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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, 2003
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Commission File No. 000-23377
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INTERVEST BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
10 ROCKEFELLER PLAZA, SUITE 1015
NEW YORK, NEW YORK 10020-1903
(Address of principal executive offices)
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(212) 218-2800
(Registrant's telephone number, including area code)
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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:
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Class A Common Stock, $1.00 par value per share 4,476,626 Outstanding at July 31, 2003
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Class B Common Stock, $1.00 par value per share 385,000 Outstanding at July 31, 2003
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
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ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of June 30, 2003 (Unaudited) and December 31, 2002 . . . . . 2
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Six-Months Ended June 30, 2003 and 2002. . 3
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) for the Quarters and Six-Months Ended
June 30, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Changes in
Stockholders' Equity (Unaudited) for the Six-Months Ended
June 30, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six-Months Ended June 30, 2003 and 2002 . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . 7
Review by Independent Certified Public Accountants . . . . . . . . 11
Report on Reviews by Independent Certified Public Accountants. . . 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 25
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CERTIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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
JUNE 30, DECEMBER 31,
($ in thousands, except par value) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 6,857 $ 10,351
Federal funds sold 16,053 9,114
Commercial paper 9,575 7,950
Other short-term investments 920 3,434
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Total cash and cash equivalents 33,405 30,849
Time deposits with banks - 2,000
Securities held to maturity, net (estimated fair value of $122,457 and $146,560, respectively) 121,833 145,694
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 2,805 1,108
Loans receivable (net of allowance for loan losses of $5,385 and $4,611, respectively) 570,590 485,301
Accrued interest receivable 4,138 4,263
Loan fees receivable 4,711 3,706
Premises and equipment, net 5,924 6,098
Foreclosed real estate - 1,081
Deferred income tax asset 2,504 1,997
Deferred debenture offering costs, net 3,595 3,498
Other assets 272 384
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TOTAL ASSETS $ 749,777 $ 685,979
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LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 6,926 $ 5,924
Interest-bearing deposit accounts:
Checking (NOW) accounts 10,001 10,584
Savings accounts 31,583 30,174
Money market accounts 141,165 134,293
Certificate of deposit accounts 363,713 324,983
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Total deposit accounts 553,388 505,958
Subordinated debentures payable 90,490 84,430
Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000
Note payable 260 266
Accrued interest payable on all debentures 14,774 13,872
Accrued interest payable on deposits 906 895
Mortgage escrow funds payable 8,926 5,894
Official checks outstanding 5,538 4,373
Other liabilities 2,486 2,165
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TOTAL LIABILITIES 691,768 632,853
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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,
4,359,235 and 4,348,087 shares issued and outstanding, respectively) 4,359 4,348
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 and 355,000 shares issued and outstanding, respectively) 385 355
Additional paid-in-capital, common 24,609 24,134
Retained earnings 28,656 24,289
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TOTAL STOCKHOLDERS' EQUITY 58,009 53,126
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 749,777 $ 685,979
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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,
------------------------------------
($ in thousands, except per share data) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $11,613 $ 9,972 $22,283 $18,792
Securities 770 983 1,657 1,825
Other interest-earning assets 87 53 155 102
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TOTAL INTEREST AND DIVIDEND INCOME 12,470 11,008 24,095 20,719
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INTEREST EXPENSE
Deposits 4,518 4,347 8,971 8,269
Subordinated debentures 2,067 1,804 4,024 3,577
Junior debentures - capital securities 374 374 748 748
Note payable 5 5 9 7
Federal funds purchased - - - 2
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TOTAL INTEREST EXPENSE 6,964 6,530 13,752 12,603
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NET INTEREST AND DIVIDEND INCOME 5,506 4,478 10,343 8,116
Provision for loan loss reserves 430 426 774 772
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NET INTEREST AND DIVIDEND INCOME
AFTER PROVISION FOR LOAN LOSS RESERVES 5,076 4,052 9,569 7,344
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NONINTEREST INCOME
Customer service fees 50 48 88 83
Income from mortgage lending activities 261 106 414 208
Income from the early repayment of mortgage loans 896 224 1,037 361
Loss from early call of investment securities (37) - (40) -
All other 6 - 6 -
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TOTAL NONINTEREST INCOME 1,176 378 1,505 652
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NONINTEREST EXPENSES
Salaries and employee benefits 897 822 1,764 1,538
Occupancy and equipment, net 318 322 638 637
Data processing 190 148 338 266
Advertising and promotion 7 27 22 34
Professional fees and services 80 85 187 165
Stationery, printing and supplies 37 38 79 71
Postage and delivery 25 22 50 46
FDIC and general insurance 54 42 111 84
All other 271 174 474 301
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TOTAL NONINTEREST EXPENSES 1,879 1,680 3,663 3,142
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Earnings before taxes 4,373 2,750 7,411 4,854
Provision for income taxes 1,807 1,106 3,044 1,962
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NET EARNINGS $ 2,566 $ 1,644 $ 4,367 $ 2,892
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BASIC EARNINGS PER SHARE $ 0.55 $ 0.42 $ 0.93 $ 0.74
DILUTED EARNINGS PER SHARE $ 0.45 $ 0.33 $ 0.77 $ 0.60
DIVIDENDS PER SHARE $ - $ - $ - $ -
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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) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
NET EARNINGS $2,566 $1,644 $4,367 $2,892
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Net unrealized holding losses on available-for-sale securities - - - (46)
Credit for income taxes related to unrealized losses
on available-for-sale securities - - - (20)
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OTHER COMPREHENSIVE LOSS, NET OF TAX - - - (26)
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TOTAL COMPREHENSIVE INCOME, NET OF TAX $2,566 $1,644 $4,367 $2,866
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See accompanying notes to condensed consolidated financial statements.
