News Column

INTERVEST BANCSHARES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 4, 2014

General

Intervest Bancshares Corporation ("IBC") is the parent company of Intervest National Bank ("INB"). References in this report to "we," "us" and "our" refer to these entities on a consolidated basis, unless otherwise specified. For a discussion of our business, see note 1 to the financial statements in our 2013 Annual Report on Form 10-K ("2013 10-K"). Our business is also affected by various risk factors, which are disclosed beginning on page 27 of our 2013 10-K in Item 1A thereof and updated as needed in Item 1A of Part II of our reports on Form 10-Q. Management's discussion and analysis of financial condition and results of operations that follows should be read in conjunction with the accompanying financial statements in this report on Form 10-Q as well as our entire 2013 10-K. Available Information IBC's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements and any amendments to those reports can be obtained (excluding exhibits) without charge by writing to: Intervest Bancshares Corporation, Attention: Secretary, One Rockefeller Plaza (Suite 400) New York, New York 10020. In addition, the reports (with exhibits) are available on the Securities and Exchange Commission's website at www.sec.gov. IBC has a website at www.intervestbancsharescorporation.com that is used for limited purposes and contains certain reports after they are electronically filed with or furnished to the SEC. INB also has a website at www.intervestnatbank.com. The information on both of these web sites is not and should not be considered part of this report and is not incorporated by reference in this report.



Critical Accounting Policies

We consider our critical accounting policies to be those that relate to the determination of the following: our allowance for loan losses; our valuation allowance for real estate losses; other than temporary impairment assessments of our security investments; and the need for and amount of a valuation allowance for our deferred tax asset. These items are considered critical accounting estimates because each is highly susceptible to change from period to period and require us to make numerous assumptions about a variety of information that directly affect the calculation of the amounts reported in our consolidated financial statements. For example, the impact of a large unexpected chargeoff could deplete the allowance for loan losses and potentially require us to record increased loan loss provisions to replenish the allowance, which could negatively affect our operating results and financial condition. A detailed discussion of our critical accounting policies and the factors and estimates we use in applying them can be found under the caption "Critical Accounting Policies" on pages 42 to 45 in our 2013 10-K.



Overview

Net earnings for the second quarter of 2014 (Q2-14) increased 79% to $5.7 million, or $0.26 per share, from $3.2 million, or $0.14 per share, for the second quarter of 2013 (Q2-13). For the first half of 2014 (6mths-14), net earnings increased 44% to $9.6 million, or $0.43 per share, from $6.6 million, or $0.30 per share, for the first half of 2013 (6mths-13).

Operating Summary Net interest and dividend income increased to $10.9 million in Q2-14, from



$8.6 million in Q2-13, and to $21.1 million in 6mths-14, from $17.6 million in

6mths-13, reflecting a higher net interest margin. The margin (exclusive of

loan prepayment income) increased to 2.84% in Q2-14 and 2.79% in 6mths-14,

from 2.30% and 2.33% in the same periods of 2013.



Credits for loan losses of $1.0 million and $1.5 million were recorded in

Q2-14 and 6mths-14, respectively, compared to $0.8 million and $1.8 million in

the same periods of 2013. The amounts in the 2014 periods reflected improved

credit quality resulting from the payoff of four substandard loans totaling

$6.9 million in Q2-14 and an upgrade of one loan ($1.6 million) in Q1-14,

while the 2013 amounts were due to partial recoveries of prior loan charge

offs. Noninterest income (inclusive of loan prepayment income) increased to $2.5



million in Q2-14 and to $3.3 million in 6mths-14, from $0.7 million and $1.4

million in the same periods of 2013. The increases were due to a higher level

of loan prepayment income (including $0.7 million in Q2-14 from one loan) and

the absence of security impairment charges in the 2014 periods.



No provisions for real estate losses were required on properties owned through

foreclosure (REO) in the 2014 periods, compared to $0.1 million in Q2-13 and

$0.7 million in 6mths-13.



Real estate expenses, net of rental and other income, amounted to $0.3 million

in Q2-14 and $0.5 million in 6mths-14, compared to net income of $0.3 million

in Q2-13 and net income of $1.3 million in 6mths-13. The net income for the

2013 periods reflected recoveries of expenses associated with previously owned

properties. Exclusive of these recoveries, REO expense would have been $0.5

million and $1.0 million for 2013 periods, respectively. 24



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Table of Contents Operating expenses decreased slightly to $3.9 million in Q2-14, from $4.0

million in Q2-13, but increased to $8.5 million in 6mths-14, from $8.1 million

in 6mths-13. The six-month period increase was primarily due to normal salary

increases and higher stock compensation and employee bonus expense, partially

offset by a decrease in FDIC insurance premiums. Our efficiency ratio, which measures our ability to control expenses as a



percentage of revenues, continued to be favorable and improved to 27% for

Q2-14 and 35% for 6mths-14, from 43% in the same periods of 2013.



There were no preferred dividend requirements in the 2014 periods, compared to

$0.3 million in Q2-13 and $0.8 million in 6mths-13. The 2013 dividend

requirements related to IBC's TARP preferred stock, which was repurchased and

retired during June and August 2013. Balance Sheet Summary



Assets amounted to $1.57 billion at June 30, 2014, unchanged from December 31,

2013, as increases of $31 million in loans and $11 million in cash and

short-term investments were offset by decreases of $26 million in security

investments and $8 million in REO. Loans increased to $1.16 billion at June 30, 2014, from $1.13 billion at



December 31, 2013. New loan originations for 6mths-14 increased to $165

million from $124 million for 6mths-13. Loan repayments decreased to $134

million in 6mths-14 from $172 million in 6mths-13. Deposits amounted to $1.28 billion at June 30, 2014, a decrease of $4.4 million from December 31, 2013. Stockholders' equity increased to $207 million at June 30, 2014, from $197



million at December 31, 2013, reflecting primarily an increase in retained

earnings of $8.5 million, net of a $1.1 million cash dividend on common stock

paid on May 26, 2014.



INB's regulatory capital ratios at June 30, 2014 were as follows: Tier One

Leverage - 15.92%; Tier One Risk-Based Capital - 20.18%; and Total Risk-Based

Capital - 21.45%. Book value per common share increased to $9.38 at June 30, 2014, from $8.99 at December 31, 2013. Asset Quality Summary



Impaired loans (comprised of nonaccrual loans, restructured loans (TDRs) and

one other accruing and performing loan) totaled $57.8 million at June 30,

2014, compared to $57.2 million at December 31, 2013.



Nonaccrual loans decreased to $23.0 million at June 30, 2014, from $35.9

million at December 31, 2013, primarily reflecting one loan transferred to an

accruing TDR status. Nonaccrual loans included TDRs at each date of $17.7

million and $33.2 million, respectively. These TDRs were current and had a

weighted-average interest rate of 4.25% as of June 30, 2014.



Accruing TDR loans increased to $27.1 million at June 30, 2014 from $13.4

million at December 31, 2013, due to the transfer of the loan noted above.

These TDR loans had a weighted-average interest rate of approximately 5% at

June 30, 2014.



The allowance for loan losses was $26.6 million, or 2.30% of total loans, at

June 30, 2014, compared to $27.8 million, or 2.47%, at December 31, 2013. The

allowance included specific reserves allocated to impaired loans at each date

(totaling $5.5 million and $6.1 million, respectively).



REO decreased to $2.6 million at June 30, 2014, from $10.6 million at

December 31, 2013, reflecting the sales of two properties. Termination of Agreement As previously reported, on March 13, 2014, the Federal Reserve Bank of New York announced the termination of the written agreement dated as of January 14, 2011 between IBC and the FRB. The termination was effective March 7, 2014. As a result of this termination and the March 2013 termination of INB's formal agreement with its primary regulator, neither IBC or INB is subject to any formal or informal regulatory agreement or related restrictions that were described in our 2013 10-K. Common Stock Dividend On April 24, 2014, IBC's Board of Directors approved the initiation of a regular quarterly cash dividend to common shareholders. The initial quarterly dividend declared of $0.05 per common share was paid on May 26, 2014 to shareholders of record at the close of business May 15, 2014. IBC also announced on July 16, 2014 that its Board of Directors declared a quarterly dividend of $0.05 per common share payable on August 26, 2014 to shareholders of record at the close of business August 15, 2014. Merger Agreement On July 31, 2014, IBC and INB, entered into a definitive agreement and plan of merger (the "Agreement") with Bank of the Ozarks, Inc. ("Ozarks") and its wholly-owned bank subsidiary, Bank of the Ozarks, relating to a proposed merger transaction. For further discussion of this transaction, see note 15 to the financial statements in this report. 25



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Comparison of Financial Condition at June 30, 2014 and December 31, 2013

General

Total assets at June 30, 2014 amounted to $1.57 billion, unchanged from December 31, 2013, as increases of $31 million in loans and $11 million in cash and short-term investments were offset by decreases of $26 million in security investments and $8 million in REO.



