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.
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
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.
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.
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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
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.
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.
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.
ITEM 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.
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
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
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.
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.
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
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
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.
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.
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, 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).
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:
The following table shows scheduled contractual principal repayments of the loan portfolio at December 31, 2004:
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:
5. FIXED ASSETS Fixed assets are summarized as follows:
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:
7. SUBORDINATED DEBENTURES PAYABLE
The following table summarizes debenture payable.
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.
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:
8. DIVIDEND RESTRICTION
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 certain provisions of the indentures under which the Company's debentures were issued.
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 - --------------------------------------------------------------------------------
9. PROFIT SHARING PLAN
The Company maintains a tax-qualified, profit sharing plan and trust in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan is available to each of the Company's eligible employees who elect to participate after meeting certain length-of-service requirements. The Company makes discretionary matching contributions up to 3% of employee compensation, which vest to the employees over a period of time. Total cash contributions to the plan for 2004, 2003 and 2002 were $18,000, $13,000 and $13,000, respectively.
10. RENTAL EXPENSE
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.
Total rent expense amounted to $486,000 in 2004, $242,000 in 2003 and $218,000 in 2002. Rent expense for 2004 included related charges paid to the Parent Company of $317,000.
11. RELATED PARTY TRANSACTIONS
From time to time, the Company participates with Intervest National Bank (a wholly owned subsidiary of the Parent Company) in certain mortgage loans receivable. The Company had no participations outstanding with Intervest National Bank at December 31, 2004, compared to an outstanding balance of $5,533,000 at December 31, 2003.
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 the 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 the years ended 2004, 2003 and 2002, respectively, in connection with this servicing agreement. Such services are performed by Company personnel and the expenses associated with the performance of such services are borne by the Company.
The Company has interest-bearing and noninterest-bearing deposit accounts with Intervest National Bank totaling $9,352,000 at December 31, 2004, and $18,869,000 at December 31, 2003. The Company received interest income of $138,000, $102,000 and $81,000 for the years ended 2004, 2003 and 2002, respectively, in connection with such deposits. These amounts are included in interest income in the consolidated statements of operations.
Intervest Securities Corporation, an affiliate, received commissions and fees aggregating $119,000, $77,100 and $58,000 for the years ended 2004, 2003 and 2002 in connection with the placement of subordinated debentures of the Company.
The Company paid fees of $137,000 in 2004, $199,000 in 2003 and $115,000 in 2002 for legal services rendered by a law firm, a partner of which is a director of the Company. The Company paid commissions and fees in connection with the placement of debentures aggregating $679,000 in 2004, $531,000 in 2003 and $515,000 in 2002 to a broker/dealer, a principal of which is a director of the Company.
The Company will reimburse the Parent Company for the new leased space as follows: $394,000 in 2005; $394,000 in 2006; $394,000 in 2007; $427,000 in 2008; 437,000 in 2009 and $1,913,000 thereafter for an aggregate amount of $3,959,000.
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.
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 - --------------------------------------------------------------------------------
12. INCOME TAXES
The Company files consolidated Federal and combined New York State and City income tax returns with its Parent Company on a calendar year basis. Income taxes are provided as if the Company filed a separate consolidated tax return with its subsidiaries.
At December 31, 2004 and 2003, the Company's net deferred tax asset was $362,000 and $317,000, respectively, which is included in other assets on the balance sheet. The asset relates to the unrealized benefit for net temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance was not maintained at any time in 2004, 2003 or 2002.
Allocation of federal, state and local income taxes between current and deferred portions is as follows:
The components of the deferred tax benefit are summarized as follows:
The tax effects of the temporary differences that give rise to the deferred tax asset are summarized as follows:
Reconciliation between the statutory federal income tax rate and the Company's effective tax rate follows:
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 - --------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement with Jerome Dansker, its Chairman of the Board and Executive Vice President that expires June 30, 2014. The agreement provides for an annual salary in the present amount of $211,185, which is subject to increase annually by six percent or by the percentage increase in the consumer price index, if higher. The agreement also provides for monthly expense payments, the use of a car and medical benefits. In the event of Mr. Dansker's death or disability, monthly payments of one-half of this amount which otherwise would have been paid to Mr. Dansker will continue until the longer of (i) the balance of the term of employment, or (ii) three years. The agreement also provides for additional compensation of $1,000 per month for each $10,000,000 of gross assets of the Company in excess of $100,000,000. For 2004 and 2003, Mr. Dansker received $25,000 and $4,000, respectively of such additional compensation. No additional compensation was paid for 2002.
