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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 March 31, 2003
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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
- ------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation)
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO XX .
-- --
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
- -------------------- -------------------
Class A Common Stock, $1.00 par value per share 4,348,087 Outstanding at April 25, 2003
- ----------------------------------------------- ---------------------------------------
Class B Common Stock, $1.00 par value per share 355,000 Outstanding at April 25, 2003
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2003 (Unaudited) and December 31, 2002......................... 2
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters Ended March 31, 2003 and 2002................................. 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Quarters Ended March 31, 2003 and 2002................................. 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Quarters Ended March 31, 2003 and 2002................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Quarters Ended March 31, 2003 and 2002................................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ................. 7
Review by Independent Certified Public Accountants ............................... 9
Report on Reviews by Independent Certified Public Accountants .................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 22
Item 4. Controls and Procedures ................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 22
Item 2. Changes in Securities and Use of Proceeds................................ 22
Item 3. Defaults Upon Senior Securities.......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders...................... 22
Item 5. Other Information........................................................ 22
Item 6. Exhibits and Reports on Form 8-K ........................................ 22
Signatures............................................................................... 23
Certification............................................................................ 24
Private Securities Litigation Reform Act Safe Harbor Statement
The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-Q that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's interest rate spread, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting banks and bank holding companies.
1
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
($ in thousands, except par value) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 8,005 $10,351
Federal funds sold 17,812 9,114
Commercial paper 8,600 7,950
Other short-term investments 3,313 3,434
--------------------------------
Total cash and cash equivalents 37,730 30,849
Time deposits with banks 2,000 2,000
Securities held to maturity, net (estimated fair value of $137,967 and $146,560, 137,243 145,694
respectively)
Federal Reserve Bank stock, at cost 1,114 1,108
Loans receivable (net of allowance for loan losses of $4,955 and $4,611, respectively) 527,637 485,301
Accrued interest receivable 4,606 4,263
Loan fees receivable 4,139 3,706
Premises and equipment, net 6,029 6,098
Foreclosed real estate 1,081 1,081
Deferred income tax asset 2,245 1,997
Deferred debenture offering costs, net 3,807 3,498
Other assets 314 384
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Total assets $727,945 $685,979
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LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 4,597 $ 5,924
Interest-bearing deposit accounts:
Checking (NOW) accounts 14,370 10,584
Savings accounts 32,848 30,174
Money market accounts 139,930 134,293
Certificate of deposit accounts 346,353 324,983
--------------------------------
Total deposit accounts 538,098 505,958
Subordinated debentures payable 90,530 84,430
Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000
Note payable 263 266
Accrued interest payable on all debentures 14,345 13,872
Accrued interest payable on deposits 929 895
Mortgage escrow funds payable 8,959 5,894
Official checks outstanding 2,117 4,373
Other liabilities 2,704 2,165
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Total liabilities 672,945 632,853
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STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
4,348,087 shares issued and outstanding) 4,348 4,348
Class B common stock ($1.00 par value, 700,000 shares authorized,
355,000 shares issued and outstanding) 355 355
Additional paid-in-capital, common 24,207 24,134
Retained earnings 26,090 24,289
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Total stockholders' equity 55,000 53,126
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Total liabilities and stockholders' equity $727,945 $685,979
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See accompanying notes to condensed consolidated financial statements.
2
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
Quarter Ended
March 31,
------------ -------------
($ in thousands, except per share data) 2003 2002
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INTEREST AND DIVIDEND INCOME
Loans receivable $10,670 $8,820
Securities 887 842
Other interest-earning assets 68 49
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Total interest and dividend income 11,625 9,711
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INTEREST EXPENSE
Deposits 4,453 3,922
Subordinated debentures 1,957 1,773
Junior debentures - capital securities 374 374
Note payable 4 2
Federal funds purchased - 2
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Total interest expense 6,788 6,073
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Net interest and dividend income 4,837 3,638
Provision for loan loss reserves 344 346
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Net interest and dividend income after provision for loan loss reserves 4,493 3,292
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NONINTEREST INCOME
Customer service fees 38 35
Income from mortgage lending activities 153 102
Income from the early repayment of mortgage loans 141 137
All other (3) -
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Total noninterest income 329 274
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NONINTEREST EXPENSES
Salaries and employee benefits 867 716
Occupancy and equipment, net 320 315
Data processing 148 118
Advertising and promotion 15 7
Professional fees and services 107 80
Stationery, printing and supplies 42 33
FDIC and general insurance 57 42
Postage and delivery 25 24
All other 203 127
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Total noninterest expenses 1,784 1,462
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Earnings before taxes 3,038 2,104
Provision for income taxes 1,237 856
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Net earnings $ 1,801 $ 1,248
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Basic earnings per share $ 0.38 $ 0.32
Diluted earnings per share $ 0.32 $ 0.30
Dividends per share $ - $ -
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See accompanying notes to condensed consolidated financial statements.
3
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Quarter Ended
March 31,
-----------------------
($ in thousands) 2003 2002
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Net earnings $1,801 $1,248
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Net unrealized holding losses on available-for-sale securities - (46)
Provision for income taxes related to unrealized losses on available-for-sale securities - (20)
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax
- (26)
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Total comprehensive income, net of tax $1,801 $1,222
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See accompanying notes to condensed consolidated financial statements.
4
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Quarter Ended
March 31,
-----------------------------
($ in thousands) 2003 2002
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CLASS A COMMON STOCK
Balance at beginning of period $ 4,348 $ 3,545
Issuance of 11,500 shares upon the exercise of warrants in 2002 - 11
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Balance at end of period 4,348 3,556
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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 24,134 19,001
Compensation related to vesting of certain Class B stock warrants 6 6
Compensation related to certain Class A stock warrants modified in 2002 67 -
Issuance of 11,500 shares upon the exercise of Class A stock warrants in 2002,
inclusive of tax benefits - 65
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Balance at end of period 24,207 19,072
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RETAINED EARNINGS
Balance at beginning of period 24,289 17,383
Net earnings for the period 1,801 1,248
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Balance at end of period 26,090 18,631
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period - 111
Net change in accumulated other comprehensive income, net - (26)
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Balance at end of period - 85
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Total stockholders' equity at end of period $55,000 $41,699
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See accompanying notes to condensed consolidated financial statements.
