-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GTA7c9j3d+OzLSXQfefc9f5A1gs2Zc08qPkfJPRzEFXRcFRzAYVFneNOVzE/laCX bXIkVKW3TWoZRAWMXPM1jw== 0001015402-03-002156.txt : 20030523 0001015402-03-002156.hdr.sgml : 20030523 20030523123106 ACCESSION NUMBER: 0001015402-03-002156 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20030523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERVEST BANCSHARES CORP CENTRAL INDEX KEY: 0000927807 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 133699013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 333-64177 FILM NUMBER: 03717680 BUSINESS ADDRESS: STREET 1: 10 ROCKEFELLER PLAZA STREET 2: STE 1015 CITY: NEW YORK STATE: NY ZIP: 10020-1903 BUSINESS PHONE: 2127577300 MAIL ADDRESS: STREET 1: 10 ROCKEFELLER PLAZA STREET 2: SUITE 1015 CITY: NEW YORK STATE: NY ZIP: 10020-1903 POS AM 1 doc1.txt ================================================================================ As filed with the Securities and Exchange Commission on May 23, 2003 File No. 333-64177 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 POST-EFFECTIVE AMENDMENT NO. 5 ON FORM S-2 TO REGISTRATION STATEMENT ON FORM SB-2 Under The Securities Act of 1933 INTERVEST BANCSHARES CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) ------------------- DELAWARE 13-3699013 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) ------------------- 10 ROCKEFELLER PLAZA SUITE 1015 NEW YORK, NEW YORK 10020-1903 (212)218-2800 (Address, Including Zip Code, and Telephone Number, Including Area Code of Registrant's Principal Executive Offices) ------------------- COPY TO: LAWRENCE G. BERGMAN, VICE PRESIDENT THOMAS E. WILLETT, ESQ. Intervest Bancshares Corporation Harris Beach LLP 10 Rockefeller Plaza (Suite 1015) 99 Garnsey Road New York, New York 10020-1903 Pittsford, New York 14534 (212-218-2800) (716) 419-8800 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [x] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [x] 333-64177 If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------- PRIOR REGISTRATION - RULE 429 * As permitted by Rule 429, the Prospectus included herein also relates to: a Registration Statement on Form SB-2 (No. 333-5013) with respect to shares of Class A Common Stock issuable upon conversion of debentures; a Registration Statement on Form SB-2 (No. 333-82246) with respect to 675,000 Warrants and 675,000 shares of Class A Common Stock; a Registration Statement on Form SB-2 (No. 333-3522) with respect to 613,500 Warrants and 613,500 shares of Class A Common Stock; a Registration Statement on Form SB-2 (No. 333-26583) with respect to 240,165 Warrants, 240,165 shares of Class A Common Stock and 150,000 shares of Class B Common Stock; and a Registration Statement on Form SB-2 (No. 333-33419) related to 965,683 Warrants and 965,683 shares of Class A Common Stock. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8 (A), MAY DETERMINE. ================================================================================ The information in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer is not permitted. Subject to Completion Dated May 23, 2003 PROSPECTUS INTERVEST BANCSHARES CORPORATION (A Financial Holding Company) This prospectus covers shares of our Class A Common Stock and Class B Common Stock that we may issue whenever someone exercises warrants that we previously issued. We have issued warrants which currently entitle the holders to purchase up to 1,555,010 shares of Class A Common Stock and up to 195,000 shares of Class B Common Stock. This prospectus also covers shares of Class A Common Stock that we may issue upon conversion of debentures. We have issued convertible debentures which allow the holders to currently convert them into up to 1,010,803 shares of our Class A Common Stock. OUR CLASS A COMMON STOCK IS LISTED ON THE NASDAQ SMALLCAP MARKET UNDER THE SYMBOL "IBCA". PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER. ------------------- THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------- ----------------- --------------- ------------- Underwriting Discounts and Proceeds to Price to Public Commissions (1) Company (2) --------------- ----------------- --------------- ------------- Per Share (3) --- (3) --------------- ----------------- --------------- ------------- Per Warrant (4) --- --- --- --------------- ----------------- --------------- ------------- Total $ 15,358,000 --- $ 15,358,000 --------------- ----------------- --------------- ------------- (1) The Company will not use brokers or dealers in connection with this offering. (2) Before deducting expenses estimated at $8,000. The Company will not receive any proceeds in connection with the conversion of its debentures. (3) Warrants related to 501,465 shares of Class A Common Stock are at an exercise price of $6.67 per share. Warrants related to 1,053,545 shares of Class A Common Stock are at an exercise price of $10.01per share. Warrants related to 145,000 shares of Class B Common Stock are at an exercise price of $6.67 per share. Warrants related to 50,000 shares of Class B Common Stock are at an exercise price of $10.00 per share. (4) The Company has attributed no value to the Warrants. The date of this Prospectus is, ___________ 2003
TABLE OF CONTENTS PAGE ---- Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . 3 Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 4 Ratio of Earnings to Fixed Charges. . . . . . . . . . . . . . . 8 Where You Can Find More Information . . . . . . . . . . . . . . 8 Forward-Looking Information . . . . . . . . . . . . . . . . . . 9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 9 Determination of Offering Price . . . . . . . . . . . . . . . . 9 Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . 10 Description of Securities . . . . . . . . . . . . . . . . . . . 10 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . 16 Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ABOUT THIS PROSPECTUS YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE ARE NOT MAKING OFFERS TO SELL THE SECURITIES COVERED BY THIS PROSPECTUS OR SOLICITING OFFERS TO PURCHASE THE SECURITIES COVERED BY THIS PROSPECTUS IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY OTHER DATE. 2 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Intervest Bancshares Corporation and the securities being sold in this offering and our audited consolidated financial statements contained in our Form 10-K for the fiscal year ended December 31, 2002, and our unaudited consolidated financial statements contained in our Form 10-Q for the quarter ended March 31, 2003, which are incorporated by reference in this prospectus. THE COMPANY Intervest Bancshares Corporation (the "Holding Company") is a registered financial holding company incorporated in 1993 under the laws of the State of Delaware. At March 31, 2003, the Holding Company owned 100% of the outstanding capital stock of Intervest National Bank, Intervest Mortgage Corporation and Intervest Statutory Trust I. Unless the context otherwise requires, references in this prospectus to the "Company" include Intervest Bancshares Corporation and its subsidiaries. Intervest National Bank is may be referred to as the "Bank." Intervest National Bank, which began operations on April 1, 1999, is a full-service, nationally chartered commercial bank with its office in Rockefeller Plaza in New York City and with five full-service banking offices in Clearwater and Pinellas County, Florida. Intervest Mortgage Corporation is a mortgage investment company also located in Rockefeller Plaza in New York City. Intervest Statutory Trust I was formed in December 2001 in connection with the issuance of $15,000,000 of capital securities. It is not authorized and does not conduct any trade or business, and was formed for the sole purpose of the issuance, sale and administration of the capital securities. The principal business of the Bank is to attract deposits and to loan or invest those deposits on profitable terms. The Bank offers a variety of deposit accounts, which are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per depositor. The lending of the Bank consists primarily of real estate loans, commercial loans and consumer loans. The Bank is one of several providers of funds for such purposes in its market areas, and its lending policies, deposit products and related services are intended to meet the needs of individuals and businesses in those market areas. Intervest Mortgage Corporation's principal business is investing in commercial and multifamily real estate mortgage loans on income producing properties, such as office and commercial properties and multifamily residential apartment buildings.
THE OFFERING Securities Offered . . . . . . . . . . . . . . . . . . . . 1,555,010 shares of Class A Common Stock and 195,000 shares of Class B Common Stock issuable upon exercise of Warrants and 1,010,803 shares of Class A Common Stock currently issuable upon conversion of Debentures. See "Description of Capital Stock" and "Description of Debentures." - ---------------------------------------------------------- ----------------------------------------------------------------------- Shares of Class A Common Stock currently outstanding (1). 4,348,087 - ---------------------------------------------------------- ----------------------------------------------------------------------- Shares of Class A Common Stock outstanding after exercise of Class A Warrants and conversion of debentures . . . 6,913,900 - ---------------------------------------------------------- ----------------------------------------------------------------------- Shares of Class B Common stock currently outstanding . . . 355,000 - ---------------------------------------------------------- ----------------------------------------------------------------------- Shares of Class B Common stock outstanding after exercise of Class B Warrants. . . . . . . . . . . . 550,000 - ---------------------------------------------------------- ----------------------------------------------------------------------- Class A Common Stock . . . . . . . . . . . . . . . . . . . The Class A Common Stock is listed on the Nasdaq Stock Market's SmallCap Market under the symbol "IBCA." - ---------------------------------------------------------- ----------------------------------------------------------------------- Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . We intend to apply the net proceeds of this Offering to our capital for general corporate purposes, including the financing of the expansion of our operations through the infusion of capital to our subsidiaries. See "Use of Proceeds." - ---------------------------------------------------------- ----------------------------------------------------------------------- Investment Considerations. . . . . . . . . . . . . . . . . Investors should consider the information discussed under the heading "Risk Factors." - ---------------------------------------------------------- -----------------------------------------------------------------------
------------- (1) Does not include: (i) 355,000 shares of Class A Common stock issuable upon the conversion of issued and outstanding shares of Class B Common Stock; (ii) 1,555,010 shares of Class A Common Stock issuable upon exercise of Warrants for Class A Common Stock; (iii) 195,000 shares of Class A Common Stock issuable upon conversion of Class B Common Stock issuable upon exercise of Warrants for Class B Common Stock; and (iv) 1,010,803 shares of Class A Common Stock issuable upon conversion of the Company's Convertible Subordinated Debentures. 3 THE COMPANY AND ITS SUBSIDIARIES INTERVEST BANCSHARES CORPORATION - -------------------------------- Intervest Bancshares Corporation, is a Delaware corporation and a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The principal executive offices of the Holding Company are located at 10 Rockefeller Plaza (Suite 1015), New York, New York 10020, and its telephone number is (212) 218-2800. The Holding Company's primary business is the ownership and operation of Intervest National Bank and Intervest Mortgage Corporation. Unless the context otherwise requires, references in this prospectus to the Company include Intervest Bancshares Corporation and its subsidiaries. The Holding Company, through its ownership of the Bank, is engaged in the commercial banking business and its primary source of earnings is derived from income generated by its ownership and operation of the Bank. The Holding Company is a legal entity separate and distinct from the Bank and Intervest Mortgage Corporation. There are various legal limitations with respect to the Bank's financing or otherwise supplying funds to the Holding Company. In particular, under federal banking law, the Banks may not declare a dividend that exceeds undivided profits. In addition, federal banking laws prohibit or restrict the Bank from extending credit to the Holding Company under certain circumstances. INTERVEST NATIONAL BANK - ----------------------- Intervest National Bank is a national bank, which received its charter from the Office of the Comptroller of the Currency ("OCC") and began operations on April 1, 1999. Intervest National Bank is a full-service commercial bank and is subject to the supervision of and examination by the OCC. The principal executive office of Intervest National Bank is located at One Rockefeller Plaza, Suite 300, New York, New York 10020 and its telephone number is (212) 218-8383. The Bank also has a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank primarily focuses on providing personalized banking services to businesses and individuals within its market areas. The Bank originates commercial loans to businesses, collateralized and uncollateralized consumer loans, and real estate loans (primarily commercial and multifamily real estate loans). The Bank's income is derived principally from interest and fees earned in connection with their lending activities, interest and dividends on securities, short-term investments and other services. Provisions for loan loss reserves also affect the Bank's income. Its principal expenses are interest paid on deposits and operating expenses. The Bank's operations are also significantly affected by local economic and competitive conditions in their market areas. Changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, and the attendant actions of the regulatory authorities all have an impact on the Bank's operations. INTERVEST MORTGAGE CORPORATION - ------------------------------ Intervest Mortgage Corporation is a New York corporation engaged in the business of investing in commercial and multi-family mortgage loans on income-producing property. The principal executive office of Intervest Mortgage Corporation is located at 10 Rockefeller Plaza, Suite 1015, New York, New York 10020, and its telephone number is (212) 218-2800. RISK FACTORS Before you invest in our securities, you should be aware that there are various risks, including those described below. You should carefully consider these risks together with all of the other information included in this prospectus, incorporated by reference in this prospectus, and filed as exhibits to our registration statement. A prospective investor should review and consider carefully the following risk factors, together with the other information contained in this prospectus in evaluating an investment. The prospectus contains certain forward-looking statements and actual results could differ materially from those projected in the forward-looking statements as a result of numerous factors, including those set forth below and elsewhere in the prospectus. MANAGEMENT'S BROAD DISCRETION OVER PROCEEDS - ------------------------------------------- None of the proceeds of the Offering have yet been committed to specific applications. All determinations concerning the use and investment of the proceeds will be made by management of the Company. See "Use of Proceeds." 4 LACK OF DIVERSIFICATION - ----------------------- The primary business activity of the Holding Company consists of its ownership and control of the capital stock of the Bank and Intervest Mortgage Corporation . As a result, the Company presently lacks diversification as to business activities and market areas, and any event affecting the Bank or Intervest Mortgage Corporation will have a direct impact on the Company. INTEREST RATES - -------------- 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 Although the Company monitors its interest rate sensitivity and attempts to reduce the risk of the significant decrease in net interest income caused by a change in interest rates, rising interest rates could nevertheless adversely affect the Company's results of operations. In addition, the Company's profitability is affected by the level of its noninterest income and expenses, the provision for loan loss reserves, and its effective income tax rate. Noninterest income consists primarily of loan and other banking fees. Noninterest expense consists of compensation and benefits, occupancy and equipment related expenses, data processing expenses, advertising expense, deposit insurance premiums and other operating expenses. The Company's profitability is also significantly affected by general economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. Since the properties underlying the Company's mortgages are concentrated in the New York City area and the State of Florida, the economic conditions in those areas can also have an impact on the Company's operations. Finally, the Company's success, in large part, depends on its ability to invest most of its assets in mortgages. Although many of the Company's mortgage loans include penalties for prepayment, fluctuating interest rates may provide an incentive for borrowers to prepay their loans. If the Company is unable to reinvest the proceeds of such prepayments at the same or higher interest rates, the Company's business, financial condition and results of operations may be adversely affected. COMPETITION - ----------- Competition in the banking and financial services industry is intense. In its primary market areas, the Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other lenders and investors operating locally and elsewhere. Most of these competitors have substantially greater resources and lending limits than the Bank and may offer certain services that the Bank does not provide at this time. In making its investments, Intervest Mortgage Corporation also experiences significant competition from banks, insurance companies, savings and loan associations, mortgage bankers, pension funds, real estate investment trusts, limited partnerships and other lenders and investors engaged in purchasing mortgages or making real property investments with investment objectives similar in whole or part to its own. An increase in the general availability of funds may increase competition in the making of investments in mortgages and real property, and may reduce the yields available therefrom. The profitability of the Company depends upon the ability of the Bank and Intervest Mortgage Corporation to compete in their market areas. LOCAL ECONOMIC CONDITIONS - ------------------------- The primary market area of the Bank's New York office is considered to be the New York City metropolitan region, and Manhattan in particular. The primary market area of the Bank's Florida offices is considered to be Pinellas County, which is the most populous county in the Tampa Bay area of Florida. The area has many more seasonal residents. The Tampa Bay area is located on the West Coast of Florida, midway up the Florida peninsula. The major cities in the area are Tampa (Hillsborough County) and St. Petersburg and Clearwater (Pinellas County). The Bank's deposit gathering and lending markets are concentrated in the communities surrounding its offices. Management believes that all the Bank's offices are located in areas serving small and mid-sized businesses and serving middle and upper income communities. The Bank's deposit-gathering market also includes its web site on the internet: www.intervestnatbank.com, which attracts deposit customers from both within and outside the Bank's primary market areas. 5 Intervest Mortgage Corporation's lending activities have been concentrated in the New York City metropolitan region. It also makes loans in other states, including Connecticut, Florida, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, Virginia and Washington D.C. The success of the Company is dependent to a certain extent upon the general economic conditions in geographic markets served by its subsidiaries. There is no assurance that there will be favorable economic conditions or that the Company's expectation of future growth and profitability will be achieved. Adverse changes in their geographic markets would likely impair the Company's ability to collect loans and could otherwise have a negative effect on the financial condition and profitability of the Company. ASSET QUALITY - ------------- Although the Bank seeks to maintain a high level of asset quality when considering investments in securities and the originations of loans, there can be no assurances that we will earn amounts equal to our projected return on investment or that there will not be defaults on loans in our portfolio. Intervest Mortgage Corporation does not have formal policies regarding the percentage of its assets that may be invested in any single mortgage, the type of mortgage loans and investments it can make, the geographic location of properties collateralizing those mortgages and limits as to loan-to-value ratios. Intervest Mortgage Corporation also does not have a Loan Committee or a formal loan approval process. In the event the Company is required to foreclose on a mortgage loan or otherwise pursue our remedies in order to protect its investment in the loan, there can be no assurance that the Company will recover funds in an amount equal to its investment. At March 31, 2003, the Company did not have any nonaccrual or impaired loans. At March 31, 2003, the Company's foreclosed real estate amounted to $1,081,000 and represented one commercial real estate property located in the State of Florida that was acquired by the Bank through foreclosure. ADEQUACY OF ALLOWANCE FOR LOAN LOSSES - ------------------------------------- There is a risk that losses may be experienced in the Company's loan portfolio. Almost all of the Company's current loan portfolio is comprised of loans secured by commercial and multifamily real estate, including rental and cooperative apartment buildings, office buildings and shopping centers. The risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the loan. There can be no assurance that a downturn in real estate values, as well as other economic factors, would not have an adverse impact on the Company's future level of nonperforming assets and profitability. Management maintains an allowance for loan loss reserves. The allowance is established through a provision charged to operations. Loans are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The adequacy of the allowance is evaluated monthly or more frequently when necessary with consideration given to: the nature and volume of the loan portfolio; overall portfolio quality; loan concentrations; specific problem loans and commitments and estimates of fair value thereof; historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's perception of the current and anticipated economic conditions in the Company's lending areas. The Company actively manages its loan portfolio in an effort to minimize credit losses and to maintain an adequate loan loss allowance. Although management believes that its allowance for loan loss reserves is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses. Further, although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the Company's loan portfolio. Material additions to the allowance for loan loss reserves would result in a decrease of the Company's net income. TERRORIST ACTS AND ARMED CONFLICTS - ---------------------------------- Terrorist acts, such as those that occurred on September 11, 2001, and armed conflicts, such as the recent Gulf War, may have an adverse impact on the Company's results of operations and on the economy generally. While these matters have not had a material adverse affect on the Company's business, there can be no assurances as to any future impact. 6 COMPLIANCE WITH ENVIRONMENTAL LAWS - ---------------------------------- Federal and state statutes impose liability on property owners and operators for the clean-up or removal of hazardous substances found on their property. Courts have extended this liability to lenders who have obtained title to properties through foreclosure or have become involved in managing properties prior to obtaining title. In addition, these statutes allow the government to place liens for environmental liability against the affected properties, which liens are senior in priority to other liens, including mortgages against the properties. The Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may adversely impact the Company. SUPERVISION AND REGULATION - -------------------------- Financial holding companies and banks operate in a highly regulated environment and are subject to supervision and examination by several federal and state regulatory agencies. The Company is subject to the BHCA and to regulation and supervision by the FRB. Intervest National Bank is subject to the regulation and supervision of the OCC. Federal and state laws and regulations govern matters ranging from the regulation of certain debt obligations, changes in control of bank holding companies, and the maintenance of adequate capital for the general business operations and financial condition of the Bank, including permissible types, amounts and terms of loans and investments, the amount of reserves against deposits, restrictions on dividends, establishment of branch offices, and the maximum rate of interest that may be charged by law. The FRB also possesses cease and desist powers over holding companies to prevent or remedy unsafe or unsound practices or violations of law. These and other restrictions limit the manner by which the Bank and the Company may conduct their business and obtain financing. Furthermore, the commercial banking business is affected not only by general economic conditions, but also by the monetary policies of the FRB. These monetary policies have had and/or are expected to continue to have significant effects on the operating results of commercial banks. Although the Company believes that it is in compliance in all material respects with applicable state and federal laws, rules and regulations, there can be no assurance that more restrictive laws, rules and regulations will not be adopted in the future which could make compliance more difficult or expensive, or otherwise affect the ability of the Bank to attract deposits and make loans. DEPENDENCE ON KEY PERSONNEL - --------------------------- The Company and its subsidiaries are dependent upon the services of their principal officers. If the services of any of these persons were to become unavailable for any reason, the operation of the Company and its subsidiaries might be adversely affected in a material manner. The Bank presently has a written employment agreement with the President of its Florida Division, and Intervest Mortgage Corporation has an employment agreement with its Chairman. No other employment agreements exist. Neither the Company nor any of its subsidiaries maintains key man life insurance policies on executives and they do not have any immediate plans to obtain such policies. The successful development of the Company's business will depend, in part, on its ability to attract or retain qualified officers and employees. VOTING CONTROL - -------------- As of the date of this Prospectus, the three original shareholders of the Company and a related party own 2,321,500 shares of Class A Common Stock or approximately 53 % of the issued and outstanding shares of Class A Common Stock of the Company. These same persons own all of the issued and outstanding shares of Class B Common Stock. The shares of Class B Common Stock, as a separate class, are entitled to elect two-thirds of the directors of the Company. As a result, voting control continues to rest with these four persons. DIVIDENDS - --------- Since its inception, the Holding Company has not paid any dividends on its common stock and there is no immediate prospect or contemplation of the payment of such dividends. Dividends paid by the Holding Company are subject to the financial conditions of both the Holding Company and its subsidiaries as well as other business considerations. In addition, banking regulations limit the amount of dividends that may be paid by the Bank to the Holding Company without prior regulatory approval. The amount of allowable dividends which could be payable by the Holding Company are in substance limited to net profits earned by the Holding Company, less any earnings retention consistent with the Holding Company's capital needs, asset quality and overall financial condition. Distributions paid by the Holding Company to shareholders will be taxable to the shareholders as dividends, to the extent of the Holding Company's accumulated current earnings and profits. The payment of dividends by the Bank to the Holding Company is regulated by various state and federal laws and by regulations promulgated by the OCC, which restrict the payment of dividends under certain circumstances. In addition, such regulations also impose certain minimum capital requirements which affect 7 the amount of cash available for the payment of dividends by regulated banking institutions such as the Bank. Even if the Bank is able to generate sufficient earnings to pay dividends, there is no assurance that the Board of Directors might not decide or be required to retain a greater portion of the Bank's earnings in order to maintain or achieve the capital deemed necessary or appropriate. The occurrence of any of these events would decrease the amount of funds potentially available for the payment of dividends by the Bank to the Holding Company. In addition, in some cases, the Bank's regulators could take the position that it has the power to prevent the Bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices. Further, the determination of whether dividends are paid and their frequency and amount will depend upon the financial condition and performance of t he Bank and the Company, and other factors deemed appropriate by the Boards of Directors of the Bank and of the holding Company. Accordingly, there can be no assurance that any dividends will be paid in the future by the Bank or the Holding Company.
RATIO OF EARNINGS TO FIXED CHARGES (1) Fiscal Years Ended Three Months ---------------------------------------- Ended March 31, December 31, December 31, December 31, 2003 2002 2001 2000 --------------- ------------ ------------ ------------ CONSOLIDATED COMPANY Excluding interest on deposits 2.3 2.3 1.9 1.5 Including interest on deposits 1.4 1.4 1.3 1.2 INTERVEST BANCSHARES CORPORATION (2) 0.8 0.8 0.8 5.0 INTERVEST MORTGAGE CORPORATION 1.3 1.4 1.2 1.1
=============== (1) The ratio of earnings to fixed charges has been computed by dividing earnings (before the provision for income taxes and fixed charges) by fixed charges. Fixed charges consist of interest expense incurred during the period and amortization of deferred debenture offering costs. (2) Intervest Bancshares Corporation's earnings include dividends received from its subsidiaries for purposes of this calculation. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission ("SEC") a registration statement on Form S-2 under the Securities Act of 1933 registering Class A common stock. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement. Also, any statement made in this prospectus concerning the contents of any contract, agreement or other document is not necessarily complete. If we have filed any contract, agreement or other document as an exhibit to the registration statement, you should read the exhibit for a more complete understanding of the document or matter involved. We are also required to file periodic reports and other information with the SEC under the Securities Exchange Act. Accordingly, we file reports, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and current reports on Form 8-K, and other information with the Commission. You may read and copy the registration statement, including the attached exhibits, and any reports, statements or other information that we may file, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549-1004, and at the SEC's Midwest Regional Office located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You can request copies of these documents, upon payment of the duplicating fee, by writing to the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our SEC filings are also available to the public on the SEC's Internet site (http://www.sec.gov). The SEC allows us to "incorporate by reference" information we have filed with it, which means that we can disclose important information to you by referring you to those previously filed documents. These incorporated documents contain important business and financial information about us that is not included in or delivered with this prospectus. The information incorporated by reference is considered to be part of this prospectus. We incorporate by reference the documents listed below. - Our Annual Report on Form 10-K for the year ended December 31, 2002. - Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. A copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 are being delivered with this prospectus. The above filings are also 8 available at the SEC's offices and Internet site described above. We will also provide you, and any beneficial owner, with a copy free of charge, of any of the documents identified above that we incorporate by reference into this prospectus, but do not deliver with this prospectus. You may request a copy of the filings by writing or telephoning us at the following address: Intervest Bancshares Corporation 10 Rockefeller Plaza (Suite 1015) New York, New York 10020 Attention: Secretary Telephone (212) 218-2800 FORWARD-LOOKING INFORMATION This prospectus, together with the documents incorporated by reference into this prospectus, contains forward-looking statements, which are not statements of historical facts. We have based these forward-looking statements on our current expectations and projections about future events, based on the information currently available to us. The forward-looking statements include, among other things, our expectations and estimates about business operations, strategies and future financial performance. The forward-looking statements are subject to risks, uncertainties and assumptions about us, and about the future, and could prove to be wrong. Important factors that could cause actual results to differ materially from our expectations are discussed in this prospectus, including the forward-looking statements included in this prospectus and under "Risk Factors." Among the factors that could impact our ability to achieve our goals are: changes in economic conditions in the Company's market areas; changes in policies by regulatory agencies; fluctuations in interest rates; demand for loans; and competition. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus may not occur. USE OF PROCEEDS The net proceeds to the Company will depend upon the number of Warrants actually exercised and cannot be determined at this time. However, assuming all of the Warrants were to be exercised, the net proceeds to the Company would be approximately $15.4 million. The net proceeds of the Offering will become a part of the Company's capital funds to be used for general corporate purposes, including, without limitation, the financing of the expansion of the Company, the Bank's or Intervest Mortgage Corporation's business through acquisitions, the establishment of new branches or subsidiaries, and the infusion of capital to the Bank and Intervest Mortgage Corporation and any future subsidiaries of the Company. Neither the Company nor any of its subsidiaries currently has any plans, understandings, arrangements or agreements, written or oral, with respect to the establishment of any branches or with respect to any specific acquisition prospect, and none of them is presently negotiating with any party with respect thereto. The actual application of the net proceeds will depend on the capital needs of the Holding Company's subsidiaries, the Company's own financial requirements and available business opportunities. None of the uses described herein constitute a commitment by the Company to expend the proceeds in a particular manner. The Company reserves the right to make shifts in the allocation of the proceeds from this offering if future events, including changes in the economic climate or the Company's planned operations, make such shifts necessary or desirable. In such events, proceeds may be applied to the working capital requirements of the Company, the Bank or Intervest Mortgage Corporation. Pending their ultimate application, the net proceeds will be invested in such relatively short-term investments or otherwise applied as management may determine. DETERMINATION OF OFFERING PRICE Although the Company's Class A Common Stock is presently traded over the counter and quoted on the NASDAQ Small Cap Market under the symbol IBCA, at the time of original issuance of the warrants, there was no established trading market for any of the Company's securities. The exercise prices for the Warrants and the conversion prices for the debentures were established based upon a number of factors, including the following: (i) the financial condition 9 of the Company and its subsidiaries; (ii) the experience of management; and (iii) the general status of the securities markets and other relevant factors. The Company has reviewed the exercise and conversion prices from time to time and recently approved certain reductions in the exercise price of warrants and the conversion prices of debentures, which revised prices are described in this prospectus. PLAN OF DISTRIBUTION The Company's Warrants are not exercisable and its Debentures are not convertible unless the Company has a current prospectus covering the shares issuable upon exercise of the Warrants or conversion of the Debentures and this prospectus covers those shares. With respect to the shares of Class A Common Stock and Class B Common Stock issuable upon exercise of the Warrants, those shares shall be issued by the Company, from time to time, upon exercise by the holders thereof of the Warrants. Shares of Class A Common Stock or Class B Common Stock may be purchased by the holders of Warrants only by mailing or delivering a completed and duly executed Election to Purchase Form which is on the reverse side of the Warrant Certificate, together with payment of the then applicable exercise price per share for each warrant surrendered to the Bank of New York, the Company's warrant agent, prior to expiration of the warrant. Payment may be made in certified funds, cashier check, bank draft or bank check, payable to the order of the Warrant Agent. All funds received by the Warrant Agent from the exercise of warrants will be forwarded to the Company. With respect to the shares of Class A Common Stock issuable upon conversion of the Debentures, those shares will be issued upon written notice to the Company at the office maintained for that purpose and delivery of the certificate representing the Debentures to be converted. DESCRIPTION OF SECURITIES This description summarizes some of the provisions of our restated certificate of incorporation, a copy of which has been included as an exhibit to our registration statement. If you want more complete information, you should read the provisions of our restated certificate of incorporation. DESCRIPTION OF CAPITAL STOCK GENERAL - ------- The Company's Certificate of Incorporation provides for two classes of common capital stock consisting of 9,500,000 shares of Class A Common Stock, par value $1.00 per share, and 700,000 shares of Class B Common Stock, par value $1.00 per share. In addition, the Company's Certificate of Incorporation provides for 300,000 shares of preferred stock, par value $1.00 per share ("Preferred Stock"). The Company's Certificate of Incorporation authorizes the Board of Directors, without shareholder approval, to fix the preferences, limitations and relative rights of the Preferred Stock, to establish one or more series or classes of Preferred Stock, and to determine the variations between each such series or class. No shares of Preferred Stock are issued or outstanding. As of the date of this Prospectus, there were issued and outstanding 4,348,087 shares of Class A Common Stock, 2,321,500 of which are held by the initial stockholders of the Company and a related party and 355,000 shares of Class B Common Stock were held by the same persons. COMMON STOCK - ------------- Both classes of 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 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 Company. Under Delaware law, the holders of Class A and Class B Common Stock would be entitled to vote as separate classes upon certain matters which would adversely affect or subordinate the rights of a class. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock (none of which are presently outstanding), holders of Class A Common Stock are entitled to share ratably in dividends when and as declared by the Company's Board of Directors out of funds legally available therefor. See "Dividends." The holders of Class A Common Stock and Class B Common Stock share ratably in dividends when and as declared by the Board of Directors. 10 The shares of Class B Common Stock are convertible, on a share for share basis, into Class A Common Stock. Neither Class A nor Class B Common Stock holders have any preemptive rights as to additional issues of common stock. Shareholders are subject to no assessments and, upon liquidation, both Class A and Class B common shareholders would be entitled to participate equally per share in the assets of the Company available to common shareholders. CLASS A WARRANTS - ------------------ As of the date of this prospectus, 1,555,010 warrants were outstanding to purchase the Company's Class A Common Stock as follows: Warrants totaling 501,465 entitle the registered holder thereof to purchase one share of Class A Common Stock at a price of $6.67 per share. These warrants expire on January 31, 2007. Warrants totaling 1,053,545entitle the registered holders thereof to purchase one share of Class A Common Stock at a price of $10.01 per share. These warrants expire on December 31, 2003 (provided that the Company may establish an earlier expiration date on not less than 30 nor more than 90 days' notice). Except for the exercise price, the expiration dates and the redemption provisions, all of the outstanding warrants related to Class A Shares are alike in all respects and the following discussions apply to all of the warrants for Class A Common Stock. The exercise price is subject to adjustment in accordance with the anti-dilution and other provisions referred to below. The holder of any Warrant may exercise such Warrant or any portion thereof by surrendering the certificate representing the Warrant to the Company's transfer and warrant agent, with the subscription on the reverse side of such certificate properly completed and executed, together with payment of the exercise price. The Warrant may be exercised at any time until expiration of the Warrant. No fractional shares will be issued upon the exercise of the Warrants. Warrants may not be exercised as to fewer than 100 shares unless exercised as to all Warrants held by the holder thereof. The exercise prices of the Warrants have been arbitrarily determined by the Company and are not necessarily related to the Company's book value, net worth or other established criteria of value. The exercise price should in no event be regarded as an indication of any future market price of the securities offered hereby. The Warrants are not exercisable unless, at the time of exercise, the Company has a current prospectus covering the shares of common stock issuable upon exercise of such Warrants and such shares have been registered, qualified or deemed to be exempt under the securities law of the state of residence of the holders of such Warrants. Although the Company will use its best efforts to have all such shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of such Warrants, there can be no assurance that it will be able to do so. The exercise price and the number of shares of Class A Common Stock purchasable upon the exercise of the Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassifications on or of the Class A Common Stock or sales by the Company of shares of its Class A Common Stock at a price below the then applicable exercise price of the Warrants. Additionally, an adjustment will be made in the case of a reclassification or exchange of Class A Common Stock, consolidation or merger of the Company with or into another corporation or sale of all or substantially all of the assets of the Company in order to enable warrant holders to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of the number of shares of Class A Common Stock that might otherwise have been purchased upon the exercise of the Warrant. In most cases, no adjustment will be made until the number of shares issued by the Company exceeds 5% of the number of shares outstanding after the offering and thereafter no adjustments will be made until the cumulative adjustments and exercise price per share amount to $.05 or more. No adjustment to the exercise price of the shares subject to the Warrants will be made for dividends (other than stock dividends), if any paid on the Class A Common Stock or for securities issued pursuant to a company stock option plan, if any, or other employee benefit plans of the Company. The Board of Directors also has the authority to make certain revisions in the terms and conditions of the Warrants and it has exercised that authority by extending the term for exercise of certain of the warrants and by decreasing the price at which certain of the Warrants may be exercised. 11 The Warrants are fully registered and may be presented to the transfer and warrant agent for transfer, exchange or exercise at any time at or prior to the close of business on the expiration date for such Warrant, at which time the Warrant becomes wholly void and of no value. If a market for the Warrants develops, the holder may sell the Warrants instead of exercising them. There can be no assurance, however, that a market for the Warrants will develop or continue. The Warrants do not confer upon holders any voting or any other rights as a shareholder of the Company. CLASS B WARRANTS - ---------------- As of the date of this prospectus, there were outstanding warrants to purchase up to 195,000 shares of Class B Common Stock, of which 145,000 allow the purchase at any time prior to January 31, 2008 (provided that the Company may, at its election, establish an earlier expiration date to occur after February 1, 2007 and before January 31, 2008 by giving not less than 30 nor more than 90 days notice), at a purchase price of $6.67 per share, and 50, 000 that allow the purchase at any time prior to January 31, 2008, at a purchase price of $10.00 per share. The warrant contains terms and conditions substantially in conformity with the Warrants related to shares of Class A Common Stock. In addition, the Warrant provides for an adjustment in the number of shares of Class B Common Stock purchasable upon the exercise of the Warrant and the exercise price per share in accordance with anti-dilution and other provisions which are in substantial conformity with those described above, but which relate to share issuances and recapitalizations for both Class A and Class B Common Stock. TRANSFER AGENT AND WARRANT AGENT - -------------------------------- The registrar and transfer agent for the Common Stock and the Warrant Agent for the Warrants is The Bank of New York. PREFERRED STOCK - --------------- The Company's Certificate of Incorporation authorizes the Board of Directors, without further shareholder approval, to issue shares of Preferred Stock in one or more series with powers, preferences, rights, restrictions, limitations, and other qualifications that could adversely affect the voting and other rights of the holders of Common Stock. The Board of Directors has the authority to issue up to 300,000 shares of the Preferred Stock of the Company in any number of series (to designate the rights and preferences of such series) which could operate to render more difficult the accomplishment of mergers or other business combinations. The Board of Directors of the Company has no present intent to issue any Preferred Stock at this time. Under certain circumstances, and when, in the judgment of the Board of Directors, the action will be in the best interest of the stockholders and the Company, such shares could be used to create voting impediments or to frustrate persons seeking to gain control of the Company. Such shares could be privately placed with purchasers friendly to the Board of Directors in opposing a hostile takeover bid. In addition, the Board of Directors could authorize holders of a series of Preferred Stock to vote either separately as a class or with the holders of the Company's Common Stock on any merger, sale or exchange of assets by the Company or any other extraordinary corporate transaction. The existence of the additional authorized shares could have the effect of discouraging unsolicited takeover attempts or delaying, deferring or preventing a change in control of the Company. Such an occurrence, in the event of a hostile takeover attempt, may have an adverse impact on stockholders who may wish to participate in such offer. The issuance of new shares could be used to dilute the stock ownership of a person or entity seeking to obtain control of the Company should the Board of Directors consider the action of such entity or person not to be in the best interest of the stockholders and the Company. The Board of Directors is not aware of any present attempt or effort by any person to accumulate the Company's securities or obtain control of the Company. RESTRICTIONS ON CHANGES IN CONTROL - ---------------------------------- Under the Federal Change in Bank Control Act (the "Control Act"), a notice must be submitted to the FRB if any person, or group acting in concert, seeks to acquire 10% or more of any class of outstanding voting securities of the Company, unless the FRB determines that the acquisition will not result in a change of control of the Company. Both the Class A Common Stock and the Warrants are deemed to be voting securities for these purposes. Under the Control Act, the FRB has 60 days within which to act on such notice, taking into consideration certain factors, including the financial and managerial resources of the acquiror, the convenience and needs of the community served by the bank holding company and its subsidiary banks, and the antitrust effects of the acquisition. Under the BHCA a company is generally required to obtain prior approval of the FRB before it may obtain control of a bank holding company. Control is generally described to mean the beneficial ownership of 25% or more of all outstanding voting securities of a company. 