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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number: 0-21231
MATRIX BANCORP, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1233716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 4, 2002, 6,518,604 shares of common stock were outstanding. The
aggregate market value of common stock held by non-affiliates of the registrant,
based on the closing sales price of such stock on the NASDAQ National Market on
March 4, 2002, was $30,870,893. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive proxy statement for the Annual
Meeting of Shareholders to be held May 17, 2002 are incorporated by reference
into Part III of this Form 10-K.
TABLE OF CONTENTS Page
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PART I
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 24
Item 3. Legal Proceedings............................................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 27
Item 6. Selected Financial Data...................................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 52
Item 8. Financial Statements and Supplementary Data.................................................. 52
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......... 52
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 52
Item 11. Executive Compensation....................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 52
Item 13. Certain Relationships and Related Transactions............................................... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 52
2
PART I
Item 1. Business
Matrix Bancorp, Inc.
General. Matrix Bancorp, Inc. (occasionally referred to in this document,
on a consolidated basis, as "us," "we," the "Company" or similar terms), is a
unitary thrift holding company that, through our subsidiaries, focuses on
traditional banking, mortgage banking, trust and clearing activities, lending
activities and other fee-based services. Our traditional banking activities
include originating and servicing residential, commercial and consumer loans and
providing a broad range of depository services. Our mortgage banking activities
consist of purchasing and selling residential mortgage loans and residential
mortgage servicing rights; offering brokerage, consulting and analytical
services to financial services companies and financial institutions; servicing
residential mortgage portfolios for investors; originating residential
mortgages; and providing real estate management and disposition services. Our
trust and clearing activities focus primarily on offering specialized custody
and clearing services to banks, trust companies, broker-dealers, third party
administrators and investment professionals, as well as the administration of
self-directed individual retirement accounts, qualified business retirement
plans and custodial and directed trust accounts. Our other fee-based services
and lending activities include providing outsourced business services, such as
budgeting, governmental reporting, accounts payable, payroll, facility and
safety management and comprehensive insurance programs to charter schools. We
also offer financing to charter schools for the purchase of school sites and
equipment.
Matrix Bancorp was incorporated in Colorado in June 1993 and was
formerly called "Matrix Capital Corporation." The trading symbol for our common
stock on The Nasdaq National Market is "MTXC."
The Subsidiaries
Our core business operations are conducted through the operating
subsidiaries and an investment in a settlement and clearing operation described
below.
Matrix Capital Bank. With offices in New Mexico, Arizona and Colorado,
Matrix Bank serves its local communities by providing a broad range of personal
and business depository services, offering residential loans and providing
consumer and commercial real estate loans, including Small Business
Administration loans. In 2001, Matrix Bank decided to relocate its domicile from
Las Cruces, New Mexico to Denver, Colorado. The relocation is anticipated to be
complete in the second quarter of 2002. Matrix Bank intends to offer all of its
existing banking services in the Denver market.
Matrix Bank holds the noninterest-bearing custodial escrow deposits related
to the residential mortgage loan portfolio serviced by Matrix Financial Services
Corporation, the interest-bearing money market accounts administered by Sterling
Trust Company and the deposits resulting from transactions in which Matrix Bank
acts as the clearing bank for clients of Matrix Settlement & Clearance Services,
L.L.C. These deposits, as well as other traditional deposits, are used primarily
to fund our mortgage origination activity, as well as bulk purchases of
residential mortgage loan portfolios throughout the United States, a substantial
portion of which are serviced for Matrix Bank by Matrix Financial following
their purchase. As of December 31, 2001, Matrix Bank had total assets of $1.5
billion.
Matrix Bank and several of our other subsidiaries have significant
experience in purchasing and originating mortgage loans, have familiarity with
real estate markets throughout the United States and have traditionally had
access to relatively low-cost deposits. We believe that the resulting knowledge
and activities permit Matrix Bank to manage its funding and capital position in
a way that enhances its performance.
Matrix Financial Services Corporation. Matrix Financial, which became a
wholly owned subsidiary of Matrix Bank in August 2000, originates mortgage loans
through its wholesale loan origination network, acquires mortgage servicing
rights on a nationwide basis through purchases in the secondary market and
services the loans underlying the purchased mortgage servicing rights and a
portion of our originated mortgage servicing rights.
As of December 31, 2001, Matrix Financial serviced 86,155 borrower accounts
representing $5.7 billion in principal balances, excluding $889.0 million in
subservicing for companies that are unaffiliated with us. Many of these accounts
were seasoned loans having lower principal and higher custodial escrow balances
than newly originated mortgage loans. As a servicer of mortgage loans, Matrix
Financial generally is required to establish custodial escrow accounts for the
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deposit of borrowers' payments. These custodial accounts are maintained at
Matrix Bank. At December 31, 2001, the custodial escrow accounts related to our
servicing portfolio maintained at Matrix Bank were $129.7 million.
During 2001, Matrix Financial originated $3.6 billion in residential
mortgage loans primarily through its regional wholesale production offices
located in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Sacramento, Santa
Ana and St. Louis. The mortgage loans originated by Matrix Financial are
typically sold in the secondary market.
Matrix Capital Markets, Inc. Matrix Capital Markets, formerly known as
United Financial, Inc., provides brokerage and consulting services to financial
institutions and financial services companies in the mortgage banking industry.
These services include:
o the brokering and analysis of residential mortgage loan servicing
rights and residential mortgage loans;
o corporate and mortgage loan servicing portfolio valuations, which
includes the "mark-to-market" valuation and analysis required under
Statements of Financial Accounting Standards No. 133 and No. 140; and
o to a lesser extent, consultation and brokerage services in connection
with mergers and acquisitions of mortgage banking entities.
Matrix Capital Markets provides brokerage services to the mortgage banking
entities of several of the nation's largest financial institutions. During 2001,
Matrix Capital Markets brokered the sale of 25 mortgage loan servicing
portfolios totaling $23.9 billion in outstanding mortgage loan principal
balances.
Matrix Capital Markets' volume of brokerage activity and the expertise of
its analytics department give us access to a wide array of information relating
to the mortgage banking industry, including emerging market trends, prevailing
market prices, pending regulatory changes and changes in levels of supply and
demand. Consequently, we are often able to identify certain types of mortgage
loan and mortgage loan servicing portfolios that are well suited to our
particular servicing platform, investment objectives and unique corporate
structure.
First Matrix Investment Services Corp. First Matrix, which became a wholly
owned subsidiary of Matrix Capital Markets in October 2001, is registered with
the National Association of Securities Dealers ("NASD") as a fully disclosed
broker-dealer, with its headquarters in Denver, Colorado and branch offices in
Fort Worth, Texas and Memphis Tennessee. First Matrix offers brokerage service
related to a wide range of investment options for both individual and
institutional investors, including stocks, bonds, mutual funds and fixed income
and debt securities, as well as providing investment banking services focusing
on fixed income products. The Fort Worth office focuses primarily on long-term
investing and retirement planning for individuals. The Denver office assists
primarily financial institutions in managing their investment portfolios.
Denver's client base currently consists of more than 500 banks throughout the
United States. The Memphis office, which focuses on the acquisition, brokering
and sale of SBA loan pools, began its operations in the fourth quarter of 2001.
Matrix Asset Management Corporation. Matrix Asset Management provides
nationwide real estate management and disposition services on foreclosed
properties owned by financial services companies and financial institutions. In
addition to the unaffiliated clients currently served by Matrix Asset
Management, Matrix Financial utilizes Matrix Asset Management to handle the
disposition of foreclosed real estate for which it is responsible as servicer.
As of December 31, 2001, Matrix Asset Management had approximately 1,100
foreclosed properties under its management.
Matrix Asset Management also provides limited collateral valuation opinions
to clients that are interested in assessing the value of the collateral
underlying mortgage loans, as well as to clients such as Matrix Bank and other
third party mortgage loan buyers evaluating potential bulk purchases of mortgage
loans.
Sterling Trust Company. Sterling Trust, headquartered in Waco, Texas, was
incorporated in 1984 as a Texas non-bank trust company specializing in the
administration of self-directed individual retirement accounts, qualified
business retirement plans and custodial and directed trust accounts. As of
December 31, 2001, Sterling Trust administered approximately 41,300 accounts,
with assets under administration of over $6.0 billion. As of December 31, 2001,
approximately $120.4 million of the $6.0 billion represented money market
deposits held at Matrix Bank.
ABS School Services, L.L.C. ABS School Services (sometimes referred to
hereafter collectively with its subsidiaries as "ABS") provides outsourced
business services to charter schools. Charter schools are public schools that
are an alternative to traditional public schools. As of December 31, 2001, ABS
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provided its services to approximately 125 schools. The primary services offered
include fund accounting, cash management, budgeting, governmental reporting,
payroll and accounts payable. ABS also offers administrative and instructional
leadership and consults with schools and offers assistance in the following
areas: facility and safety management, technology, policy development, grant
administration and comprehensive insurance programs. Additionally, ABS has a
financing division, which offers financing to charter schools for the purchase
of school sites and equipment.
Matrix Settlement & Clearance Services, L.L.C. Matrix Settlement &
Clearance Services, is a joint venture in which we own a 45% equity interest.
Matrix Settlement & Clearance Services provides automated clearing of mutual
funds utilizing the National Securities Clearing Corporation's Fund/SERV and
Defined Contribution Clearance & Settlement platform for banks, trust companies,
third party administrators and registered investment advisors. For the year
ended December 31, 2001, Matrix Settlement & Clearance Services had $3.5 million
of revenues and a net loss of approximately $400,000. Effective January 2, 2002,
Matrix Settlement & Clearance Services' wholly owned subsidiary, MSCS Financial
Services, LLC, began operations as a NASD registered broker-dealer.
As of December 31, 2001, Matrix Settlement & Clearance Services had 56
clients under contract. These clients administer approximately $7.6 billion in
funds that would be eligible for inclusion in the automated clearing environment
of the National Securities Clearing Corporation. Matrix Settlement & Clearance
Services has developed relationships with several Matrix Bancorp subsidiaries to
assist in the performance of services for its customers. For example, Matrix
Bank, as the National Securities Clearing Corporation member, serves as the
settlement bank for Fund/SERV transactions and provides banking services for
certain Matrix Settlement & Clearance Services customers. This relationship
helps generate low-cost deposits for Matrix Bank. As of December 31, 2001,
Matrix Settlement & Clearance Services' clients had $54.3 million of deposits at
Matrix Bank.
Lending Activities
Purchase and Sale of Bulk Loan Portfolios. In addition to our mortgage loan
origination and servicing-related activities, which are discussed under
"--Residential Mortgage Loan Origination" and "Mortgage Servicing Activities,"
respectively, we traditionally make bulk purchases of residential mortgage loans
in the secondary market through Matrix Bank. We believe that our structure
provides advantages over our competitors in the purchase of bulk mortgage loan
packages. In particular:
o Matrix Capital Markets, through its networking within the mortgage
banking and financial services industries, is able to refer companies
that are interested in selling mortgage loan portfolios directly to
Matrix Bank. This direct contact reduces the number of portfolios
that must be purchased through competitive bid situations, thereby
reducing the cost associated with the acquisition of bulk residential
mortgage loan portfolios; and
o Matrix Bank's subsidiary, Matrix Financial, provides servicing
advantages that a typical "stand-alone" community bank does not
possess. Matrix Financial acts as a subservicer for a majority of
Matrix Bank's mortgage loan portfolio. Because Matrix Financial
services loans throughout the entire United States, Matrix Bank can
acquire various types of loans secured by property located in any of
the fifty states.
Substantially all of the residential mortgage loans that Matrix Bank
acquires are classified as held for sale. This accounting classification
requires Matrix Bank to carry the loans at the lower of aggregate cost or
market. The purchased loan portfolios typically include both fixed and
adjustable rate mortgage loans. Although Matrix Bank reviews many loan
portfolios for prospective acquisition, it focuses on acquiring seasoned first
lien priority loans secured primarily by one-to-four single-family residential
properties with unpaid principal balances of less than $500,000. To the extent
that adjustable rate loans are available, Matrix Bank generally targets
adjustable over fixed rate portfolios. Due to the accounting treatment required,
we believe that the focus on seasoned and adjustable rate products is generally
expected to reduce the effect of changing interest rates on the portfolio's
market value.
Matrix Bank purchases mortgage loan portfolios from various sellers who
have either originated the loans or, more typically, acquired the loan
portfolios in bulk purchases. Matrix Bank considers several factors prior to a
purchase. Among other factors, Matrix Bank considers the product type, the
current loan balance, the current interest rate environment, the seasoning of
the mortgage loans, payment histories, geographic location of the underlying
collateral, price, the current liquidity of Matrix Bank and the product mix in
its existing mortgage loan portfolio.
In some cases, the mortgage loan portfolios that Matrix Bank acquires are
purchased at yields that exceed market. Some of the loans in these portfolios
are considered performing loans that have had payment problems in the past or
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have had document deficiencies. These types of portfolios afford Matrix Bank
with an opportunity to resell the loans at a higher price if the discount to
market on these portfolios accurately reflects the additional risks associated
with purchasing these types of loans. Loan document deficiencies are identified
in the due diligence process and, to the extent practical, are cured by Matrix
Bank prior to reselling the loans. Matrix Bank also analyzes the payment history
on each mortgage loan portfolio. Many prior problems may be a result of
inefficient servicing or may be attributable to several servicing transfers of
the loans over a short period of time. Because many considerations may impact
pricing or yield, Matrix Bank prices each loan package based on the specific
underlying loan characteristics.
In the past, Matrix Bank has purchased nonperforming Federal Housing
Administration and Veteran's Administration loans from third party sellers. The
Department of Housing and Urban Development ("HUD") generally guarantees the
majority of principal and interest on these nonperforming loans. These loans are
at fixed rates and have a relatively short average life since the loans are
typically liquidated through the foreclosure and subsequent claim process with
HUD. As of December 31, 2001, Matrix Bank owned $68.3 million of these loans.
Matrix Bank performs due diligence on each mortgage loan portfolio that it
desires to purchase on a bulk basis. These procedures consist of analyzing a
representative sample of the mortgage loans in the portfolio and are typically
performed by Matrix Bank employees, but occasionally are outsourced to third
party contractors. The underwriter takes into account many factors and
statistics in analyzing the sample of mortgage loans in the subject portfolio,
including: the general economic conditions in the geographic area or areas in
which the underlying residential properties are located; the loan-to-value
ratios on the underlying loans; and the payment histories of the borrowers. In
addition, the underwriter attempts to verify that each sample loan conforms to
the standards for loan documentation set by Fannie Mae and Freddie Mac. In cases
where a significant portion of the sample loans contain nonconforming
documentation, Matrix Bank assesses the additional risk involved in purchasing
the loans. This process helps Matrix Bank determine whether the mortgage loan
portfolio meets its investment criteria and, if it does, the range of pricing
that is appropriate.
Matrix Bank continually monitors the secondary market for purchases and
sales of mortgage loan portfolios and typically undertakes a sale of a
particular loan portfolio in an attempt to "match" an anticipated bulk purchase
of a particular mortgage loan portfolio or to generate current period earnings
and cash flow. To the extent that Matrix Bank is unsuccessful in matching its
purchases and sales of mortgage loans, Matrix Bank may have excess capital,
resulting in less leverage and higher capital ratios.
During the year ended December 31, 2001, we made bulk purchases of mortgage
loans of approximately $105.9 million and made bulk sales of approximately $76.1
million for a net gain on sale of bulk mortgage loans of $960,000.
Residential Mortgage Loan Origination. We originate residential mortgage
loans on a wholesale basis through Matrix Financial and on a retail basis
through both Matrix Financial and Matrix Bank. Matrix Financial originated a
total of $3.6 billion in residential mortgage loans for the year ended December
31, 2001.
Wholesale Originations. Matrix Financial's primary source of mortgage loan
originations is its wholesale division, which originates mortgage loans through
approved independent mortgage loan brokers. These brokers qualify to participate
in Matrix Financial's program through a formal application process that includes
an analysis of the broker's financial condition and sample loan files, as well
as the broker's reputation, general lending expertise and references. As of
December 31, 2001, Matrix Financial had approved relationships with
approximately 2,000 mortgage loan brokers. From Matrix Financial's offices in
Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Sacramento, Santa Ana and
St. Louis, the sales staff solicits mortgage loan brokers throughout the
Southeastern, Western, Midwestern and Rocky Mountain areas of the United States
for mortgage loans that meet Matrix Financial's criteria.
Mortgage loan brokers act as intermediaries between borrowers and Matrix
Financial in arranging mortgage loans. Matrix Financial, as an approved
seller/servicer for Fannie Mae, Freddie Mac, the Government National Mortgage
Association and a multitude of private investors, provides these brokers access
to the secondary market for the sale of mortgage loans that they otherwise
cannot access because they do not meet the applicable seller/servicer net worth
requirements. Matrix Financial attracts and maintains relationships with
mortgage loan brokers by offering a variety of services and products.
To supplement our product offerings made through our wholesale loan
origination network, we offer a program tailored to borrowers who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources. The
borrowers who need this type of loan product often have impaired or
unsubstantiated credit histories and/or unverifiable income and require or seek
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a high degree of personalized service and swift response to their loan
applications. As a result, these borrowers generally are not adverse to paying
higher interest rates for this loan product type, as compared to the interest
rates charged by conventional lending sources. We have established
classifications with respect to the credit profiles of these borrowers. The
classifications range from Alternative A through D depending upon a number of
factors, including the borrower's credit history and employment status. During
2001, Matrix Financial originated $135.8 million of Alternative A through D
credit residential mortgage loans, the majority of which were sold to
unaffiliated third party investors on a nonrecourse basis. All current
originations of Alternative A through lesser quality credit loans are originated
under third party investor guidelines and are generally sold monthly in bulk
loan portfolios. This method of sale generally provides better execution as
compared to selling individual loans.
In 2000, Matrix Financial acquired a servicing portfolio and production
platform in Missouri. The production platform specializes in the origination of
loans under a first-time home buyer program. Under this program, first-time home
buyers are able to obtain loans at rates that are generally below market. The
funding for the loans is available as a result of bond issues through various
state and local governmental units, such as Missouri Housing Authority. As
master servicer under the bond programs, Matrix Financial purchases the loans
from the originator, principally other financial institutions or mortgage
brokers. Once acquired by Matrix Financial, the loans under the specific bond
programs are packaged and Government National Mortgage Association securities
are issued to the bond trustees under the programs. Our contract with the
Missouri Housing Authority expired without renewal relative to our capacity to
act as master servicer for any bond series issued after August 1, 2001. We will
continue, however, to service prior bond series until such a time as the series
is no longer outstanding under the indenture.
For strategic purposes, Matrix Financial's management has increased its
emphasis on wholesale originations by opening two new production offices in 2000
and another in January 2001, acquiring a servicing and production platform and
hiring additional administrative and production staff at existing offices. In
low or decreasing interest rate environments, increased loan origination
volumes, which result in increased fee income, can act as an economic hedge
against decreases in interest income and the decreasing value of mortgage
servicing portfolios caused by increased prepayments, which reduces revenues.
Retail Originations. Matrix Bank originates residential loans on a retail
basis through its branches in Las Cruces, New Mexico and Sun City, Arizona.
Matrix Bank's lending office in Evergreen, Colorado primarily originates
residential construction loans and commercial loans in the local market place.
We attempt to convert the construction loans funded through the Evergreen office
into permanent mortgage loans. The retail loans originated by Matrix Bank
consist of a broad range of residential loans, at both fixed and adjustable
rates, consumer loans and commercial real estate loans. Once Matrix Bank
completes its change of domicile, we anticipate that the Evergreen office will
consolidate with the new office in Denver, Colorado with no interruption in
services.
Matrix Financial has also developed a retention center that focuses on the
solicitation of our servicing portfolio and third-party owned servicing
portfolios for refinancing opportunities. The goal is to identify those
borrowers which are likely to refinance and have them refinance with Matrix
Financial. If the refinanced loan replaces a loan that comprises part of our
servicing portfolio, we have effectively preserved a portion of our servicing
portfolio and the periodic servicing fees resulting therefrom, as the borrower
would have been likely to refinance with an unaffiliated lender if not with us,
which would result in a loss of the servicing income that results from servicing
the loan.
Quality Control. We have a loan quality control process designed to ensure
sound lending practices and compliance with Fannie Mae, Freddie Mac, Ginnie Mae
and applicable private investor guidelines. Prior to funding any wholesale or
retail loan, we perform a verbal or written verification of employment as
required by investor programs and utilize a detailed checklist to ensure
accuracy of documentation. In addition, on a monthly basis, we select 10% of all
closed loans for a detailed audit conducted by our own personnel or a third
party service provider. The quality control process entails performing a
complete underwriting review and independent re-verification of all employment
information, tax returns, source of down payment funds, bank accounts and
credit. Furthermore, 10% of the audited loans are chosen for an independent
field review and standard factual credit report. All discovered deficiencies in
these audits are reported to our senior management to determine trends and
additional training needs. We then address and cure all resolvable issues. We
also perform a quality control audit on all early payment defaults, first
payment defaults and 60-day delinquent loans, the findings of which are reported
to the appropriate investor and/or senior management.
Sale of Originated Loans. We generally sell the residential mortgage loans
that we originate. Under ongoing programs established with Fannie Mae, Freddie
Mac and Ginnie Mae, conforming conventional and government loans may be sold on
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a cash basis or pooled by us and exchanged for securities guaranteed by Fannie
Mae, Freddie Mac or Ginnie Mae. We then sell these securities to national or
regional broker-dealers. Mortgage loans sold to Fannie Mae, Freddie Mac or
Ginnie Mae are sold on a nonrecourse basis, except for standard representations
and warranties, so that foreclosure losses are generally borne by Fannie Mae,
Freddie Mac or Ginnie Mae and not by us.
We also sell nonconforming and conforming residential mortgage loans on a
nonrecourse basis to other secondary market investors. Nonconforming loans are
typically first lien mortgage loans that do not meet all of the agencies'
underwriting guidelines, and are originated instead for other institutional
investors with whom we have previously negotiated purchase commitments and for
which we occasionally pay a fee.
We sell residential mortgage loans on a servicing-retained or
servicing-released basis. Certain purchasers of mortgage loans require that the
loan be sold to them servicing-released. We sell nonconforming loans on a
servicing-released basis and may sell conforming loans on a servicing-retained
or servicing-released basis. See "Mortgage Servicing Activities --Residential
Mortgage Loan Servicing."
In connection with our residential mortgage loan originations and sales, we
make customary representations and warranties. Our experience has been that
giving such representations and warranties have not resulted in material
repurchases. However, there can be no assurance that we will not be required to
make a significant repurchase in the future or that losses will not occur in the
future due to the representations and warranties made.
The sale of mortgage loans may generate a gain or loss for us. Gains or
losses result primarily from two factors. First, we may make a loan to a
borrower at a rate resulting in a price that is higher or lower than we would
receive if we had immediately sold the loan in the secondary market. These price
differences occur primarily as a result of competitive pricing conditions in the
primary loan origination market. Second, gains or losses may result from changes
in interest rates that consequently change the market value of the mortgage
loans. The change in the market value of the mortgage loans may occur after the
price commitment is given to the borrower and before the time that the mortgage
loan is sold to the investor. Net gains and losses on originated loans sold are
recorded in loan origination income.
In order to hedge against the interest rate risk resulting from these
timing differences, we historically have committed to sell all closed originated
mortgage loans held for sale and a portion of the mortgage loans that are not
yet closed but for which the interest rate has been established, sometimes
referred to in this document as "pipeline loans." We adjust our net commitment
position daily either by entering into new commitments to sell or by buying back
commitments to sell depending upon our projection of the portion of the pipeline
loans that we expect to close. These projections are based on numerous factors,
including changes in interest rates and general economic trends. The accuracy of
the underlying assumptions bears directly upon the effectiveness of our use of
forward commitments and subsequent profitability. In addition, during the second
half of 2000, we began selling a portion of our pipeline loans, both conforming
and nonconforming, to third party investors on a best efforts basis. By selling
the loans on a best efforts basis, we significantly reduce our hedging risk. The
market value of loans committed for sale is determined based on the related
forward loan sale commitments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Risk Sensitive Assets and
Liabilities" for information on our adoption of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities.