5
Intervest Bancshares Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended
March 31,
---------------------------
($ in thousands) 2003 2002
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OPERATING ACTIVITIES
Net earnings $ 1,801 $ 1,248
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 131 151
Provision for loan loss reserves 344 346
Deferred income tax benefit (248) (155)
Amortization of deferred debenture offering costs 245 218
Compensation expense related to common stock and warrants 73 6
Amortization of premiums, fees and discounts, net (197) (280)
Net increase in accrued interest payable on debentures 473 994
Net decrease in official checks outstanding (2,256) (1,616)
Net change in all other assets and liabilities 1,097 663
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Net cash provided by operating activities 1,463 1,575
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INVESTING ACTIVITIES
Net decrease in interest-earning time deposits with banks - 100
Maturities and calls of securities held to maturity 27,665 18,000
Purchases of securities held to maturity (19,815) (14,158)
Net increase in loans receivable (43,112) (36,989)
Purchases of Federal Reserve Bank stock, net (6) (450)
Purchases of premises and equipment, net (62) (521)
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Net cash used in investing activities (35,330) (34,018)
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FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 10,770 36,287
Net increase in certificates of deposit 21,370 5,295
Net increase in mortgage escrow funds payable 3,065 2,832
Principal repayments of debentures (1,400) -
Principal repayments of note payable (3) -
Proceeds from issuance of debentures, net of issuance costs 6,946 5,325
Proceeds from issuance of common stock, net of issuance costs - 76
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Net cash provided by financing activities 40,748 49,815
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Net increase in cash and cash equivalents 6,881 17,372
Cash and cash equivalents at beginning of period 30,849 24,409
====================================================================================================================================
Cash and cash equivalents at end of period $ 37,730 $ 41,781
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest $ 6,036 $ 4,880
Income taxes 963 1,000
Noncash activities:
Accumulated other comprehensive income,
change in unrealized loss on securities available for sale, net of tax - (26)
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
6
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Note 1 - General
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for the
information derived from the audited Consolidated Balance Sheet as of December
31, 2002. The financial statements in this report should be read in conjunction
with the consolidated financial statements and related notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 2002.
The condensed consolidated financial statements include the accounts of
Intervest Bancshares Corporation (a financial holding company referred to by
itself as the "Holding Company") and its subsidiaries, Intervest National Bank
(the Bank), Intervest Mortgage Corporation and Intervest Statutory Trust I. The
Holding Company and its subsidiaries are referred to as the "Company" on a
consolidated basis. The Holding Company's primary business activity is the
ownership of the aforementioned subsidiaries.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Center in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank conducts a
full-service commercial banking business, which consists of attracting deposits
from the general public and investing those funds, together with other sources
of funds, primarily through the origination of commercial and multifamily real
estate loans, and through the purchase of security investments.
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation, are located
in Rockefeller Center in New York City. Intervest Mortgage Corporation is
engaged in the real estate business, including the origination and purchase of
real estate mortgage loans, consisting of first mortgage, junior mortgage and
wraparound mortgage loans.
Intervest Statutory Trust I was formed in December 2001 for the sole purpose of
issuing $15,000,000 of capital securities as more fully described in note 9 to
the consolidated financial statements in the Company's Annual Report to
Stockholders on Form 10-K for the year ended December 31, 2002.
In the opinion of management, all material adjustments necessary for a fair
presentation of financial condition and results of operations for the interim
periods presented in this report have been made. These adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of results that may be expected for the entire year
or any other interim period. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts to conform to the current periods' presentation.
Note 2 - Allowance for Loan Loss Reserves
The Company monitors its loan portfolio to determine the appropriate level of
the allowance for loan loss reserves based on various factors. These factors
include: the type and level of loans outstanding; volume of loan originations;
overall portfolio quality; loan concentrations; specific problem loans,
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's assessment of the current and
anticipated economic conditions in the Company's lending regions.
Activity in the allowance for loan loss reserves for the periods indicated is
summarized as follows:
Quarter Ended
March 31,
------------------------------
($ in thousands) 2003 2002
- --------------------------------------------------------------------------------
Balance at beginning of period $4,611 $3,380
Provision charged to operations 344 346
Recoveries of previous chargeoffs (1) - 107
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Balance at end of period $4,955 $3,833
- --------------------------------------------------------------------------------
(1) Represents proceeds received from the sale of collateral from a loan that
was charged off prior to 1997.
7
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Note 3 - Earnings Per Share (EPS)
Basic EPS is calculated by dividing net earnings by the weighted-average number
of shares of common stock outstanding. Diluted EPS is calculated by dividing
adjusted net earnings by the weighted-average number of shares of common stock
outstanding and dilutive potential common stock shares that may be outstanding
in the future. Potential common stock shares may arise from outstanding dilutive
common stock warrants (as computed by the "treasury stock method") and
convertible debentures (as computed by the "if converted method"). Diluted EPS
considers the potential dilution that could occur if the Company's outstanding
stock warrants and convertible debentures were converted into common stock that
then shared in the Company's adjusted earnings (as adjusted for interest
expense, net of tax, that would no longer occur if the debentures were
converted).
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are summarized
in the table that follows:
Quarter Ended
March 31,
--------------------------
($ in thousands, except share and per share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $1,801 $1,248
Average number of common shares outstanding 4,703,087 3,901,290
- --------------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share amount $0.38 $0.32
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $1,801 $1,248
Adjustment to net earnings from assumed conversion of debentures (1) 114 -
--------------------------
Adjusted net earnings for diluted earnings per share computation $1,915 $1,248
--------------------------
Average number of common shares outstanding:
Common shares outstanding 4,703,087 3,901,290
Potential dilutive shares resulting from exercise of warrants (2) 230,516 263,944
Potential dilutive shares resulting from conversion of debentures (3) 1,010,803 -
--------------------------
Total average number of common shares outstanding used for dilution 5,944,406 4,165,234
- --------------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per share amount $0.32 $0.30
- --------------------------------------------------------------------------------------------------------------------------------
(1) Represents interest expense on dilutive convertible debentures, net of tax,
that would not occur if they were assumed converted.
(2) Diluted EPS includes shares that would be outstanding if dilutive common
stock warrants and convertible debentures were assumed to be
exercised/converted during the period. Certain warrants are not considered
in diluted EPS computations because their exercise price per share exceeded
the average market price of Class A common stock during those periods as
follows: Warrants to purchase 1,134,000 shares of common stock at prices
ranging from $10.00 to $10.01 per share were not considered in the 2002
quarterly computation. All outstanding warrants of 1,750,000 for the 2003
quarterly computation were considered.
