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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2003
Commission File No. 33-22976-NY
INTERVEST MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-3415815
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO .
- -
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act):
YES NO X.
- -
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
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Common Stock, no par value per share 100 shares outstanding at April 25, 2003
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2003 (Unaudited) and December 31, 2002 .................................... 2
Condensed Consolidated Statements of Operations (Unaudited)
for the Three-Months Ended March 31, 2003 and 2002 ........................................ 3
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
for the Three-Months Ended March 31, 2003 and 2002 ........................................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three-Months Ended March 31, 2003 and 2002 ........................................ 5
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................. 6
Review by Independent Certified Public Accountants ........................................... 9
Report on Review by Independent Certified Public Accountants ................................. 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......................... 14
Item 4. Controls and procedures ............................................................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 15
Item 2. Changes in Securities and Use of Proceeds ........................................... 15
Item 3. Defaults Upon Senior Securities ..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ................................. 15
Item 5. Other Information ................................................................... 15
Item 6. Exhibits and Reports on Form 8-K .................................................... 15
Signatures ........................................................................................ 15
Certification ..................................................................................... 16
Private Securities Litigation Reform Act Safe Harbor Statement
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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. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's net interest income, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting the Company.
1
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
- ----------------------------
Intervest Mortgage Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
($ in thousands) 2003 2002
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ASSETS
Cash and due from banks $ 1,088 $ 3,225
Commercial paper and other short-term investments 11,871 14,721
-----------------------------
Total cash and cash equivalents 12,959 17,946
Time deposits with banks 2,000 2,000
Mortgage loans receivable (net of unearned fees and discounts and allowance for
loan losses -note 2) 85,397 73,398
Accrued interest receivable 658 583
Fixed assets, net 61 67
Deferred debenture offering costs, net (note 3) 2,894 2,556
Other assets 1,002 761
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Total assets $104,971 $ 97,311
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LIABILITIES
Mortgage escrow funds payable $ 1,023 $ 660
Subordinated debentures payable (note 4) 80,100 74,000
Debenture interest payable at maturity (note 4) 10,655 10,751
Other liabilities 494 487
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Total liabilities 92,272 85,898
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STOCKHOLDER'S EQUITY
Class A common stock (no par value, 200 shares authorized, 100 shares issued and 2,100 2,100
outstanding)
Class B common stock (no par value, 100 shares authorized, none issued) - -
Additional paid-in-capital 4,510 3,509
Retained earnings 6,089 5,804
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Total stockholder's equity 12,699 11,413
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Total liabilities and stockholder's equity $104,971 $ 97,311
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See accompanying notes to condensed consolidated financial statements
2
Intervest Mortgage Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three-Months Ended
March 31,
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($ in thousands) 2003 2002
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REVENUES
Interest and fee income on mortgages $2,019 $1,894
Interest income on short-term investments 73 87
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Total interest and fee income 2,092 1,981
Service agreement income - related party (note 5) 487 271
Gain on early repayment of mortgages 8 35
Other income 44 32
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Total revenues 2,631 2,319
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EXPENSES
Interest on debentures 1,442 1,301
Amortization of deferred debenture offering costs 216 190
General and administrative 449 338
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Total expenses 2,107 1,829
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Income before income taxes 524 490
Provision for income taxes 239 226
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Net income $285 $264
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See accompanying notes to condensed consolidated financial statements.
3
Intervest Mortgage Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholder's Equity
(Unaudited)
Three-Months Ended
March 31,
--------------------------
($ in thousands) 2003 2002
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COMMON STOCK
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Balance at beginning and end of period $ 2,100 $ 2,100
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ADDITIONAL PAID-IN-CAPITAL, COMMON
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Balance at beginning of period 3,509 3,509
Contribution from Parent Company 1,001 -
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Balance at end of period 4,510 3,509
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RETAINED EARNINGS
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Balance at beginning of period 5,804 4,238
Net income for the period 285 264
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Balance at end of period 6,089 4,502
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Total stockholder's equity at end of period $ 12,699 $ 10,111
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See accompanying notes to condensed consolidated financial statements.
