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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 SEPTEMBER 30, 2003
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Commission File No. 33-22976-NY
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INTERVEST MORTGAGE CORPORATION
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(Exact name of registrant as specified in its charter)
New York 13-3415815
- ------------------------------------ ----------------------------------------
(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 October 31, 2003
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
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ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of September 30, 2003 (Unaudited) and December 31, 2002. . . . . . . . . . 2
Condensed Consolidated Statements of Operations (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2003 and 2002. . . . . . 3
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
for the Nine-Months Ended September 30, 2003 and 2002 . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2003 and 2002 .. . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . 6
Review by Independent Certified Public Accountants . . . . . . . . . . . . . . . 10
Review Report of Independent Certified Public Accountants . . . . . . . . . . . 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . 16
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . . . . . 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 17
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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
- --------------------------------
ITEM 1. FINANCIAL STATEMENTS
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
($in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,253 $ 3,225
Commercial paper and other short-term investments 15,717 14,721
-------------- -------------
Total cash and cash equivalents 16,970 17,946
Time deposits with banks - 2,000
Mortgage loans receivable (net of unearned fees and discounts and allowance for
loan losses -notes 2 and 3) 96,911 73,398
Accrued interest receivable 637 583
Fixed assets, net 52 67
Deferred debenture offering costs, net (note 4) 3,033 2,556
Other assets 1,146 761
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TOTAL ASSETS $ 118,749 $ 97,311
================================================================================================================
LIABILITIES
Mortgage escrow funds payable $ 1,358 $ 660
Subordinated debentures payable (note 5) 88,600 74,000
Debenture interest payable at maturity (note 5) 11,791 10,751
Other liabilities 308 487
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TOTAL LIABILITIES 102,057 85,898
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STOCKHOLDER'S EQUITY
Class A common stock (no par value, 200 shares authorized, 100 shares issued and
outstanding) 2,100 2,100
Class B common stock (no par value, 100 shares authorized, none issued) - -
Additional paid-in-capital 7,510 3,509
Retained earnings 7,082 5,804
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TOTAL STOCKHOLDER'S EQUITY 16,692 11,413
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 118,749 $ 97,311
================================================================================================================
See accompanying notes to condensed consolidated financial statements.
2
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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($in thousands) 2003 2002 2003 2002
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REVENUES
Interest and fee income on mortgages $ 2,409 $ 2,046 $ 6,778 $ 6,207
Interest income on short-term investments 33 68 141 183
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Total interest and fee income 2,442 2,114 6,919 6,390
Service agreement income - related party (note 6) 615 473 1,599 1,145
Gain on early repayment of mortgages 47 152 180 235
Other income 44 37 136 97
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TOTAL REVENUES 3,148 2,776 8,834 7,867
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EXPENSES
Interest on debentures 1,568 1,384 4,543 4,001
Amortization of deferred debenture offering costs 243 200 691 592
General and administrative 401 347 1,254 1,040
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TOTAL EXPENSES 2,212 1,931 6,488 5,633
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Income before income taxes 936 845 2,346 2,234
Provision for income taxes 427 325 1,068 961
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NET INCOME $ 509 $ 520 $ 1,278 $ 1,273
================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
---------------------
($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 4,001 -
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Balance at end of period 7,510 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 1,278 1,273
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Balance at end of period 7,082 5,511
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TOTAL STOCKHOLDER'S EQUITY AT END OF PERIOD $ 16,692 $ 11,120
===================================================================
See accompanying notes to condensed consolidated financial statements.
