-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kn/HjizgKbpMKMv/sF8YcXW0qZ1i8PcH8lBYzo5Vq9GvitVrw/RT9I7ZwLCX6+Vm vbDcMmAAAalu5sOmsUz5Gw== 0001140361-06-007102.txt : 20060510 0001140361-06-007102.hdr.sgml : 20060510 20060510161817 ACCESSION NUMBER: 0001140361-06-007102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060510 DATE AS OF CHANGE: 20060510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERVEST BANCSHARES CORP CENTRAL INDEX KEY: 0000927807 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 133699013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23377 FILM NUMBER: 06826409 BUSINESS ADDRESS: STREET 1: 1 ROCKEFELLER PLAZA STREET 2: SUITE 400 CITY: NEW YORK STATE: NY ZIP: 10020-2002 BUSINESS PHONE: 2122182800 MAIL ADDRESS: STREET 1: 1 ROCKEFELLER PLAZA STREET 2: SUITE 400 CITY: NEW YORK STATE: NY ZIP: 10020-2002 10-Q 1 form10-q.txt INTERVEST BANCSHARES 10-Q 3-31-2006 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, 2006 -------------- 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 (IRS Employer of incorporation or organization) 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 is a large accelerated filer, an accelerated filer, or a nonaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check one: Large accelerated filer Accelerated filer Nonaccelerated filer XX -- -- -- 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding: - -------------------- ------------------- Class A Common Stock, $1.00 par value per share 7,457,302 outstanding as of April 28, 2006 - ----------------------------------------------- ------------------------------------------ Class B Common Stock, $1.00 par value per share 385,000 outstanding as of April 28, 2006 - ----------------------------------------------- ----------------------------------------
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES FORM 10-Q MARCH 31, 2006 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005 . . . . . . . . . . . . 3 Condensed Consolidated Statements of Earnings (Unaudited) for the Quarters Ended March 31, 2006 and 2005 . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Quarters Ended March 31, 2006 and 2005 . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Quarters Ended March 31, 2006 and 2005 . . . . . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . 7 Review by Independent Registered Public Accounting Firm. . . . . . . . . . . . . 17 Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . 30 ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . 30 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS . . . . . . . 30 ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 30 ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ITEM 6. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT Intervest Bancshares Corporation and subsidiaries (the "Company") is making this statement in order to satisfy the "Safe Harbor" provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this report on Form 10-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. 2
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, ($in thousands, except par value) 2006 2005 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) (Audited) Cash and due from banks $ 8,698 $ 11,595 Federal funds sold 16,022 42,675 Commercial paper and other short-term investments 3,111 2,446 ---------------------------- Total cash and cash equivalents 27,831 56,716 Securities held to maturity, net (estimated fair value of $325,290 and $249,088, respectively) 327,974 251,508 Federal Reserve Bank and Federal Home Loan Bank stock, at cost 6,299 5,241 Loans receivable (net of allowance for loan losses of $15,542 and $15,181, respectively) 1,386,466 1,352,805 Accrued interest receivable 9,066 7,706 Loan fees receivable 11,229 10,941 Premises and equipment, net 6,347 6,421 Deferred income tax asset 7,208 6,988 Deferred debenture offering costs, net 5,327 5,610 Other assets 2,777 2,487 ============================================================================================================================ TOTAL ASSETS $ 1,790,524 $ 1,706,423 ============================================================================================================================ LIABILITIES Deposits: Noninterest-bearing demand deposit accounts $ 6,484 $ 9,188 Interest-bearing deposit accounts: Checking (NOW) accounts 8,903 7,202 Savings accounts 15,913 17,351 Money market accounts 246,431 223,075 Certificate of deposit accounts 1,151,950 1,118,514 ---------------------------- Total deposit accounts 1,429,681 1,375,330 Borrowed Funds: Federal Home Loan Bank advances 23,500 - Subordinated debentures 86,000 87,390 Subordinated debentures - capital securities 61,856 61,856 Accrued interest payable on all borrowed funds 6,898 6,250 Mortgage note payable 226 229 ---------------------------- Total borrowed funds 178,480 155,725 Accrued interest payable on deposits 3,665 3,232 Mortgage escrow funds payable 25,830 20,302 Official checks outstanding 2,900 11,689 Other liabilities 7,140 3,967 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,647,696 1,570,245 - ---------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock (300,000 shares authorized, none issued) - - Class A common stock ($1.00 par value, 9,500,000 shares authorized, 7,452,642 and 7,438,058 shares issued and outstanding, respectively) 7,453 7,438 Class B common stock ($1.00 par value, 700,000 shares authorized, 385,000 shares issued and outstanding) 385 385 Additional paid-in-capital, common 65,524 65,309 Retained earnings 69,466 63,046 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 142,828 136,178 ============================================================================================================================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,790,524 $ 1,706,423 ============================================================================================================================ See accompanying notes to condensed consolidated financial statements.
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) QUARTER ENDED MARCH 31, ----------------------- ($in thousands, except per share data) 2006 2005 - ------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND INCOME Loans receivable $ 26,931 $ 18,811 Securities 2,747 1,563 Other interest-earning assets 388 194 - ------------------------------------------------------------------------------------------ TOTAL INTEREST AND DIVIDEND INCOME 30,066 20,568 - ------------------------------------------------------------------------------------------ INTEREST EXPENSE Deposits 14,559 9,039 Subordinated debentures 1,908 2,060 Subordinated debentures - capital securities 1,090 1,090 Other borrowed funds 23 94 - ------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 17,580 12,283 - ------------------------------------------------------------------------------------------ NET INTEREST AND DIVIDEND INCOME 12,486 8,285 Provision for loan losses 361 1,033 - ------------------------------------------------------------------------------------------ NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 12,125 7,252 - ------------------------------------------------------------------------------------------ NONINTEREST INCOME Customer service fees 159 76 Income from mortgage lending activities 249 149 Income from the early repayment of mortgage loans 1,674 654 Loss from early call of investment securities - (1) - ------------------------------------------------------------------------------------------ TOTAL NONINTEREST INCOME 2,082 878 - ------------------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries and employee benefits 1,459 1,285 Occupancy and equipment, net 403 357 Data processing 178 136 Professional fees and services 225 139 Stationery, printing and supplies 53 54 Postage and delivery 41 33 FDIC and general insurance 88 79 Director and committee fees 122 122 Advertising and promotion 72 47 All other 155 122 - ------------------------------------------------------------------------------------------ TOTAL NONINTEREST EXPENSES 2,796 2,374 - ------------------------------------------------------------------------------------------ Earnings before income taxes 11,411 5,756 Provision for income taxes 4,991 2,508 ========================================================================================== NET EARNINGS $ 6,420 $ 3,248 ========================================================================================== BASIC EARNINGS PER SHARE $ 0.82 $ 0 .52 DILUTED EARNINGS PER SHARE $ 0.77 $ 0 .48 CASH DIVIDENDS PER 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, --------------------------------------- 2006 2005 --------------------------------------- ($thousands) SHARES AMOUNT SHARES AMOUNT - ---------------------------------------------------------------------------------------------- CLASS A COMMON STOCK Balance at beginning of period 7,438,058 $ 7,438 5,886,433 $ 5,886 Issuance of shares upon the conversion of debentures 14,584 15 2,410 3 - ---------------------------------------------------------------------------------------------- Balance at end of period 7,452,642 7,453 5,888,843 5,889 - ---------------------------------------------------------------------------------------------- CLASS B COMMON STOCK - ---------------------------------------------------------------------------------------------- Balance at beginning and end of period 385,000 385 385,000 385 - ---------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN-CAPITAL, COMMON Balance at beginning of period 65,309 38,961 Issuance of shares upon the conversion of debentures 215 31 - ---------------------------------------------------------------------------------------------- Balance at end of period 65,524 38,992 - ---------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 63,046 44,862 Net earnings for the period 6,420 3,248 - ---------------------------------------------------------------------------------------------- Balance at end of period 69,466 48,110 - ---------------------------------------------------------------------------------------------- ============================================================================================== TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD 7,837,642 $142,828 6,273,843 $93,376 ============================================================================================== See accompanying notes to condensed consolidated financial statements.
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) QUARTER ENDED MARCH 31, ---------------------- ($in thousands) 2006 2005 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 6,420 $ 3,248 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 136 129 Provision for loan losses 361 1,033 Deferred income tax benefit (220) (452) Amortization of deferred debenture offering costs 284 296 Amortization of premiums (accretion) of discounts and deferred loan fees, net (2,752) (1,499) Net increase (decrease) in accrued interest payable on debentures 722 (1,032) Net decrease in official checks outstanding (8,789) (5,483) Net increase in loan fees receivable (288) (524) Net change in all other assets and liabilities 3,857 3,718 - -------------------------------------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (269) (566) - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Maturities and calls of securities held to maturity 29,050 19,305 Purchases of securities held to maturity (105,449) (25,523) Net increase in loans receivable (33,219) (79,896) Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (1,058) - Purchases of premises and equipment, net (62) (103) - -------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (110,738) (86,217) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in deposits 54,351 129,785 Net increase in mortgage escrow funds payable 5,528 5,381 Net increase (decrease) in FHLB advances 23,500 (21,000) Principal repayments of debentures and mortgage note payable (1,253) (2,603) Debenture issuance costs (4) (32) - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 82,122 111,531 - -------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (28,885) 24,748 Cash and cash equivalents at beginning of period 56,716 24,599 ======================================================================================================== Cash and cash equivalents at end of period $ 27,831 $ 49,347 ======================================================================================================== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 16,122 $ 12,606 Income taxes 2,956 871 Noncash activities: Conversion of debentures and accrued interest into Class A common stock 230 34 - -------------------------------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements.
