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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
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Commission File Number 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
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(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
1 ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934
None
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(Title of class)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934
None
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(Title of class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes XX No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes No XX.
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As of February 1, 2005, there were 100 shares of the registrant's common stock
outstanding, all of which are held by its Parent Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
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None
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
ITEM 1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4 Submission of Matters to a Vote of Security Holders . . . . . . . 6
PART II
ITEM 5 Market for Common Equity, Related Stockholder Matters and Issuer 7
Purchases of Equity Securities
ITEM 6 Selected Consolidated Financial Data . . . . . . . . . . . . . . 7
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 8
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk . . . 15
ITEM 8 Financial Statements and Supplementary Data. . . . . . . . . . . 15
ITEM 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 9A Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 33
ITEM 9B Other Information. . . . . . . . . . . . . . . . . . . . . . . . 33
PART III
ITEM 10 Directors, Executive Officers and Other Key Employees . . . . . 33
ITEM 11 Executive Compensation. . . . . . . . . . . . . . . . . . . . . 35
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Transactions. . . . . . . . . . . . . . 35
ITEM 13 Certain Relationships and Related Transactions. . . . . . . . . 36
ITEM 14 Principal Accountant Fees and Services. . . . . . . . . . . . . 36
PART IV
ITEM 15 Exhibits and Financial Statement Schedules. . . . . . . . . . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1
PART I
ITEM 1. BUSINESS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
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-K 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, lending, servicing activities; and changes in
laws and regulations affecting the Company.
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, consisting of first mortgage, junior mortgage and wraparound mortgage
loans. The Company also provides mortgage loan origination services to Intervest
National Bank ("the Bank"), an affiliated entity. The principal office of the
Company is located at 1 Rockefeller Plaza, Suite 400, New York, New York
10020-2002, and its telephone number is 212-218-2800.
Intervest Bancshares Corporation (which is a financial holding company and
hereafter referred to as the "Parent Company") owns 100% of the capital stock of
the Company. The Company's executive officers are directors of the Company and
are also officers, directors and principal shareholders of the Parent Company.
In addition to Intervest Mortgage Corporation, the Parent Company also owns
Intervest National Bank (a national bank with its headquarters and full-service
banking office in Rockefeller Center, New York, and four full-service banking
offices in Clearwater, Florida and one in South Pasadena, Florida) and Intervest
Securities Corporation (a broker/dealer that is an NASD and SIPC member firm
also located in Rockefeller Center, New York). Intervest Securities Corporation
participates as a selected dealer from time to time in the Company's offerings
of debentures.
The Company's business is significantly influenced by the movement of interest
rates, general economic conditions, particularly those in the New York City
metropolitan area where most of the properties that secure its mortgage loans
are concentrated. In addition, the Company's business is also affected by the
volume of origination services it provides to the Bank, whose business is
dependent upon these same factors.
MARKET AREA AND COMPETITION
The Company's lending activities have been concentrated in the New York City
metropolitan region. The Company also makes loans in other states, including
Alabama, Connecticut, Florida, Georgia, Maryland, Massachusetts, New Jersey,
Pennsylvania and Virginia.
In connection with originating mortgage loans, the Company experiences
significant competition from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, real estate investment trusts,
limited partnerships and other lenders and investors. Most of these competitors
also have significantly greater financial and marketing resources. An increase
in the general availability of funds may increase competition in the making of
investments in mortgages and real property, and may reduce the yields available
from such investments. Certain affiliates of the Company and/or entities owned
or controlled by principals of the Company are engaged in real estate lending
activities involving similar properties and in that regard are competing with
the Company.
2
LENDING ACTIVITIES
The Company's lending activities include both long-term and short-term mortgage
loans on real estate properties, including multifamily residential apartment
buildings, office buildings, commercial properties and vacant land. The Company
also may acquire or originate mortgage loans on other types of properties, and
may resell mortgages.
At December 31, 2004, the Company's mortgage loan portfolio amounted to
$101,532,000, compared to $90,417,000 at December 31, 2003. At December 31,
2004, $43,726,000 or forty-two (42) loans, were collateralized by multi-family
apartment buildings located in the City of New York. These loans represent
approximately 43% of the total mortgage loan portfolio.
In determining whether to make mortgage loans, the Company analyzes relevant
real property and financial factors, which may include factors such as: the
condition and use of the subject property; the property's income-producing
capacity; and the quality of, lending experience with and creditworthiness of
the borrower. The Company also considers the borrower's experience in owning or
managing similar properties. The Company requires that all mortgaged properties
be covered by property insurance in amounts deemed adequate in the opinion of
management. In addition, representatives of the Company, as part of the approval
process, make physical inspections of properties being considered for mortgage
loans.
The Company does not have formal policies regarding the percentage of its assets
that may be invested in any single mortgage, the type of mortgage loans and
investments it can make, the geographic location of properties collateralizing
those mortgages or limits on the amounts loaned to one borrower, loan-to-value
ratios or debt service coverage ratios. It also does not have a loan committee
or a formal loan approval process.
Mortgage loans originated and acquired are solicited directly by the Company's
officers, from existing borrowers, through advertising and from broker
referrals. The Company has in the past and may in the future participate in
mortgages originated by its affiliates, including Intervest National Bank.
The Company's mortgage loans typically provide for periodic payments of interest
and principal during the term of the mortgage, with the remaining principal
balance and any accrued interest due at the maturity date. The majority of the
mortgages owned by the Company provide for balloon payments at maturity, which
means that a substantial part or the entire original principal amount is due in
one lump sum payment at maturity. Eighty-nine (89) of the mortgage loans in the
Company's portfolio, representing approximately 93% of the principal balance of
the Company's portfolio, have balloon payments due at the time of their
maturity. If the net revenue from the property is not sufficient to make all
debt service payments due on the mortgage, or if at maturity or the due date of
any balloon payment, the owner of the property fails to raise the funds (by
refinancing, sale or otherwise) to make the lump sum payment, the Company could
sustain a loss on its investment in the mortgage. To the extent that the
aggregate net revenues from the Company's mortgage investments are insufficient
to provide funds equal to the payments due under the Company's debt obligations,
then the Company would be required to utilize its working capital for such
purposes or otherwise obtain the necessary funds from outside sources. No
assurance can be given that such funds would be available to the Company. The
Company's mortgage loans are generally not personal obligations of the borrower
and are not insured or guaranteed by governmental agencies.
The Company's mortgage loans include first mortgage loans and junior mortgage
loans. The Company owns fifty-five (55) junior mortgages. These mortgages are
subordinate in right of payment to senior mortgages on the various properties
securing the loans. In all cases, in the opinion of management, the current
value of the underlying property collateralizing the mortgage loan is in excess
of the stated amount of its junior mortgage loan plus the senior loan.
Therefore, in the opinion of management of the Company, each property on which a
mortgage owned by the Company is a lien constitutes adequate collateral for the
related mortgage loan. Accordingly, in the event the owner of a property fails
to make required debt service payments, management believes that, based upon
current value, upon a foreclosure of the mortgage and sale of the property, the
Company would recover its entire investment. However, there can be no assurance
that the current value of the underlying property will be maintained.
The majority of the Company's mortgages are non-recourse. It is expected that
most mortgages that the Company acquires in the future will be non-recourse
mortgages as well. Under the terms of non-recourse mortgages, the owner of the
property subject to the mortgage has no personal obligation to pay the mortgage
note which the mortgage secures. Therefore, in the event of default, the
Company's ability to recover its investment is solely dependent upon
3
the value of the mortgaged property and balances of any loans secured by
mortgages and liens that are senior in right to the Company, which must be paid
from the net proceeds of any foreclosure proceeding. Any loss the Company may
incur as a result of the foregoing factors may have a material adverse effect on
the Company's business, financial condition and results of operations.
