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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From to
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Commission file number 000-23377
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INTERVEST BANCSHARES CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3699013
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
ONE ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices) (Zip Code)
(212) 218-2800
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO .
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a nonaccelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Check one:
Large accelerated filer Accelerated filer Nonaccelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
YES NO X .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
- -------------------- -------------------
Class A Common Stock, $1.00 par value per share 7,470,490 outstanding as of October 31, 2006
- ----------------------------------------------- --------------------------------------------
Class B Common Stock, $1.00 par value per share 385,000 outstanding as of October 31, 2006
- ----------------------------------------------- ------------------------------------------
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2006
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 2006 (Unaudited) and December 31, 2005. . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2006 and 2005. . . . . . . 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine-Months Ended September 30, 2006 and 2005 . . . . . . . . . . .. . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2006 and 2005. . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . . 7
Review by Independent Registered Public Accounting Firm. . . . . . . . . . . . . . 19
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .. . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . 36
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . .. . . . . . . . . . . . . . . 36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ITEM 1A. RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS . . . . . . . . 37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . 37
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ITEM 6. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Intervest Bancshares Corporation and Subsidiaries (the "Company") is making this
statement in order to satisfy the "Safe Harbor" provision contained in the
Private Securities Litigation Reform Act of 1995. The statements contained in
this report on Form 10-Q that are not statements of historical fact may include
forward-looking statements that involve a number of risks and uncertainties.
Such forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting the Company and are subject to
uncertainties and factors relating to the Company's operations and economic
environment, all of which are difficult to predict and many of which are beyond
the control of the Company, that could cause actual results of the Company to
differ materially from those matters expressed in or implied by forward-looking
statements.
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
($in thousands, except par value) 2006 2005
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited)
Cash and due from banks $ 10,924 $ 11,595
Federal funds sold 63,093 42,675
Commercial paper and other short-term investments 28,984 2,446
-------------------------------
Total cash and cash equivalents 103,001 56,716
Securities held to maturity, net (estimated fair value of $339,661 and $249,088, respectively) 340,783 251,508
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 5,813 5,241
Loans receivable (net of allowance for loan losses of $17,038 and $15,181, respectively) 1,475,314 1,352,805
Accrued interest receivable 9,908 7,706
Loan fees receivable 10,924 10,941
Premises and equipment, net 6,176 6,421
Deferred income tax asset 8,402 6,988
Deferred debenture offering costs, net 5,964 5,610
Investments in unconsolidated subsidiaries 2,166 1,856
Other assets 1,655 631
===============================================================================================================================
TOTAL ASSETS $ 1,970,106 $ 1,706,423
===============================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 4,134 $ 9,188
Interest-bearing deposit accounts:
Checking (NOW) accounts 6,591 7,202
Savings accounts 11,876 17,351
Money market accounts 231,450 223,075
Certificate of deposit accounts 1,347,073 1,118,514
-------------------------------
Total deposit accounts 1,601,124 1,375,330
Borrowed Funds:
Subordinated debentures 95,830 87,390
Subordinated debentures - capital securities 72,166 61,856
Accrued interest payable on all borrowed funds 5,865 6,250
Mortgage note payable 219 229
-------------------------------
Total borrowed funds 174,080 155,725
Accrued interest payable on deposits 4,061 3,232
Mortgage escrow funds payable 28,537 20,302
Official checks outstanding 4,206 11,689
Other liabilities 3,696 3,967
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,815,704 1,570,245
- -------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 12,000,000 shares authorized,
7,470,490 and 7,438,058 shares issued and outstanding, respectively) 7,470 7,438
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 shares issued and outstanding) 385 385
Additional paid-in-capital, common 65,789 65,309
Retained earnings 80,758 63,046
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 154,402 136,178
===============================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,970,106 $ 1,706,423
===============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------
($in thousands, except per share data) 2006 2005 2006 2005
- -------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 28,829 $ 23,569 $ 83,963 $ 63,180
Securities 3,439 1,895 9,408 5,181
Other interest-earning assets 492 297 1,192 664
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TOTAL INTEREST AND DIVIDEND INCOME 32,760 25,761 94,563 69,025
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 16,920 12,029 46,995 31,443
Subordinated debentures 1,987 1,973 5,712 6,036
Subordinated debentures - capital securities 1,106 1,089 3,286 3,268
Other borrowed funds 193 15 440 142
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 20,206 15,106 56,433 40,889
- -------------------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME 12,554 10,655 38,130 28,136
Provision for loan losses 907 1,803 1,857 3,288
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NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 11,647 8,852 36,273 24,848
- -------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Customer service fees 102 105 361 260
Income from mortgage lending activities 326 304 1,115 754
Income from the early repayment of mortgage loans 737 1,348 3,383 3,570
Commissions and fees 50 56 50 115
Gain from early call of investment securities - - - 1
- -------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 1,215 1,813 4,909 4,700
- -------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and employee benefits 2,797 1,336 5,560 4,003
Occupancy and equipment, net 421 395 1,249 1,109
Data processing 180 156 538 438
Professional fees and services 304 172 839 578
Stationery, printing and supplies 44 52 157 161
Postage and delivery 36 31 110 96
FDIC and general insurance 96 82 278 238
Director and committee fees 89 141 311 394
Advertising and promotion 78 52 229 149
All other 157 149 459 523
- -------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 4,202 2,566 9,730 7,689
- -------------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,660 8,099 31,452 21,859
Provision for income taxes 3,776 3,533 13,740 9,522
=============================================================================================================
NET EARNINGS $ 4,884 $ 4,566 $ 17,712 $ 12,337
=============================================================================================================
BASIC EARNINGS PER SHARE $ 0.62 $ 0.66 $ 2.26 $ 1.90
DILUTED EARNINGS PER SHARE $ 0.59 $ 0.61 $ 2.13 $ 1.76
CASH DIVIDENDS PER SHARE $ - $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
2006 2005
----------------------------------------
($thousands) SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of period 7,438,058 $ 7,438 5,886,433 $ 5,886
Issuance of shares upon the conversion of debentures 32,432 32 32,002 32
Issuance of shares in public offering 1,436,468 1,437
- -----------------------------------------------------------------------------------------------
Balance at end of period 7,470,490 7,470 7,354,903 7,355
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CLASS B COMMON STOCK
- -----------------------------------------------------------------------------------------------
Balance at beginning and end of period 385,000 385 385,000 385
- -----------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 65,309 38,961
Issuance of shares upon the conversion of debentures 480 409
Issuance of shares in public offering - 24,898
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Balance at end of period 65,789 64,268
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 63,046 44,862
Net earnings for the period 17,712 12,337
- -----------------------------------------------------------------------------------------------
Balance at end of period 80,758 57,199
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===============================================================================================
TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD 7,855,490 $154,402 7,739,903 $129,207
===============================================================================================
See accompanying notes to condensed consolidated financial statements.
5
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
-----------------------
($in thousands) 2006 2005
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 17,712 $ 12,337
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 410 415
Provision for loan losses 1,857 3,288
Deferred income tax benefit (1,414) (1,501)
Amortization of deferred debenture offering costs 861 890
Amortization of premiums (accretion) of discounts and deferred loan fees, net (7,902) (5,305)
Net decrease in accrued interest payable on debentures (176) (2,613)
Net decrease in official checks outstanding (7,483) (6,598)
Net decrease (increase) in loan fees receivable 17 (2,327)
Net change in all other assets and liabilities 4,070 10,256
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,952 8,842
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INVESTING ACTIVITIES
Maturities and calls of securities held to maturity 96,935 62,820
Purchases of securities held to maturity (185,864) (52,360)
Net increase in loans receivable (123,548) (305,859)
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (572) (1,026)
Purchases of premises and equipment, net (165) (313)
Investment in unconsolidated subsidiaries (310) -
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (213,524) (296,738)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 225,794 308,437
Net increase in mortgage escrow funds payable 8,235 12,477
Net decrease in FHLB advances - (36,000)
Principal repayments of debentures and mortgage note payable (7,260) (29,109)
Gross proceeds from debenture issuance costs 26,310 26,000
Debenture issuance costs (1,222) (1,820)
Gross proceeds from issuance of common stock - 28,370
Common stock issuance costs - (2,035)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 251,857 306,320
- ------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 46,285 18,424
Cash and cash equivalents at beginning of period 56,716 24,599
============================================================================================================
Cash and cash equivalents at end of period $ 103,001 $ 43,023
============================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 54,919 $ 41,547
Income taxes 16,252 9,860
Noncash activities:
Conversion of debentures and accrued interest into Class A common stock 512 441
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
6
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for
information derived from the 2005 audited consolidated financial statements and
notes thereto. The condensed consolidated financial statements in this report
should be read in conjunction with the 2005 audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2005.
The consolidated financial statements include the accounts of Intervest
Bancshares Corporation (a registered financial holding company referred to by
itself as the "Holding Company") and its three wholly owned subsidiaries,
Intervest National Bank (referred to as the "Bank"), Intervest Mortgage
Corporation and Intervest Securities Corporation. All the entities are referred
to collectively as the "Company" on a consolidated basis. All significant
intercompany balances and transactions have been eliminated in consolidation.
Intervest Statutory Trust I, II, III, IV and V are wholly owned subsidiaries of
the Holding Company that are unconsolidated entities as required by Financial
Accounting Standards Board (FASB) Interpretation No. 46-R, "Consolidation of
Variable Interest Entities." The accounting and reporting policies of the
Company conform to United States generally accepted accounting principles and to
general practices within the banking industry.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent liabilities as of the date of the
consolidated financial statements, and revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Estimates
that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the estimated fair values of
financial instruments. In the opinion of management, all material adjustments
necessary for a fair presentation of financial condition and results of
operations for the interim periods presented in this report have been made.
These adjustments are of a normal recurring nature. The results of operations
for the interim periods are not necessarily indicative of results that may be
expected for the entire year or any other interim period.
NOTE 2 - DESCRIPTION OF BUSINESS
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest
Securities Corporation and the Bank's headquarters and full-service banking
office are located on the entire fourth floor of One Rockefeller Plaza in New
York City, New York, 10020-2002, and the main telephone number is 212-218-2800.
The Holding Company's primary business is the ownership and operation of its
subsidiaries. It does not engage in any other substantial business activities
other than a limited amount of real estate mortgage lending, including the
participation in loans originated by the Bank. From time to time, the Holding
Company also issues debt and equity securities to raise funds for working
capital purposes.
The Company's primary business segment is banking and real estate lending. The
Company's lending activities are comprised almost entirely of originating for
its loan portfolio 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 properties, parking lots/garages and vacant land). These
loans have an average life of approximately three years. The Company tends to
lend in areas that are in the process of being revitalized, with a concentration
of loans on properties located in New York State and the State of Florida. A
significant portion of the residential properties are located in New York City
and are subject to rent control and rent stabilization laws, which limit the
ability of the property owners to increase rents.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Plaza in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank expects to open
an additional branch office in Clearwater Beach, Florida by November 1, 2006.
The Bank conducts a personalized commercial and consumer banking business and
attracts deposits from the areas served by its banking offices. The Bank also
provides internet banking services through its web site:
www.intervestnatbank.com, which can attract deposit customers from outside its
primary market areas. The deposits, together with funds derived from other
sources, are mainly used to originate mortgage loans secured by commercial and
multifamily real estate properties and to purchase investment securities. The
information on the aforementioned web site is not and should not be considered
part of this report and is not incorporated by reference.
7
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - DESCRIPTION OF BUSINESS - CONTINUED
Intervest Mortgage Corporation's business focuses on the origination of first
mortgage and junior mortgage loans secured by commercial and multifamily real
estate properties. It also provides loan origination services to the Bank.
Intervest Mortgage Corporation funds its lending business through the issuance
of subordinated debentures in public offerings. It currently has one wholly
owned subsidiary, Intervest Realty Servicing Corporation, which is engaged in
certain mortgage servicing activities.
Intervest Securities Corporation is a broker/dealer and a member of the National
Association of Securities Dealers (NASD) whose business activities to date have
not been material. Its only revenues have been derived from participating as a
selected dealer from time to time in offerings of debt securities of Intervest
Mortgage Corporation and the Holding Company. In October 2006, the limited
operations of Intervest Securities Corporation were discontinued and its net
assets will be distributed to the Holding Company during the fourth quarter of
2006.
Intervest Statutory Trust I, II, III, IV and V issued in December 2001,
September 2003, March 2004, September 2004, and September 2006, trust preferred
securities of $15 million each for Trust I to IV and $10 million for Trust V for
a total of $70 million. Each trust was formed for the sole purpose of issuing
and administering the trust preferred securities and they do not conduct any
trade or business. For a further discussion, see note 8 herein.
