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IBCA > SEC Filings for IBCA > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for INTERVEST BANCSHARES CORP


30-Apr-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Intervest Bancshares Corporation ("IBC") is the parent company of Intervest National Bank ("INB"). References in this report to "we," "us" and "our" refer to these entities on a consolidated basis, unless otherwise specified. For a discussion of our business, see note 1 to the financial statements in our 2012 Annual Report on Form 10-K ("2012 10-K"). Our business is also affected by various risk factors, which are disclosed beginning on page 28 of our 2012 10-K in Item 1A thereof and updated as needed in Item 1A of Part II of our reports on Form 10-Q. Management's discussion and analysis of financial condition and results of operations that follows should be read in conjunction with the accompanying financial statements in this report on Form 10-Q as well as our entire 2012 10-K.

Available Information

IBC's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements and any amendments to those reports can be obtained (excluding exhibits) without charge by writing to: Intervest Bancshares Corporation, Attention: Secretary, One Rockefeller Plaza (Suite 400) New York, New York 10020. In addition, the reports (with exhibits) are available on the Securities and Exchange Commission's website at www.sec.gov. IBC has a website at www.intervestbancsharescorporation.com that is used for limited purposes and contains certain reports after they are electronically filed with or furnished to the SEC. INB also has a website at www.intervestnatbank.com. The information on both of these web sites is not and should not be considered part of this report and is not incorporated by reference in this report.

Critical Accounting Policies

We consider our critical accounting policies to be those that relate to the determination of the following: our allowance for loan losses; our valuation allowance for real estate losses; other than temporary impairment assessments of our security investments; and the need for and amount of a valuation allowance for our deferred tax asset. These items are considered critical accounting estimates because each is highly susceptible to change from period to period and require us to make numerous assumptions about a variety of information that directly affect the calculation of the amounts reported in our consolidated financial statements. For example, the impact of a large unexpected chargeoff could deplete the allowance for loan losses and potentially require us to record increased loan loss provisions to replenish the allowance, which could negatively affect our operating results and financial condition. A detailed discussion of our critical accounting policies and the factors and estimates we use in applying them can be found under the caption "Critical Accounting Policies" on pages 44 to 48 in our 2012 10-K.

Overview

Net earnings for the first quarter of 2013 ("Q1-13") increased to $3.4 million, or $0.16 per common share, from $2.8 million, or $0.13 per common share, for the first quarter of 2012 ("Q1-12"). The $0.6 million increase in net earnings was driven by a $1.0 million credit for loan losses and a $1.4 million decrease in net real estate expenses. These items were largely offset by a $0.9 million decrease in net interest and dividend income, a $0.4 million decrease in noninterest income, a $0.4 million increase in income tax expense and a $0.1 million increase in the provision for real estate losses.

Key points regarding the quarter's results follow:

A credit for loan losses of $1.0 million was recorded in Q1-13, compared to no provision for loan losses in Q1-12. The credit was the result of $1.1 million of recoveries of prior loan charge offs (from settlements of various litigation on two foreclosure actions commenced prior to 2011).

Expenses, net of rental income, associated with real estate owned through foreclosure ("REO") totaled $0.5 million in Q1-12, compared to net income of $0.9 million in Q1-13. The amount for Q1-13 included a $1.5 million recovery of real estate expenses from prior periods associated with one property (that was sold in 2008) due to the litigation settlement noted above.

Net interest and dividend income decreased to $9.0 million in Q1-13, from $9.9 million in Q1-12, primarily due to a planned reduction in INB's assets. The decrease in assets contributed to a significant increase in INB's regulatory capital ratios. The net interest margin (exclusive of loan prepayment income) improved to 2.37% in Q1-13, from 2.16% in Q1-12.

Noninterest income decreased to $0.7 million in Q1-13, from $1.1 million in Q1-12. The decrease was due to $0.2 million of less income from loan prepayments and other lending fees, and a $0.2 million increase in security impairment charges.

Income tax expense increased to $3.1 million in Q1-13, from $2.7 million in Q1-12 due to higher pre-tax income.

