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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 March 31, 2011

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) 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   XX   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 XX      

  (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 XX.

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

As of April 29, 2011, there were 21,126,489 shares of Class A common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES

FORM 10-Q

March 31, 2011

TABLE OF CONTENTS

 

      Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements Financial Statements

  

Condensed Consolidated Balance Sheets
as of March 31, 2011 (Unaudited) and December 31, 2010

     3   

Condensed Consolidated Statements of Operations (Unaudited)
for the Quarters Ended March  31, 2011 and 2010

     4   

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
for the Quarters Ended March 31, 2011 and 2010

     5   

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Quarters Ended March  31, 2011 and 2010

     6   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   

Review by Independent Registered Public Accounting Firm

     22   

Report of Independent Registered Public Accounting Firm

     23   

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

     24   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4. Controls and Procedures

     35   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     35   

Item 1A. Risk Factors

     35   

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

     35   

Item 3. Defaults Upon Senior Securities

     36   

Item 4. (Removed and Reserved)

     36   

Item 5. Other Information

     36   

Item 6. Exhibits

     36   

Signatures

     36   

Certifications

  

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 Securities and Exchange Commission 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 our Annual Report on Form 10-K and updated as needed 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 March 31,
2011
  
  
   
 
At December 31,
2010
  
  
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 9,778      $ 5,190   

Federal funds sold and other short-term investments

     19,301        18,721   

Total cash and cash equivalents

     29,079        23,911   

Securities held to maturity, net (estimated fair value of $580,409 and $606,658, respectively)

     589,940        614,335   

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

     10,105        9,655   

Loans receivable (net of allowance for loan losses of $32,400 and $34,840, respectively)

     1,268,146        1,302,486   

Accrued interest receivable

     8,246        8,925   

Loan fees receivable

     5,225        5,470   

Premises and equipment, net

     4,268        4,612   

Foreclosed real estate (net of valuation allowance of $2,688)

     27,064        27,064   

Deferred income tax asset

     45,339        47,079   

Other assets

     26,713        27,331   

Total assets

   $ 2,014,125      $ 2,070,868   

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand deposit accounts

   $ 4,528      $ 4,149   

Interest-bearing deposit accounts:

    

Checking (NOW) accounts

     10,048        10,126   

Savings accounts

     9,380        10,123   

Money market accounts

     423,956        436,740   

Certificate of deposit accounts

     1,258,718        1,304,945   

Total deposit accounts

     1,706,630        1,766,083   

Borrowed funds:

    

Federal Home Loan Bank advances

     22,500        25,500   

Subordinated debentures - capital securities

     56,702        56,702   

Accrued interest payable on all borrowed funds

     2,870        2,326   

Mortgage note payable

     -        148   

Total borrowed funds

     82,072        84,676   

Accrued interest payable on deposits

     3,137        4,593   

Mortgage escrow funds payable

     28,510        20,709   

Other liabilities

     5,585        8,847   

Total liabilities

     1,825,934        1,884,908   

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

     (1,052     (1,148

Class A common stock ($1.00 par value; 62,000,000 shares authorized;
21,126,489 issued and outstanding)

     21,126        21,126   

Additional paid-in-capital, common

     84,720        84,705   

Unearned compensation on restricted common stock awards

     (686     (749

Retained earnings

     59,083        57,026   

Total stockholders’ equity

     188,191        185,960   

Total liabilities and stockholders’ equity

   $ 2,014,125      $ 2,070,868   

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
March 31,
 
($ in thousands, except per share data)    2011     2010  

INTEREST AND DIVIDEND INCOME

    

Loans receivable

   $ 20,970      $ 26,019   

Securities

     2,618        3,607   

Other interest-earning assets

     6        5   

Total interest and dividend income

     23,594        29,631   

INTEREST EXPENSE

    

Deposits

     12,450        16,148   

Subordinated debentures - capital securities

     542        514   

FHLB advances and all other borrowed funds

     251        479   

Total interest expense

     13,243        17,141   

Net interest and dividend income

     10,351        12,490   

Provision for loan losses

     2,045        9,639   

Net interest and dividend income after provision for loan losses

     8,306        2,851   

NONINTEREST INCOME

    

Income from the early repayment of mortgage loans

     9        498   

Income from mortgage lending activities

     256        268   

Customer service fees

     118        107   

Gain from the sales of securities available for sale

     -        693   

Loss from early call of investment securities

     -        (524

Impairment writedowns on investment securities

     (105     (530

All other

     45        -   

Total noninterest income

     323        512   

NONINTEREST EXPENSES

    

Salaries and employee benefits

     1,780        1,618   

Occupancy and equipment, net

     415        470   

Data processing

     93        295   

Professional fees and services

     498        626   

Stationery, printing, supplies, postage and delivery

     69        82   

FDIC insurance

     1,122        1,166   

General insurance

     140        134   

Director and committee fees

     106        94   

Advertising and promotion

     7        23   

Real estate activities expense

     325        976   

Provision for real estate losses

     -        2,001   

All other

     180        181   

Total noninterest expenses

     4,735        7,666   

Earnings (loss) before income taxes

     3,894        (4,303

Provision (benefit) for income taxes

     1,741        (1,825
        

Net earnings (loss)

     2,153        (2,478

Preferred stock dividend requirements and discount amortization

     (427     (409

Net earnings (loss) available to common stockholders

   $ 1,726      $ (2,887

Basic earnings (loss) per common share

   $ 0.08      $ (0.35

Diluted earnings (loss) per common share

   $ 0.08      $ (0.35

Cash dividends per common share

   $ -      $ -   

See accompanying notes to condensed consolidated financial statements.

 

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Intervest Bancshares Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

     Quarter Ended
March 31,
 
     2011     2010  
($ 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

        (1,148       (1,534

Amortization of preferred stock discount

        96          97   

Balance at end of period

              (1,052             (1,437
 

CLASS A COMMON STOCK

         

Balance at beginning and end of period

     21,126,489         21,126        8,095,151        8,095   
 

CLASS B COMMON STOCK

         

Balance at beginning and end of period

     -         -        580,000        580   
 

ADDITIONAL PAID-IN-CAPITAL, COMMON

         

Balance at beginning of period

        84,705          81,353   

Compensation expense related to grants of stock options

        15          10   

Balance at end of period

              84,720                81,363   
 

RETAINED EARNINGS

         

Balance at beginning of period

        57,026          110,560   

Net earnings (loss)

        2,153          (2,478

Preferred stock dividends accrued

        -          (312

Preferred stock discount amortization

        (96       (97

Balance at end of period

              59,083                107,673   
 

TREASURY COMMON STOCK

         

Balance at beginning and end of period

     -         -        (404,339     (10,000
 

UNEARNED COMPENSATION - RESTRICTED STOCK

         

Balance at beginning of period

        (749       -   

Amortization of unearned compensation on restricted stock grants to compensation expense

        63          -   

Balance at end of period

              (686             -   

Total stockholders’ equity at end of period

     21,151,489       $ 188,191        8,295,812      $ 211,274   
 

Preferred stockholder’s equity

     25,000       $ 23,948        25,000      $ 23,563   

Common stockholders’ equity

     21,126,489         164,243        8,270,812        187,711   

Total stockholders’ equity at end of period

     21,151,489       $ 188,191        8,295,812      $ 211,274   

See accompanying notes to condensed consolidated financial statements.

