-----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, G2gCywnAcFMZ94/h1a6dI/wdHnALHK7qP2ebuvzBQLDVdk3v82rPpuISAX1z7sbP +4A7E/oNpjvlYg6F7fsPog== 0001140361-06-011213.txt : 20060807 0001140361-06-011213.hdr.sgml : 20060807 20060807091220 ACCESSION NUMBER: 0001140361-06-011213 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060807 DATE AS OF CHANGE: 20060807 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: 061007406 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 6-30-2006 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 JUNE 30, 2006 ------------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From to ------ ------ 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 7,468,098 outstanding as of July 31, 2006 - ----------------------------------------------- ----------------------------------------- Class B Common Stock, $1.00 par value per share 385,000 outstanding as of July 31, 2006 - ----------------------------------------------- -----------------------------------------
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES FORM 10-Q JUNE 30, 2006 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005. . . . . . . . . . . . . 3 Condensed Consolidated Statements of Earnings (Unaudited) for the Quarters and Six-Months Ended June 30, 2006 and 2005 . . . . . . . . . 4 Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Six-Months Ended June 30, 2006 and 2005. . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six-Months Ended June 30, 2006 and 2005. . . . . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . 7 Review by Independent Registered Public Accounting Firm. . . . . . . . . . . . . 18 Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . 34 ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . 34 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 1A. RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS . . . . . . . 34 ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . 34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 35 ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ITEM 6. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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 JUNE 30, DECEMBER 31, ($in thousands, except par value) 2006 2005 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) (Audited) Cash and due from banks $ 8,802 $ 11,595 Federal funds sold 7,717 42,675 Commercial paper and other short-term investments 3,021 2,446 ---------------------------- Total cash and cash equivalents 19,540 56,716 Securities held to maturity, net (estimated fair value of $297,567 and $249,088, respectively) 300,779 251,508 Federal Reserve Bank and Federal Home Loan Bank stock, at cost 5,813 5,241 Loans receivable (net of allowance for loan losses of $16,131 and $15,181, respectively) 1,423,305 1,352,805 Accrued interest receivable 8,869 7,706 Loan fees receivable 11,595 10,941 Premises and equipment, net 6,272 6,421 Deferred income tax asset 7,319 6,988 Deferred debenture offering costs, net 5,110 5,610 Other assets 3,070 2,487 ============================================================================================================================ TOTAL ASSETS $ 1,791,672 $ 1,706,423 ============================================================================================================================ LIABILITIES Deposits: Noninterest-bearing demand deposit accounts $ 7,279 $ 9,188 Interest-bearing deposit accounts: Checking (NOW) accounts 7,816 7,202 Savings accounts 13,559 17,351 Money market accounts 231,628 223,075 Certificate of deposit accounts 1,190,673 1,118,514 ---------------------------- Total deposit accounts 1,450,955 1,375,330 Borrowed Funds: Subordinated debentures 82,390 87,390 Subordinated debentures - capital securities 61,856 61,856 Accrued interest payable on all borrowed funds 5,060 6,250 Mortgage note payable 222 229 ---------------------------- Total borrowed funds 149,528 155,725 Accrued interest payable on deposits 3,646 3,232 Mortgage escrow funds payable 23,444 20,302 Official checks outstanding 11,528 11,689 Other liabilities 3,158 3,967 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,642,259 1,570,245 - ---------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock (300,000 shares authorized, none issued) - - Class A common stock ($1.00 par value, 12,000,000 shares authorized, 7,463,905 and 7,438,058 shares issued and outstanding, respectively) 7,464 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 65,690 65,309 Retained earnings 75,874 63,046 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 149,413 136,178 ============================================================================================================================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,791,672 $ 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 SIX-MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ ($ in thousands, except per share data) 2006 2005 2006 2005 - ------------------------------------------------------------------------------------------- ------------------------ INTEREST AND DIVIDEND INCOME Loans receivable $ 28,203 $ 20,800 $ 55,134 $ 39,611 Securities 3,222 1,723 5,969 3,286 Other interest-earning assets 312 173 700 367 - ------------------------------------------------------------------------------------------- ------------------------ TOTAL INTEREST AND DIVIDEND INCOME 31,737 22,696 61,803 43,264 - ------------------------------------------------------------------------------------------- ------------------------ INTEREST EXPENSE Deposits 15,516 10,375 30,075 19,414 Subordinated debentures 1,817 2,003 3,725 4,063 Subordinated debentures - capital securities 1,090 1,089 2,180 2,179 Other borrowed funds 224 33 247 127 - ------------------------------------------------------------------------------------------- ------------------------ TOTAL INTEREST EXPENSE 18,647 13,500 36,227 25,783 - ------------------------------------------------------------------------------------------- ------------------------ NET INTEREST AND DIVIDEND INCOME 13,090 9,196 25,576 17,481 Provision for loan losses 589 452 950 1,485 - ------------------------------------------------------------------------------------------- ------------------------ NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 12,501 8,744 24,626 15,996 - ------------------------------------------------------------------------------------------- ------------------------ NONINTEREST INCOME Customer service fees 100 79 259 155 Income from mortgage lending activities 540 301 789 450 Income from the early repayment of mortgage loans 972 1,568 2,646 2,222 Commissions and fees - 59 - 59 Gain from early call of investment securities - 2 - 1 - ------------------------------------------------------------------------------------------- ------------------------ TOTAL NONINTEREST INCOME 1,612 2,009 3,694 2,887 - ------------------------------------------------------------------------------------------- ------------------------ NONINTEREST EXPENSES Salaries and employee benefits 1,304 1,382 2,763 2,667 Occupancy and equipment, net 425 357 828 714 Data processing 180 146 358 282 Professional fees and services 310 267 535 406 Stationery, printing and supplies 60 55 113 109 Postage and delivery 33 32 74 65 FDIC and general insurance 94 77 182 156 Director and committee fees 100 131 222 253 Advertising and promotion 79 50 151 97 All other 147 252 302 374 - ------------------------------------------------------------------------------------------- ------------------------ TOTAL NONINTEREST EXPENSES 2,732 2,749 5,528 5,123 - ------------------------------------------------------------------------------------------- ------------------------ Earnings before income taxes 11,381 8,004 22,792 13,760 Provision for income taxes 4,973 3,481 9,964 5,989 =========================================================================================== ======================== NET EARNINGS $ 6,408 $ 4,523 $ 12,828 $ 7,771 =========================================================================================== ======================== BASIC EARNINGS PER SHARE $ 0.82 $ 0.72 $ 1.64 $ 1.24 DILUTED EARNINGS PER SHARE $ 0.77 $ 0.67 $ 1.54 $ 1.15 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) SIX-MONTHS ENDED JUNE 30, --------------------------------------- 2006 2005 ------------------- ------------------ ($ thousands) SHARES AMOUNT SHARES AMOUNT - -------------------------------------------------------------------------- ------------------ CLASS A COMMON STOCK Balance at beginning of period 7,438,058 $ 7,438 5,886,433 $ 5,886 Issuance of shares upon the conversion of debentures 25,847 26 8,068 8 - -------------------------------------------------------------------------- ------------------ Balance at end of period 7,463,905 7,464 5,894,501 5,894 - -------------------------------------------------------------------------- ------------------ 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 381 102 - -------------------------------------------------------------------------- ------------------ Balance at end of period 65,690 39,063 - -------------------------------------------------------------------------- ------------------ RETAINED EARNINGS Balance at beginning of period 63,046 44,862 Net earnings for the period 12,828 7,771 - -------------------------------------------------------------------------- ------------------ Balance at end of period 75,874 52,633 - -------------------------------------------------------------------------- ------------------ ========================================================================== ================== TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD 7,848,905 $149,413 6,279,501 $97,975 ========================================================================== ================== See accompanying notes to condensed consolidated financial statements.
