as a selected dealer from time to time in offerings of debt securities of the Company, primarily those of Intervest Mortgage Corporation.
Intervest Statutory Trust I, II, III and IV are wholly owned subsidiaries of the Holding Company that are unconsolidated entities as required by Financial Accounting Standards Board (FASB) Interpretation No. 46-R, "Consolidation of Variable Interest Entities." Intervest Statutory Trust I, II, III and IV issued in December 2001, September 2003, March 2004 and September 2004, $15.0 million, respectively, of trust preferred securities for a total of $60.0 million. Each trust was formed for the sole purpose of issuing and administering the trust preferred securities. The trusts do not conduct any trade or business. For a further discussion, see note 9 herein.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Holding Company and its subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and Intervest Securities Corporation. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform to the current year's presentation. The accounting and reporting policies of the Company conform to United States generally accepted accounting principles and to general practices within the banking industry.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, as of the date of the consolidated financial statements, and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the estimated fair values of financial instruments.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash equivalents include federal funds sold (generally sold for one-day periods) and commercial paper and other short-term investments that have maturities of three months or less from the time of purchase.
SECURITIES
Securities that the Company has the ability and intent to hold until maturity are classified as securities held to maturity and are carried at cost, adjusted for accretion of discounts and amortization of premiums, which are recognized into interest income using the interest method over the period to maturity. Securities that are held for indefinite periods of time which management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates or other factors, are classified as available for sale and are carried at fair value. Unrealized gains and losses on securities available for sale, net of related income taxes, are reported as a separate component of comprehensive income. Realized gains and losses from sales of securities are determined using the specific identification method. The Company does not acquire securities for the purpose of engaging in trading activities.
LOANS RECEIVABLE
Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or satisfaction are carried at their outstanding principal net of chargeoffs, the allowance for loan losses, unamortized discounts and deferred loan fees or costs. Loan origination and commitment fees, net of certain costs, are deferred and amortized to interest income as an adjustment to the yield of the related loans over the contractual life of the loans using the interest method. When a loan is paid off or sold, or if a commitment expires unexercised, any unamortized net deferred amount is credited or charged to earnings accordingly.
Loans are placed on nonaccrual status when principal or interest becomes 90 days or more past due unless the loan is well secured and in the process of collection. Accrued interest receivable previously recognized is reversed when a loan is placed on nonaccrual status. Amortization of net deferred fee income is discontinued for loans placed on nonaccrual status. Interest payments received on loans in nonaccrual status are recognized as income on a cash basis unless future collections of principal are doubtful, in which case the payments received are applied as a reduction of principal. Loans remain on nonaccrual status until principal and interest payments are current.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is netted against loans receivable and is increased by provisions charged to operations and decreased by chargeoffs (net of recoveries). The adequacy of the allowance is evaluated monthly with consideration given to: the nature and size of the loan portfolio; overall portfolio quality; loan concentrations; specific problem loans and estimates of fair value thereof; historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's perception of the current and anticipated economic conditions in the Company's lending areas. In addition, Statement of Financial Accounting Standards (SFAS) No. 114 specifies the manner in which the portion of the allowance for loan losses is computed related to certain loans that are impaired. A loan is normally deemed impaired when, based upon current information and events, it is probable the Company will be unable to collect both principal and interest due according to the contractual terms of the loan agreement. Impaired loans normally consist of loans on nonaccrual status. Interest income on impaired loans is recognized on a cash basis. Impairment for commercial real estate and multifamily loans is measured based on: the present value of expected future cash flows, discounted at the loan's effective interest rate; or the observable market price of the loan; or the estimated fair value of the loan's collateral, if payment of the principal and interest is dependent upon the collateral. When the fair value of the property is less than the recorded investment in the loan, this deficiency is recognized as a valuation allowance within the overall allowance for loan losses and a charge through the provision for loan losses. The Company charges off any portion of the recorded investment in the loan that exceeds the fair value of the collateral. The net carrying amount of an impaired loan does not at any time exceed the recorded investment in the loan.
Lastly, the Company's regulators, as an integral part of their examination process, periodically review the allowance for loan losses. Accordingly, the Company may be required to take certain chargeoffs and/or recognize additions to the allowance based on the regulators' judgment concerning information available to them during their examination.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized using the straight-line method over the terms of the related leases, or the useful life of the asset, whichever is shorter. Maintenance, repairs and minor improvements are expensed as incurred, while major improvements are capitalized.