Commercial and Other Lending. We have sought to diversify and enhance the
yield of our loan portfolio by originating commercial and, to a lesser extent,
consumer loans and by offering a full range of lending products to our
customers. The Company offers a variety of commercial loan products, including:
single-family construction loans; commercial real estate loans; business and SBA
loans; and financing to charter schools for the purchase of real estate and
equipment. Matrix Bank's loan production office in Evergreen, Colorado, a suburb
of Denver, principally originates single-family construction and commercial real
estate loans. Matrix Bank's office in Las Cruces, New Mexico also originates a
portion of these loans. ABS performs underwriting and funding of financings for
charter schools.
Matrix Bank's SBA division, located in Denver, Colorado, offers the
following loan products: SBA 7a loans; first trust deed loans senior to SBA 504
debentures; first trust deed companion loans senior to SBA 7a loans; and
Business and Industry Guaranteed Loans offered through the United States
Department of Agriculture. Matrix Bank has received preferred lender status
under the SBA program in the Colorado market area, and is anticipating expansion
of that designation in New Mexico, Utah, Oregon, Idaho and Las Vegas, Nevada
during 2002. Preferred lender status allows Matrix Bank to approve
SBA-guaranteed loan applications without prior review from the SBA, thereby
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accelerating the approval process for small business loan applications.
Preferred lenders also are granted unilateral servicing powers over the term of
those loans. During 2001, Matrix Bank originated $26.1 million SBA loans.
Matrix Bank generally limits its commercial lending to income-producing
real estate properties. The repayment of loans collateralized by
income-producing properties depends upon the successful operation of the related
real estate property and also on the credit and net worth of the borrower. Thus,
repayment is subject to the profitable operation of the borrower's business,
conditions in the real estate market, interest rate levels and overall economic
conditions. Loans on income-producing properties must generally meet internal
underwriting guidelines that include: a limit on the loan-to-value ratio of 75%;
a review of the borrower with regard to management talent, integrity, experience
and available financial resources; and, in most instances, a personal guarantee
from the borrower.
Matrix Bank originates loans to builders for the construction of
single-family properties, and to a lesser extent, for the acquisition and
development of improved residential lots. Matrix Bank generally makes these
loans on commitment terms that last from nine to eighteen months and typically
adjust with the prime rate of interest. In many cases, the residential
properties have been pre-sold to the homeowner. It is generally considered that
construction lending involves a higher level of risk than secured lending on
existing properties because the properties securing construction loans are
usually more speculative and more difficult to evaluate and monitor.
In addition to origination, Matrix Bank also buys participations in
commercial real estate loans primarily from banks located in the Colorado
market. The loans that we acquire through participations are underwritten with
the same diligence and standards as though we were originating them directly.
ABS offers financing to charter schools located primarily in Arizona,
Colorado, Florida and Texas for the purchase of real estate, modular space and
equipment. The offered financing is generally fully amortizing and completed on
a tax-exempt basis. On occasion, we also provide cash flow loans to charter
schools. During 2001, we funded $27.1 million loans to charter schools and, as
of December 31, 2001, we had a total of $59.5 million loans to charter schools.
Charter school financing involves inherent risks such as:
o the loan-to-value ratio for real estate transactions can be as high as
90% and for furniture, fixtures and equipment and modular space it is
100%;
o there are no personal guarantees; and
o cash flow to service the financing is derived from the school's
student count. If the school's student count decreases, or is less
than projected, the school's ability to make scheduled payments on the
financing may be impaired.
In addition, Matrix Bank offers a variety of lending products to meet the
specific needs of its customers. These products include fully amortizing secured
installment loans, manufactured housing financing, credit card programs, home
equity loans, business loans and share loans. In addition to the secured
consumer loans, Matrix Bank extends unsecured loans, on a limited basis, to
qualified borrowers based on their financial statements and creditworthiness.
Matrix Bank originates the majority of its consumer lending within the Las
Cruces, New Mexico market area.
Mortgage Servicing Activities
Residential Mortgage Loan Servicing. We conduct our residential mortgage
loan servicing activities exclusively through Matrix Financial including the
residential mortgage loan servicing that Matrix Financial provides as
subservicer for Matrix Bank's servicing portfolio. At December 31, 2001, Matrix
Financial serviced approximately $5.7 billion of mortgage loans, excluding
$889.0 million subserviced for companies that are not affiliated with us.
Servicing mortgage loans involves a contractual right to receive a fee for
processing and administering loan payments. This processing involves collecting
monthly mortgage payments on behalf of investors, reporting information to those
investors on a monthly basis and maintaining custodial escrow accounts for the
payment of principal and interest to investors and property taxes and insurance
premiums on behalf of borrowers. These payments are held in custodial escrow
accounts at Matrix Bank. Matrix Bank invests this money in interest-earning
assets with returns that historically have been greater than could be realized
by Matrix Financial using the custodial escrow deposits as compensating balances
to reduce the effective borrowing cost on its warehouse credit facilities.
As compensation for its mortgage servicing activities, Matrix Financial
receives servicing fees, plus any late charges collected from delinquent
borrowers and other fees incidental to the services provided. In the event of
9
default by the borrower, Matrix Financial receives no servicing fees until the
default is cured. At December 31, 2001, Matrix Financial's annual
weighted-average servicing fee was 0.39%.
Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
Our policy is to accept only a limited number of servicing assets on a recourse
basis. As of December 31, 2001, on the basis of outstanding principal balances,
less than 1% of our owned mortgage servicing contracts involved recourse
servicing. To the extent that servicing is done on a recourse basis, we are
exposed to credit risk with respect to the underlying loan in the event of a
repurchase. Additionally, many of our nonrecourse mortgage servicing contracts
owned require us to advance all or part of the scheduled payments to the owner
of the mortgage loan in the event of a default by the borrower. Many owners of
mortgage loans also require the servicer to advance insurance premiums and tax
payments on schedule even though sufficient escrow funds may not be available.
Therefore, we must bear the funding costs associated with making such advances.
If the delinquent loan does not become current, these advances are typically
recovered at the time of the foreclosure sale. Foreclosure expenses, which may
include legal fees or property maintenance, are generally not fully reimbursable
by Fannie Mae, Freddie Mac or Ginnie Mae, for which agencies we provide
significant amounts of mortgage loan servicing. As of December 31, 2001, we had
advanced approximately $9.6 million in funds on behalf of third party investors.
A foreclosure reserve is estimated and included in the consolidated financial
statements. For the Veteran's Administration loans sold and serviced for the
Ginnie Mae, which are sold on a nonrecourse basis, the Veteran's Administration
loan guarantees may not cover the entire principal balance and, in that case,
the Company is responsible for the losses which exceed the Veteran's
Administration's guarantee.
Mortgage servicing rights represent a contractual right to service, and not
a beneficial ownership interest in, underlying mortgage loans. Failure to
service the loans in accordance with contract or other applicable requirements
may lead to the termination of the mortgage servicing rights and the loss of
future servicing fees. To date, there have been no terminations of mortgage
servicing rights by any mortgage loan owners because of our failure to service
the loans in accordance with our obligations.
In order to track information on our servicing portfolio, Matrix Financial
utilizes a data processing system provided by Alltel Information Services, Inc.
Because Alltel is one of the largest mortgage banking service bureaus in the
United States, we believe that this system gives Matrix Financial capacity to
support expansion of our residential mortgage loan servicing portfolio.
The following table sets forth certain information regarding the
composition of our mortgage servicing portfolio, excluding loans subserviced for
others, as of the dates indicated:
As of December 31,
---------------------------------------------------
2001 2000 1999
-------------- -------------- ----------------
(In thousands)
FHA insured/VA guaranteed residential........................ $ 2,187,686 $1,608,115 $ 926,179
Conventional loans........................................... 3,272,109 3,764,586 4,891,809
Other loans.................................................. 196,570 145,262 71,727
-------------- --------------- ---------------
Total mortgage servicing portfolio...................... $ 5,656,365 $5,517,963 $5,889,715
=============== ============== ===============
Fixed rate loans............................................. $ 5,009,501 $4,346,813 $4,926,055
Adjustable rate loans........................................ 646,864 1,171,150 963,660
--------------- -------------- ---------------
Total mortgage servicing portfolio...................... $ 5,656,365 $5,517,963 $5,889,715
=============== ============== ===============
The following table shows the delinquency statistics for the mortgage loans
serviced by Matrix Financial, excluding loans subserviced for others, compared
with national average delinquency rates as of the dates presented. Delinquencies
and foreclosures for the mortgage loans serviced by us generally exceed the
national average due to high rates of delinquencies and foreclosures on certain
bulk loan and bulk servicing portfolios that we acquired at a discount. In
September 1999, we acquired a servicing portfolio with higher loan delinquency.
The majority of loans in that portfolio were in active bankruptcy or
foreclosure. This portfolio was responsible for the majority of the increase in
the percentage of our servicing portfolio that was delinquent at both December
31, 2000 and 1999.
10
As of December 31,
-------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------------------------
National National National
Company Average(1) Company Average(1) Company Average(1)
---------------------- ---------- ----------------------- ---------- ---------------------- -----------
Number Percentage Percentage Number Percentage Percentage Number Percentage Percentage
of of Servicing of of of Servicing of of of Servicing of
Loans Portfolio Loans Loans Portfolio Loans Loans Portfolio Loans
--------- ------------ ---------- ---------- ------------ ---------- --------- ------------ -----------
Loans delinquent
for:
30-59 days..... 4,610 5.35% 3.35% 5,214 5.64% 3.16% 4,079 4.50% 2.74%
60-89 days..... 932 1.08 0.79 992 1.07 0.73 1,120 1.24 0.63
90 days and over 616 0.72 0.73 530 0.58 0.61 2,426 2.68 0.56
--------- ------------ ---------- ---------- ------------ ---------- --------- ------------ -----------
Total
delinquencies.. 6,158 7.15% 4.87% 6,736 7.29% 4.50% 7,625 8.42% 3.93%
========= ============ ========== ========== ============ ========== ========= ============ ===========
Foreclosures.... 757 0.88% Not 1,027 1.11% 0.84% 905 1.00% 0.98%
Available
========= ============ ========== ========== ============ ========== ========= ============ ===========
- ----------
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (Data as of September 30,
2001, December 31, 2000 and December 31, 1999, respectively. Data as of
September 30, 2001 used as December 31, 2001 not yet available and data
regarding foreclosures was not available.)
The following table sets forth certain information regarding the number and
aggregate principal balance of the mortgage loans serviced by Matrix Financial,
including both fixed and adjustable rate loans, excluding loans subserviced for
others, at various interest rates:
As of December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------- -----------------------------------------------------------------------
Percentage Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance
---- --------- ---------- ------------ --------- ---------- ------------ -------- ----------- ------------
(Dollars in thousands)
Less than 7.00%.... 16,024 $1,443,862 25.53% 6,317 $ 474,596 8.60 % 7,301 $ 618,659 10.50 %
7.00%--7.99%...... 23,815 1,895,797 33.52 18,424 1,335,738 24.21 30,848 2,467,177 41.89
8.00%--8.99%...... 19,002 1,144,290 20.23 27,691 1,801,131 32.64 28,620 1,822,777 30.95
9.00%--9.99%...... 12,122 542,621 9.59 19,369 1,002,226 18.16 15,892 647,918 11.00
10.00% and over.... 15,192 629,795 11.13 20,603 904,272 16.39 7,898 333,184 5.66
---------- ---------- ----------- ---------- ---------- ------------ -------- ---------- ------------
Total............ 86,155 $5,656,365 100.00% 92,404 $5,517,963 100.00 % 90,559 $5,889,715 100.00 %
========== ========== =========== ========== ========== ============ ======== ========== ============
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining contractual maturity of the mortgage loans serviced by Matrix
Financial, excluding loans subserviced for others, as of the dates shown. The
changes in the remaining maturities as a percentage of unpaid principal between
2001, 2000 and 1999, as reflected below, are the result of acquisitions of
mortgage servicing rights completed during 2001 and 2000.
11
As of December 31,
------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid
of of Number Principal Principal of of Number Principal Principal of of Number Principal Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount Loans of Loans Amount Amount
--------- ------- --------- ---------- -------- ------- ---------- --------- --------- ------- ---------- ---------- --------
(Dollars in thousands)
1-5 years... 11,539 13.39% $ 169,794 3.00% 19,489 21.09% $ 321,196 5.82% 34,990 38.64% $1,043,559 17.72%
6-10 years... 14,711 17.08 442,458 7.82 15,891 17.20 411,152 7.45 10,364 11.44 577,077 9.80
11-15 years... 12,101 14.05 729,162 12.89 14,981 16.21 779,922 14.13 8,691 9.60 560,212 9.51
16-20 years... 18,013 20.91 1,428,794 25.26 27,779 30.06 2,505,728 45.41 18,624 20.57 1,766,824 30.00
21-25 years... 2,219 2.58 246,835 4.36 4,522 4.90 444,679 8.06 3,417 3.77 381,663 6.48
More than 25
years......... 27,572 32.00 2,639,322 46.66 9,742 10.54 1,055,286 19.13 14,473 15.98 1,560,380 26.49
------- --------- ---------- -------- ------- ---------- --------- --------- ------- ---------- ---------- --------
Total....... 86,155 100.00% $5,656,365 100.00% 92,404 100.00% $5,517,963 100.00% 90,559 100.0 % $5,889,715 100.00%
======= ========= ========== ======== ======= ========== ========= ========= ======= ========== ========= ========
Our servicing activity is diversified throughout all 50 states with
concentrations at December 31, 2001 in California, Texas, Missouri, Arizona and
Florida of approximately 14.5%, 14.5%, 16.4%, 8.2% and 5.6%, respectively, based
on aggregate outstanding unpaid principal balances of the mortgage loans
serviced.
Acquisition of Servicing Rights. Our strategy with respect to mortgage
servicing focuses on acquiring servicing for which the underlying mortgage loans
tend to be more seasoned and to have higher interest rates, lower principal
balances and higher custodial escrow balances than newly originated mortgage
loans. We believe this strategy allows us to reduce our prepayment risk, while
allowing us to capture relatively high custodial escrow balances in relation to
the outstanding principal balance. During periods of declining interest rates,
prepayments of mortgage loans usually increase as homeowners seek to refinance
at lower interest rates, resulting in a decrease in the value of the servicing
portfolio. Mortgage loans with higher interest rates and/or higher principal
balances are more likely to result in prepayments since the cost savings to the
borrower from refinancing can be significant. During 2001, interest rates
continued to decrease throughout the year. While our prepayment rates increased,
despite the strategy mentioned above, we remained opportunistic in our
acquisition philosophy. Due to the interest rates prevalent during 2001 and the
lack of the discussed servicing products available, we purchased only minimal
servicing during 2001. If higher balance, less-seasoned portfolios are available
at our desired internal rate of return, we may, from time to time, pursue such
acquisitions.
13
The following table shows quarterly and annual average prepayment rate
experience on the mortgage loans serviced by Matrix Financial, excluding loans
subserviced by and for others:
For the Year Ended December 31,
-----------------------------------------------------
2001(1)(4) 2000(2)(4) 1999(3)(4)
---------------- ---------------- ----------------
Quarter ended:
December 31.... 24.67% 12.50% 13.63%
September 30... 25.13 12.70 17.43
June 30........ 24.63 12.70 24.70
March 31....... 17.13 10.50 26.47
---------------- ---------------- ----------------
Annual average.... 22.89% 12.10% 20.56%
================ ================ ================
- ----------
(1) These prepayment rates exclude prepayment experience for mortgage servicing
rights subserviced for us by others of $889.0 million, $581.8 million,
$306.9 million and $1.1 billion for the quarters ended December 31,
September 30, June 30, and March 31, 2001, respectively.
(2) These prepayment rates exclude prepayment experience for mortgage servicing
rights subserviced for us by others of $447 million, $0, $16 million and $0
for the quarters ended December 31, September 30, June 30 and March 31,
2000, respectively.
(3) These prepayment rates exclude prepayment experience for mortgage servicing
rights subserviced for us by others of $0, $576 million, $1.0 billion and
$238 million for the quarters ended December 31, September 30, June 30, and
March 31, 1999, respectively.
(4) These prepayment rates do not include prepayments that resulted from us
targeting our own servicing portfolio for refinance opportunities.
Historically, we acquired substantially all of our mortgage servicing
rights in the secondary market. The industry expertise of Matrix Capital Markets
and Matrix Financial allows us to capitalize upon inefficiencies in this market
when acquiring mortgage servicing rights. Prior to acquiring mortgaging
servicing rights, we analyze a wide range of characteristics of each portfolio
considered for purchase. This analysis includes projecting revenues and expenses
and reviewing geographic distribution, interest rate distribution, loan-to-value
ratios, outstanding balances, delinquency history and other pertinent
statistics. Due diligence is performed either by our employees or a designated
independent contractor on a representative sample of the mortgages involved. The
purchase price is based on the present value of the expected future cash flow,
calculated by using a discount rate, loan prepayment, default rate and other
assumptions that we consider to be appropriate to reflect the risk associated
with the investment. In 2000, we began to retain a portion of the mortgage
servicing rights generated from the origination platform. Throughout 2000 and
for the majority of 2001, we generally retained the servicing on the loans sold
to Ginnie Mae. In the fourth quarter of 2001, we began to retain the servicing
on loans sold to Fannie Mae and Freddie Mac and sold our newly originated Ginnie
Mae servicing. The decision on which servicing to retain or sell is based on
factors including interest rate environment, secondary market pricing for the
servicing, our capital levels and liquidity. As of December 31, 2001, in terms
of unpaid principal amount, approximately $1.4 billion of the mortgage servicing
rights in our portfolio were from loans originated and sold by Matrix Financial.
Sales of Servicing Rights. We periodically sell our purchased mortgage
servicing portfolios and generally sell a portion of the mortgage servicing
rights on new loans that we originate, as mentioned above. These sales generate
cash at the time of sale but reduce future cash flow and servicing fee income.
We sold mortgage servicing rights on loans that we originated having an
aggregate principal amount of $1.7 billion during the year ended December 31,
2001. Periodically, we may also sell purchased mortgage servicing rights to
restructure our portfolio or generate revenues. Purchased mortgage servicing
rights were sold on loans having an aggregate principal amount of $126.8 million
during the year ended December 31, 2001 for net gains of approximately $200,000.
We anticipate that we will continue to sell a portion of our originated
mortgage servicing rights on new loans that we originate. We also may sell
purchased mortgage servicing rights. We intend to base decisions regarding
13
future mortgage servicing sales upon our cash requirements, purchasing
opportunities, capital needs, earnings and the market price for mortgage
servicing rights. During a quarter in which we sell purchased mortgage servicing
rights, reported income will tend to be greater than if we had not made the sale
during that quarter. Prices obtained for mortgage servicing rights vary
depending on servicing fee rates, anticipated prepayment rates, average loan
balances, remaining time to maturity, servicing costs, custodial escrow
balances, delinquency and foreclosure experience and purchasers' required rates
of return.
In the ordinary course of selling mortgage servicing rights in accordance
with industry standards, we make certain representations and warranties to
purchasers of mortgage servicing rights. If a borrower defaults and there has
been a breach of representations or warranties and we have no third party
recourse, we may become liable for the unpaid principal and interest on
defaulted loans. In such a case, we may be required to repurchase the mortgage
loan and bear any subsequent loss on the loan. In connection with any purchases
of mortgage servicing rights that we make, we also are exposed to liability to
the extent that an originator or seller of the mortgage servicing rights is
unable to honor its representations and warranties. Historically, we have not
incurred material losses due to breaches of representations and warranties and
we do not anticipate any future material losses due to breaches of
representations and warranties; however, there can be no assurance that we will
not experience such losses.
Hedging of Servicing Rights. Our investment in mortgage servicing rights is
exposed to potential impairment in certain interest rate environments. As
previously discussed, the prepayment of mortgage loans increases during periods
of declining interest rates as homeowners seek to refinance their loan to lower
interest rates. If the level of prepayment on segments of our mortgage servicing
portfolio reaches a level higher than we projected for an extended period of
time, the associated basis in the mortgage servicing rights may be impaired. To
mitigate this risk of impairment due to declining interest rates, we initiated a
hedging strategy during 1997 that used a program of exchange-traded futures and
options. Through December 31, 2000, our hedging program qualified for hedge
accounting treatment based on a high degree of statistical correlation and then
current accounting guidance. With the required adoption of SFAS 133 on January
1, 2001, we did not attempt to qualify for hedge accounting treatment due to the
requirements in the standard that are necessary to do so. As such, currently, we
are not hedging our servicing rights. See additional information regarding the
impact of SFAS 133 in Note 2 to the consolidated financial statements included
elsewhere in this document. During 2001, based on valuation models which
incorporate, among other things, prepayment speeds, we recorded an impairment
reserve on our mortgage servicing rights totaling approximately $200,000.
Brokerage, Consulting and Outsourcing Services
Brokerage Services. Matrix Capital Markets, formerly called United
Financial, Inc., changed its name in 2001 to better identify itself as
affiliated with the Matrix family of companies. Matrix Capital Markets operates
as one of the nation's leading full-service mortgage servicing and mortgage loan
brokers. It is capable of analyzing, packaging, marketing and closing
transactions involving mortgage servicing and loan portfolios and selected
merger and acquisition transactions for mortgage banking entities. Matrix
Capital Markets markets its services to all types and sizes of market
participants, thereby developing diverse relationships.
Mortgage servicing rights are sold either on a bulk basis or a flow basis.
In a bulk sale, the seller identifies, packages and sells a portfolio of
mortgage servicing rights to a buyer in a single transaction. In a flow sale,
the seller agrees to sell to a specified buyer from time to time, at a
predetermined price, the mortgage servicing rights originated by the seller that
meet certain criteria. Matrix Capital Markets is capable of helping both buyers
and sellers with respect to bulk and flow sales of mortgage servicing rights.
We believe that the client relationships developed by Matrix Capital
Markets through its national network of contacts with commercial banks, mortgage
companies, savings associations and other institutional investors represent a
significant competitive advantage and form the basis for Matrix Capital Market's
national market presence. These contacts also enable Matrix Capital Markets to
identify prospective clients for our other subsidiaries and make referrals when
appropriate. See "--Consulting and Analytic Services" below.
Most institutions that own mortgage servicing rights have found that
careful management of these assets is necessary due to their susceptibility to
interest rate cycles, changing prepayment patterns of mortgage loans and
fluctuating earnings rates achieved on custodial escrow balances. Because
companies must capitalize originated mortgage servicing rights, management of
mortgage servicing assets has become even more critical. These management
efforts, combined with interest rate sensitivity of assets and the growth
strategies of market participants, create constantly changing supply and demand
and, therefore, constantly fluctuating price levels in the secondary market for
mortgage servicing rights.
14
The sale and transfer of mortgage servicing rights occurs in a market that
is inefficient and often requires an intermediary to match buyers and sellers.
Prices are unpublished and closely guarded by market participants, unlike most
other major financial secondary markets. This lack of pricing information
complicates an already difficult process of differentiating between servicing
product types, evaluating regional, economic and socioeconomic trends and
predicting the impact of interest rate movements. Due to its significant
contacts, reputation and market penetration, Matrix Capital Markets has access
to information on the availability of mortgage servicing portfolios, which helps
it bring interested buyers and sellers together. Due to the consolidation that
has taken place in the mortgage banking industry, the overall market, including
the number of buyers and sellers of servicing, has decreased. As a result, we
have experienced an overall decrease in both the portfolios brokered and the
corresponding revenue. In the current market, we do not anticipate this trend to
reverse.
In addition, Matrix Capital Markets provides brokerage services to buyers
and sellers of all types of loan products. Matrix Capital Markets provides loan
brokerage services to both servicing brokerage clients and non-servicing
brokerage clients. During 2001, Matrix Capital Markets continued to enhance its
ability in the areas of analyzing, brokering and acquisition of all loan
products. This was accomplished by hiring additional professional personnel and
continued cross-training of existing staff.
Consulting and Analytic Services. Matrix Capital Markets continues to make
significant commitments to its analytics department, which has developed
expertise in helping companies implement and track their "mark-to-market"
valuations and analyses. Matrix Capital Markets has enhanced its existing
valuation models and has created a software program that can be customized to
fit its customers' many different needs and unique situations in performing
valuations and analyses. In addition, Matrix Capital Markets has the
infrastructure and management information system capabilities necessary to
undertake the complex analyses required by SFAS 140. Many of the companies
affected by the implementation of SFAS 140 have outsourced this function to a
third party rather than dedicate the resources necessary to develop systems for
and perform their own SFAS 140 valuations.
