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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2002
Commission File No. 33-22976-NY
INTERVEST MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-3415815
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation)
10 Rockefeller Plaza, Suite 1015
New York, New York 10020-1903
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(Address of principal executive offices)
(212) 218-2800
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(Registrant's telephone number, including area code)
Intervest Corporation of New York
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(Registrant's former name)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES X NO .
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
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Common Stock, no par value per share 100 shares outstanding at October 31, 2002
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2002 (Unaudited) and December 31, 2001 ......................... 2
Condensed Consolidated Statements of Operations (Unaudited)
for the Quarters and Nine-Months Ended September 30, 2002 and 2001.................. 3
Condensed Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
for the Nine-Months Ended September 30, 2002 and 2001............................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine-Months Ended September 30, 2002 and 2001............................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited) ...................... 6
Review by Independent Certified Public Accountants .................................... 10
Report on Review by Independent Certified Public Accountants .......................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................... 16
Item 4. Controls and Procedures ..................................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 17
Item 2. Changes in Securities and Use of Proceeds..................................... 17
Item 3. Defaults Upon Senior Securities............................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................... 17
Item 5. Other Information............................................................. 17
Item 6. Exhibits and Reports on Form 8-K ............................................. 17
Signatures.................................................................................. 17
Certification .............................................................................. 18
Private Securities Litigation Reform Act Safe Harbor Statement
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The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this report on Form 10-Q that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by forward-looking statements. The following factors are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions, the
development of an interest rate environment that may adversely affect the
Company's net interest income, other income or cash flow anticipated from the
Company's operations, investment and lending activities; and changes in laws and
regulations affecting the Company.
1
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
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INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
($ in thousands) 2002 2001
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ASSETS
Cash and due from banks $ 1,079 $ 1,050
Commercial paper and other short-term investments 23,899 15,702
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Total cash and cash equivalents 24,978 16,752
Mortgage loans receivable net of unearned fees and discounts and allowance for loan losses (note 2) 67,310 62,647
Accrued interest receivable 570 523
Fixed assets, net 67 61
Deferred debenture offering costs, net (note 3) 2,758 2,348
Other assets 692 752
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Total assets $96,375 $83,083
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LIABILITIES
Mortgage escrow funds payable $ 751 $ 658
Subordinated debentures payable (note 4) 74,000 63,000
Debenture interest payable at maturity (note 4) 10,085 9,113
Other liabilities 419 465
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Total liabilities 85,255 73,236
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STOCKHOLDER'S EQUITY
Common stock (no par value, 100 shares issued and outstanding) 2,100 2,100
Additional paid-in-capital 3,509 3,509
Retained earnings 5,511 4,238
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Total stockholder's equity 11,120 9,847
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Total liabilities and stockholder's equity $96,375 $83,083
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See accompanying notes to condensed consolidated financial statements.
2
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Ended Nine-Months Ended
September 30, September 30,
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($ in thousands) 2002 2001 2002 2001
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REVENUES
Interest and fee income on mortgages $2,046 $1,842 $6,207 $5,066
Interest income on short-term investments 68 91 183 536
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Total interest income 2,114 1,933 6,390 5,602
Gain on early repayment of mortgages 152 8 235 339
Other income (note 5) 510 123 1,242 362
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Total revenues 2,776 2,064 7,867 6,303
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EXPENSES
Interest on debentures 1,384 1,380 4,001 4,455
Amortization of deferred debenture offering costs 200 166 592 479
General and administrative 347 272 1,040 885
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Total expenses 1,931 1,818 5,633 5,819
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Income before income taxes 845 246 2,234 484
Income tax expense 325 112 961 224
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Net income $ 520 $ 134 $1,273 $ 260
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See accompanying notes to condensed consolidated financial statements.
3
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholder's Equity
(Unaudited)
Nine-Months Ended
September 30,
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($ in thousands) 2002 2001
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COMMON STOCK
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Balance at beginning and end of period $ 2,100 $ 2,100
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ADDITIONAL PAID-IN-CAPITAL, COMMON
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Balance at beginning and end of period 3,509 3,509
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RETAINED EARNINGS
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Balance at beginning of period 4,238 3,660
Net income for the period 1,273 260
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Balance at end of period 5,511 3,920
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Total stockholder's equity at end of period $11,120 $ 9,529
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See accompanying notes to condensed consolidated financial statements.