DEFERRED DEBENTURE OFFERING COSTS
Costs relating to offerings of debentures are amortized over the terms of the debentures. The costs consist primarily of underwriters' commissions. Accumulated amortization amounted to $3.0 million at December 31, 2005 and $4.4 million at December 31, 2004.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold. Upon foreclosure of the property, the related loan is transferred from the loan portfolio to foreclosed real estate at the lower of the loan's carrying value at the date of transfer, or estimated fair value of the property less estimated selling costs. Such amount becomes the new cost basis of the property. Adjustments made to the carrying value at the time of transfer are charged to the allowance for loan losses. After foreclosure, management periodically performs market valuations and the real estate is carried at the lower of cost or estimated fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance of the property are included in the consolidated statements of earnings.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION
The Company used Accounting Principles Board (APB) No.25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for compensation related to its stock warrants in 2005, 2004 and 2003. Under APB No. 25, if the exercise price of the Company's stock warrants issued to employees or directors equals the market price of the underlying stock on the date of the grant or modification, no compensation expense is recognized. SFAS No.123, "Accounting for Stock-Based Compensation," as amended by SFAS No.148 "Accounting for Stock-Based Compensation Transition and Disclosure," collectively "SFAS No.123," requires pro forma disclosures of net earnings and earnings per share determined as if the Company accounted for its stock warrants under the fair value method. Had compensation expense been determined based on estimated fair value, the Company's net earnings and earnings per share would have not have been materially different than those reported. As discussed under the caption "Recent Accounting and Regulatory Developments," on January 1, 2006, the Company adopted SFAS No. 123-R "Share-Based Payment," which replaces the existing SFAS 123 and supersedes APB 25.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded if it is more likely than not that some portion or all of the deferred tax assets will not be realized based on a review of available evidence.
EARNINGS PER SHARE (EPS)
Basic and diluted EPS are calculated in accordance with SFAS No. 128, "Earnings per Share." Basic EPS is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by dividing adjusted net earnings by the weighted-average number of shares of common stock and dilutive potential common stock shares that may be outstanding in the future.
Potential common stock shares consist of shares that may arise from outstanding dilutive common stock warrants (the number of which is computed using the "treasury stock method") and from outstanding convertible debentures (the number of which is computed using the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding common stock warrants and convertible debentures were converted into common stock that then shared in the Company's earnings (as adjusted for interest expense, net of taxes, that would no longer occur if the debentures were converted).
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net earnings. However, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders' equity section of the consolidated balance sheet, such items along with net earnings, are components of comprehensive income.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit, unused lines of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS
SHARE-BASED COMPENSATION. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes APB No. 25. SFAS 123-R requires companies recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and directors, but expresses no preference for a type of valuation model. SFAS 123-R is effective for interim and annual reporting periods beginning on January 1, 2006. Accordingly, the Company's financial statements will be prepared in accordance with this new standard beginning on January 1, 2006 if and when the Company issues any new stock warrants and/or options to employees or directors in the future. SFAS 123-R does not impact any of the Company's outstanding warrants at December 31, 2005, all of which are vested and were issued prior to this new standard.
ACCOUNTING CHANGES AND ERROR CORRECTIONS. In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections." This statement requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods' financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, Accounting Changes, which previously required that most voluntary changes in accounting principle be recognized by including in the current period's net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between "retrospective application" of an accounting principle and the "restatement" of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB Opinion No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement.
CERTAIN LOANS AND DEBT SECURITIES ACQUIRED IN A TRANSFER. In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, "Accounting for Certain Loans and Debt Securities Acquired in a Transfer" (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows expected to be collected and an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 also prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of SOP 03-3. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 did not impact the Company's financial condition or result of operations.
ACCOUNTING FOR LOAN COMMITMENTS. In March 2005, the SEC issued Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments" (SAB 105). SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments. Currently, loan commitments that the Company enters into would not be required to be accounted for as derivative instruments under SAB 105.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
2. SECURITIES
The carrying value (amortized cost) and estimated fair value of securities held to maturity are as follows:
All the securities at December 31, 2005 and 2004 were debt obligations of U.S. government corporations or sponsored agencies (FHLB, FNMA, FHLMC, or FFCB) and were held by the Bank. The securities have fixed rates or have predetermined scheduled rate increases, and some have call features that allow the issuer to call the security at par before its stated maturity without penalty.
At December 31, 2005, the portfolio consisted of 159 securities, of which 150 had an unrealized loss. Substantially all of the losses were for a continuous period of more than 12 months. Management believes that the cause of the unrealized losses is directly related to changes in interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, their fair value will increase.
