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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, 2003
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Commission File No. 000-23377
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INTERVEST BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3699013
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(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
10 ROCKEFELLER PLAZA, SUITE 1015
NEW YORK, NEW YORK 10020-1903
(Address of principal executive offices)
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(212) 218-2800
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES XX NO.
-- --
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO XX
-- --
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
-------------------- -------------------
Class A Common Stock, $1.00 par value per share 4,762,986 Outstanding at October 17, 2003
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Class B Common Stock, $1.00 par value per share 385,000 Outstanding at October 17, 2003
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 2003 (Unaudited) and December 31, 2002 . . . . . . . . . . . 2
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2003 and 2002 . . . . . . . 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2003 and 2002 . . . . . . . 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine-Months Ended September 30, 2003 and 2002. . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2003 and 2002. . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited). . . . . . . . . . 7
Review by Independent Certified Public Accountants. . . . . . . . . . . . . . . . . 12
Report on Reviews by Independent Certified Public Accountants . . . . . . . . . . . 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . 25
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . 26
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-Q that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's interest rate spread, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting banks and bank holding companies.
1
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
($in thousands, except par value) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 7,838 $ 10,351
Federal funds sold 24,267 9,114
Commercial paper 3,275 7,950
Other short-term investments 2,315 3,434
Total cash and cash equivalents 37,695 30,849
--------------- -------------
Time deposits with banks - 2,000
Securities held to maturity, net (estimated fair value of $134,559 and $146,560, respectively) 134,164 145,694
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 2,805 1,108
Loans receivable (net of allowance for loan losses of $5,987 and $4,611, respectively) 625,374 485,301
Accrued interest receivable 4,311 4,263
Loan fees receivable 5,199 3,706
Premises and equipment, net 5,862 6,098
Foreclosed real estate - 1,081
Deferred income tax asset 2,900 1,997
Deferred debenture offering costs, net 4,312 3,498
Other assets 278 384
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TOTAL ASSETS $ 822,900 $ 685,979
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LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 5,850 $ 5,924
Interest-bearing deposit accounts:
Checking (NOW) accounts 14,570 10,584
Savings accounts 32,760 30,174
Money market accounts 150,678 134,293
Certificate of deposit accounts 390,974 324,983
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Total deposit accounts 594,832 505,958
Subordinated debentures payable 98,760 84,430
Guaranteed preferred beneficial interest in junior subordinated debentures 30,000 15,000
Accrued interest payable on all debentures 15,345 13,872
Note payable 258 266
Accrued interest payable on deposits 914 895
Mortgage escrow funds payable 13,694 5,894
Official checks outstanding 2,440 4,373
Other liabilities 2,912 2,165
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TOTAL LIABILITIES 759,155 632,853
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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,
4,668,686 and 4,348,087 shares issued and outstanding, respectively) 4,669 4,348
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 and 355,000 shares issued and outstanding, respectively) 385 355
Additional paid-in-capital, common 27,504 24,134
Retained earnings 31,187 24,289
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TOTAL STOCKHOLDERS' EQUITY 63,745 53,126
===============================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 822,900 $ 685,979
===============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED | NINE-MONTHS ENDED
SEPTEMBER 30, | SEPTEMBER 30,
------------------|-----------------------
($in thousands, except per share data) 2003 2002 | 2003 2002
- -------------------------------------------------------------------------|-----------------------
|
INTEREST AND DIVIDEND INCOME |
Loans receivable $ 12,172 $10,254| $ 34,455 $ 29,046
Securities 609 1,064| 2,266 2,889
Other interest-earning assets 64 78| 219 180
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TOTAL INTEREST AND DIVIDEND INCOME 12,845 11,396| 36,940 32,115
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|
INTEREST EXPENSE |
Deposits 4,550 4,603| 13,521 12,872
Subordinated debentures 2,110 1,874| 6,134 5,451
Junior debentures - capital securities 414 375| 1,162 1,123
Note payable 5 5| 14 12
Federal funds purchased - -| - 2
- -------------------------------------------------------------------------|-----------------------
TOTAL INTEREST EXPENSE 7,079 6,857| 20,831 19,460
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|
NET INTEREST AND DIVIDEND INCOME 5,766 4,539| 16,109 12,655
Provision for loan loss reserves 602 192| 1,376 964
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NET INTEREST AND DIVIDEND INCOME |
AFTER PROVISION FOR LOAN LOSS RESERVES 5,164 4,347| 14,733 11,691
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|
NONINTEREST INCOME |
Customer service fees 58 40| 146 123
Income from mortgage lending activities 206 172| 620 380
Income from the early repayment of mortgage loans 747 518| 1,784 879
(Loss) gain from early call of investment securities (11) 6| (51) 6
All other 38 -| 44 -
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TOTAL NONINTEREST INCOME 1,038 736| 2,543 1,388
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|
NONINTEREST EXPENSES |
Salaries and employee benefits 892 714| 2,656 2,252
Occupancy and equipment, net 310 358| 948 995
Data processing 192 150| 530 416
Advertising and promotion 4 19| 26 53
Professional fees and services 89 85| 276 250
Stationery, printing and supplies 33 34| 112 105
Postage and delivery 23 24| 73 70
FDIC and general insurance 57 48| 168 132
All other 212 162| 686 463
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TOTAL NONINTEREST EXPENSES 1,812 1,594| 5,475 4,736
- -------------------------------------------------------------------------|-----------------------
Earnings before taxes 4,390 3,489| 11,801 8,343
Provision for income taxes 1,859 1,385| 4,903 3,347
=========================================================================|=======================
NET EARNINGS $ 2,531 $ 2,104| $ 6,898 $ 4,996
=========================================================================|=======================
|
BASIC EARNINGS PER SHARE $ 0.52 $ 0.52| $ 1.45 $ 1.26
DILUTED EARNINGS PER SHARE $ 0.42 $ 0.41| $ 1.19 $ 1.01
DIVIDENDS PER SHARE $ - $ -| $ - $ -
- -------------------------------------------------------------------------------------------------
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,
----------------------------------------
($in thousands) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 2,531 $2,104 $ 6,898 $ 4,996
- ------------------------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) on available-for-sale securities - 8 - (38)
Provision (credit) for income taxes related to unrealized gains (losses)
on available-for-sale securities - 4 - (16)
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX - 4 - (22)
==================================================================================================================
TOTAL COMPREHENSIVE INCOME, NET OF TAX $ 2,531 $2,108 $ 6,898 $ 4,974
==================================================================================================================
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,
----------------------
($in thousands) 2003 2002
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CLASS A COMMON STOCK
Balance at beginning of period $ 4,348 $ 3,545
Issuance of 279,900 and 219,450 shares upon the exercise of warrants 280 219
Issuance of 40,699 shares upon the conversion of debentures 41 -
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Balance at end of period 4,669 3,764
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CLASS B COMMON STOCK
Balance at beginning of period 355 355
Issuance of 30,000 shares for the acquisition of Intervest Securities Corporation 30 -
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Balance at end of period 385 355
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ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 24,134 19,001
Compensation related to vesting of certain Class B stock warrants 19 19
Compensation related to certain Class A stock warrants modified 290 74
Issuance of 30,000 shares of Class B stock for the acquisition
of Intervest Securities Corporation 185 -
Issuance of 279,900 and 219,450 shares of Class A stock upon the exercise of
warrants, inclusive of tax benefits 2,522 1,437
Issuance of 40,699 shares of Class A stock upon the conversion of debentures 354 -
- ----------------------------------------------------------------------------------------------------------
Balance at end of period 27,504 20,531
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RETAINED EARNINGS
Balance at beginning of period 24,289 17,383
Net earnings for the period 6,898 4,996
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Balance at end of period 31,187 22,379
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period - 111
Net change in accumulated other comprehensive income, net - (22)
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Balance at end of period - 89
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TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD $ 63,745 $ 47,118
==========================================================================================================
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,