A provision for real estate losses of $0.6 million was recorded in Q1-13, compared to $0.5 million in Q1-12.


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Operating expenses for Q1-13 totaled $4.2 million, unchanged from Q1-12 as a $0.1 million increase in salaries and benefits expense was offset by a $0.1 million decrease in FDIC insurance expense. The Company's efficiency ratio
(which measures its ability to control expenses as a percentage of revenues) continued to be favorable but increased slightly to 42% in Q1-13, from 38% in Q1-12.

Nonaccrual loans decreased to $41 million at March 31, 2013, from $46 million at December 31, 2012. Nonaccrual loans include certain restructured loans ("TDRs") that are current as to payments and performing in accordance with their renegotiated terms, but are required to be reported nonaccrual based on regulatory guidance. At March 31, 2013, such loans totaled $33 million compared to $36 million at December 31, 2012. These loans were yielding 4.82% at March 31, 2013.

REO increased to $18.3 million at March 31, 2013, from $15.9 million at December 31, 2012, reflecting the addition of one property for $3.0 million, partially offset by $0.6 million of write-downs (recorded as a provision for real estate losses) in the carrying value of several properties.

New loan originations for Q1-13 increased to $62 million, from $50 million in Q1-12. Total loan repayments increased to $86 million in Q1-13, from $57 million in Q1-12.

Book value per common share (after subtracting preferred dividends in arrears) was $8.48 at March 31, 2013 and $8.44 at December 31, 2012.

On March 21, 2013, INB's primary regulator, the Office of the Comptroller of the Currency, terminated its Formal Agreement with INB and INB is no longer subject to the operating restrictions required by that agreement. INB is also no longer subject to heightened regulatory capital requirements which had been in effect since February 2010. INB's regulatory capital ratios at March 31, 2013 were as follows: Tier One Leverage - 15.55%; Tier One Risk-Based - 20.90%; and Total Risk-Based Capital - 22.17%, well above the minimum requirements to be considered a well-capitalized institution. As of March 31, 2013, IBC remained subject to its written agreement with the Federal Reserve Bank of New York (the "FRB") and the restrictions contained therein.

The U.S. Treasury is currently conducting periodic, individual auctions of the preferred stock investments held by the Treasury as part of the Capital Purchase Program (the "TARP Securities"), including the Series A preferred stock issued by IBC. IBC is exploring opportunities to purchase its TARP Securities held by the Treasury through such auctions. In order to purchase the securities, IBC would need to first repay $6.7 million of accrued interest on its $55 million of outstanding junior subordinated debentures as well as approximately $4.6 million of dividends in arrears on its $25 million of preferred stock held by the Treasury. Both IBC and INB have received approvals from their regulators to undertake the necessary steps, including making a necessary one-time cash dividend payment from INB to IBC of $31 million, to permit IBC to participate in such auctions and make a bid to purchase its securities. IBC would use INB's cash dividend and a large portion of its $8.5 million of available cash on hand at March 31, 2013 to fund the foregoing actions. IBC expects to make a bid in the second quarter of 2013; however, there can be no assurance that IBC's TARP Securities will be sold in any auction or that IBC will be the successful bidder in any such auction.

   Comparison of Financial Condition at March 31, 2013 and December 31, 2012

A comparison of selected balance sheet information follows:

                                                                                  At March 31, 2013                       At December 31, 2012
                                                                           Carrying              % of                Carrying              % of
 ($ in thousands)                                                            Value           Total Assets              Value           Total Assets

 Cash and cash equivalents                                                   $   83,945             5.2%               $   60,395             3.6%
 Securities and other investments                                               423,720           26.0                    458,098           27.5
 Loans receivable, net of deferred fees and allowance for loan losses         1,053,272           64.7                  1,079,363           64.8
 Foreclosed real estate, net of valuation allowance                              18,334            1.1                     15,923            1.0
 All other assets                                                                48,516            3.0                     52,013            3.1

 Total assets                                                                $1,627,787           100.0%               $1,665,792           100.0%

