10-Q 1 doc1.txt ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 ------------- Commission File No. 33-22976-NY ----------- INTERVEST MORTGAGE CORPORATION ------------------------------ (Exact name of registrant as specified in its charter) New York 13-3415815 ---------------------------------- -------------------------------- (State or other jurisdiction (I.R.S. employer of incorporation) identification no.) 1 ROCKEFELLER PLAZA, SUITE 400 NEW YORK, NEW YORK 10020-2002 --------------------------------------------------- (Address of principal executive offices) (212) 218-2800 -------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO . --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act): YES NO X . --- --- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Title of Each Class: Shares Outstanding: -------------------- ------------------- Common Stock, no par value per share 100 shares outstanding at July 30, 2004 ------------------------------------ ---------------------------------------

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-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors relating to the Company's operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions, the development of an interest rate environment that may adversely affect the Company's net interest income, other income or cash flow anticipated from the Company's operations, investment and lending activities; and changes in laws and regulations affecting the Company. 1

5 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE 1 - GENERAL The condensed consolidated financial statements of Intervest Mortgage Corporation and Subsidiaries (the "Company") in this report have not been audited except for the information derived from the audited Consolidated Balance Sheet as of December 31, 2003. The financial statements in this report should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The condensed consolidated financial statements include the accounts of Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation. All material intercompany accounts and transactions have been eliminated in consolidation. The Company is engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage loans and junior mortgage loans. The Company's investment policy emphasizes the investment in mortgage loans on income producing properties. The Company is a wholly owned subsidiary of Intervest Bancshares Corporation (the "Parent Company"). Officers of the Company are Directors of the Company and are officers, principal shareholders and Directors of the Parent Company. In the opinion of management, all material adjustments necessary for a fair presentation of financial condition and results of operations for the interim periods presented in this report have been made. These adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of results that may be expected for the entire year or any other interim period. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the current periods' presentation. NOTE 2 - MORTGAGE LOANS RECEIVABLE Mortgage loans receivable are summarized as follows:

6 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE 2 - MORTGAGE LOANS RECEIVABLE, CONTINUED The following table shows scheduled contractual principal repayments of the loan portfolio at June 30, 2004:

NOTE 3 - ALLOWANCE FOR MORTGAGE LOAN LOSSES Activity in the allowance for mortgage loan losses for the periods indicated is summarized as follows:

At June 30, 2004, there were no impaired loans or loans which were ninety days past due and still accruing interest. At December 31, 2003, two real estate loans with an aggregate principal balance of $1,057,000 were on nonaccrual status and impaired. During the quarter ended March 31, 2004, one of these loans was repaid and the other was brought current and returned to accrual status. During August 2004, one real estate loan with a principal balance of $179,000 will most likely become ninety days past due and will be placed on nonaccrual status. This loan will be considered impaired under the criteria of SFAS No.114. This loan is a second mortgage where Intervest National Bank, an affiliated Company, holds the first mortgage. The Company's recorded investment in this loan will total $181,000. The Company has commenced foreclosure proceedings against the borrowers and currently believes the estimated fair value of the underlying properties is sufficient to provide for repayment of its recorded investment. As a result, the Company believes that no specific valuation allowance is required. Interest income that will be reversed on this nonaccrual loan under their contractual terms will amount to $5,000. NOTE 4 - DEFERRED DEBENTURE OFFERING COSTS Deferred debenture offering costs are summarized as follows:

7 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE 5 - SUBORDINATED DEBENTURES PAYABLE The following table summarizes debentures payable.

