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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 SEPTEMBER 30, 2004
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Commission File No. 000-23377
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INTERVEST BANCSHARES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation)
1 ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES XX NO.
-- --
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO XX .
-- --
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
- ----------------------------------------------- -----------------------------------------
Class A Common Stock, $1.00 par value per share 5,663,075 Outstanding at October 29, 2004
- ----------------------------------------------- -----------------------------------------
Class B Common Stock, $1.00 par value per share 385,000 Outstanding at October 29, 2004
- ----------------------------------------------- -----------------------------------------
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
September 30, 2004 (Unaudited) and December 31, 2003. . . . . 2
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Nine-Months Ended
September 30, 2004 and 2003 . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Changes in
Stockholders' Equity (Unaudited) for the Nine-Months
Ended September 30, 2004 and 2003 . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2004 and 2003 . . . . 5
Notes to Condensed Consolidated Financial
.. Statements (Unaudited). . . . . . . . . . . . . . . . . . . . 6
Review by Independent Registered Public Accounting Firm. . . . 14
Report of Independent Registered Public Accounting Firm. . . . 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 29
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . 29
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 29
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . 29
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
($in thousands, except par value) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 18,167 $ 8,833
Federal funds sold 15,037 36,816
Commercial paper and other short-term investments 13,934 18,479
------------------------------
Total cash and cash equivalents 47,138 64,128
Securities held to maturity, net (estimated fair value of $254,525 and $152,995, respectively) 255,340 152,823
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 4,642 3,075
Loans receivable (net of allowance for loan losses of $10,008 and $6,580, respectively) 928,993 664,545
Accrued interest receivable 6,601 4,995
Loan fees receivable 7,556 5,622
Premises and equipment, net 6,964 5,752
Deferred income tax asset 4,564 2,960
Deferred debenture offering costs, net 5,280 4,023
Other assets 2,178 3,600
==============================================================================================================================
TOTAL ASSETS $ 1,269,256 $ 911,523
==============================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 6,350 $ 6,210
Interest-bearing deposit accounts:
Checking (NOW) accounts 14,072 9,146
Savings accounts 30,723 30,784
Money market accounts 210,433 162,214
Certificate of deposit accounts 714,814 467,159
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Total deposit accounts 976,392 675,513
Borrowed Funds:
Subordinated debentures 105,060 94,690
Subordinated debentures - capital securities 61,856 30,928
Accrued interest payable on all debentures 13,206 14,510
Mortgage note payable 246 255
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Total borrowed funds 180,368 140,383
Accrued interest payable on deposits 1,502 1,080
Mortgage escrow funds payable 20,170 10,540
Official checks outstanding 4,246 6,122
Other liabilities 2,168 2,500
==============================================================================================================================
TOTAL LIABILITIES 1,184,846 836,138
==============================================================================================================================
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
5,663,075 and 5,603,377 shares issued and outstanding, respectively) 5,663 5,603
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 shares issued and outstanding) 385 385
Additional paid-in-capital, common 36,561 35,988
Retained earnings 41,801 33,409
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 84,410 75,385
==============================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,269,256 $ 911,523
==============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------
($in thousands, except per share data) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $16,428 $12,172 $44,677 $34,455
Securities 1,137 609 2,701 2,266
Other interest-earning assets 90 64 261 219
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TOTAL INTEREST AND DIVIDEND INCOME 17,655 12,845 47,639 36,940
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INTEREST EXPENSE
Deposits 7,158 4,550 18,376 13,521
Subordinated debentures 2,291 2,110 6,622 6,134
Subordinated debentures - capital securities 883 414 2,405 1,162
Other borrowed funds 16 5 26 14
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TOTAL INTEREST EXPENSE 10,348 7,079 27,429 20,831
- --------------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME 7,307 5,766 20,210 16,109
Provision for loan losses 1,067 602 3,428 1,376
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NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 6,240 5,164 16,782 14,733
- --------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 44 58 178 146
Income from mortgage lending activities 430 206 1,034 620
Income from the early repayment of mortgage loans 940 747 2,830 1,784
Commissions and fees 63 38 119 38
Loss from early call of investment securities - (11) (3) (51)
All other - - - 6
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TOTAL NONINTEREST INCOME 1,477 1,038 4,158 2,543
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NONINTEREST EXPENSES
Salaries and employee benefits 1,004 892 2,906 2,656
Occupancy and equipment, net 463 310 1,288 948
Data processing 131 192 387 530
Professional fees and services 100 89 298 276
Stationery, printing and supplies 47 33 137 112
Postage and delivery 32 23 86 73
FDIC and general insurance 64 57 191 168
Director and committee fees 88 84 260 151
Advertising and promotion 46 4 81 26
All other 166 128 470 535
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TOTAL NONINTEREST EXPENSES 2,141 1,812 6,104 5,475
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Earnings before income taxes 5,576 4,390 14,836 11,801
Provision for income taxes 2,424 1,859 6,444 4,903
========================================================================================================
NET EARNINGS $ 3,152 $ 2,531 $ 8,392 $ 6,898
========================================================================================================
BASIC EARNINGS PER SHARE $ 0.52 $ 0.52 $ 1.39 $ 1.45
DILUTED EARNINGS PER SHARE $ 0.47 $ 0.42 $ 1.25 $ 1.19
DIVIDENDS PER SHARE $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
2004 2003
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($in thousands) SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of period 5,603,377 $ 5,603 4,348,087 $ 4,348
Issuance of shares upon the exercise of warrants 42,510 43 279,900 280
Issuance of shares upon the conversion of debentures 17,188 17 40,699 41
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period 5,663,075 5,663 4,668,686 4,669
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CLASS B COMMON STOCK
Balance at beginning of period 385,000 385 355,000 355
Issuance of shares for acquisition of Intervest Securities Corporation - - 30,000 30
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period 385,000 385 385,000 385
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ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 35,988 24,134
Compensation related to vesting of certain Class B stock warrants 9 19
Compensation related to certain Class A stock warrants modified - 290
Issuance of shares upon the exercise of warrants 383 2,522
Issuance of shares upon the conversion of debentures 181 354
Issuance of shares for acquisition of Intervest Securities Corporation - 185
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period 36,561 27,504
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RETAINED EARNINGS
Balance at beginning of period 33,409 24,289
Net earnings for the period 8,392 6,898
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Balance at end of period 41,801 31,187
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===================================================================================================================
TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD 6,048,075 $ 84,410 5,053,686 $63,745
===================================================================================================================
See accompanying notes to condensed consolidated financial statements.
4
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE-MONTHS ENDED
------------------------
SEPTEMBER 30,
------------------------
($in thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 8,392 $ 6,898
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 459 391
Provision for loan losses 3,428 1,376
Deferred income tax benefit (1,604) (903)
Amortization of deferred debenture offering costs 941 784
Compensation expense related to common stock warrants 9 309
Amortization of premiums (accretion) of discounts and deferred loan fees, net (1,566) (1,130)
Net loss from sale of foreclosed real estate - 51
Net (decrease) increase in accrued interest payable on debentures (1,231) 1,610
Net decrease in official checks outstanding (1,876) (1,933)
Net change in all other assets and liabilities 5,314 4,639
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NET CASH PROVIDED BY OPERATING ACTIVITIES 12,266 12,092
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INVESTING ACTIVITIES
Net decrease in interest-earning time deposits with banks - 2,000
Maturities and calls of securities held to maturity 66,650 92,490
Purchases of securities held to maturity (170,849) (82,625)
Net increase in loans receivable (271,042) (142,622)
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 (1,567) (1,697)
Purchases of premises and equipment, net (1,671) (155)
Investment in unconsolidated subsidiaries (928) (464)
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NET CASH USED IN INVESTING ACTIVITIES (379,407) (132,705)
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FINANCING ACTIVITIES
Net increase in deposits 300,879 88,874
Net increase in mortgage escrow funds payable 9,630 7,800
Principal repayments of debentures and mortgage note payable (11,009) (1,408)
Gross proceeds from issuance of debentures 52,428 31,000
Debenture issuance costs (2,203) (1,609)
Proceeds from issuance of common stock 426 2,802
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NET CASH PROVIDED BY FINANCING ACTIVITIES 350,151 127,459
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Net (decrease) increase in cash and cash equivalents (16,990) 6,846
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Cash and cash equivalents at beginning of period 64,128 30,849
==============================================================================================================
Cash and cash equivalents at end of period $ 47,138 $ 37,695
==============================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 27,927 $ 18,418
Income taxes 8,628 5,589
Noncash activities:
Loan to finance sale of foreclosed real estate - 880
Conversion of debentures and accrued interest into Class A common stock 203 395
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for
information derived from the 2003 audited consolidated financial statements and
notes thereto. The condensed consolidated financial statements in this report
should be read in conjunction with the 2003 audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
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 and Intervest Securities Corporation. 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 period amounts
to conform to the current period'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.
Intervest Statutory Trust I, II, III and IV are wholly owned subsidiaries of the
Holding Company that are unconsolidated entities as required by FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" as revised
in December 2003. FIN 46 requires bank holding companies that have used
controlled business trusts to raise financing by issuing trust preferred
securities (capital securities) to deconsolidate their investments in those
trusts. On January 1, 2004,the Company adopted FIN 46 and the deconsolidation of
Intervest Statutory Trust I and II, which were formed prior to FIN 46, increased
both the Company's total assets and borrowed funds previously reported at
December 31, 2003 by $968,000, but had no effect on net income, stockholders'
equity and regulatory capital.
