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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, 2002
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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
of incorporation) identification no.)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES XX NO .
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
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Class A Common Stock, $1.00 par value per share 3,821,979 Outstanding at October 31, 2002
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Class B Common Stock, $1.00 par value per share 355,000 Outstanding at October 31, 2002
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2002 (Unaudited) and December 31, 2001................................... 2
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2002 and 2001........................... 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2002 and 2001 .......................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine-Months Ended September 30, 2002 and 2001 ....................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2002 and 2001........................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................... 7
Review by Independent Certified Public Accountants ............................................. 10
Report on Reviews by Independent Certified Public Accountants .................................. 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 23
Item 4. Controls and Procedures ............................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 24
Item 2. Changes in Securities and Use of Proceeds.............................................. 24
Item 3. Defaults Upon Senior Securities........................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.................................... 24
Item 5. Other Information...................................................................... 24
Item 6. Exhibits and Reports on Form 8-K ...................................................... 24
Signatures............................................................................................... 24
Certification ........................................................................................... 25
Private Securities Litigation Reform Act Safe Harbor Statement
The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-Q that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's interest rate spread, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting banks and bank holding companies.
1
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
($ in thousands, except par value) 2002 2001
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ASSETS (Unaudited)
Cash and due from banks $ 5,755 $ 4,714
Federal funds sold 8,809 6,345
Commercial paper 22,200 12,400
Other short-term investments 877 950
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Total cash and cash equivalents 37,641 24,409
Time deposits with banks - 250
Securities available for sale at estimated fair value 5,654 6,192
Securities held to maturity, net (estimated fair value of $147,134 and $99,404, respectively) 146,400 99,157
Federal Reserve Bank stock, at cost 1,104 654
Loans receivable (net of allowance for loan losses of $4,301 and $3,380, respectively) 450,090 365,146
Accrued interest receivable 4,557 3,202
Loan fees receivable 3,327 2,679
Premises and equipment, net 6,196 6,042
Foreclosed real estate 1,081 -
Deferred income tax asset 1,685 1,236
Deferred debenture offering costs, net 3,729 3,396
Other assets 257 259
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Total assets $661,721 $512,622
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LIABILITIES
Noninterest-bearing demand deposit accounts $ 4,584 $ 5,550
Interest-bearing deposit accounts:
Checking (NOW) accounts 9,023 10,204
Savings accounts 29,833 24,624
Money market accounts 132,344 80,594
Certificate of deposit accounts 310,839 241,465
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Total deposit accounts 486,623 362,437
Subordinated debentures payable 84,430 73,430
Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000
Note payable 269 -
Accrued interest payable on all debentures 13,383 11,480
Accrued interest payable on deposits 853 817
Mortgage escrow funds payable 9,684 4,253
Official checks outstanding 2,394 3,219
Other liabilities 1,967 1,591
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Total liabilities 614,603 472,227
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STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
3,764,079 and 3,544,629 shares issued and outstanding, respectively ) 3,764 3,545
Class B common stock ($1.00 par value, 700,000 shares authorized,
355,000 shares issued and outstanding) 355 355
Additional paid-in-capital, common 20,531 19,001
Retained earnings 22,379 17,383
Accumulated other comprehensive income -
Net unrealized gain on securities available for sale, net of tax 89 111
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Total stockholders' equity 47,118 40,395
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Total liabilities and stockholders' equity $661,721 $512,622
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See accompanying notes to condensed consolidated financial statements.
2
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
Quarter Ended Nine-Months Ended
September 30, September 30,
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($ in thousands, except per share data) 2002 2001 2002 2001
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INTEREST AND DIVIDEND INCOME
Loans receivable $10,254 $ 8,050 $29,046 $21,637
Securities 1,064 463 2,889 2,643
Other interest-earning assets 78 437 180 1,758
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Total interest and dividend income 11,396 8,950 32,115 26,038
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INTEREST EXPENSE
Deposits 4,603 4,193 12,872 12,968
Subordinated debentures 1,874 1,821 5,451 5,722
Junior debentures - capital securities 375 - 1,123 -
Note payable 5 - 12 -
Federal funds purchased - - 2 -
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Total interest expense 6,857 6,014 19,460 18,690
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Net interest and dividend income 4,539 2,936 12,655 7,348
Provision for loan loss reserves 192 264 964 364
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Net interest and dividend income after
provision for loan loss reserves 4,347 2,672 11,691 6,984
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NONINTEREST INCOME
Customer service fees 40 37 123 110
Income from mortgage lending activities 690 198 1,259 915
All other 6 2 6 6
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Total noninterest income 736 237 1,388 1,031
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NONINTEREST EXPENSES
Salaries and employee benefits 714 611 2,252 1,823
Occupancy and equipment, net 358 277 995 859
Data processing 150 109 416 204
Advertising and promotion 19 6 53 20
Professional fees and services 85 72 250 269
Stationery, printing and supplies 34 32 105 100
Postage and delivery 24 29 70 72
FDIC and general insurance 48 46 132 131
All other 162 131 463 488
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Total noninterest expenses 1,594 1,313 4,736 3,966
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Earnings before taxes 3,489 1,596 8,343 4,049
Provision for income taxes 1,385 667 3,347 1,661
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Net earnings $ 2,104 $ 929 $ 4,996 $ 2,388
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Basic earnings per share $ 0.52 $ 0.24 $ 1.26 $ 0.61
Diluted earnings per share $ 0.41 $ 0.24 $ 1.01 $ 0.61
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See accompanying notes to condensed consolidated financial statements.
3
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter Nine-Months
Ended Ended
September 30, September 30,
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($ in thousands) 2002 2001 2002 2001
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Net earnings $ 2,104 $ 929 $ 4,996 $ 2,388
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Net unrealized gains (losses) on securities available for sale 8 94 (38) 644
Provision for income taxes related to unrealized gains (losses)
on securities available for sale 4 46 (16) 253
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Other comprehensive income (loss), net of tax 4 48 (22) 391
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Total comprehensive income, net of tax $ 2,108 $ 977 $ 4,974 $ 2,779
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See accompanying notes to condensed consolidated financial statements.
4
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Nine-Months Ended
September 30,
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($ in thousands) 2002 2001
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CLASS A COMMON STOCK
Balance at beginning of period $ 3,545 $ 3,545
Issuance of 219,450 shares upon the exercise of warrants in 2002 219 -
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Balance at end of period 3,764 3,545
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CLASS B COMMON STOCK
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Balance at beginning and end of period 355 355
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ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 19,001 18,975
Compensation related to vesting of certain Class B stock warrants 19 20
Compensation related to certain Class A stock warrants modified 74 -
Issuance of 219,450 shares upon the exercise of Class A stock warrants
and related tax benefit in 2002 1,437 -
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Balance at end of period 20,531 18,995
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RETAINED EARNINGS
Balance at beginning of period 17,383 13,605
Net earnings for the period 4,996 2,388
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Balance at end of period 22,379 15,993
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 111 (252)
Net change in accumulated other comprehensive income, net (22) 391
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Balance at end of period 89 139
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Total stockholders' equity at end of period $ 47,118 $ 39,027
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See accompanying notes to condensed consolidated financial statements.