Because SFAS 140 requires that mortgage servicing portfolios be valued at
the lower of cost or market value on a quarterly basis, active management of
servicing assets has become a critical component to holders of mortgage
servicing rights. Due to the risk of impairment of mortgage servicing rights as
a result of constantly changing interest rates and prepayment speeds on the
underlying mortgage portfolio, risk management of mortgage servicing rights by
holders of mortgage servicing rights portfolios, which typically takes the form
of hedging the portfolio, has become more prevalent. The SFAS 140
"mark-to-market" analyses done by Matrix Capital Markets help clients assess
which of their portfolios of mortgage servicing rights are most susceptible to
impairment due to interest rate and prepayment risk.
We believe that the services offered by the analytics department of Matrix
Capital Markets provide us with a competitive advantage in attracting and
retaining clients because we are able to offer financial services companies and
financial institutions a more complete package of services than our competitors.
In addition, Matrix Capital Markets is able to refer clients to Matrix Bank for
financing opportunities and bulk loan acquisitions and to Matrix Asset
Management for real estate management and disposition services. The full range
of services offered by Matrix Capital Markets and its affiliates further
strengthens Matrix Capital Market's client relationships.
Real Estate Management and Disposition Services. Matrix Asset Management
provides real estate management and disposition services on foreclosed
properties owned by financial services companies and financial institutions
across the United States. In addition to the unaffiliated clients currently
served by Matrix Asset Management, many of which are also clients of Matrix
Capital Markets, Matrix Financial uses Matrix Asset Management exclusively in
handling the disposition of foreclosed real estate for which it is responsible.
Having Matrix Asset Management, rather than Matrix Financial, provide this
service transforms the disposition process into a revenue generator for us,
since Matrix Asset Management typically collects a referral fee based on the
value of the foreclosed real estate from the real estate broker involved in the
sale transaction. Because Matrix Asset Management typically collects a portion
of its fee from the real estate broker, Matrix Asset Management is able to
provide this disposition service on an outsourced basis at a reduced cost to the
mortgage loan servicer. Matrix Asset Management is able to pass a portion of the
cost of the disposition on to the real estate broker because of the volume it
generates.
In addition, Matrix Asset Management provides limited collateral valuation
opinions to clients who are interested in assessing the value of the underlying
collateral on nonperforming mortgage loans, as well as to clients such as Matrix
15
Bank and other third party mortgage loan originators and buyers interested in
evaluating potential bulk purchases of mortgage loans.
School Services. In addition to providing financing to charter schools as
mentioned in "Lending Activities --Commercial and Other Lending," ABS also
provides a wide variety of outsourced business and consulting services to
charter schools. The most basic services offered by ABS include fund accounting,
cash management, budgeting, governmental reporting and payroll and accounts
payable processing. Additionally, ABS consults with and offers programs to
charter schools in the following areas:
o facility and safety management;
o technology;
o policy development;
o grant administration; and
o comprehensive insurance coverage.
ABS also provides administrative and instructional leadership to some charter
schools by placing administrators on-site at the charter schools to take a
hands-on approach and work with the schools with regard to curriculum
development, special education and personnel management.
The business services provided by ABS are integral to the financing
division, as these services allow ABS to use their knowledge of the school's
financial condition and the capability of the schools' operators to make
informed decisions in the underwriting of charter school financing. The services
also give ABS a significant advantage in the servicing and ongoing monitoring of
the schools, which we believe is imperative to the collection process and the
overall success of our financing efforts.
ABS has begun to expand its services to include more operational control
over individual charter schools, which consists of active oversight of the
day-to-day operations of the charter, including the selection of curriculum. The
expansion of the services applies to both independent charter schools and
charter schools managed by ABS.
Self-Directed Trust, Custody and Clearing Activities
Self-Directed Trust and Custody Services. Sterling Trust provides
administrative services for self-directed individual retirement accounts,
qualified business retirement plans and personal custodial accounts, as well as
corporate escrow and paying agent services. In addition, Sterling Trust offers
specialized custody and clearing services to investment professionals. These
services are marketed on a nationwide basis to the financial services industry,
specifically broker-dealers, registered representatives, financial planners and
advisors, tax professionals, insurance agents and investment product sponsors.
The advantage offered by Sterling Trust is the ability to hold a wide array of
publicly traded investments, as well as nonstandard assets and private placement
offerings.
Sterling Trust does not offer financial planning or advising services, nor
does it recommend, sell or solicit any investments. Sterling Trust acts only as
a directed custodian and is not affiliated with any investment. It has always
been Sterling Trust's mission to keep this independence to ensure that high
quality services are offered without any conflicting interests. Sterling Trust
executes no investment transaction without the direction of the account holder
or the account holder's authorized representative.
At December 31, 2001, Sterling Trust had assets under administration of
over $6.0 billion.
Clearing Services. Matrix Settlement & Clearance Services, our joint
venture, provides automated clearing of mutual funds utilizing the National
Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance &
Settlement platform for banks, trust companies, third party administrators and
registered investment advisors. In performing services for its customers, Matrix
Settlement & Clearance Services generates low-cost deposits and trust and
custodial fees for the Company. As of December 31, 2001, Matrix Settlement &
Clearance Services had 56 clients under contract with those clients
administering approximately $7.6 billion in funds that would be eligible for
inclusion in the automated clearing environment of the National Securities
Clearing Corporation.
During 2001, Matrix Settlement & Clearance Services established its
subsidiary, MSCS Financial Services, LLC, which began operations January 2, 2002
as a NASD registered broker-dealer.
16
Through our wholly owned subsidiary, Matrix Advisory Services, LLC, we plan
to offer an Internet-based private wealth management service through the
utilization of proprietary asset allocation models in 2002 as a complementary
business to the clearing operation. The model was developed and will be
supported by a nationally recognized research and investment firm with whom we
have an exclusive agreement. This research and investment firm will, in most
cases, act as the investment advisor to the client. The advantage that our
service will offer is a turnkey approach with the automation of the mutual fund
clearing.
Competition
We compete for the acquisition of mortgage servicing rights and bulk loan
portfolios mainly with mortgage companies, savings associations, commercial
banks and other institutional investors. We believe that we have competed
successfully for the acquisition of mortgage servicing rights and bulk loan
portfolios by relying on the advantages provided by our unique corporate
structure and the secondary market expertise of our employees.
We believe that Matrix Bank's most direct competition for deposits comes
from local financial institutions. Customers distinguish between market
participants based primarily on price and, to a lesser extent, the quality of
customer service and name recognition. Matrix Bank's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
we expect additional significant competition for deposits from corporate and
governmental debt securities, as well as from money market mutual funds. Matrix
Bank competes for conventional deposits by emphasizing quality of service,
extensive product lines and competitive pricing.
For mortgage loan and mortgage servicing rights, brokerage and consulting,
we compete mainly with other mortgage banking consulting firms and national and
regional investment banking companies. We believe that the customers distinguish
between market participants based primarily on customer service. Matrix Capital
Markets competes for its brokerage and consulting activities by:
o recruiting qualified and experienced sales people;
o developing innovative sales techniques;
o offering superior analytical services;
o providing financing opportunities to its customers through its
affiliation with Matrix Bank; and
o seeking to provide a higher level of service than is furnished by its
competitors.
In originating mortgage loans, Matrix Financial and Matrix Bank compete
mainly with other mortgage companies, finance companies, savings associations
and commercial banks. Customers distinguish among market participants based
primarily on price and, to a lesser extent, the quality of customer service and
name recognition. Aggressive pricing policies of our competitors, especially
during a declining period of mortgage loan originations, could in the future
result in a decrease in our mortgage loan origination volume and/or a decrease
in the profitability of our loan originations, thereby reducing our revenues and
net income. We compete for loans by offering competitive interest rates and
product types and by seeking to provide a higher level of personal service to
mortgage brokers and borrowers than is furnished by our competitors. However, we
do not have a significant market share of the lending markets in which we
conduct operations.
Sterling Trust faces considerable competition in all of the services and
products that it offers, mainly from other self-directed trust companies and
broker-dealers. Sterling Trust also faces competition from other trust companies
and trust divisions of financial institutions. Sterling Trust's niche has been,
and will continue to be, providing high quality customer service and servicing
nonstandard retirement products. In an effort to increase market share, Sterling
Trust will endeavor to provide superior service, offer technologically advanced
solutions, expand its marketing efforts, provide competitive pricing and
continue to diversify its product mix.
Matrix Asset Management competes against other companies that specialize
in providing real estate management and disposition services on foreclosed
property. Additionally, clients or potential clients that opt to perform these
services in-house diminish Matrix Asset Management's market.
ABS competes with other outsourcing companies and Educational Management
Organizations, as well as schools that prefer to perform the services offered by
ABS in-house.
17
Employees
At December 31, 2001, the Company had 960 employees. We believe that our
relations with our employees are good. The Company is not party to any
collective bargaining agreement.
Regulation and Supervision
Set forth below is a brief description of various laws and regulations
affecting our operations. The description of laws and regulations contained in
this document does not purport to be complete and is qualified in its entirety
by reference to applicable laws and regulations.
Any change in applicable laws, regulations or regulatory policies may have
a material effect on our business, operations and prospects.
Matrix Bancorp. We are a unitary savings and loan holding company within
the meaning of the Home Owners' Loan Act. As such, we are subject to Office of
Thrift Supervision regulation, examination, supervision and reporting
requirements. In addition, the Office Thrift Supervision has enforcement
authority over us and our savings association and non-savings association
subsidiaries. Among other things, this authority permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a
serious risk to the financial safety, soundness or stability of our subsidiary
savings institution, Matrix Bank. In addition, Matrix Bank must notify the
Office of Thrift Supervision at least 30 days before making any capital
distribution to us.
As a unitary savings and loan holding company that has been in existence
previous to May 4, 1999, we generally are not restricted under existing laws as
to the types of business activities in which we may engage, provided that Matrix
Bank continues to be a "qualified thrift lender" under the Home Owners' Loan
Act. To maintain its status as a qualified thrift lender, Matrix Bank must
maintain a minimum percentage of its assets in qualified thrift investments
unless the Office of Thrift Supervision grants an exception to this requirement.
In general, qualified thrift investments include certain types of residential
mortgage loans and mortgage-backed securities. If we acquire control of another
savings association as a separate subsidiary, we would become a multiple savings
and loan holding company. Multiple savings and loan holding companies may only
engage in those activities permissible for a financial holding company under the
Bank Holding Company Act of 1956. Generally, financial holding companies may
only engage in activities such as banking, insurance and securities activities,
as well as merchant banking activities under certain circumstances. In addition,
if Matrix Bank fails to maintain its status as a qualified thrift lender, within
one year of Matrix Bank's failure, we would be required to register as a bank
holding company under the Bank Holding Company Act of 1956.
The Change in Bank Control Act provides that no person, acting directly or
indirectly or thorough or in concert with one or more other persons, may acquire
control of a savings association unless the Office of Thrift Supervision has
been given 60 days prior written notice. The Home Owners' Loan Act provides that
no company may acquire control of a savings association without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings association (which includes its
holding company) is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25% of any class of voting stock of the
association or the ability to control the election of a majority of the
directors of the association. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or more than 25% of any class of stock of a savings
association, where certain enumerated "control factors" are also present in the
acquisition. The Office of Thrift Supervision may prohibit an acquisition of
control if it would result in a monopoly or substantially lessen competition,
the financial condition of the acquiring person might jeopardize the financial
stability of the association, or the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Gramm-Leach-Bliley. The Gramm-Leach-Bliley Act of 1999 (otherwise known as
the "Financial Services Modernization Act") eliminated many federal and state
law barriers to affiliations among banks, securities firms, insurance companies
and other financial service providers. The law revised and expanded the Bank
Holding Company Act framework to permit a holding company structure to engage in
a full range of financial activities through a new entity known as a "Financial
Holding Company." "Financial activities" is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determined to be financial in nature, incidental to
18
such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
The Financial Services Modernization Act prohibits unitary savings and
loan holding companies formed after May 4, 1999 from engaging in nonfinancial
activities. We are a grandfathered unitary savings and loan holding company. The
Financial Services Modernization Act has not had a material adverse effect on
our operations. However, the Financial Services Modernization Act permits banks,
securities firms and insurance companies to affiliate. This has continued a
trend in the financial services industry toward further consolidation. The
Financial Services Modernization Act could result in an increasing amount of
competition from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources. In addition, the Financial Services Modernization Act may have an
anti-takeover effect because it may tend to limit our attractiveness as an
acquisition candidate to other savings and loan holding companies and financial
holding companies.
The Office of Thrift Supervision is proposing to require certain savings
and loan holding companies to notify the Office of Thrift Supervision 30 days
before undertaking certain significant new business activities. According to the
Office of Thrift Supervision, the notice will enable the agency to assess the
potential impact on the risk profile of the consolidated entity and subsidiary
thrifts. The Office of Thrift Supervision also seeks comment on its proposal to
codify its current practices for reviewing the capital adequacy of savings and
loan holding companies and, when necessary, requiring additional capital on a
case-by-case basis. The Office of Thrift Supervision could object or approve
with conditions an activity or transaction if it finds a material risk to the
safety and soundness and stability of the thrift. It is possible that such
regulations, if adopted, would impose time delays and potential increased
capital costs to the operations of Matrix Bank.
Federal Savings Bank Operations. Matrix Bank is subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator, and potentially by the Federal Deposit Insurance
Corporation, which insures its deposits up to applicable limits. Such regulation
and supervision:
o establishes a comprehensive framework of activities in which Matrix
Bank can engage;
o limits the types and amounts of investments permissible for Matrix
Bank;
o limits the ability of Matrix Bank to extend credit to any given
borrower;
o significantly limits the transactions in which Matrix Bank may engage
with its affiliates;
o requires Matrix Bank to meet a qualified thrift lender test that
requires Matrix Bank to invest in qualified thrift investments, which
include primarily residential mortgage loans and related investments;
o places limitations on capital distributions by savings associations
such as Matrix Bank, including cash dividends;
o imposes assessments to the Office of Thrift Supervision to fund its
operations;
o establishes a continuing and affirmative obligation, consistent with
Matrix Bank's safe and sound operation, to help meet the credit needs
of its community, including low and moderate income neighborhoods;
o requires Matrix Bank to maintain certain noninterest-bearing reserves
against its transaction accounts;
o establishes various capital categories resulting in various levels of
regulatory scrutiny applied to the institutions in a particular
category; and
o establishes standards for safety and soundness.
Matrix Bank must submit annual audit reports prepared by independent
auditors to federal and state regulators. Auditors must receive examination
reports, supervisory agreements and reports of enforcement actions. In addition,
an attestation by the auditor regarding the statements of management relating to
the internal controls must be submitted to the Office of Thrift Supervision. The
audit committees of such institutions must include members with experience in
banking or financial management, must have access to outside counsel and must
not include representatives of large customers. The regulatory structure is
designed primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities. Any change in
these regulations, whether by the Office of Thrift Supervision, the Federal
Deposit Insurance Corporation or Congress, could have a material impact on
Matrix Bank and its operations.
Transactions with Affiliates. Under current federal law, Sections 23A and
23B of the Federal Reserve Act govern transactions between depository
institutions and their affiliates. These provisions are made applicable to
savings associations, such as Matrix Bank, by the Home Owners' Loan Act. In a
holding company context, in general, the parent holding company of a savings
association and any companies that are controlled by the parent holding company
are affiliates of the savings association. However, the Office of Thrift
Supervision has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis. Section 23A limits the extent to which the
19
savings association or its subsidiaries may engage in certain transactions with
its affiliates. These transactions include, among other things, the making of
loans or other extensions of credit to an affiliate and the purchase of assets
from an affiliate. Generally, these transactions between the savings association
and any one affiliate cannot exceed 10% of the savings association's capital
stock and surplus, and these transactions between the savings institution and
all of its affiliates cannot, in the aggregate, exceed 20% of the savings
institution's capital stock and surplus. Section 23A also establishes specific
collateral requirements for loans or extensions of credit to an affiliate, and
for guarantees or acceptances on letters of credit issued on behalf of an
affiliate. Applicable regulations prohibit a savings association from lending to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates. Section 23B requires that
transactions covered by Section 23A and a broad list of other specified
transactions be on terms and under circumstances substantially the same, or no
less favorable to the savings association or its subsidiary, as similar
transactions with non-affiliates. In addition to the restrictions on
transactions with affiliates that Sections 23A and 23B of the Federal Reserve
Act impose on depository institutions, the regulations of the Office of Thrift
Supervision also generally prohibit a savings association from purchasing or
investing in securities issued by an affiliate. Matrix Bank engages in
transactions with its affiliates, which are structured with the intent of
complying with these regulations.
Insurance of Accounts and Regulation by the Federal Deposit Insurance
Corporation. Matrix Bank is a member of the Savings Association Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation. The deposits
of Matrix Bank are insured up to $100,000 per depositor by the Federal Deposit
Insurance Corporation. This insurance is backed by the full faith and credit of
the United States. As insurer, the Federal Deposit Insurance Corporation imposes
deposit insurance assessments and is authorized to conduct examinations of and
to require reporting by institutions insured by the Federal Deposit Insurance
Corporation. It also may prohibit any Federal Deposit Insurance
Corporation-insured institution from engaging in any activity the Federal
Deposit Insurance Corporation determines by regulation or order to pose a
serious risk to the Federal Deposit Insurance Corporation. The Federal Deposit
Insurance Corporation also may initiate enforcement actions against savings
associations and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is in
an unsafe or unsound condition.
The Federal Deposit Insurance Corporation's deposit insurance premiums are
assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation. Under the
system, institutions classified as well capitalized, as defined below, and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized, as defined below, and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
depository institutions is made by the Federal Deposit Insurance Corporation for
each semi-annual assessment period.
The Federal Deposit Insurance Corporation is authorized to increase
assessment rates, on a semi-annual basis, if it determines that the reserve
ratio of the Savings Association Insurance Fund will be less than the designated
reserve ratio of 1.25% of the Savings Association Insurance Fund's insured
deposits. In setting these increased assessments, the Federal Deposit Insurance
Corporation must seek to restore the reserve ratio to that designated reserve
level, or such higher reserve ratio as established by the Federal Deposit
Insurance Corporation. The Federal Deposit Insurance Corporation may also impose
special assessments on Savings Association Insurance Fund members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the Federal Deposit Insurance Corporation.
Since January 1, 1997, the premium schedule for insured institutions in
the Bank Insurance Fund and the Savings Association Insurance Fund has ranged
from 0 to 27 basis points. However, Savings Association Insurance Fund and Bank
Insurance Fund insured institutions are required to pay a Financing Corporation
or "FICO" assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. For the quarter ended December 31, 2002, the FICO
assessment for both Savings Association Insurance Fund and Bank Insurance Fund
insured institutions was equal to 1.84% for each $100 in domestic deposits
maintained at the institution. These assessment, which will be revised based
upon the level of Savings Association Insurance Fund and Bank Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
Brokered Deposits. Under the Federal Deposit Insurance Corporation
regulations governing brokered deposits, well capitalized associations, such as
Matrix Bank, are not subject to brokered deposit limitations, while adequately
capitalized associations are subject to certain brokered deposit limitations and
undercapitalized associations may not accept brokered deposits. At December 31,
2001, Matrix Bank had $303.0 million of brokered deposits. In the event Matrix
Bank is not permitted to accept brokered deposits in the future, it would have
to find replacement sources of funding. It is possible that such alternatives,
if available, would result in a higher cost of funds.
20
Matrix Bank's Capital Ratios. Federal law requires, among other things,
that federal bank regulatory authorities take "prompt corrective action" with
respect to savings institutions that do not meet minimum capital requirements.
For these purposes, the law establishes five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
The Office of Thrift Supervision has adopted regulations to implement the
prompt corrective action legislation. An institution is deemed to be:
o "well capitalized" if it has a total risk-based capital ratio of 10%
or greater and a leverage ratio of 5% or greater; o "adequately
capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier I risk-based capital ratio of 4% or greater and
generally a leverage ratio of 4% or greater;
o "undercapitalized" if it has a total risk-based capital ratio of less
than 8%, a Tier I risk-based capital ratio of less than 4%, or
generally a leverage ratio of less than 4%;
o "significantly undercapitalized" if it has a total risk-based capital
ratio of less than 6%, a Tier I risk-based capital ratio of less than
3%, or a leverage ratio of less than 3%; and
o "critically undercapitalized" if it has a ratio of tangible equity (as
defined in the regulations) to total assets that is equal to or less
than 2%.
As of December 31, 2001, Matrix Bank was a "well capitalized" institution.
"Undercapitalized" institutions must adhere to growth, capital
distribution and dividend and other limitations and are required to submit a
capital restoration plan with the Office of Thrift Supervision within 45 days
after an association receives notice of such undercapitalization. A savings
institution's compliance with its capital restoration plan is required to be
guaranteed by any company that controls the "undercapitalized" institution in an
amount equal to the lesser of 5% of total assets when deemed "undercapitalized"
or the amount necessary to achieve the status of "adequately capitalized." If an
"undercapitalized" savings institution fails to submit an acceptable plan, it is
treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" institutions must comply with one or more of a number of
additional restrictions, including an order by the Office of Thrift Supervision
to sell sufficient voting stock to become "adequately capitalized," requirements
to reduce total assets and cease receipt of deposits from correspondent banks or
dismiss directors or officers, and restriction on interest rates paid on
deposits, compensation of executive officers and capital distributions to the
parent holding company. "Critically undercapitalized" institutions must comply
with additional sanctions, including, subject to a narrow exception, the
appointment of a receiver or conservator within 270 days after it obtains this
status.
The following table indicates Matrix Bank's regulatory capital ratios at
December 31, 2001:
As of
December 31, 2001
----------------------------------
Core Risk-Based
Capital Capital
---------------- -----------------
(Dollars in thousands)
Shareholder's equity/GAAP capital............................................. $ 103,360 $ 103,360
Disallowed assets............................................................. 3,386 3,386
Unrealized gain on available for sale securities.............................. (25) (25)
Additional capital items:
General valuation allowances............................................. -- 6,361
---------------- -----------------
Regulatory capital as reported to the Office of Thrift Supervision............ 99,949 106,310
Minimum capital requirement as reported to the Office of Thrift Supervision... 61,671 72,418
---------------- -----------------
Regulatory capital-excess..................................................... $ 38,278 $ 33,892
================ =================
Capital ratios................................................................ 6.48% 11.74%
Well capitalized requirement.................................................. 5.00% 10.00%
Federal Home Loan Bank System. Matrix Bank is a member of the Federal Home
Loan Bank system, which consists of 12 regional Federal Home Loan Banks. The
Federal Home Loan Bank provides a central credit facility primarily for member
associations and administers the home financing credit function of savings
associations. The Federal Home Loan Bank advances must be secured by specified
types of collateral and may only be obtained for the purpose of providing funds
for residential housing finance. The Federal Home Loan Bank funds its operations
primarily from proceeds derived from the sale of consolidated obligations of the
21
Federal Home Loan Bank system. Matrix Bank, as a member of the Federal Home Loan
Bank system, must acquire and hold shares of capital stock in its regional
Federal Home Loan Bank in an amount equal to the greater of 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, 0.3% of total assets, or 5% of its
advances (borrowings) from the Federal Home Loan Bank. Matrix Bank was in
compliance with this requirement with an investment in Federal Home Loan Bank
stock at December 31, 2001 of $18.2 million.
Federal Reserve System. The Federal Reserve Board regulations require all
depository institutions to maintain noninterest-earning reserves at specified
levels against their transaction accounts (primarily NOW and regular checking
accounts). At December 31, 2001, Matrix Bank was in compliance with the Federal
Reserve Board's reserve requirements. Savings associations, such as Matrix Bank,
are authorized to borrow from the Federal Reserve Bank "discount window," but
the Federal Reserve Board regulations require institutions to exhaust other
reasonable alternative sources of funds, including Federal Home Loan Bank
borrowings, before borrowing from the Federal Reserve Bank.
Mortgage Banking Operations. The rules and regulations applicable to our
mortgage banking operations establish underwriting guidelines that, among other
things, include anti-discrimination provisions, require provisions for
inspections, appraisals and credit reports on prospective borrowers and fix
maximum loan amounts. Moreover, we are required annually to submit audited
financial statements to the Department of Housing and Urban Development, Fannie
Mae, Freddie Mac and the Government National Mortgage Association, and each
regulatory entity maintains its own financial guidelines for determining net
worth and eligibility requirements. Our operations are also subject to
examination by the Department of Housing and Urban Development, Fannie Mae,
Freddie Mac and the Government National Mortgage Association at any time to
assure compliance with the applicable regulations, policies and procedures.