4
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
SIX-MONTHS ENDED
JUNE 30,
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($ in thousands) 2003 2002
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CLASS A COMMON STOCK
Balance at beginning of period $ 4,348 $ 3,545
Issuance of 5,200 and 105,650 shares upon the exercise of warrants 5 105
Issuance of 5,948 shares upon the conversion of debentures 6 -
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Balance at end of period 4,359 3,650
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CLASS B COMMON STOCK
Balance at beginning of period 355 355
Issuance of 30,000 shares for the acquisition of Intervest Securities Corporation 30 -
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Balance at beginning and end of period 385 355
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ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 24,134 19,001
Compensation related to vesting of certain Class B stock warrants 13 13
Compensation related to certain Class A stock warrants modified 194 117
Issuance of 30,000 shares of Class B stock for the acquisition
of Intervest Securities Corporation 185 -
Issuance of 5,200 and 105,650 shares of Class A stock upon the exercise of
warrants, inclusive of tax benefits 47 659
Issuance of 5,948 shares of Class A stock upon the conversion of debentures 36 -
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Balance at end of period 24,609 19,790
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RETAINED EARNINGS
Balance at beginning of period 24,289 17,383
Net earnings for the period 4,367 2,892
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Balance at end of period 28,656 20,275
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period - 111
Net change in accumulated other comprehensive income, net - (26)
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Balance at end of period - 85
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TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD $58,009 $44,155
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See accompanying notes to condensed consolidated financial statements.
5
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX-MONTHS ENDED
JUNE 30,
----------------------
($ in thousands) 2003 2002
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OPERATING ACTIVITIES
Net earnings $ 4,367 $ 2,892
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 261 292
Provision for loan loss reserves 774 772
Deferred income tax benefit (507) (399)
Amortization of deferred debenture offering costs 508 449
Compensation expense related to common stock warrants 207 130
Amortization of premiums, fees and discounts, net (590) (443)
Net loss from sale of foreclosed real estate 51 -
Net increase in accrued interest payable on debentures 902 815
Net increase in official checks outstanding 1,165 961
Net change in all other assets and liabilities 2,544 486
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NET CASH PROVIDED BY OPERATING ACTIVITIES 9,682 5,955
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INVESTING ACTIVITIES
Net decrease in interest-earning time deposits with banks 2,000 200
Maturities and calls of securities available for sale - 500
Maturities and calls of securities held to maturity 61,890 36,950
Purchases of securities held to maturity (39,185) (67,355)
Net increase in loans receivable (86,416) (83,529)
Sale of foreclosed real estate 150 -
Cash acquired through acquisition of Intervest Securities Corporation 218 -
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (1,697) (450)
Purchases of premises and equipment, net (87) (333)
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NET CASH USED IN INVESTING ACTIVITIES (63,127) (114,017)
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FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 8,700 54,092
Net increase in certificates of deposit 38,730 49,224
Net increase in mortgage escrow funds payable 3,032 3,151
Principal repayments of debentures (1,400) (2,500)
Principal repayments of note payable (6) (4)
Proceeds from issuance of debentures, net of issuance costs 6,893 5,295
Proceeds from issuance of common stock, net of issuance costs 52 764
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NET CASH PROVIDED BY FINANCING ACTIVITIES 56,001 110,022
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Net increase in cash and cash equivalents 2,556 1,960
Cash and cash equivalents at beginning of period 30,849 24,409
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,405 $ 26,369
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 12,331 $ 11,292
Income taxes 3,618 2,754
Noncash activities:
Transfer of loan to foreclosed real estate, net of chargeoff - 1,081
Loan to finance sale of foreclosed real estate 880 -
Purchase of premises with note payable - 275
Conversion of debentures into Class A common stock 42 -
Accumulated other comprehensive income,
change in unrealized loss on securities available for sale, net of tax - (26)
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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 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, USE OF ESTIMATES
AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for
information derived from the audited Consolidated Balance Sheet as of December
31, 2002. The statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
to Stockholders on Form 10-K for the year ended December 31, 2002.
The 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, Intervest Securities Corporation and Intervest Statutory
Trust I. All the entities are referred to collectively as the "Company" on a
consolidated basis. 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 fnancial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets, 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. 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.
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
Holding Company became a financial holding company effective January 23, 2003.
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 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 Mortgage Corporation sells
debentures to provide funding for its business.
Intervest Securities Corporation is a broker/dealer registered in nine states
and is an NASD and SIPC member firm. It has and will continue to participate as
a selected dealer from time to time in offerings of debt securities of the
Company, primarily those of Intervest Mortgage Corporation. On June 2, 2003, the
Holding Company acquired all of the outstanding capital stock of Intervest
Securities Corporation for 30,000 shares of its Class B common stock that was
newly issued for this transaction. Intervest Securities Corporation's total
assets consisted of approximately $218,000 of cash at the time of acquisition.
Prior to the acquisition, Intervest Securities Corporation was an affiliated
entity in that its sole shareholder is the spouse of the Chairman of the Holding
Company. The acquisition was accounted for at historical cost and accordingly,
the recorded assets, liabilities and shareholders' equity of both companies were
combined and recorded at their historical cost amounts. No restatements of the
Company's prior period consolidated financial statements in this report have
been made because the financial results of Intervest Securities Corporation were
diminimus.
7
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, USE OF ESTIMATES
AND DESCRIPTION OF BUSINESS - CONTINUED
Intervest Statutory Trust I was formed in December 2001 for the sole purpose of
issuing and administering $15,000,000 of capital securities as more fully
described in note 9 to the consolidated financial statements in the Company's
Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002.
It does not conduct any trade or business.
NOTE 2 - ALLOWANCE FOR LOAN LOSS RESERVES
Activity in the allowance for loan loss reserves for the periods indicated is
summarized as follows:
Quarter Ended Six-Months Ended
June 30, June 30,
---------------------------------
($ in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------
Balance at beginning of period $4,955 $3,833 $4,611 $3,380
Provision charged to operations 430 426 774 772
Recoveries of previous chargeoffs - - - 107
Chargeoffs - (150) - (150)
- --------------------------------------------------------------------
Balance at end of period $5,385 $4,109 $5,385 $4,109
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NOTE 3 - EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average number
of shares of common stock outstanding. Diluted EPS is calculated by dividing
adjusted net earnings by the weighted-average number of shares of common stock
outstanding and dilutive potential common stock shares that may be outstanding
in the future. Potential common stock shares may arise from outstanding
dilutive common stock warrants (as computed by the "treasury stock method") and
convertible debentures (as computed by the "if converted method"). Diluted EPS
considers the potential dilution that could occur if the Company's outstanding
stock warrants and convertible debentures were converted into common stock that
then shared in the Company's adjusted earnings (as adjusted for interest
expense, net of tax, that would no longer occur if the debentures were
converted).