-----------------------
($in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 6,898 $ 4,996
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 391 473
Provision for loan loss reserves 1,376 964
Deferred income tax benefit (903) (433)
Amortization of deferred debenture offering costs 784 677
Compensation expense related to common stock warrants 309 93
Amortization of premiums, fees and discounts, net (1,130) (534)
Net loss from sale of foreclosed real estate 51 -
Net increase in accrued interest payable on debentures 1,610 1,903
Net decrease in official checks outstanding (1,933) (825)
Net change in all other assets and liabilities 4,175 (976)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 11,628 6,338
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INVESTING ACTIVITIES
Net decrease in interest-earning time deposits with banks 2,000 250
Maturities and calls of securities available for sale - 500
Maturities and calls of securities held to maturity 92,490 69,285
Purchases of securities held to maturity (82,625) (117,905)
Net increase in loans receivable (142,622) (85,691)
Sale of foreclosed real estate 150 -
Cash acquired through acquisition of Intervest Securities Corporation 218 -
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (1,697) (450)
Purchases of premises and equipment, net (155) (352)
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NET CASH USED IN INVESTING ACTIVITIES (132,241) (134,363)
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FINANCING ACTIVITIES
Net increase in demand, savings, NOW and money market deposits 22,883 54,812
Net increase in certificates of deposit 65,991 69,374
Net increase in mortgage escrow funds payable 7,800 5,431
Principal repayments of debentures (1,400) (2,500)
Principal repayments of note payable (8) (6)
Proceeds from issuance of debentures, net of issuance costs 29,391 12,490
Proceeds from issuance of common stock, net of issuance costs 2,802 1,656
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NET CASH PROVIDED BY FINANCING ACTIVITIES 127,459 141,257
- -------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,846 13,232
Cash and cash equivalents at beginning of period 30,849 24,409
=============================================================================================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,695 $ 37,641
=============================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 18,418 $ 16,844
Income taxes 5,589 3,955
Noncash activities:
Transfer of loan to foreclosed real estate, net of chargeoff - 1,081
Loan to finance sale of foreclosed real estate 880 -
Purchase of premises with note payable - 275
Conversion of debentures and accrued interest into Class A common stock 395 -
Accumulated other comprehensive income,
change in unrealized loss on securities available for sale, net of tax - (22)
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
6
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for
information derived from the audited Consolidated Balance Sheet as of December
31, 2002. The statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
The financial statements include the accounts of Intervest Bancshares
Corporation (a financial holding company referred to by itself as the "Holding
Company") and its subsidiaries, Intervest National Bank (the "Bank"), Intervest
Mortgage Corporation, Intervest Securities Corporation, Intervest Statutory
Trust I and Intervest Statutory Trust II. The entities are referred to
collectively as the "Company" on a consolidated basis. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform to the
current year's presentation. The accounting and reporting policies of the
Company conform to accounting principles generally accepted in the United States
of America and to general practices within the banking industry.
In preparing the fnancial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent liabilities as of the date of the financial statements,
and revenues and expenses during the reporting periods. Actual results could
differ from those estimates. Estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan loss
reserves and the valuation allowances for deferred tax assets. In the opinion of
management, all material adjustments necessary for a fair presentation of
financial condition and results of operations for the interim periods presented
in this report have been made. These adjustments are of a normal recurring
nature. The results of operations for the interim periods are not necessarily
indicative of results that may be expected for the entire year or any other
interim period.
NOTE 2 - DESCRIPTION OF BUSINESS
The Holding Company is located at 10 Rockefeller Plaza in New York City and its
primary business is the operation of its subsidiaries. It does not engage in any
other substantial business activities other than a limited amount of real estate
mortgage lending. From time to time, the Holding Company also sells debentures
to raise funds for working capital purposes. The Holding Company became a
financial holding company effective January 23, 2003.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office at One Rockefeller Plaza in New
York City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank conducts a
personalized commercial and consumer banking business and attracts deposits from
the areas served by its banking offices. It also provides internet banking
services through its web site: www.intervestnatbank.com, which can attract
deposit customers from outside its primary market areas. The deposits, together
with funds derived from other sources, are used to originate real estate,
commercial and consumer loans and to purchase investment securities. The Bank
emphasizes multifamily and commercial real estate lending.
Intervest Mortgage Corporation is a mortgage investment company also located at
10 Rockefeller Plaza in New York City. It is engaged in the real estate
business, including the origination and purchase of real estate mortgage loans,
consisting of first mortgage, junior mortgage and wraparound mortgage loans. Its
wholly owned subsidiaries, Intervest Distribution Corporation and Intervest
Realty Servicing Corporation are nonoperating entities that provide
administrative services to Intervest Mortgage Corporation. Intervest Mortgage
Corporation sells debentures to provide funding for its business.
Intervest Securities Corporation is a broker/dealer registered in nine states
and is an NASD and SIPC member firm. It is also located at 10 Rockefeller Plaza
in New York City and it participates as a selected dealer from time to time in
offerings of debt securities of the Company, primarily those of Intervest
Mortgage Corporation. On June 2, 2003, the Holding Company acquired all of the
outstanding capital stock of Intervest Securities Corporation for 30,000 shares
of its Class B common stock that was newly issued for this transaction.
Intervest Securities Corporation's total assets consisted of approximately
$218,000 of cash at the time of acquisition. Prior to the acquisition, Intervest
Securities Corporation was an affiliated entity in that it was wholly owned by
the spouse of the Chairman of the Holding Company.
7
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - DESCRIPTION OF BUSINESS - CONTINUED
The acquisition was accounted for at historical cost and accordingly, the
recorded assets, liabilities and shareholders' equity of both companies were
combined and recorded at their historical cost amounts. No restatements of the
Company's prior period consolidated financial statements in this report have
been made because the financial results of Intervest Securities Corporation were
diminimus.
Intervest Statutory Trust I was formed in December 2001 and Intervest Statutory
Trust II was formed in September 2003. Each was formed for the sole purpose of
issuing and administering $15,000,000 of capital securities for a total of
$30,000,000 as more fully described in note 4 below. The Trusts do not conduct
any trade or business.
The Company will be moving from its present New York locations to the entire
fourth floor of One Rockefeller Plaza, New York, NY. Renovations are expected to
be completed by March 2004.
NOTE 3 - ALLOWANCE FOR LOAN LOSS RESERVES
Activity in the allowance for loan loss reserves for the periods indicated is
summarized as follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
------------------ ---------------------
($in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------
Balance at beginning of period $ 5,385 $ 4,109 $ 4,611 $ 3,380
Provision charged to operations 602 192 1,376 964
Recoveries of previous chargeoffs - - - 107
Chargeoffs - - - (150)
- -----------------------------------------------------------------------------
Balance at end of period $ 5,987 $ 4,301 $ 5,987 $ 4,301
- -----------------------------------------------------------------------------
At September 30, 2003, two real estate loans with an aggregate principal balance
of $8,474,000 were on nonaccrual status. These loans were considered impaired
under the criteria of SFAS No.114. The Company's recorded investment in these
loans totaled $8,469,000. The Company has commenced foreclosure proceedings
against the borrowers and currently believes the estimated fair value of each of
the underlying properties (which are located in New York City) is sufficient to
provide repayment of its recorded investment. As a result, there was no specific
valuation allowance maintained. Interest income that was not recorded on these
loans under their contractual terms was $180,000 for the 2003 periods included
in this report. The average balance of impaired loans for the quarter and
nine-months ended September 30, 2003 was approximately $8,474,000 and
$2,432,000, respectively. At September 30, 2003 and December 31, 2002, there
were no other impaired loans or loans ninety days past due and still accruing
interest.
NOTE 4 - GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES
Intervest Statutory Trust I was formed in December 2001 for the sole purpose of
issuing and administering 9.875% Trust Preferred Securities due December 18,
2031 in the aggregate principal amount of $15,000,000, hereafter referred to as
"Capital Securities I". The net proceeds from the sale, in addition to the
initial capital contribution of $464,000 from the Holding Company to the Trust,
were reinvested into the Holding Company in exchange for $15,464,000 of the
Holding Company's 9.875% Junior Subordinated Debentures due December 18, 2031.
