10-Q 1 body_10q.txt INTERVEST MORTGAGE 10-Q 3-31-2005 ================================================================================ 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 MARCH 31, 2005 -------------- Commission File No. 33-27404-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.) ONE 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 100 shares outstanding at -------------------- ------------------------- value per share April 30, 2005 --------------- -------------- ================================================================================

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

See accompanying notes to condensed consolidated financial statements. 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, 2004. 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, 2004. 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 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. The Company is engaged in the real estate business, including the origination and purchase of real estate mortgage loans. The Company's investment policy emphasizes the investment in mortgage loans on income producing properties. The Company also provides loan origination services to Intervest National Bank, a wholly owned subsidiary 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 mortgage loans receivable portfolio at March 31, 2005:

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

At March 31, 2005 and December 31, 2004, one loan with a principal balance of $179,000 was on nonaccrual status. This loan is 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 was $181,000 at March 31, 2005 and December 31, 2004. The Company has commenced foreclosure proceedings against the borrower and currently believes the estimated fair value of the underlying properties is sufficient to provide for repayment of its recorded investment. The Company believes that a specific valuation allowance was not required at any time for impaired loans. At March 31, 2005 and December 31, 2004, there were no other impaired loans or loans ninety days past due and still accruing interest. Interest income that was not recorded on nonaccrual loans under their contractual terms for the first quarter 2005 amounted to $5,000. There was no such interest in the same period of 2004. The average balance of nonaccrual (impaired) loans for the quarter ended March 31, 2005 was $179,000. 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 5.75% on March 31, 2005 and 5.25% on December 31, 2004. The floating rate debentures have a maximum interest rate of 12%. In April of 2005, the Company issued its Series 3/21/05 debentures in the principal amount of $14,000,000. Net proceeds, after deferred offering costs, amounted to approximately $12,975,000. On January 1, 2005, the Company's Series 11/10/98 debentures matured and were repaid for $2,600,000 of principal and $1,859,000 of accrued interest. On April 1, 2005, the Company's Series 5/10/96 debentures matured and were repaid for $10,000,000 of principal and $ 2,218,000 of accrued interest. On April 1, 2005, the Company's Series 8/1/01 debentures due April 1, 2005 matured and were repaid for $1,750,000 of principal and $ 84,000 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 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; $1,910,000 of Series 6/7/04 debentures and $1,920,000 of Series 3/21/05, which accrue and compound interest quarterly, with such interest due and payable at maturity. 8 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE 5 - SUBORDINATED DEBENTURES PAYABLE, CONTINUED The holders of Series 6/28/99, 9/18/00 and 1/17/02 thru 3/21/05 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, January 1, 2008 for Series 6/7/04 and April 1, 2009 for Series 3/21/05) 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. Redemptions would be at a premium of 1% if they occurred prior to July 1, 2005 for the Series 6/7/04 debentures or prior to October 1, 2006 for the Series 3/21/05 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 March 31, 2005 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 outstanding with Intervest National Bank at March 31, 2005 and December 31, 2004. The Company has a servicing agreement with Intervest National Bank under which the company provides 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 $1,332,000 and $842,000 for the three-months ended March 31, 2005 and March 31, 2004, 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 $6,913,000 at March 31, 2005 and $9,352,000 at December 31, 2004. The Company earned interest income of $80,000 from these deposits for the three-months ended March 31, 2005, compared to $45,000 for the same period of 2004. Intervest Securities Corporation, an affiliate, receives commissions and fees from the Company in connection with the placement of the Company's debentures. These fees aggregated $0 and $56,000 for the quarters ended March 31, 2005 and 2004, respectively. 9 INTERVEST MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE 6 - RELATED PARTY TRANSACTIONS, CONTINUED The Company incurred fees of approximately $13,000 and $10,000 for the three-months ended March 31, 2005 and 2004 respectively, for legal services rendered by a law firm, a partner of which is a director of the Company. The Company incurred commissions and fees in connection with the placement of its debentures to a broker/dealer, a principal of which is a director of the Company, of $0 and $315,000 during the three-months ending March 31, 2005 and 2004, respectively. The Company has an informal agreement with its Parent Company, whereby the Company will reimburse the Parent Company for the occupancy expense associated with the leased space that it occupies as follows: $296,000 for the remaining nine months of 2005; $394,000 in 2006; $394,000 in 2007; $426,000 in 2008; $437,000 in 2009 and $1,913,000 thereafter for an aggregate amount of $3,860,000. The Company has a management agreement with its Parent, that is reviewed annually, under which the Company incurred a management fee of $ 12,500 per month. The Company paid $37,500 to the Parent Company during the first quarter of 2005. The Parent Company provides services related to corporate finance and planning and intercompany administration, and acts as a liaison for the Company in various corporate matters. There was no management fee paid in the first quarter of 2004. 