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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 June 30, 2002
Commission File No. 000-23377
INTERVEST BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(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 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:
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Class A Common Stock, $1.00 par value per share 4,077,279 Outstanding at July 31, 2002
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Class B Common Stock, $1.00 par value per share 355,000 Outstanding at July 31, 2002
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2002 (Unaudited) and December 31, 2001.......................... 2
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Six-Months Ended June 30, 2002 and 2001................... 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Quarters and Six-Months Ended June 30, 2002 and 2001 .................. 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Six-Months Ended June 30, 2002 and 2001................................ 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six-Months Ended June 30, 2002 and 2001................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ................. 7
Review by Independent Certified Public Accountants ............................... 10
Report on Reviews by Independent Certified Public Accountants .................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 23
Item 2. Changes in Securities and Use of Proceeds................................ 23
Item 3. Defaults Upon Senior Securities.......................................... 23
Item 4. Submission of Matters to a Vote of Security Holders...................... 23
Item 5. Other Information........................................................ 24
Item 6. Exhibits and Reports on Form 8-K ........................................ 24
Signatures................................................................................. 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
At June 30, At December 31,
($ in thousands, except par value) 2002 2001
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ASSETS (Unaudited)
Cash and due from banks $ 7,735 $ 4,714
Federal funds sold 13,637 6,345
Commercial paper 3,440 12,400
Other short-term investments 1,557 950
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Total cash and cash equivalents 26,369 24,409
Time deposits with banks 50 250
Securities available for sale at estimated fair value 5,646 6,192
Securities held to maturity, net (estimated fair value of $129,151 and $99,404, respectively) 128,766 99,157
Federal Reserve Bank stock, at cost 1,104 654
Loans receivable (net of allowance for loan losses of $4,109 and $3,380, respectively) 445,662 365,146
Accrued interest receivable 4,496 3,202
Loan fees receivable 3,316 2,679
Premises and equipment, net 6,358 6,042
Foreclosed real estate 1,081 -
Deferred income tax asset 1,654 1,236
Deferred debenture offering costs 3,402 3,396
Other assets 253 259
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Total assets $628,157 $512,622
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LIABILITIES
Noninterest-bearing demand deposit accounts $ 4,695 $ 5,550
Interest-bearing deposit accounts:
Checking (NOW) accounts 9,011 10,204
Savings accounts 30,089 24,624
Money market accounts 131,269 80,594
Certificate of deposit accounts 290,689 241,465
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Total deposit accounts 465,753 362,437
Subordinated debentures payable 76,680 73,430
Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000
Note payable 271 -
Accrued interest payable on all debentures 12,295 11,480
Accrued interest payable on deposits 864 817
Mortgage escrow funds payable 7,404 4,253
Official checks outstanding 4,180 3,219
Other liabilities 1,555 1,591
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Total liabilities 584,002 472,227
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STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
3,650,279 and 3,544,629 shares issued and outstanding, respectively ) 3,650 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 19,790 19,001
Retained earnings 20,275 17,383
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale, net of tax 85 111
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Total stockholders' equity 44,155 40,395
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Total liabilities and stockholders' equity $628,157 $512,622
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See accompanying notes to condensed consolidated financial statements.
2
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
Quarter Ended Six-Months Ended
June 30, June 30,
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($ in thousands, except per share data) 2002 2001 2002 2001
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INTEREST AND DIVIDEND INCOME
Loans receivable $9,972 $6,984 $18,792 $13,587
Securities 983 684 1,825 2,180
Other interest-earning assets 53 736 102 1,321
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Total interest and dividend income 11,008 8,404 20,719 17,088
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INTEREST EXPENSE
Deposits 4,347 4,169 8,269 8,775
Federal funds purchased - - 2
Subordinated debentures 1,804 1,886 3,577 3,901
Junior debentures - capital securities 374 - 748 -
Note payable 5 - 7 -
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Total interest expense 6,530 6,055 12,603 12,676
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Net interest and dividend income 4,478 2,349 8,116 4,412
Provision for loan loss reserves 426 100 772 100
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Net interest and dividend income after
provision for loan loss reserves 4,052 2,249 7,344 4,312
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NONINTEREST INCOME
Customer service fees 48 35 83 73
Income from mortgage lending activities 330 534 569 717
All other - 1 - 4
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Total noninterest income 378 570 652 794
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NONINTEREST EXPENSES
Salaries and employee benefits 822 586 1,538 1,212
Occupancy and equipment, net 322 278 637 582
Data processing 148 60 266 95
Advertising and promotion 27 6 34 14
Professional fees and services 85 100 165 197
Stationery, printing and supplies 38 35 71 68
Postage and delivery 22 21 46 43
FDIC and general insurance 42 40 84 85
All other 174 203 301 357
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Total noninterest expenses 1,680 1,329 3,142 2,653
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Earnings before taxes 2,750 1,490 4,854 2,453
Provision for income taxes 1,106 612 1,962 994
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Net earnings $1,644 $878 $ 2,892 $ 1,459
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Basic earnings per share $0.42 $ 0.23 $ 0.74 $ 0.37
Diluted earnings per share $0.33 $ 0.23 $ 0.60 $ 0.37
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See accompanying notes to condensed consolidated financial statements.
