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Table of Contents

 

 

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, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From              to             

Commission file number 000-23377

 

 

INTERVEST BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3699013

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

One Rockefeller Plaza, Suite 400

New York, New York 10020-2002

(Address of principal executive offices) (Zip Code)

(212) 218-2800

(Registrant’s telephone number, including area code)

Not Applicable

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*    YES  ¨    NO  ¨. * The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   x  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

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 number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of October 20, 2010, there were 19,720,812 shares of Class A Common Stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

 

INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES

FORM 10-Q

September 30, 2010

TABLE OF CONTENTS

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements Financial Statements

  

Condensed Consolidated Balance Sheets
as of September 30, 2010 (Unaudited) and December  31, 2009

     3   

Condensed Consolidated Statements of Operations (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2010 and 2009

     4   

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
for the Nine-Months Ended September 30, 2010 and 2009

     5   

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September  30, 2010 and 2009

     6   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   

Review by Independent Registered Public Accounting Firm

     25   

Report of Independent Registered Public Accounting Firm

     26   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 4. Controls and Procedures

     46   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     46   

Item 1A. Risk Factors

     46   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     59   

Item 3. Defaults Upon Senior Securities

     59   

Item 4. (Removed and Reserved)

     59   

Item 5. Other Information

     59   

Item 6. Exhibits

     59   

Signatures

     59   

Certifications

     60-62   

Private Securities Litigation Reform Act Safe Harbor Statement

We are 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. Words such as “may,” “will,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “assume,” “indicate,” “continue,” “target,” “goal,” and similar words or expressions of the future are intended to identify forward-looking statements. Except for historical information, the matters discussed herein are subject to certain risks and uncertainties that may affect our actual results of operations. The following important factors, among others, could cause actual results to differ materially from those set forth in forward looking statements: changes in general economic conditions and real estate values in our market areas; changes in regulatory policies and enforcement actions; fluctuations in interest rates; demand for loans and deposits; changes in tax laws or the availability of net operating losses, the effects of additional capital, the availability of regulatory waivers; and competition. Reference is made to our filings with the SEC for further discussion of risks and uncertainties regarding our business. Historical results are not necessarily indicative of our future prospects. Our risk factors are disclosed in Item 1A of Part II of this report on Form 10-Q.

 

2


Table of Contents

 

PART 1. FINANCIAL INFORMATION - ITEM 1. Financial Statements

Intervest Bancshares Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

($ in thousands, except par value)

   At September 30,
2010
    At December 31,
2009
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 9,276      $ 6,318   

Federal funds sold, commercial paper and other short-term investments

     4,539        1,659   
                

Total cash and cash equivalents

     13,815        7,977   
                

Securities held to maturity, net (estimated fair value of $614,054 and $630,554, respectively)

     613,844        634,856   

Federal Reserve Bank and Federal Home Loan Bank stock, at cost

     9,865        10,708   

Loans receivable (net of allowance for loan losses of $32,250 and $32,640, respectively)

     1,331,062        1,653,524   

Accrued interest receivable

     9,210        11,196   

Loan fees receivable

     5,734        7,890   

Premises and equipment, net

     4,687        4,924   

Foreclosed real estate (net of valuation allowance of $3,654 and $2,793, respectively)

     38,792        31,866   

Deferred income tax asset

     47,806        18,044   

Other assets

     29,283        20,219   
                

Total assets

   $ 2,104,098      $ 2,401,204   
                

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand deposit accounts

   $ 3,480      $ 3,429   

Interest-bearing deposit accounts:

    

Checking (NOW) accounts

     11,015        9,117   

Savings accounts

     10,363        11,682   

Money market accounts

     455,601        496,065   

Certificate of deposit accounts

     1,326,375        1,509,691   
                

Total deposit accounts

     1,806,834        2,029,984   
                

Borrowed funds:

    

Federal Home Loan Bank advances

     30,500        61,500   

Subordinated debentures - capital securities

     56,702        56,702   

Accrued interest payable on all borrowed funds

     1,780        183   

Mortgage note payable

     153        167   
                

Total borrowed funds

     89,135        118,552   
                

Accrued interest payable on deposits

     3,518        6,201   

Mortgage escrow funds payable

     30,780        24,363   

Other liabilities

     9,759        8,050   
                

Total liabilities

     1,940,026        2,187,150   
                

STOCKHOLDERS’ EQUITY

    

Preferred stock ($1.00 par value; 300,000 shares authorized; 25,000 issued and outstanding)

     25        25   

Additional paid-in-capital, preferred

     24,975        24,975   

Preferred stock discount

     (1,245     (1,534

Class A common stock ($1.00 par value; 62,000,000 shares authorized; 8,540,812 and 8,095,151 shares issued at September 30 and December 31, respectively; and 8,540,812 and 7,690,812 shares outstanding at September 30 and December 31, respectively)

     8,541        8,095   

Class B common stock ($1.00 par value; 700,000 shares authorized; and 580,000 shares issued and outstanding, respectively)

     580        580   

Additional paid-in-capital, common

     74,933        81,353   

Retained earnings

     56,263        110,560   

Treasury common stock (404,339 shares at December 31, at cost)

     —          (10,000
                

Total stockholders’ equity

     164,072        214,054   
                

Total liabilities and stockholders’ equity

   $ 2,104,098      $ 2,401,204   
                

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

 

Intervest Bancshares Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

      Quarter Ended
September 30,
    Nine-Months Ended
September 30,
 

($ in thousands, except per share data)

   2010     2009     2010     2009  

INTEREST AND DIVIDEND INCOME

        

Loans receivable

   $ 22,372      $ 26,581      $ 72,616      $ 79,277   

Securities

     2,888        4,356        9,689        13,129   

Other interest-earning assets

     5        2        20        16   
                                

Total interest and dividend income

     25,265        30,939        82,325        92,422   
                                

INTEREST EXPENSE

        

Deposits

     14,260        18,711        45,511        57,468   

Subordinated debentures

     —          58        —          796   

Subordinated debentures - capital securities

     562        660        1,605        2,188   

Other borrowed funds

     358        495        1,269        1,468   
                                

Total interest expense

     15,180        19,924        48,385        61,920   
                                

Net interest and dividend income

     10,085        11,015        33,940        30,502   

Provision for loan losses

     1,598        2,396        98,770        6,939   
                                

Net interest and dividend income (expense) after provision for loan losses

     8,487        8,619        (64,830     23,563   
                                

NONINTEREST INCOME

        

Income from the early repayment of mortgage loans

     64        614        904        734   

Income from mortgage lending activities

     260        269        848        828   

Customer service fees

     98        84        350        304   

Gain from the sales of securities available for sale

     —          —          693        —     

Loss from early call of investment securities

     (122     (163     (917     (269

Other than temporary impairment of investment securities

     (293     (709     (841     (1,372
                                

Total noninterest income

     7        95        1,037        225   
                                

NONINTEREST EXPENSES

        

Salaries and employee benefits

     1,672        1,612        4,902        4,717   

Occupancy and equipment, net

     452        461        1,358        1,448   

Data processing

     823        279        1,392        830   

Professional fees and services

     632        505        1,798        1,303   

Stationery, printing, supplies, postage and delivery

     64        62        227        227   

FDIC insurance

     1,093        1,155        3,262        4,047   

General insurance

     135        94        403        284   

Director and committee fees

     104        101        274        294   

Advertising and promotion

     8        25        66        140   

Real estate activities expense

     665        1,965        3,762        3,686   

Provision for real estate losses

     2,984        400        13,505        688   

Loss on the early extinguishment of debentures

     —          542        —          1,702   

All other

     180        135        500        463   
                                

Total noninterest expenses

     8,812        7,336        31,449        19,829   
                                

(Loss) earnings before income taxes

     (318     1,378        (95,242     3,959   

(Benefit) provision for income taxes

     (78     627        (41,075     1,535   
                                

Net (loss) earnings

     (240     751        (54,167     2,424   

Preferred stock dividend requirements and discount amortization

     (421     (409     (1,245     (1,223
                                

Net (loss) earnings available to common stockholders

   $ (661   $ 342      $ (55,412   $ 1,201   
                                

Basic (loss) earnings per common share

   $ (0.07   $ 0.04      $ (6.39   $ 0.14   

Diluted (loss) earnings per common share

   $ (0.07   $ 0.04      $ (6.39   $ 0.14   

Cash dividends per common share

   $ —        $ —        $ —        $ —     
                                

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

 

Intervest Bancshares Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

      Nine-Months Ended
September 30,
 
      2010     2009  

($in thousands)

   Shares     Amount     Shares     Amount  

PREFERRED STOCK

        

Balance at beginning and end of period

     25,000      $ 25        25,000      $ 25   
                                

ADDITIONAL PAID-IN-CAPITAL, PREFERRED

        

Balance at beginning and end of period

       24,975          24,975   
                    

PREFERRED STOCK DISCOUNT

        

Balance at beginning of period

       (1,534       (1,920

Amortization of preferred stock discount

       289          290   
                    

Balance at end of period

       (1,245       (1,630
                    

CLASS A COMMON STOCK

        

Balance at beginning of period

     8,095,151        8,095        8,095,151        8,095   

Issuance of 850,000 shares in a private placement

     850,000        850        —          —     

Retirement of 404,339 shares of treasury stock

     (404,339     (404     —          —     
                                

Balance at end of period

     8,540,812        8,541        8,095,151        8,095   
                                

CLASS B COMMON STOCK

        

Balance at beginning and end of period

     580,000        580        580,000        580   
                                

ADDITIONAL PAID-IN-CAPITAL, COMMON

        

Balance at beginning of period

       81,353          81,157   

Issuance of 850,000 shares in a private placement, net of stock issuance costs

       3,145          —     

Retirement of 404,339 shares of treasury stock

       (9,596       —     

Compensation expense related to common stock options

       31          154   
                    

Balance at end of period

       74,933          81,311   
                    

RETAINED EARNINGS

        

Balance at beginning of period

       110,560          109,062   

Net (loss) earnings

       (54,167       2,424   

Preferred stock dividends accrued

       —            (127

Reversal of accrued preferred stock dividends

       159          —     

Preferred stock cash dividends paid

       —            (806

Preferred stock discount amortization

       (289       (290
                    

Balance at end of period

       56,263          110,263   
                    

TREASURY COMMON STOCK

        

Balance at beginning period

     (404,339     (10,000     (404,339     (10,000

Retirement of 404,339 shares of treasury stock

     404,339        10,000        —          —     
                                

Balance at end of period

     —          —          (404,339     (10,000
                                

Total stockholders’ equity at end of period

     9,145,812      $ 164,072        8,295,812      $ 213,619   
                                

Preferred stockholder’s equity

     25,000      $ 23,755        25,000      $ 23,370   

Common stockholders’ equity

     9,120,812        140,317        8,270,812        190,249   
                                

Total stockholders’ equity at end of period

     9,145,812      $ 164,072        8,295,812      $ 213,619   
                                

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

Intervest Bancshares Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

      Nine-Months Ended
September 30,
 

($ in thousands)

   2010     2009  

OPERATING ACTIVITIES

    

Net (loss) earnings

   $ (54,167   $ 2,424   

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

    

Depreciation and amortization

     283        388   

Provision for loan losses

     98,770        6,939   

Provision for real estate losses

     13,505        688   

Deferred income tax benefit

     (29,762     (2,662

Compensation expense related to common stock options

     31        154   

Amortization of premiums (accretion) of discounts and deferred loan fees, net

     825        (2,407

Other than temporary impairment writedowns of investment securities

     841        1,372   

Net gain from sales of securities available for sale

     (693     —     

Net loss (gain) from sale or foreclosed real estate

     127        (10

Net loss on early extinguishments of debentures

     —          1,702   

Net increase (decrease) in accrued interest payable on debentures

     1,627        (2,000

Net increase (decrease) in official checks outstanding

     1,590        (7,267

Net decrease in loan fees receivable

     2,156        662   

Net change in all other assets and liabilities

     (8,894     370   
                

Net cash provided by operating activities

     26,239        353   
                

INVESTING ACTIVITIES

    

Maturities and calls of securities held to maturity

     640,852        438,808   

Purchases of securities held to maturity

     (647,859     (563,744

Proceeds from sales of securities available for sale

     24,772        —     

Proceeds from sales of foreclosed real estate

     12,471        48   

Proceeds from sales of loans

     110,001        —     

Net decrease (increase) in loans receivable

     82,317        (17,578

Redemptions (purchases) of FRB and FHLB stock, net

     843        (1,028

Purchases of premises and equipment, net

     (46     (10
                

Net cash provided by (used in) investing activities

     223,351        (143,504
                

FINANCING ACTIVITIES

    