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) SIX-MONTHS ENDED JUNE 30, -------------------------- ($ in thousands) 2006 2005 - ---------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 12,828 $ 7,771 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 275 257 Provision for loan losses 950 1,485 Deferred income tax benefit (331) (705) Amortization of deferred debenture offering costs 563 586 Amortization of premiums (accretion) of discounts and deferred loan fees, net (5,537) (3,227) Net decrease in accrued interest payable on debentures (1,027) (3,172) Net decrease in official checks outstanding (161) (2,368) Net increase in loan fees receivable (654) (1,193) Net change in all other assets and liabilities 2,635 5,297 - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,541 4,731 - ---------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Maturities and calls of securities held to maturity 61,785 42,195 Purchases of securities held to maturity (110,859) (25,523) Net increase in loans receivable (70,886) (159,333) Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (572) (891) Purchases of premises and equipment, net (126) (189) - ---------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (120,658) (143,741) - ---------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in deposits 75,625 223,634 Net increase in mortgage escrow funds payable 3,142 3,293 Net decrease in FHLB advances - (36,000) Principal repayments of debentures and mortgage note payable (4,757) (14,356) Gross proceeds from debenture issuance costs - 14,000 Debenture issuance costs (69) (963) - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 73,941 189,608 - ---------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (37,176) 50,598 Cash and cash equivalents at beginning of period 56,716 24,599 ================================================================================================================ Cash and cash equivalents at end of period $ 19,540 $ 75,197 ================================================================================================================ SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 36,277 $ 27,699 Income taxes 12,181 6,095 Noncash activities: Conversion of debentures and accrued interest into Class A common stock 407 110 - ---------------------------------------------------------------------------------------------------------------- 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 originating for its loan portfolio mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). These loans have an average life of approximately three years. The Company tends to lend in areas that are in the process of being revitalized, with a concentration of loans on properties located in New York State and the State of Florida. A significant portion of the residential properties are located in New York City and are subject to rent control and rent stabilization laws, which limit the ability of the property owners to increase rents. The Bank is a nationally chartered, full-service commercial bank that has its headquarters and full-service banking office in Rockefeller Plaza in New York City, and a total of five full-service banking offices in Pinellas County, Florida - four in Clearwater and one in South Pasadena. The Bank 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 Intervest Mortgage Corporation and the Holding Company. 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 June 30, 2006 $ 300,779 $ - $ 3,212 $ 297,567 4.12% 1.3 Years At December 31, 2005 $ 251,508 $ 14 $ 2,434 $ 249,088 3.26% 1.1 Years - -------------------------------------------------------------------------------------------
All the securities at June 30, 2006 and December 31, 2005 were debt obligations of U.S. government corporations or sponsored agencies (such as FHLB, FNMA, FHLMC or FFCB) and were held by the Bank. The securities have fixed rates or have predetermined scheduled rate increases, and many have call features that allow the issuer to call the security at par before its stated maturity without penalty. At June 30, 2006, the portfolio consisted of 185 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, which have steadily increased since June 2004. In general, as interest rates rise, the fair value of fixed rate securities will decrease; as interest rates fall, their fair value will increase. Management views the unrealized losses noted above to be temporary based on the impact of 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 June 30, 2006: Due in one year or less $ 117,839 $ 116,758 3.39% Due after one year through five years 182,940 180,809 4.59% ---------------------------------------------------------------------------------------------- $ 300,779 $ 297,567 4.12% ---------------------------------------------------------------------------------------------- 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 June 30, 2006 At December 31, 2005 ------------------------ ------------------------ ($ in thousands) # of Loans Amount # of Loans Amount ------------------------------------------------------------------------------------------- Commercial real estate loans 275 $ 795,945 264 $ 735,650 Residential multifamily loans 235 572,897 234 538,760 Land development and other land loans 30 81,837 31 105,251 Residential 1-4 family loans 2 53 3 100 Commercial business loans 21 943 22 1,089 Consumer loans 16 255 10 194 ------------------------------------------------------------------------------------------- Loans receivable 579 1,451,930 564 1,381,044 ------------------------------------------------------------------------------------------- Deferred loan fees (12,494) (13,058) ------------------------------------------------------------------------------------------- Loans receivable, net of deferred fees 1,439,436 1,367,986 ------------------------------------------------------------------------------------------- Allowance for loan losses (16,131) (15,181) ------------------------------------------------------------------------------------------- Loans receivable, net $ 1,423,305 $ 1,352,805 -------------------------------------------------------------------------------------------
At June 30, 2006, there were five real estate loans totaling $3.1 million on nonaccrual status, compared to two real estate loans totaling $0.7 million at December 31, 2005. Nonaccrual loans are considered impaired under the criteria of SFAS No. 114, but no valuation allowance was maintained at any time since the Company believes that the estimated fair value of the underlying collateral for each loan exceeded its recorded investment in each loan. At June 30, 2006 and December 31, 2005, there were no other impaired loans. At June 30, 2006 and December 31, 2005, there were $1.3 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 $66,000 for the quarter ended June 30, 2006 and $117,000 for the six-months ended June 30, 2006, compared to none and $36,000, respectively, for the same periods of 2005. The average principal balance of nonaccrual loans for the quarter and six-months ended June 30, 2006 and 2005 was $2.4 million and $2.7 million for the 2006 periods, and $0.8 million and $2.7 million for the 2005 periods, respectively. NOTE 5 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
Quarter Ended June 30, Six-Months Ended June 30, ---------------------------- ---------------------------- ($ in thousands) 2006 2005 2006 2005 - -------------------------------------------------------------------------------------------- Balance at beginning of period $ 15,542 $ 12,139 $ 15,181 $ 11,106 Provision charged to operations 589 452 950 1,485 - -------------------------------------------------------------------------------------------- Balance at end of period $ 16,131 $ 12,591 $ 16,131 $ 12,591 - --------------------------------------------------------------------------------------------
NOTE 6 - DEPOSITS Scheduled maturities of certificates of deposit accounts are as follows:
At June 30, 2006 At December 31, 2005 ------------------------- ------------------------- Amount Wtd-Avg Wtd-Avg ($ in thousands) Stated Rate Amount Stated Rate ------------------------------------------------------------------------------- Within one year $ 517,657 4.43% $ 381,968 3.77% Over one to two years 224,135 4.33 259,698 4.30 Over two to three years 152,673 4.27 126,546 4.13 Over three to four years 202,333 4.61 160,344 4.43 Over four years 93,875 4.82 189,958 4.69 ------------------------------------------------------------------------------- $ 1,190,673 4.45% $ 1,118,514 4.18% -------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $412.9 million and $371.8 million at June 30, 2006 and December 31, 2005, respectively. At June 30, 2006, certificate of deposit accounts of $100,000 or more by remaining maturity were as follows: $190.7 million due within one year; $75.5 million due over one to two years; $45.7 million due over two to three years; $69.1 million due over three to four years; and $31.9 million due over four years. 9 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE Subordinated debentures by series and mortgage note payable are summarized as follows:
At June 30, At December 31, ($ in thousands) 2006 2005 - ------------------------------------------------------------------------------------------------------------- INTERVEST MORTGAGE CORPORATION: Series 06/28/99 - interest at 9% fixed - due July 1, 2006 $ - $ 2,000 Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250 Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750 Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750 Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250 Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250 Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000 Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000 Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 - 1,500 Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000 Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 3,000 Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 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 ------------------------------ 79,250 82,750 INTERVEST BANCSHARES CORPORATION: Series 05/14/98 - interest at 8% fixed - due July 1, 2008 1,890 2,140 Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 - 1,250 Series 12/15/00 - interest at 9% fixed - due April 1, 2008 1,250 1,250 ------------------------------ 3,140 4,640 INTERVEST NATIONAL BANK: Mortgage note payable(1) - interest at 7% fixed - due February 1, 2017 222 229 - ------------------------------------------------------------------------------------------------------------- $ 82,612 $ 87,619 - ------------------------------------------------------------------------------------------------------------- (1) The note cannot be prepaid except during the last year of its term.
Scheduled contractual maturities as of June 30, 2006 were as follows:
($ in thousands) Principal Accrued Interest -------------------------------------------------------------------------------- For the period July 1, 2006 to December 31, 2006 $ 2,507 $ 1,228 For the year ended December 31, 2007 7,015 227 For the year ended December 31, 2008 15,906 2,348 For the year ended December 31, 2009 13,517 361 For the year ended December 31, 2010 13,019 298 Thereafter 30,648 444 -------------------------------------------------------------------------------- $ 82,612 $ 4,906 --------------------------------------------------------------------------------
10 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED Intervest Bancshares Corporation repaid the following debentures in the first half of 2006: - - Series 12/15/00 due 4/1/06 were repaid early on 3/1/06 for $1.25 million of principal and $18,000 of accrued interest; Intervest Mortgage Corporation repaid the following debentures in the first half of 2006: - - Series 6/28/99 due 7/1/06 were repaid early on 5/1/06 for $2.0 million of principal and $1.6 million of accrued interest; - - Series 1/21/03 due 7/1/06 were repaid early on 5/1/06 for $1.5 million of principal and $8,000 of accrued interest; Interest is paid quarterly on Intervest Mortgage Corporation's debentures except for the following: all of Series 9/18/00; $0.6 million of Series 8/01/01; $0.2 million of Series 1/17/02; $1.1 million of Series 8/05/02; $1.8 million of Series 11/28/03; $1.9 million of Series 6/7/04; $1.9 million of Series 3/21/05; $1.8 million of Series 8/12/05 and $2.3 million of Series 6/12/06, all of which accrue and compound interest quarterly, with such interest due and payable at maturity. The holders of Intervest Mortgage Corporation's Series 9/18/00 and 1/17/02 through 8/12/05 debentures can require Intervest Mortgage Corporation, on a first come basis during a specified time, to repurchase the debentures for face amount plus accrued interest once each year (beginning 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, Series 8/12/05 and Series 6/12/06, which would be at a premium of 1% if they were redeemed prior to October 1, 2006, April 1, 2007 and January 1, 2008, respectively. All the debentures are unsecured and subordinate to all present and future senior indebtedness, as defined in the indenture related to each debenture. In July 2006, Intervest Mortgage Corporation completed a public offering of $16 million in aggregate principal amount of Series 6/12/06 debentures, maturing at various times through July 1, 2014 and at fixed rates of interest ranging from 6.50% to 7.00%. Net proceeds after offering costs amounted to approximately $14.7 million. 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 half of 2006, $413,000 of debentures ($250,000 of principal and $163,000 of accrued interest) were converted into shares of Class A common stock at $16.00 per share. At June 30, 2006, interest accrued and compounded quarterly on $1.4 million of the Holding Company's convertible debentures at the rate of 8% per annum, while $0.5 million of the convertible debentures pay interest quarterly at the rate of 8% per annum. All accrued interest of $1.3 million is due and payable at maturity whether by acceleration, redemption or otherwise. Any convertible debenture holder may, on or before July 1 of each year, elect to be paid all accrued interest and to thereafter receive regular quarterly payments of interest. The Holding Company may redeem any of its debentures, in whole or in part, at any time for face value. NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES Capital Securities (commonly referred to as trust preferred securities) are summarized as follows:
At June 30, 2006 At December 31, 2005 ------------------------ ------------------------ Accrued Accrued ($ in thousands) Principal Interest Principal Interest - --------------------------------------------------------------------------------------------------------------- Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 59 $ 15,464 $ 59 Capital Securities II - debentures due September 17, 2033 15,464 35 15,464 35 Capital Securities III - debentures due March 17, 2034 15,464 31 15,464 31 Capital Securities IV - debentures due September 20, 2034 15,464 29 15,464 29 - --------------------------------------------------------------------------------------------------------------- $ 61,856 $ 154 $ 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 June 30, 2006, the Bank had agreements with correspondent banks whereby it could borrow up to $16 million on an unsecured basis. In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB), the Bank can also borrow from these institutions on a secured basis. At June 30, 2006, the Bank had available collateral consisting of investment securities to support total borrowings of $292 million from the FHLB and FRB. At June 30, 2006, there were no borrowings outstanding from any of the sources noted above. 12 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT, CONTINUED The following is a summary of certain information regarding short-term borrowings in the aggregate:
Quarter Ended June 30, Six-Months Ended June 30, -------------------------------------------------------------- ($ in thousands) 2006 2005 2006 2005 - ------------------------------------------------------------------------------------------------------------------- Balance at period end $ - $ - $ - $ - Maximum amount outstanding at any month end $ 42,000 $ 6,000 $ 42,000 $ 17,000 Average outstanding balance for the period $ 17,382 $ 3,824 $ 9,496 $ 8,840 Weighted-average interest rate paid for the period 5.08% 3.04% 5.08% 2.71% Weighted-average interest rate at period end -% -% -% -% - -------------------------------------------------------------------------------------------------------------------
NOTE 10 - COMMON STOCK WARRANTS At June 30, 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 June 30, 2006 501,465 $ 6.67 Remaining contractual life in years at June 30, 2006 (1) 0.6 - ------------------------------------------------------------------------------------------------------
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 June 30, 2006 145,000 50,000 195,000 $ 7.52 Remaining contractual life in years at June 30, 2006 (1) 1.6 1.6 1.6 - --------------------------------------------------------------------------------------------------------------------- (1) At June 30, 2006, the intrinsic value and weighted-average remaining contractual life for all warrants was $23.4 million and 0.9 years, respectively.