In the table above, prime represents the prime rate of JPMorganChase Bank, which was 4.25% on June 30, 2004 and 4.00% on December 31, 2003. The floating rate debentures have a maximum interest rate of 12%. In July of 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 approximately $10,730,000. Of the $11,500,000, $9,590,000 will accrue and pay interest quarterly and approximately $1,910,000 will accrue and compound interest quarterly until maturity. In January of 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. On March 1, 2004, Intervest Mortgage Corporation'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, Intervest mortgage Corporation's Series 6/28/99 debentures due July 1, 2004 were redeemed for $2,000,000 of principal and $980,000 of accrued interest. Interest is paid quarterly on the Company's debentures except for the following: $1,950,000 of Series 10/19/95; $1,980,000 of Series 5/10/96; all of 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; and $1,750,000 of Series 11/28/03 debentures, which accrue and compound interest quarterly, with such interest due and payable at maturity. Any debenture holder of Series 10/19/95 and 5/10/96 whose interest accrues and is due at maturity may at any time elect to receive the accrued interest and subsequently receive regular payments of interest. 8 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE 5 - SUBORDINATED DEBENTURES PAYABLE, CONTINUED The holders of Series 11/10/98 thru 9/18/00 and 1/17/02 thru 11/28/03 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 and January 1, 2007 for Series 11/28/03) 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 11/28/03 and Series 6/7/04. Redemptions would be at a premium of 1% if they occurred prior to January 1, 2005 for the Series 11/28/03 debentures and prior to July 1, 2005 for the Series 6/7/04 debentures . All the debentures are unsecured and subordinate to all present and future senior indebtedness, as defined in the indenture related to each debenture. Scheduled contractual maturities of debentures as of June 30, 2004 are summarized as follows:

NOTE 6 - RELATED PARTY TRANSACTIONS From time to time, the Company participates with Intervest National Bank (another wholly owned subsidiary of the Parent Company) in certain mortgage loans receivable. The Company had no participations with Intervest National Bank at June 30, 2004. The aggregate balance of the Company's participations in these mortgages was $5,533,000 at December 31, 2003. The Company has a service agreement, which renews each January 1, unless terminated by either party, with Intervest National Bank with respect to mortgage loan originations and servicing for them. The Company earned $1,014,000 and $1,856,000 from Intervest National Bank for the quarter and six-months ended June 30, 2004, and $497,000 and $984,000 for the quarter and six-months ended June 30, 2003, in connection with this service agreement. The Company has interest-bearing and noninterest-bearing deposit accounts with Intervest National Bank totaling $4,068,000 at June 30, 2004 and $18,869,000 at December 31, 2003. The Company received interest income of $29,000 and $74,000 from Intervest National Bank for the quarter and six-months ended June 30, 2004, and $7,000 and $24,000 for the quarter and six-months ended June 30, 2003, respectively, in connection with such deposits. These amounts are included in interest income in the condensed consolidated statements of operations. Intervest Securities Corporation (another wholly owned subsidiary of the Parent Company) did not receive commissions during the quarters ending June 30, 2004 and 2003. Commissions and fees aggregating $56,000 and $39,000 were received for the six-months ended June 30, 2004 and 2003 in connection with the placement of subordinated debentures of the Company. The Company paid fees of approximately $55,000 and $65,000 for the quarter and six-months ended June 30, 2004 respectively, and $56,000 and $111,000 for the quarter and six-months ended June 30, 2003, respectively, for legal services rendered by a law firm, a partner of which is a director of the Company. The Company did not pay commissions and fees in connection with the placement of debentures to a broker/dealer, a principal of which is a director of the Company during the quarters ending June 30, 2004 and 2003. The Company paid such commission and fees aggregating $315,000 and $274,000 for the six-months ended June 30, 2004 and 2003, respectively. 9 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Eisner LLP, the Company's independent registered public accounting firm, has made a limited review of the condensed consolidated financial statements as of June 30, 2004, and for the three-and six-month periods ended June 30, 2004 and June 30, 2003 presented in this document, in accordance with the standards established by the Public Company Accounting Oversight Board. Their report furnished pursuant to Article 10 of Regulation S-X is included herein. 10 REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholder Intervest Mortgage Corporation New York, New York: We have reviewed the accompanying condensed consolidated balance sheet of Intervest Mortgage Corporation and Subsidiaries (the "Company") as of June 30, 2004, and the related condensed consolidated statements of operations for each of the three-month and six-month periods ended June 30, 2004 and 2003 and the related condensed consolidated statements of changes in stockholder's equity and cash flows for the six months ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2003 and the related consolidated statements of operations, changes in stockholder's equity and cash flows for the year then ended (not presented herein), and in our report dated February 3, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the condensed consolidated balance sheet as of December 31, 2003 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Eisner LLP ---------------- New York, New York July 28, 2004 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL ------- Intervest Mortgage Corporation and its wholly owned subsidiaries, Intervest Distribution Corporation and Intervest Realty Servicing Corporation (hereafter referred to as the "Company" on a consolidated basis), are engaged in the real estate business, including the origination and purchase of real estate mortgage loans, consisting of first mortgage and junior mortgage loans. 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 has historically invested primarily in short-term real estate mortgage loans that mature within approximately five years and are secured by income producing real property. The properties to be mortgaged are inspected by representatives of the Company and mortgage loans are made only on those type of properties where management is knowledgeable as to operating income and expense. The Company generally relies upon management in connection with the valuation of properties. From time to time, however, it may engage independent appraisers and other agents to assist in determining the value of income-producing properties underlying mortgages, in which case the costs associated with such services are generally paid by the mortgagor. The Company does not finance new construction. While the Company has not previously made acquisitions of real property, it may also, from time to time, acquire interests in real property, including fee interests. The Company's