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. Commitments to extend credit amounted to $6,080,000 at December 31, 2004, nearly all of which will either close or expire in 2005.
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.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time based on available information about each financial instrument. Where available, quoted market prices are used. However, a significant portion of the Company's financial instruments, such as commercial real estate and multifamily mortgage loans receivable, do not have an active marketplace in which they can be readily sold or purchased to determine fair value. Consequently, fair value estimates for such instruments are based on assumptions made by management that include the financial instrument's credit risk characteristics and future estimated cash flows and prevailing interest rates. As a result, these fair value estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Accordingly, changes in any of management's assumptions could cause the fair value estimates to deviate substantially.
The fair value estimates also do not reflect any additional premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument, nor estimated transaction costs. Further, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on and have not been considered in the fair value estimates. Finally, fair value estimates do not attempt to estimate the value of anticipated future business and the Company's customer relationships.
INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 - --------------------------------------------------------------------------------
The carrying and estimated fair values of the Company's financial instruments are as follows:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
MORTGAGE LOANS RECEIVABLE. The estimated fair value of mortgage loans receivable is based on a discounted cash flow analysis, using interest rates currently being offered for mortgage loans receivable with similar terms to borrowers of similar credit quality. Management can make no assurance that its perception and quantification of credit risk would be viewed in the same manner as that of a potential investor. Therefore, changes in any of management's assumptions could cause the fair value estimates of mortgage loans receivable to deviate substantially.
DEBENTURES AND ACCRUED INTEREST PAYABLE. The estimated fair value of debentures and related accrued interest payable is based on a discounted cash flow analysis. The discount rate used in the present value computation was estimated by comparison to what management believes to be the Company's incremental borrowing rate for similar arrangements.
ALL OTHER FINANCIAL ASSETS AND LIABILITIES. The estimated fair value of cash and cash equivalents and accrued interest receivable approximates their carrying values since these instruments are payable on demand or have short-term maturities.
OFF-BALANCE SHEET INSTRUMENTS. The carrying amounts of commitments to lend approximated estimated fair value. The fair value of commitments to lend is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the counter-party's credit standing.
Notes: (Y) Yearly principal and interest payments (M) Monthly principal and interest payments (P) Percentages indicated are on original loan balances unless otherwise stated 31 days interest is on original loan balance unless otherwise stated
The following summary reconciles mortgages receivable at their carrying value
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal Executive and Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Principal Executive and Financial Officer has concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports 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 SEC's rules and regulations, and are operating in an effective manner. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to December 31, 2004.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not Applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The current Directors, Executive Officers and Other Key Employee of the Company are as follows:
LAWRENCE G. BERGMAN, age 60, serves as a Director, Vice President and Secretary of the Company and has served in such capacities since 1987. Mr. Bergman received a Bachelor of Science degree and a Master of Engineering (Electrical) degree from Cornell University, and a Master of Science in Engineering and a Ph.D. degree from The Johns Hopkins University. Mr. Bergman is also a Director, Vice-President and Secretary of Intervest Bancshares Corporation, the Parent Company, and a Director and a member of the Loan Committee of Intervest National Bank and a Director, Vice President and Secretary of Intervest Securities Corporation, wholly owned subsidiaries of Intervest Bancshares Corporation.