10 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 review of the condensed consolidated financial statements as of March 31, 2005, and for the three-month periods ended March 31, 2005 and 2004 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. 11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholder Intervest Mortgage Corporation We have reviewed the accompanying condensed consolidated balance sheet of Intervest Mortgage Corporation and Subsidiaries (the "Company") as of March 31, 2005, and the related condensed consolidated statements of operations, changes in stockholder's equity and cash flows for the three-month periods ended March 31, 2005 and 2004. These interim condensed consolidated 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 (United States), 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 interim condensed consolidated financial statements for them to be in conformity with U. S. generally acceped 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, 2004 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 10, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 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 April 22, 2005 12 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. The Company also provides mortgage loan origination services to Intervest National Bank ("the Bank"), an affiliated entity. 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 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. However, 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 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. 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. 13 COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2005 AND DECEMBER 31, 2004 ------------------------------------------------------------------------- Total assets at March 31, 2005 decreased to $119,455,000, from $122,451,000 at December 31, 2004. The decrease reflected a $12,290,000 decrease in mortgage loans outstanding, mostly offset by a $9,349,000 increase in cash and cash equivalents and the application of cash to the redemption at maturity of $2,600,000 subordinated debentures outstanding and $1,495,000 of interest payable on subordinated debentures. Cash and cash equivalents amounted to $26,500,000 at March 31, 2005, compared to $17,151,000 at December 31, 2004. The increase reflected a higher level of noninterest-bearing funds and short-term commercial paper investments, partially offset by a lower level of balances maintained in money market accounts. Cash equivalents of $14,100,000 at March 31, 2005 were used on April 1, 2005 to repay maturing subordinated debentures and related accrued interest. Mortgage loans receivable, net of unearned income and allowance for mortgage loan losses, amounted to $88,084,000 at March 31, 2005, compared to $100,188,000 at December 31, 2004. The decrease was due to repayments exceeding new mortgage loan originations during the period. At March 31, 2005 and December 31, 2004, one loan with a principal balance of $179,000 was on nonaccrual status. This loan was considered impaired under the criteria of SFAS No.114. 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 the Company's recorded investment. The allowance for loan losses amounted to $332,000 at March 31, 2005 and December 31, 2004. 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 in the report on form 10-K for the year ended December 31, 2004. 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 subordinated debenture offering costs, net of accumulated amortization, decreased to $3,034,000 at March 31, 2005, from $3,271,000 at December 31, 2004. The decrease was due to normal amortization. Total liabilities at March 31, 2005 decreased to $95,302,000, from $98,924,000 at December 31, 2004 largely due to a lower level of subordinated debentures outstanding and debenture interest payable relating to the maturity of Series 11/10/1998 debentures. Subordinated debentures outstanding at March 31, 2005 decreased to $86,250,000, from $88,850,000 at December 31, 2004. The decrease was due to the payment at maturity of Series 11/10/98 subordinated debenture in the principal amount of $2,600,000. Subordinated debentures interest payable decreased to $6,724,000 at March 31, 2005, from $8,219,000 at December 31, 2004, primarily due to the payment of accrued interest on Series 11/10/98 of $1,859,000, partially offset by the accrual of interest on the balance of the subordinated debentures outstanding. Mortgage escrow funds increased to $1,784,000 at March 31, 2005, from $1,644,000 at December 31, 2004. The increase was primarily due to the ongoing accumulation of funds for the semi annual scheduled tax payments in the second quarter. This increase was partially offset by escrow deposits returned to borrowers on the loans that were paid off during the three-month period ended March 31, 2005. Mortgage escrow funds payable represent advance payments made to the Company by the borrowers for taxes, insurance and other charges that are remitted by the Company to third parties. Stockholder's equity increased to $24,153,000 at March 31, 2005, from $23,527,000 at year-end 2004. The increase was due to net income of $626,000 for the three-months ended March 31, 2005. COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2005 AND ----------------------------------------------------------------------------- 2004 ---- 14 The Company's net income increased $113,000 to $626,000 in the first quarter of 2005 from $513,000 for the first quarter of 2004. The increase was primarily due to a $490,000 increase in servicing fee income received from Intervest National Bank, a $104,000 decrease in interest on debentures and a $56,000 increase in interest and fee income on mortgage loans, partially offset by a $271,000 increase in general and administrative expenses, a $184,000 decrease in gain on early repayment of mortgages, and a $97,000 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 the first quarter of 2005 and 2004. 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.