4
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE-MONTHS ENDED
SEPTEMBER 30,
-----------------------
($in thousands) 2003 2002
- -------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,278 $ 1,273
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 24 20
Amortization of deferred debenture offering costs 691 592
Amortization of premiums, fees and discounts, net (652) (491)
Gain on early repayment of mortgage loans receivable (180) (235)
Increase in mortgage escrow funds payable 698 94
Increase in debenture interest payable at maturity 1,040 972
Change in all other assets and liabilities, net 727 623
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NET CASH PROVIDED BY OPERATING ACTIVITIES 3,626 2,848
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INVESTING ACTIVITIES
Principal repayments of mortgage loans receivable 44,013 21,794
Originations of mortgage loans receivable (68,039) (26,390)
Decrease in interest-earning time deposits 2,000 -
Purchases of fixed asset, net (9) (25)
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NET CASH USED IN INVESTING ACTIVITIES (22,035) (4,621)
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FINANCING ACTIVITIES
Proceeds from issuance of debentures, net of offering costs 14,832 12,499
Principal repayments of debentures (1,400) (2,500)
Capital contribution from Parent Company 4,001 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 17,433 9,999
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Net (decrease) increase in cash and cash equivalents (976) 8,226
Cash and cash equivalents at beginning of period 17,946 16,752
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,970 $ 24,978
=====================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 3,502 $ 3,029
Income taxes 1,372 970
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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"). Executive Officers of the Company are also shareholders and officers
of the Parent Company and serve on the Board 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 summarized as follows:
At September 30, 2003 At December 31, 2002
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($in thousands) #of loans Amount # of loans Amount
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Mortgage loans receivable 79 $ 98,331 61 $ 74,305
Deferred loan fees and unamortized discount (1,202) (806)
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Mortgage loans receivable, net of fees and discount 97,129 73,499
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Allowance for loan losses (218) (101)
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Mortgage loans receivable, net $ 96,911 $ 73,398
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Mortgage loans receivable are stated at their outstanding principal balances,
exclusive of any deferred fees or costs on originated mortgage loans receivable
and net of 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.
6
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - MORTGAGE LOANS RECEIVABLE, CONTINUED
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 loan 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
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.
NOTE 3 - ALLOWANCE FOR LOAN LOSS RESERVES
Activity in the allowance for loan loss reserves for the periods indicated is
summarized as follows:
Quarter Ended Nine-Months Ended
September 30, September 30,
------------------ ---------------------
($in thousands) 2003 2002 2003 2002
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Balance at beginning of period $ 194 $ 74 $ 101 $ 18
Provision charged to operations 24 10 117 66
Recoveries of previous chargeoffs - - - -
Chargeoffs - - - -
- -----------------------------------------------------------------------------
Balance at end of period $ 218 $ 84 $ 218 $ 84
- -----------------------------------------------------------------------------
At September 30, 2003, two real estate loans with an aggregate principal balance
of $1,057,000 were on nonaccrual status. These loans are considered impaired
under the criteria of SFAS No.114. Both loans are second mortgages where
Intervest National Bank, an affiliated Company, holds the first mortgage. The
Company's recorded investment in these loans totaled $1,058,000. The Company has
commenced foreclosure proceedings against the borrowers and currently believes
the estimated fair value of each of the underlying properties is sufficient to
provide for repayment of its recorded investment. As a result, the Company
believes that no specific valuation allowance is required. Interest income that
was not recorded on the nonaccrual loans under their contractual terms amounted
to $29,000 for the three months and nine months ended September 30, 2003. The
average balance of impaired loans for the quarter and nine-months ended
September 30, 2003 was approximately $1,058,000 and $343,000, respectively. At
September 30, 2003 and December 31, 2002, there were no other impaired loans or
loans which were ninety days past due and still accruing interest.
NOTE 4 - 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 September 30, 2003, deferred
debenture offering costs, net of accumulated amortization of $4,096,000,
amounted to $3,033,000. At December 31, 2002, deferred debenture offering costs,
net of accumulated amortization of $3,488,000, amounted to $2,556,000.
7
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SUBORDINATED DEBENTURES PAYABLE
The following table summarizes debentures payable.
At September 30, At December 31,
----------------- ----------------
($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 8 1/2% 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 8 1/2% 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 8 1/2% 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 7 1/2% 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 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 1,250
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 1,750
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 1,500 -
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 -
Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 -
Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 -
Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 -
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 -
- --------------------------------------------------------------------------------------------------------------
$ 88,600 $ 74,000
- --------------------------------------------------------------------------------------------------------------
The "prime" in the preceding table refers to the prime rate of JP Morgan Chase
Bank, which was 4.00% at September 30, 2003 and 4.25% at December 31, 2002.