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 consolidated financial statements, and revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the need for a
valuation allowance 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.
NOTE 2 - DESCRIPTION OF BUSINESS
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest
Securities Corporation and the Bank's headquarters and full-service banking
office are located on the entire fourth floor of One Rockefeller Plaza in New
York City, New York, 10020-2002.
The 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 issues debt securities to raise funds for working capital purposes.
The Company's business segment is banking.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Plaza in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank conducts a
personalized commercial and consumer banking business and attracts deposits from
the areas served by its banking offices. 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 engaged in the
real estate business, including the origination and purchase of real estate
mortgage loans, consisting of first mortgage and junior mortgage loans.
Intervest Mortgage Corporation issues debentures to provide funding for its
business. Intervest Mortgage Corporation also provides loan origination services
to the Bank.
6
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 2 - DESCRIPTION OF BUSINESS - CONTINUED
Intervest Securities Corporation is a broker/dealer and a NASD and SIPC member
firm that participates 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 in exchange 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 $218,000 of cash at the time of acquisition. Prior to the
acquisition, Intervest Securities Corporation was an affiliated entity in that
it was wholly owned by the spouse of the Chairman of the Holding Company. The
acquisition was accounted for at historical cost. No restatements of the
Company's prior period consolidated financial statements were made because the
financial results of Intervest Securities Corporation were diminimus.
Intervest Statutory Trust I, II, III and IV were formed in December 2001,
September 2003, March 2004 and September 2004, respectively. Each was formed for
the sole purpose of issuing and administering capital securities as discussed in
note 7 herein. The Trusts do not conduct any trade or business.
NOTE 3 - LOANS RECEIVABLE
Loans receivable is summarized as follows:
At September 30, 2004 At December 31, 2003
-----------------------------------------------------
($in thousands) # of Loans Amount # of Loans Amount
- ----------------------------------------------------------------------------------------------
Commercial real estate loans 231 $ 523,924 184 $ 344,071
Residential multifamily loans 246 400,630 210 310,650
Land development and other land loans 11 22,932 6 20,526
Residential 1-4 family loans 4 984 26 1,628
Commercial business loans 23 1,134 28 1,662
Consumer loans 15 294 16 319
- ----------------------------------------------------------------------------------------------
Loans receivable 530 949,898 470 678,856
- ----------------------------------------------------------------------------------------------
Deferred loan fees (10,897) (7,731)
- ----------------------------------------------------------------------------------------------
Loans receivable, net of deferred fees 939,001 671,125
- ----------------------------------------------------------------------------------------------
Allowance for loan losses (10,008) (6,580)
- ----------------------------------------------------------------------------------------------
Loans receivable, net $ 928,993 $ 664,545
- ----------------------------------------------------------------------------------------------
At September 30, 2004, $5,226,000 of loans were on a nonaccrual status, compared
to $8,474,000 at December 31, 2003. These loans were considered impaired under
the criteria of SFAS No.114. but no valuation allowance was maintained at any
time since the Company believes that the estimated fair value of the underlying
properties exceeded the Company's recorded investment. At September 30, 2004 and
December 31, 2003, there were no other impaired loans or loans ninety days past
due and still accruing interest.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $140,000 for the quarter and nine-month period
ended September 30, 2004, compared to $180,000 for the same periods of 2003. The
average balance of nonaccrual (impaired) loans for the quarter and nine-month
period ended September 30, 2004 was $2,199,000 and $2,611,000, respectively. The
average balance of impaired loans for the quarter and nine-months ended
September 30, 2003 was $8,474,000 and $2,432,000, respectively.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Quarter Ended September 30, Nine-Months Ended September 30,
-------------------------------------------------------------------
($in thousands) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
Balance at beginning of period $ 8,941 $ 5,385 $ 6,580 $ 4,611
Provision charged to operations 1,067 602 3,428 1,376
- -----------------------------------------------------------------------------------------------------
Balance at end of period $ 10,008 $ 5,987 $ 10,008 $ 5,987
- -----------------------------------------------------------------------------------------------------
NOTE 5 - DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
7
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 5 - DEPOSITS, CONTINUED
At September 30, 2004 At December 31, 2003
---------------------------------------------------
Wtd-Avg Wtd-Avg
($in thousands) Amount Stated Rate Amount Stated Rate
- ------------------------------------------------------------------------------
Within one year $ 259,683 2.75% $ 182,693 2.75%
Over one to two years 134,280 3.35 90,936 3.64
Over two to three years 102,701 4.64 30,094 4.43
Over three to four years 63,110 4.16 89,085 4.83
Over four years 155,040 4.42 74,351 4.20
- ------------------------------------------------------------------------------
$ 714,814 3.62% $ 467,159 3.66%
- ------------------------------------------------------------------------------
NOTE 6 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures and mortgage note payable are summarized as follows:
($in thousands) At Sep 30, 2004 At Dec 31, 2003
- -----------------------------------------------------------------------------------------------------------------
INTERVEST MORTGAGE CORPORATION:
Series 05/12/95 - interest at 2% above prime (1) - due April 1, 2004 $ - $ 9,000
Series 10/19/95 - interest at 2% above prime (1) - due October 1, 2004 9,000 9,000
Series 05/10/96 - interest at 2% above prime (1) - due April 1, 2005 10,000 10,000
Series 10/15/96 - interest at 2% above prime (1) - due October 1, 2005 5,500 5,500
Series 04/30/97 - interest at 1% above prime (1) - due October 1, 2005 8,000 8,000
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 8 1/2 % fixed - due July 1, 2004 - 2,000
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
Series 09/18/00 - interest at 8 1/2 % fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2 % fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2 % fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4 % fixed - due October 1, 2005 1,250 1,250
Series 01/17/02 - interest at 7 1/2 % fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4 % fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/4 % fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 7 1/2 % fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4 % fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4 % fixed - due July 1, 2006 1,500 1,500
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4 % fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2 % fixed - due October 1, 2006 2,500 2,500
Series 07/25/03 - interest at 6 3/4 % fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4 % fixed - due April 1, 2007 2,000 -
Series 11/28/03 - interest at 6 1/2 % fixed - due April 1, 2009 3,500 -
Series 11/28/03 - interest at 6 3/4 % fixed - due April 1, 2011 4,500 -
Series 06/07/04 - interest at 6 1/4 % fixed - due January 1, 2008 2,500 -
Series 06/07/04 - interest at 6 1/2 % fixed - due January 1, 2010 4,000 -
Series 06/07/04 - interest at 6 3/4 % fixed - due January 1, 2012 5,000 -
----------------------------------
97,850 87,350
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 4,710 4,840
Series 12/15/00 - interest at 8 1/2 % fixed - due April 1, 2006 1,250 1,250
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250
----------------------------------
7,210 7,340
INTERVEST NATIONAL BANK:
Mortgage note payable (2) - interest at 7% fixed - due February 1, 2017 246 255
- -----------------------------------------------------------------------------------------------------------------
$ 105,306 $ 94,945
- -----------------------------------------------------------------------------------------------------------------
(1) Prime represents prime rate of JPMorganChase Bank, which was 4.75% on September 30, 2004 and 4.00% at
December 31, 2003. The floating -rate debentures have a maximum interest rate of 12%. (2) The note cannot be
prepaid except during the last year of its term.
8
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 6 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
In January 2004, Intervest Mortgage Corporation issued $10,000,000 of its Series
11/28/03 debentures for net proceeds, after offering costs, of $9,252,000. In
July 2004, Intervest Mortgage Corporation issued $11,500,000 of its Series
6/7/04 debentures for net proceeds, after offering costs, of $10,672,000.
On March 1, 2004, Intervest Mortgage Corporation's Series 5/12/95 debentures due
April 1, 2004 were redeemed for $9,000,000 of principal and $2,749,000 of
accrued interest. On May 1, 2004, Intervest Mortgage Corporation's Series
6/28/99 debentures due July 1, 2004 were redeemed for $2,000,000 of principal
and $980,000 of accrued interest.
Interest is paid quarterly on Intervest Mortgage Corporation's debentures except
for the following debentures: $1,950,000 of Series 10/19/95; $1,980,000 of
Series 5/10/96; all of Series 11/10/98, 6/28/99, 9/18/00; $770,000 of Series
8/01/01; $270,000 of Series 1/17/02; $1,520,000 of Series 8/05/02; $1,750,000 of
Series 11/28/03; and $1,910,000 of Series 6/7/04, which accrue and compound
interest quarterly, with such interest due and payable at maturity. Any holder
of Series 10/19/95 and 5/10/96 debentures whose interest accrues and is due at
maturity may at any time elect to receive the accrued interest and thereafter
receive regular interest payments quarterly.
The holders of Intervest Mortgage Corporation's Series 11/10/98 through 9/18/00
and Series 1/17/02 through 6/7/04 debentures can require Intervest Mortgage
Corporation to repurchase the debentures for face amount plus accrued interest
each year (beginning October 1, 2005 for Series 1/17/02, January 1, 2006 for
Series 8/05/02, July 1, 2006 for Series 1/21/03, October 1, 2006 for Series
7/25/03, January 1, 2007 for Series 11/28/03 and January 1, 2008 for Series
6/7/04). However, in no calendar year can the required purchases be more than
$100,000 in principal amount of each maturity, in each series of debentures, on
a non-cumulative basis.