At December 31, 2004: three of the mortgages in the Company's portfolio
(representing approximately 6% of the principal balance in the Company's
portfolio) allowed recourse against the mortgagor only with respect to
liabilities related to tenant security deposits; fifty-four (54) of the
mortgages (representing approximately 56% of the principal balance in the
Company's portfolio) allowed recourse against the mortgagor only with respect to
liabilities relating to tenant security deposits, proceeds from insurance
policies, losses arising under environmental laws and losses resulting from
waste or acts of malfeasance; thirty five (35) loans (representing approximately
37% of the portfolio), are full recourse; one loan (representing approximately
0.2% of the portfolio), is a full recourse loan that is currently in default;
and four loans were without recourse. In addition, at December 31, 2004,
thirty-five (35) of the Company's mortgages were guaranteed by third parties.
The Company normally charges loan origination fees on nearly all of the mortgage
loans it originates based on a percentage of the principal amount. These fees
are normally comprised of a fee that is received from the borrower at the time
the loan is originated and another similar fee that is contractually due when
the loan is repaid. The total fee, net of related direct loan origination costs,
is deferred and amortized over the contractual life of the loans as an
adjustment to the loan's yield. At December 31, 2004, the Company had $1,012,000
of net deferred loan fees and $884,000 of loan fees receivable. The Company also
earns fees from the servicing of its loans.
Many of the Company's mortgage loans include provisions relating to Prepayment
and others prohibit prepayment of indebtedness entirely. When a mortgage loan is
repaid prior to maturity, the Company may recognize prepayment income, which
consists largely of the recognition of unearned fees associated with such loans
at the time of payoff and the receipt of additional prepayment fees due at the
time of repayment and interest in certain cases. The amount and timing of, as
well as income from loan prepayments, if any, cannot be predicted and can
fluctuate significantly. Normally, the number of instances of prepayment of
mortgage loans tends to increase during periods of declining interest rates and
tends to decrease during periods of increasing interest rates. Of the ninety-six
(96) mortgages in the portfolio: four (4) allow prepayment without a fee
payment; three (3) prohibit prepayment; forty-eight (48) permit prepayment only
after passage of a specific period with fees of 1% or 31 days interest on
forty-six of these forty-eight loans; and forty-one (41) permit prepayment after
payment of fees ranging from 0.5% up to 5% of the principal balance. The Company
earned prepayment income from the early repayment of loans of $447,000 in 2004,
$260,000 in 2003 and $334,000 in 2002.
REAL ESTATE INVESTING ACTIVITIES
The Company periodically may purchase equity interests in real property or it
may acquire such an equity interest pursuant to a foreclosure upon a mortgage in
the normal course of business. With respect to such equity interests in real
estate, the Company may acquire and retain title to properties either directly
or through a subsidiary. While no such transactions are presently pending, the
Company would, in appropriate circumstances, consider the expansion of its
business through investments in or acquisitions of other companies engaged in
real estate or mortgage business activities. While the Company has not
previously made acquisitions of real property, its management has had
substantial experience in the acquisition and management of properties.
TEMPORARY INVESTMENT ACTIVITIES
The Company has historically invested its excess cash (after meeting its lending
commitments and scheduled repayments of borrowed funds) in commercial paper and
certificate of deposits issued by large commercial banks and U.S. government
securities. The level of such investments fluctuates based on various factors,
including liquidity needs, loan demand and scheduled repayments of debentures.
Cash and short-term investments at December 31, 2004 amounted to $17,151,000,
compared to $25,772,000 at December 31, 2003.
ASSET QUALITY
After a loan is originated, the Company makes ongoing reviews in order to
monitor documentation and valuations of collateral with the objective of quickly
identifying, evaluating and initiating corrective actions if necessary.
4
All loans are subject to the risk of default, otherwise known as credit risk,
which represents the possibility of the Company not recovering amounts due from
its borrowers. A borrower's ability to make payments due under a mortgage loan
is related to the Company's underwriting standards and is dependent upon the
risks associated with real estate investments in general, including: general or
local economic conditions in the areas the properties are located, neighborhood
values, interest rates, real estate tax rates, operating expenses of the
mortgaged properties, supply of and demand for rental units, supply of and
demand for properties, ability to obtain and maintain adequate occupancy of the
properties, zoning laws, governmental rules, regulations and fiscal policies.
Additionally, terrorist acts, such as those that occurred on September 11, 2001,
armed conflicts, such as the war on terrorism, and natural disasters, such as
hurricanes, may have an adverse impact on economic conditions. Economic
conditions affect the market value of the underlying collateral as well as the
levels of occupancy of income-producing properties.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities. The Company's loan portfolio is concentrated in
commercial real estate and multifamily mortgage loans (including land loans).
The properties underlying the Company's mortgages are also concentrated in New
York State (85%). Many of the New York properties are located in New York City
and are subject to rent control and rent stabilization laws, which limit the
ability of the property owners to increase rents.
Loans are placed on nonaccrual status when principal or interest becomes 90 days
or more past due unless the loan is well secured and in the process of
collection. At December 31, 2004, one loan with a principal balance of $179,000
was on nonaccrual status, compared to two loans with an aggregate principal
balance of $1,057,000 at December 31, 2003. The loans were considered impaired
under the criteria of SFAS No.114. The loan at December 31, 2004 is a second
mortgage where Intervest National Bank, an affiliated Company, holds the first
mortgage. The Company has commenced foreclosure proceedings against this
borrower. A valuation allowance was not maintained at any time under SFAS 114
for these loans because the Company believes that the estimated fair value of
the underlying properties is sufficient to provide for repayment of its recorded
investment. There were no other impaired loans or loans ninety days past due and
still accruing interest.
The Company evaluates its portfolio of mortgage loans based on various factors
to determine the need for an allowance for loan losses. At December 31, 2004,
the allowance was $332,000. During the last five years, the Company has not
experienced a loss from its lending activities. There can be no assurance
however, that a downturn in real estate values or local economic conditions, as
well as other factors, would not have an adverse impact on the Company's asset
quality and future level of nonperforming assets, chargeoffs and profitability.
SOURCES OF FUNDS
The Company's principal sources of funds for investing consist of borrowings
(through the issuance of its debentures), mortgage repayments and cash flow
generated from operations. From time to time, it has also received capital
contributions from the Parent Company. At December 31, 2004, Intervest Mortgage
Corporation had debentures outstanding of $88,850,000, compared to $87,350,000
at December 31, 2003.
SERVICING AGREEMENT
The Company has a servicing agreement with Intervest National Bank to provide
origination services which include: the identification of potential properties
and borrowers; the inspection of properties constituting collateral for such
loans; the negotiation of the terms and conditions of such loans in accordance
with Intervest National Bank's underwriting standards; preparing commitment
letters and coordinating the loan closing process. This agreement, renews each
January 1 unless terminated by either party. The Company earned $4,262,000,
$2,343,000 and $1,597,000 for 2004, 2003 and 2002, respectively, in connection
with this agreement. Such services are performed by Company personnel and the
expenses associated with the performance of such services are borne by the
Company.
EMPLOYEES
At December 31, 2004, the Company employed 17 full-time equivalent employees,
compared to 16 at year-end 2003. The Company provides various benefit plans,
including group life, health and a 401(k) Plan. The employees are not covered by
a collective bargaining agreement and the Company believes employee relations
are good.