NOTE 3 - SECURITIES
The carrying value (amortized cost) and estimated fair value of securities held
to maturity are as follows:
Gross Gross Estimated Wtd-Avg
Amortized Unrealized Unrealized Fair Wtd-Avg Remaining
($in thousands) Cost Gains Losses Value Yield Maturity
- ----------------------------------------------------------------------------------------------
At September 30, 2006 $ 340,783 $ 119 $ 1,241 $ 339,661 4.53% 1.5 Years
At December 31, 2005 $ 251,508 $ 14 $ 2,434 $ 249,088 3.26% 1.1 Years
- ----------------------------------------------------------------------------------------------
All the securities at September 30, 2006 and December 31, 2005 were debt
obligations of U.S. government corporations or sponsored agencies (such as FHLB,
FNMA, FHLMC or FFCB) and were held by the Bank. The securities have fixed rates
or have predetermined scheduled rate increases, and many have call features that
allow the issuer to call the security at par before its stated maturity without
penalty.
At September 30, 2006, the portfolio consisted of 197 securities, of which 156
had an unrealized loss. A large portion of the unrealized losses were for a
continuous period of more than 12 months. Management believes that the cause of
these unrealized losses is directly related to changes in market interest rates,
which have steadily increased since June 2004. In general, as interest rates
rise, the fair value of fixed rate securities will decrease; as interest rates
fall, their fair value will increase.
Management views the unrealized losses noted above to be temporary based on the
impact of changes in interest rates, the very short maturities of the
investments and their high credit quality. In addition, the Bank has the ability
and intent to hold its investments for a period of time sufficient for the fair
value of the securities to recover. To date, the Bank has always recovered the
cost of its investment securities upon maturity. Management evaluates securities
for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation.
The amortized cost and estimated fair value of securities held to maturity by
remaining term to contractual maturity is as follows:
($in thousands) Amortized Cost Estimated Fair Value Average Yield
----------------------------------------------------------------------------------------------
At September 30, 2006:
Due in one year or less $ 118,884 $ 118,220 3.77%
Due after one year through five years 221,899 221,441 4.94%
----------------------------------------------------------------------------------------------
$ 340,783 $ 339,661 4.53%
----------------------------------------------------------------------------------------------
At December 31, 2005:
Due in one year or less $ 124,413 $ 123,345 2.71%
Due after one year through five years 127,095 125,743 3.79%
----------------------------------------------------------------------------------------------
$ 251,508 $ 249,088 3.26%
----------------------------------------------------------------------------------------------
There were no securities classified as available for sale or any sales of
securities during the reporting periods.
8
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
At September 30, 2006 At December 31, 2005
----------------------- -----------------------
($in thousands) # of Loans Amount # of Loans Amount
-----------------------------------------------------------------------------------------
Commercial real estate loans 280 $ 814,929 264 $ 735,650
Residential multifamily loans 234 621,096 234 538,760
Land development and other land loans 24 67,474 31 105,251
Residential 1-4 family loans 2 52 3 100
Commercial business loans 21 816 22 1,089
Consumer loans 14 225 10 194
-----------------------------------------------------------------------------------------
Loans receivable 575 1,504,592 564 1,381,044
-----------------------------------------------------------------------------------------
Deferred loan fees (12,240) (13,058)
-----------------------------------------------------------------------------------------
Loans receivable, net of deferred fees 1,492,352 1,367,986
-----------------------------------------------------------------------------------------
Allowance for loan losses (17,038) (15,181)
-----------------------------------------------------------------------------------------
Loans receivable, net $1,475,314 $1,352,805
-----------------------------------------------------------------------------------------
At September 30, 2006, there were three real estate loans totaling $7.7 million
on nonaccrual status, compared to two real estate loans totaling $0.7 million at
December 31, 2005. Nonaccrual loans are considered impaired under the criteria
of SFAS No. 114, but no valuation allowance was maintained at any time since the
Company believes that the estimated fair value of the underlying collateral for
each loan exceeded its recorded investment in each loan. At September 30, 2006
and December 31, 2005, there were no other impaired loans. At September 30, 2006
and December 31, 2005, there were $18.6 million and $2.6 million, respectively,
of loans ninety days past due and still accruing interest because they were
deemed by management to be well secured and in the process of collection.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $157,000 for the quarter ended September 30, 2006
and $273,000 for the nine months ended September 30, 2006, compared to $19,000
and $55,000, respectively, for the same periods of 2005. The average principal
balance of nonaccrual loans for the quarter and nine months ended September 30,
2006 and 2005 was $6.2 million and $3.8 million for the 2006 periods, and $0.8
million and $2.1 million for the 2005 periods, respectively.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Quarter Ended September 30, Nine-Months Ended September 30,
------------------------------------ ----------------------------------
($in thousands) 2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 16,131 $ 12,591 $ 15,181 $ 11,106
Provision charged to operations 907 1,803 1,857 3,288
- ----------------------------------------------------------------------------------------------------------
Balance at end of period $ 17,038 $ 14,394 $ 17,038 $ 14,394
- ----------------------------------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
At September 30, 2006 At December 31, 2005
------------------------ ------------------------
Wtd-Avg Wtd-Avg
($in thousands) Amount Stated Rate Amount Stated Rate
-----------------------------------------------------------------------------
Within one year $ 616,709 4.69% $ 381,968 3.77%
Over one to two years 198,023 4.49 259,698 4.30
Over two to three years 220,968 4.50 126,546 4.13
Over three to four years 178,831 4.66 160,344 4.43
Over four years 132,542 5.26 189,958 4.69
-----------------------------------------------------------------------------
$1,347,073 4.68% $1,118,514 4.18%
-----------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $489.8 million and
$371.8 million at September 30, 2006 and December 31, 2005, respectively. At
September 30, 2006, certificate of deposit accounts of $100,000 or more by
remaining maturity were as follows: $226.9 million due within one year; $68.0
million due over one to two years; $78.6 million due over two to three years;
$59.5 million due over three to four years; and $56.8 million due over four
years.
9
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures by series and mortgage note payable are summarized as follows:
At September 30, At December 31,
($in thousands) 2006 2005
- ------------------------------------------------------------------------------------------------------------------
INTERVEST MORTGAGE CORPORATION:
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 $ - $ 2,000
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 - 1,500
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 - 2,500
Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4% fixed - due April 1, 2007 2,000 2,000
Series 11/28/03 - interest at 6 1/2% fixed - due April 1, 2009 3,500 3,500
Series 11/28/03 - interest at 6 3/4% fixed - due April 1, 2011 4,500 4,500
Series 06/07/04 - interest at 6 1/4% fixed - due January 1, 2008 2,500 2,500
Series 06/07/04 - interest at 6 1/2% fixed - due January 1, 2010 4,000 4,000
Series 06/07/04 - interest at 6 3/4% fixed - due January 1, 2012 5,000 5,000
Series 03/21/05 - interest at 6 1/4% fixed - due April 1, 2009 3,000 3,000
Series 03/21/05 - interest at 6 1/2% fixed - due April 1, 2011 4,500 4,500
Series 03/21/05 - interest at 7% fixed - due April 1, 2013 6,500 6,500
Series 08/12/05 - interest at 6 1/4% fixed - due October 1, 2009 2,000 2,000
Series 08/12/05 - interest at 6 1/2% fixed - due October 1, 2011 4,000 4,000
Series 08/12/05 - interest at 7% fixed - due October 1, 2013 6,000 6,000
Series 06/12/06 - interest at 6 1/2% fixed - due July 1, 2010 2,000 -
Series 06/12/06 - interest at 6 3/4% fixed - due July 1, 2012 4,000 -
Series 06/12/06 - interest at 7% fixed - due July 1, 2014 10,000 -
-----------------------------------
92,750 82,750
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 1,830 2,140
Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 - 1,250
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250
-----------------------------------
3,080 4,640
INTERVEST NATIONAL BANK:
Mortgage note payable (1) - interest at 7% fixed - due February 1, 2017 219 229
- ------------------------------------------------------------------------------------------------------------------
$ 96,049 $ 87,619
- ------------------------------------------------------------------------------------------------------------------
(1) The note cannot be prepaid except during the last year of its term.
Scheduled contractual maturities as of September 30, 2006 were as follows:
($in thousands) Principal Accrued Interest
-----------------------------------------------------------------------------------
For the period October 1, 2006 to December 31, 2006 $ 4 $ 1,358
For the year ended December 31, 2007 7,015 245
For the year ended December 31, 2008 15,846 2,425
For the year ended December 31, 2009 13,517 397
For the year ended December 31, 2010 15,019 331
Thereafter 44,648 551
-----------------------------------------------------------------------------------
$ 96,049 $ 5,307
-----------------------------------------------------------------------------------
10
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
Intervest Bancshares Corporation repaid the following debentures in the first
nine months of 2006:
- - Series 12/15/00 due 4/1/06 were repaid early on 3/1/06 for $1.25 million of
principal and $18,000 of accrued interest.
Intervest Mortgage Corporation issued and repaid the following debentures in the
first nine months of 2006:
- - Series 06/28/99 due 7/1/06 were repaid early on 5/1/06 for $2.0 million of
principal and $1.6 million of accrued interest;
- - Series 01/21/03 due 7/1/06 were repaid early on 5/1/06 for $1.5 million of
principal and $8,000 of accrued interest;
- - Series 07/25/03 due 10/1/06 were repaid early on 9/1/06 for $2.5 million of
principal and $27,000 of accrued interest; and
- - Series 06/12/06 issued in July for $16.0 million of principal for net
proceeds, after offering costs, of $14.8 million.
Interest is paid quarterly on Intervest Mortgage Corporation's debentures except
for the following: all of Series 9/18/00; $0.6 million of Series 8/01/01; $0.2
million of Series 1/17/02; $1.1 million of Series 8/05/02; $1.8 million of
Series 11/28/03; $1.9 million of Series 6/7/04; $1.9 million of Series 3/21/05;
$1.8 million of Series 8/12/05 and $2.3 million of Series 6/12/06, all of which
accrue and compound interest quarterly, with such interest due and payable at
maturity.
The holders of Intervest Mortgage Corporation's Series 9/18/00 and 1/17/02
through 8/12/05 debentures can require Intervest Mortgage Corporation, on a
first come basis during a specified time, to repurchase the debentures for face
amount plus accrued interest once each year (beginning January 1, 2007 for
Series 11/28/03, January 1, 2008 for Series 6/7/04, April 1, 2009 for Series
3/21/05 and October 1, 2009 for Series 8/12/05). However, in no calendar year
can the required purchases be more than $100,000 in principal amount of each
maturity, in each series of debentures, on a non-cumulative basis.
Intervest Mortgage Corporation's debentures may be redeemed at its option at any
time, in whole or in part, for face value, except Series 8/12/05 and Series
6/12/06, which would be at a premium of 1% if they were redeemed prior to April
1, 2007 and January 1, 2008, respectively. All the debentures are unsecured and
subordinate to all present and future senior indebtedness, as defined in the
indenture related to each debenture.
On November 1, 2006, Intervest Mortgage Corporation repaid early certain
debentures scheduled to mature at various times through April 1, 2009 for a
total of $10.3 million ($9.0 million of principal and $1.3 million of accrued
interest). Unamortized offering costs associated with these debentures of $0.1
million was expensed as a result of the early retirement.
The Holding Company's Series 5/14/98 subordinated debentures are convertible
along with accrued interest at the option of the holders at any time prior to
April 1, 2008 into shares of its Class A common stock at the following
conversion prices per share: $16.00 in 2006; $18.00 in 2007 and $20.00 from
January 1, 2008 through April 1, 2008. In the first nine months of 2006,
$519,000 of debentures ($310,000 of principal and $209,000 of accrued interest)
were converted into shares of Class A common stock at $16.00 per share.
At September 30, 2006, interest accrued and compounded quarterly on $1.4 million
of the Holding Company's convertible debentures at the rate of 8% per annum,
while $0.4 million of the convertible debentures pay interest quarterly at the
rate of 8% per annum. All accrued interest of $1.3 million is due and payable at
maturity whether by acceleration, redemption or otherwise. Any convertible
debenture holder may, on or before July 1 of each year, elect to be paid all
accrued interest and to thereafter receive regular quarterly payments of
interest. The Holding Company may redeem any of its debentures, in whole or in
part, at any time for face value.
NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as trust preferred securities) are
summarized as follows:
At September 30, 2006 At December 31, 2005
--------------------- ---------------------
Accrued Accrued
($in thousands) Principal Interest Principal Interest
- ---------------------------------------------------------------------------------------------------------
Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 441 $ 15,464 $ 59
- ---------------------------------------------------------------------------------------------------------
Capital Securities II - debentures due September 17, 2033 15,464 38 15,464 35
Capital Securities III - debentures due March 17, 2034 15,464 33 15,464 31
Capital Securities IV - debentures due September 20, 2034 15,464 29 15,464 29
Capital Securities V - debentures due December 15, 2036 10,310 17 - -
- ---------------------------------------------------------------------------------------------------------
$ 72,166 $ 558 $ 61,856 $ 154
- ---------------------------------------------------------------------------------------------------------
11
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
The Capital Securities are obligations of the Holding Company's wholly owned
statutory business trusts, Intervest Statutory Trust I, II, III IV and V. Each
Trust was formed with a capital contribution of $464,000 (except for Statutory
Trust V which was formed with $310,000) from the Holding Company and for the
sole purpose of issuing and administering the Capital Securities. The proceeds
from the issuance of the Capital Securities together with the capital
contribution for each Trust were used to acquire the Holding Company's Junior
Subordinated Debentures that are due concurrently with the Capital Securities.