3
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter Ended Six-Months Ended
June 30, June 30,
---------------------- -----------------------
($ in thousands) 2002 2001 2002 2001
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Net earnings $1,644 $878 $2,892 $1,459
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Net unrealized gains (losses) on securities available for sale - 51 (46) 550
Provision for income taxes related to unrealized gains (losses)
on securities available for sale - 19 (20) 207
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Other comprehensive income (loss), net of tax - 32 (26) 343
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Total comprehensive income, net of tax $1,644 $910 $2,866 $1,802
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See accompanying notes to condensed consolidated financial statements.
4
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Six-Months Ended
June 30,
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($ in thousands) 2002 2001
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CLASS A COMMON STOCK
Balance at beginning of period $ 3,545 $ 3,545
Issuance of 105,650 shares upon the exercise of warrants in 2002 105 -
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Balance at end of period 3,650 3,545
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CLASS B COMMON STOCK
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Balance at beginning and end of period 355 355
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ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 19,001 18,975
Compensation related to vesting of certain Class B stock warrants 13 12
Compensation related to certain Class A stock warrants modified 117 -
Issuance of 105,650 shares upon the exercise of Class A stock warrants
and related tax benefit in 2002 659 -
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Balance at end of period 19,790 18,987
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RETAINED EARNINGS
Balance at beginning of period 17,383 13,605
Net earnings for the period 2,892 1,459
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Balance at end of period 20,275 15,064
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 111 (252)
Net change in accumulated other comprehensive income, net (26) 343
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Balance at end of period 85 91
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Total stockholders' equity at end of period $44,155 $38,042
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See accompanying notes to condensed consolidated financial statements.
5
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six-Months Ended
June 30,
---------------------------
($ in thousands) 2002 2001
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OPERATING ACTIVITIES
Net earnings $ 2,892 $ 1,459
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 292 228
Provision for loan loss reserves 772 100
Deferred income tax benefit (399) (6)
Amortization of deferred debenture offering costs 449 355
Compensation expense related to common stock warrants 130 12
Amortization of premiums, fees and discounts, net (443) (1,308)
Net increase in accrued interest payable on debentures 815 1,198
Net increase in official checks outstanding 961 2,440
Net increase in all other assets and liabilities 486 1,775
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Net cash provided by operating activities 5,955 6,253
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INVESTING ACTIVITIES
Maturities of interest-earning time deposits with banks 200 -
Maturities and calls of securities available for sale 500 60,194
Maturities and calls of securities held to maturity 36,950 21,875
Purchases of securities held to maturity (67,355) (17,792)
Net increase in loans receivable (83,529) (47,159)
Purchases of Federal Reserve Bank stock, net (450) (64)
Purchases of premises and equipment, net (333) (228)
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Net cash (used in) provided by investing activities (114,017) 16,826
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FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 54,092 8,931
Net increase (decrease) in certificates of deposit 49,224 (12,162)
Net increase in mortgage escrow funds payable 3,151 1,761
Principal repayments of debentures (2,500) (1,400)
Principal repayments of note payable (4) -
Proceeds from issuance of debentures, net of issuance costs 5,295 3,176
Proceeds from issuance of common stock 764 -
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Net cash provided by financing activities 110,022 306
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Net increase in cash and cash equivalents 1,960 23,385
Cash and cash equivalents at beginning of period 24,409 42,938
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Cash and cash equivalents at end of period $ 26,369 $ 66,323
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 11,292 $ 12,118
Income taxes 2,754 1,218
Noncash activities:
Transfer of loans to foreclosed real estate, net of chargeoffs 1,081 -
Purchase of premises with note payable 275 -
Accumulated other comprehensive income,
change in unrealized gain on securities available for sale, net of tax (26) 343
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See accompanying notes to condensed consolidated financial statements.
6
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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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, 2001. 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, 2001.
The condensed consolidated financial statements include the accounts of
Intervest Bancshares Corporation (a bank holding company referred to by itself
as the "Holding Company") and its subsidiaries, Intervest National Bank (the
Bank), Intervest Corporation of New York 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.
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 Clearwater and Pinellas County, Florida. 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 Corporation of New York and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation, are located
in Rockefeller Center in New York City. Intervest Corporation of New York 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 $15,000,000 of capital securities as more fully described in note 9 to
the consolidated financial statements in the Company's Annual Report to
Stockholders on Form 10-K for the year ended December 31, 2001.
In the opinion of management, all material adjustments necessary for a fair
presentation of financial condition and results of operations for the interim
periods presented in this report have been made. These adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of results that may be expected for the entire year
or any other interim period. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts to conform to the current periods' presentation.
Note 2 - Allowance for Loan Loss Reserves
The Company monitors its loan portfolio to determine the appropriate level of
the allowance for loan loss reserves based on various factors. These factors
include: the type and level of loans outstanding; volume of loan originations;
overall portfolio quality; loan concentrations; specific problem loans,
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's assessment of the current and
anticipated economic conditions in the Company's lending regions.
Activity in the allowance for loan loss reserves for the periods indicated is
summarized as follows:
Quarter Ended Six-Months Ended
June 30, June 30,
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($ in thousands) 2002 2001 2002 2001
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Balance at beginning of period $3,833 $2,768 $3,380 $2,768
Provision charged to operations 426 100 772 100
Recoveries of previous chargeoffs (1) - - 107 -
Chargeoffs (2) (150) - (150) -
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Balance at end of period $4,109 $2,868 $4,109 $2,868
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(1) Represents proceeds received from the sale of collateral from a loan that
was charged off prior to 1997.