5
FEDERAL AND STATE TAXATION
The Company files consolidated Federal, New York State and City income tax
returns with its Parent Company on a calendar year basis. Consolidated returns
have the effect of eliminating intercompany distributions, including dividends,
from the computation of consolidated taxable income for the taxable year in
which the distributions occur. Income taxes are provided in the consolidated
financial statements as if the Company filed a separate consolidated tax return
with its subsidiaries.
SUBSIDIARIES
Intervest Distribution Corporation performs record-keeping functions for the
Company. Intervest Realty Servicing Corporation is engaged in certain mortgage
servicing activities.
There were no dividends paid to the Company by its subsidiaries in 2004, 2003 or
2002.
EFFECT OF GOVERNMENT REGULATION
Investment in mortgages on real properties may be impacted by government
regulation in several ways. As a subsidiary of a Financial Holding Company, the
Company is subject to the regulation by the Federal Reserve Board.
Residential properties may be subject to rent control and rent stabilization
laws. As a consequence, the owner of the property may be restricted in its
ability to raise the rents on apartments. If real estate taxes, fuel costs and
maintenance of and repairs to the property were to increase substantially, and
such increases are not offset by increases in rental income, the ability of the
owner of the property to make the payments due on the mortgage as and when they
are due might be adversely affected.
Laws and regulations relating to asbestos have been adopted in many
jurisdictions, including New York City, which require that whenever any work is
undertaken in a property in an area in which asbestos is present, the asbestos
must be removed or encapsulated in accordance with such applicable local and
federal laws and regulations. The cost of asbestos removal or encapsulation may
be substantial, and if there were not sufficient cash flow from the property,
after debt service on mortgages, to fund the required work, and the owner of the
property fails to fund such work from other sources, the value of the property
could be adversely affected, with consequent impairment of the security for the
mortgage.
Laws regulating the storage, disposal and clean up of hazardous or toxic
substances at real property have been adopted at the federal, state and local
levels. Such laws may impose a lien on the real property superior to any
mortgages on the property. In the event such a lien was imposed on any
property, which serves as security for a mortgage owned by the Company, the
security for such mortgage could be impaired. In addition, as a bank holding
company, the Parent Company is extensively regulated under both federal and
state laws and regulations.
ITEM 2. PROPERTIES
As of May, 2004, the Company shares office space with its Parent Company which
leases the entire fourth floor, approximately 21,500 square feet, of One
Rockefeller Plaza in New York City. The Company occupies approximately one half
of the space. The Parent Company's lease expires March 2014. The Company has an
informal agreement with the Parent Company whereby it reimburses the Parent
Company for its share of the rent.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as foreclosure
proceedings. Management does not believe that there is any pending or threatened
proceeding against the Company, which, if determined adversely, would have a
material effect on the business, results of operations, or financial position of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company is a wholly owned subsidiary of the Parent Company, therefore there
is no market for its stock. The payment of dividends by the Company to the
Parent Company is subject to restrictions. The Company cannot declare or pay any
dividend or make any distribution on its capital stock (other than dividends or
distributions payable in capital stock), or purchase, redeem or otherwise
acquire or retire for value, or permit any subsidiary to purchase or otherwise
acquire for value, capital stock of the Company, if at the time of such payment,
the Company is not in compliance with the indentures under which the Company's
debentures were issued. The payment of dividends if any, will be determined by
the Company's Board of Directors and in addition to the restrictions noted
above, is dependent upon a number of factors, including the results of
operations and financial condition of the Company.
The Company paid a $3,000,000 dividend to the Parent Company in 2000. The actual
amount, if any, and timing of future dividends will depend on the above factors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The table below presents selected consolidated financial data. This data should
be read in conjunction with, and are qualified in their entirety by, the
Consolidated Financial Statements and the Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this report.
At or For The Year Ended December 31,
------------------------------------------------
($ in thousands) 2004 2003 2002 2001 2000
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FINANCIAL CONDITION DATA:
Total assets $122,451 $119,578 $ 97,311 $ 83,083 $ 74,860
Cash and short-term investments 17,151 25,772 17,946 16,752 19,476
Mortgage loans receivable, net of deferred fees 100,520 89,307 73,499 62,665 51,992
Allowance for mortgage loan losses 332 191 101 18 --
Subordinated debentures and related interest payable 97,069 99,402 84,751 72,113 64,347
Stockholder's equity 23,527 18,173 11,413 9,847 9,269
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OPERATIONS DATA:
Interest and fee income $ 9,896 $ 9,269 $ 8,420 $ 7,625 $ 8,519
Servicing agreement income - related party 4,262 2,343 1,597 463 285
Gain on early repayment of mortgages 447 260 334 582 340
Other income 207 196 125 106 130
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Total revenues 14,812 12,068 10,476 8,776 9,274
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Interest on debentures (1) 6,811 6,187 5,483 5,849 7,304
Amortization of deferred debenture offering costs 1,134 953 805 662 714
Provision for mortgage loan losses 141 90 83 18 --
General and administrative expenses 2,347 1,583 1,332 1,174 1,015
- -------------------------------------------------------------------------------------------------------
Total expenses 10,433 8,813 7,703 7,703 9,033
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Earnings before income taxes 4,379 3,255 2,773 1,073 241
Provision for income taxes (1) 2,025 1,496 1,207 495 112
- -------------------------------------------------------------------------------------------------------
Net income $ 2,354 $ 1,759 $ 1,566 $ 578 $ 129
- -------------------------------------------------------------------------------------------------------
RATIOS AND OTHER DATA
Ratio of earnings to fixed charges (2) 1.6x 1.5x 1.4x 1.2x 1.1x
Dividends paid to Parent Company $ -- $ -- $ -- $ -- $ 3,000
- -------------------------------------------------------------------------------------------------------
A charge of $206,000, net of taxes, from the early retirement of debentures that
was previously reported in 2000 as an extraordinary item has been reclassified
(a $382,000 increase to interest expense and a $176,000 decrease to the
provision for income taxes) to give effect to SFAS No. 145," Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections."
The ratio of earnings to fixed charges has been computed by dividing earnings
(before the provision for income taxes and fixed charges) by fixed charges.
Fixed charges consist of interest expense incurred during the period and
amortization of deferred debenture offering costs.
7
ITEM 7. 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, consisting of first mortgage, junior mortgage and wraparound mortgage
loans. The Company also provides mortgage loan origination services to Intervest
National Bank.
Intervest Bancshares Corporation (which is a financial holding company and
hereafter referred to as the "Parent Company") owns 100% of the capital stock of
the Company. The Company's executive officers are directors of the Company and
are also officers, directors and principal shareholders of the Parent Company.
In addition to Intervest Mortgage Corporation, the Parent Company also owns
Intervest National Bank (a national bank with its headquarters and full-service
banking office in Rockefeller Center, New York, and four full-service banking
offices in Clearwater, Florida and one in South Pasadena, Florida) and Intervest
Securities Corporation (a broker/dealer that is an NASD and SIPC member firm
also located in Rockefeller Center, New York). Intervest Securities Corporation
participates as a selected dealer from time to time in the Company's offerings
of debentures.
The Company's lending activities include both long-term and short-term mortgage
loans on real estate properties that mature within approximately five years,
including multifamily residential apartment buildings, office buildings,
commercial properties and vacant land. The Company also may acquire or originate
mortgage loans on other types of properties, and may resell mortgages to third
parties. No mortgage loans have been resold to third parties during the past
five years. 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.
Many of the properties collateralizing the loans in the Company's mortgage loan
portfolio 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.