4
Intervest Mortgage Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three-Months Ended
March 31,
----------------------------------------
($ in thousands) 2003 2002
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OPERATING ACTIVITIES
Net income $ 285 $ 264
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 8 6
Amortization of deferred debenture offering costs 216 190
Amortization of premiums, fees and discounts, net (181) (149)
Gain on early repayment of mortgage loans receivable (8) (35)
Increase in mortgage escrow funds payable 363 305
(Decrease) increase in debenture interest payable at maturity (96) 441
Change in all other assets and liabilities, net 173 (34)
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Net cash provided by operating activities 760 988
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INVESTING ACTIVITIES
Principal repayments of mortgage loans receivable 12,081 3,043
Originations of mortgage loans receivable (24,375) (7,155)
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Net cash used in investing activities (12,294) (4,112)
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FINANCING ACTIVITIES
Proceeds from issuance of debentures, net of offering costs 6,946 5,325
Principal repayments of debentures (1,400) -
Capital contribution from Parent Company 1,001 -
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Net cash provided by financing activities 6,547 5,325
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Net (decrease) increase in cash and cash equivalents (4,987) 2,201
Cash and cash equivalents at beginning of period 17,946 16,752
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Cash and cash equivalents at end of period $ 12,959 $ 18,953
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 1,540 $ 860
Income taxes 450 337
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See accompanying notes to condensed consolidated financial statements.
5
Intervest Mortgage Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 1 - General
The condensed consolidated financial statements of Intervest Mortgage
Corporation and Subsidiaries (the "Company") in this report have not been
audited except for the information derived from the audited Consolidated Balance
Sheet as of December 31, 2002. The financial statements in this report should be
read in conjunction with the consolidated financial statements and related notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
The condensed consolidated financial statements include the accounts of
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation. All
material intercompany accounts and transactions have been eliminated in
consolidation.
The Company is engaged in the real estate business, including the origination
and purchase of real estate mortgage loans, consisting of first mortgage, junior
mortgage loans and wraparound mortgage loans receivable. The Company's
investment policy emphasizes the investment in mortgage loans receivable on
income producing properties.
The Company is 100% owned by Intervest Bancshares Corporation (the "Parent
Company"). Officers of the Company are also shareholders and officers of the
Parent Company and serve on the Boards of Directors of both companies.
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. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts to conform to the current periods' presentation.
Note 2 - Mortgage Loans Receivable
Mortgage loans receivable are stated at their outstanding principal balances,
exclusive of any deferred fees or costs on originated mortgage loans receivable
and net unamortized discounts on purchased mortgage loans receivable and the
allowance for mortgage loans receivable losses. Purchased mortgage loans
receivable, all of which have been made from affiliated companies, are recorded
at cost which is equivalent to the carrying amount of the seller. The purchase
price is deemed equivalent to fair value of the mortgage loans receivable based
on their variable or floating interest rates. Interest income is accrued on the
unpaid principal balance. Discounts are amortized to income over the term of the
related mortgage loans receivable using the constant interest method. Mortgage
loans receivable origination fees net of certain direct origination costs are
deferred and recognized as an adjustment of the yield of the related mortgage
loans receivable.