Management views the unrealized losses noted above to be temporary based on the impact of interest rates, the very short maturities of the investments and their high credit quality. In addition, the Bank has the ability and intent to hold its investments for a period of time sufficient for the fair value of the securities to recover. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
The amortized cost and estimated fair value of securities held to maturity by remaining term to contractual maturity is as follows:
There were no securities classified as available for sale and no sales of securities during 2005, 2004 and 2003.
3. LOANS RECEIVABLE
Loans receivable is as follows:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
3. LOANS RECEIVABLE, CONTINUED
At December 31, 2005, $0.7 million of loans were on a nonaccrual status, compared to $4.6 million at December 31, 2004. These loans were considered impaired under the criteria of SFAS No.114. but no valuation allowance was maintained at any time since the Company believes that the estimated fair value of the underlying properties exceeded the Company's recorded investment. In April 2005, the property collateralizing a loan classified as nonaccrual at December 31, 2004 with a principal balance of $3.9 million was sold at foreclosure to a third party. The loan was repaid in full and the Bank recovered all amounts due thereunder. At December 31, 2005 and 2004, there were no other loans classified as nonaccrual or impaired.
At December 31, 2005, there were $2.6 million of loans ninety days past due and still accruing interest since they were deemed by management to be well secured and in the process of collection. There were no loans classified as such at December 31, 2004.
Interest income that was not recorded on nonaccrual loans under their contractual terms amounted to $0.1 million in 2005, $0.2 million in 2004 and $0.3 million in 2003. The average balance of nonaccrual (impaired) loans for 2005, 2004 and 2003 was $3.8 million, $3.2 million and $4.6 million, respectively.
Credit risk represents the possibility of the Company not recovering amounts due from its borrowers and is significantly related to local economic conditions in the areas the properties are located. Economic conditions affect the market value of the underlying collateral as well as the levels of rent and occupancy of income-producing properties (such as office buildings, shopping centers and rental and cooperative apartment buildings).
The geographic distribution of the loan portfolio is as follows:
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is as follows:
5. PREMISES AND EQUIPMENT, LEASE COMMITMENTS AND RENTAL EXPENSE
Premises and equipment is as follows:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT, LEASE COMMITMENTS AND RENTAL EXPENSE, CONTINUED
Depreciation and amortization of premises and equipment, reflected as a component of noninterest expense in the consolidated statements of earnings, was $0.6 million for 2005, 2004 and 2003.
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest Securities Corporation and the Bank's headquarters and full-service banking office are located in leased premises on the entire fourth floor of One Rockefeller Plaza in New York City. In addition, the Bank leases its Belcher Road office in Clearwater, Florida. Both leases contain operating escalation clauses related to taxes and operating costs based upon various criteria and are accounted for as operating leases, and they expire in March 2014 and June 2007, respectively. The Bank owns all of its remaining offices in Florida and also leases a portion of the space in its office buildings in Florida that is not used for banking operations to other companies under leases that expire at various times through October 2009.
Future minimum annual lease payments (expense) and sublease income due under non-cancelable leases as of December 31, 2005 are as follows:
Rent expense under operating leases aggregated $0.9 million in 2005, $1.0 million in 2004 and $0.7 million in 2003. Lease rental income aggregated $0.6 million in 2005 and $0.5 million in 2004 and 2003.
6. DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
Certificate of deposit accounts of $100,000 or more totaled $371.8 million and $215.9 million at December 31, 2005 and 2004, respectively. At December 31, 2005, certificate of deposit accounts of $100,000 or more by remaining maturity were as follows: due within one year $120.4 million; over one to two years $100.0 million; over two to three years $33.7 million; over three to four years $53.1 million; and over four years $64.6 million.
Interest expense on deposits is as follows:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures and mortgage note payable outstanding are summarized as follows:
Scheduled contractual maturities as of December 31, 2005 are as follows:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
Intervest Mortgage Corporation repaid and issued the following debentures in 2005:
Series 11/10/98 matured on 1/01/05 and were repaid for $2.6 million of principal and $1.8 million of accrued interest; Series 05/10/96 matured on 4/01/05 and were repaid for $10.0 million of principal and $2.2 million of accrued interest; Series 08/01/01 matured on 4/01/05 and were repaid for $1.75 million of principal and $0.1 million of accrued interest; Series 10/15/96 due 10/01/05 were repaid early on 8/1/05 for $5.5 million of principal and $0.1 million of accrued interest; Series 01/17/02 due 10/01/05 were repaid early on 8/1/05 for $1.25 million of principal and $0.1 million of accrued interest; Series 04/30/97 due 10/01/05 were repaid early on 9/1/05 for $8.0 million of principal and $0.1 million of accrued interest; Series 09/18/00 due 1/1/06 were repaid early on 12/1/05 for $1.25 million of principal and $0.6 million of accrued interest; Series 08/05/02 due 1/1/06 were repaid early on 12/1/05 for $1.75 million of principal and $0.1 million of accrued interest; Series 03/21/05 issued in April for $14.0 million of principal for net proceeds, after offering costs, of $13.0 million; and Series 08/12/05 issued in September for $12.0 million of principal for net proceeds, after offering costs, of $11.1 million.