Many of the Company's mortgage loans include provisions relating to prepayment
and others prohibit prepayment of indebtedness entirely. When a mortgage loan is
repaid prior to maturity, the Company may recognize prepayment income, which
consists largely of the recognition of unearned fees associated with such loans
at the time of payoff and the receipt of prepayment fees and interest in certain
cases. The amount and timing of, as well as income from, loan prepayments, if
any, cannot be predicted and can fluctuate significantly. Normally, the number
of instances of prepayment of mortgage loans tends to increase during periods of
declining interest rates and tends to decrease during periods of increasing
interest rates
The Company's profitability is affected by its net interest income, which is the
difference between interest income generated from its mortgage loans and the
interest expense, inclusive of amortization of offering costs, incurred on its
debentures. The Company's profitability is also affected by its noninterest
income and expenses, provision for loan losses and income taxes. Noninterest
income consists of fee income from providing mortgage loan origination services
to Intervest National Bank as well as loan service charges and prepayment income
generated from the Company's loan portfolio. Noninterest expense consists mainly
of compensation and benefits expense, occupancy expenses, professional fees,
insurance expense and other operating expenses.
The Company's profitability is significantly affected by general economic and
competitive conditions, changes in market interest rates, government policies
and actions of regulatory authorities. 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.
Additionally, terrorist acts, such as those that occurred on September 11, 2001,
and armed conflicts, such as the war on terrorism, and natural disasters, such
as hurricanes, may have an adverse impact on economic conditions.
8
CRITICAL ACCOUNTING POLICIES
An accounting policy is deemed to be "critical" if it is important to a
company's results of operations and financial condition, and requires
significant judgment and estimates on the part of management in its application.
The preparation of financial statements and related disclosures in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect certain amounts reported in the financial
statements and related disclosures. Actual results could differ from these
estimates and assumptions. The Company believes that the estimates and
assumptions used in connection with the amounts reported in its financial
statements and related disclosures are reasonable and made in good faith. The
Company believes that currently its most critical accounting policy relates to
the determination of its allowance for mortgage loan losses. For a further
discussion of this policy as well as all of the Company's significant accounting
policies, see note 1 to the consolidated financial statements.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND DECEMBER 31, 2003
Total assets at December 31, 2004 increased to $122,451,000, from $119,578,000
at December 31, 2003. The increase is the result of new mortgage loans,
partially offset by a decrease in cash and cash equivalents.
Cash and cash equivalents decreased to $17,151,000 at December 31, 2004, from
$25,772,000 at December 31, 2003 due primarily to a lower level of short-term
investments. Mortgage loans receivable, net of unearned income and allowance for
loan losses, amounted to $100,188,000 at December 31, 2004, compared to
$89,116,000 at December 31, 2003. The growth reflected new originations,
partially offset by principal repayments.
At December 31, 2004, one loan with a principal balance of $179,000 was on
nonaccrual status, compared to two loans with an aggregate principal balance
of $1,057,000 at December 31, 2003. These loans were considered impaired under
the criteria of SFAS No.114. However a specific valuation allowance was not
maintained at any time since the Company believes the estimated fair value of
each of the underlying properties is greater than its recorded investment.
The allowance for loan losses amounted to $332,000 at December 31, 2004,
compared to $191,000 at December 31, 2003. The increase reflected a $141,000
provision resulting from an increase in loans outstanding during 2004. The
increased provision was also the result of management's decision to increase the
allowance for loan losses by five basis points on the entire portfolio. The
adequacy of the allowance is evaluated monthly with consideration given to a
number of factors, which are discussed in note 1 to the consolidated financial
statements. Although management believes it uses the best information available
to make determinations with respect to the need for and amount of the allowance,
future adjustments may be necessary if economic conditions or other factors
differ from those assumed.
Deferred debenture offering costs, net of accumulated amortization, increased to
$3,271,000 at December 31,2004, from $2,851,000 at December 31, 2003. The
increase was primarily due to $1,554,000 of additional deferred costs associated
with issuing new debentures, partially offset by normal amortization.
Total liabilities at December 31, 2004 decreased to $98,924,000, from
$101,405,000 at December 31, 2003. The decrease primarily reflected a lower
level of debenture interest payable, partially offset by an increase in
subordinated debentures payable.
Subordinated debentures payable increased to $88,850,000 at December 31, 2004
from $87,350,000 at December 31, 2003. The increase was due to the issuance of
Series 11/28/03 and 6/7/04 debentures totaling $21,500,000 in principal amount.
The sales, after underwriter's commissions and other issuance costs, resulted in
net proceeds of $19,924,000. The new debentures were offset by Series 5/12/95
debentures that were redeemed on March 1, 2004 (principal of $9,000,000 and
accrued interest of $2,749,000), Series 6/28/99 debentures (due 7/1/04) that
matured and were retired on 7/1/04 (principal of $2,000,000 and accrued interest
of $980,000) and Series 10/19/95 debentures (principal of $9,000,000 and accrued
interest of $2,133,000) that matured and were retired on 10/01/04.
At December 31, 2004, debenture interest payable at maturity amounted to
$8,219,000, compared to $12,052,000 at year-end 2003. The decrease was due to
the repayment of interest resulting from the maturity or early
9
redemption of debentures partially offset by the normal accrual of interest on
outstanding debentures. Nearly all of the accrued interest payable at December
31, 2004 is due and payable at the maturity of the various debentures.
Stockholder's equity increased to $23,527,000 at December 31, 2004, from
$18,173,000 at December 31, 2003 due to net income of $2,354,000 and capital
contributions from the Parent Company totaling $3,000,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
2003
The Company's net income increased by $595,000 to $2,354,000 in 2004 from
$1,759,000 in 2003. The increase was primarily due to a $1,919,000 increase in
service fee income received from Intervest National Bank and a $627,000 increase
in interest and fee income on mortgage loans, partially offset by a $764,000
increase in general and administrative expenses, a $624,000 increase in interest
on debentures and a $529,000 increase in income tax expense.
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2004 and 2003. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
-------------------------------
2004 2003
------------------------------- -------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- ------------------------------------------------------------------------------------------------------------------
Assets
Mortgage loans receivable (1) $102,789 $ 9,657 9.40% $ 91,123 $ 9,066 9.95%
Short-term investments 16,167 239 1.48 13,502 203 1.50
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 118,956 $ 9,896 8.32% 104,625 $ 9,269 8.86%
- ------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 4,551 3,659
- ------------------------------------------------------------------------------------------------------------------
Total assets $123,507 $108,284
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Debentures and accrued interest payable $100,022 $ 7,945 7.94% $ 92,172 $ 7,140 7.75%
Noninterest-bearing liabilities 2,486 1,858
Stockholders' equity 20,999 14,254
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $123,507 $108,284
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,951 $ 2,129
- ------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 18,934 1.64% $ 12,453 2.03%
- ------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.19x 1.13x
- ------------------------------------------------------------------------------------------------------------------
Mortgage loans receivable include non-performing loans.
Net interest income is a major source of the Company's revenues and is
influenced primarily by the amount, distribution and repricing characteristics
of its interest-earning assets and interest-bearing liabilities as well as by
the relative levels and movements of interest rates.
Net interest income amounted to $1,951,000 in 2004, compared to $2,129,000 in
2003. The decrease in net interest income was due to a lower net interest
margin, partially offset by growth in the Company's total interest-earning
assets. The decrease in the margin to 1.64% in 2004 from 2.03% in 2003 was due
to the Company's yield on interest-earning assets decreasing without an
offsetting decrease in its cost of subordinated debentures. The growth in
average assets consisted of an increase in mortgage loans of $11,666,000 and
short-term investments of $2,665,000, funded by new debentures of $7,850,000 and
a $6,745,000 increase in average stockholders' equity.