MICHAEL A. CALLEN, age 64, serves as a Director of the Company, and has served in such capacity since October 1992. Mr. Callen received a Bachelor of Arts degree from the University of Wisconsin in Economics and Russian. Mr. Callen is President of Avalon Argus Associates, a financial consulting firm. Previously, Mr. Callen had been Senior Advisor, The National Commercial Bank, Jeddah, Kingdom of Saudi Arabia and was a Director and Sector Executive at Citicorp/Citibank , responsible for corporate banking activities in North America, Europe and Japan. Mr. Callen is a Director of Intervest Bancshares Corporation and Intervest National Bank, and also serves as a Director of AMBAC, Inc.
JEROME DANSKER, age 86, serves as Chairman of the Board of Directors and as Executive Vice President of the Company, and has served in such capacities since June 1996 and November 1993, respectively. Mr. Dansker received a Bachelor of Science degree from the New York University School of Commerce, Accounts and Finance, a law degree from the New York University School of Law, and is admitted to practice as an attorney in the State of New York. Mr. Dansker is a Director, Chairman of the Board and Chief Executive Officer of Intervest Bancshares Corporation, the Parent Company. He is also Chairman of the Board of Directors and Chairman of the Loan Committee of Intervest National Bank and Chairman of the Board of Directors of Intervest Securities Corporation, wholly owned subsidiaries of Intervest Bancshares Corporation.
LOWELL S. DANSKER, age 54, serves as Vice Chairman of the Board of Directors and as President and Treasurer of the Company, and has served in such capacities since 2003 and 1987, respectively. Mr. Dansker received a Bachelor of Science in Business Administration from Babson College, a law degree from the University of Akron School of Law, and is admitted to practice as an attorney in New York, Ohio, Florida and the District of Columbia. Mr. Dansker is also Vice Chairman, President and Treasurer of Intervest Bancshares Corporation, the Parent
Company, and he is the Chief Executive Officer, Director and a member of the Loan Committee of Intervest National Bank and a Director and Chief Executive Officer of Intervest Securities Corporation, wholly owned subsidiaries of Intervest Bancshares Corporation.
PAUL R. DEROSA, age 63, serves as a Director of the Company, and has served in such capacity since February, 2003. Mr. DeRosa is a graduate of Columbia University with a Ph.D in Economics. Mr. DeRosa has been a principal of Mt. Lucas Management Corporation, an investment firm, since 1998. He was an Officer of Eastbridge Holdings Inc., an investment firm, from 1988 to 1998 and served as its Chief Executive Officer from 1995 to 1998. Mr. DeRosa is also a Director of Intervest Bancshares Corporation and Intervest National Bank.
STEPHEN A. HELMAN, age 66, serves as a Director of the Company and has served in such capacity since December, 2003. Mr. Helman received a Bachelor of Arts degree from the University of Rochester and a law degree from Columbia University. Mr. Helman is a lawyer in private practice in New York, New York. Mr. Helman is also a director of Intervest Bancshares Corporation and Intervest National Bank.
WAYNE F. HOLLY, age 48, serves as a Director of the Company and has served in such capacity since June, 1999. Mr. Holly received a Bachelor of Science degree in Economics from Alfred University. Mr. Holly is President of Sage, Rutty & Co., Inc., a member of the Boston Stock Exchange, with offices in Rochester, New York and Canandaigua, New York, and is also a Director of Intervest Bancshares Corporation and Intervest National Bank.
LAWTON SWAN, III, age 62, serves as a Director of the Company, and has served in such capacity since February, 2000. Mr. Swan received a Bachelor of Science degree from Florida State University in Business Administration and Insurance. Mr. Swan is President of Interisk Corporation, a consulting firm specializing in risk management and employee benefit plans, which he founded in 1978. He is also a Director of Intervest Bancshares Corporation and Intervest National Bank.
THOMAS E. WILLETT, age 57, serves as a Director of the Company, and has served in such capacity since March, 1999. Mr. Willett received a Bachelor of Science Degree from the United States Air Force Academy and a law degree from Cornell University School of Law. Mr. Willett has been a partner of Harris Beach LLP, a law firm in Rochester, New York, for more than five years and is a Director of Intervest Bancshares Corporation and Intervest National Bank.