(2) Represents a chargeoff in connection with the transfer of a nonperforming
loan to foreclosed real estate.
7
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 2 - Allowance for Loan Loss Reserves, Continued
In the second quarter of 2002, the property collateralizing a commercial real
estate loan with a principal balance of $1,243,000 that was on nonaccrual status
and considered impaired under the criteria of SFAS No.114 at March 31, 2002 and
December 31, 2001, 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. At June 30, 2002, there were no
nonaccrual or impaired loans. At December 31, 2001, the aforementioned loan of
$1,243,000 was on nonaccrual status and considered impaired. Interest income
that was not accrued on this loan under its contractual terms prior to
foreclosure amounted to $31,000 in the first half of 2002.
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 Six-Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
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BASIC EARNINGS PER SHARE
Net earnings $1,644,000 $878,000 $2,892,000 $1,459,000
Average number of common shares outstanding 3,959,542 3,899,629 3,930,577 3,899,629
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Basic net earnings per share $0.42 $0.23 $0.74 $0.37
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DILUTED EARNINGS PER SHARE
Adjusted net earnings for diluted earnings per share computation (1) $1,752,000 $878,000 $3,105,000 $1,459,000
Average number of common shares outstanding for dilution:
Common shares outstanding per above 3,959,542 3,899,629 3,930,577 3,899,629
Potential dilutive shares resulting from exercise of warrants (2) 417,965 - 324,577 -
Potential dilutive shares resulting from conversion of debentures (3) 952,502 - 952,502 -
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Total average number of common shares outstanding 5,330,009 3,899,629 5,207,656 3,899,629
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Diluted net earnings per share $0.33 $0.23 $0.60 $0.37
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(1) Adjusted net earnings represents net earnings plus interest expense on
dilutive convertible debentures, net of tax, that would not occur if they
were assumed converted.
(2) Common stock warrants to purchase 1,132,403 shares of common stock at
prices of $10.00 and $10.01 per share were not considered in the six-month
computation of diluted EPS for 2002 because their exercise price per share
exceeded the average market price of Class A common stock during the
period.
Common stock warrants to purchase 2,650,218 shares of common stock at
prices ranging from $6.67 to $16.00 per share were not considered in the
quarterly and six-month computations of diluted EPS for 2001 because their
exercise price per share exceeded the average market price of Class A
common stock during those periods.
(3) Convertible debentures outstanding at June 30, 2001 totaling $8,808,000
(outstanding principal and accrued interest) were convertible into common
stock at a price of $14.00 per share, but were not considered in the
quarterly and six-month computations of diluted EPS for 2001 because they
were not dilutive.
8
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 4 - 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 June 30, 2002 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
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Total capital to risk-weighted assets 12.72% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.74% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 9.55% 4.00% 5.00%
9
Intervest Bancshares Corporation and Subsidiaries
Review by Independent Certified Public Accountants
Hacker, Johnson & Smith PA, the Company's independent certified public
accountants, have made a limited review of the financial data as of June 30,
2002, and for the three- and six-month periods ended June 30, 2002 and 2001
presented in this document, in accordance with standards established by the
American Institute of Certified Public Accountants.
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 June 30,
2002, and the related condensed consolidated statements of earnings and
comprehensive income for the three- and six-month periods ended June 30, 2002
and 2001, and the related condensed consolidated statements of changes in
stockholders' equity and cash flows for the six-month periods ended June 30,
2002 and 2001 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 Corporation of New York, whose
total assets as of June 30, 2002 constituted 13.8% of the related consolidated
total, and whose net interest income, noninterest income and net earnings for
the three- and six-month periods then ended, constituted 17.4%, 22.5%, and
29.7%; and 15.6%, 23.6% and 26.1%, respectively, and whose net interest income,
noninterest income and net earnings for the three- and six-month periods ended
June 30, 2001, constituted 9.5%, 61.8% and 20.6%; and 6.4%, 49.1% and 8.6%,
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, 2001, 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 21,
2002, we 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, 2001 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Hacker, Johnson & Smith PA
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HACKER, JOHNSON & SMITH PA
Tampa, Florida
July 30, 2002
11
Report on Review by Independent Certified Public Accountants
Board of Directors and Stockholder
Intervest Corporation of New York
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest
Corporation of New York and subsidiaries (the "Company") as of June 30, 2002,
and the related condensed consolidated statements of operations for the three-
and six-month periods ended June 30, 2002 and 2001, and the related condensed
consolidated statements of changes in stockholder's equity and cash flows for
the six-month periods ended June 30, 2002 and 2001 (all of which are not
presented seperately 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 accompanying condensed consolidated financial statements
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 as of
December 31, 2001 and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for the year then ended (not presented
herein), and in our report dated January 21, 2002, we 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, 2001 is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ Eisner, LLP
- ---------------
New York, New York
July 30, 2002
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
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Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest
National Bank, 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. From time to time, the Holding
Company 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 Clearwater and
Pinellas County, Florida. The Bank conducts a personalized commercial and
consumer banking business, which consists of attracting 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 Corporation of New York 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 Corporation of New York.