10
During 2004, the Company continued to operate in a refinancing environment where
higher rate loans were paid off and lower rate loans were originated for its
portfolio. This contributed to a reduction in net interest income, the effects
of which were partially offset by an increase in gain on the early repayment of
mortgages.
The Company's yield on interest-earning assets decreased 54 basis points to
8.32% in 2004 due to lower rates on new mortgage loans originated and
prepayments of higher-yielding loans. The cost of debentures increased 19 basis
points to 7.94% in 2004 largely due to the redemption of Series 5/12/95 and
Series 10/19/95 floating-rate debentures totaling $18,000,000. These debentures
were indexed to the JPMorgan Chase Bank prime rate and had an interest rate of
between 4.00% and 4.75% at the time of redemption.
Servicing agreement income increased to $4,262,000 in 2004, from $2,343,000 in
2003. The increase of $1,919,000 was the result of increased loan origination
services provided to Intervest National Bank.
Gain on early repayment of mortgages increased to $447,000 in 2004, from
$260,000 in 2003. The increase of $187,000 was the result of an increase in the
number of loans that were repaid prior to maturity in the 2004 compared to 2003.
The provision for loan losses was $141,000 in 2004, compared to $90,000 in 2003.
The higher provision reflected an increase in loans outstanding during 2004 as
well as a five basis point increase in 2004 in the amount of allowance
maintained on the entire portfolio.
General and administrative expenses increased to $2,347,000 in 2004, from
$1,583,000 in 2003, largely due to increases in salaries and employee benefits
expenses, occupancy expenses, professional fees and directors' fees, and the
commencement of a management fee that is paid by the Company to the Parent
Company.
Salaries and employee benefits expense increased $353,000 due to an increase in
staff, a higher cost of employee benefits, bonus payments and salary increases.
The Company had 17 fulltime employees at December 31, 2004 versus 16 at
December 31, 2003.
Occupancy expenses increased $257,000 due to the payment of additional rent on
the Company's new office space. The Company shares office space, under an
informal agreement, with its Parent Company which leases the entire fourth
floor, approximately 21,500 square feet, of One Rockefeller Plaza in New York
City. This lease expires March 2014. The Company occupies approximately one half
of the space. The Company's share of the rent and related expenses was $35,000
per month in 2004. The lease on the Company's former space expired in September
2004 and the Company's obligation to pay approximately $22,000 per month ended
in September 2004.
Beginning in the third quarter of 2004, the Company commenced paying a
management fee to the Parent Company of $37,500 per quarter. There was no
management fee in 2003. Professional fees increased by $23,000 due to higher
audit fees. Director fees increased by $40,000 due to higher fees paid to
directors for each board and committee meeting attended. The fees were increased
in June 2003 and October 2004.
The provision for income taxes amounted to $2,025,000 and $1,496,000 in 2004 and
2003, respectively. The provision represented 46% of pretax income for 2004 and
2003. The Company files consolidated Federal, New York State and New York City
income tax returns with its Parent Company.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002
The Company's net income increased $193,000 to $1,759,000 in 2003 from
$1,566,000 in 2002. The increase was primarily due to a $746,000 increase in
service fee income received from Intervest National Bank, partially offset by a
$289,000 increase in income tax expense and a $251,000 increase in general and
administrative expenses.
11
The following table provides information on average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for 2003 and 2002. The yields and rates shown
are based on a computation of income/expense (including any related fee income
or expense) for each year divided by average interest-earning
assets/interest-bearing liabilities during each year. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each year.
For the Year Ended December 31,
-------------------------------
2003 2002
------------------------------- -------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate Balance Inc./Exp. Rate
- -------------------------------------------------------------------------------------------------------------
Assets
Mortgage loans receivable (1) $ 91,123 $ 9,066 9.95% $ 71,346 $ 8,131 11.40%
Short-term investments 13,502 203 1.50 15,473 289 1.87
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets 104,625 $ 9,269 8.86% 86,819 $ 8,420 9.70%
- -------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 3,659 3,000
- -------------------------------------------------------------------------------------------------------------
Total assets $108,284 $ 89,819
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Debentures and accrued interest payable $ 92,172 $ 7,140 7.75% $ 77,742 $ 6,288 8.09%
Noninterest-bearing liabilities 1,858 1,488
Stockholders' equity 14,254 10,589
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $108,284 $ 89,819
- -------------------------------------------------------------------------------------------------------------
Net interest income $ 2,129 $ 2,132
- -------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 12,453 2.03% $ 9,077 2.46%
- -------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest- bearing liabilities 1.13x 1.12x
- -------------------------------------------------------------------------------------------------------------
Mortgage loans receivable include non-performing loans.
Net interest income amounted to $2,129,000 in 2003, compared to $2,132,000 in
2002. The growth in average interest-earning assets was offset by the Company's
yield on interest-earning assets decreasing at a faster pace than its cost of
debentures. The growth in average assets consisted of net new mortgage loans of
$19,777,000 funded primarily by new debentures of $14,430,000 and a $3,665,000
increase in average stockholders' equity.
The yield on interest-earning assets decreased 84 basis points to 8.86% in 2003
due to lower rates on new mortgage loans originated, prepayments of
higher-yielding loans and lower yields earned on short-term investments. The
cost of debentures decreased 34 basis points to 7.75% in 2003 largely due to
lower rates paid on $41,500,000 of floating-rate debentures. These debentures
are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of
25 basis points from December 2002.
Servicing agreement income from Intervest National Bank increased to $2,343,000
in 2003, from $1,597,000 in 2002. The increase of $746,000 was due to increased
loan origination services provided to the bank.
General and administrative expenses aggregated $1,583,000 in 2003, compared to
$1,332,000 in 2002. The increase of $251,000 was primarily the result of an
increase in salary expense of $149,000 (resulting from additional staff, salary
increases and a higher cost of benefits) and a $45,000 increase in occupancy
expense, primarily due to additional rented space and higher lease escalation
costs.
The provision for income taxes amounted to $1,496,000 and $1,207,000 in 2003 and
2002, respectively. The provision represented 46% and 44% of pretax income for
2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet its operations, lending commitments and the repayment of
debentures. 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
12
ongoing operations. From time to time, the Company also receives capital
contributions from the Parent Company. For additional information about the cash
flows from the Company's operating, investing and financing activities, see the
consolidated statements of cash flows in this report.
At December 31, 2004, the Company had commitments outstanding to lend of
$6,080,000. If all these commitments were to close, they would be funded by the
combination of cash on hand and from the scheduled maturities of existing loans.
For the year ending December 31, 2005, the Company is required to repay
$29,100,000 of principal and $5,191,000 of accrued interest on its subordinated
debentures. The Company expects to repay these subordinated debentures and
related accrued interest from scheduled maturities of existing mortgage loans,
cash generated from ongoing operations and cash on hand. The Company considers
its current liquidity and sources of funds sufficient to satisfy its outstanding
lending commitments and its maturing liabilities.
The Company has filed a registration statement relating to an offering of
additional debentures. It is anticipated that debentures in an aggregate
principal amount of up to $14,000,000 will be issued in the second quarter of
2005.
OFF-BALANCE SHEET COMMITMENTS
Commitments to extend credit amounted to $6,080,000 at December 31, 2004, of
which nearly all will either close or expire in 2005. The Company issues
commitments to extend credit in the normal course of business, which may
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated balance sheets. Commitments to
extend credit are agreements to lend funds under specified conditions. Such
commitments generally have fixed expiration dates or other termination clauses
and may require payment of fees. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements.
CONTRACTUAL OBLIGATIONS
The table below summarizes the Company's contractual obligations as of December
31, 2004.