5
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine-Months Ended
September 30,
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($ in thousands) 2002 2001
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OPERATING ACTIVITIES
Net earnings $ 4,996 $ 2,388
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 473 353
Provision for loan loss reserves 964 364
Deferred income tax benefit (433) (210)
Amortization of deferred debenture offering costs 677 545
Compensation expense related to common stock warrants 93 20
Amortization of premiums, fees and discounts, net (534) (1,777)
Net increase in accrued interest payable on debentures 1,903 1,947
Net decrease in official checks outstanding (825) (670)
Net (increase) decrease in all other assets and liabilities (976) 2,544
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Net cash provided by operating activities 6,338 5,504
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INVESTING ACTIVITIES
Purchases of interest-earning time deposits with banks - (350)
Maturities of interest-earning time deposits with banks 250 -
Maturities and calls of securities available for sale 500 66,789
Maturities and calls of securities held to maturity 69,285 31,284
Purchases of securities held to maturity (117,905) (80,975)
Net increase in loans receivable (85,691) (85,229)
Purchases of Federal Reserve Bank stock, net (450) (49)
Purchases of premises and equipment, net (352) (619)
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Net cash used in investing activities (134,363) (69,149)
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FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 54,812 25,310
Net increase in certificates of deposit 69,374 16,174
Net increase in mortgage escrow funds payable 5,431 3,747
Principal repayments of debentures (2,500) (1,400)
Principal repayments of note payable (6) -
Proceeds from issuance of debentures, net of issuance costs 12,490 9,932
Proceeds from issuance of common stock 1,656 -
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Net cash provided by financing activities 141,257 53,763
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Net increase (decrease) in cash and cash equivalents 13,232 (9,882)
Cash and cash equivalents at beginning of period 24,409 42,938
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Cash and cash equivalents at end of period $ 37,641 $ 33,056
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 16,844 $ 16,263
Income taxes 3,955 1,896
Noncash activities:
Transfer of loans to foreclosed real estate, net of chargeoffs 1,081 -
Purchase of premises with note payable 275 -
Accumulated other comprehensive income,
change in unrealized gain on securities available for sale, net of tax (22) 391
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See accompanying notes to condensed consolidated financial statements.
6
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 1 - General
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for the
information derived from the audited Consolidated Balance Sheet as of December
31, 2001. The financial statements in this report should be read in conjunction
with the consolidated financial statements and related notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 2001.
The condensed consolidated financial statements include the accounts of
Intervest Bancshares Corporation (a bank holding company referred to by itself
as the "Holding Company") and its subsidiaries, Intervest National Bank (the
Bank), Intervest Mortgage Corporation (formerly known as Intervest Corporation
of New York) and Intervest Statutory Trust I. The Holding Company and its
subsidiaries are referred to as the "Company" on a consolidated basis. The
Holding Company's primary business activity is the ownership of the
aforementioned subsidiaries.
Intervest National Bank has its headquarters and full-service banking office in
Rockefeller Center in New York City, and a total of five full-service banking
offices in Clearwater and Pinellas County, Florida. The Bank conducts a
full-service commercial banking business, which consists of attracting deposits
from the general public and investing those funds, together with other sources
of funds, primarily through the origination of commercial and multifamily real
estate loans, and through the purchase of security investments.
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation, are located
in Rockefeller Center in New York City. Intervest Mortgage Corporation is
engaged in the real estate business, including the origination and purchase of
real estate mortgage loans, consisting of first mortgage, junior mortgage and
wraparound mortgage loans.
Intervest Statutory Trust I was formed in December 2001 for the sole purpose of
issuing $15,000,000 of capital securities as more fully described in note 9 to
the consolidated financial statements in the Company's Annual Report to
Stockholders on Form 10-K for the year ended December 31, 2001.
In the opinion of management, all material adjustments necessary for a fair
presentation of financial condition and results of operations for the interim
periods presented in this report have been made. These adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of results that may be expected for the entire year
or any other interim period. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts to conform to the current periods' presentation.
Note 2 - Allowance for Loan Loss Reserves
The Company monitors its loan portfolio to determine the appropriate level of
the allowance for loan loss reserves based on various factors. These factors
include: the type and level of loans outstanding; volume of loan originations;
overall portfolio quality; loan concentrations; specific problem loans,
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's assessment of the current and
anticipated economic conditions in the Company's lending regions.
Activity in the allowance for loan loss reserves for the periods indicated is
summarized as follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
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($ in thousands) 2002 2001 2002 2001
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Balance at beginning of period $4,109 $2,868 $3,380 $2,768
Provision charged to operations 192 264 964 364
Recoveries of previous chargeoffs (1) - - 107 -
Chargeoffs (2) - - (150) -
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Balance at end of period $4,301 $3,132 $4,301 $3,132
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(1) Represents proceeds received from the sale of collateral from a loan that
was charged off prior to 1997.
(2) Represents a chargeoff in connection with the transfer of a nonperforming
loan to foreclosed real estate.
7
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 2 - Allowance for Loan Loss Reserves, Continued
In the second quarter of 2002, the property collateralizing a commercial real
estate loan with a principal balance of $1,243,000 that was on nonaccrual status
and considered impaired under the criteria of SFAS No.114 at March 31, 2002 and
December 31, 2001, was acquired through foreclosure and transferred to
Foreclosed Real Estate at estimated fair value less estimated selling costs. A
loan charge off of $150,000 was recorded against the allowance for loan loss
reserves in connection with this transfer. At September 30, 2002, there were no
nonaccrual or impaired loans. At December 31, 2001, the aforementioned loan of
$1,243,000 was on nonaccrual status and considered impaired. Interest income
that was not accrued on this loan under its contractual terms prior to
foreclosure amounted to $31,000.
Note 3 - Earnings Per Share (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average number
of shares of common stock outstanding. Diluted EPS is calculated by dividing
adjusted net earnings by the weighted-average number of shares of common stock
outstanding and dilutive potential common stock shares that may be outstanding
in the future. Potential common stock shares may arise from outstanding dilutive
common stock warrants (as computed by the "treasury stock method") and
convertible debentures (as computed by the "if converted method").
Diluted EPS considers the potential dilution that could occur if the Company's
outstanding stock warrants and convertible debentures were converted into common
stock that then shared in the Company's adjusted earnings (as adjusted for
interest expense, net of tax, that would no longer occur if the debentures were
converted).