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are summarized
in the table that follows:
Quarter Ended Six-Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------
($in thousands, except share and per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $ 2,566 $ 1,644 $ 4,367 $ 2,892
Average number of common shares outstanding 4,714,344 3,959,542 4,708,747 3,930,577
- -----------------------------------------------------------------------------------------------------------------------
Basic net earnings per share amount $ 0.55 $ 0.42 $ 0.93 $ 0.74
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $ 2,566 $ 1,644 $ 4,367 $ 2,892
Adjustment to net earnings from assumed conversion of debentures (1) 117 108 231 213
----------------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 2,683 $ 1,752 $ 4,598 $ 3,105
----------------------------------------------
Average number of common shares outstanding:
Common shares outstanding 4,714,344 3,959,542 4,708,747 3,930,577
Potential dilutive shares resulting from exercise of warrants (2) 292,458 417,965 266,197 324,577
Potential dilutive shares resulting from conversion of debentures (3) 983,656 952,502 983,656 952,502
----------------------------------------------
Total average number of common shares outstanding used for dilution 5,990,458 5,330,009 5,958,600 5,207,656
- -----------------------------------------------------------------------------------------------------------------------
Diluted net earnings per share amount $ 0.45 $ 0.33 $ 0.77 $ 0.60
- -----------------------------------------------------------------------------------------------------------------------
(1) Represents interest expense on dilutive convertible debentures, net of taxes, that would not occur if they were
assumed converted.
(2) Warrants to purchase 1,132,000 shares of common stock at prices ranging from $10.00 to $10.01 per share were not
considered in the 2002 six-month computation because their exercise price per share exceeded the average market
price of Class A common stock during the period. All outstanding warrants were considered for the remaining EPS
computations.
(3) Convertible debentures (principal and accrued interest) outstanding at June 30, 2003 and June 30, 2002 totaling
$9,846,000 and $9,535,000, respectively, were convertible into common stock at a price of $10.01 per share.
8
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 4 - BANK REGULATORY CAPITAL
The Bank is designated as a well-capitalized institution as defined in FDIC
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 this
designation.
At June 30, 2003, the actual capital of the Bank on a percentage basis was as
follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ -----------------
Total capital to risk-weighted assets 11.47% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 10.47% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 8.71% 4.00% 5.00%
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 currently exercisable, 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 501,465 931,545 122,000 1,555,010 $ 8.93
Exercised during first six months of 2003 - (5,200) - (5,200) $10.01
- ------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2003 501,465 926,345 122,000 1,549,810 $ 8.93
- ------------------------------------------------------------------------------------------------------
Remaining contractual life in years at June 30, 2003 (1) 3.6 0.5 0.5 1.5
- ----------------------------------------------------------------------------------------------------------------------
(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 June 30, 2003 145,000 50,000 195,000 $7.52
- ------------------------------------------------------------------------------------------
Remaining contractual life in years at June 30, 2003 4.6 4.6 4.6
- -----------------------------------------------------------------------------------------------------------
(1) At June 30, 2003, 42,600 of these warrants were immediately exercisable. An additional 7,100
warrants vest and become exercisable on April 27th of 2004. The warrants, which expire on
January 31, 2008, become fully vested earlier upon certain conditions.
The Company elects to use the intrinsic value-based method prescribed under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its stock warrants. Under this method, compensation expense related to stock
warrants granted to employees is the excess, if any, of the market price of the
stock as of the grant or modification date over the exercise price of the
warrant.
For warrants granted to employees whose exercise price was reduced to $10.01
effective January 1, 2002 and whose expiration date was extended in 2002,
compensation expense is being recorded under variable rate accounting as
prescribed by APB 25 and related interpretations. For these warrants, which
total 138,500, compensation expense is being recorded in salaries and employee
benefits expense with a corresponding credit to paid in capital in the
consolidated financial statements. Compensation related to these warrants will
fluctuate up or down until December 31, 2003 and will be a function of the
Company's Class A common stock price and number of warrants outstanding and
exercised.
9
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 5 - COMMON STOCK WARRANTS, CONTINUED
Compensation expense recorded in connection with warrants is summarized as
follows:
Quarter Ended Six-Months Ended
June 30, June 30,
------------- ----------------
($ in thousands) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------
Compensation expense recorded in connection with vesting
of Class B warrants during the period $ 6 $ 6 $ 13 $ 13
Compensation expense recorded in connection with Class A
common stock warrants whose terms were modified 127 117 194 117
- -------------------------------------------------------------------------------------------
$ 133 $ 123 $ 207 $ 130
- -------------------------------------------------------------------------------------------
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 from the periods included in this
report on Form 10-Q.
10
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 June
30, 2003 and for the three- and six-month periods ended June 30, 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.
11
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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,
2003, and the related condensed consolidated statements of earnings and
comprehensive income for the three- and six-month periods ended June 30, 2003
and 2002, and the related condensed consolidated statements of changes in
stockholders' equity and cash flows for the six-month periods ended June 30,
2003 and 2002. These financial statements are the responsibility of the
Company's management.
We were furnished the report of other accountants on their reviews of the
interim financial information of Intervest Mortgage Corporation, whose total
assets as of June 30, 2003 constituted 14.1% 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 11.3%, 15.5%, and 18.9%;
and 10.2%, 16.1% and 17.6%, respectively, and whose net interest income,
noninterest income and net earnings for the three- and six-month periods ended
June 30, 2002, constituted 17.4%, 22.5%, and 29.7%; and 15.6%, 23.6% and 26.1%,
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 review 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
August 6, 2003
12
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 June 30, 2003, and
the related condensed consolidated statements of operations for the three- and
six-month periods ended June 30, 2003 and 2002, and the related condensed
consolidated statements of changes in stockholder's equity and cash flows for
the six-month periods ended June 30, 2003 and 2002 (all of which are 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
July 22, 2003
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
-------
Intervest Bancshares Corporation has four wholly owned subsidiaries - Intervest
National Bank, Intervest Mortgage Corporation, Intervest Securities 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. For a discussion of the Company's business, see
note 1 to the condensed consolidated financial statements included in this
report.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan loss reserves and effective income tax
rate. Noninterest income consists mostly of loan and other banking fees as well
as income from loan prepayments. The amount and timing of, as well as income
from, loan prepayments, if any, cannot be predicted and can fluctuate
significantly. Normally, the number of instances of prepayment of mortgage loans
tends to increase during periods of declining interest rates and tends to
decrease during periods of increasing interest rates. Many of the Company's
mortgage loans include prepayment provisions, and others prohibit prepayment of
indebtedness entirely. Noninterest expense consists of compensation and benefits
expense, occupancy and equipment expenses, data processing expenses, advertising
expense, professional fees, insurance expense and other operating expenses.