Mortgage loan origination activities are subject to, among other laws, the Equal
Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate
Settlement Procedures Act of 1974, and the regulations promulgated under these
laws that prohibit discrimination and require the disclosure of certain basic
information to mortgagors concerning credit terms and settlement costs.
Moreover, the Office of Thrift Supervision, as primary regulatory authority over
Matrix Bank (the parent of Matrix Financial), examines our mortgage banking
operations as well.
Regulation of Sterling Trust Company. Sterling Trust provides custodial
services and directed, non-discretionary trustee services. Sterling Trust was
chartered under the laws of the State of Texas, and as a Texas trust company is
subject to supervision, regulation and examination by the Texas Department of
Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is
subject to virtually all provisions of the Texas Banking Act as if the trust
company were a state chartered bank. The activities of a Texas trust company are
limited by applicable law generally to acting as a trustee, executor,
administrator, guardian or agent for the performance of any lawful act, and to
lend and accumulate money when authorized under applicable law. In addition, a
Texas trust company with capital of $1 million or more, such as Sterling Trust,
has the power to:
o purchase, sell, discount and negotiate notes, drafts, checks and other
evidences of indebtedness;
o purchase and sell securities;
o issue subordinated debentures and promissory notes; and
o exercise powers incidental to the enumerated powers of Texas trust
companies as set forth in the Texas Banking Act.
A Texas trust company, such as Sterling Trust, is generally prohibited
from accepting demand or time deposits if not insured by the Federal Deposit
Insurance Corporation.
Limitation on Capital Distributions. The Texas Finance Code prohibits a
Texas trust company from reducing its outstanding capital and certified surplus
through redemption or other capital distribution without the prior written
approval of the Texas Banking Commissioner. Moreover, Sterling Trust anticipates
that it will not pay cash dividends during 2002.
Investments. A Texas trust company is generally obligated to maintain an
amount equal to 40% of its capital and surplus in investments that are readily
marketable and that can be converted into cash within four business days. So
long as it complies with those requirements, a Texas trust company generally is
permitted to invest its corporate assets in any investment otherwise permitted
by law. Generally, a Texas trust company cannot invest an amount in excess of
15% of its capital and certified surplus in the securities of a single issuer.
22
Branching. The Texas Banking Act permits a Texas trust company to
establish and maintain branch offices at any location within the state if it
first obtains written approval of the Texas Banking Commissioner.
Transactions with Related Parties. The Texas Banking Act prohibits the
sale or lease of an asset of a Texas trust company, or the purchase or lease of
an asset by a Texas trust company, where the transaction involves an officer,
director, principal shareholder or affiliate, unless the transaction is approved
by a disinterested majority of the board of directors or the written approval of
the Texas Banking Commissioner is first obtained. In no event, however, may a
Texas trust company lease real property in a transaction involving an officer,
director, principal shareholder or affiliate without the prior approval of the
Texas Banking Commissioner.
Enforcement. Under applicable provisions of the Texas Banking Act, the
Texas Banking Commissioner has the power to issue enforcement actions against a
Texas trust company or any officer, employee or director of a Texas trust
company. In addition, in certain circumstances, the Texas Banking Commissioner
may remove a present or former officer, director or employee of a Texas trust
company from office or employment, and may prohibit a shareholder or other
persons participating in the affairs of a Texas trust company from such
participation. The Texas Banking Commissioner has the authority to assess civil
penalties of up to $500 per day against a Texas trust company (penalties against
individuals may be higher) for violations of a cease and desist, removal or
prohibition order. The Texas Banking Commissioner may also refer violations of a
cease and desist order to the attorney general for enforcement by injunction.
The Texas Banking Commissioner may pursue an order of supervision or
conservatorship if:
o the Texas Banking Commissioner determines that the Texas trust company
is in a hazardous condition and that the continuation of business
would be hazardous to the public or to the shareholders or creditors
of the Texas trust company;
o the Texas Banking Commissioner determines that the Texas trust company
has exceeded its powers;
o the Texas trust company has violated the law; or
o the Texas trust company gives written consent to supervision or
conservatorship.
The Texas Banking Commissioner also has the authority to pursue the
appointment of an independent receiver for a Texas trust company.
Capital Requirements. Applicable law generally requires a Texas trust
company to have and maintain minimum restricted capital of at least $1 million.
Sterling Trust was out of compliance with the $1 million capital requirement at
December 31, 2001. Subsequent to year-end, the Company contributed $900,000 to
Sterling Trust to meet the minimum capital requirements.
A Texas trust company may not have at anytime outstanding liabilities in
an amount that exceeds five times its capital stock and surplus, except that
with the approval of the Texas Banking Commissioner, a Texas trust company may
have outstanding liabilities in an amount that does not exceed ten times its
capital stock and surplus. The Texas Banking Commissioner may require additional
capital of a Texas trust company if the Texas Banking Commissioner determines it
necessary to protect the safety and soundness of such company. If the Texas
Banking Commissioner were to do so, or in the event Sterling Trust fails to
maintain capital of at least $1 million, there is no assurance that Sterling
Trust would be able to restore its capital or meet such additional requirements.
In either case, the Texas Banking Commissioner could pursue various enforcement
actions, such as appointing either a conservator or a receiver for Sterling
Trust. Currently, however, Sterling Trust is in compliance with all capital
requirements under Texas law.
Regulation of First Matrix Investment Services Corp. First Matrix
Investment Services Corp. is a registered broker-dealer subsidiary that is
subject to the Securities and Exchange Commission's net capital rule, Rule
15c3-1, promulgated under the Securities Exchange Act of 1934. The net capital
rule is designed to measure the general financial condition and liquidity of a
broker-dealer. Net capital generally is the net worth of a broker or dealer
(assets minus liabilities), less deductions for certain types of assets. If a
firm fails to maintain the required net capital, it may be subject to suspension
or revocation of registration by the Securities and Exchange Commission and
suspension or expulsion by the NASD, and could ultimately lead to the firm's
liquidation. The net capital rule also limits the ability of broker-dealers to
transfer large amounts of capital to parent companies and other affiliates. At
December 31, 2001, First Matrix was in compliance with these requirements with
net capital of $408,000, which was $395,000 in excess of its required net
capital of $13,000.
23
The foregoing is an attempt to summarize some of the relevant laws, rules
and regulations governing unitary savings and loan holding companies and savings
institutions but does not purport to be a complete summary of all applicable
laws, rules and regulations governing such financial institutions.
Item 2. Properties
We believe that all of our present facilities are adequate for our current
needs and that additional space is available for future expansion on acceptable
terms. The following table sets forth certain information concerning the real
estate that we own or lease:
Square Monthly Rent or
Location Feet/Acres Owned/Leased Occupant Mortgage Payment
- ----------------------- ---------------- ----------------------------------------- -------------------------- -----------------
Denver, CO............ 29,318 Leased through July 31, 2006 Matrix Bancorp, Matrix $ 45,652
Capital Markets, Matrix
Asset Management, Matrix
Bank, First Matrix and
Matrix Settlement &
Clearance Services
Phoenix, AZ........... 62,771 Leased through February 28, 2007 Matrix Financial, Matrix $ 61,463
Bank, ABS and Matrix
Bancorp
Memphis, TN........... 3,305 Leased month to month Matrix Bancorp $ 5,508
Atlanta, GA........... 4,129 Leased through August 31, 2003 Matrix Financial $ 4,843
Chicago, IL........... 1,658 Leased through April 30, 2003 Matrix Financial $ 2,728
Clayton, MO........... 6,718 Leased through June 30, 2003 Matrix Financial $ 14,275
Dallas, TX............ 6,205 Leased through May 31, 2004 Matrix Financial $ 7,756
Denver, CO............ 9,549 Leased through June 30, 2002(2) Matrix Financial $ 11,401
Houston, TX........... 4,011 Leased through October 31, 2003 Matrix Financial $ 5,682
Phoenix, AZ........... 4,040 Leased through June 14, 2002(2) Matrix Financial $ 7,070
Sacramento, CA........ 4,230 Leased through December 31, 2003 Matrix Financial $ 7,563
Santa Ana, CA......... 8,851 Leased through August 31, 2003 Matrix Financial $ 13,277
Littleton, CO......... 300 Leased month to month Matrix Financial $ 800
Denver, CO............ 23,615 Leased through December 21, 2013 Matrix Bank $ 43,294
Evergreen, CO......... 1,855 Leased through December 31, 2002 Matrix Bank $ 4,085
Las Cruces, NM........ 1,800 Owned Matrix Bank N/A
Las Cruces, NM........ 30,000(1) Owned Matrix Bank N/A
Sun City, AZ.......... 3,000 Owned Matrix Bank N/A
Westminster, CO....... 823 Leased through March 1, 2003 Matrix Bank $ 1,419
Waco, TX.............. 11,294 Leased through June 30, 2006 Sterling Trust $ 13,553
Waco, TX.............. 928 Leased through June 30, 2002(2) Sterling Trust $ 1,021
Fort Worth, TX........ 1,148 Leased through November 30, 2004 First Matrix $ 1,579
Cottonwood, AZ........ 2,400 Owned ABS N/A
Cottonwood, AZ........ 1,000 Leased month to month ABS $ 765
Tucson, AZ............ 1,879 Leased through September 30, 2002(2) ABS $ 2,400
Snowflake, AZ......... 2,850 Leased month to month ABS $ 2,760
Deerfield Beach, FL 500 Leased month to month ABS $ 750
Peoria, AZ............ 29,470 Owned ABS N/A
Phoenix, AZ........... 10,924 Owned ABS N/A
Phoenix, AZ........... 3,800 Owned ABS N/A
Phoenix, AZ........... 22,920 Owned ABS N/A
Phoenix, AZ........... 1.39 Acres Owned ABS N/A
Maricopa County, AZ... 12.893 Acres Owned ABS N/A
Flagstaff, AZ......... 1.1 Acres Owned ABS N/A
Dallas, TX............ 15,000 Owned ABS N/A
Dallas, TX............ 11.8 Acres Owned ABS N/A
Port Charlotte, FL.... 8,576 Owned ABS N/A
- ----------
(1) Of this 30,000 square feet, approximately 15,500 square feet serve as the
headquarters for Matrix Bank. Substantially all of the remaining space is
rented to unaffiliated third parties at market prices. After the change of
domicile is completed, it is anticipated that approximately 10,100 square
feet will be utilized by Matrix Bank.
(2) Management is reviewing options concerning renewal of the lease at its
expiration.
24
Item 3. Legal Proceedings
General. We are from time to time party to various litigation matters, in
most cases, involving ordinary and routine claims incidental to our business.
With respect to all pending litigation matters, our ultimate legal and financial
responsibility, if any, cannot be estimated with certainty. Therefore, no
accrual for loss has been made as of December 31, 2001. However, the outcome
with respect to one or more of these matters, if adverse, is reasonably likely
to have a material, adverse impact on the consolidated financial condition,
results of operations or cash flows of the Company.
Matrix Bancorp. In early 1999, Matrix Bancorp and Matrix Bank instituted
an arbitration action with the American Arbitration Association in Phoenix,
Arizona against Fidelity National Financial, Inc. The arbitration action arose
out of an alleged breach by Fidelity of a Merger Termination Agreement entered
into between Matrix Bancorp and Fidelity in connection with the termination of
their proposed merger. The arbitration panel has ruled that the entire Merger
Termination Agreement was unenforceable. Matrix Bancorp and Matrix Bank filed an
appeal of the arbitration panel's decision in federal district court in Phoenix,
Arizona, which has been denied. In October 2001, Fidelity initiated a second
arbitration to determine the validity of a release given in connection with the
Merger Termination Agreement. Matrix Bancorp and Matrix Bank contest that the
releases are valid and, in the alternative, have filed a counterclaim against
Fidelity demanding restitutional damages for the value of the releases if they
are determined valid.
Matrix Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings, Inc.,
Matrix Bank, and Guy A. Gibson, President and Chief Executive Officer of Matrix
Bancorp, Richard V. Schmitz, Chairman of the Board of Matrix Bancorp, and D.
Mark Spencer, Vice Chairman of Matrix Bancorp, have been named defendants in an
action filed in November 2000 styled Roderick Adderley, et al. v. Guy A. Gibson,
et al. pending in the District Court of Tarrant County, Texas, seeking to impose
joint and several liability on these defendants for the judgment against
Sterling Trust in Roderick Adderley, et al. v. Advance Financial Services, Inc.,
et al. ("Adderley I") See "--Sterling Trust" below. The plaintiffs have asserted
various theories of liability, including control person theories of liability
under the Texas Securities Act and fraudulent transfer theories of liability.
The defendants believe they have adequate defenses and intend to vigorously
defend this action. The parties have agreed to abate the action pending the
outcome of Adderley I. See "--Sterling Trust." The ultimate legal and financial
liability of the Company, if any, in this matter cannot be estimated with
certainty at this time.
Matrix Bank. A former customer of Matrix Bank is a debtor in a Chapter 11
proceeding under the Bankruptcy Code styled In re Apponline.com, Inc. and Island
Mortgage Network, Inc. pending in the United States Bankruptcy Court for the
Eastern District of New York. Prior to the bankruptcy filing, Matrix Bank had
provided the customer, Island Mortgage Network, Inc., with a purchase/repurchase
facility under which Matrix Bank purchased residential mortgage loans from
Island Mortgage, with Island Mortgage having the right or obligation to
repurchase such mortgage loans within a specified period of time. Several other
financial institutions had provided Island Mortgage with warehouse financing or
additional purchase/repurchase facilities (the "Origination Facilities"). At
this time, it appears that no other financial institution that provided an
Origination Facility to Island Mortgage has a conflicting interest with Matrix
Bank in respect of the loans purchased by Matrix Bank, which were approximately
$12.4 million in original principal amount (the "Purchased Loans").
Various third parties have instituted lawsuits, adversary proceedings or
competing bankruptcy claims against Matrix Bank claiming an equitable interest
in approximately eighteen of the Purchased Loans (approximately $2.1 million in
original principal amount). These third parties consist primarily of title
companies, closing attorneys and other closing agents that provided settlement
funds in connection with the funding of a borrower's mortgage loan, in many
cases, we believe in violation of various "good funds" laws, which typically
require a closing agent to wait for receipt of "good funds" prior to
disbursement of settlement funds on the origination of a loan. After providing
settlement funds, these closing agents discovered that Island Mortgage had
either provided company checks with insufficient funds or had inappropriately
placed a stop payment on the checks. To date, Matrix Bank has fully resolved one
claim and has reached tentative agreements to settle claims asserted against
five others upon terms satisfactory to Matrix Bank.
Additionally, certain parties in the chain of title to property securing
approximately $2.7 million of loans, including sellers and prior lien holders,
are seeking to void or rescind their transactions on the theory that they never
received consideration. Matrix Bank has reached tentative agreement to settle
claims arising from thirteen of these Purchased Loans upon terms satisfactory to
Matrix Bank and is awaiting approval of the Bankruptcy Court.
Matrix Bank believes it has adequate defenses and intends to vigorously
defend the actions discussed in the previous two paragraphs. The ultimate legal
and financial liability of the Company, if any, in these matters cannot be
estimated with certainty at this time.
25
The trustee for Island Mortgage has received an order from the Bankruptcy
Court finding that the Purchased Loans are a part of the estate of Island
Mortgage. Nevertheless, the trustee and Matrix Bank have reached an agreement,
in principle, whereby the trustee will release all of its right in and to the
Purchased Loans if the trustee, after performance of a "due diligence" review,
determines that Matrix Bank owns the Purchased Loans or would otherwise have a
perfected security interest in the Purchased Loans. Matrix Bank believes it can
adequately demonstrate to the trustee that it is the owner of the Purchased
Loans, or otherwise has perfected security interest in the Purchased Loans. The
Company intends to vigorously defend its position in this matter. The ultimate
legal and financial liability of the Company, if any, in this bankruptcy cannot
be estimated with certainty at this time.
For a description of Roderick Adderley, et al. v. Guy A. Gibson, et al.,
see "-Matrix Bancorp" above.
Sterling Trust. Sterling Trust has been named a defendant in an action
filed July 1999 styled Roderick Adderley, et al. v. Advanced Financial Services,
Inc., et al. that was tried in Tarrant County, Texas district court in the
spring of 2000. The jury returned a verdict adverse to Sterling Trust with
respect to two of 12 theories of liability posed by the plaintiffs, and the
court has signed a judgment for certain of the plaintiffs in the amount of
approximately $6.4 million. Sterling Trust has filed an appeal of this judgment
and believes it has meritorious points of appeal. It intends to vigorously
prosecute the appeal of this action. The ultimate resolution of this appeal,
which is expected to occur in two to six months, could result in a loss of up to
$6.4 million plus post-judgment interest and additional attorneys' fees. The
ultimate legal and financial liability, if any, of Sterling Trust cannot be
estimated with certainty at this time.
Sterling Trust was named a defendant in several putative class action
lawsuits instituted in November 2000 by one law firm in Pennsylvania. The styles
of such lawsuits are as follows: Douglas Wheeler, et al. v. Pacific Air
Transport, et al.; Paul C. Jared, et al. v. South Mountain Resort and Spa, Inc.,
et al.; Lawrence Rehrig, et al. v. Caffe Diva, et al.; Merrill B. Christman, et
al. v. Millennium 2100, Inc., et al.; David M. Veneziale, et al. v. Sun
Broadcasting Systems, Inc., et al.; Don Glazer, et al. v. Technical Support
Servs., Inc., et al.; and Donald Maudlin, et al. v. World Vision Entertainment,
Inc., et al. All of such lawsuits were originally filed in the United States
District Court for the Western District of Pennsylvania. On April 26, 2001, the
District Court for the Western District of Pennsylvania ordered that all of such
cases, except Maudlin, be transferred to the United States District Court for
the Western District of Texas so that Sterling Trust could properly present its
motion to compel arbitration. Sterling Trust filed separate motions to compel
arbitration in these actions, all of which were granted. Each of the six
plaintiffs timely filed arbitration demands with the American Arbitration
Association. The demands seek damages and allege Sterling Trust breached
fiduciary duties and was negligent in administrating each claimant's
self-directed individual retirement account holding a nine-month promissory
note. Sterling Trust believes it has meritorious defenses and is defending the
matters vigorously.
With respect to the Maudlin case, Sterling Trust filed a motion to dismiss
because it can find no evidence that the named plaintiff in the case ever had
accounts with Sterling Trust. On December 7, 2001, the Court stayed Sterling
Trust's motion to dismiss and granted the named plaintiff thirty days to file an
amended petition adding a Sterling Trust accountholder as a nominal plaintiff.
The named plaintiff filed an amended petition within the 30-day period; however,
he did not add any additional plaintiffs. On February 5, 2002, the court granted
Sterling Trust's motion to dismiss the case.
Sterling Trust was named a defendant in an action filed in October 1999
styled John A. Redin, et al. v. Sterling Trust Company, et al. in the Superior
Court of the State of California for the County of Los Angeles. The plaintiffs
in this action sought to certify a class action on behalf of all persons and
entities that invested in promissory notes issued by Personal Choice
Opportunities. The plaintiffs alleged, among other things, that Sterling Trust,
as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty
and was negligent. In January 2002, this matter was settled. The settlement
requires no payment from Sterling other than the $5,000 retention amount
pursuant to the terms of the Company's insurance policy. The remainder of the
settlement consideration is to be paid the by Company's insurer. The settlement
is subject to, among other things, approval of the settlement by the Court and
negotiation and execution of appropriate releases between Sterling Trust and its
insurer. If these conditions are met, the case will be dismissed with prejudice.
In addition, Sterling Trust has been the subject of numerous lawsuits and
arbitration proceedings in which customers and, in some cases, persons who are
not customers allege various theories of liability against the Company for
losses suffered by these claimants in connection with their failed investments
in several enterprises. To the extent that Sterling Trust has had any
relationship with any of such claimants, it has been solely as custodian of such
claimants self-directed IRAs pursuant to contracts that specify the limited
nature of Sterling Trust's obligations. We believe Sterling Trust has in each
case acted in accordance with its obligations under the contracts and/or as
otherwise imposed by law. We further believe that the ultimate outcome of each
of these cases will not be material to the consolidated financial statements of
26
Company; but, there can be no assurances that there will not be an adverse
outcome in any one or more of these cases or that any such adverse outcome will
not have a material adverse effect on the consolidated financial statements of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock, $.0001 par value, is traded on The Nasdaq National
Market under the symbol "MTXC." The following table sets forth the high and low
sales prices for our common stock on The Nasdaq National Market for the periods
indicated.
Market Price
-----------------------------
Quarter Ended: High Low
------------ ------------
December 31, 2001............. $ 11.400 $ 9.960
September 30, 2001............ 11.420 9.810
June 30, 2001................. 11.750 8.600
March 31, 2001 ............... 9.375 6.938
December 31, 2000............. $ 8.250 $ 6.031
September 30, 2000............ 12.938 5.500
June 30, 2000 ................ 9.000 6.750
March 31, 2000................ 14.125 7.875
On March 4, 2002, the closing price of our common stock was $10.80 per
share. Also, as of that date, the approximate number of holders of record of our
common stock was 44. This number does not include beneficial owners who hold
their shares in a depository trust in "street" name.
In May 2000, we announced the adoption of a Common Stock Repurchase
Program under which we were authorized to repurchase up to $3 million of our
common stock. Under this program, we had repurchased a total of 323,500 shares
through December 31, 2001, for a total purchase price of approximately $2.5
million. Subsequent to December 31, 2001, the Company repurchased additional
shares and reached the $3 million level. No executive officer or director
participated in this repurchase. Our ability to repurchase stock is further
limited due to various provisions in Matrix Bancorp's debt instruments, the most
restrictive of which is our bank stock loan. Under the bank stock loan, Matrix
Bancorp is allowed to make certain restricted payments, which includes
repurchases of stock and payments of dividends to shareholders, in an amount of
up to $3 million plus 25% of the Company's cumulative consolidated net income
for fiscal quarters beginning with the quarter ending March 31, 2001. Although
we have no present plans to do so, we may seek in the future authorization from
the Board of Directors of Matrix Bancorp to repurchase additional shares of our
Common Stock under the Common Stock Repurchase Program. Any such additional
authorization will be consistent with the restrictions and limitations under our
debt covenants, including those of the bank stock loan described above.
We have not paid any dividends on our equity for the last three fiscal
years. Any future determination as to dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including our future earnings, capital requirements, financial
condition and future prospects and such other factors the Board of Directors may
deem relevant. Our ability to pay dividends is restricted by the same provisions
that restrict our ability to repurchase our stock, as described in the
immediately preceding paragraph. Additionally, Matrix Bancorp is prohibited from
paying dividends on its common stock if the scheduled payments on our junior
subordinated debentures and trust preferred securities have not been made. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 9 to the consolidated
financial statements included elsewhere in this document. In addition, the
ability of Sterling Trust and Matrix Bank to pay dividends to Matrix Bancorp may
be restricted due to certain regulatory requirements. See "Regulation and
Supervision."
27
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
OF MATRIX BANCORP, INC.
The following selected consolidated financial data and operating
information of Matrix Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," each of which is
included elsewhere in this document.