In September of 2003, the Company issued its Series 07/25/03 debentures in the
principal amount of $8,500,000. Net proceeds, after deferred offering costs,
amounted to $7, 891,000. This series accrues and pays interest quarterly.
In March 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 $6,330,000 of these
debentures at September 30, 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.
8
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SUBORDINATED DEBENTURES PAYABLE, CONTINUED
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,
1/21/03 and 7/25/03 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, July 1, 2006 for Series 1/21/03 and October 1, 2006 for Series
7/25/03) 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 01/21/03 and Series
7/25/03 debentures. The Series 01/21/03 debentures would be redeemable at a
premium of 1% if the redemption were prior to April 1, 2004. The Series 07/25/03
debentures would be redeemable at a premium of 1% if the redemption were prior
to July 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.
The Company has notified holders of Series 9/18/00 debentures due to mature on
January 1, 2004 that these debentures would be redeemed on November 1, 2003. At
that time, $1,250,000 of principal and $335,000 of accrued interest through
October 31, 2003 will be paid to the holders of these debentures.
The Company has filed an offering to issue additional subordinated debentures.
It is anticipated that debentures in an aggregate principal amount of up to
$10,000,000 will be issued.
Scheduled contractual maturities of debentures as of September 30, 2003 are
summarized as follows:
($in thousands) Principal Accrued Interest
----------------------------------------------------------------------------
For the three-months ended December 31, 2003 $ 1,250 $ 1,372
For the year ended December 31, 2004 20,000 5,351
For the year ended December 31, 2005 29,100 3,183
For the year ended December 31, 2006 9,000 1,275
For the year ended December 31, 2007 5,000 58
Thereafter 24,250 552
----------------------------------------------------------------------------
$ 88,600 $ 11,791
----------------------------------------------------------------------------
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company has a service agreement, which renews each January 1, unless
terminated by either party, with Intervest National Bank (another wholly owned
subsidiary of the Parent Company) with respect to mortgage loan originations and
servicing for them. The Company earned $615,000 and $1,599,000 from Intervest
National Bank for the quarter and nine-months ended September 30, 2003,
respectively and $473,000 and $1,145,000 for the quarter and nine-months ended
September 30, 2002, respectively, in connection with this service agreement.
The Company participates with Intervest National Bank in certain mortgage loans
receivable. The aggregate balance of the Company's participation in these
mortgages was $5,560,000 and $6,224,000 at September 30, 2003 and December 31,
2002, respectively.
The Company has interest-bearing and noninterest-bearing deposit accounts with
Intervest National Bank totaling $12,466,000 at September 30, 2003 and
$4,255,000 at December 31, 2002. The Company received interest income of $27,000
and $51,000 from Intervest National Bank for the quarter and nine-months ended
September 30, 2003, respectively and $8,000 and $45,000 for the quarter and
nine-months ended September 30, 2002, respectively, in connection with such
deposits. These amounts are included in interest income in the statement of
operations.
9
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
September 30, 2003, and for the three- and nine-month periods ended September
30, 2003 and 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.
10
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest
Mortgage Corporation and Subsidiaries (the "Company") as of September 30, 2003,
and the related condensed consolidated statements of operations for the three
and nine-month periods ended September 30, 2003 and 2002 and the related
condensed consolidated statements of changes in stockholder's equity and cash
flows for the nine-month periods ended September 30, 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 have 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 (not presented
herein), 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
- --------------
New York, New York
October 22, 2003
11
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.
In 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 and Intervest Securities Corporation.
Intervest National Bank is 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.
Intervest Securities Corporation is a broker/dealer who participates as a
selected dealer from time to time in offerings of debt securities for the
Company.
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 can 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.