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 six-months of 2006 and no compensation expense recorded in any of the reporting periods in connection with the Company's outstanding warrants. NOTE 11 - EARNINGS PER SHARE (EPS) Basic and diluted EPS are calculated in accordance with SFAS No. 128, "Earnings per Share." Basic EPS is calculated by dividing net earnings by the weighted-average number of shares of common stock outstanding. Diluted EPS is calculated by dividing adjusted net earnings by the weighted-average number of shares of common stock and dilutive potential common stock shares that may be outstanding in the future. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock warrants (the number of which is computed using the "treasury stock method") and from outstanding convertible debentures (the number of which is computed using the "if converted method"). Diluted EPS considers the potential dilution that could occur if the Company's outstanding common stock warrants and convertible debentures were converted into common stock that then shared in the Company's earnings (as adjusted for interest expense, net of taxes, that would no longer occur if the debentures were converted). 13 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED - -------------------------------------------------------------------------------- NOTE 11 - EARNINGS PER SHARE (EPS), CONTINUED Net earnings applicable to common stock and the weighted-average number of shares used for basic and diluted earnings per share computations are summarized in the table that follows:
Quarter Ended Six-Months Ended June 30, June 30, -------------------------------------------------- ($ in thousands, except share and per share amounts) 2006 2005 2006 2005 - --------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Net earnings applicable to common stockholders $ 6,408 $ 4,523 $ 12,828 $ 7,771 Average number of common shares outstanding 7,842,288 6,275,954 7,834,063 6,274,904 - --------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 0.82 $ 0.72 $ 1.64 $ 1.24 - --------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share: Net earnings applicable to common stockholders $ 6,408 $ 4,523 $ 12,828 $ 7,771 Adjustment to net earnings from assumed conversion of debentures (1) 37 55 77 110 -------------------------------------------------- Adjusted net earnings for diluted earnings per share computation $ 6,445 $ 4,578 $ 12,905 $ 7,881 -------------------------------------------------- Average number of common shares outstanding: Common shares outstanding 7,842,288 6,275,954 7,834,063 6,274,904 Potential dilutive shares resulting from exercise of warrants (2) 327,963 249,763 319,658 252,509 Potential dilutive shares resulting from conversion of debentures (3) 202,716 344,575 207,696 343,390 -------------------------------------------------- Total average number of common shares outstanding used for dilution 8,372,967 6,870,292 8,361,417 6,870,803 - --------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share $ 0.77 $ 0.67 $ 1.54 $ 1.15 - --------------------------------------------------------------------------------------------------------------------------- (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 June 30, 2006 and 2005 totaling $3.2 million and $4.8 million, respectively, were convertible into common stock at a price of $16.00 per share in 2006 and $14.00 per share in 2005 and resulted in additional common shares (based on average balances outstanding).
NOTE 12 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments are in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. The Company's maximum exposure to credit risk is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and normally require payment of fees. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The contractual amounts of off-balance sheet financial instruments is summarized as follows:
At June 30, At December 31, ($ in thousands) 2006 2005 ---------------------------------------------------------- Unfunded loan commitments $ 131,562 $ 101,597 Available lines of credit 906 737 Standby letters of credit 100 100 ---------------------------------------------------------- $ 132,568 $ 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 June 30, 2006 and December 31, 2005, assuming the Company no longer included its trust preferred securities in Tier 1 Capital, the Company would still exceed the well capitalized threshold under the regulatory framework for prompt corrective action. Management believes, as of June 30, 2006 and December 31, 2005, that the Company and the Bank met all capital adequacy requirements to which they are subject. As of June 30, 2006, the most recent notification from the Bank's regulators categorized the Bank as a well-capitalized institution under the regulatory framework for prompt corrective action, which requires minimum Tier 1 leverage and Tier 1 and total risk-based capital ratios of 5%, 6% and 10%, respectively. Management is not aware of any current conditions or events outstanding that would change the designation from well capitalized. At June 30, 2006, the actual capital of the Bank on a percentage basis was as follows:
Actual Minimum To Be Considered Ratios Requirement Well Capitalized ------- ------------ ----------------- Total capital to risk-weighted assets 12.76% 8.00% 10.00% Tier 1 capital to risk-weighted assets 11.66% 4.00% 6.00% Tier 1 capital to total average assets - leverage ratio 9.91% 4.00% 5.00%
At June 30, 2006, the actual capital of the Company (consolidated) on a percentage basis was as follows:
Actual Minimum To Be Considered Ratios Requirement Well Capitalized ------- ------------ ---------------- Total capital to risk-weighted assets 14.62% 8.00% NA Tier 1 capital to risk-weighted assets 12.91% 4.00% NA Tier 1 capital to total average assets - leverage ratio 11.07% 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 June 30, 2006, Intervest Securities Corporation's net capital was $0.5 million. 15 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 14 - CONTINGENCIES After the mailing of the Company's 2006 proxy statement for its 2006 annual meeting of shareholders, a lawsuit was filed in the Court of Chancery of the State of Delaware, individually and as a class action on behalf of Class A stockholders. The action challenged the proposed amendment and extension of warrants held by the Company's Chairman, which was one of the items on the agenda for the annual meeting. Although the Company denies any wrongdoing or liability, it determined that it is in the best interests of the Company and its stockholders to reach a prompt and amicable settlement with respect to the action. In that regard, on May 15, 2006, the Company entered into a Memorandum of Understanding with the plaintiff in the matter. The Memorandum provides, among other things, that: (i) if the amendments are approved by the stockholders, the authority conferred on the directors will not provide for an extension of the terms of the warrants for more than 2 years; (ii) in determining incentive compensation of the Chairman, the Company's Compensation Committee will take into consideration any extension of the term of the warrants, the value of the extension and any related expense to the Company; and (iii) the Company agreed to send its shareholders a supplement to its proxy statement. The proposed amendments were approved by the Company's shareholders at the Annual Meeting of the Company held on May 25, 2006. The parties have agreed to move forward with a Stipulation of Settlement and dismissal of the action upon the terms of the Memorandum, although any such settlement is subject to the approval by the Court of Chancery. The proposed settlement will not have a material effect on the Company's business, results of operations, financial position or liquidity. The Company is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as foreclosure proceedings. Based on review and consultation with legal counsel, management does not believe that there is any pending or threatened proceeding against the Company which, if determined adversely, would have a material effect on the business, results of operations, financial position or liquidity of the Company. NOTE 15 - 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 June 30, 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 six-months 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. 16 INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 15 - RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED 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. 17 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 June 30, 2006 and for the three- and six-month periods ended June 30, 2006, and 2005 presented in this document, in accordance with the standards established by the Public Company Accounting Oversight Board. The report of Hacker, Johnson & Smith, P.A., P.C. furnished pursuant to Article 10 of Regulation S-X is included herein. 18 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 June 30, 2006 and the related condensed consolidated statements of earnings for the three- and six-month periods ended June 30, 2006 and 2005, and the related condensed consolidated statements of changes in stockholders' equity and cash flows for the six-month periods ended June 30, 2006 and 2005. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of the Company as of December 31, 2005, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 3, 2006, we, based on our audit expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Hacker, Johnson & Smith, P.A., P.C. - --------------------------------------- HACKER, JOHNSON & SMITH, P.A.,P.C. Tampa, Florida July 21, 2006 19 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 units, supply of and demand for properties, ability to obtain and maintain adequate occupancy of the properties, 20 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 JUNE 30, 2006 AND DECEMBER 31, 2005 ------------------------------------------------------------------------ OVERVIEW - -------- Total assets at June 30, 2006 increased to $1.79 billion, from $1.71 billon at December 31, 2005. Total liabilities at June 30, 2006 increased to $1.64 billion, from $1.57 billion at December 31, 2005, and stockholders' equity increased to $149.4 million at June 30, 2006, from $136.2 million at December 31, 2005. Book value per common share increased to $19.04 at June 30, 2006, from $17.41 at December 31, 2005. Selected balance sheet information as of June 30, 2006 follows:
Intervest Intervest Intervest Inter- National Mortgage Securities Company ($ in thousands) Holding Company Bank Corp. Corp. Amounts (1) Consolidated - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 6,397 $ 14,672 $ 13,819 $ 506 $ (15,854) $ 19,540 Security investments - 306,592 - - - 306,592 Loans receivable, net of deferred fees 9,196 1,336,283 93,957 - - 1,439,436 Allowance for loan losses (85) (15,740) (306) - - (16,131) Investment in consolidated subsidiaries 195,758 - - - (195,758) - All other assets 4,734 31,764 5,591 6 140 42,235 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 216,000 $1,673,571 $ 113,061 $ 512 $ (211,472) $ 1,791,672 - ------------------------------------------------------------------------------------------------------------------- Deposits $ - $1,466,833 $ - $ - $ (15,878) 1,450,955 Borrowed funds and related interest payable 66,469 222 82,837 - - 149,528 All other liabilities 118 39,831 1,655 8 164 41,776 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 66,587 1,506,886 84,492 8 (15,714) 1,642,259 - ------------------------------------------------------------------------------------------------------------------- Stockholders' equity 149,413 166,685 28,569 504 (195,758) 149,413 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 216,000 $1,673,571 $ 113,061 $ 512 $ (211,472) $ 1,791,672 - ------------------------------------------------------------------------------------------------------------------- (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 June 30, 2006 At December 31, 2005 ---------------------------- ---------------------------- Carrying % of Carrying % of ($ in thousands) Value Total Assets Value Total Assets - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 19,540 1.1% $ 56,716 3.3% Security investments 306,592 17.1 256,749 15.0 Loans receivable, net of deferred fees and loan loss allowance 1,423,305 79.4 1,352,805 79.3 All other assets 42,235 2.4 40,153 2.4 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,791,672 100.0% $ 1,706,423 100.0% - --------------------------------------------------------------------------------------------------------------------------- Deposits $ 1,450,955 81.0% $ 1,375,330 80.6% Borrowed funds and related interest payable 149,528 8.4 155,725 9.1 All other liabilities 41,776 2.3 39,190 2.3 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,642,259 91.7 1,570,245 92.0 - --------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 149,413 8.3 136,178 8.0 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,791,672 100.0% $ 1,706,423 100.0% - ---------------------------------------------------------------------------------------------------------------------------