12 DESCRIPTION OF THE SERIES 5/14/98 CONVERTIBLE SUBORDINATED DEBENTURES GENERAL - ------- The Debentures are unsecured subordinated obligations of the Company, limited to an aggregate principal amount of $6,930,000 and mature on July 1, 2008. The Debentures were issued pursuant to an Indenture dated as of June 1, 1998 (the "Indenture") between the Company and the Bank of New York, as trustee (the "Trustee"). Interest on the Debentures accrues each calendar quarter at the rate of 8% per annum. In addition, interest accrues each calendar quarter on the balance of the accrued interest as of the last day of the preceding calendar quarter at the same interest rate. All accrued interest on the Debentures is payable at the maturity of the Debentures, whether by acceleration, redemption or otherwise. Any debenture holder may, on or before July 1 of each year, commencing July 1, 2003, elect to be paid all accrued interest on the Debentures and to thereafter receive payments of quarterly interest. The election must be made after April 1 and before May 31 and the holder will receive a payment of accrued interest on July 1 and will thereafter receive quarterly payments of interest on the first day of each January, April, July and October until the maturity date. Once made, an election to receive interest is irrevocable. Quarterly interest is payable to holders of record on the first day of the month preceding the interest payment date. SUBORDINATION OF DEBENTURES - --------------------------- The Debentures are general unsecured obligations of the Company limited to $6,930,000 principal amount. The Debentures are subordinated in payment of principal and interest to all Senior Indebtedness. The term Senior Indebtedness is defined in the Indenture to mean all indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, which (i) is secured, in whole or in part, by any asset or assets owned by the Company or by a corporation, a majority of whose voting stock is owned by the Company or a subsidiary of the Company ("Subsidiary"), or (ii) arises from unsecured borrowings by the Company from commercial banks, savings banks, savings and loan associations, insurance companies, companies whose securities are traded in a national securities market, or any majority-owned subsidiary of any of the foregoing, or (iii) arises from unsecured borrowings by the Company from any pension plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended), or (iv) arises from borrowings by the Company which are evidenced by commercial paper, or (v) other unsecured borrowings by the Company which are subordinate to indebtedness of a type described in clauses (i), (ii) or (iv) above, or (vi) is a guaranty or other liability of the Company of, or with respect to any indebtedness of, the subsidiary of the type described in clauses (ii), (iii) or (iv) above. As of December 31, 1997, the Company had no senior indebtedness. There is no limitation or restriction in the Debentures or the Indenture on the creation of senior indebtedness by the Company on the amount of such senior indebtedness to which the Debentures may be subordinated. There is also no limitation on the creation or amount of indebtedness which is pari passu with (i.e. having no priority of payment over and not subordinated in right of payment to) the Debentures. Upon any distributions of any assets of the Company in connection with any dissolution, winding-up, liquidation or reorganization of the Company, the holders of all senior indebtedness will first be entitled to receive payment in full of the principal and premium, if any, thereof and any interest due thereof, before the holders of the Debentures are entitled to receive any payment upon the principal of or interest on the Debentures, and thereafter payments to the debenture holders will be pro rata with payments to holders of pari passu indebtedness. In the absence of any such events, the Company is obligated to pay principal of and interest on the Debentures in accordance with their terms. The Company will not maintain any sinking fund for the retirement of any of the Debentures. CONVERSION RIGHTS - ----------------- The Debentures are convertible, at the option of the holder, into shares of Class A Common Stock of the Company at any time prior to April 1, 2008 (subject to prior redemption by the Company on not less than 30 days notice and not more than 90 days notice), at a current conversion price of $10.01 per share through December 31, 2003, which conversion price increases annually thereafter on January 1 of each year. The Company reserves the right, from time to time in its discretion to establish conversion prices per share which are less than the conversion prices set forth above, which lower prices shall remain in effect for such periods as the Company may determine and as shall be set forth in a written notice to the holders of Debentures. The Company has, on two occasions, reduced the price at which the Debentures may be converted during specified periods. 13 The conversion price is subject to adjustment in certain events, including (i) dividends (and other distributions) payable in Class A Common Stock on any class of capital stock of the Company, (ii) the issuance to all holders of common stock of rights or warrants entitling them to subscribe for or purchase Class A Common Stock at less than the current market price (as defined), (iii) subdivisions, combinations and reclassifications of common stock, (iv) distributions to all holders of Class A Common Stock of evidence of indebtedness of the Company or assets (including securities, but excluding those dividends, rights, warrants and distributions referred to above and any dividend or distribution paid exclusively in cash. Fractional shares of Class A Common Stock will not be issued upon conversion, but, in lieu thereof, the Company will pay cash adjustment equal to the portion of the principal and/or interest not converted into whole shares. TRANSFERS - --------- The Debentures are transferable on the books of the Company by the registered holders thereof upon surrender of the Debentures to the Registrar appointed by the Company and, if requested by the Registrar, shall be accompanied by a written instrument of transfer in form satisfactory to the registrar. The Company has appointed The Bank of New York as the "Registrar" for the Debentures. The person in whose name any Debenture is registered shall be treated as the absolute owner of the Debenture for all purposes, and shall not be affected by any notice to the contrary. Upon transfer, the Debentures will be canceled, and one or more new registered Debentures, in the same aggregate principal amount, of the same maturity and with the same terms, will be issued to the transferee in exchange therefor. (Art. 2, Sec. 2.07(a)). DUTIES OF THE TRUSTEE - --------------------- The Indenture provides that in case an Event of Default (as defined) shall occur and continue, the Trustee will be required to use the same degree of care and skill as a prudent person would exercise or use under the circumstances in the conduct of his own affairs in the exercise of its power. While the Trustee may pursue any available remedies to enforce any provision of the Indenture or the Debentures, the holders of a majority in principal amount of all outstanding Debentures may direct the time, method, and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the Debenture holders, unless they shall have offered to the Trustee security and indemnity satisfactory to it. REDEMPTION - ---------- The Company may, at its option, at any time call all or any part of the Debentures for payment, and redeem the same at any time prior to the maturity thereof. The redemption price for any redemption of Debentures is the face amount. In all cases, the Debenture Holder will also receive interest accrued to the date of redemption. Notice of redemption must be sent by first class mail, postage prepaid, to the registered holders of the Debentures not less than 30 days nor more than 90 days prior to the date the redemption is to be made. In the event of a call for redemption, no further interest shall accrue after the redemption date on any Debentures called for redemption. (Art. 3, Section 3.03, Paragraph 5). Since the payment of principal of, interest on, or any other amounts due on the Debentures is subordinate in right of payment to the prior payment in full of all Senior Indebtedness upon the dissolution, winding up, liquidation or reorganization of the Company, no redemption will be permitted upon the happening of such an event. LIMITATION ON DIVIDENDS AND OTHER PAYMENTS - ------------------------------------------ The Indenture provides that the Company will not declare or pay any dividend or make any distribution on its Capital Stock (i.e. any and all shares, interests, participations, rights or other equivalents of the Company's stock) or to its shareholders (other than dividends or distributions payable in Capital Stock), or purchase, redeem or otherwise acquire or retire for value, or permit any Subsidiary to purchase or otherwise acquire for value, Capital Stock of the Company, if at the time of such payment, or after giving effect thereto, an Event of Default, as hereinafter defined, shall have occurred and be continuing or a default shall occur as a result thereof; provided, however, that the foregoing limitation shall not prevent (A) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment complied with the provisions of such limitation, or (B) the acquisition or retirement of any shares of the Company's Capital Stock by exchange for, or out of the proceeds of the sale of shares of, its Capital Stock. (Art. 4, Section 4.04). 14 DISCHARGE PRIOR TO REDEMPTION OR MATURITY - ----------------------------------------- If the Company at any time deposits with the Trustee money or U.S. Government Obligations sufficient to pay principal and interest on the Debentures prior to their redemption or maturity, the Company will be discharged from the Indenture, provided certain other conditions specified in the Indenture are satisfied. In the event of such deposit, which is irrevocable, Debenture Holders must look only to the deposited money and securities for payment. U.S. Government Obligations are securities backed by the full faith and credit of the United States. (Art. 8, Section 8.01(2)). ACCESS OF INFORMATION TO SECURITY HOLDERS - ----------------------------------------- Debenture Holders may obtain from the Trustee information necessary to communicate with other Debenture Holders. Upon written application to the Trustee by any three or more Debenture Holders stating that such Debenture Holders desire to communicate with other Debenture Holders with respect to their rights under the Indenture or under the Debentures, and upon providing the Trustee with the form of proxy or other communication which the Debenture Holders propose to transmit, and upon receipt by the Trustee from the Debenture Holders of reasonable proof that each such Debenture Holder has owned a Debenture for a period of at least six months preceding the date of such application, the Trustee shall, within five business days after the receipt of such information, either (a) provide the applicant Debenture Holders access to all information in the Trustee's possession with respect to the names and addresses of the Debenture Holders; or (b) provide the applicant Debenture Holders with information as to the number of Debenture Holders and the approximate cost of mailing to such Debenture Holders the form of proxy or other communication, if any, specified in the applicant Debenture Holders' application, and upon written request from such applicant Debenture Holders and receipt of the material to be mailed and of payment, the Trustee shall mail to all the Debenture Holders copies of the from of proxy or other communication so specified in the request. (Art. 2, Section 2.08). COMPLIANCE WITH CONDITIONS AND COVENANTS - ---------------------------------------- Upon any request by the Company to the Trustee to take any action under the Indenture, the Company is required to furnish to the Trustee (i) an officers' certificate of the Company stating that all conditions and covenants in the Indenture relating to the proposed action have been complied with and (ii) an opinion of counsel stating that, in the opinion of such counsel, all such conditions and covenants have been complied with. (Art. 11, Sec. 11.03). AMENDMENT, SUPPLEMENT AND WAIVER - -------------------------------- Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented, and compliance by the Company with any provision of the Indenture or the Debentures may be waived, with the consent of the holders of a majority in principal amount of the Debentures outstanding. Without notice to or consent of any holders of Debentures, the Company may amend or supplement the Indenture or the Debentures to cure any ambiguity, omission, defect or inconsistency, or to make any change that does not adversely affect the rights of any holders of Debentures. However, without the consent of each holder of Debentures affected, an amendment, supplement or waiver may not reduce the amount of Debentures whose holders must consent to an amendment, supplement or waiver, reduce the rate or extend the time for payment of interest on any Debentures (except that the payment of interest on Debentures may be postponed for a period not exceeding three years from its due date with the consent of holders of not less than 75% in principal amount of Debentures at the time outstanding, which consent shall be binding upon all holders), reduce the principal of or extend the fixed maturity of any Debentures, make any Debentures payable in money other than that stated in the Indenture, make any change in the subordination provisions of the Indenture that adversely affects the rights of any holder of Debentures or waive a default in the payment of principal of or interest on, or other redemption payment on any Debentures. (Art. 9, Sec. 9.02). DEFAULTS AND REMEDIES - --------------------- Each of the following is an "Event of Default" under the Indenture: (a) failure by the Company to pay any principal on the Debentures when due; (b) failure by the Company to pay any interest installment on the Debentures within thirty days after the due date; (c) failure to perform any other covenant or agreement of the Company made in the Indenture or the Debentures, continued for sixty days after receipt of notice thereof from the Trustee or the holders of at least 25% in principal amount of the Debentures; and (d) certain events of bankruptcy, insolvency or reorganization. (Art. 6, Sec. 6.01). If an Event of Default (other than those described in clause (d) above) occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the Debentures, by notice to the Company, may declare the principal of and accrued interest on all of the Debentures to be due and payable immediately. If 15 an Event of Default of the type described in clause (d) above occurs, all unpaid principal and accrued interest on the Debentures shall automatically become due and payable without any declaration or other act on the part of the Trustee or any holder. (Art. 6, Sec. 6.02). Holders of Debentures may not enforce the Indenture or the Debentures except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Debentures unless it receives indemnity and security satisfactory to it. Subject to certain limitations, the holders of a majority in principal amount of the Debentures may direct the Trustee in its exercise of any trust or power conferred on the Trustee, and may rescind an acceleration of the Debentures. The Trustee may withhold from holders of Debentures notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interest. (Art. 6, Secs. 6.05 and 6.06). The Indenture requires the Company to furnish to the Trustee an annual statement, signed by specified officers of the Company, stating whether or not such officers have knowledge of any Default under the Indenture, and, if so, specifying each such Default and the nature thereof. (Art. 4, Sec. 4.03). FEDERAL INCOME TAX CONSEQUENCES - ------------------------------- Holders of the Debentures are required to include in their income for federal income tax purposes all of the accrued but unpaid interest for each taxable year, since such amounts constitute interest income within the meaning of the applicable provisions of the Internal Revenue Code of 1986, as amended to date (the "Code"). As a result, such debenture holders are required to pay taxes on interest which has accrued, although such interest will not be paid until maturity of the Debenture. Interest payments received by holders of Debentures who have elected to receive quarterly payments of interest will be includable in the income of such holders for federal income tax purposes for the taxable year in which the interest was received, except with respect to the payment of accrued interest that has been included in their income in prior years. Holders who hold the Debentures for investment purposes should treat all reportable interest (whether actually received or accrued) as portfolio income under applicable code provisions. The Company's deposit of funds with the Trustee to effect the discharge of the Company's obligations under the Debentures and the Indenture prior to redemption or maturity of the Debentures, will have no effect on the amount of income realized or recognized (gain or loss) by the Debenture Holders or the timing of recognition of gain or loss for federal income tax purposes. LEGAL MATTERS Harris Beach LLP, Pittsford, New York will pass on certain legal matters in connection with the offering, including the validity of the issuance of securities being offered hereby. EXPERTS The consolidated balance sheets of Intervest Bancshares Corporation and Subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for the three-year period ended December 31, 2002 included in this Prospectus, have been included herein in reliance on the reports of Hacker, Johnson & Smith P.A., P.C., Tampa, Florida, independent auditors, as set forth in their report thereon appearing elsewhere herein, which is based in part on the report of Eisner LLP, New York, New York, independent auditors for Intervest Mortgage Corporation (whose financial statements are not presented separately herein or therein) appearing elsewhere herein. The financial statements referred to above are included in reliance upon such reports, given on the authority of those firms as experts in accounting and auditing. 16 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth expenses in connection with the issuance and distribution of the securities being registered. All amounts except the registration fee payable to the Securities and Exchange Commission are estimates. SEC Registration Fee . . . . . . . . . . . . . . $ None Legal Fees and Expenses. . . . . . . . . . . . . * $ 2,000 Accountants Fees and Expenses. . . . . . . . . . * $ 3,000 Printing and Engraving Fees. . . . . . . . . . . * $ 1,000 Blue Sky Fees and Expenses . . . . . . . . . . . * $ 1,000 Transfer Agent and Registration Fee and Expenses None Miscellaneous. . . . . . . . . . . . . . . . . . * $ 1,000 -------- Total Issuance and Distribution Expenses . . . $ 8,000 ======== *Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of Delaware provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any action, suit or proceeding, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. No indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Company's bylaws provide that the Company will indemnify the officers and directors of the Company to the fullest extent permitted under the laws of the State of Delaware. In that regard, the Company is obligated to indemnify officers and directors of the Company from and against any and all judgments, fines, amounts paid in settlement, and reasonable expenses, including attorneys' fees, actually and necessarily incurred by an officer or director as a result of any action or proceeding, or any appeal therein, to the extent such amounts may be indemnified under the laws of Delaware; and to pay any officer or director of the Company in advance of the final disposition of any civil or criminal proceeding, the expenses incurred by such officer or director in defending such action or proceeding. The Company's obligation to indemnify its officers and directors continues to individuals who have ceased to be officers or directors of the Company and to the heirs and personal representatives of former officers and directors of the Company. 17 ITEM 16. EXHIBITS. EXHIBIT INDEX Exhibit Number Description of Exhibit - -------------- ---------------------- 5.1 Opinion of Harris Beach LLP 13.1 Report on Form 10-K for the year ended December 31, 2002 13.2 Report on Form 10-Q for the quarter ended March 31, 2003 24.1 Consent of Harris Beach LLP is included in the Opinion of Harris Beach LLP, filed as Exhibit 5.1 24.2 Consent of Hacker, Johnson & Smith P.A., P.C. 24.3 Consent of Eisner, LLP 18 ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for purposes of determining liability under the Securities Act of 1933, each such post-effective amendment shall be deemed a new registration statement relating to the securities offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 19 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement or Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 20th day of May, 2003. INTERVEST BANCSHARES CORPORATION (Registrant) By: /s/ Lowell S. Dansker ---------------------------- Lowell S. Dansker, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement or Amendment has been signed by the following persons in the capacities and on the dates indicated.
Title Date ----- ---- /s/ Lawrence G. Bergman Vice President, Secretary and Director May 20, 2003 - ---------------------------- (Lawrence G. Bergman) - ---------------------------- Director _______, 2003 (Michael A. Callen) /s/ Jerome Dansker Chairman of the Board, May 20, 2003 - ---------------------------- Executive Vice President, Director (Jerome Dansker) /s/ Lowell S. Dankser President, Treasurer, and Director May 20, 2003 - ---------------------------- (Principal Executive, Financial (Lowell S. Dansker) and Accounting Officer) /s/ Paul R. DeRosa Director May 20, 2003 - ---------------------------- (Paul R. DeRosa) /s/ Wayne F. Holly Director May 20, 2003 - ---------------------------- (Wayne F. Holly) - ---------------------------- Director _____, 2003 (Lawton Swan, III) /s/ Thomas E. Willett Director May 20, 2003 - ---------------------------- (Thomas E. Willett) /s/ David J. Wilmott Director May 20, 2003 - ---------------------------- (David J. Wilmott) - ---------------------------- Director ______, 2003 (Wesley T. Wood)
20 EXHIBIT INDEX Exhibit Number Description of Exhibit - -------------- ---------------------- 5.1 Opinion of Harris Beach LLP 13.1 Report on Form 10-K for the year ended December 31, 2002 13.2 Report on Form 10-Q for the quarter ended March 31, 2003 24.1 Consent of Harris Beach LLP is included in the Opinion of Harris Beach LLP, filed as Exhibit 5.1 24.2 Consent of Hacker, Johnson & Smith P.A., P.C. 24.3 Consent of Eisner, LLP 21 EX-5.1 3 doc2.txt Exhibit 5.1 May 21, 2003 Intervest Bancshares Corporation 10 Rockefeller Plaza, Suite 1015 New York, New York 10020-1903 Re: INTERVEST BANCSHARES CORPORATION POST EFFECTIVE AMENDMENT ON FORM S-2 TO REGISTRATION STATEMENT ON FORM SB-2 Gentlemen: You have requested our opinion in connection with a Post Effective Amendment on Form S-2 to a Registration Statement on Form S-1 (the "Registration Statement") filed by Intervest Bancshares Corporation (the "Company") with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), in connection with the Company's issuance of up to 1,555,010 shares of Class A Common Stock and up to 195,000 shares of Class B Common Stock upon the exercise of outstanding warrants and the issuance of up to 1,010,803 shares of Class A Common Stock upon the conversion of outstanding debentures. The shares of Class A and Class B Common Stock covered by the Registration Statement are herein referred to as the "Shares." Capitalized terms, unless otherwise defined herein, shall have the meanings set forth in the Registration Statement. In connection with this opinion, we have examined the Registration Statement, the Certificate of Incorporation of the Company, the Bylaws of the Company, Certificates of Public Officials and Officers of the Company and such other documents and records as we have deemed necessary or appropriate for purposes of our opinion. Based on the foregoing, and subject to the qualifications and assumptions referred to herein, we are of the opinion that: a. The Company is a corporation validly existing and in good standing under the laws of the State of Delaware. b. The Shares, when issued and delivered in the manner contemplated in the Registration Statement will be validly issued, fully paid and nonassessable. We have assumed the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, and the truth of all facts recited in all relevant documents. The opinions set forth above are limited to the laws of the state of New York and the federal laws of the United States. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the prospectus included in the Registration Statement. Very truly yours, Harris Beach LLP By: /s/ Thomas E. Willett --------------------- Thomas E. Willett, Member of the Firm Enc. EX-13.1 4 doc3.txt ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 Commission File Number 000-23377 INTERVEST BANCSHARES CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3699013 - ----------------------------- ------------------- (State or other jurisdiction (I.R.S. employer of incorporation) identification no.) 10 Rockefeller Plaza, Suite 1015 New York, New York 10020-1903 ------------------------------------------------------- (Address of principal executive offices) (212) 218-2800 ------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 None ---------------------- (Title of class) Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 Class A Common Stock, par value $1.00 per share ----------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes XX No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes _ No_. As of February 25, 2003 there were 4,348,087 shares of the Registrant's Class A common stock and 355,000 shares of the Registrant's Class B common stock issued and outstanding. The aggregate market value of 1,765,437 shares of the Registrant's Class A common stock on February 25, 2003, which excludes 2,582,650 shares held by affiliates as a group, was $19,137,337. This value is based on the average bid and asked price of $10.84 per share on February 25, 2003 of the Class A common stock on the NASDAQ Small Cap Market. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ Intervest Bancshares Corporation and Subsidiaries 2002 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Page ---- Item 1 Description of Business ........................................... 2 Item 2 Description of Properties ......................................... 12 Item 3 Legal Proceedings ................................................. 13 Item 4 Submission of Matters to a Vote of Security Holders................ 13 Item 4A Executive Officers and Other Key Employees......................... 13 PART II Item 5 Market for Common Equity and Related Stockholder Matters........... 15 Item 6 Selected Consolidated Financial and Other Data..................... 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 17 Item7A Quantitative and Qualitative Disclosures About Market Risk........... 34 Item 8 Financial Statements and Supplementary Data........................ 34 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure .......................... 66 PART III Item 10 Directors and Executive Officers .................................. 66 Item 11 Executive Compensation ............................................ 66 Item 12 Security Ownership of Certain Beneficial Owners and Management..... 66 Item 13 Certain Relationships and Related Transactions..................... 66 Item 14 Controls and Procedures............................................ 66 PART IV Item 15 Exhibits, Financial Statements Schedules and Reports on Form 8-K... 66 Signatures ................................................................. 68 Certification .............................................................. 69 1 PART I Item 1. Description of Business General Private Securities Litigation Reform Act Safe Harbor Statement - -------------------------------------------------------------- The Company is making this statement in order to satisfy the "Safe Harbor" provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this report on Form 10-K that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the development of an interest rate environment that may adversely affect the Company's interest rate spread, other income or cash flow anticipated from the Company's operations, investment and lending activities; and changes in laws and regulations affecting banks and bank holding companies. Intervest Bancshares Corporation - -------------------------------- Intervest Bancshares Corporation is a registered bank holding company (the "Holding Company") incorporated in 1993 under the laws of the State of Delaware. Its principal office is located at 10 Rockefeller Plaza, Suite 1015, New York, New York 10020, and its telephone number is 212-218-2800. The Holding Company's Class A common stock is listed on the NASDAQ SmallCap Market (Symbol: IBCA). At December 31, 2002, the Holding Company owned 100% of the outstanding capital stock of Intervest National Bank (the "Bank"), Intervest Mortgage Corporation (whose name was changed from Intervest Corporation of New York in 2002) and Intervest Statutory Trust I (hereafter referred to collectively as the "Company," on a consolidated basis). On July 20, 2001, Intervest Bank (the Holding Company's other wholly owned banking subsidiary prior to that date) was merged into Intervest National Bank. The merger was treated as a reorganization and accounted for at historical cost similar to the pooling-of-interests method of accounting. Under this method of accounting, the recorded assets, liabilities, shareholders' equity, income and expenses of both banks were combined and recorded at their historical cost amounts. At December 31, 2002, the Company had total assets of $685,979,000, cash and security investments of $179,651,000, net loans of $489,912,000, deposits of $505,958,000, debentures and related interest payable of $113,302,000, and stockholders' equity of $53,126,000, compared to total assets of $512,622,000, cash and security investments of $130,662,000, net loans of $368,526,000, deposits of $362,437,000, debentures and related interest payable of $99,910,000, and stockholders' equity of $40,395,000 at December 31, 2001. The Holding Company's primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending. From time to time, the Holding Company has sold debentures to raise funds for working capital purposes. The Holding Company is subject to examination and regulation by the Federal Reserve Board. In December 2002, Intervest Bancshares Corporation entered into an agreement to acquire Intervest Securities Corporation, an affiliated entity that is a broker/dealer registered in nine states and is an NASD and SIPC member firm. Intervest Securities Corporation participates as a selected dealer from time to time in offerings of debt securities of the Company, primarily those of Intervest Mortgage Corporation. Pursuant to this agreement, Intervest Bancshares Corporation will acquire all of the capital stock of Intervest Securities Corporation for 30,000 shares of its Class B common stock that will be newly issued for this transaction. At December 31, 2002, Intervest Securities Corporation's net assets amounted to approximately $200,000 and consisted of cash. The transaction is subject to the approval of both the NASD and the Federal Reserve Bank of New York (FRB) and is expected to close in the first quarter of 2003. Intervest Securities Corporation will become a wholly owned subsidiary of Intervest Bancshares Corporation. In connection with this transaction, Intervest Bancshares Corporation filed an election with and was approved by the FRB to become a financial holding company under Regulation Y effective January 23, 2003. The Company has also previously announced that it 2 intends to explore further growth through the acquisition of other banks or thrifts. It will consider acquisition of banks/thrifts with operations compatible with its own, with a view towards consolidating selected lines of business, operations and support functions in order to achieve economies of scale, greater efficiency and operational consistency. The Company anticipates that any such banks/thrifts would be located in the eastern United States. The Company emphasizes that it has not entered into any agreements or identified any institutions for acquisition and there can be no assurances that any such acquisitions will be successfully completed. Intervest National Bank - ----------------------- Intervest National Bank is a nationally chartered bank that has its headquarters and full-service banking office at One Rockefeller Plaza, in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. At December 31, 2002, the Bank had total assets of $581,435,000, cash and security investments of $163,167,000, net loans of $407,128,000, deposits of $517,209,000 and stockholder's equity of $51,936,000, compared to total assets of $421,152,000, cash and security investments of $116,387,000, net loans of $296,255,000, deposits of $365,978,000 and stockholder's equity of $46,749,000, at December 31, 2001. The Bank provides a wide range of banking services to small and middle-market businesses and individuals. It conducts a personalized commercial and consumer banking business and attracts deposits from the areas served by its banking offices. The Bank also provides internet banking through its web site: www.intervestnatbank.com, which can attract deposit customers from within as well as outside its primary market areas. The deposits, together with funds derived from other sources, are used to originate a variety of real estate, commercial and consumer loans and to purchase investment securities. The Bank emphasizes multifamily residential and commercial real estate lending and also offers commercial and consumer loans. The revenues of the Bank are primarily derived from interest and fees received from originating loans, and from interest and dividends earned on securities and other short-term investments. The principal sources of funds for the Bank's lending activities are deposits, repayment of loans, maturities and calls of securities and cash flow generated from operating activities. The Bank's principal expenses are interest paid on deposits and operating and general and administrative expenses. Deposit flows and the rates paid thereon are influenced by interest rates on competing investments available to depositors and general market rates of interest. Lending activities are affected by the demand for real estate and other types of loans, interest rates at which such loans may be offered and other factors affecting the availability of funds to lend. The Bank faces strong competition in the attraction of deposits and in the origination of loans. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent permitted by law. As is the case with banking institutions generally, the Bank's operations are significantly influenced by general economic conditions and by related monetary and fiscal policies of banking regulatory agencies, including the FRB and FDIC. The Bank is also subject to the supervision, regulation and examination of the Office of the Comptroller of the Currency of the United States of America (OCC). In June 2001, the OCC terminated a Memorandum of Understanding with the Bank that was in effect since June 2000. The memorandum was a formal written agreement whereby, among other things, the Bank had been required to review, revise, develop and implement various policies and procedures with respect to its lending and credit underwriting. Management implemented various actions in order for the Bank to be in full compliance with the memorandum. Intervest Mortgage Corporation - ------------------------------ Intervest Mortgage Corporation is in the business of investing primarily in commercial and multifamily real estate mortgage loans on income producing properties, such as office and commercial properties and multifamily residential apartment buildings. It also makes loans on other types of properties and may resell mortgages. Intervest Mortgage Corporation is located at 10 Rockefeller Plaza in New York City. Intervest Mortgage Corporation was acquired by the Holding Company on March 10, 2000. In the acquisition, all of the outstanding capital stock of Intervest Mortgage Corporation was acquired in exchange for 1,250,000 shares of the 3 Holding Company's Class A common stock. Former shareholders of Intervest Mortgage Corporation are officers and directors of Intervest Mortgage Corporation and the Holding Company. The acquisition was accounted for at historical cost similar to the pooling-of-interests method of accounting. Under this method of accounting, the recorded assets, liabilities, shareholders' equity, income and expenses of both companies were combined and recorded at their historical cost amounts. At December 31, 2002, Intervest Mortgage Corporation had total assets of $97,311,000, net loans of $73,499,000, debentures and related interest payable of $84,751,000, and stockholder's equity of $11,413,000, compared to total assets of $83,083,000, net loans of $62,665,000, debentures and related interest payable of $72,113,000, and stockholder's equity of $9,847,000, at December 31, 2001. Intervest Mortgage Corporation's operations are significantly influenced by the movement of interest rates and by general economic conditions, particularly those in the New York City metropolitan area where most of the properties that secure its mortgage loans are concentrated. Intervest Statutory Trust I - --------------------------- Intervest Statutory Trust I was formed in December 2001 in connection with the issuance of $15,000,000 of capital securities. It is not authorized and does not conduct any trade or business, and was formed for the sole purpose of the issuance, sale and administration of the capital securities. See note 9 to the consolidated financial statements for further discussion of the capital securities. Market Area The primary market area of the Bank's New York office is considered to be the New York City metropolitan region, and Manhattan in particular. The primary market area of the Bank's Florida offices is considered to be Pinellas County, which is the most populous county in the Tampa Bay area of Florida. The area has many more seasonal residents. The Tampa Bay area is located on the West Coast of Florida, midway up the Florida peninsula. The major cities in the area are Tampa (Hillsborough County) and St. Petersburg and Clearwater (Pinellas County). The Bank's deposit gathering and lending markets are concentrated in the communities surrounding its offices. Management believes that all the Bank's offices are located in areas serving small and mid-sized businesses and serving middle and upper income communities. The Bank's deposit-gathering market also includes its web site on the internet: www.intervestnatbank.com, which attracts deposit customers from both within and outside the Bank's primary market areas. Intervest Mortgage Corporation's lending activities have been concentrated in the New York City metropolitan region. It also makes loans in other states, including Connecticut, Florida, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, Virginia and Washington D.C. Competition The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies, as well as an increasing level of interstate banking, have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits, and may offer services that the Bank does not currently provide. In addition, many of the Bank's non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community bank is better positioned to establish personalized banking relationships with both commercial customers and individual households. The Bank's community commitment and involvement in 4 its primary market areas, as well as its commitment to quality and personalized banking services are factors that contribute to the Bank's competitiveness. Management believes a locally-based bank is often perceived by the local business community as possessing a clearer understanding of local commerce and their needs. Consequently, management believes that the Bank can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability, although no assurances can be given that such factors will assure success. In addition, management believes a personalized service approach enables the Bank to attract and retain core deposits. In making its investments, Intervest Mortgage Corporation also experiences significant competition from banks, insurance companies, savings and loan associations, mortgage bankers, pension funds, real estate investment trusts, limited partnerships and other lenders and investors engaged in purchasing mortgages or making real property investments with investment objectives similar in whole or part to its own. An increase in the general availability of funds may increase competition in the making of investments in mortgages and real property, and may reduce the yields available therefrom. Asset Quality The Bank seeks to maintain a high level of asset quality when considering investments in securities and the originations of loans. In originating loans, the Bank places emphasis on the borrower's ability to generate cash flow to support its debt obligations and other cash related expenses. The Bank's lending activities are conducted pursuant to written policies and defined lending limits. Depending on their type and size, certain loans must be reviewed and approved by a Loan Committee comprised of certain members of the Board of Directors prior to being originated. As part of its loan portfolio management strategy, loan-to-value ratios (the ratio that the original principal amount of the loan bears to the lower of the purchase price or appraised value of the property securing the loan at the time of origination) on new loans originated by the Bank typically do not exceed 80%. In addition, physical inspections of properties being considered for mortgage loans are made as part of the approval process. The Bank's Loan Committee, as well as its senior management and lending officers, concentrate their efforts and resources on loan review and underwriting procedures. Internal controls include ongoing reviews of loans to monitor documentation and ensure the existence and valuations of collateral. The Bank also has in place a review process with the objective of quickly identifying, evaluating and initiating necessary corrective actions for any problem loans. Intervest Mortgage Corporation does not have formal policies regarding the percentage of its assets that may be invested in any single mortgage, the type of mortgage loans and investments it can make, the geographic location of properties collateralizing those mortgages and limits as to loan-to-value ratios. Intervest Mortgage Corporation also does not have a Loan Committee or a formal loan approval process. At December 31, 2002, the Company did not have any nonaccrual or impaired loans. At December 31, 2001, the Bank had one commercial real estate loan with a principal balance of $1,243,000 classified as nonperforming and impaired. In the second quarter of 2002, the property collateralizing this loan was acquired through foreclosure and transferred to Foreclosed Real Estate at estimated fair value less estimated selling costs. A loan charge off of $150,000 was recorded against the allowance for loan loss reserves in connection with this transfer. There can be no assurance that a downturn in real estate values, as well as other economic factors, would not have an adverse impact on the Company's future level of nonperforming assets and profitability. Lending Activities The Company's lending activities include real estate loans and commercial and consumer loans. Real estate loans include primarily the origination of loans for commercial and multifamily properties. While the Bank's lending activities include single-family residential mortgages, such lending has not been emphasized. Commercial loans include loans to businesses originated for working capital needs. Consumer loans include those for the purchase of automobiles, boats, home improvements and investments. At December 31, 2002, the Company's loan portfolio, net of deferred fees, amounted to $489,912,000, compared to $368,526,000 at December 31, 2001. 5 Commercial and Multifamily Real Estate Mortgage Lending - ------------------------------------------------------- Almost all of the Company's current loan portfolio is comprised of loans secured by commercial and multifamily real estate, including rental and cooperative apartment buildings, office buildings and shopping centers. Commercial and multifamily mortgage lending generally involves greater risk than 1-4 family residential lending. Such lending typically involves larger loan balances to single borrowers and repayment of loans secured by income producing properties is typically dependent upon the successful operation of the underlying real estate. Mortgage loans on commercial and multifamily properties are normally originated for terms of no more than 20 years, many with variable interest rates that are based on the prime rate. Additionally, many loans have an interest rate floor which resets upward along with any increase in the loan's interest rate. This feature reduces the loan's interest rate exposure to declining interest rates. Mortgage loans on commercial and multifamily properties typically provide for periodic payments of interest and principal during the term of the mortgage, with the remaining principal balance and any accrued interest due at the maturity date. The majority of the mortgages owned by the Company provide for balloon payments at maturity, which means that a substantial part or the entire original principal amount is due in one lump sum payment at maturity. If the net revenue from the property is not sufficient to make all debt service payments due on the mortgage or, if at maturity or the due date of any balloon payment, the owner of the property fails to raise the funds (by refinancing, sale or otherwise) to make the lump sum payment, the Company could sustain a loss on its investment in the mortgage loan. The Company's mortgage loans are generally not personal obligations of the borrower and are not insured or guaranteed by governmental agencies. Commercial Lending - ------------------ The Bank offers a variety of commercial loan services including term loans, lines of credit and equipment financing. Short-to-medium term commercial loans, both collateralized and uncollateralized, are made available to businesses for working capital needs (including those secured by inventory, receivables and other assets), business expansion (including acquisitions of real estate and improvements), and the purchase of equipment and machinery. Commercial loans are typically underwritten on the basis of the borrower's ability to make repayment from the cash flow of their business and are generally collateralized as discussed above. