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IBCA > SEC Filings for IBCA > Form 10-Q on 1-Aug-2013All Recent SEC Filings

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Form 10-Q for INTERVEST BANCSHARES CORP


1-Aug-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

Our net earnings for the second quarter of 2013 (Q2-13) increased by 39% to $3.2 million, or $0.14 per share, from $2.3 million, or $0.11 per share, for the second quarter of 2012 (Q2-12). For the first half of 2013 (6mths-13), net earnings increased by 30% to $6.6 million, or $0.30 per share, from $5.1 million, or $0.24 per share, for the first half of 2012 (6mths-12). The increase in net earnings for both periods was primarily driven by a credit for loan losses, a lower provision for real estate losses and a decrease in net real estate expenses, partially offset by decreases in both net interest income and noninterest income and higher income tax expense.

Financial Operating Highlights

A credit for loan losses of $0.8 million and $1.8 million was recorded in Q2-13 and 6mths-13, respectively, compared to no credits or provisions for loan losses in the same periods of 2012.

The provision for real estate losses decreased to $0.1 million in Q2-13 from $1.4 million in Q2-12, and to $0.7 million in 6mths-13 from $1.9 million in 6mths-12.

Real estate expenses, net of rental and other income, totaled $0.5 million in Q2-12 and $0.9 million in 6mths-12, compared to net real estate income of $0.3 million in Q2-13 and $1.3 million in 6mths-13.

Net interest and dividend income decreased to $8.6 million in Q2-13, from $9.7 million in Q2-12, and to $17.6 million in 6mths-13 from $19.7 million in 6mths-12.

The net interest margin (exclusive of loan prepayment income) improved to 2.30% in Q2-13, from 2.23% in Q2-12 and to 2.33% in 6mths-13, from 2.19% in 6mths-12.

Noninterest income decreased to $0.7 million in Q2-13 from $1.4 million in Q2-12, and to $1.4 million in 6mths-13 from $2.5 million in 6mths-12.

Operating expenses decreased to $4.0 million in Q2-13 from $4.2 million in Q2-12, and to $8.1 million in 6mths-13 from $8.3 million in 6mths-12.


Table of Contents
The Company's efficiency ratio (which measures its ability to control expenses as a percentage of revenues) continued to be favorable but increased to 43% in Q2-13, from 37% in Q2-12, due to lower revenues.

Income tax expense increased to $2.8 million in Q2-13, from $2.3 million in Q2-12, and to $5.9 million in 6mths-13, from $5.0 million in 6mths-12.

Financial Condition Highlights

Total assets at June 30, 2013 decreased to $1.60 billion from $1.67 billion at December 31, 2012

Loans decreased to $1.06 billion at June 30, 2013 from $1.11 billion at December 31, 2012.

New loan originations for 6mths-13 increased to $124 million from $97 million for 6mths-12.

Loan repayments increased to $172 million in 6mths-13 from $121 million in 6mths-12.

The allowance for loan losses at June 30, 2013 was $26.5 million, representing 2.50% of total net loans, compared to $28.1 million, or 2.54%, at December 31, 2012. The allowance included specific reserves for impaired loans (comprised of all nonaccrual loans as well as accruing restructured loans or TDRs) at each date totaling $4.7 million and $5.9 million, respectively.

Securities held to maturity decreased to $411 million at June 30, 2013 from $444 million at December 31, 2012.

Deposits at June 30, 2013 decreased to $1.29 billion from $1.36 billion at December 31, 2012.

Borrowed funds and related interest payable at June 30, 2013 decreased to $56.7 million from $62.9 million at December 31, 2012.

Nonaccrual loans decreased to $39 million at June 30, 2013 from $46 million at December 31, 2012. Nonaccrual loans include certain TDRs that are current as to payments and performing in accordance with their renegotiated terms. At June 30, 2013, such loans totaled $35.8 million compared to $36.3 million at December 31, 2012. These loans were yielding 4.57% at June 30, 2013.

Real estate owned through foreclosure decreased to $14.8 million at June 30, 2013 from $15.9 million at December 31, 2012.