21 CASH AND CASH EQUIVALENTS - ------------------------- Cash and cash equivalents decreased to $19.5 million at June 30, 2006, from $56.7 million at December 31, 2005. The decrease reflected the investment of funds into loans and securities. SECURITY INVESTMENTS - -------------------- Securities, which the Company has the intent and ability to hold to maturity, are classified as held to maturity and carried at amortized cost. Currently, only the Bank holds such security investments, which increased to $300.8 million at June 30, 2006, from $251.5 million at December 31, 2005. The increase reflected new purchases exceeding maturities and calls during the period. The Bank continues to invest in short-term (up to 5 year maturities) U.S. government agency debt obligations to emphasize liquidity and to currently target its loan-to-deposit ratio at approximately 85%. This ratio stood at 88% at June 30, 2006. At June 30, 2006, the held-to-maturity portfolio consisted of short-term debt obligations of the Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation with a weighted-average yield of 4.12% and a weighted-average remaining maturity of 1.3 years, compared to 3.26% and 1.1 years, respectively, at December 31, 2005. The securities are fixed rate or have predetermined scheduled rate increases, and many have call features that allow the issuer to call the security before its stated maturity without penalty. At June 30, 2006 and December 31, 2005, the held-to-maturity portfolio's estimated fair value was $297.6 million and $249.1 million, respectively. At June 30, 2006, the held-to-maturity portfolio had unrealized losses totaling $3.2 million. Management believes that the cause of these unrealized losses is directly related to changes in market interest rates, which have steadily increased since June 30, 2004. In general, as interest rates rise, the fair value of fixed-rate securities will decrease; as interest rates fall, their fair value will increase. Management views the unrealized losses noted above to be temporary based on the impact of interest rates, the very short maturities of the investments and their high credit quality. In addition, the Bank has the ability and intent to hold its investments for a period of time sufficient for the fair value of the securities to recover. To date, the Bank has always recovered the cost of its investment securities upon maturity. In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in their capital stock, which amounted to $3.4 million and $2.4 million, respectively, at June 30, 2006. The FRB stock currently pays a dividend of 6%, while the FHLB stock dividend fluctuates and most recently was 5.25%. The total investment, which amounted to $5.8 million at June 30, 2006, compared to $5.2 million at December 31, 2005, fluctuates based on the Bank's capital level for the FRB stock and the Bank's loans and borrowings for the FHLB stock. LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------- Loans receivable, net of deferred fees and allowance for loan losses, increased to $1.42 billion at June 30, 2006 from $1.35 billion at December 31, 2005. The growth reflected new mortgage loan originations secured by commercial and multifamily real estate exceeding principal repayments. New loan originations totaled $146.6 million and $290.1 million in the second quarter and first half of 2006, compared to $173.1 million and $324.6 million in the second quarter and first half of 2005, respectively. Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage loans secured by commercial and multifamily real estate properties (including rental and cooperative/condominium apartment buildings, office buildings, mixed-use properties, shopping centers, hotels, restaurants, industrial properties, parking lots/garages and vacant land). At June 30, 2006, such loans consisted of 540 loans with an aggregate principal balance of $1.45 billion and an average principal size of $2.7 million. Loans with principal balances of $5.0 million or more aggregated to 74 loans or $684.9 million, with the largest loan amounting to $20.5 million. At June 30, 2006, there were five real estate loans (one collateralized by a multifamily property, one by a commercial property, one by vacant land and two by cash proceeds) totaling $3.1 million on nonaccrual status, compared to two loans totaling $0.7 million at December 31, 2005. With respect to two of the loans totaling $0.7 million, the borrower declared bankruptcy and the Bankruptcy Trustee sold the properties collateralizing the loans. The resulting proceeds serve as collateral and are sufficient to provide for repayment of the Company's recorded investment. The Company is taking appropriate action to obtain the proceeds from the Bankruptcy Trustee. With 22 respect to the remaining loans, foreclosure actions have 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 collateralizing each loan exceeded its recorded investment in each loan. At June 30, 2006 and December 31, 2005, there were no other impaired loans. At June 30, 2006, the Bank held four real estate loans totaling approximately $8.6 million, each of which are collateralized by real estate located in New Jersey. The borrowing entities owning the properties are controlled by a principal who is currently experiencing legal and financial difficulties and for whom a court-appointed fiscal agent has been appointed to administer his assets. As of June 30, 2006, three of these loans totaling $7.8 million were on accruing status and the remaining loan of $0.8 million was on nonaccrual status. All four of these loans were originated within the Bank's underwriting guidelines. Although the Bank believes that all the loans are well collateralized, there can be no assurance that loan chargeoffs or significant expenses will not be incurred by the Bank with respect to the ultimate collection of the loans. At June 30, 2006 and December 31, 2005, there were $1.3 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 process of collection. The amount at June 30, 2006 represented one loan that is past its maturity date, but with the agreement of management, the borrower continues to make monthly payments of interest and principal. Based upon discussions with the borrower, it is anticipated that this loan will be repaid in full or refinanced in the near term. At June 30, 2006, the allowance for loan losses amounted to $16.1 million, compared to $15.2 million at December 31, 2005. The allowance represented 1.12% of total loans, net of deferred fees, outstanding at June 30, 2006, compared to 1.11% at December 31, 2005. The increase in the allowance was due to provisions aggregating $1.0 million during the period resulting largely from growth in loans outstanding, which amounted to $70.9 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 $42.2 million at June 30, 2006, from $40.2 million at December 31, 2005, primarily due to an increase in accrued interest receivable, which fluctuates based on the amount of loans, investments and other interest-earning assets outstanding and the timing of interest payments received. DEPOSITS - -------- Deposits increased to $1.45 billion at June 30, 2006, from $1.38 billion at December 31, 2005, reflecting increases in certificate of deposit accounts of $72.2 million and an increase in checking, savings and money market accounts totaling $3.4 million. At June 30, 2006, certificate of deposit accounts totaled $1.19 billion, and checking, savings and money market accounts aggregated $260.3 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 82% of total deposits at June 30, 2006 and 81% at December 31, 2005. At June 30, 2006 and December 31, 2005, certificate of deposit accounts included $48.3 million and $40.5 million, respectively, of brokered deposits. BORROWED FUNDS AND RELATED INTEREST PAYABLE - ------------------------------------------- At June 30, 2006, borrowed funds and related interest payable decreased to $149.5 million from $155.7 million at December 31, 2005. The decrease was primarily due to $4.8 million of principal repayments of debentures and a $1.2 million decrease in related interest payable due to repayments of interest partially offset by new accruals. ALL OTHER LIABILITIES - --------------------- All other Liabilities increased to $41.8 million at June 30, 2006, from $39.2 million at December 31, 2005. The increase was primarily due to a higher level of mortgage escrow funds payable (which represent advance payments made to the Company by borrowers for property taxes and insurance that are remitted by the Company to third parties), partially offset by a decrease in income taxes payable. 23 STOCKHOLDERS' EQUITY - -------------------- Stockholders' equity increased to $149.4 million at June 30, 2006 as follows:
($ in thousands) Amount Shares Per Share --------------------------------------------------------------------------------------------------- Stockholders' equity at December 31, 2005 $136,178 7,823,058 $ 17.41 Net earnings for the period 12,828 - - Convertible debentures converted at election of debenture holders 407 25,847 15.75 --------------------------------------------------------------------------------------------------- Stockholders' equity at June 30, 2006 $149,413 7,848,905 $ 19.04 ---------------------------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2006 AND ---------------------------------------------------------------------------- 2005 ---- OVERVIEW - -------- Consolidated net earnings for the second quarter of 2006 increased by $1.9 million, or 42%, to $6.4 million, or $0.77 per diluted share, from $4.5 million, or $0.67 per diluted share, in the second 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 in the third quarter of 2005. The $1.9 million increase in earnings was due to a $3.9 million increase in net interest and dividend income, partially offset by a $0.4 million decrease in noninterest income, a $0.1 million increase in the provision for loan losses and $1.5 million increase in income tax expense. The Company's efficiency ratio, which is a measure of its ability to control expenses as a percentage of its revenues, improved to 19% in the second quarter of 2006, from 25% in the second quarter of 2005. The Company's return on average assets and equity was 1.42% and 17.66%, respectively, in the 2006 second quarter, compared to 1.26% and 19.01%, respectively, in the 2005 second quarter. Selected information regarding results of operations for the second quarter of 2006 follows:
Intervest Intervest Intervest Inter- National Mortgage Securities Holding Company ($ in thousands) Bank Corp. Corp. Company Amounts(2) Consolidated - ------------------------------------------------------------------------------------------------------------------------ Interest and dividend income $ 28,769 $ 2,923 $ 6 $ 181 $ (142) $ 31,737 Interest expense 15,882 1,717 - 1,190 (142) 18,647 ---------------------------------------------------------------------------- Net interest and dividend income 12,887 1,206 6 (1,009) - 13,090 Provision for loan losses 565 24 - - - 589 Noninterest income 1,339 1,646 - 114 (1,487) 1,612 Noninterest expenses 3,289 738 8 184 (1,487) 2,732 ---------------------------------------------------------------------------- Earnings before taxes 10,372 2,090 (2) (1,079) - 11,381 Provision for income taxes 4,507 966 (1) (499) - 4,973 - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 5,865 $ 1,124 $ (1) $ (580) $ - $ 6,408 - ------------------------------------------------------------------------------------------------------------------------ Intercompany dividends(1) (1,089) - - 1,089 - - - ------------------------------------------------------------------------------------------------------------------------ Net earnings after intercompany dividends $ 4,776 $ 1,124 $ (1) $ 509 $ - $ 6,408 - ------------------------------------------------------------------------------------------------------------------------ Net earnings after intercompany dividends for the same period of 2005 $ 3,316 $ 714 $ 13 $ 480 $ - $ 4,523 - ------------------------------------------------------------------------------------------------------------------------ (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 $13.1 million in the second quarter of 2006, from $9.2 million in the second quarter of 2005. The improvement was attributable to a $359 million increase in average interest-earning assets resulting from continued growth in loans of $295 million and a higher level of security and short-term investments aggregating $64 million. The growth in average assets was funded largely by $298 million of additional interest-bearing deposits and a $50 million increase in stockholders' equity. The Company's net interest margin increased to 2.94% in the second quarter of 2006, from 2.59% in the second quarter of 2005. The higher margin was due to the Company's yield on interest-earning assets increasing at a faster 24 pace than its cost of funds and an increase in its net interest-earning assets of $56 million resulting largely from the $26.3 million of proceeds from the issuance of common stock in the third quarter of 2005 and increased retained earnings. In a rising rate environment, the yield on interest-earning assets increased 75 basis points to 7.14% in the 2006 quarter due to rate increases on existing variable-rate loans indexed to the prime rate, higher yields on new mortgage loans originated and higher yields earned on security and other short-term investments. The cost of funds increased by 50 basis points to 4.65% in the 2006 quarter primarily due to higher rates paid on deposit accounts. The following table provides information on: average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period.