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself. Further, the collateral underlying the loans may depreciate over time, cannot be appraised with as much precision as residential real estate, and may fluctuate in value based on the success of the business. Consumer Lending - ---------------- The Bank offers consumer loans including those for: the purchase of automobiles, recreation vehicles and boats; second mortgages; home improvements; home equity lines of credit; and personal loans (both collateralized and uncollateralized). Consumer loans typically have a shorter term and carry higher interest rates than other types of loans. In addition, consumer loans have additional risks of collectability when compared to traditional types of loans granted by commercial banks such as residential mortgage loans. In many instances, the Bank is required to rely on the borrower's ability to repay the loan from personal income sources, since the collateral may be of reduced value at the time of collection. Loan Solicitation and Processing - -------------------------------- Loan originations are derived from the following: advertising in newspapers and trade journals; referrals from mortgage brokers; existing customers and borrowers; walk-in customers; and through direct solicitation by the Company's officers. The Company's underwriting procedures normally require the following: physical inspections by management of properties being considered for mortgage loans; mortgage title insurance; hazard insurance; and an appraisal of the property securing the loan to determine the property's adequacy as collateral performed by an appraiser approved by the Company. In addition, the Company analyzes relevant real property and financial factors, which in certain cases may 6 include: the condition and use of the subject property; the property's income-producing capacity; and the quality, experience and creditworthiness of the property's owner. For commercial and consumer loans, upon receipt of a loan application from a prospective borrower, a credit report and other verifications are obtained to substantiate specific information relating to the applicant's employment income and credit standing. Real Estate Investing Activities The Company, from time to time, may purchase equity interests in real property or it may acquire such an equity interest pursuant to a foreclosure upon a mortgage in the normal course of business. With respect to such equity interests in real estate, the Company may acquire and retain title to properties either directly or through a subsidiary. While no such transactions are presently pending, the Company would consider the expansion of its business through investments in or acquisitions of other companies engaged in real estate or mortgage business activities. While the Company has not previously made acquisitions of real property (other than purchases in connection with the operation of its offices or properties acquired through foreclosure) its management has had substantial experience in the acquisition and management of properties and, in particular, multifamily residential properties. Investment Activities The Bank's investment policies and strategies are reviewed and approved by its Board of Directors and Investment Committee. The Company has historically purchased securities that are issued directly by the U.S. government or one of its agencies. Accordingly, the Company's investments in securities carry a significantly lower credit risk than its loan portfolio. To manage interest rate risk, the Company normally purchases securities that have adjustable rates or securities with fixed rates that have short- to intermediate-maturity terms. From time to time, a securities available-for-sale portfolio may be maintained to provide flexibility for implementing asset and liability management strategies. The Company does not engage in trading activities. Securities held to maturity totaled $145,694,000 at December 31, 2002, compared to $99,157,000 at December 31, 2001. Securities available for sale amounted $6,192,000 at December 31, 2001. There were no securities classified as available for sale at December 31, 2002. The Company also invests in various money market instruments, including overnight and term federal funds, short-term bank commercial paper and certificate of deposits. These instruments are used to temporarily invest funds resulting from deposit-gathering activities, normal cash flow from operations and sales of debentures. Cash and short-term investments at December 31, 2002 amounted to $30,849,000, compared to $24,409,000 at December 31, 2001. Sources of Funds The Bank's primary sources of funds consist of the following: retail deposits obtained through its branch offices and through the mail; amortization, satisfactions and repayments of loans; maturities and calls of securities; and cash generated by operating activities. In addition, the Bank has from time to time received capital contributions from the Holding Company. Deposit accounts are solicited from individuals, small businesses and professional firms located throughout the Bank's primary market areas through the offering of a broad variety of deposit services. The Bank also uses its web site on the internet: www.intervestnatbank.com, which attracts deposit customers from both within and outside its primary market areas. At December 31, 2002, consolidated deposit liabilities totaled $505,958,000, compared to $362,437,000 at December 31, 2001. Deposit services include the following: certificates of deposit (including denominations of $100,000 or more); individual retirement accounts (IRAs); other time deposits; checking and other demand deposit accounts; negotiable order of withdrawal (NOW) accounts; savings accounts; and money market accounts. Interest rates offered by the Bank on deposit accounts are normally competitive with those in the principal market areas of the Bank. In addition, the determination of rates and terms also considers the Bank's liquidity requirements, growth goals, capital levels and federal regulations. Maturity terms, service fees and withdrawal penalties on deposit products are reviewed and established by the Bank on a periodic basis. 7 The Bank offers internet banking services, ATM services with access to local, state and national networks, wire transfers, direct deposit of payroll and social security checks and automated drafts for various accounts. In addition, the Bank offers safe deposit boxes to its customers in Florida. The Bank periodically reviews the scope of the banking products and services it offers consistent with market opportunities and available resources. The Bank purchases federal funds from time to time to manage its liquidity needs. At December 31, 2002 and 2001, there were no such funds outstanding, and such funding has not been emphasized. The Bank has agreements with correspondent banks whereby it may borrow up to $8,000,000 on an unsecured basis. There were no outstanding borrowings under these agreements at December 31, 2002 or 2001. Intervest Mortgage Corporation's principal sources of funds consist of borrowings (through the sale of its debentures), mortgage repayments and cash flow generated from operations. At December 31, 2002, Intervest Mortgage Corporation had debentures outstanding of $74,000,000, compared to $63,000,000 at December 31, 2001. The Holding Company has also sold debentures for working capital purposes. The Holding Company's debentures outstanding totaled $10,430,000 at December 31, 2002 and December 31, 2001. On December 18, 2001, the Holding Company's wholly-owned subsidiary, Intervest Statutory Trust I, sold 9.875% Trust Preferred Securities due December 18, 2031 to third party investors in the aggregate principal amount of $15,000,000, referred to in this report as the Capital Securities. The net proceeds from the sale, as well as the initial capital contribution of $464,000 from the Holding Company, were reinvested by the Trust into the Holding Company in exchange for $15,464,000 of the Holding Company's 9.875% Junior Subordinated Debentures (the "Junior Subordinated Debentures") due December 18, 2031. The Holding Company then invested $15,000,000 as a capital contribution in the Bank. The sole asset of the Trust, the obligor on the Capital Securities, is the Junior Subordinated Debentures. For a further discussion of all the debentures, including conversion prices and redemption premiums, see note 7 and note 9 to the consolidated financial statements. Employees At December 31, 2002, the Company employed 57 full-time equivalent employees. The Company provides various benefit plans, including group life, health and a 401(k) Plan. The employees are not covered by a collective bargaining agreement and the Company considers its employee relations are good. Federal and State Taxation The Company and its subsidiaries file a consolidated federal income tax return and combined state and city income tax returns in New York. The Company also files a state income tax return in New Jersey and a franchise tax return in Delaware. The Bank also files a state income tax return in Florida. Intervest Mortgage Corporation files state income tax returns in various other states. All the returns are filed on a calendar year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. In accordance with an income tax sharing agreement, income tax charges or credits are, for financial reporting purposes, allocated to the Holding Company and its subsidiaries on the basis of their respective taxable income or taxable loss included in the consolidated income tax return. Banks and bank holding companies are subject to federal and state income taxes in the same manner as other corporations. Florida taxes banks under the same provisions as other corporations, while New York State and New York City taxable income is calculated under applicable sections of the Internal Revenue Code of 1986, as amended (the "Code"), with some modifications required by state law. Although the Bank's federal income tax liability is determined under provisions of the Code, which is applicable to all taxpayers, Sections 581 through 597 of the Code apply specifically to financial institutions. The two primary areas in which the treatment of financial institutions differs from the treatment of other corporations under the Code are in the areas of bond gains and losses and bad debt deductions. Bond gains and losses generated from the sale or exchange of portfolio instruments are generally treated for financial institutions as ordinary gains and losses as opposed to capital gains and losses for other corporations, as the Code considers bond portfolios held by banks to be 8 inventory in a trade or business rather than capital assets. Banks are allowed a statutory method for calculating a reserve for bad debt deductions. Based on its asset size, a bank is permitted to maintain a bad debt reserve calculated on an experience method, based on chargeoffs and recoveries for the current and preceding five years, or a "grandfathered" base year reserve, if larger. In 2002, due to its asset size, the Bank no longer qualifies for this method and began using the direct write-off method in computing its bad debt deduction for tax purposes. Investment in Subsidiaries The following table provides information regarding the Holding Company's subsidiaries:
At December 31, 2002 -------------------- Subsidiaries ($ in thousands) % of Equity in Earnings for the Voting Total Underlying Year Ended December 31, Subsidiary Stock Investment Net Assets 2002 2001 2000 - ------------------------------ ----- ---------- ---------- ---- ---- ----- Intervest National Bank 100% $51,936 $51,936 $6,459 $3,404 $2,619 Intervest Mortgage Corporation 100% $11,413 $11,413 $1,567 $ 577 $ 129 Intervest Statutory Trust I 100% $ 464 $ 464 $ - $ - $ -
Effective December 2001, the Bank began paying a monthly dividend of $125,000, or $1,500,000 annually, to the Holding Company in order to provide funds for the debt service on the Capital Securities (the proceeds of which were contributed to the Bank as capital). In 2000, Intervest Mortgage Corporation paid a $3,000,000 dividend to the Holding Company, which was reinvested in the Bank as a capital contribution. Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state laws and regulations that are intended to protect depositors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Holding Company and its subsidiaries. Bank Holding Company Regulation - ------------------------------- As a bank holding company registered under the Bank Holding Company Act of 1956 (BHCA), the Holding Company is subject to the regulation and supervision of the FRB. The Holding Company is required to file with the FRB periodic reports and other information regarding its business operations and those of its subsidiaries. The Holding Company has also been approved by the FRB to become a financial holding company. As a bank holding company, the Holding Company is required to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantial anti-competitive result, unless the anti-competitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. A bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in any non-banking activity, unless such activity has been determined by the FRB to be closely related to banking or managing banks. The FRB has identified by regulation various non-banking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB. The FRB monitors the capital adequacy of bank holding companies and uses risk-based capital adequacy guidelines to evaluate bank holding companies on a consolidated basis. The guidelines require a ratio of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. At December 31, 2002, the Company's consolidated ratio of total capital to risk-weighted assets was 13.06% and its risk-based Tier 1 capital ratio was 12.21%. At December 31, 2001, the same ratios were 14.11% and 12.89%, respectively. The guidelines also require a ratio of Tier 1 capital to adjusted total average assets of not less 9 than 3%. The Company's consolidated leverage ratio at December 31, 2002 and 2001, was 9.88% and 10.67%, respectively. The federal banking agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The FRB guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the FRB provide that concentration of credit risk and certain risk arising from nontraditional activities, as well as an institution's ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization's overall capital adequacy. The FRB and the other federal banking agencies have adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the agency's determination of a banking institution's capital adequacy. The amendments require such institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk. Bank Regulation - --------------- The Bank is a nationally chartered banking corporation subject to supervision, examination and regulation of the FRB, FDIC and OCC. These regulators have the power to: enjoin "unsafe or unsound practices;" require affirmative action to correct any conditions resulting from any violation or practice; issue an administrative order that can be judicially enforced; direct an increase in capital; restrict the growth of a bank; assess civil monetary penalties; and remove officers and directors. The operations of the Bank are subject to numerous statutes and regulations. Such statutes and regulations relate to required reserves against deposits, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, establishment of branches, and other aspects of the Bank's operations. Various consumer laws and regulations also affect the operations of the Bank, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, and fair credit reporting. The Bank is subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder, which govern certain transactions, such as loans, extensions of credit, investments and purchases of assets between member banks and their affiliates, including their parent holding companies. These restrictions limit the transfer of funds to the Holding Company in the form of loans, extensions of credit, investment or purchases of assets ("Transfers"), and they require that the Bank's transactions with the Holding Company be on terms no less favorable to the Bank than comparable transactions between the Bank and unrelated third parties. Transfers by the Bank to the Holding Company are limited in amount to 10% of the Bank's capital and surplus, and transfers to all affiliates are limited in the aggregate to 20% of the Bank's capital and surplus. Furthermore, such loans and extensions of credit are also subject to various collateral requirements. These regulations and restrictions may limit the Holding Company's ability to obtain funds from the Bank for its cash needs, including funds for acquisitions, and the payment of dividends, interest and operating expenses. The Bank is prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, the Bank may not generally require a customer to obtain other services from the Bank or the Holding Company, and may not require the customer to promise not to obtain other services from a competitor as a condition to an extension of credit. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal stockholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than those prevailing at the time for, comparable transactions with persons not covered above and who are not employees and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. In addition, extensions of credit to such persons beyond limits set by FRB regulations must be approved by the Board of 10 Directors. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the Bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of the Bank or the imposition of a cease and desist order. Applicable law provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of those powers depends upon whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Under federal regulations, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of 1). A bank is considered (a) "undercapitalized " if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capitalized ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of 1); (b) "significantly undercapitalized" if a bank has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3%, and (c) "critically undercapitalized" if a bank has a ratio of tangible equity to total assets equal to or less than 2%. At December 31, 2002 and 2001, the Bank met the definition of a well-capitalized institution. The deposits of the Bank are insured by the FDIC through the Bank Insurance Fund (the "BIF") to the extent provided by law. Under the FDIC's risk-based insurance system, BIF-insured institutions are currently assessed premiums of between zero and $0.27 per $100 of eligible deposits, depending upon the institutions capital position and other supervisory factors. Legislation also provides for assessments against BIF insured institutions that will be used to pay certain financing corporation ("FICO") obligations. In addition to any BIF insurance assessments, BIF-insured banks are expected to make payments for the FICO obligations currently equal to an estimated $0.0168 per $100 of eligible deposits each year. The assessment is determined quarterly. Regulations promulgated by the FDIC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law") place limitations on the ability of certain insured depository institutions to accept, renew or rollover deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other depository institutions having the same type of charter in such depository institutions normal market area. Under these regulations, well-capitalized institutions may accept, renew or rollover such deposits without restriction, while adequately capitalized institutions may accept, renew or rollover such deposits with a waiver from the FDIC (subject to certain restrictions on payment of rates). Undercapitalized institutions may not accept, renew or rollover such deposits. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of Default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. The Federal Community Reinvestment Act of 1977 ("CRA"), among other things, allows regulators to withhold approval of an acquisition or the establishment of a branch unless the applicant has performed satisfactorily under the CRA. Satisfactory performance means adequately meeting the credit needs of the communities the institution serves, including low and moderate income areas. The applicable federal regulators now regularly conduct CRA examinations to assess the performance of financial institutions. The Bank has received an "outstanding" rating in its most recent CRA examination. The federal regulators have adopted regulations and examination procedures promoting the safety and soundness of individual institutions by specifically addressing, among other things: (i) internal controls; information systems and 11 internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets to capital; (vii) minimum earnings; and (viii) compensation and benefits standards for management officials. The FRB, OCC and other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, and impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Holding Company or its banking subsidiary, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially civil monetary penalties. Interstate Banking and Other Recent Legislation - ----------------------------------------------- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates the interstate expansion and consolidation of banking organizations by permitting bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state. The Act also permits interstate mergers of banks, with some limitations and the establishment of new branches on an interstate basis provided that such action is authorized by the law of the host state. The Gramm-Leach-Bliley Act of 1999 permits banks, securities firms and insurance companies to affiliate under a common holding company structure. In addition to allowing new forms of financial services combinations, this Act clarifies how financial services conglomerates will be regulated by the different federal and state regulators. The Gramm-Leach-Bliley Act amended the BHCA and expanded the permissible activities of certain qualifying bank holding companies, known as financial holding companies. In addition to engaging in banking and activities closely related to banking, as determined by the FRB by regulation or order, financial holding companies may engage in activities that are financial in nature or incidental to financial activities that are complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Under the Gramm-Leach-Bliley Act, all financial institutions, including the Company and the Bank, were required to develop privacy policies, restrict the sharing of non-public customer data with nonaffiliated parties at the customer's request, and establish procedures and practices to protect customer data from unauthorized access. Under the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001 (adopted as Title III of the USA PATRIOT Act), all financial institutions are subject to additional requirements to collect customer information, monitor transactions and report certain information to U.S. law enforcement agencies concerning customers and their transactions. In general, accounts maintained by or on behalf of "non-United States persons," as defined in the Act, are subject to particular scrutiny. Correspondent accounts for or on behalf of foreign banks with profiles that raise money-laundering concerns are subject to even greater scrutiny, and correspondent accounts for or on behalf of foreign banks with no physical presence in any country are barred altogether. Additional requirements are imposed by this Act on financial institutions, all with a view towards encouraging information sharing among financial institutions, regulators and law enforcement agencies. Financial institutions are also required to adopt and implement "anti-money-laundering programs." Additional legislative and regulatory proposals have been made and others can be expected. These include proposals designed to improve the overall the financial stability of the United States banking system, and to provide for other changes in the bank regulatory structure, including proposals to reduce regulatory burdens on banking organizations and to expand the nature of products and services banks and bank holding companies may offer. It is not possible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on the Company. Monetary Policy and Economic Control - ------------------------------------ The commercial banking business in which the Company engages is affected not only by general economic conditions, but also by the monetary policies of the FRB. Changes in the discount rate on member bank borrowing, availability of borrowing at the "discount window," open market operations, the imposition of changes in reserve requirements against member banks' deposits and assets of foreign branches and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the FRB. These monetary policies are used in varying combinations to influence overall growth and distributions of 12 bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The monetary policies of these agencies are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the United States Government. Future monetary policies and the effect of such policies on the future business and earnings of the Company cannot be predicted. Item 2. Description of Properties The office of the Holding Company and Intervest Mortgage Corporation is located in leased premises (of approximately 5,000 sq. ft.) on the tenth floor of 10 Rockefeller Plaza, New York, N.Y, 10020. The lease expires in September 2004. The Bank's headquarters and banking office is located in leased premises on the third floor of One Rockefeller Plaza, New York, N.Y, 10020. The office consists of approximately 7,000 sq. ft. and has been leased through May 2008. The Bank's principal office in Florida is located at 625 Court Street, Clearwater, Florida, 33756. In addition, the Bank operates an additional four branch offices; three of which are in Clearwater, Florida, at 1875 Belcher Road North, 2175 Nursery Road and 2575 Ulmerton Road, and one is at 6750 Gulfport Blvd, South Pasadena, Florida. With the exception of the Belcher Road office, which is leased through June 2007, the Bank owns all its offices in Florida. The Bank's office at 625 Court Street consists of a two-story building containing approximately 22,000 sq. ft. The Bank occupies the ground floor (approximately 8,500 sq. ft.) and leases the 2nd floor to a single commercial tenant. The branch office at 1875 Belcher Road is a two-story building in which the Bank leases approximately 5,100 sq. ft. on the ground floor. The branch office at 2175 Nursery Road is a one-story building containing approximately 2,700 sq. ft., which is entirely occupied by the Bank. The branch office at 2575 Ulmerton Road is a three-story building containing approximately 17,000 sq. ft. The Bank occupies the ground floor (approximately 2,500 sq. ft.) and leases the upper floors to commercial tenants. The branch office at 6750 Gulfport Blvd. is a one-story building containing approximately 2,800 sq. ft., which is entirely occupied by the Bank. In addition, each of the Bank's Florida offices include drive-through teller facilities. The Bank also owns a two-story building located on property contiguous to its Court Street office in Florida. The building contains approximately 12,000 sq. ft. and is leased to commercial tenants. In 2002, the Bank acquired property across from its Court Street branch office in Florida. This property, which has an office building that contains approximately 1,400 sq.ft. and is leased to one commercial tenant, was purchased primarily to provide additional parking for the Court Street branch. Item 3. Legal Proceedings The Company is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of mortgage loans, and other issues incident to the Company's business. Management does not believe that there is any pending or threatened proceeding against the Company, which, if determined adversely, would have a material effect on the business, results of operations, or financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2002, to a vote of security holders of the Company, through the solicitation of proxies or otherwise. Item 4A. Executive Officers and Other Key Employees Jerome Dansker, age 84, serves as Chairman of the Board of Directors and Executive Vice President of Intervest Bancshares Corporation. He has served as Executive Vice President since 1994 and as Chairman of the Board since 1996. Mr. Dansker received a Bachelor of Science degree from the New York University School of Commerce, Accounts and Finance, a Law degree from the New York University School of Law, and is admitted to practice as an attorney in the State of New York. Mr. Dansker also serves as Chairman of the Board of Directors 13 and Chairman of the Loan Committee of Intervest National Bank. He is also Chairman of the Board of Directors and Executive Vice President of Intervest Mortgage Corporation. Lowell S. Dansker, age 52, serves as a Director, President and Treasurer of Intervest Bancshares Corporation and has served in such capacities since 1993. Mr. Dansker received a Bachelor of Science in Business Administration from Babson College, a Law degree from the University of Akron School of Law, and is admitted to practice as an attorney in New York, Ohio, Florida and the District of Columbia. Mr. Dansker also serves as Chief Executive Officer, Director and a member of the Loan Committee of Intervest National Bank. He is also a Director, President and Treasurer of Intervest Mortgage Corporation. Lawrence G. Bergman, age 58, serves as a Director, Vice President and Secretary of Intervest Bancshares Corporation and has served in such capacities since 1993. Mr. Bergman received a Bachelor of Science degree and a Master of Engineering (Electrical) degree from Cornell University and a Master of Science in Engineering and a Ph.D. degree from The Johns Hopkins University. Mr. Bergman also serves as a Director and a member of the Loan Committee of Intervest National Bank. He is also a Director, Vice-President and Secretary of Intervest Mortgage Corporation. Keith A. Olsen, age 49, serves as President of the Florida Division and as a Director of Intervest National Bank and has served in such capacities since July 2001. Prior to that, Mr. Olsen was the President of Intervest Bank from 1994 until it merged into Intervest National Bank in July 2001. Prior to that, he was Senior Vice President of Intervest Bank since 1991. Mr. Olsen received an Associates degree from St. Petersburg Junior College and a Bachelors degree in Business Administration and Finance from the University of Florida, Gainesville. He is also a graduate of the Florida School of Banking of the University of Florida, Gainesville, the National School of Real Estate Finance of Ohio State University and the Graduate School of Banking of the South of Louisiana State University. Mr. Olsen has been in banking for more than 15 years and has served as a senior bank officer for more than 10 years. Raymond C. Sullivan, age 56, serves as President and as a Director of Intervest National Bank and has served in such capacities since April 1999. Prior to that, Mr. Sullivan was an employee of Intervest Bancshares Corporation from March 1998 to March 1999. Mr. Sullivan received an MBA degree from Fordham University, an M.S. degree from City College of New York and a B.A. degree from St. Francis College. Mr. Sullivan also has a Certificate in Advanced Graduate Study in Accounting from Pace University and is a graduate of the National School of Finance and Management. Mr. Sullivan has over 27 years of banking experience. Prior to joining the Company, Mr. Sullivan was the Operations Manager of the New York Agency Office of Banco Mercantile, C.A. from 1994 to 1997, a Senior Associate at LoBue Associates, Inc. from 1992 to 1993, and an Executive Vice President, Chief Operations Officer and Director of Central Federal Savings Bank from 1985 to 1992. John J. Arvonio, age 40, serves as Senior Vice President, Chief Financial Officer and Secretary of Intervest National Bank and has served in such capacities since September 2000. Prior to that, Mr. Arvonio served as Vice President, Controller and Secretary of Intervest National Bank since April 1999. Prior to that, Mr. Arvonio was an employee of Intervest Bancshares Corporation from April 1998 to March 1999. Mr. Arvonio received a B.B.A. degree from Iona College and is a Certified Public Accountant. Mr. Arvonio has over 14 years of banking experience. Prior to joining the Company, Mr. Arvonio served as Second Vice President, Technical Advisor and Assistant Controller for The Greater New York Savings Bank from 1992 to 1997. Prior to that, Mr. Arvonio was a Manager of Financial Reporting for the Leasing and Investment Banking Divisions of Citibank from 1989 to 1992, and a Senior Auditor for Ernst & Young from 1985 to 1989. 14 PART II Item 5. Market for Common Equity and Related Stockholder Matters Market for Securities The Holding Company's Class A common stock is quoted on the NASDAQ SmallCap Market under the symbol: IBCA. There is no public-trading market for the Holding Company's Class B common stock. At December 31, 2002, there were 4,348,087 and 355,000 shares of Class A and Class B common stock outstanding, respectively. At December 31, 2002, there were approximately 800 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, 2002, there were four holders of record of Class B common stock. The high and low sales prices, which represent actual sales transactions as reported by the NASDAQ, for the Class A common stock by calendar quarter for 2002 and 2001 are as follows: 2002 2001 ---- ---- High Low High Low First quarter $ 9.99 $ 7.20 $ 6.50 $ 3.75 Second quarter $11.05 $ 8.79 $ 7.28 $ 5.30 Third quarter $11.50 $ 7.46 $ 7.75 $ 5.25 Fourth quarter $11.25 $ 8.99 $ 8.65 $ 6.25 Dividends Class A and Class B common stockholders are entitled to receive dividends when and if declared by the Board of Directors out of funds legally available for such purposes. The Holding Company has not paid any dividends on its capital stock and currently is not contemplating the payment of a dividend. The Holding Company's ability to pay dividends is generally limited to earnings from the prior year, although retained earnings and dividends from its subsidiaries may also be used to pay dividends under certain circumstances. The primary source of funds for dividends payable by the Holding Company to its shareholders is the dividends received from its subsidiaries. The payment of dividends by a subsidiary to the Holding Company is determined by the subsidiary's Board of Directors and is dependent upon a number of factors, including the subsidiary's capital requirements, regulatory limitations, results of operations and financial condition. There are also various legal limitations with respect to the Bank supplying funds to the Holding Company. In particular, under federal banking law, the Bank may not declare a dividend that exceeds undivided profits. In addition, the approval of the FRB and OCC is required if the total amount of all dividends declared in any calendar year exceeds the Bank's net profits for that year, combined with its retained net profits for the preceding two years. The FRB also has the authority to limit further the payment of dividends by the Bank under certain circumstances. In addition, federal banking laws prohibit or restrict the Bank from extending credit to the Holding Company under certain circumstances. The FRB and OCC have established certain financial and capital requirements that affect the ability of banks to pay dividends and also have the general authority to prohibit banks from engaging in unsafe or unsound practices in conducting business. Depending upon the financial condition of the Bank, the payment of cash dividends could be deemed to constitute such an unsafe or unsound practice. Under FRB policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support each such bank. Consistent with this policy, the FRB has stated that, as a matter of prudent banking, a bank holding company generally should not pay cash dividends unless the available net earnings of the bank holding company is sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with a holding company's capital needs, asset quality and overall financial condition. 15
Item 6. Selected Consolidated Financial and Other Data - ----------------------------------------------------------------------------------------------------------------------------------- At or For The Year Ended December 31, ------------------------------------------------------------------------- ($ in thousands, except per share data) 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Financial Condition Data: Total assets .......................................... $ 685,979 $ 512,622 $ 416,927 $ 340,481 $ 300,080 Cash and cash equivalents ............................. 30,849 24,409 42,938 32,095 40,977 Securities available for sale ......................... - 6,192 74,789 - - Securities held to maturity, net ...................... 145,694 99,157 20,970 83,132 82,338 Loans receivable, net of deferred fees ................ 489,912 368,526 266,326 212,937 164,986 Deposits .............................................. 505,958 362,437 300,241 201,080 170,420 Federal funds purchased ............................... - - - 6,955 - Debentures and related accrued interest payable ....... 113,302 99,910 72,813 92,422 93,090 Stockholders' equity .................................. 53,126 40,395 36,228 33,604 31,112 Nonaccrual loans ...................................... - 1,243 - - - Foreclosed real estate ................................ 1,081 - - - - Allowance for loan loss reserves ...................... 4,611 3,380 2,768 2,493 1,662 Loan chargeoffs ....................................... 150 - - - - Loan recoveries ....................................... 107 - - 1 10 - ----------------------------------------------------------------------------------------------------------------------------------- Operations Data: Interest and dividend income .......................... $ 43,479 $ 35,462 $ 31,908 $ 25,501 $ 24,647 Interest expense ...................................... 26,325 24,714 23,325 18,419 17,669 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest and dividend income ...................... 17,154 10,748 8,583 7,082 6,978 Provision for loan loss reserves ...................... 1,274 612 275 830 479 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest and dividend income after provision for loan loss reserves ................. 15,880 10,136 8,308 6,252 6,499 Noninterest income .................................... 2,218 1,655 983 900 700 Noninterest expenses .................................. 6,479 5,303 4,568 4,059 3,077 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes, extraordinary item and change in accounting principle ............... 11,619 6,488 4,723 3,093 4,122 Provision for income taxes ............................ 4,713 2,710 1,909 1,198 1,740 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings before extraordinary item and change in accounting principle ................... 6,906 3,778 2,814 1,895 2,382 Extraordinary item, net of tax (1) .................... - - (206) - - Cumulative effect of accounting change, net of tax (2) - - - (128) - - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings .......................................... $ 6,906 $ 3,778 $ 2,608 $ 1,767 $ 2,382 - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Data: Basic earnings per share .............................. $ 1.71 $ 0.97 $ 0.67 $ 0.47 $ 0.64 Diluted earnings per share ............................ 1.37 0.97 0.67 0.44 0.54 Common book value per share ........................... 11.30 10.36 9.29 8.76 8.33 Dividends per share ................................... - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Other Data and Ratios: Common shares outstanding ............................. 4,703,087 3,899,629 3,899,629 3,836,879 3,734,515 Average common shares used to calculate: Basic earnings per share ......................... 4,043,619 3,899,629 3,884,560 3,760,293 3,707,113 Diluted earnings per share ....................... 5,348,121 3,899,629 3,884,560 4,020,118 4,723,516 Adjusted net earnings for diluted earnings per share .. $ 7,342 $ 3,778 $ 2,608 $ 1,767 $ 2,554 Full-service banking offices .......................... 6 6 6 6 5 Return on average assets .............................. 1.13% 0.85% 0.69% 0.57% 0.87% Return on average equity .............................. 15.56% 9.94% 7.48% 5.48% 8.05% Loans, net of unearned income to deposits ............. 96.83% 101.7% 88.70% 105.90% 96.81% Allowance for loan losses to total net loans .......... 0.94% 0.92% 1.04% 1.17% 1.01% Average stockholders' equity to average total assets .. 7.27% 8.50% 9.18% 10.37% 10.82% Stockholders' equity to total assets .................. 7.74% 7.88% 8.69% 9.87% 10.37% - ----------------------------------------------------------------------------------------------------------------------------------- (1) Represents a charge, net of taxes, from the early retirement of debentures. (2) Represents a charge, net of taxes, from the adoption of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General Management's discussion and analysis of financial condition and results of operations that follows should be read in conjunction with the Consolidated Financial Statements and Notes included in this report on Form 10-K. Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest National Bank, Intervest Mortgage Corporation (formerly known as Intervest Corporation of New York) and Intervest Statutory Trust I (hereafter referred to collectively as the "Company" on a consolidated basis). Intervest Bancshares Corporation and Intervest National Bank may be referred to individually as the "Holding Company" and the "Bank," respectively. The Holding Company's primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending. The Holding Company also sells debentures to raise funds for working capital purposes. The Bank is a nationally chartered, full-service commercial bank that opened for business on April 1, 1999. On July 20, 2001, Intervest Bank (the Holding Company's other wholly owned banking subsidiary prior to this date) merged into Intervest National Bank. Intervest Bank was a Florida state chartered commercial bank. The merger was treated as a reorganization and accounted for at historical cost similar to the pooling-of-interests method of accounting. Under this method of accounting, the recorded assets, liabilities, shareholders' equity, income and expenses of both banks were combined and recorded at their historical cost amounts. Intervest National Bank has its headquarters and full-service banking office in Rockefeller Center in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank conducts a personalized commercial and consumer banking business and attracts deposits from the areas served by its banking offices. It also provides internet banking services through its web site: www.intervestnatbank.com, which can attract deposit customers from outside its primary market areas. The deposits, together with funds derived from other sources, are used to originate a variety of real estate, commercial and consumer loans and to purchase investment securities. The Bank emphasizes multifamily and commercial real estate lending. Intervest Mortgage Corporation is a mortgage investment company located in Rockefeller Center in New York City. It is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage, junior mortgage and wraparound mortgage loans. Its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation are nonoperating entities that provide administrative services to Intervest Mortgage Corporation. In March 2000, the Holding Company acquired all the outstanding capital stock of Intervest Mortgage Corporation in exchange for 1,250,000 shares of the Holding Company's Class A common stock. As a result of the acquisition, Intervest Mortgage Corporation became a wholly owned subsidiary of the Holding Company. Former shareholders of Intervest Mortgage Corporation are officers and directors of both the Holding Company and Intervest Mortgage Corporation. The acquisition was also accounted for at historical cost similar to the pooling-of-interests method of accounting. Intervest Statutory Trust I was formed in December 2001 in connection with the issuance of $15,000,000 of Capital Securities. See the discussion entitled "Debentures Payable and Accrued Interest Payable on Debentures" that follows later in this report for a further discussion. 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, the provision for loan loss reserves, and its effective income tax rate. Noninterest income consists primarily of loan and other banking fees. Noninterest expense consists of compensation and benefits, occupancy and equipment related expenses, data processing expenses, advertising expense, 17 deposit insurance premiums and other operating expenses. The Company's profitability is also significantly affected by general economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. Since the properties underlying the Company's mortgages are concentrated in the New York City area and the State of Florida, the economic conditions in those areas can also have an impact on the Company's operations. Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001. General - ------- Consolidated net earnings for 2002 increased 83% to $6,906,000, or $1.37 per fully diluted share, from $3,778,000, or $0.97 per fully diluted share, for 2001. Net earnings for 2002 represent the highest level of earnings reported by the Company since its inception in 1993. The growth in earnings was due to a $6,406,000 increase in net interest and dividend income and a $563,000 increase in noninterest income, partially offset by a $2,003,000 increase in the provision for income taxes, a $1,176,000 increase in noninterest expenses, and a $662,000 increase in the provision for loan loss reserves. The fully diluted earnings per share computation in 2002 included a higher number of common shares resulting from common stock warrants and convertible debentures outstanding that became dilutive during the year. Return on average assets and equity increased to 1.13% and 15.56%, respectively, for 2002, up from 0.85% and 9.94% for 2001. Selected information regarding results of operations for 2002 follows:
Intervest Intervest Intervest Inter- National Mortgage Statutory Holding Company ($ in thousands) Bank Corporation Trust I Company Balances Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 34,197 $ 8,420 $ 1,527 $ 988 $ (1,653) $ 3,479 Interest expense 17,514 6,288 1,481 2,695 (1,653) 26,325 ------------------------------------------------------------------------------ Net interest and dividend income expense 16,683 2,132 46 (1,707) - 7,154 Provision (credit) for loan loss reserves 1,193 83 - (2) - 1,274 Noninterest income 1,723 2,057 - 205 (1,767) 2,218 Noninterest expenses 6,324 1,332 46 544 (1,767) 6,479 ------------------------------------------------------------------------------ Earnings (loss) before taxes 10,889 2,774 - (2,044) - 11,619 Provision (credit) for income taxes 4,430 1,207 - (924) - 4,713 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 6,459 $ 1,567 $ - $ (1,120) $ - $ 6,906 - ----------------------------------------------------------------------------------------------------------------------------------- Intercompany dividends (paid) received (1) $ (1,500) $ - $ - $ 1,500 $ - $ - - ----------------------------------------------------------------------------------------------------------------------------------- (1) The Bank pays a monthly dividend of $125,000 to the Holding Company in order to provide funds for the debt service on the Junior Debentures-Capital Securities, the amount of which is included in the interest expense line in the table. The proceeds of the capital securities were contributed to the Bank as capital in December 2001.