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are summarized
in the table that follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
-------------------------------------------------
2002 2001 2002 2001
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BASIC EARNINGS PER SHARE
Net earnings $2,104,000 $ 929,000 $4,996,000 $2,388,000
Average number of common shares outstanding 4,067,433 3,899,629 3,976,700 3,899,629
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Basic net earnings per share $ 0.52 $ 0.24 $ 1.26 $ 0.61
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DILUTED EARNINGS PER SHARE
Adjusted net earnings for diluted earnings per share computation (1) $2,214,000 $ 929,000 $5,319,000 $2,388,000
Average number of common shares outstanding for dilution:
Common shares outstanding per above 4,067,443 3,899,629 3,976,700 3,899,629
Potential dilutive shares resulting from exercise of warrants (2) 426,366 45,868 338,722 -
Potential dilutive shares resulting from conversion of debentures (3) 971,552 - 971,552 -
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Total average number of common shares outstanding 5,465,361 3,945,497 5,286,974 3,899,629
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Diluted net earnings per share $ 0.41 $ 0.24 $ 1.01 $ 0.61
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(1) Adjusted net earnings represents net earnings plus interest expense on
dilutive convertible debentures, net of tax, that would not occur if they
were assumed converted.
(2) Common stock warrants to purchase 1,134,000 shares of common stock at
prices ranging from $10.00 to $16.00 per share and common stock warrants to
purchase 2,650,000 shares of common stock at prices ranging from $6.67 to
$16.00 per share were not considered in the 2001 quarterly and nine-month
computations of diluted EPS, respectively, because their exercise price per
share exceeded the average market price of Class A common stock during
those periods.
(3) Convertible debentures outstanding in 2001 totaling $8,985,000 (principal
and accrued interest) were convertible into common stock at a price of
$14.00 per share, but were not considered in both computations of diluted
EPS for 2001 because they were not dilutive. For the 2002 computations,
convertible debentures outstanding totaling $9,725,000 (principal and
accrued interest) were convertible into common stock at a price of $10.01
per share and were considered dilutive, which resulted in additional common
shares.
8
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 4 - Regulatory Capital
The Bank is required to maintain certain minimum regulatory capital
requirements. The Bank is a well-capitalized institution as defined in the
regulations, which require minimum Tier 1 leverage and Tier 1 and total
risk-based ratios of 5%, 6% and 10%, respectively. Management believes that
there are no current conditions or events outstanding which would change the
Bank's designation as a well-capitalized institution.
The following is a summary at September 30, 2002 of the minimum regulatory
capital requirements and the actual capital of the Bank on a percentage basis:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------ ----------- ----------------
Total capital to risk-weighted assets 12.54% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.55% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 8.96% 4.00% 5.00%
9
Intervest Bancshares Corporation and Subsidiaries
Review by Independent Certified Public Accountants
Hacker, Johnson & Smith, P.A., P.C. the Company's independent certified
public accountants, have made a limited review of the financial data as of
September 30, 2002, and for the three- and nine-month periods ended September
30, 2002 and 2001 presented in this document, in accordance with standards
established by the American Institute of Certified Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
10
Report on Review by Independent Certified Public Accountants
The Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of
September 30, 2002, and the related condensed consolidated statements of
earnings and comprehensive income for the three- and nine-month periods ended
September 30, 2002 and 2001, and the related condensed consolidated statements
of changes in stockholders' equity and cash flows for the nine-month periods
ended September 30, 2002 and 2001 included in this report. These financial
statements are the responsibility of the Company's management.
We were furnished with the report of other accountants on their reviews of
the interim financial information of Intervest Mortgage Corporation (formerly
known as Intervest Corporation of New York), whose total assets as of September
30, 2002 constituted 14.3% 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 11.7%, 26.5% and 24.7%; and 14.2%,
25.2% and 25.5%, respectively, and whose net interest income, noninterest income
and net earnings for the three- and nine-month periods ended September 30, 2001,
constituted 13.2%, 16.9% and 14.4%; and 9.1%, 41.7% and 10.9%, respectively of
the related consolidated totals.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews and the report of other accountants, we are not aware
of any material modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001, and the related consolidated statements of earnings,
comprehensive income, changes in stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 21,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2001 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Hacker, Johnson & Smith, P.A., P.C.
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HACKER, JOHNSON & SMITH, P.A.,P.C.
Tampa, Florida
November 4, 2002
11
Report on Review by Independent Certified Public Accountants
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest
Mortgage Corporation (formerly known as "Intervest Corporation of New York" and
subsidiaries (the "Company") as of September 30, 2002, and the related condensed
consolidated statements of operations for the three- and nine-month periods
ended September 30, 2002 and 2001, and the related condensed consolidated
statements of changes in stockholder's equity and cash flows for the nine-month
periods ended September 30, 2002 and 2001 (all of which are not presented
separately herein). These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001 and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for the year then ended (not presented
herein), and in our report dated January 21, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2001 is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ Eisner, LLP
- ---------------
ESINER,LLP
New York, New York
October 23, 2002
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
-------
Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest
National Bank, Intervest Mortgage Corporation (formerly known as Intervest
Corporation of New York) and Intervest Statutory Trust I (hereafter referred to
collectively as the "Company" on a consolidated basis). Intervest Bancshares
Corporation and Intervest National Bank may be referred to individually as the
"Holding Company" and the "Bank," respectively.
The Holding Company's primary business is the operation of its subsidiaries. It
does not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the Holding
Company sells debentures to raise funds for working capital purposes.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Center, in New York
City, and a total of five full-service banking offices in Clearwater and
Pinellas County, Florida. The Bank conducts a personalized commercial and
consumer banking business and attracts deposits from the areas served by its
banking offices. It also provides internet banking services through its web
site: www.intervestnatbank.com, which can attract deposit customers from outside
its primary market areas. The deposits, together with funds derived from other
sources, are used to originate a variety of real estate, commercial and consumer
loans and to purchase investment securities. The Bank emphasizes multifamily and
commercial real estate lending.
Intervest Mortgage Corporation is a mortgage investment company located in
Rockefeller Center in New York City. It is engaged in the real estate business,
including the origination and purchase of real estate mortgage loans, consisting
of first mortgage, junior mortgage and wraparound mortgage loans. Its wholly
owned subsidiaries, Intervest Distribution Corporation and Intervest Realty
Servicing Corporation are nonoperating entities that provide administrative
services to Intervest Mortgage Corporation.
Intervest Statutory Trust I was formed in December 2001 in connection with the
issuance of $15,000,000 of capital securities. For a further discussion, See the
section entitled "Debentures Payable and Accrued Interest Payable on Debentures"
on page 30 of the Company's Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2001.