(3) Convertible debentures outstanding at March 31, 2002 (consisting of
principal and accrued interest for this purpose) totaling $9,348,000 were
convertible into common stock at a price of $10.01 per share, but were not
considered in the computations of diluted EPS for the 2002 quarter because
they were not dilutive. For the 2003 computation, convertible debentures
outstanding at March 31, 2003 totaling $10,118,000 were convertible into
common stock at a price of $10.01 per share and were considered dilutive,
which resulted in additional common shares.
Note 4 - Bank Regulatory Capital
The Bank is required to maintain certain minimum regulatory capital
requirements. The Bank is a well-capitalized institution as defined in the
regulations, which require minimum Tier 1 leverage and Tier 1 and total
risk-based ratios of 5%, 6% and 10%, respectively. Management believes that
there are no current conditions or events outstanding which would change the
Bank's designation as a well-capitalized institution.
The following is a summary at March 31, 2003 of the minimum regulatory capital
requirements and the actual capital of the Bank on a percentage basis:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------ ----------- ----------------
Total capital to risk-weighted assets 11.82% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 10.83% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 8.72% 4.00% 5.00%
8
Intervest Bancshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Note 5 - Common Stock Warrants
The Holding Company has common stock warrants outstanding that entitle the
registered holders thereof to purchase one share of common stock for each
warrant. All warrants are exercisable when issued, except for certain Class B
common stock warrants. The warrants have been issued in connection with public
stock offerings, to directors and employees of the Company and to outside third
parties for performance of services. In 2001, the Holding Company modified the
terms of its Class A and Class B warrants as follows: the expiration date of all
warrants exercisable at $6.67 per share were extended one year beyond their
original expiration dates effective October 4, 2001, and the exercise price of
certain Class A warrants (exercisable at $12.50 and $16.00 per share as of
December 31, 2001) were reduced to $10.01 per share commencing January 1, 2002
until their original expiration date of December 31, 2002. In 2002, the $10.01
per share warrants were further modified by extending their expiration date to
December 31, 2003.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class A Common Stock Warrants: $6.67 $10.01 $10.01 Warrants Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 and March 31, 2003 501,465 931,545 122,000 1,555,010 $ 8.93
- -------------------------------------------------------------------------------------------------------------------------------
Remaining contractual life in years at March 31, 2003 (1) 3.8 0.8 0.8 1.7
- -------------------------------------------------------------------------------------------------------------------------------
(1) The Holding Company may, at its sole discretion, set an earlier expiration
date.
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class B Common Stock Warrants: $6.67 $10.00(1) Warrants Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 and March 31, 2003 145,000 50,000 195,000 $ 7.52
- -------------------------------------------------------------------------------------------------------------------------------
Remaining contractual life in years at March 31, 2003 4.8 4.8 4.8
- -------------------------------------------------------------------------------------------------------------------------------
(1) At March 31, 2003 and December 31, 2002, 35,500 of these warrants were
immediately exercisable. An additional 7,100 warrants vest and become
exercisable on April 27th of 2003 and the remaining 7,400 on April 27,
2004. The warrants, which expire on January 31, 2008, become fully vested
earlier upon certain conditions.
The Company uses the intrinsic value-based method prescribed under APB Opinion
No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock
warrants. Under this method, compensation expense related to stock warrants
granted to employees is the excess, if any, of the market price of the stock as
of the grant or modification date or over the exercise price of the warrant. In
accordance with APB 25, approximately $6,000 of compensation expense was
included in salaries and employee benefits expense for the quarter ended March
31, 2003 and 2002 in connection with Class B warrants that vested during these
periods. For warrants granted to employees whose exercise price was reduced to
$10.01 effective January 1, 2002 and whose expiration date was extended in 2002,
compensation expense of $67,000 was recorded in the quarter ended March 31, 2003
under variable rate accounting as prescribed under APB 25. No other compensation
expense was recorded during the first quarter of 2003 and 2002 associated with
common stock warrants.
Had compensation expense been determined based on the estimated fair value of
the warrants in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per share would not have
been different from the amounts reported for the periods included in this report
on Form 10-Q.
9
Intervest Bancshares Corporation and Subsidiaries
Review by Independent Certified Public Accountants
Hacker, Johnson & Smith, P.A., P.C. the Company's independent certified
public accountants, have made a limited review of the financial data as of March
31, 2003 and for the three-month periods ended March 31, 2003 and 2002 presented
in this document, in accordance with standards established by the American
Institute of Certified Public Accountants. As part of Hacker, Johnson & Smith,
P.A., P.C.'s review, Eisner, LLP was relied upon for their limited review of
Intervest Mortgage Corporation, a wholly owned subsidiary of the Company.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
10
Report on Review by Independent Certified Public Accountants
The Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of March
31, 2003 and the related condensed consolidated statements of earnings,
comprehensive income, changes in stockholders' equity and cash flows for the
three-month periods ended March 31, 2003 and 2002 included in this report. These
financial statements are the responsibility of the Company's management.
We were furnished with the report of other accountants on their reviews of
the interim financial information of Intervest Mortgage Corporation, whose total
assets as of March 31, 2003 constituted 14.3% of the related consolidated total,
and whose net interest income, noninterest income and net earnings for the
three-month period then ended, constituted 9.0%, 18.5%, and 15.8%, respectively,
and whose net interest income, noninterest income and net loss for the
three-month period ended March 31, 2002, constituted 13.5%, 25.2% and 21.2%,
respectively, of the related consolidated totals.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews and the report of other accountants, we are not aware
of any material modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, and the related consolidated statements of earnings,
comprehensive income, changes in stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 24,
2003, we, based on our audits and the report of other auditors, expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ---------------------------------------
HACKER, JOHNSON & SMITH, P.A.,P.C.
Tampa, Florida
April 25, 2003
11
Report on Review by Independent Certified Public Accountants
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest
Mortgage Corporation and subsidiaries (the "Company") as of March 31, 2003, and
the related condensed consolidated statements of operations, changes in
stockholder's equity and cash flows for the three-month periods ended March 31,
2003 and 2002 (not presented separately herein). These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002 and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the year then
ended (not presented separately herein), and in our report dated January 23,
2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the condensed
consolidated balance sheet as of December 31, 2002 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ Eisner, LLP
- ---------------
EISNER,LLP
New York, New York
April 18, 2003
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest
National Bank, Intervest Mortgage Corporation and Intervest Statutory Trust I
(hereafter referred to collectively as the "Company" on a consolidated basis).