As of and for the
Year Ended December 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------- ------------- -------------- ------------
(Dollars in thousands, except per share data)
Statement of Income Data
Net interest income before provision for
loan and valuation losses.................. $ 40,510 $ 29,785 $ 29,463 $ 24,190 $ 13,888
Provision for loan and valuation losses.... 2,980 4,235 3,180 4,607 874
------------ ------------- ------------ -------------- ------------
Net interest income after provision for
loan and valuation losses.................. 37,530 25,550 26,283 19,583 13,014
------------ ------------- ------------ -------------- ------------
Noninterest income:
Loan administration...................... 30,113 23,850 23,686 17,411 16,007
Brokerage................................ 2,959 5,476 6,156 7,054 3,921
Trust services........................... 4,036 4,923 4,840 4,169 3,561
Real estate disposition services......... 2,572 3,677 3,659 2,036 1,121
Gain on sale of loans, mortgage-backed
and SBA securities...................... 1,475 982 3,247 3,108 2,441
Gain on sale of mortgage servicing rights 167 2,634 363 803 3,365
Loan origination(8)...................... 34,933 7,587 6,218 5,677 4,694
School services.......................... 5,427 4,240 2,813 46 -
Other.................................... 9,474 5,423 9,378 6,441 2,919
------------ ------------- ------------ -------------- ------------
Total noninterest income............... 91,156 58,792 60,360 46,745 38,029
Noninterest expense........................ 115,899 77,841 69,586 52,939 37,746
------------ ------------- ------------ -------------- ------------
Income before income taxes(8).............. 12,787 6,501 17,057 13,389 13,297
Income taxes(8)............................ 4,275 2,243 6,278 4,876 5,159
------------ -------------- ------------ -------------- ------------
Net income................................. $ 8,512 $ 4,258 $ 10,779 $ 8,513 $ 8,138
============ ============= ============ ============== ============
Net income per share assuming dilution(1).. $ 1.30 $ 0.63 $ 1.58 $ 1.24 1.20
Weighted average common shares assuming
dilution................................... 6,560,454 6,748,857 6,833,546 6,881,890 6,781,808
Balance Sheet Data
Total assets............................... $ 1,646,787 $ 1,418,795 $ 1,283,746 $ 1,012,155 $ 606,581
Mortgage-backed and SBA securities......... 6,963 66,616 -- -- --
Total loans, net........................... 1,349,150 1,116,021 1,103,515 848,448 511,372
Mortgage servicing rights, net............. 78,712 71,529 63,479 57,662 36,276
Deposits(2)................................ 866,235 602,669 562,194 490,516 224,982
Custodial escrow balances.................. 129,665 77,647 94,206 96,824 53,760
FHLB borrowings............................ 303,361 519,433 405,000 168,000 171,943
Borrowed money............................. 222,032 124,503 142,101 178,789 89,909
Total shareholders' equity................. 71,312 64,023 60,497 49,354 40,610
Operating Ratios and Other Selected Data
Return on average assets(3)................ 0.54 % 0.32 % 1.02 % 1.02 % 1.78%
Return on average equity(3)................ 12.82 6.79 19.79 18.92 22.71
Average equity to average assets(3)........ 4.18 4.75 5.16 5.41 7.86
Net interest margin(3)(4).................. 2.87 2.51 3.25 3.37 3.70
Operating efficiency ratio(5).............. 71.42 76.76 59.21 59.74 60.14
Total amount of loans purchased............ $ 105,936 $ 225,898 $ 701,952 $ 678,150 $ 493,693
Balance of owned servicing portfolio (end
of period)................................. 5,656,365 5,517,963 5,889,715 5,357,729 3,348,062
Trust assets under administration (end of
period).................................... 6,017,085 3,847,038 2,545,060 2,089,562 1,437,478
Wholesale loan origination volume.......... 3,612,477 512,541 443,363 574,963 402,984
Ratios of Earnings to Fixed Charges(6)
Including interest on deposits............. 1.19x 1.09x 1.38x 1.36x 1.71x
Excluding interest on deposits............. 1.39x 1.15x 1.75x 1.64x 2.30x
Loan Performance Ratios and Data
Allowance for loan and valuation losses.... $ 9,338 $ 8,581 $ 6,354 $ 3,710 $ 1,756
Nonperforming loans(7) .................... 37,251 28,516 25,641 13,209 4,990
Nonperforming loans/total loans(7) ........ 2.74 % 2.54 % 2.31 % 1.55 % 0.97%
Nonperforming assets/total assets(7) ...... 2.79 2.20 2.06 1.40 1.03
28
Net loan charge-offs/average loans(3) ..... 0.17 0.18 0.06 0.38 0.04
Allowance for loan and valuation losses/
total loans ........................... 0.69 0.72 0.57 0.44 0.34
Allowance for loan and valuation losses/
nonperforming loans .................... 25.07 30.09 24.78 28.09 35.19
- ----------
(1) Net income per common share assuming dilution is based on the weighted
average number of common shares outstanding during each period and the
dilutive effect, if any, of stock options and warrants outstanding. There
are no other dilutive securities.
(2) Beginning in February 1998, Matrix Bank began accepting brokered deposits.
At December 31, 2001, 2000 and 1999, the total balance of brokered deposits
was $303.0 million, $203.6 million and $221.5 million, respectively.
(3) Calculations are based on average daily balances where available and
monthly averages otherwise.
(4) Net interest margin has been calculated by dividing net interest income
before loan and valuation loss provision by average interest-earning
assets.
(5) The operating efficiency ratio has been calculated by dividing noninterest
expense, excluding amortization of mortgage servicing rights, by operating
income. Operating income is equal to net interest income before provision
for loan and valuation losses plus noninterest income.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
(7) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Nonperforming
Assets" for a discussion of the level of nonperforming loans.
(8) Amounts for the year ended December 31, 2001 are shown net of cumulative
effect of a change in accounting principle.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following management's discussion and analysis of the
financial condition and results of operations in conjunction with the preceding
"Selected Consolidated Financial and Operating Information." Additionally, our
consolidated financial statements and the notes thereto, as well as other data
included in this document, should be read and analyzed in combination with the
analysis below.
General
Matrix Bancorp was formed in June 1993 when the founding shareholders of
Matrix Financial and United Financial, now known as Matrix Capital Markets, two
of our subsidiaries, exchanged all of their outstanding capital stock for shares
of our stock in a series of transactions that were each accounted for as a
pooling of interests. In September 1993, we acquired Dona Ana Savings and Loan
Association, FSB, which was subsequently renamed Matrix Capital Bank. The
acquisition was accounted for using the purchase method of accounting. We formed
Matrix Asset Management, formerly United Special Services, in June 1995 and
United Capital Markets in December 1996. In February 1997, we acquired The
Vintage Group (whose primary subsidiary is Sterling Trust) in a pooling of
interests and, accordingly, no goodwill was recorded and our consolidated
financial statements for the prior periods were restated. Additionally, we
acquired ABS in March 1999. The acquisition was accounted for using the purchase
method of accounting. We entered into our joint venture, Matrix Settlement &
Clearance Services, in September of 1999. On August 1, 2000, we sold the stock
of United Capital Markets to one of the officers of that company. On August 1,
2000, Matrix Financial, our mortgage banking operation, became an operating
subsidiary of Matrix Bank. On October 31, 2001, First Matrix, our broker-dealer
operation, became an operating subsidiary of Matrix Capital Markets.
The principal components of our revenues consist of:
o net interest income recorded by Matrix Bank, Matrix Financial and ABS
School Services;
o loan origination fees generated by Matrix Financial and, to a lesser
extent, Matrix Bank;
o brokerage and consulting and disposition services fees realized by
Matrix Capital Markets and Matrix Asset Management, respectively;
o gains on sales of mortgage loans and mortgage servicing rights
generated by Matrix Bank and Matrix Financial;
o loan administration fees generated by Matrix Financial;
o trust service fees generated by Sterling Trust; and
o school service fees generated by ABS.
Our results of operations are influenced by changes in interest rates and
the effect of these changes on our interest margins, the volume of loan
originations, mortgage loan prepayments and the value of mortgage servicing
portfolios. Our fee-based businesses are effected to a lesser extent by interest
rates and more by competition and general market conditions.
29
Comparison of Results of Operations for Fiscal Years 2001 and 2000
Net Income; Return on Average Equity. Net income increased $4.2 million to
$8.5 million for fiscal year 2001 as compared to $4.3 million for fiscal year
2000. On a per share basis, net income was $1.30 per diluted share for fiscal
year 2001 and $0.63 for fiscal year 2000. Return on average equity increased to
12.8% for fiscal year 2001 as compared to 6.8% for fiscal year 2000. The
increases in net income, earnings per share and return on average equity were
caused primarily by an increase in net interest income after provision for loan
and valuation losses and large increases in loan origination income and loan
administration fees generated at Matrix Financial, offset by increases in
compensation and employee benefit costs and increased amortization expense on
mortgage servicing rights.
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $10.7 million to $40.5 million for fiscal year 2001
as compared to $29.8 million for fiscal year 2000. Our net interest income
before provision for loan and valuation losses increased due to the $229
million, or 19%, increase in our interest-earning assets. Additionally, an
element of the increase was our net interest margin increasing to 2.87% for the
year ended December 31, 2001 as compared to 2.51% for the year ended December
31, 2000. Although the yield on our interest-earning assets decreased to 7.46%
for the year ended December 31, 2001 from 8.22% for the year ended December 31,
2000, that decrease was more than offset by the decrease in our cost of
interest-bearing liabilities which for the same periods decreased to 5.15% from
6.15%. Both the decrease in the yield on our interest-earning assets and cost of
interest-bearing liabilities is a direct result of the interest rate environment
prevalent in 2001, which saw significant interest rate cuts by the Federal
Reserve. Also, attributing to the increase in the margin was the overall
increase in average noninterest-bearing deposits to $205 million at December 31,
2001 as compared to $141 million at December 31, 2000. The increase in the
noninterest-bearing deposits is due to a combination of an increase in our
custodial deposits and deposits generated from our investment in Matrix
Settlement & Clearance Services. For a tabular presentation of the changes in
net interest income due to changes in volume of interest-earning assets and
changes in interest rates, see "--Analysis of Changes in Net Interest Income Due
to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and
valuation losses decreased $1.2 million, or 30%, to $3.0 million for fiscal year
2001 as compared to $4.2 million for fiscal year 2000. This decrease was
primarily attributable to year 2000 including a significant charge-off at ABS of
a loan to a school client which closed, as well as a high year 2000 provision at
ABS and Matrix Bank versus levels in 2001. For a discussion of the components of
the allowance for loan losses, see "--Asset and Liability Management--Analysis
of Allowance for Loan and Valuation Losses." For a discussion on the allowance
as it relates to nonperforming assets, see "--Asset and Liability
Management--Nonperforming Assets."
Loan Administration. Loan administration income represents service fees
earned from servicing loans for various investors, which are based on a
contractual percentage of the outstanding principal balance plus late fees and
other ancillary charges, as well as activity in Ginnie Mae servicing portfolios.
Loan administration fees increased $6.3 million to $30.1 million for fiscal year
2001 as compared to $23.8 million for fiscal year 2000. Loan administration fees
are affected by factors that include the size of our residential mortgage loan
servicing portfolio, the servicing spread, the timing of payment collections and
the amount of ancillary fees received. Our mortgage loan servicing portfolio
increased slightly to an average balance of $5.5 billion for fiscal year 2001 as
compared to an average balance of $5.4 billion for fiscal year 2000, despite
significant increases in prepayment rates due to the declining interest rate
environment in the latter part of 2001. The increase in loan administration fees
was primarily driven by increased revenue generated from the purchasing of
delinquent government loans out of our Ginnie Mae servicing and the subsequent
sale of those loans. The revenue generated from this activity was approximately
$1.8 million. There were also increases in our ancillary fees. The remainder of
the increase is attributed to a slightly higher average servicing balance and a
higher balance of government servicing which tends to have higher servicing
fees.
Brokerage fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to mortgage servicing rights. Brokerage
fees continued with 2000 trends and decreased $2.5 million, or 46%, to $3.0
million for fiscal year 2001 as compared to $5.5 million for fiscal year 2000.
This decrease was the result of a decrease in the balance of residential
mortgage servicing portfolios brokered by Matrix Capital Markets, which in terms
of aggregate unpaid principal balances on the underlying loans, decreased $12.5
billion, or 34%, to $23.9 billion for fiscal year 2001 as compared to $36.4
billion for fiscal year 2000. As previously discussed, the decrease noted is due
to the consolidation that has taken place in the mortgage banking industry. The
overall market, including the number of buyers and sellers servicing, has
decreased, and as a result, we have experienced an overall decrease in both the
portfolios brokered and the corresponding revenue. In any event, brokerage fees
vary from quarter to quarter as the timing of servicing sales is dependent upon
the seller's need to recognize a sale or to receive cash flows.
30
Trust Services. Trust service fees decreased $900,000, or 18%, to $4.0
million for fiscal year 2001 as compared to $4.9 million for fiscal year 2000.
The decrease in revenue is despite the fact that trust accounts under
administration at Sterling Trust increased to 41,329 accounts at December 31,
2001 from 39,220 accounts at December 31, 2000 and total fiduciary assets under
administration increased to $6.0 billion at December 31, 2001 from $3.8 billion
at December 31, 2000. The growth in accounts and assets under administration
occurred in third party administrator accounts, which increased 147% in 2001 to
3,554 accounts, which are generally priced at lower fees based on the level of
administration required and generate revenues based on number of transactions
within accounts versus level of assets.
Real Estate Disposition Services. Real estate disposition services
represents fees earned by Matrix Asset Management for real estate management and
disposition services provided on foreclosed properties owned by third party
financial services companies and financial institutions. Real estate disposition
service income decreased $1.1 million, or 30%, between the fiscal years 2001 and
2000 to $2.6 million. The decrease was due to the decrease in the number of
properties closed during the year, which decreased 23%, from 1,872 in 2000 to
1,444 in 2001.
Gain on Sale of Loans, Mortgage-Backed and SBA Securities. Gain on sale of
loans and mortgage-backed securities increased $500,000 to $1.5 million for
fiscal year 2001 as compared to $1.0 million for fiscal year 2000. Loan sales of
approximately $76.1 million in 2001 were completed under standard purchase and
sale agreements, with standard representations and warranties and without
recourse. Sales of mortgage-backed securities were approximately $59.6 million
in 2001 and pertained to loans that the Company had purchased and swapped for
securities. The gains from both types of these sales represent cash gains. Gains
on sale can fluctuate significantly from year to year based on a variety of
factors, such as the current interest rate environment, the supply and mix of
loan or mortgage-backed portfolios available in the market, the type of loan or
mortgage-backed portfolios we purchase and the particular loan portfolios we
elect to sell.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage
servicing rights decreased $2.5 million to approximately $200,000 for fiscal
year 2001 as compared to $2.7 million for fiscal year 2000. In terms of
aggregate outstanding principal balances of mortgage loans underlying such
mortgage servicing rights, we sold $1.7 billion in purchased mortgage servicing
rights during fiscal year 2001 as compared to $1.1 billion during fiscal year
2000. Gains from the sale of mortgage servicing rights can fluctuate
significantly from year to year based on the market value of our servicing
portfolio, the particular servicing portfolios we elect to sell and the
availability of similar portfolios in the market. Due to our position in and
knowledge of the market, we expect to, at times, pursue opportunistic sales of
mortgage servicing rights. The 2000 year sale was undertaken to take advantage
of aggressive pricing in the marketplace while the market was not as favorable
of 2001 with the low interest rate environment prevalent throughout the year.
Loan Origination. Loan origination income includes all mortgage loan fees,
secondary marketing activity on new loan originations for both residential and
SBA loans, and servicing release premiums on servicing sold and capitalized
servicing on new originations sold, net of origination costs. Loan origination
income increased $27.4 million, or 360%, to $34.9 million for fiscal year 2001
as compared to $7.5 million for fiscal year 2000. The increase is primarily
attributable to an increase in wholesale residential mortgage loan production at
Matrix Financial by $3.1 billion, or 602%, to $3.6 billion during fiscal year
2001 as compared to $512.5 million during fiscal year 2000. The increases in
volume were due to our 2000 initiatives to increase origination platform and by
the declining interest rate environment of 2001.
School Services. School services income represents fees earned by ABS for
outsourced business and consulting services provided to schools. School services
income increased $1.2 million, or 28%, to $5.4 million for fiscal year 2001 as
compared to $4.2 million for fiscal year 2000. This increase was primarily due
to an increase in new school customers during 2001.
Other Income. Other income increased $4.1 million, or 75%, to $9.5 million
for fiscal year 2001 as compared to $5.4 million for fiscal year 2000. The
increase in other income was primarily due to $3.4 million pre-tax gain on sale
of assets generated due to the condemnation of real estate held by Matrix Bank
in Denver, Colorado, which was going to be used for relocation of Matrix Bank's
domicile. The City and County of Denver condenmed the property in October 2001.
Noninterest Expense. Noninterest expense increased $38.1 million, or 49%,
to $115.9 million for fiscal year 2001 as compared to $77.8 million for fiscal
year 2000. This increase was primarily due to increased compensation and
benefits expense, increased amortization of mortgage servicing rights and
increased other general and administrative expense, offset by a decrease in
professional fees. The following table details the major components of
noninterest expense for the periods indicated:
31
Year Ended
December 31,
-------------------------------
2001 2000
--------------- --------------
(In thousands)
Compensation and employee benefits.......... $ 52,573 $ 34,245
Amortization of mortgage servicing rights .. 21,862 9,851
Occupancy and equipment..................... 6,525 4,785
Postage and communication................... 4,063 2,812
Professional fees........................... 2,883 4,687
Data processing............................. 2,907 2,413
Other general and administrative............ 25,086 19,048
--------------- --------------
Total.................................. $ 115,899 $ 77,841
=============== ==============
Compensation and employee benefits increased $18.3 million, or 54%, to
$52.6 million for fiscal year 2001 as compared to $34.2 million for fiscal year
2000. This increase was primarily the result of increased salary expense at
Matrix Financial, and to a lesser extent, at ABS, Matrix Bancorp and Matrix
Bank. Matrix Financial's salary expense increased related to its initiative to
develop its production platform and $15.9 million of the total company increase
in compensation and employee benefits is attributable to Matrix Financial. This
initiative involved opening two new production offices, acquiring a servicing
and production platform and hiring additional administrative and production
staff in late 2000 which operated all of 2001. The Company had an overall
increase of 225 employees, or 31%, to 960 employees at December 31, 2001 as
compared to 735 employees at December 31, 2000.
Amortization of mortgage servicing rights increased $12.0 million, or 122%,
to $21.9 million for fiscal year 2001 as compared to $9.9 million for fiscal
year 2000. Amortization of mortgage servicing rights fluctuates based on the
size of our mortgage servicing portfolio and the prepayment rates experienced
with respect to the underlying mortgage loan portfolio. In response to the lower
interest rates prevalent in the market, prepayment speeds on our servicing
portfolio increased to an average of 22.9% during fiscal year 2001 as compared
to 12.1% during fiscal year 2000.
The remainder of noninterest expense, which includes occupancy and
equipment expense, postage and communication expense, professional fees, data
processing costs and other expenses, increased $7.7 million, or 23%, to $41.5
million for fiscal year 2001 as compared to $33.8 million for fiscal year 2000.
The $6.0 million increase in other general and administrative expense was
primarily attributable to increases in foreclosure and REO expenses, increases
in travel and entertainment costs, and in other miscellaneous expenses
associated with the increased number of employees, and increases in outside
services, consulting and temporary help, as well as a $984,000 charge recorded
related to the relocation of Matrix Bank's domicile primarily for severence and
contract benefits to be paid to certain of Matrix Bank's employees. For further
discussion of these charges, see Note 2 to the consolidated financial
statements. This was offset by a $1.8 million decrease in professional fees
related mainly to high amounts in 2000 for litigation at Sterling Trust and
legal expenses associated with the Harbor settlement which were not incurred in
2001. For a discussion of the Harbor items, see Note 19 to the consolidated
financial statements.
Provision for Income Taxes. Our provision for income taxes increased $2.1
million to $4.3 million for fiscal year 2001 as compared to $2.2 million for
fiscal year 2000. The increase in pre-tax income was enhanced by a reduction in
our effective tax rate to 33.4% for fiscal year 2001 from 34.5% for fiscal year
2000. The decrease in the effective tax rate was the result of our origination
of tax-exempt financing at ABS.
Comparison of Results of Operations for Fiscal Years 2000 and 1999
Net Income; Return on Average Equity. Net income decreased $6.5 million to
$4.3 million for fiscal year 2000 as compared to $10.8 million for fiscal year
1999. On a per share basis, net income was $0.63 per share for fiscal year 2000
and $1.58 for fiscal year 1999. Return on average equity decreased to 6.8% for
fiscal year 2000 as compared to 19.8% for fiscal year 1999. The decreases in net
income, earnings per share and return on average equity were caused primarily by
the substantial increase in the cost of our interest-bearing liabilities, which
resulted from the higher interest rate environment of fiscal year 2000 as
compared to fiscal year 1999. Additionally, we incurred losses related to loans
that we acquired under a previously existing purchase/repurchase facility, as
well as related to the settlement of the Harbor Financial Mortgage Corporation
bankruptcy. Our legal expenses in fiscal year 2000 were substantially higher
than the prior fiscal year relating to litigation at Sterling Trust and the two
losses mentioned above. See "Legal Proceedings."
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $322,000 to $29.8 million for fiscal year 2000 as
compared to $29.5 million for fiscal year 1999. Our net interest income before
provision for loan and valuation losses increased only slightly in spite of the
$276.9 million, or 30.5%, increase in our interest-earning assets. The reason
32
for the small increase in net interest income before provision for loan and
valuation losses was due to the interest rate environment, which caused the cost
of our interest-bearing liabilities to increase significantly more than the
yield on our interest-earning assets. The cost of our interest-bearing
liabilities increased by 87 basis points, whereas the yield on our
interest-earning assets only increased 9 basis points between the comparable
periods. The increase in the cost of our interest-bearing liabilities caused our
net interest margin to decrease to 2.51% for fiscal year 2000 as compared to
3.25% for fiscal year 1999 and our interest rate spread to decrease to 2.07% for
fiscal year 2000 as compared to 2.85% for fiscal year 1999. As noted above, the
compression in our net interest margin was a result of the interest rate
environment during 2000 and our continued philosophy of acquiring
adjustable-rate mortgages. For a tabular presentation of the changes in net
interest income due to changes in volume of interest-earning assets and changes
in interest rates, see "--Analysis of Changes in Net Interest Income Due to
Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and
valuation losses increased $1.0 million, or 33.2%, to $4.2 million for fiscal
year 2000 as compared to $3.2 million for fiscal year 1999. This increase was
primarily attributable to ABS' charge-off of a $768,000 loan during 2000 due to
the closing of one of its school customers. The remaining increase was due to
increases in the provision at ABS, Matrix Bank and Matrix Financial. For a
discussion of the components of the allowance for loan losses, see "--Asset and
Liability Management--Analysis of Allowance for Loan and Valuation Losses." For
a discussion on the allowance as it relates to nonperforming assets, see
"--Asset and Liability Management--Nonperforming Assets."
Loan Administration. Loan administration fees were consistent with an
increase of only $164,000 to $23.9 million for fiscal year 2000 as compared to
$23.7 million for fiscal year 1999. Loan administration fees are affected by
factors that include the size of our residential mortgage loan servicing
portfolio, the servicing spread, the timing of payment collections and the
amount of ancillary fees received. Our mortgage loan servicing portfolio
decreased to an average balance of $5.4 billion for fiscal year 2000 as compared
to an average balance of $5.6 billion for fiscal year 1999. This decrease was
offset by a small increase in the average service fee rate, including all
ancillary income, to 0.44% for fiscal year 2000 as compared to 0.43% for fiscal
year 1999.
Brokerage fees. Brokerage fees decreased $680,000, or 11.0%, to $5.5
million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999.
This decrease was the result of a decrease in the balance of residential
mortgage servicing portfolios brokered by Matrix Capital Markets, which in terms
of aggregate unpaid principal balances on the underlying loans, decreased $11.3
billion to $36.4 billion for fiscal year 2000 as compared to $47.7 billion for
fiscal year 1999. Brokerage fees vary from quarter to quarter as the timing of
servicing sales is dependent upon the seller's need to recognize a sale or to
receive cash flows.
Trust Services. Trust service fees increased $83,000, or 1.7%, to $4.9
million for fiscal year 2000 as compared to $4.8 million for fiscal year 1999.
Trust accounts under administration at Sterling Trust increased to 39,220
accounts at December 31, 2000 from 36,546 accounts at December 31, 1999 and
total fiduciary assets under administration increased to $3.8 billion at
December 31, 2000 from $2.5 billion at December 31, 1999. Most of the growth in
accounts and assets under administration occurred in third party administrator
accounts, which are generally priced at lower fees based on the level of
administration required.
Real Estate Disposition Services. Real estate disposition services
represents fees earned by Matrix Asset Management for real estate management and
disposition services provided on foreclosed properties owned by third party
financial services companies and financial institutions. Real estate disposition
service income was consistent between the fiscal years 2000 and 1999, with only
an $18,000 increase in fiscal year 2000 over fiscal year 1999.