The Company has previously announced that it intends to explore further growth
through the acquisition of other banks or thrifts. It will consider acquisition
of banks/thrifts with operations compatible with its own, with a view towards
consolidating selected lines of business, operations and support functions in
order to achieve economies of scale, greater efficiency and operational
consistency. The Company anticipates that any such banks/thrifts would be
located in the eastern United States. The Company emphasizes that it has not
entered into any agreements or identified any institutions for acquisition and
there can be no assurances that any such acquisitions will be successfully
completed.
The Company's profitability depends primarily on net interest income, which is
the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, the provision for loan loss reserves, and its effective
income tax rate. Noninterest income consists primarily of loan and other banking
fees. Noninterest expense consists of compensation and benefits, occupancy and
equipment related expenses, data processing expenses, advertising expense,
deposit insurance premiums and other operating expenses. The Company's
profitability is also significantly affected by general economic and competitive
conditions, changes in market interest rates, government policies and actions of
regulatory authorities. Since the properties underlying the Company's mortgages
are concentrated in the New York City area and the State of Florida, the
economic conditions in those areas can also have an impact on the Company's
operations. While none of the properties underlying these mortgages were
directly impacted by the terrorist act of September 11, 2001, it is impossible
to predict the impact such events will have on real estate generally in the City
of New York.
13
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
-----------------------------------------------------------------------------
Overview
- --------
Total assets at September 30, 2002 increased to $661,721,000, from $512,622,000
at December 31, 2001. Total liabilities at September 30, 2002 increased to
$614,603,000, from $472,227,000 at December 31, 2001. Stockholders' equity
increased to $47,118,000 at September 30, 2002, from $40,395,000 at year-end
2001. Book value per common share rose to $11.44 per share at September 30,
2002, from $10.36 at December 31, 2001.
Selected balance sheet information as of September 30, 2002 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Company
($ in thousands) Company Bank Corporation Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 4,848 $ 13,610 $ 24,978 $ - $ (5,795) $ 37,641
Securities available for sale - 5,654 - - - 5,654
Securities held to maturity, net - 146,400 - 15,464 (15,464) 146,400
Federal Reserve Bank stock - 1,104 - - - 1,104
Loans receivable, net of deferred fees 8,403 378,594 67,394 - - 454,391
Allowance for loan loss reserves (42) (4,175) (84) - - (4,301)
Investment in subsidiaries 61,847 - - - (61,847) -
Foreclosed real estate - 1,081 - - - 1,081
All other assets 1,482 14,435 4,087 441 (694) 19,751
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 76,538 $ 556,703 $ 96,375 $ 15,905 $ (83,800) $ 661,721
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 492,726 $ - $ - $ (6,103) $ 486,623
Subordinated debentures payable 25,894 - 74,000 - (15,464) 84,430
Junior debentures payable-capital securities - - - 15,000 - 15,000
Note payable - 269 - - - 269
Accrued interest payable on all debentures 3,311 - 10,085 428 (441) 13,383
All other liabilities 215 13,445 1,170 13 55 14,898
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 29,420 506,440 85,255 15,441 (21,953) 614,603
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 47,118 50,263 11,120 464 (61,847) 47,118
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 76,538 $ 556,703 $ 96,375 $ 15,905 $ (83,800) $ 661,721
- ------------------------------------------------------------------------------------------------------------------------------------
A comparison of the consolidated balance sheets as of September 30, 2002 and
December 31, 2001 follows:
At September 30, 2002 At December 31, 2001
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $37,641 5.7% $24,409 4.8%
Time deposits with banks - - 250 0.1
Securities available for sale at estimated fair value 5,654 0.9 6,192 1.2
Securities held to maturity, net 146,400 22.1 99,157 19.3
Federal Reserve Bank stock 1,104 0.2 654 0.1
Loans receivable, net of deferred fees and loan loss reserves 450,090 68.0 365,146 71.2
Foreclosed real estate 1,081 0.1 - -
All other assets 19,751 3.0 16,814 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $661,721 100.0% $512,622 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $486,623 73.5% $362,437 70.7%
Subordinated debentures payable 84,430 12.8 73,430 14.3
Junior debentures payable-capital securities 15,000 2.3 15,000 2.9
Note payable 269 0.1 - -
Accrued interest payable on all debentures 13,383 2.0 11,480 2.3
All other liabilities 14,898 2.2 9,880 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 614,603 92.9 472,227 92.1
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 47,118 7.1 40,395 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $661,721 100.0% $512,622 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
14
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents amounted to $37,641,000 at September 30, 2002,
compared to $24,409,000 at December 31, 2001, and consisted of cash on hand and
due from banks, overnight federal funds and short-term commercial paper
investments. The level of cash and cash equivalents fluctuates based on various
factors, including liquidity needs, loan prepayments, loan demand, deposit
flows, calls of securities, repayments of borrowed funds and alternative
investment opportunities.
Securities Available for Sale
- -----------------------------
Securities available for sale amounted to $5,654,000 at September 30, 2002,
compared to $6,192,000 at December 31, 2001. The decrease was due to maturities.
At September 30, 2002, the portfolio had an unrealized gain, net of tax, of
$89,000, compared to $111,000 at December 31, 2001. Unrealized gains and losses
on securities available for sale, net of related income taxes, are reported as a
separate component of comprehensive income and included in stockholders' equity.
Securities Held to Maturity, Net
- --------------------------------
Securities held to maturity increased to $146,400,000 at September 30, 2002,
from $99,157,000 at December 31, 2001. The increase was due to new purchases
exceeding maturities and calls during the period. The portfolio consists of
short-term debt obligations of FNMA, FHLB, FHLMC and FFCB with a
weighted-average yield of approximately 2.61% and a weighted-average term of 1.5
years. The securities are predominately fixed rate and some have call features,
which allow the issuer to call the security before its stated maturity without
penalty.
Federal Reserve Bank Stock
- --------------------------
In order for the Bank to be a member of the Federal Reserve Banking System, the
Bank maintains an investment in the capital stock of the Federal Reserve Bank,
which pays a dividend that is currently 6%. The investment, which amounted to
$1,104,000 at September 30, 2002 and $654,000 at December 31, 2001, fluctuates
based on the Bank's capital level.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Loss Reserves
- ---------------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan loss reserves,
increased to $450,090,000 at September 30, 2002, from $365,146,000 at December
31, 2001. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments. Commercial
real estate and multifamily real estate properties collateralized almost all of
the loans in the Company's loan portfolio.