Intervest Bancshares Corporation and Intervest National Bank may be referred to
individually as the "Holding Company" and the "Bank," respectively.
The Holding Company's primary business is the operation of its subsidiaries. It
does not engage in any other substantial business activities other than a
limited amount of real estate mortgage lending. From time to time, the Holding
Company also sells debentures to raise funds for working capital purposes.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Center, in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank conducts a
personalized commercial and consumer banking business and attracts deposits from
the areas served by its banking offices. It also provides internet banking
services through its web site: www.intervestnatbank.com, which can attract
deposit customers from outside its primary market areas. The deposits, together
with funds derived from other sources, are used to originate a variety of real
estate, commercial and consumer loans and to purchase investment securities. The
Bank emphasizes multifamily and commercial real estate lending.
Intervest Mortgage Corporation is a mortgage investment company located in
Rockefeller Center in New York City. It is engaged in the real estate business,
including the origination and purchase of real estate mortgage loans, consisting
of first mortgage, junior mortgage and wraparound mortgage loans. Its wholly
owned subsidiaries, Intervest Distribution Corporation and Intervest Realty
Servicing Corporation are nonoperating entities that provide administrative
services to Intervest Mortgage Corporation.
Intervest Statutory Trust I was formed in December 2001 in connection with the
issuance of $15,000,000 of capital securities. For a further discussion, See the
section entitled "Debentures Payable and Accrued Interest Payable on Debentures"
on page 30 of the Company's Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2002.
As previously announced, in December 2002, Intervest Bancshares Corporation
entered into an agreement to acquire Intervest Securities Corporation, an
affiliated entity that is a broker/dealer registered in nine states and is an
NASD and SIPC member firm. Intervest Securities Corporation participates as a
selected dealer from time to time in offerings of debt securities of the
Company, primarily those of Intervest Mortgage Corporation. Pursuant to this
agreement, Intervest Bancshares Corporation will acquire all the capital stock
of Intervest Securities Corporation for 30,000 shares of its newly issued Class
B common stock. At December 31, 2002, Intervest Securities Corporation's net
assets amounted to approximately $200,000 and consisted of cash. In connection
with this transaction, Intervest Bancshares Corporation was approved by the FRB
to become a financial holding company under Regulation Y effective January 23,
2003. The transaction is awaiting the approval of the NASD and is expected to
close in the second quarter of 2003. Intervest Securities Corporation will
become a wholly owned subsidiary of Intervest Bancshares Corporation.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan loss reserves and effective income tax
rate. Noninterest income consists primarily of loan and other banking fees.
Noninterest expense consists of compensation and benefits, occupancy and
equipment related expenses, data processing expenses, advertising expense,
deposit insurance premiums and other operating expenses. The Company's
profitability is also significantly affected by general economic and competitive
conditions, changes in market interest rates, government policies and actions of
regulatory authorities. Since the properties underlying the Company's mortgages
are concentrated in the New York City area and the State of Florida, the
economic conditions in those areas can also have an impact on the Company's
operations.
13
Comparison of Financial Condition at March 31, 2003 and December 31, 2002
-------------------------------------------------------------------------
Overview
Total assets at March 31, 2003 increased to $727,945,000, from $685,979,000 at
December 31, 2002. Total liabilities at March 31, 2003 increased to
$672,945,000, from $632,853,000 at December 31, 2002. Stockholders' equity
increased to $55,000,000 at March 31, 2003, from $53,126,000 at year-end 2002.
Book value per common share rose to $11.69 per share at March 31, 2003, from
$11.30 at December 31, 2002.
Selected balance sheet information as of March 31, 2003 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Company
($ in thousands) Company Bank Corporation Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,788 $ 24,855 $ 12,959 $ - $ (1,872) $ 37,730
Time deposits with banks - - 2,000 - - 2,000
Securities held to maturity, net - 137,243 - 15,464 (15,464) 137,243
Federal Reserve Bank stock - 1,114 - - - 1,114
Loans receivable, net of deferred fees 15,073 431,964 85,555 - - 532,592
Allowance for loan loss reserves (75) (4,722) (158) - - (4,955)
Investment in subsidiaries 66,536 - - - (66,536) -
Foreclosed real estate - 1,081 - - - 1,081
All other assets 1,408 15,237 4,615 441 (561) 21,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 84,730 $ 606,772 $ 104,971 $ 15,905 $ (84,433) $ 727,945
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 540,277 $ - $ - $ (2,179) $ 538,098
Subordinated debentures payable 25,894 - 80,100 - (15,464) 90,530
Junior debentures payable-capital securities - - - 15,000 - 15,000
Note payable - 263 - - - 263
Accrued interest payable on all debentures 3,704 - 10,654 428 (441) 14,345
All other liabilities 132 12,859 1,518 13 187 14,709
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 29,730 553,399 92,272 15,441 (17,897) 672,945
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 55,000 53,373 12,699 464 (66,536) 55,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 84,730 $ 606,772 $ 104,971 $ 15,905 $ (84,433) $ 727,945
- ------------------------------------------------------------------------------------------------------------------------------------
A comparison of the consolidated balance sheets as of March 31, 2003 and
December 31, 2002 follows:
At March 31, 2003 At December 31, 2002
----------------- --------------------
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 37,730 5.2% $ 30,849 4.4%
Time deposits with banks 2,000 0.3 2,000 0.3
Securities held to maturity, net 137,243 18.9 145,694 21.2
Federal Reserve Bank stock 1,114 0.2 1,108 0.2
Loans receivable, net of deferred fees and loan loss reserves 527,637 72.4 485,301 70.7
Foreclosed real estate 1,081 0.1 1,081 0.2
All other assets 21,140 2.9 19,946 3.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $727,945 100.0% $685,979 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $538,098 73.9% $505,958 73.8%
Subordinated debentures payable 90,530 12.4 84,430 12.3
Junior debentures payable-capital securities 15,000 2.1 15,000 2.2
Note payable 263 - 266 0.1
Accrued interest payable on all debentures 14,345 2.0 13,872 2.0
All other liabilities 14,709 2.0 13,327 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 672,945 92.4 632,853 92.3
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 55,000 7.6 53,126 7.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $727,945 100.0% $685,979 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
14
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents increased to $37,730,000 at March 31, 2003, from
$30,849,000 at December 31, 2002, due to a higher level of overnight federal
fund investments. Cash and cash equivalents include federal funds sold and
interest-bearing and noninterest-bearing cash balances with banks, and other
short-term investments that have original maturities of three months or less.