Net Interest and Dividend Income - -------------------------------- Net interest and dividend income is the Company's primary source of earnings and is influenced primarily by the amount, distribution and repricing characteristics of its interest-earning assets and interest-bearing liabilities as well as by the relative levels and movements of interest rates. Net interest and dividend income increased to $17,154,000 in 2002, from $10,748,000 in 2001. The increase was attributable to growth of $160,969,000 in average interest-earning assets and an increase in the net interest margin from 2.47% in 2001, to 2.88% in 2002. The growth in average earning assets was due to $124,093,000 in new mortgage loans and a net increase in security and other short-term investments aggregating $36,876,000. These increases were funded by $125,002,000 of deposit growth, $27,875,000 of additional borrowed funds and a $6,395,000 increase in stockholders' equity. The increase in the margin was due to the cost of funds decreasing at a faster pace than the yield earned on interest-earning assets in a declining interest rate environment. The yield on interest-earning assets decreased 86 basis points to 7.29% in 2002 due to lower rates on new mortgage loans originated, prepayments of higher-yielding loans and lower yields earned on security and other short-term investments (including the effect of early calls of security investments by the issuers with the resulting proceeds being invested in lower yielding securities). The cost of funds decreased 146 basis points to 4.81% in 2002, primarily due to lower rates paid on deposit accounts and rate decreases 18 on floating-rate debentures. The floating-rate debentures are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of 525 basis points from January 2001 to December 2002. The following table provides information on average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for 2002 and 2001. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each year divided by average interest-earning assets/interest-bearing liabilities during each year. Average balances are derived mainly from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each year.
For the Year Ended December 31, -------------------------------- 2002 2001 ------------------------------- -------------------------------- Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate ------------------------------------------------------------------------------------------------------------------------------ Assets Interest-earning assets: Loans $439,241 $39,273 8.94% $315,148 $30,187 9.58% Securities 142,840 3,964 2.78 75,117 3,423 4.56 Other interest-earning assets 14,001 242 1.73 44,848 1,852 4.13 ------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 596,082 $43,479 7.29% 435,113 $35,462 8.15% - ------------------------------------------------------------------------------------------------------------------------------ Noninterest-earning assets 14,586 11,973 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $610,668 $447,086 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest checking deposits $ 9,521 $ 221 2.32% $ 8,089 $ 238 2.94% Savings deposits 29,221 762 2.61 19,629 778 3.96 Money market deposits 119,582 3,082 2.58 65,581 2,640 4.03 Certificates of deposit 282,720 13,304 4.71 222,743 13,423 6.03 - ------------------------------------------------------------------------------------------------------------------------------ Total deposit accounts 441,044 17,369 3.94 316,042 17,079 5.40 - ------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased 116 2 1.87 - - - Debentures and accrued interest payable 90,777 7,440 8.20 77,671 7,577 9.76 Junior debentures - capital securities 15,000 1,497 9.98 586 58 9.90 Note payable 239 17 7.00 - - - - ------------------------------------------------------------------------------------------------------------------------------ Total borrowed funds 106,132 8,956 8.44 78,257 7,635 9.76 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 547,176 $26,325 4.81% 394,299 $24,714 6.27% - ------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 5,277 6,338 Noninterest-bearing liabilities 13,831 8,460 Stockholders' equity 44,384 37,989 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $610,668 $447,086 - ------------------------------------------------------------------------------------------------------------------------------ Net interest and dividend income/spread $17,154 2.48% $10,748 1.88% - ------------------------------------------------------------------------------------------------------------------------------ Net interest-earning assets/margin $ 48,906 2.88% $ 40,814 2.47% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of total interest-earning assets to total interest-bearing liabilities 1.09x 1.10x - ------------------------------------------------------------------------------------------------------------------------------ Other Ratios: Return on average assets 1.13% 0.85% Return on average equity 15.56% 9.94% Noninterest expense to average assets 1.06% 1.19% Efficiency ratio (1) 33.45% 42.76% Average stockholders' equity to average assets 7.27% 8.50% - ------------------------------------------------------------------------------------------------------------------------------ (1) Defined as noninterest expenses (excluding the provision for loan losses) as a % of net interest and dividend income plus noninterest income.
The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume). 19
For the Year Ended December 31, 2002 vs. 2001 --------------------------------------------- Increase (Decrease) Due To Change In: ------------------------------------- ($ in thousands) Rate Volume Rate/Volume Total - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans $ (2,017) $ 11,886 $ (783) $ 9,086 Securities (1,337) 3,086 (1,208) 541 Other interest-earning assets (1,076) (1,274) 740 (1,610) - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (4,430) 13,698 (1,251) 8,017 - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Interest checking deposits (50) 42 (9) (17) Savings deposits (267) 380 (129) (16) Money market deposits (951) 2,174 (781) 442 Certificates of deposit (2,940) 3,614 (793) (119) - ----------------------------------------------------------------------------------------------------------------------------------- Total deposit accounts (4,208) 6,210 (1,712) 290 - ----------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased - - 2 2 Debentures and related interest payable (1,212) 1,279 (204) (137) Junior debentures - capital securities - 1,427 12 1,439 Note payable - - 17 17 - ----------------------------------------------------------------------------------------------------------------------------------- Total borrowed funds (1,212) 2,706 (173) 1,321 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (5,420) 8,916 (1,885) 1,611 - ----------------------------------------------------------------------------------------------------------------------------------- Net change in interest and dividend income $ 990 $ 4,782 $ 634 $ 6,406 - -----------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Loss Reserves - -------------------------------- The provision for loan losses was $1,274,000 in 2002, compared to $612,000 in 2001. The provision is based on management's ongoing assessment of the adequacy of the allowance for loan loss reserves, which takes into consideration a number of factors, including the level of outstanding loans. See the discussion entitled "Comparison of Financial Condition at December 31, 2002 and 2001" that follows later in this report for a further discussion of these factors. The higher provision was largely a function of loan growth (of $123,028,000 in 2002 versus $103,969,00 in 2001) as well as an increase in the Bank's internal reserve percentages used in calculating the allowance. Noninterest Income - ------------------ Noninterest income includes fees from customer service charges, income from mortgage lending activities (which consists mostly of fees from expired loan commitments and loan servicing, maintenance and inspections charges), and income from the early repayment of mortgage loans (which consists largely of the recognition of unearned fees associated with such loans at the time of payoff and the receipt of prepayment penalties in certain cases). Noninterest income increased to $2,218,000 in 2002, from $1,655,000 in 2001. The increase was due to higher income ($286,000) from the prepayment of mortgage loans and increases in fees earned on expired loan commitments and loan service charge income aggregating $144,000. In addition, in the fourth quarter of 2002, the Bank sold securities available for sale totaling $3,500,000 and recognized a net gain of $120,000. The amount and timing of, as well as income from, loan prepayments, if any, cannot be predicted and can fluctuate significantly. Normally, the number of instances of prepayment of mortgage loans tends to increase during periods of declining interest rates and tends to decrease during periods of increasing interest rates. Many of the Company's mortgage loans include prepayment provisions, and others prohibit prepayment of indebtedness entirely. Noninterest Expenses - -------------------- Noninterest expenses increased to $6,479,000 in 2002, from $5,153,000 in 2001, excluding approximately $150,000 of nonrecurring expenses in 2001 associated with the merger of Intervest Bank into Intervest National Bank. The resulting increase of $1,326,000 was largely due to a $565,000 increase in compensation and benefits, a $235,000 increase in data processing expenses, a $141,000 increase in occupancy and equipment expenses, a $100,000 increase in operational charges, a $44,000 increase in advertising expenses and the addition of $114,000 of net expenses in 2002 associated with foreclosed real estate. Foreclosed real estate expenses, net of any rental income, consist mostly of real estate taxes, insurance, utilities, maintenance, professional fees and other charges required to protect the Company's interest in the property acquired through foreclosure. 20 The increase in compensation and benefits expense was due to the following: $306,000 from additional staff, salary increases and a higher cost of employee benefits; bonus payments aggregating $150,000 to the Chairman of the Company; and $109,000 of compensation expense associated with certain common stock warrants held by employees. In 2001, the Holding Company modified the terms of its Class A common stock warrants outstanding that were granted to employees by reducing the exercise price per share to $10.01 (from a range of $12.50 to $16.00 per share) commencing January 1, 2002 and extending the expiration date to December 31, 2002. In September 2002, the warrants were modified further by extending the expiration date to December 31, 2003. With respect to these warrants, which total 138,500 shares of Class A common stock, compensation expense is being recorded in the consolidated statements of earnings with the corresponding credit to paid in capital in accordance with variable rate accounting as prescribed in APB Opinion No. 25 and related interpretations. Future compensation expense related to the modified warrants will fluctuate up or down (but not less than $73,000 recorded through the date of the second modification) until December 31, 2003 and will be a function of the Company's Class A common stock price and number of warrants outstanding and exercised. The increase in data processing expenses was due to growth in the Bank's assets. The Bank engages a third-party servicer for its main data processing and the fee is a function of the Bank's total assets, which increased to $581,435,000 at December 31, 2002, from $421,152,000 at December 31, 2001. The increase in occupancy and equipment expenses was primarily due to increased depreciation expense and higher real estate taxes and maintenance charges, including insurance and security protection expenses. The increase in operational charges was a direct function of growth in the Bank's transactional deposit accounts. The increase in advertising expenses was due to additional advertising to support loan and deposit growth. Provision for Income Taxes - -------------------------- The provision for income taxes increased to $4,713,000 in 2002, from $2,710,000 in 2001, due to higher pre-tax earnings. The Company's effective tax rate (inclusive of state and local taxes) amounted to 40.6% in 2002, compared to 41.8% in 2001. The decrease in the effective rate was largely due to a lower New York State tax rate. Comparison of Results of Operations for the Years Ended December 31, 2001 and 2000. General - ------- Consolidated net earnings for 2001 increased 45% to $3,778,000, or $0.97 per fully diluted share, from $2,608,000, or $0.67 per fully diluted share, for 2000. The growth was due to an increase of $2,165,000 in net interest and dividend income and an increase of $672,000 in noninterest income. These items were partially offset by an $801,000 increase in the provision for income taxes, a $735,000 increase in noninterest expense and a $337,000 increase in the provision for loan losses. Results for 2000 included an extraordinary charge, net of taxes, of $206,000, in connection with the early retirement of various debentures. Selected information regarding results of operations for 2001 follows:
Intervest Intervest Inter- National Mortgage Holding Company ($ in thousands) Bank Corporation Company (1) Balances Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 27,126 $ 7,624 $ 818 $ (106) $ 5,462 Interest expense 17,185 6,511 1,124 (106) 24,714 ---------------------------------------------------------------------- Net interest and dividend income (expense) 9,941 1,113 (306) - 10,748 Provision for loan loss reserves 575 18 19 - 612 Noninterest income 925 1,152 176 (598) 1,655 Noninterest expenses 4,500 1,175 226 (598) 5,303 ---------------------------------------------------------------------- Earnings (loss) before taxes 5,791 1,072 (375) - 6,488 Provision (credit) for income taxes 2,387 495 (172) - 2,710 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 3,404 $ 577 $ (203) $ - $ 3,778 - ----------------------------------------------------------------------------------------------------------------------------------- Intercompany dividends (paid) received (2) $ (125) $ - $ 125 $ - $ - - ----------------------------------------------------------------------------------------------------------------------------------- (1) Includes the net activity of Intervest Statutory Trust I from December 18 to December 31, 2001. (2) The Bank pays a monthly dividend of $125,000 to the Holding Company in order to provide funds for the debt service on the Junior Debentures-Capital Securities, the amount of which is included in the interest expense line in the table. The proceeds of the capital securities were contributed to the Bank as capital in December 2001.
21 Net Interest and Dividend Income - -------------------------------- Net interest and dividend income increased to $10,748,000 in 2001, from $8,583,000 in 2000. The improvement was attributable to growth in the balance sheet and a higher net interest margin. Average loans increased by $64,207,000 during 2001, funded by a similar increase in average deposits. The net interest margin increased to 2.47% in 2001, from 2.34% in 2000 due to the cost of funds decreasing at a faster pace than the yield on interest-earning assets. The yield on interest-earning assets decreased 53 basis points to 8.15% in 2001 due to the steady decline in market interest rates resulting from the Federal Reserve Board decreasing the federal funds target rate on 11 occasions during 2001 for a total of 475 basis points. The lower rate environment resulted in originations of new loans with lower rates than the average yield of the loan portfolio in 2000, prepayments of higher-yielding loans, early calls of security investments by the issuers with the resulting proceeds being invested in lower yielding securities, and lower rates earned on overnight and short-term investments. The cost of funds decreased 77 basis points to 6.27% in 2001 also due to the lower rate environment, which resulted in lower rates paid on deposit accounts and variable-rate debentures indexed to the prime rate. The following table provides information on average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for 2001 and 2000. For a further description of the table, see the section "Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001".
For the Year Ended December 31, -------------------------------- 2001 2000 ------------------------------- ------------------------------- Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate ----------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Loans $315,148 $30,187 9.58% $250,941 $24,923 9.93% Securities 75,117 3,423 4.56 101,532 6,056 5.96 Other interest-earning assets 44,848 1,852 4.13 14,925 929 6.22 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 435,113 $35,462 8.15% 367,398 $31,908 8.68% - ------------------------------------------------------------------------------------------------------------------------------ Noninterest-earning assets 11,973 12,257 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $447,086 $379,655 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest checking deposits $ 8,089 $ 238 2.94% $ 7,611 $ 232 3.05% Savings deposits 19,629 778 3.96 17,070 897 5.25 Money market deposits 65,581 2,640 4.03 52,182 2,832 5.43 Certificates of deposit 222,743 13,423 6.03 175,552 10,892 6.20 - ------------------------------------------------------------------------------------------------------------------------------ Total deposit accounts 316,042 17,079 5.40 252,415 14,853 5.88 - ------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased - - - 2,544 150 5.90 Debentures and accrued interest payable 78,257 7,635 9.76 76,546 8,322 10.87 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 394,299 $24,714 6.27% 331,505 $23,325 7.04% - ------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 6,338 5,696 Noninterest-bearing liabilities 8,460 7,599 Stockholders' equity 37,989 34,855 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $447,086 $379,655 - ------------------------------------------------------------------------------------------------------------------------------ Net interest and dividend income/spread $10,748 1.88% $ 8,583 1.64% - ------------------------------------------------------------------------------------------------------------------------------ Net interest-earning assets/margin $ 40,814 2.47% $ 35,893 2.34% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of total interest-earning assets to total interest-bearing liabilities 1.10x 1.11x - ------------------------------------------------------------------------------------------------------------------------------ Other Ratios: Return on average assets 0.85% 0.69% Return on average equity 9.94% 7.48% Noninterest expense to average assets 1.19% 1.20% Efficiency ratio (1) 42.76% 47.75% Average stockholders' equity to average assets 8.50% 9.18% - ------------------------------------------------------------------------------------------------------------------------------ (1) Defined as noninterest expenses (excluding the provision for loan losses) as a % of net interest and dividend income plus noninterest income.
22 The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).
For the Year Ended December 31, 2001 vs. 2000 --------------------------------------------- Increase (Decrease) Due To Change In: ------------------------------------- ($ in thousands) Rate Volume Rate/Volume Total - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans $ (886) $ 6,377 $ (227) $ 5,264 Securities (1,429) (1,576) 372 (2,633) Other interest-earning assets (313) 1,863 (627) 923 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (2,628) 6,664 (482) 3,554 - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Interest checking deposits (8) 15 (1) 6 Savings deposits (220) 134 (33) (119) Money market deposits (731) 727 (188) (192) Certificates of deposit (313) 2,928 (84) 2,531 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposit accounts (1,272) 3,804 (306) 2,226 - ----------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased (150) (150) 150 (150) Debentures and accrued interest payable (854) 186 (19) (687) - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (2,276) 3,840 (175) 1,389 - ----------------------------------------------------------------------------------------------------------------------------------- Net change in interest and dividend income $ (352) $ 2,824 $ (307) $ 2,165 - -----------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Loss Reserves - -------------------------------- The provision amounted to $612,000 in 2001, compared to $275,000 in 2000. The provision for loan loss reserves is based on management's ongoing assessment of the adequacy of the allowance for loan loss reserves, which takes into consideration a number of factors, including the level of outstanding loans. See the discussion entitled "Comparison of Financial Condition at December 31, 2002 and 2001" that follows later in this report for a further discussion of these factors. The higher provision for 2001 was due to net loan growth (which amounted to $103,969,000 in 2001, versus $53,623,000 in 2000). Noninterest Income - ------------------ Noninterest income increased to $1,655,000 in 2001, from $983,000 in 2000. The increase was due to a higher level of income ($631,000) from the early repayment of mortgage loans. See the section "Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001" for a description of noninterest income. Noninterest Expenses - -------------------- Noninterest expenses increased to $5,303,000 in 2001, from $4,568,000 in 2000. Expenses for 2001 included approximately $150,000 of nonrecurring expenses associated with the merger of Intervest Bank into Intervest National Bank. Expenses for the 2000 period included approximately $210,000 of nonrecurring expenses (consisting of $51,000 of attorney fees, consulting fees and printing costs, and $159,000 of stock compensation) associated with the acquisition of Intervest Mortgage Corporation. Absent the aforementioned expenses, noninterest expenses totaled $5,153,000 in 2001, compared to $4,358,000 in 2000. The increase was due to the following: a $382,000 increase in compensation and benefits (of which $254,000 was the result of salary increases, additional staff and increased benefit expenses, and the remainder due to a lower amount of SFAS No. 91 deferred origination costs); a $212,000 increase in data processing expenses (due to Intervest National Bank's growth in assets); a $87,000 increase in occupancy expenses (due to higher taxes and other charges); and a $145,000 increase in all other noninterest expenses (primarily due to $40,000 of higher FDIC insurance premiums and increases in general insurance, telephone and director expenses aggregating $47,000). These increases were partially offset by lower advertising expenses and professional fees aggregating $28,000. 23 Provision for Income Taxes - -------------------------- The provision for income taxes increased to $2,710,000 in 2001, from $1,909,000 in 2000, largely due to higher pre-tax earnings. The Company's effective tax rate (inclusive of state and local taxes) amounted to 41.8% in 2001, compared to 40.4% in 2000. The increase in the effective tax rate was primarily due to higher earnings generated from the Company's New York operations, which is taxed at a higher rate than Florida. Extraordinary Item - ------------------ In 2000, Intervest Mortgage Corporation redeemed debentures totaling $24,000,000 in principal prior to maturity for the outstanding principal plus accrued interest totaling $3,970,000. In connection with these redemptions, $382,000 of unamortized deferred debenture offering costs was charged to expense and reported as an extraordinary charge, net of a tax benefit of $176,000, in the consolidated statement of earnings for the year ended December 31, 2000. Comparison of Financial Condition at December 31, 2002 and December 31, 2001. Overview - -------- Total assets at December 31, 2002 increased to $685,979,000, from $512,622,000 at December 31, 2001. Total liabilities at December 31, 2002 increased to $632,853,000, from $472,227,000 at December 31, 2001, and stockholders' equity increased to $53,126,000 at December 31, 2002, from $40,395,000 at year-end 2001. Book value per common share increased to $11.30 per share at December 31, 2002, from $10.36 at December 31, 2001. Selected balance sheet information as of December 31, 2002 follows:
Intervest Intervest Intervest Inter- National Mortgage Statutory Holding Company ($ in thousands) Bank Corporation Trust I Company Balances Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 16,365 $ 17,946 $ - $ 7,487 $ (10,949) $ 30,849 Time deposits with banks - 2,000 - - - 2,000 Securities held to maturity, net 145,694 - 15,464 - (15,464) 145,694 Federal Reserve Bank stock 1,108 - - - - 1,108 Loans receivable, net of deferred fees 407,128 73,499 - 9,285 - 489,912 Allowance for loan loss reserves (4,464) (101) - (46) - (4,611) Investment in subsidiaries - - - 63,813 (63,813) - Foreclosed real estate 1,081 - - - - 1,081 All other assets 14,523 3,967 59 1,751 (354) 19,946 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 581,435 $ 97,311 $ 15,523 $ 82,290 $ (90,580) $ 685,979 - ----------------------------------------------------------------------------------------------------------------------------------- Deposits $ 517,209 $ - $ - $ - $ (11,251) $ 505,958 Subordinated debentures payable - 74,000 - 25,894 (15,464) 84,430 Junior debentures payable-capital securities - - 15,000 - - 15,000 Note payable 266 - - - - 266 Accrued interest payable on all debentures - 10,751 57 3,123 (59) 13,872 All other liabilities 12,024 1,147 2 147 7 13,327 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 529,499 85,898 15,059 29,164 (26,767) 632,853 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 51,936 11,413 464 53,126 (63,813) 53,126 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 581,435 $ 97,311 $ 15,523 $ 82,290 $ (90,580) $ 685,979 - -----------------------------------------------------------------------------------------------------------------------------------
24 A comparison of the Company's consolidated balance sheet as of December 31, 2002 and 2001 follows:
At December 31, 2002 At December 31, 2001 ----------------------- ------------------------ Carrying % of Carrying % of ($ in thousands) Value Total Assets Value Total Assets - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 30,849 4.4% $ 24,409 4.8% Time deposits with banks 2,000 0.3 250 0.1 Securities available for sale at estimated fair value - - 6,192 1.2 Securities held to maturity, net 145,694 21.2 99,157 19.3 Federal Reserve Bank stock 1,108 0.2 654 0.1 Loans receivable, net of deferred fees and loan loss reserves 485,301 70.7 365,146 71.2 Foreclosed real estate 1,081 0.2 - - All other assets 19,946 3.0 16,814 3.3 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $685,979 100.0% $512,622 100.0% - ----------------------------------------------------------------------------------------------------------------------------------- Deposits $505,958 73.8% $362,437 70.7% Subordinated debentures payable 84,430 12.3 73,430 14.3 Junior debentures payable-capital securities 15,000 2.2 15,000 2.9 Note payable 266 0.1 - - Accrued interest payable on all debentures 13,872 2.0 11,480 2.3 All other liabilities 13,327 1.9 9,880 1.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 632,853 92.3 472,227 92.1 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 53,126 7.7 40,395 7.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $685,979 100.0% $512,622 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - ------------------------- Cash and cash equivalents increased to $30,849,000 at December 31, 2002, from $24,409,000 at December 31, 2001, due to a higher level of overnight federal fund investments and noninterest-earning balances due from banks. Cash and cash equivalents include federal funds sold and interest-bearing and noninterest-bearing cash balances with banks, and other short-term investments that have original maturities of three months or less. The short-term investments are normally comprised of commercial paper issued by large commercial banks, certificates of deposit and U.S. government securities. The level of cash and cash equivalents fluctuates based on various factors, including liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. Securities Available for Sale and Held to Maturity - -------------------------------------------------- The Company invests in securities after satisfying its liquidity objectives and lending commitments. The Company has historically only purchased debt securities that are issued by the U.S. government or one of its agencies, such as the Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). The Company's security investments have lower yields than its loan portfolio. To manage interest rate risk, the Company normally purchases securities that have adjustable rates or securities with fixed rates that have short to intermediate maturity terms. The Company does not engage in trading activities. Securities that are held for indefinite periods of time which management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates or other factors, are classified as available for sale and are carried at estimated fair value. There were no securities classified as available for sale at December 31, 2002, compared to $6,192,000 at December 31, 2001. The decline in the portfolio was due to the sale of $3,500,000 of securities, and the remainder was due to early calls and maturities during the year. A net gain of $120,000 was realized on the sale of securities. At December 31, 2001, the portfolio had an unrealized gain, net of tax, of $111,000. Unrealized gains and losses on securities available for sale, net of income taxes, are reported as a separate component of comprehensive income and included in stockholders' equity. 25 Securities for which the Company has the intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Such securities totaled $145,694,000 at December 31, 2002, compared to $99,157,000 at December 31, 2001. The increase was due to new purchases exceeding maturities and calls of securities during the year. At December 31, 2002, the portfolio consisted of short-term debt obligations of FNMA, FHLB, FHLMC and FFCB with a weighted-average yield of 2.39% and a weighted-average remaining maturity of 1.6 years. 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, 2002 and 2001, the portfolio's estimated fair value was $146,560,000 and $99,404,000, respectively. Federal Reserve Bank Stock - -------------------------- In order for the Bank to be a member of the Federal Reserve Banking System, the Bank maintains an investment in the capital stock of the Federal Reserve Bank, which pays a dividend that is currently 6%. The investment, which amounted to $1,108,000 at December 31, 2002 and $654,000 at December 31, 2001, fluctuates based on the Bank's capital level. Loans Receivable, Net of Deferred Fees and Allowance for Loan Loss Reserves - --------------------------------------------------------------------------- Loans receivable, net of deferred fees and the allowance for loan loss reserves, increased to $485,301,000 at December 31, 2002, from $365,146,000 at December 31, 2001. The growth reflected new originations of commercial real estate and multifamily mortgage loans, partially offset by principal repayments. At December 31, 2002, the loan portfolio consisted of $134,360,000 of fixed-rate loans and $360,942,000 of adjustable-rate loans. The loan portfolio has historically been concentrated in commercial real estate and multifamily mortgage loans. Such loans represented 99% of the total loan portfolio at December 31, 2002 and 2001. Loan concentrations are defined as amounts loaned to a number of borrowers engaged in similar activities, which would cause the loans to be similarly impacted by economic or other conditions. Credit risk, which represents the possibility of the Company not recovering amounts due from its borrowers, is significantly related to local economic conditions in the areas the properties are located, as well as the Company's underwriting standards. Economic conditions affect the market value of the underlying collateral as well as the levels of occupancy of income-producing properties (such as office buildings, shopping centers and rental and cooperative apartment buildings). The following table sets forth information concerning the loan portfolio:
At December 31, 2002 At December 31, 2001 -------------------- -------------------- # of % of # of % of ($ in thousands) Loans Amount Total Loans Amount Total - ----------------------------------------------------------------------------------------------------------------------------------- Commercial real estate loans 162 $ 275,096 55.5% 139 $ 183,167 49.2% Residential multifamily loans 168 214,515 43.3 153 182,569 49.0 Land development and other land loans 3 1,890 0.4 3 2,485 0.7 Residential 1-4 family loans 28 1,953 0.4 33 2,404 0.6 Commercial loans 27 1,608 0.3 26 1,363 0.4 Consumer loans 16 240 0.1 15 286 0.1 - ----------------------------------------------------------------------------------------------------------------------------------- Total gross loans receivable 404 495,302 100.0% 369 372,274 100.0% Deferred loan fees (5,390) (3,748) - ----------------------------------------------------------------------------------------------------------------------------------- Loans, net of deferred fees 489,912 368,526 Allowance for loan loss reserves (4,611) (3,380) - ----------------------------------------------------------------------------------------------------------------------------------- Loans receivable, net $ 485,301 $ 365,146 - -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the scheduled contractual principal repayments of the loan portfolio: At December 31, --------------- ($ in thousands) 2002 2001 ------------------------------------------------------------------ Within one year $103,398 $ 85,447 Over one to five years 305,013 221,435 Over five years 86,891 65,392 ------------------------------------------------------------------ $495,302 $372,274 ------------------------------------------------------------------ 26 At December 31, 2002, $308,393,000 of loans with adjustable rates and $83,511,000 of loans with fixed rates were due after one year. The following table sets forth the activity in the loan portfolio: For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 --------------------------------------------------------------------------- Loans receivable, net, at beginning of year $365,146 $263,558 Loans originated 233,689 195,754 Principal repayments (110,661) (91,785) Recoveries (107) - Chargeoffs 150 - Increase in deferred loan fees (1,642) (1,769) Provision for loan loss reserves (1,274) (612) --------------------------------------------------------------------------- Loans receivable, net, at end of year $485,301 $365,146 --------------------------------------------------------------------------- Nonaccrual and Impaired Loans - ----------------------------- Loans are placed on nonaccrual status when principal or interest becomes 90 days or more past due. 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. At December 31, 2002, there were no nonaccrual or impaired loans. At December 31, 2001, one commercial real estate loan with a principal balance of $1,243,000 was on a nonaccrual status and considered impaired under the criteria of SFAS No.114. At December 31, 2001, there was no valuation allowance recorded for this impaired loan. In the second quarter of 2002, the property collateralizing the impaired loan was acquired through foreclosure and transferred to Foreclosed Real Estate at estimated fair value less estimated selling costs. A loan charge off of $150,000 was recorded against the allowance for loan loss reserves in connection with this transfer. Interest that was not accrued on this loan under its contractual terms amounted to $29,000 in 2002 and $51,000 in 2001. Allowance for Loan Loss Reserves - -------------------------------- At December 31, 2002, the allowance for loan loss reserves increased to $4,611,000, from $3,380,000 at December 31, 2001. The increase was largely a function of loan growth (of $123,028,000 in 2002, versus $103,969,00 in 2001) as well as an increase in the internal reserve percentages used by the Company in calculating the allowance. At December 31, 2002 and 2001, the allowance for loan loss reserves was predominately allocated to commercial real estate, multifamily and land loans. The following table sets forth information with respect to the allowance for loan loss reserves:
For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 -------------------------------------------------------------------------------------------- Allowance at beginning of year $ 3,380 $ 2,768 Provision charged to operations 1,274 612 Chargeoffs (150) - Recoveries 107 - -------------------------------------------------------------------------------------------- Allowance at end of year $ 4,611 $ 3,380 -------------------------------------------------------------------------------------------- Ratio of allowance to total loans, net of deferred fees 0.94% 0.92% Total loans, net of deferred fees at year end $489,912 $368,526 Average loans outstanding during the year $439,241 $315,148 --------------------------------------------------------------------------------------------
The allowance for loan loss reserves is established through a provision charged to operations. Loans are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The adequacy of the allowance is evaluated monthly or more frequently when necessary with consideration given to: the nature and volume of the loan portfolio; overall portfolio quality; loan concentrations; specific problem loans and commitments and estimates of fair value thereof; historical chargeoffs and recoveries; adverse situations which may affect the 27 borrowers' ability to repay; and management's perception of the current and anticipated economic conditions in the Company's lending areas. Although management believes it uses the best information available to make determinations with respect to the allowance for loan loss reserves, future adjustments may be necessary if economic conditions, or other factors, differ from those assumed in the determination of the level of the allowance. In addition, SFAS No. 114 specifies the manner in which the portion of the allowance for loan loss reserves related to impaired loans is computed. A loan is normally deemed impaired when, based upon current information and events, it is probable that the Company will be unable to collect both full principal and interest due according to the contractual terms of the loan agreement. Impairment for larger balance loans such as commercial real estate and multifamily loans are measured based on: the present value of expected future cash flows, discounted at the loan's effective interest rate; or the observable market price of the loan; or the estimated fair value of the loan's collateral, if payment of the principal and interest is dependent upon the collateral. When the fair value of the property is less than the recorded investment in the loan, this deficiency is recognized as a valuation allowance within the overall allowance for loan loss reserves and a charge through the provision for loan loss reserves. 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 net carrying amount of an impaired loan does not at any time exceed the recorded investment in the loan. 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, except for smaller balance homogeneous loans, such as consumer loans, whose evaluation for impairment is done on an aggregate basis. For consumer loans, historical charge-off experience as well as the chargeoff experience of peer groups and industry statistics are used to evaluate the adequacy of the allowance for loan loss reserves. The Company's regulators, as an integral part of their examination process, periodically review the allowance for loan loss reserves. 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. Foreclosed Real Estate - ---------------------- At December 31, 2002, foreclosed real estate amounted to $1,081,000 and represented one commercial real estate property located in the State of Florida that was acquired by the Bank as discussed previously. The property is actively being marketed for sale. Foreclosed real estate is carried at the lower of the new cost basis or estimated fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance of the property are included in the consolidated statements of earnings. In 2001, the Company had no foreclosed real estate. All Other Assets - ---------------- The following table sets forth the composition of all other assets: At December 31, --------------- ($ in thousands) 2002 2001 ------------------------------------------------------------------------ Accrued interest receivable $ 4,263 $ 3,202 Loans fee receivable 3,706 2,679 Premises and equipment, net 6,098 6,042 Deferred income tax asset 1,997 1,236 Deferred debenture offering costs, net 3,498 3,396 All other 384 259 ------------------------------------------------------------------------ $19,946 $16,814 ------------------------------------------------------------------------ 28 Accrued interest receivable fluctuates based on the amount of loans, investments and other interest-earning assets outstanding and the timing of interest payments received. The increase was due to the growth in these assets. Loan fees receivable are fees due to the Company in accordance with the terms of mortgage loans. Such amounts are generally due upon the full repayment of the loan. This fee is recorded as deferred income at the time a loan is originated and is then amortized to interest income over the life of the loan as a yield adjustment. The increase was due to an increase in mortgage loan originations. Premises and equipment is detailed in note 5 to the consolidated financial statements. Premises and equipment increased due to purchases exceeding normal amortization and depreciation during the year. In 2002, the Bank purchased a property that is across from its Court Street branch office in Florida at a cost of $350,000. This property was purchased primarily to provide additional parking for the branch. The deferred income tax asset relates primarily to the unrealized tax benefit on the Company's allowance for loan loss reserves, depreciation, and organizational start-up costs. These charges have been expensed for financial statement purposes, but are not all currently deductible for income tax purposes. The ultimate realization of the deferred tax asset is dependent upon the generation of sufficient taxable income by the Company during the periods in which these temporary differences become deductible for tax purposes. Management believes that it is more likely than not that the Company's deferred tax asset will be realized and accordingly, a valuation allowance for deferred tax assets is not maintained. Deferred debenture offering costs consist primarily of underwriters' commissions and are amortized over the terms of the debentures. The increase was due to additional costs ($1,021,000) incurred with the sale of new debentures in 2002 by Intervest Mortgage Corporation, partially offset by normal amortization. Deposits - -------- Consolidated deposit liabilities increased to $505,958,000 at December 31, 2002, from $362,437,000 at December 31, 2001, reflecting growth in deposit accounts during the year. Management believes that the Bank does not have a concentration of deposits from any one source and that a large portion of its depositors are residents in the Bank's primary market areas (although there has been growth in deposits from outside the primary areas resulting from the Bank's deposit-gathering activities through its web site on the internet: www.intervestnatbank.com). The Bank does not accept brokered deposits. The following table sets forth the distribution of deposit accounts by type:
At December 31, 2002 At December 31, 2001 -------------------- -------------------- ($ in thousands) Amount % of Total Amount % of Total ------------------------------------------------------------------------------------ Demand deposits $ 5,924 1.2% $ 5,550 1.5% Interest checking deposits 10,584 2.1 10,204 2.8 Savings deposits 30,174 6.0 24,624 6.8 Money market deposits 134,293 26.5 80,594 22.2 Certificates of deposit 324,983 64.2 241,465 66.7 ------------------------------------------------------------------------------------ Total deposit accounts (1) $505,958 100.0% $362,437 100.0% ------------------------------------------------------------------------------------ (1) Includes individual retirement accounts totaling $53,340,000 and $28,193,000 at December 31, 2002 and 2001, respectively, nearly all of which are certificates of deposit.