Cash and Cash Equivalents

Cash and cash equivalents amounted to $35 million at June 30, 2014, compared to $25 million at December 31, 2013. They include interest-bearing and noninterest-bearing cash balances with banks and other short-term investments, and they fluctuate based on various factors, including our liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities.



Time Deposits with Banks

Time deposits with banks amounted to $5.4 million at June 30, 2014, unchanged from December 31, 2013. These deposits had a weighted-average yield of 1.12% and remaining maturity of 1.3 years at June 30, 2014. Most of these deposits are Community Reinvestment Act eligible investments.



Securities Available for Sale and Securities Held to Maturity

Securities available for sale at June 30, 2014 and December 31, 2013 amounted to approximately $1.0 million. The investment represented approximately 92,850 and 91,700 shares, respectively, of an intermediate bond fund (trading symbol CRAIX) that holds securities that are deemed to be qualified under the Community Reinvestment Act. Securities held to maturity decreased to $358 million at June 30, 2014, from $384 million at December 31, 2013, reflecting calls of securities exceeding new purchases. Securities are classified as held to maturity ("HTM") and are carried at amortized cost when INB has the intent and ability to hold them to maturity. INB invests primarily in U.S. government agency debt obligations to emphasize safety and liquidity. For additional information on securities, see note 2 to the financial statements in this report.



Investments in Federal Reserve Bank of New York (FRB) and Federal Home Loan Bank of New York (FHLB) Stock

In order for INB to be a member of the FRB and FHLB, INB must maintain an investment in the capital stock of each entity, which amounted to $5.9 million and $2.4 million, respectively, at June 30, 2014, compared to $5.9 million and $2.3 million, respectively, at December 31, 2013. The FRB stock has historically paid a dividend of 6%, while the FHLB stock dividend fluctuates quarterly and was most recently at the rate of 3.90%. The total required investment fluctuates based on INB's capital level for the FRB stock and INB's loans and outstanding FHLB borrowings for the FHLB stock.



Loans Receivable, Net

Major classifications of loans receivable are summarized as follows:

At June 30, 2014 At December 31, 2013 # of # of ($ in thousands) Loans Amount Loans Amount Loans Secured By Real Estate: Commercial loans 414 $ 888,043 394 $ 838,766 Multifamily loans 142 205,258 138 210,270 One to four family loans 16 59,211 20 72,064 Land loans 5 8,381 5 9,178 577 1,160,893 557 1,130,278 All Other Loans: Business loans 18 1,031 19 1,061 Consumer loans 8 170 12 211 26 1,201 31 1,272 Loans receivable, gross 603 1,162,094 588 1,131,550 Deferred loan fees (4,137 ) (4,028 ) Loans receivable, net of deferred fees 1,157,957 1,127,522 Allowance for loan losses (26,598 ) (27,833 ) Loans receivable, net $ 1,131,359$ 1,099,689 Loans on nonaccrual status $ 23,005$ 35,903 Loans restructured and on accrual status 27,088 13,429 Accruing loans contractually past due 90 days or more 2,993 4,087 26



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The $31 million net increase in loans receivable, gross at June 30, 2014 compared to December 31, 2013 reflected $164.6 million of new originations and $0.3 million of recoveries of prior charge offs, partially offset by $110.1 million of payoffs and $24.2 million of principal amortization and partial pay downs. New originations were comprised of $131 million of commercial real estate (CRE) loans, $28 million of multifamily loans and $5 million of loans secured by investor-owned, 1-4 family condominiums. New CRE loans included $25 million of single tenant credit and $28 million of single tenant non-credit properties. The table below sets forth the activity in the net loan portfolio for the periods indicated. Quarter Ended Quarter Ended Six-Months Ended ($ in thousands) March 31, 2014 June 30, 2014 June 30, 2014 Loans receivable, net, at beginning of period $ 1,099,689$ 1,114,813$ 1,099,689 Originations 66,816 97,799 164,617 Principal repayments (52,017 ) (82,319 ) (134,338 ) Recoveries 85 180 265 Net (increase) decrease in deferred loan fees (175 ) 66 (109 ) Net decrease in allowance for loan losses 415 820 1,235



Loans receivable, net, at end of period $ 1,114,813$ 1,131,359$ 1,131,359

New originations for the first half of 2014 had a weighted-average rate, term, debt service coverage ratio and loan-to-value ratio of 4.72%, 6.6 years, 1.24x and 59%, respectively, compared to 4.47%, 5.9 years, 1.29x and 58%, respectively, for new loans originated in the first half of 2013. Nearly all of the new loans in both periods had fixed interest rates. Loans paid off in 6mths-14 and 6mths-13 had a weighted-average rate of 5.22% and 5.98%, respectively. Loans with fixed interest rates constituted approximately 99% of the portfolio at June 30, 2014, which included some loans that have small predetermined interest rate increases over the life of the loan. The entire loan portfolio had a weighted-average remaining contractual term of 4.8 years as of June 30, 2014. The table below sets forth information on our new loan originations for the first half of 2014. Weighted-Average #of % of Interest Effective Loan-to- ($ in thousands) Loans (1) Amount Total Rate Yield (2) Term (3) DSCR (4) Value Ratio Commercial Real Estate: Shopping centers - anchored 3 $ 7,950 5 % 4.98 % 5.05 % 9.6 0.82 57 % Mixed-use commercial 8 19,650 12 % 4.25 % 4.39 % 4.7 0.81 44 % Single tenant - credit 9 25,290 15 % 4.56 % 4.62 % 9.5 1.49 56 % Single tenant - noncredit 21 27,737 17 % 4.89 % 4.94 % 6.9 1.28 62 % Office buildings 4 21,392 13 % 5.21 % 5.34 % 5.2 1.92 60 % Industrial/warehouses 4 7,691 5 % 4.48 % 4.74 % 2.9 0.25 65 % Mobile home park 8 21,233 13 % 4.88 % 4.95 % 9.6 1.32 65 % Multifamily (5 or more units): Rent regulated apartments 6 7,663 5 % 3.87 % 3.99 % 3.4 0.93 56 % Non-rent regulated apartments 3 2,950 2 % 4.06 % 4.10 % 3.8 0.99 73 % Garden apartments 4 9,763 6 % 4.64 % 4.79 % 3.8 1.10 67 % Mixed-use multifamily 7 7,945 5 % 4.38 % 4.40 % 6.5 1.13 55 % One to four family (investor condos) 3 5,238 3 % 4.71 % 4.86 % 2.6 1.54 61 % Personal and Business 4 115 - % 4.45 % 4.45 % 4.1 1.00 60 % Totals 84 $ 164,617 100 % 4.72 % 4.81 % 6.6 1.24 59 %



(1) Advances on existing loans for purposes of this table are counted as a new

loan.

(2) Computed using origination and exit fee income, net of direct origination

costs, as a level yield adjustment over the life of the loan.

(3) Represents contractual maturity (expressed in number of years) and does not

consider the impact of self-liquating loans.

(4) Debt service coverage ratio (DSCR) is computed based on the property's actual

cash flows at date of origination and excludes pro-forma (or projected) cash

flows in cases where the property is vacant or substantially vacant and is in

the process of being leased or stabilized to market rents. Also excludes any

escrow deposits made by the borrower with us in order to establish a minimum

annual DSCR of 1.20 (for the subsequent 12-month period only) at time of

origination in cases where the property's cash flow is inadequate.

The following table sets forth information regarding loans outstanding at June 30, 2014 by year of origination.

($ in thousands) Balance % of Balance Rated % of

Balance Year Originated (1) Outstanding Total Substandard Outstanding Nonaccrual % of Outstanding 2004 and prior $ 113,879 10 % $ - - % $ - - % 2005 42,105 4 3,110 7 - - 2006 74,992 6 8,695 12 8,695 12 2007 126,290 10 36,749 29 14,310 11 2008 97,700 8 7,727 8 - - 2009 66,180 6 - - - - 2010 13,424 1 2,149 16 - - 2011 35,665 3 - - - - 2012 182,474 16 500 - - - 2013 267,134 23 - - - - 2014 142,251 12 - - - - $ 1,162,094 100 % $ 58,930 5 % $ 23,005 2 %



(1) Does not consider those loans that have been extended or renewed since the

date of original origination. 27



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At June 30, 2014, the loan portfolio was concentrated in CRE loans and was comprised of 76% of loans secured by CRE, 18% secured by multifamily properties and 5% by investor-owned, 1-4 family condominiums. The single tenant category totaled $206 million at June 30, 2014, or approximately 23% of the total CRE loan portfolio, up from $157 million and 19% at December 31, 2013.



The table below sets forth information on the properties securing the real estate loan portfolio at June 30, 2014.