The Capital Securities, net of the Company's capital contributions totaling $2.2
million, qualify as regulatory capital.
The sole assets of the Trusts, the obligors on the Capital Securities, are the
Junior Subordinated Debentures. In addition, for each Trust, the Holding Company
has guaranteed the payment of distributions on, payments on any redemptions of,
and any liquidation distribution with respect to the Capital Securities.
Issuance costs of $0.5 million, $0.4 million, $0.4 million and $0.2 million
associated with Capital Securities I, II, III and IV, respectively, have been
capitalized by the Holding Company and are being amortized over the life of the
securities using the straight-line method. There are no deferred costs
associated with Capital Securities V.
Interest payments on the Junior Subordinated Debentures (and the corresponding
distributions on the Capital Securities) are payable in arrears as follows:
Capital Securities I - semi-annually at the fixed rate of 9.875% per annum;
Capital Securities II - quarterly at the fixed rate of 6.75% per annum until
September 17, 2008 and thereafter at the rate of 2.95% over 3 month libor;
Capital Securities III - quarterly at the fixed rate of 5.88% per annum until
March 17, 2009 and thereafter at the rate of 2.79% over 3 month libor; Capital
Securities IV - quarterly at the fixed rate of 6.20% per annum until September
20, 2009 and thereafter at the rate of 2.40% over 3 month libor; and Capital
Securities V - quarterly at the fixed rate of 6.83% per annum until September
15, 2011 and thereafter at the rate of 1.65% over 3 month libor.
Interest payments may be deferred at any time and from time to time during the
term of the Junior Subordinated Debentures at the election of the Holding
Company for up to 20 consecutive quarterly periods, or 5 years. There is no
limitation on the number of extension periods the Holding Company may elect;
provided, however, no deferral period may extend beyond the maturity date of the
Junior Subordinated Debentures. During an interest deferral period, interest
will continue to accrue on the Junior Subordinated Debentures and interest on
such accrued interest will accrue at an annual rate equal to the interest rate
in effect for such deferral period, compounded quarterly from the date such
interest would have been payable were it not deferred. At the end of the
deferral period, the Holding Company will be obligated to pay all interest then
accrued and unpaid.
All of the Capital Securities are subject to mandatory redemption as follows:
(i) in whole, but not in part, upon repayment of the Junior Subordinated
Debentures at stated maturity or earlier, at the option of the Holding Company,
within 90 days following the occurrence and continuation of certain changes in
the tax or capital treatment of the Capital Securities, or a change in law such
that the Trust would be considered an investment company, contemporaneously with
the redemption by the Holding Company of the Junior Subordinated Debentures; and
(ii) in whole or in part at any time on or after December 18, 2006 for Capital
Securities I, September 17, 2008 for Capital Securities II, March 17, 2009 for
Capital Securities III, September 20, 2009 for Capital Securities IV and
September 15, 2011 for Capital Securities V contemporaneously with the optional
redemption by the Holding Company of the Junior Subordinated Debentures in whole
or in part. Any redemption would be subject to the receipt of regulatory
approvals.
The Holding Company intends to use the proceeds from the sale of Capital
Securities V (that was completed in September 2006), together with $5 million of
available cash on hand, to redeem on December 18, 2006 Capital Securities I in
the principal amount of $15 million. The net effect of these actions will reduce
the Company's future annual interest expense by $0.8 million. Upon the
redemption of Capital Securities I, $0.4 million of related unamortized issuance
costs will be expensed in the fourth quarter of 2006.
12
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT
From time to time, the Bank may borrow funds on an overnight or short-term basis
to manage its liquidity needs. At September 30, 2006, the Bank had agreements
with correspondent banks whereby it could borrow up to $16 million on an
unsecured basis.
In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and
the Federal Reserve Bank of New York (FRB), the Bank can also borrow from these
institutions on a secured basis. At September 30, 2006, the Bank had available
collateral consisting of investment securities to support total borrowings of
$331 million from the FHLB and FRB. At September 30, 2006, there were no
borrowings outstanding from any of the sources noted above.
The following is a summary of certain information regarding short-term
borrowings in the aggregate:
Quarter Ended Nine-Months Ended
September 30, September 30,
-------------------------------------
($in thousands) 2006 2005 2006 2005
- ------------------------------------------------------------------------------------------
Balance at period end $ - $ - $ - $ -
Maximum amount outstanding at any month end $46,200 $3,000 $46,200 $17,000
Average outstanding balance for the period $13,526 $1,108 $10,854 $ 6,234
Weighted-average interest rate paid for the period 5.54% 3.94% 5.27% 2.79%
Weighted-average interest rate at period end -% -% -% -%
- ------------------------------------------------------------------------------------------
NOTE 10 - COMMON STOCK WARRANTS
At September 30, 2006, there were 696,465 common stock warrants outstanding that
entitle its current holder, the estate of the former Chairman of the Company,
Jerome Dansker, to purchase one share of the Holding Company's Class A or Class
B common stock as the case may be for each warrant. All warrants are vested and
currently exercisable.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant
-------------------------- Wtd-Avg
Class A Common Stock Warrants: $ 6.67 Exercise Price
- -------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 and September 30, 2006 501,465 $ 6.67
Remaining contractual life in years at September 30, 2006 (1) 0.3
- -------------------------------------------------------------------------------------------------------------
Exercise Price Per Warrant
-------------------------------- Total Wtd-Avg
Class B Common Stock Warrants: $ 6.67 $ 10.00 Warrants Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 and September 30, 2006 145,000 50,000 195,000 $ 7.52
Remaining contractual life in years at September 30, 2006 (1) 1.3 1.3 1.3
- --------------------------------------------------------------------------------------------------------------------------------
(1) At September 30, 2006, the intrinsic value and weighted-average remaining
contractual life for all warrants was $25.5 million and 0.6 years,
respectively.
There were no grants of warrants or options in the first nine months of 2006 and
no compensation expense recorded in any of the reporting periods in connection
with the Company's outstanding warrants.
NOTE 11 - EARNINGS PER SHARE (EPS)
Basic and diluted EPS are calculated in accordance with SFAS No. 128, "Earnings
per Share." Basic EPS is calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding. Diluted EPS is
calculated by dividing adjusted net earnings by the weighted-average number of
shares of common stock and dilutive potential common stock shares that may be
outstanding in the future.
Potential common stock shares consist of shares that may arise from outstanding
dilutive common stock warrants (the number of which is computed using the
"treasury stock method") and from outstanding convertible debentures (the number
of which is computed using the "if converted method"). Diluted EPS considers the
potential dilution that could occur if the Company's outstanding common stock
warrants and convertible debentures were converted into common stock that then
shared in the Company's earnings (as adjusted for interest expense, net of
taxes, that would no longer occur if the debentures were converted).
13
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED
- --------------------------------------------------------------------------------
NOTE 11 - EARNINGS PER SHARE (EPS), CONTINUED
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are summarized
in the table that follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
----------------------------------------------
($in thousands, except share and per share amounts) 2006 2005 2006 2005
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net earnings applicable to common stockholders $ 4,884 $ 4,566 $ 17,712 $ 12,337
Average number of common shares outstanding 7,852,537 6,967,473 7,840,289 6,508,297
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.62 $ 0.66 $ 2.26 $ 1.90
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net earnings applicable to common stockholders $ 4,884 $ 4,566 $ 17,712 $ 12,337
Adjustment to net earnings from assumed conversion of debentures (1) 36 55 113 165
----------------------------------------------
Adjusted net earnings for diluted earnings per share computation $ 4,920 $ 4,621 $ 17,825 $ 12,502
----------------------------------------------
Average number of common shares outstanding:
Common shares outstanding 7,852,537 6,967,473 7,840,289 6,508,297
Potential dilutive shares resulting from exercise of warrants (2) 335,170 269,754 325,656 259,052
Potential dilutive shares resulting from conversion of debentures (3) 197,163 335,664 204,656 339,191
----------------------------------------------
Total average number of common shares outstanding used for dilution 8,384,870 7,572,891 8,370,601 7,106,540
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.59 $ 0.61 $ 2.13 $ 1.76
- -----------------------------------------------------------------------------------------------------------------------
(1) Represents interest expense on dilutive convertible debentures, net of
taxes, that would not occur if they were assumed converted.
(2) All outstanding warrants were considered for the EPS computations.
(3) Convertible debentures (principal and accrued interest) outstanding at
September 30, 2006 and 2005 totaling $3.1 million and $4.6 million,
respectively, were convertible into common stock at a price of $16.00 per
share in 2006 and $14.00 per share in 2005 and resulted in additional
common shares (based on average balances outstanding).
NOTE 12 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments are in the form of commitments to extend credit, unused lines
of credit and standby letters of credit, and may involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated financial statements. The Company's maximum exposure to credit
risk is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination clauses
and normally require payment of fees. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the counterparty. Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The contractual amounts of off-balance sheet financial instruments is summarized
as follows:
At September 30, At December 31,
----------------- ----------------
($in thousands) 2006 2005
---------------------------------------------------------------
Unfunded loan commitments $ 48,558 $ 101,597
Available lines of credit 926 737
Standby letters of credit 100 100
---------------------------------------------------------------
$ 49,584 $ 102,434
---------------------------------------------------------------
14
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY CAPITAL
The Holding Company is subject to regulation, examination and supervision by the
FRB. The Bank is also subject to regulation, examination and supervision by the
Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller
of the Currency of the United States of America (OCC). Intervest Securities
Corporation is subject to regulation, examination and supervision by the U.S.
Securities and Exchange Commission (SEC) and the National Association of
Securities Dealers (NASD).
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet them can initiate certain mandatory and possibly discretionary
actions by the regulators that, if undertaken, could have a direct material
effect on the Company's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. These capital amounts
are also subject to qualitative judgment by the regulators about components,
risk weighting and other factors.
Quantitative measures established by the regulations to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets, as defined by the regulations.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies (BHC), but
with stricter quantitative limits and clearer qualitative standards. The new
rule provides a transition period for BHCs to meet the new, stricter limitations
within regulatory capital by allowing the limits on restricted core capital
elements to become fully effective as of March 31, 2009. Until March 31, 2009,
BHCs generally must comply with the current Tier 1 capital limits. As of
September 30, 2006 and December 31, 2005, assuming the Company no longer
included its trust preferred securities in Tier 1 Capital, the Company would
still exceed the well capitalized threshold under the regulatory framework for
prompt corrective action.
Management believes, as of September 30, 2006 and December 31, 2005, that the
Company and the Bank met all capital adequacy requirements to which they are
subject. As of September 30, 2006, the most recent notification from the Bank's
regulators categorized the Bank as a well-capitalized institution under the
regulatory framework for prompt corrective action, which requires minimum Tier 1
leverage and Tier 1 and total risk-based capital ratios of 5%, 6% and 10%,
respectively. Management is not aware of any current conditions or events
outstanding that would change the designation from well capitalized.
At September 30, 2006, the actual capital of the Bank on a percentage basis was
as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ -----------------
Total capital to risk-weighted assets 12.41% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.31% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 9.84% 4.00% 5.00%
At September 30, 2006, the actual capital of the Company (consolidated) on a
percentage basis was as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ ----------------
Total capital to risk-weighted assets 14.88% 8.00% NA
Tier 1 capital to risk-weighted assets 12.69% 4.00% NA
Tier 1 capital to total average assets - leverage ratio 11.08% 4.00% NA
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital
Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net
capital of $5,000. At September 30, 2006, Intervest Securities Corporation's net
capital was $0.5 million.
15
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 14 - CONTINGENCIES
The Company is party to a class action lawsuit that was filed in conjuntion with
the Company's 2006 proxy statement issued in advance of the Company's 2006
annual meeting of shareholders. The lawsuit was filed in the Court of Chancery
of the State of Delaware, individually and as a class action on behalf of Class
A stockholders. The action challenged the proposed amendment and extension of
warrants held by the Company's former Chairman, Jerome Dansker, which was one of
the items on the agenda for the annual meeting.
Although the Company denied any wrongdoing or liability, it determined that it
was in the best interests of the Company and its stockholders to reach a prompt
and amicable settlement with respect to the action. In that regard, on May 15,
2006, the Company entered into a Memorandum of Understanding with the plaintiff
in the matter. The Memorandum provided, among other things, that: (i) if the
amendments were approved by the stockholders, the authority conferred on the
directors by the amendments would not provide for an extension of the terms of
the warrants for more than 2 years; (ii) in determining incentive compensation
of the chairman, the Company's Compensation Committee would take into
consideration any extension of the term of the warrants, the value of such
extension and any related expense to the Company; and (iii) the Company agreed
to and did send to its stockholders a supplement to its proxy statement. The
proposed amendments were approved by the Company's stockholders at the Annual
Meeting of the Company held on May 25, 2006.