Due In
------------------------------------------
2006 and 2008 and 2010 and
($in thousands) Total 2005 2007 2009 Later
- ---------------------------------------------------------------------------------------
Subordinated debentures payable $ 88,850 $ 29,100 $ 16,000 $ 21,250 $ 22,500
Debenture interest payable 8,219 5,191 1,960 857 211
- ---------------------------------------------------------------------------------------
$ 97,069 $ 34,291 $ 17,960 $ 22,107 $ 22,711
- ---------------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company does not engage in trading
or hedging activities and does not invest in interest-rate derivatives or enter
into interest rate swaps.
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.
13
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
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
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.
The Company's one-year interest rate sensitivity gap was a positive $64,025,000,
or 52% of total assets, at December 31, 2004, compared to a positive
$43,996,000, or 37%, at December 31, 2003. The increase was primarily due to the
origination of new floating-rate mortgage loans funded by the issuance of
fixed-rate subordinated debentures with terms of greater than one year.
The following table summarizes information relating to the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
2004, that are scheduled to mature or reprice within the periods shown.
Floating-rate loans and debentures, which are subject to adjustment at any time,
are included in the 0-3 month period rather than in the period in which they
mature. Fixed-rate loans and debentures are scheduled according to their
contractual maturities.
0-3 4-12 Over 1-4 Over 4
($in thousands) Months Months Years Years Total
- -----------------------------------------------------------------------------------------
Floating-rate loans $ 72,435 $ - $ - $ - $ 72,435
Fixed-rate loans 5,445 9,444 10,589 3,619 29,097
- -----------------------------------------------------------------------------------------
Total loans 77,880 9,444 10,589 3,619 101,532
Short-term investments 10,991 - - - 10,991
- -----------------------------------------------------------------------------------------
Total rate-sensitive assets $ 88,871 $ 9,444 $ 10,589 $ 3,619 $112,523
- -----------------------------------------------------------------------------------------
Debentures payable $ 26,100 $ 3,000 $ 28,750 $ 31,000 $ 88,850
Accrued interest on debentures 5,133 57 2,641 388 8,219
- -----------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 31,233 $ 3,057 $ 31,391 $ 31,388 $ 97,069
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
GAP (repricing differences) $ 57,638 $ 6,387 $ (20,802) $(27,769) $ 15,454
- -----------------------------------------------------------------------------------------
Cumulative GAP $ 57,638 $ 64,025 $ 43,223 $ 15,454 $ 15,454
- -----------------------------------------------------------------------------------------
Cumulative GAP to total assets 47.0% 52.3% 35.3% 12.6% 12.6%
- -----------------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning the Company
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
The primary impact of inflation on the operations of the Company is reflected in
increased operating costs. Virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, changes in interest rates have a
more significant impact on the performance of the Company than do the effects of
changes in the general rate of inflation and changes in prices. Additionally,
interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
14
In a rising rate environment, it is possible that the Company would have to
devote a higher percentage of the interest payments it receives from its
fixed-rate mortgages to meet the interest payments due on variable-rate
Debentures. However, it should be noted that the interest rate on variable-rate
debentures is limited to a maximum of 12%.
ITEM 7A. 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-issuance activities. The Company has
not engaged in and accordingly has no risk related to trading accounts,
commodities, interest rate hedges 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, 2004 and 2003, which reflect changes in
market prices and rates, can be found in note 14 to the consolidated financial
statements.
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
herein:
- - Report of Independent Registered Public Accounting Firm (PAGE 16)
- - Consolidated Balance Sheets at December 31, 2004 and 2003 (PAGE 17)
- - Consolidated Statements of Operations for the Years Ended December 31, 2004,
2003 and 2002 (PAGE 18)
- - Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2004, 2003 and 2002 (PAGE 19)
- - Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
2003 and 2002 (PAGE 20)
- - Notes to the Consolidated Financial Statements (PAGES 21 TO 30)
- - Schedule IV - Mortgage Loans on Real Estate (PAGES 31 AND 32)
Other financial statement schedules and inapplicable periods with respect to
schedules listed above are omitted because the conditions requiring their filing
do not exist or the information required thereby is included in the financial
statements filed, including the notes thereto.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have audited the consolidated balance sheets of Intervest Mortgage
Corporation and subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above fairly present, in
all material respects, the consolidated financial position of Intervest Mortgage
Corporation and subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004 in conformity with U.S.
generally accepted accounting principles.
/s/ Eisner LLP
- --------------
Eisner LLP
New York, New York
February 10, 2005
16
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
-----------------
($ in thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 6,160 $ 1,379
Short-term investments (note 2) 10,991 24,393
-------- --------
Total cash and cash equivalents 17,151 25,772
Mortgage loans receivable
(net of unearned fees and discounts and allowance for loan losses, notes 3 and 4) 100,188 89,116
Accrued interest receivable 497 642
Loan fees receivable 884 762
Fixed assets, net (note 5) 88 86
Deferred debenture offering costs, net (note 6) 3,271 2,851
Other assets 372 349
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $122,451 $119,578
- --------------------------------------------------------------------------------------------------------
LIABILITIES
Mortgage escrow funds payable $ 1,644 $ 1,671
Subordinated debentures payable (note 7) 88,850 87,350
Debenture interest payable at maturity (note 7) 8,219 12,052
Other liabilities 211 332
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 98,924 101,405
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 11 and 13)
STOCKHOLDER'S EQUITY
Class A common stock
(no par value, 200 shares authorized, 100 issued and outstanding) 2,100 2,100
Class B common stock ( no par value, 100 shares authorized, none issued ) - -
Additional paid-in-capital 11,510 8,510
Retained earnings (note 8) 9,917 7,563
- --------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 23,527 18,173
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $122,451 $119,578
========================================================================================================
See accompanying notes to consolidated financial statements.
17
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------
($ in thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
REVENUES
Interest and fee income on mortgages $ 9,657 $ 9,066 $ 8,131
Interest income on short-term investments 239 203 289
-------------------------
Total interest and fee income 9,896 9,269 8,420
Servicing agreement income - related party (note 11) 4,262 2,343 1,597
Gain on early repayment of mortgages 447 260 334
Other income 207 196 125
- -------------------------------------------------------------------------------
TOTAL REVENUES 14,812 12,068 10,476
- -------------------------------------------------------------------------------
EXPENSES
Interest on debentures 6,811 6,187 5,483
Amortization of deferred debenture offering costs 1,134 953 805
Provision for loan losses 141 90 83
General and administrative 2,347 1,583 1,332
- -------------------------------------------------------------------------------
TOTAL EXPENSES 10,433 8,813 7,703
- -------------------------------------------------------------------------------
Income before income taxes 4,379 3,255 2,773
Provision for income taxes (note 12) 2,025 1,496 1,207
- -------------------------------------------------------------------------------
NET INCOME $ 2,354 $ 1,759 $ 1,566
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31,
-------------------------
($ in thousands) 2004 2003 2002
- --------------------------------------------------------------------
CLASS A COMMON STOCK
- --------------------------------------------------------------------
Balance at beginning and end of year $ 2,100 $ 2,100 $ 2,100
- --------------------------------------------------------------------
CLASS B COMMON STOCK
- --------------------------------------------------------------------
Balance at beginning and end of year - - -
- --------------------------------------------------------------------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year 8,510 3,509 3,509
Contributions from Parent Company 3,000 5,001 -
- --------------------------------------------------------------------
Balance at end of year 11,510 8,510 3,509
- --------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 7,563 5,804 4,238
Net income 2,354 1,759 1,566
- --------------------------------------------------------------------
Balance at end of year 9,917 7,563 5,804
- --------------------------------------------------------------------
- --------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY AT END OF YEAR $23,527 $18,173 $11,413
====================================================================
See accompanying notes to consolidated financial statements.