Intervest Statutory Trust II was formed in September 2003 for the sole purpose
of issuing and administering 6.75% Trust Preferred Securities due September 17,
2033 in the aggregate principal amount of $15,000,000, hereafter referred to as
the "Capital Securities II". The net proceeds from the sale, in addition to the
initial capital contribution of $464,000 from the Holding Company to the Trust,
were reinvested into the Holding Company in exchange for $15,464,000 of the
Holding Company's 6.75% Junior Subordinated Debentures due September 17, 2033.
The sole assets of the Trusts, the obligors on the Capital Securities, are the
Junior Subordinated Debentures. In addition, for each Trust, the Holding Company
has guaranteed the payment of distributions on, payments on any redemptions of,
and any liquidation distribution with respect to the Capital Securities.
Cash distributions are payable semi-annually in arrears at the fixed rate of
9.875% per annum on December 18 and June 18 of each year for the Capital
Securities I and the 9.875% Junior Subordinated Debentures. For the Capital
Securities II and the 6.75% Junior Subordinated Debentures, cash distributions
are payable quarterly in arrears on March 17, June 17, September 17 and December
17 of each year based on a fixed rate of 6.75% per annum for the first five
years, and thereafter at the rate of 2.95% over 3 month libor until maturity.
8
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES, CONTINUED
Issuance costs of $469,000 associated with Capital Securities I and $441,000 for
Capital Securities II have been capitalized by the Holding Company and are being
amortized over the life of the securities.
All of the Capital Securities are subject to mandatory redemption (i) in whole,
but not in part, upon repayment of the Junior Subordinated Debentures at stated
maturity or, at the option of the Holding Company, their earlier redemption in
whole upon the occurrence of certain changes in the tax treatment or capital
treatment of the Capital Securities, or a change in the law such that the Trust
would be considered an investment company and (ii) in whole or in part at any
time on or after December 18, 2006 for Capital Securities I and September 17,
2008 for Capital Securities II contemporaneously with the optional redemption by
the Holding Company of the Junior Subordinated Debentures in whole or in part.
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Holding Company (i) on or after December 18, 2006 for the 9.875%
Junior Subordinated Debentures and on or after September 17, 2008 for the 6.75%
Junior Subordinated Debentures, in whole at any time or in part from time to
time, or (ii) in whole, but not in part, at any time within 90 days following
the occurrence and continuation of certain changes in the tax treatment or
capital treatment of the Capital Securities, or a change in law such that the
Trust would be considered an investment company. Any redemption would need prior
regulatory approvals.
NOTE 5 - COMMON STOCK WARRANTS
The Holding Company has common stock warrants outstanding that entitle the
registered holders thereof to purchase one share of common stock for each
warrant. All warrants are currently exercisable, except for certain Class B
common stock warrants. 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
-------------------------------- Wtd-Avg
Total Exercise
Class A Common Stock Warrants: $6.67 $10.01 $10.01 Warrants Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 501,465 931,545 122,000 1,555,010 $ 8.93
Exercised during first nine months of 2003 - (265,250) (14,650) (279,900) $ 10.01
- ------------------------------------------------------------------------------------------------
Outstanding at September 30, 2003 501,465 666,295 107,350 1,275,110 $ 8.70
- ------------------------------------------------------------------------------------------------
Remaining contractual life in years at September 30, 2003 (1) 3.3 0.3 0.3 1.5
- -----------------------------------------------------------------------------------------------------------------------------
(1) The Holding Company may, at its sole discretion, set an earlier expiration date.
Exercise Price Per Warrant
-------------------------------- Wtd-Avg
Total Exercise
Class A Common Stock Warrants: $6.67 $10.01(1) Warrants Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 and September 30, 2003 145,000 50,000 195,000 $ 7.52
- ------------------------------------------------------------------------------------------------------------------
Remaining contractual life in years at September 30, 2003 4.3 4.3 4.3
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) At September 30, 2003, 42,600 of these warrants were immediately exercisable. An additional 7,100 warrants
vest and become exercisable on April 27th of 2004. The warrants, which expire on January 31, 2008, become fully
vested earlier upon certain conditions.
The Company elects to use the intrinsic value-based method prescribed under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its stock warrants. Under this method, compensation expense related to stock
warrants granted to employees is the excess, if any, of the market price of the
stock as of the grant or modification date over the exercise price of the
warrant.
For warrants granted to employees whose exercise price was reduced to $10.01
effective January 1, 2002 and whose expiration date was extended in 2002,
compensation expense is being recorded under variable rate accounting as
prescribed by APB 25 and related interpretations. For these warrants, which
originally totaled 138,500, compensation expense is being recorded in salaries
and employee benefits expense with a corresponding credit to paid in capital in
the consolidated financial statements. Compensation related to these warrants
will fluctuate up or down until December 31, 2003 and will be a function of the
Company's Class A common stock price and number of warrants outstanding and
exercised.
9
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - COMMON STOCK WARRANTS, CONTINUED
Compensation expense recorded in connection with warrants is summarized as
follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
------------------- --------------------
($in thousands) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Compensation expense recorded in connection with vesting
of Class B warrants during the period $ 6 $ 7 $ 19 $ 20
Compensation expense (credit) recorded in connection with
Class A common stock warrants whose terms were modified 96 (44) 290 73
- -------------------------------------------------------------------------------------------------------
$ 102 $ (37) $ 309 $ 93
- -------------------------------------------------------------------------------------------------------
Had compensation expense been determined based on the estimated fair value of
the warrants in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per share would not have
been different from the amounts reported from the periods included in this
report on Form 10-Q.
NOTE 6 - 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 (computed by the "treasury stock method") and
convertible debentures (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 (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,
- -----------------------------------------------------------------------------------------------------------------------
($in thousands, except share and per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net earnings applicable to common stockholders $ 2,531 $ 2,104 $ 6,898 $ 4,996
Average number of common shares outstanding 4,894,436 4,067,433 4,771,323 3,976,700
- -----------------------------------------------------------------------------------------------------------------------
Basic net earnings per share amount $ 0.52 $ 0.52 $ 1.45 $ 1.26
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Net earnings applicable to common stockholders $ 2,531 $ 2,104 $ 6,898 $ 4,996
Adjustment to net earnings from assumed conversion of debentures (1) 115 110 346 323
----------------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 2,646 $ 2,214 $ 7,244 $ 5,319
----------------------------------------------
Average number of common shares outstanding:
Common shares outstanding 4,894,436 4,067,443 4,771,323 3,976,700
Potential dilutive shares resulting from exercise of warrants (2) 411,446 426,366 335,353 338,722
Potential dilutive shares resulting from conversion of debentures (3) 966,281 971,552 966,281 971,552
----------------------------------------------
Total average number of common shares outstanding used for dilution 6,272,163 5,465,361 6,072,957 5,286,974
- -----------------------------------------------------------------------------------------------------------------------
Diluted net earnings per share amount $ 0.42 $ 0.41 $ 1.19 $ 1.01
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents interest expense on dilutive convertible debentures, net of taxes, that would not occur if they were
assumed converted.
(2) All outstanding warrants were considered for the EPS computations.
(3) Convertible debentures (principal and accrued interest) outstanding at September 30, 2003 and September 30,
2002 totaling $9,672,000 and $9,725,000, respectively, were convertible into common stock at a price of $10.01
per share.
10
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - BANK REGULATORY CAPITAL
The Bank is designated as a well-capitalized institution as defined in FDIC
regulations, which require minimum Tier 1 leverage and Tier 1 and total
risk-based ratios of 5%, 6% and 10%, respectively. Management believes that
there are no current conditions or events outstanding which would change this
designation.
At September 30, 2003, the actual capital of the Bank on a percentage basis was
as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ -----------------
Total capital to risk-weighted assets 12.41% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.40% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 9.98% 4.00% 5.00%
11
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, 2003 and for the three- and nine-month periods ended September 30,
2003 and 2002 presented in this document, in accordance with standards
established by the American Institute of Certified Public Accountants. As part
of Hacker, Johnson & Smith, P.A., P.C.'s review, Eisner, LLP was relied upon for
their limited review of Intervest Mortgage Corporation, a wholly owned
subsidiary of the Company.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
12
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of
September 30, 2003, and the related condensed consolidated statements of
earnings and comprehensive income for the three- and nine-month periods ended
September 30, 2003 and 2002, and the related condensed consolidated statements
of changes in stockholders' equity and cash flows for the nine-month periods
ended September 30, 2003 and 2002. These financial statements are the
responsibility of the Company's management.