The parties have agreed to a Stipulation of Settlement and dismissal of the
action consistent with the Memorandum. Such settlement remains subject to the
approval by the Court of Chancery before which a motion for approval is
currently pending. By the terms of the Stipulation of Settlement, the Company is
required to pay the fees and out of pocket expenses of plaintiffs counsel in the
class action lawsuit, not to exceed $150,000 in the aggregate. The proposed
settlement will not have a material effect on the Company's business, results of
operations, financial position or liquidity.
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Based on review and consultation with legal counsel, management
does not believe that there is any pending or threatened proceeding against the
Company, which, if determined adversely, would have a material effect on the
business, results of operations, financial position or liquidity of the Company.
NOTE 15 - CONTRACTUAL DEATH BENEFIT PAYMENTS
The Holding Company and its wholly owned subsidiary, Intervest Mortgage
Corporation, are contractually obligated to pay death benefits to the spouse of
each company's former Chairman, Jerome Dansker, pursuant to the terms of the
employment agreements between Jerome Dansker and those two companies. The
employment agreements require the payment to his spouse of an amount called the
"Distribution Amount" during a period called the "Distribution Term." The
Distribution Amount, in the case of the Holding Company is 25% of the amounts
that would have been paid monthly to Jerome Dansker as salary by the Holding
Company and the Distribution Term is the balance of the term of the agreement,
or through June 30, 2014. In the case of Interevst Mortage Corproation, the
Distribution Amount is 50% of the amounts that would have been paid monthly to
Jerome Dansker as salary by Intervest Mortgage Corporation and the Distribution
Term is likewise through June 30, 2014.
As a result of the death of the former Chairman in August 2006, a consolidated
death benefit expense of $1.5 million was recorded in the third quarter of 2006.
The liability is included in the condensed consolidated balance sheet in the
line item "other liabilities" and the expense is included in the statement of
earnings in the line item "salaries and employee benefits." The expense
represents the estimated net present value of the total monthly death benefit
payments of $1.9 million that are payable to the former Chairman's spouse
through June 30, 2014. The difference between the net present value and the
total payments will be recorded as interest expense in future periods through
June 30, 2014. In the event of the death of the spouse of the former Chairman
prior to the June 30, 2014, any remaining payments will be paid in a lump sum to
the spouse's estate.
16
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS
SHARE-BASED COMPENSATION. On January 1, 2006, the Company adopted SFAS No.
123-R "Share-Based Payment" which replaces the existing SFAS 123 and supersedes
APB No. 25. SFAS 123-R requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation
issued to employees and directors, but expresses no preference for a type of
valuation model. SFAS 123-R did not impact any of the Company's outstanding
warrants at January 1, 2006 since all were vested and issued prior to this new
standard. The Company has not issued any new stock warrants and/or options
during 2006. The Company will be required to recognize expense on new stock
warrants/options granted, or modified, which may have a material impact on the
Company's statement of earnings.
CONCENTRATION OF CREDIT RISKS. On January 1, 2006, the Company adopted
Statement of Position ("SOP") 94-6-1, "Terms of Loan Products That May Give Rise
to a Concentration of Credit Risk." The SOP addresses the circumstances under
which the terms of loan products give rise to a concentration of credit risk and
related disclosures and accounting considerations, and is intended to emphasize
the requirement to assess the adequacy of disclosures for all lending products
and the effect of changes in market or economic conditions on the adequacy of
those disclosures. The adoption of this SOP did not impact the Company's
financial statements.
IMPAIRMENT. On January 1, 2006, the Company adopted FASB Staff Position ("FSP")
115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," which supersedes Emerging Issues Task Force Issue ("EITF")
03-1 and related amendments to EITF 03-1. The guidance in FSP 115-1 outlines a
three-step model for identifying investment impairments regarding impairment
measurement, other-than-temporary impairment evaluation and recognition of
other-than-temporary impairment losses and subsequent accounting. It also
carries forward the disclosure requirements of EITF 03-1. The adoption of this
FSP did not impact the Company's financial statements.
ACCOUNTING CHANGES AND ERROR CORRECTIONS. On January 1, 2006, the Company
adopted SFAS No. 154 "Accounting Changes and Error Corrections." This statement
requires entities that voluntarily make a change in accounting principle to
apply that change retrospectively to prior periods' financial statements, unless
this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20,
Accounting Changes, which previously required that most voluntary changes in
accounting principle be recognized by including in the current period's net
income the cumulative effect of changing to the new accounting principle. SFAS
No. 154 also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. Another significant change in practice under SFAS
No. 154 will be that if an entity changes its method of depreciation,
amortization, or depletion for long-lived, non-financial assets, the change must
be accounted for as a change in accounting estimate. Under APB Opinion No. 20,
such a change would have been reported as a change in accounting principle. The
adoption of this statement did not impact the Company's financial statements.
ACCOUNTING FOR PENSION PLANS. In September 2006, the FASB issued SFAS No. 158,
"Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans." SFAS 158 requires recognition in the consolidated statement of financial
condition of the over or underfunded status of postretirement plans, measured as
the difference between the fair value of the plan assets and the benefit
obligation. For pension plans, the benefit obligation is the projected benefit
obligation, for other postretirement plans, the benefit obligation is the
accumulated postretirement obligation. SFAS 158 is effective for the Company on
January 1, 2007. Currently, the Company does not offer any plans covered under
this statement and therefore the adoption of this statement will have no impact
on the Company's financial statements.
FAIR VALUE MEASUREMENTS. In September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements." SFAS 157, among other things, defines fair value,
establishes a framework for measuring fair value and enhances disclosures about
fair value measurements required under other accounting pronouncements, but does
not change existing guidance as to whether or not an instrument is carried at
fair value. SFAS 157 is effective for the Company on January 1, 2008. The
Company is currently evaluating the provisions of SFAS 157 and its potential
effect on its financial statements.
17
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED
ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS. In March 2006, the FASB issued
SFAS No. 156, "Accounting for Servicing of Financial Assets." SFAS 156 amends
SFAS 140 with respect to the accounting for separately-recognized servicing
assets and liabilities. SFAS 156 requires all separately-recognized servicing
assets and liabilities to be initially measured at fair value, and permits
companies to elect, on a class-by-class basis, to account for servicing assets
and liabilities on either a lower of cost or market value basis or a fair value
basis. SFAS 156 is effective for the Company on January 1, 2007. The Company is
currently evaluating the provisions of SFAS 156 and its potential effect on its
financial statements.
FSP FIN 46(R)-6. In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6,
"Determining the Variability to Be Considered in Applying FASB Interpretation
No. 46(R)." FSP FIN 46(R)-6 addresses how variability should be considered when
applying FIN 46(R). Variability affects the determination of whether an entity
is a VIE, which interests are variable interests, and which party, if any, is
the primary beneficiary of the VIE required to consolidate. FSP FIN 46(R)-6
clarifies that the design of the entity also should be considered when
identifying which interests are variable interests. The Company adopted FSP FIN
46(R)-6 effective September 1, 2006. FSP FIN 46(R)-6 must be applied
prospectively to all entities in which the Company first becomes involved with
as of the date of adoption. The adoption of FSP FIN 46(R)-6 is not expected to
have a material effect on the Company's financial statements.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. In June 2006, the FASB issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting for
income taxes by prescribing the minimum recognition threshold that a tax
position must meet to be recognized in the financial statements. FIN 48 also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company
must adopt FIN 48 on January 1 2007. The Company is currently evaluating FIN 48
and its potential effect on its financial statements.
ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS. In February 2006, the FASB
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments",
which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement also
resolves issues addressed in SFAS 133 Implementation Issue No. D1, Application
of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS
155 eliminates the exemption from applying SFAS No. 133 to interests in
securitized financial assets so that similar instruments are accounted for
similarly regardless of the form of the instruments. SFAS 155 also allows a
preparer to elect fair value measurement at acquisition, at issuance, or when a
previously recognized financial instrument is subject to a remeasurement (new
basis) event, on an instrument-by-instrument basis, in case in which a
derivative would otherwise have to be bifurcated. SFAS No. 155 is effective for
all financial instruments acquired or issued by the Company after December 31,
2006. The Company does not expect the adoption SFAS 155 to have a material
effect on its financial statements.
ACCOUNTING FOR MISSTATEMENTS. In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements", providing guidance on quantifying financial statement misstatement
and implementation (e.g., restatement or cumulative effect to assets,
liabilities and retained earnings) when first applying this guidance. SAB 108 is
effective for the Company in 2007. The Company does not believe the guidance
provided by SAB 108 will have a material effect on the Company's financial
statements.
18
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hacker, Johnson & Smith, P.A., P.C., the Company's independent registered
public accounting firm, has made a limited review of the financial data as of
September 30, 2006 and for the three- and nine-month periods ended September 30,
2006 and 2005 presented in this document, in accordance with the standards
established by the Public Company Accounting Oversight Board.
The report of Hacker, Johnson & Smith, P.A., P.C. furnished pursuant to
Article 10 of Regulation S-X is included herein.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of
September 30, 2006 and the related condensed consolidated statements of earnings
for the three- and nine-month periods ended September 30, 2006 and 2005, and the
related condensed consolidated statements of changes in stockholders' equity and
cash flows for the nine-month periods ended September 30, 2006 and 2005. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board, the consolidated balance sheet of the
Company as of December 31, 2005, and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated February 3, 2006, we, based on
our audit expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2005 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ---------------------------------------
HACKER, JOHNSON & SMITH, P.A.,P.C.
Tampa, Florida
November 2, 2006
20
On October 31, 2006 a loan
with a principal balance of $13.4 million secured by a multifamily real estate
property located in Long Island, New York and a loan with a principal balance of
$2.3 million secured by a commercial real estate property located in Brooklyn,
New York were placed on nonaccrual status and foreclosure proceedingshave been
commenced. Management believes that these loans are well secured.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 2005.
Intervest Bancshares Corporation has three wholly owned consolidated
subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and
Intervest Securities Corporation (hereafter referred to collectively as the
"Company" on a consolidated basis). Intervest Bancshares Corporation and
Intervest National Bank may be referred to individually as the "Holding Company"
and the "Bank," respectively. Intervest Bancshares Corporation also has five
wholly owned unconsolidated subsidiaries, Intervest Statutory Trust I, II, III
IV and V. In October 2006, the limited operations of Intervest Securities
Corporation were discontinued and its net assets will be distributed to the
Holding Company during the fourth quarter of 2006. For a discussion of the
Company's business, see note 2 to the condensed consolidated financial
statements in this report.
The Company's principal revenues are derived from interest, dividends and fees
earned on its interest-earning assets, which are comprised of mortgage loans,
securities and other short-term investments. The Company's principal expenses
consist of interest paid on its interest-bearing liabilities, which are
comprised of deposits, debentures and other short-term borrowings, and its
operating and general expenses and income tax expense.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest--earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest-rate
spread will generate net interest income. The interest-rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan losses and income tax expense.
Noninterest income consists mostly of loan and other banking fees as well as
income from loan prepayments. When a mortgage loan is repaid prior to maturity,
the Company may recognize prepayment income, which consists of the recognition
of unearned fees associated with such loans at the time of payoff and the
receipt of additional prepayment fees and interest in certain cases. Many of the
Company's mortgage loans include provisions relating to prepayment and others
prohibit prepayment of indebtedness entirely. The Company's income from loan
prepayments fluctuates and cannot be predicted. Normally, loan prepayments tend
to increase during periods of declining interest rates and tend to decrease
during periods of increasing interest rates. However, given the nature and type
of the mortgage loans the Company originates, including their short average
life, the Company may still experience loan prepayments notwithstanding the
effects of movements in interest rates. Noninterest expenses consist of the
following: compensation and benefits, occupancy and equipment, data processing,
advertising, professional fees, FDIC and general insurance and other operating
and general expenses. The Company's profitability is also significantly affected
by general and local economic conditions, competition, changes in market
interest rates, government policies and actions of regulatory authorities.
The Company's loan portfolio is concentrated (99.9%) 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 properties,
parking lots/garages and vacant land). These loans have an average life of
approximately three years. The Company tends to lend in areas that are in the
process of being revitalized, with a concentration of loans on properties
located in New York State and the State of Florida. A significant portion of the
residential properties are located in New York City and are subject to rent
control and rent stabilization laws, which limit the ability of the property
owners to increase rents.
All loans are subject to the risk of default, otherwise known as credit risk,
which represents the possibility of the Company not recovering amounts due from
its borrowers. A borrower's ability to make payments due under a mortgage loan
is dependent upon the risks associated with real estate investments in general,
including the following: general or local economic conditions in the areas the
properties are located, neighborhood values, interest rates, real estate tax
rates, operating expenses of the mortgaged properties, supply of and demand for
rental
21
units, supply of and demand for properties, ability to obtain and maintain
adequate occupancy of the properties, zoning laws, governmental rules,
regulations and fiscal policies. Additionally, terrorist acts and armed
conflicts, such as the war on terrorism, and natural disasters, such as
hurricanes, may have an adverse impact on economic conditions. Economic
conditions affect the market value of the mortgaged properties underlying the
Company's loans as well as the levels of rent and occupancy of income-producing
properties.