Additionally, the Company's profitability is significantly affected by general
economic and competitive conditions, changes in market interest rates,
government policies and actions of regulatory authorities. 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 have an
impact on the Company's results of operations.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND DECEMBER 31, 2002
------------------------------------------------------------------------
OVERVIEW
- --------
Total assets at June 30, 2003 increased to $749,777,000, from $685,979,000 at
December 31, 2002. Total liabilities at June 30, 2003 increased to $691,768,000,
from $632,853,000 at December 31, 2002. Stockholders' equity increased to
$58,009,000 at June 30, 2003, from $53,126,000 at year-end 2002. Book value per
common share rose to $12.23 per share at June 30, 2003, from $11.30 at December
31, 2002.
Selected balance sheet information as of June 30, 2003 follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($ in thousands) Company Bank Corp Trust I Corp Balances Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 866 $ 21,880 $ 11,708 $ - $ 465 $ (1,514) $ 33,405
Securities held to maturity, net - 121,833 - 15,464 - (15,464) 121,833
FRB and FHLB stock - 2,805 - - - - 2,805
Loans receivable, net of deferred fees 14,897 470,157 90,921 - - - 575,975
Allowance for loan loss reserves (74) (5,117) (194) - - - (5,385)
Investment in subsidiaries 70,504 - - - - (70,504) -
All other assets 1,277 15,351 4,489 59 - (32) 21,144
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 87,470 $ 626,909 $ 106,924 $ 15,523 $ 465 $ (87,514) $ 749,777
- -------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 555,192 $ - $ - $ - $ (1,804) $ 553,388
Subordinated debentures payable 25,854 - 80,100 - - (15,464) 90,490
Junior debentures payable
capital securities - - - 15,000 - - 15,000
Note payable - 260 - - - - 260
Accrued interest payable on
all debentures 3,521 - 11,255 57 - (59) 14,774
All other liabilities 86 16,065 1,386 2 - 317 17,856
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 29,461 571,517 92,741 15,059 - (17,010) 691,768
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 58,009 55,392 14,183 464 465 (70,504) 58,009
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 87,470 $ 626,909 $ 106,924 $ 15,523 $ 465 $ (87,514) $ 749,777
- -------------------------------------------------------------------------------------------------------------------------------
14
A comparison of selected balance sheet information as of June 30, 2003 and
December 31, 2002 follows:
At June 30, 2003 At December 31, 2002
---------------- --------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 33,405 4.5% $ 30,849 4.4%
Time deposits with banks - - 2,000 0.3
Securities held to maturity, net 121,833 16.2 145,694 21.2
FRB and FHLB stock 2,805 0.4 1,108 0.2
Loans receivable, net of deferred fees and loan loss reserves 570,590 76.1 485,301 70.7
Foreclosed real estate - - 1,081 0.2
All other assets 21,144 2.8 19,946 3.0
- ----------------------------------------------------------------------------------------------------------------
Total assets $749,777 100.0% $685,979 100.0%
- ----------------------------------------------------------------------------------------------------------------
Deposits $553,388 73.8% $505,958 73.8%
Subordinated debentures payable 90,490 12.1 84,430 12.3
Junior debentures payable-capital securities 15,000 2.0 15,000 2.2
Note payable 260 - 266 0.1
Accrued interest payable on all debentures 14,774 2.0 13,872 2.0
All other liabilities 17,856 2.4 13,327 1.9
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 691,768 92.3 632,853 92.3
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity 58,009 7.7 53,126 7.7
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $749,777 100.0% $685,979 100.0%
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
- ----------------------------
Cash and cash equivalents increased to $33,405,000 at June 30, 2003, from
$30,849,000 at December 31, 2002, as reflected in a higher level of overnight
federal fund investments. This category includes 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 $121,833,000 at June 30, 2003, from
$145,694,000 at December 31, 2002. The decrease was due to maturities and early
calls exceeding new purchases during the period. The portfolio consists of debt
obligations of FNMA, FHLB, FHLMC, SLMA and FFCB with a weighted-average yield of
approximately 2.12% and a weighted-average remaining maturity of 1.7 years at
June 30, 2003, compared to 2.39% and 1.6 years, respectively, at December 31,
2002. 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 AND FEDERAL HOME LOAN BANK STOCK
- -------------------------------------------------------------
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank (FHLB), the Bank maintains an investment in their capital
stock, each of which pay a dividend (currently 6% for the FRB and approximately
5% for the FHLB). The total investment, which amounted to $2,805,000 at June 30,
2003, compared to $1,108,000 at December 31, 2002, fluctuates based on specific
factors (the Bank's capital level for the FRB and the Bank's loans for the
FHLB). The Bank became a member of the FHLB during the second quarter of 2003.
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 $570,590,000 at June 30, 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 June 30, 2003 and December 31,
2002, there were no loans classified as nonaccrual or impaired.
15
At June 30, 2003, the allowance for loan loss reserves amounted to $5,385,000,
compared to $4,611,000 at December 31, 2002. The allowance represented 0.93% of
total loans (net of deferred fees) outstanding at June 30, 2003, compared to
0.94% at December 31, 2002. The increase in the allowance was due to provisions
aggregating $774,000 during the period resulting from loan growth.
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.
FORECLOSED REAL ESTATE
- ------------------------
At June 30, 2003, there was no foreclosed real estate, compared to one
commercial real estate property located in the State of Florida with a carrying
value of $1,081,000 at year-end 2002. In the second quarter of 2003, the Bank
sold this property for net proceeds of approximately $1,030,000 (consisting of
cash, after selling costs, of $150,000 and a mortgage of $880,000 provided by
the Bank). The net loss of $51,000 from the sale was included in noninterest
expenses (foreclosed real estate expense) in the consolidated statement of
earnings.