Stockholders' equity increased slightly to $212 million at June 30, 2013 from $211 million at December 31, 2012.

Book value per common share (after subtracting preferred dividends in arrears) increased to $8.64 at June 30, 2013 from $8.44 at December 31, 2012.

INB's regulatory capital ratios at June 30, 2013 were as follows: Tier One Leverage - 15.45%; Tier One Risk-Based - 20.99%; and Total Risk-Based Capital
- 22.25%, well above the minimum requirements to be considered a well-capitalized institution.

Other Developments During the First Half of 2013

On March 21, 2013, the Office of the Comptroller of the Currency (the "OCC"), 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 the OCC's heightened regulatory capital requirements, which had been in effect since February 2010. As of June 30, 2013, IBC remained subject to its written agreement with the Federal Reserve Bank of New York (the "FRB") and the restrictions contained therein. IBC has been informed by the FRB that it is reviewing the need for such agreement and IBC has advised the FRB that in IBC's view it has complied with the requirements of the agreement.

On June 6, 2013, the U.S Treasury announced its intent to sell its investment in IBC's Series A Fixed Rate Cumulative Perpetual Preferred Stock (the "Preferred Stock"), along with similar investments the Treasury had made in five other financial institutions, primarily to qualified institutional buyers and certain institutional accredited investors in a modified Dutch auction. IBC sought and obtained regulatory approvals allowing it to participate in the auction. Using a modified Dutch auction methodology that established a market price by allowing investors to submit bids at specified increments during the period from June 10, 2013 through June 13, 2013, the Treasury auctioned all of IBC's 25,000 shares of Preferred Stock. IBC was the winning bidder on 6,250 shares of the Preferred Stock and the remaining 18,750 shares were purchased by unrelated third parties. The closing price of the auctioned shares was $970.00 per share.

On June 24, 2013, IBC completed the repurchase of 6,250 shares of the Preferred Stock from the Treasury and those shares were retired. The shares were repurchased at $970.00 per share or $6.1 million, plus an additional $1.2 million in accumulated and unpaid dividends through June 24, 2013, for a total of $7.3 million. At June 30, 2013, preferred dividends accumulated and in arrears on the remaining 18,750 shares of Preferred Stock outstanding totaled $3.7 million. Because the Treasury no longer owns any of IBC's Preferred Stock, IBC is no longer subject to Treasury's regulations concerning executive compensation and corporate governance.

On July 17, 2013, IBC announced its intention to redeem the remaining 18,750 shares of Preferred Stock outstanding. The effective date of the planned redemption is August 15, 2013. The purchase price for these shares will be the stated liquidation value of $1,000 per share, plus any accumulated and unpaid dividends that have been earned thereon or a total expected cost of approximately $22.6 million to redeem the shares, which will be recorded as a reduction in stockholders' equity and regulatory capital. IBC has received all necessary regulatory approvals to complete the redemption.


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    Comparison of Financial Condition at June 30, 2013 and December 31, 2012

A comparison of selected balance sheet information follows:



                                               At June 30, 2013                  At December 31, 2012
                                          Carrying           % of            Carrying            % of
 ($ in thousands)                           Value        Total Assets          Value        Total Assets
 Cash and cash equivalents               $    86,977         5.4%           $    60,395          3.6%
 Securities and other investments            425,596         26.7               458,098          27.5
 Loans receivable, net                     1,029,736         64.5             1,079,363          64.8
 Foreclosed real estate, net                  14,869         0.9                 15,923          1.0
 All other assets                             39,461         2.5                 52,013          3.1
 Total assets                            $ 1,596,639        100.0%          $ 1,665,792         100.0%
 Deposits                                  1,293,175        81.0%           $ 1,362,619         81.8%
 Borrowed funds and related interest
payable                                       56,760         3.5                 62,930          3.8
 All other liabilities                        34,929         2.2                 29,296          1.7
 Total liabilities                         1,384,864         86.7             1,454,845          87.3
 Total stockholders' equity                  211,775         13.3               210,947          12.7
 Total liabilities and stockholders'
equity                                   $ 1,596,639        100.0%          $ 1,665,792         100.0%

Cash and Cash Equivalents

Cash and cash equivalents 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. See the section "Liquidity and Capital Resources" in this report for a discussion of our liquidity and funding commitments.