19
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
($ in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,354 $ 1,759 $ 1,566
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 32 33 28
Provision for loan losses 141 90 83
Amortization of deferred debenture offering costs 1,134 953 805
Amortization of premiums, fees and discounts, net (1,047) (878) (640)
Gain on early repayment of mortgage loans receivable (447) (260) (334)
Net (decrease) increase in mortgage escrow funds payable (27) 1,011 2
Net (decrease) increase in debenture interest payable at maturity (3,833) 1,301 1,638
Net change in all other assets and liabilities 1,276 878 800
- -----------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (417) 4,887 3,948
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal repayments of mortgage loans receivable 61,270 62,209 25,494
Originations of mortgage loans receivable (72,385) (78,321) (36,205)
Net decrease (increase) in interest-earning time deposits with banks -- 2,000 (2,000)
Purchases of fixed assets, net (35) (52) (31)
- -----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,150) (14,164) (12,742)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of debentures, net of offering costs 19,946 14,752 12,488
Principal repayments of debentures (20,000) (2,650) (2,500)
Capital contributions from Parent Company 3,000 5,001 --
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,946 17,103 9,988
- -----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (8,621) 7,826 1,194
Cash and cash equivalents at beginning of year 25,772 17,946 16,752
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,151 $ 25,772 $ 17,946
=====================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 10,644 $ 4,886 $ 3,845
Income taxes 2,112 1,817 1,214
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Intervest Mortgage Corporation and Subsidiaries (the "Company") is a
wholly owned subsidiary of Intervest Bancshares Corporation (the "Parent
Company"). The Company is engaged in the real estate business, including
the origination and purchase of real estate mortgage loans. The Company
also provides loan origination services to Intervest National Bank, a
wholly owned subsidiary of the Parent Company. Officers of the Company are
Directors of the Company and are officers, principal shareholders and
Directors of the Parent Company.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The 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. Certain reclassifications have been made to prior year
amounts to conform to the current year's presentation. The accounting and
reporting policies of the Company conform to accounting principals
generally accepted in the United States of America.
USE OF ESTIMATES
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the financial statements and revenues and
expenses during the reporting periods. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan
losses and the estimated fair values of the Company's financial
instruments.
CASH EQUIVALENTS
For purposes of the statements of cash flows, cash equivalents include
short-term investments that have original maturities of three months or
less when purchased.
MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable are stated at their outstanding principal
balances, net of any deferred fees or costs on originated mortgage loans
receivable, unamortized discounts on purchased mortgage loans receivable
and the allowance for loan 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 the fair value of the mortgage loans
receivable based on their interest rates. Interest income is accrued on the
unpaid principal balance. Discounts are amortized to income over the life
of the related mortgage loans receivable using the constant interest
method. Loan origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment of the yield of the related
mortgage loans receivable. When a loan is paid off or sold, or if a
commitment expires unexercised, any unamortized net deferred amount is
credited or charged to earnings accordingly.
Mortgage loans receivable are placed on nonaccrual status when principal or
interest becomes 90 days or more past due unless the loan is well secured
and in the process of collection. Accrued interest receivable previously
recognized is reversed and amortization of net deferred fee income is
discontinued for mortgage loans receivable placed on a nonaccrual status.
Interest payments received on mortgage loans receivable in a nonaccrual
status are recognized as income on a cash basis unless future collections
on principal are doubtful, in which case the payments received are applied
as a reduction of principal. Mortgage loans receivable remain on nonaccrual
status until principal and interest payments are current.
21
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
ALLOWANCE FOR MORTGAGE LOAN LOSSES
The allowance for mortgage loan 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 loan portfolio, overall portfolio quality, loan 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 loan losses is computed related to certain
mortgage loans receivable that are impaired. A loan 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 loan's effective
interest rate, or the observable market price of the loan or the estimated
fair value of the loan'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 loan, this deficiency
is recognized as a valuation allowance, and a charge to the provision for
loan losses. The Company will charge off any portion of a recorded
investment in a loan that exceeds its fair value of the collateral.
FIXED ASSETS
Fixed assets are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of the asset. Maintenance, repairs and minor improvements are
charged to operating expenses as incurred while major improvements are
capitalized.
DEFERRED DEBENTURE OFFERING COSTS
Costs relating to offerings of debentures are amortized over the terms
of the debentures. Deferred debenture offering costs consist primarily of
underwriters' commissions.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded if it is more likely than not
that some portion or all of the deferred tax assets will not be realized
based on a review of available evidence.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into
off-balance sheet financial instruments consisting of commitments to extend
credit. Such financial instruments are recorded in the consolidated
financial statements when they are funded and related fees are recorded
when incurred or received.
22
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
RECENT ACCOUNTING AND REGULATORY DEVELOPMENTS
ACCOUNTING FOR LOAN COMMITMENTS In March 2004, the SEC issued Staff
Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" (SAB 105). SAB 105 provides recognition guidance for entities
that issue loan commitments that are required to be accounted for as
derivative instruments. Currently, loan commitments that the Company enters
into would not be required to be accounted for as derivative instruments
under SAB 105.
2. SHORT-TERM INVESTMENTS
At December 31, 2004 and 2003, short-term investments were comprised of
bank commercial paper, money market and savings accounts with banks.
3. MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable are summarized as follows:
At December 31, 2004 At December 31, 2003
------------------------ ------------------------
($ in thousands) # of loans Amount # of loans Amount
-------------------------------------------------------------------------------------------------------
Residential multifamily mortgage loans receivable 52 $ 52,543 47 $ 48,039
Commercial real estate mortgage loans receivable 40 38,121 32 30,596
Land and land development loans receivable 4 10,868 3 11,782
-------------------------------------------------------------------------------------------------------
Mortgage loans receivable 96 101,532 82 90,417
-------------------------------------------------------------------------------------------------------
Deferred loan fees and unamortized discount (1,012) (1,110)
-------------------------------------------------------------------------------------------------------
Mortgage loans receivable, net of fees and discount 100,520 89,307
-------------------------------------------------------------------------------------------------------
Allowance for mortgage loan losses (332) (191)
-------------------------------------------------------------------------------------------------------
Mortgage loans receivable, net $ 100,188 $ 89,116
-------------------------------------------------------------------------------------------------------
At December 31, 2004, the loan portfolio consisted of $60,265,000 and
$41,267,000 of first mortgage loans and junior mortgage loans,
respectively. These loans were comprised of $28,897,000 of fixed-rate loans
and $72,635,000 of adjustable-rate loans. At December 31, 2003, the loan
portfolio consisted of $61,869,000 and $28,548,000 of first mortgage loans
and junior mortgage loans, respectively. These loans were comprised of
$32,773,000 of fixed-rate loans and $57,644,000 of adjustable-rate loans.
At December 31, 2004, effective interest rates on mortgages ranged
from 5.69% to 17.40%, compared to 5.08% to 17.19% at December 31, 2003.
Many of the mortgage loans receivable have an interest rate floor which
resets upward along with any increase in the loan's interest rate. This
feature reduces the loan's interest rate exposure in periods of declining
interest rates.
During 2004, 2003 and 2002, certain mortgages were repaid in full
prior to their maturity date. The prepayments resulted in the recognition
of unearned fees and discounts associated with such mortgage loans
receivable, as well as the receipt of prepayment fees in certain cases. For
2004, 2003 and 2002, income associated with the prepayments of mortgages
was $447,000, $260,000 and $334,000, respectively.