ALL OTHER ASSETS
- ------------------
The following table sets forth the composition of the caption "All other assets"
in the table on page 15 as follows:
At June 30, At December 31,
----------- ---------------
($in thousands) 2003 2002
--------------------------------------------------------------------
Accrued interest receivable $ 4,138 $ 4,263
Loans fee receivable 4,711 3,706
Premises and equipment, net 5,924 6,098
Deferred income tax asset 2,504 1,997
Deferred debenture offering costs, net 3,595 3,498
All other 272 384
--------------------------------------------------------------------
$21,144 $19,946
--------------------------------------------------------------------
Accrued interest receivable fluctuates based on the level of interest-earning
assets and the timing of interest payments received therefrom.
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 because the Company expects to generate sufficient taxable earnings 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
$554,000 of costs incurred by Intervest Mortgage Corporation in the first half
of 2003 in connection with the sale of its Series 01/21/03 debentures, and
$53,000 incurred to date with respect to a new series as described below,
partially offset by normal amortization during the period. Intervest Mortgage
Corporation filed a registration statement in the second quarter of 2003 to
issue subordinated debentures in the aggregate principal amount of up to
$8,500,000. These debentures are expected to be sold in the third quarter of
2003.
16
DEPOSIT LIABILITIES
- --------------------
Deposit liabilities increased to $553,388,000 at June 30, 2003, from
$505,958,000 at December 31, 2002, primarily reflecting increases in money
market and certificate of deposit accounts of $6,872,000 and $38,730,000,
respectively. At June 30, 2003, certificate of deposit accounts totaled
$363,713,000 and checking, savings and money market accounts aggregated
$189,675,000. The same categories of deposit accounts totaled $324,983,000 and
$180,975,000, respectively, at December 31, 2002. Certificate of deposit
accounts represented 66% of total deposits at June 30, 2003 and 64% at December
31, 2002.
DEBENTURES PAYABLE, RELATED ACCRUED INTEREST PAYABLE AND TRUST PREFERRED
- --------------------------------------------------------------------------------
SECURITIES
- ----------
At June 30, 2003, debentures payable amounted to $90,490,000, compared to
$84,430,000 at year-end 2002. The increase was due to the sale of 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. This increase was partially offset by
the maturity and repayment of $1,400,000 of its Series 11/10/98 debentures and
the conversion of the Holding Company's convertible debentures in the aggregate
principal amount of $40,000 into shares of Class A common stock at the election
of the debenture holders.
The sale of the aforementioned debentures, after underwriter's commissions and
other issuance costs, resulted in net proceeds of $6,935,000. At June 30, 2003,
Intervest Mortgage Corporation had $80,100,000 of debentures payable
outstanding, compared to $74,000,000 at December 31, 2002.
At June 30, 2003, the Holding Company had $10,390,000 of debentures payable
outstanding, of which $6,890,000 were convertible into its Class A common stock
at a current conversion price of $10.01 per share through December 31,
2003.
At June 30, 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.
At June 30, 2003, accrued interest payable on all debentures amounted to
$14,774,000, 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 June 30, 2003 and December 31, 2002, note payable amounted to $260,000 and
$266,000, respectively. The note was issued by the Bank in 2002 in connection
with the Bank's purchase of property that is located across from its Court
Street branch office in Florida. The note matures in February of 2017 and calls
for monthly payments of principal and interest at 7% per annum.
ALL OTHER LIABILITIES
- -----------------------
The table below sets forth the composition of the caption "All other
liabilities" in the table on page 15 as follows:
At June 30, At December 31,
----------- ---------------
($in thousands) 2003 2002
------------------------------------------------------------------------
Mortgage escrow funds payable $ 8,926 $ 5,894
Official checks outstanding 5,538 4,373
Accrued interest payable on deposits 906 895
Income taxes payable 457 526
All other 2,029 1,639
------------------------------------------------------------------------
$17,856 $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 growth in the loan portfolio as well as the timing of
payments to taxing authorities. The level of official checks outstanding varies
and fluctuates based on banking activity. The level of accrued interest payable
on deposits fluctuates based on total deposits and timing of interest payments.
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.
17
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
- -----------------------------------------------
Stockholders' equity increased to $58,009,000 at June 30, 2003, from $53,126,000
at December 31, 2002 due to the following: net earnings of $4,367,000; the
issuance of 30,000 shares ($215,000) of Class B common stock to acquire
Intervest Securities Corporation; the issuance of 5,948 shares ($42,000) of
Class A common stock upon the conversion of convertible debentures; the issuance
of 5,200 shares ($52,000) of Class A common stock upon the exercise of common
stock warrants; and the recording of $207,000 of compensation expense related to
stock warrants held by employees and directors. For discussion of compensation
related to stock warrants, see note 5 to the condensed consolidated financial
statements in this report.
The Bank is a well-capitalized institution as defined in applicable banking
regulations. 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 its 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 interest rate sensitivity gap was a positive $154,449,000, or
20.6% of total assets, at June 30, 2003, compared to a positive $107,681,000, or
15.7%, at December 31, 2002. The increase was primarily due to the origination
of new floating-rate loans as well as existing loans migrating into the less
than one-year maturity timeframe. The new loans were funded primarily by
increases in deposits and borrowed funds with maturity dates of over one year.
In computing the gap, the Company treats its interest checking, money market and
savings deposit accounts as immediately repricing. Further, the Company has a
"floor," or minimum rate, on many of its floating-rate loans that is determined
in relation to prevailing market rates on the date of origination. This floor
only adjusts upwards in the event of increases in the loan's interest rate. This
feature reduces the effect on interest income of a falling rate environment
because the interest rates on such loans do not reset downward. For a further
discussion of interest rate risk and gap analysis, including the assumptions
used in preparing the gap, see the Company's 2002 Annual Report to Stockholders
on Form 10-K, pages 32 and 33.