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 $495,000 in the first quarter of 2005, compared to $316,000 in the first quarter of 2004. The increase in net interest income was due to a higher net interest margin. The increase in the margin to 1.76% in the first quarter of 2005 from 1.08% in the first quarter of 2004 was due to an increase in higher yielding mortgage loans of $4,887,000, offset by a decrease in significantly lower yielding short-term investments of $9,041,000. The increase in the yield on earning assets was mostly offset by an increase in the yield on subordinated debentures. The Company's yield on interest-earning assets increased 56 basis points to 8.52% in the first quarter of 2005 due to the effect of an increase in the prime rate which was 175 basis points higher at the end of the first quarter of 2005 than it was in the first quarter of 2004 and a reduction in lower yielding short-term investments. The cost of debentures increased 53 basis points to 8.37% in the first quarter of 2005 largely due to the effect of the increase in the prime rate on floating-rate debentures. These debentures were indexed to the JPMorgan Chase Bank prime rate at the beginning of the quarter and therefore had a higher interest rate in the first quarter of 2005 than 2004. Servicing agreement income increased to $1,332,000 in the first quarter of 2005, from $842,000 in the same period of 2004. The increase of $490,000 was the result of increased loan origination services provided to Intervest National Bank. 15 Gain on early repayment of mortgages decreased to $49,000 in the first quarter of 2005, from $233,000 in the first quarter of 2004. The decrease of $184,000 was the result of two large lockout interest payments received in the first quarter of 2004 and an overall decrease in the number of loans that were repaid prior to maturity in the first quarter of 2005. The Company receives lockout interest when the borrower prepays a loan prior to the date specified in the mortgage. In such cases the borrower pays interest from the prepayment date through the lockout date. There was no provision for loan losses in the first quarter of 2005, compared to $40,000 in the first quarter of 2004. A provision was not recorded in the first quarter ended March 31, 2005 based upon management review of the mortgage loan portfolio and its conclusion that no additional provision was required. General and administrative expenses increased to $732,000 in the first quarter of 2005, from $461,000 in the same period of 2004, largely due to the increase in salaries and employee benefits expenses, occupancy expenses, and the commencement of a management fee that is paid by the Company to the Parent Company. Salaries and employee benefits expense increased $183,000 due to bonuses and salary increases, an increase in staff and a higher cost of employee benefits. The Company had 18 full time employees during the first quarter of 2005, compared to 17 full time employees during the first quarter of 2004. Occupancy expenses increased $39,000 due to a rent increase associated with the Company's move to 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 amounts to approximately $36,000 per month in 2005. 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. The Parent Company provides services related to corporate finance and planning and intercompany administration, and acts as a liaison for the Company in various corporate matters. There was no management fee in the first quarter of 2004. The provision for income taxes for the quarter ended March 31, 2005 amounted to $539,000, compared to $442,000 in the first quarter ended March 31, 2004. The provision represented approximately 46% of pretax income 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 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 March 31, 2005, the Company had commitments outstanding to lend of $4,540,000. 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 remaining nine months of 2005, the Company is required to repay $26,500,000 of principal and $3,425,000 of accrued interest on its subordinated debentures. Of these amounts, $11,750,000 of principal and $2,302,000 of interest were due and repaid on April 1, 2005. The Company expects to repay the remaining 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. In April of 2005, The Company issued its Series 3/21/05 debentures in the principal amount of $14,000,000. Net proceeds, after offering costs, amounted to approximately $12,975,000. 16 OFF-BALANCE SHEET COMMITMENTS ------------------------------- Commitments to extend credit amounted to $4,540,000 at March 31, 2005, 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. 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 $52,580,000, or 44% of total assets, at March 31, 2005, compared to a positive $64,025,000, or 52%, at December 31, 2004. The decrease was primarily due to the repayment of floating-rate mortgage loans which was partially offset by the maturity of fixed-rate subordinated debentures at January 1, 2005. The following table summarizes information relating to the Company's interest-earning assets and interest-bearing liabilities as of March 31, 2005, that are scheduled to mature or reprice within the periods shown. 17

Significant assumptions used in preparing the preceding gap table follow: (1) Floating-rate loans and subordinated debentures payable that adjust at specified time are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate loans and subordinated debentures payable are scheduled, including repayments, according to their contractual maturities. Deferred loan fees are excluded from this analysis. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and debenture-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, which reflect changes in market prices and rates, can be found in note 14 to the consolidated financial statements included in the Company's annual report on form 10-K for the year ended December 31, 2004. 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 The Company's management evaluated, with the participation of its Principal Executive and Financial Officer(s), 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(s) have 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 furnishes 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 control over financial reporting or in other factors that could significantly affect these controls subsequent to March 31, 2005. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (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 Not Applicable ITEM 5. OTHER INFORMATION (a) Not applicable (b) Not applicable ITEM 6. EXHIBITS The following exhibits are filed as part of this report: 4.0 - Form of Indenture between the Company and The Bank of New York dated as of April 1, 2005. 31.0 - Certification of the principal executive and financial officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 32.0 - Certification of the principal executive and financial officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 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: May 2, 2005 By: /s/ Lowell S. Dansker ----------------- Lowell S. Dansker, Vice Chairman, President and Treasurer (Principal Executive and Financial Officer ) Date: May 2, 2005 By: /s/ Lawrence G. Bergman ------------------- Lawrence G. Bergman, Vice President and Secretary 19

INTERVEST MORTGAGE CORP 10-Q