New York Florida Other States Total Loans Impaired ($ in thousands) # Amount # Amount # Amount # Amount % Loans Commercial Real Estate: Shopping centers - anchored (1) 5 $ 10,059



6 $ 21,557 7 $ 20,902 18 $ 52,518 4.5 $ 10,411 Shopping centers - grocery anchored (1)

2 18,276



1 1,261 2 6,383 5 25,920 2.2

- Shopping centers - unanchored (1) 45 100,633 14 34,566 6 9,048 65 144,247 12.4 17,143 Mixed-use commercial (2) 75 173,441 5 14,524 3 3,132 83 191,097 16.5 - Single tenant - credit (3) 7 8,956 6 8,701 10 24,257 23 41,914 3.6 - Single tenant - noncredit (3) 36 50,478 34 38,743 58 74,710 128 163,931 14.1 - Office buildings (4) 12 33,885 15 51,356 5 12,662 32 97,903 8.4 22,980 Industrial/warehouses (5) 14 34,691 3 3,936 - - 17 38,627 3.3 - Hotels (6) 7 33,378 4 19,721 - - 11 53,099 4.6 - Mobile home parks (7) - - 20 38,580 2 7,875 22 46,455 4.0 - Mini-storage (8) 3 7,766 - - - - 3 7,766 0.7 - Parking lots/garages 6 22,716 - - - - 6 22,716 2.0 2,622 Other commercial 1 1,850 - - - - 1 1,850 0.2 - Multifamily (5 or more units): Rent regulated apartments (9) 33 43,363 - - - - 33 43,363 3.7 - Non-rent regulated apartments (9) 22 25,067 21 3,932 3 1,942 46 30,941 2.7 - Garden apartments (10) 2 1,531 18 46,294 3 5,904 23 53,729 4.6 3,110 Mixed-use multifamily (2) 39 76,436 - - 1 789 40 77,225 6.7 - One to four family (11) 2 5,168 14 54,043 - - 16 59,211 5.1 - Land 1 3,500 3 3,326 1 1,555 5 8,381 0.7 1,555 Total real estate loans 312 $ 651,194 164 $ 340,540 101 $ 169,159 577 $ 1,160,893 100.0 $ 57,821 Average loan balance $ 2,087$ 2,076$ 1,675$ 2,012 Loans on nonaccrual status 1 $ 2,622 2 $ 9,005 2 $ 11,378 5 $ 23,005 2.0 Loans with full or partial personal guarantees 194 $ 363,861 136 $ 266,925 66 $ 114,811 396 $ 745,597 64.2 Loans with DSCRs of less than 1.00x (12) 54 $ 98,709



14 $ 32,819 11 $ 27,849 79 $ 159,377 13.7 Loans with DSCRs of 1.00x to 1.19x (12)

35 $ 75,970 41 $ 44,637 6 $ 7,252 82 $ 127,859 11.0



(1) Comprised predominantly of neighborhood/community strip shopping centers

containing general merchandise and convenience retailers, including grocery,

drug, service, personal care, repair, discount and home improvement stores.

An anchored center contains one tenant, which may be either a credit or non-credit tenant, whose percentage of the property's total income and rentable space is 50% or greater.



(2) Comprised of properties having both residential and commercial use, usually

containing retail or commercial space on the ground floor. Mixed use loans

are classified as multifamily or commercial based on the greater percentage

of income from residential or commercial use.

(3) Comprised of properties occupied by a single tenant consisting mostly of

restaurants, bank branches, fast food establishments, discount retailers,

retail drugstore chains, convenience stores, grocery stores, professional

offices, as well as local retailers and service and repair businesses. The

single tenants have been further segmented by those with an investment grade

rating (minimum BBB rating on its publicly traded debt), or credit tenants,

and those that are either non-rated or have a less than investment grade

rating, or non-credit tenants.

The table below summarizes the single-tenant category by the ten largest tenants and by industry based on principal balance outstanding:

($ in thousands) # of Loans Amount Industry Amount Rite Aid 11 $ 23,001 Restaurants $ 46,646 Walgreens 4 12,141 Drugstores 42,980 Kentucky Fried Chicken 11 8,101 Fast Food 31,181 CVS 4 7,838 Specialty Retail 25,080 Open Peak Inc. 1 6,860 Convenience 14,895 Applebee's 4 6,717 Personal Services 12,400 IHOP 4 6,141 Other 9,294 Walmart 1 6,058 Retail 9,800 Taco Bell 5 5,638 Banks 8,859 Hardees 7 5,487 Automotive 4,710 52 $ 87,982$ 205,845



(4) Comprised of office building properties, normally with multiple floors with

multiple tenants engaged in various businesses, including medical,

administrative and legal services.

(5) Comprised typically of commercial buildings used for or intended to be used

for the storage of goods by manufacturers, importers, exporters, wholesalers,

transport businesses, etc. They are usually large buildings in industrial

areas of cities/towns/villages that contain one or more tenants.

(6) Hotel properties in Florida are comprised of flagged hotels located in

Orlando, Miami Beach, Clearwater and Tampa areas, with room counts ranging

from 50 to over 200 and floors ranging from 2 to 7. Hotel properties in New

York are comprised predominantly of single occupancy room hotels (commonly

known as "SROs") in New York City and Brooklyn, and several small non-flagged

hotels/motels in Long Island.

(7) Mobile homes are often sited in land lease communities known as mobile home

parks. These communities allow home owners to rent space on which to place a

home, normally consisting of single or double manufactured homes. In addition

to providing space, the community can provide basic utilities and other amenities. 28



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Notes to preceding table continued:

(8) Mini-storage facilities, also known as self-storage, are storage space

facilities leased to individuals or companies for storing various personal

items or business parts or inventory. Mini-storage facilities may also

provide other services in addition to rentals.

(9) Comprised of apartment buildings principally in the 5 boroughs of New York

City consisting mostly of pre- and post-war walkup, elevator and loft

buildings, including brownstones and townhouses, further segmented by those

subject to rent regulations (rent control and rent stabilization).

(10) Comprised of garden style apartments, which refer to a large development of

small apartment buildings two to four stories tall where there are no

internal hallways, although adjacent apartments may share a wall. Entrance

to the apartments is from a common stairwell or patio, and the buildings are

typically surrounded by outdoor landscaping or patios.

(11) Comprised nearly all of investor-owned individual residential condominium

dwelling units or townhouses. These loans are made primarily to investors

who purchase multiple (blocks of) units/townhouses that remain unsold after

a condo conversion or the unsold units in a new development. The units are

normally rented (or in the process of being rented) for an extended period

of time until they can be sold as originally intended. The loans are

underwritten in accordance with our multifamily underwriting policies and

their risk characteristics are essentially the same as our multifamily real

estate lending, and we risk weight them for regulatory capital purposes the

same as substantially all of the rest of our loan portfolio, or at 100%.

(12) Consist of loans where the underlying collateral is not producing adequate

cash flows to service the loan's required payments (predominantly in cases

where the collateral is a vacant or substantially vacant building or land)

and such payments are being made in full or in part by the borrower's other

sources of funds. In many such cases, the borrower or its principals has

guaranteed the loan and/or deposited escrow funds with us to cover the

loan's contractual debt service payments for a portion of the loan term

while the underlying collateral property is being leased up or improved to

increase rents. These types of loans include loans known in the industry as

bridge loans. In accordance with our internal grading criteria (which

considers loan-to-value ratios, personal guarantees, projected stabilized

cash flows from the collateral, deposits of debt service payments with us

and other qualitative factors), the total amount of these loans were

internally graded as follows at June 30, 2014: $228 million were Pass rated,

$5 million were Special Mention rated and $54 million were Substandard

rated. Such conclusions on ratings may or may not be viewed in the same

manner as another third-party. See Note 1 to our audited consolidated financial statements included in our 2013 10-K for a discussion of our internal grading criteria. The table below sets forth information regarding our loans of $10 million or more at June 30, 2014. ($ in thousands) Principal Current Days Property Type Property Location Balance Interest Rate (1) Maturity Date Past Due Status/Rating Unanchored Retail Center White Plains, New York $ 16,132 4.30 % 04/01/2017 None Accrual/Pass Hotel Orlando, Florida 15,573 5.00 % 01/01/2018 None Accrual/Pass Office Building Fort Lauderdale, Florida 13,900 4.75 % 03/01/2019 None Accrual/Pass Office Building Miami Gardens, Florida 13,840 5.25 % 10/01/2018 None TDR-accrual (2) Commercial Mixed Use Brooklyn, New York 11,619 4.13 % 10/01/2018 None Accrual/Pass Grocery Anchored Retail Center Manorville, New York 11,283 4.38 % 08/01/2028 None Accrual/Pass Hotel New York, New York 11,009 4.00 % 12/01/2016 None Accrual/Pass Commercial Mixed Use New York, New York 10,928 4.13 % 04/01/2019 None Accrual/Pass Hotel Woodbury, New York 10,532 4.00 % 07/01/2019 None Accrual/Pass Mobile Home Park Avon Park, Florida 10,125 4.75 % 06/01/2024 None Accrual/Pass Commercial Mixed Use New York, New York 10,075 4.50 % 07/01/2022 None Accrual/Pass $ 135,016



(1) Rates are all fixed; the loan on the office building in Miami and loan on the

mobile home park has scheduled step-ups in rate.