4
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine-Months Ended
September 30,
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($ in thousands) 2002 2001
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OPERATING ACTIVITIES
Net income $ 1,273 $ 260
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 20 17
Amortization of deferred debenture offering costs 592 479
Amortization of premiums, fees and discounts, net (491) (428)
Provision for loan losses 65 -
Gain on early repayment of mortgages (235) (339)
Increase in mortgage escrow funds payable 94 117
Increase in debenture interest payable at maturity 972 1,354
Change in all other assets and liabilities, net 558 413
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Net cash provided by operating activities 2,848 1,873
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INVESTING ACTIVITIES
Principal repayments of mortgage loans receivable 21,794 28,432
Originations of mortgage loans receivable (26,390) (41,353)
Purchases of premises and equipment (25) (8)
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Net cash used in investing activities (4,621) (12,929)
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FINANCING ACTIVITIES
Proceeds from issuance of debentures, net of offering costs 12,499 6,672
Principal repayments of debentures (2,500) (1,400)
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Net cash provided by financing activities 9,999 5,272
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Net increase (decrease) in cash and cash equivalents 8,226 (5,784)
Cash and cash equivalents at beginning of period 16,752 19,476
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Cash and cash equivalents at end of period $ 24,978 $ 13,692
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SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 3,029 $ 3,101
Income taxes 970 320
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See accompanying notes to condensed consolidated financial statements.
5
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 1 - General
In the most recent quarter, the Company changed its name from Intervest
Corporation of New York, to Intervest Mortgage Corporation.
The condensed consolidated financial statements of Intervest Mortgage
Corporation and Subsidiaries (the "Company") in this report have not been
audited except for the information derived from the audited Consolidated Balance
Sheet as of December 31, 2001. The financial statements in this report should be
read in conjunction with the consolidated financial statements and related notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
The condensed consolidated financial statements include the accounts of
Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest
Distribution Corporation and Intervest Realty Servicing Corporation. All
material intercompany accounts and transactions have been eliminated in
consolidation.
The Company is engaged in the real estate business, including the origination
and purchase of real estate mortgage loans, consisting of first mortgage, junior
mortgage and wraparound mortgage loans. The Company's investment policy
emphasizes the investment in mortgage loans on income producing properties.
The Company is 100% owned by Intervest Bancshares Corporation (the "Parent
Company"). Officers of the Company are also shareholders and officers of the
Parent Company and serve on the Boards of Directors of both companies.
In the opinion of management, all material adjustments necessary for a fair
presentation of financial condition and results of operations for the interim
periods presented in this report have been made. These adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of results that may be expected for the entire year
or any other interim period. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates.
Note 2 - Mortgage Loans Receivable
Loans are stated at their outstanding principal balances, net of any deferred
fees or costs on originated loans and unamortized discounts on purchased loans
and the allowance for loan losses. Purchased loans, all of which have been made
from affiliated companies, are recorded at cost which is equivalent to the
carrying amount of the seller. The purchase price is deemed equivalent to fair
value of the loans based on their variable or floating interest rates. Interest
income is accrued on the unpaid principal balance. Discounts are amortized to
income over the life of the related receivables 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 loans.
The allowance for loan losses is netted against 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 loans 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 loans 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 loans normally consist of loans on nonaccrual status.
Interest income on impaired loans is recognized on a cash basis. Impairment for
commercial real estate and residential loans is measured based on the present
6
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 2 - Mortgage Loans Receivable, Continued
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 through the provision for loan losses. The Company
normally charges off any portion of the recorded investment in the loan that
exceeds the fair value of the collateral.
Management believes that all loans at September 30, 2002 and December 31, 2001
were collectible. The allowance for loan losses was $84,000 at September 30,
2002 and $18,000 at December 31, 2001. For the quarter and nine- months ended
September 30, 2002, the provision for loan losses was $9,000 and $65,000,
respectively. There was no provision for the same periods of 2001. There were no
loan chargeoffs, or loans classified as nonaccrual or impaired during the
reporting periods of this report.