 

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Intervest Bancshares Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

      Quarter Ended
March 31,
 
($ in thousands)    2011     2010  

OPERATING ACTIVITIES

    

Net earnings (loss) before preferred dividend requirements

   $ 2,153      $ (2,478

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

    

Depreciation and amortization

     84        98   

Provisions for loan and real estate losses

     2,045        11,640   

Deferred income tax expense

     1,740        628   

Compensation expense related to grants of common stock and options

     78        10   

Amortization of deferred debenture offering costs

     9        9   

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

     (228     98   

Net gain from sales of securities available for sale

     -        (693

Net gain from sale of premises and equipment

     (44     -   

Impairment writedowns on investment securities

     105        530   

Net increase in accrued interest payable on debentures

     550        520   

Net decrease in official checks outstanding

     (3,568     (1,052

Net change in all other assets and liabilities

     579        (3,687

Net cash provided by operating activities

     3,503        5,623   

INVESTING ACTIVITIES

    

Maturities and calls of securities held to maturity

     77,030        215,678   

Purchases of securities held to maturity

     (53,381     (97,430

Proceeds from sales of securities available for sale

     -        24,772   

(Purchases) redemptions of FRB and FHLB stock, net

     (450     719   

Repayments of loans receivable, net

     32,962        10,765   

Proceeds from sales of premises and equipment

     379        -   

Purchases of premises and equipment, net

     (75     (14

Net cash provided by investing activities

     56,465        154,490   

FINANCING ACTIVITIES

    

Net decrease in deposits

     (59,453     (103,212

Net increase in mortgage escrow funds payable

     7,801        7,597   

Net repayments of FHLB advances - original terms of 3 months or less

     -        (11,000

Net repayments of FHLB advances - original terms of more than 3 months

     (3,000     (5,000

Principal repayments of mortgage note payable

     (148     (5

Net cash used in financing activities

     (54,800     (111,620

Net increase in cash and cash equivalents

     5,168        48,493   

Cash and cash equivalents at beginning of period

     23,911        7,977   

Cash and cash equivalents at end of period

   $ 29,079      $ 56,470   

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the period for interest

   $ 14,146      $ 18,718   

Cash paid during the period for income taxes

     141        719   

Loans transferred to foreclosed real estate

     -        27,993   

Preferred stock dividend requirements and amortization of related discount

     427        409   

Securities held to maturity transferred to securities available for sale

     -        24,079   

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 2010 consolidated financial statements and notes thereto and should be read in conjunction with our 2010 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 financial statements included in our 2010 Annual Report on Form 10-K, as updated by the information contained in this Form 10-Q.

In preparing our 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 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, 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 estimates involve a higher degree of complexity and subjectivity and may require assumptions about highly uncertain matters. Current market conditions increase the risk and complexity of the judgments in these estimates. 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 (IBC) is a bank holding company incorporated in 1993 under the laws of the State of Delaware. IBC’s Class A common stock trades on the Nasdaq Global Select Market: symbol IBCA. IBC is the parent company of Intervest National Bank (INB) and IBC owns 100% of its capital stock. IBC also owned 100% of Intervest Mortgage Corporation (IMC) whose business had focused on commercial and multifamily real estate lending funded by the issuance of its subordinated debentures in public offerings. IMC was merged into IBC effective January 1, 2011 and IMC’s remaining net assets of $9.5 million were transferred to IBC. IBC does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending, including the participation in loans originated by INB. From time to time, IBC issues debt and equity securities to raise funds as needed for working capital purposes. References to “we,” “us” and “our” in these notes refer to IBC and INB on a consolidated basis, unless otherwise specified.

Our business is banking and real estate lending conducted through INB’s operations. INB is a nationally chartered commercial bank that opened on April 1, 1999. We have only one operating segment, which is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and evaluated regularly by a company’s chief decision makers to perform resource allocations and performance assessments.

INB’s headquarters and full-service banking office is located in Rockefeller Plaza in New York City, and it has 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. It 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 of loans and securities and other sources, to originate mortgage loans secured by commercial and multifamily real estate and to purchase investment securities. The offices of IBC 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. The main telephone number is 212-218-2800.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 2 - Description of Business - Continued

Our business strategy is to attract deposits and use those funds to originate commercial and multifamily real estate loans on a profitable basis, while maintaining the combination of efficient customer service and loan underwriting and a 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 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 emphasize the origination, for our portfolio, of first mortgage loans secured by commercial and multifamily real estate. As a matter of policy, we do not own or originate construction/development loans or condominium conversion loans. We tend to 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. We solicit deposit accounts 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.

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 March 31, 2011

                   

U.S. government agencies (1)

     338       $ 585,465       $ 923       $ 6,494       $ 579,894         1.64     4.5 Years   

Corporate (2)

     8         4,475         -         3,960         515         2.03     22.3 Years   
       346       $ 589,940       $ 923       $ 10,454       $ 580,409         1.64     4.8 Years   

At December 31, 2010

                   

U.S. government agencies (1)

     345       $ 609,755       $ 1,661       $ 5,468       $ 605,948         1.63     4.8 Years   

Corporate (2)

     8         4,580         -         3,870         710         2.02     22.6 Years   
       353       $ 614,335       $ 1,661       $ 9,338       $ 606,658         1.63     5.0 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. Amortized cost at March 31, 2011 and December 31, 2010 is reported net of other than temporary impairment charges of $3.6 million and $3.5 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:

 

            

Less Than Twelve Months

    

Twelve Months or Longer

    

Total

 
($ in thousands)    Number of
Securities
    

Estimated

Fair

Value

    

Gross

Unrealized

Losses

    

Estimated

Fair

Value

    

Gross

Unrealized

Losses

    

Estimated

Fair

Value

    

Gross

Unrealized

Losses

 

At March 31, 2011

                    

U.S. government agencies

     218       $ 363,425       $ 6,494       $ -       $ -       $ 363,425       $ 6,494   

Corporate

     8         -         -         515         3,960         515         3,960   
       226       $ 363,425       $ 6,494       $ 515       $ 3,960       $ 363,940       $ 10,454   

At December 31, 2010

                    

U.S. government agencies

     186       $ 316,238       $ 5,468       $ -       $ -       $ 316,238       $ 5,468   

Corporate

     8         -         -         710         3,870         710         3,870   
       194       $ 316,238       $ 5,468       $ 710       $ 3,870       $ 316,948       $ 9,338   

We believe that the cause of the 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.

 

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Intervest Bancshares Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 3 - Securities, Continued

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 the 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 also owns trust preferred securities that are also classified as held to maturity. The estimated fair values of these securities are depressed due to the weakened economy, the financial condition of a large number of the issuing banks and from restrictions that have been or can be placed on the payment of interest by regulatory agencies, all of which have severely reduced the demand for these securities and rendered their trading market inactive. 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 to varying degrees. The OTTI determinations are based on the 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 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 March 31, 2011

  

                         

74041PAEO

     C       $ 1,000       $ (651   $ 349       $ 22       $ (327     34.53     10.29     39         Yes         1.90

74040XAD6

     C+         1,016         (263     753         141         (612     14.39     15.94     54         Yes         1.80

74040XAE4

     C+         994         (241     753         141         (612     14.39     15.94     54         Yes         1.80

74040XAE4

     C+         994         (241     753         141         (612     14.39     15.94     54         Yes         1.80

74040YAF9

     C         981         (629     352         13         (339     16.32     29.17     58         Yes         1.70

74040YAE2

     C         1,000         (648     352         13         (339     16.32     29.17     58         Yes         1.70

74041UAE9

     C+         1,022         (441     581         22         (559     7.56     27.42     64         Yes         1.57

74041UAE9

     C+         1,023         (441     582         22         (560     7.56     27.42     64         Yes         1.57
      $ 8,030       $ (3,555   $ 4,475       $ 515       $ (3,960            

At December 31, 2010

  

                         

74041PAEO

     C       $ 1,000       $ (642   $ 358       $ 33       $ (325     34.53     9.34     39         Yes         1.90

74040XAD6

     C+         1,016         (262     754         154         (600     14.39     15.94     54         Yes         1.80

74040XAE4

     C+         994         (241     753         152         (601     14.39     15.94     54         Yes         1.80

74040XAE4

     C+         994         (241     753         152         (601     14.39     15.94     54         Yes         1.80

74040YAF9

     C         981         (629     352         12         (340     15.69     29.80     58         Yes         1.70

74040YAE2

     C         1,000         (648     352         12         (340     15.69     29.80     58         Yes         1.70

74041UAE9

     C+         1,022         (393     629         98         (531     7.56     26.17     64         Yes         1.57

74041UAE9

     C+         1,023         (394     629         97         (532     7.56     26.17     64         Yes         1.57
      $ 8,030       $ (3,450   $ 4,580       $ 710       $ (3,870            

(1) At March 31, 2011 all of these securities were 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. In April 2011, INB received payments of interest on several securities – cusip # 74040XAD6 and 74040XAE4.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 3 - Securities, Continued

(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.