The table that follows summarizes the Company's interest-earning assets and
interest-bearing liabilities as of June 30, 2003, that are scheduled to
mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4
--- ----- -------- ------
($ in thousands) Months Months Years Years Total
- -------------------------------------------------------------------------------------------------
Loans (1) $180,030 $233,867 $115,843 $ 52,858 $582,598
Securities held to maturity (2) 25,246 50,487 46,100 - 121,833
Short-term investments 26,548 - - - 26,548
FRB and FHLB stock 1,691 - - 1,114 2,805
- -------------------------------------------------------------------------------------------------
Total rate-sensitive assets $233,515 $284,354 $161,943 $ 53,972 $733,784
- -------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 10,001 $ - $ - $ - $ 10,001
Savings deposits 31,583 - - - 31,583
Money market deposits 141,165 - - - 141,165
Certificates of deposit 48,532 80,385 154,409 80,387 363,713
-----------------------------------------------------
Total deposits 231,281 80,385 154,409 80,387 546,462
Debentures payable (1) 41,500 2,250 18,100 28,640 90,490
Debentures payable- capital securities (1) - - - 15,000 15,000
Accrued interest on all debentures (1) 7,651 353 3,314 3,456 14,774
Note payable - - - 260 260
- -------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $280,432 $ 82,988 $175,823 $127,743 $666,986
- -------------------------------------------------------------------------------------------------
GAP (repricing differences) $(46,917) $201,366 $(13,880) $(73,771) $ 66,798
- -------------------------------------------------------------------------------------------------
Cumulative GAP $(46,917) $154,449 $140,569 $ 66,798 $ 66,798
- -------------------------------------------------------------------------------------------------
Cumulative GAP to total assets -6.3% 20.6% 18.7% 8.9% 8.9%
- -------------------------------------------------------------------------------------------------
18
Significant assumptions used in preparing the preceding gap table follow:
(1) Floating-rate loans and debentures payable are included in the period in which their interest
rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate
loans and debentures payable are scheduled, including repayments, according to their contractual
maturities. Deferred loan fees are excluded from this analysis; (2) securities are scheduled
according to the earlier of their contractual maturity or the date in which the interest rate is
scheduled to increase. The effects of possible prepayments that may result from the issuer's
right to call a security before its contractual maturity date are not considered; (3) interest
checking, savings and money market deposits are regarded as 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. As a member of
the FHLB and the FRB, the Bank also has the ability to borrow from these
institutions on a secured basis. Additionally, the Bank has agreements with
correspondent banks whereby it may borrow on an overnight and unsecured basis up
to $16,000,000. There were no outstanding borrowings under any of these lines.
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 maximum exposure to credit risk 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 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 amounts of the Company's off-balance sheet financial instruments
is as follows:
At June 30, At Dec 31,
----------- ----------
($ in thousands) 2003 2002
---------------------------------------------------------
Unfunded loan commitments $103,107 $68,244
Available lines of credit 795 533
Standby letters of credit 567 1,267
---------------------------------------------------------
$104,469 $70,044
---------------------------------------------------------
19
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2003 AND
----------------------------------------------------------------------------
2002
----
OVERVIEW
- --------
Consolidated net earnings in the second quarter of 2003 increased to $2,566,000,
from $1,644,000 in the second quarter of 2002. Earnings per share on a diluted
basis increased to $0.45 in the second quarter of 2003, from $0.33 in the second
quarter of 2002. The earnings per share computation for the 2003 period included
a higher number of common shares outstanding resulting from the exercise of
common stock warrants in the latter part of 2002.
The improvement in earning was attributable to increases in both net interest
and dividend income and noninterest income. Net interest and dividend income was
higher by $1,028,000 reflecting growth in the loan portfolio, while noninterest
income increased by $798,000 due to higher income from loan prepayments as well
as fees earned from loan commitments that expired during the period. These
increases were partially offset by a $199,000 increase in noninterest expenses
(most of which was attributable to the Company's growth) and a $701,000 increase
in the provision for income taxes due to higher pre-tax income.
Selected information regarding results of operations for the second quarter of
2003 follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($in thousands) Company Bank Corp Trust I Corp (2) Balances Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 284 $ 9,812 $ 2,385 $ 381 $ - $ (392) $ 12,470
Interest expense 687 4,534 1,765 370 - (392) 6,964
-------------------------------------------------------------------------------------
Net interest and dividend income (403) 5,278 620 11 - - 5,506
Provision for loan loss reserves (1) 395 36 - - - 430
Noninterest income 49 993 670 - - (536) 1,176
Noninterest expenses 214 1,821 368 11 1 (536) 1,879
-------------------------------------------------------------------------------------
Earnings before taxes (567) 4,055 886 - (1) - 4,373
Provision for income taxes (257) 1,662 402 - - - 1,807
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ (310) $ 2,393 $ 484 $ - $ (1) $ - $ 2,566
- ----------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) $ 375 $ (375) $ - $ - $ - $ - $ -
Net earnings for same period of 2002 $ (329) $ 1,484 $ 489 $ - $ - $ - $ 1,644
- ----------------------------------------------------------------------------------------------------------------------------
(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).
(2) Results are from date of acquisition, June 2, 2003, thru June 30, 2003.
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 $5,506,000 in the second quarter
of 2003, from $4,478,000 in the same period of 2002. The increase was
attributable to growth of $141,543,000 in average interest-earning assets due to
new mortgage loans of $122,639,000 and an increase in security and other
short-term investments aggregating $18,904,000. The increases were funded by
$106,519,000 of new deposits, $16,170,000 of additional borrowed funds and a
$13,328,000 increase in stockholders' equity.