DAVID J. WILLMOTT, age 66, serves as a Director of the Company, and has served in such capacity since June, 1989. Mr. Willmott is a graduate of Becker Junior College and attended New York University Extension and Long Island University Extension of Southampton College. Mr. Willmott is the Editor and Publisher of Suffolk Life Newspapers, which he founded more than 25 years ago. Mr. Willmott is also a Director of Intervest Bancshares Corporation and Intervest National Bank.
WESLEY T. WOOD, age 62, serves as a Director of the Company, and has served in such capacity since April, 1992. Mr. Wood received a Bachelor of Science degree from New York University, School of Commerce. Mr. Wood is President of Marketing Capital Corporation, an international marketing consulting and investment firm which he founded in 1973. He is also a Director of Intervest Bancshares Corporation and Intervest National Bank, a Director of the Center of Direct Marketing at New York University, a member of the Marketing Committee at Fairfield University in Connecticut, and a Trustee of St. Dominics in Oyster Bay, New York.
JOHN H. HOFFMANN, age 53, serves as Vice President and Controller of Intervest Mortgage Corporation and has served in such capacities since August 2002 and October 2000, respectively. Mr. Hoffmann received a B.B.A. degree from Susquehanna University and is a Certified Public Accountant. Mr. Hoffmann has over 20 years of banking experience. Prior to joining the Company, Mr. Hoffmann served as Accounting Manager for Smart World Technologies from 1998 to 2000. and Vice President of Mortgage Accounting for The Greater New York Savings Bank from 1987 to 1997
All of the Directors of the Company have been elected to serve as Directors until the next annual meeting of the Company's shareholders. Each of the officers of the Company has been elected to serve as an officer until the next annual meeting of the Company's Directors.
Jerome Dansker is the father of Lowell S. Dansker.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Chairman and Vice Chairman each currently receive a fee of $4,000 for each meeting of the Board he attends and the other directors receives a fee of $1,250 for each meeting attended. The Chairman of a Committee of the Board receives $1,000 for each Committee meeting attended, and other members of such Committees receive $750 per meeting attended.
The Company has an employment agreement with Jerome Dansker, its Chairman of the Board and Executive Vice President that expires June 30, 2014. The agreement provides for an annual salary in the present amount of $211,185, which is subject to increase annually by six percent or by the percentage increase in the consumer price index, if higher. The agreement also provides for monthly expense payments, the use of a car and medical benefits. In the event of Mr. Dansker's death or disability, monthly payments of one-half of this amount which otherwise would have been paid to Mr. Dansker will continue until the longer of (i) the balance of the term of employment, or (ii) three years. The agreement also provides for additional compensation of $1,000 per month for each $10,000,000 of gross assets of the Company in excess of $100,000,000. For 2004 and 2003, Mr. Dansker received $25,000 and $4,000, respectively of such additional compensation. No additional compensation was been paid for 2002.
The following table sets forth information concerning total compensation paid during the last three years to the Company's Chairman, Vice Chairman and Vice President. No other executive officer of the Company received annual compensation in excess of $100,000.
(1) Includes unused vacation and medical expense reimbursement paid by the Company for Jerome Dansker.
(2) Represents director and committee fees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Intervest Bancshares Corporation, located at 1 Rockefeller Plaza, Suite 400 New York, New York, owns 100% of the outstanding stock of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Wayne F. Holly, who is a director of the Company, also serves as President of Sage, Rutty & Co., Inc., which firm has acted as an underwriter/placement agent in connection with the Company's offerings of debentures, including the offering of debentures conducted during fiscal 2004, 2003 and 2002. Sage, Rutty and Co., Inc. received fees and commissions of $680,000 in 2004, $531,000 in 2003 and $515,000 in 2002.
Mr. Thomas E. Willett, who is a director of the Company, also is a partner in the law firm of Harris Beach LLP, which firm has provided legal services to the Company and the Parent Company in 2004, 2003 and 2002. Harris Beach LLP, received fees from the Company of $137,000 in 2004, $199,000 in 2003 and $115,000 in 2002.