Gain on Sale of Loans and Mortgage-Backed Securities. Gain on sale of loans
and mortgage-backed securities decreased $2.3 million to $982,000 for fiscal
year 2000 as compared to $3.2 million for fiscal year 1999. These loan sales
were completed under standard purchase and sale agreements, with standard
representations and warranties and without recourse. The gains from these sales
represent cash gains. Gain on sale of loans can fluctuate significantly from
year to year based on a variety of factors, such as the current interest rate
environment, the supply and mix of loan portfolios available in the market, the
type of loan portfolios we purchase and the particular loan portfolios we elect
to sell.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage
servicing rights increased $2.3 million to $2.6 million for fiscal year 2000 as
compared to $363,000 for fiscal year 1999. In terms of aggregate outstanding
principal balances of mortgage loans underlying such mortgage servicing rights,
we sold $1.1 billion in purchased mortgage servicing rights during fiscal year
2000 as compared to $161.2 million during fiscal year 1999. Gains from the sale
of mortgage servicing rights can fluctuate significantly from year to year based
on the market value of our servicing portfolio, the particular servicing
33
portfolios we elect to sell and the availability of similar portfolios in the
market. Due to our position in and knowledge of the market, we expect to, at
times, pursue opportunistic sales of mortgage servicing rights. The current year
sale was undertaken to take advantage of aggressive pricing in the marketplace.
Loan Origination. Loan origination income increased $1.4 million, or 22.0%,
to $7.6 million for fiscal year 2000 as compared to $6.2 million for fiscal year
1999. Approximately $806,000 of this increase related to increased originations
ans sales by Matrix Bank's SBA loan department. The remainder of the increase is
attributable to an increase in wholesale residential mortgage loan production by
$69.1 million, or 15.6%, to $512.5 million during fiscal year 2000 as compared
to $443.4 million during fiscal year 1999.
School Services. School services income increased $1.4 million, or 50.7%,
to $4.2 million for fiscal year 2000 as compared to $2.8 million for fiscal year
1999. This increase was primarily due to an increase in the pricing for ABS
services, the addition of new school customers and our acquisition of ABS in
March 1999, which resulted in less than a full year of revenues being recognized
in 1999.
Other Income. Other income decreased $4.0 million, or 42.2%, to $5.4
million for fiscal year 2000 as compared to $9.4 million for fiscal year 1999.
The decrease in other income was primarily due to:
o a $1.9 million decrease in consulting income from United Capital
Markets because of its August sale and an overall slower year for that
company; and
o a decrease in Matrix Bank's income from certain financing
transactions, which decreased miscellaneous fee income by $1.7 million
compared to the prior fiscal year.
Noninterest Expense. Noninterest expense increased $8.2 million, or 11.9%,
to $77.8 million for fiscal year 2000 as compared to $69.6 million for fiscal
year 1999. This increase was primarily due to increased compensation and
benefits expense, increased other general and administrative expense and
increased professional fees. These increases were offset by a decrease in the
amortization of mortgage servicing rights. The following table details the major
components of noninterest expense for the periods indicated:
Year Ended
December 31,
---------------------------
2000 1999
------------ ------------
(In thousands)
Compensation and employee benefits............. $ 34,245 $ 29,336
Amortization of mortgage servicing rights ..... 9,851 16,403
Occupancy and equipment........................ 4,785 3,727
Postage and communication...................... 2,812 2,688
Professional fees.............................. 4,687 2,385
Data processing................................ 2,413 1,688
Other general and administrative............... 19,048 13,359
------------ ------------
Total..................................... $ 77,841 $ 69,586
============ ============
Compensation and employee benefits increased $4.9 million, or 16.7%, to
$34.2 million for fiscal year 2000 as compared to $29.3 million for fiscal year
1999. This increase was primarily the result of increased salary expense at
Matrix Financial, ABS, Matrix Bancorp and Matrix Bank. Matrix Financial's salary
expense increased towards the later half of 2000 related to its initiative to
build a production platform. This initiative involved opening two new production
offices, acquiring a servicing and production platform and hiring additional
administrative and production staff. We had an overall increase of 135
employees, or 22.5%, to 735 employees at December 31, 2000 as compared to 600
employees at December 31, 1999.
Amortization of mortgage servicing rights decreased $6.5 million, or 39.9%,
to $9.9 million for fiscal year 2000 as compared to $16.4 million for fiscal
year 1999. Amortization of mortgage servicing rights fluctuates based on the
size of our mortgage servicing portfolio and the prepayment rates experienced
with respect to the underlying mortgage loan portfolio. In response to the
higher interest rates prevalent in the market, prepayment speeds on our
servicing portfolio decreased to an average of 12.1% during fiscal year 2000 as
compared to 20.6% during fiscal year 1999.
The remainder of noninterest expense, which includes occupancy and
equipment expense, postage and communication expense, professional fees, data
processing costs and other expenses, increased $9.9 million, or 41.5%, to $33.7
million for fiscal year 2000 as compared to $23.8 million for fiscal year 1999.
The $5.7 million increase in other general and administrative expense increase
was primarily attributable to previously mentioned losses from a
purchase/repurchase facility and the Harbor settlement. Additionally, we
34
experienced a $2.3 million increase in professional fees related mainly to
litigation at Sterling Trust and legal expenses associated with the Harbor
settlement.
Provision for Income Taxes. Our provision for income taxes decreased $4.1
million to $2.2 million for fiscal year 2000 as compared to $6.3 million for
fiscal year 1999. The decrease in pre-tax income was further enhanced by a
reduction in our effective tax rate to 34.5% for fiscal year 2000 from 36.8% for
fiscal year 1999. The decrease in the effective tax rate was the result of our
reduced earnings and our origination of tax-exempt financing.
Average Balance Sheet
The following table sets forth for the periods and as of the dates
indicated, information regarding our average balances of assets and liabilities,
as well as the dollar amounts of interest income from interest-earning assets
and interest expense on interest-bearing liabilities and the resultant yields or
costs. Ratio, yield and rate information is based on average daily balances
where available; otherwise, average monthly balances have been used. Nonaccrual
loans are included in the calculation of average balances for loans for the
periods indicated.
Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- --------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- -------- ------------------ -------- --------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans receivable, net ................ $1,338,613 $102,058 7.62% $1,086,041 $90,591 8.34% $877,117 $72,355 8.25%
Mortgage-backed and SBA securities.... 17,667 1,335 7.56 45,253 3,374 7.46 -- -- --
Interest-earning deposits............. 33,746 1,008 2.99 28,831 1,508 5.23 16,326 629 3.85
Federal Home Loan Bank stock.......... 23,281 996 4.28 24,199 1,913 7.91 13,934 766 5.50
--------- -------- -------- ----------- ------- -------- ---------- --------- -------
Total interest-earning assets....... 1,413,307 105,397 7.46% 1,184,324 97,386 8.22% 907,377 73,750 8.13%
Noninterest-earning assets:
Cash.................................. 24,196 16,305 18,090
Allowance for loan and valuation
losses.............................. (9,038) (7,302) (4,392)
Premises and equipment................ 17,838 10,318 10,765
Other assets.......................... 142,914 116,602 122,705
--------- ---------- ----------
Total noninterest-earning assets.... 175,910 135,923 147,168
--------- ---------- ----------
Total assets........................ $1,589,217 $1,320,247 $1,054,545
========= ========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts..................... $ 3,467 108 3.12% $ 2,981 102 3.42% $ 2,758 96 3.48 %
Money market and NOW accounts......... 239,941 5,220 2.18 156,649 3,671 2.34 213,192 6,356 2.98
Certificates of deposit............... 493,954 29,544 5.98 361,084 22,502 6.23 287,347 15,137 5.27
Federal Home Loan Bank borrowings..... 347,807 16,071 4.62 430,331 27,242 6.33 175,619 9,184 5.23
Borrowed money........................ 176,980 13,944 7.88 147,377 14,084 9.56 159,272 13,514 8.48
--------- -------- -------- ----------- ------- -------- ----------- ---------- -------
Total interest-bearing liabilities.. 1,262,149 64,887 5.14% 1,098,422 67,601 6.15% 838,188 44,287 5.28 %
--------- -------- -------- ----------- ------- -------- ----------- ---------- -------
Noninterest-bearing liabilities:
Demand deposits (including custodial
escrow balances).................... 204,923 140,615 140,847
Other liabilities..................... 55,764 18,505 21,054
--------- ---------- ----------
Total noninterest-bearing liabilities. 260,687 159,120 161,901
Shareholders' equity.................. 66,381 62,705 54,456
--------- ---------- ----------
Total liabilities and shareholders'
equity............................ $1,589,217 $ 1,320,247 $1,054,545
========= ========== ==========
Net interest income before provision
for loan and valuation losses........... $ 40,510 $29,785 $29,463
========= ========= ==========
Interest rate spread.................... 2.32% 2.07 % 2.85 %
======== ======== =======
Net interest margin..................... 2.87% 2.51 % 3.25 %
======== ======== =======
Ratio of average interest-earning
assets to average interest-bearing %
liabilities........................... 111.98% 107.82 % 108.25 %
======== ======== ========
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
o changes in volume, in other words, changes in volume multiplied by old
rate; and
o changes in rate, in other words, changes in rate multiplied by old
volume.
35
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
Year Ended December 31, 2001 vs. 2000 Year Ended December 31, 2000 vs. 1999
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
--------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ ------------------------ ------------ ------------
(In thousands)
Interest-earning assets:
Loans receivable, net................. $ 19,781 $ (8,314) $ 11,467 $ 17,438 $ 798 $ 18,236
Mortgage-backed and SBA securities.... (2,085) 46 (2,039) 3,374 -- 3,374
Interest-earning deposits............. 225 (725) (500) 599 280 879
Federal Home Loan Bank stock.......... (70) (847) (917) 719 428 1,147
--------- ---------- ----------- --------- ---------- ----------
Total interest-earning assets....... 17,851 (9,840) 8,011 22,130 1,506 23,636
--------- ---------- ----------- --------- --------- ----------
Interest-bearing liabilities:
Passbook accounts..................... 16 (10) 6 8 (2) 6
Money market and NOW accounts......... 1,822 (273) 1,549 (1,886) (799) (2,685)
Certificates of deposit............... 7,984 (942) 7,042 4,307 3,058 7,365
Federal Home Loan Bank advances....... (4,637) (6,534) (11,171) 15,770 2,288 18,058
Borrowed money........................ 2,563 (2,703) (140) (957) 1,527 570
--------- ---------- ----------- --------- ---------- ----------
Total interest-bearing liabilities.. 7,748 (10,462) (2,714) 17,242 6,072 23,314
--------- ---------- ----------- --------- ---------- ----------
Change in net interest income before
provision for loan and valuation losses. $ 10,103 $ 622 $ 10,725 $ 4,888 $ (4,566) $ 322
========= ========== =========== ========= ========== ==========
Asset and Liability Management
General. A significant portion of our revenues and net income is derived
from net interest income and, accordingly, we strive to manage our
interest-earning assets and interest-bearing liabilities to generate what we
believe to be an appropriate contribution from net interest income. Asset and
liability management seeks to control the volatility of our performance due to
changes in interest rates. We constantly attempt to achieve an appropriate
relationship between rate sensitive assets and rate sensitive liabilities. We
have responded to interest rate volatility by developing and implementing asset
and liability management strategies designed to increase noninterest income and
improve the match between interest-earning assets and interest-bearing
liabilities. These strategies include:
o maintaining a wholesale loan origination operation. Wholesale
originations provide a form of hedge against the balance of mortgage
servicing rights. In a decreasing interest rate environment, the value
of the servicing portfolio tends to decrease due to increased
prepayments of the underlying loans. During this same environment,
however, the volume of loan originations generally increases;
o utilizing mortgage servicing rights as a source of noninterest income
and as a countermeasure against the decline in the value of mortgage
loans during a rising interest rate environment. Increases in interest
rates tend to increase the value of mortgage servicing rights because
of the resulting decrease in prepayment rates on the underlying loans;
o focusing on noninterest-bearing custodial escrow balances related to
our mortgage servicing rights;
o increasing focus on lines of business that are less interest rate
sensitive, such as brokerage activities, consulting services,
self-directed trust services, clearing operations, real estate
disposition and school business services;
o originating and purchasing adjustable rate mortgages and selling newly
originated fixed rate residential mortgages in the secondary market;
o increasing emphasis on the origination of construction and commercial
real estate lending, including SBA loans, which tend to have higher
interest rates with shorter loan maturities than residential mortgage
loans and generally are at adjustable rates;
o acquisition and sales of guaranteed portions of SBA loans, which are
generally at adjustable rates;
o increasing retail deposits, which are less susceptible to changes in
interest rates than other funding sources;
o pursuing strategic acquisitions or alliances that provide fee-based
income or generate liabilities that are less expensive or less
interest rate sensitive than retail deposits or borrowings from third
party institutions to fund our investing activities;
o using Matrix Bank as the settlement bank for settlement and clearing
services offered by Sterling Trust and Matrix Settlement & Clearance
Services to generate low-cost deposits; and
o hedging segments of our servicing portfolio and selling forward
commitments on our loan pipeline.
Lending Activities. Our major interest-earning asset is our loan portfolio.
Consequently, a significant part of our asset and liability management involves
monitoring the composition of our loan portfolio, including the corresponding
maturities. The following table sets forth the composition of our loan portfolio
by loan type as of the dates indicated. The amounts in the table below are shown
net of discounts and other deductions.
36
As of December 31,
------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------- --------------------- --------- --------- ---------- ----------- -------- ---------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------ -------- ---------- -------- --------- --------- ---------- ----------- -------- ---------
(Dollars in thousands)
Residential........... $1,062,640 78.76% $ 903,955 81.00% 954,424 86.49% $732,512 86.34% $462,604 90.46%
Multi-family, commercial
real estate and 193,520 14.34 123,491 11.07 78,046 7.07 52,689 6.21 29,492 5.77
commercial.........
School financing...... 61,969 4.59 51,909 4.65 31,748 2.88 24,429 2.88 2,708 0.53
Construction ......... 35,023 2.60 36,768 3.29 36,056 3.26 27,648 3.26 7,591 1.48
Consumer.............. 5,336 0.40 8,479 0.76 9,595 0.87 14,880 1.75 10,733 2.10
------------ -------- ----------- -------- ---------- --------- ---------- ----------- -------- ---------
Total loans...... $1,358,488 100.69% 1,124,602 100.77 1,109,869 69,100.57 852,158 100.44 513,128 100.34
Less allowance for loan
and valuation losses 9,338 0.69 8,581 0.77 6,354 0.57 3,710 0.44 1,756 0.34
------------ -------- ----------- -------- ---------- ---------- ---------- ----------- -------- ---------
Loans receivable, net. 1,349,150 100.00 $1,116,021 100.00% $1,103,515 100.00% $848,448 100.00% $511,372 100.00%
============ ======== =========== ======== ========== ========== ========== =========== ======== =========
The following table presents the aggregate maturities of loans in each
major category of our loan portfolio as of December 31, 2001, excluding the
allowance for loan losses. Loans held for sale are classified as maturing over
five years. Actual maturities may differ from the contractual maturities shown
below as a result of renewals and prepayments or the timing of loan sales.
As of December 31, 2001
------------------------------------------------------
Less than One to Over Five
One Year Five Years Years Total
------------- ------------ ------------ -------------
(In thousands)
Residential.............................................. $ 651,685 $ 405,125 $ 5,830 $ 1,062,640
Multi-family, commercial real estate and commercial...... 83,276 20,023 90,221 193,520
School financing......................................... 10,622 51,347 -- 61,969
Construction............................................. 28,223 6,800 -- 35,023
Consumer................................................. 1,754 2,292 1,290 5,336
------------- ------------ ------------ -------------
Total loans ........................................ $ 775,560 $ 485,587 $ 97,341 $ 1,358,488
============= ============ ============ =============
Included in the balance of residential loans are approximately $434.3
million of loans originated by Matrix Financial that are committed for sale.
Although the majority of the loans are fixed rate, we have very little interest
risk associated with the loans because they are committed for sale.........
Loans held for sale, excluding the allowance for loan losses, which are
primarily contractually due in less than one to five years, are split between
fixed and adjustable rates as follows:
As of December 31, 2001
-----------------------------------------------------
Less than One to Over Five
One Year Five Years Years Total
------------- ------------ ------------ ------------
(In thousands)
Fixed ................................................... $ 562,041 $ 166,336 $ 799 $ 729,176
Adjustable............................................... 144,849 289,817 709 435,375
------------- ------------ ------------ ------------
Total loans ........................................ $ 706,890 $ 456,153 $ 1,508 $1,164,551
============= ============ ============ ============
Loans held for investment, excluding the allowance for loan losses, which
are contractually due in one or more years, are split between fixed and
adjustable rates as follows:
As of December 31, 2001
-----------------------------------------------------
Less than One to Over Five
One Year Five Years Years Total
------------- ------------ ------------ ------------
(In thousands)
Fixed ................................................... $ 11,805 $ 8,193 $19,660 $ 39,658
Adjustable............................................... 56,864 21,241 76,174 154,279
------------- ------------ ------------ ------------
Total loans ........................................ $ 68,669 $ 29,434 $95,834 $193,937
============= ============ ============ ============
Nonperforming Assets. As part of asset and liability management, we
monitor nonperforming assets on a monthly basis. Nonperforming assets consist
primarily of nonaccrual loans and foreclosed real estate. Loans are placed on
nonaccrual when full payment of principal or interest is in doubt or when they
are past due 90 days as to either principal or interest. Foreclosed real estate
37
arises primarily through foreclosure on mortgage loans owned. The following
table sets forth our nonperforming assets as of the dates indicated:
As of December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Nonaccrual residential mortgage loans............ $ 19,039 $ 22,592 $ 20,185 $ 8,208 $ 4,796
Nonaccrual commercial loans and school
financing .................................... 18,172 5,792 5,301 4,349 --
Nonaccrual consumer loans........................ 40 132 155 652 194
----------- ----------- ----------- ----------- -----------
Total nonperforming loans................... 37,251 28,516 25,641 13,209 4,990
Foreclosed real estate........................... 8,355 2,646 800 916 1,242
----------- ----------- ----------- ----------- -----------
Total nonperforming assets.................. $ 45,606 $ 31,162 $ 26,441 $ 14,125 6,232
=========== =========== =========== =========== ===========
Total nonperforming loans
to total loans................................ 2.74 % 2.54% 2.31% 1.55% 0.97%
Total nonperforming assets to total assets....... 2.79 % 2.20% 2.06% 1.40% 1.03%
Ratio of allowance for loan and valuation losses
to total nonperforming loans................. 25.07 % 30.09% 24.78% 28.09% 35.19%
Interest income on nonperforming loans not
included in interest income.................. $ 1,773 $ 1,016 $ 979 $ 524 $ 89
We accrue for interest on government-sponsored loans such as Federal
Housing Administration insured and Veteran's Administration guaranteed loans
which are past due 90 or more days, as the majority of the interest on these
loans is insured by the federal government. The aggregate unpaid principal
balance of government-sponsored accruing loans that were past due 90 or more
days was $55.2 million, $101.1 million and $147.9 million as of December 31,
2001, 2000 and 1999, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were
1.4% at December 31, 2001, 2.1% at December 31, 2000, 1.8% at December 31, 1999,
1.0% at December 1998 and 0.9% at December 31, 1997. The nonaccrual residential
mortgage loans have improved at December 31, 2001 as compared to December 30,
2000. The improvement is due to maturity and improvement in certain portfolios
acquired in 2000 and 1999 on which the recourse option we had was eliminated
with the bankruptcy of the seller/servicer. The balance of these loans in
nonaccrual at December 31, 2001 totals $4.9 million as compared to $6.8 million
at December 31, 2000. Associated with these nonaccrual loans, we have recorded
$1.8 million of discounts.
The increase in nonaccrual commercial loans and school financing in 2001 is
primarily attributable to the increased volume of our SBA originated and
purchased loans and the increased amount of those loans in nonaccrual status,
which at December 31, 2001 was $8.1 million. It should be noted, however, that
approximately $5.7 million of the interest and principal of these loans is
guaranteed, and as such, our credit risk is minimized despite the increase in
the balances. With regard to our school financing, a majority of our origination
of tax-exempt financing for charter schools is for the purchase of real estate
and equipment. We have noted that many of our charter schools have encountered
enrollment and/or state funding delays with their start-up, which has delayed
their funding and caused the school's loans to us to become delinquent. We have
historically, however, been able to work with many of the schools on their cash
flow issues and eventually removed them from the delinquent lists.
The prior delinquency and anticipated future delinquencies are taken into
consideration in the pricing of the loans acquired. We generally purchase such
loans at discounts and, in limited instances, receive recourse from the seller
to further reduce our risk of loss associated with the loans' nonaccrual status.
At December 31, 2001, $15.0 million, or 40.3%, of the nonaccrual loans were
loans that were residential loans purchased in bulk loan portfolios and remain
classified as "held for sale." Total loans held for sale at December 31, 2001,
were $1.2 billion, of which $4.7 million, or 0.41%, were nonaccrual loans
related to commercial loans and school financing held for sale.
The increase in foreclosed real estate in 2001 as compared to 2000 is
primarily due to one commercial real estate property in Colorado of
approximately $3.9 million, which was foreclosed upon in December 2001. This
property was sold in February 2002 at no principal loss to Matrix Bank.
Analysis of Allowance for Loan and Valuation Losses. The following table
sets forth information regarding changes in our allowance for loan and valuation
losses for the periods indicated. The table includes the allowance for both
loans held for investment and loans held for sale.
38
As of and for the Year Ended December 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ----------- ----------- ----------- ----------
(Dollars in thousands)
Balance at beginning of period................. $ 8,581 $ 6,354 $ 3,710 $ 1,756 $ 1,039
Charge-offs:
Real estate - mortgage (1)................ 872 434 98 1,922 22
Real estate - construction ............... 31 320 -- -- --
Commercial loans and school financing .... 746 819 -- -- --
Consumer.................................. 659 476 509 789 166
------------ ------------ ----------- ----------- ----------
Total charge-offs.................... 2,308 2,049 607 2,711 188
Recoveries:
Real estate-mortgage...................... 4 1 2 2 --
Consumer.................................. 81 40 69 56 31
------------ ------------ ----------- ----------- ----------
Total recoveries..................... 85 41 71 58 31
------------ ------------ ----------- ----------- ----------
Net charge-offs................................ 2,223 2,008 536 2,653 157
Provision for loan losses charged to operations 2,980 4,235 3,180 4,607 874
------------ ------------ ----------- ----------- ----------
Balance at end of period....................... $ 9,338 $ 8,581 $ 6,354 $ 3,710 $ 1,756
============ ============ =========== =========== ==========
Ratio of net charge-offs to average loans...... 0.17% 0.18% 0.06% 0.38% 0.04%
============ ============ =========== =========== ==========
Average loans outstanding during the period.... $1,338,613 $1,086,041 $ 877,117 $ 692,443 $355,848
============ ============ =========== =========== ==========
- ----------
(1) A majority of the increase in real estate mortgage charge-offs for 1998 as
compared to 1997 is due to the loss recognized which related to loans
acquired under an alleged fraudulent agreement. No future losses are
anticipated.
The allowance for loan and valuation losses is analyzed by management as
discussed below and is increased by the provision for loan and valuation losses,
which is charged to operations, as necessary. The allowance for loan and
valuation losses is calculated, in part, based on historical loss experience. In
addition, management takes into consideration other factors, such as:
o qualitative evaluations of individual classified assets;
o geographic and other portfolio concentrations;
o new products or markets;
o evaluations of the changes in the historical loss experience
component; and
o projections of this component into the current and future periods
based on current knowledge and conditions.
These loss factors range from 0.10% for Federal Housing
Administration/Veteran's Administration loans guaranteed by the Department of
Housing and Urban Development, to 8.00% for credit card loans. The loss factors
are applied to the outstanding principal balance of loans in their respective
categories. Loans in the commercial and school finance portfolios are assigned
loss factors based on items similar to those listed, plus additional individual
loan review on all significant loans, including SBA loans, which result in loans
being classified as watch, substandard or doubtful.
The Company considers a loan impaired when, based on current information
and events, it is probable that it will be unable to collect all amounts due
according to the contractual terms of the loan. Accordingly, potential impaired
loans of the Company include only commercial loans, real estate construction
loans, commercial real estate mortgage loans and school financing. Impairment
allowances are considered by the Company in determining the overall adequacy of
the allowance for loan losses.