We were furnished the report of other accountants on their reviews of the
interim financial information of Intervest Mortgage Corporation, whose total
assets as of September 30, 2003 constituted 12.9% 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 10.9%, 9.9%, and
20.1%; and 10.5%, 13.6% and 18.5%, respectively, and whose net interest income,
noninterest income and net earnings for the three- and nine-month periods ended
September 30, 2002, constituted 11.7%, 26.5%, and 24.7%; and 14.2%, 25.2% and
25.5%, respectively of the related consolidated totals.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews and the review report of other accountants, we are not
aware of any material modifications that should be made to the condensed
consolidated financial statements referred to above for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, and the related consolidated statements of earnings,
comprehensive income, changes in stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 24,
2003, we, based on our audit and the report of other auditors, expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 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
November 6, 2003
13
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 September 30, 2003,
and the related condensed consolidated statements of operations for the three-
and nine-month periods ended September 30, 2003 and 2002, and the related
condensed consolidated statements of changes in stockholder's equity and cash
flows for the nine-month periods ended September 30, 2003 and 2002 (all of which
are not presented separately herein). These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002 and the related consolidated statements of
operations, changes in stockholder's equity and cash flows for the year then
ended (not presented separately herein), and in our report dated January 23,
2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the condensed
consolidated balance sheet as of December 31, 2002 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ Eisner, LLP
- -----------------
EISNER,LLP
New York, New York
October 22, 2003
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
-------
Intervest Bancshares Corporation has five wholly owned subsidiaries - Intervest
National Bank, Intervest Mortgage Corporation, Intervest Securities Corporation,
Intervest Statutory Trust I and Intervest Statutory Trust II (hereafter referred
to collectively as the "Company" on a consolidated basis). Intervest Bancshares
Corporation and Intervest National Bank may be referred to individually as the
"Holding Company" and the "Bank," respectively. For a discussion of the
Company's business, see note 2 to the condensed consolidated financial
statements in this report.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The interest rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan loss reserves and effective income tax
rate. Noninterest income consists mostly of loan and other banking fees as well
as income from loan prepayments. The amount and timing of, as well as income
from, loan prepayments, if any, cannot be predicted and can fluctuate
significantly. Normally, the number of instances of prepayment of mortgage loans
tends to increase during periods of declining interest rates and tends to
decrease during periods of increasing interest rates. Many of the Company's
mortgage loans include prepayment provisions, and others prohibit prepayment of
indebtedness entirely. Noninterest expense consists of compensation and benefits
expense, occupancy and equipment expenses, data processing expenses, advertising
expense, professional fees, insurance expense and other operating expenses.
Additionally, the Company's profitability is significantly affected by general
economic and competitive conditions, changes in market interest rates,
government policies and actions of regulatory authorities. Since the properties
underlying the Company's mortgages are concentrated in the New York City area
and the State of Florida, the economic conditions in those areas can have an
impact on the Company's results of operations.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
-----------------------------------------------------------------------------
OVERVIEW
- --------
Total assets at September 30, 2003 increased to $822,900,000, from $685,979,000
at December 31, 2002. Total liabilities at September 30, 2003 increased to
$759,155,000, from $632,853,000 at December 31, 2002. Stockholders' equity
increased to $63,745,000 at September 30, 2003, from $53,126,000 at year-end
2002. Book value per common share rose to $12.61 per share at September 30,
2003, from $11.30 at December 31, 2002.
Selected balance sheet information as of September 30, 2003 follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($in thousands) Company Bank Corp Trusts Corp Balances
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 6,011 $ 30,954 $ 16,970 $ - $ 479 $ (16,719)
Securities held to maturity, net - 134,164 - 30,928 - (30,928)
FRB and FHLB stock - 2,805 - - - -
Loans receivable, net of deferred fees 16,425 517,807 97,129 - - -
Allowance for loan loss reserves (82) (5,687) (218) - - -
Investment in subsidiaries 84,424 - - - - (84,424)
All other assets 1,777 16,232 4,868 482 - (497)
- -----------------------------------------------------------------------------------------------------------------------
Total assets $108,555 $ 696,275 $ 118,749 $ 31,410 $ 479 $(132,568)
- -----------------------------------------------------------------------------------------------------------------------
Deposits $ - $ 611,846 $ - $ - $ - $ (17,014)
Subordinated debentures payable 41,088 - 88,600 - - (30,928)
Junior debentures payable-capital securities - - - 30,000 - -
Accrued interest payable on all debentures 3,569 - 11,791 467 - (482)
All other liabilities 153 18,097 1,666 15 7 280
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 44,810 629,943 102,057 30,482 7 (48,144)
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 63,745 66,332 16,692 928 472 (84,424)
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $108,555 $ 696,275 $ 118,749 $ 31,410 $ 479 $(132,568)
- -----------------------------------------------------------------------------------------------------------------------
($in thousands) Consolidated
- -------------------------------------------------------------
Cash and cash equivalents $ 37,695
Securities held to maturity, net 134,164
FRB and FHLB stock 2,805
Loans receivable, net of deferred fees 631,361
Allowance for loan loss reserves (5,987)
Investment in subsidiaries -
All other assets 22,862
- -------------------------------------------------------------
Total assets $ 822,900
- -------------------------------------------------------------
Deposits $ 594,832
Subordinated debentures payable 98,760
Junior debentures payable-capital securities 30,000
Accrued interest payable on all debentures 15,345
All other liabilities 20,218
- -------------------------------------------------------------
Total liabilities 759,155
- -------------------------------------------------------------
Stockholders' equity 63,745
- -------------------------------------------------------------
Total liabilities and stockholders' equity $ 822,900
- -------------------------------------------------------------
15
A comparison of selected balance sheet information as of September 30, 2003 and
December 31, 2002 follows:
At September 30, 2003 At December 31, 2002
------------------------ ------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 37,695 4.6% $ 30,849 4.4%
Time deposits with banks - - 2,000 0.3
Securities held to maturity, net 134,164 16.3 145,694 21.2
FRB and FHLB stock 2,805 0.3 1,108 0.2
Loans receivable, net of deferred fees and loan loss reserves 625,374 76.0 485,301 70.7
All other assets 22,862 2.8 21,027 3.2
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 822,900 100.0% $ 685,979 100.0%
- ------------------------------------------------------------------------------------------------------------------
Deposits $ 594,832 72.3% $ 505,958 73.8%
Subordinated debentures payable 98,760 12.0 84,430 12.3
Junior debentures payable-capital securities 30,000 3.6 15,000 2.2
Accrued interest payable on all debentures 15,345 1.9 13,872 2.0
All other liabilities 20,218 2.5 13,593 2.0
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 759,155 92.3 632,853 92.3
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity 63,745 7.7 53,126 7.7
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 822,900 100.0% $ 685,979 100.0%
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
- ----------------------------
Cash and cash equivalents increased to $37,695,000 at September 30, 2003, from
$30,849,000 at December 31, 2002, as reflected in a higher level of overnight
federal fund investments. This category includes federal funds sold and
interest-bearing and noninterest-bearing cash balances with banks, and other
short-term investments that have original maturities of three months or less.
The short-term investments are normally comprised of commercial paper issued by
large commercial banks, certificates of deposit and U.S. government securities.
The level of cash and cash equivalents fluctuates based on various factors,
including liquidity needs, loan demand, deposit flows, calls of securities,
repayments of borrowed funds and alternative investment opportunities.
SECURITIES HELD TO MATURITY, NET
- ------------------------------------
Securities held to maturity decreased to $134,164,000 at September 30, 2003,
from $145,694,000 at December 31, 2002. The decrease was due to maturities and
early calls exceeding new purchases during the period. The portfolio consists of
debt obligations of FNMA, FHLB, FHLMC, SLMA and FFCB with a weighted-average
yield of approximately 1.80% and a weighted-average remaining maturity of 1.6
years at September 30, 2003, compared to 2.39% and 1.6 years, respectively, at
December 31, 2002. The securities are fixed rate or have predetermined scheduled
rate increases, and some have call features that allow the issuer to call the
security before its stated maturity without penalty. The Company normally
invests in short-to-medium term security investments to emphasize liquidity.