A significant portion of the Company's mortgage portfolio is composed 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 a 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 SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Total assets at September 30, 2003 increased to $118,749,000, from $97,311,000
at December 31, 2002. The increase is primarily due to new mortgage loans of
$68,039,000, offset by $44,013,000 of payoffs and amortization, funded by a net
increase in subordinated debentures and accrued interest payable of $15,640,000,
a decrease in time deposits of $2,000,000, capital contributions totaling
$4,001,000 from the Parent Company and $1,278,000 of income for the nine months
of 2003.
Cash and cash equivalents amounted to $16,970,000 at September 30, 2003,
compared to $17,946,000 at December 31, 2002. The decrease was reflected in a
lower level of short term investments in the form of commercial paper which was
mostly offset by an increase in balances maintained in money market accounts.
The decrease was used to fund a portion of the additional mortgage loans
receivable originated in the first nine months of 2003.
12
Mortgage loans receivable, net of unearned income and allowance for loan losses,
amounted to $96,911,000 at September 30, 2003, compared to $73,398,000 at
December 31, 2002. The increase was due to new originations exceeding repayments
during the period. At September 30, 2003 the Company had two loans totaling
$1,057,000 classified as nonaccrual. See note 3 to the condensed consolidated
financial statements in this report for further discussion.
Deferred debenture offering costs, net of accumulated amortization, increased to
$3,033,000 at September 30, 2003, from $2,556,000 at December 31, 2002. The
increase was primarily due to the incremental costs associated with the issuance
of Series 1/21/03 and 7/25/03 subordinated debentures, which was partially
offset by normal amortization.
Total liabilities at September 30, 2003 increased to $102,057,000, from
$85,898,000 at December 31, 2002. The increase was primarily due to the issuance
of subordinated debentures with a principal amount of $16,000,000, partially
offset by the maturity and redemption of subordinated debentures with a
principal balance of $1,400,000. Also contributing to this increase was an
increase in accrued interest payable on debentures and a higher level of
mortgage escrow funds payable.
Subordinated debentures outstanding at September 30, 2003 increased to
$88,600,000, from $74,000,000 at December 31, 2002 as a result of the issuance
of $7,500,000 of series 01/21/03 and $8,500,000 of series 7/25/03 debentures.
These new issues were partially offset by the maturity and redemption of a
portion of series 11/10/98 with a principal balance of $1,400,000. Debenture
interest payable increased to $11,791,000 at September 30, 2003, from
$10,751,000 at December 31, 2002, primarily as a result of the accrual of
interest on the debentures outstanding, which was partially offset by the
payment of $570,000 of accrued interest on the debentures that were redeemed at
maturity.
Mortgage escrow funds increased to $1,358,000 at September 30, 2003, an increase
of $698,000 from the December 31, 2002 balance of $660,000. This increase was
primarily due to new escrow funds resulting from 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 $16,692,000 at September 30, 2003, from
$11,413,000 at year-end 2002. The increase was due to capital contributions
aggregating $4,001,000 from the Parent Company and net income of $1,278,000 for
the nine-months ended September 30, 2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 AND
- --------------------------------------------------------------------------------
2002
- ----
The Company recorded net income of $509,000 for the third quarter of 2003,
compared to net income of $520,000 for the third quarter of 2002.
Interest income was $2,442,000 for the quarter ended September 30, 2003,
compared to $2,114,000 for the same period a year ago. The increase of $328,000
was primarily due to an increase in the average balance of mortgage loans
receivable of $26,800,000 ($99,000,000 in the third quarter of 2003 verses
$72,200,000 in the third quarter of 2002), which was partially offset by a
decrease in rates on new mortgage loans receivable, repayments of
higher-yielding loans and lower rates earned on short-term investments.
Service agreement income was $615,000 for the third quarter of 2003, compared to
$473,000 in the same period of 2002. The increase of $142,000 was the result of
increased lending activity.
Interest expense on debentures was $1,568,000 for the quarter ended September
30, 2003, compared to $1,384,000 for the same period of 2002. The increase of
$184,000 was primarily due to a $14,400,000 increase in the average balance of
debentures outstanding in the third quarter of 2003 ($83,400,000), compared to
the third quarter of 2002 ($69,000,000). This increase was partially offset by a
75 basis point decrease in interest rates on floating-rate debentures as well as
new fixed-rate debentures issued at a lower rate than those that matured.