Net (decrease) increase in deposits

     (223,150     148,860   

Net increase in mortgage escrow funds payable

     6,417        10,867   

Net repayments of FHLB advances - original terms of three months or less

     (11,000     —     

Net repayments of FHLB advances - original terms greater than three months

     (20,000     —     

Principal repayments of debentures and mortgage note payable

     (14     (40,013

Cash received from issuance of common stock, net of issuance costs

     3,995        —     

Cash dividends paid to preferred stockholder - U.S. Treasury

     —          (806
                

Net cash (used in) provided by financing activities

     (243,752     118,908   
                

Net increase (decrease) in cash and cash equivalents

     5,838        (24,243

Cash and cash equivalents at beginning of period

     7,977        54,903   
                

Cash and cash equivalents at end of period

   $ 13,815      $ 30,660   
                

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the period for interest

   $ 49,443      $ 66,148   

Cash paid during the period for income taxes

     929        4,763   

Loans transferred to foreclosed real estate

     40,885        27,210   

Preferred stock dividend requirements and amortization of related discount

     1,245        1,223   

Securities held to maturity transferred to securities available for sale

     24,079        —     

Loans to finance sales of foreclosed real estate

     7,856        2,650   

Loans held to maturity transferred to loans available for sale

     110,001        —     
                

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

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 in this report on Form 10-Q have not been audited except for information derived from our audited consolidated financial statements and notes thereto and should be read in conjunction with our 2009 annual report on Form 10-K. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Our accounting and reporting policies conform to GAAP and general practices within the banking industry and are consistent with those described in note 1 to the consolidated financial statements included in our annual report on Form 10-K, as updated by the information contained in this Form 10-Q.

In preparing the consolidated financial statements, we are 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 currently relate to the determination of our allowance for loan losses, our valuation allowance for real estate losses, other than temporary impairment assessments of our security investments and the determination of the need for and amount of a valuation allowance for our deferred tax asset. These estimates involve a higher degree of complexity and subjectivity and require assumptions about highly uncertain matters. In our opinion, all material adjustments necessary for a fair presentation of our 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. All significant intercompany balances and transactions have been eliminated in consolidation. Our 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

Intervest Bancshares Corporation is a holding company under the Bank Holding Company Act and was incorporated in 1993 under the laws of the State of Delaware and is referred to by itself in this report as “IBC.” IBC’s wholly owned consolidated subsidiaries are Intervest National Bank (referred to as “INB”) and Intervest Mortgage Corporation (referred to as “IMC”). References to “we,” “us” and “our” in this report refer to IBC and its consolidated subsidiaries on a consolidated basis, unless otherwise specified. Our business is banking and real estate lending. IBC’s principal operating subsidiary is INB, which accounts for 99% of our total consolidated assets. We expect INB will continue to be our principal operating entity in generating our future business and consolidated results of operations. IMC is currently not conducting new business.

IBC’s Class A common stock is listed on the NASDAQ Global Select Market under the Trading Symbol “IBCA.” There was no public trading market for IBC’s Class B common stock outstanding at September 30, 2010. The offices of IBC, IMC and INB’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.

IBC’s principal business is the ownership and operation of its subsidiaries. From time to time, it also engages in a limited amount of real estate mortgage lending, including participation in loans originated by INB. IBC also issues debt and equity securities to raise funds for working capital purposes as needed. IBC also has four other wholly owned subsidiaries, Intervest Statutory Trust II, III, IV and V that are unconsolidated entities as required by GAAP. These entities are statutory business trusts formed for the sole purpose of issuing and administering trust preferred securities and lending the proceeds to IBC. They do not conduct any trade or business. See note 10.

IMC’s business had focused on the origination of mortgage loans secured by commercial and multifamily real estate. Its loan originations were funded through the issuance of subordinated debentures in public offerings. At September 30, 2010, IMC had no outstanding debt, total assets of $12 million and stockholder’s equity of $11 million. In the first half of 2010, IMC distributed $8.6 million of its cash to IBC as a return of capital, which was redeployed by IBC as an additional capital investment in INB.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 2 - Description of Business - Continued

 

 

INB is a nationally chartered commercial bank that has its headquarters and full-service banking office at One Rockefeller Plaza, Suite 400, in New York City, and a total of six full-service banking offices in Pinellas County, Florida - four in Clearwater, one in Clearwater Beach and one in South Pasadena. INB conducts a personalized commercial and consumer banking business that attracts deposits from the general public. INB also provides internet banking services through its web site: www.intervestnatbank.com, which also attracts deposit customers from outside its primary market areas. INB uses the deposits, together with funds generated from its operations, principal repayments on loans and securities and other sources, to originate mortgage loans secured by commercial and multifamily real estate and to purchase investment securities.

Our business strategy is to attract deposits and use those funds to originate commercial and multifamily real estate loans, as well as other types of loans, on a profitable basis, while maintaining the combination of efficient customer service and loan underwriting and low-cost infrastructure. We rely upon the relationships we have developed with our borrowers and brokers with whom we have done business in the past as primary sources of new loans. We believe that our ability to rapidly and efficiently process and close mortgage loans gives us a competitive advantage. We also emphasize providing exceptional customer service as a means to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe the above factors distinguish us from larger banks that operate in our primary market areas. In addition, we have a website, I-netMortgageClearingHouse.com, which is an interactive web portal connecting buyers and sellers of real estate mortgages. The website provides access to banks and credit unions throughout the country so that prospective buyers of mortgage loans can easily access information about potential portfolio properties and sellers of loans can efficiently list mortgages for sale. We expect this website to be beneficial to our business strategy.

Our lending activities are comprised almost entirely of the origination for our loan portfolio of mortgage loans secured by commercial and multifamily real estate (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial/warehouse properties, parking lots/garages, mobile home parks, self-storage facilities and some vacant land). Loans in the portfolio had an average life of approximately 3.5 years at September 30, 2010. As a matter of policy, we do not own or originate construction/development loans or condominium conversion loans. We generally lend in geographical areas that are in the process of being revitalized or redeveloped, with a concentration of loans on properties located in New York and Florida. In addition, our new originations during the last two years have nearly all been fixed-rate loans due to the demand by borrowers for longer-term, fixed-rate product that has been driven by the historically low interest rate environment. We expect this demand for longer-term, fixed-rate product to continue for a period of time and that most of our new loan originations for the remainder of 2010 will have similar terms. Fixed-rate loans constituted approximately 79% of our consolidated loan portfolio at September 30, 2010.

INB’s deposit accounts are solicited from individuals, small businesses and professional firms located throughout our primary market areas in New York and Florida through the offering of a variety of deposit products. INB also uses its internet web site: www.intervestnatbank.com to attract and retain deposit customers from both within and outside its primary market areas. Due primarily to higher regulatory capital requirements applicable to INB, INB gradually reduced its balance sheet during the first nine months of 2010 by decreasing its deposit rates and encouraging net deposit outflow, repaying its borrowed funds as they matured and decreasing the volume of its new loan originations from historical levels. INB plans to reduce its balance sheet further during the remainder of 2010 by encouraging net deposit outflow and funding the deposit reductions mainly through cash generated from the expected calls of its agency security investments.

Our revenues consist of interest, dividends and fees earned on our interest-earning assets, which are comprised of mortgage loans, securities and other short-term investments, and noninterest income. Our expenses consist of interest paid on our interest-bearing liabilities, which are comprised of deposits, debentures and other borrowings, as well as our operating and general expenses. Our profitability depends primarily on our net interest income, which is the difference between interest income generated from our interest-earning assets and interest expense incurred on our 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.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 2 - Description of Business - Continued

 

 

When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest-rate spread will generate net interest income. Our profitability is also affected by the level of our noninterest income and expenses, provision for loan and real estate losses and income tax expense. Our profitability is also significantly affected by general and local economic conditions, competition, changes in market interest rates, changes in real estate values, government policies and actions of regulatory authorities.

Our noninterest income is derived mostly from loan and other banking fees as well as income from loan prepayments. When a mortgage loan is repaid prior to maturity, we 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/or interest in certain cases, in accordance with the prepayment provisions of the mortgage loan. Our 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 mortgage loans we originate we may still experience loan prepayments notwithstanding the effects of movements in interest rates.

Our noninterest expenses are derived primarily from the following: salaries and employee benefits; occupancy and equipment; data processing; advertising and promotion; professional fees and services; FDIC insurance; general insurance; real estate activities; and other operating and general expenses. We also record provisions for loan and real estate losses. FDIC insurance premiums for all FDIC insured banks increased substantially in 2009 and may increase further in the future, including a scheduled three basis point increase in premiums starting in 2011.

Our operating results since the end of 2007 have and continue to be affected by the weak economy, high unemployment, increased office and retail vacancy rates and an increasing supply of distressed properties for sale in the marketplace at discounted prices, all of which have significantly reduced commercial and multifamily real estate values both nationally and in our lending areas. These conditions resulted in a large amount of our assets being classified as nonperforming and have increased our loan and real estate loss provisions and related expenses to carry these assets. We are taking various steps to resolve our nonaccrual and problem loans, including proceeding with foreclosures on many of the collateral properties and attempting to sell them, working with certain borrowers to provide payment relief and, in limited cases, accepting partial payment as full satisfaction of a nonaccrual loan. Due to the cost of and delays we have encountered in connection with the pursuit of available remedies and to respond to concerns from our regulators to reduce our criticized assets, we completed a bulk sale in May 2010 in order to accelerate the reduction of our problem assets.

In May 2010, we sold in bulk certain non-performing and underperforming loans on commercial real estate and multi-family properties and some real estate owned. The assets sold aggregated to approximately $207 million and consisted of $187 million of loans and $14.4 million of real estate owned by INB and $5.6 million of loans owned by IMC. The assets were sold at a substantial discount to their net carrying values of $197.7 million for an aggregate purchase price of $121.5 million. As a result of this bulk sale, we recorded a $78.6 million combined provision for loan and real estate losses, which contributed approximately $44 million to the net loss of $55 million we reported for the first nine months of 2010.

At September 30, 2010, our nonaccrual loans and real estate owned totaled $77.4 million, or 3.68% of total assets, compared to $53.2 million, or 2.46%, at June 30, 2010 and $155.8 million, or 6.49%, at December 31, 2009. The increase over June 30, 2010, was due to the reclassification of approximately $21 million of our performing TDRs to nonaccrual status based on more restrictive regulatory guidance. These TDRs continue to pay as agreed under their renegotiated terms. We intend to continue to actively manage our remaining problem assets working toward their resolution on an individual basis. Additional increases in our level of nonperforming assets could have an adverse effect on our financial condition, operating results and regulatory capital.

In May 2010, we raised capital as IBC sold in a private placement 850,000 shares of its Class A common stock at $5 per share for net proceeds of $3,995,000. Additionally, as discussed in note 20, IBC raised additional capital in October 2010 through the sale of shares of its Class A common stock in a public stock offering. For a further discussion of our regulatory capital requirements and other regulatory matters, see note 17.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 3 - Securities

The carrying value (amortized cost) and estimated fair value of securities held to maturity are as follows:

 

($ in thousands)

   Number of
Securities
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Wtd-Avg
Yield
    Wtd-Avg
Remaining
Maturity
 

At September 30, 2010

                   

U.S. government agencies (1)

     338       $ 608,913       $ 3,516       $ 161       $ 612,268         1.67     4.6 Years   

Corporate (2)

     8         4,931         —           3,145         1,786         2.20     22.8 Years   
                                                             
     346       $ 613,844       $ 3,516       $ 3,306       $ 614,054         1.67     4.8 Years   
                                                             

At December 31, 2009

                   

U.S. government agencies (1)

     387       $ 629,084       $ 2,458       $ 3,136       $ 628,406         2.74     4.3 Years   

Corporate (2)

     8         5,772         —           3,624         2,148         1.67     23.6 Years   
                                                             
     395       $ 634,856       $ 2,458       $ 6,760       $ 630,554         2.73     4.5 Years   
                                                             

 

(1) Consist of debt obligations of U.S. government sponsored agencies - FHLB, FNMA, FHLMC and FFCB.
(2) Consist of variable-rate pooled trust preferred securities backed by obligations of companies in the banking industry.