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, 2001.
The Company announced that it 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.
The Company's profitability depends primarily on 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,
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. While none of the properties underlying these mortgages were
13
directly impacted by the terrorist act of September 11, 2001, it is impossible
to predict the impact such events will have on real estate generally in the City
of New York.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
------------------------------------------------------------------------
Overview
- --------
Total assets at June 30, 2002 increased to $628,157,000, from $512,622,000 at
December 31, 2001. Total liabilities at June 30, 2002 increased to $584,002,000,
from $472,227,000 at December 31, 2001. Stockholders' equity increased to
$44,155,000 at June 30, 2002, from $40,395,000 at year-end 2001. Book value per
common share rose to $11.02 per share at June 30, 2002, from $10.36 at December
31, 2001.
Selected balance sheet information for the Holding Company and its subsidiaries
as of June 30, 2002 follows:
Intervest
Intervest Corporation Intervest Inter-
Holding National of New Statutory Company
($ in thousands) Company Bank York Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,725 $ 19,613 $ 6,737 $ - $ (1,706) $ 26,369
Time deposits with banks - 50 - - - 50
Securities available for sale - 5,646 - - - 5,646
Securities held to maturity, net - 128,766 - 15,464 (15,464) 128,766
Federal Reserve Bank stock - 1,104 - - - 1,104
Loans receivable, net of deferred fees 10,076 362,932 76,763 - - 449,771
Allowance for loan loss reserves (51) (3,984) (74) - - (4,109)
Investment in subsidiaries 59,809 - - - (59,809) -
Foreclosed real estate - 1,081 - - - 1,081
All other assets 1,498 14,050 4,097 59 (225) 19,479
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 73,057 $ 529,258 $ 87,523 $ 15,523 $ (77,204) $ 628,157
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 467,773 $ - $ - $ (2,020) $ 465,753
Subordinated debentures payable 25,894 - 66,250 - (15,464) 76,680
Junior debentures payable-capital securities - - - 15,000 - 15,000
Note payable - 271 - - - 271
Accrued interest payable on all debentures 2,739 - 9,558 57 (59) 12,295
All other liabilities 269 12,469 1,115 2 148 14,003
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 28,902 480,513 76,923 15,059 (17,395) 584,002
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 44,155 48,745 10,600 464 (59,809) 44,155
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 73,057 $ 529,258 $ 87,523 $ 15,523 $ (77,204) $ 628,157
- ------------------------------------------------------------------------------------------------------------------------------------
A comparison of the consolidated balance sheets as of June 30, 2002 and December
31, 2001 follows:
At June 30, 2002 At December 31, 2001
---------------- --------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $26,369 4.2% $24,409 4.8%
Time deposits with banks 50 - 250 0.1
Securities available for sale at estimated fair value 5,646 0.9 6,192 1.2
Securities held to maturity, net 128,766 20.5 99,157 19.3
Federal Reserve Bank stock 1,104 0.2 654 0.1
Loans receivable, net of deferred fees and loan loss reserves 445,662 70.9 365,146 71.2
Foreclosed real estate 1,081 0.2 - -
All other assets 19,479 3.1 16,814 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $628,157 100.0% $512,622 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $465,753 74.1% $362,437 70.7%
Subordinated debentures payable 76,680 12.2 73,430 14.3
Junior debentures payable-capital securities 15,000 2.4 15,000 2.9
Note payable 271 0.1 - -
Accrued interest payable on all debentures 12,295 2.0 11,480 2.3
All other liabilities 14,003 2.2 9,880 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 584,002 93.0 472,227 92.1
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 44,155 7.0 40,395 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $628,157 100.0% $512,622 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
14
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents amounted to $26,369,000 at June 30, 2002, compared to
$24,409,000 at December 31, 2001, and consisted of cash on hand and due from
banks, overnight federal funds and short-term commercial paper investments. 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
- -----------------------------
Securities available for sale amounted to $5,646,000 at June 30, 2002, compared
to $6,192,000 at December 31, 2001. The decrease was due to maturities. At June
30, 2002, the portfolio had an unrealized gain, net of tax, of $85,000, compared
to $111,000 at December 31, 2001. Unrealized gains and losses on securities
available for sale, net of related income taxes, are reported as a separate
component of comprehensive income and included in stockholders' equity.
Securities Held to Maturity
- ---------------------------
Securities held to maturity increased to $128,766,000 at June 30, 2002, from
$99,157,000 at December 31, 2001. The increase was due to new purchases
exceeding maturities during the period. The portfolio consists of short-term
debt obligations of FNMA, FHLB, FHLMC and FFCB with a weighted-average yield of
approximately 2.89% and a weighted average term of 1.3 years. The securities are
predominately fixed rate and some have call features, which allow the issuer to
call the security before its stated maturity without penalty.
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
$1,104,000 at June 30, 2002 and $654,000 at December 31, 2001, fluctuates based
on the Bank's capital level.
Loans Receivable, Net of Deferred Fees and Loan Loss Reserves
- -------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan loss reserves,
increased to $445,662,000 at June 30, 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. Commercial
real estate and multifamily real estate properties collateralized almost all of
the loans in the Company's loan portfolio.
