EX-13.2 5 doc4.txt ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2003 -------------- Commission File No. 000-23377 --------- INTERVEST BANCSHARES CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3699013 ------------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation) 10 Rockefeller Plaza, Suite 1015 New York, New York 10020-1903 -------------------------------------------------------------------- (Address of principal executive offices) (212) 218-2800 -------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES XX NO . -- -- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): YES NO XX . -- -- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding: -------------------- ------------------- Class A Common Stock, $1.00 par value per share 4,348,087 Outstanding at April 25, 2003 ----------------------------------------------- --------------------------------------- Class B Common Stock, $1.00 par value per share 355,000 Outstanding at April 25, 2003 ----------------------------------------------- ---------------------------------------
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES FORM 10-Q March 31, 2003 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002......................... 2 Condensed Consolidated Statements of Earnings (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 3 Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 4 Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Quarters Ended March 31, 2003 and 2002................................. 6 Notes to Condensed Consolidated Financial Statements (Unaudited) ................. 7 Review by Independent Certified Public Accountants ............................... 9 Report on Reviews by Independent Certified Public Accountants .................... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 22 Item 4. Controls and Procedures ................................................. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................ 22 Item 2. Changes in Securities and Use of Proceeds................................ 22 Item 3. Defaults Upon Senior Securities.......................................... 22 Item 4. Submission of Matters to a Vote of Security Holders...................... 22 Item 5. Other Information........................................................ 22 Item 6. Exhibits and Reports on Form 8-K ........................................ 22 Signatures............................................................................... 23 Certification............................................................................ 24
Private Securities Litigation Reform Act Safe Harbor Statement The Company is making this statement in order to satisfy the "Safe Harbor" provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this report on Form 10-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions, the development of an interest rate environment that may adversely affect the Company's interest rate spread, other income or cash flow anticipated from the Company's operations, investment and lending activities; and changes in laws and regulations affecting banks and bank holding companies. 1
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Balance Sheets March 31, December 31, ($ in thousands, except par value) 2003 2002 ------------------------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) Cash and due from banks $ 8,005 $10,351 Federal funds sold 17,812 9,114 Commercial paper 8,600 7,950 Other short-term investments 3,313 3,434 -------------------------------- Total cash and cash equivalents 37,730 30,849 Time deposits with banks 2,000 2,000 Securities held to maturity, net (estimated fair value of $137,967 and $146,560, 137,243 145,694 respectively) Federal Reserve Bank stock, at cost 1,114 1,108 Loans receivable (net of allowance for loan losses of $4,955 and $4,611, respectively) 527,637 485,301 Accrued interest receivable 4,606 4,263 Loan fees receivable 4,139 3,706 Premises and equipment, net 6,029 6,098 Foreclosed real estate 1,081 1,081 Deferred income tax asset 2,245 1,997 Deferred debenture offering costs, net 3,807 3,498 Other assets 314 384 ------------------------------------------------------------------------------------------------------------------------------- Total assets $727,945 $685,979 ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest-bearing demand deposit accounts $ 4,597 $ 5,924 Interest-bearing deposit accounts: Checking (NOW) accounts 14,370 10,584 Savings accounts 32,848 30,174 Money market accounts 139,930 134,293 Certificate of deposit accounts 346,353 324,983 -------------------------------- Total deposit accounts 538,098 505,958 Subordinated debentures payable 90,530 84,430 Guaranteed preferred beneficial interest in junior subordinated debentures 15,000 15,000 Note payable 263 266 Accrued interest payable on all debentures 14,345 13,872 Accrued interest payable on deposits 929 895 Mortgage escrow funds payable 8,959 5,894 Official checks outstanding 2,117 4,373 Other liabilities 2,704 2,165 ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 672,945 632,853 ------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock (300,000 shares authorized, none issued) - - Class A common stock ($1.00 par value, 9,500,000 shares authorized, 4,348,087 shares issued and outstanding) 4,348 4,348 Class B common stock ($1.00 par value, 700,000 shares authorized, 355,000 shares issued and outstanding) 355 355 Additional paid-in-capital, common 24,207 24,134 Retained earnings 26,090 24,289 ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 55,000 53,126 =============================================================================================================================== Total liabilities and stockholders' equity $727,945 $685,979 ===============================================================================================================================
See accompanying notes to condensed consolidated financial statements. 2
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) Quarter Ended March 31, -------------------------- ($ in thousands, except per share data) 2003 2002 ------------------------------------------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND INCOME Loans receivable $10,670 $8,820 Securities 887 842 Other interest-earning assets 68 49 ------------------------------------------------------------------------------------------------------------------------------ Total interest and dividend income 11,625 9,711 ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Deposits 4,453 3,922 Subordinated debentures 1,957 1,773 Junior debentures - capital securities 374 374 Note payable 4 2 Federal funds purchased - 2 ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 6,788 6,073 ------------------------------------------------------------------------------------------------------------------------------ Net interest and dividend income 4,837 3,638 Provision for loan loss reserves 344 346 ------------------------------------------------------------------------------------------------------------------------------ Net interest and dividend income after provision for loan loss reserves 4,493 3,292 ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Customer service fees 38 35 Income from mortgage lending activities 153 102 Income from the early repayment of mortgage loans 141 137 All other (3) - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 329 274 ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries and employee benefits 867 716 Occupancy and equipment, net 320 315 Data processing 148 118 Advertising and promotion 15 7 Professional fees and services 107 80 Stationery, printing and supplies 42 33 FDIC and general insurance 57 42 Postage and delivery 25 24 All other 203 127 ------------------------------------------------------------------------------------------------------------------------------ Total noninterest expenses 1,784 1,462 ------------------------------------------------------------------------------------------------------------------------------ Earnings before taxes 3,038 2,104 Provision for income taxes 1,237 856 ============================================================================================================================== Net earnings $ 1,801 $ 1,248 ============================================================================================================================== Basic earnings per share $ 0.38 $ 0.32 Diluted earnings per share $ 0.32 $ 0.30 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 Ended March 31, ----------------------- ($ in thousands) 2003 2002 --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Net earnings $1,801 $1,248 --------------------------------------------------------------------------------------------------------------------------------- Net unrealized holding losses on available-for-sale securities - (46) Provision for income taxes related to unrealized losses on available-for-sale securities - (20) --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive loss, net of tax - (26) --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income, net of tax $1,801 $1,222 ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 4
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Quarter Ended March 31, ----------------------------- ($ in thousands) 2003 2002 ----------------------------------------------------------------------------------------------------------------------- CLASS A COMMON STOCK Balance at beginning of period $ 4,348 $ 3,545 Issuance of 11,500 shares upon the exercise of warrants in 2002 - 11 ----------------------------------------------------------------------------------------------------------------------- Balance at end of period 4,348 3,556 ----------------------------------------------------------------------------------------------------------------------- CLASS B COMMON STOCK ----------------------------------------------------------------------------------------------------------------------- Balance at beginning and end of period 355 355 ----------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN-CAPITAL, COMMON Balance at beginning of period 24,134 19,001 Compensation related to vesting of certain Class B stock warrants 6 6 Compensation related to certain Class A stock warrants modified in 2002 67 - Issuance of 11,500 shares upon the exercise of Class A stock warrants in 2002, inclusive of tax benefits - 65 ----------------------------------------------------------------------------------------------------------------------- Balance at end of period 24,207 19,072 ----------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 24,289 17,383 Net earnings for the period 1,801 1,248 ----------------------------------------------------------------------------------------------------------------------- Balance at end of period 26,090 18,631 ----------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period - 111 Net change in accumulated other comprehensive income, net - (26) ----------------------------------------------------------------------------------------------------------------------- Balance at end of period - 85 ----------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity at end of period $55,000 $41,699 -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 5