The amortized cost at September 30, 2010 and December 31, 2009 is reported net of other than temporary impairment charges of $3.1 million and $2.3 million, respectively.

The estimated fair values of securities with gross unrealized losses segregated between securities that have been in a continuous unrealized loss position for less than twelve months at the respective dates and those that have been in a continuous unrealized loss position for twelve months or longer are summarized as follows:

 

($ in thousands)

   Number of
Securities
     Less Than Twelve Months      Twelve Months or Longer      Total  
      Estimated
Fair
Value
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Gross
Unrealized
Losses
 

At September 30, 2010

                    

U.S. government agencies

     39       $ —         $ —         $ 67,164       $ 161       $ 67,164       $ 161   

Corporate

     8         —           —           1,786         3,145         1,786         3,145   
                                                              
     47       $ —         $ —         $ 68,950       $ 3,306       $ 68,950       $ 3,306   
                                                              

At December 31, 2009

                    

U.S. government agencies

     188       $ 280,275       $ 2,881       $ 15,117       $ 255       $ 295,392       $ 3,136   

Corporate

     8         —           —           2,148         3,624         2,148         3,624   
                                                              
     196       $ 280,275       $ 2,881       $ 17,265       $ 3,879       $ 297,540       $ 6,760   
                                                              

We believe that the cause of unrealized gains and losses on the U.S. government agencies securities portfolio is directly related to changes in market interest rates, which has been consistent with our experience. In general, as interest rates rise, the estimated fair value of fixed-rate securities will decrease; as interest rates fall, their value will increase. All of the securities in the agency portfolio have either fixed interest rates or have predetermined scheduled interest rate increases and have call features that allow the issuer to call the security at par before its stated maturity without penalty. INB, which holds the portfolio, has the ability and intent to hold all of the investments for a period of time sufficient for the estimated fair value of the securities with unrealized losses to recover, which may be at time of maturity.

Historically, INB has always recovered the cost of its investments in U.S. government agency securities upon maturity. We view all the gross unrealized losses related to the agency portfolio to be temporary for the reasons noted above. The estimated fair values disclosed in the table above for U.S. government agency securities are obtained from third-party brokers who provide quoted prices derived from active markets for identical or similar securities.

INB owns trust preferred securities that are also classified as held to maturity. The estimated fair values of these securities are very depressed due to the weakened economy and financial condition of a large number of the issuing banks, which have severely reduced the demand for these securities and rendered their trading market inactive.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 3 - Securities, Continued

 

 

We concluded that an adverse change in the estimated future cash flows has occurred to such a level that all of these securities have been other than temporarily impaired (“OTTI”) as of September 30, 2010 to varying degrees. The OTTI determinations are based on increases since 2009 in the aggregate amount of deferred and defaulted interest payments on the underlying collateral by the issuing banks such that it is no longer probable that INB will recover its full investment in the applicable security over time as indicated by an expected cash flow analysis prepared by a third party broker utilizing guidance prescribed under GAAP. There can be no assurance that there will not be further write downs in the future on these trust preferred securities as conditions change.

The following table provides various information regarding trust preferred securities.

 

($ in thousands)

                                                                        

Cusip #

(1)

   Credit
Rating
     Cost
Basis
     Write
Downs
(2)
    Adj.
Cost
Basis
     Estimated
Fair

Value
(3)
     Unrealized
Loss
    % of
Collateral
Defaulted
    % of
Collateral
Deferred
    # of
Banks
in Pool
     OTTI
(4)
     Discount
Margin

(4)
 

At September 30, 2010:

                            

74041PAEO

     C       $ 1,000       $ (642   $ 358       $ 106       $ (252     33.35     10.52     39         Yes         1.90

74040XAD6

     C+         1,016         (262     754         322         (432     14.39     14.83     54         Yes         1.80

74040XAE4

     C+         994         (241     753         322         (431     14.39     14.83     54         Yes         1.80

74040XAE4

     C+         994         (241     753         323         (430     14.39     14.83     54         Yes         1.80

74040YAF9

     C         981         (629     352         89         (263     15.69     30.42     58         Yes         1.70

74040YAE2

     C         1,000         (648     352         89         (263     15.69     30.42     58         Yes         1.70

74041UAE9

     C+         1,022         (218     804         267         (537     6.30     22.45     64         Yes         1.57

74041UAE9

     C+         1,023         (218     805         268         (537     6.30     22.45     64         Yes         1.57
                                                          
      $ 8,030       $ (3,099   $ 4,931       $ 1,786       $ (3,145            
                                                          

At December 31, 2009

                            

74041PAEO

     C+       $ 1,000       $ (636   $ 364       $ 109       $ (255     22.61     20.23     39         Yes         1.90

74040XAD6

     CC         1,016         (235     781         315         (466     14.39     11.94     54         Yes         1.80

74040XAE4

     CC         994         (214     780         315         (465     14.39     11.94     54         Yes         1.80

74040XAE4

     CC         994         (212     782         314         (468     14.39     11.94     54         Yes         1.80

74040YAF9

     CC         981         (471     510         155         (355     11.53     22.80     58         Yes         1.70

74040YAE2

     CC         1,000         (490     510         154         (356     11.53     22.80     58         Yes         1.70

74041UAE9

     CC         1,022         —          1,022         393         (629     3.78     11.30     64         No         1.57

74041UAE9

     CC         1,023         —          1,023         393         (630     3.78     11.30     64         No         1.57
                                                          
      $ 8,030       $ (2,258   $ 5,772       $ 2,148       $ (3,624            
                                                          

 

(1) Cusip 74041PAE0, 74040YAF9, 74040YAE2 and 74041UAE9 have been placed on cash basis accounting because INB is currently not receiving contractual interest payments on these securities. The cash flows for the interest payments on these securities are being redirected to a more senior class of bondholders to pay down the principal balance on the more senior class faster. This occurs when deferral and default activity reduces the security’s underlying performing collateral to a level where a predetermined coverage test fails and requires cash flows from interest payments to be redirected to a senior class of security holders. If no additional deferrals or defaults occur, such test will eventually be met again through the redirection of the cash flow and cash interest payments would resume on INB’s bonds, although no such assurance can be given as to the amount and timing of the resumption, if any.
(2) Writedowns are derived from the difference between the book value of the security and the projected present value of the security’s cash flows as indicated per an analysis performed using guidance prescribed by GAAP.
(3) Obtained from Moody’s pricing service, which uses a complex valuation model that factors in numerous assumptions and data, including anticipated discounts related to illiquid trading markets, credit and interest rate risk, which under GAAP would be considered Level 3 inputs. INB believes that the actual values that would be realized in an orderly market under normal credit conditions between a willing buyer and seller would approximate the projected present value of the securities’ cash flows and therefore, these estimated fair values are used for disclosure purposes only and are not used for calculating and recording impairment. INB also has the intent and the ability to retain these trust preferred securities until maturity and currently has no intention of selling them.
(4) In determining whether there is OTTI, INB relies on a cash flow analysis as prescribed under GAAP and prepared by a third party broker to determine whether conditions are such that the projected cash flows are insufficient to recover INB’s principal investment. The basic methodology under GAAP is to compare the present value of the cash flows that are derived from assumptions made with respect to deferrals, defaults and prepayments from quarter to quarter. A decline in the present value versus that for the previous quarter is considered to be an adverse change. The discount margin in the table above represents the incremental credit spread used to derive the discount rate for present value computations. Other assumptions utilized: prepayments of 1% annually and 100% at maturity and annual defaults of 75 bps with a 15% recovery after a 2 year lag.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 3 - Securities, Continued

 

In March 2010, securities held to maturity with a total carrying value of $24.1 million (and an estimated fair value of $24.8 million) were transferred to the available-for-sale category and promptly sold. A gross realized gain of $0.7 million was realized from this transaction. The securities sold consisted of INB’s entire portfolio of non-callable, fixed-rate U.S. government agency securities that were scheduled to mature at various times from 2011 through 2013. This transaction was undertaken to enhance INB’s capital levels in response to the higher regulatory capital requirements currently applicable to INB. At September 30, 2010 and December 31, 2009, there were no securities classified as available for sale. There were no sales of securities in the first nine months of 2009.

The amortized cost and estimated fair value of securities held to maturity by remaining term to contractual maturity as of September 30, 2010 is as follows:

 

($ in thousands)

   Amortized Cost      Estimated Fair Value      Average Yield  

Due in one year or less

   $ 9,903       $ 9,918         1.55

Due after one year through five years

     409,629         411,759         1.52   

Due after five years through ten years

     185,504         186,711         1.97   

Due after ten years

     8,808         5,666         2.02   
                          
   $ 613,844       $ 614,054         1.67
                          

Note 4 - Loans Receivable

Major classifications of loans receivable are summarized as follows:

 

     At September 30, 2010     At December 31, 2009  

($ in thousands)

   # of Loans      Amount     # of Loans      Amount  

Commercial real estate loans

     370       $ 943,214        403       $ 1,128,646   

Residential multifamily loans

     201         406,238        234         529,431   

Land development and other land loans

     10         17,739        15         32,934   

Residential 1-4 family loans

     2         423        2         441   

Commercial business loans

     21         1,512        22         1,687   

Consumer loans

     7         122        25         616   
                                  

Loans receivable

     611         1,369,248        701         1,693,755   

Deferred loan fees

        (5,936        (7,591
                      

Loans receivable, net of deferred fees

        1,363,312           1,686,164   

Allowance for loan losses

        (32,250        (32,640
                      

Loans receivable, net

      $ 1,331,062         $ 1,653,524   
                      

At September 30, 2010 and December 31, 2009, we had $38.6 million and $123.9 million of loans, respectively, on a nonaccrual status and considered impaired. At September 30, 2010 and December 31, 2009, a specific valuation allowance (included as part of the overall allowance for loan losses) in the amount of $4.0 million and $11.6 million, respectively, was maintained on nonaccrual loans.

At September 30, 2010 and December 31, 2009, we also had $0.6 million and $97.3 million, respectively, of accruing loans on which INB granted certain concessions to provide payment relief to the borrower. These concessions generally consist of the deferral of principal and or interest payments for a period of time, or a partial reduction in interest payments. These loans are considered troubled debt restructurings (TDRs) and are also impaired. An additional specific valuation allowance of $19,000 and $2.2 million was maintained on TDRs at September 30, 2010 and December 31, 2009, respectively.

At September 30, 2010, there were eight loans totaling $16.9 million and at December 31, 2009 two loans totaling $6.8 million that were classified as ninety days past due and still accruing interest. These loans were past their maturity date but the borrowers were making monthly loan payments. The majority of the loans at September 30, 2010 are expected to be extended at market terms.

Selected information related to impaired loans is summarized as follows:

 

     Quarter Ended
September 30,
     Nine-Months Ended
September 30,
 

($ in thousands)

   2010      2009      2010      2009  

Interest income that was not recorded on nonaccrual loans under contractual terms

   $ 416       $ 2,408       $ 2,351       $ 7,257   

Average principal balance of nonaccrual loans

     25,802         135,401         56,556         124,581   

Average principal balance of restructured loans (TDRs)

     16,174         71,727         62,634         53,215   

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

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)

   2010     2009     2010     2009  

Balance at beginning of period

   $ 30,350      $ 32,054      $ 32,640      $ 28,524   

Provision for loan losses charged to expense

     1,598        2,396        98,770        6,939   

Loan recoveries

     600        —          600        1,329   

Loan chargeoffs

     (298     (2,635     (99,760     (4,977
                                

Balance at end of period

   $ 32,250      $ 31,815      $ 32,250      $ 31,815   
                                

Note 6 - Foreclosed Real Estate and Valuation Allowance for Real Estate Losses

Real estate acquired through foreclosure by property type is summarized as follows:

 

     At September 30, 2010      At December 31, 2009  

($ in thousands)

   # of
Properties
     Amount (1)      # of
Properties
     Amount (1)  

Commercial real estate

     2       $ 7,932         4       $ 11,390   

Residential multifamily

     5         26,201         2         13,013   

Undeveloped land

     2         4,659         4         7,463   
                                   
     9       $ 38,792         10       $ 31,866   
                                   

 

(1) Reported net of valuation allowance.