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK
- -------------------------------------------------------------
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in
their capital stock of $1,114,000 and $1,691,000, respectively. The FRB stock
currently pays a dividend of 6%, while the FHLB stock dividend was suspended in
September 2003. The total investment, which amounted to $2,805,000 at September
30, 2003, compared to $1,108,000 at December 31, 2002, fluctuates based on
specific factors (the Bank's capital level for the FRB and the Bank's loans for
the FHLB). The Bank became a member of the FHLB during the second quarter of
2003.
LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSS RESERVES
- --------------------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan loss reserves,
increased to $625,374,000 at September 30, 2003, from $485,301,000 at December
31, 2002. The growth reflected new originations of commercial real estate and
multifamily mortgage loans, partially offset by principal repayments. Commercial
real estate and multifamily real estate properties collateralized almost all of
the loans in the Company's loan portfolio. At September 30, 2003, two real
estate loans with an aggregate principal balance of $8,474,000 were on
nonaccrual status and considered impaired. At December 31, 2002, there were no
loans classified as nonaccrual or impaired. For a further discussion of
nonaccrual loans, see note 3 to the condensed consolidated financial statements
in this report.
16
At September 30, 2003, the allowance for loan loss reserves amounted to
$5,987,000, compared to $4,611,000 at December 31, 2002. The allowance
represented 0.95% of total loans (net of deferred fees) outstanding at September
30, 2003, compared to 0.94% at December 31, 2002. The increase in the allowance
was due to provisions aggregating $1,376,000 during the period resulting from
loan growth.
The Company monitors its loan portfolio to determine the appropriate level of
the allowance for loan loss reserves based on various factors. These factors
include: the type and level of loans outstanding; volume of loan originations;
overall portfolio quality; loan concentrations; specific problem loans,
historical chargeoffs and recoveries; adverse situations which may affect the
borrowers' ability to repay; and management's assessment of the current and
anticipated economic conditions in the Company's lending regions.
ALL OTHER ASSETS
- ------------------
The following table sets forth the composition of the caption "All other assets"
in the table on page 16 as follows:
At September 30, At December 31,
----------------- ----------------
($in thousands) 2003 2002
----------------------------------------------------------------------------
Accrued interest receivable $ 4,311 $ 4,263
Loans fee receivable 5,199 3,706
Premises and equipment, net 5,862 6,098
Foreclosed real estate - 1,081
Deferred income tax asset 2,900 1,997
Deferred debenture offering costs, net 4,312 3,498
All other 278 384
----------------------------------------------------------------------------
$ 22,862 $ 21,027
----------------------------------------------------------------------------
Accrued interest receivable fluctuates based on the level of interest-earning
assets and the timing of interest payments received therefrom.
Loan fees receivable are fees due to the Company in accordance with the terms of
mortgage loans. Such amounts are generally due upon the full repayment of the
loan. This fee is recorded as deferred income at the time a loan is originated
and is then amortized to interest income over the life of the loan as a yield
adjustment. The increase was due to an increase in mortgage loan originations.
Premises and equipment decreased due to depreciation and amortization, partially
offset by new additions of $155,000.
Foreclosed real estate at December 31, 2002 represented one commercial real
estate property located in the State of Florida with a carrying value of
$1,081,000. In the second quarter of 2003, the Bank sold this property for net
proceeds of approximately $1,030,000 (consisting of cash, after selling costs,
of $150,000 and a mortgage of $880,000 provided by the Bank). The net loss of
$51,000 from the sale was included in noninterest expenses (foreclosed real
estate expense) in the consolidated statement of earnings.
Deferred income tax asset relates primarily to the unrealized tax benefit on the
Company's allowance for loan loss reserves, depreciation, organizational
start-up costs and compensation expense on unexercised warrants. These charges
have been expensed for financial statement purposes, but are not all currently
deductible for income tax purposes. The ultimate realization of the deferred tax
asset is dependent upon the generation of sufficient taxable income by the
Company during the periods in which these temporary differences become
deductible for tax purposes. Management believes that it is more likely than not
that the Company's deferred tax asset will be realized because the Company
expects to generate sufficient taxable earnings and accordingly, a valuation
allowance for deferred tax assets is not maintained.
Deferred debenture offering costs consist primarily of underwriters' commissions
and are amortized over the terms of the debentures. The increase was due to
$1,163,000 incurred by Intervest Mortgage Corporation in connection with the
sale of its Series 01/21/03 and 07/25/03 debentures, $5,000 incurred by
Intervest Mortgage Corporation through September 30, 2003 on a new series
expected to be sold in late 2003 and $441,000 incurred by the Holding Company in
connection with the sale of Trust Preferred Securities. These items were
partially offset by normal amortization.
DEPOSIT LIABILITIES
- --------------------
Deposit liabilities increased to $594,832,000 at September 30, 2003, from
$505,958,000 at December 31, 2002, primarily reflecting increases in money
market and certificate of deposit accounts of $16,385,000 and $65,991,000,
17
respectively. At September 30, 2003, certificate of deposit accounts totaled
$390,974,000 and checking, savings and money market accounts aggregated
$203,858,000. The same categories of deposit accounts totaled $324,983,000 and
$180,975,000, respectively, at December 31, 2002. Certificate of deposit
accounts represented 66% of total deposits at September 30, 2003 and 64% at
December 31, 2002.
DEBENTURES PAYABLE, RELATED ACCRUED INTEREST PAYABLE AND TRUST PREFERRED
- --------------------------------------------------------------------------------
SECURITIES
- ----------
At September 30, 2003, debentures payable amounted to $98,760,000, compared to
$84,430,000 at year-end 2002. The increase was due to the sale of debentures by
Intervest Mortgage Corporation (Series 01/21/03 and 07/25/03 totaling
$16,000,000 with fixed rates of interest ranging from 6.5% to 7.25% and maturing
at various times through October 1, 2010) as part of its normal funding of its
mortgage loan originations. This increase was partially offset by the maturity
and repayment of $1,400,000 of its Series 11/10/98 debentures and the conversion
of the Holding Company's convertible debentures in the aggregate principal
amount of $270,000 into shares of Class A common stock at the election of the
debenture holders. The sale of Intervest Mortgage Corporation's debentures in
2003, after underwriter's commissions and other issuance costs, resulted in net
proceeds of $14,826,000.
At September 30, 2003, Intervest Mortgage Corporation had $88,600,000 of
debentures outstanding, compared to $74,000,000 at December 31, 2002. Intervest
Mortgage Corporation has elected to redeem on November 1, 2003, $1,250,000 of
its Series 9/18/00 debentures due January 1, 2004, plus accrued interest through
October 31, 2003 of approximately $335,000. In September 2003, Intervest
Mortgage Corporation filed a registration statement to sell additional
debentures in the aggregate principal amount of up to $10,000,000.
At September 30, 2003, the Holding Company had $10,160,000 of debentures payable
outstanding, of which $6,660,000 were convertible into its Class A common stock
at a current conversion price of $10.01 per share through December 31, 2003. The
Holding Company has also elected to redeem on November 1, 2003, $1,000,000 of
its Series 12/15/00 non-convertible debentures due April 1, 2004.
At September 30, 2003, the Holding Company, through its wholly owned
subsidiaries Intervest Statutory Trust I and Intervest Statutory Trust II, has
Trust Preferred Securities (Junior Debentures Payable) outstanding totaling
$30,000,000, compared to $15,000,000 at December 31, 2002. These securities
qualify as regulatory capital. The increase from year-end 2002 was due the sale
of $15,000,000 of Trust Preferred Securities as discussed in note 4 to the
condensed consolidated financial statements in this report.