The amortized cost and estimated fair value of securities held to maturity by remaining term to contractual maturity at March 31, 2011 is as follows:

 

($ in thousands)    Amortized Cost      Estimated Fair Value      Average Yield  

Due in one year or less

   $ -       $ -         -

Due after one year through five years

     395,246         393,507         1.49   

Due after five years through ten years

     183,664         180,081         1.93   

Due after ten years

     11,030         6,821         2.24   
     $ 589,940       $ 580,409         1.64

In March 2010, securities held to maturity with a carrying value of $24.1 million (estimated fair value of $24.8 million) were transferred to available-for-sale and promptly sold. A gross gain of $0.7 million was realized. The securities sold consisted 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 level in response to its higher regulatory capital requirements. At March 31, 2001 and December 31, 2010, there were no securities classified as available for sale. There were no sales of securities in the first quarter of 2011.

Note 4 - Loans Receivable

Major classifications of loans receivable are summarized as follows:

 

     

At March 31, 2011

   

At December 31, 2010

 
($ in thousands)    # of Loans      Amount     # of Loans      Amount  

Commercial real estate loans

     362       $ 922,992        372       $ 948,275   

Residential multifamily loans

     187         368,395        193         380,180   

Land development and other land loans

     10         12,255        10         12,550   

Residential 1-4 family loans

     2         410        2         416   

Commercial business loans

     20         1,379        20         1,454   

Consumer loans

     7         104        8         107   

Loans receivable, gross

     588         1,305,535        605         1,342,982   

Deferred loan fees

        (4,989        (5,656
                      

Loans receivable, net of deferred fees

        1,300,546           1,337,326   

Allowance for loan losses

              (32,400              (34,840

Loans receivable, net

            $ 1,268,146               $ 1,302,486   

At March 31, 2011 and December 31, 2010, there were $45.2 million and $52.9 million of loans, respectively, on nonaccrual status and $5.6 million and $3.6 million, respectively, of accruing troubled debt restructured loans (TDRs), and all were considered impaired loans. All of our loans are evaluated for impairment on a loan-by-loan basis.

At March 31, 2011 and December 31, 2010, a specific valuation allowance (included in the overall allowance for loan losses) totaling $3.8 million and $7.2 million, respectively, was maintained on impaired loans.

At March 31, 2011 and December 31, 2010, there were three loans totaling $3.9 million and three loans totaling $7.5 million, respectively, that were ninety days past due and still accruing interest.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 4 - Loans Receivable, Continued

The unpaid principal balance (which approximates our recorded investment) of impaired loans and corresponding impairment valuation allowance summarized by collateral type and location follows:

 

($ in thousands)

At March 31, 2011

   New York      Florida      New Jersey      Ohio      Total     

Valuation

Allowance

     # of
Loans
 

Commercial real estate:

                    

Retail

   $ 3,017       $ 9,504       $ 500       $ 2,640       $ 15,661       $ 810         5   

Office Building

     1,265         17,485         -         -         18,750         1,064         3   

Warehouse

     2,614         -         -         -         2,614         112         2   

Mixed Use

     9,024         -         -         -         9,024         1,280         3   

Residential mulitifamily

     1,126         2,000         -         1,647         4,773         581         3   

Totals

   $ 17,046       $ 28,989       $ 500       $ 4,287       $ 50,822       $ 3,847         16   

At December 31, 2010

                    

Commercial real estate:

                    

Retail

   $ 3,017       $ 10,834       $ 500       $ 4,712       $ 19,063       $ 3,741         5   

Office Building

     5,973         17,485         -         -         23,458         2,542         4   

Warehouse

     2,614         -         -         -         2,614         112         2   

Mixed Use

     3,929         -         -         -         3,929         515         2   

Residential multifamily

     2,981         2,863         -         1,647         7,491         295         4   

Totals

   $ 18,514       $ 31,182       $ 500       $ 6,359       $ 56,555       $ 7,205         17   

Selected information related to impaired loans is summarized as follows:

 

      Quarter Ended
March 31,
 
($ in thousands)    2011      2010  

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

   $ 626       $ 1,257   

Average principal balance of nonaccrual loans

     52,958         105,597   

Average principal balance of accruing TDR loans

     4,131         105,210   

Age analysis of our loan portfolio is summarized as follows:

 

  ($ in thousands)   

Current

0-30

Days

    

Past Due

31-59
Days

    

Past Due

60-89

Days

    

Past Due

90 or more

Days

    

Total

Past Due

    

Total

Nonaccrual

 

At March 31, 2011

                       

Accruing Loans:

                       

Commercial real estate

   $ 866,880       $ 10,379       $ -       $ 3,314       $ 13,693       $ -   

Residential multifamily

     353,651         11,406         -         565         11,971         -   

Land

     12,255         -         -         -         -         -   

All other

     1,893         -         -         -         -            

Total accruing loans

     1,234,679         21,785         -         3,879         25,664         -   

Nonaccrual Loans:

                       

Commercial real estate (1)

     24,434         -         -         17,985         17,985         42,419   

Residential multifamily

     -         1,125         -         1,648         2,773         2,773   

Total nonaccrual loans

     24,434         1,125         -         19,633         20,758         45,192   

Total loans

   $ 1,259,113       $ 22,910       $ -       $ 23,512       $ 46,422       $ 45,192   

At December 31, 2010

                       

Accruing Loans:

                       

Commercial real estate

   $ 892,332       $ 2,731       $ 680       $ 7,100       $ 10,511       $ -   

Residential multifamily

     364,649         4,331         3,328         381         8,040         -   

Land

     12,256         294         -         -         294         -   

All other

     1,977         -         -         -         -            

Total accruing loans

     1,271,214         7,356         4,008         7,481         18,845         -   

Nonaccrual Loans:

                       

Commercial real estate (1)

     22,743         14,834         -         7,855         22,689         45,432   

Residential multifamily

     -         1,131         -         6,360         7,491         7,491   

Total nonaccrual loans

     22,743         15,965         -         14,215         30,180         52,923   

Total loans

   $ 1,293,957       $ 23,321       $ 4,008       $ 21,696       $ 49,025       $ 52,923   

(1) Included $18.1 million and $21.5 million at March 31, 2011 and December 31, 2010, respectively, of TDRs for which payments are being made in accordance with restructured terms, but the loans are maintained on nonaccrual status in accordance with regulatory guidance. The remaining portion of this category is comprised of certain loans that are on nonaccrual status and interest from loan payments are being recognized on a cash basis.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 4 - Loans Receivable, Continued

Information regarding the credit quality of the loan portfolio based on internally assigned grades follows:

 

($ in thousands)    Pass      Special
Mention
     Substandard (1)      Total  

At March 31, 2011

           

Commercial real estate

   $ 840,790       $ 16,751         $  65,451       $ 922,992   

Residential multifamily

     339,474         11,172         17,749         368,395   

Land

     9,283         -         2,972         12,255   

All other

     1,893         -         -         1,893   

Total loans

   $ 1,191,440       $ 27,923         $  86,172       $ 1,305,535   

Allocation of allowance for loan losses

   $ 23,304       $ 646         $    8,450       $ 32,400   

At December 31, 2010

           

Commercial real estate

   $ 858,632       $ 23,295         $  66,348       $ 948,275   

Residential multifamily

     346,589         14,127         19,464         380,180   

Land

     9,417         2,837         296         12,550   

All other

     1,977         -         -         1,977   

Total loans

   $ 1,216,615       $ 40,259         $  86,108       $ 1,342,982   

Allocation of allowance for loan losses

   $ 23,236       $ 1,174         $  10,430       $ 34,840   

(1) Substandard loans consist of $45.2 million of nonaccrual loans, $5.6 million of accruing TDRs and $35.3 million of other performing loans at March 31, 2011 and $52.9 million of nonaccrual loans, $3.6 million of accruing TDRs and $29.6 million of other performing loans at December 31, 2010. For a discussion regarding the internal credit grade criteria, see note 3 to the financial statements in our 2010 Annual Report on Form 10-K.