Interest is paid quarterly on Intervest Mortgage Corporation's debentures except for the following: all of Series 6/28/99 and 9/18/00; $0.6 million of Series 8/01/01; $0.3 million of Series 1/17/02; $1.1 million of Series 8/05/02; $1.8 million of Series 11/28/03; $1.9 million of Series 6/7/04; $1.9 million of Series 3/21/05; and $1.8 million of Series 8/12/05, all of which accrue and compound interest quarterly, with such interest due and payable at maturity.
The holders of Intervest Mortgage Corporation's Series 6/28/99, 9/18/00 and 1/17/02 through 8/12/05 debentures can require Intervest Mortgage Corporation, on a first come basis during a specified time, to repurchase the debentures for face amount plus accrued interest once each year (beginning January 1, 2006 for Series 8/05/02, July 1, 2006 for Series 1/21/03, October 1, 2006 for Series 7/25/03, January 1, 2007 for Series 11/28/03, January 1, 2008 for Series 6/7/04, April 1, 2009 for Series 3/21/05 and October 1, 2009 for Series 8/12/05). However, in no calendar year can the required purchases be more than $100,000 in principal amount of each maturity, in each series of debentures, on a non-cumulative basis.
Intervest Mortgage Corporation's debentures may be redeemed at its option at any time, in whole or in part, for face value, except for Series 3/21/05 and Series 8/12/05, which would be at a premium of 1% if they were redeemed prior to October 1, 2006 and April 1, 2007, respectively. All the debentures are unsecured and subordinate to all present and future senior indebtedness, as defined in the indenture related to each debenture.
The Holding Company's Series 5/14/98 subordinated debentures are convertible along with accrued interest at the option of the holders at any time prior to April 1, 2008 into shares of its Class A common stock at the following conversion prices per share: $16.00 in 2006; $18.00 in 2007 and $20.00 from January 1, 2008 through April 1, 2008. The Holding Company has the right to establish conversion prices that are less than those set forth above for such periods as it may determine. In 2005, $1.6 million of debentures ($0.9 million of principal and $0.7 million of accrued interest) were converted into shares of Class A common stock at $14.00 per share.
At December 31, 2005, interest accrued and compounded quarterly on $1.6 million of the Holding Company's convertible debentures at the rate of 8% per annum, while $0.5 million of the convertible debentures pay interest quarterly at the rate of 8% per annum. All accrued interest of $1.3 million is due and payable at maturity whether by acceleration, redemption or otherwise. Any convertible debenture holder may, on or before July 1 of each year, elect to be paid all accrued interest and to thereafter receive regular quarterly payments of interest. The Holding Company may redeem any of its debentures, in whole or in part, at any time for face value.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
8. SHORT-TERM BORROWINGS AND LINES OF CREDIT
From time to time, the Bank may borrow funds on an overnight or short-term basis to manage its liquidity needs. At December 31, 2005, the Bank had agreements with correspondent banks whereby it could borrow up to $16 million on an unsecured basis. In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB), the Bank can also borrow from these institutions on a secured basis. At December 31, 2005, the Bank had available collateral consisting of investment securities to support total borrowings of $243 million from the FHLB and FRB. At December 31, 2005, there were no outstanding borrowings from any of the aforementioned sources.
The following is a summary of certain information regarding short-term borrowings in the aggregate:
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as Trust Preferred Securities) are summarized as follows:
The Capital Securities are obligations of the Holding Company's wholly owned statutory business trusts, Intervest Statutory Trust I, II, III and IV. Each Trust was formed with a capital contribution of $464,000 from the Holding Company and for the sole purpose of issuing and administering the Capital Securities. The proceeds from the issuance of the Capital Securities together with the capital contribution for each Trust were used to acquire the Holding Company's Junior Subordinated Debentures that are due concurrently with the Capital Securities. The Capital Securities, net of the Company's capital contributions totaling $1.9 million, qualify for inclusion in regulatory capital.