At September 30, 2002, the allowance for loan loss reserves amounted to
$4,301,000, compared to $3,380,000 at December 31, 2001. The allowance
represented 0.95% of total loans (net of deferred fees) outstanding at September
30, 2002, compared to 0.92% at December 31, 2001. The Company monitors its loan
portfolio to determine the appropriate level of the allowance for loan loss
reserves based on various factors. These factors include: the type and level of
loans outstanding; volume of loan originations; overall portfolio quality; loan
concentrations; specific problem loans, historical chargeoffs and recoveries;
adverse situations which may affect the borrowers' ability to repay; and
management's assessment of the current and anticipated economic conditions in
the Company's lending regions. The increase in the allowance was due to a
provision for loan losses of $964,000 (due to loan growth) and a $107,000
recovery from the sale of collateral from a loan that was charged off prior to
1997. These additions were partially offset by a $150,000 charge off recorded in
connection with a nonperforming loan as discussed below.
In the second quarter of 2002, the property collateralizing a commercial real
estate loan with a principal balance of $1,243,000 that was on nonaccrual status
and considered impaired under the criteria of SFAS No.114 at March 31, 2002 and
December 31, 2001, was acquired through foreclosure and transferred to
Foreclosed Real Estate at estimated fair value less estimated selling costs. A
loan charge off of $150,000 was recorded against the allowance for loan loss
reserves in connection with this transfer. At September 30, 2002, there were no
nonaccrual or impaired loans. At December 31, 2001, the aforementioned loan of
$1,243,000 was the only loan on nonaccrual status and considered impaired.
15
Foreclosed Real Estate
- ----------------------
At September 30, 2002, foreclosed real estate amounted to $1,081,000 and
represented one commercial real estate property located in the State of Florida
that was acquired by the Bank as discussed in the preceding paragraph. The
property is actively being marketed for sale. Foreclosed real estate is carried
at the lower of the new cost basis or estimated fair value less estimated
selling costs. Revenue and expenses from operations and changes in the valuation
allowance of the property are included in the consolidated statement of
earnings.
All Other Assets
- ----------------
The following table sets forth the composition of all other assets in the table
on page 14:
At September 30, At December 31,
($ in thousands) 2002 2001
------------------------------------------------------------------------------
Accrued interest receivable $4,557 $3,202
Loans fee receivable 3,327 2,679
Premises and equipment, net 6,196 6,042
Deferred income tax asset 1,685 1,236
Deferred debenture offering costs, net 3,729 3,396
All other 257 259
------------------------------------------------------------------------------
$19,751 $16,814
------------------------------------------------------------------------------
Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received. The increase was due to a higher level of the aforementioned
interest-earning assets.
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. These fees are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan. The increase
was due to an increase in mortgage loan originations, partially offset by
payments received.
Premises and equipment increased due to the purchase of property, at a cost of
$350,000, by the Bank that is across from its Court Street branch office in
Florida. This property was purchased primarily to provide additional parking for
the branch. This increase was largely offset by normal amortization and
depreciation.
The deferred income tax asset relates primarily to the unrealized tax benefit on
the Company's allowance for loan loss reserves, depreciation, and organizational
start-up costs. These charges have been expensed for financial statement
purposes, but are not all currently deductible for income tax purposes. The
ultimate realization of the deferred tax asset is dependent upon the generation
of sufficient taxable income by the Company during the periods in which these
temporary differences become deductible for tax purposes. Management believes
that it is more likely than not that the Company's deferred tax asset will be
realized and accordingly, a valuation allowance for deferred tax assets is not
maintained.
Deferred debenture offering costs consist primarily of underwriters' commissions
and are amortized over the terms of the debentures. The increase was due to
additional costs ($1,010,000) incurred with the sale of new debentures by
Intervest Mortgage Corporation, partially offset by normal amortization.
Deposit Liabilities
- -------------------
Deposit liabilities increased to $486,623,000 at September 30, 2002, from
$362,437,000 at December 31, 2001, primarily reflecting increases in money
market and certificate of deposit accounts of $51,750,000 and $69,374,000,
respectively. At September 30, 2002, certificate of deposit accounts totaled
$310,839,000 and demand deposit, savings, NOW and money market accounts
aggregated $175,784,000. The same categories of deposit accounts totaled
$241,465,000 and $120,972,000, respectively, at December 31, 2001. Certificate
of deposit accounts represented 64% of total deposits at September 30, 2002,
compared to 67% at year-end 2001.
Debentures Payable and Related Accrued Interest Payable
- -------------------------------------------------------
At September 30, 2002, debentures payable amounted to $84,430,000, compared to
$73,430,000 at year-end 2001. The increase was due to the sale of additional
debentures by Intervest Mortgage Corporation (Series 1/17/02 and 8/05/02
totaling $13,500,000 in principal amount and maturing at various times through
January 1, 2010) as part of its normal funding of its mortgage loan
originations, partially offset by the repayment of $2,500,000 of its Series
06/28/99 debentures. The sale of the debentures, after underwriter's commissions
and other issuance costs, resulted in net proceeds of $12,490,000. At September
16
30, 2002, Intervest Mortgage Corporation had $74,000,000 principal amount of
debentures payable outstanding and the Holding Company had $10,430,000 principal
amount of debentures payable outstanding, of which $6,930,000 were convertible
into the Holding Company's Class A common stock at a current conversion price of
$10.01 per share.
At September 30, 2002 and December 31, 2001, the Holding Company, through its
wholly owned subsidiary Intervest Statutory Trust I, has Trust Preferred
Securities (Junior Debentures Payable) outstanding totaling $15,000,000 that
qualify as regulatory capital.
At September 30, 2002, accrued interest payable on all debentures amounted to
$13,383,000, compared to $11,480,000 at year-end 2001. Nearly all of the accrued
interest payable is due and payable at the maturity of various debentures. For a
further discussion of all the debentures, including conversion prices and
redemption premiums, see notes 7 and 9 to the consolidated financial statements
included in the Company's Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2001.
Note Payable
- ------------
In connection with the purchase of property by the Bank that is across from its
Court Street branch office in Florida as described previously, the Bank issued a
note payable to the seller for $275,000. The note matures in February of 2017
and calls for monthly payments of principal and interest at 7% per annum.
All Other Liabilities
- ---------------------
The following table shows the composition of all other liabilities in the table
on page 14:
At September 30, At December 31,
($ in thousands) 2002 2001
-----------------------------------------------------------------------------
Mortgage escrow funds payable $9,684 $4,253
Official checks outstanding 2,394 3,219
Accrued interest payable on deposits 853 817
Income taxes payable 464 772
All other 1,503 819
-----------------------------------------------------------------------------
$14,898 $9,880
-----------------------------------------------------------------------------
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted by the Company to third parties. The
increase reflects the timing of payments to taxing authorities as well as the
growth in the loan portfolio. The level of official checks outstanding varies
and fluctuates based on banking activity. The increase in all other is largely
due to fees collected and unearned on outstanding loan commitments.