------------------------------------------------------------------ Quarter Ended ------------------------------------------------------------------ June 30, 2006 June 30, 2005 -------------------------------- -------------------------------- Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate(2) Balance Inc./Exp. Rate(2) - --------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans (1) $1,435,306 $ 28,203 7.88% $1,140,156 $ 20,800 7.32% Securities 322,628 3,222 4.01 260,383 1,723 2.65 Other interest-earning assets 25,882 312 4.84 23,799 173 2.92 - --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,783,816 $ 31,737 7.14% 1,424,338 $ 22,696 6.39% - --------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 15,865 14,900 - --------------------------------------------------------------------------------------------------------------------- Total assets $1,799,681 $1,439,238 - --------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest checking deposits $ 9,071 $ 43 1.90% $ 10,968 $ 42 1.54% Savings deposits 14,600 107 2.94 21,794 139 2.56 Money market deposits 243,698 2,484 4.09 191,078 1,308 2.75 Certificates of deposit 1,172,287 12,882 4.41 917,943 8,886 3.88 - --------------------------------------------------------------------------------------------------------------------- Total deposit accounts 1,439,656 15,516 4.32 1,141,783 10,375 3.64 - --------------------------------------------------------------------------------------------------------------------- FHLB advances and Fed funds purchased 17,382 220 5.08 3,824 29 3.04 Debentures and related interest payable 88,095 1,817 8.27 95,784 2,003 8.39 Debentures - capital securities 61,856 1,090 7.07 61,856 1,089 7.06 Mortgage note payable 225 4 7.13 238 4 7.00 - --------------------------------------------------------------------------------------------------------------------- Total borrowed funds 167,558 3,131 7.49 161,702 3,125 7.75 - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,607,214 $ 18,647 4.65% 1,303,485 $ 13,500 4.15% - --------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 5,722 5,734 Noninterest-bearing liabilities 41,614 34,865 Stockholders' equity 145,131 95,154 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,799,681 $1,439,238 - --------------------------------------------------------------------------------------------------------------------- Net interest and dividend income/spread $ 13,090 2.49% $ 9,196 2.24% - --------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/margin $ 176,602 2.94% $ 120,853 2.59% - --------------------------------------------------------------------------------------------------------------------- Ratio of total interest-earning assets to total interest-bearing liabilities 1.11 1.09 - --------------------------------------------------------------------------------------------------------------------- OTHER RATIOS: Return on average assets (2) 1.42% 1.26% Return on average equity (2) 17.66% 19.01% Noninterest expense to average assets (2) 0.61% 0.76% Efficiency ratio (3) 19% 25% Average stockholders' equity to average assets 8.06% 6.61% - --------------------------------------------------------------------------------------------------------------------- (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.
25 The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).
For the Quarter Ended June 30, 2006 vs 2005 ------------------------------------------------------------------ Increase (Decrease) Due To Change In: ------------------------------------------------------------------ ($ in thousands) Rate Volume Rate/Volume Total - --------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans $ 1,596 $ 5,401 $ 406 $ 7,403 Securities 885 412 202 1,499 Other interest-earning assets 114 15 10 139 - --------------------------------------------------------------------------------------------------------------- Total interest-earning assets 2,595 5,828 618 9,041 - --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Interest checking deposits 10 (7) (2) 1 Savings deposits 21 (46) (7) (32) Money market deposits 640 362 174 1,176 Certificates of deposit 1,216 2,467 313 3,996 - --------------------------------------------------------------------------------------------------------------- Total deposit accounts 1,887 2,776 478 5,141 - --------------------------------------------------------------------------------------------------------------- FHLB advances and Fed funds purchased 20 103 68 191 Debentures and accrued interest payable (29) (161) 4 (186) Debentures - capital securities 2 - (1) 1 Mortgage note payable - - - - - --------------------------------------------------------------------------------------------------------------- Total borrowed funds (7) (58) 71 6 - --------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,880 2,718 549 5,147 - --------------------------------------------------------------------------------------------------------------- Net change in interest and dividend income $ 715 $ 3,110 $ 69 $ 3,894 - ---------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses increased by $0.1 million to $0.6 million in the second quarter of 2006, from $0.5 million in the second quarter of 2005. The slight increase was due to the favorable impact of $0.3 million from the satisfaction of a $3.9 million nonaccrual loan in April 2005 that did not recur and $0.1 million of additional provision associated with various credit downgrades in the 2006 period. These increases of $0.4 million were largely offset by a $0.3 million reduction in the 2006 provision resulting from a decrease in the rate of net loan growth over the prior year period. Total loans outstanding grew by $37.7 million in the 2006 period, compared to $79.4 million in the 2005 period. NONINTEREST INCOME - ------------------ Noninterest income decreased by $0.4 million to $1.6 million in the second quarter of 2006, from $2.0 million in the second quarter of 2005. The lower income was primarily due to a $0.6 million decrease in income from the prepayment of mortgage loans (all of which was associated with the early satisfaction of a nonaccrual loan in April 2005), partially offset by a $0.2 million increase in fees earned from expired loan commitments. NONINTEREST EXPENSES - -------------------- Noninterest expenses remained unchanged totaling $2.7 million in the second quarter of 2006 and 2005, as additional payroll costs of $0.2 million and other operating expenses of $0.2 million associated with the Company's growth in staff and total assets were largely offset by a decrease of $0.3 million in executive bonuses and a nonrecurring Nasdaq National Market entry fee of $0.1 million paid in the 2005 period. The Company had 76 employees at June 30, 2006, compared to 68 at June 30, 2005. PROVISION FOR INCOME TAXES - -------------------------- The provision for income taxes increased by $1.5 million to $5.0 million in the second quarter of 2006, from $3.5 million in the second 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 43.5% in the 2005 period. 26 COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED JUNE 30, 2006 AND ------------------------------------------------------------------------------ 2005 ---- OVERVIEW - -------- Consolidated net earnings for the first half of 2006 increased by $5.0 million, or 64%, to $12.8 million, or $1.54 per diluted share, from $7.8 million, or $1.15 per diluted share, in the first half 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 in the third quarter of 2005. The $5.0 million increase in earnings was due to a $8.1 million increase in net interest and dividend income, a $0.8 million increase in noninterest income and a $0.5 million decrease in the provision for loan losses, partially offset by a $4.0 million increase in income tax expense and a $0.4 million increase in noninterest expenses. The Company's efficiency ratio, which is a measure of its ability to control expenses as a percentage of its revenues, improved to 19% in the first half of 2006, from 25% in the first half of 2005. The Company's return on average assets and equity also increased to 1.45% and 18.09%, respectively, in the 2006 first half, from 1.10% and 16.68% in the 2005 first half. Selected information regarding results of operations for the first half of 2006 follows:
Intervest Intervest Intervest Inter- National Mortgage Securities Holding Company ($ in thousands) Bank Corp. Corp. Company Amounts(2) Consolidated - ------------------------------------------------------------------------------------------------------------------------ Interest and dividend income $ 56,225 $ 5,608 $ 11 $ 379 $ (420) $ 61,803 Interest expense 30,742 3,499 - 2,406 (420) 36,227 ---------------------------------------------------------------------------- Net interest and dividend income 25,483 2,109 11 (2,027) - 25,576 Provision for loan losses 894 56 - - - 950 Noninterest income 3,272 3,085 - 233 (2,896) 3,694 Noninterest expenses 6,570 1,507 13 334 (2,896) 5,528 ---------------------------------------------------------------------------- Earnings before taxes 21,291 3,631 (2) (2,128) - 22,792 Provision for income taxes 9,270 1,678 (1) (983) - 9,964 - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 12,021 $ 1,953 $ (1) $ (1,145) $ - $ 12,828 - ------------------------------------------------------------------------------------------------------------------------ Intercompany dividends(1) (2,178) - - 2,178 - - - ------------------------------------------------------------------------------------------------------------------------ Net earnings after intercompany dividends $ 9,843 $ 1,953 $ (1) $ 1,033 $ - $ 12,828 - ------------------------------------------------------------------------------------------------------------------------ Net earnings after intercompany dividends for the same period of 2005 $ 5,408 $ 1,339 $ 11 $ 1,013 $ - $ 7,771 - ------------------------------------------------------------------------------------------------------------------------ (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 $25.6 million in the first half of 2006, from $17.5 million in the first half of 2005. The improvement was attributable to a $365 million increase in average interest-earning assets resulting from continued growth in loans of $308 million and a higher level of security and short-term investments aggregating $57 million. The growth in average assets was funded by $315 million of additional interest-bearing deposits and a $49 million increase in stockholders' equity. The Company's net interest margin increased to 2.93% in the first half of 2006, from 2.53% in the first half of 2005. The higher margin was due to the same factors discussed in the comparison of the quarterly periods on page 24. The yield on interest-earning assets increased 83 basis points to 7.09% in the 2006 first half due rate increases on existing variable-rate loans indexed to the prime rate, higher yields on new mortgage loans originated and higher yields earned on security and other short-term investments. The cost of funds increased by 53 basis points to 4.60% in the 2006 first half due to higher rates paid on deposit accounts. 27 The following table provides information on: average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period.
