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| IBCA > SEC Filings for IBCA > Form 10-Q on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
Overview
The following management's discussion of financial condition and results of operations of Intervest Bancshares Corporation and Subsidiaries should be read in conjunction with the accompanying quarterly condensed consolidated financial statements in this report on Form 10-Q as well as the entire annual report on Form 10-K for the year ended December 31, 2007.
Intervest Bancshares Corporation has two wholly owned consolidated subsidiaries, Intervest National Bank and Intervest Mortgage Corporation (hereafter, together with Intervest Bancshares Corporation, 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 also has four wholly owned unconsolidated subsidiaries, Intervest Statutory Trust II, III, IV and V, which were formed in connection with the issuance of trust preferred securities. For a more detailed discussion of the Company's business, see note 2 to the condensed consolidated financial statements in this report.
Critical Accounting Policies
The Company believes that currently its only accounting policy that is critical to the presentation of its financial statements and requires estimates and judgment on the part of management relates to the determination of the Company's allowance for loan losses. The allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period requiring management to make assumptions about future loan chargeoffs. The impact of a sudden large chargeoff could deplete the allowance and potentially require increased provisions to replenish the allowance, which could negatively affect the Company's earnings and financial position.
A more detailed discussion of the factors and estimates used in computing the allowance can be found under the caption "Critical Accounting Policies" on pages 37 to 39 of the Company's annual report on Form 10-K for the year ended December 31, 2007.
Comparison of Financial Condition at September 30, 2008 and December 31, 2007
Selected balance sheet information by entity as of September 30, 2008 follows:
Intervest Intervest Inter-
Holding National Mortgage Company
($ in thousands) Company Bank Corporation Amounts (1) Consolidated
Cash and cash equivalents $ 2,422 $ 15,058 $ 31,990 $ (27,501 ) $ 21,969
Security investments - 421,756 - - 421,756
Loans receivable, net of deferred
fees 2,598 1,634,090 55,163 - 1,691,851
Allowance for loan losses (30 ) (24,810 ) (988 ) - (25,828 )
Investment in consolidated
subsidiaries 234,815 - - (234,815 ) -
All other assets 3,406 62,139 6,132 (679 ) 70,998
Total assets $ 243,211 $ 2,108,233 $ 92,297 $ (262,995 ) $ 2,180,746
Deposits $ - $ 1,762,326 $ - $ (27,506 ) $ 1,734,820
Borrowed funds and related
interest payable 56,833 95,498 58,220 - 210,551
All other liabilities 148 47,335 2,336 (674 ) 49,145
Total liabilities 56,981 1,905,159 60,556 (28,180 ) 1,994,516
Stockholders' equity 186,230 203,074 31,741 (234,815 ) 186,230
Total liabilities and
stockholders' equity $ 243,211 $ 2,108,233 $ 92,297 $ (262,995 ) $ 2,180,746
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(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely from intercompany deposit accounts and investments in subsidiaries.
A comparison of selected consolidated balance sheet information follows:
At September 30, 2008 At December 31, 2007
Carrying % of Carrying % of
($ in thousands) Value Total Assets Value Total Assets
Cash and cash equivalents $ 21,969 1.0 % $ 33,086 1.6 %
Security investments 421,756 19.3 350,456 17.3
Loans receivable, net of deferred
fees and loan loss allowance 1,666,023 76.4 1,592,439 78.8
All other assets 70,998 3.3 45,411 2.3
Total assets $ 2,180,746 100.0 % $ 2,021,392 100.0 %
Deposits $ 1,734,820 79.6 % $ 1,659,174 82.1 %
Borrowed funds and related interest
payable 210,551 9.7 136,434 6.7
All other liabilities 49,145 2.2 46,223 2.3
Total liabilities 1,994,516 91.5 1,841,831 91.1
Stockholders' equity 186,230 8.5 179,561 8.9
Total liabilities and stockholders'
equity $ 2,180,746 100.0 % $ 2,021,392 100.0 %
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Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and noninterest-bearing cash balances with banks, and other short-term investments that have original maturities of three months or less. Cash and cash equivalents decreased to $22 million at September 30, 2008, from $33 million at December 31, 2007. 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.
Security Investments
Securities are classified as held to maturity and are carried at amortized cost when management has the intent and ability to hold them to maturity. Such investments, all of which are held by the Bank, increased to $411 million at September 30, 2008, from $344 million at December 31, 2007. The increase reflected new purchases exceeding maturities and calls during the period. The Bank invests in U.S. government agency debt obligations to emphasize safety and liquidity. The Company does not own or invest in any collateralized debt obligations, collateralized mortgage obligations, or any preferred or common stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
At September 30, 2008, securities held to maturity consisted of investment grade rated debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation totaling $403 million and corporate securities (trust preferred notes) of $8 million. At September 30, 2008, the entire portfolio had a weighted-average yield of 4.21% and a weighted-average remaining maturity of 4.6 years, compared to 5.01% and 4.0 years, respectively, at December 31, 2007. Nearly all of the securities in the portfolio have fixed rates of interest or have predetermined rate increases, and many have call features that allow the issuer to call the security before its stated maturity without penalty. The sharp decline in market interest rates during the first quarter of 2008 resulted in a higher level of securities being called by the issuers.