The short-term investments are normally comprised of commercial paper issued by
large commercial banks, certificates of deposit and U.S. government securities.
The level of cash and cash equivalents fluctuates based on various factors,
including liquidity needs, loan demand, deposit flows, calls of securities,
repayments of borrowed funds and alternative investment opportunities.
Securities Held to Maturity, Net
- --------------------------------
Securities held to maturity decreased to $137,243,000 at March 31, 2003, from
$145,694,000 at December 31, 2002. The decrease was due to maturities and early
calls exceeding new purchases during the period. At March 31, 2003, the
portfolio consisted of debt obligations of FNMA, FHLB, FHLMC, SLMA and FFCB with
a weighted-average yield of approximately 2.32% and a weighted-average remaining
maturity of 1.7 years. At December 31, 2002, the portfolio had a
weighted-average yield of 2.39% and a weighted-average remaining maturity of 1.6
years. The securities are fixed rate or have predetermined scheduled rate
increases, and some have call features that allow the issuer to call the
security before its stated maturity without penalty. The Company normally
invests in short-to-medium term security investments to emphasize liquidity.
Federal Reserve Bank Stock
- --------------------------
In order for the Bank to be a member of the Federal Reserve Banking System, the
Bank maintains an investment in the capital stock of the Federal Reserve Bank,
which pays a dividend that is currently 6%. The investment, which amounted to
$1,114,000 at March 31, 2003 and $1,108,000 at December 31, 2002, fluctuates
based on the Bank's capital level.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Loss Reserves
- ---------------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan loss reserves,
increased to $527,637,000 at March 31, 2003, from $485,301,000 at December 31,
2002. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments. Commercial
real estate and multifamily real estate properties collateralized almost all of
the loans in the Company's loan portfolio. At March 31, 2003 and December 31,
2002, there were no loans classified as nonaccrual or impaired.
At March 31, 2003, the allowance for loan loss reserves amounted to $4,955,000,
compared to $4,611,000 at December 31, 2002. The allowance represented 0.93% of
total loans (net of deferred fees) outstanding at March 31, 2003, compared to
0.94% at December 31, 2002. The Company monitors its loan portfolio to determine
the appropriate level of the allowance for loan loss reserves based on various
factors. These factors include: the type and level of loans outstanding; volume
of loan originations; overall portfolio quality; loan concentrations; specific
problem loans, historical chargeoffs and recoveries; adverse situations which
may affect the borrowers' ability to repay; and management's assessment of the
current and anticipated economic conditions in the Company's lending regions.
The increase in the allowance was due to a provision for loan losses of $344,000
in the first quarter of 2003 (resulting from loan growth).
Foreclosed Real Estate
- ----------------------
At March 31, 2003 and year-end 2002, foreclosed real estate amounted to
$1,081,000 and represented one commercial real estate property located in the
State of Florida. This property was acquired by the Bank through foreclosure.
The property continues to be actively marketed for sale. Foreclosed real estate
is carried at the lower of the new cost basis or estimated fair value less
estimated selling costs. Revenue and expenses from operations and changes in the
valuation allowance of the property are included in the consolidated statement
of earnings.
15
All Other Assets
- ----------------
The following table sets forth the composition of all other assets in the table
on page 14:
At March 31, At December 31,
($ in thousands) 2003 2002
- --------------------------------------------------------------------------------
Accrued interest receivable $4,606 $4,263
Loans fee receivable 4,139 3,706
Premises and equipment, net 6,029 6,098
Deferred income tax asset 2,245 1,997
Deferred debenture offering costs, net 3,807 3,498
All other 314 384
- --------------------------------------------------------------------------------
$21,140 $19,946
- --------------------------------------------------------------------------------
Accrued interest receivable fluctuates based on the amount of loans, investments
and other interest-earning assets outstanding and the timing of interest
payments received. The increase was due to the growth in these assets.
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. Such amounts are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan as a yield
adjustment. The increase was due to an increase in mortgage loan originations.
Premises and equipment is detailed in note 5 to the consolidated financial
statements in the Company's Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2002.
The deferred income tax asset relates primarily to the unrealized tax benefit on
the Company's allowance for loan loss reserves, depreciation, and organizational
start-up costs. These charges have been expensed for financial statement
purposes, but are not all currently deductible for income tax purposes. The
ultimate realization of the deferred tax asset is dependent upon the generation
of sufficient taxable income by the Company during the periods in which these
temporary differences become deductible for tax purposes. Management believes
that it is more likely than not that the Company's deferred tax asset will be
realized and accordingly, a valuation allowance for deferred tax assets is not
maintained.
Deferred debenture offering costs consist primarily of underwriters' commissions
and are amortized over the terms of the debentures. The increase was due to
additional costs ($554,000) incurred in the first quarter of 2003 in connection
with the sale of Series 01/21/03 debentures by Intervest Mortgage Corporation,
partially offset by normal amortization during the period.
Deposit Liabilities
- -------------------
Deposit liabilities increased to $538,098,000 at March 31, 2003, from
$505,958,000 at December 31, 2002, primarily reflecting increases in money
market and certificate of deposit accounts of $5,637,000 and $21,370,000,
respectively. At March 31, 2003, certificate of deposit accounts totaled
$346,353,000 and demand deposit, savings, NOW and money market accounts
aggregated $191,745,000. The same categories of deposit accounts totaled
$324,983,000 and $180,975,000, respectively, at December 31, 2002. Certificate
of deposit accounts represented 64% of total deposits at March 31, 2003 and
December 31, 2002.
Debentures Payable and Related Accrued Interest Payable
- -------------------------------------------------------
At March 31, 2003, debentures payable amounted to $90,530,000, compared to
$84,430,000 at year-end 2002. The increase was due to the sale of additional
debentures by Intervest Mortgage Corporation (Series 01/21/03 totaling
$7,500,000 in principal amount and maturing at various times through July 1,
2010) as part of its normal funding of its mortgage loan originations, partially
offset by the repayment of $1,400,000 of its Series 11/10/98 debentures. The
sale of the debentures, after all underwriter's commissions and other issuance
costs, resulted in net proceeds of $6,935,000. At March 31, 2003, Intervest
Mortgage Corporation had $80,100,000 principal amount of debentures payable
outstanding and the Holding Company had $10,430,000 principal amount of
debentures payable outstanding, of which $6,930,000 were convertible into the
Holding Company's Class A common stock at a current conversion price of $10.01
per share through December 31, 2003.