At September 30, 2003, accrued interest payable on all debentures amounted to
$15,345,000, compared to $13,872,000 at year-end 2002. Nearly all of the accrued
interest payable is due and payable at the maturity of various debentures. For a
further discussion of the debentures, including conversion prices and redemption
premiums, see note 7 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ALL OTHER LIABILITIES
- -----------------------
The table below sets forth the composition of the caption "All other
liabilities" in the table on page 16 as follows:
At September 30, At December 31,
----------------- ----------------
($in thousands) 2003 2002
--------------------------------------------------------------------------
Note payable $ 258 $ 266
Mortgage escrow funds payable 13,694 5,894
Official checks outstanding 2,440 4,373
Accrued interest payable on deposits 914 895
Income taxes payable 745 526
All other 2,167 1,639
--------------------------------------------------------------------------
$ 20,218 $ 13,593
--------------------------------------------------------------------------
Note payable represents a mortgage note issued by the Bank in 2002 in connection
with the Bank's purchase of property that is located across from its Court
Street branch office in Florida. The note matures in February of 2017 and calls
for monthly payments of principal and interest at 7% per annum.
Mortgage escrow funds payable represent advance payments made by borrowers for
taxes and insurance that are remitted by the Company to third parties. The
increase reflects the growth in the loan portfolio as well as the timing of
payments to taxing authorities.
The level of official checks outstanding varies and fluctuates based on banking
activity. The level of accrued interest payable on deposits fluctuates based on
total deposits and timing of interest payments. The level of income taxes
payable fluctuates based on the Company's earnings, effective tax rate and
timing of tax payments. All other
18
is comprised mainly of accrued expenses as well as fees received on loan
commitments that have not yet been funded. The increase in all other was due to
fees received from increased loan commitments outstanding.
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
- -----------------------------------------------
Stockholders' equity increased to $63,745,000 at September 30, 2003, from
$53,126,000 at December 31, 2002 due to the following: net earnings
($6,898,000); the issuance of 30,000 shares ($215,000) of Class B common stock
to acquire Intervest Securities Corporation; the issuance of 40,699 shares
($395,000) of Class A common stock upon the conversion of convertible
debentures; the issuance of 279,900 shares ($2,802,000) of Class A common stock
upon the exercise of common stock warrants; and the recording of compensation
expense ($309,000) related to stock warrants held by employees and directors.
For discussion of compensation related to stock warrants, see note 5 to the
condensed consolidated financial statements in this report.
The Bank is a well-capitalized institution as defined in applicable banking
regulations. See note 7 to the condensed consolidated financial statements in
this report for the Bank's capital ratios.
ASSET AND LIABILITY MANAGEMENT
------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The primary objective of the Company's
asset/liability management strategy is to limit, within its established
guidelines, the adverse impact of changes in interest rates on the Company's net
interest income and capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. The
Company's one-year interest rate sensitivity gap was a positive $128,712,000 or
15.6% of total assets, at September 30, 2003, compared to a positive
$107,681,000, or 15.7%, at December 31, 2002. The increase was primarily due to
the origination of new floating-rate loans as well as existing loans migrating
into the less than one-year maturity timeframe. The new loans were funded
primarily by increases in deposits and borrowed funds with of over one year.
In computing the gap, the Company treats its interest checking, money market and
savings deposit accounts as immediately repricing. Further, the Company has a
"floor," or minimum rate, on many of its floating-rate loans that is determined
in relation to prevailing market rates on the date of origination. This floor
only adjusts upwards in the event of increases in the loan's interest rate. This
feature reduces the effect on interest income of a falling rate environment
because the interest rates on such loans do not reset downward. For a further
discussion of interest rate risk and gap analysis, including the assumptions
used in preparing the gap, see the Company's 2002 Annual Report on Form 10-K,
pages 32 and 33.
The table that follows summarizes the Company's interest-earning assets and
interest-bearing liabilities as of September 30, 2003, that are scheduled to
mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4
--------- --------- ---------- ---------
($in thousands) Months Months Years Years Total
- --------------------------------------------------------------------------------------------------
Loans (1) $200,144 $227,952 $ 140,311 $ 70,397 $638,804
Securities held to maturity (2) 24,285 48,660 61,219 - 134,164
Short-term investments 29,857 - - - 29,857
FRB and FHLB stock 1,691 - - 1,114 2,805
- --------------------------------------------------------------------------------------------------
Total rate-sensitive assets $255,977 $276,612 $ 201,530 $ 71,511 $805,630
- --------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 14,570 $ - $ - $ - $ 14,570
Savings deposits 32,760 - - - 32,760
Money market deposits 150,678 - - - 150,678
Certificates of deposit 30,109 120,969 170,374 69,522 390,974
------------------------------------------------------
Total deposits 228,117 120,969 170,374 69,522 588,982
Debentures payable (1) 43,750 2,000 18,600 34,410 98,760
Debentures payable- capital securities (1) - - - 30,000 30,000
Accrued interest on all debentures (1) 8,203 838 2,737 3,567 15,345
Note payable - - - 258 258
- --------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $280,070 $123,807 $ 191,711 $137,757 $733,345
- --------------------------------------------------------------------------------------------------
GAP (repricing differences) $(24,093) $152,805 $ 9,819 $(66,246) $ 72,285
- --------------------------------------------------------------------------------------------------
Cumulative GAP $(24,093) $128,712 $ 138,531 $ 72,285 $ 72,285
- --------------------------------------------------------------------------------------------------
Cumulative GAP to total assets -2.9% 15.6% 16.8% 8.8% 8.8%
- --------------------------------------------------------------------------------------------------
19
<FN>
Significant assumptions used in preparing the preceding gap table follow:
(1) Floating-rate loans and debentures payable are included in the period
in which their interest rates are next scheduled to adjust rather than in
the period in which they mature. Fixed-rate loans and debentures payable
are scheduled, including repayments, according to their contractual
maturities. Deferred loan fees are excluded from this analysis; (2)
securities are scheduled according to the earlier of their contractual
maturity or the date in which the interest rate is scheduled to increase.
The effects of possible prepayments that may result from the issuer's right
to call a security before its contractual maturity date are not considered;
(3) interest checking, savings and money market deposits are regarded as
ready accessible withdrawable accounts; and certificates of deposit are
scheduled through their maturity dates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of: retail deposits obtained through the Bank's branch offices
and through the mail; amortization, satisfactions and repayments of loans; the
maturities and calls of securities; sales of debentures; borrowings in the
federal funds market and cash provided by operating activities. As a member of
the FHLB and the FRB, the Bank also has the ability to borrow from these
institutions on a secured basis that amounted to approximately $127,000,000 at
September 30, 2003. Additionally, the Bank has agreements with correspondent
banks whereby it may borrow on an overnight and unsecured basis up to
$16,000,000. At September 30, 2003, there were no outstanding borrowings under
any of these lines.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
---------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are in the form of commitments to extend credit, unused
lines of credit and standby letters of credit, and may involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract amounts of these
instruments reflect the extent of involvement the Company has in these financial
instruments. The Company's maximum exposure to credit risk is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination clauses
and require payment of fees. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the counterparty. Standby letters of credit
are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
The Company believes that it can fund all of its commitments from the sources of
funds noted above.
The contractual amounts of the Company's off-balance sheet financial instruments
is as follows:
At At
-------------- -------------
September 30, December 31,
-------------- -------------
($in thousands) 2003 2002
---------------------------------------------------------
Unfunded loan commitments $ 105,980 $ 68,244
Available lines of credit 865 533
Standby letters of credit 100 1,267
---------------------------------------------------------
$ 106,945 $ 70,044
---------------------------------------------------------
Management is not aware of any trends, known demand, commitments or
uncertainties which are expected to have a material impact on future operating
results, liquidity or capital resources.
20
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
AND 2002
--------
OVERVIEW
- --------
Consolidated net earnings in the third quarter of 2003 increased 20% to
$2,531,000, from $2,104,000 in the third quarter of 2002. Diluted earnings per
share amounted to $0.42 in the third quarter of 2003, compared to $0.41 in the
third quarter of 2002. The per share computation for the 2003 period included a
higher number of common shares outstanding resulting from the exercise of common
stock warrants and conversion of debentures.