At September 30, 2008 and December 31, 2007, the held-to-maturity portfolio's estimated fair value was $405 million and $346 million, respectively. At September 30, 2008, the held-to-maturity portfolio had a net unrealized loss of $5.7 million, compared to a net unrealized gain of $1.4 million at December 31, 2007. See note 3 to the condensed consolidated financial statements in this report for a discussion regarding unrealized losses in the held to maturity securities portfolio, which management deems to be temporary.
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in the capital stock of each entity, which amounted to $3.6 million and $7.3 million, respectively, at September 30, 2008. The FRB stock has historically paid a dividend of 6%, while the FHLB stock dividend fluctuates quarterly and most recently was 6.5%. The total investment, which amounted to $10.9 million at September 30, 2008, compared to $6.4 million at December 31, 2007, fluctuates based on the Bank's capital level for the FRB stock and the Bank's loans and outstanding FHLB borrowings for the FHLB stock.
Loans Receivable, Net of Deferred Fees and Allowance for Loan Losses
Loans receivable, net of deferred fees, increased to $1.69 billion at September 30, 2008, from $1.61 billion at December 31, 2007. The growth reflected $327 million of new mortgage loan originations secured by commercial and multifamily real estate exceeding the aggregate of: $221 million of principal repayments; $25 million of loans transferred to foreclosed real estate; and $4.3 million of loan charge offs. The new loans are predominantly fixed-rate with a weighted-average yield and term of 6.34% and 5.3 years, respectively.
Competitive market conditions and resulting lower pricing for new loans has made it more difficult to identify suitable mortgage investment opportunities, which has resulted in lower volumes of loan originations, particularly in the case of Intervest Mortgage Corporation. In addition, the Company has historically originated short-term real estate mortgage loans with either fixed or variable interest rates. Commencing in early 2007, as a result of competitive market conditions, the Company began placing greater reliance on fixed-rate loan originations with somewhat longer maturities. To illustrate, fixed-rate loans constituted approximately 72% of the loan portfolio at September 30, 2008, compared to approximately 40% at December 31, 2006. Loans in the portfolio had an average life of approximately 4 years at September 30, 2008, compared with 3 years at December 31, 2006.
Loan originations and repayments for the last eight consecutive quarters are summarized in the following table:
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31,
($ in thousands) 2008 2008 2008 2007 2007 2007 2007 2006
Originations:
Intervest National Bank $ 100,788 $ 129,013 $ 95,990 $ 80,919 $ 140,137 $ 146,499 $ 138,687 $ 105,941
Intervest Mortgage Corp - - 1,200 6,933 16,650 18,355 6,450 5,033
$ 100,788 $ 129,013 $ 97,190 $ 87,852 $ 156,787 $ 164,854 $ 145,137 $ 110,974
Principal Repayments:
Intervest National Bank 81,610 $ 73,948 $ 26,129 $ 99,316 $ 140,155 $ 82,040 $ 78,302 $ 96,373
Intervest Mortgage Corp. 29,207 5,927 4,452 3,252 6,759 12,459 7,714 16,391
Holding Company (1) 13 12 12 14 41 1,830 72 70
$ 110,830 $ 79,887 $ 30,593 $ 102,582 $ 146,955 $ 96,329 $ 86,088 $ 112,834
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(1) Excludes the repurchase by the Bank of the Holding Company's participations in loans originated by the Bank.
Loans receivable is concentrated in mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial/warehouse properties, parking lots/garages, mobile home parks, self storage facilities and vacant land). At September 30, 2008, such loans consisted of 614 loans with an aggregate principal balance of $1.70 billion and an average loan size of $2.8 million. Loans with principal balances of more than $10 million consisted of 19 loans or $262 million, with the largest loan being $20.6 million. Loans with principal balances of $5 million to $10 million consisted of 81 loans and aggregated to $541 million.
Nonaccrual (Impaired) Loans
Nonaccrual loans decreased to $82.8 million (19 loans) at September 30, 2008, from $90.8 million (18 loans) at December 31, 2007. At September 30, 2008, there were no loans classified as ninety days past due and still accruing interest, compared to two loans totaling $11.9 million classified as such at December 31, 2007. Nonaccrual loans are considered impaired under the criteria of SFAS 114 "Accounting by Creditors for Impairment of a Loan-an amendment of FASB Statements 5 and 15". At September 30, 2008, nonaccrual loans had a specific valuation allowance in the aggregate amount of $5.4 million (included as part of the overall allowance for loan losses) in accordance with SFAS 114. Estimated loan-to-value ratios, net of specific valuation allowances, on nonaccrual (impaired) loans ranged from 35% to 98% at September 30, 2008. At September 30, 2008 and December 31, 2007, there were no other loans classified as impaired.
