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IBCA > SEC Filings for IBCA > Form 10-Q on 5-Nov-2012All Recent SEC Filings




Quarterly Report

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


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 2011 Annual Report on Form 10-K ("2011 10-K").

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 included in our 2011 10-K. Our business is also affected by various risk factors, which are disclosed beginning on page 31 of our 2011 10-K in Item 1A thereof and updated as needed in Item 1A of Part II of our reports on Form 10-Q.

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 IBC has a website at 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 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 46 to 51 in our 2011 10-K.


Net earnings for the third quarter of 2012 ("Q3-12") amounted to $2.2 million, or $0.10 per diluted common share, compared to $2.6 million, or $0.12 per share, for the third quarter of 2011 ("Q3-11"). For the first nine months of 2012 ("9mths-12"), net earnings amounted to $7.3 million or $0.34 per share, compared to $6.8 million, or $0.32 per share, for the first nine months of 2011 ("9mths-11").

Key components of our performance are summarized below.

Intervest National Bank's regulatory capital ratios continued to increase through the retention of earnings and a gradual reduction in the size of its balance sheet. The Bank's ratios at September 30, 2012 were as follows: Tier One Leverage - 13.24%; Tier One Risk-Based - 18.41%; and Total Risk-Based Capital - 19.67%; well above its minimum requirements of 9%, 10% and 12%, respectively. Tier One capital amounted to $237 million and was $76 million in excess of the required minimum for the Tier One Leverage ratio.

New loan originations increased to $159 million in the 9mths-12 period, from $50 million in 9mths-11.

Nonaccrual loans decreased to $48 million at September 30, 2012, from $57 million at December 31, 2011. 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 classified nonaccrual based on regulatory guidance. At September 30, 2012, such loans totaled $39 million compared to $46 million at December 31, 2011. These loans were yielding approximately 5% at September 30, 2012.

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Real estate owned through foreclosure (REO) decreased to $21.9 million at September 30, 2012, from $28.3 million at December 31, 2011, reflecting $4.9 million of sales and $2.9 million of writedowns, partially offset by $1.4 million of additions.

Provisions for loan and real estate losses decreased to $1.0 million in Q3-12 from $2.9 million in Q3-11, and $2.9 million in 9mths-12 from $6.9 million in 9mths-11.

Operating expenses amounted to $4.2 million in Q3-12, compared to $3.6 million in Q3-11, and $12.5 million in 9mths-12, compared to $12.1 million in 9mths-11. The Company's efficiency ratio (which measures its ability to control expenses as a percentage of revenues) continued to be favorable and was 38% for Q3-12 and 9mths-12, compared to 29% for Q3-11 and 35% for 9mths-11.

The net interest margin (exclusive of loan prepayment income) increased to 2.32% in Q3-12 and 2.23% in 9mths-12, from 2.13% and 2.17%, respectively, for the same periods of 2011. Net interest and dividend income, which was affected by a smaller balance sheet, amounted to $9.8 million in Q3-12 compared to $10.4 million in Q3-11, and $29.5 million in 9mths-12 compared to $31.7 million in 9mths-11.

Book value per common share (after subtracting preferred dividends in arrears) increased to $8.28 at September 30, 2012, from $8.07 at December 31, 2011.

Since early 2010 through September 30, 2012, INB has steadily lowered the interest rates offered on its deposit products to encourage deposit outflow and reduce the overall size of its balance sheet. This posture combined with the retention of operating earnings has increased INB's regulatory capital ratios significantly during this period. During the same time, INB has also successfully focused on the reduction of its nonperforming and underperforming assets. In addition, as described in our 2011 10-K and 2012 Form10-Q filings to date, each of IBC and INB has also been operating under a formal agreement with its primary regulator during this period which has increased our regulatory expenses, imposed various operating restrictions on us and consumed a large amount of our senior management's time and focus.

As of September 30, 2012, we believe that we were in compliance with all the requirements of both formal agreements. INB's regulator has communicated to us that INB must have sustained performance with respect to several articles in its formal agreement in order to achieve full compliance. We cannot predict when the regulators will consider us in full compliance and when they will lift the formal agreements.