The allowance for mortgage loans receivable losses is netted against mortgage
loans receivable and is increased by provisions charged to operations and
decreased by chargeoffs (net of recoveries). The adequacy of the allowance is
evaluated monthly with consideration given to the nature and volume of the
mortgage loans receivable portfolio, overall portfolio quality, mortgage loans
receivable concentrations, specific problem mortgage loans receivable and
commitments and estimates of fair value thereof; historical chargeoffs and
recoveries, adverse situations which may affect the borrowers' ability to repay,
and management's perception of the current and anticipated economic conditions
in the Company's lending areas. In addition, Statement of Financial Accounting
Standards (SFAS) No. 114 specifies the manner in which the portion of the
allowance for mortgage loans receivable losses is computed related to certain
mortgage loans receivable that are impaired. A mortgage loans receivable is
normally deemed impaired when, based upon current information and events, it is
probable the Company will be unable to collect both principal and interest due
according to the contractual terms of the loan agreement. Impaired mortgage
loans receivable normally consist of mortgage loans receivable on nonaccrual
status. Interest income on impaired mortgage loans receivable is recognized on a
cash basis. Impairment for commercial real estate and residential mortgage loans
receivable is measured based on the present value of expected future cash flows,
discounted at the mortgage loan receivable's effective interest rate, or the
6
Intervest Mortgage Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 2 - Mortgage Loans Receivable, Continued
observable market price of the mortgage loan receivable or the estimated fair
value of the mortgage loan receivable's collateral, if payment of the principal
and interest is dependent upon the collateral. When the fair value of the
property is less than the recorded investment in the mortgage loan receivable,
this deficiency is recognized as a valuation allowance and a charge through the
provision for loan losses. The Company normally charges off any portion of the
recorded investment in the mortgage loan receivable that exceeds the fair value
of the collateral.
The balance of the allowance for mortgage loans receivable losses was $158,000
at March 31, 2003 and $101,000 at December 31, 2002. For the quarter ended March
31, 2003 and 2002, the provision for mortgage loans receivable losses was
$57,000 and $18,000, respectively. For the quarter ended March 31, 2003 and
2002, there were no mortgage loans receivable chargeoffs, or mortgage loans
receivable classified as nonaccrual or impaired.
Note 3 - Deferred Debenture Offering Costs
Costs related to offerings of debentures are deferred and amortized over the
respective terms of the debentures. Deferred debenture offering costs consist
primarily of underwriter's commissions. At March 31, 2003, deferred debenture
offering costs, net of accumulated amortization of $3,621,000, amounted to
$2,894,000. At December 31, 2002, deferred debenture offering costs, net of
accumulated amortization of $3,488,000, amounted to $2,556,000.
Note 4 - Subordinated Debentures Payable
The following table summarizes debentures payable.
At March 31, At December 31,
($ in thousands) 2003 2002
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Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ 9,000 $ 9,000
Series 10/19/95 - interest at 2% above prime - due October 1, 2004 9,000 9,000
Series 05/10/96 - interest at 2% above prime - due April 1, 2005 10,000 10,000
Series 10/15/96 - interest at 2% above prime - due October 1, 2005 5,500 5,500
Series 04/30/97 - interest at 1% above prime - due October 1, 2005 8,000 8,000
Series 11/10/98 - interest at 81/2% fixed - due January 1, 2003 - 1,400
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 81/2% fixed - due July 1, 2004 2,000 2,000
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
Series 09/18/00 - interest at 8% fixed - due January 1, 2004 1,250 1,250
Series 09/18/00 - interest at 81/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 71/2% fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 81/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 71/4% fixed - due October 1, 2005 1,250 1,250
Series 01/17/02 - interest at 71/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 73/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 71/4% fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 71/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 73/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 63/4% fixed - due July 1, 2006 1,500 -
Series 01/21/03 - interest at 7% fixed - due July 1, 2008 3,000 -
Series 01/21/03 - interest at 71/4% fixed - due July 1, 2010 3,000 -
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$ 80,100 $ 74,000
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The "prime" in the preceding table refers to the prime rate of JP Morgan Chase
Bank, which was 4.25% at March 31, 2003 and December 31, 2002.
7
Intervest Mortgage Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 4 - Subordinated Debentures Payable, Continued
In February of 2003, the Company issued its Series 01/21/03 debentures in the
principal amount of $7,500,000. Net proceeds, after deferred offering costs,
amounted to $6,935,000. This series accrues and pays interest quarterly.