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 32 and 33 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2005.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
-----------------------------------------------------------------------------
OVERVIEW
- --------
Total assets at September 30, 2006 increased to $1.97 billion, from $1.71 billon
at December 31, 2005. Total liabilities at September 30, 2006 increased to $1.82
billion, from $1.57 billion at December 31, 2005, and stockholders' equity
increased to $154.4 million at September 30, 2006, from $136.2 million at
December 31, 2005. Book value per common share increased to $19.66 at September
30, 2006, from $17.41 at December 31, 2005.
Selected balance sheet information as of September 30, 2006 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($in thousands) Company Bank Corp. Corp. Amounts (1) Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 17,548 $ 72,441 $ 33,632 $ 512 $ (21,132) $ 103,001
Security investments - 346,596 - - - 346,596
Loans receivable, net of deferred fees 9,142 1,394,911 88,299 - - 1,492,352
Allowance for loan losses (85) (16,655) (298) - - (17,038)
Investment in consolidated subsidiaries 200,142 - - - (200,142) -
All other assets 4,977 33,382 6,903 4 (71) 45,195
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $231,724 $1,830,675 $ 128,536 $ 516 $ (221,345) $ 1,970,106
- ----------------------------------------------------------------------------------------------------------------------------
Deposits $ - $1,622,264 $ - $ - $ (21,140) 1,601,124
Borrowed funds and related interest payable 77,131 219 96,730 - - 174,080
All other liabilities 191 37,578 2,784 10 (63) 40,500
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 77,322 1,660,061 99,514 10 (21,203) 1,815,704
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 154,402 170,614 29,022 506 (200,142) 154,402
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $231,724 $1,830,675 $ 128,536 $ 516 $ (221,345) $ 1,970,106
- ----------------------------------------------------------------------------------------------------------------------------
(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 balance sheet information follows:
At September 30, 2006 At December 31, 2005
--------------------------- -------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 103,001 5.2% $ 56,716 3.3%
Security investments 346,596 17.6 256,749 15.0
Loans receivable, net of deferred fees and loan loss allowance 1,475,314 74.9 1,352,805 79.3
All other assets 45,195 2.3 40,153 2.4
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,970,106 100.0% $1,706,423 100.0%
- -----------------------------------------------------------------------------------------------------------------------
Deposits $1,601,124 81.3% $1,375,330 80.6%
Borrowed funds and related interest payable 174,080 8.8 155,725 9.1
All other liabilities 40,500 2.1 39,190 2.3
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,815,704 92.2 1,570,245 92.0
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 154,402 7.8 136,178 8.0
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,970,106 100.0% $1,706,423 100.0%
- -----------------------------------------------------------------------------------------------------------------------
22
CASH AND CASH EQUIVALENTS
- ----------------------------
Cash and cash equivalents increased to $103.0 million at September 30, 2006,
from $56.7 million at December 31, 2005, reflecting the temporary investment of
deposit inflows during September 2006. A portion of these funds is expected to
fund new loans and to redeem prior to their scheduled maturities certain
debentures outstanding during the fourth quarter of 2006.
SECURITY INVESTMENTS
- ---------------------
Securities, which the Company has the intent and ability to hold to maturity,
are classified as held to maturity and carried at amortized cost. Currently,
only the Bank holds such security investments, which increased to $340.8 million
at September 30, 2006, from $251.5 million at December 31, 2005. The increase
reflected new purchases exceeding maturities and calls during the period. The
Bank continues to invest in short-term (up to 5 year maturities) U.S. government
agency debt obligations to emphasize liquidity and to currently target its
loan-to-deposit ratio at approximately 85%. This ratio stood at 84% at September
30, 2006.
At September 30, 2006, the held-to-maturity portfolio consisted of short-term
debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank,
Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
with a weighted-average yield of 4.53% and a weighted-average remaining maturity
of 1.5 years, compared to 3.26% and 1.1 years, respectively, at December 31,
2005. The securities are fixed rate or have predetermined scheduled rate
increases, and many have call features that allow the issuer to call the
security before its stated maturity without penalty.
At September 30, 2006 and December 31, 2005, the held-to-maturity portfolio's
estimated fair value was $339.7 million and $249.1 million, respectively. At
September 30, 2006, the held-to-maturity portfolio had net unrealized losses
totaling $1.1 million, compared to $2.4 million at December 31, 2005. Management
believes that the cause of these unrealized losses is directly related to
changes in market interest rates. In general, as interest rates rise, the fair
value of fixed-rate securities will decrease; as interest rates fall, their fair
value will increase. Management views the unrealized losses noted above to be
temporary based on the impact of changes in interest rates, the very short
maturities of the investments and their high credit quality. In addition, the
Bank has the ability and intent to hold its investments for a period of time
sufficient for the fair value of the securities to recover. To date, the Bank
has always recovered the cost of its investment securities upon maturity.
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
their capital stock, which amounted to $3.4 million and $2.4 million,
respectively, at September 30, 2006. The FRB stock currently pays a dividend of
6%, while the FHLB stock dividend fluctuates and most recently was 5.75%. The
total investment, which amounted to $5.8 million at September 30, 2006, compared
to $5.2 million at December 31, 2005, fluctuates based on the Bank's capital
level for the FRB stock and the Bank's loans and borrowings for the FHLB stock.
LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------
Loans receivable, net of deferred fees and allowance for loan losses, increased
to $1.48 billion at September 30, 2006 from $1.35 billion at December 31, 2005.
The growth reflected new mortgage loan originations secured by commercial and
multifamily real estate exceeding principal repayments. New loan originations
totaled $147 million and $437 million in the third quarter and first nine months
of 2006, compared to $221 million and $545 million in the third quarter and
first nine months of 2005, respectively.
Nearly all (99.9%) of the Company's loan portfolio 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
properties, parking lots/garages and vacant land). At September 30, 2006, such
loans consisted of 538 loans with an aggregate principal balance of $1.50
billion and an average principal size of $2.8 million. Loans with principal
balances of $5.0 million or more aggregated to 81 loans or $736.2 million, with
the largest loan amounting to $20.5 million.
Nonaccrual loans at September 30, 2006 totaled $7.7 million and were comprised
of three real estate loans (one collateralized by a multifamily property and two
by commercial properties), compared to two loans totaling $0.7 million on at
December 31, 2005. In September 2006, the Company received full principal
repayment of the loans
23
on nonaccrual status at December 31, 2005. With respect to the nonaccrual loans
at September 30, 2006, foreclosure actions have been commenced for nonpayment.
Nonaccrual loans are considered impaired under the criteria of SFAS No. 114, but
no valuation allowance was maintained at any time since the Company believes
that the estimated fair value of the underlying properties collateralizing each
loan exceeded its recorded investment in each loan. At September 30, 2006 and
December 31, 2005, there were no other impaired loans. On October 31, 2006, a
loan with a principal balance of $13.4 million secured by a multifamily real
estate property located in Long Island, New York, and a loan with a principal
balance of $2.3 million secured by a commercial real estate property located in
Brooklyn, New York were placed on nonaccrual status and foreclosure proceedings
have been commenced. Management believes that these loans are well secured.
Loans ninety days past due and still accruing interest at September 30, 2006 and
December 31, 2005 totaled $18.6 million and $2.6 million, respectively. These
commercial and multifamily real estate loans were deemed by management to be
well secured and in the process of collection. The amount at September 30, 2006
represented six loans; of which five ($16.2 million) have matured and the
borrowers continue to make monthly payments of interest and principal. In
October 2006, $11.9 million of these loans were renewed and extended and $3.7
million was repaid in full. The remaining loan of $3.0 million is expected to be
revewed and extended in November.
At September 30, 2006, the Bank was closely monitoring four real estate loans
totaling $8.5 million, each of which are collateralized by real estate located
in New Jersey. Each loan is guaranteed by a principal who is currently
experiencing legal and financial difficulties and for whom a court-appointed
fiscal agent has been appointed to administer his assets. As of September 30,
2006, three of these loans totaling $7.7 million were on accruing status as the
Bank is receiving payments of principal and interest, and the remaining loan of
$0.8 million was on nonaccrual status and included in the nonaccrual loans
reported above. All four of these loans were originated within the Bank's
underwriting guidelines. Although the Bank believes that all the loans are well
collateralized, there can be no assurance that loan chargeoffs or significant
expenses will not be incurred by the Bank with respect to the ultimate
collection of these loans.
The allowance for loan losses amounted to $17.0 million at September 30, 2006,
compared to $15.2 million at December 31, 2005. The allowance represented 1.14%
of total loans, net of deferred fees, outstanding at September 30, 2006,
compared to 1.11% at December 31, 2005. The increase in the allowance was due to
provisions aggregating $1.8 million during the period resulting largely from
growth in loans outstanding, which amounted to $123.5 million from December 31,
2005.
ALL OTHER ASSETS
- ------------------
All other assets increased to $45.2 million at September 30, 2006, from $40.2
million at December 31, 2005, primarily due to an increase in accrued interest
receivable, which fluctuates based on the amount of loans, investments and other
interest-earning assets outstanding and the timing of interest payments
received.
DEPOSITS
- --------
Deposits increased to $1.60 billion at September 30, 2006, from $1.38 billion at
December 31, 2005, reflecting an increase of $228.6 million in certificate of
deposit accounts, partially offset by a net decrease in checking, savings and
money market accounts totaling $2.8 million.
At September 30, 2006, certificate of deposit accounts totaled $1.35 billion,
and checking, savings and money market accounts aggregated $254.1 million. The
same categories of deposit accounts totaled $1.12 billion and $256.8 million,
respectively, at December 31, 2005. Certificate of deposit accounts represented
84% of total deposits at September 30, 2006, compared to 81% at December 31,
2005. At September 30, 2006 and December 31, 2005, certificate of deposit
accounts included $55.7 million and $40.5 million, respectively, of brokered
deposits.
BORROWED FUNDS AND RELATED INTEREST PAYABLE
- ------------------------------------------------
At September 30, 2006, borrowed funds and related interest payable increased to
$174.1 million, from $155.7 million at December 31, 2005. The increase was
primarily due to issuance of $26.3 million of additional debentures ($10.3
million were issued by the Holding Company to its newly created wholly owned
unconsolidated subsidiary, Intervest Statutory Trust V and $16.0 million were
issued by Intervest Mortgage Corporation. The new debentures were partially
offset by principal repayments of $7.3 million and a $0.4 million net decrease
in related interest payable. In the fourth quarter of 2006, the Company expects
to retire prior to their stated maturity certain debentures. See the section
entitled "Liquidity and Capital Resources" in this report for a further
discussion.
24
ALL OTHER LIABILITIES
- -----------------------
All other liabilities increased to $40.5 million at September 30, 2006, from
$39.2 million at December 31, 2005. The increase was due to the recording of a
$1.5 million liability associated with death benefit payments as discussed in
note 15 to the condensed consolidated financial statements included in the
report.
STOCKHOLDERS' EQUITY
- ---------------------
Stockholders' equity increased to $154.4 million at September 30, 2006 as
follows:
($in thousands) Amount Shares Per Share
---------------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2005 $136,178 7,823,058 $ 17.41
Net earnings for the period 17,712 - -
Convertible debentures converted at election of debenture holders 512 32,432 15.79
---------------------------------------------------------------------------------------------------
Stockholders' equity at September 30, 2006 $154,402 7,855,490 $ 19.66
---------------------------------------------------------------------------------------------------
25
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2006
-----------------------------------------------------------------------------
AND 2005
--------
OVERVIEW
- --------
Consolidated net earnings for the third quarter of 2006 increased by $0.3
million, or 7%, to $4.9 million, or $0.59 per diluted share, from $4.6 million,
or $0.61 per diluted share, in the third quarter of 2005. The earnings per share
calculation for the 2006 period included a greater number of average outstanding
shares resulting primarily from a public offering of 1.4 million shares of Class
A common stock during the third quarter of 2005.
The increase in earnings was due to a $1.9 million increase in net interest and
dividend income and a $0.9 million decrease in the provision for loan losses,
partially offset by a $1.6 million increase in noninterest expenses, a $0.6
million decrease in noninterest income and a $0.3 million increase in the
provision for income taxes. Noninterest expenses for the 2006 period included a
one-time charge of $1.5 million resulting from the Company's contractual
obligation to provide death benefit payments to the spouse of the Company's
former Chairman and founder, Jerome Dansker, who passed away in August of this
year. This charge represents the estimated net present value of the future
contractual payments that total $1.9 million.
The Company's efficiency ratio, which is a measure of its ability to control
expenses as a percentage of its revenues, continued to be favorable and was 20%
(exclusive of the one-time charge) in the third quarter of 2006, compared to 21%
in the third quarter of 2005. The Company's return on average assets and equity
was 1.05% and 12.90%, respectively, in the 2006 third quarter, compared to 1.17%
and 16.32% in the 2005 third quarter.