Activity in the valuation allowance for real estate losses is summarized as follows:

 

     Quarter Ended
September 30,
     Nine-Months Ended
September 30,
 

($ in thousands)

   2010     2009      2010     2009  

Balance at beginning of period

   $ 1,582      $ 806       $ 2,793      $ 518   

Provision for real estate losses charged to expense

     2,984        400         13,505        688   

Real estate charge-offs

     (912     —           (12,644     —     
                                 

Balance at end of period

   $ 3,654      $ 1,206       $ 3,654      $ 1,206   
                                 

Note 7 - Deposits

Scheduled maturities of certificates of deposit accounts are as follows:

 

     At September 30, 2010     At December 31, 2009  

($ in thousands)

   Amount      Wtd-Avg
Stated Rate
    Amount      Wtd-Avg
Stated Rate
 

Within one year

   $ 451,897         3.18   $ 591,746         3.63

Over one to two years

     317,375         3.74        256,025         4.28   

Over two to three years

     207,951         3.91        241,217         4.45   

Over three to four years

     227,097         4.50        251,745         4.61   

Over four years

     122,055         4.14        168,958         4.31   
                                  
   $ 1,326,375         3.74   $ 1,509,691         4.11
                                  

Certificate of deposit accounts (CDs) of $100,000 or more totaled $641 million and $693 million at September 30, 2010 and December 31, 2009, respectively, and included brokered CDs of $159 million and $170 million at each date, respectively. At September 30, 2010, CDs of $100,000 or more by remaining maturity were as follows: $185 million due within one year; $156 million due over one to two years; $111 million due over two to three years; $123 million due over three to four years; and $66 million due over four years.

Note 8 - FHLB Advances and Lines of Credit

At September 30, 2010, INB had agreements with correspondent banks whereby it could borrow up to $9 million on an unsecured basis. The agreements are cancelable at any time. In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB), INB can also borrow from these institutions on a secured basis. At September 30, 2010, INB has access to the FRB’s secondary discount window lending program. At September 30, 2010, INB had available collateral consisting of investment securities and certain loans that could be pledged to support additional total borrowings of approximately $649 million from the FHLB and FRB if needed.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 8 - FHLB Advances and Lines of Credit, Continued

 

The following is a summary of certain information regarding FHLB advances in the aggregate:

 

     At or for the Quarter Ended
September 30,
    At or for the Nine-Months Ended
September 30,
 

($ in thousands)

   2010     2009     2010     2009  

Balance at period end

   $ 30,500      $ 50,500      $ 30,500      $ 50,500   

Maximum amount outstanding at any month end

   $ 35,500      $ 53,500      $ 55,500      $ 59,500   

Average outstanding balance for the period

   $ 35,944      $ 51,466      $ 43,809      $ 50,991   

Weighted-average interest rate paid for the period

     3.92     3.80     3.85     3.83

Weighted-average interest rate at period end

     3.93     3.81     3.93     3.81

Scheduled contractual maturities of outstanding FHLB advances as of September 30, 2010 were as follows:

 

($ in thousands)

   Amount      Wtd. Avg. Rate  

Maturing in the period October 1 through December 31, 2010

   $ 5,000         3.49

Maturing in 2011

     8,000         3.83

Maturing in 2012

     10,500         4.02

Maturing in 2013

     7,000         4.22
                 
   $ 30,500         3.93
                 

Note 9 - Subordinated Debentures

During the first nine months of 2009, a number of IMC’s debentures totaling to $40 million of principal and $1.3 million of related accrued interest payable were repaid at various times with cash on hand prior to their stated maturity. A loss aggregating to $0.5 million and $1.7 million from the early extinguishment of debentures was recorded in the third quarter and first nine months of 2009, respectively. This loss represents the expensing of remaining related unamortized issuance costs at the time of the debenture repayments. IMC had no outstanding debentures at September 30, 2010 and December 31, 2009.

Note 10 - Subordinated Debentures - Capital Securities

Capital Securities (commonly referred to as trust preferred securities) outstanding are summarized as follows:

 

($ in thousands)

   Principal      Accrued
Interest Payable
 

Capital Securities II - debentures due September 17, 2033

   $ 15,464       $ 412   

Capital Securities III - debentures due March 17, 2034

     15,464         392   

Capital Securities IV - debentures due September 20, 2034

     15,464         338   

Capital Securities V - debentures due December 15, 2036

     10,310         570   
                 
   $ 56,702       $ 1,712   
                 

Capital Securities outstanding are obligations of IBC’s wholly owned statutory business trusts, Intervest Statutory Trust II, III, IV and V, respectively. Each Trust was formed with a capital contribution from IBC 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 IBC’s Junior Subordinated Debentures that are due concurrently with the Capital Securities. The Capital Securities, net of IBC’s capital contributions of $1.7 million, total $55 million and qualify as regulatory Tier 1 capital up to certain limits.

The sole assets of the Trusts, the obligors on the Capital Securities, are the Junior Subordinated Debentures. In addition, for each Trust, IBC has guaranteed the payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to the Capital Securities. Issuance costs associated with Capital Securities II, III and IV were capitalized by IBC and are being amortized over the life of the securities using the straight-line method. The unamortized balance of these costs totaled $862,000 at September 30, 2010. There were no issuance costs associated with Capital Securities V.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 10 - Subordinated Debentures - Capital Securities, Continued

 

As of September 30, 2010, interest payments on the Junior Subordinated Debentures (and the corresponding distributions on the Capital Securities) are payable in arrears as follows:

 

   

Capital Securities II - quarterly at the rate of 2.95% over 3 month libor;

 

   

Capital Securities III - quarterly at the rate of 2.79% over 3 month libor;

 

   

Capital Securities IV - quarterly 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.

The 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 IBC for up to 20 consecutive quarterly periods, or 5 years. There is no limitation on the number of extension periods IBC 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, IBC will be obligated to pay all interest then accrued and unpaid. In February 2010, IBC exercised its right to defer regularly scheduled interest payments. The regularly scheduled interest payments are being accrued for payment in the future and reported as interest expense for financial statement purposes.

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 IBC, 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 statutory trust would be considered an investment company, contemporaneously with the redemption by IBC of the Junior Subordinated Debentures; and (ii) in whole or in part at any time for Capital Securities II, III, and IV and on or after September 15, 2011 for Capital Securities V contemporaneously with the optional redemption by IBC of the Junior Subordinated Debentures in whole or in part. Any redemption would be subject to the receipt of regulatory approvals.

Note 11 - Common Stock Options and Warrant

IBC has a shareholder-approved Long Term Incentive Plan (the “Plan”) under which stock options and other forms of incentive compensation may be awarded from time to time to officers, employees and directors of IBC and its subsidiaries. The maximum number of shares of Class A common stock that may be awarded under the Plan is 750,000. As of September 30, 2010, 423,760 shares of Class A common stock were available for award under the Plan. There were no grants of options or warrants during the reporting periods in this report.

Activity in IBC’s outstanding Class A common stock options and warrant and related information for the nine-months ended September 30, 2010 is summarized as follows:

 

     Exercise Price Per Warrant/Option           Wtd.-Avg.
Exercise  Price
 

($ in thousands, except per share amounts)

   $5.42 (1)     $7.50     $17.10     $4.02     Total    

Outstanding at December 31, 2009

     691,882        130,690        123,940        73,210        1,019,722      $ 7.01   

Forfeited

     —          —          —          (300     (300     4.02   

Expired (2)

     —          (900     (400     —          (1,300     10.45   
                                          

Outstanding at September 30, 2010

     691,882        129,790        123,540        72,910        1,018,122        7.00   
                                          

Expiration date

     12/23/18        12/11/18        12/13/17        12/10/19       

Vested and exercisable (3)

     100     100     100     0    

Wtd-avg contractual remaining term (in years)

     8.2        8.2        7.2        9.2        8.2     

Intrinsic value at September 30, 2010 (4)

     None        None        None        None        None     
                                          

 

(1) This is a warrant held by the U.S. Treasury to purchase IBC’s Class A common stock at $5.42 per share.
(2) Represent vested options issued to former employees that have expired unexercised under the terms of the option agreements.
(3) The $4.02 options will vest and become exercisable at the rate of 33.33% on December 10th of 2010, 2011 and 2012.
(4) Intrinsic value is zero since the closing market price of the Class A common stock on September 30, 2010 of $2.10 was below the exercise price of each option or warrant.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 11 - Common Stock Options and Warrant, Continued

 

Compensation expense recorded in connection with stock options outstanding with a corresponding increase to paid in capital is as follows: for the quarter ended September 30, 2010 and 2009, $10,000 and $56,000, respectively, and for the nine-months ended September 30, 2010 and 2009, $31,000 and $154,000, respectively.

At September 30, 2010, there was approximately $92,000 of unrecognized compensation expense related to outstanding stock options granted in 2009 that is expected to be recognized ratably during the period October 1, 2010 through December 31, 2012.

Note 12 - Income Taxes

At September 30, 2010 and December 31, 2009, we had a deferred tax asset totaling $47.8 million and $18.0 million, respectively. The asset relates to the unrealized benefit for net temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases that will result in future income tax deductions as well as an unused net operating loss carryforward (NOL) of $66.7 million as of September 30, 2010 that may be applied against future taxable income. The carryforward expires in twenty years.

The tax effects of the temporary differences and NOL that give rise to the deferred tax asset are as follows:

 

($ in thousands)

   At September 30,
2010
     At December 31
2009
 

Net operating loss carryforward

   $ 28,964       $ —     

Allowances for loan losses and real estate losses

     15,510         15,270   

Capitalized real estate expenses

     1,122         831   

Impairment writedowns on investment securities

     1,338         972   

Deferred compensation and benefits

     813         858   

Depreciation

     53         103   

Deferred income

     6         10   
                 

Total deferred tax asset

   $ 47,806       $ 18,044   
                 

A valuation allowance was not required during the reporting periods because we believe that it is more likely than not that our deferred tax assets will be fully realized. This conclusion is based on our prior earnings history, exclusive of the NOL generated in the second quarter of 2010, coupled with evidence indicating that we will be able to generate an adequate amount of future taxable income to fully utilize the deferred tax asset. Our ability to realize our deferred tax asset could be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support our deferred tax amount. In addition, the amount of our net operating loss carryforwards and certain other tax attributes realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code as a result of offerings of our capital securities, which could trigger a “change in control” provision as defined in Section 382.

Note 13 - (Loss) Earnings Per Common Share

Net (loss) earnings applicable to common stockholders and the weighted-average number of shares used for basic and diluted (loss) earnings per common share computations are summarized in the table that follows:

 

     Quarter Ended
September 30,
     Nine-Months Ended
September 30,
 

($ in thousands, except share and per share amounts)

   2010     2009      2010     2009  

Net (loss) earnings applicable to common stockholders

   $ (661   $ 342       $ (55,412   $ 1,201   

Weighted-Average number of common shares outstanding (1)

     9,120,812        8,270,812         8,672,460        8,270,812   
                                 

Basic (Loss) Earnings Per Common Share

   $ (0.07   $ 0.04       $ (6.39   $ 0.14   
                                 

Diluted (Loss) Earnings Per Common Share

   $ (0.07   $ 0.04       $ (6.39   $ 0.14   
                                 

 

(1) All outstanding options and warrant to purchase common stock during each of the periods above were not dilutive for purposes of the diluted earnings per share computations.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 14 - Stockholders’ Equity

IBC is authorized to issue up to 63,000,000 shares of its capital stock, consisting of 62,000,000 shares of Class A common stock, 700,000 shares of Class B common stock and 300,000 shares of preferred stock. IBC’s board of directors determines the powers, preferences and rights, and the qualifications, limitations, and restrictions thereof on any series of preferred stock issued. A total of 25,000 shares of preferred stock are designated as Series A and are owned by the U.S. Treasury as described later in this footnote.

At September 30, 2010, IBC had two classes of common stock outstanding - Class A and B common stock. The shares of Class B common stock are convertible, on a share-for-share basis, into Class A common stock at any time. As discussed in more detail in note 20, all issued and outstanding Class B shares were converted into Class A shares in October 2010.

On May 25, 2010, IBC sold in a private placement 850,000 shares of its Class A common stock for an aggregate purchase price of $4,250,000 to affiliates of FirstCity and Varde Partners Inc. Sandler O’Neill & Partners, L.P. acted as placement agent and was paid $255,000 in commissions by IBC. The shares issued represented 9.9% of IBC’s issued and outstanding shares of Class A common stock at the time of issuance. On June 30, 2010, IBC retired a total of 404,339 shares of its Class A common stock that was held as treasury stock. The shares had an aggregate cost of $10.0 million or an average purchase price per share of $24.73. As discussed in more detail in note 20, IBC raised additional capital through the sale of shares of its Class A common stock in October 2010.