The Company's net interest margin remained nearly unchanged at 3.06% in the
second quarter of 2003, compared to 3.10% in the same period of 2002. In a
declining interest rate environment, the yield on interest-earning assets
decreased 68 basis points (bp) to 6.93% in the 2003 period due to lower rates on
new mortgage loans originated, prepayments of higher-yielding loans and lower
yields earned on security and other short-term investments. The cost of funds
decreased 65 bp to 4.25% in the 2003 period due to lower rates paid on deposit
accounts and a rate decrease on floating-rate debentures. The debentures are
indexed to the JPMorgan Chase Bank prime rate, which has decreased by a total of
75 bp from July 2002 to June 2003. The recent decline of 25 bp in June will
further reduce interest expense on such debentures beginning in July 2003.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
20
---------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------
June 30, 2003 June 30, 2002
-------------------------------- -----------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $558,262 $ 11,613 8.34% $435,623 $ 9,972 9.18%
Securities 135,071 770 2.29 132,345 983 2.98
Other interest-earning assets 28,349 87 1.23 12,171 53 1.75
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 721,682 $ 12,470 6.93% 580,139 $ 11,008 7.61%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,082 15,643
- ------------------------------------------------------------------------------------------------------------------
Total assets $735,764 $595,782
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 11,156 $ 44 1.58% $ 9,640 $ 59 2.45%
Savings deposits 31,745 151 1.91 29,938 208 2.79
Money market deposits 141,443 670 1.90 122,896 852 2.78
Certificates of deposit 353,556 3,653 4.14 268,907 3,228 4.81
- ------------------------------------------------------------------------------------------------------------------
Total deposit accounts 537,900 4,518 3.37 431,381 4,347 4.04
- ------------------------------------------------------------------------------------------------------------------
Debentures and related interest payable 104,063 2,067 7.97 87,882 1,804 8.23
Junior debentures - capital securities 15,000 374 10.00 15,000 374 10.00
Note payable 262 5 7.00 273 5 7.00
- ------------------------------------------------------------------------------------------------------------------
Total borrowed funds 119,325 2,446 8.22 103,155 2,183 8.49
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 657,225 $ 6,964 4.25% 534,536 $ 6,530 4.90%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,013 5,040
Noninterest-bearing liabilities 17,544 13,552
Stockholders' equity 55,982 42,654
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $735,764 $595,782
- ------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 5,506 2.68% $ 4,478 2.71%
- ------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 64,457 3.06% $ 45,603 3.10%
- ------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10 1.09x
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (1) 1.40% 1.10%
Return on average equity (1) 18.33% 15.42%
Noninterest expense to average assets (1) 1.02% 1.13%
Efficiency ratio (2) 28% 35%
Average stockholders' equity to average assets 7.61% 7.16%
- ------------------------------------------------------------------------------------------------------------------
(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
- ------------------------------------
The provision for loan losses was $430,000 in the second quarter of 2003, versus
$426,000 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 16 of this report. The provisions were a function of loan growth
($44,184,000 in the 2003 period and $45,297,000 in the 2002 period).
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 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.
21
Noninterest income increased $798,000 to $1,176,000 in the second quarter of
2003, from $378,000 in the second quarter of 2002, due to higher income from
loan prepayments as well as fees earned from loan commitments that expired
during the period.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased $199,000 to $1,879,000 in the second quarter of
2003, from $1,680,000 in the comparable quarter of 2002. the increase was
largely due to the following: a $76,000 increase in operational charges; a
$75,000 increase in compensation and benefits expense; a $42,000 increase in
data processing expense; and a $22,000 increase in director expense. These items
were partially offset by a $20,000 decrease in advertising expense.
The increase in operational charges was a direct function of growth in the
Bank's transactional deposit accounts.
The increase in compensation and benefits expense was due to $144,000 resulting
from additional staff (62 full-time employees at June 30, 2003 vs. 57 at June
30, 2002), salary increases and a higher cost of employee benefits. These items
were partially offset by a $41,000 increase in SFAS 91 direct fee income (due to
increased loan originations as well as a higher amount recognized per loan
origination) and bonus payments of $37,000 made to the Chairman of the Company
in the 2002 quarter that did not recur in 2003.
The increase in data processing expense 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 ($626,909,000 at June 30, 2003, versus
$529,258,000 at June 30, 2002).
The increase in director expense was due to an increase in director fees
beginning in June 2003.
The decrease in advertising expenses was due to less advertising for loans and
deposits.
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased to $1,807,000 in the second quarter of
2003, from $1,106,000 in the second quarter of 2002, due to higher pre-tax
income. The Company's effective tax rate (inclusive of state and local taxes)
amounted to 41% in the 2003 period, compared to 40% in the 2002 period.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED JUNE 30, 2003 AND
------------------------------------------------------------------------------
2002
----
OVERVIEW
- --------
Consolidated net earnings for the first half of 2003 increased to $4,367,000, or
$0.77 per diluted share, from $2,892,000, or $0.60 per diluted share, in the
first half of 2002. The improvement in earnings for the first half of 2003 was
due to the same factors that contributed to the 2003 quarterly earnings
increase. Net interest and dividend income increased by $2,227,000, while
noninterest income increased by $853,000. These increases were partially offset
by a $521,000 increase in noninterest expenses and a $1,082,000 increase in the
provision for income taxes.
Selected information regarding results of operations for the first half of 2003
follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($in thousands) Company Bank Corp Trust I Corp (2) Balances Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 553 $ 19,114 $ 4,477 $ 764 $ - $ (813) $ 24,095
Interest expense 1,372 9,029 3,423 741 - (813) 13,752
-------------------------------------------------------------------------------------
Net interest and dividend income (819) 10,085 1,054 23 - - 10,343
Provision for loan loss reserves 28 653 93 - - - 774
Noninterest income 99 1,261 1,209 - - (1,064) 1,505
Noninterest expenses 363 3,580 760 23 1 (1,064) 3,663
-------------------------------------------------------------------------------------
Earnings before taxes (1,111) 7,113 1,410 - (1) - 7,411
Provision for income taxes (504) 2,907 641 - - - 3,044
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (607) $ 4,206 $ 769 $ - $ ( 1) $ - $ 4,367
- ----------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) $ 750 $ (750) $ - $ - $ - $ - $ -
Net earnings for same period of 2002 $ (582) $ 2,720 $ 754 $ - $ - $ - $ 2,892
- ----------------------------------------------------------------------------------------------------------------------------
(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).
(2) Results are from date of acquisition, June 2, 2003, thru June 30, 2003.
22
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income increased to $10,343,000 in the first half of
2003, from $8,116,000 in the same period of 2002. The increase was attributable
to growth of $158,197,000 in the Company's average interest-earning assets due
to new mortgage loans of $122,630,000 and an increase in security and other
short-term investments aggregating $35,567,000. The increases were funded by
$127,247,000 of new deposits, $14,381,000 of additional borrowed funds and a
$13,115,000 increase in stockholders' equity.
The Company's net interest margin remained nearly unchanged at 2.96% in the
first half of 2003, compared to 3.00% in the same period of 2002. In a declining
interest rate environment, the yield on interest-earning assets decreased 75 bp
to 6.90% in the first half of 2003, while its cost of funds also decreased 75 bp
to 4.31% in the first half of 2003. The reasons for the decreases are the same
as those discussed in the "Comparison of Results of Operations for the Quarters
Ended June 30, 2003 and 2002."
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. For a further
description of the table, see the section "Comparison of Results of Operations
for the Quarters Ended June 30, 2003 and 2002."