At March 31, 2003 and December 31, 2002, the Holding Company, through its wholly
owned subsidiary Intervest Statutory Trust I, has Trust Preferred Securities
(Junior Debentures Payable) outstanding totaling $15,000,000 that qualify as
regulatory capital.
16
At March 31, 2003, accrued interest payable on all debentures amounted to
$14,345,000, compared to $13,872,000 at year-end 2002. Nearly all of the accrued
interest payable is due and payable at the maturity of various debentures. For a
further discussion of all the debentures, including conversion prices and
redemption premiums, see notes 7 and 9 to the consolidated financial statements
included in the Company's Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2002.
Note Payable
- ------------
At March 31, 2003 and December 31, 2002, the note payable amounted to $263,000
and $266,000, respectively. The note was issued by the Bank in connection with
the purchase of property in 2002 by the Bank that is across from its Court
Street branch office in Florida. The Bank issued a note payable to the seller
that matures in February of 2017 and calls for monthly payments of principal and
interest at 7% per annum.
All Other Liabilities
- ---------------------
The following table shows the composition of all other liabilities in the table
on page 14:
At March 31, At December 31,
------------ ---------------
($ in thousands) 2003 2002
- --------------------------------------------------------------------------------
Mortgage escrow funds payable $8,959 $5,894
Official checks outstanding 2,117 4,373
Accrued interest payable on deposits 929 895
Income taxes payable 1,048 526
All other 1,656 1,639
- --------------------------------------------------------------------------------
$14,709 $13,327
- --------------------------------------------------------------------------------
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted by the Company to third parties. The
increase reflects the timing of payments to taxing authorities as well as the
growth in the loan portfolio. The level of official checks outstanding varies
and fluctuates based on banking activity. The level of income taxes payable
fluctuates based on the Company's earnings, effective tax rate and timing of tax
payments. All other is comprised mainly of accrued expenses as well as fees
received on loan commitments that have not yet been funded.
Stockholders' Equity and Regulatory Capital
- -------------------------------------------
Stockholders' equity increased to $55,000,000 at March 31, 2003, from
$53,126,000 at December 31, 2002. The increase was due to the following: net
earnings of $1,801,000 and the recording of $67,000 of compensation expense
related to stock warrants held by employees and directors. For additional
discussion of employee stock warrants, see the section "Comparison of Results of
Operations for the Quarters Ended March 31, 2003 and 2002"
The Bank is a well-capitalized institution as defined in applicable banking
regulations, which require minimum Tier 1 leverage and Tier 1 and total
risk-based ratios of 5%, 6% and 10%, respectively. Management believes that
there are no current conditions or events outstanding which would change the
Bank's designation as a well-capitalized institution. See note 4 to the
condensed consolidated financial statements in this report for the Bank's
capital ratios.
Asset and Liability Management
------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The primary objective of the Company's
asset/liability management strategy is to limit, within established guidelines,
the adverse impact of changes in interest rates on the Company's net interest
income and capital. The Company uses "gap analysis," which measures the
difference between interest-earning assets and interest-bearing liabilities that
mature or reprice within a given time period, to monitor its interest rate
sensitivity. The Company's one-year positive interest rate sensitivity gap was a
positive $143,639,000, or 19.7% at March 31, 2003, compared to a positive
$107,681,000, or 15.7% at December 31, 2002. The increase was primarily due to
existing loans moving into the less than one-year maturity timeframe as well as
the addition of new floating-rate loans and short-term investments funded by an
increase in deposits and borrowed funds with a term of over one year.
In computing the gap, the Company treats its interest checking, money market and
savings deposit accounts as immediately repricing. Further, the Company has a
"floor," or minimum rate, on many of its floating-rate loans that is determined
in relation to prevailing market rates on the date of origination. This floor
only adjusts upwards in the event of increases in the loan's interest rate. This
feature reduces the effect on interest income in a falling rate environment. For
17
a further discussion of interest rate risk and gap analysis, including all of
the assumptions used in developing the one-year gap, see the Company's 2002
Annual Report to Stockholders on Form 10-K, pages 32 and 33.
The table that follows summarizes the Company's interest-earning assets and
interest-bearing liabilities as of March 31, 2003, that are scheduled to mature
or reprice within the periods shown.
($ in thousands) 0-3 4-12 Over 1-4 Over 4
Months Months Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Loans (1) $ 158,793 $ 230,130 $ 109,171 $ 40,320 $ 538,414
Securities held to maturity (2) 17,673 65,631 53,939 - 137,243
Short-term investments 29,725 - - - 29,725
Federal Reserve Bank stock - - - 1,114 1,114
Interest-earning time deposits 2,000 - - - 2,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 208,191 $ 295,761 $ 163,110 $ 41,434 $ 708,496
- ------------------------------------------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 14,370 $ - $ - $ - $ 14,370
Savings deposits 32,848 - - - 32,848
Money market deposits 139,930 - - - 139,930
Certificates of deposit 29,475 94,782 120,116 101,980 346,353
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 216,623 94,782 120,116 101,980 533,501
Debentures payable 41,500 - 17,600 31,430 90,530
Debentures payable- capital securities - - - 15,000 15,000
Accrued interest on all debentures 7,408 - 3,294 3,643 14,345
Note payable - - - 263 263
- ------------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 265,531 $ 94,782 $ 141,010 $ 152,316 $ 653,639
- ------------------------------------------------------------------------------------------------------------------------------------
GAP (repricing differences) $ (57,340) $ 200,979 $ 22,100 $(110,882) $ 54,857
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP $ (57,340) $ 143,639 $ 165,739 $ 54,857 $ 54,857
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets -7.9% 19.7% 22.8% 7.5% 7.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the table above:
(1) Adjustable-rate loans are included in the period in which their interest
rates are next scheduled to adjust rather than in the period in which the
loans mature. Fixed-rate loans are scheduled, including repayments,
according to their contractual maturities. Deferred loan fees are excluded
from this analysis; (2) securities are scheduled according to the earlier
of their contractual maturity or the date in which the interest rate is
scheduled to increase. The effects of possible prepayments that may result
from the issuer's right to call a security before its contractual maturity
date are not considered. (3) interest checking, savings and money market
deposits are regarded as ready accessible withdrawable accounts; and
certificates of deposit are scheduled through their maturity dates.