mortgage portfolio is composed predominantly of mortgages on multi-family residential properties, many of which are subject to applicable rent control and rent stabilization statutes and regulations. In both cases, any increases in rent are subject to specific limitations. As such, properties of the nature of those constituting the most significant portion of the Company's mortgage portfolio are not affected by the general movement of real estate values in the same manner as other income-producing properties. The prepayment of mortgage loans tends to increase during periods of declining interest rates and tends to decrease during periods of increasing interest rates. Certain of the Company's mortgages include prepayment provisions, and others prohibit prepayment of indebtedness entirely The Company's profitability depends on 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 and other 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 recent Gulf War, may have an adverse impact on economic conditions. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND DECEMBER 31, 2003 ------------------------------------------------------------------------ 12 Total assets at June 30, 2004 decreased to $119,509,000, from $119,578,000 at December 31, 2003. The decrease is reflective of a reduction in debenture interest payable and debentures outstanding which was mostly offset by an increase in paid-in-capital and retained earnings. While total assets decreased slightly, cash and cash equivalents decreased by $18,564,000, which was almost entirely offset by an increase in net new mortgage loans of $18,369,000. Cash and cash equivalents amounted to $7,208,000 at June 30, 2004, compared to $25,772,000 at December 31, 2003. The decrease was reflected in a lower level of balances maintained in money market accounts and short term investments in the form of commercial paper. The decrease in cash and cash equivalents was primarily used to fund additional loans. Mortgage loans receivable, net of unearned income and allowance for mortgage loan losses, amounted to $107,164,000 at June 30, 2004, compared to $89,116,000 at December 31, 2003. The increase was due to new originations exceeding repayments during the period. Deferred debenture offering costs, net of accumulated amortization, increased to $3,023,000 at June 30, 2004, from $2,851,000 at December 31, 2003. The increase was primarily due to the incremental costs associated with the issuance of Series 11/28/03 subordinated debentures, which was partially offset by normal amortization. Total liabilities at June 30, 2004 decreased to $98,321,000, from $101,405,000 at December 31, 2003. The decrease was primarily due to the redemption of Series 5/12/95 and Series 6/28/99 debentures in the principal amount of $9,000,000 and $2,000,000, respectively, plus accrued interest of $2,749,000 and $980,000, respectively. This decrease was mostly offset by: the issuance of Series 11/28/03 subordinated debentures with a principal amount of $10,000,000, the accrual of interest on the balance of the debenture portfolio and a higher level of mortgage escrow funds payable. Subordinated debentures outstanding at June 30, 2004 decreased to $86,350,000, from $87,350,000 at December 31, 2003 as a result of the redemption of Series 5/12/95 debentures with a principal balance of $9,000,000 and the redemption of Series 6/28/99 due July 1, 2004 with a principal balance of $2,000,000. These decreases were mostly offset by the issuance of $10,000,000 of Series 11/28/03 debentures. Debenture interest payable decreased to $9,378,000 at June 30, 2004, from $12,052,000 at December 31, 2003, primarily due to the payment of accrued interest on the redemption of debentures in the amount of $2,749,000 on the Series 5/12/95 debentures and $980,000 on the Series 6/28/99 debentures. This decrease in accrued interest on debentures was partially offset by the accrual of interest on the balance of the debentures outstanding. Mortgage escrow funds increased to $2,164,000 at June 30, 2004, from $1,671,000 at December 31, 2003. This increase was primarily due to new escrow funds resulting from the increase in mortgage loans receivable. Mortgage escrow funds payable represent advance payments made by the borrowers for taxes, insurance and other charges remitted by the Company to third parties. Stockholder's equity increased to $21,188,000 at June 30, 2004, from $18,173,000 at year-end 2003. The increase was due to capital contributions of $2,000,000 from the Parent Company and net income of $1,015,000 for the six-months ended June 30, 2004. COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2004 AND ---------------------------------------------------------------------------- 2003 ---- The Company recorded net income of $502,000 for the second quarter of 2004, compared to net income of $484,000 for the second quarter of 2003. This increase was primarily the result of a higher level of service agreement income which was mostly offset by a higher level of general and administrative expenses as well as an increase in debenture interest and an increase in the provision for loan losses. 13 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 the second quarter of 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 quarter. 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 quarter.