The geographic distribution of the loan portfolio by state follows:

 

      At March 31, 2011     At December 31, 2010  
($ in thousands)    Amount      % of Total     Amount      % of Total  

New York

   $ 892,139         68.3     $   916,485         68.2

Florida

     300,357         23.0        310,560         23.1   

New Jersey

     32,269         2.5        32,482         2.4   

Pennsylvania

     23,067         1.8        23,360         1.7   

Connecticut

     11,755         0.9        11,816         0.9   

Georgia

     9,162         0.7        9,254         0.7   

Virginia

     8,332         0.6        8,377         0.6   

North Carolina

     7,827         0.6        7,859         0.6   

Kentucky

     7,787         0.6        7,826         0.6   

Ohio

     5,138         0.4        7,215         0.6   

All other states

     7,702         0.6        7,748         0.6   
     $ 1,305,535         100.0     $1,342,982         100.0

Note 5 - Allowance for Loan Losses

Activity in the allowance for loan losses by loan type follows:

 

($ in thousands)   

Commercial

Real Estate

    Residential
Multifamily
    Land    

All

Other

    Total  

Quarter Ended March 31, 2011

          

Balance at beginning of period

   $ 21,919      $ 11,356      $ 1,553      $ 12      $ 34,840   

Loan chargeoffs

     (4,164     (349     -        -        (4,513

Loan recoveries

     -        28        -        -        28   

Provision (credit) for loan losses

     1,934        169        (57     (1     2,045   

Balance at end of period (1)

   $ 19,689      $ 11,204      $ 1,496      $ 11      $ 32,400   

Quarter Ended March 31, 2010

          

Balance at beginning of period

   $ 19,275      $ 11,696      $ 1,650      $ 19      $ 32,640   

Loan chargeoffs

     (3,047     (9,531     (1,401     -        (13,979

Loan recoveries

     -        -        -        -        -   

Provision (credit) for loan losses

     3,404        5,698        538        (1     9,639   

Balance at end of period (1)

   $ 19,632      $   7,863      $ 787      $ 18      $ 28,300   

(1) Impairment for all of our impaired loans is calculated on a loan-by-loan basis using either the estimated fair value of the loan’s collateral less estimated selling costs (for collateral dependent loans) or the present value of the loan’s cash flows (for non-collateral dependent loans). Any calculated impairment is recognized as a valuation allowance within the overall allowance for loan losses and a charge through the provision for loan losses. We may charge off any portion of the impaired loan with a corresponding decrease to the valuation allowance when such impairment is deemed uncollectible.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

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 March 31, 2011      At December 31, 2010  
($ in thousands)    # of
Properties
     Amount (1)      # of
Properties
     Amount (1)  

Commercial real estate

     2       $ 7,932         2       $ 7,932   

Residential multifamily

     3         14,573         3         14,573   

Land

     2         4,559         2         4,559   
       7       $ 27,064         7       $ 27,064   

(1) Reported net of valuation allowance.

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

 

     Quarter Ended
March 31,
 

($ in thousands)

     2011         2010   

Valuation allowance at beginning of period

   $ 2,688       $ 2,793   

Provision for real estate losses charged to expense

     -         2,001   

Real estate chargeoffs

     -         -   

Valuation allowance at end of period

   $ 2,688       $ 4,794   

Note 7 - Deposits

Scheduled maturities of certificates of deposit accounts are as follows:

 

     At March 31, 2011            At December 31, 2010  
($ in thousands)    Amount     

Wtd-Avg

Stated Rate

            Amount     

Wtd-Avg

Stated Rate

 

Within one year

   $ 436,384         3.02      $ 431,881         3.09

Over one to two years

     339,089         3.47           349,174         3.63   

Over two to three years

     270,936         4.23           298,287         4.26   

Over three to four years

     125,759         3.64           113,587         3.78   

Over four years

     86,550         4.32                 112,016         4.13   
     $ 1,258,718         3.55            $ 1,304,945         3.65

CDs of $100,000 or more totaled $614 million at March 31, 2011 and $639 million at December 31, 2010 and included brokered CDs of $138 million and $159 million, respectively. At March 31, 2011, CDs of $100,000 or more by remaining maturity were as follows: $185 million due within one year; $164 million due over one to two years; $150 million due over two to three years; $63 million due over three to four years; and $52 million thereafter.

Note 8 - FHLB Advances and Lines of Credit

At March 31, 2011, INB had access to $38 million of unsecured credit lines that were cancelable at any time. As a member of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB), INB can borrow from these institutions on a secured basis. At March 31, 2011, INB had available collateral consisting of investment securities and certain loans that could be pledged to support additional total borrowings of approximately $621 million from the FHLB and FRB if needed.

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

 

     At or for the Quarter Ended
March 31,
 
($ in thousands)        2011             2010      

Balance at period end

     $22,500        $45,500   

Maximum amount outstanding at any month end

     $25,500        $55,500   

Average outstanding balance for the period

     $24,800        $52,161   

Weighted-average interest rate paid for the period

     4.09     3.70

Weighted-average interest rate at period end

     4.07     3.89

 

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Note 8 - FHLB Advances and Lines of Credit, Continued

Scheduled contractual maturities of outstanding FHLB advances as of March 31, 2011 were as follows:

 

($ in thousands)    Amount      Wtd. Avg. Rate  

Maturing in the period April 1 through December 31, 2011

   $ 5,000         3.98

Maturing in 2012

     10,500         4.02

Maturing in 2013

     7,000         4.22
     $ 22,500         4.07

Note 9 - Subordinated Debentures - Capital Securities

Capital Securities (commonly referred to as trust preferred securities) outstanding at March 31, 2011 are summarized as follows:

 

($ in thousands)    Principal     

Accrued

Interest Payable

     Interest
Rate
 

Capital Securities II - debentures due September 17, 2033

     $15,464         $   673         3.26

Capital Securities III - debentures due March 17, 2034

     15,464         640         3.10

Capital Securities IV - debentures due September 20, 2034

     15,464         554         2.71

Capital Securities V - debentures due December 15, 2036

     10,310         945         6.83
       $56,702         $2,812      

The securities 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. 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 to IV were capitalized and are being amortized over the life of the securities using the straight-line method. The unamortized balance totaled $844,000 at March 31, 2011. There were no issuance costs associated with Capital Securities V.

As of March 31, 2011, 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.

Interest payments may be deferred at any time and from time to time during the term of the Junior Subordinated Debentures at IBC’s election 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 interest payments. This deferral does not constitute a default under the indentures governing the securities. At March 31, 2011, IBC had accrued a total of $2.8 million of interest payments on the Junior Subordinated Debentures.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 9 - Subordinated Debentures - Capital Securities, Continued

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 10 - Stockholders’ Equity and Dividends in Arrears

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 in note 11 to financial statements included in our 2010 Annual Report on Form 10-K. As a condition of its public common stock offering in 2010, IBC agreed to no longer issue or authorize the issuance of any Class B common stock and IBC is asking its stockholders (at its 2011 annual meeting of stockholders to be held in May 2011) to vote on and approve a proposal to amend and restate IBC’s Certificate of Incorporation to eliminate any and all references to Class B common stock and to rename its Class A common stock “common stock.”

In February 2010, IBC ceased declaration and payment of dividends on the preferred stock held by the Treasury as required by its regulator. IBC has missed five dividend payments as of the date of filing of this report.

At March 31, 2011, the amount of Preferred Share Dividends undeclared, unpaid and in arrears totaled $1.7 million. The preferred stock carries 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. A failure to pay a total of six preferred share dividend payments, whether or not consecutive, gives the holders of the 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 April 2011, IBC agreed with the Treasury to have one or more employees of the Office of Financial Stability (“OFS”) attend and observe IBC’s and INB’s full Board of Director meetings as well as certain meetings of committees of each Board, as appropriate. The observers will participate primarily by listening to discussions and presentations in such meetings, limiting their participation to clarifying questions on materials distributed, presentations made or actions proposed or taken at such meetings.