Intervest Bancshares Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Quarter Ended March 31, -------------------------- ($ in thousands) 2003 2002 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 1,801 $ 1,248 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 131 151 Provision for loan loss reserves 344 346 Deferred income tax benefit (248) (155) Amortization of deferred debenture offering costs 245 218 Compensation expense related to common stock and warrants 73 6 Amortization of premiums, fees and discounts, net (197) (280) Net increase in accrued interest payable on debentures 473 994 Net decrease in official checks outstanding (2,256) (1,616) Net change in all other assets and liabilities 1,097 663 ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,463 1,575 ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net decrease in interest-earning time deposits with banks - 100 Maturities and calls of securities held to maturity 27,665 18,000 Purchases of securities held to maturity (19,815) (14,158) Net increase in loans receivable (43,112) (36,989) Purchases of Federal Reserve Bank stock, net (6) (450) Purchases of premises and equipment, net (62) (521) ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (35,330) (34,018) ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, savings, NOW and money market deposits 10,770 36,287 Net increase in certificates of deposit 21,370 5,295 Net increase in mortgage escrow funds payable 3,065 2,832 Principal repayments of debentures (1,400) - Principal repayments of note payable (3) - Proceeds from issuance of debentures, net of issuance costs 6,946 5,325 Proceeds from issuance of common stock, net of issuance costs - 76 ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 40,748 49,815 ----------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 6,881 17,372 Cash and cash equivalents at beginning of period 30,849 24,409 =================================================================================================================================== Cash and cash equivalents at end of period $ 37,730 $ 41,781 =================================================================================================================================== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 6,036 $ 4,880 Income taxes 963 1,000 Noncash activities: Accumulated other comprehensive income, change in unrealized loss on securities available for sale, net of tax - (26) -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 6 Intervest Bancshares Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- Note 1 - General The condensed consolidated financial statements of Intervest Bancshares Corporation and Subsidiaries in this report have not been audited except for the information derived from the audited Consolidated Balance Sheet as of December 31, 2002. The financial statements in this report should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. The condensed consolidated financial statements include the accounts of Intervest Bancshares Corporation (a financial holding company referred to by itself as the "Holding Company") and its subsidiaries, Intervest National Bank (the Bank), Intervest Mortgage Corporation and Intervest Statutory Trust I. The Holding Company and its subsidiaries are referred to as the "Company" on a consolidated basis. The Holding Company's primary business activity is the ownership of the aforementioned subsidiaries. The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Center in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank conducts a full-service commercial banking business, which consists of attracting deposits from the general public and investing those funds, together with other sources of funds, primarily through the origination of commercial and multifamily real estate loans, and through the purchase of security investments. Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation, are located in Rockefeller Center in New York City. Intervest Mortgage Corporation is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage, junior mortgage and wraparound mortgage loans. Intervest Statutory Trust I was formed in December 2001 for the sole purpose of issuing $15,000,000 of capital securities as more fully described in note 9 to the consolidated financial statements in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. In the opinion of management, all material adjustments necessary for a fair presentation of financial condition and results of operations for the interim periods presented in this report have been made. These adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of results that may be expected for the entire year or any other interim period. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the current periods' presentation. Note 2 - Allowance for Loan Loss Reserves The Company monitors its loan portfolio to determine the appropriate level of the allowance for loan loss reserves based on various factors. These factors include: the type and level of loans outstanding; volume of loan originations; overall portfolio quality; loan concentrations; specific problem loans, historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's assessment of the current and anticipated economic conditions in the Company's lending regions. Activity in the allowance for loan loss reserves for the periods indicated is summarized as follows: Quarter Ended March 31, ------------------------------ ($ in thousands) 2003 2002 -------------------------------------------------------------------------------- Balance at beginning of period $4,611 $3,380 Provision charged to operations 344 346 Recoveries of previous chargeoffs (1) - 107 -------------------------------------------------------------------------------- Balance at end of period $4,955 $3,833 -------------------------------------------------------------------------------- (1) Represents proceeds received from the sale of collateral from a loan that was charged off prior to 1997. 7 Intervest Bancshares Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- Note 3 - Earnings Per Share (EPS) Basic EPS is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by dividing adjusted net earnings by the weighted-average number of shares of common stock outstanding and dilutive potential common stock shares that may be outstanding in the future. Potential common stock shares may arise from outstanding dilutive common stock warrants (as computed by the "treasury stock method") and convertible debentures (as computed by the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding stock warrants and convertible debentures were converted into common stock that then shared in the Company's adjusted earnings (as adjusted for interest expense, net of tax, that would no longer occur if the debentures were converted). Net earnings applicable to common stock and the weighted-average number of shares used for basic and diluted earnings per share computations are summarized in the table that follows:
Quarter Ended March 31, -------------------------- ($ in thousands, except share and per share amounts) 2003 2002 -------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Net earnings applicable to common stockholders $1,801 $1,248 Average number of common shares outstanding 4,703,087 3,901,290 -------------------------------------------------------------------------------------------------------------------------------- Basic net earnings per share amount $0.38 $0.32 -------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Net earnings applicable to common stockholders $1,801 $1,248 Adjustment to net earnings from assumed conversion of debentures (1) 114 - -------------------------- Adjusted net earnings for diluted earnings per share computation $1,915 $1,248 -------------------------- Average number of common shares outstanding: Common shares outstanding 4,703,087 3,901,290 Potential dilutive shares resulting from exercise of warrants (2) 230,516 263,944 Potential dilutive shares resulting from conversion of debentures (3) 1,010,803 - -------------------------- Total average number of common shares outstanding used for dilution 5,944,406 4,165,234 -------------------------------------------------------------------------------------------------------------------------------- Diluted net earnings per share amount $0.32 $0.30 -------------------------------------------------------------------------------------------------------------------------------- (1) Represents interest expense on dilutive convertible debentures, net of tax, that would not occur if they were assumed converted. (2) Diluted EPS includes shares that would be outstanding if dilutive common stock warrants and convertible debentures were assumed to be exercised/converted during the period. Certain warrants are not considered in diluted EPS computations because their exercise price per share exceeded the average market price of Class A common stock during those periods as follows: Warrants to purchase 1,134,000 shares of common stock at prices ranging from $10.00 to $10.01 per share were not considered in the 2002 quarterly computation. All outstanding warrants of 1,750,000 for the 2003 quarterly computation were considered. (3) Convertible debentures outstanding at March 31, 2002 (consisting of principal and accrued interest for this purpose) totaling $9,348,000 were convertible into common stock at a price of $10.01 per share, but were not considered in the computations of diluted EPS for the 2002 quarter because they were not dilutive. For the 2003 computation, convertible debentures outstanding at March 31, 2003 totaling $10,118,000 were convertible into common stock at a price of $10.01 per share and were considered dilutive, which resulted in additional common shares.