Our real estate lending activities continue to receive increased oversight from the regulators, including among other things, requiring us to reduce our internal commercial real estate loan concentration limits as a percentage of our regulatory capital, as that ratio is defined by the regulators. Furthermore, we cannot predict if additional regulatory burdens may be imposed on us in the future. Depending on market conditions and available lending opportunities that are suitable for us as described below, as well as any regulatory constraints that may affect us, the overall size of INB's balance sheet or its loan portfolio may continue to decline in the near term.

We rely on INB's lending activities for the bulk of our revenues. INB has always emphasized the origination of first mortgage loans secured by commercial and multifamily real estate. Historically, the amount of our loans in these two categories was more closely divided in proportion to each other. Over the past few years, due to increased liquidity in the banking system and widespread increasing competition for these types of loans, particularly multifamily loans in the New York City metropolitan area, the effective loan rates for many of these types of loans (both multifamily and commercial real estate) have been driven down substantially from historical levels, with rates currently being offered at 3% or below for 5 to 10 year multifamily balloon product, with a portion being interest only loans. In addition to this aggressive pricing by our competitors, government agency programs have increased the attractiveness of these loans and have further fueled interest rate and term competition. Further, the low rates have driven up the size of these loans in relation to the value of the underlying collateral.

As a matter of policy, we pursue the financing of multifamily and commercial real estate when we can get loan terms and rates we believe are suitable for us and which meet our underwriting standards. Current conditions in the marketplace have resulted in a large number of our existing loans being repaid through refinancing by other institutions and our new loan originations being more weighted towards commercial real estate loans, with an emphasis on mixed-use type properties and retail strip centers in the New York City metropolitan area.

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This trend, in addition to reducing the overall yield on our loan portfolio as well as that of the banking industry in general, has caused our total commercial real estate loans as a percentage of our total loans to increase from December 31, 2006 to September 30, 2012 from 57% to 75%, compared to a decrease in our multifamily loans from 40% to 24% during the same period. Additionally, during the same time frame, as a result of lower market interest rates, competitive market conditions and lower pricing in originating loans, we have placed greater reliance on fixed-rate loan originations with somewhat longer maturities. To illustrate, fixed-rate loans constituted approximately 78% of the loan portfolio at September 30, 2012, compared to approximately 40% at December 31, 2006. Loans in the portfolio had an average life of approximately 3.7 years at September 30, 2012, compared with 3 years at December 31, 2006. We cannot predict whether all the trends or factors noted above will continue for an additional extended period and how they will impact our loan origination volumes and profitability over the long term.

As a result of our increased capital levels, we are exploring opportunities to repurchase our securities held by the U.S. Treasury as part of the Capital Purchase Program. Any repurchase would require regulatory approvals from both of our primary regulators. We would also need to repay accrued but unpaid interest on our junior subordinated debentures as well as accrued but unpaid dividends on our Series A preferred stock held by the Treasury in connection with the repurchase. See the section entitled "Liquidity and Capital Resources" in this report.

 Comparison of Financial Condition at September 30, 2012 and December 31, 2011

A comparison of selected consolidated balance sheet information follows:

                                            At September 30, 2012                     At December 31, 2011
                                         Carrying              % of               Carrying              % of
($ in thousands)                          Value            Total Assets             Value           Total Assets
Cash and cash equivalents             $       94,268                 5.4 %      $      29,863                 1.5 %
Security investments, net                    452,129                25.8              711,163                36.1
Loans receivable, net of deferred
fees and loan loss allowance               1,126,789                64.3            1,133,375                57.6
Foreclosed real estate, net of
valuation allowance                           21,858                 1.3               28,278                 1.4
All other assets                              56,836                 3.2               66,861                 3.4

Total assets                          $    1,751,880               100.0 %      $   1,969,540               100.0 %

Deposits                              $    1,432,209                81.8 %      $   1,662,024                84.4 %
Borrowed funds and related
interest payable                              69,487                 4.0               78,606                 4.0
All other liabilities                         43,076                 2.4               31,379                 1.6

Total liabilities                          1,544,772                88.2            1,772,009                90.0
Stockholders' equity                         207,108                11.8              197,531                10.0

Total liabilities and
stockholders' equity                  $    1,751,880               100.0 %      $   1,969,540               100.0 %


Total assets at September 30, 2012 decreased to $1.75 billion from $1.97 billion at December 31, 2011, primarily reflecting a decrease in security investments and loans, partially offset by an increase in cash and short-term investments. The net decrease in assets was funded by a reduction in deposit liabilities and borrowed funds.