Stockholders' Equity and Regulatory Capital
- -------------------------------------------
Stockholders' equity increased to $47,118,000 at September 30, 2002, from
$40,395,000 at December 31, 2001. The increase was due to the following: net
earnings of $4,996,000; the issuance of 219,450 shares of Class A common stock
upon the exercise of common stock warrants for total proceeds, including related
tax benefits, of $1,656,000; and the recording of $93,000 of net compensation
expense related to stock warrants held by employees and directors; partially
offset by a $22,000 decrease in unrealized gains, net of tax, on securities
available for sale. For additional discussion of employee stock warrants, see
the section "Comparison of Results of Operations for the Quarters Ended
September 30, 2002 and 2001." The Bank is a well-capitalized institution as
defined in applicable banking regulations, which require minimum Tier 1 leverage
and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively.
Management believes that there are no current conditions or events outstanding
which would change the Bank's designation as a well-capitalized institution. See
note 4 to the condensed consolidated financial statements in this report for the
Bank's capital ratios.
Liquidity and Capital Resources
-------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment funding commitments,
deposit withdrawals and the repayment of borrowed funds. The Company's primary
sources of funds consist of retail deposits obtained through the Bank's offices
and through the mail, satisfactions and repayments of loans, the maturities and
calls of securities, and cash provided by operating activities. The Company may
also borrow funds through the federal funds market or sale of debentures. For
information about the cash flows from the Company's operating, investing and
financing activities, see the condensed consolidated statements of cash flows in
this report. At September 30, 2002, the Company's total commitment to lend
17
aggregated approximately $62,500,000. Based on its cash flow projections, the
Company believes that it can fund all of its outstanding commitments from the
aforementioned sources of funds.
Interest Rate Risk
------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The primary objective of the Company's
asset/liability management strategy is to limit, within established guidelines,
the adverse impact of changes in interest rates on the Company's net interest
income and capital. The Company uses "gap analysis," which measures the
difference between interest-earning assets and interest-bearing liabilities that
mature or reprice within a given time period, to monitor its interest rate
sensitivity. At September 30, 2002, the Company's one-year interest-rate
sensitivity gap was a positive $100,617,000 or 15.2% of total assets, compared
to a positive $31,738,000, or 6.2%, at December 31, 2001. The increase in the
gap was primarily due to an increase in variable rate loans funded by an
increase in certificate of deposits with a term of over one year.
In computing the gap, the Company treats its interest checking, money market and
savings deposit accounts as immediately repricing. Further, the Company has a
"floor," or minimum rate, on many of its floating-rate loans that is determined
in relation to prevailing market rates on the date of origination. This floor
only adjusts upwards in the event of increases in the loan's interest rate. This
feature reduces the effect on interest income in a falling rate environment. For
a further discussion of interest rate risk and gap analysis, including all of
the assumptions used in developing the one-year gap, see the Company's 2001
Annual Report to Stockholders on Form 10-K, pages 31and 32.
Comparison of Results of Operations for the Quarters
----------------------------------------------------
Ended September 30, 2002 and 2001
---------------------------------
Overview
- --------
Consolidated net earnings in the third quarter of 2002 increased 126% to
$2,104,000, from $929,000, in the third quarter of 2001. Earnings per share on a
fully diluted basis increased to $0.41 in the third quarter of 2002, from $0.24
in the third quarter of 2001. The earnings per share computation in the 2002
quarter included a higher amount of common shares largely due to an increase in
dilutive common stock warrants and convertible debentures outstanding resulting
from an increase in the Company's average stock price. Earnings growth was due
to an improved net interest margin and a higher level of income from mortgage
loan prepayments. Net interest and dividend income increased by $1,603,000 while
noninterest income rose by $499,000 (of which $404,000 was due to loan
prepayments). These improvements were partially offset by a $718,000 increase in
the provision for income taxes due to higher pre-tax income and a $281,000
increase in noninterest expenses, a large portion of which was attributable to
the Company's growth in assets.
Selected information regarding results of operations for the third quarter of
2002 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Company
($ in thousands) Company Bank Corporation Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 250 $ 9,052 $ 2,114 $ 381 $ (401) $11,396
Interest expense 677 4,627 1,584 370 (401) 6,857
---------------------------------------------------------------------
Net interest and dividend income (expense) (427) 4,425 530 11 - 4,539
Provision (credit) for loan loss reserves (8) 191 9 - - 192
Noninterest income 63 525 662 - (514) 736
Noninterest expenses 65 1,694 338 11 (514) 1,594
---------------------------------------------------------------------
Earnings (loss) before taxes (421) 3,065 845 - - 3,489
Provision (credit) for income taxes (198) 1,258 325 - - 1,385
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (223) $ 1,807 $ 520 $ - $ - $ 2,104
- ------------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends received (paid) (1) $ 375 $ (375) $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The Bank pays a monthly dividend of $125,000 to the Holding Company in
order to provide funds for the debt service on the Junior
Debentures-Capital Securities (the proceeds of which were contributed to
the Bank as capital in December 2001).
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates. Net interest
and dividend income increased to $4,539,000 in the third quarter of 2002, from
$2,936,000 in the third quarter of 2001. The increase was attributable to growth
of $199,713,000 in the Company's average interest-earning assets and an increase
in the net interest margin from 2.70% in the third quarter of 2001, to 2.85% in
the third quarter of 2002. The growth in average earning assets was due to
$123,247,000 in new mortgage loans and a net increase in security and other
short-term investments aggregating $76,466,000. These increases were funded by
18
$162,876,000 of new deposits, $28,220,000 of additional borrowed funds and a
$6,919,000 increase in stockholders' equity.
The increase in the margin was due to the Company's cost of funds decreasing at
a faster pace than its yield earned on interest-earning assets in a declining
interest rate environment. The yield on interest-earning assets decreased 106
basis points to 7.16% in the third quarter of 2002 due to lower rates on new
mortgage loans originated, prepayments of higher-yielding loans and lower yields
earned on security and other short-term investments. The cost of funds decreased
143 basis points to 4.68% in the third quarter of 2002 primarily due to lower
rates paid on deposit accounts and rate decreases on floating-rate debentures.