The sole assets of the Trusts, the obligors on the Capital Securities, are the Junior Subordinated Debentures. In addition, for each Trust, the Holding Company has guaranteed the payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to the Capital Securities. Issuance costs of $0.5 million, $0.4 million, $0.4 million and $0.2 million associated with Capital Securities I, II, III and IV, respectively, have been capitalized by the Holding Company and are being amortized over the life of the securities using the straight-line method.
Interest payments on the Junior Subordinated Debentures (and the corresponding distributions on the Capital Securities) are payable in arrears as follows: Capital Securities I - semi-annually at the fixed rate of 9.875% per annum; Capital Securities II - quarterly at the fixed rate of 6.75% per annum until September 17, 2008 and thereafter at the rate of 2.95% over 3 month libor; Capital Securities III - quarterly at the fixed rate of 5.88% per annum until March 17, 2009 and thereafter at the rate of 2.79% over 3 month libor; and Capital Securities IV - quarterly at the fixed rate of 6.20% per annum until September 20, 2009 and thereafter at the rate of 2.40% over 3 month libor.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
9. SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
Interest payments may be deferred at any time and from time to time during the term of the Junior Subordinated Debentures at the election of the Holding Company for up to 20 consecutive quarterly periods, or 5 years. There is no limitation on the number of extension periods the Holding Company may elect; provided, however, no deferral period may extend beyond the maturity date of the Junior Subordinated Debentures. During an interest deferral period, interest will continue to accrue on the Junior Subordinated Debentures and interest on such accrued interest will accrue at an annual rate equal to the interest rate in effect for such deferral period, compounded quarterly from the date such interest would have been payable were it not deferred. At the end of the deferral period, the Holding Company will be obligated to pay all interest then accrued and unpaid.
All of the Capital Securities are subject to mandatory redemption as follows: (i) in whole, but not in part, upon repayment of the Junior Subordinated Debentures at stated maturity or earlier, at the option of the Holding Company, within 90 days following the occurrence and continuation of certain changes in the tax or capital treatment of the Capital Securities, or a change in law such that the Trust would be considered an investment company, contemporaneously with the redemption by the Holding Company of the Junior Subordinated Debentures; and (ii) in whole or in part at any time on or after December 18, 2006 for Capital Securities I, September 17, 2008 for Capital Securities II, March 17, 2009 for Capital Securities III, and September 20, 2009 for Capital Securities IV contemporaneously with the optional redemption by the Holding Company of the Junior Subordinated Debentures in whole or in part. Any redemption would be subject to the receipt of regulatory approvals.
10. STOCKHOLDERS' EQUITY
The Holding Company's Board of Directors is authorized to issue up to 300,000 shares of preferred stock of the Holding Company without stockholder approval. The powers, preferences and rights, and the qualifications, limitations, and restrictions thereof on any series of preferred stock issued is determined by the Board of Directors. There is no preferred stock issued and outstanding. Class A and B common stock have equal voting rights as to all matters, except that, so long as at least 50,000 shares of Class B common stock remain issued and outstanding, the holders of the outstanding shares of Class B common stock are entitled to vote for the election of two-thirds of the Board of Directors (rounded up to the nearest whole number), and the holders of the outstanding shares of Class A common stock are entitled to vote for the remaining Directors of the Holding Company. The shares of Class B common stock are convertible, on a share-for-share basis, into Class A common stock at any time.
11. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required under Federal Reserve Board regulations to maintain reserves, generally consisting of cash or noninterest-earning accounts, against its transaction accounts. At December 31, 2005 and 2004, balances maintained as reserves were approximately $1.1 million and $1.2 million, respectively.
As a member of the Federal Reserve Banking and Federal Home Loan Banking systems, the Bank must maintain an investment in the capital stock of the FRB and FHLB. At December 31, 2005 and 2004, the total investment, which earns a dividend, aggregated $5.2 million and $5.1 million. At December 31, 2005 and 2004, U.S. government agency securities with a carrying value of $72.1 million and $82.2 million, respectively, were pledged against various lines of credit.
The payment of dividends by the Holding Company to its shareholders and the payment of dividends by the Holding Company's subsidiaries to the Holding Company itself are subject to various regulatory restrictions, as well as restrictions that may arise from outstanding indentures. These restrictions take into consideration various factors such as whether there are sufficient net earnings, as defined, liquidity, asset quality, capital adequacy and economic conditions. The holders of Class A common stock and Class B common stock share ratably in any dividend. The Holding Company has not paid any dividends on its capital stock and currently is not contemplating the payment of a dividend.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
12. PROFIT SHARING PLANS
The Company sponsors tax-qualified, profit sharing plans in accordance with the provisions of Section 401(k) of the Internal Revenue Code, whereby eligible employees meeting certain length-of-service requirements may make tax-deferred contributions up to certain limits. The Company makes discretionary matching contributions up to 3% of employee compensation, which vest to the employees over a period of time. Total cash contributions to the plans included in the consolidated statements of earnings aggregated $72,000, $68,000 and $55,000 in 2005, 2004 and 2003, respectively.