Selected information regarding results of operations for the third quarter of
2006 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($in thousands) Bank Corp. Corp. Company Amounts (2) Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 29,870 $ 2,871 $ 6 $ 204 $ (191) $ 32,760
Interest expense 17,304 1,889 - 1,204 (191) 20,206
-----------------------------------------------------------------------------
Net interest and dividend income 12,566 982 6 (1,000) - 12,554
Provision for loan losses 915 (8) - - - 907
Noninterest income 1,016 1,454 50 113 (1,418) 1,215
Noninterest expenses 3,759 1,602 52 207 (1,418) 4,202
-----------------------------------------------------------------------------
Earnings before taxes 8,908 842 4 (1,094) - 8,660
Provision for income taxes 3,890 389 2 (505) - 3,776
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,018 $ 453 $ 2 $ (589) $ - $ 4,884
- -------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (1,089) - - 1,089 - -
- -------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 3,929 $ 453 $ 2 $ 500 $ - $ 4,884
- -------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2005 $ 3,114 $ 895 $ 13 $ 544 $ - $ 4,566
- -------------------------------------------------------------------------------------------------------------------------
(1) Dividends to the Holding Company from the Bank provide funds for the debt
service on the subordinated debentures-capital securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise from intercompany deposit accounts and
management and service agreements.
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $12.6 million in the third quarter
of 2006, from $10.7 million in the third quarter of 2005. The improvement was
attributable to a $298 million increase in average interest-earning assets
resulting from continued growth in loans of $240 million and a $58 million
increase in security and short-term investments. This growth was funded by $240
million of additional interest-bearing deposits, $18 million of additional
borrowed funds and a $40 million increase in stockholders' equity.
The Company's net interest margin decreased slightly to 2.71% in the third
quarter of 2006, from 2.74% in the third quarter of 2005. The lower margin was a
function of the Company's cost of funds increasing at a faster pace than its
yield on interest-earning assets, the impact of which was mostly offset by an
increase in the Company's net
26
interest-earning assets of $40 million resulting largely from $26.3 million of
proceeds from the issuance of common stock during the third quarter of 2005 and
increased retained earnings.
In a rising rate environment, the yield on interest-earning assets increased 43
basis points to 7.06% in the 2006 quarter. The increase was a function of rate
increases on existing variable-rate loans indexed to the prime rate (the impact
of which was largely offset by lower yields on new loans originated as well as a
higher level of interest not recorded from nonaccrual loans) and higher yields
earned on security and other short-term investments. The cost of funds increased
by 56 basis points to 4.82% in the 2006 quarter due to higher rates paid on
deposit accounts.
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
--------------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------------
September 30, 2006 September 30, 2005
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate (2) Balance Inc./Exp. Rate (2)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $1,485,882 $ 28,829 7.70% $1,246,341 $ 23,569 7.50%
Securities 316,214 3,439 4.31 260,272 1,895 2.89
Other interest-earning assets 37,600 492 5.19 35,441 297 3.32
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,839,696 $ 32,760 7.06% 1,542,054 $ 25,761 6.63%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 19,115 14,715
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,858,811 $1,556,769
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 6,574 $ 29 1.75% $ 9,855 $ 36 1.45%
Savings deposits 12,741 95 2.96 23,597 153 2.57
Money market deposits 230,458 2,509 4.32 201,607 1,576 3.10
Certificates of deposit 1,239,826 14,287 4.57 1,014,414 10,264 4.01
- -----------------------------------------------------------------------------------------------------------------------
Total deposit accounts 1,489,599 16,920 4.51 1,249,473 12,029 3.82
- -----------------------------------------------------------------------------------------------------------------------
FHLB advances and Fed funds purchased 13,526 189 5.54 1,108 11 3.94
Debentures and related interest payable 97,396 1,987 8.09 93,283 1,973 8.39
Debentures - capital securities 62,977 1,106 6.97 61,856 1,089 6.98
Mortgage note payable 221 4 7.18 235 4 7.01
- -----------------------------------------------------------------------------------------------------------------------
Total borrowed funds 174,120 3,286 7.49 156,482 3,077 7.80
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,663,719 $ 20,206 4.82% 1,405,955 $ 15,106 4.26%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 4,816 5,910
Noninterest-bearing liabilities 38,795 32,971
Stockholders' equity 151,481 111,933
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,858,811 $1,556,769
- -----------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 12,554 2.24% $ 10,655 2.37%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 175,977 2.71% $ 136,099 2.74%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11 1.10
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.05% 1.17%
Return on average equity (2) 12.90% 16.32%
Noninterest expense to average assets (2) 0.90% 0.66%
Efficiency ratio (3) 31% 21%
Average stockholders' equity to average assets 8.15% 7.19%
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans.
(2) Annualized.
(3) Defined as noninterest expenses (excluding the provision for loan losses)
as a percentage of net interest and dividend income plus noninterest
income. Noninterest expenses for the 2006 period included a one-time charge
of $1.5 million.
27
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
For the Quarter Ended September 30, 2006 vs 2005
-----------------------------------------------------------
Increase (Decrease) Due To Change In:
-----------------------------------------------------------
($in thousands) Rate Volume Rate/Volume Total
-------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 623 $ 4,491 $ 146 $ 5,260
Securities 924 404 216 1,544
Other interest-earning assets 166 18 11 195
-------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,713 4,913 373 6,999
-------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits 7 (12) (2) (7)
Savings deposits 23 (70) (11) (58)
Money market deposits 615 224 94 933
Certificates of deposit 1,420 2,260 343 4,023
-------------------------------------------------------------------------------------------------------
Total deposit accounts 2,065 2,402 424 4,891
-------------------------------------------------------------------------------------------------------
FHLB advances and Fed funds purchased 4 122 52 178
Debentures and accrued interest payable (70) 86 (2) 14
Debentures - capital securities (2) 20 (1) 17
Mortgage note payable - - - -
-------------------------------------------------------------------------------------------------------
Total borrowed funds (68) 228 49 209
-------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,997 2,630 473 5,100
-------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ (284) $ 2,283 $ (100) $ 1,899
-------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses decreased by $0.9 million to $0.9 million in the
third quarter of 2006, from $1.8 million in the third quarter of 2005. The
decrease was primarily due to a decrease in the rate of net loan growth over the
prior year period, partially offset by $0.2 million of additional provision
associated with various credit downgrades in the 2006 period. Total loans
outstanding grew by $52.7 million in the 2006 period, compared to $146.5 million
in the 2005 period.
NONINTEREST INCOME
- -------------------
Noninterest income decreased by $0.6 million to $1.2 million in the third
quarter of 2006, from $1.8 million in the third quarter of 2005. The lower
income was due to a decrease in income from the prepayment of mortgage loans.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased by $1.6 million to $4.2 million in the third
quarter of 2006, from $2.6 million in the third quarter of 2005. The increase
was nearly all due to a one-time charge of $1.5 million resulting from the
contractual obligation to provide death benefit payments to the spouse of the
Company's former Chairman and founder, Jerome Dansker (as discussed in note 15
to the condensed consolidated financial statements included in this report).
Excluding the one-time charge, increases in payroll costs of $0.1 million
(resulting from additional employees, salary increases and a higher cost of
employee benefits) and all other operating expenses of $0.2 million associated
with the Company's growth in total assets were largely offset by a decrease of
$0.2 million in executive bonuses. The Company had 75 employees at September 30,
2006, compared to 68 at September 30, 2005.
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased by $0.3 million to $3.8 million in the
third quarter of 2006, from $3.5 million in the third quarter of 2005 due to an
increase in pre-tax income. The Company's effective tax rate (inclusive of state
and local taxes) amounted to 43.6% in the 2006 period and the 2005 period.
28
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 30, 2006 AND 2005
---------------------------
OVERVIEW
- --------
Consolidated net earnings for the first nine months of 2006 increased by $5.4
million, or 44%, to $17.7 million, or $2.13 per diluted share, from $12.3
million, or $1.76 per diluted share, in the first nine months of 2005. The
earnings per share calculation for the 2006 period included a greater average
number of outstanding shares resulting primarily from a public offering of 1.4
million shares of Class A common stock during the third quarter of 2005.
The $5.4 million increase in earnings was due to a $10.0 million increase in net
interest and dividend income, a $1.4 million decrease in the provision for loan
losses and a $0.2 million increase in noninterest income. These items were
partially offset by a $2.0 million increase in noninterest expenses and a $4.2
million increase in the provision for income taxes. Noninterest expenses for the
2006 period included a one-time charge of $1.5 million (as discussed in note 15
to the condensed consolidated financial statements included in this report).
The Company's efficiency ratio, which is a measure of its ability to control
expenses as a percentage of its revenues, improved to 19% (excluding the
one-time charge) in the first nine months of 2006, from 23% in the first nine
months of 2005. The Company's return on average assets and equity was 1.31% and
16.28% for the first nine months of 2006, compared to 1.13% and 16.53%,
respectively, in the first nine months of 2005.
Selected information regarding results of operations for the first nine months
of 2006 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($in thousands) Bank Corp. Corp. Company Amounts (2) Consolidated
- ------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 86,095 $ 8,479 $ 17 $ 583 $ (611) $ 94,563
Interest expense 48,046 5,388 - 3,610 (611) 56,433
----------------------------------------------------------------------------
Net interest and dividend income 38,049 3,091 17 (3,027) - 38,130
Provision for loan losses 1,809 48 - - - 1,857
Noninterest income 4,288 4,539 50 346 (4,314) 4,909
Noninterest expenses 10,329 3,109 65 541 (4,314) 9,730
----------------------------------------------------------------------------
Earnings before taxes 30,199 4,473 2 (3,222) - 31,452
Provision for income taxes 13,160 2,067 1 (1,488) - 13,740
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 17,039 $ 2,406 $ 1 $ (1,734) $ - $ 17,712
- ------------------------------------------------------------------------------------------------------------------------
Intercompany dividends (1) (3,267) - - 3,267 - -
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 13,772 $ 2,406 $ 1 $ 1,533 $ - $ 17,712
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2005 $ 8,523 $ 2,234 $ 24 $ 1,556 $ - $ 12,337
- ------------------------------------------------------------------------------------------------------------------------
(1) Dividends to the Holding Company from the Bank provide funds for the debt
service on the subordinated debentures-capital securities, which is
included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in
consolidation. Such amounts arise from intercompany deposit accounts and
management and service agreements.
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $38.1 million in the first nine
months of 2006, from $28.1 million in the first nine months of 2005. The
improvement was attributable to a $342 million increase in average
interest-earning assets resulting from continued growth in loans of $285 million
and a higher level of security and short-term investments aggregating $57
million. The growth in average assets was funded by $290 million of additional
interest-bearing deposits and a $46 million increase in stockholders' equity.
The Company's net interest margin increased to 2.85% in the first nine months of
2006, from 2.61% in the first nine months of 2005. The higher margin was a
function of the Company's yield on interest-earning assets increasing at a
faster pace than its cost of funds and an increase in net interest-earning
assets of $51 million, resulting largely from $26.3 million of proceeds from the
issuance of common stock during the third quarter of
29
2005 and increased retained earnings. In a rising rate environment, the yield on
interest-earning assets increased 69 basis points to 7.08% in the 2006 period.
The increase was a function of rate increases on existing variable-rate loans
indexed to the prime rate (the impact of which was partially offset by lower
yields on new loans originated as well as a higher level of interest not
recorded from nonaccrual loans) and higher yields earned on security and other
short-term investments. The cost of funds increased by 54 basis points to 4.68%
in the 2006 period due to higher rates paid on deposit accounts.
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
--------------------------------------------------------------------
Nine-Months Ended
--------------------------------------------------------------------
September 30, 2006 September 30, 2005
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate (2) Balance Inc./Exp. Rate (2)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $1,438,349 $ 83,963 7.80% $1,153,425 $ 63,180 7.32%
Securities 314,346 9,408 4.00 259,572 5,181 2.67
Other interest-earning assets 33,224 1,192 4.80 30,569 664 2.90
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,785,919 $ 94,563 7.08% 1,443,566 $ 69,025 6.39%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 16,891 14,921
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,802,810 $1,458,487
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 8,052 $ 111 1.84% $ 11,408 $ 130 1.52%
Savings deposits 14,630 323 2.95 23,547 405 2.30
Money market deposits 237,151 7,286 4.11 195,714 3,943 2.69
Certificates of deposit 1,186,996 39,275 4.42 926,087 26,965 3.89
- -----------------------------------------------------------------------------------------------------------------------
Total deposit accounts 1,446,829 46,995 4.34 1,156,756 31,443 3.63
- -----------------------------------------------------------------------------------------------------------------------
FHLB advances and Fed Funds purchased 10,854 428 5.27 6,234 130 2.79
Debentures and related interest payable 92,611 5,712 8.25 96,066 6,036 8.40
Debentures - capital securities 62,233 3,286 7.06 61,856 3,268 7.06
Mortgage note payable 224 12 7.16 238 12 7.00
- -----------------------------------------------------------------------------------------------------------------------
Total borrowed funds 165,922 9,438 7.61 164,394 9,446 7.68
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,612,751 $ 56,433 4.68% 1,321,150 $ 40,889 4.14%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 5,675 5,942
Noninterest-bearing liabilities 39,322 31,904
Stockholders' equity 145,062 99,491
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,802,810 $1,458,487
- -----------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 38,130 2.40% $ 28,136 2.25%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 173,168 2.85% $ 122,416 2.61%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11 1.09
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.31% 1.13%
Return on average equity (2) 16.28% 16.53%
Noninterest expense to average assets (2) 0.72% 0.70%
Efficiency ratio (3) 23% 23%
Average stockholders' equity to average assets 8.05% 6.82%
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes nonaccrual loans.