 Deposits                                                                    $1,318,215            81.0%               $1,362,619            81.8%
 Borrowed funds and related interest payable                                     63,373            3.9                     62,930            3.8
 All other liabilities                                                           30,934            1.9                     29,296            1.7

 Total liabilities                                                            1,412,522           86.8                  1,454,845           87.3
 Total stockholders' equity                                                     215,265           13.2                    210,947           12.7

 Total liabilities and stockholders' equity                                  $1,627,787           100.0%               $1,665,792           100.0%

General

Total assets at March 31, 2013 decreased to $1.63 billion from $1.67 billion at December 31, 2012, primarily reflecting a $34 million decrease in security and other investments and a $26 million decrease in loans, partially offset by a $24 million increase in cash and short-term investments.


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Cash and Cash Equivalents

Cash and cash equivalents, which increased to $84 million at March 31, 2013 from $60 million at December 31, 2012, include interest-bearing and noninterest-bearing cash balances with banks and other short-term investments. The level of cash and cash equivalents fluctuates based on various factors, including our liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. A significant portion of the balance at March 31, 2013 is expected to be used for the purposes noted above under "Overview". See the section "Liquidity and Capital Resources" in this report for a discussion of our liquidity and funding commitments.

Security and Other Investments

The table below sets forth information about the composition of and changes to
our security and other investments.



                                                         Balance                                        Activity for the Period                                      Balance
                                                            At                          Matured        Called                        Amortization                       At
                                                         Dec 31,                          or             By          Principal        (Premium)                      Mar 31,
 ($ in thousands)                                          2012         Purchased      Redeemed        Issuer         Payments         Discount          OTTI          2013

 Securities held to maturity:
  U.S. government agencies (1)                             $355,244        $14,864        $    -       $(42,561)        $     -             $(208)       $    -       $327,339
  Residential MBS (2)                                        84,279            927             -               -        (6,706)              (480)            -         78,020
  State and municipal                                           533              -             -               -              -                  -            -            533
  Corporate (3)                                               3,721              -             -               -           (63)                  -        (366)          3,292

                                                            443,777         15,791             -        (42,561)        (6,769)              (688)        (366)        409,184
 Securities available for sale:
  Mutual fund (4)                                             1,000              5             -               -              -                  -            -          1,005
 Other investments:
  FRB and FHLB stock (5)                                      8,151             10             -               -              -                  -            -          8,161
  Time deposits with banks (6)                                5,170            200             -               -              -                  -            -          5,370

                                                           $458,098        $16,006         $   -       $(42,561)       $(6,769)             $(688)       $(366)       $423,720

(1) Consist of investment grade debt obligations of the Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).

(2) Consist of investment grade residential mortgage-backed securities issued by the Government National Mortgage Association (GNMA), FNMA and FHLMC.

(3) Consist of non-investment grade corporate securities (consisting of variable-rate pooled trust preferred securities (or TRUPs) backed by obligations of companies in the banking industry). As discussed in greater detail in note 2 to the financial statements in this report, other than temporary impairment charges totaling $4.6 million have been recorded on these securities as of March 31, 2013.

(4) Consists of shares owned in an intermediate bond fund that holds securities that are deemed to be qualified under the Community Reinvestment Act.

(5) In order for INB to be a member of the FRB and FHLB, INB must maintain an investment in the capital stock of each entity, which amounted to $5.9 million and $2.3 million, respectively, at March 31, 2013. The FRB stock has historically paid a dividend of 6%, while the FHLB stock dividend fluctuates quarterly and was most recently at the rate of 4.5%. The total required investment fluctuates based on INB's capital level for the FRB stock and INB's loans and outstanding FHLB borrowings for the FHLB stock.

(6) At March 31, 2013, time deposits with banks had a weighted-average yield of 1.12% and remaining maturity of 2.5 years.

All of the investments in the preceding table were held by INB. Securities are classified as held to maturity ("HTM") and are carried at amortized cost when INB has the intent and ability to hold them to maturity. INB invests primarily in U.S. government agency debt obligations to emphasize safety and liquidity. A large portion of the resulting proceeds from the net reduction in total investments from December 31, 2012 was used to fund deposit outflow.