On December 23, 2008, IBC issued and sold to the United States Treasury (the “Treasury”) 25,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”), along with a ten year warrant (the “Warrant”) to purchase at any time up to 691,882 shares of IBC’s Class A common stock for $5.42 per share, for a total cash investment for both the shares and the warrant of $25 million from the Treasury (the “Transaction”). The Transaction was completed pursuant to, and is governed by, the U.S. Treasury’s Capital Purchase Program (the “CPP”).

GAAP required the Transaction proceeds of $25 million to be allocated between the Preferred Shares and Warrant based on the ratio of the estimated fair value of the Warrant to the aggregate estimated fair value of both the Preferred Shares and the Warrant. The value of the Warrant was computed to be $1.6 million using the Black Scholes model with the following inputs: expected dividend yield of 4.61%; expected stock volatility of 81%, risk-free interest rate of 1.60% and expected life of 5 years.

The value of the Preferred Shares was computed to be $18.7 million based on the net present value of the expected cash flows over five years using a discount rate of 12%, which represented IBC’s estimated incremental borrowing rate for a similar transaction in the private sector. The allocation of the Transaction proceeds to the Warrant was recorded as a “preferred stock discount” against the Preferred Shares, with a corresponding and equal entry to additional paid in common equity in the amount of $1.9 million, computed as follows ($1.6 million divided by the sum of ($1.6 million plus $18.7 million) multiplied by the Transaction proceeds of $25 million). This discount is being amortized over five years on a straight-line basis and reduces earnings or increases losses available to common stockholders in each year.

The Preferred Shares carry a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% beginning in December 2013. Dividends compound if they accrue and are not paid and they also reduce earnings or increase losses available to common stockholders. The Preferred Shares have a liquidation preference of $1,000 per share, plus accrued unpaid dividends. IBC may redeem the Preferred Shares at any time, plus accrued unpaid dividends, in whole or in part, subject to the approval of its primary regulator. While the Preferred Shares are outstanding, certain restrictions apply to IBC, including, among others the following. The Preferred Shares have a senior rank and IBC cannot issue other preferred stock senior to the Preferred Shares. Until December 23, 2012, unless the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, IBC may not increase its common stock cash dividend (which was last paid in June 2008 in the amount of $0.25 per share) or repurchase common stock or other equity shares (subject to certain limited exceptions) without the Treasury’s approval.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 14 - Stockholders’ Equity, Continued

 

The Preferred Shares generally are non-voting, other than in connection with proposals to issue preferred stock senior to the Preferred Shares, certain merger transactions, amendments to the rights of the holder of the Preferred Shares, and other than in connection with the board representation rights mentioned below, or as required by Delaware State law.

Dividends on IBC’s common stock can be resumed only if all Preferred Share dividends in arrears have been paid. Similar restrictions apply to IBC’s ability to repurchase common stock if Preferred Share dividends are not paid. A failure to pay a total of six Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to IBC’s board of directors. That right would continue until IBC pays all dividends in arrears. In February 2010, IBC ceased declaration and payment of the Preferred Share Dividend. IBC has missed the February, May and August 2010 dividend payments as of September 30, 2010. At September 30, 2010, the amount of Preferred Share Dividends unpaid and in arrears totaled $1,115,000.

The Warrant held by the Treasury is exercisable at any time at the option of the Treasury and expires on December 23, 2018. The Warrant has anti-dilution protections and certain other protections for the holder, as well as potential registration rights upon written request from the Treasury. If requested by the Treasury, the Warrant (and the underlying common stock) may need to be listed on a national securities exchange. The Treasury has agreed not to exercise voting rights with respect to common shares it may acquire upon exercise of the Warrant. If the Preferred Shares are redeemed in whole, IBC can purchase the Warrant or any common shares held by the Treasury at their fair market value at that time.

Our senior executive officers have agreed to limit certain compensation, bonus, incentive and other benefits plans, arrangements, and policies with respect to them during the period that the Treasury owns any securities acquired in the Transaction. Among other things, no executive compensation in excess of $500,000 per annum can be deducted for tax purposes.

Note 15 - Dividend Restrictions

The payment of cash dividends by IBC to its shareholders and the payment of cash dividends by IBC’s subsidiaries to IBC itself are subject to various regulatory restrictions, as well as restrictions that may arise from any outstanding indentures and other capital securities as discussed in note 14 above. These restrictions take into consideration various factors such as whether there are sufficient net earnings, as defined, liquidity, asset quality, capital adequacy and economic conditions. The holders of IBC’s Class A common stock and Class B common stock share ratably in any dividend. No cash common stock dividends have been declared or paid since June 2008.

IBC declared and paid cash dividends totaling $1.1 million during 2009 on its Series A Preferred Stock issued in December 2008 and held by the Treasury. No dividends were declared or paid in the first nine months of 2010 as discussed below.

In February 2010, the Federal Reserve Bank of NY (FRB), IBC’s primary regulator, informed IBC that it may not, without the prior approval of the FRB, pay dividends on or redeem its capital stock, pay interest on or redeem its trust preferred securities, or incur new debt. INB was also informed by its primary regulator, the Office of the Comptroller of the Currency of the United States of America (OCC), that it cannot pay any cash dividends to IBC. Accordingly, INB and IBC have suspended the payment of all dividends. The deferral of interest and preferred dividend payments referred to in greater detail in notes 10 and 14 will resume at such times as both IBC and INB are permitted to do so and upon the determination that such payments are consistent with IBC’s and INB’s overall financial performance and capital requirements.

Note 16 - Off-Balance Sheet Financial Instruments

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our 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. Our maximum exposure to credit risk is represented by the contractual amount of those instruments.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 16 - Off-Balance Sheet Financial Instruments, Continued

 

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 to us. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. INB from time to time issues standby letters of credit, which are conditional commitments issued by INB to guarantee the performance of a customer to a third party. The credit risk involved in the underwriting of letters of credit is essentially the same as that involved in originating loans.

The contractual amounts of off-balance sheet financial instruments is summarized as follows:

 

($ in thousands)

   At September 30,
2010
     At December 31,
2009
 

Unfunded loan commitments

   $ 12,612       $ 26,823   

Available lines of credit

     790         968   
                 
   $ 13,402       $ 27,791   
                 

Note 17 - Regulatory Capital and Regulatory Matters

We are subject to regulation, examination and supervision by the FRB. INB is also subject to regulation, examination and supervision by the FDIC and the OCC. We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to comply with these requirements can initiate mandatory and discretionary actions by the regulators that, if undertaken, could have a material adverse effect on our financial condition, results of operations and business. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts are also subject to qualitative judgement by the regulators about components, risk weighting and other factors. Quantitative measures established by the regulations to ensure capital adequacy require us to maintain minimum amounts and ratios of total Tier 1 capital to risk-weighted assets, total Tier 1 capital to average assets and total regulatory capital to risk weighted assets, as defined by the regulations.

IBC has trust preferred securities (TRUPS) outstanding (that were issued prior to 2007 and mature at various times from 2033 through 2036) which can be included in Tier 1 capital of bank holding companies. Bank holding companies generally may include cumulative perpetual preferred stock and trust preferred securities in Tier 1 capital up to 25 percent of total core capital elements (excluding senior preferred stock issued to the U.S. Treasury, all of which qualifies as Tier 1 capital without restriction). Amounts of qualifying cumulative perpetual preferred stock and qualifying trust preferred securities in excess of this limit may be included in Tier 2 capital.

Beginning March 31, 2011, the amount of qualifying cumulative perpetual preferred stock (excluding senior preferred stock issued to the U.S. Treasury) and qualifying trust preferred securities, as well as certain types of minority interest, that may be included as Tier 1 capital will be are limited to 25 percent of the sum of core capital elements net of goodwill. We do not have any goodwill or minority interests. Additionally, the excess amounts of restricted core capital elements in the form of qualifying trust preferred securities included in Tier 2 capital will be limited to 50 percent of Tier 1 capital (net of goodwill). However, amounts in excess of this limit will still be taken into account in the overall assessment of an organization’s funding and financial condition. In the last five years before the underlying subordinated note matures, the associated trust preferred securities must be treated as limited-life preferred stock. Thus, in the last five years of the life of the note, the outstanding amount of trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital, subject, together with subordinated debt and other limited-life preferred stock, to a limit of 50 percent of Tier 1 capital. During this period, the trust preferred securities will be amortized out of Tier 2 capital by one-fifth of the original amount (less redemptions) each year and excluded totally from Tier 2 capital during the last year of life of the underlying note. Based on our current capital levels, we do not expect IBC’s Tier 1 capital to be reduced when the changes described above become effective on March 31, 2011.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 17 - Regulatory Capital and Regulatory Matters, Continued

 

Under the recently enacted Dodd Frank Wall Street Reform and Consumer Protection Act, certain bank holding companies will not be able to count “hybrid capital instruments,” such as TRUPS, as Tier 1 capital. These provisions apply to IBC as follows: holding companies, such as IBC, with at least $500 million but less than $15 billion in total consolidated assets cannot count as Tier 1 capital any hybrid capital instruments, including TRUPS, issued on or after May 19, 2010. However, these holding companies can continue to count as Tier 1 capital any hybrid capital instruments issued before May 19, 2010. These provisions do not apply to any hybrid capital instrument issued prior to October 4, 2010 to the U.S. government or a U.S. government agency under the Emergency Economic Stabilization Act of 2008, such as Troubled Asset Relief Program (TARP). Accordingly, IBC’s outstanding TRUPS and preferred stock held by the U.S. Treasury continue to count as Tier 1 capital under the provisions of this legislation.

In April 2009, INB agreed with the OCC to maintain minimum capital ratios at specified levels higher than those otherwise required by applicable regulations as noted in the table that follows. At September 30, 2010 and December 31, 2009, we believe that we have met all capital adequacy requirements to which we are subject, except for INB’s Tier 1 leverage capital ratio, which stood at 8.42% at September 30, 2010 and was below the 9% requirement. We intend to meet this requirement by increasing our capital as described later in this footnote. As of the date of filing of this report on Form 10-Q, we are not aware of any conditions or events that would have changed the status of our compliance with our regulatory capital requirements from September 30, 2010, except for the capital raise referred to at the end of this footnote.

The table that follows presents information regarding IBC’s and INB’s capital adequacy.

 

           Capital Requirements  
     Actual Capital     Minimum Under
Prompt

Corrective Action
Provisions
    To Be “Well
Capitalized” Under
Prompt Corrective
Action Provisions
    Minimum
Under
Agreement with
OCC
 

($ in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Consolidated at September 30, 2010: (1)

  

                 

Total capital to risk-weighted assets

   $ 204,475         12.96   $ 126,141         8.00     NA         NA        NA         NA   

Tier 1 capital to risk-weighted assets

   $ 184,297         11.68   $ 63,091         4.00     NA         NA        NA         NA   

Tier 1 capital to average assets

   $ 184,297         8.81   $ 83,701         4.00     NA         NA        NA         NA   

Consolidated at December 31, 2009:

                    

Total capital to risk-weighted assets

   $ 292,881         15.44   $ 151,786         8.00     NA         NA        NA         NA   

Tier 1 capital to risk-weighted assets

   $ 269,054         14.18   $ 75,893         4.00     NA         NA        NA         NA   

Tier 1 capital to average assets

   $ 269,054         11.17   $ 96,342         4.00     NA         NA        NA         NA   

INB at September 30, 2010:

                    

Total capital to risk-weighted assets

   $ 194,801         12.43   $ 125,386         8.00   $ 156,732         10.00   $ 188,079         12.00

Tier 1 capital to risk-weighted assets

   $ 175,059         11.17   $ 62,693         4.00   $ 94,039         6.00   $ 156,732         10.00

Tier 1 capital to average assets

   $ 175,059         8.42   $ 83,205         4.00   $ 104,007         5.00   $ 187,212         9.00

INB at December 31, 2009:

                    

Total capital to risk-weighted assets

   $ 263,239         14.04   $ 149,980         8.00   $ 187,475         10.00   $ 224,970         12.00

Tier 1 capital to risk-weighted assets

   $ 239,698         12.79   $ 74,990         4.00   $ 112,485         6.00   $ 187,475         10.00

Tier 1 capital to average assets

   $ 239,698         10.05   $ 95,394         4.00   $ 119,242         5.00   $ 214,636         9.00

 

(1) Assuming IBC had excluded its eligible outstanding trust preferred capital securities from its Tier 1 capital at September 30, 2010 (which totaled $54.8 million) and included the entire amount in its Tier 2 capital, consolidated proforma capital ratios at September 30, 2010 would have been 12.96%, 8.22% and 6.19%, respectively.