Note 4 - Bank Regulatory Capital The Bank is required to maintain certain minimum regulatory capital requirements. The Bank is a well-capitalized institution as defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management believes that there are no current conditions or events outstanding which would change the Bank's designation as a well-capitalized institution. The following is a summary at March 31, 2003 of the minimum regulatory capital requirements and the actual capital of the Bank on a percentage basis:
Actual Minimum To Be Considered Ratios Requirement Well Capitalized ------ ----------- ---------------- Total capital to risk-weighted assets 11.82% 8.00% 10.00% Tier 1 capital to risk-weighted assets 10.83% 4.00% 6.00% Tier 1 capital to total average assets - leverage ratio 8.72% 4.00% 5.00%
8 Intervest Bancshares Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- Note 5 - Common Stock Warrants The Holding Company has common stock warrants outstanding that entitle the registered holders thereof to purchase one share of common stock for each warrant. All warrants are exercisable when issued, except for certain Class B common stock warrants. The warrants have been issued in connection with public stock offerings, to directors and employees of the Company and to outside third parties for performance of services. In 2001, the Holding Company modified the terms of its Class A and Class B warrants as follows: the expiration date of all warrants exercisable at $6.67 per share were extended one year beyond their original expiration dates effective October 4, 2001, and the exercise price of certain Class A warrants (exercisable at $12.50 and $16.00 per share as of December 31, 2001) were reduced to $10.01 per share commencing January 1, 2002 until their original expiration date of December 31, 2002. In 2002, the $10.01 per share warrants were further modified by extending their expiration date to December 31, 2003. Data concerning common stock warrants is as follows:
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class A Common Stock Warrants: $6.67 $10.01 $10.01 Warrants Exercise Price ------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2002 and March 31, 2003 501,465 931,545 122,000 1,555,010 $ 8.93 ------------------------------------------------------------------------------------------------------------------------------- Remaining contractual life in years at March 31, 2003 (1) 3.8 0.8 0.8 1.7 ------------------------------------------------------------------------------------------------------------------------------- (1) The Holding Company may, at its sole discretion, set an earlier expiration date.
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class B Common Stock Warrants: $6.67 $10.00(1) Warrants Exercise Price ------------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2002 and March 31, 2003 145,000 50,000 195,000 $ 7.52 ------------------------------------------------------------------------------------------------------------------------------- Remaining contractual life in years at March 31, 2003 4.8 4.8 4.8 ------------------------------------------------------------------------------------------------------------------------------- (1) At March 31, 2003 and December 31, 2002, 35,500 of these warrants were immediately exercisable. An additional 7,100 warrants vest and become exercisable on April 27th of 2003 and the remaining 7,400 on April 27, 2004. The warrants, which expire on January 31, 2008, become fully vested earlier upon certain conditions.
The Company uses the intrinsic value-based method prescribed under APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock warrants. Under this method, compensation expense related to stock warrants granted to employees is the excess, if any, of the market price of the stock as of the grant or modification date or over the exercise price of the warrant. In accordance with APB 25, approximately $6,000 of compensation expense was included in salaries and employee benefits expense for the quarter ended March 31, 2003 and 2002 in connection with Class B warrants that vested during these periods. For warrants granted to employees whose exercise price was reduced to $10.01 effective January 1, 2002 and whose expiration date was extended in 2002, compensation expense of $67,000 was recorded in the quarter ended March 31, 2003 under variable rate accounting as prescribed under APB 25. No other compensation expense was recorded during the first quarter of 2003 and 2002 associated with common stock warrants. Had compensation expense been determined based on the estimated fair value of the warrants in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would not have been different from the amounts reported for the periods included in this report on Form 10-Q. 9 Intervest Bancshares Corporation and Subsidiaries Review by Independent Certified Public Accountants Hacker, Johnson & Smith, P.A., P.C. the Company's independent certified public accountants, have made a limited review of the financial data as of March 31, 2003 and for the three-month periods ended March 31, 2003 and 2002 presented in this document, in accordance with standards established by the American Institute of Certified Public Accountants. As part of Hacker, Johnson & Smith, P.A., P.C.'s review, Eisner, LLP was relied upon for their limited review of Intervest Mortgage Corporation, a wholly owned subsidiary of the Company. Their report furnished pursuant to Article 10 of Regulation S-X is included herein. 10 Report on Review by Independent Certified Public Accountants The Board of Directors and Stockholders Intervest Bancshares Corporation New York, New York: We have reviewed the accompanying condensed consolidated balance sheet of Intervest Bancshares Corporation and Subsidiaries (the "Company") as of March 31, 2003 and the related condensed consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for the three-month periods ended March 31, 2003 and 2002 included in this report. These financial statements are the responsibility of the Company's management. We were furnished with the report of other accountants on their reviews of the interim financial information of Intervest Mortgage Corporation, whose total assets as of March 31, 2003 constituted 14.3% of the related consolidated total, and whose net interest income, noninterest income and net earnings for the three-month period then ended, constituted 9.0%, 18.5%, and 15.8%, respectively, and whose net interest income, noninterest income and net loss for the three-month period ended March 31, 2002, constituted 13.5%, 25.2% and 21.2%, respectively, of the related consolidated totals. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews and the report of other accountants, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, we, based on our audits and the report of other auditors, expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Hacker, Johnson & Smith, P.A., P.C. --------------------------------------- HACKER, JOHNSON & SMITH, P.A.,P.C. Tampa, Florida April 25, 2003 11 Report on Review by Independent Certified Public Accountants Board of Directors and Stockholder Intervest Mortgage Corporation New York, New York: We have reviewed the condensed consolidated balance sheet of Intervest Mortgage Corporation and subsidiaries (the "Company") as of March 31, 2003, and the related condensed consolidated statements of operations, changes in stockholder's equity and cash flows for the three-month periods ended March 31, 2003 and 2002 (not presented separately herein). These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2002 and the related consolidated statements of operations, changes in stockholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated January 23, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2002 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Eisner, LLP --------------- EISNER,LLP New York, New York April 18, 2003 12 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Intervest Bancshares Corporation has three wholly owned subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and Intervest Statutory Trust I (hereafter referred to collectively as the "Company" on a consolidated basis). Intervest Bancshares Corporation and Intervest National Bank may be referred to individually as the "Holding Company" and the "Bank," respectively. The