(2) Annualized.
(3) Defined as noninterest expenses (excluding the provision for loan losses)
as a percentage of net interest and dividend income plus noninterest
income. Noninterest expenses for the 2006 period included a one-time charge
of $1.5 million.
30
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
For the Nine-Months Ended September 30, 2006 vs 2005
----------------------------------------------------------
Increase (Decrease) Due To Change In:
----------------------------------------------------------
($in thousands) Rate Volume Rate/Volume Total
-------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 4,152 $ 15,642 $ 989 $ 20,783
Securities 2,589 1,097 541 4,227
Other interest-earning assets 436 58 34 528
-------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,177 16,797 1,564 25,538
-------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits 27 (38) (8) (19)
Savings deposits 115 (154) (43) (82)
Money market deposits 2,084 836 423 3,343
Certificates of deposit 3,681 7,612 1,017 12,310
-------------------------------------------------------------------------------------------------------
Total deposit accounts 5,907 8,256 1,389 15,552
-------------------------------------------------------------------------------------------------------
FHLB advances and Fed Funds purchased 116 97 85 298
Debentures and accrued interest payable (108) (218) 2 (324)
Debentures - capital securities - 20 (2) 18
Mortgage note payable 1 (1) - -
-------------------------------------------------------------------------------------------------------
Total borrowed funds 9 (102) 85 (8)
-------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,916 8,154 1,474 15,544
-------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ 1,261 $ 8,643 $ 90 $ 9,994
-------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses decreased by $1.4 million to $1.9 million in the
first nine months of 2006, from $3.3 million in the first nine months of 2005.
The lower provision was primarily due to a decrease in the rate of net loan
growth over the prior year period, partially offset by $0.5 million of
additional provision associated with various credit downgrades in the 2006
period. Total loans outstanding grew by $123.5 million in the 2006 period,
compared to $305.9 million in the 2005 period. The provision for the 2005 period
was also favorably impacted by $0.3 million from the satisfaction of a $3.9
million nonaccrual loan in April 2005.
NONINTEREST INCOME
- -------------------
Noninterest income increased by $0.2 million to $4.9 million in the first nine
months of 2006, from $4.7 million in the first nine months of 2005. The higher
income was primarily due to a $0.3 million increase in fees earned from expired
loan commitments and a $0.1 million increase in banking fee income, partially
offset by a $0.2 million decrease in income from the prepayment of mortgage
loans. Income from the prepayment of mortgage loans for the 2005 period included
$0.6 million from the satisfaction of a $3.9 million nonaccrual loan in April
2005.
NONINTEREST EXPENSES
- ---------------------
Noninterest expenses increased by $2.0 million to $9.7 million in the first nine
months of 2006, from $7.7 million in the first nine months of 2005. Noninterest
expenses increased due to the following: a one-time charge of $1.5 million
associated with death benefits (as discussed in the section entitled "Comparison
of Results of Operations for the Quarters Ended September 30, 2006 and 2005")
and increases in professional fees of $0.3 million and all other operating
expenses of $0.3 million associated with to the Company's growth in total
assets. Payroll costs, exclusive of the one-time charge, remained unchanged as a
$0.5 million increase resulting from additional employees, salary increases and
a higher cost of employee benefits was offset by a $0.5 million decrease in
executive bonuses. The Company had 75 employees at September 30, 2006, compared
to 68 at September 30, 2005.
31
PROVISION FOR INCOME TAXES
- -----------------------------
The provision for income taxes increased by $4.2 million to $13.7 million in the
first nine months of 2006, from $9.5 million in the first nine months of 2005
due to an increase in pre-tax income. The Company's effective tax rate
(inclusive of state and local taxes) amounted to 43.7% in the 2006 period,
compared to 43.6% in the 2005 period.
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
--------------------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. For a
further discussion of these financial instruments, see note 12 to the condensed
consolidated financial statements included in this report.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of the following: retail deposits obtained through the Bank's
branch offices and through the mail; principal repayments of loans; maturities
and calls of securities; issuance of debentures; borrowings from the federal
funds market and through FHLB advances; and cash flow provided by operating
activities. For additional detail concerning the Company's cash flows, see the
condensed consolidated statements of cash flows included in this report.
The Bank's lending business is dependent on its continuing ability to generate a
positive interest rate spread between the rates offered on its deposits and the
yields earned on its loans. The Bank needs to pay competitive interest rates to
attract and retain deposits to fund its loan originations. The Bank has and
expects to continue to rely heavily on certificates of deposit (time deposits)
as its main source of funds. Total consolidated deposits amounted to $1.60
billion at September 30, 2006 and time deposits represented 84%, or $1.35
billion, of those deposits, up from 81% at December 31, 2005. Additionally, time
deposits of $100,000 or more at September 30, 2006 totaled $489.8 million and
included $55.7 million of brokered deposits. Brokered deposits are sold by
investment firms, which are paid a fee by the Bank for placing the deposit. The
Bank must maintain its status as a well-capitalized insured depository
institution in order to solicit and accept, renew or roll over any brokered
deposit without restriction. Time deposits are the only deposit accounts offered
by the Bank that have stated maturity dates. These deposits are generally
considered to be rate sensitive and have a higher cost than deposits with no
stated maturities, such as checking, savings and money market accounts. At
September 30, 2006, the Bank had $616.7 million of time deposits maturing by
September 30, 2007. The Bank expects that a substantial portion of these
deposits will be renewed and stay with the Bank. The Bank has in the past and
may continue in the future to rely on capital contributions from the Holding
Company to increase its capital to support its asset growth. The Holding Company
made a total of $32.5 million of capital contributions to the Bank during 2005.
No contributions of capital were made in the first nine months of 2006. At
September 30, 2006, the Bank had excess capital to support an additional $364
million of growth and still maintain a well-capitalized designation.
The Bank, from time to time, may borrow funds on an overnight or short-term
basis to manage its liquidity needs. The Bank has agreements with
correspondent banks whereby it could borrow up to $16 million on an unsecured
basis at September 30, 2006. As a member of the FHLB and FRB, the Bank can also
borrow from these institutions on a secured basis. In the first nine months of
2006, the Bank borrowed a total of $166.2 million of short-term FHLB advances
and overnight borrowings from correspondent banks, all of which was repaid. At
September 30, 2006 and December 31, 2005, there were no outstanding borrowings
from any of the aforementioned sources. At September 30, 2006, the Bank had
available collateral consisting of investment securities to support total
borrowings of $331 million from the FHLB and FRB.
Intervest Mortgage Corporation has and expects to continue to rely on the
issuance of its subordinated debentures in registered, best efforts offerings to
the public as a source of funds to support its loan originations. In addition,
as the Bank's mortgage loan portfolio has grown, service fee income received by
Intervest Mortgage Corporation from the Bank has comprised an increasing
percentage of Intervest Mortgage Corporation's cash flow. The Bank has a
servicing agreement with Intervest Mortgage Corporation, which is described
under the caption "Liquidity and Capital Resources" on page 46 of the Company's
Annual Report on Form 10-K. In addition, from time to time, Intervest Mortgage
Corporation has also received capital contributions from the Holding Company.
There have been no capital contributions since August 2004.
32
Intervest Mortgage Corporation's lending business is dependent on its ability to
sell its debentures with interest rates that result in a positive interest rate
spread, which is the difference between yields earned on its loans and the rates
paid on its debentures. As detailed in note 7 to the condensed consolidated
financial statements included in this report, at September 30, 2006, Intervest
Mortgage Corporation had $92.8 million of subordinated debentures outstanding
with fixed interest rates that range from 6.25% to 9.00% per annum and
maturities that range from April 1, 2007 to July 1, 2014. In the first nine
months of 2006, Intervest Mortgage Corporation repaid various debentures for a
total of $7.6 million ($6.0 million of principal and $1.6 million of related
accrued interest payable) and issued new debentures totaling $16.0 million for
net proceeds, after offering costs, of $14.8 million. At September 30, 2006,
Intervest Mortgage Corporation had $8.6 million of debentures and related
accrued interest payable maturing by September 30, 2007, which is expected to be
repaid from cash flow generated from maturities of existing mortgage loans,
ongoing operations and cash on hand. On November 1, 2006, Intervest Mortgage
Corporation repaid early certain debentures scheduled to mature at various times
through April 1, 2009 for a total of $10.3 million ($9.0 million of principal
and $1.3 million of accrued interest). Unamortized offering costs associated
with these debentures of $0.1 million was expensed as a result of the early
retirement.
The Holding Company's sources of funds and capital to date have been derived
from the following: interest income from a limited portfolio of mortgage loans
and short-term investments; monthly dividends from the Bank to service interest
expense on trust preferred securities; monthly management fees from Intervest
Mortgage Corporation and the Bank for providing these subsidiaries with certain
administrative services; the issuance of its common stock through public
offerings; exercise of outstanding common stock warrants and conversion of
outstanding convertible debentures; the issuance of trust preferred securities
through its wholly owned business trusts; and the direct issuance of other
subordinated debentures to the public.
In the first nine months of 2006, the Holding Company repaid various debentures
totaling $1.3 million of principal and related accrued interest payable. At
September 30, 2006, the Holding Company did not have any debentures maturing by
September 30, 2007. In the third quarter of 2005, the Holding Company completed
a public offering of 1,436,468 shares of its Class A common stock for $19.75 per
share. The issuance of these shares, after underwriting commissions and
expenses, resulted in $26.3 million of additional capital which was invested in
the Bank as a capital contribution.
From 2001 to 2004, the Holding Company, through its wholly owned business trusts
Intervest Statutory Trust I, II, III and IV, issued at various times trust
preferred securities for a total of $60 million at both fixed and variable rates
of interest that mature in 2031 or later. The total proceeds from these
securities have been invested in the Bank at various times through capital
contributions. In September 2006, the Holding Company issued additional trust
preferred securities in the amount of $10.0 million through its newly
established wholly owned business trust Intervest Statutory Trust V. The new
securities mature in 30 years and bear interest at a fixed rate of 6.83% per
annum for the first five years and thereafter at a floating rate of 1.65% over 3
month LIBOR. The Holding Company intends to use the proceeds from this recent
sale, together with $5 million of available cash, to redeem on December 18, 2006
other trust preferred securities in the principal amount of $15 million that
bear interest at a fixed rate of 9.88%. The net effect of these actions will
reduce future annual interest expense by $0.8 million. Upon the redemption of
these securities, $0.4 million of related unamortized issuance costs will be
written off as a noncash expense in the fourth quarter of 2006. At such time,
the Company will have $55 million of trust preferred securities outstanding,
compared to $70 million at September 30, 2006. The Holding Company is required
to make interest payments on the principal of all the trust-preferred
securities, which amounted to $5.0 million annually as of September 30, 2006.
The Bank provides funds to Holding Company in the form of dividends for this
purpose. At September 30, 2006, $51.5 million of the trust preferred securities
qualified as regulatory Tier 1 capital and the remainder qualified as Tier 2
capital in the Holding Company's computation of regulatory capital.
Additional information concerning outstanding time deposits, debentures and
trust preferred securities, including interest rates and maturity dates can be
found in notes 6, 7 and 8 of the notes to the condensed consolidated financial
statements included in this report.
At September 30, 2006, the Company's commitments to lend aggregated $49.6
million. Although there is no certainty, management anticipates that the
majority of these loan commitments will be funded over the next 12 months. If
all these commitments were to close, they would be funded by the sources of
funds described above. The Company considers its current liquidity and sources
of funds sufficient to satisfy its outstanding lending commitments and its
33
maturing liabilities. Management is not aware of any trends, known demand,
commitments or uncertainties which are expected to have a material impact on
future operating results, liquidity or capital resources.
REGULATORY CAPITAL
------------------
The Bank is subject to various regulatory capital requirements. The Federal
Deposit Insurance Corporation (FDIC) and other bank regulatory agencies use five
capital categories ranging from well capitalized to critically undercapitalized
to determine various matters, including prompt corrective action and each
institution's FDIC deposit insurance premiums. These categories involve
quantitative measures of a bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements.
The Bank is required to maintain regulatory defined minimum Tier 1 leverage and
Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%,
respectively. At September 30, 2006 and December 31, 2005, management believes
the Bank met its capital adequacy requirements and is a well-capitalized
institution as defined in the regulations, which require minimum Tier 1 leverage
and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively.