On April 7, 2009, INB entered into a Memorandum of Understanding, or MOU, with the OCC, its primary regulator, which requires INB to do the following: appoint a Compliance Committee to monitor and coordinate INB’s adherence to the MOU and to submit progress reports to the OCC; develop and implement a Strategic Plan in accordance with guidelines set forth in the MOU; review and revise INB’s Contingency Funding Plan to address expansion of the number of crisis scenarios used, define responsibilities and decision making authority and restrict the use of brokered deposits; develop and implement a written program to improve credit risk management processes that are consistent across INB’s two primary markets; develop and implement a three-year capital program in accordance with guidelines set out in the MOU; and review and revise INB’s interest rate risk policy and procedures to address matters set forth in the MOU.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 17 - Regulatory Capital and Regulatory Matters, Continued

 

Although INB believes it has made progress in addressing various matters covered by the MOU, it understands that the OCC plans to pursue and enter into a formal agreement with INB, which agreement is likely to cover many of the same areas addressed in the MOU, including the following:

 

   

appointment of a compliance committee, all but one of which must be independent, to monitor and coordinate adherence to the formal agreement;

 

   

development of a strategic plan, which will, among other things, establish objectives and identify strategies to achieve those objectives;

 

   

development of a long-term capital plan and achievement and maintenance of required capital levels;

 

   

an assessment of certain executive officers;

 

   

development and implementation of a plan to improve earnings;

 

   

a program for liquidity risk management and maintenance of adequate liquidity levels with monthly reporting and weekly advisories to the OCC concerning deposit maturities;

 

   

implementation of a plan to diversify assets;

 

   

implementation of a plan to improve loan portfolio management;

 

   

a program to eliminate criticized assets;

 

   

a program for the review of loans to assure timely identification and characterization of problem credits;

 

   

a program for the maintenance of an adequate allowance for loan losses consistent with OCC rules;

 

   

appraisals of real property that are timely and comply with OCC requirements; and

 

   

interest rate risk policies.

Many of these plans and programs will be subject to OCC review and approval.

If INB enters into the formal agreement with the OCC, INB will not be allowed to accept brokered deposits without the prior approval of the OCC and it would also be required, in the absence of a waiver from the FDIC, based on a determination that INB operates in high cost deposit markets, to maintain its deposit pricing at or below the national rates published by the FDIC, plus 75 basis points. At September 30, 2010, INB had total brokered deposits of $159.1 million, of which $31.3 million (20%) mature by December 31, 2011. At September 30, 2010, all of INB’s deposit products were at levels at or below the FDIC national rates plus 75 basis points. The FDIC’s national rate is a simple average of rates paid by U.S. depository institutions as calculated by the FDIC. See note 8 for a discussion of our lines of credit and pledgeable assets.

We also expect that the current capital levels INB is required to maintain (Tier 1 capital to total average assets (leverage ratio) - 9%; Tier 1 capital to risk-weighted assets - 10%; and total capital to risk-weighted assets - 12%) will be included in any formal agreement that INB may enter into with the OCC.

On October 20, 2010, IBC completed a public offering of shares of its Class A common stock to raise additional capital. See note 20 for more information regarding this capital raise. IBC has invested a large portion of the proceeds from the offering as a capital contribution to INB and has restored INB’s Tier I leverage capital ratio above the required level of 9%. Failure by INB or IBC to maintain any of its required regulatory capital ratios may lead to additional regulatory enforcement actions or other restrictions.

Note 18 - Contingencies

We are 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 us, which, if determined adversely, would have a material effect on our business, results of operations, financial position or liquidity.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 19 - Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Currently, we have no assets or liabilities that are recorded at fair value on a recurring basis, such as a securities available for sale portfolio. From time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as impaired loans, impaired investment securities and foreclosed real estate. These nonrecurring fair value adjustments involve the application of lower-of-cost-or-market accounting or writedowns of individual assets. In accordance with GAAP, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. For level 3, valuations are generated from model-based techniques that use significant assumptions not observable in the market. These assumptions reflect our estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. See note 22 to the consolidated financial statements in our 2009 Annual Report on Form 10-K for a more detailed further discussion of valuation levels.

The following table provides information regarding our assets measured at fair value on a nonrecurring basis.

 

     Carrying Value
At September 30, 2010
     Total Losses (3)
Nine-Months Ended September 30,
 

($ in thousands)

   Total      Level 1      Level 2      Level 3      2010      2009  

Impaired loans (1)

   $ 39,177       $ —         $ —         $ 39,177       $ 86,731       $ 8,928   

Impaired securities (2)

     4,931         —           —           4,931         841         1,372   

Foreclosed real estate

     38,792         —           —           38,792         13,632         678   

 

(1) Comprised of loans classified as nonaccrual and troubled debt restructurings. Amount excludes a specific valuation allowance of $4.0 million.
(2) Comprised of certain investments in trust preferred securities considered other than temporarily impaired.
(3) Represents total losses recognized on all assets measured at fair value on a nonrecurring basis during the period indicated. The loss for impaired loans represents the change (before net chargeoffs) during the period in the corresponding specific valuation allowance and a large portion of these losses were attributable to a bulk sale of loans at significant discounts to loans’ estimated fair values. The loss for foreclosed real estate represents writedowns in carrying values subsequent to foreclosure (recorded as provisions for real estate losses) adjusted for any gains or losses from the sale of the properties during the period. The loss on investment securities represents OTTI charges recorded as a component of noninterest income.

The following table presents information regarding the change in assets measured at fair value on a nonrecurring basis for the nine-months ended September 30, 2010.

 

($ in thousands)

   Impaired
Securities
    Impaired
Loans
    Foreclosed
Real Estate
 

Balance at December 31, 2009

   $ 3,727      $ 221,188      $ 31,866   

Net new impaired securities and loans

     2,045        79,984        —     

Other than temporary impairment writedowns

     (841     —          —     

Sales and principal repayments

     —          (123,987     (20,327

Loan chargeoffs

     —          (97,123     —     

Loans transferred to foreclosed real estate

     —          (40,885     40,885   

Writedowns of carrying value subsequent to foreclosure

     —          —          (13,505

Loss on sales

     —          —          (127
                        

Balance at September 30, 2010

   $ 4,931      $ 39,177      $ 38,792   
                        

The fair value estimates of all of our financial instruments shown in the table that follows are made at a specific point in time based on available information. Where available, quoted market prices are used. A significant portion of our financial instruments, such as our mortgage loans, do not have an active marketplace in which they can be readily sold or purchased to determine fair value. Consequently, fair value estimates for such instruments are based on assumptions made by us that include the instrument’s credit risk characteristics and future estimated cash flows and prevailing interest rates. As a result, these fair value estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Accordingly, changes in any of our assumptions could cause the fair value estimates to deviate substantially.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 19 - Fair Value Measurements, Continued

 

Further discussion regarding the assumptions used to compute the estimated fair values disclosed in the table below can be found in note 22 to the consolidated financial statements included in our 2009 Annual Report on Form 10-K.

The carrying and estimated fair values of our financial instruments are as follows:

 

     At September 30, 2010      At December 31, 2009  

($ in thousands)

   Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Financial Assets:

           

Cash and cash equivalents

   $ 13,815       $ 13,815       $ 7,977       $ 7,977   

Securities held to maturity, net

     613,844         614,054         634,856         630,554   

FRB and FHLB stock

     9,865         9,865         10,708         10,708   

Loans receivable, net

     1,331,062         1,366,877         1,653,524         1,655,591   

Loan fees receivable

     5,734         4,681         7,890         6,221   

Accrued interest receivable

     9,210         9,210         11,196         11,196   

Financial Liabilities:

           

Deposits

     1,806,834         1,862,514         2,029,984         2,088,502   

Borrowed funds plus accrued interest payable

     89,135         89,530         118,552         118,524   

Accrued interest payable on deposits

     3,518         3,518         6,201         6,201   

Off-Balance Sheet Instruments:

           

Commitments to lend

     106         106         267         267   

Note 20 - Subsequent Event

On October 20, 2010, IBC completed a public offering of 10,600,000 shares of its Class A common stock at a price to the public of $1.95 per share. The net proceeds from the sale of the shares, after underwriting discounts and commissions and other offering expenses, amounted to approximately $19.1 million. IBC also granted the underwriter a 30-day option to purchase up to an aggregate of 1,590,000 additional shares of Class A common stock to cover over-allotments, if any. IBC has invested a large portion of the proceeds from the offering as a capital contribution to INB and has restored INB’s Tier 1 leverage capital ratio above its required level of 9%. See note 17.

Concurrent with the public offering, on October 20, 2010, the three holders of all of IBC’s issued and outstanding Class B common stock totaling 580,000 shares converted all of their shares into shares of Class A common stock at the conversion rate of one share of Class A common stock for each share of Class B common stock. IBC will no longer issue, or authorize the issuance of, any Class B common stock. Total Class A common shares outstanding as of October 20, 2010 amounted to 19,720,812.

Note 21 - Recent Accounting Standards Update

In January 2010, the FASB issued ASU No. 2010-01 “Accounting for Distributions to Shareholders with Components of Stock and Cash (Topic 505),” which clarifies that a distribution to shareholders that offers them the ability to elect to receive their entire distribution in cash or stock with a potential limitation on the total amount of cash that all shareholders can receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. We adopted this guidance which had no effect on our consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06 “Improving Disclosures About Fair Value Measurements (Topic 820),” which amends the guidance for fair value measurements and disclosures. The guidance in ASU 2010-06 requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 21 - Recent Accounting Standards Update, Continued

 

Furthermore, ASU 2010-06 requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for our financial statements for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective January 1, 2011 and for interim periods thereafter. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Early adoption is permitted. The adoption of this guidance is not expected to significantly impact our annual and interim financial statement disclosures and will not have any impact on our consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for companies that are subject to the periodic reporting requirements of the Exchange Act to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. generally accepted accounting principals. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance, except for the use of the issued date for conduit debt obligors, which will be effective for interim or annual periods ending after June 15, 2010. The adoption of this guidance did not have a material effect on our consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging (Topic 815),” which clarifies that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. This guidance was effective for us on July 1, 2010. The adoption of this guidance did not have a material effect on our consolidated financial statements.

On July 21, 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosures will require significantly more information about credit quality in a financial institution’s loan portfolio. This statement addresses only disclosures and does change recognition or measurement of the allowance. This statement will be effective for us on January 1, 2011. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

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Intervest Bancshares Corporation and Subsidiaries

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith, P.A., P.C., our independent registered public accounting firm, has made a limited review of our financial data as of September 30, 2010 and for the three- and nine-month periods ended September 30, 2010 and 2009 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 on the following page herein.

 

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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, 2010 and the related condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2010 and 2009, and the related condensed consolidated statements of changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2010 and 2009. 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, 2009, 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 March 2, 2010, 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, 2009 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
October 27, 2010

 

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

Overview

Management’s discussion and analysis of financial condition and results of operations of Intervest Bancshares Corporation and Subsidiaries that follows should be read in conjunction with the accompanying quarterly condensed consolidated financial statements in this report on Form 10-Q as well as our entire 2009 annual report on Form 10-K.

Intervest Bancshares Corporation has two wholly owned consolidated subsidiaries, Intervest National Bank and Intervest Mortgage Corporation. These entities may be referred to individually as “IBC,” “INB” and “IMC,” respectively, in this report. IBC also has four wholly owned unconsolidated subsidiaries, Intervest Statutory Trust II, III, IV and V, all of which were formed at various times in connection with the issuance of trust preferred securities. References in this report to “we,” “us” and “our” refer to Intervest Bancshares Corporation and its consolidated subsidiaries on a consolidated basis, unless otherwise specified. For a detailed discussion of our business, see note 2 to the condensed consolidated financial statements included in this report. Our business is also affected by various risk factors that have been updated in Item 1A of Part II of this report.

Critical Accounting Policies

We consider our critical accounting policies to be those that relate to the determination of the following: our allowance for loan losses; our valuation allowance for real estate losses; other than temporary impairment assessments of our security investments; and the need for and amount of a valuation allowance for our deferred tax asset.