At March 31, 2013, the HTM portfolio had a weighted-average yield to earliest call date of 1.06% and a weighted-average remaining expected life and contractual maturity of 2.4 years and 6.9 years, respectively. A large number of the securities have fixed interest rates or have predetermined rate increases and call features that allow the issuer to call the security before its stated maturity without penalty. Over the next twelve months, approximately $166 million of securities in the portfolio could potentially be called or repaid assuming market interest rates remain at or near current levels. A large portion of the resulting proceeds would then be reinvested into similar securities and potentially at lower rates. At the time of purchase, securities with callable features routinely have higher yields than non-callable securities with the same maturity. However, the callable features or the expiration of the non-callable period of the security will most likely result in the early call of securities in a declining or flat rate environment, which results in re-investment risk of the proceeds. At March 31, 2013, the HTM portfolio's estimated fair value was $408 million and the portfolio had a net unrealized loss of $1.6 million. For additional information concerning the HTM portfolio, see note 2 to the financial statements in this report.


Table of Contents

Loans Receivable, Net of Deferred Fees

Total loans receivable, net of unearned fees, amounted to $1.08 billion at
March 31, 2013, a $26.0 million decrease from $1.11 billion at December 31,
2012.

The table below sets forth information regarding our loan portfolio.



                                           At March 31, 2013                      At December 31, 2012
 ($ in thousands)                    # of Loans           Amount             # of Loans           Amount

 Loans Secured By Real Estate:
  Commercial loans                         369             $ 811,464               376            $ 852,213
  Multifamily loans                        143               204,831               142              208,699
  One to four family loans                  18                60,869                13               41,676
  Land loans                                 5                 6,418                 7                7,167

                                           535             1,083,582               538            1,109,755

 All Other Loans:
  Business loans                            18                 1,028                18                  949
  Consumer loans                            14                   425                12                  359

                                            32                 1,453                30                1,308

 Loans receivable                          567             1,085,035               568            1,111,063
 Deferred loan fees                                          (3,553)                                 (3,597)

 Loans receivable, net of
deferred fees                                              1,081,482                              1,107,466
 Allowance for loan losses                                  (28,210)                                (28,103)

 Loans receivable, net                                    $1,053,272                             $1,079,363

 Loans that were on nonaccrual
status                                                       $40,931                                $45,898
 Loans restructured and on accrual status (1)                 13,906                                 20,076
 Accruing loans contractually past due 90 days
or more                                                        5,916                                  4,391

(1) One loan in the amount of $2.1 million matured and was in the process of renewal at March 31, 2013. Such loan was also included in the "Loans 90 days past due and still accruing" category.

The table below sets forth the activity in the net loan portfolio for the quarter ended March 31, 2013.

($ in thousands)

            Loans receivable, net, at December 31, 2012     $1,079,363
             Originations                                       61,627
             Repayments                                       (85,722)
             Transfers to foreclosed real estate               (3,040)
             Chargeoffs                                          (115)
             Recoveries                                          1,222
             Net decrease in deferred loan fees                     44
             Net increase in allowance for loan losses           (107)

            Loans receivable, net, at March 31, 2013        $1,053,272

New loan originations during the period had nearly all fixed interest rates and a weighted-average yield, term and loan-to-value ratio of 4.60%, 5.1 years and 58%, respectively. The new originations were comprised of $33.3 million of commercial real estate loans, $8.5 million of multifamily loans, $19.6 million of loans made on investor owned 1-4 family condominiums and $0.2 million of other consumer and business loans. Loans paid off during the period had a weighted-average yield of 6.14%.

Loans with fixed interest rates constituted approximately 90% of the loan portfolio at March 31, 2013. The portfolio also included loans (approximately 8% of the portfolio) that have terms that call for predetermined interest rate increases over the life of the loan. The entire loan portfolio had a short weighted-average remaining life of approximately 4.0 years as of March 31, 2013. See the section "Asset and Liability Management" in our 2012 10-K for a further discussion of our fixed-rate loans and their impact on our interest rate risk.