Liquidity and Capital Resources
-------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of: retail deposits obtained through the Bank's branch offices
and through the mail; amortization, satisfactions and repayments of loans; the
maturities and calls of securities; sales of debentures; borrowings in the
federal funds market and cash provided by operating activities. The Bank has
agreements with correspondent banks whereby it may borrow up to $8,000,000 on an
unsecured basis. There were no outstanding borrowings under these agreements. In
April 2003, the Bank was approved to become a member of the Federal Home Loan
Bank of New York.
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are in the form of commitments to extend credit, unused
lines of credit and standby letters of credit, and may involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract amounts of these
instruments reflect the extent of involvement the Company has in these financial
instruments. The Company's exposure to credit loss in the event of
nonperformance by the other party to the off-balance sheet financial instruments
is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments as it does for on-balance sheet
instruments.
18
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination clauses
and require payment of fees. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the counterparty. Standby letters of credit
are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
The Company believes that it can fund all of its commitments from the sources of
funds noted above.
The contractual (notional) amounts of the Company's off-balance sheet financial
instruments is as follows:
At Mar 31, At Dec 31,
---------- ----------
($ in thousands) 2003 2002
- --------------------------------------------------------------------------------
Unfunded loan commitments $84,342 $68,244
Available lines of credit 826 533
Standby letters of credit 1,267 1,267
Comparison of Results of Operations for the Quarters Ended March 31, 2003 and
-----------------------------------------------------------------------------
2002
----
Overview
- --------
Consolidated net earnings in the first quarter of 2003 increased to $1,801,000,
from $1,248,000 in the first quarter of 2002. Earnings per share on a diluted
basis increased to $0.32 in the first quarter of 2003, from $0.30 in the first
quarter of 2002. The earnings per share computation for the 2003 quarter
included a higher number of common shares resulting from the exercise of common
stock warrants in the latter part of 2002 and the inclusion of dilutive shares
from convertible debentures outstanding. The Company's return on average assets
and equity increased to 1.03% and 13.40%, respectively, in the first quarter of
2003, up from 0.95% and 12.23% in the first quarter of 2002.
The improvement in quarterly earnings was attributable to growth in the
Company's net interest and dividend income, which increased by $1,199,000 due to
an increase in the Company's loan portfolio. This improvement was partially
offset by a $322,000 increase in noninterest expenses (a large portion of which
was attributable to the Company's growth in assets) and a $381,000 increase in
the provision for income taxes due to higher pre-tax income.
Selected information regarding results of operations for the first quarter of
2003 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Company
($ in thousands) Company Bank Corporation Trust I Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 269 $ 9,302 $ 2,092 $ 382 $ (420) $11,625
Interest expense 684 4,495 1,659 370 (420) 6,788
------------------------------------------------------------------------
Net interest and dividend income (expense) (415) 4,807 433 12 - 4,837
Provision (credit) for loan loss reserves 29 258 57 - - 344
Noninterest income 49 268 539 - (527) 329
Noninterest expenses 148 1,760 391 12 (527) 1,784
------------------------------------------------------------------------
Earnings (loss) before taxes (543) 3,057 524 - - 3,038
Provision (credit) for income taxes (246) 1,244 239 - - 1,237
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (297) $ 1,813 $ 285 $ - $ - $ 1,801
- ------------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends received (paid) (1) $ 375 $ (375) $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The Bank pays a monthly dividend of $125,000 to the Holding Company in
order to provide funds for the debt service on the Junior
Debentures-Capital Securities (the proceeds of which were contributed to
the Bank as capital in December 2001).
Net Interest and Dividend Income
- --------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $4,837,000 in the first quarter of
2003, from $3,638,000 in the first quarter of 2002. The increase was
attributable to growth of $174,145,000 in the Company's average interest-earning
assets. The growth in average earning assets was due to $121,792,000 in new
mortgage loans and a net increase in security and other short-term investments
aggregating $52,353,000. These increases were funded by $148,249,000 of new
deposits, $11,766,000 of additional borrowed funds and a $12,924,000 increase in
stockholders' equity.
19
The Company's net interest margin remained nearly unchanged at 2.85% in the
first quarter of 2003, compared to 2.87% in the same period of 2002. In a
declining interest rate environment, the yield on the Company's interest-earning
assets decreased 81 basis points to 6.86% in the first quarter of 2003 due to
lower rates on new mortgage loans originated (resulting from increased
competition to make loans), prepayments of higher-yielding loans and lower
yields earned on security and other short-term investments. The Company's cost
of funds decreased 88 basis points to 4.37% in the first quarter of 2003 due to
lower rates paid on deposit accounts and a rate decrease on floating-rate
debentures. The floating-rate debentures are indexed to the JPMorgan Chase Bank
prime rate, which decreased by a total of 50 basis points from April 1, 2002 to
March 31, 2003.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
Quarter Ended
-----------------------------------------------------------------------------
March 31, 2003 March 31, 2002
-----------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
Loans $509,189 $10,670 8.50% $387,397 $8,820 9.23%
Securities 158,120 887 2.28 114,764 842 2.98
Other interest-earning assets 20,040 68 1.38 11,043 49 1.80
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Total interest-earning assets 687,349 $11,625 6.86% 513,204 $9,711 7.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,084 14,100
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Total assets $702,433 $527,304
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Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest checking deposits $11,831 $ 56 1.92% $ 9,563 $ 61 2.60%
Savings deposits 31,174 162 2.11 26,841 192 2.90
Money market deposits 138,880 722 2.11 89,227 636 2.89
Certificates of deposit 333,768 3,513 4.27 241,773 3,033 5.09
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Total deposit accounts 515,653 4,453 3.50 367,404 3,922 4.33
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Federal funds purchased - - - 344 2 1.96
Debentures and related interest payable 98,641 1,957 8.05 86,652 1,773 8.30
Junior debentures - capital securities 15,000 374 10.10 15,000 374 10.10
Note payable 265 4 6.87 144 2 6.91
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Total borrowed funds 113,906 2,335 8.31 102,140 2,151 8.54
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Total interest-bearing liabilities 629,559 $6,788 4.37% 469,544 $6,073 5.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,109 6,151
Noninterest-bearing liabilities 14,015 10,783
Stockholders' equity 53,750 40,826
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Total liabilities and stockholders' equity $702,433 $527,304
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Net interest and dividend income/spread $4,837 2.49% $3,638 2.42%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $57,790 2.85% $43,660 2.87%
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Ratio of total interest-earning assets
to total interest-bearing liabilities 1.09 1.09x
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Other Ratios:
Return on average assets (1) 1.03% 0.95%
Return on average equity (1) 13.40% 12.23%
Noninterest expense to average assets (1) 1.02% 1.11%
Efficiency ratio (2) 35% 37%
Average stockholders' equity to average assets 7.65% 7.74%
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(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income
before the provision for loan losses plus noninterest income.