Net interest income amounted to $473,000 in the second quarter of 2004, compared to $620,000 in the second quarter of 2003. Income related to the growth in average interest-earning assets was more than 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 $11,476,000 and a $2,055,000 increase in short-term investments which were funded primarily by new debentures of $5,310,000 and a $7,015,000 increase in average stockholders' equity. During the second quarter of 2004, the Company continued to operate in a refinancing environment where higher rate loans were paid off and lower rate loans were added to our portfolio. This contributed to a reduction in the net interest income, the effects of which were offset by an increase in gain on early repayment of loans. The yield on interest-earning assets decreased 118 basis points to 8.26% 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 increased 8 basis points to 7.92%, primarily due to the repayment of Series 5/12/95 floating rate debentures in the first quarter of 2004 and the issuance of Series 7/25/03 and Series 11/28/03 debentures at slightly higher fixed interest rates. This increase was mostly offset by lower rates paid on floating-rate debentures. These debentures are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of 25 basis points from the second quarter of 2003. Service agreement income was $1,014,000 for the second quarter of 2004, compared to $497,000 in the same period of 2003. The increase of $517,000 was the result of increased loan origination services provided to Intervest National Bank. Gain on early repayment of mortgages decreased to $56,000 for the quarter ended June 30, 2004 from $124,000 for the quarter ended June 30, 2003. The decrease of $68,000 was mostly due to $70,000 additional penalty interest and fees collected on one loan that was repaid prior to maturity in the second quarter of 2003. The provision for loan losses was $95,000 for the second quarter of 2004, compared to $36,000 in the same period of 2003. The increase was primarily due to a 5 basis point increase in the amount of allowance maintained on the loan portfolio in the second quarter of 2004 compared to the second quarter of 2003. 14 General and administrative expenses increased to $583,000 for the quarter ended June 30, 2004, from $368,000 for the same period of 2003. The increase was primarily the result of a $105,000 increase in occupancy expense relating to the payment of rent on the Company's new office space. The lease on the Company's former space expires in September of 2004 and the Company's obligation to pay approximately $22,000 per month on that space will also end in September 2004. Salaries and employee benefits also increased by $82,000 primarily due to an increase in staff and salary increases. Directors fees and other expenses increased by $28,000. The provision for income taxes for the quarter ended June 30, 2004 amounted to $431,000, compared to $402,000 for the quarter ended June 30, 2003. The Company's effective tax rate was approximately 46% for the quarters ended June 30, 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 SIX- MONTHS ENDED JUNE 30, 2004 AND ------------------------------------------------------------------------------- 2003 ---- The Company recorded net income of $1,015,000 for the first six months of 2004, compared to net income of $769,000 for the first six months 2003. This increase was primarily the result of: a higher level of service agreement income, an increase in interest income on mortgage loans and an increase in gain on early repayment of mortgages. These increases were partially offset by an increase in interest on debentures and a higher level of 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 the first six months of 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 quarter. 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 quarter.