Note 3 - Deferred Debenture Offering Costs
Costs related to offerings of debentures are deferred and amortized over the
respective terms of the debentures. Deferred debenture offering costs consist
primarily of underwriter's commissions. At September 30, 2002, deferred
debenture offering costs, net of accumulated amortization of $3,275,000,
amounted to $2,758,000. At December 31, 2001, deferred debenture offering costs,
net of accumulated amortization of $2,851,000, amounted to $2,348,000.
Note 4 - Subordinated Debentures Payable
The following table summarizes debentures payable.
At September 30, At December 31,
($ in thousands) 2002 2001
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Series 05/12/95 - interest at 2% above prime - due April 1, 2004 $ 9,000 $ 9,000
Series 10/19/95 - interest at 2% above prime - due October 1, 2004 9,000 9,000
Series 05/10/96 - interest at 2% above prime - due April 1, 2005 10,000 10,000
Series 10/15/96 - interest at 2% above prime - due October 1, 2005 5,500 5,500
Series 04/30/97 - interest at 1% above prime - due October 1, 2005 8,000 8,000
Series 11/10/98 - interest at 8 1/2% fixed - due January 1, 2003 1,400 1,400
Series 11/10/98 - interest at 9% fixed - due January 1, 2005 2,600 2,600
Series 06/28/99 - interest at 8% fixed - due July 1, 2002 - 2,500
Series 06/28/99 - interest at 8 1/2% fixed - due July 1, 2004 2,000 2,000
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 2,000 2,000
Series 09/18/00 - interest at 8% fixed - due January 1, 2004 1,250 1,250
Series 09/18/00 - interest at 8 1/2% fixed - due January 1, 2006 1,250 1,250
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 7 1/2% fixed - due April 1, 2005 1,750 1,750
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/4% fixed - due October 1, 2005 1,250 -
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 -
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 -
Series 08/05/02 - interest at 7 1/4% fixed - due January 1, 2006 1,750 -
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 -
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 -
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$ 74,000 $ 63,000
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7
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 4 - Subordinated Debentures Payable, Continued
The "prime" in the preceding table refers to the prime rate of JP Morgan Chase
Bank, which was 4.75% at September 30, 2002 and December 31, 2001.
In August of 2002, the Company issued its Series 08/05/02 debentures in the
aggregate principal amount of $7,750,000. Net proceeds, after deferred offering
costs, amounted to $7,173,000. Of the $7,750,000, $6,240,000 accrue and pay
interest quarterly and $1,510,000 accrue and compound interest quarterly until
maturity.
In the first quarter of 2002, the Company notified holders of the Series 6/28/99
debentures due July 1, 2002 that those debentures would be redeemed on April 1,
2002. On such date, those debentures were redeemed for a total of $3,086,000,
which is comprised of $2,500,000 of principal and $586,000 of accrued interest.
The Series 5/12/95, 10/19/95, 5/10/96, 10/15/96 and 4/30/97 debentures have a
maximum interest rate of 12%.Interest on an aggregate of $6,370,000 of these
debentures at September 30, 2002 is accrued and compounded quarterly, and is due
and payable at maturity. The payment of interest on the remaining debentures is
made quarterly. Any debenture holder in the aforementioned Series whose interest
accrues and is due at maturity may at any time elect to receive the accrued
interest and subsequently receive regular payments of interest.
The Series 11/10/98, 6/28/99, 9/18/00, $770,000 of Series 8/1/01, $270,000 of
Series 1/17/02 and $1,510,000 of Series 8/5/02 debentures accrue and compound
interest quarterly, with such interest due and payable at maturity. The holders
of Series 11/10/98, 6/28/99, 9/18/00, 1/17/02 and 8/5/02 debentures can require
the Company to repurchase the debentures for face amount plus accrued interest
each year (beginning January 1, 2004 for Series 9/18/00, October 1, 2005 for
Series 1/17/02 and January 1, 2006 for Series 8/5/02) provided, however, that in
no calendar year will the Company be required to purchase more than $100,000 in
principal amount of each maturity, in each series of debentures, on a
non-cumulative basis.
All the debentures may be redeemed, in whole or in part, at any time at the
option of the Company, for face value, except for Series 1/17/02 and Series
8/5/02 debentures. The Series 1/17/02 debentures would be redeemable at a
premium of 1% if the redemption were prior to April 1, 2003. The Series 8/5/02
debentures would be redeemable at a premium of 1% if the redemption were prior
to October 1, 2003. All the debentures are unsecured and subordinate to all
present and future senior indebtedness, as defined in the indenture related to
the debenture.