The improvement in quarterly earnings was attributable to increases in both the
Company's net interest and dividend income and noninterest income. Net interest
and dividend income was higher by $1,227,000, while noninterest income increased
by $302,000. These improvements were partially offset by a $410,000 increase in
the provision for loan losses, a $218,000 increase in noninterest expenses and a
$474,000 increase in the provision for income taxes.
Selected information regarding results of operations for the third quarter of
2003 follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($in thousands) Company Bank Corp Trusts Corp (2) Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 288 $ 10,151 $ 2,442 $ 423 $ 1 $ (460) $ 12,845
Interest expense 726 4,592 1,811 410 - (460) 7,079
---------------------------------------------------------------------------------------
Net interest and dividend income (438) 5,559 631 13 1 - 5,766
Provision for loan loss reserves 8 570 24 - - - 602
Noninterest income 73 874 706 - 38 (653) 1,038
Noninterest expenses 179 1,871 377 13 25 (653) 1,812
---------------------------------------------------------------------------------------
Earnings before taxes (552) 3,992 936 - 14 - 4,390
Provision for income taxes (252) 1,678 427 - 6 - 1,859
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings $ (300) $ 2,314 $ 509 $ - $ 8 $ - $ 2,531
- ------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) $ 375 $ (375) $ - $ - $ - $ - $ -
Net earnings for same period of 2002 $ (223) $ 1,807 $ 520 $ - $ - $ - $ 2,104
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company provide funds for the debt service on the Junior Debentures-Capital Securities.
(2) Results are from date of acquisition, June 2, 2003 through September 30, 2003.
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $5,766,000 in the third quarter of
2003, from $4,539,000 in the same period of 2002. The increase was attributable
to growth of $122,128,000 in average interest-earning assets and a lower cost of
funds. The growth in assets consisted of new mortgage loans of $144,582,000,
partially offset by a decrease in security and short-term investments
aggregating $22,454,000. The net growth in assets was funded by $82,937,000 of
new deposits, $18,515,000 of additional borrowed funds and a $15,094,000
increase in stockholders' equity.
The Company's net interest margin increased to 3.03% in the third quarter of
2003, from 2.85% in the same period of 2002. The increase was due to the
Company's cost of funds decreasing at a faster pace than its yield on
interest-earning assets. In a declining interest rate environment, the yield on
interest-earning assets decreased 40 basis points (bp) to 6.76% in the 2003
quarter 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 56 bp to 4.12% in the 2003 quarter due
to lower rates paid on deposit accounts and $41,500,000 of floating-rate
debentures. The debentures are indexed to the JPMorgan Chase Bank prime rate,
which has decreased by a total of 75 bp from October 1, 2002 to September 30,
2003.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
21
-------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------------- ----------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $605,374 $ 12,172 7.98% $460,792 $ 10,254 8.83%
Securities 121,674 609 1.99 152,944 1,064 2.76
Other interest-earning assets 26,808 64 0.95 17,992 78 1.72
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 753,856 $ 12,845 6.76% 631,728 $ 11,396 7.16%
- -----------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 12,329 14,395
Total assets $766,185 $646,123
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 10,713 $ 39 1.44% $ 9,404 $ 53 2.24%
Savings deposits 32,108 145 1.79 30,719 193 2.49
Money market deposits 145,134 651 1.78 131,775 826 2.49
Certificates of deposit 368,707 3,715 4.00 303,196 3,531 4.62
- -----------------------------------------------------------------------------------------------------------------
Total deposit accounts 556,662 4,550 3.24 475,094 4,603 3.84
- -----------------------------------------------------------------------------------------------------------------
Debentures and related interest payable 107,565 2,110 7.78 91,321 1,874 8.14
Junior debentures - capital securities 17,283 414 9.50 15,000 375 9.92
Note payable 259 5 7.00 271 5 7.00
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 125,107 2,529 8.02 106,592 2,254 8.39
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 681,769 $ 7,079 4.12% 581,686 $ 6,857 4.68%
- -----------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,793 4,424
Noninterest-bearing liabilities 18,207 14,691
Stockholders' equity 60,416 45,322
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $766,185 $646,123
- -----------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 5,766 2.64% $ 4,539 2.48%
- -----------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 72,087 3.03% $ 50,042 2.85%
- -----------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11 1.09
- -----------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (1) 1.32% 1.30%
Return on average equity (1) 16.76% 18.57%
Noninterest expense to average assets (1) 0.95% 0.99%
Efficiency ratio (2) 27% 30%
Average stockholders' equity to average assets 7.89% 7.01%
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses
plus noninterest income.
PROVISION FOR LOAN LOSS RESERVES
- ------------------------------------
The provision for loan losses increased to $602,000 in the third quarter of 2003
from $192,000 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 17 of this report. The higher provision for the 2003
quarter was a function of loan growth, which amounted to $56,206,000 in the 2003
quarter, versus $4,648,000 in the 2002 quarter.
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).
Noninterest income increased $302,000 to $1,038,000 in the third quarter of
2003, from $736,000 in the third quarter of 2002, primarily due to higher income
from loan prepayments and mortgage lending activities of $229,000 and $34,000,
respectively.
22
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased $218,000 to $1,812,000 in the third quarter of
2003, from $1,594,000 in the same quarter of 2002. The increase was largely due
to a $178,000 increase in compensation and benefits expense, a $42,000 increase
in data processing expense and a $61,000 increase in director expense. These
items were partially offset by a $48,000 decrease in occupancy and equipment
expenses and a $29,000 decrease in foreclosed real estate expense.
The increase in compensation and benefits expense was due to $171,000 resulting
from additional staff (60 employees at September 30, 2003 vs. 56 at September
30, 2002), salary increases and a higher cost of employee benefits, and $102,000
associated with common stock warrants held by employees and directors (as a
result of an increase in the Company's Class A common stock price during the
period). These items were partially offset by a $57,000 increase in SFAS 91
direct fee income (due to increased loan originations) and bonus payments of
$38,000 made to the Chairman of the Company in the 2002 quarter that did not
recur in 2003. See note 5 to the condensed consolidated financial statements in
this report for information regarding common stock warrants.
The increase in data processing expense was due to growth in the Bank's assets.
The Bank engages a third-party servicer for its main data processing and the fee
is a function of the Bank's total assets ($696,275,000 at September 30, 2003,
versus $556,703,000 at September 30, 2002).
The increase in director expense was due to increases in director and committee
fees per meeting beginning in June 2003. The decrease in occupancy and equipment
expenses was due to higher depreciation expense being recorded in the 2002
quarter in connection with the disposal of various equipment by the Bank.
The decrease in foreclosed real estate expense was due to the sale of a
foreclosed property in the second quarter of 2003. Foreclosed real estate
expense, net of any rental income, consists mostly of real estate taxes,
insurance, utilities, maintenance, professional fees and other charges required
to protect the Company's interest in the property.
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased $474,000 to $1,859,000 in the third
quarter of 2003, from $1,385,000 in the third quarter of 2002, due to higher
pre-tax income. The Company's effective tax rate (inclusive of state and local
taxes) amounted to 42.3% in the 2003 period, compared to 39.7% in the 2002
period. The higher rate for the 2003 period is due to a larger portion of
consolidated taxable income being generated from New York, which has a higher
income tax rate than Florida.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2003 AND 2002
-------------
OVERVIEW
- --------
Consolidated net earnings for the nine-months ended September 30, 2003 increased
38% to $6,898,000, or $1.19 per diluted share, from $4,996,000, or $1.01 per
diluted share, in the same period of 2002. The improvement was due to increases
in net interest and dividend income and noninterest income. Net interest and
dividend income increased by $3,454,000, while noninterest income increased by
$1,155,000. These improvements were partially offset by a $739,000 increase in
noninterest expenses, a $412,000 increase in the provision for loan losses and a
$1,556,000 increase in the provision for income taxes.