13. RELATED PARTY TRANSACTIONS
At December 31, 2005 and 2004, consolidated deposits included deposit accounts from affiliated companies, directors, executive officers and members of their immediate families and related business interests of approximately $24 million and $18 million, respectively. There are no loans to any directors or executive officers of the Holding Company or its subsidiaries.
The Company paid fees of approximately $0.2 million in 2005, $0.2 million in 2004 and $0.3 million in 2003 for legal services rendered by a law firm, a principal of which is a director of the Company. Intervest Mortgage Corporation paid commissions and fees in connection with the placement of debentures of approximately $0.9 million in 2005, $0.7 million in 2004 and $0.5 million in 2003 to a broker/dealer, a principal of which is a director of the Company. The Bank paid commissions to the same broker/dealer of approximately of $22,000 in 2005, $69,000 in 2004 and $53,000 in 2003 in connection with the purchase of investment securities.
14. COMMON STOCK WARRANTS
The Holding Company had 696,465 common stock warrants outstanding at December 31, 2005 and 2004, that entitle its holder, the Chairman of the Board of the Company, to purchase one share of Class A or Class B common stock as the case may be for each warrant. All warrants are vested and currently exercisable.
Data concerning common stock warrants is as follows:
For the reporting periods of this report, the Company elected to use the intrinsic value-based method prescribed under APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock warrants. Under this method, compensation expense related to stock warrants granted to employees is the excess, if any, of the market price of the stock as of the grant or modification date over the exercise price of the warrant.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
14. COMMON STOCK WARRANTS, CONTINUED
For warrants granted to employees whose exercise price was reduced to $10.01 effective January 1, 2002 and whose expiration date was extended in 2002, compensation expense was recorded under variable rate accounting as prescribed by APB No. 25 and related interpretations. For these warrants, which originally totaled 138,500, compensation expense was recorded in salaries and employee benefits expense with a corresponding credit to paid in capital in the consolidated financial statements.
Compensation expense recorded in connection with common stock warrants is summarized as follows:
On January 1, 2006, the Company adopted SFAS No. 123-R, "Share-Based Payment" replaces SFAS 123 and supersedes APB No. 25. SFAS 123-R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and directors, but expresses no preference for a type of valuation model. Accordingly, the new standard will apply to new stock warrants and/or options issued to employees or directors in the future. SFAS 123-R does not impact any of the Company's outstanding warrants at December 31, 2005, all of which are vested and were issued prior to this new standard.
15. INCOME TAXES
The Holding Company and its subsidiaries file a consolidated federal income tax return and combined state and city income tax returns in New York. The Holding Company also files a franchise tax return in Delaware and the Bank files a state income tax return in Florida. All returns are filed on a calendar year basis.
At December 31, 2005 and 2004, the Company had a net deferred tax asset amounting to $7.0 million and $5.1 million, respectively. The asset relates to the unrealized benefit for net temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases that will result in future tax deductions. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized based on available evidence. Management concluded that a valuation allowance for deferred tax assets was not necessary at any time during the reporting periods.
Allocation of federal, state and local income taxes between current and deferred portions is as follows:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
15. INCOME TAXES, CONTINUED
The components of the deferred tax benefit are as follows:
The tax effects of the temporary differences that give rise to the deferred tax asset are as follows:
The reconciliation between the statutory federal income tax rate and the Company's effective income tax rate (including state and local taxes) is as follows:
16. EARNINGS PER SHARE
The following table reflects the reconciliation of the basic EPS computation to the diluted EPS computation:
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17. CONTINGENCIES
The Company is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as foreclosure proceedings. Based on review and consultation with legal counsel, management does not believe that there is any pending or threatened proceeding against the Company which, if determined adversely, would have a material effect on the business, results of operations, financial position or liquidity of the Company.
18. REGULATORY CAPITAL
The Holding Company is subject to regulation, examination and supervision by the FRB. The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency of the United States of America (OCC). Intervest Securities Corporation is subject to regulation, examination and supervision by the U.S. Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD).
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet them can initiate certain mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts are also subject to qualitative judgement by the regulators about components, risk weighting and other factors.
Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, as defined by the regulations.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies (BHC), but with stricter quantitative limits and clearer qualitative standards. The new rule provides a transition period for BHCs to meet the new, stricter limitations within regulatory capital by allowing the limits on restricted core capital elements to become fully effective as of March 31, 2009. Until March 31, 2009, BHCs generally must comply with the current Tier 1 capital limits.
Management believes, as of December 31, 2005 and 2004, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2005, the most recent notification from the Bank's regulators categorized the Bank as a well-capitalized institution under the regulatory framework for prompt corrective action, which requires minimum Tier 1 leverage and Tier 1 and total risk-based capital ratios of 5%, 6% and 10%, respectively. Management is not aware of any current conditions or events outstanding that would change the designation from well capitalized.
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital Rule, which requires the maintenance of minimum net capital of $5,000. At December 31, 2005 and 2004, Intervest Securities Corporation's net capital was $0.5 million.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
18. REGULATORY CAPITAL, CONTINUED
The table that follows presents information regarding the Company's and the Bank's capital adequacy.
19. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments are in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. The Company's maximum exposure to credit risk is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and normally require payment of fees. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The contractual amounts of the Company's off-balance sheet financial instruments are as follows:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial instruments are as follows:
Fair value estimates are made at a specific point in time based on available information. Where available, quoted market prices are used. However, a significant portion of the Company's financial instruments, such as mortgage loans, do not have an active marketplace in which they can be readily sold or purchased to determine fair value. Consequently, fair value estimates for such instruments are based on assumptions made by management that include the instrument's credit risk characteristics and future estimated cash flows and prevailing interest rates. As a result, these fair value estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Accordingly, changes in any of management's assumptions could cause the fair value estimates to deviate substantially. The fair value estimates also do not reflect any additional premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument, nor estimated transaction costs.
Further, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on and have not been considered in the fair value estimates. Finally, fair value estimates do not attempt to estimate the value of anticipated future business, the Company's customer relationships, branch network, and the value of assets and liabilities that are not considered financial instruments, such as core deposit intangibles and premises and equipment.
The following methods and assumptions were used to estimate the fair value of financial instruments:
SECURITIES. The estimated fair value of securities held to maturity is based on quoted market prices. The estimated fair value of the FRB and FHLB stock approximates carrying value since the securities do not present credit concerns and are redeemable at cost.
LOANS RECEIVABLE. The estimated fair value of loans is based on a discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Management can make no assurance that its perception and quantification of credit risk would be viewed in the same manner as that of a potential investor. Therefore, changes in any of management's assumptions could cause the fair value estimates of loans to deviate substantially.
DEPOSITS. The estimated fair value of deposits with no stated maturity, such as savings, money market, checking and noninterest-bearing demand deposit accounts approximates carrying value. The estimated fair value of certificates of deposit are based on the discounted value of their contractual cash flows. The discount rate used in the present value computation was estimated by comparison to current interest rates offered by the Bank for certificates of deposit with similar remaining maturities.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
BORROWED FUNDS AND ACCRUED INTEREST PAYABLE. The estimated fair value of borrowed funds and related accrued interest payable is based on a discounted cash flow analysis. The discount rate used in the present value computation was estimated by comparison to what management believes to be the Company's incremental borrowing rate for similar arrangements.
ALL OTHER FINANCIAL ASSETS AND LIABILITIES. The estimated fair value of cash and cash equivalents, accrued interest receivable and accrued interest payable on deposits approximates their carrying values since these instruments are payable on demand or have short-term maturities.
OFF-BALANCE SHEET INSTRUMENTS. The carrying amounts of commitments to lend approximated estimated fair value. The fair value of commitments to lend is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter party's credit standing.
21. BUSINESS SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." An operating segment is defined therein as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly by the Company's chief operating decision makers to perform resource allocations and performance assessments.
The Company's primary business is banking and real estate lending as more fully described in note 1 herein. The Company's day-to-day operating decisions are normally made by the members of its Executive Committee of the Board of Directors, which is comprised of the Chairman, Vice Chairman and Vice President of the Company. The Executive Committee generally uses revenue and earnings performance of each segment to determine operating, strategic and resource allocation decisions.
The accounting policies of the segments identified below are the same as those described in the summary of significant accounting policies. The revenues and net earnings of the segments are not necessarily indicative of the amounts which would be achieved if each of the segments were a separate company.