13
Amortization of deferred debenture offering costs was $243,000 for the quarter
ended September 30, 2003, compared to $200,000 for the same period of 2002. The
increase of $43,000 reflected the increased amount of debentures outstanding.
General and administrative expenses increased to $401,000 for the quarter ended
September 30, 2003, from $347,000 for the same period of 2002. The increase was
primarily the result of an increase in: directors fees of $17,000, a provision
for loan losses of $15,000 and occupancy expenses of $14,000 .
The provision for income taxes for the quarter ended September 30, 2003 amounted
to $427,000, compared to $325,000 for the quarter ended September 30, 2002. The
Company's effective tax rate was approximately 46% for the third quarter of 2003
verses 37% in the third quarter of 2002. The Company files consolidated Federal,
New York State and New York City income tax returns with its Parent Company. In
the third quarter of 2002, a favorable adjustment of $61,000 resulting from the
finalization of the 2001 tax returns and allocation of taxable income between
the Parent Company and it's subsidiaries reduced the Company's tax expense.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
AND 2002
- ---------
The Company recorded net income of $1,278,000 for the nine-months September 30,
2003, compared to net income of $1,273,000 for the nine-months ended September
30, 2002.
Interest income was $6,919,000 for the nine-months ended September 30, 2003,
compared to $6,390,000 for the same period a year ago. The increase of $529,000
was primarily due to an increase in average balance of mortgage loans receivable
of $16,800,000 ($88,600,000 for the first nine months of 2003 verses $71,800,000
for the first nine months of 2002), which was partially offset by a decrease in
rates on new mortgage loans receivable, repayments of higher-yielding loans and
lower rates earned on short-term investments.
Service agreement income was $1,599,000 for the first nine months of 2003
compared to $1,145,000 in the same period of 2002. The increase of $472,000 was
the result of increased lending activity.
Interest expense on debentures was $4,543,000 for the nine-months ended
September 30, 2003, compared $4,001,000 for the same period of 2002. The
increase of $542,000 was primarily due to a $12,800,000 increase in the average
balance of debentures outstanding from $66,900,000 in for the first nine months
of 2002 verses $79,700,000 for the first nine months of 2003. This increase was
partially offset by a 75 basis point decrease in interest rates on floating-rate
debentures from September 30, 2002 to September 30, 2003 and a lower rate on new
fixed-rate debentures issued in 2003.
Amortization of deferred debenture offering costs was $691,000 for the
nine-months ended September 30, 2003, compared to $592,000 for the same period
of 2002. The increase of $99,000 reflected the increased amount of debentures
outstanding.
General and administrative expenses increased to $1,254,000 for the nine-months
ended September 30, 2003, from $1,040,000 for the same period of 2002. The
increase primarily reflected an increase in compensation and benefits expense of
$127,000 due to additional staff and salary increases, partially offset by a
$49,000 increase in SFAS 91 direct fee income resulting from increased
originations as well as a higher amount recognized per loan. The increase was
also due to an increase in the provision for loan losses of $51,000 due to new
loan originations and an increase in occupancy expense of $49,000 due to an
increase in rented space and an increase in real estate tax escalation charges.
Income tax expense for the nine-months ended September 30, 2003 amounted to
$1,068,000, compared to $961,000 for the nine- months ended September 30, 2002.
The Company's effective tax rate was approximately 46% for the nine-months ended
September 30, 2003 and 43% for the same period of 2002. The Company files
14
consolidated Federal, New York State and New York City income tax returns with
its Parent Company. In the third quarter of 2002, a favorable adjustment of
$61,000 resulting from the finalization of the 2001 tax returns and allocation
of taxable income between the Parent Company and it's subsidiaries reduced the
Company's tax expense.
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 September 30, 2003, the Company's has committed to lend approximately
$4,753,000.
During the first nine-months of 2003, the Company received capital contributions
aggregating $4,001,000 from the Parent Company.