The following table sets forth certificate of deposits by maturity for the periods indicated:
At December 31, 2002 At December 31, 2001 -------------------- -------------------- Wtd-Avg Wtd-Avg ($ in thousands) Amount Stated Rate Amount Stated Rate ------------------------------------------------------------------------------------ Within one year $122,890 3.51% $144,739 5.00% Over one to two years 57,895 4.18 45,512 4.95 Over two to three years 31,281 5.53 14,954 5.82 Over three to four years 17,730 5.32 16,903 6.84 Over four years 95,187 4.92 19,357 5.61 ------------------------------------------------------------------------------------ $324,983 4.33% $241,465 5.22% ------------------------------------------------------------------------------------
29 The following table sets forth the maturities of certificates of deposit in denominations of $100,000 or more: At December 31, --------------- ($ in thousands) 2002 2001 ---------------------------------------------------------------------------- Due within three months or less $7,508 $10,332 Due over three months to six months 6,122 4,483 Due over six months to one year 13,033 18,401 Due over one year 46,209 20,529 ---------------------------------------------------------------------------- $72,872 $53,745 ---------------------------------------------------------------------------- As a percentage of total deposits 14.4% 14.8% ---------------------------------------------------------------------------- The following table sets forth net deposit flows: For the Year Ended ------------------ December 31, ------------ ($ in thousands) 2002 2001 ---------------------------------------------------------------------------- Net increase before interest credited $126,230 $45,078 Net interest credited 17,291 17,118 ---------------------------------------------------------------------------- Net deposit increase $143,521 $62,196 ---------------------------------------------------------------------------- Federal Funds Purchased - ----------------------- Periodically, the Bank purchases federal funds to manage its liquidity needs. At December 31, 2002 and 2001, there were no funds outstanding. The Bank did not emphasize these types of borrowings in 2002 and 2001. Debentures Payable and Accrued Interest Payable on Debentures - ------------------------------------------------------------- At December 31, 2002, debentures payable amounted to $84,430,000, compared to $73,430,000 at year-end 2001. The increase was due to the sale of additional debentures by Intervest Mortgage Corporation (Series 1/17/02 and 8/05/02 totaling $13,500,000 in principal amount and maturing at various times through January 1, 2010) as part of its normal funding of its mortgage loan originations, partially offset by the repayment of $2,500,000 of its Series 06/28/99 debentures. The sale of the debentures, after underwriter's commissions and other issuance costs, resulted in net proceeds of approximately $12,500,000. At December 31, 2002, Intervest Mortgage Corporation had $74,000,000 principal amount of debentures payable outstanding and the Holding Company had $10,430,000 principal amount of debentures payable outstanding, of which $6,930,000 were convertible into the Holding Company's Class A common stock at a current conversion price of $10.01 per share. At December 31, 2002 and 2001, the Holding Company, through its wholly owned subsidiary Intervest Statutory Trust I, has Trust Preferred Securities (Junior Debentures Payable) outstanding totaling $15,000,000 that qualify as regulatory capital. On December 18, 2001, Intervest Statutory Trust I, sold 9.875% Trust Preferred Securities due December 18, 2031 in the aggregate principal amount of $15,000,000, hereafter referred to as the "Capital Securities". The net proceeds from the sale, in addition to the initial capital contribution of $464,000 from the Holding Company to the Trust, were reinvested into the Holding Company in exchange for $15,464,000 of the Holding Company's 9.875% Junior Subordinated Debentures (the "Junior Subordinated Debentures") due December 18, 2031. The Holding Company then invested the $15,000,000 as a capital contribution in the Bank. The sole asset of the Trust, the obligor on the Capital Securities, is the Junior Subordinated Debentures. At December 31, 2002, accrued interest payable on all debentures amounted to $13,872,000, compared to $11,480,000 at year-end 2001. Nearly all of the accrued interest payable at December 31, 2002 is due and payable at the maturity of various debentures. For a further discussion of all the debentures, including conversion prices and redemption premiums, see notes 7 and 9 to the consolidated financial statements. Note Payable - ------------ In connection with the purchase of property by the Bank that is across from its Court Street branch office in Florida as described previously, the Bank issued a note payable to the seller for $275,000. The note matures in February of 2017 and calls for monthly payments of principal and interest at 7% per annum. 30 All Other Liabilities - --------------------- The following table shows the composition of all other liabilities: At December 31, --------------- ($ in thousands) 2002 2001 ------------------------------------------------------------------------ Mortgage escrow funds payable $5,894 $4,253 Official checks outstanding 4,373 3,219 Accrued interest payable on deposits 895 817 Income taxes payable 526 772 All other 1,639 819 ------------------------------------------------------------------------ $13,327 $9,880 ------------------------------------------------------------------------ Mortgage escrow funds payable represent advancepayments made by borrowers for taxes and insurance that are remitted by the Company to third parties. The increase reflects the timing of payments to taxing authorities as well as the growth in the loan portfolio. The level of official checks outstanding varies and fluctuates based on banking activity. The level of income taxes payable fluctuates based on the Company's earnings, effective tax rate and timing of tax payments. All other is comprised mainly of accrued expenses and fees received on loan commitments that have not yet been funded. Stockholders' Equity - -------------------- Stockholders' equity increased to $53,126,000 at December 31, 2002, from $40,395,000 at December 31, 2001. The increase was due to the following: net earnings of $6,906,000; the issuance of 803,458 shares of Class A common stock upon the exercise of common stock warrants for total proceeds, including related tax benefits, of $5,801,000; and the recording of $109,000 of net compensation expense related to stock warrants held by employees and directors; partially offset by a $111,000 decrease in unrealized gains, net of tax, on securities available for sale. For additional discussion of employee stock warrants, see the section "Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001." 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: retail deposits obtained through the Bank's branch offices and through the mail; amortization, satisfactions and repayments of loans; the maturities and calls of securities; sales of debentures; borrowings in the federal funds market and cash provided by operating activities. For additional information concerning the Company's cash flows, see the consolidated statements of cash flows included in this report. At December 31, 2002, the Company's total commitment to lend aggregated $70,044,000. The Company believes that it can fund such commitments from the aforementioned sources of funds. The Bank has agreements with correspondent banks whereby it may borrow up to $8,000,000 on an unsecured basis. There were no outstanding borrowings under these agreements at December 31, 2002 or 2001. Intervest Mortgage Corporation filed a registration statement in late 2002 relating to the issuance of additional subordinated debentures in the aggregate amount of up to $7,500,000. These debentures are expected to be issued in the first quarter of 2003. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The FDIC Improvement Act of 1991, among other things, established five capital categories ranging from well capitalized to critically undercapitalized. Such classifications are used by the FDIC and other bank regulatory agencies to determine various matters, including prompt corrective action and each institution's FDIC deposit insurance premium assessments. The capital categories involve quantitative measures of a bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The Bank is required to maintain, for regulatory compliance and reporting purposes, regulatory defined minimum Tier 1 leverage and Tier 1 and total risk-based capital ratio levels of at least 4%, 4% and 8%, respectively. At 31 December 31, 2002 and 2001, management believes that the Bank met its capital adequacy requirements. The Bank is a well-capitalized institution as defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management believes that there are no current conditions or events outstanding which would change the Bank's designation as a well-capitalized institution. Information regarding the Bank's regulatory capital and related ratios is summarized below:
At December 31, --------------- ($ in thousands) 2002 2001 ----------------------------------------------------------------------------------------------------- Tier 1 Capital: Stockholder's equity $ 51,936 $ 46,749 Disallowed portion of deferred tax asset (1,623) (946) Unrealized gain on debt securities, net of tax - (111) ----------------------------------------------------------------------------------------------------- Total Tier 1 capital 50,313 45,692 ----------------------------------------------------------------------------------------------------- Tier 2 Capital: Allowable portion of allowance for loan loss reserves 4,464 3,314 ----------------------------------------------------------------------------------------------------- Total risk-based capital $ 54,777 $ 49,006 ----------------------------------------------------------------------------------------------------- Net risk-weighted assets $450,599 $326,030 Average assets for regulatory purposes $569,204 $402,124 Tier 1 capital to average assets 8.84% 11.36% Tier 1 capital to risk-weighted assets 11.17% 14.01% Total capital to risk-weighted assets 12.16% 15.03% -----------------------------------------------------------------------------------------------------
Asset and Liability Management Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The primary objective of the Company's asset/liability management strategy is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. This strategy is overseen in part through the direction of the Asset and Liability Committee ("ALCO") of the Board of Directors of the Bank, which establishes policies and monitors results to control interest rate sensitivity. 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. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If the repricing of the Company's assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal. A simple interest rate gap analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates for the following reasons. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in market rates. In addition, certain assets, such as adjustable-rate mortgage loans, may have features generally referred to as "interest rate caps or collars," which limit changes in interest rates on a short-term 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 32 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 was 15.7% at December 31, 2002, compared to 6.20% at December 31, 2001. The increase was primarily due to an increase in variable rate loans funded by an increase in certificate of deposits with a term of over one year. For purposes of computing the gap, 100% of deposits with no stated maturities are treated as readily accessible accounts. However, if such deposits were treated differently, then the gap would change. The behavior of core depositors may not necessarily result in the immediate withdrawal of funds in the event deposit rates offered by the Bank did not change as quickly and uniformly as changes in general market rates. For example, if only 25% of deposits with no stated maturity were assumed to be readily accessible, the one-year gap would have been a positive 34.8% at year-end 2002, compared to a positive 23.1% at year-end 2001. The Company has a "floor," or minimum rate, on many of its floating-rate loans that is determined in relation to prevailing market rates on the date of origination. This floor only adjusts upwards in the event of increases in the loan's interest rate. This feature reduces the effect on interest income in a falling rate environment. 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 following table summarizes the Company's interest-earning assets and interest-bearing liabilities as of December 31, 2002, that are scheduled to mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4 --- ---- -------- ------ ($ in thousands) Months Months Years Years Total ------------------------------------------------------------------------------------------------------------ Loans (1) $139,843 $211,299 $122,427 $ 21,733 $495,302 Securities held to maturity (2) 16,237 66,128 63,329 - 145,694 Short-term investments 20,498 - - - 20,498 Federal Reserve Bank stock - - - 1,108 1,108 Interest-earning time deposits - 2,000 - - 2,000 ------------------------------------------------------------------------------------------------------------ Total rate-sensitive assets $176,578 $279,427 $185,756 $ 22,841 $664,602 ------------------------------------------------------------------------------------------------------------ Deposit accounts (3): Interest checking deposits $10,584 $ - $ - $ - $ 10,584 Savings deposits 30,174 - - - 30,174 Money market deposits 134,293 - - - 134,293 Certificates of deposit 35,163 87,727 106,906 95,187 324,983 ---------------------------------------------------------------- Total deposits 210,214 87,727 106,906 95,187 500,034 Debentures payable 42,900 - 16,100 25,430 84,430 Debentures payable- capital securities - - - 15,000 15,000 Accrued interest on all debentures 7,426 57 3,020 3,369 13,872 Note payable - - - 266 266 ------------------------------------------------------------------------------------------------------------ Total rate-sensitive liabilities $260,540 $ 87,784 $126,026 $ 139,252 $613,602 ------------------------------------------------------------------------------------------------------------ GAP (repricing differences) $(83,962) $191,643 $ 59,730 $(116,411) $51,000 ------------------------------------------------------------------------------------------------------------ Cumulative GAP $(83,962) $107,681 $167,411 $ 51,000 $51,000 ------------------------------------------------------------------------------------------------------------ Cumulative GAP to total assets -12.2% 15.7% 24.4% 7.4% 7.4% ------------------------------------------------------------------------------------------------------------ Significant assumptions used in preparing the table above: (1) Adjustable-rate loans are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans are scheduled, including repayments, according to their contractual maturities; (2) securities are scheduled according to the earlier of their contractual maturity or the date in which the interest rate is scheduled to increase. The effects of possible prepayments that may result from the issuer's right to call a security before its contractual maturity date are not considered. (3) interest checking, savings and money market deposits are regarded as ready accessible withdrawable accounts; and certificates of deposit are scheduled through their maturity dates.
33 Recent Accounting Pronouncements See note 1 to the consolidated financial statements for a discussion of this topic. Impact of Inflation and Changing Prices The financial statements and related financial data concerning the Company presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Virtually all of the assets and liabilities of the Company are monetary in nature. As a result, changes in interest rates have a more significant impact on the performance of the Company than do the effects of changes in the general rate of inflation and in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities, and the issuance of its debentures. The Company has not engaged in and accordingly has no risk related to trading accounts, commodities or foreign exchange. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments as of December 31, 2002 and 2001, which reflect changes in market prices and rates, can be found in note 20 to the consolidated financial statements. Management actively monitors and manages the Company's interest rate risk exposure. The primary objective in managing interest rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. For a further discussion, see the section "Asset and Liability Management." Item 8. Financial Statements and Supplementary Data Financial Statements The following consolidated financial statements of the Company are included herein: - - Independent Auditors' Report - Hacker, Johnson & Smith, P.A., P.C. (page 36) - - Independent Auditors' Report - Eisner LLP (page 37) - - Consolidated Balance Sheets at December 31, 2002 and 2001 (page 38) - - Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001 and 2000 (page 39) - - Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000 (page 40) - - Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 (page 41) - - Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 (page 42) - - Notes to the Consolidated Financial Statements (pages 43 to 65) Supplementary Data Securities Available for Sale - ----------------------------- The following table sets forth, by maturity distribution, information pertaining to securities available for sale:
After One Year to After Five Years to ----------------- ------------------- One Year or Less Five Years Ten Years Total ---------------- ---------- --------- ----- Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg. ($ in thousands) Value Yield Value Yield Value Yield Value Yield - ------------------------------------------------------------------------------------------------------------------------- At December 31, 2002: U.S. government agencies $ - -% $ - -% $ - -% $ - -% At December 31, 2001: U.S. government agencies $2,571 5.78% $ 3,621 5.46% $ - -% $ 6,192 5.59% At December 31, 2000: U.S. government agencies $ 998 5.42% $63,809 5.70% $9,982 6.56% $74,789 5.81% - -------------------------------------------------------------------------------------------------------------------------
34 Supplementary Data, Continued Securities Held to Maturity - --------------------------- The following table sets forth, by maturity distribution, information pertaining to securities held to maturity:
After One Year to After Five Years to ----------------- ------------------- One Year or Less Five Years Ten Years Total ------------------ ---------- --------- ----- Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg. ($ in thousands) Value Yield Value Yield Value Yield Value Yield - ----------------------------------------------------------------------------------------------------------------------------------- At December 31, 2002: - --------------------- U.S. government agencies $ 75,566 2.52% $ 70,128 2.25% $ - -% $ 145,694 2.39% At December 31, 2001: - --------------------- U.S. government agencies $ 79,411 2.85% $ 19,746 3.02% $ - -% $ 99,157 2.89% At December 31, 2000: - --------------------- U.S. government agencies $ 20,970 6.52% $ - -% $ - -% $ 20,970 6.52% - -----------------------------------------------------------------------------------------------------------------------------------
Loans and Allowance for Loan Loss Reserves - ------------------------------------------ The following table sets forth information with respect to loans receivable at December 31:
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Carrying Carrying Carrying Carrying Carrying ($ in thousands) value value value value value - ----------------------------------------------------------------------------------------------------------------------------------- Commercial real estate and multifamily loans $ 489,611 $ 365,736 $ 260,753 $ 207,521 $ 160,610 Land development and other land loans 1,890 2,485 2,531 2,501 - Residential 1-4 family loans 1,953 2,404 3,034 2,311 2,627 Commercial business loans 1,608 1,363 1,781 2,107 2,875 Consumer loans 240 286 206 242 184 --------------------------------------------------------------------- Loans receivable 495,302 372,274 268,305 214,682 166,296 Deferred loan fees (5,390) (3,748) (1,979) (1,745) (1,310) --------------------------------------------------------------------- Loans receivable, net of deferred fees 489,912 368,526 266,326 212,937 164,986 Allowance for loan loss reserves (4,611) (3,380) (2,768) (2,493) (1,662) - ----------------------------------------------------------------------------------------------------------------------------------- Loans receivable, net $ 485,301 $ 365,146 $ 263,558 $ 210,444 $ 163,324 - ----------------------------------------------------------------------------------------------------------------------------------- Loans included above that were on a nonaccrual status at year end $ - $ 1,243 $ - $ - $ - - -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth information with respect to the allowance for loan loss reserves at December 31:
($ in thousands) 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Allowance at beginning of year $ 3,380 $ 2,768 $ 2,493 $ 1,662 $ 1,173 Provision charged to operations 1,274 612 275 830 479 Chargeoffs (150) - - - - Recoveries 107 - - 1 10 - ----------------------------------------------------------------------------------------------------------------------------------- Allowance at end of year $ 4,611 $ 3,380 $ 2,768 $ 2,493 $ 1,662 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans, net of deferred fees $ 489,912 $ 368,526 $ 266,326 $ 212,937 $ 164,986 Average loans outstanding during the year $ 439,241 $ 315,148 $ 250,941 $ 175,980 $ 170,675 Ratio of allowance to net loans receivable 0.94% 0.92% 1.04% 1.17% 1.01% - -----------------------------------------------------------------------------------------------------------------------------------
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. 35 Independent Auditors' Report Board of Directors and Stockholders Intervest Bancshares Corporation New York, New York: We have audited the accompanying consolidated balance sheets of Intervest Bancshares Corporation and Subsidiaries (the "Company") as of December 31, 2002 and 2001 and the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Intervest Mortgage Corporation (formerly known as Intervest Corporation of New York), whose total assets as of December 31, 2002 and 2001, constituted 13.6% and 15.6% of the related consolidated totals, respectively, and whose net interest income, noninterest income and net earnings for the years ended December 31, 2002, 2001 and 2000, constituted 12.4%, 21.9% and 22.7%, respectively in 2002, 10.4%, 42.5% and 15.3%, respectively in 2001 and 10.3%, 48.6% and 5.0%, respectively in 2000, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion insofar as it relates to the amounts included in the consolidated totals, are based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ Hacker, Johnson & Smith, P.A., P.C. - --------------------------------------- Hacker, Johnson & Smith, P.A., P.C. Tampa, Florida January 24, 2003 36 Independent Auditors' Report Board of Directors and Stockholder Intervest Mortgage Corporation New York, New York: We have audited the consolidated balance sheets of Intervest Mortgage Corporation (formerly known as Intervest Corporation of New York) and Subsidiaries (the "Company") at December 31, 2002 and 2001 and the related consolidated statements of operations, changes in stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 2002 (all of which are not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above fairly present, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ Eisner LLP - -------------- Eisner LLP New York, New York January 23, 2003 37
Intervest Bancshares Corporation and Subsidiaries Consolidated Balance Sheets At December 31, ------------------------- ($ in thousands, except par value) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 10,351 $ 4,714 Federal funds sold 9,114 6,345 Commercial paper and other short-term investments 11,384 13,350 - ----------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 30,849 24,409 Time deposits with banks 2,000 250 Securities available for sale at estimated fair value - 6,192 Securities held to maturity, net 145,694 99,157 Federal Reserve Bank stock, at cost 1,108 654 Loans receivable (net of allowance for loan losses of $4,611 in 2002 and $3,380 in 2001) 485,301 365,146 Accrued interest receivable 4,263 3,202 Loan fees receivable 3,706 2,679 Premises and equipment, net 6,098 6,042 Foreclosed real estate 1,081 - Deferred income tax asset 1,997 1,236 Deferred debenture offering costs, net 3,498 3,396 Other assets 384 259 =================================================================================================================================== Total assets $685,979 $512,622 =================================================================================================================================== LIABILITIES Deposits: Noninterest-bearing demand deposit accounts $ 5,924 $ 5,550 Interest-bearing deposit accounts: Checking (NOW) accounts 10,584 10,204 Savings accounts 30,174 24,624 Money market accounts 134,293 80,594 Certificate of deposit accounts 324,983 241,465 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposit accounts 505,958 362,437 Subordinated debentures payable 84,430 73,430 Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000 Note payable 266 - Accrued interest payable on all debentures 13,872 11,480 Accrued interest payable on deposits 895 817 Mortgage escrow funds payable 5,894 4,253 Official checks outstanding 4,373 3,219 Other liabilities 2,165 1,591 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 632,853 472,227 - ----------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (notes 5, 17 and 19) STOCKHOLDERS' EQUITY Preferred stock (300,000 shares authorized, none issued) - - Class A common stock ($1.00 par value, 9,500,000 shares authorized, 4,348,087 and 3,544,629 shares issued and outstanding, respectively) 4,348 3,545 Class B common stock ($1.00 par value, 700,000 shares authorized, 355,000 shares issued and outstanding) 355 355 Additional paid-in-capital, common 24,134 19,001 Retained earnings 24,289 17,383 Accumulated other comprehensive income - Net unrealized gain on securities available for sale, net of tax - 111 - ----------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 53,126 40,395 =================================================================================================================================== Total liabilities and stockholders' equity $685,979 $512,622 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 38
Intervest Bancshares Corporation and Subsidiaries Consolidated Statements of Earnings Year Ended December 31, --------------------------------------- ($ in thousands, except per share data) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME Loans receivable $ 39,273 $ 30,187 $ 24,923 Securities 3,964 3,423 6,056 Other interest-earning assets 242 1,852 929 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 43,479 35,462 31,908 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 17,369 17,079 14,853 Subordinated debentures 7,440 7,577 8,322 Junior debentures - capital securities 1,497 58 - Note payable 17 - - Federal funds purchased 2 - 150 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 26,325 24,714 23,325 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest and dividend income 17,154 10,748 8,583 Provision for loan loss reserves 1,274 612 275 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest and dividend income after provision for loan loss reserves 15,880 10,136 8,308 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Customer service fees 171 159 139 Income from mortgage lending activities 485 341 291 Income from the early repayment of mortgage loans 1,435 1,149 518 Gain from the sales of securities available for sale 120 - - All other 7 6 35 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 2,218 1,655 983 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and employee benefits 3,016 2,451 2,228 Occupancy and equipment, net 1,318 1,177 1,090 Data processing 564 329 117 Advertising and promotion 69 25 35 Professional fees and services 350 341 410 Stationery, printing and supplies 141 137 140 FDIC and general insurance 179 177 117 Postage and delivery 93 91 92 All other 749 575 339 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 6,479 5,303 4,568 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings before taxes and extraordinary item 11,619 6,488 4,723 Provision for income taxes 4,713 2,710 1,909 -------------------------------- Earnings before extraordinary item 6,906 3,778 2,814 Extraordinary item, net of tax (note 7) - - (206) =================================================================================================================================== Net earnings $ 6,906 $ 3,778 $ 2,608 =================================================================================================================================== Basic earnings per share: Earnings before extraordinary item $ 1.71 $ 0.97 $ 0.72 Extraordinary item, net of tax - - (0.05) =================================================================================================================================== Net earnings per share $ 1.71 $ 0.97 $ 0.67 =================================================================================================================================== Diluted earnings per share: Earnings before extraordinary item $ 1.37 $ 0.97 $ 0.72 Extraordinary item, net of tax - - (0.05) =================================================================================================================================== Net earnings per share $ 1.37 $ 0.97 $ 0.67 ===================================================================================================================================
See accompanying notes to consolidated financial statements 39 Intervest Bancshares Corporation and Subsidiaries Consolidated Statements of Comprehensive Income
Year Ended December 31, --------------------------------------- ($ in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 6,906 $ 3,778 $ 2,608 - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized holding (losses) gains on available-for-sale securities (72) 596 (405) Reclassification adjustment for gains realized in earnings (120) - - - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized (losses) gains on available-for-sale securities (192) 596 (405) - ----------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes related to unrealized (losses) gains on available-for-sale securities 81 (233) 153 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive (loss) income , net of tax (111) 363 (252) =================================================================================================================================== Total comprehensive income, net of tax $ 6,795 $ 4,141 $ 2,356 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 40
Intervest Bancshares Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Year Ended December 31, ---------------------------------------- ($ in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- CLASS A COMMON STOCK Balance at beginning of year $ 3,545 $ 3,545 $ 3,532 Issuance of 803,458 and 12,750 shares in 2002 and 2000, respectively, upon the exercise of warrants 803 - 13 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 4,348 3,545 3,545 - ----------------------------------------------------------------------------------------------------------------------------------- CLASS B COMMON STOCK Balance at beginning of year 355 355 305 Issuance of 50,000 shares of restricted stock compensation - - 50 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 355 355 355 - ----------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN-CAPITAL, COMMON Balance at beginning of year 19,001 18,975 18,770 Compensation related to vesting of certain Class B stock warrants 26 26 26 Compensation related to certain Class A stock warrants modified 109 - - Issuance of 50,000 shares of restricted Class B stock compensation - - 109 Issuance of 803,458 and 12,750 shares in 2002 and 2000, respectively, upon the exercise of stock warrants, inclusive of tax benefits 4,998 - 70 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 24,134 19,001 18,975 - ----------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of year 17,383 13,605 10,997 Net earnings for the year 6,906 3,778 2,608 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 24,289 17,383 13,605 - ----------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year 111 (252) - Net change in accumulated other comprehensive income (loss), net (111) 363 (252) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at end of year - 111 (252) - ----------------------------------------------------------------------------------------------------------------------------------- =================================================================================================================================== Total stockholders' equity at end of year $ 53,126 $ 40,395 $ 36,228 ===================================================================================================================================
See accompanying notes to consolidated financial statements 41