6 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES The condensed consolidated financial statements of Intervest Bancshares Corporation and Subsidiaries in this report have not been audited except for information derived from the 2005 audited consolidated financial statements and notes thereto. The condensed consolidated financial statements in this report should be read in conjunction with the 2005 audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. The consolidated financial statements include the accounts of Intervest Bancshares Corporation (a registered financial holding company referred to by itself as the "Holding Company") and its three wholly owned subsidiaries, Intervest National Bank (referred to as the "Bank"), Intervest Mortgage Corporation and Intervest Securities Corporation. All the entities are referred to collectively as the "Company" on a consolidated basis. All significant intercompany balances and transactions have been eliminated in consolidation. Intervest Statutory Trust I, II, III and IV are wholly owned subsidiaries of the Holding Company that are unconsolidated entities as required by Financial Accounting Standards Board (FASB) Interpretation No. 46-R, "Consolidation of Variable Interest Entities." The accounting and reporting policies of the Company conform to United States generally accepted accounting principles and to general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the date of the consolidated financial statements, and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the estimated fair values of financial instruments. In the opinion of management, all material adjustments necessary for a fair presentation of financial condition and results of operations for the interim periods presented in this report have been made. These adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of results that may be expected for the entire year or any other interim period. NOTE 2 - DESCRIPTION OF BUSINESS The offices of the Holding Company, Intervest Mortgage Corporation, Intervest Securities Corporation and the Bank's headquarters and full-service banking office are located on the entire fourth floor of One Rockefeller Plaza in New York City, New York, 10020-2002, and the main telephone number is 212-218-2800. The Holding Company's primary business is the ownership and operation of its subsidiaries. It does not engage in any other substantial business activities other than a limited amount of real estate mortgage lending, including the participation in loans originated by the Bank. From time to time, the Holding Company also issues debt and equity securities to raise funds for working capital purposes. The Company's primary business segment is banking and real estate lending. The Company's lending activities are comprised almost entirely of origination for its loan portfolio, mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). These loans have an average life of approximately three years. The Company tends to lend in areas that are in the process of being revitalized, with a concentration of loans on properties located in New York State and the State of Florida. A significant portion of the residential properties are located in New York City and are subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents. The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Plaza in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank has received regulatory permission to open an additional branch office in Clearwater Beach, Florida, which is expected to open by August 1, 2006. The Bank conducts a personalized commercial and consumer banking business and attracts deposits from the areas served by its banking offices. The Bank also provides internet banking services through its web site: www.intervestnatbank.com, which can attract deposit customers from outside its primary market areas. The deposits, together with funds derived from other sources, are mainly used to originate mortgage loans secured by commercial and multifamily real estate properties and to purchase investment securities. The information on the aforementioned web site is not and should not be considered part of this report and is not incorporated by reference. 7 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 2 - DESCRIPTION OF BUSINESS - CONTINUED Intervest Mortgage Corporation's business focuses on the origination of first mortgage and junior mortgage loans secured by commercial and multifamily real estate properties. It also provides loan origination services to the Bank. Intervest Mortgage Corporation funds its lending business through the issuance of subordinated debentures in public offerings. It currently has one active wholly owned subsidiary, Intervest Realty Servicing Corporation, which is engaged in certain mortgage servicing activities. Intervest Securities Corporation is a broker/dealer and a member of the National Association of Securities Dealers (NASD) whose business activities to date have not been material. Its only revenues have been derived from participating as a selected dealer from time to time in offerings of debt securities of the Company, primarily those of Intervest Mortgage Corporation. Intervest Statutory Trust I, II, III and IV issued in December 2001, September 2003, March 2004 and September 2004, $15 million, respectively, of trust preferred securities for a total of $60 million. Each trust was formed for the sole purpose of issuing and administering the trust preferred securities and they do not conduct any trade or business. For a further discussion, see note 8 herein. NOTE 3 - SECURITIES The carrying value (amortized cost) and estimated fair value of securities held to maturity are as follows:
Gross Gross Estimated Wtd-Avg Amortized Unrealized Unrealized Fair Wtd-Avg Remaining ($in thousands) Cost Gains Losses Value Yield Maturity - -------------------------------------------------------------------------------------------- At March 31, 2006 $ 327,974 $ 3 $ 2,687 $ 325,290 3.88% 1.4 Years At December 31, 2005 $ 251,508 $ 14 $ 2,434 $ 249,088 3.26% 1.1 Years - --------------------------------------------------------------------------------------------
All the securities at March 31, 2006 and December 31, 2005 were debt obligations of U.S. government corporations or sponsored agencies (such as FHLB, FNMA, FHLMC or FFCB) and were held by the Bank. The securities have fixed rates or have predetermined scheduled rate increases, and some have call features that allow the issuer to call the security at par before its stated maturity without penalty. At March 31, 2006, the portfolio consisted of 201 securities nearly all of which had an unrealized loss. A large portion of the unrealized losses were for a continuous period of more than 12 months. Management believes that the cause of these unrealized losses is directly related to changes in market interest rates. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, their fair value will increase. Management views the unrealized losses noted above to be temporary based on the impact of interest rates, the very short maturities of the investments and their high credit quality. In addition, the Bank has the ability and intent to hold its investments for a period of time sufficient for the fair value of the securities to recover. To date, the Bank has always recovered the cost of its investment securities upon maturity. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The amortized cost and estimated fair value of securities held to maturity by remaining term to contractual maturity is as follows:
($in thousands) Amortized Cost Estimated Fair Value Average Yield ---------------------------------------------------------------------------------------------- At March 31, 2006: Due in one year or less $ 122,904 $ 121,885 3.05% Due after one year through five years 205,070 203,405 4.39% ---------------------------------------------------------------------------------------------- $ 327,974 $ 325,290 3.88% ---------------------------------------------------------------------------------------------- ($in thousands) Amortized Cost Estimated Fair Value Average Yield ---------------------------------------------------------------------------------------------- At December 31, 2005: Due in one year or less $ 124,413 $ 123,345 2.71% Due after one year through five years 127,095 125,743 3.79% ---------------------------------------------------------------------------------------------- $ 251,508 $ 249,088 3.26% ----------------------------------------------------------------------------------------------
There were no securities classified as available for sale or any sales of securities during the reporting periods. 8 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 4 - LOANS RECEIVABLE Loans receivable are summarized as follows:
At March 31, 2006 At December 31, 2005 ------------------------ ------------------------ ($in thousands) # of Loans Amount # of Loans Amount ------------------------------------------------------------------------------------------- Commercial real estate loans 273 $ 753,792 264 $ 735,650 Residential multifamily loans 234 568,042 234 538,760 Land development and other land loans 33 90,886 31 105,251 Residential 1-4 family loans 3 100 3 100 Commercial business loans 22 1,139 22 1,089 Consumer loans 14 304 10 194 ------------------------------------------------------------------------------------------- Loans receivable 579 1,414,263 564 1,381,044 ------------------------------------------------------------------------------------------- Deferred loan fees (12,255) (13,058) ------------------------------------------------------------------------------------------- Loans receivable, net of deferred fees 1,402,008 1,367,986 ------------------------------------------------------------------------------------------- Allowance for loan losses (15,542) (15,181) ------------------------------------------------------------------------------------------- Loans receivable, net $ 1,386,466 $ 1,352,805 -------------------------------------------------------------------------------------------
At March 31, 2006, there were three multifamily real estate loans totaling $1.7 million on nonaccrual status, compared to two loans totaling $0.7 million at December 31, 2005. Nonaccrual loans are considered impaired under the criteria of SFAS No. 114, but no valuation allowance was maintained at any time since the Company believes that the estimated fair value of the underlying properties exceeded its recorded investment. At March 31, 2006 and December 31, 2005, there were no other impaired loans. At March 31, 2006 and December 31, 2005, there were $1.5 million and $2.6 million, respectively, of loans ninety days past due and still accruing interest because they were deemed by management to be well secured and in the process of collection. Interest income that was not recorded on nonaccrual loans under their contractual terms amounted to $51,000 for the quarter ended March 31, 2006, compared to $104,000 for the quarter ended March 31, 2005. The average balance of nonaccrual loans for the quarter ended March 31, 2006 and 2005 was $2.9 million and $4.6 million, respectively. NOTE 5 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
Quarter Ended March 31, ------------------------------ ($in thousands) 2006 2005 - ---------------------------------------------------------------- Balance at beginning of period $ 15,181 $ 11,106 Provision charged to operations 361 1,033 - ---------------------------------------------------------------- Balance at end of period $ 15,542 $ 12,139 - ----------------------------------------------------------------
NOTE 6 - DEPOSITS Scheduled maturities of certificates of deposit accounts are as follows:
At March 31, 2006 At December 31, 2005 ------------------------- ------------------------- Wtd-Avg Wtd-Avg ($in thousands) Amount Stated Rate Amount Stated Rate ------------------------------------------------------------------------------- Within one year $ 417,655 4.10% $ 381,968 3.77% Over one to two years 275,991 4.33 259,698 4.30 Over two to three years 131,094 4.23 126,546 4.13 Over three to four years 183,675 4.51 160,344 4.43 Over four years 143,535 4.79 189,958 4.69 ------------------------------------------------------------------------------- $ 1,151,950 4.32% $ 1,118,514 4.18% -------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $388.1 million and $371.8 million at March 31, 2006 and December 31, 2005, respectively. At March 31, 2006, certificate of deposit accounts of $100,000 or more by remaining maturity were as follows: due within one year $135.9 million; over one to two years $104.4 million; over two to three years $37.4 million; over three to four years $62.3 million; and over four years $48.1 million. 9 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE Subordinated debentures by series and mortgage note payable are summarized as follows:
At March 31, At December 31, ($in thousands) 2006 2005 - -------------------------------------------------------------------------------------------------------------- INTERVEST MORTGAGE CORPORATION: Series 06/28/99 - interest at 9% fixed - due July 1, 2006 $ 2,000 $ 2,000 Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250 Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750 Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750 Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250 Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250 Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000 Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000 Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 1,500 1,500 Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000 Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 3,000 Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 2,500 Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 3,000 Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000 Series 11/28/03 - interest at 6 1/4% fixed - due April 1, 2007 2,000 2,000 Series 11/28/03 - interest at 6 1/2% fixed - due April 1, 2009 3,500 3,500 Series 11/28/03 - interest at 6 3/4% fixed - due April 1, 2011 4,500 4,500 Series 06/07/04 - interest at 6 1/4% fixed - due January 1, 2008 2,500 2,500 Series 06/07/04 - interest at 6 1/2% fixed - due January 1, 2010 4,000 4,000 Series 06/07/04 - interest at 6 3/4% fixed - due January 1, 2012 5,000 5,000 Series 03/21/05 - interest at 6 1/4% fixed - due April 1, 2009 3,000 3,000 Series 03/21/05 - interest at 6 1/2% fixed - due April 1, 2011 4,500 4,500 Series 03/21/05 - interest at 7% fixed - due April 1, 2013 6,500 6,500 Series 08/12/05 - interest at 6 1/4% fixed - due October 1, 2009 2,000 2,000 Series 08/12/05 - interest at 6 1/2% fixed - due October 1, 2011 4,000 4,000 Series 08/12/05 - interest at 7% fixed - due October 1, 2013 6,000 6,000 ------------------------------- 82,750 82,750 INTERVEST BANCSHARES CORPORATION: Series 05/14/98 - interest at 8% fixed - due July 1, 2008 2,000 2,140 Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 1,250 1,250 Series 12/15/00 - interest at 9% fixed - due April 1, 2008 - 1,250 ------------------------------- 3,250 4,640 INTERVEST NATIONAL BANK: Mortgage note payable (1) - interest at 7% fixed - due February 1, 2017 226 229 - -------------------------------------------------------------------------------------------------------------- $ 86,226 $ 87,619 - -------------------------------------------------------------------------------------------------------------- (1) The note cannot be prepaid except during the last year of its term.