Cash and Cash Equivalents

Cash and cash equivalents increased to $94 million at September 30, 2012 from $30 million at December 31, 2011. 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 following section for the explanation as to the primary factor causing the increase in this line item. INB expects to utilize a large portion of the September 30 balance to fund new loans over the next several quarters.

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

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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)                      Sep 30,
($ in thousands)                        2011        Purchased      Redeemed         Issuer         Payments           Discount          OTTI         2012
Securities held to maturity:
U.S. government agencies (1)          $ 696,066     $  143,513     $      -       $ (491,970 )    $        -       $       (1,037 )    $   -       $ 346,572
Residential MBS (2)                          -          99,438            -               -            (9,900 )              (863 )        -          88,675
State and municipal                          -             535            -               -                -                   (1 )        -             534
Corporate (3)                             4,378             -             -               -                -                   -         (157 )        4,221

                                        700,444        243,486            -         (491,970 )         (9,900 )            (1,901 )      (157 )      440,002
Other investments:
FRB and FHLB stock (4)                    9,249            245        (1,037 )            -                -                   -           -           8,457
Time deposits with banks (5)              1,470          2,200            -               -                -                   -           -           3,670

                                      $ 711,163     $  245,931     $  (1,037 )    $ (491,970 )    $    (9,900 )    $       (1,901 )    $ (157 )    $ 452,129

(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 (MBS) issued by the Government National Mortgage Association (GNMA) and FNMA.

(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 3 to the financial statements in this report, other than temporary impairment charges totaling $3.8 million have been recorded on the TRUPs as of September 30, 2012.

(4) 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 $5.8 million and $2.6 million, respectively, at September 30, 2012. 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 4.50% on August 17, 2012. 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.

(5) At September 30, 2012, time deposits with banks had a weighted-average yield of 1.23% and remaining maturity of 2.68 years.

All of the investments in the above table were held by INB. Securities are classified as held to maturity 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. In March 2012, INB also began purchasing MBS in an effort to increase the overall yield on its investment portfolio. The resulting proceeds from the reduction in total investments from December 31, 2011 was used to fund planned deposit outflow and a portion was being held temporarily in cash and short-term investments for anticipated funding of new loans as denoted earlier.

At September 30, 2012, the securities held to maturity portfolio had a weighted-average yield to earliest call date of 1.32% and a weighted-average remaining expected life and contractual maturity of 1.3 years and 7.2 years, respectively. Nearly all 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 $300 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 September 30, 2012 and December 31, 2011, the securities held-to-maturity portfolio's estimated fair value was $439 million and $699 million, respectively. At September 30, 2012, the portfolio had a net unrealized loss of $1.3 million, compared to a net unrealized loss of $1.6 million at December 31, 2011.

For additional information concerning our securities held to maturity portfolio, see note 3 to the financial statements included in this report.

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Loans Receivable, Net of Deferred Fees

Total loans receivable, net of deferred fees, amounted to $1.16 billion at
September 30, 2012, unchanged from December 31, 2011.

The table below sets forth information regarding our loan portfolio.

                                                 At September 30, 2012                    At December 31, 2011
($ in thousands)                            # of Loans             Amount            # of Loans            Amount
Commercial real estate loans                         373        $    870,938                  347        $   864,470
Multifamily loans                                    155             277,101                  161            290,011
Land loans                                             7               7,210                    9             11,218

                                                     535           1,155,249                  517          1,165,699

One to four family loans                               2               1,824                    1                 25
Commercial business loans                             19               1,496                   19              1,520
Consumer loans                                        14                 371                   12                329

                                                      35               3,691                   32              1,874

Loans receivable, gross (1)                          570           1,158,940                  549          1,167,573
Deferred loan fees                                                    (3,769 )                                (3,783 )

Loans receivable, net of deferred fees                             1,155,171                               1,163,790
Allowance for loan losses                                            (28,382 )                               (30,415 )

Loans receivable, net                                           $  1,126,789                             $ 1,133,375

The table below sets forth the activity in the net loan portfolio during the first nine months of 2012.