Credit risk, which represents the possibility of the Company not recovering
amounts due from its borrowers, is significantly related to local economic
conditions in the areas the properties are located, as well as the
Company's underwriting standards. Economic conditions affect the market
value of the underlying collateral as well as the levels of occupancy of
income-producing properties (such as office buildings, shopping centers and
rental and cooperative apartment buildings).
23
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
3. MORTGAGE LOANS RECEIVABLE, CONTINUED
The geographic distribution of the properties that collateralize the loan
portfolio is summarized as follows:
At December 31, 2004 At December 31, 2003
------------------------ ------------------------
($ in thousands) Amount % of Total Amount % of Total
---------------------------------------------------------------------
New York $ 86,701 85.4% $ 80,130 88.6%
New Jersey 8,133 8.0 1,309 1.4
Florida 2,304 2.3 5,200 5.8
Pennsylvania 1,822 1.8 2,156 2.4
Maryland 880 0.9 - -
Alabama 789 0.8 - -
Connecticut 340 0.3 793 0.9
All other 563 0.5 829 0.9
---------------------------------------------------------------------
$ 101,532 100.0% $ 90,417 100.0%
---------------------------------------------------------------------
The following table shows scheduled contractual principal repayments of the loan
portfolio at December 31, 2004:
($in thousands)
---------------------------------------------------------------------
Year ended December 31, 2005 $ 47,596
Year ended December 31, 2006 25,378
Year ended December 31, 2007 16,230
Year ended December 31, 2008 1,254
Year ended December 31, 2009 1,599
Thereafter 9,475
---------------------------------------------------------------------
$101,532
---------------------------------------------------------------------
At December 31, 2004, $39,928,000 of mortgage loans receivable with
adjustable rates and $14,008,000 of mortgage loans receivable with fixed
rates are due after one year.
At December 31, 2004, one loan with a principal balance of $179,000
was on a nonaccrual status, compared to two loans with an aggregate
principal balance of $1,057,000 at December 31, 2003. These loans were
considered impaired under the criteria of SFAS No.114. but no valuation
allowance was maintained at any time since the Company believes that the
estimated fair value of the underlying properties exceeded the Company's
recorded investment.
At December 31, 2004 and 2003, there were no other loans classified as
nonaccrual, impaired or ninety days past due and still accruing interest.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $15,000 in 2004 and $58,000 in 2003. The
average balance of nonaccrual (impaired) loans for 2004 and 2003 was
$76,000 and $610,000, respectively. There were no nonaccrual loans for
2002.
4. ALLOWANCE FOR MORTGAGE LOAN LOSSES
Activity in the allowance for mortgage loan losses is summarized as
follows:
For the Year Ended December 31,
----------------------------------------------
($ in thousands) 2004 2003 2002
-------------------------------------------------------------------------------
Balance at beginning of year $ 191 $ 101 $ 18
Provision charged to operations 141 90 83
-------------------------------------------------------------------------------
Balance at end of year $ 332 $ 191 $ 101
-------------------------------------------------------------------------------
5. FIXED ASSETS
Fixed assets are summarized as follows:
At December 31,
------------------------------
($ in thousands) 2004 2003
-----------------------------------------------------------------
Furniture, fixtures and equipment $ 82 $ 99
Automobiles 43 43
-----------------------------------------------------------------
Total cost 125 142
-----------------------------------------------------------------
Less accumulated deprecation (37) (56)
-----------------------------------------------------------------
Fixed assets, net $ 88 $ 86
-----------------------------------------------------------------
24
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
6. DEFERRED DEBENTURE OFFERING COSTS
Deferred debenture offering costs are summarized as follows:
At December 31,
------------------------------
($ in thousands) 2004 2003
----------------------------------------------------------------------
Deferred debenture offering costs $ 7,079 $ 7,209
Less accumulated amortization (3,808) (4,358)
----------------------------------------------------------------------
Deferred debenture offering costs, net $ 3,271 $ 2,851
----------------------------------------------------------------------
7. SUBORDINATED DEBENTURES PAYABLE
The following table summarizes debenture payable.
At December 31, At December 31,
------------------ ----------------
($in thousands) 2004 2003
------------------------------------------------------------------------- ------------------ ----------------
Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ - $ 9,000
Series 10/19/95 - interest at 2% above prime - due October 1, 2004 - 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 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
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
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 1,500
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4 % fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2 % fixed - due October 1, 2006 2,500 2,500
Series 07/25/03 - interest at 6 3/4 % fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4 % fixed - due April 1, 2007 2,000 -
Series 11/28/03 - interest at 6 1/2 % fixed - due April 1, 2009 3,500 -
Series 11/28/03 - interest at 6 3/4 %fixed - due April 1, 2011 4,500 -
Series 06/07/04 - interest at 6 1/4 % fixed - due January 1, 2008 2,500 -
Series 06/07/04 - interest at 6 1/2 %fixed - due January 1, 2010 4,000 -
Series 06/07/04 - interest at 6 3/4 % fixed - due January 1, 2012 5,000 -
---------------------------------------------------------------------------------------------------------------
$ 88,850 $ 87,350
---------------------------------------------------------------------------------------------------------------
In the table above, prime represents the prime rate of JPMorganChase
Bank, which was 5.25% on December 31, 2004 and 4.00% on December 31, 2003.
The floating rate debentures have a maximum interest rate of 12%.
In January 2004, the Company issued its Series 11/28/03 debentures in
the principal amount of $10,000,000. Net proceeds, after deferred offering
costs, amounted to $9,252,000.
25
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
7. SUBORDINATED DEBENTURES PAYABLE, CONTINUED
In July 2004, the Company issued its Series 6/7/04 debentures in the
principal amount of $11,500,000. Net proceeds, after deferred offering
costs, amounted to $10,672,000.
On March 1, 2004, the Company's Series 5/12/95 debentures due April 1,
2004 were redeemed for $9,000,000 of principal and $2,749,000 of accrued
interest. On May 1, 2004, the Company's Series 6/28/99 debentures due July
1, 2004 were redeemed for $2,000,000 of principal and $980,000 of accrued
interest. On October 1, 2004, the Company's Series 10/19/95 debentures were
repaid for $9,000,000 of principal and $2,244,000 of accrued interest.
Interest is paid quarterly on the Company's debentures except for the
following: $1,980,000 of Series 5/10/96; all of Series 11/10/98, 6/28/99,
9/18/00; $770,000 of Series 8/01/01; $270,000 of Series 1/17/02; $1,520,000
of Series 8/05/02; $1,750,000 of Series 11/28/03; and $1,910,000 of Series
6/7/04 debentures, all of which accrue and compound interest quarterly,
with such interest due and payable at maturity.
The holders of Series 11/10/98 thru 9/18/00 and 1/17/02 thru 6/7/04
debentures can require the Company repurchase the debentures for face
amount plus accrued interest each year (beginning October 1, 2005 for
Series 1/17/02, January 1, 2006 for Series 8/05/02, July 1, 2006 for Series
1/21/03, October 1, 2006 for Series 7/25/03, January 1, 2007 for Series
11/28/03 and January 1, 2008 for Series 6/7/04) provided, however, 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.
The Company's debentures may be redeemed at its option at any time, in
whole or in part, for face value, except for Series 6/7/04; which would be
redeemed at a premium of 1% if it were redeemed prior to July 1, 2005. All
the debentures are unsecured and subordinate to all present and future
senior indebtedness, as defined in the indenture related to each debenture.
The Company has filed a registration statement relating to an offering
of additional debentures. It is anticipated that debentures in an aggregate
principal amount of up to $14,000,000 will be issued in the second quarter
of 2005.
Scheduled contractual maturities of debentures as of December 31, 2004
are summarized as follows:
($in thousands) Principal Accrued Interest
-------------------------------------------------------------------