------------------------------------------------------------------ Six-Months Ended ------------------------------------------------------------------ June 30, 2006 June 30, 2005 -------------------------------- -------------------------------- Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate(2) Balance Inc./Exp. Rate(2) - --------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans (1) $1,414,189 $ 55,134 7.86% $1,106,197 $ 39,611 7.22% Securities 313,396 5,969 3.84 259,217 3,286 2.56 Other interest-earning assets 31,000 700 4.55 28,092 367 2.63 - --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,758,585 $ 61,803 7.09% 1,393,506 $ 43,264 6.26% - --------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 15,761 15,026 - --------------------------------------------------------------------------------------------------------------------- Total assets $1,774,346 $1,408,532 - --------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest checking deposits $ 8,803 $ 82 1.88% $ 12,198 $ 94 1.55% Savings deposits 15,590 228 2.95 23,521 252 2.16 Money market deposits 240,553 4,777 4.00 192,718 2,367 2.48 Certificates of deposit 1,160,143 24,988 4.34 881,191 16,701 3.82 - --------------------------------------------------------------------------------------------------------------------- Total deposit accounts 1,425,089 30,075 4.26 1,109,628 19,414 3.53 - --------------------------------------------------------------------------------------------------------------------- FHLB advances and Fed Funds purchased 9,496 239 5.08 8,840 119 2.71 Debentures and related interest payable 90,179 3,725 8.33 97,481 4,063 8.41 Debentures - capital securities 61,856 2,180 7.11 61,856 2,179 7.10 Mortgage note payable 226 8 7.14 239 8 6.98 - --------------------------------------------------------------------------------------------------------------------- Total borrowed funds 161,757 6,152 7.67 168,416 6,369 7.63 - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,586,846 $ 36,227 4.60% 1,278,044 $ 25,783 4.07% - --------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 6,111 5,959 Noninterest-bearing liabilities 39,590 31,362 Stockholders' equity 141,799 93,167 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,774,346 $1,408,532 - --------------------------------------------------------------------------------------------------------------------- Net interest and dividend income/spread $ 25,576 2.49% $ 17,481 2.19% - --------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/margin $ 171,739 2.93% $ 115,462 2.53% - --------------------------------------------------------------------------------------------------------------------- Ratio of total interest-earning assets to total interest-bearing liabilities 1.11 1.09 - --------------------------------------------------------------------------------------------------------------------- OTHER RATIOS: Return on average assets (2) 1.45% 1.10% Return on average equity (2) 18.09% 16.68% Noninterest expense to average assets (2) 0.62% 0.73% Efficiency ratio (3) 19% 25% Average stockholders' equity to average assets 7.99% 6.61% - --------------------------------------------------------------------------------------------------------------------- (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). 28
For the Six-Months Ended June 30, 2006 vs 2005 ------------------------------------------------------------------ Increase (Decrease) Due To Change In: ------------------------------------------------------------------ ($ in thousands) Rate Volume Rate/Volume Total - --------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans $ 3,540 $ 11,119 $ 864 $ 15,523 Securities 1,659 693 331 2,683 Other interest-earning assets 270 38 25 333 - --------------------------------------------------------------------------------------------------------------- Total interest-earning assets 5,469 11,850 1,220 18,539 - --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Interest checking deposits 20 (26) (6) (12) Savings deposits 93 (86) (31) (24) Money market deposits 1,465 593 352 2,410 Certificates of deposit 2,291 5,328 668 8,287 - --------------------------------------------------------------------------------------------------------------- Total deposit accounts 3,869 5,809 983 10,661 - --------------------------------------------------------------------------------------------------------------- FHLB advances and Fed Funds purchased 105 9 6 120 Debentures and accrued interest payable (39) (307) 8 (338) Debentures - capital securities 3 - (2) 1 Mortgage note payable - - - - - --------------------------------------------------------------------------------------------------------------- Total borrowed funds 69 (298) 12 (217) - --------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,938 5,511 995 10,444 - --------------------------------------------------------------------------------------------------------------- Net change in interest and dividend income $ 1,531 $ 6,339 $ 225 $ 8,095 - ---------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses decreased by $0.5 million to $1.0 million in the first half of 2006, from $1.5 million in the first half 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 $70.9 million in the 2006 period, compared to $159.3 million in the 2005 period. The provision for the 2005 period was also favorably impacted by $0.3 million from the satisfaction of a $3.9 million nonaccrual loan in April 2005. NONINTEREST INCOME - ------------------ Noninterest income increased by $0.8 million to $3.7 million in the first half of 2006, from $2.9 million in the first half of 2005. The higher income was primarily due to a $0.4 million increase in income from the prepayment of mortgage loans and a $0.3 million increase in fees earned from expired loan commitments. NONINTEREST EXPENSES - -------------------- Noninterest expenses increased by $0.4 million to $5.5 million in the first half of 2006, from $5.1 million in the first half of 2005. Noninterest expenses were higher primarily due to increases in payroll costs of $0.4 million and other operating expenses of $0.4 million associated with the Company's growth in staff and total assets, partially offset by a decrease of $0.3 million in executive bonuses and a nonrecurring Nasdaq National Market entry fee of $0.1 million paid in the 2005 period. The Company had 76 employees at June 30, 2006, compared to 68 at June 30, 2005. PROVISION FOR INCOME TAXES - -------------------------- The provision for income taxes increased by $4.0 million to $10.0 million in the first half of 2006, from $6.0 million in the first half 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 43.5% in the 2005 period. OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS -------------------------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. For a further discussion of these financial instruments, see note 12 to the condensed consolidated financial statements included in this report. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company manages its liquidity position on a daily basis to assure that funds are available to meet operations, loan and investment commitments, deposit withdrawals and the repayment of borrowed funds. The Company's primary sources of funds consist of the following: retail deposits obtained through the Bank's branch offices and through the mail; principal repayments of loans; maturities and calls of securities; issuance of debentures; 29 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 $1.45 billion at June 30, 2006 and time deposits represented 82%, or $1.19 billion, of those deposits. Additionally, time deposits of $100,000 or more at June 30, 2006 totaled $412.9 million and included $48.3 million of brokered deposits. Brokered deposits are sold by an investment firm, which is paid a fee by the Bank for placing the deposit. The Bank must maintain its status as a well-capitalized insured depository institution in order to solicit and accept, renew or roll over any brokered deposit without restriction. Time deposits are the only deposit accounts offered by the Bank that have stated maturity dates. These deposits are generally considered to be rate sensitive and have a higher cost than deposits with no stated maturities, such as checking, savings and money market accounts. At June 30, 2006, the Bank had $517.7 million of time deposits maturing by June 30, 2007. The Bank expects that a substantial portion of these deposits will be renewed and stay with the Bank. The Bank has in the past and may continue in the future to rely on capital contributions from the Holding Company to increase its capital to support its asset growth. The Holding Company made a total of $32.5 million of capital contributions to the Bank during 2005. No contributions of capital were made in the first half of 2006. At June 30, 2006, the Bank had excess capital to support an additional $394 million of growth and still maintain a well-capitalized designation. The Bank, from time to time, may borrow funds on an overnight or short-term basis to manage its liquidity needs. The Bank has agreements with correspondent banks whereby it could borrow up to $16 million on an unsecured basis at June 30, 2006. As a member of the FHLB and FRB, the Bank can also borrow from these institutions on a secured basis. In the first half of 2006, the Bank borrowed a total of $79.2 million of short-term FHLB advances and overnight borrowings from correspondent banks, all of which was repaid. At June 30, 2006 and December 31, 2005, there were no outstanding borrowings from any of the aforementioned sources. At June 30, 2006, the Bank had available collateral consisting of investment securities to support total borrowings of $292 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 June 30, 2006, $79.3 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 October 1, 2006 to October 1, 2013. In the first half of 2006, Intervest Mortgage Corporation repaid various debentures for a total of $5.2 million ($3.5 million of principal and $1.7 million of related accrued interest payable). At June 30, 2006, Intervest Mortgage Corporation had $8.6 million of debentures and related accrued interest payable maturing by June 30, 2007, which is expected to be repaid from cash flow generated from maturities of existing mortgage loans, ongoing operations and cash on hand. Intervest Mortgage Corporation completed a public offering of $16.0 million in aggregate principal amount of debentures in July 2006. 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 30 public offerings; exercise of outstanding common stock warrants and conversion of outstanding convertible debentures; the issuance of trust preferred securities through its wholly owned business trusts; and the direct issuance of other subordinated debentures to the public. In the first half of 2006, the Holding Company repaid various debentures totaling $1.3 million of principal and related accrued interest payable. At June 30, 2006, the Holding Company did not have any debentures maturing by June 30, 2007. In the third quarter of 2005, the Holding Company completed a public offering of 1,436,468 shares of its Class A common stock for $19.75 per share. The issuance of these shares, after underwriting commissions and expenses, resulted in $26.3 million of additional capital. 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 June 30, 2006, 49.8 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 June 30, 2006, the Company's commitments to lend aggregated $132.6 million. Although there is no certainty, management anticipates that the majority of these loan commitments will be funded over the next 12 months. If all these commitments were to close, they would be funded by the sources of funds described above. The Company considers its current liquidity and sources of funds sufficient to satisfy its outstanding lending commitments and its 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 June 30, 2006 and December 31, 2005, management believes the Bank met its capital adequacy requirements and is a well-capitalized institution as defined in the regulations, which require minimum Tier 1 leverage and Tier 1 and total risk-based ratios of 5%, 6% and 10%, respectively. Management is not aware of any conditions or events that would change the Bank's designation as a well-capitalized institution. Information regarding the Bank's regulatory capital and related ratios is summarized as follows:
At June 30, At December 31, ($ in thousands) 2006 2005 ------------------------------------------------------------------------- Tier 1 Capital $ 166,685 $ 156,842 Tier 2 Capital 15,740 14,846 ------------------------------------------------------------------------- Total risk-based capital $ 182,425 $ 171,688 ------------------------------------------------------------------------- Net risk-weighted assets $ 1,430,060 $ 1,362,728 Average assets for regulatory purposes $ 1,681,655 $ 1,562,779 ------------------------------------------------------------------------- Tier 1 capital to average assets 9.91% 10.04% Tier 1 capital to risk-weighted assets 11.66% 11.51% Total capital to risk-weighted assets 12.76% 12.60% -------------------------------------------------------------------------
31 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 June 30, 2006 and December 31, 2005, management believes that the Holding Company met its capital adequacy requirements. Information regarding the Company's (consolidated) regulatory capital and related ratios is summarized below:
At June 30, At December 31, ($ in thousands) 2006 2005 ------------------------------------------------------------------------- Tier 1 Capital (1) $ 199,217 $ 181,571 Tier 2 Capital(1) 26,327 29,788 ------------------------------------------------------------------------- Total risk-based capital $ 225,544 $ 211,359 ------------------------------------------------------------------------- Net risk-weighted assets $ 1,542,806 $ 1,466,027 Average assets for regulatory purposes $ 1,799,681 $ 1,673,832 ------------------------------------------------------------------------- Tier 1 capital to average assets 11.07% 10.85% Tier 1 capital to risk-weighted assets 12.91% 12.39% Total capital to risk-weighted assets 14.62% 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 June 30, 2006 and December 31, 2005, $49.8 million and $45.4 million of those securities, respectively, was included in Tier 1 Capital, and the remaining portion was included in Tier 2 Capital.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies but with stricter quantitative limits and clearer qualitative standards. The new rule provides a transition period for bank holding companies to meet the new, stricter limitations within regulatory capital by allowing the limits on restricted core capital elements to become fully effective as of March 31, 2009. 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 June 30, 2006 and December 31, 2005, assuming the Company no longer included its trust preferred securities in Tier 1 Capital, the Company would still exceed the well capitalized threshold under the regulatory framework for prompt corrective action. Intervest Securities Corporation is subject to the Securities and Exchange Commission's (SEC) Uniform Net Capital Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net capital of $5,000. At June 30, 2006 and December 31, 2005, Intervest Securities Corporation's net capital was $0.5 million. ASSET AND LIABILITY MANAGEMENT ------------------------------ Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The Company does not engage in trading or hedging activities, nor does it invest in interest rate derivatives or enter into interest rate swaps. The primary objective of the Company's asset/liability management strategy is to limit, within established guidelines, the adverse impact of changes in interest rates on its net interest income and capital. The Company uses "gap analysis," which measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period, to monitor its interest rate sensitivity. For a further discussion of gap analysis, including the factors that effect its computation and results, see page 50 of the Company's Annual Report on Form 10-K for the year ended December 31, 2005. The Company's one-year positive interest rate sensitivity gap decreased to $351.3 million, or 19.6% of total assets, at June 30, 2006, from $498.7 million, or 29.2% at December 31, 2005. The decrease in the positive gap primarily reflects an increase in the purchase of security investments with over one-year maturities, funded by increases in money-market deposit accounts and time deposits with terms of less than one year. For purposes of computing the gap, all deposits with no stated maturities are treated as readily accessible accounts. However, if such deposits were treated differently, the one-year gap would then change. The behavior of core depositors may not necessarily result in the immediate withdrawal of funds in the event deposit rates offered by the Bank did not change as quickly and uniformly as changes in general market rates. For example, if only 25% of deposits with no stated maturity were assumed to be readily accessible, the one-year gap would have been a positive 30.2% at June 30, 2006, compared to a positive 40.1% at December 31, 2005. 32 The table that follows summarizes interest-earning assets and interest-bearing liabilities as of June 30, 2006, that are scheduled to mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4 --------- --------- ---------- --------- ($ in thousands) Months Months Years Years Total - --------------------------------------------------------------------------------------------------- Loans (1) $576,204 $356,528 $ 377,158 $138,964 $1,448,854 Securities held to maturity (2) 67,070 117,803 115,906 - 300,779 Short-term investments 10,738 - - - 10,738 FRB and FHLB stock 2,374 - - 3,439 5,813 - --------------------------------------------------------------------------------------------------- Total rate-sensitive assets $656,386 $474,331 $ 493,064 $142,403 $1,766,184 - --------------------------------------------------------------------------------------------------- Deposit accounts (3): Interest checking deposits $ 7,816 $ - $ - $ - $ 7,816 Savings deposits 13,559 - - - 13,559 Money market deposits 231,628 - - - 231,628 Certificates of deposit 99,857 417,800 579,141 93,875 1,190,673 - --------------------------------------------------------------------------------------------------- Total deposits 352,860 417,800 579,141 93,875 1,443,676 - --------------------------------------------------------------------------------------------------- Debentures and mortgage note payable (1) - 7,250 85,032 52,186 144,468 Accrued interest on all borrowed funds(1) 1,323 225 3,068 444 5,060 - --------------------------------------------------------------------------------------------------- Total borrowed funds 1,323 7,475 88,100 52,630 149,528 - --------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities $354,183 $425,275 $ 667,241 $146,505 $1,593,204 - --------------------------------------------------------------------------------------------------- GAP (repricing differences) $302,203 $ 49,056 $(174,177) $ (4,102) $ 172,980 - --------------------------------------------------------------------------------------------------- Cumulative GAP $302,203 $351,259 $ 177,082 $172,980 $ 172,980 - --------------------------------------------------------------------------------------------------- Cumulative GAP to total assets 16.9% 19.6% 9.9% 9.7% 9.7% - ---------------------------------------------------------------------------------------------------
Significant assumptions used in preparing the preceding gap table follow: (1) Floating-rate loans and debentures payable are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate loans and debentures payable are scheduled, including repayments, according to their contractual maturities. Deferred loan fees, nonaccrual loans and the effect of loan prepayments are excluded from the analysis. (2) Securities are scheduled according to the earlier of their contractual maturity or the date in which the interest rate is scheduled to increase. The effects of possible prepayments that may result from the issuer's right to call a security before its contractual maturity date are not considered. (3) Interest checking, savings and money market deposits are regarded as readily accessible withdrawable accounts; and certificates of deposit are scheduled through their maturity dates. 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. 33 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 June 30, 2006. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth under Note 14contained in the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item. ITEM 1A. RISK FACTORS The Company's business is affected by a number of factors, including but not limited to the impact of: interest rates; loan demand; loan concentrations; loan prepayments; dependence on brokers and other sources for new loan referrals, ability to raise funds for investment; competition; general or local economic conditions; credit risk and the related adequacy of the allowance for loan losses; terrorist acts; natural disasters; armed conflicts; environmental liabilities, regulatory supervision and regulation and costs thereof; 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 34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) An Annual Meeting of Stockholders was held on May 25, 2006. (b) Pursuant to the Company's charter and bylaws, one-third of the directors are elected by the holders of Class A common stock and two-thirds are elected by holders of Class B common stock. On all other matters, Class A and Class B common stockholders generally vote together as a single class. Each of the persons named in the Proxy Statement dated April 15, 2006 as a nominee for director was elected for a one-year term expiring on the date of the next annual meeting (see Item 4-c). Additionally, as more fully described in the Proxy Statement, three proposals were voted upon at the annual meeting, one regarding a proposed amendment to the Company's Restated Certificate of Incorporation to increase the authorized chares of Class A Common Stock to 12 million from 9.5 million, one regarding the approval of the 2006 Long Term Incentive Plan and the other regarding proposed amendments to warrants held by the Chairman. The Company's shareholders approved each of the proposals. (see Item 4-c). (c) The table below summarizes voting results on the matters submitted to the Company's common stockholders:
AGAINST OR FOR WITHHELD ABSTAINED ----------------------------------------------------------------------------- ELECTION OF DIRECTORS - CLASS A ------------------------------- Michael A. Callen. . . . . . . . . . . . . . 6,775,678 360,323 - Wayne F. Holly . . . . . . . . . . . . . . . 5,922,700 1,213,301 - Lawton Swan, III . . . . . . . . . . . . . . 6,817,878 318,123 - ELECTION OF DIRECTORS - CLASS B -------------------------------- Jerome Dansker . . . . . . . . . . . . . . . 385,000 - - Lowell S. Dansker. . . . . . . . . . . . . . 385,000 - - Paul DeRosa. . . . . . . . . . . . . . . . . 385,000 - - Stephen A. Helman. . . . . . . . . . . . . . 385,000 - - Thomas E. Willett. . . . . . . . . . . . . . 385,000 - - David J. Willmott. . . . . . . . . . . . . . 385,000 - - Wesley T. Wood . . . . . . . . . . . . . . . 385,000 - - TO CONSIDER AND APPROVE AN AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF ----------------------------------------------------------------------------- INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS A COMMON --------------------------------------------------------------------------- STOCK FROM 9,500,000 TO 12,000,000: ----------------------------------- Class A shareholders. . . . . . . . . . 7,025,278 101,945 8,778 Class B shareholders. . . . . . . . . . 385,000 - - TO CONSIDER AND APPROVE THE 2006 LONG TERM INCENTIVE PLAN (1): -------------------------------------------------------------- Class A shareholders. . . . . . . . . . 3,939,141 1,305,869 11,767 Class B shareholders. . . . . . . . . . 385,000 - - TO CONSIDER AND APPROVE AMENDMENTS TO OUTSTANDING COMMON STOCK WARRANTS HELD ---------------------------------------------------------------------------- BY THE CHAIRMAN (1): -------------------- Class A shareholders. . . . . . . . . . 5,010,643 226,294 19,840 Class B shareholders. . . . . . . . . . 385,000 - - ----------------------------------------------------------------------------- (1) Total broker non-votes for these proposals were 1,879,224 shares.