After an allowance has been established for the loan portfolio, management
establishes a portion of the allowance for loan losses, which is attributed to
factors that cannot be associated with a specific loan or loan portfolio. The
Company evaluates its residential loans collectively due to their homogeneous
nature. These factors include:
o general economic conditions;
o recognition of specific regional geographic concerns;
o loan type and the assessed risk inherent in each loan category; and
o trends in the portfolio and portfolio growth trends.
39
Substandard and doubtful loans of homogeneous loan portfolios are assigned
loss factors of 5.00% to 50.00%. The loss factors are applied to the outstanding
principal balances of loans in their respective categories.
The total for all categories as described above determines our allowance
for loan and valuation losses. Loan losses are charged against the allowance
when the probability of collection is considered remote.
The following table shows information regarding the components of our
allowance for loan and valuation losses as of the dates indicated:
As of December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------- --------------------- --------------------- --------------------- ------------------
Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans
in each in each in each in each in each
Category Category Category Category Category
Amount to Amount to Amount to Amount to Amount to
Total Total Total Total Total
Loans Loans Loans Loans Loans
--------- ----------- --------- ---------- --------- ----------- --------- ---------- ------- ----------
(Dollars in thousands)
Residential..............$3,918 78.30% $4,133 80.39% $3,591 86.00% $2,295 85.96% $1,234 90.15%
Multi-family,
commercial real 2,400 14.15 1,684 11.28 835 7.02 564 6.18 91 5.75
estate and commercial ..
School financing......... 2,527 4.56 2,329 4.31 1,320 2.86 275 2.87 -- 0.53
Construction............. 445 2.59 302 3.27 286 3.25 207 3.24 23 1.48
Consumer................. 48 0.40 133 0.75 322 0.87 369 1.75 408 2.09
--------- ----------- --------- ---------- --------- ----------- --------- ---------- ------- ----------
$9,338 100.00% $8,581 100.00% $6,354 100.00% $3,710 100.00% $1,756 100.00%
========= =========== ========= ========== ========= =========== ========= ========== ======= ==========
The ratio of the allowance for loan and valuation losses to total loans
was 0.69% at December 31. 2001; 0.77% at December 31, 2000; 0.57% at December
31, 1999; 0.44% at December 31, 1998; and 0.34% at December 31, 1997. The
allowance for loan and valuation losses is reduced by loans charged off, net of
recoveries. The balance of the allowance for loan and valuation losses allocated
to residential, multi-family, commercial real estate, commercial, school
financing and construction loans has increased mainly due to the increased
outstanding loan principal balances in these loan categories. In addition, we
have increased our origination of non 1-4 family loans, which are perceived to
be higher risk and also are a contributor to the overall increase in the balance
of the allowance. As of December 31, 2001, we believe that the allowance, when
taken as a whole, is adequate to absorb losses in the current loan portfolio.
Risk Sensitive Assets and Liabilities. As discussed in "Asset and
Liability Management--General" a significant portion of our earnings and
ultimate success is partially dependent upon our ability to manage our interest
rate risk. Interest rate risk can be defined as the exposure of our net interest
income to adverse movements in interest rates. Although we manage other risks,
such as credit, operational and liquidity risk in the normal course of business,
we consider interest rate risk to be a significant market risk which could
potentially have the largest material effect on our financial condition and
results of operations. The majority of our market risk related to interest rates
exists within the operations of Matrix Bank. However, Matrix Financial also has
interest rate risk related to its primary asset, mortgage servicing rights, and
also related to its loan origination volumes, as well as the net interest income
earned on its originated loans that are funded through warehouse lines of
credit. With the majority of Matrix Financial's operations being funded by
Matrix Bank, this is a smaller risk to the Company as compared to when Matrix
Financial's operations were funded entirely by unaffiliated financial
institutions. The susceptibility to movements in interest rates affects the cash
flows generated from the mortgage servicing rights which are recorded in other
income versus interest income. In a decreasing interest rate environment, the
underlying servicing portfolio tends to prepay faster which reduces future
servicing income; while in an increasing interest rate environment, prepayments
tend to decrease, which increases expected future servicing income. As it
relates to Matrix Financial's lending activities, Matrix Financial originates
residential mortgage loans, which are generally pre-sold. However, between the
time that the loan is originated and sold to the ultimate investor, Matrix
Financial earns interest income. The loans are funded through the use of
warehouse credit facilities or borrowings from Matrix Bank, both of which are
generally priced based on short-term interest rates. Therefore, the net interest
income that is earned by Matrix Financial is generally dependent on the spread
between long-term mortgage rates and short-term interest rates. Aside from
Matrix Financial's investment in servicing rights, the majority of the risk
associated with interest rate movements relates more to the overhead associated
with our origination platform. As discussed, a significant portion of the loan
origination is directly related to the interest rate environment. Overhead
significantly increased in 2001 to support the higher levels of originations. As
a result, when interest rates increase and originations decrease, there is a
risk that we will not be able to manage our overhead proportionally to the
overall decrease in loan origination income.
40
We currently do not maintain a trading portfolio. As a result, we are not
exposed to market risk as it relates to trading activities. The majority of our
residential loan portfolio is held for sale which requires us to perform
quarterly market valuations of the portfolio in order to properly record the
portfolio at the lower of aggregate cost or market. Therefore, we continually
monitor the interest rates of our loan portfolio as compared to prevalent
interest rates in the market.
Interest rate risk management at Matrix Bank is the responsibility of the
Asset and Liability Committee, which reports to the board of directors of Matrix
Bank. The Asset and Liability Committee establishes policies that monitor and
coordinate our sources, uses and pricing of funds. The Asset and Liability
Committee is also involved in formulating our budget and strategic plan as it
relates to investment objectives. We have engaged a third party to provide
consulting services that assists us with our asset/liability management. We meet
with this consulting firm quarterly to review the results of our interest rate
risk analysis and to discuss strategies. We are also researching various
asset/liability software packages for possible future acquisition by Matrix
Bank. Part of the modeling which is done is to comply with the requirements of
the Office of Thrift Supervision.
We continue to attempt to reduce the volatility in net interest income by
managing the relationship of interest rate sensitive assets to interest rate
sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate
residential mortgages and have increased our efforts regarding the origination
of residential construction loans, commercial real estate loans, SBA loans and
limited consumer lending, which re-price or mature more quickly than fixed rate
residential real estate loans. In the fourth quarter of 2001, we began a
strategy of purchasing with the intent to sell the guaranteed portion of SBA
loans. Again, the loans generally adjust with prime and present very little
interest rate risk. The other significant asset that we invest in is residential
mortgage servicing rights. The value and cash flows from residential mortgage
servicing rights respond counter-cyclically to the value of fixed rate
mortgages. When interest rates increase and the value of fixed rate mortgages
decrease, in turn decreasing net interest income, the value of the mortgage
servicing rights increase. In a decreasing interest rate environment, the
inverse occurs. It is important to note, however, that an equal increase or
decrease in interest rates will not affect the value of our mortgage servicing
rights portfolio equally. A decrease in interest rates causes a greater
reduction in the value of the portfolio as compared to the increase in value in
the portfolio from an equal increase in interest rates. Another significant
strategy that we focus on in managing interest rate risk is identifying lines of
business that generate noninterest rate sensitive liabilities. Examples of this
strategy are the investment in mortgage servicing rights, which generate no cost
escrow deposits; Sterling Trust's operations, which administer deposits with
relatively low costs; and our investment in Matrix Settlement & Clearance
Services, which uses Matrix Bank as the clearing bank, which creates low-cost
deposits.
In the ordinary course of business, we make commitments to originate
residential mortgage loans and hold originated loans until delivery to an
investor. Inherent in this business are risks associated with changes in
interest rates and the resulting change in the market value of the pipeline
loans. We mitigate this risk through the use of mandatory and best effort
forward commitments to sell loans and mortgage-backed securities. As of December
31, 2001, we had $155.0 million and $492.6 million in pipeline and funded loans,
respectively, offset with mandatory forward commitments of $434.3 million and
best effort forward commitments of $96.2 million. The market value of loans
committed for sale is determined based on the related forward loan sale
commitments. Effective January 1, 2001, with the adoption of SFAS 133, we were
required to treat substantially all mortgage loan commitments and loan sale
commitments (both mandatory and best effort) as derivatives and record the fair
value of those derivatives on the balance sheet and any subsequent changes in
the fair value of those derivatives through current earnings. As the changes in
fair value of the loan commitments and the loan sale commitments are generally
expected to offset one another, we do not anticipate any material impact to our
future earnings from pipeline loans as a result of the adoption of SFAS 133.
Ownership of mortgage servicing rights exposes us to impairment of their
value in certain interest rate environments. The incidence of prepayment of a
mortgage loan increases during periods of declining interest rates as the
homeowner seeks to refinance the loan to a lower interest rate. If the level of
prepayment on segments of our mortgage servicing portfolio achieves a level
higher than we projected for an extended period of time, then an impairment in
the associated basis in the mortgage servicing rights may occur. To mitigate
this risk of impairment due to declining interest rates, we hedged a segment of
our portfolio beginning in September 1997. We had identified and hedged $353.2
million as of December 31, 2000 of our mortgage servicing portfolio using a
program of exchange-traded futures and options. Due to FASB 133 and the low
interest rate environment, we elected to discontinue our hedging strategy in the
first quarter of 2001. The Company has no immediate plans to reinstate its
hedging strategy of using derivative products. We have, however, developed a
different strategy to address the risk as discussed below.
With regards to our interest-sensitive liabilities during 2001, and in
order to take advantage of the historically low interest rates, Matrix Bank has
41
entered into short option agreements and other longer term advances (2 to 5
years) totaling $120 million, which have interest rates ranging from 2.69% to
4.85%. It is anticipated that our interest margin will benefit in the long term
from locking in these interest rates.
The following tables represent, in tabular form, contractual balances of
our on balance sheet financial instruments in dollars at the expected maturity
dates, as well as the fair value of those on balance sheet financial instruments
for the periods ended December 31, 2001 and 2000. The expected maturity
categories take into consideration historical and anticipated prepayment speeds,
as well as actual amortization of principal and do not take into consideration
the reinvestment of cash. Our assets and liabilities that do not have a stated
maturity date, such as interest-earning deposits, Federal Home Loan Bank stock
and certain other deposits, are considered to be long term in nature and are
reported in the thereafter column. We are very active in the secondary market as
it relates to the purchase and sale of mortgage loans. We use a five-year
maturity assumption for all of Matrix Bank's held for sale loans and school
financing, and we use a one-year maturity assumption for Matrix Financial's
originated loans held for sale. We also treat the Federal Home Loan Bank and
revolving borrowings as long term in nature, as the continued availability of
these amounts is anticipated indefinitely. Third party servicers service a
portion of our loan portfolio; as a result, a portion of the information
presented is based on the best available information.
For the most part, the carrying amounts of interest-earning deposits,
Federal Home Loan Bank stock, Federal Home Loan Bank borrowings and borrowed
money approximate those assets' and liabilities' fair values. The fair values of
the loan portfolios held for sale and held for investment are based on quoted
market prices or outstanding commitments from investors. If quoted market prices
are not available, fair values are based on quoted market prices of similar
loans sold in securitization transactions, adjusted for differences in loan
characteristics. The fair values of demand deposits are, by definition, equal to
the amount payable upon demand at the reporting date. The fair value of time
deposits are based upon the discounted value of contractual cash flows, which is
estimated using interest rates currently being offered on certificates to a
schedule of aggregated expected periodic maturities on time deposits.
Mortgage servicing rights are not included in the tabular presentation, as
the investment does not directly affect interest income. As noted, however,
earnings from mortgage servicing rights directly correlate with market risk as
it relates to interest rate fluctuations. We attempt to mitigate a portion of
this risk by the type of mortgage servicing rights we acquire. The loans
underlying the servicing rights acquired tend to be more seasoned and have lower
principal balances. Management believes that the more seasoned, lower balance
servicing portfolios carry less prepayment risk than less seasoned, higher
balance mortgage servicing, because the cost savings of refinancing a lower
balance loan tend to be less than for a higher balance loan with a comparable
interest rate. We also believe that if a loan has been outstanding for a period
of time and has been through several declining interest rate cycles without
refinancing, the risk of prepayment in the future is less than a newly
originated loan. In addition, in 2001 we began to retain a portion of our
originated servicing. Based on the interest rate environment prevalent
throughout 2001, the Company believes that retaining servicing that was
generated in the lower interest rate environment will incur less prepayment
risk. Although significantly higher in 1999 and 1998, the prepayment percentages
which we have experienced over the past three years have been lower than
experienced in the industry, as a whole. The prepayment speeds for the years
ended December 31, 2001, 2000 and 1999 were 22.9%, 12.1%, and 20.6%,
respectively. In the tables below, prepayment speeds of 19% and 12% for 2001 and
2000, respectively, were used for all loan types to project expected cash flows.
These assumptions are based on our historical prepayment speeds, as well as our
knowledge and experience in the market.
The Company's on balance sheet financial instruments for the period ended
December 31, 2001:
42
Expected Maturity Date - Fiscal Year Ended December 31,
----------------------------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 after Total Value
---------- ----------- ----------- ----------- ---------- ----------- ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Available for sale:
Fixed-rate mortgage-backed
securities.................. $ 584 $ -- $ -- $ -- $ -- $ -- $ 584 $ 584
Average interest rate.... 6.50 % -- % -- % -- % -- % -- % 6.50 %
Adjustable-rate mortgage-
backed and SBA securities.. $ 6,379 $ -- $ -- $ -- $ -- $ -- $ 6,379 $ 6,379
Average interest rate...... 6.95 % -- % -- % -- % -- % -- % 6.95 %
Held for sale (1)(2)(8):
Fixed-rate residential loans. $542,650 $ 29,010 $ 29,010 $ 29,010 $ 29,011 $ -- $ 658,691 $ 661,697
Average interest rate.... 7.20 % 8.51 % 8.51 % 8.51 % 8.51 % -- % 7.43 %
Adjustable-rate residential
loans...................... $101,771 $ 72,335 $ 72,335 $ 72,336 $ 72,365 $ -- $ 391,142 $ 391,504
Average interest rate.... 7.50 % 7.50 % 7.50 % 7.50 % 7.50 % -- % 7.50 %
Fixed-rate commercial and
other loans................ $ 14,610 $ 51,071 $ -- $ -- $ -- $ 795 $ 66,476 $ 66,478
Average interest rate.... 9.22 % 10.08 % -- % -- % -- % 9.07 % 10.38 %
Adjustable-rate commercial
and other loans............ $ 40,787 $ 10 $ 45 $ 41 $ 92 $ 705 $ 41,680 $ 41,702
Average interest rate.... 5.64 % 8.89 % 8.89 % 8.89 % 8.89 % 8.89 % 5.71 %
Held for investment(2):
Fixed-rate residential loans. $ 856 $ 686 $ 550 $ 440 $ 353 $ 1,331 $ 4,216 $ 4,228
Average interest rate(3). 8.20 % 8.20 % 8.20 % 8.20 % 8.20 % 8.20 % 8.20 %
Adjustable-rate residential . $ 466 $ 371 $ 296 $ 234 $ 186 $ 653 $ 2,206 $ 2,211
Average interest rate(3). 7.18 % 7.18 % 7.18 % 7.18 % 7.18 % 7.18 % 7.18 %
Fixed-rate consumer loans.... $ 1,869 $ 1,403 $ 1,038 $ -- $ -- $ -- $ 4,310 $ 4,325
Average interest rate(3). 10.43 % 10.43 % 10.43 % -- % -- % -- % 10.43 %
Adjustable-rate consumer
loans(4)................... $ 261 $ 201 $ 153 $ 115 $ 87 $ 109 $ 926 $ 928
Average interest rate(3). 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % 7.45 %
Fixed-rate other loans(5).... $ 10,263 $ 7,789 $ 5,471 $ 4,068 $ 2,973 $ -- $ 30,564 $ 30,656
Average interest rate(3). 8.92 % 8.92 % 8.92 % 8.92 % 8.92 % -- % 8.92 %
Adjustable-rate other
loans(4)(5)................ $ 50,290 $ 37,878 $ 18,356 $ 13,984 $ 10,557 $17,874 $ 148,939 $ 149,313
Average interest rate(3). 7.42 % 7.42 % 7.42 % 7.42 % 7.42 % 7.42 % 7.42 %
Federal funds sold.............. $ 400 $ -- $ -- $ -- $ -- $ -- $ 400 $ 400
Average interest rate.... 1.81 % -- % -- % -- % -- % -- % 1.81 %
Interest-earning deposits....... $ -- $ -- $ -- $ -- $ -- $31,559 $ 31,559 $ 31,559
Average interest rate.... -- % -- % -- % -- % -- % 1.47 % 1.47 %
Federal Home Loan Bank stock.... $ -- $ -- $ -- $ -- $ -- $18,181 $ 18,181 $ 18,181
Average interest rate.... -- % -- % -- % -- % -- % 3.00 % 3.00 %
Total interest-earning assets. $766,222 $200,754 $127,254 $120,228 $115,624 $71,207 $1,401,289 $1,410,145
========= ========== ========== ========== ========= ========== =========== ===========
Interest-bearing liabilities:
Passbook accounts............... $ -- $ -- $ -- $ -- $ -- $ 4,291 $ 4,291 $ 4,291
Average interest rate.... -- % -- % -- % -- % -- % 4.47 % 4.47 %
NOW accounts(6)................. $ -- $ -- $ -- $ -- $ -- $ 40,046 $ 40,046 $ 40,046
Average interest rate.... -- % -- % -- % -- % -- % 2.57 % 2.57 %
Money market accounts........... $ -- $ -- $ -- $ -- $ -- $249,234 $ 249,234 $ 249,234
Average interest rate.... -- % -- % -- % -- % -- % 2.11 % 2.11 %
Certificates of deposit over $ 16,674 $ 2,545 $ 1,960 $ 711 $ 520 $ -- $ 22,410 $ 22,797
$100,000...........................
Average interest rate.... 5.13 % 5.61 % 4.76 % 6.92 % 5.06 % -- % 5.20 %
Brokered certificates of deposit. $351,271 $ -- $ -- $ 10,000 $ -- $ -- $ 361,271 $ 362,079
Average interest rate......... 4.13 % -- % -- % 4.85 % -- % -- % 4.15 %
Other certificates of deposit... $ 82,281 $ 12,719 $ 11,788 $ 8,230 $ 6,828 $ -- $ 121,846 $ 123,631
Average interest rate.... 5.32 % 5.10 % 4.80 % 6.66 % 5.18 % -- % 5.33 %
Federal Home Loan Bank
borrowings(7)................. $ -- $ -- $ -- $ -- $ -- $303,361 $ 303,361 $ 309,931
Average interest rate.... -- % -- % -- % -- % -- % 2.94 % 2.94 %
Revolving borrowings............ $ -- $ -- $ -- $ -- $ -- $143,415 $ 143,415 $ 143,415
Average interest rate.... -- % -- % -- % -- % -- % 3.68 % 3.68 %
Term borrowings................. $ 1,478 $ 7,184 $ 10,455 $ -- $ -- $ 59,500 $ 78,617 78,617
Average interest rate.... 8.00 % 8.23 % 11.50 % -- % -- % 9.76 % 9.82 %
Total interest-bearing
liabilities.................. $451,704 $ 22,448 $ 24,203 $ 18,941 $ 7,348 $799,847 $1,324,491 $1,334,041
========= ========== ========== ========== ========= ========== =========== ===========
43
- ----------
(1) Loans held for sale are assumed to mature within one year.
(2) Balances are stated net of discounts and other deductions.
(3) For the fixed-rate loans held for investment, we computed a weighted
average interest rate and a weighted average maturity for the loan
portfolio and then applied a prepayment assumption of 19% in determining
the cash flows. The same approach was used for the adjustable-rate loans,
which are generally fully indexed loans.
(4) The adjustable-rate loans generally are indexed to the 1-year treasury.
However, included in the balance are loans indexed to 11th district cost of
funds, prime and 3-, 5- and 7-year treasury.
(5) Other consists of multi-family, commercial real estate, commercial, land
and construction loans.
(6) Excludes noninterest-bearing demand deposits of approximately $67.1
million.
(7) See "--Short-term Borrowings" for additional discussion on the term of the
Federal Home Loan Bank borrowings.
(8) The value of the hedging instruments used with our loan portfolio are
included in the balance of the loans for purposes of fair value disclosure.
See discussion regarding FAS 133 for additional information.
The Company's on balance sheet financial instruments for the period ended
December 31, 2000:
Expected Maturity Date - Fiscal Year Ended December 31,
----------------------------------------------------------------------
There-after Fair
2001 2002 2003 2004 2005 Total Value
---------- ----------- ----------- ----------- ---------- ----------- ------------ ------------
(Dollars in thousands)
Interest-earning assets:
Available for sale:
Fixed-rate mortgage-backed
securities.................. $ 4,540 $ -- $ -- $ -- $ -- $ -- $ 4,450 $ 4,540
Average interest rate.... 7.54 % -- % -- % -- % -- % -- % 7.54 %
Adjustable-rate mortgage-
backed securities........... $ 62,076 $ -- $ -- $ $ -- $ -- $ 62,076 $ 62,076
Average interest rate.... 8.31 % -- % -- % -- % -- % -- % 8.31 %
Held for sale (1)(2):
Fixed-rate residential loans. $176,811 $ 48,130 $ 48,130 $ 48,130 $ 48,130 $ -- $369,331 $ 371,637
Average interest rate.... 8.28 % 8.56 % 8.56 % 8.56 % 8.56 % -- % 8.42 %
Adjustable-rate residential
loans....................... $124,104 $ 99,858 $ 99,858 $ 99,857 $ 99,857 $ -- $523,534 $ 526,802
Average interest rate.... 8.51 % 8.47 % 8.47 % 8.47 % 8.47 % -- % 8.47 %
Fixed-rate commercial and
other loans................. $ 9,926 $ 9,926 $ 9,926 $ 9,926 $ 9,926 $ -- $ 49,630 $ 49,630
Average interest rate.... 10.65 % 10.65 % 10.65 % 10.65 % 10.65 % -- % 10.65 %
Held for investment(2):
Fixed-rate residential loans. $ 602 $ 526 $ 460 $ 402 $ 351 $ 2,139 $ 4,480 $ 4,665
Average interest rate(3). 8.10 % 8.10 % 8.10 % 8.10 % 8.10 % 8.10 % 8.10 %
Adjustable-rate residential
loans(4)................... $ 495 $ 432 $ 377 $ 329 $ 287 $ 1,608 $ 3,528 $ 3,673
Average interest rate(3). 8.47 % 8.47 % 8.47 % 8.47 % 8.47 % 8.47 % 8.47 %
Fixed-rate consumer loans.... $ 2,513 $ 2,170 $ 1,870 $ -- $ -- $ -- $ 6,553 $ 6,538
Average interest rate(3). 10.93 % 10.93 % 10.93 % -- % -- % -- % 10.93 %
Adjustable-rate consumer
loans(4)................... $ 351 $ 306 $ 265 $ 230 $ 199 $ 322 $ 1,673 $ 1,669
Average interest rate(3). 11.04 % 11.04 % 11.04 % 11.04 % 11.04 % 11.04 % 11.04 %
Fixed-rate other loans(5).... $ 9,064 $ 7,787 $ 6,670 $ 5,694 $ 4,842 $ -- $ 34,057 $ 34,182
Average interest rate(3). 9.31 % 9.31 % 9.31 % 9.31 % 9.31 % -- % 9.31 %
Adjustable-rate other
loans(4)(5)................ $ 24,048 $ 20,919 $ 18,172 $ 15,761 $ 13,646 $ 30,688 $123,234 $ 123,688
Average interest rate(3). 10.66 % 10.66 % 10.66 % 10.66 % 10.66 % 10.66 % 10.66 %
Federal funds sold.............. $ 20,000 $ -- $ -- $ -- $ -- $ -- $ 20,000 $ 20,000
Average interest rate.... 5.94 -- -- -- -- -- 5.94
Interest-earning deposits....... $ -- $ -- $ -- $ -- $ -- $ 15,631 $ 15,631 $ 15,631
Average interest rate.... -- % -- % -- % -- % -- % 4.27 % 4.27 %
Federal Home Loan Bank stock.... $ -- $ -- $ -- $ -- $ -- $ 27,814 $ 27,814 $ 27,814
Average interest rate.... -- % -- % -- % -- % -- % 6.52 % 6.52 %
Total interest-earning assets. $434,530 $ 190,054 $185,728 $180,329 $177,238 $ 78,202 $1,246,081 $ 1,252,545
========= ========== ========== ========== ========= ========= =========== =========
Interest-bearing liabilities:
Passbook accounts............... $ -- $ -- $ -- $ -- $ -- $ 3,010 $ 3,010 $ 3,010
Average interest rate.... -- % -- % -- % -- % -- % 3.44 % 3.44 %
NOW accounts(6)................. $ -- $ -- $ -- $ -- $ -- $ 33,000 $ 33,000 $ 33,000
Average interest rate.... -- % -- % -- % -- % -- % 2.01 % 2.01 %
Money market accounts........... $ -- $ -- $ -- $ -- $ -- $ 122,992 $ 122,992 $ 122,992
Average interest rate.... -- % -- % -- % -- % -- % 2.37 % 2.37 %
Certificates of deposit over
$100,000...................... $ 11,382 $ 5,161 $ 871 $ -- $ 1,401 $ -- $ 18,815 $ 18,916
Average interest rate.... 6.54 % 6.67 % 6.47 % -- % 6.58 % -- % 6.57 %
Brokered certificates of deposit. $175,600 $ 28,000 $ -- $ -- $ -- $ -- $ 203,600 $ 204,129
Average interest rate......... 6.42 % 6.53 % -- % -- % -- % -- % 6.44 %
Other certificates of deposit... $120,968 $ 33,448 $ 4,870 $ 1,440 $ 7,540 $ -- $ 168,266 $ 169,390
Average interest rate.... 6.48 % 6.58 % 6.13 % 5.59 % 6.68 % -- % 6.49 %
Federal Home Loan Bank
borrowings(7)................. $ -- $ -- $ -- $ -- $ -- $ 519,433 $ 519,433 $ 521,194
Average interest rate.... -- % -- % -- % -- % -- % 6.29 % 6.29 %
Revolving borrowings............ $ -- $ -- $ -- $ -- $ -- $ 66,288 $ 66,288 $ 66,288
Average interest rate.... -- % -- % -- % -- % -- % 8.26 % 8.26 %
Term borrowings................. $ 3,793 $ 1,468 $ 5,398 $ 20,056 $ -- $ 27,500 $ 58,215 $ 52,965
Average interest rate.... 9.65 % 8.28 % 8.28 % 11.50 % -- % 10.00 % 10.29 %
Total interest-bearing
liabilities................. $311,743 $ 68,077 $ 11,139 $ 21,496 $ 8,941 $ 772,223 $1,193,619 $ 1,191,884
========= ========== ========== ========== ========= ========= =========== ===========
- ----------
(1) Loans held for sale are assumed to mature within one year.