Holding Company's primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending. From time to time, the Holding Company also sells debentures to raise funds for working capital purposes. The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Center, in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank conducts a personalized commercial and consumer banking business and attracts deposits from the areas served by its banking offices. It also provides internet banking services through its web site: www.intervestnatbank.com, which can attract deposit customers from outside its primary market areas. The deposits, together with funds derived from other sources, are used to originate a variety of real estate, commercial and consumer loans and to purchase investment securities. The Bank emphasizes multifamily and commercial real estate lending. Intervest Mortgage Corporation is a mortgage investment company located in Rockefeller Center in New York City. It is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage, junior mortgage and wraparound mortgage loans. Its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation are nonoperating entities that provide administrative services to Intervest Mortgage Corporation. Intervest Statutory Trust I was formed in December 2001 in connection with the issuance of $15,000,000 of capital securities. For a further discussion, See the section entitled "Debentures Payable and Accrued Interest Payable on Debentures" on page 30 of the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. As previously announced, in December 2002, Intervest Bancshares Corporation entered into an agreement to acquire Intervest Securities Corporation, an affiliated entity that is a broker/dealer registered in nine states and is an NASD and SIPC member firm. Intervest Securities Corporation participates as a selected dealer from time to time in offerings of debt securities of the Company, primarily those of Intervest Mortgage Corporation. Pursuant to this agreement, Intervest Bancshares Corporation will acquire all the capital stock of Intervest Securities Corporation for 30,000 shares of its newly issued Class B common stock. At December 31, 2002, Intervest Securities Corporation's net assets amounted to approximately $200,000 and consisted of cash. In connection with this transaction, Intervest Bancshares Corporation was approved by the FRB to become a financial holding company under Regulation Y effective January 23, 2003. The transaction is awaiting the approval of the NASD and is expected to close in the second quarter of 2003. Intervest Securities Corporation will become a wholly owned subsidiary of Intervest Bancshares Corporation. The Company's profitability depends primarily on its net interest income, which is the difference between interest income generated from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities. Net interest income is dependent upon the interest-rate spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The interest rate spread is impacted by interest rates, deposit flows and loan demand. The Company's profitability is also affected by the level of its noninterest income and expenses, provision for loan loss reserves and effective income tax rate. Noninterest income consists primarily of loan and other banking fees. Noninterest expense consists of compensation and benefits, occupancy and equipment related expenses, data processing expenses, advertising expense, deposit insurance premiums and other operating expenses. The Company's profitability is also significantly affected by general economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. Since the properties underlying the Company's mortgages are concentrated in the New York City area and the State of Florida, the economic conditions in those areas can also have an impact on the Company's operations. 13 Comparison of Financial Condition at March 31, 2003 and December 31, 2002 ------------------------------------------------------------------------- Overview Total assets at March 31, 2003 increased to $727,945,000, from $685,979,000 at December 31, 2002. Total liabilities at March 31, 2003 increased to $672,945,000, from $632,853,000 at December 31, 2002. Stockholders' equity increased to $55,000,000 at March 31, 2003, from $53,126,000 at year-end 2002. Book value per common share rose to $11.69 per share at March 31, 2003, from $11.30 at December 31, 2002. Selected balance sheet information as of March 31, 2003 follows:
Intervest Intervest Intervest Inter- Holding National Mortgage Statutory Company ($ in thousands) Company Bank Corporation Trust I Balances Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 1,788 $ 24,855 $ 12,959 $ - $ (1,872) $ 37,730 Time deposits with banks - - 2,000 - - 2,000 Securities held to maturity, net - 137,243 - 15,464 (15,464) 137,243 Federal Reserve Bank stock - 1,114 - - - 1,114 Loans receivable, net of deferred fees 15,073 431,964 85,555 - - 532,592 Allowance for loan loss reserves (75) (4,722) (158) - - (4,955) Investment in subsidiaries 66,536 - - - (66,536) - Foreclosed real estate - 1,081 - - - 1,081 All other assets 1,408 15,237 4,615 441 (561) 21,140 ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 84,730 $ 606,772 $ 104,971 $ 15,905 $ (84,433) $ 727,945 ----------------------------------------------------------------------------------------------------------------------------------- Deposits $ - $ 540,277 $ - $ - $ (2,179) $ 538,098 Subordinated debentures payable 25,894 - 80,100 - (15,464) 90,530 Junior debentures payable-capital securities - - - 15,000 - 15,000 Note payable - 263 - - - 263 Accrued interest payable on all debentures 3,704 - 10,654 428 (441) 14,345 All other liabilities 132 12,859 1,518 13 187 14,709 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 29,730 553,399 92,272 15,441 (17,897) 672,945 ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 55,000 53,373 12,699 464 (66,536) 55,000 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 84,730 $ 606,772 $ 104,971 $ 15,905 $ (84,433) $ 727,945 -----------------------------------------------------------------------------------------------------------------------------------
A comparison of the consolidated balance sheets as of March 31, 2003 and December 31, 2002 follows:
At March 31, 2003 At December 31, 2002 ----------------- -------------------- Carrying % of Carrying % of ($ in thousands) Value Total Assets Value Total Assets ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 37,730 5.2% $ 30,849 4.4% Time deposits with banks 2,000 0.3 2,000 0.3 Securities held to maturity, net 137,243 18.9 145,694 21.2 Federal Reserve Bank stock 1,114 0.2 1,108 0.2 Loans receivable, net of deferred fees and loan loss reserves 527,637 72.4 485,301 70.7 Foreclosed real estate 1,081 0.1 1,081 0.2 All other assets 21,140 2.9 19,946 3.0 ----------------------------------------------------------------------------------------------------------------------------------- Total assets $727,945 100.0% $685,979 100.0% ----------------------------------------------------------------------------------------------------------------------------------- Deposits $538,098 73.9% $505,958 73.8% Subordinated debentures payable 90,530 12.4 84,430 12.3 Junior debentures payable-capital securities 15,000 2.1 15,000 2.2 Note payable 263 - 266 0.1 Accrued interest payable on all debentures 14,345 2.0 13,872 2.0 All other liabilities 14,709 2.0 13,327 1.9 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 672,945 92.4 632,853 92.3 ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 55,000 7.6 53,126 7.7 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $727,945 100.0% $685,979 100.0% -----------------------------------------------------------------------------------------------------------------------------------