20
Provision for Loan Loss Reserves
- --------------------------------
In the first quarter of 2003, the Company recorded a provision for loan losses
of $344,000, compared to $346,000 in the same quarter of 2002. The provision is
based on management's ongoing assessment of the adequacy of the allowance for
loan loss reserves for each subsidiary, which takes into consideration a number
of factors as discussed on page 15 of this report. The provision for each
quarter was a function of net loan growth, which amounted to $42,680,000 during
the 2003 first quarter, versus $36,529,000 in the first quarter of 2002. In the
first quarter of 2003, a larger percentage of the growth was attributable to the
Holding Company and Intervest Mortgage Corporation whose internal reserve
percentages are lower than those of the Bank.
Noninterest Income
- ------------------
Noninterest income includes fees from customer service charges, income from
mortgage lending activities (which consists mostly of fees from expired loan
commitments and loan servicing, maintenance and inspections charges), and income
from the early repayment of mortgage loans (which consists largely of the
recognition of unearned fees associated with such loans at the time of payoff
and the receipt of prepayment penalties in certain cases). The amount and timing
of, as well as income from, loan prepayments, if any, cannot be predicted and
can fluctuate significantly. Normally, the number of instances of prepayment of
mortgage loans tends to increase during periods of declining interest rates and
tends to decrease during periods of increasing interest rates. Many of the
Company's mortgage loans include prepayment provisions, and others prohibit
prepayment of indebtedness entirely.
Noninterest income increased $55,000 to $329,000 in the first quarter of 2003,
from $274,000 in the first quarter of 2002. The increase was due to an increase
in income from expired loan commitments and loan service charge income resulting
from growth in the loan portfolio.
Noninterest Expenses
- --------------------
Noninterest expenses increased to $1,784,000 in the first quarter of 2003, from
$1,462,000 in the comparable quarter of 2002. The increase of $322,000 was
largely due to a $151,000 increase in compensation and benefits, a $30,000
increase in data processing expenses, a $27,000 increase in professional fees, a
$15,000 increase in insurance expense and the addition of $43,000 of net
expenses associated with foreclosed real estate.
The increase in compensation and benefits expense was due to $122,000 resulting
from additional staff (60 full-time employees at March 31, 2003 vs. 54 at March
31, 2002), salary increases and a higher cost of employee benefits. Compensation
for the first quarter of 2002 included bonus payments of $37,000 to the Chairman
of the Company. Compensation for the first quarter of 2003 included $67,000 of
expense associated with certain common stock warrants held by employees and
directors as a result of an increase in the Company's Class A common stock price
during the quarter. (In 2001, the Company modified the terms of its Class A
common stock warrants - exercisable at $12.50 and $16.00 per share as of
December 31, 2001 - and reduced the exercise price to $10.01 per share
commencing January 1, 2002 and extended the expiration date to December 31,
2002. In September 2002, the Company further modified the warrants by extending
the expiration date to December 31, 2003. For these warrants, which total
138,500, compensation expense is being recorded in the statement of earnings
with the corresponding credit to paid in capital in accordance with variable
rate accounting as prescribed in APB Opinion No. 25 and related interpretations.
Future compensation related to these warrants will fluctuate up or down until
December 31, 2003 and will be a function of the Company's Class A common stock
price and number of warrants outstanding and exercised).
The increase in data processing expenses was due to growth in the Bank's assets.
The Bank engages a third-party servicer for its main data processing and the fee
is a function of the Bank's total assets, which increased to $606,772,000 at
March 31, 2003, from $463,930,000 at March 31, 2002. The increase in
professional fees and insurance expense was primarily due to the Company's
growth.
The foreclosed real estate expenses relate to one commercial real estate
property located in the State of Florida that was acquired by the Bank through
foreclosure. Foreclosed real estate expenses, net of any rental income, consist
mostly of real estate taxes, insurance, utilities, maintenance, professional
fees and other charges required to protect the Company's interest in the
property.
Provision for Income Taxes
- --------------------------
The provision for income taxes increased to $1,237,000 in the first quarter of
2003, from $856,000 in the first quarter of 2002, due to higher pre-tax income.
The Company's effective tax rate (inclusive of state and local taxes) amounted
to 40.7% in both periods.
21
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit-taking activities, and the issuance of
its debentures. The Company has not engaged in and accordingly has no risk
related to trading accounts, commodities or foreign exchange. The measurement of
market risk associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance sheet transactions are aggregated, and
the resulting net positions are identified. Disclosures about the fair value of
financial instruments as of December 31, 2002, which reflect changes in market
prices and rates, can be found in note 20 to the consolidated financial
statements included in the Company's Annual Report to Stockholders on Form 10-K
for the year ended December 31, 2002.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within established guidelines, the adverse impact of changes in interest rates
on the Company's net interest income and capital, while adjusting the Company's
asset-liability structure to obtain the maximum yield versus cost spread on that
structure. Management relies primarily on its asset-liability structure to
control interest rate risk. However, a sudden and substantial increase in
interest rates could adversely impact the Company's earnings, to the extent that
the interest rates borne by assets and liabilities do not change at the same
speed, to the same extent, or on the same basis. Management believes that there
have been no significant changes in the Company's market risk exposure since
December 31, 2002.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company maintains
---------------------------------------------------
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the Chief Executive
and Chief Financial Officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes in its
-----------------------------
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive and Chief Financial Officer.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the reporting period covered
by this report.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
Date: April 25, 2003 By: /s/ Lowell S. Dansker
-------------------------
Lowell S. Dansker, President and Treasurer
(Principal Executive and Financial Officer)
Date: April 25, 2003 By: /s/ Lawrence G. Bergman
---------------------------
Lawrence G. Bergman, Vice President and Secretary
23
CERTIFICATION
I, Lowell S. Dansker, as the principal executive and principal financial
officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"),
certify, that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Company and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the Audit Committee of the Company's Board of Directors:
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the Company's ability
to record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Lowell S. Dansker
---------------------
Lowell S. Dansker, President and Treasurer
(Principal Executive and Financial Officer)
April 25, 2003
24