(2) Loan restructured in June 2011 and has performed in accordance with its

restructured terms through June 30, 2014. Loan placed on accrual status in

June 2014. Current monthly payments are comprised of principal and interest

payments at a 5.125% interest rate. The interest rate increases each year on

June 1 (beginning on June 1, 2015), as follows to: 5.375%, 5.50%, 5.625% and

5.75%. Loan is rated Substandard.

The table below details scheduled contractual principal repayments of the loan portfolio as of June 30, 2014 by type.

Due Within Due Over One Due Over ($ in thousands) One Year to Five Years Five Years Total



Commercial real estate $ 80,624$ 500,203$ 307,216$ 888,043

Multifamily 17,101 142,884



45,273 205,258

One to four family 9,956 34,579



14,676 59,211

Land 5,055 3,326 - 8,381 Commercial business 700 331 - 1,031 Consumer 130 40 - 170 $ 113,566$ 681,363$ 367,165$ 1,162,094 For additional information on and discussion of our loan portfolio, including a discussion of our recent lending trends, underwriting standards and other pertinent information, see the section entitled "Lending Activities" in Item 1 "Business" of our 2013 10-K and note 3 to the financial statements in this report.



Allowance for Loan Losses

The allowance for loan losses decreased to $26.6 million, or 2.30% of total loans, at June 30, 2014, from $27.8 million, or 2.47%, at December 31, 2013. The allowance included specific reserves at each date (totaling $5.5 million and $6.1 million, respectively) allocated to our impaired loans. The decrease in the allowance was due to a credit for loan losses of $1.5 million, partially offset by recoveries of prior chargeoffs of $0.3 million. The credit reflected primarily improved credit quality in our loan portfolio resulting from the repayment in full of four substandard rated loans (totaling $6.9 million) in Q2-14 and the upgrade of one performing TDR loan ($1.6 million) in Q1-14 due to an increase in the loan's collateral value. 29



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As detailed in note 3 to the financial statements in this report, at June 30, 2014, loans rated substandard in our loan portfolio decreased to a total of $59 million, from $68 million at December 31, 2013. For a discussion of the criteria used to determine the adequacy of the allowance for loan losses, see the section entitled "Critical Accounting Policies" in this report. For additional information on the allowance for loan losses, see note 4 to the financial statements in this report.



Impaired Loans

At June 30, 2014, our impaired loans totaled $58 million, compared to $57 million at December 31, 2013. At June 30, 2014, impaired loans were comprised of 5 nonaccrual loans totaling $23.0 million, one accruing loan of $7.7 million and 7 loans classified as accruing troubled debt restructured loans or "TDRs" totaling $27.1 million, compared to 6 nonaccrual loans totaling $35.9 million, one accruing loan of $7.8 million and 6 loans classified as "TDRs" totaling $13.4 million at December 31, 2013.



The table below summarizes certain information on loans at June 30, 2014.

Pass Substandard ($ in thousands) Rated Loans Rated Loans Total Loans on nonaccrual status $ - $ 23,005$ 23,005 TDRs on accruing status 2,001 25,088 27,089 Other impaired accruing loan - 7,727 7,727 Total loans classified impaired 2,001 55,820 57,821 Other non-impaired accruing loans (1) - 3,110 3,110 Total (2) $ 2,001$ 58,930$ 60,931



(1) Represent loans for which there were concerns at the date indicated regarding

the ability of the borrowers to meet existing repayment terms. These loans

reflect the distinct possibility, but not the probability, that we will not

be able to collect all amounts due according to the contractual terms of the

loans. These loans may never become delinquent, nonaccrual or impaired.

(2) All of these loans are closely monitored and considered in the determination

of the overall adequacy of the allowance for loan losses.

At June 30, 2014 with respect to all of our impaired loans, we had obtained current appraisals of the underlying collateral as follows: 22% dated within the preceding 3 months; 49% dated within the preceding 4-6 months; 6% dated within the preceding 7-9 months; 22% dated within the preceding 10-12 months; and 1% dated over 12 months prior. Our policy is to obtain externally prepared appraisals for all of our substandard-rated impaired loans at least annually. One TDR loan in the amount of $0.4 million was rated pass and an annual appraisal is not required under our appraisal policy.



For additional discussion on the allowance for loan losses, including the factors we use in maintaining a specific valuation allowance for our impaired loans and our policy regarding loan chargeoffs, see note 1 to the financial statements in our 2013 10-K.

Summary of Asset Quality

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

At June 30, At December 31, ($ in thousands) 2014 2013 Nonaccrual loans (1): Loans past due 90 days or more $ 2,622 $ - Loans past due 0-30 days 2,683 2,719 TDR loans past due 0-30 days (2) (3) 17,700



33,184

Total nonaccrual loans 23,005



35,903

Real estate acquired through foreclosure 2,650



10,669

Total assets considered nonperforming $ 25,655



$ 46,572

TDR loans on accruing status and 0-30 days past due (4) $ 27,088 $ 13,429 Loans past due 90 days or more and still accruing 2,993 4,087 Loans past due 60-89 days and still accruing - - Loans past due 31-59 days and still accruing - 2,642 Nonaccrual loans to total gross loans 1.98 % 3.17 % Nonperforming assets to total assets 1.63 % 2.97 % Allowance for loan losses to total net loans 2.30 % 2.47 % Allowance for loan losses to nonaccrual loans 116 % 78 %



(1) We may place a loan on nonaccrual status prior to it becoming past due 90

days based on the specific facts and circumstances associated with each loan

that indicate that it is probable the borrower may not be able to continue

making monthly payments. Interest income from payments made on all nonaccrual

loans is recognized on a cash basis (or when collected) if the outstanding

principal is determined to be collectible. A loan on nonaccrual status can

only be returned to accrual status if ultimate collectability of contractual

principal is assured and the borrower has demonstrated satisfactory payment

performance. In the case of a TDR, satisfactory payment performance can be

achieved either before or after the restructuring (usually for a period of no

shorter than six months). 30



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Notes to preceding table follow:

(2) Represent loans whose terms have been modified through the deferral of

principal and/or a partial reduction in interest payments, or extension of

maturity term (referred to as a TDR in this report). All were current as to

payments and performing in accordance with their restructured terms at the

dates indicated, but were required to be classified nonaccrual for the

reasons noted in footnote 1 above.

(3) These loans were yielding 4.25% on a weighted-average basis at June 30, 2014.

A number of the nonaccrual TDR loans in the table above (which aggregated to

2 loans or $9 million at June 30, 2014) have been partially charged-off (by a

cumulative total of $1.8 million). For these TDRs, the evaluation for full

repayment of contractual principal must include the collectability of amounts

charged off. Although the loans have been partially charged off for financial

statement purposes, the borrowers remain obligated to pay all contractual

principal due, although there can be no assurance that such charged-off

amounts will be collected.

(4) Represent modified loans as described in footnote 2 above, except that they

were maintained on accrual status. All of these loans were performing and

current and as of June 30, 2014, they had an aggregate weighted-average yield

of 5.05%.

The table below summarizes the change in loans on nonaccrual status for the periods indicated.

Quarter Ended Quarter Ended Six-Months Ended ($ in thousands) March 31, 2014 June 30, 2014 June 30, 2014



Balance at beginning of period $ 35,903$ 38,750 $ 35,903 Net new additions

3,466 - 3,466 Transfer of TDR loan to accruing TDR status - (13,840 ) (13,840 ) Principal repayments (619 ) (1,905 ) (2,524 ) Balance at end of period $ 38,750$ 23,005 $ 23,005 The table below summarizes the change in TDRs on accrual status for the periods indicated. Quarter Ended Quarter Ended Six-Months Ended ($ in thousands) March 31, 2014 June 30, 2014 June 30, 2014



Balance at beginning of period $ 13,429$ 13,337 $

13,429 Transfer of TDR loan from nonaccrual status - 13,840 13,840 Principal repayments (92 ) (89 ) (181 ) Balance at end of period $ 13,337$ 27,088 $ 27,088 The table below sets forth information regarding our TDRs as of June 30, 2014. Contractual Collateral ($ in thousands) Principal Carrying Interest Principal Maturity Last Property Type Property Location Balance Due Value Rate Amortization Date Appraised Nonaccrual Status (1) Unanchored retail center West Palm, Florida $ 5,549$ 4,320 4.50 % No Aug 2014 Mar 2014 Unanchored retail center Lake Worth, Florida 5,452 4,685 4.50 % No Sep 2014 Mar 2014 Office building Norcross, Georgia 8,695 8,695 4.00 % No Dec 2015 Apr 2014 19,696 17,700 4.25 % Accrual Status Unanchored retail center New York, New York 5,259 5,259 4.50 % Yes Sep 2014 Jan 2014 Land Rapid City, S. Dakota 1,555 1,555 5.00 % Yes Jan 2015 Mar 2013 Garden apartment Orlando, Florida 2,264 2,264 4.75 % Yes Nov 2015 Sep 2013 Garden apartment Lake Worth, Florida 846 846 6.00 % Yes Oct 2016 Nov 2013 Unanchored retail center Monroe, New York 2,879 2,879 5.13 % Yes Mar 2017 Aug 2013 Office building Clearwater, Florida 445 445 5.00 % Yes Oct 2017 Nov 2012 Office building Miami, Florida 13,840 13,840 5.25 % Yes Oct 2018 Mar 2014 27,088 27,088 5.05 % $ 46,784$ 44,788 4.74 %



(1) All these TDRs were performing in accordance with their modified terms but

were maintained on nonaccrual status as of June 30, 2014 in accordance with

regulatory guidance. Interest income on such loans is recognized on a cash

basis. The carrying value for these loans represents contractual unpaid principal balance less any partial principal chargeoffs (totaling $1.8 million) and interest received and applied as a reduction of principal (totaling $0.2 million). The borrowers remain obligated to pay all



contractual amounts due although collection of such amounts by us is not

assured.