Note 11 - Common Stock Options and Warrant

IBC has a shareholder-approved Long Term Incentive Plan (the “Plan”) under which stock options, restricted stock 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 March 31, 2011, 77,160 shares of Class A common stock were available for award under the Plan. There were no grants during the reporting periods in this report. There was no activity in outstanding awards for the three-months ended March 31, 2011. For a summary of outstanding options and warrant held by the Treasury, see note 14 to the financial statements in our 2010 Annual Report on Form 10-K.

Stock-based compensation expense is recognized on a straight-line basis over the vesting period of each award and totaled $78,000 and $10,000 for the quarter ended March 31, 2011 and 2010, respectively. Stock-based compensation expense is recorded as an expense and a corresponding increase to stockholders’ equity. At March 31, 2011, pre-tax compensation cost related to all nonvested awards of options and restricted stock not yet recognized totaled $811,000 and will be recognized over a weighted-average period of approximately 2.66 years.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 12 - Deferred Tax Asset

At March 31, 2011 and December 31, 2010, we had a deferred tax asset totaling $45.3 million and $47.1 million, respectively. The tax 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 $54.2 million for Federal purposes and $86.2 million for state and local purposes as of March 31, 2011. The NOLs are available to be applied against our future taxable income. The NOLs expire in 2030.

We have determined that a valuation allowance for the deferred tax assets was not required 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 (such as our profitable fourth quarter of 2010 and first quarter of 2011, and future projections of taxable income) 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.

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 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 future offerings of our capital securities, which could trigger a “change in control” as defined in Section 382. IBC currently has no plan to issue additional capital securities.

Note 13 - Earnings (Loss) Per Common Share

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

 

     Quarter Ended
March 31,
 
      2011      2010  

Net earnings (loss) applicable to common stockholders

     $1,726,000         $(2,887,000)   

Weighted-Average number of common shares outstanding (1)

     21,126,489         8,270,812   

Basic Earnings (Loss) Per Common Share

     $0.08         $(0.35)   

Diluted Earnings (Loss) Per Common Share

     $0.08         $(0.35)   

(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.

Note 14 - 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 can be 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.

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.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 14 - Off-Balance Sheet Financial Instruments, Continued

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

 

      At March 31,      At December 31,  
($ in thousands)    2011      2010  

Unfunded loan commitments

     $32,808         $6,305   

Available lines of credit

     836         816   
       $33,644         $7,121   

Note 15 - Regulatory Capital and Regulatory Matters

In December 2010, INB entered into a formal written agreement (the “Formal Agreement”) with its primary regulator, The Office of The Comptroller of the Currency of the United States of America (“OCC”). The Formal Agreement superseded and replaced a Memorandum of Understanding (“MOU”) entered into on April 7, 2009 between INB and the OCC. The Formal Agreement requires INB to take certain actions, including the development of strategic and capital plans covering at least three years, completing a management assessment, and developing programs related to: loan portfolio management; criticized assets; credit concentrations; loan review; accounting for other real estate owned; maintaining an adequate allowance for loan losses; liquidity risk management; and interest rate risk. INB is required to and is submitting periodic progress reports to the OCC regarding various aspects of the foregoing actions. INB’s Board of Directors appointed a compliance committee to monitor and coordinate INB’s performance under the Formal Agreement.

We are aggressively working to address the requirements of the Formal Agreement. All of the steps and actions we have and will continue to take are subject to the on-going review, satisfaction and acceptance of the OCC. Timing with respect to full compliance with the Formal Agreement cannot be predicted and many of the steps and actions we have taken will need to be in place and operating effectively for a period of time as determined by the OCC in order to achieve full compliance with the Formal Agreement.

The Formal Agreement also limits INB’s ability to pay dividends to IBC and requires INB to maintain Tier 1 capital at least equal to 9% of adjusted total assets, Tier 1 capital at least equal to 10% of risk-weighted assets; and total risk-based capital at least equal to 12% of risk-weighted assets. These are the same levels that INB agreed with the OCC to maintain beginning April 7, 2009. Furthermore, INB is not allowed to accept brokered deposits without the prior approval of the OCC and it is also 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 March 31, 2011, 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.

In January 2011, as a result of INB’s Formal Agreement with the OCC, IBC also entered into a written agreement (the “Federal Reserve Agreement”) with its primary regulator, the FRB, which requires IBC’s Board of Directors to take the steps necessary to utilize IBC’s financial and managerial resources to serve as a source of strength to INB, including causing INB to comply with its Formal Agreement. In addition, IBC cannot declare or pay dividends without the prior approval of the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors (the “Banking Director”). IBC also cannot take any payments representing a reduction in capital from INB without prior approval of the FRB and IBC cannot not make any distributions of interest, principal or other sums on its subordinated debentures or trust preferred securities without prior approval from the FRB and the Banking Director. Furthermore, IBC may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior approval of the FRB. IBC was required to and submitted within 90 days of the date of the Federal Reserve Agreement a plan to continue to maintain sufficient capital. Finally, IBC must notify the FRB when appointing any new director or senior executive officer or changing responsibilities of any senior executive officer, and IBC is also restricted in making certain severance and indemnification payments. We are committed to and are taking all necessary actions to promptly address the requirements of the Federal Reserve Agreement.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 15 - Regulatory Capital and Regulatory Matters, Continued

At March 31, 2011 and December 31, 2010, we believe that IBC and INB met all capital adequacy requirements to which they are subject. As of the date of filing of this report, we are not aware of any conditions or events that would have changed the status of such compliance with regulatory capital requirements from March 31, 2011.

Information regarding our regulatory capital and related ratios is summarized as follows:

 

     

INB

    

IBC Consolidated

 
      At March 31,      At December 31,      At March 31,      At December 31,  
($ in thousands)    2011      2010      2011      2010  

Tier 1 Capital (1)

     $201,129         $197,660         $210,954         $208,091   

Tier 2 Capital

     18,720         19,254         18,833         19,370   

Total risk-based capital

     $219,849         $216,914         $229,787         $227,461   

Net risk-weighted assets

     $1,484,407         $1,525,185         $1,493,060         $1,534,108   

Average assets for regulatory purposes

     $2,003,105         $2,057,155         $2,013,762         $2,069,318   

Total capital to risk-weighted assets

     14.81%         14.22%         15.39%         14.83%   

Tier 1 capital to risk-weighted assets

     13.55%         12.96%         14.13%         13.56%   

Tier 1 capital to average assets

     10.04%         9.61%         10.48%         10.06%   

(1) IBC’s consolidated Tier 1 capital at March 31, 2011 and December 31, 2010 included $55 million of IBC’s outstanding qualifying trust preferred securities and $25 million of IBC’s cumulative perpetual preferred stock held by the U.S. Treasury.

The table that follows presents information regarding 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 March 31, 2011: (1)

                    

Total capital to risk-weighted assets

   $ 229,787         15.39     $119,445         8.00     NA         NA        NA         NA   

Tier 1 capital to risk-weighted assets

   $ 210,954         14.13     $  59,722         4.00     NA         NA        NA         NA   

Tier 1 capital to average assets

   $ 210,954         10.48     $  80,550         4.00     NA         NA        NA         NA   

Consolidated at December 31, 2010: (1)

                    

Total capital to risk-weighted assets

   $ 227,461         14.83     $122,729         8.00     NA         NA        NA         NA   

Tier 1 capital to risk-weighted assets

   $ 208,091         13.56     $  61,364         4.00     NA         NA        NA         NA   

Tier 1 capital to average assets

   $ 208,091         10.06     $  82,773         4.00     NA         NA        NA         NA   

INB at March 31, 2011:

                    

Total capital to risk-weighted assets

   $ 219,849         14.81     $118,753         8.00     $148,441         10.00     $178,129         12.00

Tier 1 capital to risk-weighted assets

   $ 201,129         13.55     $  59,376         4.00     $  89,064         6.00     $148,441         10.00

Tier 1 capital to average assets

   $ 201,129         10.04     $  80,124         4.00     $100,155         5.00     $180,279         9.00

INB at December 31, 2010:

                    

Total capital to risk-weighted assets

   $ 216,914         14.22     $122,015         8.00     $152,519         10.00     $183,022         12.00

Tier 1 capital to risk-weighted assets

   $ 197,660         12.96     $  61,007         4.00     $  91,511         6.00     $152,519         10.00

Tier 1 capital to average assets

   $ 197,660         9.61     $  82,286         4.00     $102,858         5.00     $185,144         9.00

(1) Assuming IBC had excluded all of its eligible outstanding trust preferred securities (which totaled $55 million) from its Tier 1 capital and included the entire amount in its Tier 2 capital, consolidated proforma capital ratios at March 31, 2011 would have been 15.39%, 10.45% and 7.74%, respectively.