At June 30, 2002, the allowance for loan loss reserves amounted to $4,109,000,
compared to $3,380,000 at December 31, 2001. The allowance represented 0.91% of
total loans (net of deferred fees) outstanding at June 30, 2002, compared to
0.92% at December 31, 2001. 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 $772,000
(due to loan growth) and a $107,000 recovery from the sale of collateral from a
loan that was charged off prior to 1997. These additions were partially offset
by a $150,000 charge off recorded in connection with a nonperforming loan as
discussed below.
In the second quarter of 2002, the property collateralizing a commercial real
estate loan with a principal balance of $1,243,000 that was on nonaccrual status
and considered impaired under the criteria of SFAS No.114 at March 31, 2002 and
December 31, 2001, 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. At June 30, 2002, there were no
nonaccrual or impaired loans. At December 31, 2001, the aforementioned loan of
$1,243,000 was the only loan on nonaccrual status and considered impaired.
15
Foreclosed Real Estate
- ----------------------
At June 30, 2002, foreclosed real estate amounted to $1,081,000 and represented
one commercial real estate property located in the State of Florida that was
acquired by the Bank as discussed in the preceding paragraph. The property is
actively being marketed for sale. Foreclosed real estate is carried at the lower
of the new cost basis or estimated fair value less estimated selling costs.
Revenue and expenses from operations and changes in the valuation allowance of
the property are included in the consolidated statement of earnings.
All Other Assets
- ----------------
The following table sets forth the composition of all other assets in the table
on page 14:
At June 30, At December 31,
----------- ---------------
($ in thousands) 2002 2001
----------------------------------------------------------------------------
Accrued interest receivable $4,496 $3,202
Loans fee receivable 3,316 2,679
Premises and equipment, net 6,358 6,042
Deferred income tax asset 1,654 1,236
Deferred debenture offering costs, net 3,402 3,396
All other 253 259
----------------------------------------------------------------------------
$19,479 $16,814
----------------------------------------------------------------------------
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 a higher level of the aforementioned
interest-earning assets.
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. These fees 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. The increase
was due to an increase in mortgage loan originations.
Premises and equipment increased due to the purchase of property, at a cost of
$350,000, by the Bank that is across from its Court Street branch office in
Florida. 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 incurred with the sale of new debentures by Intervest
Corporation of New York, partially offset by normal amortization.
Deposit Liabilities
- -------------------
Deposit liabilities increased to $465,753,000 at June 30, 2002, from
$362,437,000 at December 31, 2001, primarily reflecting increases in money
market and certificate of deposit accounts of $50,675,000 and $49,224,000,
respectively. At June 30, 2002, certificate of deposit accounts totaled
$290,689,000 and demand deposit, savings, NOW and money market accounts
aggregated $175,064,000. The same categories of deposit accounts totaled
$241,465,000 and $120,972,000, respectively, at December 31, 2001. Certificate
of deposit accounts represented 62% of total deposits at June 30, 2002, compared
to 67% at year-end 2001.
Debentures Payable and Related Accrued Interest Payable
- -------------------------------------------------------
At June 30, 2002, debentures payable amounted to $76,680,000, compared to
$73,430,000 at year-end 2001. The increase was due to the sale of additional
debentures (Series 1/17/02 maturing at various times through October 1, 2009) by
Intervest Corporation of New York totaling $5,750,000 (as part of its normal
funding of its mortgage loan originations), partially offset by the repayment of
16
$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
$5,325,000.
At June 30, 2002, Intervest Corporation of New York had $66,250,000 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 price
of $10.01 per share. Intervest Corporation of New York has filed a registration
statement for the issuance of up to an additional $7,750,000 in principal amount
of debentures that is expected to be completed in the third quarter.
At June 30, 2002 and December 31, 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.
At June 30, 2002, accrued interest payable on all debentures amounted to
$12,295,000, compared to $11,480,000 at year-end 2001. 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, 2001.
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 $275,000. The note matures in February of 2017
and calls for monthly payments of principal and interest at 7% per annum.
All Other Liabilities
- ---------------------
The following table shows the composition of all other liabilities in the table
on page 14:
At June 30, At December 31,
($ in thousands) 2002 2001
-------------------------------------------------------------------------
Mortgage escrow funds payable $7,404 $4,253
Official checks outstanding 4,180 3,219
Accrued interest payable on deposits 864 817
Income taxes payable 326 772
All other 1,229 819
-------------------------------------------------------------------------
$14,003 $9,880
-------------------------------------------------------------------------
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 increase in all other is largely
due to fees collected and unearned on outstanding loan commitments.
Stockholders' Equity and Regulatory Capital
- -------------------------------------------
Stockholders' equity increased to $44,155,000 at June 30, 2002, from $40,395,000
at December 31, 2001. The increase was due to the following: net earnings of
$2,892,000; the issuance of 105,650 shares of common stock upon the exercise of
Class A common stock warrants for total proceeds, including related tax
benefits, of $764,000; the recording of $130,000 of compensation related to
stock warrants; and a $26,000 decrease in unrealized gains, net of tax, on
securities available for sale. For additional discussion of the aforementioned
compensation, see the section "Comparison of Results of Operations for the
Quarters Ended June 30, 2002 and 2001."
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. See note 4 to the condensed consolidated financial
statements in this report for the Bank's capital ratios.