The Series 5/12/95, 10/19/95, 5/10/96, 10/15/96 and 4/30/97 debentures have a
maximum interest rate of 12%. Interest on an aggregate of $6,350,000 of these
debentures at March 31, 2003 is accrued and compounded quarterly, and is due and
payable at maturity. The payment of interest on the remaining debentures is made
quarterly. Any debenture holder in the aforementioned Series whose interest
accrues and is due at maturity may at any time elect to receive the accrued
interest and subsequently receive regular payments of interest.
The Series 11/10/98, 6/28/99, 9/18/00, $770,000 of Series 8/1/01, $270,000 of
Series 1/17/02 and $1,520,000 of Series 8/5/02 debentures accrue and compound
interest quarterly, with such interest due and payable at maturity. Interest is
paid quarterly on the remaining debentures in series 8/1/01, 1/17/02 and 8/5/02.
The holders of Series 11/10/98, 6/28/99, 9/18/00, 1/17/02, 8/5/02 and 1/21/03
debentures can require the Company to repurchase the debentures for face amount
plus accrued interest each year (beginning January 1, 2004 for Series 9/18/00,
October 1, 2005 for Series 1/17/02, January 1, 2006 for Series 8/5/02 and July
1, 2006 for series 1/21/03) provided, however, that in no calendar year will the
Company be required to purchase more than $100,000 in principal amount of each
maturity, in each series of debentures, on a non-cumulative basis.
All the debentures may be redeemed, in whole or in part, at any time at the
option of the Company, for face value, except for Series 08/05/02 and Series
01/21/03 debentures. The Series 08/05/02 debentures would be redeemable at a
premium of 1% if the redemption were prior to October 1, 2003. The Series
01/21/03 debentures would be redeemable at a premium of 1% if the redemption
were prior to April 1, 2004. All the debentures are unsecured and subordinate to
all present and future senior indebtedness, as defined in the indenture related
to the debenture.
Scheduled contractual maturities of debentures as of March 31, 2003 are
summarized as follows:
($ in thousands) Principal Accrued Interest
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For the nine-months ended December 31, 2003 $ - $ 932
For the year ended December 31, 2004 21,250 5,294
For the year ended December 31, 2005 29,100 2,905
For the year ended December 31, 2006 6,500 1,069
For the year ended December 31, 2007 5,000 42
Thereafter 18,250 413
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$80,100 $10,655
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Note 5 - Related Party Transactions
The Company has a service agreement, which renews each January 1, unless
terminated by either party, with Intervest National Bank with respect to
providing mortgage loan origination and servicing services to Intervest National
Bank. The Company earned $487,000 and $271,000 from Intervest National Bank for
the three months ended March 31, 2003 and 2002, respectively, in connection with
this service agreement.
The Company participates with Intervest National Bank (another wholly owned
subsidiary of the Parent Company) in certain mortgage loans receivable. The
aggregate balance of the Company's participation in these mortgages was
$7,513,000 and $6,224,000 at March 31, 2003 and December 31, 2002, respectively.
The Company has interest-bearing and noninterest-bearing deposit accounts with
Intervest National Bank totaling $1,231,000 at March 31, 2003 and $4,255,000 at
December 31, 2002. The Company received interest income of $17,000 and $33,000
for the three months ended March 31, 2003 and 2002, respectively in connection
with such deposits. These amounts are included in interest income in the
statement of operations.
8
Intervest Mortgage Corporation and Subsidiaries
Review by Independent Certified Public Accountants
Eisner LLP, the Company's independent certified public accountants, have made a
limited review of the condensed consolidated financial statements as of March
31, 2003, and for the three-month periods ended March 31, 2003 and March 31,
2002 presented in this document, in accordance with standards established by the
American Institute of Certified Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
9
Report on Review by Independent Certified Public Accountants
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Mortgage Corporation and Subsidiaries (the "Company") as of March 31,
2003, and the related condensed consolidated statements of operations, changes
in stockholder's equity and cash flows for the three-month periods ended March
31, 2003 and 2002. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States of
America, 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 review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002 and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for the year then ended, and in our
report dated January 23, 2003, we 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, 2002 is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ Eisner LLP
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New York, New York
April 18, 2003
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- -------
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation (hereafter
referred to as the "Company" on a consolidated basis), are engaged in the real
estate business, including the origination and purchase of real estate mortgage
loans receivable, consisting of first mortgage, junior mortgage and wraparound
mortgage loans receivable.