Scheduled contractual maturities as of March 31, 2006 were as follows:
($in thousands) Principal Accrued Interest --------------------------------------------------------------------------------- For the period April 1, 2006 to December 31, 2006 $ 6,011 $ 2,872 For the year ended December 31, 2007 7,015 210 For the year ended December 31, 2008 16,016 2,294 For the year ended December 31, 2009 13,517 325 For the year ended December 31, 2010 13,019 270 Thereafter 30,648 361 --------------------------------------------------------------------------------- $ 86,226 $ 6,332 ---------------------------------------------------------------------------------
10 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED Intervest Bancshares Corporation repaid the following debentures: - - Series 12/15/00 due 4/1/08 were repaid early on 3/1/06 for $1,250,000 of principal and $18,000 of accrued interest; Intervest Mortgage Corporation repaid the following debentures subsequent to March 31, 2006: - - Series 6/28/99 due 7/1/06 were repaid early on 5/1/06 for $2,000,000 of principal and $1,645,000 of accrued interest; - - Series 1/21/03 due 7/1/06 were repaid early on 5/1/06 for $1,500,000 of principal and $34,000 of accrued interest; Interest is paid quarterly on Intervest Mortgage Corporation's debentures except for the following: all of Series 6/28/99 and 9/18/00; $0.6 million of Series 8/01/01; $0.2 million of Series 1/17/02; $1.1 million of Series 8/05/02; $1.8 million of Series 11/28/03; $1.9 million of Series 6/7/04; $1.9 million of Series 3/21/05; and $1.8 million of Series 8/12/05, all of which accrue and compound interest quarterly, with such interest due and payable at maturity. The holders of Intervest Mortgage Corporation's Series 9/18/00 and 1/17/02 through 8/12/05 debentures can require Intervest Mortgage Corporation, on a first come basis during a specified time, to repurchase the debentures for face amount plus accrued interest once each year (beginning July 1, 2006 for Series 1/21/03, October 1, 2006 for Series 7/25/03, January 1, 2007 for Series 11/28/03, January 1, 2008 for Series 6/7/04, April 1, 2009 for Series 3/21/05 and October 1, 2009 for Series 8/12/05). However, in no calendar year can the required purchases be more than $100,000 in principal amount of each maturity, in each series of debentures, on a non-cumulative basis. Intervest Mortgage Corporation's debentures may be redeemed at its option at any time, in whole or in part, for face value, except for Series 3/21/05 and Series 8/12/05, which would be at a premium of 1% if they were redeemed prior to October 1, 2006 and April 1, 2007, respectively. All the debentures are unsecured and subordinate to all present and future senior indebtedness, as defined in the indenture related to each debenture. In the second quarter of 2006, Intervest Mortgage Corporation anticipates completing a public offering of up to $16 million in aggregate principal amount of additional debentures The Holding Company's Series 5/14/98 subordinated debentures are convertible along with accrued interest at the option of the holders at any time prior to April 1, 2008 into shares of its Class A common stock at the following conversion prices per share: $16.00 in 2006; $18.00 in 2007 and $20.00 from January 1, 2008 through April 1, 2008. The Holding Company has the right to establish conversion prices that are less than those set forth above for such periods as it may determine. In the first quarter of 2006, $233,000 of debentures ($140,000 of principal and $93,000 of accrued interest) were converted into shares of Class A common stock at $16.00 per share. At March 31, 2006, interest accrued and compounded quarterly on $0.5 million of the Holding Company's convertible debentures at the rate of 8% per annum, while $1.5 million of the convertible debentures pay interest quarterly at the rate of 8% per annum. All accrued interest of $1.3 million is due and payable at maturity whether by acceleration, redemption or otherwise. Any convertible debenture holder may, on or before July 1 of each year, elect to be paid all accrued interest and to thereafter receive regular quarterly payments of interest. The Holding Company may redeem any of its debentures, in whole or in part, at any time for face value. NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES Capital Securities (commonly referred to as trust preferred securities) are summarized as follows:
At March 31, 2006 At December 31, 2005 ------------------------ ------------------------ Accrued Accrued ($in thousands) Principal Interest Principal Interest - --------------------------------------------------------------------------------------------------------------- Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 441 $ 15,464 $ 59 Capital Securities II - debentures due September 17, 2033 15,464 41 15,464 35 Capital Securities III - debentures due March 17, 2034 15,464 36 15,464 31 Capital Securities IV - debentures due September 20, 2034 15,464 29 15,464 29 - --------------------------------------------------------------------------------------------------------------- $ 61,856 $ 547 $ 61,856 $ 154 - ---------------------------------------------------------------------------------------------------------------
11 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED The Capital Securities are obligations of the Holding Company's wholly owned statutory business trusts, Intervest Statutory Trust I, II, III and IV. Each Trust was formed with a capital contribution of $464,000 from the Holding Company and for the sole purpose of issuing and administering the Capital Securities. The proceeds from the issuance of the Capital Securities together with the capital contribution for each Trust were used to acquire the Holding Company's Junior Subordinated Debentures that are due concurrently with the Capital Securities. The Capital Securities, net of the Company's capital contributions totaling $1.9 million, qualify as regulatory capital. The sole assets of the Trusts, the obligors on the Capital Securities, are the Junior Subordinated Debentures. In addition, for each Trust, the Holding Company has guaranteed the payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to the Capital Securities. Issuance costs of $0.5 million, $0.4 million, $0.4 million and $0.2 million associated with Capital Securities I, II, III and IV, respectively, have been capitalized by the Holding Company and are being amortized over the life of the securities using the straight-line method. Interest payments on the Junior Subordinated Debentures (and the corresponding distributions on the Capital Securities) are payable in arrears as follows: Capital Securities I - semi-annually at the fixed rate of 9.875% per annum; Capital Securities II - quarterly at the fixed rate of 6.75% per annum until September 17, 2008 and thereafter at the rate of 2.95% over 3 month libor; Capital Securities III - quarterly at the fixed rate of 5.88% per annum until March 17, 2009 and thereafter at the rate of 2.79% over 3 month libor; and Capital Securities IV - quarterly at the fixed rate of 6.20% per annum until September 20, 2009 and thereafter at the rate of 2.40% over 3 month libor. Interest payments may be deferred at any time and from time to time during the term of the Junior Subordinated Debentures at the election of the Holding Company for up to 20 consecutive quarterly periods, or 5 years. There is no limitation on the number of extension periods the Holding Company may elect; provided, however, no deferral period may extend beyond the maturity date of the Junior Subordinated Debentures. During an interest deferral period, interest will continue to accrue on the Junior Subordinated Debentures and interest on such accrued interest will accrue at an annual rate equal to the interest rate in effect for such deferral period, compounded quarterly from the date such interest would have been payable were it not deferred. At the end of the deferral period, the Holding Company will be obligated to pay all interest then accrued and unpaid. All of the Capital Securities are subject to mandatory redemption as follows: (i) in whole, but not in part, upon repayment of the Junior Subordinated Debentures at stated maturity or earlier, at the option of the Holding Company, within 90 days following the occurrence and continuation of certain changes in the tax or capital treatment of the Capital Securities, or a change in law such that the Trust would be considered an investment company, contemporaneously with the redemption by the Holding Company of the Junior Subordinated Debentures; and (ii) in whole or in part at any time on or after December 18, 2006 for Capital Securities I, September 17, 2008 for Capital Securities II, March 17, 2009 for Capital Securities III, and September 20, 2009 for Capital Securities IV contemporaneously with the optional redemption by the Holding Company of the Junior Subordinated Debentures in whole or in part. Any redemption would be subject to the receipt of regulatory approvals. NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT From time to time, the Bank may borrow funds on an overnight or short-term basis to manage its liquidity needs. At March 31, 2006, the Bank had agreements with correspondent banks whereby it could borrow up to $16 million on an unsecured basis. In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB), the Bank can also borrow from these institutions on a secured basis. At March 31, 2006, the Bank had $23.5 million of FHLB advances outstanding and had available collateral consisting of investment securities to support total additional borrowings of $295 million from the FHLB and FRB. 12 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT, CONTINUED The following is a summary of certain information regarding short-term borrowings in the aggregate:
Quarter Ended March 31, ------------------ ($in thousands) 2006 2005 - ----------------------------------------------------------------------- Balance at period end (1) $23,500 $15,000 Maximum amount outstanding at any month end $23,500 $17,000 Average outstanding balance for the period $ 1,522 $13,911 Weighted-average interest rate paid for the period 5.06% 2.62% Weighted-average interest rate at period end 5.06% 2.96% - ----------------------------------------------------------------------- (1) The balance at March 31, 2006 represented FHLB advances that mature in April 2006.