The table below details real estate we owned through foreclosure ("REO") at the dates indicated. ($ in thousands) Net Carrying Value Date



At June 30, At December 31, Last Description of Property

City State Acquired 2014 2013 Appraised 7 story vacant office building and vacant lot (1) Yonkers NY 8/09 $ - $ 1,334 5/13 622 unit garden apart. complex - 82% occupied (2) Louisville KY 7/10 - 6,685 5/13 Two, 5 story vacant office buildings - 182K sq. ft. Jacksonville FL 2/13 2,650 2,650 4/14 $ 2,650 $ 10,669



(1) Sold in Q1-14 for $1.4 million. Original cost basis upon transfer to REO was

$2.2 million.

A net gain from the sale of this property of $0.1 million was recorded in Q1-14.

(2) Sold in Q2-14 for $6.8 million. Original cost basis upon transfer to REO was

$7.5 million.

A net gain from the sale of this property of $0.1 million was recorded in Q2-14.

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We review the estimated fair value of our REO portfolio at least quarterly by performing market valuations of the properties, which normally consist of obtaining externally prepared appraisals at least annually for every property, as well as performing quarterly reviews of economic and real estate market conditions in the local area where the property is located, including taking into consideration discussions with real estate brokers and interested buyers, in order to determine if a valuation allowance is needed to reflect any decrease in the estimated fair value of the property since acquisition. The property owned at June 30, 2014 was being marketed for sale. At June 30, 2014, the total REO valuation allowance amounted to $0.4 million, compared to $2.0 million at December 31, 2013. All Other Assets



The following table sets forth a list of our other assets:

At June 30, At December 31, ($ in thousands) 2014 2013 Accrued interest receivable $ 4,494 $ 4,861 Loan fees receivable 2,165 2,298 Income tax receivable - 1,165 Premises and equipment, net 3,926



4,056

Deferred income tax asset 14,921



18,362

Deferred debenture offering costs, net 724



742

Investment in unconsolidated subsidiaries 1,702 1,702 All other 1,512 1,036 $ 29,444 $ 34,222



All other assets decreased primarily due to a $3.4 million decrease in our deferred tax asset resulting from the partial utilization of the asset to offset part of our taxable earnings during 6mths-14.

Deposits

Total deposits at June 30, 2014 amounted to $1.28 billion, unchanged from December 31, 2013, as an increase of $15 million in certificate of deposit accounts (CDs) was partially offset by a $19 million decrease in money market deposit accounts. At June 30, 2014, CDs totaled $896 million, and checking, savings and money market accounts aggregated to $382 million. The same categories of deposit accounts totaled $882 million and $400 million, respectively, at December 31, 2013. CDs represented 70% and 69%, respectively, of total deposits at each date. At June 30, 2014 and December 31, 2013, CDs included $87 million and $91 million of brokered deposits, respectively. See the section "Liquidity and Capital Resources" in this report for a further discussion of our deposits.



Borrowed Funds and Related Interest Payable

Borrowed funds and related accrued interest payable decreased to $56.8 million at June 30, 2014, from $57.6 million at December 31, 2013, due to the payment of accrued interest payable on IBC's outstanding debt, which is in the form of junior subordinated notes (TRUPs).



All Other Liabilities

The following table sets forth the composition of our other liabilities:

At June 30, At December 31, ($ in thousands) 2014 2013



Accrued interest payable on deposits $ 1,440 $ 1,508

Mortgage escrow funds payable 20,945



18,879

Official checks outstanding 4,881

7,335 Income taxes payable 313 - All other liabilities 3,083 3,281 $ 30,662 $ 31,003 Accrued interest payable on deposits fluctuates based on total deposits and the timing of interest payments. Mortgage escrow funds payable fluctuate based on the level of loans outstanding and other factors and represent advance payments made to us by borrowers for property taxes and insurance that we remit to third parties when due. Official checks outstanding represent checks issued by INB in the normal course of business which fluctuate based on banking activity. All other liabilities are comprised mainly of accrued expenses as well as fees received in connection with loan commitments that have not yet been funded.



Stockholders' Equity

Stockholders' equity increased to $207 million at June 30, 2014, from $197 million at December 31, 2013, reflecting primarily an increase in retained earnings of $8.5 million, net of a $1.1 million cash dividend on common stock paid on May 26, 2014.

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Comparison of Results of Operations for the Quarters Ended June 30, 2014 and

2013



Selected information regarding our results of operations follows:

For the Quarter Ended June 30, ($ in thousands) 2014 2013 Change Interest and dividend income $ 16,066$ 15,623$ 443 Interest expense 5,195 7,048 (1,853 ) Net interest and dividend income 10,871 8,575 2,296 Credit for loan losses (1,000 ) (750 ) (250 ) Noninterest income 2,461 702 1,759 Noninterest expenses: Provision for real estate losses - 76 (76 ) Real estate activities expense (income), net 298 (346 ) 644 Operating expenses 3,926 3,954 (28 ) Earnings before provision for income taxes 10,108 6,343 3,765 Provision for income taxes 4,370 2,804 1,566 Net earnings 5,738 3,539 2,199 Preferred dividend requirements and discount amortization - 326 (326 )



Net earnings available to common stockholders $ 5,738$ 3,213$ 2,525

Diluted earnings per common share $ 0.26 $



0.14 $ 0.12

Net Interest and Dividend Income

The $2.3 million quarterly increase in net interest and dividend income reflected an improved interest rate spread and a higher ratio (1.15x compared to 1.10x) of interest-earning assets to interest-bearing liabilities due to deployment of cash into new loans. The net interest margin increased to 2.84% in Q2-14 from 2.30% in Q2-13, primarily due to a 53 basis point increase in the interest rate spread and a $56 million increase in net interest-earning assets. The higher spread reflected primarily the run-off and replacement of higher-cost legacy CDs with new CDs at lower interest rates, which reduced the average cost of funds by 54 basis points to 1.55% in Q2-14 from 2.09% in Q2-13. The average yield on earning assets decreased slightly to 4.19% in Q2-14 from 4.20% in Q2-13 as the negative impact of payoffs of older, higher yielding loans coupled with new loan originations at lower market interest rates was offset by higher yields on security investments and the growth in net interest earning assets. Total average interest-earning assets increased by $44 million in Q2-14 from Q2-13, reflecting a $107 million increase in loans, partially offset by a $63 million decrease in total securities and overnight investments. At the same time, total average deposits decreased by $12 million, while average total stockholders' equity decreased by $13 million (reflecting the repurchase and retirement of $25 million of preferred stock during the middle of 2013, partially offset by an $11 million increase in retained earnings). The following table provides information on our: average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period. The interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin is greater than the interest rate spread due to the additional income earned on those assets funded by non-interest-bearing liabilities, primarily demand deposits, and stockholders' equity. 33



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Table of Contents For the Quarter Ended June 30, 2014 June 30, 2013 Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate (2) Balance Inc./Exp. Rate (2) Interest-earning assets: Commercial real estate loans $ 891,231$ 11,438 5.15 % $ 793,529$ 11,009 5.56 % Multifamily loans 208,296 2,509 4.83 199,874 2,603 5.22 1-4 family loans 58,608 805 5.51 60,033 869 5.81 Land loans 8,569 119 5.57 6,320 91 5.78 All other loans 1,239 15 4.86 1,446 19 5.27 Total loans (1) 1,167,943 14,886 5.11 1,061,202 14,591 5.51 U.S. government agencies securities 273,328 688 1.01 332,177 712 0.86 Residential mortgage-backed securities 78,914 357 1.81 75,584 184 0.98 State and municipal securities 531 2 1.51 533 2 1.51 Corporate securities (1) - - - 3,238 - - Mutual funds and other equity securities 1,032 5 1.94 1,009 5 1.99 FRB and FHLB stock 8,293 112 5.42 8,222 111 5.41 Total securities 362,098 1,164 1.29 420,763 1,014 0.97 Other interest-earning assets 7,146 16 0.90 11,343 18 0.64 Total interest-earning assets 1,537,187 $ 16,066 4.19 % 1,493,308 $ 15,623 4.20 % Noninterest-earning assets 50,095 120,653 Total assets $ 1,587,282$ 1,613,961 Interest-bearing liabilities: Interest checking deposits $ 17,589$ 18 0.41 % $ 15,205$ 15 0.40 % Savings deposits 9,822 7 0.29 9,655 7 0.29 Money market deposits 353,621 359 0.41 375,986 381 0.41 Certificates of deposit 903,833 4,424 1.96 896,260 6,209 2.78 Total deposit accounts 1,284,865 4,808 1.50 1,297,106 6,612 2.04 Debentures - capital securities 56,702 387 2.74 56,702 436 3.08