Intervest Bancshares Corporation and Subsidiaries Consolidated Statements of Cash Flows Year Ended December 31, --------------------------------------- ($ in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 6,906 $ 3,778 $ 2,608 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 606 505 433 Provision for loan loss reserves 1,274 612 275 Deferred income tax benefit (681) (364) (16) Amortization of deferred debenture offering costs 919 753 1,136 Compensation expense related to common stock and warrants 135 26 185 Amortization of premiums, fees and discounts, net (588) (1,823) (1,814) Gain from sales of securities available for sale (120) - - Net increase in accrued interest payable on debentures 2,392 2,747 641 Net increase in official checks outstanding 1,154 938 460 Net change in all other assets and liabilities, net 2,802 2,118 1,912 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 14,799 9,290 5,820 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net increase in interest-earning time deposits with banks (1,750) (250) - Maturities and calls of securities available for sale 2,500 69,194 - Sales of securities available for sale 3,620 - - Maturities and calls of securities held to maturity 104,785 35,996 26,393 Purchases of securities held to maturity (153,335) (114,013) (39,160) Net increase in loans receivable (124,271) (103,969) (53,623) Purchases of Federal Reserve Bank stock, net (454) (49) (97) Purchases of premises and equipment, net (387) (816) (301) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (169,292) (113,907) (66,788) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, savings, NOW and money market deposits 60,003 38,387 4,299 Net increase in certificates of deposit 83,518 23,809 94,862 Net increase in mortgage escrow funds payable 1,641 856 22 Principal repayments of federal funds purchased, net - - (6,955) Principal repayments of debentures (2,500) (1,400) (24,000) Principal repayments of note payable (9) - - Proceeds from issuance of debentures, net of issuance costs 12,479 24,436 3,500 Proceeds from issuance of common stock, net of issuance costs 5,801 - 83 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 160,933 86,088 71,811 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6,440 (18,529) 10,843 Cash and cash equivalents at beginning of year 24,409 42,938 32,095 =================================================================================================================================== Cash and cash equivalents at end of year $ 30,849 $ 24,409 $ 42,938 =================================================================================================================================== SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 22,936 $ 21,253 $ 21,532 Income taxes 5,301 2,704 1,004 Noncash activities: Transfer of loans to foreclosed real estate, net of chargeoffs 1,081 - - Purchase of premises with note payable 275 - - Transfers of securities from held-to-maturity to available-for-sale - - 74,789 Accumulated other comprehensive income (loss) - change in unrealized (loss) gain on securities available for sale, net of tax (111) 363 (252) - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 42 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Description of Business and Summary of Significant Accounting Policies Description of Business Intervest Bancshares Corporation (the "Holding Company") was incorporated in 1993 and is headquartered in Rockefeller Center in New York City. Its wholly owned subsidiaries are Intervest National Bank, a nationally chartered bank, Intervest Mortgage Corporation (whose name was changed from Intervest Corporation of New York in 2002), a mortgage investment company, and Intervest Statutory Trust I, a special purpose finance subsidiary. The Holding Company's primary business is the ownership of its subsidiaries. In July 2001, Intervest Bank (a Florida state chartered commercial bank and the Holding Company's other wholly owned banking subsidiary prior to that date) was merged into Intervest National Bank. The merger was treated as a reorganization and accounted for at historical cost similar to the pooling-of-interests method of accounting. Under this method, the recorded assets, liabilities, shareholders' equity, income and expenses of both banks were combined and recorded at their historical cost amounts. Hereafter, Intervest National Bank is referred to as the "Bank" and all the entities are referred to collectively as the "Company" on a consolidated basis. The Bank has its headquarters and full-service banking office in Rockefeller Center 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 full-service commercial banking business, which consists of attracting deposits from the general public and investing those funds, together with other sources of funds, primarily through the origination of commercial and multifamily real estate loans, and through the purchase of security investments. Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation, are located in Rockefeller Center in New York City. Intervest Mortgage Corporation is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage, junior mortgage and wraparound mortgage loans. Intervest Mortgage Corporation was acquired by the Holding Company in March 2000. In the acquisition, all of the outstanding capital stock of Intervest Mortgage Corporation was acquired in exchange for 1,250,000 shares of the Holding Company's Class A common stock. Former shareholders of Intervest Mortgage Corporation are officers and directors of Intervest Mortgage Corporation and the Holding Company. The acquisition was also accounted for at historical cost similar to the pooling-of-interests method of accounting. Intervest Statutory Trust I was formed in December 2001 for the sole purpose of issuing $15,000,000 of Capital Securities as more fully described in note 9. Principles of Consolidation, Basis of Presentation and Use of Estimates The consolidated financial statements include the accounts of the Holding Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year's presentation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, as of the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan loss reserves and the valuation allowances for deferred tax assets and real estate acquired through foreclosures. 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. 43 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Description of Business and Summary of Significant Accounting Policies, Continued Securities Securities for which the Company has the ability and intent to hold until maturity are classified as securities held to maturity and are carried at cost, adjusted for accretion of discounts and amortization of premiums, which are recognized into interest income using the interest method over the period to maturity. Securities that are held for indefinite periods of time which management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates or other factors, are classified as available for sale and are carried at fair value. Unrealized gains and losses on securities available for sale, net of related income taxes, are reported as a separate component of comprehensive income. Realized gains and losses from sales of securities are determined using the specific identification method. The Company does not acquire securities for the purpose of engaging in trading activities. Loans Receivable Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or satisfaction are carried at their outstanding principal net of chargeoffs, the allowance for loan loss reserves, 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. 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. Allowance for Loan Loss Reserves The allowance for loan loss reserves is netted against loans receivable and is increased by provisions charged to operations and decreased by chargeoffs (net of recoveries). The adequacy of the allowance is evaluated monthly with consideration given to: the nature and volume of the loan portfolio; overall portfolio quality; loan concentrations; specific problem loans and commitments and estimates of fair value thereof; historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's perception of the current and anticipated economic conditions in the Company's lending areas. In addition, Statement of Financial Accounting Standards (SFAS) No. 114 specifies the manner in which the portion of the allowance for loan loss reserves is computed related to certain loans that are impaired. A loan is normally deemed impaired when, based upon current information and events, it is probable the Company will be unable to collect both principal and interest due according to the contractual terms of the loan agreement. Impaired loans normally consist of loans on nonaccrual status. Interest income on impaired loans is recognized on a cash basis. Impairment for commercial real estate and residential loans is measured based on: the present value of expected future cash flows, discounted at the loan's effective interest rate; or the observable market price of the loan; or the estimated fair value of the loan's collateral, if payment of the principal and interest is dependent upon the collateral. When the fair value of the property is less than the recorded investment in the loan, this deficiency is recognized as a valuation allowance within the overall allowance for loan loss reserves 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. 44 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Description of Business and Summary of Significant Accounting Policies, Continued Allowance for Loan Loss Reserves, Continued Lastly, the Company's regulators, as an integral part of their examination process, periodically review the allowance for loan loss reserves. 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 $3,793,000 at December 31, 2002 and $3,042,000 at December 31, 2001. 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 loss reserves. 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. Stock-Based Compensation The Company follows APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation, which is generally in the form of stock warrants. SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.148 "Accounting for Stock-Based Compensation Transition and Disclosure," collectively "SFAS No.123," requires pro forma disclosures of net earnings and earnings per share determined as if the Company accounted for its stock warrants under the fair value method. Advertising Costs Advertising costs are expensed as incurred. Income Taxes Under SFAS No. 109, "Accounting for 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. 45 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Description of Business and Summary of Significant Accounting Policies, Continued Earnings Per Share (EPS) Basic EPS is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by dividing adjusted net earnings by the weighted-average number of shares of common stock and dilutive potential common stock shares that may be outstanding in the future. Potential common stock shares consist of outstanding dilutive common stock warrants (which are computed using the "treasury stock method") and convertible debentures (computed using the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding stock warrants and convertible debentures were converted into common stock that then shared in the Company's earnings (as adjusted for interest expense that would no longer occur if the debentures were converted). Comprehensive Income The Company follows SFAS No. 130, "Reporting 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 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. Start-Up Costs The Company follows the AICPA's Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," which requires all start-up costs (except for those that are capitalizable under other accounting principles generally accepted in the United States of America) to be expensed as incurred for financial statement purposes. Recent Accounting Pronouncements Accounting for Business Combinations. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," SFAS 141 addresses the accounting and reporting for business combinations and requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting and prohibits the use of pooling-of-interests method of accounting. Pooling transactions initiated prior to that date were not affected. SFAS 141 also requires identifiable intangible assets acquired in a business combination to be recognized as an asset apart from goodwill if they meet certain criteria. The adoption of this statement had no effect on the Company's consolidated financial statements. Accounting for Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired individually or with a group of other assets not constituting a business combination. Under SFAS 142, all goodwill and identifiable intangible assets recognized as having an indefinite useful life, including those acquired before its effective date, are not amortized but, assessed for impairment at least annually. Intangible assets, having a finite life, are separately recognized and amortized over their estimated useful lives. Intangible assets with finite useful lives will continue to be reviewed for impairment in accordance with previous pronouncements. The Company does not have goodwill or other intangible assets and as a result, the adoption of this statement had no effect on its consolidated financial statements. 46 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Description of Business and Summary of Significant Accounting Policies, Continued Recent Accounting Pronouncements, Continued Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined therein). The adoption of this statement had no effect on the Company's consolidated financial statements. Accounting for the Extinguishment of Debt and Other Technical Amendments. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," among other items, addresses income statement classification of gains or losses from extinguishment. Previously, under Statement 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates Statement 4 and requires gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria in APB Opinion No. 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. This statement is effective for financial statements issued on or after May 15, 2002. The adoption of this statement had no effect on the Company's consolidated financial statements. Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The new statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined therein was recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement is not expected to have any effect on the Company's consolidated financial statements. Accounting for Acquisitions of Certain Financial Institutions. SFAS No. 147, "Acquisitions of Certain Financial Institutions - an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9," removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, the statement amends No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that statement 144 requires for other long-lived assets that are held and used. The provisions of this statement are effective as of October 1, 2002. The adoption of this statement had no effect on the Company's consolidated financial statements. 47 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 1. Description of Business and Summary of Significant Accounting Policies, Continued Recent Accounting Pronouncements, Continued Accounting for Guarantees. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," ("FIN 45"), which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have any effect on the Company's consolidated financial statements. 2. Securities The carrying value (estimated fair value) and amortized cost of securities available for sale as of December 31, 2001 is as follows: Gross Gross ----- ----- Amortized Unrealized Unrealized Carrying --------- ---------- ---------- -------- ($ in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. government agency securities $6,000 $192 $ - $6,192 - -------------------------------------------------------------------------------- There were sales of $3,500,000 of securities in 2002 and gross realized gains amounted to $120,000. There were no sales of securities in 2001 or 2000. At December 31, 2001, the available-for-sale portfolio consisted of fixed-rate debt obligations of the Federal Home Loan Bank (FHLB) and Federal National Mortgage Association (FNMA) with a weighted-average yield and remaining maturity of 5.59% and 1.4 years, respectively. There were no transfers of securities to the available-for-sale portfolio in 2002 or 2001. On December 31, 2000, $75,194,000 of securities held-to-maturity (with an estimated fair value of $74,789,000) were transferred to the available-for-sale portfolio. This transfer consisted of U.S. government agency securities with some having call features, which allow the issuer to call the security before its stated maturity without penalty. In 2001, nearly all of these securities were called by the issuers due to declining interest rates. The carrying value (amortized cost) and estimated fair value of securities held to maturity is as follows: Gross Gross Estimated ----- ----- --------- Amortized Unrealized Unrealized Fair --------- ---------- ---------- ---- ($ in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------- At December 31, 2002: U.S. government agency securities $145,694 $881 $15 $146,560 - -------------------------------------------------------------------------------- At December 31, 2001: U.S. government agency securities $99,157 $355 $108 $99,404 - -------------------------------------------------------------------------------- Securities held to maturity consist of debt obligations of the FHLB, FNMA, Federal Home Loan Mortgage Corp. (FHLMC) and Federal Farm Credit Bank (FFCB). At December 31, 2002 and 2001, the weighted-average yield and remaining maturity of the portfolio was 2.39% and 1.6 years, and 2.89% and 1.1 years, respectively. The securities are fixed rate or have predetermined scheduled rate increases, and some have call features that allow the issuer to call the security before its stated maturity without penalty. The amortized cost and estimated fair value of securities held to maturity at December 31, 2002, by remaining term to contractual maturity is as follows: Estimated --------- Amortized Fair --------- ---- ($ in thousands) Cost Value - ------------------------------------------------------------------------------ Due in one year or less $75,566 $76,078 Due after one year through five years 70,128 70,482 - ------------------------------------------------------------------------------ $145,694 $146,560 - ------------------------------------------------------------------------------ 48 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 3. Loans Receivable Loans receivable is as follows:
At December 31, 2002 At December 31, 2001 -------------------- -------------------- ($ in thousands) # of Loans Amount # of Loans Amount - --------------------------------------------------------------------------------------- Commercial real estate loans 162 $ 275,096 139 $ 183,167 Residential multifamily loans 168 214,515 153 182,569 Land development and other land loans 3 1,890 3 2,485 Residential 1-4 family loans 28 1,953 33 2,404 Commercial business loans 27 1,608 26 1,363 Consumer loans 16 240 15 286 - --------------------------------------------------------------------------------------- Loans receivable 404 495,302 369 372,274 - --------------------------------------------------------------------------------------- Deferred loan fees (5,390) (3,748) Allowance for loan loss reserves (4,611) (3,380) - --------------------------------------------------------------------------------------- Loans receivable, net $ 485,301 $ 365,146 - ---------------------------------------------------------------------------------------
At December 31, 2002, there were no nonaccrual or impaired loans. At December 31, 2001, one commercial real estate loan with a principal balance of $1,243,000 was on nonaccrual status and considered impaired under the criteria of SFAS No.114. There was no valuation allowance recorded for this impaired loan. Interest income that was not recorded from this loan under its contractual terms amounted to $29,000 in 2002 and $51,000 in 2001. The average balance of this impaired loan for 2002 and 2001 was approximately $310,000 and $104,000, respectively. There were no nonaccrual or impaired loans in 2000. At December 31, 2002 and 2001, there were no loans which were ninety days past due and still accruing interest. Credit risk, which represents the possibility of the Company not recovering amounts due from its borrowers, is significantly related to local economic conditions in the areas the properties are located, as well as the Company's underwriting standards. Economic conditions affect the market value of the underlying collateral as well as the levels of occupancy of income-producing properties (such as office buildings, shopping centers and rental and cooperative apartment buildings). The geographic distribution of the loan portfolio is as follows:
At December 31, 2002 At December 31, 2001 -------------------- -------------------- ($ in thousands) Amount % of Total Amount % of Total - ------------------------------------------------------------------------------------------- New York $278,280 56.2% $192,256 51.7% Florida 184,257 37.2 145,660 39.1 Connecticut and New Jersey 21,991 4.4 24,875 6.7 All other 10,774 2.2 9,483 2.5 - ------------------------------------------------------------------------------------------- $495,302 100.0% $372,274 100.0% - -------------------------------------------------------------------------------------------
4. Allowance for Loan Loss Reserves Activity in the allowance for loan loss reserves is as follows: For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Allowance at beginning of year $ 3,380 $ 2,768 $ 2,493 Provision charged to operations 1,274 612 275 Chargeoffs (1) (150) - - Recoveries (2) 107 - - - -------------------------------------------------------------------------------- Allowance at end of year $ 4,611 $ 3,380 $ 2,768 - -------------------------------------------------------------------------------- (1) Represents a chargeoff taken in connection with the transfer of a nonperforming loan to foreclosed real estate. (2) Represents proceeds received from the sale of collateral from a loan that was charged off prior to 1997. 49 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 5. Premises and Equipment, Lease Commitments and Rental Expense Premises and equipment is as follows: At December 31, --------------- ($ in thousands) 2002 2001 - -------------------------------------------------------------------------------- Land $ 1,516 $ 1,264 Buildings 4,810 4,575 Leasehold improvements 335 335 Furniture, fixtures and equipment 2,435 2,414 - -------------------------------------------------------------------------------- Total cost 9,096 8,588 - -------------------------------------------------------------------------------- Less accumulated deprecation and amortization (2,998) (2,546) - -------------------------------------------------------------------------------- Net book value $ 6,098 $ 6,042 - -------------------------------------------------------------------------------- The Bank leases its headquarters and branch office at Rockefeller Center in New York City, and its branch office at Belcher Road in Clearwater, Florida. Intervest Mortgage Corporation also leases its office at Rockefeller Center in New York City. All the leases contain operating escalation clauses related to taxes and operating costs based upon various criteria and are accounted for as operating leases expiring in May 2008, June 2007, and September 2004, respectively. All other offices are owned by the Bank. Total future minimum annual lease rental payments due under these noncancellable operating leases as of December 31, 2002 were as follows: $602,000 in 2003; $574,000 in 2004; $400,000 in 2005; $404,000 in 2006; $345,000 in 2007; and $261,000 thereafter for an aggregate amount of $2,586,000. Rent expense aggregated $618,000 in 2002, $554,000 in 2001 and $522,000 in 2000. The Bank subleases certain of its offices in Florida to other companies under leases that expire at various times through August 2007. Total future sublease rental income due under such leases as of December 31, 2002 were as follows: $447,000 in 2003; $432,000 in 2004; $388,000 in 2005; $314,000 in 2006; and $128,000 in 2007 for an aggregate amount of $1,709,000. Sublease rental income aggregated $421,000 in 2002, $388,000 in 2001 and $340,000 in 2000. 6. Deposits Scheduled maturities of certificates of deposit accounts are as follows: At December 31, 2002 At December 31, 2001 -------------------- -------------------- Wtd-Avg Wtd-Avg ($ in thousands) Amount Stated Rate Amount Stated Rate - ------------------------------------------------------------------------------ Within one year $122,890 3.51% $144,739 5.00% Over one to two years 57,895 4.18 45,512 4.95 Over two to three years 31,281 5.53 14,954 5.82 Over three to four years 17,730 5.32 16,903 6.84 Over four years 95,187 4.92 19,357 5.61 - ------------------------------------------------------------------------------ $324,983 4.33% $241,465 5.22% - ------------------------------------------------------------------------------ Certificate of deposit accounts of $100,000 or more totaled $72,872,000 and $53,745,000 at December 31, 2002 and 2001, respectively. At December 31, 2002, certificate of deposit accounts of $100,000 or more by remaining maturity were as follows: due within one year $26,663,000; over one to two years $11,299,000, over two to three years $6,964,000; over three to four years $3,859,000; and over four years $24,087,000. Interest expense on deposits is as follows: For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------- Interest checking accounts $ 221 $ 238 $ 232 Savings accounts 762 778 897 Money market accounts 3,082 2,640 2,832 Certificates of deposit accounts 13,304 13,423 10,892 - ------------------------------------------------------------------------------- $17,369 $17,079 $14,853 - ------------------------------------------------------------------------------- 50 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 7. Note Payable, Debentures Payable and Extraordinary Item In connection with the purchase of property by the Bank that is across from its Court Street branch office in Florida, the Bank issued a note payable to the seller for $275,000. The note matures in February of 2017 and calls for monthly payments of principal and interest at 7% per annum. The note cannot be prepaid except during the last year of its term. Debentures payable is as follows:
At December 31, --------------- ($ in thousands) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- INTERVEST MORTGAGE CORPORATION (1) : Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ 9,000 $9,000 Series 10/19/95 - interest at 2% above prime - due October 1, 2004 9,000 9,000 Series 05/10/96 - interest at 2% above prime - due April 1, 2005 10,000 10,000 Series 10/15/96 - interest at 2% above prime - due October 1, 2005 5,500 5,500 Series 04/30/97 - interest at 1% above prime - due October 1, 2005 8,000 8,000 Series 11/10/98 - interest at 8 1/2% fixed - due January 1, 2003 1,400 1,400 Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600 Series 06/28/99 - interest at 8% fixed - due July 1, 2002 - 2,500 Series 06/28/99 - interest at 8 1/2% fixed - due July 1, 2004 2,000 2,000 Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000 Series 09/18/00 - interest at 8% fixed - due January 1, 2004 1,250 1,250 Series 09/18/00 - interest at 8 1/2% fixed - due January 1, 2006 1,250 1,250 Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250 Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 1,750 1,750 Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750 Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750 Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 - Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 - Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 - Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 - Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 - Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 - ------------------- 74,000 63,000 INTERVEST BANCSHARES CORPORATION: Series 05/14/98 - interest at 8% fixed - due July 1, 2008 6,930 6,930 Series 12/15/00 - interest at 8% fixed - due April 1, 2004 1,000 1,000 Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 1,250 1,250 Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250 ------------------- 10,430 10,430 - ----------------------------------------------------------------------------------------------------------------------------------- $84,430 $73,430 - ----------------------------------------------------------------------------------------------------------------------------------- (1) Represents prime rate of JPMorganChase Bank, which was 4.25% on December 31, 2002 and 4.75% on December 31, 2001.
Intervest Mortgage Corporation filed a registration statement in late 2002 relating to the issuance of additional subordinated debentures in the aggregate amount of up to $7,500,000. These debentures are expected to be issued in the first quarter of 2003. In 2000, Intervest Mortgage Corporation's Series 6/29/92, 9/13/93, 1/28/94 and 10/28/94 debentures totaling $24,000,000 were redeemed prior to maturity for principal plus accrued interest aggregating $3,970,000. In connection with these early redemptions, $382,000 of unamortized deferred debenture offering costs was charged to expense and reported as an extraordinary charge, net of a tax benefit of $176,000, in the consolidated statement of earnings for the year ended December 31, 2000. 51 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 7. Note Payable, Debentures Payable and Extraordinary Item, Continued In 2002, Intervest Mortgage Corporation sold Series 1/17/02 and 8/05/02 debentures totaling $13,500,000 in principal amount. The sales, after underwriter's commissions and other issuance costs, resulted in net proceeds of $12,490,000. Intervest Mortgage Corporation's Series 06/28/99 debentures maturing on July 1, 2002 were redeemed on April 1, 2002 for principal of $2,500,000 and accrued interest of $586,000. Intervest Mortgage Corporation's floating-rate Series 5/12/95, 10/19/95, 5/10/96, 10/15/96 and 4/30/97 debentures have a maximum interest rate of 12%. Interest on an aggregate of $6,350,000 of these debentures at December 31, 2002 is accrued and compounded quarterly, and is due and payable at maturity. The payment of interest on the remaining debentures is made quarterly. Any debenture holder in the aforementioned Series whose interest accrues and is due at maturity may at any time elect to receive the accrued interest and subsequently receive regular payments of interest. Intervest Mortgage Corporation's Series 11/10/98, 6/28/99, 09/18/00, $770,000 of Series 08/01/01, $270,000 of Series 01/17/02 and $1,520,000 of Series 08/05/02 debentures accrue and compound interest quarterly, with such interest due and payable at maturity. The payment of interest on the remaining debentures is made quarterly. The holders of Series 11/10/98, 6/28/99, 9/18/00, 01/17/02 and 08/05/02 debentures can require Intervest Mortgage Corporation to repurchase the debentures for face amount plus accrued interest each year (beginning January 1, 2004 for Series 09/18/00, October 1, 2005 for Series 01/17/02 and January 1, 2006 for Series 08/05/02) provided, however, in no calendar year will Intervest Mortgage Corporation be required to purchase more than $100,000 in principal amount of each maturity, in each series of debentures, on a non-cumulative basis. All of Intervest Mortgage Corporation's debentures may be redeemed, in whole or in part, at any time at the option of Intervest Mortgage Corporation, for face value, except for Series 01/17/02 and 08/05/02 debentures, which would be at a premium of 1% if the redemption is prior to April 1, 2003 for Series 01/17/02 and prior to October 1, 2003 for Series 08/05/02. All the debentures are unsecured and subordinate to all present and future senior indebtedness, as defined in the indenture related to each debenture. The Holding Company's Series 5/14/98 subordinated debentures are due July 1, 2008 and are convertible at the option of the holders at any time prior to April 1, 2008, unless previously redeemed by the Holding Company, into shares of Class A common stock of the Holding Company at the following conversion prices per share effective January 1, 2002: $10.01 in 2003; $12.00 in 2004; $14.00 in 2005; $16.00 in 2006; $18.00 in 2007 and $20.00 from January 1, 2008 through April 1, 2008. The Holding Company has the right to establish conversion prices that are less than those set forth above for such periods as it may determine. In January 1999 and October 2001, the conversion prices were adjusted downward from those set at the original offering date to the current prices indicated above. Interest accrues and compounds each calendar quarter at 8%. All accrued interest is due and payable at maturity whether by acceleration, redemption or otherwise. Any convertible debenture holder may, on or before July 1 of each year commencing July 1, 2003, elect to be paid all accrued interest and to thereafter receive payments of interest quarterly. The Holding Company's debentures may be redeemed, in whole or in part, at any time at the option of the Holding Company for face value. Scheduled contractual maturities of all debentures as of December 31, 2002 is as follows: ($ in thousands) Principal Accrued Interest - ------------------------------------------------------------------------------- For the year ended December 31, 2003 $1,400 $1,613 For the year ended December 31, 2004 22,250 5,094 For the year ended December 31, 2005 29,100 2,769 For the year ended December 31, 2006 6,250 969 For the year ended December 31, 2007 5,000 34 Thereafter 20,430 3,336 - ------------------------------------------------------------------------------- $84,430 $13,815 - ------------------------------------------------------------------------------- 52 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 8. Federal Funds Purchased and Lines of Credit From time to time, the Bank purchases overnight federal funds to manage its liquidity needs. At December 31, 2002 and 2001, there were no such funds outstanding. During 2002, 2001 and 2000, federal fund purchased were not significant. The Bank has agreements with correspondent banks whereby it may borrow up to $8,000,000 on an unsecured basis and it can borrow from the Federal Reserve Bank of New York on a secured basis. There were no outstanding borrowings under these agreements at December 31, 2002 or 2001. 9. Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures On December 18, 2001, the Holding Company's wholly-owned subsidiary, Intervest Statutory Trust I, sold 9.875% Trust Preferred Securities due December 18, 2031 in the aggregate principal amount of $15,000,000, hereafter referred to as the "Capital Securities". The net proceeds from the sale, in addition to the initial capital contribution of $464,000 from the Holding Company to the Trust, were reinvested into the Holding Company in exchange for $15,464,000 of the Holding Company's 9.875% Junior Subordinated Debentures (the "Junior Subordinated Debentures") due December 18, 2031. The Holding Company then invested $15,000,000 as a capital contribution in the Bank. The sole asset of the Trust, the obligor on the Capital Securities, is the Junior Subordinated Debentures. The Holding Company has guaranteed the Trust's payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to, the Capital Securities. Cash distributions on both the Capital Securities and the Junior Subordinated Debentures are payable semi-annually in arrears on December 18 and June 18 of each year. Issuance costs of $469,000 associated with the Capital Securities have been capitalized by the Holding Company and are being amortized over the life of the securities. The Capital Securities are subject to mandatory redemption (i) in whole, but not in part, upon repayment of the Junior Subordinated Debentures at stated maturity or, at the option of the Holding Company, their earlier redemption in whole upon the occurrence of certain changes in the tax treatment or capital treatment of the Capital Securities, or a change in the law such that the Trust would be considered an investment company and (ii) in whole or in part at any time on or after December 18, 2006 contemporaneously with the optional redemption by the Holding Company of the Junior Subordinated Debentures in whole or inpart. The Junior Subordinated Debentures are redeemable prior to maturity at the option of the Holding Company (i) on or after December 18, 2006, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the Capital Securities, or a change in law such that the Trust would be considered an investment company. Any redemption would need prior regulatory approvals. 10. Stockholders' Equity The Holding Company's Board of Directors is authorized to issue up to 300,000 shares of preferred stock of the Holding Company without stockholder approval. The powers, preferences and rights, and the qualifications, limitations, and restrictions thereof on any series of preferred stock issued is determined by the Board of Directors. At December 31, 2002 and 2001, there was no preferred stock issued and outstanding. Class A and B common stock have equal voting rights as to all matters, except that, so long as at least 50,000 shares of Class B common stock remain issued and outstanding, the holders of the outstanding shares of Class B common stock are entitled to vote for the election of two-thirds of the Board of Directors (rounded up to the nearest whole number), and the holders of the outstanding shares of Class A common stock are entitled to vote for the remaining Directors of the Holding Company. The shares of Class B common stock are convertible, on a share-for-share basis, into Class A common stock at any time. 53 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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, 2002 and 2001, balances maintained as reserves were approximately $470,000 and $400,000, respectively. As a member of the Federal Reserve Banking system, the Bank must maintain an investment in the capital stock of the Federal Reserve Bank. At December 31, 2002 and 2001, such investment, which earns a dividend, aggregated $1,108,000 and $654,000, respectively. At December 31, 2002 and 2001, U.S. government agency securities with a carrying value of $7,081,000 and $7,127,000, respectively, were pledged against various deposit accounts and lines of credit. The payment of dividends by the Holding Company to its shareholders and the payment of dividends by the Holding Company's subsidiaries to the Holding Company itself is subject to various regulatory restrictions. These restrictions take into consideration various factors such as whether there are sufficient net earnings, as defined, liquidity, asset quality, capital adequacy and economic conditions. The holders of Class A common stock and Class B common stock share ratably in any dividend. The Holding Company has not paid any dividends on its capital stock and currently is not contemplating the payment of a dividend. 12. Profit Sharing Plans The Company sponsors tax-qualified, profit sharing plans in accordance with the provisions of Section 401(k) of the Internal Revenue Code, whereby eligible employees meeting certain length-of-service requirements may make tax-deferred contributions up to certain limits. The Company makes discretionary matching contributions up to 3% of employee compensation, which vest to the employees over a period of time. Total cash contributions to the plans included in the consolidated statements of earnings aggregated $47,000, $37,000 and $26,000 for 2002, 2001 and 2000, respectively. 13. Related Party Transactions The Bank has deposit accounts from affiliated companies, directors, executive officers and members of their immediate families and related business interests of approximately $19,000,000 at December 31, 2002 and $8,400,000 at December 31, 2001. There are no loans to any directors or executive officers of the Holding Company or its subsidiaries. The Company paid commissions and fees in connection with the placement of debentures of approximately $58,000 in 2002, $15,000 in 2001 and $34,000 in 2000 to Intervest Securities Corporation, an affiliate of the Company. See note 22 for a further discussion regarding Intervest Securities Corporation. The Company paid fees of approximately $157,000 in 2002, $219,000 in 2001 and $100,000 in 2000 for legal services rendered by a law firm, a principal of which is a director of the Company. The Company paid commissions and fees in connection with the placement of debentures of approximately $515,000 in 2002, $301,000 in 2001 and $246,000 in 2000 to an investment firm, a principal of which is a director of the Company. 14. Common Stock Warrants The Holding Company has common stock warrants outstanding that entitle the registered holders thereof to purchase one share of common stock for each warrant. All warrants are exercisable when issued, except for certain Class B common stock warrants. The warrants have been issued in connection with public stock offerings, to directors and employees of the Company and to outside third parties for performance of services. In 2001, the Holding Company modified the terms of its Class A and Class B warrants as follows: the expiration date of all warrants exercisable at $6.67 per share were extended one year beyond their original expiration dates effective October 4, 2001, and the exercise price of certain Class A warrants (exercisable at $12.50 and $16.00 per share as of December 31, 2001) were reduced to $10.01 per share commencing January 1, 2002 until their original expiration date of December 31, 2002. In 2002, the $10.01 per share warrants were further modified by extending their expiration date to December 31, 2003. 54 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 14. Common Stock Warrants, Continued Data concerning common stock warrants is as follows:
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class A Common Stock Warrants: $6.67 $10.01(1) $10.01(1) Warrants Exercise Price - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1999 1,383,565 962,403 122,000 2,467,968 $ 8.33 Exercised in 2000 (12,750) - - (12,750) $ 6.67 - -------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2000 and 2001 1,370,815 962,403 122,000 2,455,218 $ 9.42 - -------------------------------------------------------------------------------------------------------------- Exercised in 2002 (772,600) (30,858) - (803,458) $ 9.88 Expired in 2002 (96,750) - - (96,750) $ 6.67 - -------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2002 501,465 931,545 122,000 1,555,010 $ 8.93 - -------------------------------------------------------------------------------------------------------------- Remaining contractual life in years at December 31, 2002 (2) 4.1 1.0 1.0 2.0 - ------------------------------------------------------------------------------------------------------------------------------ (1) The exercise price per warrant was reduced to $10.01 per share in 2001. (2) The Holding Company may, at its sole discretion, set an earlier expiration date.
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class B Common Stock Warrants: $6.67 $10.00 (1) Warrants Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2000, 2001 and 2002 145,000 50,000 195,000 $ 7.52 - ----------------------------------------------------------------------------------------------------------------- Remaining contractual life in years at December 31, 2002 5.1 5.1 5.1 - ----------------------------------------------------------------------------------------------------------------------------------- (1) At December 31, 2002, 35,500 of these warrants were immediately exercisable. An additional 7,100 warrants vest and become exercisable on April 27th of 2003 and the remaining 7,400 on April 27, 2004. The warrants, which expire on January 31, 2008, become fully vested earlier upon certain conditions.