14 Cash and Cash Equivalents ------------------------- Cash and cash equivalents increased to $37,730,000 at March 31, 2003, from $30,849,000 at December 31, 2002, due to a higher level of overnight federal fund investments. Cash and cash equivalents include federal funds sold and interest-bearing and noninterest-bearing cash balances with banks, and other short-term investments that have original maturities of three months or less. The short-term investments are normally comprised of commercial paper issued by large commercial banks, certificates of deposit and U.S. government securities. The level of cash and cash equivalents fluctuates based on various factors, including liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. Securities Held to Maturity, Net -------------------------------- Securities held to maturity decreased to $137,243,000 at March 31, 2003, from $145,694,000 at December 31, 2002. The decrease was due to maturities and early calls exceeding new purchases during the period. At March 31, 2003, the portfolio consisted of debt obligations of FNMA, FHLB, FHLMC, SLMA and FFCB with a weighted-average yield of approximately 2.32% and a weighted-average remaining maturity of 1.7 years. At December 31, 2002, the portfolio had a weighted-average yield of 2.39% and a weighted-average remaining maturity of 1.6 years. The securities are fixed rate or have predetermined scheduled rate increases, and some have call features that allow the issuer to call the security before its stated maturity without penalty. The Company normally invests in short-to-medium term security investments to emphasize liquidity. Federal Reserve Bank Stock -------------------------- In order for the Bank to be a member of the Federal Reserve Banking System, the Bank maintains an investment in the capital stock of the Federal Reserve Bank, which pays a dividend that is currently 6%. The investment, which amounted to $1,114,000 at March 31, 2003 and $1,108,000 at December 31, 2002, fluctuates based on the Bank's capital level. Loans Receivable, Net of Deferred Fees and Allowance for Loan Loss Reserves --------------------------------------------------------------------------- Loans receivable, net of deferred fees and the allowance for loan loss reserves, increased to $527,637,000 at March 31, 2003, from $485,301,000 at December 31, 2002. The growth reflected new originations of commercial real estate and multifamily mortgage loans, partially offset by principal repayments. Commercial real estate and multifamily real estate properties collateralized almost all of the loans in the Company's loan portfolio. At March 31, 2003 and December 31, 2002, there were no loans classified as nonaccrual or impaired. At March 31, 2003, the allowance for loan loss reserves amounted to $4,955,000, compared to $4,611,000 at December 31, 2002. The allowance represented 0.93% of total loans (net of deferred fees) outstanding at March 31, 2003, compared to 0.94% at December 31, 2002. The Company monitors its loan portfolio to determine the appropriate level of the allowance for loan loss reserves based on various factors. These factors include: the type and level of loans outstanding; volume of loan originations; overall portfolio quality; loan concentrations; specific problem loans, historical chargeoffs and recoveries; adverse situations which may affect the borrowers' ability to repay; and management's assessment of the current and anticipated economic conditions in the Company's lending regions. The increase in the allowance was due to a provision for loan losses of $344,000 in the first quarter of 2003 (resulting from loan growth). Foreclosed Real Estate ---------------------- At March 31, 2003 and year-end 2002, foreclosed real estate amounted to $1,081,000 and represented one commercial real estate property located in the State of Florida. This property was acquired by the Bank through foreclosure. The property continues to be actively marketed for sale. Foreclosed real estate is carried at the lower of the new cost basis or estimated fair value less estimated selling costs. Revenue and expenses from operations and changes in the valuation allowance of the property are included in the consolidated statement of earnings. 15 All Other Assets ---------------- The following table sets forth the composition of all other assets in the table on page 14: At March 31, At December 31, ($ in thousands) 2003 2002 -------------------------------------------------------------------------------- Accrued interest receivable $4,606 $4,263 Loans fee receivable 4,139 3,706 Premises and equipment, net 6,029 6,098 Deferred income tax asset 2,245 1,997 Deferred debenture offering costs, net 3,807 3,498 All other 314 384 -------------------------------------------------------------------------------- $21,140 $19,946 -------------------------------------------------------------------------------- Accrued interest receivable fluctuates based on the amount of loans, investments and other interest-earning assets outstanding and the timing of interest payments received. The increase was due to the growth in these assets. Loan fees receivable are fees due to the Company in accordance with the terms of mortgage loans. Such amounts are generally due upon the full repayment of the loan. This fee is recorded as deferred income at the time a loan is originated and is then amortized to interest income over the life of the loan as a yield adjustment. The increase was due to an increase in mortgage loan originations. Premises and equipment is detailed in note 5 to the consolidated financial statements in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. The deferred income tax asset relates primarily to the unrealized tax benefit on the Company's allowance for loan loss reserves, depreciation, and organizational start-up costs. These charges have been expensed for financial statement purposes, but are not all currently deductible for income tax purposes. The ultimate realization of the deferred tax asset is dependent upon the generation of sufficient taxable income by the Company during the periods in which these temporary differences become deductible for tax purposes. Management believes that it is more likely than not that the Company's deferred tax asset will be realized and accordingly, a valuation allowance for deferred tax assets is not maintained. Deferred debenture offering costs consist primarily of underwriters' commissions and are amortized over the terms of the debentures. The increase was due to additional costs ($554,000) incurred in the first quarter of 2003 in connection with the sale of Series 01/21/03 debentures by Intervest Mortgage Corporation, partially offset by normal amortization during the period. Deposit Liabilities ------------------- Deposit liabilities increased to $538,098,000 at March 31, 2003, from $505,958,000 at December 31, 2002, primarily reflecting increases in money market and certificate of deposit accounts of $5,637,000 and $21,370,000, respectively. At March 31, 2003, certificate of deposit accounts totaled $346,353,000 and demand deposit, savings, NOW and money market accounts aggregated $191,745,000. The same categories of deposit accounts totaled $324,983,000 and $180,975,000, respectively, at December 31, 2002. Certificate of deposit accounts represented 64% of total deposits at March 31, 2003 and December 31, 2002. Debentures Payable and Related Accrued Interest Payable ------------------------------------------------------- At March 31, 2003, debentures payable amounted to $90,530,000, compared to $84,430,000 at year-end 2002. The increase was due to the sale of additional debentures by Intervest Mortgage Corporation (Series 01/21/03 totaling $7,500,000 in principal amount and maturing at various times through July 1, 2010) as part of its normal funding of its mortgage loan originations, partially offset by the repayment of $1,400,000 of its Series 11/10/98 debentures. The sale of the debentures, after all underwriter's commissions and other issuance costs, resulted in net proceeds of $6,935,000. At March 31, 2003, Intervest Mortgage Corporation had $80,100,000 principal amount of debentures payable outstanding and the Holding Company had $10,430,000 principal amount of debentures payable outstanding, of which $6,930,000 were convertible into the Holding Company's Class A common stock at a current conversion price of $10.01 per share through December 31, 2003. At March 31, 2003 and December 31, 2002, the Holding Company, through its wholly owned subsidiary Intervest Statutory Trust I, has Trust Preferred Securities (Junior Debentures Payable) outstanding totaling $15,000,000 that qualify as regulatory capital. 