Scheduled contractual maturities of debentures as of September 30, 2002 are
summarized as follows:
($ in thousands) Principal Accrued Interest
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For the three-months ended December 31, 2002 - $807
For the year ended December 31, 2003 1,400 529
For the year ended December 31, 2004 21,250 4,897
For the year ended December 31, 2005 29,100 2,630
For the year ended December 31, 2006 5,000 880
Thereafter 17,250 342
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$74,000 $10,085
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8
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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Note 5 - Related Party Transactions
The Company has a service agreement with Intervest National Bank (also a wholly
owned subsidiary of the Parent Company) with respect to providing mortgage loan
origination and servicing services to Intervest National Bank. The Company
received $1,145,000, and $283,000 from Intervest National Bank for the
nine-months ended September 30, 2002 and 2001, respectively, and $473,000 and
$97,000 for the quarter ended September 30, 2002 and 2001, respectively, in
connection with this service agreement. These amounts are included in other
income in the consolidated statements of operations.
The Company participates with Intervest National Bank in certain mortgage loans.
The balances of the Company's participation in these mortgages were $6,438,000
and $3,919,000 at September 30, 2002 and December 31, 2001, respectively.
The Company has interest-bearing and noninterest-bearing deposit accounts with
Intervest National Bank totaling $1,735,000 at September 30, 2002 and $3,030,000
at December 31, 2001. The Company received interest income of $45,000 and
$26,000 for the nine-months ended September 30, 2002 and 2001, respectively, and
$8,000 and $12,000 for the quarter ended September 30, 2002 and 2001,
respectively, in connection with such deposits. These amounts are included in
interest income in the statement of operations.
9
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Review by Independent Certified Public Accountants
Eisner LLP, the Company's independent certified public accountants, have made a
limited review of the financial data as of September 30, 2002, and for the three
and nine-month periods ended September 30, 2002 and 2001 presented in this
document, in accordance with standards established by the American Institute of
Certified Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
10
Report on Review by Independent Certified Public Accountants
Board of Directors and Stockholder
Intervest Mortgage Corporation
New York, New York:
We have reviewed the condensed consolidated balance sheet of Intervest
Mortgage Corporation (formerly Intervest Corporation of New York) and
Subsidiaries (the "Company") as of September 30, 2002, and the related condensed
consolidated statements of operations for the three and nine-month periods ended
September 30, 2002 and 2001, and the related condensed consolidated statements
of changes in stockholder's equity and cash flows for the nine-month periods
ended September 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001 and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for the year then ended, and in our
report dated January 21, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2001 is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ Eisner LLP
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New York, New York
October 23, 2002
11
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
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Intervest Mortgage Corporation (formerly known as Intervest Corporation of New
York) is 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. In the most recent quarter, the Company
changed its name from Intervest Corporation of New York, to Intervest Mortgage
Corporation. Intervest Mortgage Corporation has two wholly owned subsidiaries,
Intervest Distribution Corporation and Intervest Realty Servicing Corporation
(hereafter referred to as the "Company" on a consolidated basis), The
subsidiaries are nonoperating entities that provide administrative services to
Intervest Mortgage Corporation.
The Company is 100% owned by Intervest Bancshares Corporation (the "Parent
Company"). Officers of the Company are also shareholders and officers of the
Parent Company and serve on the Boards of Directors of both companies. The
Parent Company also owns Intervest National Bank, a national bank with its
headquarters and full-service banking office located in New York, New York, four
full-service banking offices in Clearwater, Florida and one in South Pasadena,
Florida.
The Company's results of operations are affected by general economic trends in
real estate markets, as well as by trends in the general economy and the
movement of interest rates. Since the properties underlying the Company's
mortgages are concentrated in the New York City area, the economic conditions in
that area also have an impact on the Company's operations. While none of the
properties underlying these mortgages were directly impacted by the terrorist
acts of September 11, 2001, it is impossible to predict the impact such events
will have on real estate generally in the City of New York.