On March 10, 2000, Intervest Bancshares Corporation (hereafter referred to as
the "Parent Company") acquired all the outstanding capital stock of the Company
in exchange for shares of the Parent Company's Class A common stock. As a result
of the acquisition, the Company became a wholly owned subsidiary of the Parent
Company, which is a financial holding company. Former shareholders of the
Company are officers and directors of both the Company and the Parent Company.
The Parent Company also owns Intervest National Bank, a national bank with its
headquarters and full-service banking office located in New York, New York, four
full-service banking offices in Clearwater, Florida and one in South Pasadena,
Florida.
The Company's results of operations are affected by general economic trends in
real estate markets, as well as by trends in the general economy and the
movement of interest rates. Since the properties underlying the Company's
mortgages are concentrated in the New York City area, the economic conditions in
that area also have an impact on the Company's operations.
The Company has historically invested primarily in short-term real estate
mortgage loans receivable secured by income producing real property that mature
in approximately five years. The properties to be mortgaged are inspected by
representatives of the Company and mortgage loans receivable are made only on
those types of properties where management is knowledgeable as to operating
income and expense. The Company generally relies upon management in connection
with the valuation of properties. From time to time, however, it may engage
independent appraisers and other agents to assist in determining the value of
income-producing properties underlying mortgages, in which case the costs
associated with such services are generally paid by the mortgagor. The Company
does not finance new construction. While the Company has not previously made
acquisitions of real property, it may also, from time to time, acquire interests
in real property, including fee interests.
The Company's mortgage portfolio is composed predominantly of mortgages on
multi-family residential properties, many of which are subject to applicable
rent control and rent stabilization statutes and regulations. In both cases, any
increases in rent are subject to specific limitations. As such, properties of
the nature of those constituting the most significant portion of the Company's
mortgage portfolio are not affected by the general movement of real estate
values in the same manner as other income-producing properties.
The prepayment of mortgage loans receivable tends to increase during periods of
declining interest rates and tends to decrease during periods of increasing
interest rates. Certain of the Company's mortgages include prepayment
provisions, and others prohibit prepayment of indebtedness entirely.
Comparison of Financial Condition at March 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------
Total assets at March 31, 2003 increased to $104,971,000, from $97,311,000 at
December 31, 2002. The increase is reflective of the proceeds from issuance of
subordinated debentures with a principal amount of $7,500,000 which was
partially offset by the redemption of subordinated debentures with a principal
amount of $1,400,000. Total assets also increased as the result of a $1,001,000
capital contribution from the Parent Company and $285,000 of income for the
quarter.
Cash and cash equivalents amounted to $12,959,000 at March 31, 2003, compared to
$17,946,000 at December 31, 2002. The decrease was mostly reflected in a
decrease in funds maintained in money market accounts and cash in other banks
which are reflective of additional mortgage loans receivable made in the first
quarter.
11
Mortgage loans receivable, net of unearned income and allowance for loan losses,
amounted to $85,397,000 at March 31, 2003, compared to $73,398,000 at December
31, 2002. The increase, funded by the above mentioned decrease in cash and cash
equivalents and a net increase in subordinated debentures, was due to new
originations exceeding maturities and early repayments of loans receivable . At
March 31, 2003 and December 31, 2002, the Company did not have any nonperforming
loans.
Deferred debenture offering costs, net of accumulated amortization, increased to
$2,894,000 at March 31, 2003, from $2,556,000 at December 31, 2002. The increase
was primarily due to the incremental costs associated with the issuance of
subordinated debentures, which was partially offset by normal amortization.
Total liabilities at March 31, 2003 increased to $92,272,000, from $85,898,000
at December 31, 2002. The increase was primarily due to the issuance of
subordinated debentures with a principal amount of $7,500,000, partially offset
by the redemption of subordinated debentures with a principal balance of
$1,400,000.