The Company considers its current liquidity and sources of funds sufficient to
satisfy its outstanding lending commitments and its maturing liabilities. For
the 15 months ending December 31, 2004, the Company is required to pay
$21,250,000 principal and $5,676,000 of accrued interest on maturing
subordinated debentures. The company expects to repay these debentures and
related accrued interest from working capital and / or the proceeds from
maturing loans.
The Company has notified holders of Series 9/18/00 debentures due to mature on
January 1, 2004 that these debentures would be redeemed on November 1, 2003. On
November 1, 2003, $1,250,000 of principal and $335,000 of accrued interest
through October 31, 2003 was paid to the holders of these debentures.
The Company has filed a registration statement related to its proposed issuance
of additional subordinated debentures. It is anticipated that debentures in an
aggregate principal amount of up to $10,000,000 will be issued.
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The primary objective of the Company's
asset/liability management strategy is to limit, within its established
guidelines, the adverse impact of changes in interest rates on the Company's net
interest income and capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. The
Company's one-year interest rate sensitivity gap was a positive $43,115,000, or
36% of total assets, at September 30, 2003, compared to a positive $27,642,000,
or 28%, at December 31, 2002. The increase was primarily due to the origination
of new floating-rate loans as well as existing loans migrating into the less
than one-year maturity timeframe. The new loans were funded by debentures with
terms of greater than one year.
The Company has a "floor," or minimum rate, on many of its floating-rate loans
that is determined in relation to prevailing market rates on the date of
origination. This floor only adjusts upwards in the event of increases in the
loan's interest rate. This feature reduces the effect on interest income of a
falling rate environment because the interest rates on such loans do not reset
downward. For a further discussion of interest rate risk and gap analysis,
including the assumptions used in preparing the gap, see the Company's 2002
Annual Report on Form 10-K, pages 10 and 11.
15
The table that follows summarizes the Company's interest-earning assets and
interest-bearing liabilities as of September 30, 2003, that are scheduled to
mature or reprice within the periods shown.
0-3 4-12 Over 1-4 Over 4
($in thousands) Months Months Years Years Total
- ---------------------------------------------------------------------------------------
Floating- rate loans $61,617 - - - $ 61,617
Fixed- rate loans 7,929 $11,084 $ 4,327 $ 13,374 36,714
- ---------------------------------------------------------------------------------------
Total loans 69,546 11,084 4,327 13,374 98,331
Short-term investments 15,717 - - - 15,717
- ---------------------------------------------------------------------------------------
Total rate-sensitive assets $85,263 $11,084 $ 4,327 $ 13,374 $114,048
- ---------------------------------------------------------------------------------------
Debentures payable $42,750 $ 2,000 $ 17,350 $ 26,500 $ 88,600
Accrued interest on debentures 7,644 838 2,737 572 11,791
- ---------------------------------------------------------------------------------------
Total rate-sensitive liabilities $50,394 $ 2,838 $ 20,087 $ 27,072 $100,391
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
GAP (repricing differences) $34,869 $ 8,246 $ (15,760) $(13,698) $ 13,657
- ---------------------------------------------------------------------------------------
Cumulative GAP $34,869 $43,115 $ 27,355 $ 13,657 $ 13,657
- ---------------------------------------------------------------------------------------
Cumulative GAP to total assets 29.4% 36.3% 23.0% 11.5% 11.5%
- ---------------------------------------------------------------------------------------
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 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.
16
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 exhibits are filed as part of this report:
31 - Certification of the principal executive and financial
officer pursuant to Section 302 of the Sarbanes- Oxley Act
of 2002.
32 - Certification of the principal executive and financial
officer 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: November 12, 2003 By: /s/ Lowell S. Dansker
-------------------------
Lowell S. Dansker, President (Principal
Executive Officer), Treasurer (Principal
Financial Officer and Principal Accounting
Officer) and Director
Date: November 12, 2003 By: /s/ Lawrence G. Bergman
-------------------------
Lawrence G. Bergman, Vice President, Secretary
and Director
17