The Company has historically invested primarily in short-term real estate
mortgage loans secured by income producing real property that mature in
approximately five years. The properties to be mortgaged are personally
inspected by management and mortgage loans are made only on those types of
properties where management is knowledgeable as to operating income and expense.
The Company generally relies upon management in connection with the valuation of
properties. From time to time, however, it may engage independent appraisers and
other agents to assist in determining the value of income-producing properties
underlying mortgages, in which case the costs associated with such services are
generally paid by the mortgagor. The Company does not finance new construction.
While the Company has not previously made acquisitions of real property, it may
also, from time to time, acquire interests in real property, including fee
interests.
The Company's mortgage portfolio is composed predominantly of mortgages on
multi-family residential properties, most of which are subject to applicable
rent control and rent stabilization statutes and regulations. In both cases, any
increases in rent are subject to specific limitations. As such, properties of
the nature of those constituting the most significant portion of the Company's
mortgage portfolio are not affected by the general movement of real estate
values in the same manner as other income-producing properties.
The prepayment of mortgage loans tends to increase during periods of declining
interest rates and tends to decrease during periods of increasing interest
rates. Certain of the Company's mortgages include prepayment provisions, and
others prohibit prepayment of indebtedness entirely.
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
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Total assets at September 30, 2002 increased to $96,375,000, from $83,083,000 at
December 31, 2001. The increase is reflective of the issuance of new
subordinated debentures with an aggregate principal amount of $13,500,000,
partially offset by redemptions of $2,500,000. This net increase of $11,000,000
combined with net income for the nine-months ended September 30, 2002 of
$1,273,000 were the primary cause of the increase in total assets.
12
Cash and cash equivalents amounted to $24,978,000 at September 30, 2002 compared
to $16,752,000 at December 31, 2001. The increase was due to an increase in
short term commercial paper investments.
Mortgage loans receivable, net of unearned income and allowance for loan losses,
amounted to $67,310,000 at September 30, 2002, compared to $62,647,000 at
December 31, 2001. The increase was due to new originations exceeding maturities
and early repayments of loans. At September 30, 2002 and December 31, 2001, the
Company did not have any nonperforming loans.
Deferred debenture offering costs, net of accumulated amortization, increased to
$2,758,000 at September 30, 2002, from $2,348,000 at December 31, 2001. The
increase was due to new offering costs related to the issuance of debentures in
2002, partially offset by normal amortization.
Total liabilities at September 30, 2002 increased to $85,255,000, from
$73,236,000 at December 31, 2001. The increase was primarily due to the issuance
of subordinated debentures with an aggregate principal amount of $13,500,000 and
an increase in debenture interest payable, partially offset by redemptions of
subordinated debentures with a principal amount of $2,500,000.
Subordinated debentures outstanding at September 30, 2002 increased to
$74,000,000, from $63,000,000 at December 31, 2001 due to the issuance of
subordinated debentures with an aggregate principal amount of $13,500,000,
partially offset by redemptions of $2,500,000. Debenture interest payable
increased to $10,085,000 at September 30, 2002, from $9,113,000 at December 31,
2001. The increase was the result of the accrual of interest on outstanding
debentures, which was partially offset by the payment of interest on the
$2,500,000 of subordinated debentures that were redeemed in the second quarter.
Stockholder's equity increased to $11,120,000 at September 30, 2002, from
$9,847,000 at year-end 2001. The increase was due to net income of $1,273,000
for the nine-months ended September 30, 2002.
Comparison of Results of Operations for the Quarter Ended
---------------------------------------------------------
September 30, 2002 and 2001
---------------------------
The Company recorded net income of $520,000 for the third quarter of 2002,
compared to $134,000 for the third quarter of 2001.
Interest income was $2,114,000 for the quarter ended September 30, 2002,
compared to $1,933,000 for the same period a year ago. The increase of $181,000
was primarily due to an increase in mortgage loans, which was partially offset
by lower rates on new mortgage loans, repayments of higher-yielding loans and
lower rates earned on short-term investments.
Gain on early repayment of mortgages increased to $152,000 for the quarter ended
September 30, 2002 from $8,000 in the same period a year ago. The increase was
primarily due to a $125,000 fee received in connection with the repayment of a
mortgage in the third quarter of 2002.