Subordinated debentures outstanding at March 31, 2003 increased to $80,100,000,
from $74,000,000 at December 31, 2002 as a result of the issuance of
subordinated debentures with a principal amount of $7,500,000, which was
partially offset by the redemption of subordinated debentures with a principal
balance of $1,400,000. Debenture interest payable decreased to $10,655,000 at
March 31, 2003, from $10,751,000 at December 31, 2002 primarily as a result of
the payment of $570,000 of accrued interest on subordinated debentures which
were redeemed. This decrease was mostly offset by the accrual of interest on the
remaining outstanding debentures.
Mortgage escrow funds increased to $1,023,000 at March 31, 2003, an increase of
$363,000 from the December 31, 2002 balance of $660,000. This increase was
primarily due to new escrow funds being added relating to the increase in
mortgage loans receivable. Mortgage escrow funds payable represent advance
payments made by the borrowers for taxes, insurance and other charges remitted
by the Company to third parties.
Stockholder's equity increased to $12,699,000 at March 31, 2003, from
$11,413,000 at year-end 2002. The increase was due to a $1,001,000 capital
contribution from the Parent Company and net income of $285,000 for the
three-months ended March 31, 2003.
Comparison of Results of Operations for the Quarter Ended March 31, 2003 and
- ----------------------------------------------------------------------------
2002
- ----
The Company recorded net income of $285,000 for the first quarter of 2003,
compared to net income of $264,000 for the first quarter of 2002.
Interest income was $2,092,000 for the quarter ended March 31, 2003, compared to
$1,981,000 for the same period a year ago. The increase of $111,000 was
primarily due to an increase in mortgage loans receivable, which was mostly
offset by a decrease in rates on new mortgage loans receivable, repayments of
higher-yielding loans and lower rates earned on short-term investments.
Interest expense on debentures was $1,442,000 for the quarter ended March 31,
2003, compared $1,301,000 for the same period of 2002. The increase of $141,000
was primarily due to a $10,200,000 increase in the average balance of debentures
outstanding in the first quarter of 2003, compared to the first quarter of 2002.
This increase was partially offset by a 50 basis point decrease in interest
rates on floating-rate debentures from the quarter ended March 31, 2002 to the
quarter ended March 31, 2003 and a decrease in interest rates on new fixed-rate
debentures issued since the first quarter of 2002 compared to those that were
redeemed.
Amortization of deferred debenture offering costs was $216,000 for the quarter
ended March 31, 2003, compared to $190,000 for the same period of 2002. The
increase of $26,000 reflected the increased amount of debentures outstanding.
12
General and administrative expenses increased to $449,000 for the quarter ended
March 31, 2003, from $338,000 for the same period of 2002. The increase
primarily reflected an increase in compensation and benefits expense of $42,000,
due to additional staff and salary increases, and an increase in the provision
for loan losses of $39,000 due to increased originations of loans.
Income tax expense for the quarter ended March 31, 2003 amounted to $239,000,
compared to $226,000 for the quarter ended March 31, 2002. The Company's
effective tax rate was 46% for both periods.
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 funding commitments and
the repayment of borrowed funds. The Company's principal sources of funds have
consisted of borrowings (through the issuance of its subordinated debentures),
mortgage repayments and cash flow generated from ongoing operations. For
information about the cash flows from the Company's operating, investing and
financing activities, see the condensed consolidated statements of cash flows in
this report.
At March 31, 2003, the Company's total commitment to lend aggregated
approximately $20,315,000.
The Company considers its current liquidity and sources of funds sufficient to
satisfy its outstanding lending commitments and its maturing liabilities.
Asset and Liability Management
- ------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. 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. An asset or liability is normally considered to be
interest-rate sensitive if it will reprice or mature within one year or less.
The interest-rate sensitivity gap is the difference between interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice within a
one-year time period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities.