Estimates of fair value of the collateral properties is determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company's two senior lending officers (the Chairman and the President of the Bank) related to values of properties in the Company's market areas. These officers take into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Determination of the need for updating appraisals, where practical, is made on a loan-by-loan basis.
Nonaccrual loans are summarized for the Bank and Intervest Mortgage Corporation (IMC) as follows:
($ in thousands) Principal Balance Outstanding
Property Type City State Lender Date Nonaccrual Sept 30, 2008 Dec 31, 2007 Notes
Retail store Avenel New Jersey Bank Mar 2007 $ 3,064 $ 3,064 (1)
Retail stores Neptune New Jersey Bank Mar 2007 512 2,439 (1)
Retail stores South Amboy New Jersey Bank Mar 2007 1,339 2,220 (1)
Retail store Little Silver New Jersey Bank Mar 2007 739 739 (1)
Multifamily Long Island New York Bank Jun 2007 11,316 11,316 (2)
Hotel St. Augustine Florida Bank Jun 2007 9,053 9,053 (3)
Multifamily New York New York Bank Aug 2007 - 3,864 (4)
Undeveloped land North Fort Myers Florida Bank Sept 2007 - 3,330 (6)
Multifamily Lauderhill Florida Bank Nov 2007 - 18,012 (7)
Multifamily Hollywood Florida Bank Sept 2007 - 4,065 (8)
Office building Sunny Isles Florida Bank Sept 2007 4,284 4,284 (11)
Undeveloped land Long Island City New York Bank Mar 2008 11,001 - (9)
Undeveloped land Hollywood Florida Bank Apr 2008 830 - (9)
Mobile home park Perryville Maryland Bank May 2008 4,024 - (9)
Office building Staten Island New York Bank May 2008 5,762 - (10)
Motel Lakewood New Jersey Bank Jun 2008 1,390 - (9)
Retail Stores Flushing New York Bank Aug 2008 13,060 - (9)
Multifamily Brooklyn New York Bank Aug 2008 786 - (9)
Hotel Orlando Florida Bank Aug 2008 5,939 - (9)
Undeveloped land Carabelle Florida Bank Aug 2008 1,569 - (9)
Multifamily Tampa Florida Bank Sept 2008 10 - (9)
$ 74,678 $ 62,386
Hotel St. Augustine Florida IMC Jul 2007 6,034 6,034 (3)
Multifamily New York New York IMC Aug 2007 - 4,445 (4)
Multifamily New York New York IMC Aug 2007 - 4,387 (4)
Multifamily New York New York IMC Aug 2007 - 4,178 (4)
Multifamily New York New York IMC Aug 2007 - 4,119 (4)
Multifamily New York New York IMC Aug 2007 - 1,249 (4)
Office building Brooklyn New York IMC Oct 2006 - 2,299 (5)
Hotel Howell New Jersey IMC Dec 2007 1,659 1,659 (9)
Office building Staten Island New York IMC May 2008 388 - (10)
$ 8,081 $ 28,370
$ 82,759 $ 90,756
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(1) One principal guarantees each of the four loans. The completion of foreclosure proceedings has been delayed by reason of a bankruptcy filing. The proceedings involve multiple properties. A number of collateral properties have been sold as of September 2008 and the net proceeds received by the Bank have been applied as a reduction of outstanding principal.
(2) Foreclosure proceedings are in progress. A receiver has been appointed and has taken control of the property and the rents. Currently, the rents are not sufficient to cover the operating costs of the property and the Bank is funding the shortfall as necessary, including paying real estate taxes directly, in order to protect its interest in the property.
(3) Both amounts represent one loan ($15.1 million) originated by the Bank. Intervest Mortgage Corporation owns a participation in this loan. The loan is secured by a waterfront hotel, restaurant and marina resort. Foreclosure proceedings are in progress but remain stayed by reason of a bankruptcy filing. An adversary proceeding has been instituted by the borrower challenging the Bank's claim and the priority of its lien. The market for this type of property at this location has been volatile, and both the defense of the foreclosure and the current market conditions were taken into account in classifying this loan for purposes of calculating loan loss reserves.
(4) All six loans were repaid in September 2008 for $23.5 million, which included the receipt of approximately $1.4 million of past due interest.
(5) Title to the collateral property was acquired in September 2008.
(6) Title to the collateral property was acquired in May 2008.