Other income increased to $510,000 for the quarter ended September 30, 2002,
from $123,000 for the quarter ended September 30, 2001. This increase was
primarily due to an increase in service fees from Intervest National Bank.
Interest expense on debentures was $1,384,000 for the quarter ended September
30, 2002, compared to $1,380,000 for the same period of 2001. The increase of
$4,000 was primarily due to interest expense on a higher level of subordinated
debentures which was mostly offset by interest rate decreases on floating-rate
debentures. The floating-rate debentures are indexed to the JP Morgan Chase
Prime Rate, which decreased by 200 basis points from the beginning of the third
quarter of 2001 to the quarter ended September 30, 2002.
Amortization of deferred debenture offering costs was $200,000 for the quarter
ended September 30, 2002, compared to $166,000 for the same period of 2001. The
increase of $34,000 reflected the increased amount of debentures outstanding.
13
General and administrative expenses increased to $347,000 for the quarter ended
September 30, 2002, from $272,000 for the same period of 2001. The increase
primarily reflected an increase in salaries and employee benefits of $50,000
(due to salary increases and additional staff) and an increase in the provision
for loan losses of $9,000.
Income tax expense for the quarter ended September 30, 2002 amounted to $325,000
compared to $112,000 for the quarter ended September 30, 2001. The Company's
effective tax rate was 38% in the quarter ended September 30, 2002 and 46% for
the quarter ended September 30, 2001. The effective tax rate for the quarter
ended September 30, 2002 was reduced by a $61,000 accrual adjustment resulting
from the finalization of the Company's 2001 income tax returns.
Comparison of Results of Operations for the Nine-Months Ended
-------------------------------------------------------------
September 30, 2002 and 2001
---------------------------
The Company recorded net income $1,273,000 for the nine-months ended September
30, 2002, compared $260,000 for the same period of 2001. The increase in
earnings was primarily due to a $788,000 increase in interest income, a $880,000
increase in other income and a $454,000 decrease in interest expense on
debentures. These increases were partially offset by a $737,000 increase in
income tax expense.
Interest income was $6,390,000 for the nine-months ended September 30, 2002,
compared to $5,602,000 for the same period a year ago, or an increase of
$788,000. This increase was primarily due to an increase in mortgage loans,
which was partially offset by lower rates on new mortgage loans, repayments of
higher-yielding loans and lower rates earned on short-term investments
Other income was $1,242,000 for the nine-months ended September 30, 2002,
compared to $362,000 for the same period a year ago, or an increase of $880,000,
which was primarily the result of an increase in service fees from Intervest
National Bank.
Interest expense on debentures was $4,001,000 for the nine-months ended
September 30, 2002, compared to $4,455,000 for the same period of 2001, or a
$454,000 decrease, which was primarily due to lower rates paid on floating-rate
debentures, partially offset by an increase in debentures outstanding.
Amortization of deferred debenture offering costs was $592,000 for the
nine-months ended September 30, 2002, compared to $479,000 for the same period
of 2001, or an increase of $113,000 related to an increase in the amount of
debentures outstanding.
General and administrative expenses aggregated $1,040,000 for the nine-months
ended September 30, 2002, compared to $885,000 for the same period of 2001, or
an increase of $155,000. The increase is primarily due to an increase in salary
and employee benefits of $68,000 (due to salary increases and additional staff)
and a $65,000 increase in the provision for loan losses.
The provision for income taxes amounted to $961,000 and $224,000 for the
nine-months ended September 30, 2002 and 2001, respectively. The provision
represented 43% of pretax income for the nine-months ended September 30, 2002
and 46% of pretax income for the nine-months ended September 30, 2001. The
effective tax rate for the quarter ended September 30, 2002 was reduced by a
$61,000 accrual adjustment resulting from the finalization of the Company's 2001
income tax returns.
14
Liquidity and Capital Resources
- -------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment funding commitments and
the repayment of borrowed funds. The Company's principal sources of funds have
consisted of borrowings (through the issuance of its subordinated debentures),
mortgage repayments and cash flow generated from ongoing operations. For
information about the cash flows from the Company's operating, investing and
financing activities, see the condensed consolidated statements of cash flows in
this report.
At September 30, 2002, the Company's total commitment to lend aggregated
approximately $3,590,000.