Intervest Securities Corporation, an affiliate, received commissions and fees aggregating $119,000 in 2004, $77,100 in 2003 and $58,000 in 2002 in connection with the placement of the Company's subordinated debentures.
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.
Total rent expense amounted to $486,000 in 2004, $242,000 in 2003 and $218,000 in 2002. Rent expense for 2004 included related charges paid to the Parent Company of $317,000.
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 the 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 servicing agreement. Such services are performed by Company personnel and the expenses associated with the performance of such services are borne by the Company.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES. The Company was billed a total of $45,556, $29,700 and $27,500 for the audit of the Company's annual financial statements for the years ended December 31, 2004, 2003 and 2002, and for the review of the financial statements included in the Company's Quarterly Reports on Form 10-Q filed during 2004, 2003 and 2002.
OTHER FEES. The Company was billed a total of $28,044, $22,800 and $8,000 for non-audit services from the Company's principal accountant during the year ended December 31, 2004, 2003 and 2002 and in connection with the review of the Company's registration statements related to the issuance of subordinated debentures and the delivery of consents related thereto.
TAX FEES. The Company was not billed for and did not receive any tax compliance, tax advice or tax planning services from the Company's principal accountants in the last three fiscal years.
OTHER MATTERS. The Audit Committee of the Board of Directors has considered whether the provision of non-audit services as described above is compatible with maintaining the independence of the Company's principal accountant.
Of the time expended by the Company's principal accountant to audit the Company's financial statements for the fiscal year ended December 31, 2004, less than 50% of such time involved work performed by persons other than the principal accountant's full-time, permanent employees.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ----------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS:
See Item 8 "Financial Statements and Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES:
IV - Mortgage loans receivable on Real Estate (See Item 8 "Financial Statements and Supplementary Data")
All other schedules have been omitted because they are inapplicable, not required, or the information is included in the Financial Statements or Notes thereto.
(3) EXHIBITS: The following exhibits are filed herein as part of this Form 10-K:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the date indicated.
INTERVEST MORTGAGE CORPORATION (Registrant)
By: /s/ Lowell S. Dansker Date: February 24, 2005 ---------------------- ------------------- Lowell S. Dansker, Vice Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
CHAIRMAN AND EXECUTIVE VICE PRESIDENT:
By: /s/ Jerome Dansker Date: February 24, 2005 -------------------- ------------------- Jerome Dansker
VICE CHAIRMAN, PRESIDENT AND TREASURER: (PRINCIPAL EXECUTIVE, FINANCIAL AND ACCOUNTING OFFICER):
By: /s/ Lowell S. Dansker Date: February 24, 2005 ------------------------ ------------------- Lowell S. Dansker
VICE PRESIDENT, SECRETARY AND DIRECTOR:
By: /s/ Lawrence G. Bergman Date: February 24, 2005 -------------------------- ------------------- Lawrence G. Bergman
DIRECTORS:
By: /s/ Michael A. Callen Date: February 24, 2005 ------------------------ ------------------- Michael A. Callen
By: /s/ Paul R. DeRosa Date: February 24, 2005 --------------------- ------------------- Paul R. DeRosa
By: /s/ Stephen A. Helman Date: February 24, 2005 ------------------------ ------------------- Stephen A. Helman
By: /s/ Wayne F. Holly Date: February 24, 2005 --------------------- ------------------- Wayne F. Holly
By: /s/ Lawton Swan, III Date: February 24, 2005 ----------------------- ------------------- Lawton Swan, III
By: /s/ Thomas E. Willett Date: February 24, 2005 ------------------------ ------------------- Thomas E. Willett
By: /s/ David J. Willmott Date: February 24, 2005 ------------------------ ------------------- David J. Willmott
By: /s/ Wesley T. Wood Date: February 24, 2005 --------------------- ------------------- Wesley T. Wood
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILLED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT:
Registrant does not solicit proxies or proxy statements from the holder of its securities. The annual report to holders of its Debentures has not as yet been distributed.
When the annual report has been distributed to the holders of Debentures, four copies will be sent to the Commission.