Intervest Mortgage Corporation's debentures may be redeemed at its option at any
time, in whole or in part, for face value, except for Series 11/28/03 and
6/7/04. Redemptions would be at a premium of 1% if they occurred prior to
January 1, 2005 for Series 11/28/03 and July 1, 2005 for Series 6/7/04. All the
debentures are unsecured and subordinate to all present and future senior
indebtedness, as defined in the indenture related to each debenture.
Intervest Mortgage Corporation has filed a registration statement related to an
offering of additional subordinated debentures. It is anticipated that
debentures in an aggregate principal amount of up to $14,000,000 will be issued.
The Holding Company's Series 5/14/98 subordinated debentures are convertible at
the option of the holders at any time prior to April 1, 2008 into shares of its
Class A common stock at the following conversion prices per share: $12.00 in
2004; $14.00 in 2005; $16.00 in 2006; $18.00 in 2007 and $20.00 from January 1,
2008 through April 1, 2008. The Holding Company has the right to establish
conversion prices that are less than those set forth above for such periods as
it may determine. In the first quarter of 2004, $203,000 of debentures ($130,000
of principal and $73,000 of accrued interest) were converted into shares of
Class A common stock.
At September 30, 2004, interest accrues and compounds quarterly on $4,040,000 of
the convertible debentures at the rate of 8% per annum, while $670,000 of the
debentures pay interest quarterly at the rate of 8% per annum. All accrued
interest is due and payable at maturity whether by acceleration, redemption or
otherwise. Any convertible debenture holder may, on or before July 1 of each
year elect to be paid all accrued interest and to thereafter receive regular
payments of interest quarterly. All of the Holding Company's debentures may be
redeemed, in whole or in part, at any time at the option of the Holding Company
for face value.
Scheduled contractual maturities as of September 30, 2004 are as follows:
($in thousands) Principal Accrued Interest
- ----------------------------------------------------------------------------
For the three-months ended December 31, 2004 $ 9,004 $ 3,523
For the year ended December 31, 2005 29,116 3,768
For the year ended December 31, 2006 10,269 1,716
For the year ended December 31, 2007 7,022 111
For the year ended December 31, 2008 18,735 3,227
Thereafter 31,160 315
- ----------------------------------------------------------------------------
$ 105,306 $ 12,660
- ----------------------------------------------------------------------------
9
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as Trust Preferred Securities) are
summarized as follows:
At September 30, 2004 At December 31, 2003
-------------------------- --------------------------------
Accrued Accrued
($in thousands) Principal Interest Principal Interest
- ------------------------------------------------------------------------------------------------------------------------
Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 441 $ 15,464 $ 58
Capital Securities II - debentures due September 17, 2033 15,464 41 15,464 39
Capital Securities III - debentures due March 17, 2034 15,464 35 - -
Capital Securities IV - debentures due Sepetmber 20, 2034 15,464 29 - -
- ------------------------------------------------------------------------------------------------------------------------
$ 61,856 $ 546 $ 30,928 $ 97
- ------------------------------------------------------------------------------------------------------------------------
The Capital Securities are obligations of the Holding Company's wholly owned
statutory business trusts, Intervest Statutory Trust I, II, III and IV. Each
Trust was formed with a capital contribution of $464,000 from the Holding
Company and for the sole purpose of issuing and administering Capital
Securities. The proceeds from the issuance of the Capital Securities together
with the capital contribution for each Trust were used to acquire the Holding
Company's Junior Subordinated Debentures that are due concurrently with the
Capital Securities. The Capital Securities qualify as regulatory capital (see
note 10).
The sole assets of the Trusts, the obligors on the Capital Securities, are the
Junior Subordinated Debentures. In addition, for each Trust, the Holding Company
has guaranteed the payment of distributions on, payments on any redemptions of,
and any liquidation distribution with respect to the Capital Securities.
Issuance costs of $469,000, $444,000, $444,000 and $216,000 associated with
Capital Securities I, II, III and IV, respectively, have been capitalized and
are being amortized over the life of the securities using the straight-line
method.
Interest payments on the Junior Subordinated Debentures (and the corresponding
distributions on the Capital Securities) are payable in arrears as follows:
Capital Securities I - semi-annually at the fixed rate of 9.875% per annum;
Capital Securities II - quarterly at the fixed rate of 6.75% per annum for the
first five years and thereafter at the rate of 2.95% over 3 month libor; Capital
Securities III - quarterly at the fixed rate of 5.88% per annum for the first
five years and thereafter at the rate of 2.79% over 3 month libor; and Capital
Securities IV - quarterly at the fixed rate of 6.20% per annum for the first
five years and thereafter at the rate of 2.40% over 3 month libor. Interest
payments may be deferred at any time and from time to time during the term of
the Junior Subordinated Debentures at the election of the Company for up to 20
consecutive quarterly periods (5 years). There is no limitation on the number of
extension periods the Company may elect; provided, however, no deferral period
may extend beyond the maturity date of the Junior Subordinated Debentures.
During an interest deferral period, interest will continue to accrue on the
Junior Subordinated Debentures and interest on such accrued interest will accrue
at an annual rate equal to the interest rate in effect for such deferral period,
compounded quarterly from the date such interest would have been payable were it
not deferred. At the end of the deferral period, the Company will be obligated
to pay all interest then accrued and unpaid on the Junior Subordinated
Debentures.
All of the Capital Securities are subject to mandatory redemption as follows:
(i) in whole, but not in part, upon repayment of the Junior Subordinated
Debentures at stated maturity or earlier, at the option of the Holding Company,
within 90 days following the occurrence and continuation of certain changes in
the tax or capital treatment of the Capital Securities, or a change in law such
that the Trust would be considered an investment company, contemporaneously with
the redemption by the Holding Company of the Junior Subordinated Debentures; and
(ii) in whole or in part at any time on or after December 18, 2006 for Capital
Securities I, September 17, 2008 for Capital Securities II, March 17, 2009 for
Capital Securities III, and September 20, 2009 for Capital Securities IV
contemporaneously with the optional redemption by the Holding Company of the
Junior Subordinated Debentures in whole or in part. Any redemption would be
subject to the receipt of regulatory approvals.
10
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 8 - COMMON STOCK WARRANTS
At September 30, 2004, the Holding Company had 696,465 common stock warrants
outstanding that entitle its holder, the Chairman of the Holding Company, to
purchase one share of common stock for each warrant. All warrants are currently
exercisable.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant Total Wtd-Avg
-------------------------------
Class A Common Stock Warrants: $ 6.67 $ 10.01 Warrants Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 501,465 42,510 543,975 $ 6.93
Exercised during 2004 - (42,510) (42,510) $ 10.01
- -----------------------------------------------------------------------------------------------------
Outstanding at September 30, 2004 501,465 - 501,465 $ 6.67
- -----------------------------------------------------------------------------------------------------
Remaining contractual life in years at September 30, 2004 2.3 - 2.3
- -----------------------------------------------------------------------------------------------------
(1) The holders of the 42,510 warrants outstanding at December 31, 2003 presented these warrants to the Company for
exercise prior to the expiration date of December 31, 2003. The resulting shares were issued in January 2004.
Exercise Price Per Warrant Total Wtd-Avg
------------------------------
Class B Common Stock Warrants: $ 6.67 $ 10.00 Warrants Exercise Price
- --------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 and September 30, 2004 145,000 50,000 195,000 $ 7.52
- ---------------------------------------------------------------------------------------------------
Remaining contractual life in years at September 30, 2004 3.3 3.3 3.3
- --------------------------------------------------------------------------------------------------------------------
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.
Compensation expense recorded in connection with common stock warrants is
summarized as follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
------------------------------------------
($in thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------
Compensation expense recorded in connection with vesting
of Class B common stock warrants during the period $ - $ 6 $ 9 $ 19
Compensation expense recorded in connection with
Class A common stock warrants whose terms were modified - 96 - 290
- --------------------------------------------------------------------------------------------------------
$ - $ 102 $ 9 $ 309
- --------------------------------------------------------------------------------------------------------
NOTE 9 - EARNINGS PER SHARE (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average number
of shares of common stock outstanding. Diluted EPS is calculated by dividing
adjusted net earnings by the weighted-average number of shares of common stock
and dilutive potential common stock shares that may be outstanding in the
future. Potential common stock shares consist of outstanding dilutive common
stock warrants (which are computed using the "treasury stock method") and
convertible debentures (computed using the "if converted method").
Diluted EPS considers the potential dilution that could occur if the Company's
outstanding stock warrants and convertible debentures were converted into common
stock that then shared in the Company's earnings (as adjusted for interest
expense, net of taxes, that would no longer occur if the debentures were
converted).