(7) Title to the collateral property was acquired in September 2008 and a $2.4 million loan charge off was recorded based on the estimated net sales price of this property. The Bank has entered into a contract to sell its interest in its wholly owned entity which owns this property to a third party for net proceeds of approximately $15.5 million, which is expected to close in November 2008. The property was damaged in a hurricane and the Bank expects to advance funds towards the restoration of the property for which it will be reimbursed at closing.
(8) Title to the collateral property was acquired in February 2008.
(9) Foreclosure proceedings are in progress. A $1.9 million charge off was recorded in September 2008 on the land located in Hollywood, Florida based on a current appraisal.
(10) Borrower has requested and the Bank has agreed to the deferral of contractual loan payments through November 30, 2008 to give the borrower time to lease vacant space at the property. The borrower will continue to make monthly escrow payments as required under the Bank's first mortgage loan. IMC holds a second mortgage on this property.
(11) The borrower sold the collateral property to a third party for $4.6 million in October 2008 and paid the Bank $0.4 million in cash, of which $84,000 was applied to principal and the remainder was applied to past due interest. The Bank provided new financing on the purchase and the new loan of $4.2 million is an accruing loan.
Allowance For Loan Losses
The allowance for loan losses increased to $25.8 million at September 30, 2008, from $21.6 million at December 31, 2007. The allowance represented 1.53% of total loans (net of deferred fees) outstanding at September 30, 2008 compared to 1.34% at December 31, 2007. The increase in the allowance was due to provisions totaling $8.5 million, of which $7.5 million was attributable to credit downgrades on various loans and lower estimated values of certain collateral properties and $1.0 million was due to net loan growth of $76 million from December 31, 2007. At September 30, 2008, in accordance with SFAS 114, the allowance for loan losses included a specific valuation allowance in the aggregate amount of $5.4 million for nonaccrual loans.
The following table summarizes the activity in the allowance for loan losses by entity:
Intervest Intervest
National Mortgage Holding
($ in thousands) Bank Corporation Company Consolidated
Balance at December 31, 2007 $ 20,268 $ 1,295 $ 30 $ 21,593
Chargeoffs (4,227 ) - - (4,227 )
Provision (credit) for loan losses
charged to expense 8,769 (307 ) - 8,462
Balance at September 30, 2008 $ 24,810 $ 988 $ 30 $ 25,828
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The following table sets forth information concerning nonperforming assets by entity at September 30, 2008:
Intervest Intervest
National Mortgage Holding
($ in thousands) Bank Corporation Company Consolidated
Nonaccrual (impaired) loans $ 74,678 $ 8,081 - $ 82,759
Real estate acquired through
foreclosure 22,772 2,327 - 25,099
Total nonperforming assets $ 97,450 $ 10,408 - $ 107,858
Nonperforming assets to total assets 4.62 % 11.28 % - 4.95 %
Nonaccrual loans to total gross loans 4.55 % 14.60 % - 4.87 %
Allowance for loan losses to total net
loans 1.52 % 1.79 % - 1.53 %
Allowance for loan losses to nonaccrual
loans 33.22 % 12.23 % - 31.21 %
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There can be no assurance that the Company will not incur additional loan loss provisions, loan chargeoffs or significant expenses in connection with the ultimate collection of its nonaccrual loans, which collection is anticipated to be through the eventual sale of the collateral property in most cases. The Company may also incur significant expenses in carrying and disposing of properties acquired through foreclosure.
All Other Assets
All other assets increased to $71 million at September 30, 2008, from $45 million at December 31, 2007. The increase was nearly all due to the addition of $25 million of real estate acquired through foreclosure as detailed in the notes to the table on page 24. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold. Upon foreclosure of the property, the related loan is transferred from the loan portfolio to foreclosed real estate at the lower of the loan's carrying value at the date of transfer, or estimated fair value of the property less estimated selling costs. Such amount becomes the new cost basis of the property. Adjustments made to the carrying value at the time of transfer are charged to the allowance for loan losses. After foreclosure, management periodically performs market valuations and the real estate is carried at the lower of cost 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 caption "Real Estate Activities Expenses" in the consolidated statements of earnings.
Deposits
Deposits increased to $1.73 billion at September 30, 2008, from $1.66 billion at December 31, 2007, reflecting an increase in money market accounts of $76 million.
At September 30, 2008, certificate of deposit accounts totaled $1.41 billion, and checking, savings and money market accounts aggregated $328 million. The same categories of deposit accounts totaled $1.41 billion and $254 million, respectively, at December 31, 2007. Certificate of deposit accounts represented 81% of total consolidated deposits at September 30, 2008, compared to 85% at December 31, 2007. At September 30, 2008 and December 31, 2007, certificate of deposit accounts included $169 million and $166 million of brokered deposits, respectively.
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