Management is not aware of any conditions or events that would change the Bank's
designation as a well-capitalized institution.
Information regarding the Bank's regulatory capital and related ratios is
summarized as follows:
At September 30, At December 31,
------------------ -----------------
($in thousands) 2006 2005
------------------------------------------------------------------------------
Tier 1 Capital $ 170,614 $ 156,842
Tier 2 Capital 16,655 14,846
------------------------------------------------------------------------------
Total risk-based capital $ 187,269 $ 171,688
------------------------------------------------------------------------------
Net risk-weighted assets $ 1,509,152 $ 1,362,728
Average assets for regulatory purposes $ 1,734,296 $ 1,562,779
------------------------------------------------------------------------------
Tier 1 capital to average assets 9.84% 10.04%
Tier 1 capital to risk-weighted assets 11.31% 11.51%
Total capital to risk-weighted assets 12.41% 12.60%
------------------------------------------------------------------------------
The Holding Company on a consolidated basis is subject to minimum regulatory
capital requirements administered by the FRB. These guidelines require a ratio
of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted
assets of at least 4% and a ratio of total capital to risk-weighted assets of at
least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted
total average assets of not less than 3%. At September 30, 2006 and December 31,
2005, management believes that the Holding Company met its capital adequacy
requirements.
Information regarding the Company's (consolidated) regulatory capital and
related ratios is summarized below:
At September 30, At December 31,
------------------ -----------------
($in thousands) 2006 2005
------------------------------------------------------------------------------
Tier 1 Capital (1) $ 205,869 $ 181,571
Tier 2 Capital (1) 35,571 29,788
------------------------------------------------------------------------------
Total risk-based capital $ 241,440 $ 211,359
------------------------------------------------------------------------------
Net risk-weighted assets $ 1,622,332 $ 1,466,027
Average assets for regulatory purposes $ 1,858.811 $ 1,673,832
------------------------------------------------------------------------------
Tier 1 capital to average assets 11.08% 10.85%
Tier 1 capital to risk-weighted assets 12.69% 12.39%
Total capital to risk-weighted assets 14.88% 14.42%
------------------------------------------------------------------------------
(1) At September 30, 2006 and December 31, 2005, there were $70 million
and $60 million, respectively, of qualifying capital securities
outstanding (representing at September 30, 2006 total debentures of
$72.2 million issued to Statutory Trust I, II, III IV and V by the
Holding Company less the Holding Company's investments in those trusts
aggregating $2.2 million). At September 30, 2006 and December 31,
2005, $51.5 million and $45.4 million of those securities,
respectively, was included in Tier 1 Capital, and the remaining
portion was included in Tier 2 Capital.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies but with
stricter quantitative limits and clearer qualitative standards. The new rule
provides a transition period for bank holding companies to meet the new,
stricter limitations within regulatory capital by allowing the limits on
restricted core capital elements to become fully effective as of March 31, 2009.
34
For a further discussion of these changes, see page 49 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2005. As of September 30,
2006 and December 31, 2005, assuming the Company no longer included its trust
preferred securities in Tier 1 Capital, the Company would still exceed the well
capitalized threshold under the regulatory framework for prompt corrective
action.
Intervest Securities Corporation is subject to the Securities and Exchange
Commission's (SEC) Uniform Net Capital Rule [15c3-1 (a) (2) (vi)], which
requires the maintenance of minimum net capital of $5,000. At September 30, 2006
and December 31, 2005, Intervest Securities Corporation's net capital was $0.5
million.
ASSET AND LIABILITY MANAGEMENT
------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company does not engage in trading
or hedging activities, nor does it invest in interest rate derivatives or enter
into interest rate swaps. The primary objective of the Company's
asset/liability management strategy is to limit, within established guidelines,
the adverse impact of changes in interest rates on its net interest income and
capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. For a
further discussion of gap analysis, including the factors that effect its
computation and results, see page 50 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2005.
The Company's one-year positive interest rate sensitivity gap decreased to
$273.6 million, or 13.9% of total assets, at September 30, 2006, from $498.7
million, or 29.2% at December 31, 2005. The decrease in the positive gap
primarily reflects an increase in loans and security investments with over
one-year maturities, funded by increases in time deposits with terms of one year
or less.
For purposes of computing the gap, all deposits with no stated maturities are
treated as readily accessible accounts. However, if such deposits were treated
differently, the one-year gap would then change. The behavior of core depositors
may not necessarily result in the immediate withdrawal of funds in the event
deposit rates offered by the Bank did not change as quickly and uniformly as
changes in general market rates. For example, if only 25% of deposits with no
stated maturity were assumed to be readily accessible, the one-year gap would
have been a positive 23.4% at September 30, 2006, compared to a positive 40.1%
at December 31, 2005.
The table that follows summarizes interest-earning assets and interest-bearing
liabilities as of September 30, 2006, that are scheduled to mature or reprice
within the periods shown.
0-3 4-12 Over 1-4 Over 4
--- ---- -------- ------
($in thousands) Months Months Years Years Total
- ----------------------------------------------------------------------------------------------------
Loans (1) $554,057 $312,711 $ 420,264 $209,888 $1,496,920
Securities held to maturity (2) 58,725 127,133 149,191 5,734 340,783
Short-term investments 92,077 - - - 92,077
FRB and FHLB stock 2,374 - - 3,439 5,813
- ----------------------------------------------------------------------------------------------------
Total rate-sensitive assets $707,233 $439,844 $ 569,455 $219,061 $1,935,593
- ----------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 6,591 $ - $ - $ - $ 6,591
Savings deposits 11,876 - - - 11,876
Money market deposits 231,450 - - - 231,450
Certificates of deposit 125,553 491,155 597,822 132,543 1,347,073
- ----------------------------------------------------------------------------------------------------
Total deposits 375,470 491,155 597,822 132,543 1,596,990
- ----------------------------------------------------------------------------------------------------
Debentures and mortgage note payable (1) - 4,750 89,972 73,493 168,215
Accrued interest on all borrowed funds (1) 1,916 179 3,219 551 5,865
- ----------------------------------------------------------------------------------------------------
Total borrowed funds 1,916 4,929 93,191 74,044 174,080
- ----------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $377,386 $496,084 $ 691,013 $206,587 $1,771,070
- ----------------------------------------------------------------------------------------------------
GAP (repricing differences) $329,847 $(56,240) $(121,558) $ 12,474 $ 164,523
- ----------------------------------------------------------------------------------------------------
Cumulative GAP $329,847 $273,607 $ 152,049 $164,523 $ 164,523
- ----------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 16.7% 13.9% 7.7% 8.4% 8.4%
- ----------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the preceding gap table follow:
(1) Floating-rate loans and debentures payable are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they mature. Fixed-rate loans and debentures payable are
scheduled, including repayments, according to their contractual maturities.
Deferred loan fees, nonaccrual loans and the effect of loan prepayments are
excluded from the analysis.
(2) Securities are scheduled according to the earlier of their contractual
maturity or the date in which the interest rate is scheduled to increase.
The effects of possible prepayments that may result from the issuer's right
to call a security before its contractual maturity date are not considered.
(3) Interest checking, savings and money market deposits are regarded as
readily accessible withdrawable accounts; and certificates of deposit are
scheduled through their maturity dates.
35
SARBANES OXLEY ACT OF 2002
--------------------------
The requirements of Section 404 of the Sarbanes Oxley Act and SEC rules and
regulations require an annual management report on the Company's internal
controls over financial reporting, including, among other matters, management's
assessment of the effectiveness of the Company's internal controls over
financial reporting, and an attestation report by the Company's independent
registered public accounting firm addressing these assessments.
Beginning with the Company's annual report for the year ending December 31,
2006, the Company will have to include in its annual report on Form 10-K filed
with the SEC a report of management regarding the Company's internal controls
over financial reporting in accordance with the above requirements.
In this regard, the Company is continuing its process of documenting and
evaluating its internal controls over financial reporting in order to satisfy
these requirements. The process includes the involvement of internal resources
and outside consultants. This process is designed to (i) assess and document the
adequacy of internal controls over financial reporting, (ii) take steps to
improve control processes, where appropriate, and (iii) verify through testing
that controls are functioning as documented. To date, the Company has identified
certain deficiencies in the design and operating effectiveness of its internal
controls over financial reporting, and it believes that they have been corrected
or are in the process of being corrected. Although this process is not
completed, management is not aware of any "significant deficiencies" or
"material weaknesses" in the Company's internal controls over financial
reporting, as defined in applicable SEC rules and regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company has not engaged in and accordingly has no risk
related to trading accounts, commodities, foreign exchange, hedging activities,
interest rate derivatives or interest rate swaps. The Company's market risk
arises primarily from interest rate risk inherent in its lending and
deposit-taking activities, and the issuance of its debentures. The measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance sheet transactions are aggregated, and
the resulting net positions are identified. Disclosures about the fair value of
financial instruments as of December 31, 2005, which reflect changes in market
prices and rates, can be found in note 20 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005. Management believes that there have been no significant
changes in the Company's market risk exposure since December 31, 2005.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within its established guidelines, the adverse impact of changes in interest
rates on the Company's net interest income and capital. For a further
discussion, see the section entitled "Asset and Liability Management" under Item
2 of this report.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal
Executive and Financial Officers, the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, the Principal Executive and Financial Officers
have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the
Company files or furnishes under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations, and are operating in an effective manner.
The Company made no significant changes in its internal controls over financial
reporting or in other factors that could significantly affect these controls
subsequent to September 30, 2006.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under Note 14 contained in the "Notes to Condensed
Consolidated Financial Statements" of this Quarterly Report on Form 10-Q is
incorporated by reference in answer to this Item.
ITEM 1A. RISK FACTORS
The Company's business is affected by a number of factors, including but not
limited to the impact of: interest rates; loan demand; loan concentrations; loan
prepayments; dependence on brokers and other sources for new loan referrals,
ability to raise funds for investment; competition; general or local economic
conditions; credit risk and the related adequacy of the allowance for loan
losses; terrorist acts; natural disasters; armed conflicts; environmental
liabilities; regulatory supervision and regulation and costs thereof; and
dependence on a limited number of executive officers and other key personnel.
This Item 1A requires disclosure of any material changes from risk factors
previously disclosed in the Company's most recent Form 10-K. A discussion of
material changes to one factor follows:
WE DEPEND ON OUR EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES TO IMPLEMENT OUR
BUSINESS STRATEGY AND OUR BUSINESS MAY SUFFER IF WE LOSE THEIR SERVICES.
Our success is largely dependent on the business expertise and relationships of
a small number of our executive officers and other key employees. Jerome
Dansker, our founding chairman and chief executive officer who was instrumental
to our success, passed away in August 2006. Consistent with our succession
planning, his duties were assumed by his son, Lowell S. Dansker. On August 17,
2006, Lowell S. Dansker, age 55, was elected our new Chairman of the Board and
Chief Executive Officer and John J. Arvonio, age 43, was elected our Chief
Financial Officer. Mr. Lowell S. Dansker previously served as Vice Chairman of
the Board since October 2003 and as President and Treasurer since 1993. He will
continue to serve as President of the Company. Mr. Arvonio has served as Senior
Vice President, Chief Financial Officer and Secretary of Intervest National
Bank, our wholly-owned subsidiary since September 2000 and as our Chief
Accounting Officer since December 2005. He will continue to serve in those
capacities. If the services of any of our executive officers or other key
employees were to become unavailable for any reason, the growth, performance and
operation of our company and its subsidiaries might be adversely affected
because of their skills and knowledge of the markets in which we operate, years
of real estate lending experience and the difficulty of promptly finding
qualified replacement personnel. As a result, our ability to successfully grow
our business will depend, in part, on our ability to attract and retain
additional qualified officers and employees.
Other than the changes to the risk factor discussed above, there have been no
material changes to the Company's remaining risk factors disclosed in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, where such factors are discussed on pages 22 through 26.
``
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report.
4.0 Letter Agreement between the Company and Jean Dansker dated as of October
4, 2006, incorporated by reference to the Company's Form 8-K, File No.
000-23377, filed on October 6, 2006, wherein such document is identified
as Exhibit 99.1.
4.1 Form of Indenture between the Company, as Issuer, and Wilmington Trust
Company, as Trustee, dated as of September 21, 2006.
37
31.0 Certification of the principal executive officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.
31.1 Certification of the principal financial officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002.
32.0 Certification of the principal executive and financial officers pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST BANCSHARES CORPORATION
----------------------------------
(Registrant)
Date: November 2, 2006 By: /s/ Lowell S. Dansker
-------------------------------
LOWELL S. DANSKER, CHAIRMAN AND
EXECUTIVE VICE PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 2, 2006 By: /s/ John J. Arvonio
-----------------------------
JOHN J. ARVONIO, CHIEF FINANCIAL AND
ACCOUNTING OFFICER
(PRINCIPAL FINANCIAL OFFICER)