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 funding 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 offices
17
and through the mail, satisfactions and repayments of loans, the maturities and
calls of securities, and cash provided by operating activities. The Company may
also borrow funds through the federal funds market or sale of debentures. For
information about the cash flows from the Company's operating, investing and
financing activities, see the condensed consolidated statements of cash flows in
this report. At June 30, 2002, the Company's total commitment to lend aggregated
approximately $76,000,000. Based on its cash flow projections, the Company
believes that it can fund all of its outstanding commitments from the
aforementioned sources of funds.
Interest Rate Risk
------------------
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. At June 30, 2002, the Company's one-year interest-rate sensitivity
gap was a positive $65,594,000 or 10.4% of total assets, compared to a positive
$31,738,000, or 6.2%, at December 31, 2001. In computing the gap, the Company
treats its interest checking, money market and savings deposit accounts as
immediately repricing. For a further discussion of interest rate risk and gap
analysis, including all of the assumptions used in developing the Company's
one-year gap position, see the Company's 2001 Annual Report to Stockholders on
Form 10-K, pages 31and 32.
Comparison of Results of Operations for the Quarters
----------------------------------------------------
Ended June 30, 2002 and 2001
----------------------------
Overview
- --------
Consolidated net earnings in the second quarter of 2002 increased 87% to
$1,644,000, from $878,000, in the second quarter of 2001. Earnings per share on
a fully diluted basis increased 43% to $0.33 in the second quarter of 2002, from
$0.23 in the second quarter of 2001. The earnings per share computation in the
2002 quarter included common shares resulting from common stock warrants and
convertible debentures that became dilutive during the period. The growth in
quarterly earnings was due to a $2,129,000 increase in net interest and dividend
income, partially offset by the following: a $494,000 increase in the provision
for income taxes; an increase in the provision for loan loss reserves of
$326,000; a $351,000 increase in noninterest expenses; and a $192,000 decline in
noninterest income.
Selected information regarding results of operations for the Holding Company and
its subsidiaries for the second quarter of 2002 follows:
Intervest
Intervest Corporation Intervest Inter-
Holding National of New Statutory Company
($ in thousands) Company Bank York Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 257 $ 8,465 $ 2,295 $ 382 $ (391) $11,008
Interest expense 672 4,361 1,518 370 (391) 6,530
-----------------------------------------------------------------------------
Net interest and dividend (expense) income (415) 4,104 777 12 - 4,478
Provision for loan loss reserves 2 386 38 - - 426
Noninterest income 51 291 477 - (441) 378
Noninterest expenses 234 1,559 316 12 (441) 1,680
------------------------------------------------------------------------------
Earnings (loss) before taxes (600) 2,450 900 - - 2,750
Provision (credit) for income taxes (271) 966 411 - - 1,106
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings $ (329) $ 1,484 $ 489 $ - $ - $ 1,644
- ------------------------------------------------------------------------------------------------------------------------------------
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 $4,478,000 in the second quarter of 2002, from
$2,349,000 in the second quarter of 2001. The increase was attributable to
growth of $169,002,000 in the Company's average interest-earning assets and an
increase in the net interest margin from 2.29% in the second quarter of 2001, to
3.10% in the second quarter of 2002. The growth in average earning assets was
due to $145,987,000 in new mortgage loans and a net increase in security and
other short-term investments aggregating $23,015,000. These increases were
funded by $135,450,000 of new deposits, $27,931,000 of additional borrowed funds
and $5,213,000 of additional stockholders' equity.
18
The increase in the margin was due to the Company's cost of funds decreasing at
a faster pace than its yield earned on interest-earning assets in a declining
interest rate environment. The yield on interest-earning assets decreased 59
basis points to 7.61% in the second quarter of 2002 due to lower rates on new
mortgage loans originated, and lower yields earned on security and other
short-term investments. The cost of funds decreased 164 basis points to 4.90% in
the second quarter of 2002 primarily due to lower rates paid on deposit accounts
and rate decreases on floating-rate debentures. The floating-rate debentures are
indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of 475
basis points from January 2001 to June 2002.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
Quarter Ended
----------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $435,623 $ 9,972 9.18% $289,636 $6,984 9.67%
Securities 132,345 983 2.98 52,563 684 5.22
Other interest-earning assets 12,171 53 1.75 68,938 736 4.28
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 580,139 $11,008 7.61% 411,137 $8,404 8.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,643 11,464
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $595,782 $422,601
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 9,640 $ 59 2.45% $ 7,080 $ 51 2.89%
Savings deposits 29,938 208 2.79 17,561 177 4.04
Money market deposits 122,896 852 2.78 60,284 606 4.03
Certificates of deposit 268,907 3,228 4.81 211,006 3,335 6.34
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 431,381 4,347 4.04 295,931 4,169 5.65
- ------------------------------------------------------------------------------------------------------------------------------------
Debentures and related interest payable 87,882 1,804 8.23 75,224 1,886 10.06
Junior debentures - capital securities 15,000 374 10.00 - - -
Note payable 273 5 7.00 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 103,155 2,183 8.49 75,224 1,886 10.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 534,536 $ 6,530 4.90% 371,155 $6,055 6.54%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,040 4,685
Noninterest-bearing liabilities 13,552 9,320
Stockholders' equity 42,654 37,441
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $595,782 $422,601
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 4,478 2.71% $2,349 1.66%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 45,603 3.10% $ 39,982 2.29%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09x 1.11x
- ------------------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets (1) 1.10% 0.83%
Return on average equity (1) 15.42% 9.38%
Noninterest expense to average assets (1) 1.13% 1.26%
Efficiency ratio (2) 34.60% 45.53%
Average stockholders' equity to average assets 7.16% 8.86%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income
before the provision for loan losses plus noninterest income.