           ($ in thousands)
           Loans receivable, net, at December 31, 2011    $ 1,133,375
           Originations                                       159,476
           Principal repayments and sales                    (164,619 )
           Transfers to foreclosed real estate                 (1,457 )
           Chargeoffs, net of recoveries                       (2,033 )
           Net decrease in deferred loan fees                      14
           Net decrease in allowance for loan losses            2,033

           Loans receivable, net, at September 30, 2012   $ 1,126,789

New loan originations during the period had nearly all fixed interest rates and a weighted-average yield, term and loan-to-value ratio of 4.64%, 6.0 years and 58%, respectively. The new originations were comprised of $93 million of commercial real estate loans, $64 million of multifamily loans and $2 million of other loans. Loans paid off during the first nine months of 2012 had a weighted-average yield of 6.24%.

Loans in the portfolio that had fixed interest rates constituted approximately 85% of the loan portfolio at September 30, 2012. The portfolio also included loans (approximately 13% 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 3.7 years as of September 30, 2012. See the section "Asset and Liability Management" in our 2011 10-K for a further discussion of our fixed-rate loans and their impact on our interest rate risk.

The loan portfolio at September 30, 2012 was also concentrated in mortgage loans secured by commercial and multifamily real estate properties located in New York (65%) and Florida (26%). We also have loans in Connecticut, Georgia, Indiana, Kentucky, Maryland, North Carolina, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia.

The properties collateralizing our loans include 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 some vacant land. At September 30, 2012, our loans secured by the aforementioned real estate consisted of 535 loans with an aggregate principal balance of $1.16 billion and an average loan size of $2.2 million. Loans with principal balances of more than $10 million consisted of 11 loans totaling $141 million, with the largest loan being $16.8 million. Loans with principal balances of $5 million to $10 million consisted of 46 loans and aggregated to $296 million.

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The following table sets forth information regarding loans of more than $10 million at September 30, 2012:

($ in thousands)                                   Principal          Current          Maturity     Days
Property Type           Property Location           Balance        Interest Rate         Date     Past Due         Status
Retail                  White Plains, New York     $   16,837                4.30 %    Apr 2017     None          Accrual
Office building         New York, New York             15,701                6.00 %    Aug 2013     None          Accrual
Office building         New York, New York             15,317                6.13 %    Apr 2015     None          Accrual
Office building         Miami, Florida                 14,834                5.00 %    Oct 2018     None     TDR-nonaccrual (1)
Multifamily             Tampa, Florida                 12,596                6.00 %    Sep 2020     None          Accrual
Hotel                   New York, New York             11,370                4.00 %    Dec 2016     None          Accrual
Office building         Fort Lauderdale, Florida       11,325                6.00 %    May 2016     None          Accrual
Retail                  Brooklyn, New York             11,085                6.00 %    Nov 2013     None          Accrual
Hotel                   New York, New York             10,880                6.00 %    Jul 2014     None          Accrual
Retail                  Manorville, New York           10,608                6.25 %    Sep 2024     None          Accrual
Retail                  New York, New York             10,481                4.50 %    Jul 2022     None          Accrual

                                                   $  141,034

(1) Loan was restructured in June 2011 and is performing in accordance with its restructured terms. Monthly payments are interest only based on 5.00% to June 1, 2013. Beginning July 1, 2013, monthly principal and interest payments resume with a 5.125% interest rate. Thereafter, the interest rate increases each year on June 1 as follows: 5.25%, 5.375%, 5.50%, 5.625% and 5.75%. Regulatory guidance requires the loan to remain on nonaccrual status as of September 30, 2012.

The table below sets forth the location of properties securing the real estate loan portfolio at September 30, 2012.

($ in thousands)                          New York       Florida       New Jersey       Connecticut       Other States         Total
Commercial Real Estate:
Retail                                    $ 378,649     $  95,914     $      8,863     $       5,775     $       47,653     $   536,854
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