11
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 9 - EARNINGS PER SHARE (EPS) , CONTINUED
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 Nine-Months Ended
September 30, September 30,
----------------------------------------------
($in thousands, except share and per share amounts) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $ 3,152 $ 2,531 $ 8,392 $ 6,898
Average number of common shares outstanding 6,048,075 4,894,436 6,046,339 4,771,323
- -----------------------------------------------------------------------------------------------------------------------
Basic net earnings per share amount $ 0.52 $ 0.52 $ 1.39 $ 1.45
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $ 3,152 $ 2,531 $ 8,392 $ 6,898
Adjustment to net earnings from assumed conversion of debentures (1) 83 115 247 346
----------------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 3,235 $ 2,646 $ 8,639 $ 7,244
----------------------------------------------
Average number of common shares outstanding:
Common shares outstanding 6,048,075 4,894,436 6,046,339 4,771,323
Potential dilutive shares resulting from exercise of warrants (2) 243,435 411,446 247,974 335,353
Potential dilutive shares resulting from conversion of debentures (3) 605,217 966,281 603,071 966,281
----------------------------------------------
Total average number of common shares outstanding used for dilution 6,896,727 6,272,163 6,897,384 6,072,957
- -----------------------------------------------------------------------------------------------------------------------
Diluted net earnings per share amount $ 0.47 $ 0.42 $ 1.25 $ 1.19
- -----------------------------------------------------------------------------------------------------------------------
(1) Represents interest expense on dilutive convertible debentures, net of taxes, that would not occur if they were
assumed converted.
(2) All outstanding warrants were considered for the EPS computations.
(3) Convertible debentures (principal and accrued interest) outstanding at September 30, 2004 and 2003 totaling
$7,328,000 and $9,672,000, respectively, were convertible into common stock at a price of $12.00 per share in 2004
and $10.01 per share in 2003 and resulted in additional common shares (based on average balances outstanding)
NOTE 10 - REGULATORY CAPITAL
The Bank and the Holding Company are required to maintain regulatory defined
minimum Tier 1 leverage and Tier 1 and total risk-based capital ratios.
Management believes that the Bank and the Holding Company meet their capital
adequacy requirements. Management believes that there are no current conditions
or events outstanding which would change the Bank's designation as a
well-capitalized institution.
At September 30, 2004, 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 12.95% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.87% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 10.03% 4.00% 5.00%
At September 30, 2004, the actual capital of the Company (consolidated) on a
percentage basis was as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ ----------------
Total capital to risk-weighted assets 14.61% 8.00% NA
Tier 1 capital to risk-weighted assets 10.53% 4.00% NA
Tier 1 capital to total average assets - leverage ratio 9.04% 4.00% NA
On January 1, 2004, the Company adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") as revised in December
2003. FIN 46 requires bank holding companies that have used controlled business
trusts to raise financing by issuing trust preferred securities (capital
securities) to deconsolidate their investments in those trusts.
12
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 10 - REGULATORY CAPITAL, CONTINUED
At September 30, 2004, the Company has $60,000,000 of qualifying capital
securities outstanding (which represents total debentures of $61,856,000 issued
to the Trusts by the Holding Company net of the Holding Company's investments in
those Trusts aggregating $1,856,000) that are includable for regulatory capital
computations.
The Federal Reserve has reviewed the regulatory implications of the accounting
treatment changes brought about by FIN 46 and in May 2004, the Board of
Governors of the Federal Reserve System issued a proposed rule that would retain
trust preferred securities in the Tier 1 capital of bank holding companies
(BHC), but with stricter quantitative limits and clearer qualitative standards.
The proposal would provide a three-year transition period for BHCs to meet the
new, stricter limitations within regulatory capital by proposing that the limits
on restricted core capital elements become fully effective as of March 31, 2007.
During the interim, BHCs with restricted core capital elements in excess of
these limits must consult with the Federal Reserve on a plan for ensuring that
the banking organization is not unduly relying upon these elements in its
capital base and, where appropriate, for reducing such reliance.
Until March 31, 2007, BHCs generally must comply with the current Tier 1 capital
limits. That is, BHCs generally should calculate their Tier 1 capital on a basis
that limits the aggregate amount of qualifying cumulative perpetual preferred
stock and qualifying trust preferred securities to 25 percent of the sum of
qualifying common stockholder's equity, qualifying noncumulative and cumulative
perpetual preferred stock (including related surplus), qualifying minority
interest in the equity accounts of consolidated subsidiaries, and qualifying
trust preferred securities. Amounts of qualifying cumulative perpetual preferred
stock and qualifying trust preferred securities in excess of this limit may be
included in Tier 2 capital.
Beginning March 31, 2007, qualifying cumulative perpetual preferred stock and
trust preferred securities, as well as certain types of minority interest, are
limited to 25 percent of the sum of core capital elements net of goodwill. Since
the Holding Company currently does not have any goodwill, this proposed rule
would have no effect on its current calculation of Tier 1 regulatory capital.
Beginning March 31, 2007, the excess amounts of restricted core capital elements
in the form of qualifying trust preferred securities included in Tier 2 capital
are limited to 50 percent of Tier 1 capital (net of goodwill). Amounts of these
instruments in excess of this limit, although not included in Tier 2 capital,
will be taken into account in the overall assessment of an organization's
funding and financial condition.
The proposed rule also provides that in the last five years before the
underlying subordinated note matures, the associated trust preferred securities
must be treated as limited-life preferred stock. Thus, in the last five years of
the life of the note, the outstanding amount of trust preferred securities will
be excluded from Tier 1 capital and included in Tier 2 capital, subject,
together with subordinated debt and other limited-life preferred stock, to a
limit of 50 percent of Tier 1 capital. During this period, the trust preferred
securities will be amortized out of Tier 2 capital by one-fifth of the original
amount (less redemptions) each year and excluded totally from Tier 2 capital
during the last year of life of the underlying note.
As of September 30, 2004, assuming the Company no longer included the Capital
Securities issued by Intervest Statutory Trust I, II, II and IV in Tier 1
Capital, the Company would still exceed the well capitalized threshold under the
regulatory framework for prompt corrective action.
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital
Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net
capital of $5,000. At September 30, 2004, Intervest Securities Corporation's net
capital was $483,000.
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the SEC issued Staff Accounting Bulletin No. 105, "Application of
Accounting Principles to Loan Commitments" (SAB 105). SAB 105 provides
recognition guidance for entities that issue loan commitments that are required
to be accounted for as derivative instruments. Currently, loan commitments that
the Company enters into would not be required to be accounted for as derivative
instruments under SAB 105.
13
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED
In March 2004, the Emerging Issues Task Force of the FASB reached consensus
opinions regarding the determination of whether an investment is considered
impaired, whether the identified impairment is considered other-than-temporary,
how to measure other-than-temporary impairment, and how to disclose unrealized
losses on investments that are not other-than-temporarily impaired. The
consensus opinions are detailed in Emerging Issues Task Force Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments. For the quarter ended September 30, 2004, the Company has
determined that it has the ability and intent to hold its investments classified
as held to maturity for a period of time sufficient for the fair value of the
securities to recover.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hacker, Johnson & Smith, P.A., P.C., the Company's independent registered
public accounting firm, has made a limited review of the financial data as of
September 30, 2004 and for the three- and nine-month periods ended September 30,
2004 and 2003 presented in this document, in accordance with the standards
established by the Public Company Accounting Oversight Board. 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.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of
September 30, 2004 and the related condensed consolidated statements of earnings
for the three- and nine-month periods ended September 30, 2004 and 2003, and the
related condensed consolidated statements of changes in stockholders' equity and
cash flows for the nine-month periods ended September 30, 2004 and 2003. These
interim financial statements are the responsibility of the Company's management.
We were furnished the reports of the other auditor on their reviews of the
interim financial information of Intervest Mortgage Corporation, whose total
assets as of September 30, 2004 constituted 10.2% of the related consolidated
total, and whose net interest income, noninterest income and net earnings for
the three- and nine-month periods then ended, constituted 6.9%, 10.4%, and
20.4%; and 6.4%, 14.3% and 19.8%, respectively, and whose net interest income,
noninterest income and net earnings for the three- and nine-month periods ended
September 30, 2003, constituted 10.9%, 9.9%, and 20.1%; and 10.5%, 13.6% and
18.5%, respectively, of the related consolidated totals.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board,
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 reports of the other auditor, 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 U.S.
generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board, the consolidated balance sheet as of
December 31, 2003, 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 February 6,
2004, with respect to note 3 dated March 16, 2004, we, based on our audit 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, 2003 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
November 8, 2004
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 September 30, 2004 and the
related condensed consolidated statements of operations for each of the
three-month and nine-month periods ended September 30, 2004 and 2003, and the
related condensed consolidated statements of changes in stockholders' equity and
cash flows for the nine-months ended September 30, 2004 and 2003 (all of which
are not presented separately herein). These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board,
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, 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 U.S. generally accepted accounting principles.
We previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003 and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the year then
ended (not presented herein), and in our report dated February 3, 2004, 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, 2003 (not presented separately herein) 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
October 20, 2004
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
-------
At September 30, 2004, Intervest Bancshares Corporation has three wholly owned
consolidated subsidiaries - Intervest National Bank, Intervest Mortgage
Corporation and Intervest Securities Corporation (hereafter referred to
collectively as the "Company" on a consolidated basis). Intervest Bancshares
Corporation and Intervest National Bank may be referred to individually as the
"Holding Company" and the "Bank," respectively. Intervest Bancshares Corporation
also has four wholly owned unconsolidated subsidiaries, Intervest Statutory
Trust I, II, III and IV. For a discussion of the Company's business, see note 2
to the condensed consolidated financial statements 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 losses and provision for income tax
expense. Noninterest income consists mostly of loan and other banking fees as
well as income from loan prepayments. The amount and timing of, as well as
income from, loan prepayments, if any, cannot be predicted and can fluctuate
significantly. Normally, the number of instances of prepayment of mortgage loans
tends to increase during periods of declining interest rates and tends to
decrease during periods of increasing interest rates. Many of the Company's
mortgage loans include 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.