The Company considers its current liquidity and sources of funds sufficient to
satisfy its outstanding lending commitments and its maturing liabilities.
Asset and Liability Management
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company uses "gap analysis," which
measures the difference between interest-earning assets and interest-bearing
liabilities that mature or reprice within a given time period, to monitor its
interest rate sensitivity. An asset or liability is normally considered to be
interest-rate sensitive if it will reprice or mature within one year or less.
The interest-rate sensitivity gap is the difference between interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice within a
one-year time period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities.
Conversely, a gap is considered negative when the opposite is true.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to adversely affect net interest income. If the
repricing of the Company's assets and liabilities were equally flexible and
moved concurrently, the impact of any increase or decrease in interest rates on
net interest income would be minimal.
A simple interest rate gap analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates for the
following reasons. Income associated with interest-earning assets and costs
associated with interest bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest income. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market interest rates, while interest
rates on other types may lag behind changes in market rates. The ability of many
borrowers to service their debts also may decrease in the event of an
interest-rate increase
The Company has a "floor," or minimum rate, on many of its floating-rate loans.
The floor for each specific loan is determined in relation to the prevailing
market rates on the date of origination and most adjust upwards in the event of
increases in the loan's interest rate.
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 following table summarizes information relating to the Company's
interest-earning assets and interest-bearing liabilities as of September 30,
2002, that are scheduled to mature or reprice within the periods shown.
Floating-rate loans, which are subject to adjustment at any time, are included
in the 0-3 month period rather than in the period in which the loans mature.
Fixed-rate loans are scheduled, including repayments, according to their
contractual maturities.
15
0-3 4-12 Over 1-4 Over 4
($ in thousands) Months Months Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Floating- rate loans $ 51,148 $ - $ 339 $ - $ 51,487
Fixed- rate loans - 1,200 9,891 5,612 16,703
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 51,148 1,200 10,230 5,612 68,190
Short-term investments 23,899 - - - 23,899
- ------------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 75,047 1,200 $ 10,230 $ 5,612 $ 92,089
- ------------------------------------------------------------------------------------------------------------------------------------
Debentures payable $ 41,500 $ 1,400 $ 13,850 $ 17,250 $ 74,000
Accrued interest on debentures 6,454 573 2,751 307 10,085
- ------------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $ 47,954 $ 1,973 $ 16,601 $ 17,557 $ 84,085
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
GAP (repricing differences) $ 27,093 $ (773) $ (6,371) $(11,945) $ 8,004
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP $ 27,093 $ 26,320 $ 19,949 $ 8,004 $ 8,004
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 28.1% 27.3% 20.7% 8.3% 8.3%
- ------------------------------------------------------------------------------------------------------------------------------------
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending activities and its issuance of debentures. The
Company has not engaged in and accordingly has no risk related to trading
accounts, commodities or foreign exchange. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on-and off-balance sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments as of December 31, 2001 and 2000, which reflect changes in
market prices and rates, can be found in note 12 to the consolidated financial
statements included in the Company's December 31, 2001 Form 10-K. Management
believes that there have been no significant changes in the Company's market
risk exposure since December 31, 2001.
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 asset and liability management section.
ITEM 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures. The Company maintains
----------------------------------------------------
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the chief executive
and chief financial officers of the Company concluded that the Company's
disclosure controls and procedures were adequate.
b) Changes in internal controls. The Company made no significant changes in its
----------------------------
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive and Chief Financial officers.
16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable .
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this report. 99.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the reporting period covered
by this report.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES
Date: November 8, 2002 By: /s/ Lowell S. Dansker
---------------------------------
Lowell S. Dansker, President
(Principal Executive Officer),
Treasurer (Principal Financial
Officer and Principal Accounting
Officer) and Director
Date: November 8, 2002 By: /s/ Lawrence G. Bergman
---------------------------------
Lawrence G. Bergman, Vice
President, Secretary and Director
17
CERTIFICATION
I, Lowell S. Dansker, as the principal executive and principal financial
officer of Intervest Mortgage Corporation, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on
my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the Audit Committee of the Company's Board of Directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Lowell S. Dansker
-----------------
Lowell S. Dansker, President
(Principal Executive and Financial Officer)
November 8, 2002
18