Securities 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)                       June 30,
 ($ in thousands)                             2012         Purchased        Redeemed        Issuer          Payments           Discount           OTTI           2013
 Securities held to maturity:
U.S. government agencies (1)                $ 355,244         $58,698       $       -      $ (78,673 )     $        -       $         (384 )     $    -       $  334,885
Residential MBS (2)                            84,279           2,204               -              -          (12,899 )               (938 )          -           72,646
State and municipal                               533               -               -              -                -                   (1 )          -              532
Corporate (3)                                   3,721               -               -              -             (107 )                  -         (691 )          2,923

                                              443,777          60,902               -        (78,673 )        (13,006 )             (1,323 )       (691 )        410,986
 Securities available for sale:
Mutual fund (4)                                 1,000              11               -              -                -                    -            -            1,011
 Other investments:
FRB and FHLB stock (5)                          8,151              78               -              -                -                    -            -            8,229
Time deposits with banks (6)                    5,170             200               -              -                -                    -            -            5,370
                                            $ 458,098         $61,191      $        -      $ (78,673 )     $  (13,006 )     $       (1,323 )     $ (691 )     $  425,596

(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 $4.9 million have been recorded on these securities as of June 30, 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 June 30, 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 4.00%. 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 June 30, 2013, time deposits with banks had a weighted-average yield of 1.12% and remaining maturity of 2.3 years.


Table of Contents

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.

At June 30, 2013, the HTM portfolio had a weighted-average yield to earliest call date of 1.04% and a weighted-average remaining expected life and contractual maturity of 3.5 years and 6.6 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 $58 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 June 30, 2013, the HTM portfolio's estimated fair value was $403 million and the portfolio had a net unrealized loss of $8.2 million. For additional information concerning the HTM portfolio, see note 2 to the financial statements in this report.

Loans Receivable, Net

The table below sets forth information regarding our loan portfolio.



                                                   At June 30, 2013                 At December 31, 2012
 ($ in thousands)                             # of Loans        Amount          # of Loans           Amount
 Loans Secured By Real Estate:
  Commercial loans                                    372     $   795,772                376       $   852,213
  Multifamily loans                                   136         197,464                142           208,699
  One to four family loans                             18          59,162                 13            41,676
  Land loans                                            4           5,942                  7             7,167
                                                      530       1,058,340                538         1,109,755
 All Other Loans:
  Business loans                                       19           1,157                 18               949
  Consumer loans                                       15             304                 12               359
                                                       34           1,461                 30             1,308
 Loans receivable                                     564       1,059,801                568         1,111,063
 Deferred loan fees                                                (3,610 )                             (3,597 )
 Loans receivable, net of deferred fees                         1,056,191                            1,107,466
 Allowance for loan losses                                        (26,455 )                            (28,103 )
 Loans receivable, net                                        $ 1,029,736                          $ 1,079,363
 Loans that were on nonaccrual status                             $39,069                          $    45,898
 Loans restructured and on accrual status                          11,464                               20,076

Accruing loans contractually past due 90 days or more 5,285 4,391

At June 30, 2013, our real estate loans consisted of 530 loans with an aggregate principal balance of $1.06 billion and an average loan size of $2.0 million. Loans with principal balances of more than $10 million consisted of 8 loans with an aggregate principal balance of $101 million, with the largest loan being $16.5 million. Loans with principal balances of $5 million to $10 million consisted of 38 loans and aggregated to $241 million.

The table below sets forth the activity in the loan portfolio for the periods indicated.