The Company's profitability is significantly affected by general economic and
competitive conditions, changes in market interest rates, government policies
and actions of regulatory authorities. The Company's loan portfolio has
historically been concentrated in commercial real estate and multifamily
mortgage loans. The properties underlying the Company's mortgages are also
concentrated in New York State and the State of Florida. Many of the New York
properties are located in New York City and are subject to rent control and rent
stabilization laws, which limit the ability of the property owners to increase
rents. Credit risk, which represents the possibility of the Company not
recovering amounts due from its borrowers, is significantly related to local
economic conditions in the areas the properties are located, as well as the
Company's underwriting standards. Economic conditions affect the market value of
the underlying collateral as well as the levels of occupancy of income-producing
properties. Additionally, terrorist acts, such as those that occurred on
September 11, 2001, armed conflicts, such as the recent Gulf War, and natural
disasters, such as hurricanes, may have an adverse impact on economic
conditions.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
-----------------------------------------------------------------------------
OVERVIEW
- --------
Total assets at September 30, 2004 increased to $1,269,256,000, from
$911,523,000 at December 31, 2003. Total liabilities at September 30, 2004
increased to $1,184,846,000, from $836,138,000 at December 31, 2003, and
stockholders' equity increased to $84,410,000 at September 30, 2004, from
$75,385,000 at year-end 2003. Book value per common share increased to $13.96
per share at September 30, 2004, from $12.59 at December 31, 2003.
On January 1, 2004, the Company adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") as revised in December
2003. FIN 46 requires bank holding companies that have used controlled business
trusts to raise financing by issuing trust preferred securities to deconsolidate
their investments in those trusts. The adoption of FIN 46 resulted in the
deconsolidation of the Company's common stock investment in Intervest Statutory
I and Intervest Statutory II, which increased both the Company's total assets
and borrowed funds previously reported at December 31, 2003 by $968,000 , but
had no effect on net income, stockholders' equity and regulatory capital.
17
Selected balance sheet information as of September 30, 2004 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($in thousands) Company Bank Corp. Corp. Amounts (1) Combined
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 3,085 $ 30,476 $ 18,706 $ 490 $ (5,619) $ 47,138
Security investments - 259,982 - - - 259,982
Loans receivable, net of deferred fees 15,792 814,291 108,918 - - 939,001
Allowance for loan losses (85) (9,591) (332) - - (10,008)
Investment in consolidated subsidiaries 132,790 - - - (132,790) -
All other assets 5,414 22,066 5,724 - (61) 33,143
- -------------------------------------------------------------------------------------------------------------------------
Total assets $156,996 $1,117,224 $ 133,016 $ 490 $ (138,470) $1,269,256
- -------------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 982,267 $ - $ - $ (5,875) $ 976,392
Borrowed funds and related interest payable 72,285 246 107,837 - - 180,368
All other liabilities 301 25,236 2,347 7 195 28,086
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 72,586 1,007,749 110,184 7 (5,680) 1,184,846
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 84,410 109,475 22,832 483 (132,790) 84,410
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $156,996 $1,117,224 $ 133,016 $ 490 $ (138,470) $1,269,256
- -------------------------------------------------------------------------------------------------------------------------
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely
from intercompany deposit accounts and investments.
A comparison of selected balance sheet information as of September 30, 2004 and
December 31, 2003 follows:
At September 30, 2004 At December 31, 2003
--------------------------- ------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 47,138 3.7% $ 64,128 7.0%
Security investments 259,982 20.5 155,898 17.1
Loans receivable, net of deferred fees and loan loss allowance 928,993 73.2 664,545 72.9
All other assets 33,143 2.6 26,952 3.0
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,269,256 100.0% $ 911,523 100.0%
- ----------------------------------------------------------------------------------------------------------------------
Deposits $ 976,392 76.9% $ 675,513 74.1%
Borrowed funds and related interest payable 180,368 14.2 140,383 15.4
All other liabilities 28,086 2.2 20,242 2.2
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,184,846 93.3 836,138 91.7
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 84,410 6.7 75,385 8.3
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,269,256 100.0% $ 911,523 100.0%
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
- -------------------------
Cash and cash equivalents decreased to $47,138,000 at September 30, 2004, from
$64,128,000 at December 31, 2003, due to the partial deployment of those funds
into loans and securities.
SECURITY INVESTMENTS
- --------------------
Securities held to maturity increased to $255,340,000 at September 30, 2004,
from $152,823,000 at December 31, 2003. The increase was due to new purchases
exceeding maturities and early calls during the period. The Company continues to
invest in short-term (1-5 year) U.S government agency debt obligations to
emphasize liquidity and to target Intervest National Bank's loan-to-deposit
ratio at approximately 80%. The investment portfolio at September 30, 2004 had a
weighted-average remaining maturity of 2.1 years and a yield of 2.24%, compared
to 1.75 years and a yield of 1.75% at December 31, 2003.
The Bank's total investment in the Federal Reserve Bank and the Federal Home
Loan Bank of New York stock increased to $4,642,000 at September 30, 2004, from
$3,075,000 at December 31, 2003, due to additional purchases of stock.
LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan losses,
increased to $928,993,000 at September 30, 2004, from $664,545,000 at December
31, 2003. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments.
18
New loan originations totaled $139,019,000 in the third quarter of 2004 and
$477,610,000 in the first nine months of 2004, compared to $123,937,000 and
$289,232,000, respectively, for the same periods of 2003.
At September 30, 2004, $5,226,000 of loans were on a nonaccrual status, compared
to $8,474,000 at December 31, 2003. These loans were considered impaired under
the criteria of SFAS No.114, but no valuation allowance was maintained at any
time since the Company believes that the estimated fair value of the underlying
properties exceeded the Company's recorded investment. At September 30, 2004 and
December 31, 2003, there were no other impaired loans or loans ninety days past
due and still accruing interest.
At September 30, 2004, the allowance for loan losses amounted to $10,008,000,
compared to $6,580,000 at December 31, 2003. The allowance represented 1.07% of
total loans (net of deferred fees) outstanding at September 30, 2004 and 0.98%
at December 31, 2003. The increase in the allowance was due to provisions
aggregating $3,428,000 during the period resulting largely from loan growth,
which amounted to $271,042,000, as well as a decrease in the credit grade of two
loans during the third quarter of 2004. For a further discussion of all the
criteria the Company uses to determine the adequacy of the allowance, see pages
21 and 22 in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
ALL OTHER ASSETS
- ----------------
The following table sets forth the composition of the caption "All other assets"
in the table on page 18:
At September 30, At December 31,
----------------- ----------------
($in thousands) 2004 2003
- -------------------------------------------------------------------------------
Accrued interest receivable $ 6,601 $ 4,995
Loans fee receivable 7,556 5,622
Premises and equipment, net 6,964 5,752
Deferred income tax asset 4,564 2,960
Deferred debenture offering costs, net 5,280 4,023
Investment in unconsolidated subsidiaries 1,856 928
All other 322 2,672
- -------------------------------------------------------------------------------
$ 33,143 $ 26,952
- -------------------------------------------------------------------------------
Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received. The increase was due to the growth in these assets.
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. Such amounts are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan as a yield
adjustment. The increase was due to an increase in mortgage loan originations.
Premises and equipment increased due to net additions of $1,671,000 (almost all
of which was leasehold improvements associated with new office space), partially
offset by depreciation and amortization.
Deferred income tax asset relates primarily to the unrealized tax benefit on the
Company's allowance for loan losses. The allowance has been expensed for
financial statement purposes but it is currently not deductible for income tax
purposes. Management believes that it is more likely than not that the Company's
deferred tax asset will be realized and accordingly, a valuation allowance for
deferred tax assets is not maintained. The increase in the deferred tax asset is
a function of the increase in the allowance for loan losses during the period.
Deferred debenture offering costs consist primarily of underwriters' commissions
and are amortized over the terms of the debentures. The increase was due to a
total of $2,203,000 of new costs associated with the issuance of both Intervest
Mortgage Corporation's debentures and the Holding Company's Capital Securities.
The additional costs was partially offset by normal amortization during the
period.
The investment in unconsolidated subsidiaries consists of the Holding Company's
$464,000 individual common stock investment in each of its unconsolidated
subsidiary Intervest Statutory Trust I, II, II and IV.
DEPOSITS
- --------
Deposits increased to $976,392,000 at September 30, 2004, from $675,513,000 at
December 31, 2003, primarily reflecting increases in money market and
certificate of deposit accounts of $48,219,000 and $247,655,000,
19
respectively. At September 30, 2004, certificate of deposit accounts totaled
$714,814,000 and checking, savings and money market accounts aggregated
$261,578,000. The same categories of deposit accounts totaled $467,159,000 and
$208,354,000, respectively, at December 31, 2003. Certificate of deposit
accounts represented 73% of total deposits at September 30, 2004 and 69% at
December 31, 2003.