Note 16 - 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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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 17 - 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 may 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 21 to the financial statements in our 2010 Annual Report on Form 10-K for a further discussion of valuation levels 1 and 2.

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

 

     

Carrying Value

At March 31, 2011

     Total Losses (3)
For the Quarter Ended March 31,
 
($ in thousands)    Total      Level 1      Level 2      Level 3          2011              2010      

Impaired loans (1):

                 

Commercial real estate

   $ 46,049       $ -       $ -       $ 46,049       $ 402       $ 4,211   

Residential multifamily

     4,773         -         -         4,773         608         6,330   

Land

     -         -         -         -         -         612   

Total impaired loans

     50,822         -         -         50,822         1,010         11,153   

Impaired securities (2)

     4,475         -         -         4,475         105         530   

Foreclosed real estate

     27,064         -         -         27,064         -         2,001   

(1) Comprised of nonaccrual loans and accruing TDRs and excludes a specific valuation allowance of $3.8 million. See note 4.

(2) Comprised of certain investments in trust preferred securities considered other than temporarily impaired. See note 3.

(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 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 is assets measured at fair value on a nonrecurring basis for the quarter ended March 31, 2011.

 

($ in thousands)    Impaired
Securities
    Impaired
Loans
   

Foreclosed

Real Estate

 

Balance at December 31, 2010

   $ 4,580      $ 56,555      $ 27,064   

Net new impaired loans

     -        7,250        -   

Other than temporary impairment writedowns

     (105     -        -   

Principal repayments/sales

     -        (8,587     -   

Chargeoffs of impaired loans

     -        (4,396     -   

Balance at March 31, 2011

   $ 4,475      $ 50,822      $ 27,064   

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. A discussion regarding the assumptions used to compute the estimated fair values disclosed in the table below can be found in note 21 to the financial statements in our 2010 Annual Report on Form 10-K.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 17 - Fair Value Measurements, Continued

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

 

     

At March 31, 2011

    

At December 31, 2010

 
($ in thousands)   

Carrying

Value

    

Fair

Value

    

Carrying

Value

    

Fair

Value

 

Financial Assets:

           

Cash and cash equivalents

   $ 29,079       $ 29,079       $ 23,911       $ 23,911   

Securities held to maturity, net

     589,940         580,409         614,335         606,658   

FRB and FHLB stock

     10,105         10,105         9,655         9,655   

Loans receivable, net

     1,268,146         1,298,604         1,302,486         1,336,412   

Loan fees receivable

     5,225         4,234         5,470         4,441   

Accrued interest receivable

     8,246         8,246         8,925         8,925   

Financial Liabilities:

           

Deposits

     1,706,630         1,756,217         1,766,083         1,821,899   

Borrowed funds plus accrued interest payable

     82,072         82,059         84,676         83,661   

Accrued interest payable on deposits

     3,137         3,137         4,593         4,593   

Off-Balance Sheet Instruments:

           

Commitments to lend

     266         266         143         143   

Note 18 - Recent Accounting Standards Update

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

In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” This ASU deferred the effective date of certain portions of ASU No. 2010-20 as it relates to troubled debt restructurings.

In April 2011, the FASB issued ASU 2011-02 Receivables (Topic 310): “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”. The amendments in this update apply to all creditors, such as us, that restructure receivables that fall within the scope of Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession by the creditor and (b) the debtor is experiencing financial difficulties.

The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether it has granted a concession as follows:

1. If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession. In that circumstance, a creditor should consider all aspects of the restructuring in determining whether it has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring.

2. A temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics. In such situations, a creditor should consider all aspects of the restructuring in determining whether it has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring.

3. A restructuring that results in a delay in payment that is insignificant is not a concession. However, an entity should consider various factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 18 - Recent Accounting Standards Update, Continued

The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties as follows: A creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring.

ASU 2011-02 is effective for our first interim or annual period beginning on or after June 15, 2011, and is to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying this ASU, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. We do not expect that the adoption of this new ASU to have a material impact on our consolidated financial statements.

 

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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 March 31 2011 and for the three-month periods ended March 31, 2011 and 2010 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 March 31, 2011 and the related condensed consolidated statements of operations, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2011 and 2010. 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, 2010, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 10, 2011, 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, 2010 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

April 29, 2011

 

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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 that follows should be read in conjunction with the accompanying quarterly financial statements in this report on Form 10-Q as well as our entire 2010 Annual Report on Form 10-K. Intervest Bancshares Corporation (“IBC”) is the parent company of Intervest National Bank (“INB”). References in this report to “we,” “us” and “our” refer to these entities on a consolidated basis, unless otherwise specified. For a discussion of our business, see note 2 to the financial statements included in this report. Our business is also affected by various risk factors - see Item 1A of Part II of this report.

Critical Accounting Policies

A detailed discussion of our critical accounting policies and the factors and estimates we use in applying them can be found under the caption “Critical Accounting Policies” on pages 46 to 50 in our 2010 Annual Report on Form 10-K.

Comparison of Financial Condition at March 31, 2011 and December 31, 2010

A comparison of selected consolidated balance sheet information follows:

 

     

At March 31, 2011

          

At December 31, 2010

 
($ in thousands)    Carrying
Value
     % of
Total Assets
            Carrying
Value
     % of
Total Assets
 

Cash and cash equivalents

   $ 29,079         1.4      $ 23,911         1.2

Security investments, net

     600,045         29.8           623,990         30.1   

Loans receivable, net of deferred fees and loan loss allowance

     1,268,146         63.0           1,302,486         62.9   

Foreclosed real estate, net of valuation allowance

     27,064         1.3           27,064         1.3   

All other assets

     89,791         4.5                 93,417         4.5   

Total assets

   $ 2,014,125         100.0            $ 2,070,868         100.0

Deposits

   $ 1,706,630         84.7      $ 1,766,083         85.3

Borrowed funds and related interest payable

     82,072         4.1           84,676         4.1   

All other liabilities

     37,232         1.9           34,149         1.6   

Total liabilities

     1,825,934         90.7           1,884,908         91.0   

Stockholders’ equity

     188,191         9.3                 185,960         9.0   

Total liabilities and stockholders’ equity

   $ 2,014,125         100.0            $ 2,070,868         100.0

General

Total assets at March 31, 2011 decreased to $2.01 billion from $2.07 billion at December 31, 2010, primarily reflecting a decrease in loans receivable and security investments. These decreases were funded by a reduction in deposit liabilities and borrowed funds.

Cash and Cash Equivalents

Cash and cash equivalents increased to $29 million at March 31, 2011 from $24 million at December 31, 2010. The level of cash and cash equivalents fluctuates based on various factors, including our liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. See the section “Liquidity and Capital Resources” in this report for a discussion of our liquidity.

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 totaling $600 million at March 31, 2011 and $624 million at December 31, 2010.

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 $590 million at March 31, 2011, from $614 million at December 31, 2010. The decrease reflected $72.5 million of calls, $5.1 million of maturities and $0.1 million of impairment writedowns. The aggregate of these items exceeded $53.4 million of new purchases during the period. At March 31, 2011, the securities portfolio 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 $585.5 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 $4.5 million.

 

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As discussed in more detail in note 3 to the financial statements included in this report, impairment charges totaling $3.6 million have been recorded on the trust preferred security investments.

At March 31, 2011, the held to maturity portfolio had a weighted-average yield to earliest call date of 1.64% 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 call features that allow the issuer to call the security before its stated maturity without penalty. Over the next twelve months, approximately $168 million of securities in the portfolio could potentially be called assuming market interest rates remain at or near current levels. A large portion of the resulting proceeds would then be reinvested into similar securities and potentially at lower rates. At the time of purchase, securities with callable features routinely have higher yields than non-callable securities with the same maturity. However, the callable features or the expiration of the non-callable period of the security will most likely result in the early call of securities in a declining or flat rate environment, which results in re-investment risk of the proceeds.