These items are considered critical accounting estimates because each is highly susceptible to change from period to period and require us to make numerous assumptions about a variety of information that directly affect the calculation of the amounts reported in our consolidated financial statements. For example, the impact of a large unexpected chargeoff could deplete the allowance for loan losses and potentially require us to record increased loan loss provisions to replenish the allowance, which could negatively affect our operating results and financial condition. Except for the valuation allowance for deferred tax assets which is discussed below, a more detailed discussion of the factors and estimates used in computing the above items can be found under the caption “Critical Accounting Policies” on pages 42 to 45 of our 2009 annual report on Form 10-K.

We evaluate our deferred tax assets for recoverability based on all available evidence. This process involves significant judgment on our part and assumptions that are subject to change from period to period based on changes in tax laws or variances between the future projected operating performance and our actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the more-likely-than-not criterion, we consider all positive and negative evidence as of the end of each reporting period. Future adjustments, either increases or decreases, to the deferred tax asset valuation allowance will be determined based upon changes in the expected realization of the deferred tax assets. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under the tax law. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we may be required to establish and/or record adjustments to the valuation allowance in future reporting periods. Such a charge could have a material adverse effect on our results of operations, financial condition and capital position.

As disclosed in greater detail in note 12 to the condensed consolidated financial statements in this report, at September 30, 2010, we had a deferred tax asset in the amount of $47.8 million, which includes a gross net operating loss carryfoward (NOL) totaling $67 million (representing $29 million of the total deferred tax asset). We perform quarterly reviews of our deferred tax asset and have determined that a valuation allowance was not required at September 30, 2010 or at any time during the reporting periods in this report because we believe that it is more likely than not that our deferred tax asset will be fully realized. This conclusion is based on our prior earnings history, exclusive of the NOL generated in the second quarter of 2010, coupled with evidence indicating that we will be able to generate an adequate amount of future taxable income over a reasonable period of time to fully utilize the deferred tax asset.

 

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Our ability to realize our deferred tax asset could be reduced in the future if our estimates of future taxable income from our operations and tax planning strategies do not support the realization of our deferred tax asset. In addition, the amount of NOLs and certain other tax attributes realizable for income tax purposes may be reduced under Section 382 of the Internal Revenue Code by sales of our common stock, including transactions in the open market by 5% or greater shareholders, if an ownership change is deemed to occur under Section 382 of the Internal Revenue Code. The determination of whether an ownership change has occurred under Section 382 is highly fact specific and can occur through one or more acquisitions of capital stock (including open market trading) if the result of such acquisitions is that the percentage of our outstanding common stock held by shareholders or groups of shareholders owning at least 5% of our common stock at the time of such acquisition, as determined under Section 382, is more than 50 percentage points higher than the lowest percentage of our outstanding common stock owned by such shareholders or groups of shareholders within the prior three-year period.

As discussed in notes 2 and 20 to the condensed consolidated financial statements included in this report, IBC sold 850,000 and 10,600,000 shares of its common stock in two separate transactions in May 2010 and October 2010, respectively. We have determined based on an internal analysis that the completion of these transactions did not result in a change of control as defined by Section 382, although no assurance can be given that taxing authorities would agree with such determination. The combination of these sales with any future sales of IBC’s common stock during the period defined above, could increase the risk of a change in control as determined under Section 382 and result in the partial loss of the availability of our NOLs, which would require us to expense a portion of our then deferred tax asset amount.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Selected balance sheet information by entity as of September 30, 2010 follows:

 

($ in thousands)

   IBC      INB     IMC     Eliminations (1)     Consolidated  

Cash and cash equivalents

   $ 1,482       $ 11,595      $ 1,466      $ (728   $ 13,815   

Security investments, net

     —           623,709        —          —          623,709   

Loans receivable, net of deferred fees

     —           1,354,610        8,702        —          1,363,312   

Allowance for loan losses

     —           (31,800     (450     —          (32,250

Foreclosed real estate, net of valuation allowance

     —           38,792        —          —          38,792   

Investments in consolidated subsidiaries

     217,513         —          —          (217,513     —     

All other assets

     4,067         90,757        2,396        (500     96,720   
                                         

Total assets

   $ 223,062       $ 2,087,663      $ 12,114      $ (218,741   $ 2,104,098   
                                         

Deposits

   $ —         $ 1,807,604      $ —        $ (770   $ 1,806,834   

Borrowed funds and related interest payable

     58,414         30,721        —          —          89,135   

All other liabilities

     576         42,952        987        (458     44,057   
                                         

Total liabilities

     58,990         1,881,277        987        (1,228     1,940,026   

Stockholders’ equity

     164,072         206,386        11,127        (217,513     164,072   
                                         

Total liabilities and stockholders’ equity

   $ 223,062       $ 2,087,663      $ 12,114      $ (218,741   $ 2,104,098   
                                         

 

(1) All significant intercompany balances and transactions are eliminated in consolidation. Nearly all the amounts arise from intercompany deposit accounts and investments in consolidated subsidiaries.

A comparison of selected consolidated balance sheet information follows:

 

     At September 30, 2010     At December 31, 2009  

($ in thousands)

   Carrying
Value
     % of
Total Assets
    Carrying
Value
     % of
Total Assets
 

Cash and cash equivalents

   $ 13,815         0.7   $ 7,977         0.3

Security investments, net

     623,709         29.6        645,564         26.9   

Loans receivable, net of deferred fees and loan loss allowance

     1,331,062         63.3        1,653,524         68.9   

Foreclosed real estate, net of valuation allowance

     38,792         1.8        31,866         1.3   

All other assets

     96,720         4.6        62,273         2.6   
                                  

Total assets

   $ 2,104,098         100.0   $ 2,401,204         100.0
                                  

Deposits

   $ 1,806,834         85.9   $ 2,029,984         84.5

Borrowed funds and related interest payable

     89,135         4.2        118,552         5.0   

All other liabilities

     44,057         2.1        38,614         1.6   
                                  

Total liabilities

     1,940,026         92.2        2,187,150         91.1   

Stockholders’ equity

     164,072         7.8        214,054         8.9   
                                  

Total liabilities and stockholders’ equity

   $ 2,104,098         100.0   $ 2,401,204         100.0
                                  

 

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General

Consolidated assets at September 30, 2010 decreased by $297 million, or 12%, to $2.10 billion, from $2.40 billion at December 31, 2009, primarily reflecting a decrease in loans receivable and security investments, partially offset by increases in overnight investments, income taxes receivable and our deferred tax asset. The net reduction in the size of our balance sheet in the first nine months of 2010 was the result of several factors discussed below.

Due primarily to higher regulatory capital requirements applicable to INB, in the first nine months of 2010, INB gradually reduced its balance sheet by decreasing its deposit rates and encouraging net deposit outflow, repaying its borrowed funds as they matured and decreasing the volume of its new loan originations from historical levels. INB plans to reduce its balance sheet further during the remainder of 2010 by encouraging net deposit outflow and funding the deposit reductions mainly through cash generated from the expected calls of its agency security investments.

On May 25, 2010, in order to accelerate the reduction of our problem assets, we completed a transaction to remove a large portion of our problem assets from our balance sheet. We sold in bulk certain non-performing and underperforming loans on commercial real estate and multi-family properties and some real estate owned. The assets sold aggregated to approximately $207 million and consisted of $187 million of loans and $14.4 million of real estate owned by INB and $5.6 million of loans owned by IMC. All of the assets were sold at a substantial discount to their net carrying values of $197.7 million for an aggregate purchase price of $121.5 million. As a result of this bulk sale, we recorded a $78.6 million combined provision for loan and real estate losses, which contributed approximately $44 million to the net loss we reported in the second quarter and first nine months of 2010. At September 30, 2010, our deferred tax asset increased by $30 million from December 31, 2009 to $47.8 million. A large portion of the increase was attributable to the tax-effect of the net operating loss generated by this bulk sale transaction.

On May 25, 2010, IBC sold in a private placement 850,000 shares of its Class A common stock for net proceeds of approximately $4.0 million. In October 2010, IBC completed a public offering of 10,600,000 shares of its Class A common stock for net proceeds of approximately $19.1 million. See note 20 to the condensed consolidated financial statements in this report for more information regarding these capital raises.

Cash and Cash Equivalents

Cash and cash equivalents include interest-bearing and noninterest-bearing cash balances with banks, and other short-term investments that have original maturities of three months or less. Cash and cash equivalents increased to $14 million at September 30, 2010 from $8 million at December 31, 2009. The level of cash and cash equivalents fluctuates based on various factors, including liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. See “Liquidity and Capital Resources” for a discussion of our liquidity.

Security Investments

Security investments consist of securities held to maturity and Federal Reserve Bank (FRB) and Federal Home Loan Bank of New York (FHLB) stock. Securities are classified as held to maturity and are carried at amortized cost when we have the intent and ability to hold them to maturity. Such investments, all of which are held by INB, decreased to $614 million at September 30, 2010, from $635 million at December 31, 2009. The decrease reflected an aggregate of $622 million of calls, $21 million of maturities, a $24 million transfer to the available-for-sale portfolio and $0.8 million other than temporary impairment writedowns, exceeding $648 million of new purchases during the period. INB’s investment portfolio has experienced a high level of calls by the issuers due to the low interest rate environment.

In March 2010, securities held to maturity with a total carrying value of $24.1 million (and an estimated fair value of $24.8 million) were transferred to the available-for-sale category and promptly sold. A gross realized gain of $0.7 million was realized from this transaction. The securities sold consisted of INB’s entire portfolio of non-callable, fixed-rate U.S. government agency securities that were scheduled to mature at various times from 2011 through 2013. This transaction was undertaken to enhance INB’s capital levels in response to the higher regulatory capital requirements for INB. At September 30, 2010 and December 31, 2009, there were no securities classified as available for sale.

 

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At September 30, 2010, securities held to maturity consisted of investment grade rated debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation totaling $609 million and noninvestment grade rated corporate securities (consisting of variable-rate pooled trust preferred securities backed by obligations of companies in the banking industry) totaling $4.9 million. As discussed in more detail in note 3 to the condensed consolidated financial statements, INB has recorded other than temporary impairment charges on these trust preferred security investments.

At September 30, 2010, the held to maturity portfolio had a weighted-average yield to earliest call date of 1.67% and a weighted-average remaining contractual maturity of 4.8 years. Nearly all of the securities have fixed interest rates or have predetermined rate increases, and have call features that allow the issuer to call the security before its stated maturity without penalty. Over the next twelve months, a total of approximately $389 million in securities could potentially be called assuming interest rates remain at or near current levels, a large portion of which would then be reinvested in similar securities. Securities with call features routinely have a higher yield than noncallables with the same maturity at the time of purchase. However, the lack of call protection or the expiration of the non-callable period of the security will result in the early call of securities in a declining or flat rate environment, which results in re-investment risk of the proceeds.

At September 30, 2010 and December 31, 2009, the held-to-maturity portfolio’s estimated fair value was $614 million and $631 million, respectively. At September 30, 2010, the portfolio had a net unrealized gain of $0.2 million, compared to a net unrealized loss of $4.3 million at December 31, 2009. See note 3 to the condensed consolidated financial statements for information on and a discussion of unrealized losses.

In order for INB to be a member of FRB and FHLB, INB must maintain an investment in the capital stock of each entity, which amounted to $5.2 million and $4.7 million, respectively, at September 30, 2010. The FRB stock has historically paid a dividend of 6%, while the FHLB stock dividend fluctuates quarterly and was most recently at the rate of 4.60% for the quarter ended June 30, 2010. The total required investment, which amounted to $9.9 million at September 30, 2010, compared to $10.7 million at December 31, 2009, fluctuates based on INB’s capital level for the FRB stock and INB’s loans and outstanding FHLB borrowings for the FHLB stock.

Loans Receivable, Net of Deferred Fees

Total loans receivable, net of unearned fees, amounted to $1.36 billion at September 30, 2010, a $323 million decrease from $1.68 billion at December 31, 2009. The decrease was due to an aggregate of $229 million of principal reductions resulting from the bulk sale discussed earlier and other principal repayments, $41 million of loans transferred to real estate owned and $99 million of loan chargeoffs, which exceeded $46 million of new loan originations.