The following table presents certain information regarding the Company's operations by business segment:
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
22. HOLDING COMPANY FINANCIAL INFORMATION
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
22. HOLDING COMPANY FINANCIAL INFORMATION, CONTINUED
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following information is as of or for the period ended:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In 2005, the Company's subsidiary, Invervest Mortgage Corporation, replaced its independent accountants with the Company's independent accountants. There were no disagreements with the prior accountants. The information required by this item is contained in the Company's definitive proxy statement for its 2006 Annual Meeting (the "Proxy Statement") under the section entitled "Independent Public Accountants" and is incorporated herein by reference.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal Executive and Financial Officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Principal Executive and Financial Officers have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations, and are operating in an effective manner. The Company made no significant changes in its internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to December 31, 2005.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not Applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS. The information required by this item is contained under the section entitled "Proposal One: Election of Directors" of the Proxy Statement and is incorporated herein by reference.
EXECUTIVE OFFICERS. The information required by this item is set forth at the end of Part I of this report under the caption "Executive Officers and Other Key Employees."
COMPLIANCE WITH SECTION 16(A). The information required by this item is contained under the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement is incorporated herein by reference.
AUDIT COMMITTEE FINANCIAL EXPERT. The information required by this item regarding the audit committee of the Company's Board of Directors, including information regarding audit committee financial experts serving on the audit committee is contained in the section of the Proxy Statement entitled "Corporate Governance Principles and Board Matters" and is incorporated herein by reference.
CODE OF BUSINESS CONDUCT AND ETHICS. The Company has a written code of business conduct and ethics that applies to its directors, officers and employees, and also has a written code of ethics for its principal executive and financial officers. The Company's Audit Committee has procedures for the submission of complaints or concerns regarding financial statement disclosures and other matters. A copy of these documents are attached as exhibits to the Company's Report on Form 10-K for the year ended December 31, 2004, wherein such documents are identified as Exhibit 14.1, 14.2 and 14.3. A copy of these documents will be furnished upon request and without charge to beneficial holders of the Class A common stock of the Company. Written requests should be directed to: Intervest Bancshares Corporation, Attention: Secretary, One Rockefeller Plaza, Suite 400, New York, New York 10020.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the section entitled "Executive Compensation" of the Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER TRANSACTIONS
The information required by this item is contained in the sections entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" of the Proxy Statement and are incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section entitled "Certain Relationships and Related Transactions" of the Proxy Statement and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is contained in the section entitled "Independent Public Accountants" of the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS: See Item 8 "Financial Statements and Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES: See Item 8 "Financial Statements and Supplementary Data"
(3) EXHIBITS: The following exhibits are filed herein as part of this Form 10-K:
- --------------------------------------- * Previously filed. ** Filed herewith. + Denotes management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
INTERVEST BANCSHARES CORPORATION (Registrant)
By: /s/ Lowell S. Dansker Date: February 23, 2006 ----------------------------- ---------------------- Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER: (PRINCIPAL EXECUTIVE OFFICER):
By: /s/ Jerome Dansker Date: February 23, 2006 ----------------------------- ---------------------- Jerome Dansker
VICE CHAIRMAN, PRESIDENT AND TREASURER: (PRINCIPAL FINANCIAL OFFICER):
By: /s/ Lowell S. Dansker Date: February 23, 2006 ----------------------------- ---------------------- Lowell S. Dansker,
CHIEF ACCOUNTING OFFICER: (PRINCIPAL ACCOUNTING OFFICER):
By: /s/ John J. Arvonio Date: February 23, 2006 ----------------------------- ---------------------- John J. Arvonio
VICE PRESIDENT, SECRETARY AND DIRECTOR:
By: /s/ Lawrence G. Bergman Date: February 23, 2006 ----------------------------- ---------------------- Lawrence G. Bergman
VICE PRESIDENT AND DIRECTOR:
By: /s/ Stephen A. Helman Date: February 23, 2006 ----------------------------- ---------------------- Stephen A. Helman
DIRECTORS:
By: /s/ Michael A. Callen Date: February 23, 2006 ----------------------------- ---------------------- Michael A. Callen
By: /s/ Paul R. DeRosa Date: February 23, 2006 ----------------------------- ---------------------- Paul R. DeRosa
By: /s/ Wayne F. Holly Date: February 23, 2006 ----------------------------- ---------------------- Wayne F. Holly
By: /s/ Lawton Swan, III Date: February 23, 2006 ----------------------------- ---------------------- Lawton Swan, III
By: /s/ Thomas E. Willett Date: February 23, 2006 ----------------------------- ---------------------- Thomas E. Willett
By: /s/ David J. Willmott Date: February 23, 2006 ----------------------------- ---------------------- David J. Willmott
By: /s/ Wesley T. Wood Date: February 23, 2006 ----------------------------- ---------------------- Wesley T. Wood