16 At March 31, 2003, accrued interest payable on all debentures amounted to $14,345,000, compared to $13,872,000 at year-end 2002. Nearly all of the accrued interest payable is due and payable at the maturity of various debentures. For a further discussion of all the debentures, including conversion prices and redemption premiums, see notes 7 and 9 to the consolidated financial statements included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. Note Payable ------------ At March 31, 2003 and December 31, 2002, the note payable amounted to $263,000 and $266,000, respectively. The note was issued by the Bank in connection with the purchase of property in 2002 by the Bank that is across from its Court Street branch office in Florida. The Bank issued a note payable to the seller that matures in February of 2017 and calls for monthly payments of principal and interest at 7% per annum. All Other Liabilities --------------------- The following table shows the composition of all other liabilities in the table on page 14: At March 31, At December 31, ------------ --------------- ($ in thousands) 2003 2002 ----------------------------------------------------------------------------- Mortgage escrow funds payable $8,959 $5,894 Official checks outstanding 2,117 4,373 Accrued interest payable on deposits 929 895 Income taxes payable 1,048 526 All other 1,656 1,639 ----------------------------------------------------------------------------- $14,709 $13,327 ----------------------------------------------------------------------------- Mortgage escrow funds payable represent advance payments made by borrowers for taxes and insurance that are remitted by the Company to third parties. The increase reflects the timing of payments to taxing authorities as well as the growth in the loan portfolio. The level of official checks outstanding varies and fluctuates based on banking activity. The level of income taxes payable fluctuates based on the Company's earnings, effective tax rate and timing of tax payments. All other is comprised mainly of accrued expenses as well as fees received on loan commitments that have not yet been funded. Stockholders' Equity and Regulatory Capital ------------------------------------------- Stockholders' equity increased to $55,000,000 at March 31, 2003, from $53,126,000 at December 31, 2002. The increase was due to the following: net earnings of $1,801,000 and the recording of $67,000 of compensation expense related to stock warrants held by employees and directors. For additional discussion of employee stock warrants, see the section "Comparison of Results of Operations for the Quarters Ended March 31, 2003 and 2002" The Bank is a well-capitalized institution as defined in applicable banking regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management believes that there are no current conditions or events outstanding which would change the Bank's designation as a well-capitalized institution. See note 4 to the condensed consolidated financial statements in this report for the Bank's capital ratios. Asset and Liability Management ------------------------------ Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The primary objective of the Company's asset/liability management strategy is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. The Company uses "gap analysis," which measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period, to monitor its interest rate sensitivity. The Company's one-year positive interest rate sensitivity gap was a positive $143,639,000, or 19.7% at March 31, 2003, compared to a positive $107,681,000, or 15.7% at December 31, 2002. The increase was primarily due to existing loans moving into the less than one-year maturity timeframe as well as the addition of new floating-rate loans and short-term investments funded by an increase in deposits and borrowed funds with a term of over one year. In computing the gap, the Company treats its interest checking, money market and savings deposit accounts as immediately repricing. Further, the Company has a "floor," or minimum rate, on many of its floating-rate loans that is determined in relation to prevailing market rates on the date of origination. This floor only adjusts upwards in the event of increases in the loan's interest rate. This feature reduces the effect on interest income in a falling rate environment. For 17 a further discussion of interest rate risk and gap analysis, including all of the assumptions used in developing the one-year gap, see the Company's 2002 Annual Report to Stockholders on Form 10-K, pages 32 and 33. The table that follows summarizes the Company's interest-earning assets and interest-bearing liabilities as of March 31, 2003, that are scheduled to mature or reprice within the periods shown.
($ in thousands) 0-3 4-12 Over 1-4 Over 4 Months Months Years Years Total ----------------------------------------------------------------------------------------------------------------------------------- Loans (1) $ 158,793 $ 230,130 $ 109,171 $ 40,320 $ 538,414 Securities held to maturity (2) 17,673 65,631 53,939 - 137,243 Short-term investments 29,725 - - - 29,725 Federal Reserve Bank stock - - - 1,114 1,114 Interest-earning time deposits 2,000 - - - 2,000 ----------------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive assets $ 208,191 $ 295,761 $ 163,110 $ 41,434 $ 708,496 ----------------------------------------------------------------------------------------------------------------------------------- Deposit accounts (3): Interest checking deposits $ 14,370 $ - $ - $ - $ 14,370 Savings deposits 32,848 - - - 32,848 Money market deposits 139,930 - - - 139,930 Certificates of deposit 29,475 94,782 120,116 101,980 346,353 ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 216,623 94,782 120,116 101,980 533,501 Debentures payable 41,500 - 17,600 31,430 90,530 Debentures payable- capital securities - - - 15,000 15,000 Accrued interest on all debentures 7,408 - 3,294 3,643 14,345 Note payable - - - 263 263 ----------------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities $ 265,531 $ 94,782 $ 141,010 $ 152,316 $ 653,639 ----------------------------------------------------------------------------------------------------------------------------------- GAP (repricing differences) $ (57,340) $ 200,979 $ 22,100 $(110,882) $ 54,857 ----------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP $ (57,340) $ 143,639 $ 165,739 $ 54,857 $ 54,857 ----------------------------------------------------------------------------------------------------------------------------------- Cumulative GAP to total assets -7.9% 19.7% 22.8% 7.5% 7.5% -----------------------------------------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the table above: (1) Adjustable-rate loans are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans are scheduled, including repayments, according to their contractual maturities. Deferred loan fees are excluded from this analysis; (2) securities are scheduled according to the earlier of their contractual maturity or the date in which the interest rate is scheduled to increase. The effects of possible prepayments that may result from the issuer's right to call a security before its contractual maturity date are not considered. (3) interest checking, savings and money market deposits are regarded as ready accessible withdrawable accounts; and certificates of deposit are scheduled through their maturity dates. Liquidity and Capital Resources ------------------------------- The Company manages its liquidity position on a daily basis to assure that funds are available to meet operations, loan and investment commitments, deposit withdrawals and the repayment of borrowed funds. The Company's primary sources of funds consist of: retail deposits obtained through the Bank's branch offices and through the mail; amortization, satisfactions and repayments of loans; the maturities and calls of securities; sales of debentures; borrowings in the federal funds market and cash provided by operating activities. The Bank has agreements with correspondent banks whereby it may borrow up to $8,000,000 on an unsecured basis. There were no outstanding borrowings under these agreements. In April 2003, the Bank was approved to become a member of the Federal Home Loan Bank of New York. The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the off-balance sheet financial instruments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. 18 Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and require payment of fees. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company believes that it can fund all of its commitments from the sources of funds noted above. The contractual (notional) amounts of the Company's off-balance sheet financial instruments is as follows: At Mar 31, At Dec 31, ---------- ---------- ($ in thousands) 2003 2002 ------------------------------------------------------------------------------- Unfunded loan commitments $84,342 $68,244 Available lines of credit 826 533 Standby letters of credit 1,267 1,267 Comparison of Results of Operations for the Quarters Ended March 31, 2003 and ----------------------------------------------------------------------------- 2002 ---- Overview -------- Consolidated net earnings in the first quarter of 2003 increased to $1,801,000, from $1,248,000 in the first quarter of 2002. Earnings per share on a diluted basis increased to $0.32 in the first quarter of 2003, from $0.30 in the first quarter of 2002. The earnings per share computation for the 2003 quarter included a higher number of common shares resulting from the exercise of common stock warrants in the latter part of 2002 and the inclusion of dilutive shares from convertible debentures outstanding. The Company's return on average assets and equity increased to 1.03% and 13.40%, respectively, in the first quarter of 2003, up from 0.95% and 12.23% in the first quarter of 2002. The improvement in quarterly earnings was attributable to growth in the Company's net interest and dividend income, which increased by $1,199,000 due to an increase in the Company's loan portfolio. This improvement was partially offset by a $322,000 increase in noninterest expenses (a large portion of which was attributable to the Company's growth in assets) and a $381,000 increase in the provision for income taxes due to higher pre-tax income. Selected information regarding results of operations for the first quarter of 2003 follows:
Intervest Intervest Intervest Inter- Holding National Mortgage Statutory Company ($ in thousands) Company Bank Corporation Trust I Balances Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 269 $ 9,302 $ 2,092 $ 382 $ (420) $11,625 Interest expense 684 4,495 1,659 370 (420) 6,788 ----------------------------------------------------------------------- Net interest and dividend income (expense) (415) 4,807 433 12 - 4,837 Provision (credit) for loan loss reserves 29 258 57 - - 344 Noninterest income 49 268 539 - (527) 329 Noninterest expenses 148 1,760 391 12 (527) 1,784 ----------------------------------------------------------------------- Earnings (loss) before taxes (543) 3,057 524 - - 3,038 Provision (credit) for income taxes (246) 1,244 239 - - 1,237 ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ (297) $ 1,813 $ 285 $ - $ - $ 1,801 ----------------------------------------------------------------------------------------------------------------------------------- Intercompany dividends received (paid) (1) $ 375 $ (375) $ - $ - $ - $ - ----------------------------------------------------------------------------------------------------------------------------------- (1) The Bank pays a monthly dividend of $125,000 to the Holding Company in order to provide funds for the debt service on the Junior Debentures-Capital Securities (the proceeds of which were contributed to the Bank as capital in December 2001).
Net Interest and Dividend Income -------------------------------- Net interest and dividend income is the Company's primary source of earnings and is influenced primarily by the amount, distribution and repricing characteristics of its interest-earning assets and interest-bearing liabilities as well as by the relative levels and movements of interest rates. Net interest and dividend income increased to $4,837,000 in the first quarter of 2003, from $3,638,000 in the first quarter of 2002. The increase was attributable to growth of $174,145,000 in the Company's average interest-earning assets. The growth in average earning assets was due to $121,792,000 in new mortgage loans and a net increase in security and other short-term investments aggregating $52,353,000. These increases were funded by $148,249,000 of new deposits, $11,766,000 of additional borrowed funds and a $12,924,000 increase in stockholders' equity. 19 The Company's net interest margin remained nearly unchanged at 2.85% in the first quarter of 2003, compared to 2.87% in the same period of 2002. In a declining interest rate environment, the yield on the Company's interest-earning assets decreased 81 basis points to 6.86% in the first quarter of 2003 due to lower rates on new mortgage loans originated (resulting from increased competition to make loans), prepayments of higher-yielding loans and lower yields earned on security and other short-term investments. The Company's cost of funds decreased 88 basis points to 4.37% in the first quarter of 2003 due to lower rates paid on deposit accounts and a rate decrease on floating-rate debentures. The floating-rate debentures are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of 50 basis points from April 1, 2002 to March 31, 2003. The following table provides information on average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period.
Quarter Ended ----------------------------------------------------------------------------- March 31, 2003 March 31, 2002 ----------------------------------------------------------------------------- Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate ----------------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Loans $509,189 $10,670 8.50% $387,397 $8,820 9.23% Securities 158,120 887 2.28 114,764 842 2.98 Other interest-earning assets 20,040 68 1.38 11,043 49 1.80 ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 687,349 $11,625 6.86% 513,204 $9,711 7.67% ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 15,084 14,100 ----------------------------------------------------------------------------------------------------------------------------------- Total assets $702,433 $527,304 ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest checking deposits $11,831 $ 56 1.92% $ 9,563 $ 61 2.60% Savings deposits 31,174 162 2.11 26,841 192 2.90 Money market deposits 138,880 722 2.11 89,227 636 2.89 Certificates of deposit 333,768 3,513 4.27 241,773 3,033 5.09 ----------------------------------------------------------------------------------------------------------------------------------- Total deposit accounts 515,653 4,453 3.50 367,404 3,922 4.33 ----------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased - - - 344 2 1.96 Debentures and related interest payable 98,641 1,957 8.05 86,652 1,773 8.30 Junior debentures - capital securities 15,000 374 10.10 15,000 374 10.10 Note payable 265 4 6.87 144 2 6.91 ----------------------------------------------------------------------------------------------------------------------------------- Total borrowed funds 113,906 2,335 8.31 102,140 2,151 8.54 ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 629,559 $6,788 4.37% 469,544 $6,073 5.25% ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 5,109 6,151 Noninterest-bearing liabilities 14,015 10,783 Stockholders' equity 53,750 40,826 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $702,433 $527,304 ----------------------------------------------------------------------------------------------------------------------------------- Net interest and dividend income/spread $4,837 2.49% $3,638 2.42% ----------------------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/margin $57,790 2.85% $43,660 2.87% ----------------------------------------------------------------------------------------------------------------------------------- Ratio of total interest-earning assets to total interest-bearing liabilities 1.09 1.09x ----------------------------------------------------------------------------------------------------------------------------------- Other Ratios: Return on average assets (1) 1.03% 0.95% Return on average equity (1) 13.40% 12.23% Noninterest expense to average assets (1) 1.02% 1.11% Efficiency ratio (2) 35% 37% Average stockholders' equity to average assets 7.65% 7.74% ----------------------------------------------------------------------------------------------------------------------------------- (1) Annualized (2) Defined as noninterest expenses as a percentage of net interest income before the provision for loan losses plus noninterest income.