Net interest income amounted to $789,000 in the first six months of 2004, compared to $1,054,000 in the first six months of 2003. Income related to the growth in average interest-earning assets was more than 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 $13,307,000 and a $5,005,000 increase in short-term 15 investments, which were funded primarily by new debentures of $11,854,000 and a $6,983,000 increase in average stockholders' equity. During the first six months of 2004, the Company continued to operate in a refinancing environment where higher rate loans were paid off and lower rate loans were added to our portfolio. This contributed to a reduction in the net interest income, the effects of which were offset by an increase in gain on early repayment of loans. In addition, a debenture offering closed in January 2004 temporarily increasing the Company's short-term investments and our interest expense. The yield on interest-earning assets decreased 109 basis points to 8.11% 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 increased 1 basis point to 7.88%, primarily due to the repayment of Series 5/12/95 floating rate debentures in the first quarter of 2004 and the issuance of Series 7/25/03 and Series 11/28/03 debentures at slightly higher fixed interest rates. This increase was mostly offset by lower rates paid on floating-rate debentures. These debentures are indexed to the JPMorgan Chase Bank prime rate, which decreased by a total of 25 basis points from the first six months of 2003. On June 30, 2004, the prime rate increased to 4.25%, this will result in interest income and expense on floating rate loans and floating rate debentures to increase in the fourth quarter. Service agreement income was $1,856,000 for the first six months of 2004, compared to $984,000 in the same period of 2003. The increase of $872,000 was the result of increased loan origination services provided to Intervest National Bank. Gain on early repayment of mortgages increased to $289,000 for the six months ended June 30, 2004, from $132,000 for the six months ended June 30, 2003. The increase of $157,000 was mostly due to additional penalty interest collected on three loans that were repaid prior to maturity in the 2004 period compared to $70,000 additional penalty interest and fees collected on one loan that was repaid prior to maturity in 2003. The provision for loan losses was $135,000 for the first six months of 2004, compared to $93,000 in the same period of 2003. The increase was primarily due to a 5 basis point increase in the amount of allowance maintained on the loan portfolio in the first six months of 2004 compared to the first six months of 2003 General and administrative expenses increased to $1,044,000 for the six months ended June 30, 2004, from $760,000 for the same period of 2003. The increase was primarily the result of an increase in salaries and employee benefits of $134,000 primarily due to an increase in staff and salary increases, a $105,000 increase in occupancy expense relating to the payment of rent on the Company's new office space. The lease on the Company's former space expires in September of 2004 and the Company's obligation to pay approximately $22,000 per month on that space will also end in September 2004.Director fees and other expenses also increased by $45,000. The provision for income taxes for the six-months ended June 30, 2004 amounted to $873,000, compared to $641,000 for the six months ended June 30, 2003. The Company's effective tax rate was approximately 46% for both periods. The Company files consolidated Federal, New York State and New York City income tax returns with its Parent Company. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company manages its liquidity position on a daily basis to assure that funds are available to meet operations, loan and investment funding commitments and the repayment of borrowed funds. The Company's principal sources of funds have consisted of borrowings (through the issuance of its subordinated debentures), mortgage repayments and cash flow generated from ongoing operations. For information about the cash flows from the Company's operating, investing and financing activities, see the condensed consolidated statements of cash flows in this report. At June 30, 2004, the Company has issued commitments to lend approximately $31,800,000. If all these commitments were to close, they would be funded by the combination of cash on hand, the proceeds from the sale of additional debentures and the proceeds from the scheduled maturities of existing loans. During the first six-months of 2004, the Company received capital contributions of $2,000,000 from the Parent Company. 16 The Company considers its current liquidity and sources of funds sufficient to satisfy its outstanding lending commitments and its maturing liabilities. For the six months ending December 31, 2004, the Company is required to pay $9,000,000 principal and $3,252,000 of accrued interest on maturing subordinated debentures. The company expects to repay these debentures and related accrued interest from working capital and/or the proceeds from maturing mortgage loans. In July of 2004, the Company issued its Series 6/7/04 debentures in the principal amount of $11,500,000. Net proceeds, after offering costs, amounted to approximately $10,730,000. ASSET AND LIABILITY MANAGEMENT ------------------------------ Interest rate risk arises from differences in the repricing of assets and liabilities within a given time period. The primary objective of the Company's asset/liability management strategy is to limit, within its established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. The Company uses "gap analysis," which measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period, to monitor its interest rate sensitivity. The Company's one-year interest rate sensitivity gap was a positive $56,359,000, or 47% of total assets, at June 30, 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 loans as well as existing loans migrating into the less than one-year maturity time frame. The new loans were funded by debentures with terms of greater than one year. The Company has a "floor," or minimum rate, on many of its floating-rate loans that is determined in relation to prevailing market rates on the date of origination. This floor only adjusts upwards in the event of increases in the loan's interest rate. This feature reduces the effect on interest income of a falling rate environment because the interest rates on such loans do not reset downward. For a further discussion of interest rate risk and gap analysis, including the assumptions used in preparing the gap table, see the Company's 2003 Annual Report on Form 10-K, pages 10 and 11. The table that follows summarizes the Company's interest-earning assets and interest-bearing liabilities as of June 30, 2004, that are scheduled to mature or reprice within the periods shown.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 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 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, 2003, which reflect changes in market prices and rates, can be found in note 12 of the notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Management believes that there have been no significant changes in the Company's market risk exposure since December 31, 2003. Management actively monitors and manages the Company's interest rate risk exposure. The primary objective in managing interest rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on the Company's net interest income and capital. For a further discussion, see the section "Asset and Liability Management." ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of disclosure controls and procedures. The Company maintains --------------------------------------------------- controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon his evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Principal Executive and Principal Financial Officer of the Company concluded that the Company's disclosure controls and procedures were adequate. b) Changes in internal controls. The Company made no significant changes in ------------------------------ its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Principal Executive and Principal Financial Officer. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) Not Applicable (b) Not Applicable (c) Not Applicable (d) Not Applicable (e) Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS By written consent of Intervest Bancshares Corporation, the sole shareholder of the Company, Dated May 27, 2004, the Company's board of directors was re-elected in its entirety. ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: 31 - Certification of the principal executive and financial officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2003. 32 - Certification of the principal executive and financial officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2003. (b) No reports on Form 8-K were filed during the reporting period covered by this report. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERVEST MORTGAGE CORPORATION Date: August 12, 2004 By: /s/ Lowell S. Dansker ------------------- Lowell S. Dansker, President (Principal Executive Officer), Treasurer (Principal Financial Officer and Principal Accounting Officer) and Director Date: August 12, 2004 By: /s/ Lawrence G. Bergman --------------------- Lawrence G. Bergman, Vice President, Secretary and Director 19

INTERVEST MORTGAGE CORP 10-Q