NOTE 10 - COMMON STOCK WARRANTS At March 31, 2006, there were 696,465 common stock warrants outstanding that entitle its holder, the Chairman of the Board of the Company, to purchase one share of the Holding Company's Class A or Class B common stock as the case may be for each warrant. All warrants are vested and currently exercisable. Data concerning common stock warrants is as follows:
Exercise Price Per Warrant --------------------------- Wtd-Avg Class A Common Stock Warrants: $6.67 Exercise Price - --------------------------------------------------------------------------------------------------- Outstanding at December 31, 2005 and March 31, 2006 501,465 $ 6.67 Remaining contractual life in years at March 31, 2006 0.8 - ---------------------------------------------------------------------------------------------------
Exercise Price Per Warrant -------------------------- Total Wtd-Avg Class B Common Stock Warrants: $6.67 $10.00 Warrants Exercise Price - ------------------------------------------------------------------------------------------------------------ Outstanding at December 31, 2005 and March 31, 2006 145,000 50,000 195,000 $ 7.52 Remaining contractual life in years at March 31, 2006 1.8 1.8 1.8 - ------------------------------------------------------------------------------------------------------------
Effective January 1, 2006, the Company adopted SFAS No. 123-R, "Share-Based Payment" which replaces SFAS 123 and supersedes APB No. 25. SFAS 123-R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and directors, but expresses no preference for a type of valuation model. There were no grants of warrants or options in the first quarter of 2006 and no compensation expense recorded in any of the reporting periods in connection with the Company's outstanding warrants. NOTE 11 - EARNINGS PER SHARE (EPS) Basic and diluted EPS are calculated in accordance with SFAS No. 128, "Earnings per Share." Basic EPS is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by dividing adjusted net earnings by the weighted-average number of shares of common stock and dilutive potential common stock shares that may be outstanding in the future. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock warrants (the number of which is computed using the "treasury stock method") and from outstanding convertible debentures (the number of which is computed using the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding common stock warrants and convertible debentures were converted into common stock that then shared in the Company's earnings (as adjusted for interest expense, net of taxes, that would no longer occur if the debentures were converted). 13 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - -------------------------------------------------------------------------------- NOTE 11 - EARNINGS PER SHARE (EPS), CONTINUED Net earnings applicable to common stock and the weighted-average number of shares used for basic and diluted earnings per share computations are summarized in the table that follows:
Quarter Ended March 31, ---------------------- ($in thousands, except share and per share amounts) 2006 2005 - ----------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net earnings applicable to common stockholders $ 6,420 $ 3,248 Average number of common shares outstanding 7,825,746 6,273,843 - ----------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 0.82 $ 0.52 - ----------------------------------------------------------------------------------------------- Diluted Earnings Per Share: Net earnings applicable to common stockholders $ 6,420 $ 3,248 Adjustment to net earnings from assumed conversion of debentures (1) 40 55 ---------------------- Adjusted net earnings for diluted earnings per share computation $ 6,460 $ 3,303 ---------------------- Average number of common shares outstanding: Common shares outstanding 7,825,746 6,273,843 Potential dilutive shares resulting from exercise of warrants (2) 308,888 255,207 Potential dilutive shares resulting from conversion of debentures (3) 212,149 342,719 ---------------------- Total average number of common shares outstanding used for dilution 8,346,783 6,871,769 - ----------------------------------------------------------------------------------------------- Diluted Earnings Per Share $ 0.77 $ 0.48 - ----------------------------------------------------------------------------------------------- (1) Represents interest expense on dilutive convertible debentures, net of taxes, that would not occur if they were assumed converted. (2) All outstanding warrants were considered for the EPS computations. (3) Convertible debentures (principal and accrued interest) outstanding at March 31, 2006 and 2005 totaling $3.3 million and $4.8 million, respectively, were convertible into common stock at a price of $16.00 per share in 2006 and $14.00 per share in 2005 and resulted in additional common shares (based on average balances outstanding).
NOTE 12 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments are in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. The Company's maximum exposure to credit risk is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and normally require payment of fees. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The contractual amounts of off-balance sheet financial instruments is summarized as follows:
At March 31, At December 31, ------------- ---------------- ($in thousands) 2006 2005 ----------------------------------------------------------- Unfunded loan commitments $ 153,101 $ 101,597 Available lines of credit 755 737 Standby letters of credit 100 100 ----------------------------------------------------------- $ 153,956 $ 102,434 -----------------------------------------------------------
14 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 13 - REGULATORY CAPITAL The Holding Company is subject to regulation, examination and supervision by the FRB. The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency of the United States of America (OCC). Intervest Securities Corporation is subject to regulation, examination and supervision by the U.S. Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet them can initiate certain mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These capital amounts are also subject to qualitative judgment by the regulators about components, risk weighting and other factors. Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, as defined by the regulations. The Federal Reserve on March 1, 2005 issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies (BHC), but with stricter quantitative limits and clearer qualitative standards. The new rule provides a transition period for BHCs to meet the new, stricter limitations within regulatory capital by allowing the limits on restricted core capital elements to become fully effective as of March 31, 2009. Until March 31, 2009, BHCs generally must comply with the current Tier 1 capital limits. As of March 31, 2006 and December 31, 2005, assuming the Company no longer included its trust preferred securities in Tier 1 Capital, the Company would still exceed the well capitalized threshold under the regulatory framework for prompt corrective action. Management believes, as of March 31, 2006 and December 31, 2005, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2006, the most recent notification from the Bank's regulators categorized the Bank as a well-capitalized institution under the regulatory framework for prompt corrective action, which requires minimum Tier 1 leverage and Tier 1 and total risk-based capital ratios of 5%, 6% and 10%, respectively. Management is not aware of any current conditions or events outstanding that would change the designation from well capitalized. At March 31, 2006, the actual capital of the Bank on a percentage basis was as follows:
Actual Minimum To Be Considered Ratios Requirement Well Capitalized ------- ------------ ----------------- Total capital to risk-weighted assets 12.67% 8.00% 10.00% Tier 1 capital to risk-weighted assets 11.59% 4.00% 6.00% Tier 1 capital to total average assets - leverage ratio 9.85% 4.00% 5.00%
At March 31, 2006, the actual capital of the Company (consolidated) on a percentage basis was as follows:
Actual Minimum To Be Considered Ratios Requirement Well Capitalized ------- ------------ ---------------- Total capital to risk-weighted assets 14.45% 8.00% NA Tier 1 capital to risk-weighted assets 12.60% 4.00% NA Tier 1 capital to total average assets - leverage ratio 10.89% 4.00% NA
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net capital of $5,000. At March 31, 2006, Intervest Securities Corporation's net capital was $505,000. 15 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS SHARE-BASED COMPENSATION. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing SFAS 123 and supersedes APB No. 25. SFAS 123-R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and directors, but expresses no preference for a type of valuation model. SFAS 123-R is effective for interim and annual reporting periods beginning on January 1, 2006. SFAS 123-R does not impact any of the Company's outstanding warrants at March 31, 2006, all of which are vested and were issued prior to this new standard. The Company has not issued any new stock warrants and/or options to employees or directors in the first quarter of 2006. The Company will be required to recognize expense on new stock warrants/options granted, or modified, which may have a material impact on the Company's statement of earnings. ACCOUNTING CHANGES AND ERROR CORRECTIONS. In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections." This statement requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods' financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, Accounting Changes, which previously required that most voluntary changes in accounting principle be recognized by including in the current period's net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between "retrospective application" of an accounting principle and the "restatement" of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB Opinion No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. The adoption of this statement on January 1, 2006 did not impact the Company's financial statements. ACCOUNTING FOR LOAN COMMITMENTS. In March 2005, the SEC issued Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments" (SAB 105). SAB 105 provides recognition guidance for entities that issue loan commitments related to the origination of fixed- and variable-rate mortgage loans that will be held for sale that are required to be accounted for as derivative instruments. Currently, loan commitments that the Company enters into would not be required to be accounted for as derivative instruments under SAB 105. CONCENTRATION OF CREDIT RISKS. In December 2005, the FASB issued Statement of Position ("SOP") 94-6-1, "Terms of Loan Products That May Give Rise to a Concentration of Credit Risk." This statement addresses the circumstances under which the terms of loan products give rise to a concentration of credit risk and related disclosures and accounting considerations. It is intended to emphasize the requirement to assess the adequacy of disclosures for all lending products and the effect of changes in market or economic conditions on the adequacy of those disclosures. SOP 94-6-1 is effective for all periods after December 19, 2005. The adoption of this SOP on January 1, 2006 did not impact the Company's financial statements. IMPAIRMENT. In November 2005, the FASB issued Staff Position ("FSP") 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which superseded Emerging Issues Task Force Issue ("EITF") 03-1 and related amendments to EITF 03-1. The guidance in FSP 115-1 outlines a three-step model for identifying investment impairments regarding impairment measurement, other-than-temporary impairment evaluation and recognition of other-than-temporary impairment losses and subsequent accounting. The FSP also carries forward the disclosure requirements of EITF 03-1. FSP 115-1 is effective for periods beginning after December 15, 2005. The adoption of this FSP on January 1, 2006 did not impact the Company's financial statements. 16 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Hacker, Johnson & Smith, P.A., P.C., the Company's independent registered public accounting firm, has made a limited review of the financial data as of March 31, 2006 and for the three month periods ended March 31, 2006, and 2005 presented in this document, in accordance with the standards established by the Public Company Accounting Oversight Board. The report of Hacker, Johnson & Smith, P.A., P.C. furnished pursuant to Article 10 of Regulation S-X is included herein. 17 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, 2006 and the related condensed consolidated statements of earnings, changes in stockholders' equity and cash flows for three month periods ended March 31, 2006 and 2005. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of the Company as of December 31, 2005, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 3, 2006, we, based on our audit expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Hacker, Johnson & Smith, P.A., P.C. - --------------------------------------- HACKER, JOHNSON & SMITH, P.A.,P.C. Tampa, Florida April 27, 2006 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW -------- The following management's discussion of financial condition and results of operations of Intervest Bancshares Corporation and subsidiaries should be read in conjunction with the accompanying quarterly condensed consolidated financial statements in this report on Form 10-Q as well as the entire Annual Report on Form 10-K for the year ended December 31, 2005. Intervest Bancshares Corporation has three wholly owned consolidated subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and Intervest Securities Corporation (hereafter referred to collectively as the "Company" on a consolidated basis). Intervest Bancshares Corporation and Intervest National Bank may be referred to individually as the "Holding Company" and the "Bank," respectively. Intervest Bancshares Corporation also has four wholly owned unconsolidated subsidiaries, Intervest Statutory Trust I, II, III and IV, which were formed in connection with the issuance of trust preferred securities. For a discussion of the Company's business, see note 2 to the condensed consolidated financial statements in this report. The Company's principal revenues are derived from interest, dividends and fees earned on its interest-earning assets, which are comprised of mortgage loans, securities and other short-term investments. The Company's principal expenses consist of interest paid on its interest-bearing liabilities, which are comprised of deposits, debentures and other short-term borrowings, and its operating and general expenses and income tax expense. The Company's profitability depends primarily on its net interest income, which is the difference between interest income generated from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities. Net interest income is dependent upon the interest-rate spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest-rate spread will generate net interest income. The interest-rate spread is impacted by interest rates, deposit flows and loan demand. The Company's profitability is also affected by the level of its noninterest income and expenses, provision for loan losses and income tax expense. Noninterest income consists mostly of loan and other banking fees as well as income from loan prepayments. When a mortgage loan is repaid prior to maturity, the Company may recognize prepayment income, which consists of the recognition of unearned fees associated with such loans at the time of payoff and the receipt of additional prepayment fees and interest in certain cases. Many of the Company's mortgage loans include provisions relating to prepayment and others prohibit prepayment of indebtedness entirely. The Company's income from loan prepayments fluctuates and cannot be predicted. Normally, loan prepayments tend to increase during periods of declining interest rates and tend to decrease during periods of increasing interest rates. However, given the nature and type of the mortgage loans the Company originates, including their short average life, the Company may still experience loan prepayments notwithstanding the effects of movements in interest rates. Noninterest expenses consist of the following: compensation and benefits, occupancy and equipment, data processing, advertising, professional fees, FDIC and general insurance and other operating and general expenses. The Company's profitability is also significantly affected by general and local economic conditions, competition, changes in market interest rates, government policies and actions of regulatory authorities. Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). These loans have an average life of approximately three years. The Company tends to lend in areas that are in the process of being revitalized, with a concentration of loans on properties located in New York State and the State of Florida. A significant portion of the residential properties are located in New York City and are subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents. All loans are subject to the risk of default, otherwise known as credit risk, which represents the possibility of the Company not recovering amounts due from its borrowers. A borrower's ability to make payments due under a mortgage loan is dependent upon the risks associated with real estate investments in general, including the following: general or local economic conditions in the areas the properties are located, neighborhood values, interest rates, real estate tax rates, operating expenses of the mortgaged properties, supply of and demand for rental 19 units, supply of and demand for properties, ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental rules, regulations and fiscal policies. Additionally, terrorist acts and armed conflicts, such as the war on terrorism, and natural disasters, such as hurricanes, may have an adverse impact on economic conditions. Economic conditions affect the market value of the mortgaged properties underlying the Company's loans as well as the levels of rent and occupancy of income-producing properties. CRITICAL ACCOUNTING POLICIES ---------------------------- The Company believes that currently its only accounting policy that is critical to the presentation of its financial statements and requires estimates and judgment on the part of management relates to the determination of the Company's allowance for loan losses. The allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period requiring management to make assumptions about future loan chargeoffs. The impact of a sudden large chargeoff could deplete the allowance and potentially require increased provisions to replenish the allowance, which could negatively affect the Company's earnings and financial position. A more detailed discussion of the factors and estimates used in computing the allowance can be found under the caption "Critical Accounting Policies" on pages 32 and 33 of the Company's Annual Report on Form 10-K for the year ended December 31, 2005. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2006 AND DECEMBER 31, 2005 ------------------------------------------------------------------------- OVERVIEW - -------- Total assets at March 31, 2006 increased to $1.79 billion, from $1.71 billon at December 31, 2005. Total liabilities at March 31, 2006 increased to $1.65 billion, from $1.57 billion at December 31, 2005, and stockholders' equity increased to $142.8 million at March 31, 2006, from $136.2 million at December 31, 2005. Book value per common share increased to $18.22 at March 31, 2006, from $17.41 at December 31, 2005. Selected balance sheet information as of March 31, 2006 follows:
Intervest Intervest Intervest Inter- Holding National Mortgage Securities Company ($in thousands) Company Bank Corp. Corp. Amounts (1) Consolidated - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 3,696 $ 23,236 $ 19,122 $ 507 $ (18,730) $ 27,831 Security investments - 334,273 - - - 334,273 Loans receivable, net of deferred fees 11,401 1,297,634 92,973 - - 1,402,008 Allowance for loan losses (85) (15,175) (282) - - (15,542) Investment in consolidated subsidiaries 189,859 - - - (189,859) - All other assets 5,103 31,468 5,762 9 (388) 41,954 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $209,974 $1,671,436 $ 117,575 $ 516 $ (208,977) $ 1,790,524 - ---------------------------------------------------------------------------------------------------------------------------- Deposits $ - $1,448,430 $ - $ - $ (18,749) 1,429,681 Borrowed funds and related interest payable 66,987 23,745 87,748 - - 178,480 All other liabilities 159 37,352 2,382 11 (369) 39,535 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 67,146 1,509,527 90,130 11 (19,118) 1,647,696 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 142,828 161,909 27,445 505 (189,859) 142,828 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $209,974 $1,671,436 $ 117,575 $ 516 $ (208,977) $ 1,790,524 - ---------------------------------------------------------------------------------------------------------------------------- (1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely from intercompany deposit accounts and investments in subsidiaries.
A comparison of selected balance sheet information follows:
At March 31, 2006 At December 31, 2005 -------------------------- -------------------------- Carrying % of Carrying % of ($in thousands) Value Total Assets Value Total Assets - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 27,831 1.6% $ 56,716 3.3% Security investments 334,273 18.7 256,749 15.0 Loans receivable, net of deferred fees and loan loss allowance 1,386,466 77.4 1,352,805 79.3 All other assets 41,954 2.3 40,153 2.4 - ----------------------------------------------------------------------------------------------------------------------- Total assets $ 1,790,524 100.0% $ 1,706,423 100.0% - ----------------------------------------------------------------------------------------------------------------------- Deposits $ 1,429,681 79.8% $ 1,375,330 80.6% Borrowed funds and related interest payable 178,480 10.0 155,725 9.1 All other liabilities 39,535 2.2 39,190 2.3 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 1,647,696 92.0 1,570,245 92.0 - ----------------------------------------------------------------------------------------------------------------------- Stockholders' equity 142,828 8.0 136,178 8.0 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,790,524 100.0% $ 1,706,423 100.0% - -----------------------------------------------------------------------------------------------------------------------
20 CASH AND CASH EQUIVALENTS - ---------------------------- Cash and cash equivalents decreased to $27.8 million at March 31, 2006, from $56.7 million at December 31, 2005. The decrease reflected the investment of funds into loans and securities. SECURITY INVESTMENTS - --------------------- Securities as to which the Company has the intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Currently, only the Bank holds such security investments, which increased to $328.0 million at March 31, 2006, from $251.5 million at December 31, 2005. The increase reflected new purchases exceeding maturities and calls during the period. The Bank continues to invest in short-term (up to 5 year maturities) U.S. government agency debt obligations to emphasize liquidity and to currently target its loan-to-deposit ratio at approximately 85%. This ratio stood at 87% at March 31, 2006. At March 31, 2006, the held-to-maturity portfolio consisted of short-term debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation with a weighted-average yield of 3.88% and a weighted-average remaining maturity of 1.4 years, compared to 3.26% and 1.1 years, respectively, at December 31, 2005. The securities are fixed rate or have predetermined scheduled rate increases, and some have call features that allow the issuer to call the security before its stated maturity without penalty. At March 31, 2006 and December 31, 2005, the held-to-maturity portfolio's estimated fair value was $325.3 million and $249.1 million, respectively. At March 31, 2006, the held-to-maturity portfolio had unrealized losses totaling $2.7 million. The Bank has the ability and intent to hold the securities in the portfolio for a period of time sufficient for the fair value of the securities to recover. To date, the Bank has always recovered the cost of its investment securities upon maturity. In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in their capital stock, which amounted to $3.4 million and $2.9 million, respectively, at March 31, 2006. The FRB stock currently pays a dividend of 6%, while the FHLB stock dividend fluctuates and most recently was 5.11%. The total investment, which amounted to $6.3 million at March 31, 2006, compared to $5.2 million at December 31, 2005, fluctuates based on the Bank's capital level for the FRB stock and the Bank's loans and borrowings for the FHLB stock. LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------- Loans receivable, net of deferred fees and the allowance for loan losses, increased to $1.39 billion at March 31, 2006 from $1.35 billion at December 31, 2005. The growth reflected new mortgage loan originations secured by commercial and multifamily real estate exceeding principal repayments. New loan originations totaled $144 million in the first quarter of 2006, compared to $151 million in the first quarter of 2005. Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). At March 31, 2006, such loans consisted of 540 loans with an aggregate principal balance of $1.41 billion and an average principal size of $2.6 million. Loans with principal balances of $5.0 million or more aggregated to 70 loans or $658.2 million, with the largest loan amounting to $20.5 million. At March 31, 2006, there were three multifamily real estate loans totaling $1.7 million on nonaccrual status, compared to two loans totaling $0.7 million at December 31, 2005. With respect to two of these loans totaling $0.7 million, the borrower declared bankruptcy and the Bankruptcy Trustee has sold the properties collateralizing the loans. The proceeds of the sale are sufficient to provide for repayment of the Company's recorded investment and the Company is taking appropriate action to obtain the proceeds from the Bankruptcy Trustee. With respect to the remaining loan amounting to $1.0 million, a foreclosure action has been commenced for non-payment. Nonaccrual loans are considered impaired under the criteria of SFAS No. 114, but no valuation allowance was maintained at any time since the Company believes that the estimated fair value of the underlying properties exceeded its recorded investment. At March 31, 2006 and December 31, 2005, there were no other impaired loans. At March 31, 2006 and December 31, 2005, there were $1.5 million and $2.6 million, respectively, of loans ninety days past due and still accruing interest. These loans were deemed by management to be well secured and in the 21 process of collection. The amount at March 31, 2006 represented two loans that are past their maturity date, but in each case the borrower continues to make monthly payments of interest and principal. Based upon discussions with the borrowers, it is anticipated that these loans will be repaid in full or refinanced in the near term. At March 31, 2006, the allowance for loan losses amounted to $15.5 million, compared to $15.2 million at December 31, 2005. The allowance represented 1.11% of total loans (net of deferred fees) outstanding at March 31, 2006 and December 31, 2005. The increase in the allowance was due to provisions aggregating $0.3 million during the period resulting largely from net loan growth (which amounted to $33.2 million from December 31, 2005). For a further discussion of the criteria the Company uses to determine the adequacy of the allowance, see the section entitled "Critical Accounting Policies" included in this report. ALL OTHER ASSETS - ---------------- All other assets increased to $42.0 million at March 31, 2006, from $40.2 million at December 31, 2005, primarily due to an increase in accrued interest receivable, which fluctuates based on the amount of loans, investments and other interest-earning assets outstanding and the timing of interest payments received. The increase was due to the growth in these assets. DEPOSITS - -------- Deposits increased to $1.43 billion at March 31, 2006, from $1.38 billion at December 31, 2005, reflecting increases in certificate of deposit accounts of $33.4 million and an increase in checking, savings and money market accounts totaling $21.0 million. At March 31, 2006, certificate of deposit accounts totaled $1.15 billion, and checking, savings and money market accounts aggregated $277.7 million. The same categories of deposit accounts totaled $1.12 billion and $256.8 million, respectively, at December 31, 2005. Certificate of deposit accounts represented 81% of total deposits at March 31, 2006 and December 31, 2005. At March 31, 2006 and December 31, 2005, certificate of deposit accounts included $40.5 million of brokered deposits. BORROWED FUNDS AND RELATED INTEREST PAYABLE - ------------------------------------------------ At March 31, 2006, borrowed funds and related interest payable increased to $178.5 million from $155.7 million at December 31, 2005. The increase was due to $23.5 million of short-term borrowings in March 2006 from the Federal Home Loan Bank of New York by the Bank. ALL OTHER LIABILITIES - ----------------------- All other Liabilities remained relatively unchanged at $39.5 million at March 31, 2006, compared to $39.2 million at December 31, 2005. STOCKHOLDERS' EQUITY - --------------------- Stockholders' equity increased to $142.8 million at March 31, 2006, from $136.2 million at December 31, 2005 as follows:
Per ($in thousands) Amount Shares Share ----------------------------------------------------------------------------------------------- Stockholders' equity at December 31, 2005 $136,178 7,823,058 $17.41 Net earnings for the period 6,420 - - Convertible debentures converted at election of debenture holders 230 14,584 15.75 ----------------------------------------------------------------------------------------------- Stockholders' equity at March 31, 2006 $142,828 7,837,642 $18.22 -----------------------------------------------------------------------------------------------
22 COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED --------------------------------------------------------- MARCH 31, 2006 AND 2005 ----------------------- OVERVIEW - -------- Consolidated net earnings for the first quarter of 2006 increased by $3.2 million, or 100%, to $6.4 million, or $0.77 per diluted share, from $3.2 million, or $0.48 per diluted share, in the first quarter of 2005. The earnings per share calculation for the 2006 period included a greater number of outstanding shares resulting primarily from a public offering of 1.4 million shares of Class A common stock completed in the third quarter of 2005. The $3.2 million increase in consolidated earnings reflected a $4.2 million increase in net interest and dividend income, a $1.2 million increase in noninterest income and a $0.7 million decrease in the provision for loan losses, partially offset by a $2.5 million increase in income tax expense and a $0.4 million increase in noninterest expenses. The Company's efficiency ratio, which is a measure of its ability to control expenses as a percentage of its revenues, continues to be favorable and improved to 19% in the first quarter of 2006, from 26% in the first quarter of 2005. The Company's return on average assets and equity also increased to 1.47% and 18.55%, respectively, in the 2006 first quarter, from 0.94% and 14.25% in the 2005 first quarter. Selected information regarding results of operations for the first quarter of 2006 follows:
Intervest Intervest Intervest Inter- National Mortgage Securities Holding Company ($in thousands) Bank Corp. Corp. Company Amounts(2) Consolidated - ------------------------------------------------------------------------------------------------------------------------ Interest and dividend income $ 27,456 $ 2,685 $ 5 $ 198 $ (278) $ 30,066 Interest expense 14,860 1,782 - 1,216 (278) 17,580 ---------------------------------------------------------------------------- Net interest and dividend income 12,596 903 5 (1,018) - 12,486 Provision for loan losses 329 32 - - - 361 Noninterest income 1,933 1,439 - 119 (1,409) 2,082 Noninterest expenses 3,281 769 5 150 (1,409) 2,796 ---------------------------------------------------------------------------- Earnings before taxes 10,919 1,541 - (1,049) - 11,411 Provision for income taxes 4,763 712 - (484) - 4,991 - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 6,156 $ 829 $ - $ (565) $ - $ 6,420 - ------------------------------------------------------------------------------------------------------------------------ Intercompany dividends(1) (1,089) - - 1,089 - - - ------------------------------------------------------------------------------------------------------------------------ Net earnings after intercompany dividends $ 5,067 $ 829 $ - $ 524 $ - $ 6,420 - ------------------------------------------------------------------------------------------------------------------------ Net earnings after intercompany dividends for the same period of 2005 $ 2,092 $ 625 $ (2) $ 533 $ - $ 3,248 - ------------------------------------------------------------------------------------------------------------------------ (1) Dividends to the Holding Company from the Bank provide funds for the debt service on the subordinated debentures-capital securities, which is included in the Holding Company's interest expense. (2) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise from intercompany deposit accounts and management and service agreements.
NET INTEREST AND DIVIDEND INCOME - ------------------------------------ Net interest and dividend income is the Company's primary source of earnings and is influenced primarily by the amount, distribution and repricing characteristics of its interest-earning assets and interest-bearing liabilities as well as by the relative levels and movements of interest rates. Net interest and dividend income increased to $12.5 million in the first quarter of 2006, from $8.3 million in the first quarter of 2005. The improvement was attributable to a $371 million increase in average interest-earning assets resulting from continued growth in loans of $321 million and a higher level of security and short-term investments aggregating $50 million. The growth in average assets was funded by $333 million of additional interest-bearing deposits and a $47 million increase in stockholders' equity, partially offset by a $19 million decrease in borrowed funds. The Company's net interest margin increased to 2.92% in the first quarter of 2006, from 2.47% in the first quarter of 2005. The higher margin was due to the Company's yield on interest-earning assets increasing at a faster pace than its cost of funds. In a rising rate environment, the yield on interest-earning assets increased 92 basis points to 7.04% in the 2006 quarter due to higher yields on new mortgage loans originated, rate increases on existing variable-rate loans indexed to the prime rate, and higher yields earned on security and other short-term investments. The cost of funds also increased by 57 basis points to 4.55% in the 2006 quarter primarily due to higher rates paid on deposit accounts. 23 The following table provides information on: average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period.
-------------------------------------------------------------------- Quarter Ended -------------------------------------------------------------------- March 31, 2006 March 31, 2005 --------------------------------- --------------------------------- Average Interest Yield/ Average Interest Yield/ ($in thousands) Balance Inc./Exp. Rate(2) Balance Inc./Exp. Rate(2) - ----------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans (1) $1,392,837 $ 26,931 7.84% $1,071,862 $ 18,811 7.12% Securities 304,061 2,747 3.66 258,037 1,563 2.46 Other interest-earning assets 36,175 388 4.35 32,433 194 2.43 - ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,733,073 $ 30,066 7.04% 1,362,332 $ 20,568 6.12% - ----------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 15,656 15,153 - ----------------------------------------------------------------------------------------------------------------------- Total assets $1,748,729 $1,377,485 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest checking deposits $ 8,533 $ 40 1.90% $ 13,441 $ 52 1.57% Savings deposits 16,591 121 2.96 25,268 113 1.81 Money market deposits 237,374 2,293 3.92 194,375 1,059 2.21 Certificates of deposit 1,147,864 12,105 4.28 844,031 7,815 3.76 - ----------------------------------------------------------------------------------------------------------------------- Total deposit accounts 1,410,362 14,559 4.19 1,077,115 9,039 3.40 - ----------------------------------------------------------------------------------------------------------------------- FHLB Advances 1,522 19 5.06 13,911 90 2.62 Debentures and related interest payable 92,284 1,908 8.38 99,197 2,060 8.42 Debentures - capital securities 61,856 1,090 7.15 61,856 1,090 7.15 Mortgage note payable 228 4 7.12 241 4 7.00 - ----------------------------------------------------------------------------------------------------------------------- Total borrowed funds 155,890 3,021 7.86 175,205 3,244 7.51 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,566,252 $ 17,580 4.55% 1,252,320 $ 12,283 3.98% - ----------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 6,504 6,186 Noninterest-bearing liabilities 37,543 27,820 Stockholders' equity 138,430 91,159 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,748,729 $1,377,485 - ----------------------------------------------------------------------------------------------------------------------- Net interest and dividend income/spread $ 12,486 2.49% $ 8,285 2.14% - ----------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/margin $ 166,821 2.92% $ 110,012 2.47% - ----------------------------------------------------------------------------------------------------------------------- Ratio of total interest-earning assets to total interest-bearing liabilities 1.11 1.09 - ----------------------------------------------------------------------------------------------------------------------- OTHER RATIOS: Return on average assets (2) 1.47% 0.94% Return on average equity (2) 18.55% 14.25% Noninterest expense to average assets (2) 0.64% 0.69% Efficiency ratio (3) 19% 26% Average stockholders' equity to average assets 7.92% 6.62% - ----------------------------------------------------------------------------------------------------------------------- (1) Includes nonaccrual loans. (2) Annualized. (3) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and dividend income plus noninterest income.