20 Provision for Loan Loss Reserves -------------------------------- In the first quarter of 2003, the Company recorded a provision for loan losses of $344,000, compared to $346,000 in the same quarter of 2002. The provision is based on management's ongoing assessment of the adequacy of the allowance for loan loss reserves for each subsidiary, which takes into consideration a number of factors as discussed on page 15 of this report. The provision for each quarter was a function of net loan growth, which amounted to $42,680,000 during the 2003 first quarter, versus $36,529,000 in the first quarter of 2002. In the first quarter of 2003, a larger percentage of the growth was attributable to the Holding Company and Intervest Mortgage Corporation whose internal reserve percentages are lower than those of the Bank. Noninterest Income ------------------ Noninterest income includes fees from customer service charges, income from mortgage lending activities (which consists mostly of fees from expired loan commitments and loan servicing, maintenance and inspections charges), and income from the early repayment of mortgage loans (which consists largely of the recognition of unearned fees associated with such loans at the time of payoff and the receipt of prepayment penalties in certain cases). The amount and timing of, as well as income from, loan prepayments, if any, cannot be predicted and can fluctuate significantly. Normally, the number of instances of prepayment of mortgage loans tends to increase during periods of declining interest rates and tends to decrease during periods of increasing interest rates. Many of the Company's mortgage loans include prepayment provisions, and others prohibit prepayment of indebtedness entirely. Noninterest income increased $55,000 to $329,000 in the first quarter of 2003, from $274,000 in the first quarter of 2002. The increase was due to an increase in income from expired loan commitments and loan service charge income resulting from growth in the loan portfolio. Noninterest Expenses -------------------- Noninterest expenses increased to $1,784,000 in the first quarter of 2003, from $1,462,000 in the comparable quarter of 2002. The increase of $322,000 was largely due to a $151,000 increase in compensation and benefits, a $30,000 increase in data processing expenses, a $27,000 increase in professional fees, a $15,000 increase in insurance expense and the addition of $43,000 of net expenses associated with foreclosed real estate. The increase in compensation and benefits expense was due to $122,000 resulting from additional staff (60 full-time employees at March 31, 2003 vs. 54 at March 31, 2002), salary increases and a higher cost of employee benefits. Compensation for the first quarter of 2002 included bonus payments of $37,000 to the Chairman of the Company. Compensation for the first quarter of 2003 included $67,000 of expense associated with certain common stock warrants held by employees and directors as a result of an increase in the Company's Class A common stock price during the quarter. (In 2001, the Company modified the terms of its Class A common stock warrants - exercisable at $12.50 and $16.00 per share as of December 31, 2001 - and reduced the exercise price to $10.01 per share commencing January 1, 2002 and extended the expiration date to December 31, 2002. In September 2002, the Company further modified the warrants by extending the expiration date to December 31, 2003. For these warrants, which total 138,500, compensation expense is being recorded in the statement of earnings with the corresponding credit to paid in capital in accordance with variable rate accounting as prescribed in APB Opinion No. 25 and related interpretations. Future compensation related to these warrants will fluctuate up or down until December 31, 2003 and will be a function of the Company's Class A common stock price and number of warrants outstanding and exercised). The increase in data processing expenses was due to growth in the Bank's assets. The Bank engages a third-party servicer for its main data processing and the fee is a function of the Bank's total assets, which increased to $606,772,000 at March 31, 2003, from $463,930,000 at March 31, 2002. The increase in professional fees and insurance expense was primarily due to the Company's growth. The foreclosed real estate expenses relate to one commercial real estate property located in the State of Florida that was acquired by the Bank through foreclosure. Foreclosed real estate expenses, net of any rental income, consist mostly of real estate taxes, insurance, utilities, maintenance, professional fees and other charges required to protect the Company's interest in the property. Provision for Income Taxes -------------------------- The provision for income taxes increased to $1,237,000 in the first quarter of 2003, from $856,000 in the first quarter of 2002, due to higher pre-tax income. The Company's effective tax rate (inclusive of state and local taxes) amounted to 40.7% in both periods. 21 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities, and the issuance of its debentures. The Company has not engaged in and accordingly has no risk related to trading accounts, commodities or foreign exchange. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments as of December 31, 2002, which reflect changes in market prices and rates, can be found in note 20 to the consolidated financial statements included in the Company's Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002. Management actively monitors and manages the Company's interest rate risk exposure. The primary objective in managing interest rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital, while adjusting the Company's asset-liability structure to obtain the maximum yield versus cost spread on that structure. Management relies primarily on its asset-liability structure to control interest rate risk. However, a sudden and substantial increase in interest rates could adversely impact the Company's earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Management believes that there have been no significant changes in the Company's market risk exposure since December 31, 2002. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company maintains --------------------------------------------------- controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officer of the Company concluded that the Company's disclosure controls and procedures were adequate. (b) Changes in internal controls. The Company made no significant changes in its ----------------------------- internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial Officer. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Not Applicable ITEM 2. Changes in Securities and Use of Proceeds (a) Not Applicable (b) Not Applicable (c) Not Applicable (d) Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable ITEM 5. Other Information Not Applicable ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibit is filed as part of this report. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the reporting period covered by this report. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES Date: April 25, 2003 By: /s/ Lowell S. Dansker ------------------------- Lowell S. Dansker, President and Treasurer (Principal Executive and Financial Officer) Date: April 25, 2003 By: /s/ Lawrence G. Bergman --------------------------- Lawrence G. Bergman, Vice President and Secretary 23 CERTIFICATION I, Lowell S. Dansker, as the principal executive and principal financial officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"), certify, that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and I have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: (a) all significant deficiencies in the design or operation of the internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Lowell S. Dansker --------------------- Lowell S. Dansker, President and Treasurer (Principal Executive and Financial Officer) April 25, 2003 24