Conversely, a gap is considered negative when the opposite is true.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to adversely affect net interest income. If the
repricing of the Company's assets and liabilities were equally flexible and
moved concurrently, the impact of any increase or decrease in interest rates on
net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates for the
following reasons. Income associated with interest-earning assets and costs
associated with interest bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in market rates. The ability of many
borrowers to service their debts also may decrease in the event of an
interest-rate increase
The Company has a "floor," or minimum rate, on many of its floating-rate loans.
The floor for each specific loan is determined in relation to the prevailing
market rates on the date of origination and most adjust upwards in the event of
increases in the loan's interest rate. This feature reduces the effect on
interest income in a falling rate environment.
Notwithstanding all of the above, there can be no assurances that a sudden and
substantial increase in interest rates may not adversely impact the Company's
earnings, to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
13
The following table summarizes information relating to the Company's
interest-earning assets and interest-bearing liabilities as of March 31, 2003,
that are scheduled to mature or reprice within the periods shown. Floating-rate
loans, which are subject to adjustment at any time, are included in the 0-3
month period rather than in the period in which the loans mature. Fixed-rate
loans are scheduled, including repayments, according to their contractual
maturities.
($ in thousands) 0-3 4-12 Over 1-4 Over 4
Months Months Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Floating- rate loans $ 48,838 - $ 337 - $ 49,175
Fixed- rate loans - $ 21,522 6,794 $ 9,108 37,424
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 48,838 21,522 7,131 9,108 86,599
Short-term investments 11,871 - - - 11,871
Time deposits with banks 2,000 2,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 62,709 $ 21,522 $ 7,131 $ 9,108 $100,470
- ------------------------------------------------------------------------------------------------------------------------------------
Debentures payable $ 41,500 - $ 15,350 $ 23,250 $ 80,100
Accrued interest on debentures 6,905 - 3,295 455 10,655
- ------------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 48,405 - $ 18,645 $ 23,705 $ 90,755
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
GAP (repricing differences) $ 14,304 $ 21,522 $(11,514) $(14,597) $ 9,715
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP $ 14,304 $ 35,826 $ 24,312 $ 9,715 $ 9,715
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 13.6% 34.1% 23.2% 9.3% 9.3%
- ------------------------------------------------------------------------------------------------------------------------------------
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's market risk arises primarily from interest rate
risk inherent in its lending and debenture-selling activities. The Company has
not engaged in and accordingly has no risk related to trading accounts,
commodities or foreign exchange. 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, 2002 and 2001, which reflect changes in market prices and rates,
can be found in note 12 of the notes to consolidated financial statements
included in the Company's Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2002. Management believes that there have been no
significant changes in the Company's market risk exposure since December 31,
2002.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within 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 "Asset and Liability Management."
ITEM 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures. The Company maintains
-----------------------------------------------------
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon his evaluation of those controls and procedures performed
within 90 days of the filing date of this report, the Principal Executive and
Principal Financial Officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
b) Changes in internal controls. The Company made no significant changes in its
-----------------------------
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the
Principal Executive and Principal Financial Officer.
14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes- Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the reporting period covered
by this report.
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 MORTGAGE CORPORATION
Date:April 25, 2003 By:/s/ Lowell S. Dansker
-------------------------------------------
Lowell S. Dansker, President (Principal Executive Officer),
Treasurer (Principal Financial Officer and Principal
Accounting Officer) and Director
Date:April 25, 2003 By: /s/ Lawrence G. Bergman
-------------------------------------------
Lawrence G. Bergman, Vice President, Secretary and Director
15
CERTIFICATION
-------------
I, Lowell S. Dansker, as the principal executive and principal financial
officer of Intervest Mortgage Corporation and Subsidiaries (the Company),
certify, that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, the quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Company and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date.
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the Audit Committee of the Company's Board of Directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the Company's ability
to record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Lowell S. Dansker
---------------------
Lowell S. Dansker, President
(Principal Executive and Financial Officer)
April 25, 2003
16