Total interest-bearing liabilities 1,341,567 $ 5,195

1.55 % 1,353,808 $ 7,048 2.09 % Noninterest-bearing deposits 5,748 5,036 Noninterest-bearing liabilities 37,081 39,365 Preferred stockholder's equity - 24,277 Common stockholders' equity 202,886 191,475 Total liabilities and stockholders' equity $ 1,587,282$ 1,613,961 Net interest and dividend income/spread $ 10,871 2.64 % $ 8,575 2.11 % Net interest-earning assets/margin (3) $ 195,620 2.84 % $ 139,500 2.30 % Ratio of total interest-earning assets to total interest-bearing liabilities 1.15 1.10 Return on average assets (2) 1.45 % 0.88 % Return on average common equity (2) 11.31 % 7.39 % Noninterest expense to average assets (2) (5) 0.99 % 0.98 % Efficiency ratio (4) 27 % 43 % Average stockholders' equity to average assets 12.78 % 13.37 %



(1) Includes average nonaccrual loans of $33.2 million in the 2014 period and

$40.6 million in the 2013 period. Total interest income not accrued on such

loans and excluded from the table totaled $72,000 in the 2014 period and

$25,000 in the 2013 period. Total loan fees, net of direct origination costs,

amortized and included in interest income amounted to $0.4 million in 2014

and 2013 period. Interest income on corporate securities was recognized on a

cash basis. Interest income from state and municipal securities was taxable.

(2) Annualized.



(3) Net interest margin is reported exclusive of income from loan prepayments,

which is included as a component of our noninterest income. Inclusive of

income from loan prepayments, the margin would compute to 3.36% and 2.47% for

the 2014 and 2013 period, respectively.

(4) Defined as noninterest expenses (excluding the provisions for loan and real

estate losses and real estate activities (income) expense, net) as a

percentage of net interest and dividend income plus noninterest income.

(5) Noninterest expenses for this ratio excludes provisions for loan and real

estate losses and real estate activities (income) expense, net. 34



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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, 2014 versus June 30, 2013

Increase (Decrease) Due To Change In: ($ in thousands) Rate Volume Rate/Volume Total Interest-earning assets: Total loans $ (1,057 )$ 1,476 $ 124 ) $ 295 Total securities 282 (118 ) (14 ) 150 Total other interest-earning assets 7 (7 ) (2 ) (2 ) Total interest-earning assets (768 ) 1,351 (140 ) 443 Interest-bearing liabilities: Interest checking deposits - 2 1 3 Savings deposits - - - - Money market deposits - (23 ) 1 (22 ) Certificates of deposit (1,837 ) 53 (1 ) (1,785 ) Total deposit accounts (1,837 ) 32 1 (1,804 ) Total borrowed funds (48 ) - (1 ) (49 ) Total interest-bearing liabilities (1,885 ) 32 - (1,853 ) Net change in interest and dividend income $ 1,117$ 1,319$ (140 )$ 2,296



Provision for Loan Losses

A credit for loan losses of $1.0 million was recorded in Q2-14, compared to $0.8 million in Q2-13. The amount for Q2-14 reflected the payoff of four substandard loans totaling $6.9 million. The Q2-13 credit was a function of partial cash recoveries of prior charge offs.



Noninterest Income

Noninterest income (inclusive of loan prepayment income) increased to $2.5 million in Q2-14 from $0.7 million in Q2-13. The increase was due to a higher level of loan prepayment income ($2.0 million in Q2-14 versus $0.6 million in Q2-13), which included $0.7 million from one loan in Q2-14, and the absence of security impairment charges in Q2-14, compared to $0.3 million of charges (which reduce noninterest income) in Q2-13.



Noninterest Expenses

No provision for real estate losses was required in Q2-14, compared to $0.1 million in Q2-13.

Real estate expenses, net of rental and other income, amounted to a net expense of $0.3 million in Q2-14, compared to net income of $0.3 million in Q2-13. The income for Q2-13 was due to a gain from the sale of one property and cash recovery of expenses associated with a previously owned property. Excluding these income items, real estate expenses would have amounted to $0.5 million in Q2-13.



Operating expenses decreased slightly to $3.9 million in Q2-14, from $4.0 million in Q2-13. We employed 80 people as of June 30, 2014, compared to 78 at June 30, 2013.

Provision for Income Taxes The provision for income tax expense increased to $4.4 million in Q2-14, from $2.8 million in Q2-13, due to higher pre-tax income ($10.1 million in Q2-14 versus $6.3 million in Q2-13). Our effective income tax rate (inclusive of state and local taxes) was 43% in Q2-14, compared to 44% in Q2-13. 35



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Comparison of Results of Operations for the Six-Months Ended June 30, 2014 and

2013



Selected information regarding our results of operations follows:

For the Six-Months Ended June 30, ($ in thousands) 2014 2013 Change Interest and dividend income $ 31,579$ 31,872$ (293 ) Interest expense 10,465 14,293 (3,828 ) Net interest and dividend income 21,114 17,579 3,535 Credit for loan losses (1,500 ) (1,750 ) 250 Noninterest income 3,327 1,445 1,882 Noninterest expenses: Provision for real estate losses - 705 (705 ) Real estate activities expense (income), net 499 (1,332 ) 1,831 Operating expenses 8,498 8,092 406 Earnings before provision for income taxes 16,944 13,309 3,635 Provision for income taxes 7,364 5,879 1,485 Net earnings 9,580 7,430 2,150 Preferred dividend requirements and discount amortization - 788 (788 )



Net earnings available to common stockholders $ 9,580$ 6,642$ 2,938

Diluted earnings per common share $ 0.43



$ 0.30$ 0.13

Net Interest and Dividend Income

As described in greater detail in the section entitled "Comparison of Results of Operations for the Quarters Ended June 30, 2014 and 2013" under the caption "Net Interest and Dividend Income," net interest and dividend income is our primary source of earnings. In 6mths-14, net interest and dividend income (detailed in the table that follows) increased by $3.5 million from 6mths-13. Our net interest margin increased to 2.79% in 6mths-14, from 2.33% in 6mths-13. The average cost of funds decreased by 54 basis points to 1.57% in 6mths-14, from 2.11% in 6mths-13, while the average yield on earning assets decreased by only 6 basis points to 4.17% in 6mths-14, from 4.23% in 6mths-13. Our total average interest-earning assets increased for the 6mths-14 period by $10 million from 6mths-13, reflecting an increase of $71 million in loans, partially offset by a $61 million decrease in total securities and overnight investments. At the same time, total average deposits decreased by $25 million, while average stockholders' equity decreased by $13 million.



The reasons for the above variances are the same as those discussed in the comparison of quarterly operating results.

The following table provides information on our: average assets, liabilities and stockholders' equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period. The interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin is greater than the interest rate spread due to the additional income earned on those assets funded by non-interest-bearing liabilities, primarily demand deposits, and stockholders' equity. 36



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Table of Contents For the Six-Months Ended June 30, 2014 June 30, 2013 Average Interest Yield/ Average Interest Yield/ ($ in thousands) Balance Inc./Exp. Rate (2) Balance Inc./Exp. Rate (2) Interest-earning assets: Commercial real estate loans $ 869,107$ 22,238 5.16 % $ 812,106$ 22,585 5.61 % Multifamily loans 207,455 4,947 4.81 204,138 5,338 5.27 1-4 family loans 63,164 1,742 5.56 54,895 1,597 5.87 Land loans 8,858 243 5.53 6,404 186 5.86 All other loans 1,251 31 5.00 1,400 38 5.47 Total loans (1) 1,149,835 29,201 5.12 1,078,943 29,744 5.57 U.S. government agencies securities 282,089 1,392 1.00 336,542 1,458 0.87 Residential mortgage-backed securities 78,339 709 1.83 78,432 395 1.02 State and municipal securities 531 3 1.14 533 3 1.14 Corporate securities (1) - - - 3,443 - - Mutual funds and other equity securities 1,029 12 2.35 1,006 10 2.00 FRB and FHLB stock 8,274 229 5.58 8,190 226 5.56 Total securities 370,262 2,345 1.28 428,146 2,092 0.99 Other interest-earning assets 8,009 33 0.83 11,107 36 0.65 Total interest-earning assets 1,528,106 $ 31,579 4.17 % 1,518,196 $ 31,872 4.23 % Noninterest-earning assets 58,054 107,750 Total assets $ 1,586,160$ 1,625,946 Interest-bearing liabilities: Interest checking deposits $ 17,687$ 36 0.41 % $ 14,891$ 30 0.41 % Savings deposits 9,930 15 0.30 9,651 14 0.29 Money market deposits 358,239 724 0.41 382,026 769 0.41 Certificates of deposit 900,294 8,904 1.99 904,876 12,605 2.81 Total deposit accounts 1,286,150 9,679 1.52 1,311,444 13,418 2.06 Debentures - capital securities 56,702 786 2.80 56,702 875 3.11