Selected information regarding results of operations for the nine-months ended
September 30, 2003 follows:
Intervest Intervest Intervest Intervest Inter-
Holding National Mortgage Statutory Securities Company
($in thousands) Company Bank Corp Trusts Corp (2) Balances Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 841 $ 29,264 $ 6,919 $ 1,186 $ 2 $ (1,272) $ 36,940
Interest expense 2,098 13,621 5,234 1,150 - (1,272) 20,831
---------------------------------------------------------------------------------------
Net interest and dividend income (1,257) 15,643 1,685 36 2 - 16,109
Provision for loan loss reserves 36 1,223 117 - - - 1,376
Noninterest income 173 2,136 1,915 - 38 (1,719) 2,543
Noninterest expenses 544 5,450 1,137 36 27 (1,719) 5,475
---------------------------------------------------------------------------------------
Earnings before taxes (1,664) 11,106 2,346 - 13 - 11,801
Provision for income taxes (756) 4,585 1,068 - 6 - 4,903
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (908) $ 6,521 $ 1,278 $ - $ 7 $ - $ 6,898
- ------------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) $ 1,125 $ (1,125) $ - $ - $ - $ - $ -
Net earnings for same period of 2002 $ (804) $ 4,527 $ 1,273 $ - $ - $ - $ 4,996
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company provide funds for the debt service on the Junior Debentures-Capital Securities.
(2) Results are from date of acquisition, June 2, 2003 through September 30, 2003.
23
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income increased to $16,109,000 for the nine-months
ended September 30, 2003, from $12,655,000 in the same period of 2002. The
increase was attributable to growth of $145,776,000 in average interest-earning
assets and a lower cost of funds. The growth consisted of new mortgage loans of
$129,755,000 and new security and short-term investments aggregating
$16,021,000, which was funded by $111,975,000 of new deposits, $15,499,000 of
additional borrowed funds and a $13,790,000 increase in stockholders' equity.
The Company's net interest margin increased to 2.99% in the 2003 period, from
2.94% in the 2002 period. The increase was due to the Company's cost of funds
decreasing at a faster pace than its yield on interest-earning assets. In a
declining interest rate environment, the yield on interest-earning assets for
the 2003 period decreased 61 bp to 6.85%, while cost of funds decreased 68 bp to
4.24%. The reasons for the decreases are the same as those discussed in the
"Comparison of Results of Operations for the Quarters Ended September 30, 2003
and 2002."
The table below provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. For a further
description of the table, see the section "Comparison of Results of Operations
for the Quarters Ended September 30, 2003 and 2002."
--------------------------------------------------------------
Nine-Months Ended
--------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $557,961 $ 34,455 8.26% $428,206 $ 29,046 9.07%
Securities 138,155 2,266 2.19 133,491 2,889 2.89
Other interest-earning assets 25,118 219 1.17 13,761 180 1.75
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 721,234 $ 36,940 6.85% 575,458 $ 32,115 7.46%
- -----------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 13,793 14,654
- -----------------------------------------------------------------------------------------------------------------
Total assets $735,027 $590,112
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 11,229 $ 140 1.67% $ 9,535 $ 173 2.43%
Savings deposits 31,679 457 1.93 28,958 590 2.72
Money market deposits 141,842 2,043 1.93 115,010 2,318 2.69
Certificates of deposit 352,139 10,881 4.13 271,517 9,791 4.82
- -----------------------------------------------------------------------------------------------------------------
Total deposit accounts 536,889 13,521 3.37 425,020 12,872 4.05
- -----------------------------------------------------------------------------------------------------------------
Federal funds purchased - - - 114 2 1.96
Debentures and related interest payable 103,456 6,134 7.93 88,644 5,451 8.22
Junior debentures - capital securities 15,769 1,162 9.85 15,000 1,123 10.01
Note payable 262 14 7.00 230 12 7.00
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 119,487 7,310 8.18 103,988 6,588 8.47
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 656,376 $ 20,831 4.24% 529,008 $ 19,460 4.92%
- -----------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,306 5,200
Noninterest-bearing liabilities 16,604 12,953
Stockholders' equity 56,741 42,951
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $735,027 $590,112
- -----------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 16,109 2.61% $ 12,655 2.54%
- -----------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 64,858 2.99% $ 46,450 2.94%
- -----------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.10 1.09x
- -----------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (1) 1.25% 1.13%
Return on average equity (1) 16.21% 15.51%
Noninterest expense to average assets (1) 0.99% 1.07%
Efficiency ratio (2) 29% 34%
Average stockholders' equity to average assets 7.72% 7.28%
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1) Annualized
(2) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses
plus noninterest income.
24
PROVISION FOR LOAN LOSS RESERVES
- ------------------------------------
The provision for loan losses was $1,376,000 for the nine-months ended September
30 2003, versus $964,000 in the same period of 2002. The provisions were a
function of loan growth ($143,502,000 in the 2003 period and $86,934,000 in the
2002 period).
NONINTEREST INCOME
- -------------------
Noninterest income increased $1,155,000 to $2,543,000 for the nine-months ended
September 30 2003, from $1,388,000 in the same period of 2002. The increase was
due to higher income from loan prepayments and increased fees earned from loan
commitments that expired during the period of $905,000 and $146,000,
respectively.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased $739,000 to $5,475,000 for the nine-months ended
September 30 2003, from $4,736,000 in the same period of 2002. The increase was
largely due to the following: a $404,000 increase in compensation and benefits
expense; a $114,000 increase in data processing expense; a $107,000 increase in
operational charges; a $83,000 increase in director expense and a $36,000
increase in FDIC and general insurance expense. These items were partially
offset by a $47,000 decrease in occupancy and equipment expenses and a $12,000
decrease in advertising expense.
The increase in compensation and benefits expense was due to $336,000 resulting
from additional staff (60 employees at September 30, 2003 vs. 56 at September
30, 2002), salary increases and a higher cost of employee benefits, and $309,000
associated with common stock warrants held by employees and directors (largely
as a result of an increase in the Company's Class A common stock price during
the period). These items were partially offset by a $127,000 increase in SFAS 91
direct fee income (due to increased loan originations as well as a higher amount
recognized per loan origination) and bonus payments of $114,000 made to the
Chairman of the Company in 2002 that did not recur in 2003. See note 5 to the
condensed consolidated financial statements in this report for information
regarding common stock warrants.
The increase in operational charges was a direct function of growth in the
Bank's transactional deposit accounts. The increase in FDIC and general
insurance expense was due to higher FDIC premium expense due to deposit growth
and higher general insurance premiums due to rate increases. The decrease in
advertising expenses was due to less advertising for loans and deposits.
The reasons for the changes in data processing expense, director expense and
occupancy and equipment expenses are the same as those discussed in the section
"Comparison of Results of Operations for the Quarters Ended September 30, 2003
and 2002."
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased $1,556,000 to $4,903,000 for the
nine-months ended September 30 2003, from $3,347,000 in the same period of 2002,
due to higher pre-tax income. The Company's effective tax rate (inclusive of
state and local taxes) amounted to 41.5% in the 2003 period, compared to 40.1%
in the 2002 period. The higher rate for the 2003 period is due to a larger
portion of consolidated taxable income being generated from New York, which has
a higher income tax rate than Florida.
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 on Form 10-K for the year
ended December 31, 2002.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within its established guidelines, the adverse impact of changes in interest
rates on the Company's net interest income and capital, while adjusting the
Company's asset-liability structure to obtain the maximum yield versus cost
spread on that structure. Management relies primarily on its asset-liability
structure to
25
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
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controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the Chief Executive
and Chief Financial Officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes in
------------------------------
its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive and Chief Financial Officer.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
31 - Certification of the principal executive and financial officer
pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32 - Certification of the principal executive and financial officer
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(b) A current report on Form 8-K dated September 17, 2003 was filed by the
registrant to report, under Item 9, to report the completion of the sale of
Trust Preferred Securities.
A current report on Form 8-K dated July 15, 2003 was filed by the
registrant to provide, under Item 9, to furnish its quarterly earnings
release for the period ended June 30, 2003.
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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 12, 2003 By: /s/ Lowell S. Dansker
-------------------------
Lowell S. Dansker, Vice Chairman, President
and Treasurer (Principal Executive and
Financial Officer)
Date: November 12, 2003 By: /s/ Lawrence G. Bergman
---------------------------
Lawrence G. Bergman, Vice President and
Secretary
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