The Company uses 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 or over the exercise price of the warrant. In accordance with APB 25, approximately $26,000 of compensation expense was included in salaries and employee benefits expense for 2002, 2001 and 2000, respectively, in connection with Class B warrants granted in 1998 at $10.00 per share. 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 of $109,000 was recorded in 2002 under variable rate accounting as prescribed under APB 25. No other compensation expense was recorded related to the remaining stock warrants granted because their exercise prices were the same or greater than the market price of the common shares at the date of grant or modification. Had compensation expense been determined based on the estimated fair value of the warrants at the grant date in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been reduced to the pro forma amounts as follows: For the Year Ended December 31, ($ in thousands, except per share amounts) 2002 2001 2000 - -------------------------------------------------------------------------------- Reported net earnings $6,906 $3,778 $2,608 Pro forma net earnings $6,883 $3,755 $2,585 Reported basic earnings per share $1.71 $0.97 $0.67 Pro forma basic earnings per share $1.70 $0.96 $0.66 Reported diluted earnings per share $1.37 $0.97 $0.67 Pro forma diluted earnings per share $1.37 $0.96 $0.66 - -------------------------------------------------------------------------------- 55 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 15. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return and combined state and city income tax returns in New York. The Company also files a state income tax return in New Jersey and a franchise tax return in Delaware. The Bank also files a state income tax return in Florida. Intervest Mortgage Corporation files state income tax returns in various other states. All the returns are filed on a calendar year basis. At December 31, 2002 and 2001, the Company had a net deferred tax asset of $1,997,000 and $1,236,000, respectively. The asset relates to the unrealized benefit for net temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases that will result in future tax deductions. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of such assets is dependent upon the generation of sufficient taxable income during the periods in which those temporary differences reverse. Management believes that it is more likely than not that the Company's deferred tax asset will be realized and accordingly, a valuation allowance for deferred tax assets was not maintained at any time during 2002, 2001 or 2000. The total tax provision (benefit) is as follows: For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Provision for income taxes $4,713 $2,710 $1,909 Benefit from extraordinary item - - (176) - -------------------------------------------------------------------------------- $4,713 $2,710 $1,733 - -------------------------------------------------------------------------------- Allocation of federal, state and local income taxes between current and deferred portions is as follows: ($ in thousands) Current Deferred Total - -------------------------------------------------------------------------------- Year Ended December 31, 2002: Federal $4,004 $(547) $3,457 State and Local 1,390 (134) 1,256 - -------------------------------------------------------------------------------- $5,394 $(681) $4,713 - -------------------------------------------------------------------------------- Year Ended December 31, 2001: Federal $2,265 $(284) $1,981 State and Local 809 (80) 729 - -------------------------------------------------------------------------------- $3,074 $(364) $2,710 - -------------------------------------------------------------------------------- Year Ended December 31, 2000: Federal $1,350 $(10) $1,340 State and Local 399 (6) 393 - -------------------------------------------------------------------------------- $1,749 $(16) $1,733 - -------------------------------------------------------------------------------- The components of the deferred tax benefit is as follows: For the Year Ended December 31, ($ in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Allowance for loan loss reserves $(623) $(220) $ 16 Organization and startup costs 28 41 (10) Stock-based compensation (62) (12) (17) Depreciation (41) (18) (33) Deferred income 13 (157) - All other 4 2 28 - -------------------------------------------------------------------------------- $(681) $(364) $ (16) - -------------------------------------------------------------------------------- 56 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 15. Income Taxes, Continued The tax effects of the temporary differences that give rise to the deferred tax asset are as follows: At December 31, ($ in thousands) 2002 2001 - -------------------------------------------------------------------------------- Allowance for loan loss reserves $1,572 $ 949 Unrealized net gain on securities available for sale - (80) Organization and startup costs 40 68 Stock-based compensation 118 56 Depreciation 114 73 Deferred income 144 157 All other 9 13 - -------------------------------------------------------------------------------- Total deferred tax asset $1,997 $1,236 - -------------------------------------------------------------------------------- The reconciliation between the statutory federal income tax rate and the Company's effective tax rate (including state and local taxes) is as follows:
For the Year Ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- Tax provision at statutory rate 34.0% 34.0% 34.0% Increase in taxes resulting from: State and local income taxes, net of federal benefit 6.6 7.6 6.4 Other - 0.2 - - -------------------------------------------------------------------------------- 40.6% 41.8% 40.4% - --------------------------------------------------------------------------------
16. Earnings Per Share Net earnings applicable to common stock and the weighted-average number of shares used for basic and diluted earnings per share computations are as follows:
For the Year Ended December 31, ($ in thousands, except share and per share amounts) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------ Basic earnings per share: Net earnings applicable to common stockholders $6,906 $3,778 $2,608 Average number of common shares outstanding 4,043,619 3,899,629 3,884,560 - ------------------------------------------------------------------------------------------------------------ Basic earnings per share amount $1.71 $0.97 $0.67 - ------------------------------------------------------------------------------------------------------------ Diluted earnings per share: Net earnings applicable to common stockholders $6,906 $3,778 $2,608 Adjustment to net earnings from assumed conversion of debentures 436 - - ------------------------------------- Adjusted net earnings for diluted earnings per share computation $7,342 $3,778 $2,608 ------------------------------------- Average number of common shares outstanding: Common shares outstanding 4,043,619 3,899,629 3,884,560 Potential dilutive shares resulting from exercise of warrants 313,519 - - Potential dilutive shares resulting from conversion of debentures 990,983 - - ------------------------------------- Total average number of common shares outstanding used for dilution 5,348,121 3,899,629 3,884,560 - ------------------------------------------------------------------------------------------------------------ Diluted earnings per share amount $1.37 $0.97 $0.67 - ------------------------------------------------------------------------------------------------------------
In 2001 and 2000, 2,650,218 warrants with exercise prices ranging from $6.67 to $16.00 in 2001 and $6.67 to $15.00 in 2000 were not considered in the computations of diluted EPS because their exercise price per share exceeded the average market price of Class A common stock during those years and as a result, they were not dilutive. Convertible debentures with principal and accrued interest totaling $9,164,000 at December 31, 2001 and $8,466,000 at December 31, 2000, and convertible at $14.00 per share in 2001 and $12.50 per share in 2000 into Class A common stock were not considered in the diluted EPS computations for those years because they were not dilutive. In 2002, all warrants and convertible debentures outstanding were considered in the computation of diluted EPS. 57 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 17. Contingencies The Company is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of mortgage loans, and other issues incident to the Company's business. Management does not believe that there is any pending or threatened proceeding against the Company which, if determined adversely, would have a material effect on the business, results of operations, or financial position of the Company. 18. Regulatory Matters The Company is subject to regulation, examination and supervision by the Federal Reserve Bank. The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency of the United States of America ("OCC"). The Company (on a consolidated basis) and the Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet capital requirements can initiate certain mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts are also subject to qualitative judgement by the regulators about components, risk weighting and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, as defined by the regulations. Management believes, as of December 31, 2002 and 2001, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification from the regulators categorized the Bank as a well-capitalized institution under the regulatory framework for prompt corrective action, which requires minimum Tier 1 leverage and Tier 1 and total risk-based capital ratios of 5%, 6% and 10%, respectively. Management believes that there are no current conditions or events outstanding that would change the designation from well capitalized. In June 2001, the OCC terminated a Memorandum of Understanding with the Bank that was in effect since June 2000. The memorandum was a formal written agreement whereby, among other things, the Bank had been required to review, revise, develop and implement various policies and procedures with respect to its lending and credit underwriting. Management implemented various actions in order for the Bank to be in full compliance with the memorandum. The table that follows presents information regarding the Company's and the Bank's capital adequacy. 58 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 18. Regulatory Matters, Continued
Minimum to Be Well ------------------ Capitalized Under ----------------- Minimum Capital Prompt Corrective --------------- ----------------- Actual Requirements Action Provisions ------ ------------ ----------------- ($ in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------ Consolidated as of December 31, 2002: Total capital to risk-weighted assets $70,764 13.06% $43,342 8.00% NA NA Tier 1 capital to risk-weighted assets $66,153 12.21% $21,671 4.00% NA NA Tier 1 capital to average assets $66,153 9.88% $26,788 4.00% NA NA Consolidated as of December 31, 2001: Total capital to risk-weighted assets $57,457 14.11% $32,581 8.00% NA NA Tier 1 capital to risk-weighted assets $52,505 12.89% $16,291 4.00% NA NA Tier 1 capital to average assets $52,505 10.67% $19,692 4.00% NA NA Intervest National Bank at December 31, 2002: Total capital to risk-weighted assets $54,777 12.16% $36,048 8.00% $45,060 10.00% Tier 1 capital to risk-weighted assets $50,313 11.17% $18,024 4.00% $27,036 6.00% Tier 1 capital to average assets $50,313 8.84% $22,768 4.00% $28,460 5.00% Intervest National Bank at December 31, 2001: Total capital to risk-weighted assets $49,006 15.03% $26,082 8.00% $32,603 10.00% Tier 1 capital to risk-weighted assets $45,692 14.01% $13,041 4.00% $19,562 6.00% Tier 1 capital to average assets $45,692 11.36% $16,085 4.00% $20,106 5.00% - ------------------------------------------------------------------------------------------------------------------
19. Off-Balance Sheet Financial Instruments The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the off-balance sheet financial instruments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. 59 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 19. Off-Balance Sheet Financial Instruments, Continued The notional amounts of the Company's off-balance sheet financial instruments is as follows: At December 31, ($ in thousands) 2002 2001 - -------------------------------------------------------------------------------- Unfunded loan commitments $68,244 $26,375 Available lines of credit 533 663 Standby letters of credit 1,267 167 - -------------------------------------------------------------------------------- $70,044 $27,205 - -------------------------------------------------------------------------------- 20. Estimated Fair Value of Financial Instruments Fair value estimates are made at a specific point in time based on available information about each financial instrument. Where available, quoted market prices are used. However, a significant portion of the Company's financial instruments, such as commercial real estate and multifamily loans, do not have an active marketplace in which they can be readily sold or purchased to determine fair value. Consequently, fair value estimates for such instruments are based on assumptions made by management that include the financial instrument's credit risk characteristics and future estimated cash flows and prevailing interest rates. As a result, these fair value estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Accordingly, changes in any of management's assumptions could cause the fair value estimates to deviate substantially. The fair value estimates also do not reflect any additional premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument, nor estimated transaction costs. Further, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on and have not been considered in the fair value estimates. Finally, fair value estimates do not attempt to estimate the value of anticipated future business, the Company's customer relationships, branch network, and the value of assets and liabilities that are not considered financial instruments, such as core deposit intangibles and premises and equipment. The carrying and estimated fair values of the Company's financial instruments are as follows:
At December 31, 2002 At December 31, 2001 -------------------- -------------------- Carrying Fair Carrying Fair ($ in thousands) Value Value Value Value - ------------------------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $30,849 $30,849 $24,409 $24,409 Time deposits with banks 2,000 2,000 250 250 Securities available for sale, net - - 6,192 6,192 Securities held to maturity, net 145,694 146,560 99,157 99,404 Federal Reserve Bank stock 1,108 1,108 654 654 Loans receivable, net 485,301 497,664 365,146 378,962 Accrued interest receivable 4,263 4,263 3,202 3,202 Financial Liabilities: Deposit liabilities 505,958 515,018 362,437 368,597 Debentures payable plus accrued interest 113,302 115,992 99,910 101,264 Note payable 266 278 - - Accrued interest payable 895 895 817 817 Off -Balance Sheet Instruments: Commitments to lend 415 415 180 180 - -------------------------------------------------------------------------------------------------
60 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 20. Estimated Fair Value of Financial Instruments, Continued The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Securities. The estimated fair value of securities available for sale and held to maturity are based on quoted market prices. The estimated fair value of the Federal Reserve Bank stock approximates fair value since the security does not present credit concerns and is redeemable at cost. Loans Receivable. The estimated fair value of loans is based on a discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Management can make no assurance that its perception and quantification of credit risk would be viewed in the same manner as that of a potential investor. Therefore, changes in any of management's assumptions could cause the fair value estimates of loans to deviate substantially. Deposits. The estimated fair value of deposits with no stated maturity, such as savings, money market, checking and noninterest-bearing demand deposit accounts approximates carrying value. The estimated fair value of certificates of deposit are based on the discounted value of their contractual cash flows. The discount rate used in the present value computation was estimated by comparison to current interest rates offered by the Bank for certificates of deposit with similar remaining maturities. Debentures, Note Payable and Accrued Interest Payable. The estimated fair value of debentures and related accrued interest payable as well as the note payable is based on a discounted cash flow analysis. The discount rate used in the present value computation was estimated by comparison to what management believes to be the Company's incremental borrowing rate for similar arrangements. All Other Financial Assets and Liabilities. The estimated fair value of cash and cash equivalents, time deposits with banks, accrued interest receivable and accrued interest payable 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. 61 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 21. Holding Company Financial Information
Condensed Balance Sheets At December 31, --------------- ($ in thousands) 2002 2001 - ------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 229 $ 77 Short-term investments 7,258 784 --------------------- Total cash and cash equivalents 7,487 861 Loans receivable, net (net of allowance for loan loss reserves of $47 and $49 at December 31, 2002 and 2001) 9,239 9,557 Investment in subsidiaries 63,813 57,060 Deferred debenture offering costs, net of amortization 942 1,047 All other assets 809 301 - ------------------------------------------------------------------------------------- Total assets $82,290 $68,826 - ------------------------------------------------------------------------------------- LIABILITIES Debentures payable $25,894 $25,894 Accrued interest payable on debentures 3,123 2,367 All other liabilities 147 170 - ------------------------------------------------------------------------------------- Total liabilities 29,164 28,431 - ------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common equity 53,126 40,395 - ------------------------------------------------------------------------------------- Total stockholders' equity 53,126 40,395 - ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $82,290 $68,826 - -------------------------------------------------------------------------------------
Condensed Statements of Earnings
For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------ Interest income $ 988 $ 818 $ 672 Interest expense 2,695 1,124 686 ------- ------- ------- Net interest income (1,707) (306) (14) (Credit) provision for loan loss reserves (2) 19 17 Noninterest income 205 176 165 Noninterest expenses 544 226 405 ------- ------- ------- Loss before income taxes (2,044) (375) (271) Credit for income taxes (924) (172) (131) ------- ------- ------- Net loss before earnings of subsidiaries (1,120) (203) (140) Equity in earnings of Intervest National Bank 6,459 3,404 2,619 Equity in earnings of Intervest Mortgage Corporation 1,567 577 129 - ---------------------------------------------------- ------- ------- ------- Net earnings $ 6,906 $ 3,778 $ 2,608 - ---------------------------------------------------- ------- ------- ------- Cash dividends received from subsidiaries $ 1,500 $ 125 $ 3,000
62 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 21. Holding Company Financial Information, Continued Condensed Statements of Cash Flows
For the Year Ended December 31, ------------------------------- ($ in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 6,906 $ 3,778 $ 2,608 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in earnings of subsidiaries (8,026) (3,981) (2,748) Cash dividends received from subsidiaries 1,500 125 3,000 (Credit) provision for loan loss reserves (2) 19 17 Deferred income tax benefit (55) (16) (41) Compensation expense from awards/modifications of stock warrants 135 26 185 Increase in accrued interest payable on debentures 756 831 644 Change in all other assets and liabilities, net (365) 81 24 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 849 863 3,689 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Investment in subsidiaries, net (338) (15,500) (4,000) Purchase of equipment (2) - - Loan originations and principal repayments, net 389 (3,738) (3,368) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 49 (19,238) (7,368) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net (decrease) increase in mortgage escrow funds payable (64) (11) 157 Proceeds from sale of debentures, net of issuance costs (9) 17,800 - Proceeds from issuance of common stock upon the exercise of stock warrants, inclusive of income tax benefits 5,801 - 83 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 5,728 17,789 240 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6,626 (586) (3,439) Cash and cash equivalents at beginning of year 861 1,447 4,886 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 7,487 $ 861 $ 1,447 - ----------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Cash paid (received) during the year for: Interest $ 1,825 $ 202 $ - Income taxes (617) (139) (110) Noncash transactions: Accumulated other comprehensive income, change in subsidiary's unrealized (loss) gain on securities available for sale, net of tax (111) 363 (252) - -----------------------------------------------------------------------------------------------------------------------------------
63 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 22. Acquisitions Acquisition of Intervest Securities Corporation In December 2002, the Holding Company entered into an agreement to acquire Intervest Securities Corporation ("ISC"), an affiliated entity that is a broker/dealer registered in nine states and is an NASD and SIPC member firm. ISC participates as a selected dealer from time to time in offerings of debt securities of the Company, primarily those of Intervest Mortgage Corporation. Pursuant to this agreement, the Holding Company will acquire all of the capital stock of ISC for 30,000 shares of its Class B common stock that will be newly issued for this transaction. At December 31, 2002, ISC's net assets amounted to approximately $200,000 and consisted of cash. The transaction is subject to the approval of both the NASD and the Federal Reserve Bank of New York (FRB) and is expected to close in the first quarter of 2003. ISC will become a wholly owned subsidiary of the Holding Company. In connection with this transaction, The Holding Company filed an election with and was approved by the FRB to become a financial holding company under Regulation Y effective January 23, 2003. Acquisition of Intervest Mortgage Corporation On March 10, 2000, the Holding Company acquired all of the outstanding capital stock of Intervest Mortgage Corporation ("IMC") in exchange for 1,250,000 shares of the Holding Company's Class A common stock. As a result of the acquisition, IMC became a wholly owned subsidiary of the Holding Company. Former shareholders of IMC are officers and directors of both the Holding Company and IMC. In connection with the acquisition, the Holding Company incurred approximately $210,000 in expenses related to legal and consulting fees, printing and stock compensation expense. The Board of Directors and the Holding Company's shareholders approved a grant of 50,000 shares of Class B common stock to the Chairman of the Holding Company for his services with respect to the development, structuring and other activities associated with the merger. This resulted in $159,000 of compensation expense being recorded in the consolidated statement of earnings for 2000. A summary of the Company's consolidated statement of earnings for 2000 follows:
Excluding As ($ in thousands) IMC Reported - ------------------------------------------------------------------------------------------------------ Interest and dividend income $23,389 $31,908 Interest expense 15,689 23,325 -------------- ------------ Net interest and dividend income 7,700 8,583 Provision for loan loss reserves 275 275 -------------- ------------ Net interest and dividend income after provision for loan loss reserves 7,425 8,308 Noninterest income 505 983 Noninterest expenses 3,830 4,568 -------------- ------------ Earnings before taxes and extraordinary item 4,100 4,723 Provision for income taxes 1,621 1,909 Extraordinary item, net of tax - (206) - ------------------------------------------------------------------------------------------------------ Net earnings $2,479 $2,608 - ------------------------------------------------------------------------------------------------------
The amounts reported in the table above are after elimination of intercompany revenue and expense. 64 Intervest Bancshares Corporation and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 23. Selected Quarterly Financial Data (Unaudited) The following information is as of or for the period ended:
2002 ---- First Second Third Fourth ($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------- Interest and dividend income $9,711 $11,008 $11,396 $11,364 Interest expense 6,073 6,530 6,857 6,865 ------------------------------------------- Net interest and dividend income 3,638 4,478 4,539 4,499 Provision for loan loss reserves 346 426 192 310 ------------------------------------------- Net interest and dividend income after provision for loan loss reserves 3,292 4,052 4,347 4,189 Noninterest income 274 378 736 830 Noninterest expenses 1,462 1,680 1,594 1,743 ------------------------------------------- Earnings before income taxes 2,104 2,750 3,489 3,276 Provision for income taxes 856 1,106 1,385 1,366 - ----------------------------------------------------------------------------------------------------------------------- Net earnings $1,248 $1,644 $2,104 $1,910 - ----------------------------------------------------------------------------------------------------------------------- Basic earnings per share: $ .32 $ .42 $ .52 $ .45 Diluted earnings per share: $ .30 $ .33 $ .41 $ .37 - ----------------------------------------------------------------------------------------------------------------------- Return on average assets 0.95% 1.10% 1.30% 1.14% Return on average equity 12.23% 15.42% 18.57% 15.71% Total assets $563,970 $628,157 $661,721 $685,979 Total cash and investment securities $144,193 $161,935 $190,799 $179,651 Total loans, net of unearned fees $405,055 $449,771 $454,391 $489,912 Total deposits $404,019 $465,753 $486,623 $505,958 Total borrowed funds and related interest payable $106,929 $104,246 $113,082 $113,568 Total stockholders' equity $41,699 $44,155 $47,118 $53,126 - -----------------------------------------------------------------------------------------------------------------------
2001 ---- First Second Third Fourth ($ in thousands, except per share amounts) Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------- Interest and dividend income $8,684 $8,404 $8,950 $9,424 Interest expense 6,621 6,055 6,014 6,024 ------------------------------------------- Net interest and dividend income 2,063 2,349 2,936 3,400 Provision for loan loss reserves - 100 264 248 ------------------------------------------- Net interest and dividend income after provision for loan loss reserves 2,063 2,249 2,672 3,152 Noninterest income 224 570 237 624 Noninterest expenses 1,324 1,329 1,313 1,337 ------------------------------------------- Earnings before income taxes 963 1,490 1,596 2,439 Provision for income taxes 382 612 667 1,049 - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 581 $ 878 $ 929 $1,390 - ----------------------------------------------------------------------------------------------------------------------- Basic earnings per share: $ .15 $ .23 $ .24 $ .35 Diluted earnings per share: $ .15 $ .23 $ .24 $ .35 - ----------------------------------------------------------------------------------------------------------------------- Return on average assets 0.54% 0.83% 0.84% 1.13% Return on average equity 6.31% 9.38% 9.68% 14.05% Total assets $423,081 $423,186 $475,716 $512,622 Total cash and investment securities $135,460 $99,102 $112,676 $130,662 Total loans, net of unearned fees $276,701 $313,070 $350,126 $368,526 Total deposits $301,824 $297,010 $341,725 $362,437 Total borrowed funds and related interest payable $75,466 $76,111 $84,110 $99,910 Total stockholders' equity $37,126 $38,042 $39,027 $40,395 - -----------------------------------------------------------------------------------------------------------------------
65 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers a. Directors. The information required by this item is contained under the section entitled "Election of Directors" in the Company's Proxy Statement for its 2003 Annual Meeting (the "Proxy Statement") and is incorporated herein by reference. b. Executive Officers. The information required by this item is set forth in Part I of this report under the caption Item 4A "Executive Officers and Other Key Employees." c. Compliance with Section 16(a). Information contained in the section of the Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. Item 11. Executive Compensation The information contained in the section entitled "Executive Compensation" of the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained in the section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in the section entitled "Certain Relationships and Related Transactions" of the Proxy Statement is incorporated herein by reference. Item 14. Controls and Procedures a) Evaluation of disclosure controls and procedures. The Company maintains ------------------------------------------------- controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officer of the Company concluded that the Company's disclosure controls and procedures were adequate. b) Changes in internal controls. The Company made no significant changes in ----------------------------- its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial Officer. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents Filed as Part of this Report (1) Financial Statements: See Item 8 "Financial Statements and Supplementary Data" (2) Financial Statement Schedules: See Item 8 "Financial Statements and Supplementary Data" (3) Exhibits: The following exhibits are filed herein as part of this Form 10-K: 66 Exhibit No. Description of Exhibit 2.0 Agreement and Plan of Merger dated as of November 1, 1999 by and among Intervest Bancshares Corporation, ICNY Acquisition Corporation and Intervest Corporation of New York, incorporated by reference to the Company's definitive proxy statement for the special meeting of shareholders to be held March 10, 2000, wherein such document is identified as "Annex A." 3.1 Restated Certificate of Incorporation of the Company, incorporated by reference to Amendment No.1 to the Company's Registration Statement on Form SB-2 (No 333-33419, the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") on September 22, 1997, wherein such document is identified as Exhibit 3.1. 3.2 Bylaws of the Company, incorporated by reference to the Registration Statement, wherein such document is identified as Exhibit 3.1. 4.1 Form of Certificate for Shares of Class A common stock, incorporated by reference to the Company's Pre-Effective Amendment No.1 to the Registration Statement on Form SB-2 (No. 33-82246), filed with the Commission on September 15, 1994. 4.2 Form of Certificate for Shares of Class B common stock, incorporated by reference to the Company's Pre-Effective Amendment No.1 to the Registration Statement on Form SB-2 (No. 33-82246), filed with the Commission on September 15, 1994. 4.3 Form of Warrant issued to Mr. Jerome Dansker, incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 1995, wherein such document is identified as Exhibit 4.2. 4.4 Form of Warrant for Class A common stock, incorporated by reference to the Registration Statement, wherein such document is identified as Exhibit 4.3. 4.5 Form of Warrant Agreement between the Company and the Bank of New York, incorporated by reference to the Registration Statement, wherein such document is identified as Exhibit 4.4. 4.6 Form of Indenture between the Company and the Bank of New York, as Trustee, incorporated by reference to the Company's Registration Statement on Form SB-2 (333-50113) filed with the Commission on April 15,1998. 4.7 Form of Indenture between the Company and the Bank of New York, as Trustee, dated January 1, 2001, incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 2000, wherein such document is identified as Exhibit 4.7. 4.8 Form of Indenture between the Company, as Issuer, and State Street Bank and Trust Company of Connecticut, NA, as Trustee, dated as of December 18, 2001, incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 2001, wherein such document is identified as Exhibit 4.8. 12 Statement re: computation of ratios of earnings to fixed charges. 21 Subsidiaries 23.1 Consent of Independent Accountants. 23.2 Consent of Independent Accountants. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated. INTERVEST BANCSHARES CORPORATION (Registrant) By: /s/ Lowell S. Dansker Date: February 26, 2003 -------------------------------- ----------------- Lowell S. Dansker, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Chairman of the Board, Executive Vice President and Director: By: /s/ Jerome Dansker Date: February 26, 2003 ----------------------------------------- ----------------- Jerome Dansker President, Treasurer and Director (Principal Executive, Financial and Accounting Officer): By: /s/ Lowell S. Dansker Date: February 26, 2003 ------------------------------- ----------------- Lowell S. Dansker Vice President, Secretary and Director: By: /s/ Lawrence G. Bergman Date: February 26, 2003 ----------------------------------------- ----------------- Lawrence G. Bergman Directors: By: /s/ Michael A. Callen Date: February 26, 2003 -------------------------------- ----------------- Michael A. Callen By: /s/ Paul Derosa Date: February 26, 2003 -------------------------------- ----------------- Paul Derosa By: /s/ Wayne F. Holly Date: February 26, 2003 ---------------------------------------- ----------------- Wayne F. Holly By: /s/ Lawton Swan, III Date: February 26, 2003 -------------------------------- ----------------- Lawton Swan, III By: /s/ Thomas E. Willett Date: February 26, 2003 -------------------------------- ----------------- Thomas E. Willett By: /s/ David J. Willmott Date: February 26, 2003 -------------------------------- ----------------- David J. Willmott By: /s/ Wesley T. Wood Date: February 26, 2003 ---------------------------------------- ----------------- Wesley T. Wood 68 Certification of the Principal Executive and Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 As adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 I, Lowell S. Dansker, as the principal executive and principal financial officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"), certify, that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and I have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: (a) all significant deficiencies in the design or operation of the internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Lowell S. Dansker --------------------- Lowell S. Dansker, President and Treasurer (Principal Executive and Financial Officer) February 26, 2003 69 EX-13.2 5 doc4.txt ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2003 -------------- Commission File No. 000-23377 --------- INTERVEST BANCSHARES CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3699013 - ------------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation) 10 Rockefeller Plaza, Suite 1015 New York, New York 10020-1903 -------------------------------------------------------------------- (Address of principal executive offices) (212) 218-2800 -------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES XX NO . -- -- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): YES NO XX . -- -- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding: - -------------------- ------------------- Class A Common Stock, $1.00 par value per share 4,348,087 Outstanding at April 25, 2003 - ----------------------------------------------- --------------------------------------- Class B Common Stock, $1.00 par value per share 355,000 Outstanding at April 25, 2003 - ----------------------------------------------- ---------------------------------------
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES FORM 10-Q March 31, 2003 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002......................... 2 Condensed Consolidated Statements of Earnings (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 3 Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 4 Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 6 Notes to Condensed Consolidated Financial Statements (Unaudited) ................. 7 Review by Independent Certified Public Accountants ............................... 9 Report on Reviews by Independent Certified Public Accountants .................... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 22 Item 4. Controls and Procedures ................................................. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................ 22 Item 2. Changes in Securities and Use of Proceeds................................ 22 Item 3. Defaults Upon Senior Securities.......................................... 22 Item 4. Submission of Matters to a Vote of Security Holders...................... 22 Item 5. Other Information........................................................ 22 Item 6. Exhibits and Reports on Form 8-K ........................................ 22 Signatures............................................................................... 23 Certification............................................................................ 24
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-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions, the development of an interest rate environment that may adversely affect the Company's interest rate spread, other income or cash flow anticipated from the Company's operations, investment and lending activities; and changes in laws and regulations affecting banks and bank holding companies. 1
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Balance Sheets March 31, December 31, ($ in thousands, except par value) 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) Cash and due from banks $ 8,005 $10,351 Federal funds sold 17,812 9,114 Commercial paper 8,600 7,950 Other short-term investments 3,313 3,434 -------------------------------- Total cash and cash equivalents 37,730 30,849 Time deposits with banks 2,000 2,000 Securities held to maturity, net (estimated fair value of $137,967 and $146,560, 137,243 145,694 respectively) Federal Reserve Bank stock, at cost 1,114 1,108 Loans receivable (net of allowance for loan losses of $4,955 and $4,611, respectively) 527,637 485,301 Accrued interest receivable 4,606 4,263 Loan fees receivable 4,139 3,706 Premises and equipment, net 6,029 6,098 Foreclosed real estate 1,081 1,081 Deferred income tax asset 2,245 1,997 Deferred debenture offering costs, net 3,807 3,498 Other assets 314 384 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $727,945 $685,979 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest-bearing demand deposit accounts $ 4,597 $ 5,924 Interest-bearing deposit accounts: Checking (NOW) accounts 14,370 10,584 Savings accounts 32,848 30,174 Money market accounts 139,930 134,293 Certificate of deposit accounts 346,353 324,983 -------------------------------- Total deposit accounts 538,098 505,958 Subordinated debentures payable 90,530 84,430 Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000 Note payable 263 266 Accrued interest payable on all debentures 14,345 13,872 Accrued interest payable on deposits 929 895 Mortgage escrow funds payable 8,959 5,894 Official checks outstanding 2,117 4,373 Other liabilities 2,704 2,165 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 672,945 632,853 - ------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock (300,000 shares authorized, none issued) - - Class A common stock ($1.00 par value, 9,500,000 shares authorized, 4,348,087 shares issued and outstanding) 4,348 4,348 Class B common stock ($1.00 par value, 700,000 shares authorized, 355,000 shares issued and outstanding) 355 355 Additional paid-in-capital, common 24,207 24,134 Retained earnings 26,090 24,289 - ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 55,000 53,126 =============================================================================================================================== Total liabilities and stockholders' equity $727,945 $685,979 ===============================================================================================================================
See accompanying notes to condensed consolidated financial statements. 2
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) Quarter Ended March 31, -------------------------- ($ in thousands, except per share data) 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND INCOME Loans receivable $10,670 $8,820 Securities 887 842 Other interest-earning assets 68 49 - ------------------------------------------------------------------------------------------------------------------------------ Total interest and dividend income 11,625 9,711 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Deposits 4,453 3,922 Subordinated debentures 1,957 1,773 Junior debentures - capital securities 374 374 Note payable 4 2 Federal funds purchased - 2 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 6,788 6,073 - ------------------------------------------------------------------------------------------------------------------------------ Net interest and dividend income 4,837 3,638 Provision for loan loss reserves 344 346 - ------------------------------------------------------------------------------------------------------------------------------ Net interest and dividend income after provision for loan loss reserves 4,493 3,292 - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Customer service fees 38 35 Income from mortgage lending activities 153 102 Income from the early repayment of mortgage loans 141 137 All other (3) - - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 329 274 - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries and employee benefits 867 716 Occupancy and equipment, net 320 315 Data processing 148 118 Advertising and promotion 15 7 Professional fees and services 107 80 Stationery, printing and supplies 42 33 FDIC and general insurance 57 42 Postage and delivery 25 24 All other 203 127 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest expenses 1,784 1,462 - ------------------------------------------------------------------------------------------------------------------------------ Earnings before taxes 3,038 2,104 Provision for income taxes 1,237 856 ============================================================================================================================== Net earnings $ 1,801 $ 1,248 ============================================================================================================================== Basic earnings per share $ 0.38 $ 0.32 Diluted earnings per share $ 0.32 $ 0.30 Dividends per share $ - $ - - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 3
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Unaudited) Quarter Ended March 31, ----------------------- ($ in thousands) 2003 2002 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Net earnings $1,801 $1,248 - --------------------------------------------------------------------------------------------------------------------------------- Net unrealized holding losses on available-for-sale securities - (46) Provision for income taxes related to unrealized losses on available-for-sale securities - (20) - --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive loss, net of tax - (26) - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income, net of tax $1,801 $1,222 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 4
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Quarter Ended March 31, ----------------------------- ($ in thousands) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- CLASS A COMMON STOCK Balance at beginning of period $ 4,348 $ 3,545 Issuance of 11,500 shares upon the exercise of warrants in 2002 - 11 - ----------------------------------------------------------------------------------------------------------------------- Balance at end of period 4,348 3,556 - ----------------------------------------------------------------------------------------------------------------------- CLASS B COMMON STOCK - ----------------------------------------------------------------------------------------------------------------------- Balance at beginning and end of period 355 355 - ----------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN-CAPITAL, COMMON Balance at beginning of period 24,134 19,001 Compensation related to vesting of certain Class B stock warrants 6 6 Compensation related to certain Class A stock warrants modified in 2002 67 - Issuance of 11,500 shares upon the exercise of Class A stock warrants in 2002, inclusive of tax benefits - 65 - ----------------------------------------------------------------------------------------------------------------------- Balance at end of period 24,207 19,072 - ----------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 24,289 17,383 Net earnings for the period 1,801 1,248 - ----------------------------------------------------------------------------------------------------------------------- Balance at end of period 26,090 18,631 - ----------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period - 111 Net change in accumulated other comprehensive income, net - (26) - ----------------------------------------------------------------------------------------------------------------------- Balance at end of period - 85 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity at end of period $55,000 $41,699 - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 5
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Quarter Ended March 31, -------------------------- ($ in thousands) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 1,801 $ 1,248 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 131 151 Provision for loan loss reserves 344 346 Deferred income tax benefit (248) (155) Amortization of deferred debenture offering costs 245 218 Compensation expense related to common stock and warrants 73 6 Amortization of premiums, fees and discounts, net (197) (280) Net increase in accrued interest payable on debentures 473 994 Net decrease in official checks outstanding (2,256) (1,616) Net change in all other assets and liabilities 1,097 663 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,463 1,575 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net decrease in interest-earning time deposits with banks - 100 Maturities and calls of securities held to maturity 27,665 18,000 Purchases of securities held to maturity (19,815) (14,158) Net increase in loans receivable (43,112) (36,989) Purchases of Federal Reserve Bank stock, net (6) (450) Purchases of premises and equipment, net (62) (521) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (35,330) (34,018) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, savings, NOW and money market deposits 10,770 36,287 Net increase in certificates of deposit 21,370 5,295 Net increase in mortgage escrow funds payable 3,065 2,832 Principal repayments of debentures (1,400) - Principal repayments of note payable (3) - Proceeds from issuance of debentures, net of issuance costs 6,946 5,325 Proceeds from issuance of common stock, net of issuance costs - 76 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 40,748 49,815 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 6,881 17,372 Cash and cash equivalents at beginning of period 30,849 24,409 =================================================================================================================================== Cash and cash equivalents at end of period $ 37,730 $ 41,781 =================================================================================================================================== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 6,036 $ 4,880 Income taxes 963 1,000 Noncash activities: Accumulated other comprehensive income, change in unrealized loss on securities available for sale, net of tax - (26) - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 6 Intervest Bancshares Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- Note 1 - General The condensed consolidated financial statements of Intervest Bancshares Corporation and Subsidiaries in this report have not been audited except for the information derived from the audited Consolidated Balance Sheet as of December 31, 2002. The financial statements in this report should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. The condensed consolidated financial statements include the accounts of Intervest Bancshares Corporation (a financial holding company referred to by itself as the "Holding Company") and its subsidiaries, Intervest National Bank (the Bank), Intervest Mortgage Corporation and Intervest Statutory Trust I. The Holding Company and its subsidiaries are referred to as the "Company" on a consolidated basis. The Holding Company's primary business activity is the ownership of the aforementioned subsidiaries. The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Center 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 full-service commercial banking business, which consists of attracting deposits from the general public and investing those funds, together with other sources of funds, primarily through the origination of commercial and multifamily real estate loans, and through the purchase of security investments. Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation, are located in Rockefeller Center in New York City. Intervest Mortgage Corporation is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage, junior mortgage and wraparound mortgage loans. Intervest Statutory Trust I was formed in December 2001 for the sole purpose of issuing $15,000,000 of capital securities as more fully described in note 9 to the consolidated financial statements in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. In the opinion of management, all material adjustments necessary for a fair presentation of financial condition and results of operations for the interim periods presented in this report have been made. These adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of results that may be expected for the entire year or any other interim period. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the current periods' presentation. Note 2 - Allowance for Loan Loss Reserves The Company monitors its loan portfolio to determine the appropriate level of the allowance for loan loss reserves based on various factors. These factors include: the type and level of loans outstanding; volume of loan originations; overall portfolio quality; loan concentrations; specific problem loans, historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's assessment of the current and anticipated economic conditions in the Company's lending regions. Activity in the allowance for loan loss reserves for the periods indicated is summarized as follows: Quarter Ended March 31, ------------------------------ ($ in thousands) 2003 2002 - -------------------------------------------------------------------------------- Balance at beginning of period $4,611 $3,380 Provision charged to operations 344 346 Recoveries of previous chargeoffs (1) - 107 - -------------------------------------------------------------------------------- Balance at end of period $4,955 $3,833 - -------------------------------------------------------------------------------- (1) Represents proceeds received from the sale of collateral from a loan that was charged off prior to 1997. 7 Intervest Bancshares Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- Note 3 - Earnings Per Share (EPS) Basic EPS is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by dividing adjusted net earnings by the weighted-average number of shares of common stock outstanding and dilutive potential common stock shares that may be outstanding in the future. Potential common stock shares may arise from outstanding dilutive common stock warrants (as computed by the "treasury stock method") and convertible debentures (as computed by the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding stock warrants and convertible debentures were converted into common stock that then shared in the Company's adjusted earnings (as adjusted for interest expense, net of tax, that would no longer occur if the debentures were converted). Net earnings applicable to common stock and the weighted-average number of shares used for basic and diluted earnings per share computations are summarized in the table that follows:
Quarter Ended March 31, -------------------------- ($ in thousands, except share and per share amounts) 2003 2002 - -------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Net earnings applicable to common stockholders $1,801 $1,248 Average number of common shares outstanding 4,703,087 3,901,290 - -------------------------------------------------------------------------------------------------------------------------------- Basic net earnings per share amount $0.38 $0.32 - -------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Net earnings applicable to common stockholders $1,801 $1,248 Adjustment to net earnings from assumed conversion of debentures (1) 114 - -------------------------- Adjusted net earnings for diluted earnings per share computation $1,915 $1,248 -------------------------- Average number of common shares outstanding: Common shares outstanding 4,703,087 3,901,290 Potential dilutive shares resulting from exercise of warrants (2) 230,516 263,944 Potential dilutive shares resulting from conversion of debentures (3) 1,010,803 - -------------------------- Total average number of common shares outstanding used for dilution 5,944,406 4,165,234 - -------------------------------------------------------------------------------------------------------------------------------- Diluted net earnings per share amount $0.32 $0.30 - -------------------------------------------------------------------------------------------------------------------------------- (1) Represents interest expense on dilutive convertible debentures, net of tax, that would not occur if they were assumed converted. (2) Diluted EPS includes shares that would be outstanding if dilutive common stock warrants and convertible debentures were assumed to be exercised/converted during the period. Certain warrants are not considered in diluted EPS computations because their exercise price per share exceeded the average market price of Class A common stock during those periods as follows: Warrants to purchase 1,134,000 shares of common stock at prices ranging from $10.00 to $10.01 per share were not considered in the 2002 quarterly computation. All outstanding warrants of 1,750,000 for the 2003 quarterly computation were considered. (3) Convertible debentures outstanding at March 31, 2002 (consisting of principal and accrued interest for this purpose) totaling $9,348,000 were convertible into common stock at a price of $10.01 per share, but were not considered in the computations of diluted EPS for the 2002 quarter because they were not dilutive. For the 2003 computation, convertible debentures outstanding at March 31, 2003 totaling $10,118,000 were convertible into common stock at a price of $10.01 per share and were considered dilutive, which resulted in additional common shares.
Note 4 - Bank Regulatory Capital The Bank is required to maintain certain minimum regulatory capital requirements. The Bank is a well-capitalized institution as defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management believes that there are no current conditions or events outstanding which would change the Bank's designation as a well-capitalized institution. The following is a summary at March 31, 2003 of the minimum regulatory capital requirements and the actual capital of the Bank on a percentage basis:
Actual Minimum To Be Considered Ratios Requirement Well Capitalized ------ ----------- ---------------- Total capital to risk-weighted assets 11.82% 8.00% 10.00% Tier 1 capital to risk-weighted assets 10.83% 4.00% 6.00% Tier 1 capital to total average assets - leverage ratio 8.72% 4.00% 5.00%
8 Intervest Bancshares Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- Note 5 - Common Stock Warrants The Holding Company has common stock warrants outstanding that entitle the registered holders thereof to purchase one share of common stock for each warrant. All warrants are exercisable when issued, except for certain Class B common stock warrants. The warrants have been issued in connection with public stock offerings, to directors and employees of the Company and to outside third parties for performance of services. In 2001, the Holding Company modified the terms of its Class A and Class B warrants as follows: the expiration date of all warrants exercisable at $6.67 per share were extended one year beyond their original expiration dates effective October 4, 2001, and the exercise price of certain Class A warrants (exercisable at $12.50 and $16.00 per share as of December 31, 2001) were reduced to $10.01 per share commencing January 1, 2002 until their original expiration date of December 31, 2002. In 2002, the $10.01 per share warrants were further modified by extending their expiration date to December 31, 2003. Data concerning common stock warrants is as follows:
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class A Common Stock Warrants: $6.67 $10.01 $10.01 Warrants Exercise Price - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2002 and March 31, 2003 501,465 931,545 122,000 1,555,010 $ 8.93 - ------------------------------------------------------------------------------------------------------------------------------- Remaining contractual life in years at March 31, 2003 (1) 3.8 0.8 0.8 1.7 - ------------------------------------------------------------------------------------------------------------------------------- (1) The Holding Company may, at its sole discretion, set an earlier expiration date.