At March 31, 2011 and December 31, 2010, the held-to-maturity portfolio’s estimated fair value was $580 million and $607 million, respectively. At March 31, 2011, the portfolio had a net unrealized loss of $9.5 million, compared to a net unrealized loss of $7.7 million at December 31, 2010. See note 3 to the financial statements included in this report 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 $5.8 million and $4.3 million, respectively, at March 31, 2011. 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 5.8%. The total required investment fluctuates based on INB’s capital level for the FRB stock and INB’s loans and outstanding FHLB borrowings for the FHLB stock.

Loans Receivable, Net of Deferred Fees

Total loans receivable, net of unearned fees, amounted to $1.30 billion at March 31, 2011, a $37 million decrease from $1.34 billion at December 31, 2010. The decrease was due to an aggregate of $39.5 million of principal repayments (resulting from $30.8 million of loan payoffs and $8.7 million of normal amortization) and $4.5 million of loan chargeoffs, partially offset by $6.6 million of new loan originations. The loans paid off had a weighted-average contractual yield of 6.68%. The new loan originations are secured by commercial and multifamily real estate and the loans are all fixed-rate with a weighted-average yield and term of 5.73% and 3 years, respectively. Fixed-rate loans constituted approximately 78% of the consolidated loan portfolio at March 31, 2011. See the section “Asset and Liability Management” in our 2010 Annual Report on Form 10-K for a further discussion of fixed-rate loans.

The loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties located in New York (68%) and Florida (23%). 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 March 31, 2011, such loans consisted of 559 loans with an aggregate principal balance of $1.30 billion and an average loan size of $2.3 million. Loans with principal balances of more than $10 million consisted of 10 loans totaling $132 million, with the largest loan being $16.2 million. Loans with principal balances of $5 million to $10 million consisted of 54 loans and aggregated to $356 million.

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

 

($ in thousands)    At Mar 31, 2011      At Dec 31, 2010  

Commercial Real Estate:

     

Retail stores

   $ 480,938       $ 492,596   

Office buildings

     232,134         239,047   

Industrial/warehouse

     77,375         77,890   

Hotels

     54,730         55,044   

Mobile home parks

     16,609         21,082   

Parking lots/garages

     24,270         25,488   

Other

     36,936         37,128   

Residential Multifamily (5 or more units)

     368,395         380,180   

Vacant Land

     12,255         12,550   

Residential All Other

     410         416   
     $ 1,304,052       $ 1,341,421   

 

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The following table sets forth information regarding loans of more than $10 million at March 31, 2011:

 

($ in thousands)

Property Type

   Property Location    Principal
Balance
     Interest Rate     Maturity
Date
     Status  

Office building

   New York, New York    $ 16,212         6.00%        Aug 2013         Performing   

Office building

   New York, New York      15,640         6.13%        Apr 2015         Performing   

Retail stores

   White Plains, New York      15,334         6.00%        Sep 2015         Performing   

Office building

   Miami, Florida      14,834         6.50%        Oct 2011         Nonaccrual   

Residential Multifamily

   Tampa, Florida      12,834         5.75%        Sep 2020         Performing   

Office building

   Ft. Lauderdale, Florida      12,279         5.88%        May 2011         Performing   

Retail stores

   Manorville, New York      11,430         6.25%        Sep 2024         Performing   

Retail stores

   Brooklyn, New York      11,312         6.00%        Nov 2013         Performing   

Hotel

   New York, New York      11,261         6.45%        Jul 2012         Performing   

Office building

   New York, New York      10,751         6.00%        Apr 2014         Performing   
                   
      $ 131,887           
                   

For additional information concerning the loan portfolio, see note 4 to the financial statements included in this report.

Nonperforming Assets

The table below summarizes nonperforming assets, past due loans and selected ratios as of the dates indicated.

 

($ in thousands)   

At Dec 31,

2010

   

At Mar 31,

2011

 

Nonaccrual loans (1)

   $ 52,923      $ 45,192   

Real estate acquired through foreclosure

     27,064        27,064   

Investment securities on a cash basis (2)

     2,318        4,475   

Total nonperforming assets

   $ 82,305      $ 76,731   

Loan past due 90 days and still accruing (3)

   $ 7,481      $ 3,879   

Loans past due 60-89 days and still accruing

   $ 4,008      $ -   

Loans past due 31-59 days and still accruing (4)

   $ 7,356      $ 21,785   

Nonperforming assets to total assets

     3.97     3.81

Nonaccrual loans to total gross loans

     3.94     3.46

Allowance for loan losses to total net loans

     2.61     2.49

Allowance for loan losses to nonaccrual loans

     65.83     71.69

(1) Include restructured loans (TDRs) of $21.5 million at December 31, 2010 and $18.1 million at March 31, 2011 that are performing in accordance with their restructured terms but are classified as nonaccrual in accordance with regulatory guidance.

 

(2)

See note 3 to the financial statements included in this report.

(3) At March 31, 2011, the balance consisted of 3 loans that have matured for which the borrowers were making monthly loan payments. Two loans totaling $2.0 million were extended at market terms in April 2011. One loan for $1.9 million is also past maturity and the borrower continues to make monthly loan payments.

(4) At March 31, 2011, these loans were comprised as follows: Five loans ($12.3 million) matured—payments are current and extensions are in process, three loans ($6.0 million) are historically slow payers, one loan ($0.9 million) was brought current in April and one loan ($2.6 million) is expected to be extended.

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

 

($ in thousands)   

Quarter Ended

Mar 31, 2011

 

Balance at beginning of period

   $ 52,923   

New additions

     5,250   

Sales and principal repayments

     (8,585

Chargeoffs

     (4,396

Transfers to foreclosed real estate

     -   

Balance at end of period

   $ 45,192   

The table that follows summarizes the change in accruing TDRs for the period indicated.

 

($ in thousands)   

Quarter Ended

Mar 31, 2011

 

Balance at beginning of period

   $ 3,632   

New additions

     2,000   

Principal repayments

     (2

Chargeoffs

     -   

Balance at end of period

   $ 5,630   

 

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In addition to nonaccrual loans and accruing TDRs, at March 31, 2011, there were an additional 14 loans totaling $35.3 million for which there were concerns regarding the ability of the borrowers to meet existing repayment terms. These loans are also 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 details foreclosed real estate we owned at March 31, 2011 and December 31, 2010.

 

Property Type ($ in thousands)    City      State      Date Acquired      Carrying Value (1)  

Undeveloped Land

     Hollywood         Florida         Feb 2008         $2,645   

Hotel

     Orlando         Florida         Apr 2009         5,820   

Office Building

     Yonkers         New York         Aug 2009         2,112   

Residential Multifamily

     Austell         Georgia         Sep 2009         3,696   

Undeveloped Land

     Perryville         Maryland         Apr 2010         1,914   

Residential Multifamily

     Louisville         Kentucky         Jul 2010         7,488   

Residential Multifamily

     Louisville         Kentucky         Jul 2010         3,389   
                                  $27,064   

(1) 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 $2.7 million. See note 6 to the financial statements included in this report for additional information.

For additional information on nonaccrual loans, past due loans and real estate owned, see the note 4 and 6 to the financial statements included in this report.

Allowance For Loan Losses

The allowance for loan losses amounted to $32.4 million at March 31, 2011, compared to $34.8 million at December 31, 2010. The allowance represented 2.49% of total loans (net of deferred fees) outstanding at March 31, 2011, compared to 2.61% at December 31, 2010. The net change in the allowance was due to $4.5 million of chargeoffs, partially offset by a $2.0 million loan loss provision. During the quarter, there were $3.3 million of chargeoffs resulting from updated appraisals on three performing TDRs (classified as nonaccrual and impaired as noted earlier) and the remainder of $1.2 million was from the payoff of several nonaccrual and underperforming loans at a discount to their carrying value.