19
Provision for Loan Loss Reserves
- --------------------------------
In the second quarter of 2002, the Company recorded a provision for loan losses
of $426,000, compared to $100,000 in the same quarter of 2001. 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 as discussed on page 15 of this report. The higher provision for the
2002 quarter was due to the growth in the loan portfolio of $45,297,000 during
the period.
Noninterest Income
- ------------------
Noninterest income includes fees from customer service charges and income from
mortgage lending activities, which is comprised mostly of income from loan
prepayments, fees earned on expired loan commitments, and loan service,
inspection and maintenance charges.
Noninterest income decreased to $378,000 in the second quarter of 2002, from
$570,000 in the second quarter of 2001. The decrease was due to lower income and
fees ($230,000) from the prepayment of mortgage loans, partially offset by
higher loan service fee income. The amount and timing of 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.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $1,680,000 in the second quarter of 2002, from
$1,239,000 in the comparable quarter of 2001, exclusive of $90,000 of
nonrecurring expenses associated with the merger of Intervest Bank into
Intervest National Bank in 2001. The resulting increase of $441,000 was largely
due to a $236,000 increase in compensation and benefits, a $88,000 increase in
data processing expenses, a $44,000 increase in occupancy and equipment
expenses, a $21,000 increase in advertising expenses and the addition of $47,000
of net expenses associated with foreclosed real estate during the second quarter
of 2002.
The increase in compensation and benefits was primarily due to $117,000
associated with certain common stock warrants held by employees. During 2001,
the Company modified the terms of its Class A 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 until their new expiration date of
December 31, 2002. For these warrants, 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.
Future compensation amounts related to these warrants will fluctuate up or down
depending on the Company's Class A common stock price and number of warrants
outstanding and exercised. The remainder of the increase was due to additional
staff, salary increases, and a bonus payment to the Chairman of the Company.
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.
The increase in occupancy and equipment expenses was primarily due to higher
real estate taxes and maintenance charges, including insurance and security
protection expenses.
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 $1,106,000 in the second quarter of
2002, from $612,000 in the second quarter of 2001, due to higher pre-tax income.
The Company's effective tax rate (inclusive of state and local taxes) amounted
to 40.2% in the 2002 period, compared to 41.1% in the 2001 period.
20
Comparison of Results of Operations for the Six-Months
------------------------------------------------------
Ended June 30, 2002 and 2001
----------------------------
Overview
- --------
Consolidated net earnings for the first half of 2002 increased 98% to
$2,892,000, or $0.60 per fully diluted share, from $1,459,000, or $0.37 per
fully diluted share, in the first half of 2001. The growth in earnings was due
to a $3,704,000 increase in net interest and dividend income, partially offset
by a higher provision for income taxes of $968,000, a $672,000 increase in the
provision for loan loss reserves, a $489,000 increase in noninterest expenses
and a $142,000 decline in noninterest income. The earnings per share computation
in the 2002 period included common shares resulting from common stock warrants
and convertible debentures that became dilutive during the period.
Selected information regarding results of operations for the Holding Company and
its subsidiaries for the six-months ended June 30, 2002 follows:
Intervest
Intervest Corporation Intervest Inter-
Holding National of New Statutory Company
($ in thousands) Company Bank York Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 501 $ 15,988 $ 4,275 $ 764 $ (809) $ 20,719
Interest expense 1,338 8,324 3,009 741 (809) 12,603
------------------------------------------------------------------------------------
Net interest and dividend (expense) income (837) 7,664 1,266 23 - 8,116
Provision for loan loss reserves 2 714 56 - - 772
Noninterest income 100 496 815 - (759) 652
Noninterest expenses 326 2,917 635 23 (759) 3,142
------------------------------------------------------------------------------------
Earnings (loss) before taxes (1,065) 4,529 1,390 - - 4,854
Provision (credit) for income taxes (483) 1,809 636 - - 1,962
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings $ (582) $ 2,720 $ 754 $ - $ - $ 2,892
- ------------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends received (paid) (1) $ 750 $ (750) $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
(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 $8,116,000 in the first half of
2002, from $4,412,000 in the first half of 2001. The increase was attributable
to growth of $132,837,000 in the Company's average interest-earning assets and
an increase in the net interest margin from 2.15% in the first half of 2001, to
3.00% in the first half of 2002.
The growth in average earning assets was due to $131,236,000 in new mortgage
loans. The loans were funded by $98,861,000 of new deposits, $28,074,000 of
additional borrowed funds and a $4,752,000 increase in stockholders' equity.
The increase in the margin was due to the Company's cost of funds decreasing at
a faster pace than its yield earned on interest-earning assets in a declining
interest rate environment. The yield on interest-earning assets decreased 68
basis points to 7.65% in the first half of 2002, while the cost of funds
decreased 176 basis points to 5.06% in the first half of 2002. The reasons for
the changes are substantially the same as those discussed in the "Comparison of
Results of Operations for the Quarters Ended June 30, 2002 and 2001."