                                           Quarter Ended          Quarter Ended         Six-Months Ended
 ($ in thousands)                          March 31, 2013         June 30, 2013          June 30, 2013
  Loans receivable, net, at beginning
of period                                 $      1,079,363       $     1,053,272       $        1,079,363
  Originations                                      61,627                62,530                  124,157
  Repayments and principal
amortization                                       (85,722 )             (86,759 )               (172,481 )
  Transfers to foreclosed real estate               (3,040 )                   -                   (3,040 )
  Chargeoffs                                          (115 )              (1,823 )                 (1,938 )
  Recoveries                                         1,222                   818                    2,040
  Net decrease in deferred loan fees                    44                   (57 )                    (13 )
  Net (increase) decrease in allowance
for loan losses                                       (107 )               1,755                    1,648
 Loans receivable, net, at end of
period                                    $      1,053,272       $     1,029,736       $        1,029,736


Table of Contents

New loan originations for 6mths-13 had nearly all fixed interest rates and a weighted-average yield, term and loan-to-value ratio of 4.47%, 5.9 years and 58%, respectively. The originations were comprised of $78.3 million of commercial real estate loans, $25.8 million of multifamily loans, $19.6 million of loans made on investor owned 1-4 family condominiums and $0.5 million of other consumer and business loans. Loans paid off during the period totaled $153.1 million and they had a weighted-average yield of 5.98%.

Loans with fixed interest rates constituted approximately 94% of the loan portfolio at June 30, 2013. The portfolio also included loans (approximately 5% 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 4.2 years as of June 30, 2013. See the section "Asset and Liability Management" in this report as well as our 2012 10-K for a further discussion of our fixed-rate loans and their impact on our interest rate risk.

The table below sets forth the location of properties securing the real estate loan portfolio at June 30, 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     $  21,714         8     $  25,018        7     $  21,419        22     $    68,151         6.4     $   2,746
Shopping centers - grocery anchored (1)            2        17,303         1         1,290        2         6,578         5          25,171         2.4             -
Shopping centers - unanchored (1)                 47       107,217        15        34,802        7        11,590        69         153,609        14.5        18,310
Mixed-use commercial (2)                          69       145,684         5        12,569        4         4,432        78         162,685        15.4           500
Single tenant - credit (3)                        17        16,903         4         4,765        -             -        21          21,668         2.1             -
Single tenant - noncredit (3)                     34        48,377        21        21,809       22        18,759        77          88,945         8.4             -
  Office buildings (4)                            14        40,967        15        44,905        8        20,930        37         106,802        10.1        23,989
  Industrial/warehouses (5)                       15        28,125         3         3,383        -             -        18          31,508         3.0             -
  Hotels (6)                                      10        37,415         6        30,048        -             -        16          67,463         6.4             -
  Mobile home parks (7)                            -             -        14        22,285        1         1,664        15          23,949         2.3             -
  Mini-storage (8)                                 6        20,730         1         2,059        -             -         7          22,789         2.2             -
  Parking lots/garages                             7        23,032         -             -        -             -         7          23,032         2.2             -
 Multifamily (5 or more units):
  Rent regulated apartments (9)                   32        50,219         -             -        -             -        32          50,219         4.8             -
  Non-rent regulated apartments (9)               23        28,646        22           487        3         5,947        48          35,080         3.3             -
  Garden apartments (10)                           2         1,734        16        35,109        3         6,272        21          43,115         4.1         3,150
  Mixed-use multifamily (2)                       32        65,451         -             -        3         3,599        35          69,050         6.5             -
 One to four family (11)                           2         3,508        15        54,556        1         1,098        18          59,162         5.6             -
 Land                                              -             -         3         4,104        1         1,838         4           5,942         0.6         1,838
 Total real estate loans                         319     $ 657,025       149     $ 297,189       62     $ 104,126       530     $ 1,058,340       100.0     $  50,533
 Average loan balance                                    $   2,060               $   1,995              $   1,679               $     1,997
 Loans with personal guarantees                  184     $ 337,890       123     $ 223,310       35     $  59,956       342     $   621,156        58.7
 Loans on substantially vacant properties         25     $  47,381         9     $  30,426        6     $  12,987        40     $    90,794         8.6
 Loans on nonaccrual status                        -             -         4     $  26,128        4     $  12,941         8     $    39,069         3.7

(1) Comprised predominantly of neighborhood/community strip shopping centers containing general merchandise and convenience retailers, including grocery, . . .

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