At March 31, 2011 and December 31, 2010, the allowance for loan losses included a specific valuation allowance in the aggregate amount of $3.8 million and $7.2 million, respectively, for total nonaccrual and restructured loans, all of which are considered impaired loans.

For additional information on the allowance for loan losses, see note 5 to the financial statements included in this report.

All Other Assets

All other assets at March 31, 2011 (as denoted in the table under the caption “Comparison of Financial Condition at March 31, 2011 and December 31, 2010”) decreased to $90 million, from $93 million at December 31, 2010, primarily due to a $1.7 million decrease in our deferred tax asset. For additional information on the deferred tax asset, see note 12 to the financial statements included in this report.

Deposits

Total deposits at March 31, 2011 decreased to $1.71 billion from $1.77 billion at December 31, 2010, due to a $46 million decrease in time deposits and a $13 million decrease in money market deposit accounts. At March 31, 2011, certificate of deposit accounts totaled $1.26 billion, and checking, savings and money market accounts aggregated to $448 million. The same categories of deposit accounts totaled $1.31 billion and $461 million, respectively, at December 31, 2010.

Certificate of deposit accounts represented 73.8% of total consolidated deposits at March 31, 2011, compared to 73.9% at December 31, 2010. At March 31, 2011 and December 31, 2010, certificate of deposit accounts included $138 million and $159 million of brokered deposits, respectively. For additional information on deposits, see the section “Liquidity and Capital Resources” and note 7 to the financial statements included in this report.

 

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Borrowed Funds and Related Interest Payable

Total borrowed funds and related interest payable decreased to $82 million at March 31, 2011, from $85 million at December 31, 2010, due to the maturity and repayment of $3.0 million of FHLB borrowings and the early payoff of a $0.1 million mortgage note, partially offset by a $0.5 million increase in accrued interest payable on junior subordinated notes relating to IBC’s outstanding trust preferred securities.

For additional information on and discussion of borrowed funds, see notes 8 and 9 to the financial statements included in this report, as well as the section entitled “Liquidity and Capital Resources.”

All Other Liabilities

All other liabilities at March 31, 2011 (as denoted in the table under the caption “Comparison of Financial Condition at March 31, 2011 and December 31, 2010”) amounted to $37 million, compared to $34 million at December 31, 2010. The increase was primarily due to a higher level of mortgage escrow funds payable.

Stockholders’ Equity

The following table sets forth the changes in stockholders’ equity:

 

($ in thousands, except per share amounts)    Amount    

Class A

Shares

    

Amount

Per Share (2)

 

Common stockholders’ equity at December 31, 2010

     $162,108        21,126,489         $7.67   

Net income before preferred dividend requirements

     2,153        -         0.10   

Amortization of preferred stock discount

     (96     -         -   

Compensation from stock options and restricted stock

     78        -         -   

Common stockholders’ equity at March 31, 2011

     $164,243        21,126,489         $7.77   

Preferred stockholder’s equity at December 31, 2010 (1)

     $23,852        

Amortization of preferred stock discount

     96        

Preferred stockholder’s equity at March 31, 2011

     $23,948        

Total stockholders’ equity at March 31, 2011

     $188,191        
(1)

Represents 25,000 shares of IBC’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A owned by the United States Department of the Treasury. See note 11 to the financial statements included in our 2010 Annual Report on Form 10-K and note 10 to the financial statements included in this report on Form 10-Q. In February 2010, IBC suspended the declaration and payment of the preferred dividends. At March 31, 2011, the amount of preferred share dividends unpaid and in arrears totaled $1.7 million. Dividends in arrears are recorded as reduction in common stockholders’ equity only when they are declared and payable.

 

(2)

Common stock book value per share, after adjusting for the preferred dividends in arrears, was $7.69 at March 31, 2011.

 

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Comparison of Results of Operations for the Quarters Ended March 31, 2011 and 2010

Overview

We reported net earnings available to common stockholders for the first quarter of 2011 (“Q1-11”) of $1.7 million, or $0.08 per diluted common share, compared to a net loss available to common stockholders of $2.9 million, or $0.35 per share, for the first quarter of 2010 (“Q1-10”). The results and earnings per share amounts reported for both periods were net of $0.4 million of preferred dividend requirements related to IBC’s outstanding preferred stock held by the U.S. Treasury.

Net earnings for Q1-11 increased by $4.6 million over Q1-10 due to a $9.6 million decrease in the total provision for loan and real estate losses, a $0.6 million decrease in real estate expenses and a $0.3 million decrease in noninterest expenses. The aggregate of these items was partially offset by a $2.1 million decrease in net interest and dividend income, a $0.2 million decrease in noninterest income and a $3.6 million increase in tax expense.

Selected information regarding results of operations follows:

 

($ in thousands)    Q1-2011      Q1-2010  

Interest and dividend income

   $ 23,594       $ 29,631   

Interest expense

     13,243         17,141   

Net interest and dividend income

     10,351         12,490   

Provision for loan losses

     2,045         9,639   

Noninterest income

     323         512   

Noninterest expenses:

     

Provisions for real estate losses

     -         2,001   

Real estate activities expenses

     325         976   

All other noninterest expenses

     4,410         4,689   

Earnings (loss) before taxes

     3,894         (4,303

Provision (benefit) for income taxes

     1,741         (1,825

Net earnings (loss) before preferred dividend requirements

     2,153         (2,478

Preferred dividend requirements (1)

     427         409   

Net earnings (loss) available to common stockholders

   $ 1,726       $ (2,887

(1) Represents dividend requirements of 5% on $25 million of cumulative Series A preferred stock held by the U.S. Treasury and amortization of related preferred stock discount. See note 10 to the financial statements included in this report.

Net Interest and Dividend Income

Net interest and dividend income is our primary source of earnings and is influenced by the amount, distribution and repricing characteristics of our interest-earning assets and interest-bearing liabilities, as well as by the relative levels and movements of interest rates. Net interest and dividend income is the difference between interest income earned on our interest-earning assets, such as loans and securities, and interest expense paid on our interest-bearing liabilities, such as deposits and borrowings.

Our net interest and dividend income, which is detailed in the table that follows, decreased by $2.1 million to $10.4 million in Q1-11 from $12.5 million in Q1-10. The decrease reflected the planned reduction in our assets and liabilities and a slightly lower net interest margin. Total average interest-earning assets decreased by $305 million in Q1-11 from Q1-10 in part due to the previously reported bulk loan sale in May 2010, with the remainder due to loan payoffs and principal repayments exceeding a reduced volume of new loan originations. These cash inflows were used to fund deposit outflow and repayments of maturing borrowed funds. The net reduction in the size of our balance sheet positively impacted our regulatory capital ratios.

Our net interest margin decreased to 2.14% in Q1-11 from 2.23% in Q1-10, as the yield on our average interest-earning assets decreased by 42 basis points to 4.88% in Q1-11, from 5.30% in Q1-10, while our average cost of funds decreased at a slightly slower pace of 40 basis points to 2.96% in Q1-11, from 3.36% in Q1-10. The decrease in the margin reflected the impact of the bulk loan sale, a large portion of which included the sale of $108 million of performing troubled debt restructured loans (TDRs) and other loans yielding approximately 5%, payoffs of other higher yielding loans and early calls of U.S. government agency security investments coupled with the reinvestment of the proceeds into similar securities with lower market interest rates, all of which was largely offset by lower rates paid on depositor accounts.

 

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The following table provides information on our: average assets, liabilities and stockholders’ equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period. The interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin is greater than the interest rate spread due to the additional income earned on those assets funded by non-interest-bearing liabilities, primarily demand deposits, and stockholders’ equity.

 

     

For the Quarter Ended

 
      March 31, 2011            March 31, 2010  
($ in thousands)    Average
Balance
    Interest
Inc./Exp.
     Yield/
Rate (2)
           Average
Balance
    Interest
Inc./Exp.
     Yield/
Rate (2)
 

Interest-earning assets:

                 

Loans (1)

   $ 1,329,413      $ 20,970         6.40      $ 1,680,810      $ 26,019         6.28

Securities

     615,357        2,618         1.73           566,635        3,607         2.58   

Other interest-earning assets

     17,055        6         0.14           19,145        5         0.11