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
21
Six-Months Ended
----------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $411,215 $18,792 9.22% $279,979 $13,587 9.79%
Securities 123,574 1,825 2.98 77,672 2,180 5.66
Other interest-earning assets 11,608 102 1.77 55,909 1,321 4.76
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 546,397 $20,719 7.65% 413,560 $17,088 8.33%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,824 11,514
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $561,221 $425,074
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 9,602 $ 119 2.50% $ 7,020 $ 103 2.96%
Savings deposits 28,398 401 16,938 385 4.58
2.85
Money market deposits 106,158 1,488 2.83 58,943 1,360 4.65
Certificates of deposit 255,415 6,261 4.94 217,811 6,927 6.41
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 399,573 8,269 4.17 300,712 8,775 5.88
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased 171 2 1.96 - - -
Debentures and related interest payable 86,869 3,577 74,175 3,901 10.61
8.30
Junior debentures - capital securities 15,000 748 10.06 - - -
Note payable 209 7 6.98 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 102,249 4,334 8.55 74,175 3,901 10.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 501,822 $12,603 5.06% 374,887 $12,676 6.82%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,593 5,083
Noninterest-bearing liabilities 12,061 8,111
Stockholders' equity 41,745 36,993
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $561,221 $425,074
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $8,116 2.59% $4,412 1.51%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $44,575 3.00% $38,673 2.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09x 1.10x
- ------------------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets (1) 1.03% 0.69%
Return on average equity (1) 13.86% 7.89%
Noninterest expense to average assets (1) 1.12% 1.25%
Efficiency ratio (2) 35.83% 50.96%
Average stockholders' equity to average assets 7.44% 8.70%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income
before the provision for loan losses plus noninterest income.
Provision for Loan Loss Reserves
- --------------------------------
In the first half of 2002, the Company recorded a provision for loan losses of
$772,000, compared to $100,000 in the first half of 2001. 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 as discussed on page 15 of this report. The provision for the 2002
period was due to the growth in the loan portfolio of $81,245,000.
Noninterest Income
- ------------------
Noninterest income includes fees from customer service charges and income from
mortgage lending activities, which is comprised mostly of income from loan
prepayments, fees earned on expired loan commitments, and loan service,
inspection and maintenance charges. Noninterest income decreased to $652,000 in
the first half of 2002, from $794,000 in the first half of 2001. The decrease
was due to lower income and fees ($190,000) from the prepayment of mortgage
22
loans, partially offset by higher loan service fee income. The amount and timing
of 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.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $3,142,000 in the first half of 2002, from
$2,498,000 in the comparable period of 2001, exclusive of $155,000 of
nonrecurring expenses associated with the merger of Intervest Bank into
Intervest National Bank in 2001. The resulting increase of $644,000 was largely
due to a $326,000 increase in compensation and benefits, a $171,000 increase in
data processing expenses, a $55,000 increase in occupancy and equipment
expenses, a $20,000 increase in advertising expenses and the addition of $47,000
of net expenses associated with foreclosed real estate during the second quarter
of 2002. The reasons for the changes are substantially the same as those
discussed in the "Comparison of Results of Operations for the Quarters Ended
June 30, 2002 and 2001."
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $1,962,000 in the first half of
2002, from $994,000 in the first half of 2001, due to higher pre-tax income. The
Company's effective tax rate (inclusive of state and local taxes) amounted to
40.4% in the 2002 period, compared to 40.5% in the 2001 period.
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, 2001, 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, 2001.
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, 2001.
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
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) An Annual Meeting of Stockholders was held on May 24, 2002.
23
(b) Pursuant to the Company's charter and bylaws, one-third of the directors
are elected by the holders of Class A common stock and two-thirds are
elected by holders of Class B common stock. On all other matters, Class A
and Class B common stockholders vote together as a single class. Each of
the persons named in the Proxy Statement dated April 22, 2002 as a nominee
for Director was elected for one-year terms expiring on the date of the
next annual meeting (see Item 4-C).
(c) The table that follows summarizes the voting results on the matter that was
submitted to the Company's common stockholders:
---------------------------------------------------------------------------------------------------
For Against or Withheld Abstained
---------------------------------------------------------------------------------------------------
Election of Directors - Class A
Michael A. Callen 3,298,277 1,111 -
Wayne F. Holly 3,290,288 9,100 -
Lawton Swan, III 3,290,488 8,900 -
Election of Directors - Class B
Lawrence G. Bergman 355,000 - -
Jerome Dansker 355,000 - -
Lowell S. Dansker 355,000 - -
Edward J. Merz 355,000 - -
Thomas E. Willett 355,000 - -
David J. Willmott 355,000 - -
Wesley T. Wood 355,000 - -
---------------------------------------------------------------------------------------------------
(d) Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) No Exhibits filed with this report.
(b) No reports on Form 8-K were filed during the reporting period covered by
this report.
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: August 9, 2002 By: /s/ Lowell S. Dansker
--------------------------
Lowell S. Dansker, President and Treasurer
(Chief Financial Officer)
Date: August 9, 2002 By: /s/ Lawrence G. Bergman
----------------------------
Lawrence G. Bergman, Vice President and
Secretary
24