--------------------------------------------------------------
Six-Months Ended
--------------------------------------------------------------
June 30, 2003 June 30, 2002
------------------------------- -----------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $533,845 $ 22,283 8.42% $411,215 $ 18,792 9.22%
Securities 146,532 1,657 2.28 123,574 1,825 2.98
Other interest-earning assets 24,217 155 1.29 11,608 102 1.77
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 704,594 $ 24,095 6.90% 546,397 $ 20,719 7.65%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,564 14,824
- ------------------------------------------------------------------------------------------------------------------
Total assets $719,158 $561,221
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 11,492 $ 100 1.75% $ 9,602 $ 119 2.50%
Savings deposits 31,443 313 2.01 28,398 401 2.85
Money market deposits 140,169 1,392 2.00 106,158 1,488 2.83
Certificates of deposit 343,716 7,166 4.20 255,415 6,261 4.94
- ------------------------------------------------------------------------------------------------------------------
Total deposit accounts 526,820 8,971 3.43 399,573 8,269 4.17
- ------------------------------------------------------------------------------------------------------------------
Federal funds purchased - - - 171 2 1.96
Debentures and related interest payable 101,366 4,024 8.01 86,869 3,577 8.30
Junior debentures - capital securities 15,000 748 10.06 15,000 748 10.06
Note payable 264 9 6.98 209 7 6.98
- ------------------------------------------------------------------------------------------------------------------
Total borrowed funds 116,630 4,781 8.27 102,249 4,334 8.55
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 643,450 $ 13,752 4.31% 501,822 $ 12,603 5.06%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,060 5,593
Noninterest-bearing liabilities 15,788 12,061
Stockholders' equity 54,860 41,745
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $719,158 $561,221
- ------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 10,343 2.59% $ 8,116 2.59%
- ------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 61,144 2.96% $ 44,575 3.00%
- ------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10 1.09x
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (1) 1.21% 1.03%
Return on average equity (1) 15.92% 13.86%
Noninterest expense to average assets (1) 1.02% 1.12%
Efficiency ratio (2) 31% 36%
Average stockholders' equity to average assets 7.63% 7.44%
- ------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses
plus noninterest income.
23
PROVISION FOR LOAN LOSS RESERVES
- ------------------------------------
The provision for loan losses was $774,000 in the first half of 2003, versus
$772,000 in the same period of 2002. The provisions were a function of loan
growth ($87,296,000 in the 2003 period and $82,286,000 in the 2002 period).
NONINTEREST INCOME
- -------------------
Noninterest income increased $853,000 to $1,505,000 in the first half of 2003,
from $652,000 in the same period of 2002. The increase was due to due to higher
income from loan prepayments as well as fees earned from loan commitments that
expired during the period.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased $521,000 to $3,663,000 in the first half of 2003,
from $3,142,000 in the comparable period of 2002. The increase was largely due
to the following: a $226,000 increase in compensation and benefits expense; a
$91,000 increase in operational charges; a $72,000 increase in data processing
expense; a $45,000 increase in foreclosed real estate expense; a $27,000
increase in FDIC and general insurance expense; and a $22,000 increase in
director expense. These items were partially offset by a $12,000 decrease in
advertising expense.
The increase in compensation and benefits expense was due to $294,000 resulting
from additional staff (62 full-time employees at June 30, 2003 vs. 57 at June
30, 2002), salary increases and a higher cost of employee benefits, and $77,000
of expense associated with 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 period). These items were partially offset by a $70,000 increase in SFAS 91
direct fee income (due to increased loan originations as well as a higher amount
recognized per loan origination) and bonus payments of $75,000 made to the
Chairman of the Company in 2002 that did not recur in 2003. See note 5 to the
condensed consolidated financial statements in this report for information
regarding common stock warrants.
The increased in foreclosed real estate expense was due to a net loss of $51,000
recorded in connection with the sale of the Bank's foreclosed real estate. In
addition, foreclosed real estate expense, net of any rental income, consists
mostly of real estate taxes, insurance, utilities, maintenance, professional
fees and other charges required to protect the Company's interest in the
property.
The increase in FDIC and general insurance expense was due to higher FDIC
premium expense due to deposit growth and higher general insurance premiums due
to rate increases.
The reasons for the changes in operational charges, data processing expense,
director expense and advertising expense are the same as those discussed in the
section "Comparison of Results of Operations for the Quarters Ended June 30,
2003 and 2002."
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased to $3,044,000 in the first half of
2003, from $1,962,000 in the first half of 2002, due to higher pre-tax income.
The Company's effective tax rate (inclusive of state and local taxes) amounted
to 41% in the 2003 period, compared to 40% in the 2002 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, 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 its 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
24
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
(a) An Annual Meeting of Stockholders was held on May 23, 2003.
(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, 2003 as a nominee for Director was elected for a one-year term
expiring on the date of the next annual meeting (see Item 4-C).
(c) The table below summarizes voting results on the matter submitted to the
Company's common stockholders:
- ---------------------------------------------------------------------------
FOR AGAINST OR WITHHELD ABSTAINED
- ---------------------------------------------------------------------------
ELECTION OF DIRECTORS - CLASS A
- --------------------------------
Michael A. Callen 4,043,034 5,600 -
Wayne F. Holly 4,040,034 8,300 -
Lawton Swan, III 4,043,034 5,600 -
ELECTION OF DIRECTORS - CLASS B
- --------------------------------
Lawrence G. Bergman 355,000 - -
Jerome Dansker 355,000 - -
Lowell S. Dansker 355,000 - -
Paul DeRosa 355,000 - -
Thomas E. Willett 355,000 - -
David J. Willmott 355,000 - -
Wesley T. Wood 355,000 - -
- ---------------------------------------------------------------------------
(d) Not Applicable
25
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) A report on Form 8-K was filed on April 14, 2003 by the registrant to
provide, under Item 9, its quarterly earnings release for the period
ended March 31, 2003.
A report on Form 8-K was filed on June 2, 2003 by the registrant to
report, under Item 5, the completion of its acquisition of all of the
shares of capital stock of Intervest Securities Corporation.
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 8, 2003 By: /s/ Lowell S. Dansker
------------------------------
Lowell S. Dansker, Vice Chairman, President and Treasurer
(Principal Executive and Financial Officer)
Date: August 8, 2003 By: /s/ Lawrence G. Bergman
------------------------------
Lawrence G. Bergman, Vice President and Secretary
26
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, Vice Chairman, President and Treasurer
(Principal Executive and Financial Officer)
August 8, 2003
27