Total interest-bearing liabilities 1,342,852 $ 10,465

1.57 % $ 1,368,146$ 14,293 2.11 % Noninterest-bearing deposits 6,626 5,053 Noninterest-bearing liabilities 35,893 38,607 Preferred stockholder's equity - 24,466 Common stockholders' equity 200,789 189,674 Total liabilities and stockholders' equity $ 1,586,160$ 1,625,946 Net interest and dividend income/spread $ 21,114 2.60 % $ 17,579 2.12 % Net interest-earning assets/margin (3) $ 185,254 2.79 % $ 150,050 2.33 % Ratio of total interest-earning assets to total interest-bearing liabilities 1.14 1.11 Return on average assets (2) 1.21 % 0.91 % Return on average common equity (2) 9.54 % 7.83 % Noninterest expense to average assets (2) (5) 1.07 % 1.00 % Efficiency ratio (4) 35 % 43 % Average stockholders' equity to average assets 12.66 % 13.17 %



(1) Includes average nonaccrual loans of $34.4 million in the 2014 period and

$41.9 million in the 2013 period. Total interest income not accrued on such

loans and excluded from the table totaled $154,000 in the 2014 period and

$103,000 in the 2013 period. Total loan fees, net of direct origination

costs, amortized and included in interest income amounted to $0.7 million in

the 2014 period and $0.8 million in the 2013 period. Interest income on

corporate securities was recognized on a cash basis. Interest income from

state and municipal securities was taxable.

(2) Annualized.

(3) Net interest margin is reported exclusive of income from loan prepayments,

which is included as a component of our noninterest income. Inclusive of

income from loan prepayments, the margin would compute to 3.12% and 2.51% for

the 2014 and 2013 periods, respectively.

(4) Defined as noninterest expenses (excluding the provisions for loan and real

estate losses and real estate activities (income) expense, net) as a

percentage of net interest and dividend income plus noninterest income.

(5) Noninterest expenses for this ratio excludes provisions for loan and real

estate losses and real estate activities (income) expense, net. 37



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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 Six-Months Ended June



30, 2014 versus June 30, 2013

Increase (Decrease) Due To Change In: ($ in thousands) Rate Volume Rate/Volume Total Interest-earning assets: Total loans $ (2,396 )$ 1,997$ (144 )$ (543 ) Total securities 540 (235 ) (52 ) 253 Total other interest-earning assets 10 (10 ) (3 ) (3 ) Total interest-earning assets (1,846 ) 1,752 (199 ) (293 ) Interest-bearing liabilities: Interest checking deposits - 6 - 6 Savings deposits - - 1 1 Money market deposits - (49 ) 4 (45 ) Certificates of deposit (3,710 ) (64 ) 73 (3,701 ) Total deposit accounts (3,710 ) (107 ) 78 (3,739 ) Total borrowed funds (88 ) - (1 ) (89 ) Total interest-bearing liabilities (3,798 ) (107 ) 77 (3,828 ) Net change in interest and dividend income $ 1,952$ 1,859$ (276 )$ 3,535



Provision for Loan Losses

A credit for loan losses of $1.5 million was recorded in 6mths-14, compared to $1.8 million in 6mths-13. The amounts in the 2014 period reflected improved credit quality resulting from the payoff of four substandard loans totaling $6.9 million in Q2-14 and an upgrade of one loan ($1.6 million) in Q1-14, while the 2013 amounts were primarily due to partial recoveries of prior loan charge offs.



Noninterest Income

Noninterest income (inclusive of loan prepayment income) increased to $3.3 million in 6mths-14 from $1.4 million in 6mths-13. The increases were due to a higher level of loan prepayment income and the absence of security impairment charges in the 2014 period. Income from loan prepayments increased to $2.5 million in 6mths-14, from $1.3 million in 6mths-13, while security impairment charges amounted to $0.7 million in the 2013 period.



Noninterest Expenses

No provision for real estate losses was required in 6mths-14, compared to $0.7 million in 6mths-13. The provision for the 2013 period was due to decreases in the estimated fair value of properties owned through foreclosure. Real estate expenses, net of rental and other income, amounted to a net expense of $0.5 million in 6mths-14, compared to net income of $1.3 million in 6mths-13. The income for the 2013 period was due to cash recoveries of expenses associated with previously owned properties. Exclusive of these income items, REO expenses would have been $1.0 million for the 2013 period. Operating expenses increased to $8.5 million in 6mths-14, from $8.1 million in 6mths-13, primarily due to normal salary increases and higher stock compensation and employee bonus expense (totaling $0.6 million), partially offset by decreases in FDIC insurance expense ($0.3 million) and professional fees ($0.1 million). Provision for Income Taxes



We recorded a provision for income tax expense of $7.4 million (on pre-tax income of $16.9 million) in 6mths-14, compared to $5.9 million (on pre-tax income of $13.3 million) in 6mths-13. Our effective income tax rate (inclusive of state and local taxes) was approximately 44% in the 2014 and 2013 periods.

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Off-Balance Sheet and Other Financing Arrangements INB is party to financial instruments with off-balance sheet risk in the normal course of its business to meet the financing needs of its customers. These instruments can be in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in our financial statements. Our maximum exposure to credit risk is represented by the contractual amount of those instruments. At June 30, 2014, INB had approved commitments to lend of $19 million (which excludes an additional $30 million of potential new loan commitments that were in process of being approved as of that date), most of which are anticipated to be funded during 2014. Liquidity and Capital Resources The following discussion serves as an update to the section entitled "Liquidity and Capital Resources," which begins on page 59 of our 2013 10-K, and should be read in conjunction with that discussion. For detail concerning our actual cash flows for the Q2-14, see the condensed consolidated statements of cash flows in this report. Intervest National Bank



At June 30, 2014, INB had cash and short-term investments totaling $34 million, a large portion of which is expected to be used to fund loan commitments outstanding.

At June 30, 2104, INB had available collateral consisting of investment securities and certain loans that could be pledged to support an aggregate of approximately $380 million in borrowings from the FHLB and FRB. INB also had access to overnight unsecured lines of credit from three banks totaling $41 million. At June 30, 2014, this total borrowing capacity of $421 million represented approximately 57% of INB's deposits that are considered sensitive (money-market accounts and all certificate of deposit accounts (CDs), inclusive of brokered CDs, maturing within one year). In the event that any of INB's existing lines of credit were not accessible or were limited, INB could designate all or a portion of its un-pledged U.S. government agency investment securities portfolio as available for sale and sell such securities as needed to provide liquidity. At June 30, 2014, total deposits amounted to $1.28 billion consisting of CDs totaling $896 million, and checking, savings and money market accounts aggregating to $382 million. CDs represented 70% of total deposits and CDs of $100,000 or more totaled $501 million and included $87 million of brokered CDs and $57 million of CDs obtained from the national CD market (as that market is defined in our 2013 10-K). Brokered CDs had a weighted-average remaining term and stated interest rate of 2.7 years and 2.93%, respectively, at June 30, 2014, and $19 million mature by June 30, 2015. CDs obtained through the national CD market totaled $57 million and had a weighted-average rate and term of 1.41% and 3.3 years, respectively, at June 30, 2014, and none mature within the next twelve months. At June 30, 2014, $319 million, or 36% of total CDs (inclusive of brokered and national CDs), mature by June 30, 2015. INB expects to replace its brokered and national CDs as they mature with new ones and to retain or replace a significant portion of its remaining maturing (non-brokered and non-national) CDs. INB's current objective is to maintain its deposit rates at levels to promote a stable deposit base that can be adjusted to meet its cash flow needs. INB has historically targeted its loan-to-deposit ratio in a range from 75% to 85%, and most recently has increased this target to 85% to 90%. This ratio stood at 86% as of June 30, 2014. INB expects to increase its deposits and loans during the remainder of 2014. INB also introduced or is in the process of introducing other deposit products such as remote deposit capture, landlord-tenant security deposits and electronic bill-pay, in effort to increase its non-CD deposit accounts. We cannot assure you that any of the forgoing plans or objectives will be successful or result in an increase in deposits or loans. At June 30, 2014, INB had $99 million, or 8.5%, of its loan portfolio (excluding nonaccrual loans) scheduled to mature within one year. INB expects to extend or refinance a portion of these maturing loans. Over the next twelve months, approximately $53 million of securities in the portfolio could potentially be called or repaid assuming market interest rates remain at or near the levels they were as of June 30, 2104. We intend to reinvest a large portion of the resulting proceeds into similar securities and potentially at lower rates.