(d) Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS The following exhibits are filed as part of this report.
3.0 Restated Certificate of Incorporation 4.0 Form of Indenture between Intervest Mortgage Corporation, as Issuer, and The Bank of New York, as Trustee, dated as of July 1, 2006, incorporated by reference to Intervest Mortgage Corporation's Registration Statement on Form S-11, File No. 333-132403, filed on March 14, 2006, wherein such document is identified as Exhibit 4.1. 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.
35 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: July 31, 2006 By: /s/ Jerome Dansker ----------------------------- Jerome Dansker, Chairman and Executive Vice President (Principal Executive Officer) Date: July 31, 2006 By: /s/ Lowell S. Dansker --------------------------------- Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer) 36 EX-3.0 2 ex3_0.txt EXHIBIT 3.0 RESTATED CERTIFICATE OF INCORPORATION OF INTERVEST BANCSHARES CORPORATION Intervest Bancshares Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: FIRST: The original Certificate of Incorporation of Intervest Bancshares Corporation was filed with the Secretary of State of Delaware on February 5, 1993. SECOND: The Certificate of Incorporation, as amended heretofore, is hereby further amended to increase the number of shares of Class A Common Stock that the Corporation shall be authorized to issue from 9,500,000 shares to 12,000,000 shares. The Restated Certificate of Incorporation in the form that follows has been duly adopted in accordance with the provisions of Sections 245 and 242 of the General Corporation Law of the State of Delaware by the directors and stockholders of the Corporation. THIRD: The text of the Certificate of Incorporation, as amended heretofore, is hereby restated as further amended to read in full as set forth in Exhibit A attached hereto and is hereby incorporated herein by this reference. IN WITNESS WHEREOF, the undersigned, being the President and Secretary, respectively of the Corporation, hereby execute this Restated Certificate of Incorporation this 5th day of June, 2006 and hereby affirm the truth of the statements contained herein under penalties of perjury. INTERVEST BANCSHARES CORPORATION By: /s/ Lowell S. Dansker Lowell S. Dansker, President ATTEST: By: /s/ Stephen A. Helman Stephen A. Helman, Secretary EXHIBIT A CERTIFICATE OF INCORPORATION OF INTERVEST BANCSHARES CORPORATION 1. The name of the corporation is Intervest Bancshares Corporation. 2. The address of the registered office of the Corporation in the State of Delaware is 615 South Dupont Highway, , City of Dover, County of Kent, State of Delaware 19901. The name of its registered agent at such address is Colby Attorneys Service Co., Inc. 3. The purpose for which it is formed is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. 4.(a) The Corporation is authorized to issue three classes of shares to be designated, respectively, Preferred Stock ("Preferred Stock"), Class A Common Stock ("Class A Common Stock") and Class B Common Stock ("Class B Common Stock"). The total number of shares of capital stock that the Corporation is authorized to issue is Thirteen Million (13,000,000). The total number shares of Preferred Stock this Corporation shall have authority to issue is Three Hundred Thousand (300,000). The total number of shares of Class A Common Stock this Corporation shall have authority to issue is Twelve Million (12,000,000). The total number of shares of Class B Common Stock this Corporation shall have authority to issue is Seven Hundred Thousand (700,000). All of the shares of capital stock shall have a par value of $1.00 per share. (b) The Board of Directors of the Corporation (the "Board of Directors") is authorized, subject to limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock from time to time in one or more series. The Board of Directors is expressly authorized to provide for the issue of all or any of the shares of Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such shares and as may be permitted by the General Corporation Law of the State of Delaware. The Board of Directors is also expressly authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. (c) The powers, preferences, rights, restrictions and other matters relating to the Class A Common Stock and the Class B Common Stock are as follows: (i) Dividends. Subject to preferences that may be applicable to --------- any outstanding shares of Preferred Stock, the holders of shares of Class A Common Stock shall be entitled to receive cash dividends when and as declared by the Board of Directors out of funds legally available therefore. The holders of the shares of Class B Common Stock shall not be entitled to receive any cash dividends other than liquidating dividends until January 1, 2000, after which time the holders of Class A Common Stock and Class B Common Stock will share ratably, without distinction as to class, in dividends when and as declared by the Board of Directors. (ii) Voting. So long as at least 50,000 shares of the Class B ------ Common Stock remain issued and outstanding, the holders of the outstanding shares of Class B Common Stock, voting separately and as a class, shall have the sole right to vote for the election of that number of directors which equal two-thirds of the number of directors then constituting the entire Board of Directors (rounded up to the next whole number), but shall not otherwise be entitled to vote for the election of directors of the Corporation. The holders of the outstanding shares of Class A Common Stock, voting separately and as a class, shall have the sole right to vote for the remaining directors constituting the entire Board of Directors. At such time as there shall be less than 50,000 shares of the Class B Common Stock issued and outstanding, then the entire Board of Directors shall be elected by vote of the holders of the Class A Common Stock and Class B Common Stock, voting together and without distinction as to class. Subject to the foregoing limitation, and except as otherwise expressly required by law, in all other matters as to which the vote or consent of stockholders of the Corporation shall be required or be taken, the holders of the shares of Class A Common Stock and Class B Common Stock, voting together and without distinction as to class, shall each be entitled to one vote for each share of such stock held by them, respectively. In the case of any subdivision, split up, combination, stock dividend or change of the shares of Class B Common Stock into a different number of shares of the same or any other class or classes of stock, then the 50,000 share threshold described above shall be equitably adjusted to reflect such event. (iii) Liquidation. Subject to any preferences that may be ----------- applicable to any outstanding shares of Preferred Stock, in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of the shares of Class A Common Stock and Class B Common Stock shall be entitled to share ratably, without distinction as to class, in all of the assets of the Corporation available for distribution to its stockholders. (iv) Conversion. The shares of Class B Common Stock shall be ---------- convertible, at any time and from time to time after January 1, 2000, at the option of the holder thereof, into shares of Class A Common Stock at the rate of one share Class A Common Stock for one share of Class B Common Stock. In order to exercise the conversion privilege, the holder of any shares of Class B Common Stock shall surrender the certificate or certificates for such shares of Class B Common Stock accompanied by proper instruments of surrender to the Corporation at its principal office. The certificate or certificates for such shares shall also be accompanied by a written notice to the effect that the holder elects to convert such shares and stating the name or names in which the certificate or certificates for Class A Common Stock which shall be issuable on such conversion shall be issued. Such conversion shall be deemed to have been effected on the date on which such notice shall have been received by the Corporation and such Class B Common Stock shall have been surrendered as hereinabove provided. The shares of Class B Common Stock so converted shall not be reissued and shall be retired and canceled as provided by law. In the case of the issuance of any shares of stock as a dividend upon the shares of Class A Common Stock or the shares of Class B Common Stock or in the case of any subdivision, split up, combination, or change of the shares of Class A Common Stock or shares of Class B Common Stock into a different number of shares of the same or any other class or classes of stock, or in the case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the conversion rate as hereinabove provided shall be appropriately adjusted so that the rights of the holders of Class A Common Stock and of Class B Common Stock will not be diluted as result of such stock dividend, subdivision, split up, combination, change, consolidation, merger, sale or conveyance. Adjustments in the rate of conversions shall be calculated to the nearest one-tenth of a share. The Corporation shall not be required to issue fractions of shares of Class A Common Stock upon conversion of Class B Common Stock. If any fractional interest in a share of Class A Common Stock shall be deliverable, the Corporation shall purchase such fractional interest for an amount equal to the current market value of such fractional interest. So long as any shares of Class B Common Stock are outstanding, the Corporation shall reserve and keep available out of its duly authorized but unissued stock, for the purpose of effecting the conversion of the Class B Common Stock as hereinabove provided, such number of its duly authorized shares of Class A Common Stock and other securities as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class B Common Stock. 5. The Board of Directors of the Corporation is expressly authorized to make, alter or repeal bylaws of this Corporation, but the stockholders may make additional bylaws and may alter or repeal any bylaw whether adopted by them or otherwise. 6. Election of directors need not be by written ballot except and to the extent provided in the bylaws of the Corporation. 7. To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same now exist or may hereafter be amended in a manner more favorable to directors, the directors of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. EX-31.0 3 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 June 30, 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: July 31, 2006 /s/ Jerome Dansker -------------------- Jerome Dansker, Chairman and Chief Executive Officer (Principal Executive Officer) EX-31.1 4 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 June 30, 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: July 31, 2006 /s/ Lowell S. Dansker ------------------------ Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer) EX-32.0 5 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 June 30, 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) July 31, 2006 /s/ Lowell S. Dansker - --------------------- Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Financial Officer) July 31, 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-----