BORROWED FUNDS AND RELATED INTEREST PAYABLE
- -------------------------------------------
At September 30, 2004, borrowed funds and related interest payable increased to
$180,368,000, from $140,383,000 at year-end 2003. The increase was primarily due
to the issuance of Series 11/28/03 and 6/7/04 debentures by Intervest Mortgage
Corporation totaling $10,000,000 and $11,500,000, respectively, and the issuance
of a total of $30,928,000 of debentures by the Holding company to its wholly
owned unconsolidated subsidiaries, Intervest Statutory Trust III and IV. The new
debentures were partially offset by the early repayments of Intervest Mortgage
Corporation's Series 5/12/95 debentures due April 1, 2004 ($9,000,000 of
principal and $2,749,000 of accrued interest) and Series 6/28/99 debentures due
July 1, 2004 ($2,000,000 of principal and $980,000 of accrued interest). For
further information on borrowed funds and related interest payable, see notes 6
and 7 to the condensed consolidated financial statements included in this
report.
ALL OTHER LIABILITIES
- ---------------------
The table below sets forth the composition of the caption "All other
liabilities" in the table on page 18 as follows:
At September 30, At December 31,
----------------- ----------------
($in thousands) 2004 2003
- --------------------------------------------------------------------------
Mortgage escrow funds payable $ 20,170 $ 10,540
Official checks outstanding 4,246 6,122
Accrued interest payable on deposits 1,502 1,080
All other 2,168 2,500
- --------------------------------------------------------------------------
$ 28,086 $ 20,242
- --------------------------------------------------------------------------
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted to third parties. The increase reflected
the growth in the loan portfolio. Official checks outstanding varies and
fluctuates based on banking activity. Accrued interest payable on deposits
fluctuates based on total deposits and timing of interest payments. All other is
comprised mainly of accrued expenses, income taxes payable (which fluctuates
based on the Company's earnings, effective tax rate and timing of tax payments)
and fees received on loan commitments that have not yet been funded.
STOCKHOLDERS' EQUITY
- --------------------
Stockholders' equity increased to $84,410,000 at September 30, 2004, from
$75,385,000 at year-end 2003 as follows:
($in thousands) Amount Shares
- --------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2003 $75,385 5,988,377
Net earnings for the period 8,392 -
Class A common stock warrants exercised 426 42,510
Convertible debentures converted at election of debenture holders 198 17,188
Compensation expense on warrants held by the Chairman 9 -
- --------------------------------------------------------------------------------------
Stockholders' equity at September 30, 2004 $84,410 6,048,075
- --------------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT
------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company does note engage in trading
or hedging activities, nor does it invest in interest rate derivatives or enter
into interest rate swaps. The primary objective of the Company's asset/liability
management strategy is to limit, within established guidelines, the adverse
impact of changes in interest rates on its net interest income and capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. For a
further discussion of the assumptions used in preparing the gap analysis, see
pages 27 and 28 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. The Company's one-year positive interest rate sensitivity gap
amounted to $108,803, or 8.6% of total assets, at September 30, 2004, compared
to $118,124,000, or 13.0% at December 31, 2003
20
For purposes of computing the gap, all deposits with no stated maturities are
treated as readily accessible accounts. However, if such deposits were treated
differently, the one-year gap would then change. The behavior of core depositors
may not necessarily result in the immediate withdrawal of funds in the event
deposit rates offered by the Bank did not change as quickly and uniformly as
changes in general market rates. For example, if only 25% of deposits with no
stated maturity were assumed to be readily accessible, the one-year gap would
have been a positive 23.7% at September 30, 2004, compared to a positive 29.6%
at year-end 2003.
The table below summarizes interest-earning assets and interest-bearing
liabilities as of September 30, 2004, that are scheduled to mature or reprice
within the periods shown.
0-3 4-12 Over 1-4 Over 4
--- ---- -------- ------
($in thousands) Months Months Years Years Total
- --------------------------------------------------------------------------------------------------
Loans (1) $258,701 $270,316 $ 265,729 $155,152 $ 949,898
Securities held to maturity (2) 23,263 84,517 146,437 1,123 255,340
Short-term investments 28,971 - - - 28,971
FRB and FHLB stock 2,628 - - 2,014 4,642
- --------------------------------------------------------------------------------------------------
Total rate-sensitive assets $313,563 $354,833 $ 412,166 $158,289 $1,238,851
- --------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 14,072 $ - $ - $ - $ 14,072
Savings deposits 30,723 - - - 30,723
Money market deposits 210,433 - - - 210,433
Certificates of deposit 61,004 198,679 300,091 155,040 714,814
--------------------------------------------------------
Total deposits 316,232 198,679 300,091 155,040 970,042
Debentures and mortgage note payable (1) 32,500 4,350 49,674 80,638 167,162
Accrued interest on debentures (1) 6,024 1,808 5,059 315 13,206
- --------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $354,756 $204,837 $ 354,824 $235,993 $1,150,410
- --------------------------------------------------------------------------------------------------
GAP (repricing differences) $(41,193) $149,996 $ 57,342 $(77,704) $ 88,441
- --------------------------------------------------------------------------------------------------
Cumulative GAP $(41,193) $108,803 $ 166,145 $ 88,441 $ 88,441
- --------------------------------------------------------------------------------------------------
Cumulative GAP to total assets (3.2)% 8.6% 13.1% 7.0% 7.0%
- --------------------------------------------------------------------------------------------------
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
---------
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; issuance of debentures; borrowings from the
federal funds market, FHLB advances and cash provided by operating activities.
For additional information concerning the Company's cash flows, see the
condensed consolidated statements of cash flows included in this report. The
Company believes that it can fund its contractual obligations from the
aforementioned sources of funds.
As a member of the FHLB and the FRB, the Bank can borrow from these institutions
on a secured basis of up to $245,000,000 in aggregate at September 30, 2004
based on available collateral. The Bank has federal funds line of credit
agreements with correspondent banks whereby it can borrow on an overnight,
unsecured basis of up to $16,000,000 at September 30, 2004. No borrowing from
these sources were outstanding at September 30, 2004.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
---------------------------------------
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments are in the form of commitments to extend credit, unused lines
of credit and standby letters of credit, and may involve, to varying degrees,
elements of credit and
21
interest rate risk in excess of the amounts recognized in the financial
statements. The Company's maximum exposure to credit risk is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination clauses
and may require payment of fees.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The contractual amounts of the Company's off-balance sheet financial instruments
is as follows:
At At
-- --
September 30, December 31,
-------------- -------------
($in thousands) 2004 2003
- ---------------------------------------------------------
Unfunded loan commitments $ 115,388 $ 123,791
Available lines of credit 858 825
Standby letters of credit 750 100
- ---------------------------------------------------------
$ 116,996 $ 124,716
- ---------------------------------------------------------
Management is not aware of any trends, known demand, commitments or
uncertainties which are expected to have a material impact on future operating
results, liquidity or capital resources.
22
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------------------
AND 2003
--------
OVERVIEW
- --------
Consolidated net earnings for the third quarter of 2004 increased $621,000, or
25%, to $3,152,000, from $2,531,000 for the same quarter of 2003, representing
the highest quarterly earnings ever reported by the Company. Diluted earnings
per share for the 2004 quarter was $0.47, compared to $0.42 in the 2003 quarter.
The per share computation for 2004 includes a higher number of common shares
outstanding resulting from the exercise of common stock warrants and conversion
of debentures that occurred in the later part of 2003.
The increase in consolidated earnings for the third quarter of 2004 was
primarily due to the continued growth in the Company's lending activities. Net
interest and dividend income increased 27% or $1,541,000 from the prior year
quarter while noninterest income also increased $439,000 in the current quarter.
These revenue increases were partially offset by a $465,000 increase in the
provision for loan losses, a $565,000 increase in income tax expense and a
$329,000 increase in noninterest expenses.
Selected information regarding results of operations for the third quarter of
2004 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($in thousands) Company Bank Corp. Corp. Amounts (1) Consolidated
- ------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 285 $ 14,839 $ 2,576 $ 2 $ (47) $ 17,655
Interest expense 1,099 7,221 2,075 - (47) 10,348
----------------------------------------------------------------------------
Net interest and dividend income (814) 7,618 501 2 - 7,307
Provision for loan losses - 1,061 6 - - 1,067
Noninterest income 125 1,248 1,322 63 (1,281) 1,477
Noninterest expenses 120 2,648 619 35 (1,281) 2,141
----------------------------------------------------------------------------
Earnings before income taxes (809) 5,157 1,198 30 - 5,576
Provision for income taxes (374) 2,230 554 14 - 2,424
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ (435) $ 2,927 $ 644 $ 16 $ - $ 3,152
- ------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (2) 855 (855) - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 420 $ 2,072 $ 644 $ 16 $ - $ 3,152
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2003 $ 75 $ 1,939 $ 509 $ 8 $ - $ 2,531
- ------------------------------------------------------------------------------------------------------------------------
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise from
intercompany deposit accounts and management and service agreements.