As detailed in note 3 to the financial statements in this report, the loan portfolio was also concentrated in mortgage loans secured by commercial and multifamily real estate properties located in New York and Florida. We also had loans in other states. The properties collateralizing our loans include rental cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial buildings, warehouses, parking lots/garages, mobile home parks, self-storage facilities and some vacant land.

At March 31, 2013, our real estate loans consisted of 535 loans with an aggregate principal balance of $1.08 billion and an average loan size of $2.0 million. Loans with principal balances of more than $10 million consisted of 9 loans with an aggregate principal balance of $117 million, with the largest loan being $16.6 million. Loans with principal balances of $5 million to $10 million consisted of 37 loans and aggregated to $238 million.


Table of Contents

The table below sets forth the location of properties securing the real estate loan portfolio at March 31, 2013.

                                                 New York              Florida          Other States          Total Loans                     Impaired
($ in thousands)                             #        Amount        #     Amount        #     Amount        #      Amount            %         Loans
Commercial Real Estate:
Retail:
Shopping centers. - anchored (1)               7     $  21,849       8   $  25,220       7   $  23,075      22   $    70,144         6.5 %     $ 4,465
Shopping centers - grocery anchored (1)        2        17,491       -           -       2       6,624       4        24,115         2.2             -
Shopping centers - unanchored (1)             50       110,916      11      25,675       8      12,521      69       149,112        13.8        18,349
Mixed-use commercial (2)                      72       151,782       6      13,955       4       4,454      82       170,191        15.7         3,523
Single tenant - credit (3)                    17        16,873       5       6,136       -           -      22        23,009         2.1             -
Single tenant - noncredit (3)                 30        40,248      17      19,733      18      15,960      65        75,941         7.0             -
Office buildings (4)                          20        68,594      15      44,618       9      21,867      44       135,079        12.5        16,171
Industrial/warehouses (5)                     14        23,835       2       2,397       1         624      17        26,856         2.5             -
Hotels (6)                                    10        37,606       6      30,241       -           -      16        67,847         6.3             -
Mobile home parks (7)                          -             -      13      21,360       1       1,676      14        23,036         2.1             -
Mini-storage (8)                               6        20,853       1       2,069       -           -       7        22,922         2.1             -
Parking lots/garages                           7        23,212       -           -       -           -       7        23,212         2.1             -
Multifamily (5 or more units):
Rent regulated apartments (9)                 38        60,961       -           -       -           -      38        60,961         5.6             -
Non-rent regulated apartments (9)             22        27,746      23         493       3       5,993      48        34,232         3.2             -
Garden apartments (10)                         3         3,044      18      41,534       2       3,040      23        47,618         4.4        10,038
Mixed-use multifamily (2)                     31        58,397       -           -       3       3,623      34        62,020         5.7             -
One to four family (11)                        2         3,521      15      56,244       1       1,104      18        60,869         5.6             -
Land                                           1           227       3       4,128       1       2,063       5         6,418         0.6         2,290
Total real estate loans                      332     $ 687,155     143   $ 293,803      60   $ 102,624     535   $ 1,083,582       100.0 %     $54,836
Average loan balance                                 $   2,070           $   2,055           $   1,710           $     2,025
Loans with personal guarantees               181     $ 340,224     117   $ 223,335      35   $  66,159     333   $   629,718        58.1 %
Loans on substantially vacant properties      13     $  22,909       6   $  23,955      35   $  10,446      54   $    57,310         5.3 %
Loans on nonaccrual status                     1     $   3,023       6   $  31,068       4   $   6,840      11   $    40,931         3.8 %

(1) Comprised predominantly of neighborhood/community strip shopping centers containing general merchandise and convenience retailers, including grocery, drug, service, personal care, repair, discount and home improvement stores. An anchored center contains one tenant, which may be either a credit or non-credit tenant, whose percentage of the property's total income and rentable space is 50% or greater.

(2) Comprised of properties having both residential and commercial use, usually containing retail or commercial space on the ground floor. Mixed use loans are classified as multifamily or commercial based on the greater percentage of income from residential or commercial use. . . .

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