The floating-rate debentures are indexed to the JPMorgan Chase Bank prime rate,
which decreased by a total of 475 basis points from January 2001 to September
2002.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
Quarter Ended
-----------------------------------------------------------------------------
September 30, 2002 September 30, 2001
-----------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $460,792 $10,254 8.83% $337,545 $8,050 9.46%
Securities 152,944 1,064 2.76 44,129 463 4.16
Other interest-earning assets 17,992 78 1.72 50,341 437 3.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 631,728 $11,396 7.16% 432,015 $8,950 8.22%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,395 11,897
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $646,123 $443,912
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 9,404 $ 53 2.24% $ 8,036 $ 62 3.06%
Savings deposits 30,719 193 2.49 20,292 206 4.03
Money market deposits 131,775 826 2.49 67,070 682 4.03
Certificates of deposit 303,196 3,531 4.62 216,820 3,243 5.93
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 475,094 4,603 3.84 312,218 4,193 5.33
- ------------------------------------------------------------------------------------------------------------------------------------
Debentures and related interest payable 91,321 1,874 8.14 78,372 1,821 9.22
Junior debentures - capital securities 15,000 375 9.92 - - -
Note payable 271 5 7.00 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 106,592 2,254 8.39 78,372 1,821 9.22
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 581,686 $ 6,857 4.68% 390,590 $6,014 6.11%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 4,424 5,134
Noninterest-bearing liabilities 14,691 9,785
Stockholders' equity 45,322 38,403
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $646,123 $443,912
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 4,539 2.48% $2,936 2.11%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 50,042 2.85% $ 41,425 2.70%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09 1.11x
- ------------------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets (1) 1.30% 0.84%
Return on average equity (1) 18.57% 9.68%
Noninterest expense to average assets (1) 0.99% 1.18%
Efficiency ratio (2) 30.22% 41.38%
Average stockholders' equity to average assets 7.01% 8.65%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income
before the provision for loan losses plus noninterest income.
19
Provision for Loan Loss Reserves
- --------------------------------
In the third quarter of 2002, the Company recorded a provision for loan losses
of $192,000 compared to $264,000 in the same quarter of 2001. The provision is
based on management's ongoing assessment of the adequacy of the allowance for
loan loss reserves, which takes into consideration a number of factors as
discussed on page 15 of this report. The lower provision for the 2002 quarter
was a function of net loan growth, which amounted to $4,648,000 during the
current quarter, versus $38,070,000 in the third quarter of 2001.
Noninterest Income
- ------------------
Noninterest income includes fees from customer service charges and income from
mortgage lending activities, which is comprised mostly of income from loan
prepayments, fees earned on expired loan commitments, and loan service,
inspection and maintenance charges.
Noninterest income increased to $736,000 in the third quarter of 2002, from
$237,000 in the third quarter of 2001. The increase was due to higher income and
fees ($404,000) from the prepayment of mortgage loans and increases in fees
earned on expired loan commitments and loan service charge income. 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.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $1,594,000 in the third quarter of 2002, from
$1,293,000 in the comparable quarter of 2001, exclusive of $20,000 of
nonrecurring expenses associated with the merger of Intervest Bank into
Intervest National Bank in 2001. The resulting increase of $301,000 was largely
due to a $103,000 increase in compensation and benefits, a $81,000 increase in
occupancy and equipment expenses, a $41,000 increase in data processing
expenses, a $13,000 increase in advertising expenses and the addition of $29,000
of net expenses associated with foreclosed real estate during the third quarter
of 2002.
The increase in compensation and benefits was due to $110,000 resulting from
additional staff, salary increases and a higher cost of employee benefits, and
bonus payments of $37,000 to the Chairman of the Company. These items were
partially offset by the reversal of $44,000 in compensation associated with
certain common stock warrants held by employees as a result of a decrease in the
Company's Class A common stock price during the quarter. (In 2001, the Company
modified the terms of its Class A common stock warrants - exercisable at $12.50
and $16.00 per share as of December 31, 2001 - and reduced the exercise price to
$10.01 per share commencing January 1, 2002 and extended the expiration date to
December 31, 2002.) In September 2002, the Company further modified the warrants
by extending the expiration date to December 31, 2003. For these warrants, which
total 138,500, compensation expense is being recorded in the statement of
earnings with the corresponding credit to paid in capital in accordance with
variable rate accounting as prescribed in APB Opinion No. 25 and related
interpretations. Future compensation amounts related to these warrants will
fluctuate up or down (but not less than the $73,000 recorded year to date) until
December 31, 2003 and will be a function of the Company's Class A common stock
price and number of warrants outstanding and exercised.
The increase in data processing expenses was due to growth in the Bank's assets.
The Bank engages a third-party servicer for its main data processing and the fee
is a function of the Bank's total assets, which increased to $556,703,000 at
September 30, 2002, compared to $385,928,000 at September 30, 2001.
The increase in occupancy and equipment expenses was primarily due to increased
depreciation expense and higher real estate taxes and maintenance charges,
including insurance and security protection expenses.
The increase in advertising expenses was due to additional advertising to
support loan and deposit growth.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $1,385,000 in the third quarter of
2002, from $667,000 in the third quarter of 2001, due to higher pre-tax income.
The Company's effective tax rate (inclusive of state and local taxes) amounted
to 39.7% in the 2002 period, compared to 41.8% in the 2001 period.
20
Comparison of Results of Operations for the Nine-Months
-------------------------------------------------------
Ended September 30, 2002 and 2001
---------------------------------
Overview
- --------
Consolidated net earnings for the nine-months ended September 30, 2002 more than
doubled to $4,996,000, or $1.01 per fully diluted share, from $2,388,000, or
$0.61 per fully diluted share, in the same period of 2001. The growth in
earnings was due to a $5,307,000 increase in net interest and dividend income
and a $357,000 increase in noninterest income, partially offset by a $1,686,000
increase in the provision for income taxes, a $770,000 increase in noninterest
expenses, and a $600,000 increase in the provision for loan loss reserves. The
earnings per share computation in the 2002 period included additional common
shares resulting from common stock warrants and convertible debentures that
became dilutive during the period.
Selected information regarding results of operations for the nine-months ended
September 30, 2002 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Company
($ in thousands) Company Bank Corporation Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 751 $ 25,040 $ 6,390 $ 1,145 $ (1,211) $ 32,115
Interest expense 2,015 12,952 4,593 1,111 (1,211) 19,460
-------------------------------------------------------------------------------
Net interest and dividend income (expense) (1,264) 12,088 1,797 34 - 12,655
Provision (credit) for loan loss reserves (6) 905 65 - - 964
Noninterest income 163 1,022 1,477 - (1,274) 1,388
Noninterest expenses 390 4,611 975 34 (1,274) 4,736
-------------------------------------------------------------------------------
Earnings (loss) before taxes (1,485) 7,594 2,234 - - 8,343
Provision (credit) for income taxes (681) 3,067 961 - - 3,347
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (804) $ 4,527 $ 1,273 $ - $ - $ 4,996
- ------------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends received (paid) (1) $ 1,125 $ (1,125) $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The Bank pays a monthly dividend of $125,000 to the Holding Company in
order to provide funds for the debt service on the Junior
Debentures-Capital Securities (the proceeds of which were contributed to
the Bank as capital in December 2001).
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $12,655,000 in the first nine
months of 2002, from $7,348,000 in the first nine months of 2001. The increase
was attributable to growth of $155,903,000 in the Company's average
interest-earning assets and an increase in the net interest margin from 2.34% in
the first nine months of 2001, to 2.94% in the first nine months of 2002.