(2) Dividends to the Holding Company from the Bank provide funds for the debt service on $60,000,000 of Capital
Securities. The debt service is included in the Holding Company's interest expense. The proceeds from the Capital
Securities are invested in the capital of the Bank.
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 $7,307,000 in the third quarter of
2004, from $5,766,000 in the third quarter of 2003. The improvement was
attributable to a $429,515,000 increase in average interest-earning assets
resulting from continued growth in loans of $336,968,000 and a higher level of
security and short-term investments aggregating $92,547,000. The growth in
average assets was funded by $360,328,000 of new deposits, $41,124,000 of
additional borrowed funds and a $21,889,000 increase in stockholders' equity
(resulting from earnings and issuance of shares upon the exercise of common
stock warrants and conversion of convertible debentures).
The Company's net interest margin decreased to 2.46% in the third quarter of
2004, from 3.03% in the third quarter of 2003. The decrease was due to the
Company's yield on interest-earning assets decreasing at a faster pace than its
cost of funds.
In a low interest rate environment, the yield on interest-earning assets
decreased 82 basis points to 5.94% in the 2004 quarter due to lower rates on new
mortgage loans originated as well as prepayments of higher-yielding loans,
partially offset by higher yields earned on security and other short-term
investments. The cost of funds decreased
23
32 basis points to 3.80% in the 2004 quarter due to lower rates paid on deposit
accounts and the addition of new debentures with lower rates than existing ones.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $140,000 for the third quarter of 2004, compared
to $180,000 for the same period of 2003. The average balance of nonaccrual loans
for the third quarter of 2004 amounted to $2,199,000, compared to $8,474,000 in
the 2003 quarter.
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
---------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------
September 30, 2004 September 30, 2003
-------------------------------- -----------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $ 942,342 $ 16,428 6.94% $605,374 $ 12,172 7.98%
Securities 216,463 1,137 2.09 121,674 609 1.99
Other interest-earning assets 24,566 90 1.46 26,808 64 0.95
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,183,371 $ 17,655 5.94% 753,856 $ 12,845 6.76%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,204 12,329
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,198,575 $766,185
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 12,271 $ 48 1.56% $ 10,713 $ 39 1.44%
Savings deposits 31,572 142 1.79 32,108 145 1.79
Money market deposits 204,139 982 1.91 145,134 651 1.78
Certificates of deposit 667,933 5,986 3.57 368,707 3,715 4.00
- ------------------------------------------------------------------------------------------------------------------
Total deposit accounts 915,915 7,158 3.11 556,662 4,550 3.24
- ------------------------------------------------------------------------------------------------------------------
Fed funds purchased and FHLB Advances 3,089 12 1.55 - - -
Debentures and related interest payable 114,654 2,291 7.95 107,565 2,110 7.78
Debentures - capital securities 48,241 883 7.28 17,283 414 9.50
Mortgage note payable 247 4 7.01 259 5 7.00
- ------------------------------------------------------------------------------------------------------------------
Total borrowed funds 166,231 3,190 7.64 125,107 2,529 8.02
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,082,146 $ 10,348 3.80% 681,769 $ 7,079 4.12%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,868 5,793
Noninterest-bearing liabilities 27,256 18,207
Stockholders' equity 82,305 60,416
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,198,575 $766,185
- ------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 7,307 2.14% $ 5,766 2.64%
- ------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 101,225 2.46% $ 72,087 3.03%
- ------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09 1.11
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.05% 1.32%
Return on average equity (2) 15.32% 16.76%
Noninterest expense to average assets (2) 0.71% 0.95%
Efficiency ratio (3) 24% 27%
Average stockholders' equity to average assets 6.87% 7.89%
- ------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans, if any.
(2) Annualized.
(3) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses
plus noninterest income.
24
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses increased $465,000 to $1,067,000 in the third
quarter of 2004, from $602,000 in the third quarter of 2003. The higher
provision was a function of loan growth, which amounted to $62,228,000 in the
2004 quarter versus $56,206,000 in the 2003 quarter, and a decrease in the
credit grade of two loans during the third quarter of 2004.
NONINTEREST INCOME
- ------------------
Noninterest income increased $439,000 to $1,477,000 in the third quarter of
2004, from $1,038,000 in the third quarter of 2003. The higher income was
primarily due to a $193,000 increase in income from the prepayment of mortgage
loans and $170,000 of additional fee income from loan commitments that expired
and were not funded. Income from the prepayment of mortgage loans consists
largely of the recognition of unearned fees associated with such loans at the
time of payoff and the receipt of prepayment penalties and interest in certain
cases.
NONINTEREST EXPENSES
- --------------------
Noninterest expenses increased $329,000 to $2,141,000 in the third quarter of
2004, from $1,812,000 in the third quarter of 2003. The increase was primarily
due to increases in salary and employee benefits expense of $112,000, occupancy
and equipment expenses of $153,000 and advertising expense of $42,000. These
increases were partially offset by a decrease in data processing expenses of
$61,000.
The Company's efficiency ratio, which is a measure of its ability to control
expenses, was 24% for the third quarter of 2004 and represented the third best
ratio as of March 31, 2004 among the 500 largest bank holding companies as
reported by American Banker in their September 2, 2004 issue.
Salaries and employee benefits expense increased due to the following: $125,000
from normal salary increases, a higher cost of employee benefits and additional
staff, and $103,000 from bonus payments to certain executives of the Company in
connection with the sale of capital securities and leasing of new space in 2004,
and $12,000 of additional commission expense. These items were partially offset
by a $102,000 decrease in compensation from common stock warrants held by
employees and directors, and a $26,000 decrease in compensation resulting from a
higher level of SFAS No. 91 direct fee income (due to more loan originations).
The Company had 66 fulltime employees at September 30, 2004 versus 60 at
September 30, 2003.
Occupancy and equipment expense increased due to the leasing of larger office
space. In May, Intervest Bancshares Corporation and its wholly owned
subsidiaries, Intervest National Bank (New York office), Intervest Mortgage
Corporation and Intervest Securities Corporation, completed their move to newly
constructed offices on the entire fourth floor at One Rockefeller Plaza in New
York City. Intervest Mortgage Corporation's lease obligation of approximately
$22,000 per month on its former space at 10 Rockefeller Plaza expired in
September 2004.
Advertising expenses increased due to additional advertising to support loan and
deposit growth.
Data processing expenses decreased due to lower fees incurred by the Bank. The
Bank renegotiated its data processing contract during late 2003 by extending the
expiration date to 2010 and reducing the processing fee to a fixed amount until
its assets reach $1.1 billion and thereafter the fee becomes variable and is
calculated based on total assets. Previously, the data processing fee was
entirely variable and a function of the Bank's total assets.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes increased $565,000 to $2,424,000 in the third
quarter of 2004, from $1,859,000 in the third quarter of 2003, primarily due to
an increase in pre-tax income and a higher effective income tax rate. The
Company's effective tax rate (inclusive of state and local taxes) amounted to
43.5% in the 2004 period, compared to 42.3% in the 2003 period. The higher rate
is due to a larger portion of consolidated taxable income being generated from
the Company's New York operations, which is taxed at higher income tax rate than
its Florida operations.
25
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004
- --------------------------------------------------------------------------------
AND 2003
--------
OVERVIEW
- --------
For the first nine months of 2004, consolidated net earnings amounted to
$8,392,000, or $1.25 per diluted share, an increase of $1,494,000 from
$6,898,000, or $1.19 per diluted share, reported in the first nine months of
2003. The per share computation for 2004 includes a higher number of common
shares outstanding resulting from the exercise of common stock warrants and
conversion of debentures that occurred in the later part of 2003.
The increase was due to growth in net interest and dividend income of $4,101,000
and an increase of $1,615,000 in noninterest income. These revenue increases
were partially offset by a $2,052,000 increase in the provision for loan losses,
a $1,541,000 increase in income tax expense and a $629,000 increase in
noninterest expenses.
Selected information regarding results of operations for the nine-months ended
September 30, 2004 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($in thousands) Company Bank Corp. Corp. Amounts (1) Consolidated
- ------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 856 $ 39,662 $ 7,270 $ 4 $ (153) $ 47,639
Interest expense 3,046 18,555 5,981 - (153) 27,429
----------------------------------------------------------------------------
Net interest and dividend income (2,190) 21,107 1,289 4 - 20,210
Provision for loan losses 7 3,281 140 - - 3,428
Noninterest income 276 3,431 3,599 119 (3,267) 4,158
Noninterest expenses 307 7,324 1,662 78 (3,267) 6,104
----------------------------------------------------------------------------
Earnings before income taxes (2,228) 13,933 3,086 45 - 14,836
Provision for income taxes (1,029) 6,025 1,427 21 - 6,444
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ (1,199) $ 7,908 $ 1,659 $ 24 $ - $ 8,392
- ------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (2) 2,340 (2,340) - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 1,141 $ 5,568 $ 1,659 $ 24 $ - $ 8,392
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2003 $ 217 $ 5,396 $ 1,278 $ 7 $ - $ 6,898
- ------------------------------------------------------------------------------------------------------------------------
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise from
intercompany deposit accounts and management and service agreements.
(2) Dividends to the Holding Company from the Bank provide funds for the debt service on $60,000,000 of Capital
Securities. The debt service is included in the Holding Company's interest expense. The proceeds from the Capital
Securities are invested in the capital of the Bank.