The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume). 24
For the Quarter Ended March 31, 2006 vs 2005 ---------------------------------------------------------------------- Increase (Decrease) Due To Change In: ---------------------------------------------------------------------- ($in thousands) Rate Volume Rate/Volume Total - ------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans $ 1,929 $ 5,713 $ 478 $ 8,120 Securities 774 283 127 1,184 Other interest-earning assets 156 23 15 194 - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 2,859 6,019 620 9,498 - ------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Interest checking deposits 11 (19) (4) (12) Savings deposits 73 (39) (26) 8 Money market deposits 831 238 165 1,234 Certificates of deposit 1,097 2,856 337 4,290 - ------------------------------------------------------------------------------------------------------------------- Total deposit accounts 2,012 3,036 472 5,520 - ------------------------------------------------------------------------------------------------------------------- FHLB advances 85 (81) (75) (71) Debentures and accrued interest payable (10) (146) 4 (152) Debentures - capital securities - - - - Mortgage note payable - - - - - ------------------------------------------------------------------------------------------------------------------- Total borrowed funds 75 (227) (71) (223) - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 2,087 2,809 401 5,297 - ------------------------------------------------------------------------------------------------------------------- Net change in interest and dividend income $ 772 $ 3,210 $ 219 $ 4,201 - -------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses decreased by $0.7 million to $0.3 million in the first quarter of 2006, from $1.0 million in the first quarter of 2005. The lower provision was primarily due to a decrease in the rate of net loan growth over the prior year period. Total loans outstanding grew by $33.2 million in the 2006 period, compared to $79.9 million in the 2005 period. NONINTEREST INCOME - ------------------ Noninterest income increased by $1.2 million to $2.1 million in the first quarter of 2006, from $0.9 million in the first quarter of 2005. The higher income was primarily due to a $1.0 million increase in income from the prepayment of mortgage loans. Income from the prepayment of mortgage loans consists of the recognition of unearned fees associated with such loans at the time of payoff and the receipt of prepayment penalties and interest in certain cases. The Company's income from loan prepayments fluctuates and cannot be predicted. Normally, loan prepayments tend to increase during periods of declining interest rates and tend to decrease during periods of increasing interest rates. However, given the nature and type of the mortgage loans the Company originates, including their short average life, the Company may still experience loan prepayments notwithstanding the effects of movements in interest rates. NONINTEREST EXPENSES - -------------------- Noninterest expenses increased by $0.4 million to $2.8 million in the first quarter of 2006, from $2.4 million in the first quarter of 2005. The increase was primarily to higher salaries and employee benefits expenses of $0.2 million and $0.2 million aggregate increase in all other operating expenses associated with the Company's growth. The Company had 76 employees at March 31, 2006, compared to 67 at March 31, 2005. PROVISION FOR INCOME TAXES - -------------------------- The provision for income taxes increased by $2.5 million to $5.0 million in the first quarter of 2006, from $2.5 million in the first quarter of 2005 due to an increase in pre-tax income. The Company's effective tax rate (inclusive of state and local taxes) amounted to 43.7% in the 2006 period, compared to 43.6% in the 2005 period. OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS -------------------------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. For a further discussion of these financial instruments, see note 12 to the condensed consolidated financial statements included in this report. 25 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company manages its liquidity position on a daily basis to assure that funds are available to meet operations, loan and investment commitments, deposit withdrawals and the repayment of borrowed funds. The Company's primary sources of funds consist of the following: retail deposits obtained through the Bank's branch offices and through the mail; principal repayments of loans; maturities and calls of securities; issuance of debentures; borrowings from the federal funds market and through FHLB advances; and cash flow provided by operating activities. For additional detail concerning the Company's cash flows, see the condensed consolidated statements of cash flows included in this report. The Bank's lending business is dependent on its continuing ability to generate a positive interest rate spread between the rates offered on its deposits and the yields earned on its loans. The Bank needs to pay competitive interest rates to attract and retain time deposits to fund its loan originations. The Bank has and expects to continue to rely heavily on certificates of deposit (time deposits) as its main source of funds. Total consolidated deposits amounted to $1.43 billion at March 31, 2006 and time deposits represented 81%, or $1.15 billion, of those deposits. Additionally, time deposits of $100,000 or more at March 31, 2006 totaled $388.1 million and included $40.5 million of brokered deposits. The Bank must maintain its status as a well-capitalized insured depository institution in order to solicit and accept, renew or roll over any brokered deposit without restriction. Time deposits are the only deposit accounts offered by the Bank that have stated maturity dates. These deposits are generally considered to be rate sensitive and have a higher cost than deposits with no stated maturities, such as checking, savings and money market accounts. At March 31, 2006, the Bank had $417.7 million of time deposits maturing by March 31, 2007. The Bank expects that a substantial portion of these deposits will be renewed and stay with the Bank. The Bank has and expects to continue to rely on capital contributions from the Holding Company to increase its capital to support its rapid asset growth. The Holding Company made a total of $32.5 million of capital contributions to the Bank during 2005. No contributions of capital were made in the first quarter of 2006. The Bank, from time to time, may borrow funds on an overnight or short-term basis to manage its liquidity needs. At March 31, 2006, the Bank had agreements with correspondent banks whereby it could borrow up to $16 million on an unsecured basis. In addition, as a member of the FHLB and FRB, the Bank can also borrow from these institutions on a secured basis. In the first quarter of 2006, the Bank borrowed a total of $23.5 million of short-term FHLB advances, all of which were outstanding at March 31, 2006. At December 31, 2005, there were no outstanding borrowings from any of the aforementioned sources. At March 31, 2006, the Bank had available collateral consisting of investment securities to support additional total borrowings of $295 million from the FHLB and FRB. Intervest Mortgage Corporation has and expects to continue to rely on the issuance of its subordinated debentures in registered, best efforts offerings to the public as a source of funds to support its loan originations. In addition, as the Bank's mortgage loan portfolio has grown, service fee income received by Intervest Mortgage Corporation from the Bank has comprised an increasing percentage of Intervest Mortgage Corporation's cash flow. The Bank has a servicing agreement with Intervest Mortgage Corporation, which is described under the caption "Liquidity and Capital Resources" on page 46 of the Company's Annual Report of Form 10-K. In addition, from time to time, Intervest Mortgage Corporation has also received capital contributions from the Holding Company. There have been no capital contributions since August 2004. Intervest Mortgage Corporation's lending business is dependent on its continuing ability to sell its debentures with interest rates that would result in a positive interest rate spread, which is the difference between yields earned on its loans and the rates paid on its debentures. As detailed in note 7 to the condensed consolidated financial statements included in this report, at March 31, 2006, $82.8 million in aggregate principal amount of Intervest Mortgage Corporation's subordinated debentures were outstanding with fixed interest rates that range from 6.25% to 9.00% per annum and maturities that range from July 1, 2006 to October 1, 2013. In the first quarter of 2006, Intervest Mortgage Corporation did not repay or issue new debentures. At March 31, 2006, Intervest Mortgage Corporation had $16.0 million of debentures and related accrued interest payable maturing by December 31, 2007 (of which $5.2 million were repaid early on May 1, 2006), which are expected to be repaid from cash flow generated from maturities of existing mortgage loans, ongoing operations and cash on hand. Intervest Mortgage Corporation anticipates completing a public offering of up to $16.0 million in aggregate principal amount of additional debentures in the second quarter of 2006. 26 The Holding Company's sources of funds and capital to date have been derived from the following: interest income from a limited portfolio of mortgage loans and short-term investments; monthly dividends from the Bank to service interest expense on trust preferred securities; monthly management fees from Intervest Mortgage Corporation and the Bank for providing these subsidiaries with certain administrative services; the issuance of its common stock through public offerings, exercise of outstanding common stock warrants and conversion of outstanding convertible debentures; the issuance of trust preferred securities through its wholly owned business trusts; and the direct issuance of other subordinated debentures to the public. At March 31, 2006, the Holding Company did not have any debentures maturing by December 31, 2007. The Holding Company, through its wholly owned business trusts Intervest Statutory Trust I, II, III and IV, issued in December 2001, September 2003, March 2004 and September 2004, $15.0 million, respectively, of trust preferred securities for a total of $60 million at both fixed and variable rates of interest that mature in 2031 or later. The total proceeds from these securities have been invested in the Bank at various times through capital contributions. The Holding Company is required to make interest payments on the principal of those securities, which currently amount to $4.4 million annually. The Bank provides funds to Holding Company in the form of dividends for this purpose. At March 31, 2006, approximately $47.6 million of the trust preferred securities qualified as regulatory Tier 1 capital and the remainder qualified as Tier 2 capital in the Holding Company's computation of regulatory capital. Additional information concerning outstanding time deposits, debentures and trust preferred securities, including interest rates and maturity dates can be found in notes 6, 7 and 8 of the notes to the condensed consolidated financial statements included in this report. At March 31, 2006, the Company's total commitments to lend aggregated to $154 million. Although there is no certainty, management anticipates that the majority of these loan commitments will be funded over the next 12 months. If all these commitments were to close, they would be funded by the sources of funds described above. The Company considers its current liquidity and sources of funds sufficient to satisfy its outstanding lending commitments and its maturing liabilities. Management is not aware of any trends, known demand, commitments or uncertainties which are expected to have a material impact on future operating results, liquidity or capital resources. REGULATORY CAPITAL ------------------ The Bank is subject to various regulatory capital requirements. The Federal Deposit Insurance Corporation (FDIC) and other bank regulatory agencies use five capital categories ranging from well capitalized to critically undercapitalized to determine various matters, including prompt corrective action and each institution's FDIC deposit insurance premiums. These categories involve quantitative measures of a bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The Bank is required to maintain regulatory defined minimum Tier 1 leverage and Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%, respectively. At March 31, 2006 and December 31, 2005, management believes the Bank met its capital adequacy requirements and is a well-capitalized institution as defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management is not aware of any conditions or events that would change the Bank's designation as a well-capitalized institution. Information regarding the Bank's regulatory capital and related ratios is summarized as follows:
At March 31, At December 31, -------------- ----------------- ($in thousands) 2006 2005 -------------------------------------------------------------------------- Tier 1 Capital $ 161,909 $ 156,842 Tier 2 Capital 15,175 14,846 -------------------------------------------------------------------------- Total risk-based capital $ 177,084 $ 171,688 -------------------------------------------------------------------------- Net risk-weighted assets $ 1,397,124 $ 1,362,728 Average assets for regulatory purposes $ 1,643,444 $ 1,562,779 -------------------------------------------------------------------------- Tier 1 capital to average assets 9.85% 10.04% Tier 1 capital to risk-weighted assets 11.59% 11.51% Total capital to risk-weighted assets 12.67% 12.60% --------------------------------------------------------------------------
27 The Holding Company on a consolidated basis is subject to minimum regulatory capital requirements administered by the FRB. These guidelines require a ratio of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted total average assets of not less than 3%. At March 31, 2006 and December 31, 2005, management believes that the Holding Company met its capital adequacy requirements. Information regarding the Company's (consolidated) regulatory capital and related ratios is summarized below:
At March 31, At December 31, -------------- ----------------- ($in thousands) 2006 2005 -------------------------------------------------------------------------- Tier 1 Capital (1) $ 190,437 $ 181,571 Tier 2 Capital (1) 27,933 29,788 -------------------------------------------------------------------------- Total risk-based capital $ 218,370 $ 211,359 -------------------------------------------------------------------------- Net risk-weighted assets $ 1,511,064 $ 1,466,027 Average assets for regulatory purposes $ 1,748,729 $ 1,673,832 -------------------------------------------------------------------------- Tier 1 capital to average assets 10.89% 10.85% Tier 1 capital to risk-weighted assets 12.60% 12.39% Total capital to risk-weighted assets 14.45% 14.42% -------------------------------------------------------------------------- (1) There are $60 million of qualifying capital securities outstanding (total debentures of $61.9 million issued to Statutory Trust I, II, III and IV by the Holding Company less the Holding Company's investments in those trusts aggregating $1.9 million). At March 31, 2006 and December 31, 2005, $47.6 million and $45.4 million of those securities, respectively, was included in Tier 1 Capital, and the remaining portion was included in Tier 2 Capital.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies (BHC), but with stricter quantitative limits and clearer qualitative standards. The new rule provides a transition period for BHCs to meet the new, stricter limitations within regulatory capital by allowing the limits on restricted core capital elements to become fully effective as of March 31, 2009. For a further discussion of these changes, see page 49 of the Company's Annual Report on Form 10-K for the year ended December 31, 2005. As of March 31, 2006 and December 31, 2005, assuming the Company no longer included its trust preferred securities in Tier 1 Capital, the Company would still exceed the well capitalized threshold under the regulatory framework for prompt corrective action. Intervest Securities Corporation is subject to the Securities and Exchange Commission's (SEC) Uniform Net Capital Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net capital of $5,000. At March 31, 2006 and December 31, 2005, Intervest Securities Corporation's net capital was $0.5 million. SARBANES OXLEY ACT OF 2002 -------------------------- The requirements of Section 404 of the Sarbanes Oxley Act and SEC rules and regulations require an annual management report on the Company's internal controls over financial reporting, including, among other matters, management's assessment of the effectiveness of the Company's internal controls over financial reporting, and an attestation report by the Company's independent registered public accounting firm addressing these assessments. Beginning with the Company's annual report for the year ending December 31, 2006, the Company will have to include in its annual report on Form 10-K filed with the SEC a report of management regarding the Company's internal controls over financial reporting in accordance with the above requirements. In this regard, the Company is in the process of documenting and evaluating its internal controls over financial reporting in order to satisfy these requirements. The process includes the involvement of internal resources and the retention of outside consultants. This process is designed to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, and (iii) verify through testing that controls are functioning as documented. To date, the Company has identified certain deficiencies in the design and operating effectiveness of its internal controls over financial reporting, and it believes that they have been corrected or are in the process of being corrected. Although this process is not completed, management is not aware of any "significant deficiencies" or "material weaknesses" in the Company's internal controls over financial reporting, as defined in applicable SEC rules and regulations. 28 ASSET AND LIABILITY MANAGEMENT ------------------------------ Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The Company does not engage in trading or hedging activities, nor does it invest in interest rate derivatives or enter into interest rate swaps. The primary objective of the Company's asset/liability management strategy is to limit, within established guidelines, the adverse impact of changes in interest rates on its net interest income and capital. The Company uses "gap analysis," which measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period, to monitor its interest rate sensitivity. For a further discussion of gap analysis, including the factors that effect its computation and results, see page 50 of the Company's Annual Report on Form 10-K for the year ended December 31, 2005. The Company's one-year positive interest rate sensitivity gap decreased to $451.5 million, or 25.2% of total assets, at March 31, 2006, from $498.7 million, or 29.2% at December 31, 2005. The decrease in the positive gap primarily reflects an increase in security investments with over one-year maturities, funded by increases in money-market deposit accounts, short-term borrowings and time deposits with terms of less than one year. For purposes of computing the gap, all deposits with no stated maturities are treated as readily accessible accounts. However, if such deposits were treated differently, the one-year gap would then change. The behavior of core depositors may not necessarily result in the immediate withdrawal of funds in the event deposit rates offered by the Bank did not change as quickly and uniformly as changes in general market rates. For example, if only 25% of deposits with no stated maturity were assumed to be readily accessible, the one-year gap would have been a positive 36.6% at March 31, 2006, compared to a positive 40.1% at December 31, 2005. The table that follows summarizes interest-earning assets and interest-bearing liabilities as of March 31, 2006, that are scheduled to mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4 --- ---- -------- ------ ($in thousands) Months Months Years Years Total - ----------------------------------------------------------------------------------------------------- Loans (1) $555,764 $410,826 $ 362,117 $ 85,556 $1,414,263 Securities held to maturity (2) 69,872 114,892 143,210 - 327,974 Short-term investments 19,133 - - - 19,133 FRB and FHLB stock 2,860 - - 3,439 6,299 - ----------------------------------------------------------------------------------------------------- Total rate-sensitive assets $647,629 $525,718 $ 505,327 $ 88,995 $1,767,669 - ----------------------------------------------------------------------------------------------------- Deposit accounts (3): Interest checking deposits $ 8,903 $ - $ - $ - $ 8,903 Savings deposits 15,913 - - - 15,913 Money market deposits 246,431 - - - 246,431 Certificates of deposit 80,272 337,384 590,759 143,535 1,151,950 - ----------------------------------------------------------------------------------------------------- Total deposits 351,519 337,384 590,759 143,535 1,423,197 - ----------------------------------------------------------------------------------------------------- FHLB advances 23,500 - - - 23,500 Debentures and mortgage note payable (1) 3,500 2,500 89,892 52,190 148,082 Accrued interest on all borrowed funds (1) 3,437 - 3,099 362 6,898 - ----------------------------------------------------------------------------------------------------- Total borrowed funds 30,437 2,500 92,991 52,552 178,480 - ----------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities $381,956 $339,884 $ 683,750 $ 196,087 $1,601,677 - ----------------------------------------------------------------------------------------------------- GAP (repricing differences) $265,673 $185,834 $(178,423) $(107,092) $ 165,992 - ----------------------------------------------------------------------------------------------------- Cumulative GAP $265,673 $451,507 $ 273,084 $ 165,992 $ 165,992 - ----------------------------------------------------------------------------------------------------- Cumulative GAP to total assets 14.8% 25.2% 15.3% 9.3% 9.3% - ----------------------------------------------------------------------------------------------------- Significant assumptions used in preparing the preceding gap table follow: (1) Floating-rate loans and debentures payable are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate loans and debentures payable are scheduled, including repayments, according to their contractual maturities. Deferred loan fees are excluded from this analysis. (2) Securities are scheduled according to the earlier of their contractual maturity or the date in which the interest rate is scheduled to increase. The effects of possible prepayments that may result from the issuer's right to call a security before its contractual maturity date are not considered. (3) Interest checking, savings and money market deposits are regarded as readily accessible withdrawable accounts; and certificates of deposit are scheduled through their maturity dates.
29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company has not engaged in and accordingly has no risk related to trading accounts, commodities, foreign exchange, hedging activities, interest rate derivatives or interest rate swaps. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities, and the issuance of its debentures. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments as of December 31, 2005, which reflect changes in market prices and rates, can be found in note 20 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. Management believes that there have been no significant changes in the Company's market risk exposure since December 31, 2005. Management actively monitors and manages the Company's interest rate risk exposure. The primary objective in managing interest rate risk is to limit, within its established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. For a further discussion, see the section entitled "Asset and Liability Management" under Item 2 of this report. ITEM 4. CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of its Principal Executive and Financial Officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Principal Executive and Financial Officers have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations, and are operating in an effective manner. The Company made no significant changes in its internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to March 31, 2006. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 1A. RISK FACTORS The Company's business is affected by a number of factors, including but not limited to the impact of: interest rates; loan demand; loan concentrations; loan prepayments; dependence on brokers and other sources for new loan referrals, ability to raise funds for investment; competition; general or local economic conditions; credit risk and the related adequacy of the allowance for loan losses; terrorist acts; natural disasters; armed conflicts; environmental liabilities, regulatory supervision and regulation and costs thereof; dependence on a limited number of key personnel; and voting control held by a limited number of stockholders who are also executive officers and directors. This Item 1A requires disclosure of any material changes from risk factors previously disclosed in the Company's most recent Form 10-K. There have been no material changes to the Company's risk factors disclosed in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2005, where such factors are discussed on pages 22 through 26. `` ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable 30 ITEM 6. EXHIBITS The following exhibits are filed as part of this report. 31.0 Certification of the principal executive officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 31.1 Certification of the principal financial officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 32.0 Certification of the principal executive and financial officers pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERVEST BANCSHARES CORPORATION -------------------------------- (Registrant) Date: April 27, 2006 By: /s/ Jerome Dansker ------------------------- Jerome Dansker, Chairman and Executive Vice President (Principal Executive Officer) Date: April 27, 2006 By: /s/ Lowell S. Dansker ---------------------------- Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer) 31 EX-31.0 2 ex31_0.txt EXHIBIT 31.0 EXHIBIT 31.0 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jerome Dansker, as the principal executive officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"), certify that: 1. I have reviewed this report on Form 10-Q for the quarter ended March 31, 2006 of the Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238; 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2006 /s/ Jerome Dansker ------------------ Jerome Dansker, Chairman and Chief Executive Officer (Principal Executive Officer) EX-31.1 3 ex31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Lowell S. Dansker, as the principal financial officer of Intervest Bancshares Corporation and Subsidiaries (the "Company"), certify that: 1. I have reviewed this report on Form 10-Q for the quarter ended March 31, 2006 of the Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238; 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 27, 2006 /s/ Lowell S. Dansker --------------------- Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer) EX-32.0 4 ex32_0.txt EXHIBIT 32.0 EXHIBIT 32.0 CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the "Report") by Intervest Bancshares Corporation (the "Company"), each of the undersigned, as the principal executive and principal financial officers of the Company, hereby certifies pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jerome Dansker - -------------------- Jerome Dansker, Chairman and Chief Executive Officer (Principal Executive Officer) April 27, 2006 /s/ Lowell S. Dansker - ------------------------ Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer) April 27, 2006 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----