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class B Common Stock Warrants: $6.67 $10.00(1) Warrants Exercise Price - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2002 and March 31, 2003 145,000 50,000 195,000 $ 7.52 - ------------------------------------------------------------------------------------------------------------------------------- Remaining contractual life in years at March 31, 2003 4.8 4.8 4.8 - ------------------------------------------------------------------------------------------------------------------------------- (1) At March 31, 2003 and December 31, 2002, 35,500 of these warrants were immediately exercisable. An additional 7,100 warrants vest and become exercisable on April 27th of 2003 and the remaining 7,400 on April 27, 2004. The warrants, which expire on January 31, 2008, become fully vested earlier upon certain conditions.
The Company uses 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 or over the exercise price of the warrant. In accordance with APB 25, approximately $6,000 of compensation expense was included in salaries and employee benefits expense for the quarter ended March 31, 2003 and 2002 in connection with Class B warrants that vested during these periods. 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 of $67,000 was recorded in the quarter ended March 31, 2003 under variable rate accounting as prescribed under APB 25. No other compensation expense was recorded during the first quarter of 2003 and 2002 associated with common stock warrants. Had compensation expense been determined based on the estimated fair value of the warrants in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would not have been different from the amounts reported for the periods included in this report on Form 10-Q. 9 Intervest Bancshares Corporation and Subsidiaries Review by Independent Certified Public Accountants Hacker, Johnson & Smith, P.A., P.C. the Company's independent certified public accountants, have made a limited review of the financial data as of March 31, 2003 and for the three-month periods ended March 31, 2003 and 2002 presented in this document, in accordance with standards established by the American Institute of Certified Public Accountants. As part of Hacker, Johnson & Smith, P.A., P.C.'s review, Eisner, LLP was relied upon for their limited review of Intervest Mortgage Corporation, a wholly owned subsidiary of the Company. Their report furnished pursuant to Article 10 of Regulation S-X is included herein. 10 Report on Review by Independent Certified Public Accountants The Board of Directors and Stockholders Intervest Bancshares Corporation New York, New York: We have reviewed the accompanying condensed consolidated balance sheet of Intervest Bancshares Corporation and Subsidiaries (the "Company") as of March 31, 2003 and the related condensed consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for the three-month periods ended March 31, 2003 and 2002 included in this report. These financial statements are the responsibility of the Company's management. We were furnished with the report of other accountants on their reviews of the interim financial information of Intervest Mortgage Corporation, whose total assets as of March 31, 2003 constituted 14.3% of the related consolidated total, and whose net interest income, noninterest income and net earnings for the three-month period then ended, constituted 9.0%, 18.5%, and 15.8%, respectively, and whose net interest income, noninterest income and net loss for the three-month period ended March 31, 2002, constituted 13.5%, 25.2% and 21.2%, respectively, of the related consolidated totals. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews and the report of other accountants, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, we, based on our audits and the report of other auditors, expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Hacker, Johnson & Smith, P.A., P.C. - --------------------------------------- HACKER, JOHNSON & SMITH, P.A.,P.C. Tampa, Florida April 25, 2003 11 Report on Review by Independent Certified Public Accountants Board of Directors and Stockholder Intervest Mortgage Corporation New York, New York: We have reviewed the condensed consolidated balance sheet of Intervest Mortgage Corporation and subsidiaries (the "Company") as of March 31, 2003, and the related condensed consolidated statements of operations, changes in stockholder's equity and cash flows for the three-month periods ended March 31, 2003 and 2002 (not presented separately herein). These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2002 and the related consolidated statements of operations, changes in stockholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated January 23, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2002 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Eisner, LLP - --------------- EISNER,LLP New York, New York April 18, 2003 12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and Intervest Statutory Trust I (hereafter referred to collectively as the "Company" on a consolidated basis). Intervest Bancshares Corporation and Intervest National Bank may be referred to individually as the "Holding Company" and the "Bank," respectively. The Holding Company's primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending. From time to time, the Holding Company also sells debentures to raise funds for working capital purposes. The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Center, in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank conducts a personalized commercial and consumer banking business and attracts deposits from the areas served by its banking offices. It also provides internet banking services through its web site: www.intervestnatbank.com, which can attract deposit customers from outside its primary market areas. The deposits, together with funds derived from other sources, are used to originate a variety of real estate, commercial and consumer loans and to purchase investment securities. The Bank emphasizes multifamily and commercial real estate lending. Intervest Mortgage Corporation is a mortgage investment company located in Rockefeller Center in New York City. It is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage, junior mortgage and wraparound mortgage loans. Its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation are nonoperating entities that provide administrative services to Intervest Mortgage Corporation. Intervest Statutory Trust I was formed in December 2001 in connection with the issuance of $15,000,000 of capital securities. For a further discussion, See the section entitled "Debentures Payable and Accrued Interest Payable on Debentures" on page 30 of the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. As previously announced, in December 2002, Intervest Bancshares Corporation entered into an agreement to acquire Intervest Securities Corporation, an affiliated entity that is a broker/dealer registered in nine states and is an NASD and SIPC member firm. Intervest Securities Corporation participates as a selected dealer from time to time in offerings of debt securities of the Company, primarily those of Intervest Mortgage Corporation. Pursuant to this agreement, Intervest Bancshares Corporation will acquire all the capital stock of Intervest Securities Corporation for 30,000 shares of its newly issued Class B common stock. At December 31, 2002, Intervest Securities Corporation's net assets amounted to approximately $200,000 and consisted of cash. In connection with this transaction, Intervest Bancshares Corporation was approved by the FRB to become a financial holding company under Regulation Y effective January 23, 2003. The transaction is awaiting the approval of the NASD and is expected to close in the second quarter of 2003. Intervest Securities Corporation will become a wholly owned subsidiary of Intervest Bancshares Corporation. 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 loss reserves and effective income tax rate. Noninterest income consists primarily of loan and other banking fees. Noninterest expense consists of compensation and benefits, occupancy and equipment related expenses, data processing expenses, advertising expense, deposit insurance premiums and other operating expenses. The Company's profitability is also significantly affected by general economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. Since the properties underlying the Company's mortgages are concentrated in the New York City area and the State of Florida, the economic conditions in those areas can also have an impact on the Company's operations. 13 Comparison of Financial Condition at March 31, 2003 and December 31, 2002 ------------------------------------------------------------------------- Overview Total assets at March 31, 2003 increased to $727,945,000, from $685,979,000 at December 31, 2002. Total liabilities at March 31, 2003 increased to $672,945,000, from $632,853,000 at December 31, 2002. Stockholders' equity increased to $55,000,000 at March 31, 2003, from $53,126,000 at year-end 2002. Book value per common share rose to $11.69 per share at March 31, 2003, from $11.30 at December 31, 2002. Selected balance sheet information as of March 31, 2003 follows:
Intervest Intervest Intervest Inter- Holding National Mortgage Statutory Company ($ in thousands) Company Bank Corporation Trust I Balances Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 1,788 $ 24,855 $ 12,959 $ - $ (1,872) $ 37,730 Time deposits with banks - - 2,000 - - 2,000 Securities held to maturity, net - 137,243 - 15,464 (15,464) 137,243 Federal Reserve Bank stock - 1,114 - - - 1,114 Loans receivable, net of deferred fees 15,073 431,964 85,555 - - 532,592 Allowance for loan loss reserves (75) (4,722) (158) - - (4,955) Investment in subsidiaries 66,536 - - - (66,536) - Foreclosed real estate - 1,081 - - - 1,081 All other assets 1,408 15,237 4,615 441 (561) 21,140 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 84,730 $ 606,772 $ 104,971 $ 15,905 $ (84,433) $ 727,945 - ----------------------------------------------------------------------------------------------------------------------------------- Deposits $ - $ 540,277 $ - $ - $ (2,179) $ 538,098 Subordinated debentures payable 25,894 - 80,100 - (15,464) 90,530 Junior debentures payable-capital securities - - - 15,000 - 15,000 Note payable - 263 - - - 263 Accrued interest payable on all debentures 3,704 - 10,654 428 (441) 14,345 All other liabilities 132 12,859 1,518 13 187 14,709 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 29,730 553,399 92,272 15,441 (17,897) 672,945 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 55,000 53,373 12,699 464 (66,536) 55,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 84,730 $ 606,772 $ 104,971 $ 15,905 $ (84,433) $ 727,945 - -----------------------------------------------------------------------------------------------------------------------------------
A comparison of the consolidated balance sheets as of March 31, 2003 and December 31, 2002 follows:
At March 31, 2003 At December 31, 2002 ----------------- -------------------- Carrying % of Carrying % of ($ in thousands) Value Total Assets Value Total Assets - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 37,730 5.2% $ 30,849 4.4% Time deposits with banks 2,000 0.3 2,000 0.3 Securities held to maturity, net 137,243 18.9 145,694 21.2 Federal Reserve Bank stock 1,114 0.2 1,108 0.2 Loans receivable, net of deferred fees and loan loss reserves 527,637 72.4 485,301 70.7 Foreclosed real estate 1,081 0.1 1,081 0.2 All other assets 21,140 2.9 19,946 3.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $727,945 100.0% $685,979 100.0% - ----------------------------------------------------------------------------------------------------------------------------------- Deposits $538,098 73.9% $505,958 73.8% Subordinated debentures payable 90,530 12.4 84,430 12.3 Junior debentures payable-capital securities 15,000 2.1 15,000 2.2 Note payable 263 - 266 0.1 Accrued interest payable on all debentures 14,345 2.0 13,872 2.0 All other liabilities 14,709 2.0 13,327 1.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 672,945 92.4 632,853 92.3 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 55,000 7.6 53,126 7.7 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $727,945 100.0% $685,979 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
14 Cash and Cash Equivalents - ------------------------- Cash and cash equivalents increased to $37,730,000 at March 31, 2003, from $30,849,000 at December 31, 2002, due to a higher level of overnight federal fund investments. Cash and cash equivalents include federal funds sold and interest-bearing and noninterest-bearing cash balances with banks, and other short-term investments that have original maturities of three months or less. The short-term investments are normally comprised of commercial paper issued by large commercial banks, certificates of deposit and U.S. government securities. The level of cash and cash equivalents fluctuates based on various factors, including liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. Securities Held to Maturity, Net - -------------------------------- Securities held to maturity decreased to $137,243,000 at March 31, 2003, from $145,694,000 at December 31, 2002. The decrease was due to maturities and early calls exceeding new purchases during the period. At March 31, 2003, the portfolio consisted of debt obligations of FNMA, FHLB, FHLMC, SLMA and FFCB with a weighted-average yield of approximately 2.32% and a weighted-average remaining maturity of 1.7 years. At December 31, 2002, the portfolio had a weighted-average yield of 2.39% and a weighted-average remaining maturity of 1.6 years. 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. The Company normally invests in short-to-medium term security investments to emphasize liquidity. Federal Reserve Bank Stock - -------------------------- In order for the Bank to be a member of the Federal Reserve Banking System, the Bank maintains an investment in the capital stock of the Federal Reserve Bank, which pays a dividend that is currently 6%. The investment, which amounted to $1,114,000 at March 31, 2003 and $1,108,000 at December 31, 2002, fluctuates based on the Bank's capital level. Loans Receivable, Net of Deferred Fees and Allowance for Loan Loss Reserves - --------------------------------------------------------------------------- Loans receivable, net of deferred fees and the allowance for loan loss reserves, increased to $527,637,000 at March 31, 2003, from $485,301,000 at December 31, 2002. The growth reflected new originations of commercial real estate and multifamily mortgage loans, partially offset by principal repayments. Commercial real estate and multifamily real estate properties collateralized almost all of the loans in the Company's loan portfolio. At March 31, 2003 and December 31, 2002, there were no loans classified as nonaccrual or impaired. At March 31, 2003, the allowance for loan loss reserves amounted to $4,955,000, compared to $4,611,000 at December 31, 2002. The allowance represented 0.93% of total loans (net of deferred fees) outstanding at March 31, 2003, compared to 0.94% at December 31, 2002. The Company monitors its loan portfolio to determine the appropriate level of the allowance for loan loss reserves based on various factors. These factors include: the type and level of loans outstanding; volume of loan originations; overall portfolio quality; loan concentrations; specific problem loans, historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's assessment of the current and anticipated economic conditions in the Company's lending regions. The increase in the allowance was due to a provision for loan losses of $344,000 in the first quarter of 2003 (resulting from loan growth). Foreclosed Real Estate - ---------------------- At March 31, 2003 and year-end 2002, foreclosed real estate amounted to $1,081,000 and represented one commercial real estate property located in the State of Florida. This property was acquired by the Bank through foreclosure. The property continues to be actively marketed for sale. Foreclosed real estate is carried at the lower of the new cost basis or estimated fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance of the property are included in the consolidated statement of earnings. 15 All Other Assets - ---------------- The following table sets forth the composition of all other assets in the table on page 14: At March 31, At December 31, ($ in thousands) 2003 2002 - -------------------------------------------------------------------------------- Accrued interest receivable $4,606 $4,263 Loans fee receivable 4,139 3,706 Premises and equipment, net 6,029 6,098 Deferred income tax asset 2,245 1,997 Deferred debenture offering costs, net 3,807 3,498 All other 314 384 - -------------------------------------------------------------------------------- $21,140 $19,946 - -------------------------------------------------------------------------------- Accrued interest receivable fluctuates based on the amount of loans, investments and other interest-earning assets outstanding and the timing of interest payments received. The increase was due to the growth in these assets. Loan fees receivable are fees due to the Company in accordance with the terms of mortgage loans. Such amounts are generally due upon the full repayment of the loan. This fee is recorded as deferred income at the time a loan is originated and is then amortized to interest income over the life of the loan as a yield adjustment. The increase was due to an increase in mortgage loan originations. Premises and equipment is detailed in note 5 to the consolidated financial statements in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. The deferred income tax asset relates primarily to the unrealized tax benefit on the Company's allowance for loan loss reserves, depreciation, and organizational start-up costs. These charges have been expensed for financial statement purposes, but are not all currently deductible for income tax purposes. The ultimate realization of the deferred tax asset is dependent upon the generation of sufficient taxable income by the Company during the periods in which these temporary differences become deductible for tax purposes. Management believes that it is more likely than not that the Company's deferred tax asset will be realized and accordingly, a valuation allowance for deferred tax assets is not maintained. Deferred debenture offering costs consist primarily of underwriters' commissions and are amortized over the terms of the debentures. The increase was due to additional costs ($554,000) incurred in the first quarter of 2003 in connection with the sale of Series 01/21/03 debentures by Intervest Mortgage Corporation, partially offset by normal amortization during the period. Deposit Liabilities - ------------------- Deposit liabilities increased to $538,098,000 at March 31, 2003, from $505,958,000 at December 31, 2002, primarily reflecting increases in money market and certificate of deposit accounts of $5,637,000 and $21,370,000, respectively. At March 31, 2003, certificate of deposit accounts totaled $346,353,000 and demand deposit, savings, NOW and money market accounts aggregated $191,745,000. The same categories of deposit accounts totaled $324,983,000 and $180,975,000, respectively, at December 31, 2002. Certificate of deposit accounts represented 64% of total deposits at March 31, 2003 and December 31, 2002. Debentures Payable and Related Accrued Interest Payable - ------------------------------------------------------- At March 31, 2003, debentures payable amounted to $90,530,000, compared to $84,430,000 at year-end 2002. The increase was due to the sale of additional debentures by Intervest Mortgage Corporation (Series 01/21/03 totaling $7,500,000 in principal amount and maturing at various times through July 1, 2010) as part of its normal funding of its mortgage loan originations, partially offset by the repayment of $1,400,000 of its Series 11/10/98 debentures. The sale of the debentures, after all underwriter's commissions and other issuance costs, resulted in net proceeds of $6,935,000. At March 31, 2003, Intervest Mortgage Corporation had $80,100,000 principal amount of debentures payable outstanding and the Holding Company had $10,430,000 principal amount of debentures payable outstanding, of which $6,930,000 were convertible into the Holding Company's Class A common stock at a current conversion price of $10.01 per share through December 31, 2003. At March 31, 2003 and December 31, 2002, the Holding Company, through its wholly owned subsidiary Intervest Statutory Trust I, has Trust Preferred Securities (Junior Debentures Payable) outstanding totaling $15,000,000 that qualify as regulatory capital. 16 At March 31, 2003, accrued interest payable on all debentures amounted to $14,345,000, compared to $13,872,000 at year-end 2002. Nearly all of the accrued interest payable is due and payable at the maturity of various debentures. For a further discussion of all the debentures, including conversion prices and redemption premiums, see notes 7 and 9 to the consolidated financial statements included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. Note Payable - ------------ At March 31, 2003 and December 31, 2002, the note payable amounted to $263,000 and $266,000, respectively. The note was issued by the Bank in connection with the purchase of property in 2002 by the Bank that is across from its Court Street branch office in Florida. The Bank issued a note payable to the seller that matures in February of 2017 and calls for monthly payments of principal and interest at 7% per annum. All Other Liabilities - --------------------- The following table shows the composition of all other liabilities in the table on page 14: At March 31, At December 31, ------------ --------------- ($ in thousands) 2003 2002 - ----------------------------------------------------------------------------- Mortgage escrow funds payable $8,959 $5,894 Official checks outstanding 2,117 4,373 Accrued interest payable on deposits 929 895 Income taxes payable 1,048 526 All other 1,656 1,639 - ----------------------------------------------------------------------------- $14,709 $13,327 - ----------------------------------------------------------------------------- Mortgage escrow funds payable represent advance payments made by borrowers for taxes and insurance that are remitted by the Company to third parties. The increase reflects the timing of payments to taxing authorities as well as the growth in the loan portfolio. The level of official checks outstanding varies and fluctuates based on banking activity. The level of income taxes payable fluctuates based on the Company's earnings, effective tax rate and timing of tax payments. All other is comprised mainly of accrued expenses as well as fees received on loan commitments that have not yet been funded. Stockholders' Equity and Regulatory Capital - ------------------------------------------- Stockholders' equity increased to $55,000,000 at March 31, 2003, from $53,126,000 at December 31, 2002. The increase was due to the following: net earnings of $1,801,000 and the recording of $67,000 of compensation expense related to stock warrants held by employees and directors. For additional discussion of employee stock warrants, see the section "Comparison of Results of Operations for the Quarters Ended March 31, 2003 and 2002" The Bank is a well-capitalized institution as defined in applicable banking regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management believes that there are no current conditions or events outstanding which would change the Bank's designation as a well-capitalized institution. See note 4 to the condensed consolidated financial statements in this report for the Bank's capital ratios. Asset and Liability Management ------------------------------ Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The primary objective of the Company's asset/liability management strategy is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. The Company uses "gap analysis," which measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period, to monitor its interest rate sensitivity. The Company's one-year positive interest rate sensitivity gap was a positive $143,639,000, or 19.7% at March 31, 2003, compared to a positive $107,681,000, or 15.7% at December 31, 2002. The increase was primarily due to existing loans moving into the less than one-year maturity timeframe as well as the addition of new floating-rate loans and short-term investments funded by an increase in deposits and borrowed funds with a term of over one year. In computing the gap, the Company treats its interest checking, money market and savings deposit accounts as immediately repricing. Further, the Company has a "floor," or minimum rate, on many of its floating-rate loans that is determined in relation to prevailing market rates on the date of origination. This floor only adjusts upwards in the event of increases in the loan's interest rate. This feature reduces the effect on interest income in a falling rate environment. For 17 a further discussion of interest rate risk and gap analysis, including all of the assumptions used in developing the one-year gap, see the Company's 2002 Annual Report to Stockholders on Form 10-K, pages 32 and 33. The table that follows summarizes the Company's interest-earning assets and interest-bearing liabilities as of March 31, 2003, that are scheduled to mature or reprice within the periods shown.
($ in thousands) 0-3 4-12 Over 1-4 Over 4 Months Months Years Years Total - ----------------------------------------------------------------------------------------------------------------------------------- Loans (1) $ 158,793 $ 230,130 $ 109,171 $ 40,320 $ 538,414 Securities held to maturity (2) 17,673 65,631 53,939 - 137,243 Short-term investments 29,725 - - - 29,725 Federal Reserve Bank stock - - - 1,114 1,114 Interest-earning time deposits 2,000 - - - 2,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive assets $ 208,191 $ 295,761 $ 163,110 $ 41,434 $ 708,496 - ----------------------------------------------------------------------------------------------------------------------------------- Deposit accounts (3): Interest checking deposits $ 14,370 $ - $ - $ - $ 14,370 Savings deposits 32,848 - - - 32,848 Money market deposits 139,930 - - - 139,930 Certificates of deposit 29,475 94,782 120,116 101,980 346,353 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 216,623 94,782 120,116 101,980 533,501 Debentures payable 41,500 - 17,600 31,430 90,530 Debentures payable- capital securities - - - 15,000 15,000 Accrued interest on all debentures 7,408 - 3,294 3,643 14,345 Note payable - - - 263 263 - ----------------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities $ 265,531 $ 94,782 $ 141,010 $ 152,316 $ 653,639 - ----------------------------------------------------------------------------------------------------------------------------------- GAP (repricing differences) $ (57,340) $ 200,979 $ 22,100 $(110,882) $ 54,857 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP $ (57,340) $ 143,639 $ 165,739 $ 54,857 $ 54,857 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP to total assets -7.9% 19.7% 22.8% 7.5% 7.5% - -----------------------------------------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the table above: (1) Adjustable-rate loans are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans are scheduled, including repayments, according to their contractual maturities. Deferred loan fees are excluded from this analysis; (2) securities are scheduled according to the earlier of their contractual maturity or the date in which the interest rate is scheduled to increase. The effects of possible prepayments that may result from the issuer's right to call a security before its contractual maturity date are not considered. (3) interest checking, savings and money market deposits are regarded as ready accessible withdrawable accounts; and certificates of deposit are scheduled through their maturity dates. 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: retail deposits obtained through the Bank's branch offices and through the mail; amortization, satisfactions and repayments of loans; the maturities and calls of securities; sales of debentures; borrowings in the federal funds market and cash provided by operating activities. The Bank has agreements with correspondent banks whereby it may borrow up to $8,000,000 on an unsecured basis. There were no outstanding borrowings under these agreements. In April 2003, the Bank was approved to become a member of the Federal Home Loan Bank of New York. The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the off-balance sheet financial instruments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. 18 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 require payment of fees. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company believes that it can fund all of its commitments from the sources of funds noted above. The contractual (notional) amounts of the Company's off-balance sheet financial instruments is as follows: At Mar 31, At Dec 31, ---------- ---------- ($ in thousands) 2003 2002 - ------------------------------------------------------------------------------- Unfunded loan commitments $84,342 $68,244 Available lines of credit 826 533 Standby letters of credit 1,267 1,267 Comparison of Results of Operations for the Quarters Ended March 31, 2003 and ----------------------------------------------------------------------------- 2002 ---- Overview - -------- Consolidated net earnings in the first quarter of 2003 increased to $1,801,000, from $1,248,000 in the first quarter of 2002. Earnings per share on a diluted basis increased to $0.32 in the first quarter of 2003, from $0.30 in the first quarter of 2002. The earnings per share computation for the 2003 quarter included a higher number of common shares resulting from the exercise of common stock warrants in the latter part of 2002 and the inclusion of dilutive shares from convertible debentures outstanding. The Company's return on average assets and equity increased to 1.03% and 13.40%, respectively, in the first quarter of 2003, up from 0.95% and 12.23% in the first quarter of 2002. The improvement in quarterly earnings was attributable to growth in the Company's net interest and dividend income, which increased by $1,199,000 due to an increase in the Company's loan portfolio. This improvement was partially offset by a $322,000 increase in noninterest expenses (a large portion of which was attributable to the Company's growth in assets) and a $381,000 increase in the provision for income taxes due to higher pre-tax income. Selected information regarding results of operations for the first quarter of 2003 follows:
Intervest Intervest Intervest Inter- Holding National Mortgage Statutory Company ($ in thousands) Company Bank Corporation Trust I Balances Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 269 $ 9,302 $ 2,092 $ 382 $ (420) $11,625 Interest expense 684 4,495 1,659 370 (420) 6,788 ----------------------------------------------------------------------- Net interest and dividend income (expense) (415) 4,807 433 12 - 4,837 Provision (credit) for loan loss reserves 29 258 57 - - 344 Noninterest income 49 268 539 - (527) 329 Noninterest expenses 148 1,760 391 12 (527) 1,784 ----------------------------------------------------------------------- Earnings (loss) before taxes (543) 3,057 524 - - 3,038 Provision (credit) for income taxes (246) 1,244 239 - - 1,237 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ (297) $ 1,813 $ 285 $ - $ - $ 1,801 - ----------------------------------------------------------------------------------------------------------------------------------- Intercompany dividends received (paid) (1) $ 375 $ (375) $ - $ - $ - $ - - ----------------------------------------------------------------------------------------------------------------------------------- (1) The Bank pays a monthly dividend of $125,000 to the Holding Company in order to provide funds for the debt service on the Junior Debentures-Capital Securities (the proceeds of which were contributed to the Bank as capital in December 2001).
Net Interest and Dividend Income - -------------------------------- Net interest and dividend income is the Company's primary source of earnings and is influenced primarily by the amount, distribution and repricing characteristics of its interest-earning assets and interest-bearing liabilities as well as by the relative levels and movements of interest rates. Net interest and dividend income increased to $4,837,000 in the first quarter of 2003, from $3,638,000 in the first quarter of 2002. The increase was attributable to growth of $174,145,000 in the Company's average interest-earning assets. The growth in average earning assets was due to $121,792,000 in new mortgage loans and a net increase in security and other short-term investments aggregating $52,353,000. These increases were funded by $148,249,000 of new deposits, $11,766,000 of additional borrowed funds and a $12,924,000 increase in stockholders' equity. 19 The Company's net interest margin remained nearly unchanged at 2.85% in the first quarter of 2003, compared to 2.87% in the same period of 2002. In a declining interest rate environment, the yield on the Company's interest-earning assets decreased 81 basis points to 6.86% in the first quarter of 2003 due to lower rates on new mortgage loans originated (resulting from increased competition to make loans), prepayments of higher-yielding loans and lower yields earned on security and other short-term investments. The Company's cost of funds decreased 88 basis points to 4.37% in the first quarter of 2003 due to lower rates paid on deposit accounts and a rate decrease on floating-rate debentures. The floating-rate debentures are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of 50 basis points from April 1, 2002 to March 31, 2003. The following table provides information on average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period.
Quarter Ended ----------------------------------------------------------------------------- March 31, 2003 March 31, 2002 ----------------------------------------------------------------------------- Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate - ----------------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Loans $509,189 $10,670 8.50% $387,397 $8,820 9.23% Securities 158,120 887 2.28 114,764 842 2.98 Other interest-earning assets 20,040 68 1.38 11,043 49 1.80 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 687,349 $11,625 6.86% 513,204 $9,711 7.67% - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 15,084 14,100 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $702,433 $527,304 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest checking deposits $11,831 $ 56 1.92% $ 9,563 $ 61 2.60% Savings deposits 31,174 162 2.11 26,841 192 2.90 Money market deposits 138,880 722 2.11 89,227 636 2.89 Certificates of deposit 333,768 3,513 4.27 241,773 3,033 5.09 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposit accounts 515,653 4,453 3.50 367,404 3,922 4.33 - ----------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased - - - 344 2 1.96 Debentures and related interest payable 98,641 1,957 8.05 86,652 1,773 8.30 Junior debentures - capital securities 15,000 374 10.10 15,000 374 10.10 Note payable 265 4 6.87 144 2 6.91 - ----------------------------------------------------------------------------------------------------------------------------------- Total borrowed funds 113,906 2,335 8.31 102,140 2,151 8.54 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 629,559 $6,788 4.37% 469,544 $6,073 5.25% - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 5,109 6,151 Noninterest-bearing liabilities 14,015 10,783 Stockholders' equity 53,750 40,826 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $702,433 $527,304 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest and dividend income/spread $4,837 2.49% $3,638 2.42% - ----------------------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/margin $57,790 2.85% $43,660 2.87% - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of total interest-earning assets to total interest-bearing liabilities 1.09 1.09x - ----------------------------------------------------------------------------------------------------------------------------------- Other Ratios: Return on average assets (1) 1.03% 0.95% Return on average equity (1) 13.40% 12.23% Noninterest expense to average assets (1) 1.02% 1.11% Efficiency ratio (2) 35% 37% Average stockholders' equity to average assets 7.65% 7.74% - ----------------------------------------------------------------------------------------------------------------------------------- (1) Annualized (2) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses plus noninterest income.
20 Provision for Loan Loss Reserves - -------------------------------- In the first quarter of 2003, the Company recorded a provision for loan losses of $344,000, compared to $346,000 in the same quarter of 2002. The provision is based on management's ongoing assessment of the adequacy of the allowance for loan loss reserves for each subsidiary, which takes into consideration a number of factors as discussed on page 15 of this report. The provision for each quarter was a function of net loan growth, which amounted to $42,680,000 during the 2003 first quarter, versus $36,529,000 in the first quarter of 2002. In the first quarter of 2003, a larger percentage of the growth was attributable to the Holding Company and Intervest Mortgage Corporation whose internal reserve percentages are lower than those of the Bank. Noninterest Income - ------------------ Noninterest income includes fees from customer service charges, income from mortgage lending activities (which consists mostly of fees from expired loan commitments and loan servicing, maintenance and inspections charges), and income from the early repayment of mortgage loans (which consists largely of the recognition of unearned fees associated with such loans at the time of payoff and the receipt of prepayment penalties in certain cases). The amount and timing of, as well as income from, loan prepayments, if any, cannot be predicted and can fluctuate significantly. Normally, the number of instances of prepayment of mortgage loans tends to increase during periods of declining interest rates and tends to decrease during periods of increasing interest rates. Many of the Company's mortgage loans include prepayment provisions, and others prohibit prepayment of indebtedness entirely. Noninterest income increased $55,000 to $329,000 in the first quarter of 2003, from $274,000 in the first quarter of 2002. The increase was due to an increase in income from expired loan commitments and loan service charge income resulting from growth in the loan portfolio. Noninterest Expenses - -------------------- Noninterest expenses increased to $1,784,000 in the first quarter of 2003, from $1,462,000 in the comparable quarter of 2002. The increase of $322,000 was largely due to a $151,000 increase in compensation and benefits, a $30,000 increase in data processing expenses, a $27,000 increase in professional fees, a $15,000 increase in insurance expense and the addition of $43,000 of net expenses associated with foreclosed real estate. The increase in compensation and benefits expense was due to $122,000 resulting from additional staff (60 full-time employees at March 31, 2003 vs. 54 at March 31, 2002), salary increases and a higher cost of employee benefits. Compensation for the first quarter of 2002 included bonus payments of $37,000 to the Chairman of the Company. Compensation for the first quarter of 2003 included $67,000 of expense associated with certain common stock warrants held by employees and directors as a result of an increase in the Company's Class A common stock price during the quarter. (In 2001, the Company modified the terms of its Class A common stock warrants - exercisable at $12.50 and $16.00 per share as of December 31, 2001 - and reduced the exercise price to $10.01 per share commencing January 1, 2002 and extended the expiration date to December 31, 2002. In September 2002, the Company further modified the warrants by extending the expiration date to December 31, 2003. For these warrants, which total 138,500, compensation expense is being recorded in the statement of earnings with the corresponding credit to paid in capital in accordance with variable rate accounting as prescribed in APB Opinion No. 25 and related interpretations. Future compensation related to these warrants will fluctuate up or down until December 31, 2003 and will be a function of the Company's Class A common stock price and number of warrants outstanding and exercised). The increase in data processing expenses was due to growth in the Bank's assets. The Bank engages a third-party servicer for its main data processing and the fee is a function of the Bank's total assets, which increased to $606,772,000 at March 31, 2003, from $463,930,000 at March 31, 2002. The increase in professional fees and insurance expense was primarily due to the Company's growth. The foreclosed real estate expenses relate to one commercial real estate property located in the State of Florida that was acquired by the Bank through foreclosure. Foreclosed real estate expenses, net of any rental income, consist mostly of real estate taxes, insurance, utilities, maintenance, professional fees and other charges required to protect the Company's interest in the property. Provision for Income Taxes - -------------------------- The provision for income taxes increased to $1,237,000 in the first quarter of 2003, from $856,000 in the first quarter of 2002, due to higher pre-tax income. The Company's effective tax rate (inclusive of state and local taxes) amounted to 40.7% in both periods. 21 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities, and the issuance of its debentures. The Company has not engaged in and accordingly has no risk related to trading accounts, commodities or foreign exchange. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments as of December 31, 2002, which reflect changes in market prices and rates, can be found in note 20 to the consolidated financial statements included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. 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, while adjusting the Company's asset-liability structure to obtain the maximum yield versus cost spread on that structure. Management relies primarily on its asset-liability structure to control interest rate risk. However, a sudden and substantial increase in interest rates could 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. Management believes that there have been no significant changes in the Company's market risk exposure since December 31, 2002. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company maintains --------------------------------------------------- controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officer of the Company concluded that the Company's disclosure controls and procedures were adequate. (b) Changes in internal controls. The Company made no significant changes in its ----------------------------- internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial Officer. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Not Applicable ITEM 2. Changes in Securities and Use of Proceeds (a) Not Applicable (b) Not Applicable (c) Not Applicable (d) Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable ITEM 5. Other Information Not Applicable ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibit is filed as part of this report. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the reporting period covered by this report. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES Date: April 25, 2003 By: /s/ Lowell S. Dansker ------------------------- Lowell S. Dansker, President and Treasurer (Principal Executive and Financial Officer) Date: April 25, 2003 By: /s/ Lawrence G. Bergman --------------------------- Lawrence G. Bergman, Vice President and Secretary 23 CERTIFICATION I, Lowell S. Dansker, as the principal executive and principal financial officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"), certify, that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and I have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: (a) all significant deficiencies in the design or operation of the internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Lowell S. Dansker --------------------- Lowell S. Dansker, President and Treasurer (Principal Executive and Financial Officer) April 25, 2003 24 EX-24.2 6 doc6.txt Exhibit 24.2 INDEPENDENT AUDITORS' CONSENT We consent to the reference to our firm under the caption "Experts" in Post-Effective Amendment No. 5 on Form S-2 (No. 333-64177) and to the incorporation by reference therein of our report dated January 24, 2003 with respect to the consolidated financial statements of Intervest Bancshares Corporation included in its Annual Report on Form 10-K for the year ended December 31, 2002. HACKER, JOHNSON & SMITH P.A., P.C. Tampa, Florida May 21, 2003 EX-24.3 7 doc7.txt Exhibit 24.3 INDEPENDENT AUDITORS' CONSENT We consent to the reference to our firm under the caption "Experts" in Post-Effective Amendment No. 5 on Form S-2 (No. 333-64177) and to the incorporation by reference therein of our report dated January 23, 2003 with respect to the consolidated financial statements of Intervest Mortgage Corporation (not presented separately herein or therein) included in the Annual Report on Form 10-K of Intervest Bancshares Corporation for the year ended December 31, 2002. EISNER LLP New York, New York May 19, 2003 -----END PRIVACY-ENHANCED MESSAGE-----