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 $20,210,000 in the first nine
months of 2004, from $16,109,000 in the same period of 2003. The improvement was
attributable to a $330,480,000 increase in average interest-earning assets
resulting from continued growth in loans of $273,320,000 and a higher level of
security and short-term investments aggregating $57,160,000. The growth in
average assets was funded by $265,768,000 of new deposits, $35,695,000 of
additional borrowed funds and a $22,721,000 increase in stockholders' equity
(resulting from earnings and issuance of shares upon the exercise of common
stock warrants and conversion of convertible debentures).
The Company's net interest margin decreased to 2.57% in the first nine months of
2004, from 2.99% in the same period of 2003. The decrease was due to the
Company's yield on interest-earning assets decreasing at a faster pace than its
cost of funds.
In a low interest rate environment, the yield on interest-earning assets
decreased 80 basis points to 6.05% in the 2004 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
41 basis points to 3.83% in the 2004 period due to lower rates paid on deposit
accounts and the addition of new debentures with lower rates than existing ones.
26
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $140,000 for the first nine months of 2004,
compared to $180,000 for the same period of 2003. The average balance of
nonaccrual loans for the nine-month period of 2004 was $2,611,000, compared to
$2,432,000 for the 2003 period.
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
---------------------------------------------------------------
Nine-Months Ended
---------------------------------------------------------------
September 30, 2004 September 30, 2003
--------------------------------- ----------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $ 831,281 $ 44,677 7.18% $557,961 $ 34,455 8.26%
Securities 187,761 2,701 1.92 138,155 2,266 2.19
Other interest-earning assets 32,672 261 1.07 25,118 219 1.17
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,051,714 $ 47,639 6.05% 721,234 $ 36,940 6.85%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,684 13,793
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,067,398 $735,027
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 10,891 $ 126 1.55% $ 11,229 $ 140 1.67%
Savings deposits 31,467 421 1.79 31,679 457 1.93
Money market deposits 187,058 2,561 1.83 141,842 2,043 1.93
Certificates of deposit 571,917 15,268 3.57 352,139 10,881 4.13
- ------------------------------------------------------------------------------------------------------------------
Total deposit accounts 801,333 18,376 3.06 536,889 13,521 3.37
- ------------------------------------------------------------------------------------------------------------------
Fed funds purchased and FHLB advances 1,165 13 1.49 - - -
Debentures and related interest payable 111,043 6,622 7.97 103,456 6,134 7.93
Debentures - capital securities 42,723 2,405 7.52 15,769 1,162 9.85
Mortgage note payable 251 13 7.00 262 14 7.00
- ------------------------------------------------------------------------------------------------------------------
Total borrowed funds 155,182 9,053 7.79 119,487 7,310 8.18
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 956,515 $ 27,429 3.83% 656,376 $ 20,831 4.24%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,630 5,306
Noninterest-bearing liabilities 24,791 16,604
Stockholders' equity 79,462 56,741
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,067,398 $735,027
- ------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 20,210 2.22% $ 16,109 2.61%
- ------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 95,199 2.57% $ 64,858 2.99%
- ------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10 1.10
- ------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.05% 1.25%
Return on average equity (2) 14.08% 16.21%
Noninterest expense to average assets (2) 0.76% 0.99%
Efficiency ratio (3) 25% 29%
Average stockholders' equity to average assets 7.44% 7.72%
- ------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans, if any.
(2) Annualized.
(3) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses
plus noninterest income.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses increased $2,052,000 to $3,428,000 in the first
nine months of 2004, from $1,376,000 in the same period of 2003. The higher
provision was a function of loan growth, which amounted to $271,042,000
27
in the 2004 period, versus $143,502,000 in the 2003 period, as well as a
decrease in the credit grade of two loans during the third quarter of 2004.
NONINTEREST INCOME
- ------------------
Noninterest income increased $1,615,000 to $4,158,000 in the first nine months
of 2004, from $2,543,000 in the same period of 2003. The increase was primarily
due to higher income of $1,046,000 from the prepayment of mortgage loans, a
$266,000 increase in loan service charges and $148,000 of additional fee income
from loan commitments that expired and were not funded.
NONINTEREST EXPENSES
- --------------------
Noninterest expenses increased $629,000 to $6,104,000 in the first nine months
of 2004, from $5,475,000 in the same period of 2003. The increase was due to
increases in salary and employee benefits expense of $250,000, occupancy and
equipment expenses of $340,000, director expenses of $109,000 and advertising
expenses of $55,000. These increases were partially offset by decreases in data
processing expenses of $143,000 and all other expenses of $65,000.
Salaries and employee benefits expense increased due to the following: $387,000
from normal salary increases, a higher cost of employee benefits and additional
staff, $249,000 from bonus payments to certain executives of the Company in
connection with the sale of capital securities and leasing of new space in 2004,
and $40,000 of additional commission expense. These items were partially offset
by a $300,000 decrease in compensation from common stock warrants held by
employees and directors, and a $126,000 decrease in compensation resulting from
a higher level of SFAS No. 91 direct fee income (due to more loan originations).
The Company had 66 fulltime employees at September 30, 2004 versus 60 at
September 30, 2003.
Occupancy and equipment expenses increased due to the leasing of larger office
space. In May, Intervest Bancshares Corporation and its wholly owned
subsidiaries, Intervest National Bank (New York office), Intervest Mortgage
Corporation and Intervest Securities Corporation, completed their move to newly
constructed offices on the entire fourth floor at One Rockefeller Plaza in New
York City. Intervest Mortgage Corporation's lease obligation of approximately
$22,000 per month on its former space at 10 Rockefeller Plaza expired in
September 2004.
Director expenses increased due to higher fees paid to directors for each board
and committee meeting attended beginning in September 2003.
Advertising expenses increased due to additional advertising to support loan and
deposit growth.
Data processing expenses decreased due to lower fees incurred by the Bank. The
Bank renegotiated its data processing contract during late 2003 by extending the
expiration date to 2010 and reducing the processing fee to a fixed amount until
its assets reach $1.1 billion and thereafter the fee becomes variable and is
calculated based on total assets. Previously, the data processing fee was
entirely variable and a function of the Bank's total assets.
All other expenses were lower due to a decrease of $49,000 in losses from
transactional accounts and a decrease in foreclosed real estate expenses of
$92,000, partial offset by increased travel expenses of $15,000.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes increased $1,541,000 to $6,444,000 in the first
nine months of 2004, from $4,903,000 in the same period of 2003, due to higher
pre-tax income and a higher effective income tax rate. The Company's effective
tax rate (inclusive of state and local taxes) amounted to 43.4% in the 2004
period, compared to 41.5% in the 2003 period. The higher rate is due to a larger
portion of consolidated taxable income being generated from the Company's New
York operations, which is taxed at higher income tax rate than its Florida
operations.
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 has not engaged in and accordingly has no risk
related to trading accounts, commodities, foreign exchange, hedging activities,
interest rate derivatives or interest rate swaps. 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 measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance sheet transactions are
28
aggregated, and the resulting net positions are identified. Disclosures about
the fair value of financial instruments as of December 31, 2003, 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 on Form 10-K for
the year ended December 31, 2003. Management believes that there have been no
significant changes in the Company's market risk exposure since December 31,
2003.
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. For a further
discussion, see the section "Asset and Liability Management"
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. OTHER INFORMATION
(a) In November 2004, Intervest National Bank, the Company's subsidiary,
entered into employment agreements with Mr. Keith A. Olsen, Mr. Raymond C.
Sullivan and Mr. John J. Arvonio. Those agreements are filed herein as
Exhibits 10.3, 10.4 and 10.5, respectively.
(b) Not Applicable
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report.
4.10 - Form of Indenture between the Company, as Issuer, and U.S Bank
National Association, as Trustee, dated as of March 17, 2004.
4.11 - Form of Indenture between the Company, as Issuer, and Wilmington
Trust Company, as Trustee, dated as of September 20, 2004.
29
EXHIBITS, CONTINUED
10.0 - Employment and Supplemental Benefits Agreement between the Company
and Jerome Dansker dated as of July 1, 2004.
10.1 - Employment and Supplemental Benefits Agreement between the Company
and Lowell S. Dansker dated as of July 1, 2004.
10.2 - Employment and Supplemental Benefits Agreement between the Company
and Lawrence G. Bergman dated as of July 1, 2004.
10.3 - Employment Agreement between Intervest National Bank, the Company's
subsidiary and Keith A. Olsen dated as of November 9, 2004.
10.4 - Employment Agreement between Intervest National Bank, the Company's
subsidiary and Raymond C. Sullivan dated as of November 10, 2004.
10.5 - Employment Agreement between Intervest National Bank, the Company's
subsidiary and John J. Arvonio dated as of November 10, 2004.
31.0 - Certification of the principal executive and financial officer
pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.0 - Certification of the principal executive and financial officer
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
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: November 10, 2004 By: /s/ Lowell S. Dansker
-------------------------------
Lowell S. Dansker, Vice Chairman,
President and Treasurer
(Principal Executive and Financial Officer)
Date: November 10, 2004 By: /s/ Lawrence G. Bergman
------------------------------
Lawrence G. Bergman, Vice President
and Secretary
30