The growth in average earning assets was due to $128,799,000 in new mortgage
loans and a net increase in security and other short-term investments
aggregating $27,104,000. These increases were funded by $120,691,000 of new
deposits, $28,402,000 of additional borrowed funds and a $5,488,000 increase in
stockholders' equity.
The increase in the margin was due to the Company's cost of funds decreasing at
a faster pace than its yield earned on interest-earning assets in a declining
interest rate environment. The yield on interest-earning assets decreased 84
basis points to 7.46%, while the cost of funds decreased 166 basis points to
4.92% in the first nine months of 2002. The reasons for the changes are
substantially the same as those discussed in the "Comparison of Results of
Operations for the Quarters Ended September 30, 2002 and 2001."
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
21
Nine-Months Ended
-----------------------------------------------------------------------------
September 30, 2002 September 30, 2001
-----------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $428,206 $29,046 9.07% $299,407 $21,637 9.66%
Securities 133,491 2,889 2.89 66,224 2,643 5.34
Other interest-earning assets 13,761 180 1.75 53,924 1,758 4.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 575,458 $32,115 7.46% 419,555 $26,038 8.30%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 14,654 11,721
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $590,112 $431,276
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $ 9,535 $ 173 2.43% $ 7,373 $ 165 2.99%
Savings deposits 28,958 590 2.72 18,079 591 4.37
Money market deposits 115,010 2,318 2.69 61,448 2,042 4.44
Certificates of deposit 271,517 9,791 4.82 217,429 10,170 6.25
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposit accounts 425,020 12,872 4.05 304,329 12,968 5.70
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased 114 2 1.96 - - -
Debentures and related interest payable 88,644 5,451 8.22 75,586 5,722 10.12
Junior debentures - capital securities 15,000 1,123 10.01 - - -
Note payable 230 12 7.00 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 103,988 6,588 8.47 75,586 5,722 10.12
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 529,008 $19,460 4.92% 379,915 $18,690 6.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,200 6,586
Noninterest-bearing liabilities 12,953 7,312
Stockholders' equity 42,951 37,463
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $590,112 $431,276
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $12,655 2.54% $ 7,348 1.72%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 46,450 2.94% $ 39,640 2.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09x 1.10x
- ------------------------------------------------------------------------------------------------------------------------------------
Other Ratios:
Return on average assets (1) 1.13% 0.74%
Return on average equity (1) 15.51% 8.50%
Noninterest expense to average assets (1) 1.07% 1.23%
Efficiency ratio (2) 33.72% 47.33%
Average stockholders' equity to average assets 7.28% 8.69%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income
before the provision for loan losses plus noninterest income.
Provision for Loan Loss Reserves
- --------------------------------
In the first nine months of 2002, the Company recorded a provision for loan
losses of $964,000, compared to $364,000 in the first nine months of 2001. The
provision for loan loss reserves is based on management's ongoing assessment of
the adequacy of the allowance for loan loss reserves, which takes into
consideration a number of factors as discussed on page 15 of this report. The
increase in provision for the 2002 period was due to the growth in the loan
portfolio of $86,934,000 during 2002.
Noninterest Income
- ------------------
Noninterest income includes fees from customer service charges and income from
mortgage lending activities, which is comprised mostly of income from loan
prepayments, fees earned on expired loan commitments, and loan service,
inspection and maintenance charges. Noninterest income increased to $1,388,000
in the first nine months of 2002, from $1,031,000 in the first nine months of
2001. The increase was due to higher income and fees ($214,000) from the
prepayment of mortgage loans and increases in fees earned on expired loan
commitments and loan service charge income. The amount and timing of, as well as
income from, loan prepayments, if any, cannot be predicted and can fluctuate
22
significantly. Normally, the number of instances of prepayment of mortgage loans
tends to increase during periods of declining interest rates and tends to
decrease during periods of increasing interest rates.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $4,736,000 in the first nine months of 2002,
from $3,791,000 in the comparable period of 2001, exclusive of $175,000 of
nonrecurring expenses associated with the merger of Intervest Bank into
Intervest National Bank in 2001. The resulting increase of $945,000 was largely
due to a $429,000 increase in compensation and benefits, a $212,000 increase in
data processing expenses, a $136,000 increase in occupancy and equipment
expenses, a $33,000 increase in advertising expenses and the addition of $76,000
of net expenses associated with foreclosed real estate during 2002.
The increase in compensation and benefits was due to $243,000 resulting from
additional staff, salary increases and a higher cost of employee benefits, bonus
payments of $113,000 to the Chairman of the Company and $73,000 associated with
certain common stock warrants held by employees.
For a further discussion of the compensation expense associated with the
warrants as well as the reasons for the changes for the remaining expenses noted
above (which are substantially the same as those for the quarterly period), see
the section "Comparison of Results of Operations for the Quarters Ended
September 30, 2002 and 2001."
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $3,347,000 in the first nine months
of 2002, from $1,661,000 in the first nine months of 2001, due to higher pre-tax
income. The Company's effective tax rate (inclusive of state and local taxes)
amounted to 40.1% in the 2002 period, compared to 41.0% in the 2001 period.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit-taking activities, and the issuance of
its debentures. The Company has not engaged in and accordingly has no risk
related to trading accounts, commodities or foreign exchange. The measurement of
market risk associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance sheet transactions are aggregated, and
the resulting net positions are identified. Disclosures about the fair value of
financial instruments as of December 31, 2001, which reflect changes in market
prices and rates, can be found in note 20 to the consolidated financial
statements included in the Company's Annual Report to Stockholders on Form 10-K
for the year ended December 31, 2001.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within established guidelines, the adverse impact of changes in interest rates
on the Company's net interest income and capital, while adjusting the Company's
asset-liability structure to obtain the maximum yield versus cost spread on that
structure. Management relies primarily on its asset-liability structure to
control interest rate risk. However, a sudden and substantial increase in
interest rates could adversely impact the Company's earnings, to the extent that
the interest rates borne by assets and liabilities do not change at the same
speed, to the same extent, or on the same basis. Management believes that there
have been no significant changes in the Company's market risk exposure since
December 31, 2001.
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.
23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the reporting period covered
by this report.
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 8, 2002 By: /s/ Lowell S. Dansker
--------------------------
Lowell S. Dansker, President and Treasurer
(Principal Executive and Financial Officer)
Date: November 8, 2002 By: /s/ Lawrence G. Bergman
----------------------------
Lawrence G. Bergman, Vice President
and Secretary
24
CERTIFICATION
-------------
I, Lowell S. Dansker, as the principal executive and principal financial
officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"),
certify, that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Company and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
Company's auditors and the Audit Committee of the Company's Board of
Directors:
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to the
date of my most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ Lowell S. Dansker
- ---------------------
Lowell S. Dansker, President and Treasurer
(Principal Executive and Financial Officer)
November 8, 2002
25