At June 30, 2014 and December 31, 2013, INB had no borrowed funds outstanding.

At June 30, 2014, INB's regulatory capital ratios exceeded those required to be categorized as a well-capitalized institution. INB does not expect to need additional capital over the next twelve months.

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Intervest Bancshares Corporation.

At June 30, 2014, IBC had cash and short-term investments totaling $5.7 million, of which $5.0 million was available for use (inclusive of $3.9 million on deposit with INB). IBC relies on cash dividends received from INB to fund interest payments due on IBC's outstanding debt as well as for IBC's payment of cash dividends on its capital stock, if and when declared by IBC's Board of Directors. In Q2-14, IBC received $0.6 million of dividends from INB. IBC's regulatory capital ratios at June 30, 2014 exceeded its minimum requirements and IBC does not expect to need additional capital over the next twelve months. On April 24, 2014, IBC's Board of Directors declared a cash dividend of $0.05 per share on IBC's outstanding common stock. The dividend was paid on May 26, 2014 to shareholders of record at the close of business May 15, 2014. The payment of the dividend was funded from IBC's cash on hand. On July 16, 2014, IBC announced that its Board of Directors had declared a quarterly dividend of $0.05 per common share payable on August 26, 2014 to shareholders of record at the close of business August 15, 2014. This payment is expected to be made from IBC's cash on hand.



Summary

We consider our current liquidity and sources of funds sufficient to satisfy our outstanding lending commitments and maturing liabilities. We are not aware of any trends, demands, commitments or uncertainties other than those discussed above in this section or elsewhere in this report that are expected to have a material impact on our future operating results, liquidity or capital resources. However, there can be no assurances that adverse conditions will not arise in the credit and capital markets or from the restrictions placed or that may be placed on us by our regulators that would adversely impact our liquidity and ability to raise funds to meet our operations and satisfy our outstanding lending commitments and maturing liabilities or raise new working capital if needed. Additional information concerning securities held to maturity, loans, deposits and borrowings, including interest rates and maturity dates thereon, can be found in notes 2, 6, 7, and 8 to the financial statements in this report.



Contractual Obligations

The table below summarizes our contractual obligations as of June 30, 2014 due within the periods shown. Amounts Due Within 2-3 4-5 Over ($ in thousands) Total 1 year years years 5 years Deposits with stated maturities $ 896,313$ 318,703$ 343,250$ 222,962$ 11,398 Deposits with no stated maturities 381,510 381,510 - - - Subordinated debentures - capital securities 56,702 - - - 56,702 Mortgage escrow payable and official checks outstanding 25,826 25,826 - - - Unfunded loan commitments and lines of credit (1) 20,116 20,116 - - - Operating lease payments 14,809 1,567 3,043 3,042 7,157 Accrued interest payable on deposits 1,440 1,440 - - - Accrued interest payable on all borrowed funds 58 58 - - - $ 1,396,774$ 749,220$ 346,293$ 226,004$ 75,257



(1) Since some of the commitments are expected to expire without being drawn

upon, the total commitment amount does not necessarily represent future cash requirements. Asset and Liability Management



For a discussion of our interest rate risk and the tools we use to manage it, including the gap analysis that follows and the factors that affect its computation and results, see pages 62 through 64 of our 2013 10-K.

As discussed in our 2013 10-K and in this report, our entire loan portfolio is comprised of fixed-rate loans, which increases our exposure to interest rate risk. Mitigating this somewhat was the loan portfolio's short weighted-average contractual term of approximately 4.8 years at June 30, 2014. At June 30, 2014, the gap analysis that follows indicated that our interest-bearing liabilities that were scheduled to mature or reprice within one year exceeded our interest-earning assets that were scheduled to mature or reprice within one year. This one-year interest rate sensitivity gap amounted to a negative $387 million, or a negative 24.6% of total assets, at June 30, 2014. As a result of the negative one-year gap, the composition of our balance sheet at June 30, 2014 was considered "liability-sensitive," indicating that our interest-bearing liabilities would generally reprice with changes in interest rates more rapidly than our interest-earning assets. 40



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The table below summarizes our interest-earning assets and interest-bearing liabilities as of June 30, 2014, scheduled to mature or reprice within the periods shown. 0-3 4-12 Over 1-5 Over 5 ($ in thousands) Months Months Years Years Total Loans (1) $ 29,293$ 70,572$ 679,015$ 360,209$ 1,139,089 Loans - performing nonaccrual TDRs (1) 9,005 - 8,694 - 17,699 Securities held to maturity (2) 211,045 36,027 96,686 14,580 358,338 Securities available for sale (2) 994 - - - 994 Short-term investments 2,030 - - - 2,030 FRB and FHLB stock 2,379 - - 5,923 8,302 Interest-earning time deposits with banks - 2,375 2,995 - 5,370 Total rate-sensitive assets $ 254,746$ 108,974$ 787,390$ 380,712$ 1,531,822 Deposit accounts (3): Interest checking $ 17,421 $ - $ - $ - $ 17,421 Savings 9,977 - - - 9,977 Money market 348,193 - - - 348,193 Certificates of deposit 109,956 208,747 566,212 11,398 896,313 Total deposits 485,547 208,747 566,212 11,398 1,271,904 Debentures (1) 56,702 - - - 56,702 Accrued interest on all borrowed funds (1) 58 - - - 58 Total borrowed funds 56,760 - - - 56,760 Total rate-sensitive liabilities $ 542,307$ 208,747$ 566,212$ 11,398$ 1,328,664



GAP (repricing differences) $ (287,561 )$ (99,773 )$ 221,178$ 369,314$ 203,158

Cumulative GAP $ (287,561 )$ (387,334 ) $



(166,156 ) $ 203,158$ 203,158

Cumulative GAP to total assets (18.3 )% (24.6 )% (10.6 )% 12.9 % 12.9 %



Significant assumptions used in preparing the preceding gap table follow:

(1) Loans with predetermined rate increases and floating-rate borrowings 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,

including those with options to extend are scheduled according to their

contractual maturities. Deferred loan fees and the effect of possible loan

prepayments are excluded from the analysis. Nonaccrual loans of $5.3 million

are also excluded from the table.

(2) Securities are scheduled according to the earlier of their next callable date

or the date on which the interest rate is scheduled to change. A large number

of the securities have predetermined interest rate increases or "steps up" to

a specified rate on one or more predetermined dates. Generally, the security

becomes eligible for redemption by the issuer at the date of the first

scheduled step-up.

(3) Interest checking, savings and money market deposits are regarded as 100%

readily accessible withdrawable accounts and certificates of deposit are

scheduled according to their contractual maturity dates. This assumption

contributes significantly to the liability sensitive position reported per

the one-year gap analysis. However, if such deposits were treated

differently, the one-year gap would then change accordingly. It should be

noted that depositors may not necessarily immediately withdraw funds in the

event deposit rates offered by INB did not change as quickly and uniformly as

changes in general market rates.

The table that follows summarizes the results of certain scenarios of our earnings simulation model as of June 30, 2014. The model takes into account our gap analysis as further adjusted by additional assumptions, including deposit decay factors for both rate and non-rate sensitive deposits. Furthermore, in determining the assumed rates offered on our deposit accounts in the model, we use internally developed beta factors that utilize historical data based on a specific time frames for both rising and declining interest rate environments. Rate Shock Scenario Base 100 200 300 Net interest and Basis Point Basis Point Basis Point ($ in thousands) Dividend Income Decrease (1) Increase (1) Increase (2) Next 12 months $ 43,234 $ 42,838 $ 41,411 $ 37,747 % change -0.92 % -4.22 % -12.69 % Next 13-24 months $ 43,567 $ 40,074 $ 41,284 $ 40,309 % change -8.02 % -5.24 % -7.48 % 2 Year Cumulative $ 86,801 $ 82,912 $ 82,695 $ 78,056 % change -4.48 % -4.73 % -10.07 %



(1) The model for this scenario covers a 24 month horizon and assumes interest

rate changes are gradually ramped up or down over a 12 month horizon using

various assumptions based upon a parallel yield curve shift and are

subsequently sustained at those levels for the remainder of the simulation

horizon.

(2) The model for this scenario utilizes an instantaneous parallel rate shock and

is maintained at those levels for the entire simulation horizon. 41



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A sudden and substantial change in interest rates may adversely impact our net interest and dividend income to a larger extent than noted above if interest rates on our assets and liabilities do not change at the same speed, to the same extent, or on the same basis, as those assumed in the model.



Recent Accounting Standards

See note 1 to the financial statements in this report for a discussion of this topic.


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