The new loan originations are secured predominantly by commercial and multifamily properties and the loans are nearly all fixed-rate with a weighted-average yield and term of 6.27% and 4.8 years, respectively. The terms of these loans have largely been a function of the demand by borrowers for longer-term, fixed-rate product that has been driven by the historically low interest rate environment. We expect this demand for longer-term, fixed-rate product to continue for the foreseeable future. Fixed-rate loans constituted approximately 79% of the consolidated loan portfolio at September 30, 2010, compared to 76% at December 31, 2009.

The consolidated loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties in New York (70%) and Florida (22%). The properties include rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial/warehouse properties, parking lots/garages, mobile home parks, self storage facilities and some vacant land. At September 30, 2010, such loans consisted of 581 loans with an aggregate principal balance of $1.37 billion and an average loan size of $2.4 million. Loans with principal balances of more than $10 million consisted of 10 loans totaling $133 million, with the largest loan being $16.4 million. All these loans were performing as of September 30, 2010. Loans with principal balances of $5 million to $10 million consisted of 61 loans and aggregated to $404 million. All but two loans totaling $10.9 million were performing at September 30, 2010.

 

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The following table sets forth information regarding loans with principal balances of more than $10 million at September 30, 2010:

 

Property Type

  

Property Location

   Principal
Balance
     Current
Interest Rate
   

Maturity Date

Office building

   New York, New York    $ 16,375         6.00   Aug 2013

Office building

   New York, New York      15,747         6.13   Apr 2015

Retail stores

   White Plains, New York      15,469         6.00   Sep 2015

Office building

   Miami, Florida      14,881         6.50   Oct 2011

Residential Multifamily

   Tampa, Florida      12,922         6.00   Sep 2010 (1)

Office building

   Ft. Lauderdale, Florida      12,430         5.88   May 2011

Retail stores

   Manorville, New York      11,692         6.25   Sep 2024

Retail stores

   Brooklyn, New York      11,387         6.00   Nov 2013

Hotel

   New York, New York      11,378         6.45   Jul 2012

Office building

   New York, New York      10,821         6.00   Apr 2014
                
   $ 133,102        
                

 

(1) Loan was past maturity and loan payments were current. Loan is expected to be extended in October at market terms.

The following table sets forth the types of properties securing the mortgage loan portfolio:

 

($ in thousands)

   At September
2010
     At December 31,
2009
 

Commercial Real Estate:

     

Retail stores

   $ 488,509       $ 546,199   

Office buildings

     242,540         294,637   

Industrial/warehouse

     80,702         96,646   

Hotels

     46,965         94,266   

Mobile home parks

     21,202         23,391   

Parking lots/garages

     25,991         26,332   

Other

     37,305         47,175   

Residential Multifamily (5 or more units)

     406,238         529,431   

Residential All Other

     423         441   

Vacant Land

     17,739         32,934   
                 
   $ 1,367,614       $ 1,691,452   
                 

Nonaccrual and Restructured Loans (Impaired Loans)

Nonaccrual loans decreased to $38.6 million (or 14 loans) at September 30, 2010, from $123.9 million (or 34 loans) at December 31, 2009. TDRs decreased to $0.6 million (or 1 loan) at September 30, 2010, from $97.3 million (or 18 loans) at December 31, 2009.

As a result of the bulk sale of assets described earlier, our impaired loans (nonaccrual loans and loans classified as troubled debt restructurings or TDRs) decreased substantially from December 31, 2009. TDRs are accruing and performing loans on which INB has granted certain concessions to provide payment relief to the borrower. These concessions generally consist of the deferral of principal and or interest payments for a period of time, or a partial reduction in interest payments. In the third quarter of 2010, INB re-classified approximately $21 million of performing TDRs to nonaccrual status based on regulatory guidance. These TDRs continue to pay as agreed under their renegotiated terms. At September 30, 2010, a specific valuation allowance (included as part of the overall allowance for loan losses) in the amount of $4.0 million was maintained on nonaccrual loans.

The table that follows summarizes the change in nonaccrual loans for the 2010 periods indicated.

 

($ in thousands)

   Quarter Ended
March 31,
    Quarter Ended
June 30,
    Quarter Ended
September 30,
    Nine-Months Ended
September  30,
 

Balance at beginning of period

   $ 123,877      $ 96,248      $ 18,927      $ 123,877   

New additions

     26,399        16,025        30,658        73,082   

Sales and principal repayments

     (12,056     (52,176     (8     (64,240

Chargeoffs

     (13,979     (39,155     (140     (53,274

Loans transferred to foreclosed real estate

     (27,993     (2,015     (10,877     (40,885
                                

Balance at end of period

   $ 96,248      $ 18,927      $ 38,560      $ 38,560   
                                

 

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The table that follows summarizes the change in TDRs for the 2010 periods indicated.

 

($ in thousands)

   Quarter Ended
March 31,
    Quarter Ended
June 30,
    Quarter Ended
September 30,
    Nine-Months Ended
September  30,
 

Balance at beginning of period

   $ 97,311      $ 116,905      $ 21,362      $ 97,311   

New additions (reductions)

     20,438        7,087        (20,624     6,901   

Sales and principal repayments

     (844     (58,781     (121     (59,746

Chargeoffs

     —          (43,849     —          (43,849
                                

Balance at end of period

   $ 116,905      $ 21,362      $ 617      $ 617   
                                

At September 30, 2010, there were eight loans totaling $16.9 million that were classified as ninety days past due and still accruing interest. These loans were past their maturity date but the borrowers were making monthly loan payments. The majority of these loans are expected to be extended at market terms.

At September 30, 2010, there were an additional 12 loans totaling $33.4 million for which there were concerns regarding the ability of the borrowers to meet existing repayment terms. These loans are classified as substandard for regulatory purposes and reflect the distinct possibility, but not the probability, that we will not be able to collect all amounts due according to the contractual terms of the loan. Such loans may never become delinquent, nonaccrual or impaired. Potential problem loans are considered in the determination of the overall adequacy of the allowance for loan losses.

The table that follows summarizes nonaccrual loans and TDRs at September 30, 2010 by collateral type and location.

 

Property Type

   New York      Florida      New Jersey      Ohio      Total      # of Loans  

Retail

   $ —         $ 10,917       $ 600       $ 4,729       $ 16,246         4   

Office

     5,988         2,901         —           —           8,889         3   

Warehouse

     2,614         —           —           —           2,614         2   

Mixed Use

     3,931         —           —           —           3,931         2   

Mulitifamily

     2,987         2,863         —           1,647         7,497         4   
                                                     
   $ 15,520       $ 16,681       $ 600       $ 6,376       $ 39,177         15   
                                                     

Allowance For Loan Losses

The allowance for loan losses amounted to $32.3 million at September 30, 2010, compared to $32.6 million at December 31, 2009. The allowance represented 2.37% of total loans (net of deferred fees) outstanding at September 30, 2010, compared to 1.94% at December 31, 2009. The net change in the allowance during the first nine months of 2010 was due to $99.8 million of chargeoffs, nearly all of which were offset by $98.8 million of loan loss provisions and $0.6 million of recoveries. Approximately $73.3 million of the provisions was attributable to the bulk sale and $25.5 million was attributable to the following factors: credit rating downgrades on various loans; lower estimates of value on several collateral properties; our assessment of the continued weakness in the economies and commercial real estate markets in Florida and New York and their impact on our loan portfolio; and input received from INB’s primary regulator.

At September 30, 2010 and December 31, 2009, the allowance for loan losses included a specific valuation allowance in the aggregate amount of $4.0 million and $13.8 million, respectively, for total nonaccrual and restructured loans, all of which are considered impaired loans. The reduction in the valuation allowance was attributable to the bulk sale and resulting decrease in the level of impaired loans.

The following table summarizes the activity in the allowance for loan losses for the 2010 periods indicated.

 

($ in thousands)

   Quarter Ended
March 31,
    Quarter Ended
June 30,
    Quarter Ended
September 30,
    Nine-Months Ended
September  30,
 

Balance at beginning of period

   $ 32,640      $ 28,300      $ 30,350      $ 32,640   

Loan chargeoffs

     (13,979     (85,483     (298     (99,760

Loan recoveries

     —          —          600        600   

Provisions for loan losses charged to expense

     9,639        87,533        1,598        98,770   
                                

Balance at end of period

   $ 28,300      $ 30,350      $ 32,250      $ 32,250   
                                

 

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The following table sets forth information concerning nonperforming assets and other past due loans as of the dates indicated.

 

($ in thousands)

   December 31,
2009
    March 31,
2010
    June 30,
2010
    September 30,
2010
 

Nonaccrual loans

   $ 123,877      $ 96,248      $ 18,927      $ 38,560   

Real estate acquired through foreclosure

     31,866        57,858        34,259        38,792   
                                

Total nonperforming assets

   $ 155,743      $ 154,106      $ 53,186      $ 77,352   
                                

Loan past due 90 days and still accruing

   $ 6,800      $ 3,629      $ 8,788      $ 16,865   

Loans past due 31-89 days and still accruing

     5,925        14,427        13,066        5,264   
                                

Nonperforming assets to total assets

     6.49     6.75     2.46     3.68

Nonaccrual loans to total gross loans

     7.31     5.87     1.35     2.82

Allowance for loan losses to total net loans

     1.94     1.73     2.17     2.37

Allowance for loan losses to nonaccrual loans

     26.35     29.40     160.4     83.6
                                

Real Estate Acquired Through Foreclosure (Foreclosed Real Estate)

Real estate properties that we acquire through, or in lieu of, loan foreclosure are held for sale. Upon foreclosure of the property, the related loan is transferred from the loan portfolio to the foreclosed real estate category at the estimated fair value of the property. Such amount becomes the new cost basis of the property. Adjustments made to reduce the carrying value at the time of transfer are charged to the allowance for loan losses as a loan chargeoff. After foreclosure, we periodically perform market valuations and the property continues to be carried at the lower of cost or estimated fair value less estimated selling costs. Changes in the valuation allowance of the property are charged to the “Provision for Real Estate Losses”. Revenues and expenses from operations of the property are included in the caption “Real Estate Activities Expense.”

The properties we own are detailed in the table that follows.

 

     Net carrying value (1)  

($ in thousands)

   At September 30,      At December 31,  

Property Type

  

City

  

State

  

Acquired

  

Sold

   2010      2009  

Undeveloped land

   North Fort Myers    Florida    May 2008    May 2010    $ —         $ 2,395   

Undeveloped land

   Hollywood    Florida    Feb 2008         2,645         3,821   

Office building

   Brooklyn    New York    Sep 2008    April 2010      —           2,112   

Undeveloped land

   Hollywood    Florida    Jan 2009    May 2010      —           709   

Hotel

   Orlando    Florida    Apr 2009         5,820         5,924   

Office Building

   Yonkers    New York    Aug 2009         2,112         2,158   

Multifamily

   Austell    Georgia    Sep 2009         4,200         4,757   

Multifamily

   Melbourne    Florida    Sep 2009    June 2010      —           8,256   

Office Building

   Oakland Park    Florida    Sep 2009    May 2010      —           1,196   

Undeveloped land

   Carrabelle    Florida    Dec 2009    May 2010      —           538   

Multifamily

   Tampa    Florida    Feb 2010         3,828         —     

Multifamily

   Philadelphia    Pennsylvania    Mar 2010         7,296         —     

Land

   Perryville    Maryland    Apr 2010         2,014         —     

Multifamily

   Louisville    Kentucky    Jul 2010         7,488         —     

Multifamily

   Louisville    Kentucky    Jul 2010         3,389      
                             
            $ 38,792       $ 31,866   
                             

 

(1) Net carrying value is reported net of any valuation allowance that has been recorded due to decreases in the estimated fair value of the property subsequent to the date of foreclosure. The total valuation allowance amounted to $3.7 million and $2.8 million at September 30, 2010 and December 31, 2009, respectively. See note 6 to the condensed consolidated financial statements in this report for detail to this allowance.

The following table summarizes the change in foreclosed real estate for the 2010 periods indicated.

 

     Quarter Ended
March 31,
     Quarter Ended
June 30,
    Quarter Ended
September 30,
    Nine-Months Ended
September  30,
 

($ in thousands)

   Amount     #      Amount     #     Amount     #     Amount     #  

Balance at beginning of period

   $ 31,866        10       $ 57,858        15      $ 34,259        8      $ 31,866        10   

Transfers from loan portfolio

     27,993        5         2,015        1        10,877        2        40,885        8   

Writedowns to carrying values subsequent to foreclosure

     (2,001     —           (8,520     —          (2,984     —          (13,505     —     

Sales

     —