(2) Balances are stated net of discounts and other deductions.
44
(3) For the fixed-rate loans held for investment, we computed a weighted
average interest rate and a weighted average maturity for the loan
portfolio and then applied a prepayment assumption of 12% in determining
the cash flows. The same approach was used for the adjustable-rate loans,
which are generally fully indexed loans.
(4) The adjustable-rate loans generally are indexed to the 1-year treasury.
However, included in the balance are loans indexed to 11th district cost of
funds, prime and 3-, 5- and 7-year treasury.
(5) Other consists of multi-family, commercial real estate, commercial, land
and construction loans.
(6) Excludes noninterest-bearing demand deposits of approximately $53.0
million.
(7) See "--Short-term Borrowings" for additional discussion on the term of the
Federal Home Loan Bank borrowings.
(8) Other consists of multi-family, commercial real estate, commercial
(including SBA), land and construction loans.
(9) Excludes noninterest-bearing demand deposits of approximately $21.2
million.
(10) See "--Short-term Borrowings" for additional discussion on the term of the
Federal Home Loan Bank borrowings.
Short-term Borrowings. A primary function of asset and liability management
is to ensure adequate liquidity. In addition to cash and cash equivalents, we
rely heavily on short-term borrowing capabilities for liquidity and as a funding
vehicle. The primary sources for short-term borrowings are the Federal Home Loan
Bank for Matrix Bank, Matrix Bank and unaffiliated financial institutions for
Matrix Financial and, at Matrix Bancorp, the revolving portion of the bank stock
loan. See "Liquidity and Capital Resources."
The following table sets forth a summary of our short-term borrowings
during 2001, 2000 and 1999 and as of the end of each such period:
Average
Amount Amount Maximum Weighted Weighted
Outstanding Outstanding Outstanding Average Average
at During the at any Interest Interest
Year-End Year(1) Month-End Rate During Rate at
the Year Year-End
------------------------------------------------------------- ---------------
(Dollars in thousands)
At or for the year ended December 31, 2001:
Federal Home Loan Bank borrowings(2)..... $ 303,361 $ 347,807 $ 478,921 4.62% 2.94%
Revolving lines of credit................ 95,450 58,097 95,450 4.51 3.56
School financing......................... 44,965 46,160 60,100 6.02 3.86
At or for the year ended December 31, 2000:
Federal Home Loan Bank borrowings(3)..... 519,433 430,331 526,450 6.33 6.29
Revolving lines of credit................ 21,956 40,701 52,750 8.23 7.63
Repurchase agreements.................... 385 3,240 6,906 10.70 8.75
School financing......................... 44,308 30,262 44,308 8.18 8.56
At or for the year ended December 31, 1999:
Federal Home Loan Bank borrowings(4)..... 405,000 175,619 417,606 5.23 5.64
Revolving lines of credit................ 28,205 49,762 73,878 6.38 6.71
Repurchase agreements.................... 3,156 7,157 12,467 10.11 8.67
School financing......................... 22,819 21,853 25,379 7.56 7.77
- ----------
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
(2) A total of $136.0 million of the Federal Home Loan Bank borrowings
outstanding at December 31, 2001 were borrowed under short option advance
agreements with the Federal Home Loan Bank. The interest rates on the
short option advance borrowings ranged from 2.69% to 5.63% at December 31,
2001 and their possible call dates varied from February 20, 2002 to
November 13, 2006. Additionally, $1.4 million of the Federal Home Loan
Bank borrowings outstanding at December 31, 2001 are fixed-term/rate
advances, which were borrowed from the Federal Home Loan Bank to offset
specific loans originated by Matrix Bank. The principal amount of these
fixed-term/rate advances adjust monthly based on an amortization schedule.
The interest rate on the fixed-term/rate advances was 5.84%, and their
maturity date is June 2, 2014.
(3) A total of $26.0 million of the Federal Home Loan Bank borrowings
outstanding at December 31, 2000 were borrowed under a short option
advance agreement with the Federal Home Loan Bank. These short option
advance borrowings have a term of ten years, but are callable by the
Federal Home Loan Bank beginning after a six-month or one-year lockout
period depending on the particular short option advance borrowing. After
the expiration of the lock-out period, the short option advance borrowings
are callable at three month intervals. If the Federal Home Loan Bank
exercises its call option on a short option advance borrowing, the Federal
Home Loan Bank is required to offer replacement funding to us at a market
rate of interest for the remaining term of the short option advance
borrowing. The interest rates on the short option advance borrowings
ranged from 5.40% to 5.63% at December 31, 2000 and their possible call
dates varied from February 20, 2001 to March 26, 2001. Under the terms of
the short option advance agreement, we are not permitted to prepay or
otherwise retire a callable short option advance borrowing prior to the
final maturity date. Additionally, $1.4 million of the Federal Home Loan
Bank borrowings outstanding at December 31, 2000 are fixed-term/rate
advances, which were borrowed from the Federal Home Loan Bank to offset
specific loans originated by Matrix Bank. The principal amount of these
fixed-term/rate advances adjust monthly based on an amortization schedule.
The principal amount of these fixed-term/rate advances adjust monthly
based on an amortization schedule. The interest rate on the
fixed-term/rate advances was 5.84% and their maturity date is June 2,
2014. Matrix Bank also had short-term, fixed-term/rate borrowings
outstanding at December 31, 2000 from the Federal Home Loan Bank. These
45
short-term, fixed-term/rate borrowings totaled $150.0 million, with
interest rates ranging from 6.00% to 6.23% and maturity dates ranging from
March 27, 2001 through June 26, 2001.
(4) A total of $100.0 million of the Federal Home Loan Bank borrowings
outstanding at December 31, 1999 were borrowed under a short option
advance agreement with the Federal Home Loan Bank. The interest rates on
the short option advance borrowings ranged from 4.90% to 5.63% at December
31, 1999 and their possible call dates varied from January 14, 2000 to
December 26, 2000. Additionally, $1.5 million of the Federal Home Loan
Bank borrowings outstanding at December 31, 1999 are fixed-term/rate
advances, which were borrowed from the Federal Home Loan Bank to offset
specific loans originated by Matrix Bank. The principal amount of these
fixed-term/rate advances adjust monthly based on an amortization schedule.
The interest rate on the fixed-term/rate advances was 5.84%, and their
maturity date is June 2, 2014.
Liquidity and Capital Resources
Liquidity is our ability to generate funds to support asset growth, satisfy
disbursement needs, maintain reserve requirements and otherwise operate on an
ongoing basis. To date, our principal source of funding for our investing
activities has been:
o secured senior debt provided by unaffiliated financial institutions;
o the issuance of preferred securities through Matrix Bancorp Capital
Trust I in 1999, Matrix Bancorp Capital Trust II, III and IV in 2001;
o the issuance of 11.5% senior notes in September 1997;
o a bank stock loan; and
o our initial public offering.
As of December 31, 2001, Matrix Bancorp had $81.5 million in indebtedness
outstanding. The borrowed funds have been used historically as capital
injections to Matrix Bank, Matrix Financial, Matrix Capital Markets and ABS.
On December 27, 2000, Matrix Bancorp amended its bank stock loan agreement.
The amended bank stock loan agreement has two components, a $10.0 million term
loan and a revolving line of credit of $10.0 million. As of December 31, 2001,
the balance of the term loan was $8.6 million and the balance of the revolving
line of credit was $3.0 million. The amended bank stock loan requires Matrix
Bancorp to maintain total shareholders' equity of $60.0 million. We exceed this
requirement by 19%. The term loan has a three-year term with a maturity of
December 27, 2003. The revolving line of credit is annually renewed. At December
31, 2001, the revolving line of credit was renewed for three months. At this
time, management is confident that an additional renewal will be done.
On July 30, 1999, Matrix Bancorp Capital Trust I (Trust I), a Delaware
business trust formed by Matrix Bancorp, completed the sale of $27.5 million of
10% preferred securities. Trust I also issued common securities to Matrix
Bancorp and used the net proceeds from the offering to purchase $28.6 million in
principal amount of 10% junior subordinated debentures of Matrix Bancorp due
September 30, 2029. The junior subordinated debentures are the sole assets of
Trust I and are eliminated, along with the related income statement effects, in
the consolidated financial statements.
The preferred securities accrue and pay distributions quarterly at an
annual rate of 10% of the stated liquidation amount of $25 per preferred
security. We have fully and unconditionally guaranteed all of the obligations of
Trust I under the preferred securities. The guarantee covers the quarterly
distributions and payments on liquidation or redemption of the preferred
securities, but only to the extent of funds held by Trust I.
The preferred securities are mandatorily redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indenture. We have the right to redeem the junior subordinated debentures, in
whole or in part on or after September 30, 2004, at a redemption price specified
in the indenture plus any accrued but unpaid interest to the redemption date.
See Note 9 to the consolidated financial statements included elsewhere in this
document. Under the indenture, we are prohibited from paying dividends on our
common stock if the scheduled payments on our junior debentures and trust
preferred securities have not been made.
On March 28, 2001, Matrix Bancorp Capital Trust II (Trust II), a Delaware
business trust formed by the Company, completed the sale of $12.0 million of
10.18% preferred securities. Trust II also issued common securities to the
Company and used the net process from the offering to purchase $12.4 million in
principal amount of 10.18% junior subordinated debentures of the Company due
June 8, 2031. The junior subordinated debentures are the sole assets of Trust II
and are eliminated, along with the related income statement effects, in the
consolidated financial statements.
The preferred securities accrue and pay distributions quarterly at an
annual rate of 10.18% of the stated liquidation amount of $1,000 per preferred
46
security. The Company has fully and unconditionally guaranteed all of the
obligations of Trust II under the preferred securities. The guarantee covers the
quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust II.
The preferred securities are mandatorily redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures. The Company has the right to redeem the junior subordinated
debentures, in whole or in part, on or after June 8, 2011, at a redemption price
specified in the indenture plus any accrued but unpaid interest to the
redemption date.
On July 16, 2001, Matrix Bancorp Capital Trust III (Trust III), a Delaware
business trust formed by the Company, completed the sale of $15.0 million of
10.25% preferred securities. Trust III also issued common securities to the
Company and used the net process from the offering to purchase $15.5 million in
principal amount of 10.25% junior subordinated debentures of the Company due
July 25, 2031. The junior subordinated debentures are the sole assets of Trust
III and are eliminated, along with the related income statement effects, in the
consolidated financial statements.
The preferred securities accrue and pay distributions quarterly at an
annual rate of 10.25% of the stated liquidation amount of $1,000 per preferred
security. The Company has fully and unconditionally guaranteed all of the
obligations of Trust III under the preferred securities. The guarantee covers
the quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust III.
The preferred securities are mandatorily redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures. The Company has the right to redeem the junior subordinated
debentures, in whole or in part, on or after July 25, 2006, at a redemption
price specified in the indenture plus any accrued but unpaid interest to the
redemption date.
On November 28, 2001, Matrix Bancorp Capital Trust IV (Trust IV), a
Delaware business trust formed by the Company, completed the sale of $5.0
million of floating rate of the six-month LIBOR plus 3.75% (6.007% for period
ended December 31, 2001) preferred securities. Trust IV also issued common
securities to the Company and used the net process from the offering to purchase
$5.2 million in principal amount of floating rate of the six-month LIBOR plus
3.75% junior subordinated debentures of the Company due December 8, 2031. The
junior subordinated debentures are the sole assets of Trust IV and are
eliminated, along with the related income statement effects, in the consolidated
financial statements.
The preferred securities accrue and pay distributions quarterly at a
floating annual rate as described above of the stated liquidation amount of
$1,000 per preferred security. The Company has fully and unconditionally
guaranteed all of the obligations of Trust III under the preferred securities.
The guarantee covers the quarterly distributions and payments on liquidation or
redemption of the preferred securities, but only to the extent of funds held by
Trust IV.
The preferred securities are mandatorily redeemable upon the maturity of
the junior subordinated debentures or upon earlier redemption as provided in the
indentures. The Company has the right to redeem the junior subordinated
debentures, in whole or in part, on or after December 8, 2006, at a redemption
price specified in the indenture plus any accrued but unpaid interest to the
redemption date.
Capitalized expenses associated with all of the trust preferred securities
offerings of approximately $2.3 million are included in other assets at December
31, 2001 and are being amortized on a straight-line basis over the life of the
junior subordinated debentures.
On September 29, 1997, we completed a registered debt offering of $20.0
million in senior notes due 2004, raising net proceeds of approximately $19.1
million. Interest on the senior notes of 11.5% is payable semi-annually on March
31 and September 30 of each year, commenced on March 31, 1998, with a balloon
payment for the entire principal balance due in September 2004. The 11.5% senior
notes require us to:
o maintain consolidated tangible equity capital of not less than $35
million; and
o meet the requirements necessary such that Matrix Bank will not be
classified as other than "well capitalized" as defined by applicable
regulatory guidelines.
Additionally, the 11.5% senior notes contain other covenants regarding certain
restricted payments, incurrence of indebtedness and issuance of preferred stock,
liens, merger, consolidation or sale of assets and transactions with affiliates.
As of December 31, 2001, due to repurchases made by the Company of the senior
notes, there remained $10.5 million of the debt issue outstanding.
47
Matrix Bancorp has guaranteed, with 50% recourse to our joint venture
partner, the indebtedness of Matrix Settlement & Clearance Services to U.S.
Bank, N.A., in an amount of no greater than $3 million. There was no balance
outstanding at Matrix Settlement & Clearance Services on such indebtedness at
December 31, 2001.
The trend of net cash used by our operating activities experienced over the
reported periods results primarily from the growth at Matrix Bank and more
recently the growth at Matrix Financial and ABS. We anticipate the trend of a
net use of cash from operations to continue for the foreseeable future. However,
due to liquidity and capital availability, we do not anticipate growth to be as
significant as in prior periods.
Matrix Bank's primary source of funds for use in lending, purchasing bulk
loan portfolios, investing and other general purposes are:
o retail deposits;
o trust deposits;
o custodial escrow balances;
o brokered deposits;
o Federal Home Loan Bank borrowings;
o sales of loan portfolios; and
o proceeds from principal and interest payments on loans.
Contractual loan payments and net deposit inflows are a generally predictable
source of funds, while loan prepayments and loan sales are significantly
influenced by general market interest rates and economic conditions. Borrowings
on a short-term basis are used as a cash management vehicle to compensate for
seasonal or other reductions in normal sources of funds. Matrix Bank utilizes
advances from the Federal Home Loan Bank as its primary source for borrowings.
At December 31, 2001, Matrix Bank had overnight and term borrowings from the
Federal Home Loan Bank of $303.4 million. The availability of Federal Home Loan
Bank borrowings is based on the level of collateral pledged. Generally, the
availability will be limited to the lesser of 90% of the collateral pledged or
50% of total assets. The custodial escrow balances held by Matrix Bank fluctuate
based upon the mix and size of the related mortgage servicing rights portfolios
and the timing of payments for taxes and insurance, as well as the level of
prepayments which occur. For a tabular presentation of the our short-term
borrowings, see "Asset and Liability Management--Short-term Borrowings."
Matrix Bank offers a variety of deposit accounts having a range of
interest rates and terms. Matrix Bank's retail deposits principally consist of
demand deposits and certificates of deposit. The flow of deposits is influenced
significantly by general economic conditions, changes in prevailing interest
rates and competition. Matrix Bank's retail deposits are obtained from areas in
which it is located, as well as through an Internet service. Therefore, its
retail deposits are concentrated primarily in Las Cruces and Sun City, except
for the Internet deposits, which could be out-of-market retail deposits. Matrix
Bank relies principally on customer service, marketing programs and its
relationships with customers to attract and retain in-market deposits. Beginning
in February 1998, brokered deposits were accepted and have been utilized to
support growth at Matrix Bank. In pricing deposit rates, management considers
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors. Matrix Bank intends to continue its
efforts to attract deposits as a primary source of funds to support its lending
and investing activities.
The following table sets forth the average balances for each major category
of Matrix Bank's deposit accounts and the weighted-average interest rates paid
for interest-bearing deposits for the periods indicated:
Year Ended December 31,
-------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- -------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
Passbook accounts........... $ 3,467 3.12 % $ 2,981 3.42 % $ 2,758 3.48 %
NOW accounts................ 98,872 0.94 64,523 0.96 24,038 2.50
Money market accounts....... 203,757 2.11 130,592 2.34 189,154 3.04
Time deposits
(except brokered)......... 181,535 5.60 177,399 6.10 131,054 5.45
Brokered deposits........... 312,419 6.20 183,685 6.36 156,293 5.11
----------- ------------ ----------- ----------- ------------ -----------
Total deposits......... $ 800,050 4.36 % $ 559,180 4.70 % $ 503,297 4.29 %
----------- ------------ ----------- ----------- ------------ -----------
48
The following table sets forth the amount of Matrix Bank's certificates of
deposit that are greater than $100,000 by time remaining until maturity as of
December 31, 2001:
As of December 31, 2001
----------------------------------
Weighted Average
Amount Rate Paid
-------------- ------------------
(Dollars in thousands)
Three months or less............... $ 4,419 5.74 %
Over three months through six months.. 4,556 5.11
Over six months through twelve months. 7,699 4.78
Over twelve months.................... 5,736 5.43
-------------- ----------------
Total............................ $ 22,410 5.21 %
============== ================
We actively monitor Matrix Bank's compliance with regulatory capital
requirements. Historically, Matrix Bank has increased its core capital through
the retention of a portion of its earnings. Matrix Bank's future growth is
expected to be achieved through deposit growth, brokered deposits, borrowings
from the Federal Home Loan Bank and custodial deposits directed by affiliates.
We anticipate that such growth will require additional capital. The capital
requirements related to the anticipated growth will in part be fulfilled through
retention of earnings, potentially increasing our bank stock loan and future
possible debt or equity offerings.
Prior to Matrix Financial becoming a subsidiary of Matrix Bank, our
principal source of funding for our servicing acquisition activities and working
capital needs of Matrix Financial consisted of a line of credit facility and a
working capital facility provided to Matrix Financial by an unaffiliated
financial institution. As noted earlier, effective August 1, 2000, Matrix
Financial became a wholly owned subsidiary of Matrix Bank. The contribution of
Matrix Financial increased the capital of Matrix Bank by approximately $25
million. In addition, effective August 1, 2000, through financing provided by
Matrix Bank, Matrix Financial paid off its line of credit for the financing on
its servicing acquisitions and in 2000 paid off approximately $4 million of
higher costing borrowings under its purchase/repurchase facilities and paid off
its working capital facility.
Matrix Financial's principal source of funding for its loan origination
business consists of a warehouse line of credit provided to Matrix Financial by
Matrix Bank, and a warehouse line of credit provided to Matrix Financial by an
unaffiliated financial institution. As of November 20, 2001, Matrix Financial's
warehouse line of credit facility provided by an unaffiliated financial
institution was amended. It aggregates $120.0 million, of which $24.5 million
was available to be utilized as of December 31, 2001. It is anticipated that
effective March 31, 2002, the warehouse line will be reduced to $80.0 million.
At December 31, 2001, $95.5 million was outstanding under the warehouse line at
a weighted average interest rate of 3.05%. Borrowings under the warehouse line
of credit are secured by all of the mortgage loans funded with warehouse loan
proceeds and bear interest at the LIBOR rate plus a negotiated margin.
ABS School Services' principal source of funding for its loan origination
business consists of its internal capital, a loan sale facility provided by an
unaffiliated financial institution and a partnership trust with an unaffiliated
financial institution. As of December 31, 2001, $22.8 million was outstanding
under the loan sale facility at a weighted average interest rate of 4.92%.
Borrowings under the loan sale facility are secured by all of the school
financing sold and rates paid range from prime to 8% on the underlying loans.
Amounts available under the loan sale facility and the partnership trust are at
the lender's sole discretion. The loans financed through the loan sale facility
are sold to an unaffiliated financial institution under an agreement which
allows us to repurchase the loans at our sole option. The loan sale facility
also provides a full guarantee of principal and interest in the case of default
or loss. We are in the process of attempting to arrange additional financing
vehicles to assist in the financing of originations of further charter school
loans.
The Company has placed tax-exempt financing of approximately $22 million at
December 31, 2001 it originated to charter schools into several grantor trusts.
The trusts then issued Class "A" Certificates and Class "B" Certificates, with
the Class "A" Certificates being sold to various third party investors under a
private placement at a price of par.
The "A" Certificates are guaranteed by a letter of credit issued by a third
party investment bank, and the underlying financing. The "A" Certificates'
interest rate may be determined weekly, monthly or for a term for up to one
year. The interest rate and the term of the interest rate are determined by the
Remarking Agent, which is also the investment bank. Generally, the trusts are
short-term in nature with an average life of one year or less.
49
The "B" Certificates are owned in part by the Company and in part by the
investment bank. The interest rate paid on the "A" Certificates and the "B"
Certificates owned by the investment bank is considered the Company's financing
cost. The approximate cost of the financing at December 31, 2001 and 2000 was
2.75% and 7.23%, respectively. The interest that the Company receives through
its part ownership of the "B" Certificates is tax-exempt.
Although the investment bank acts as a guarantor to the "A" Certificates,
the Company provides limited recourse to the investment bank in all cases of
loss or default. Due to the nature of the recourse and the ability of the "A"
Certificate holders to put the certificates to the trusts, the transactions have
been accounted for as a secured financing.
Matrix Bank and Sterling Trust are restricted in certain instances from
paying dividends to Matrix Bancorp due to certain regulatory requirements. See
"Regulation and Supervision." Matrix Financial is prohibited from paying
dividends to Matrix Bank under its credit agreement dated September 29, 2000. At
December 31, 2001, we were in compliance with all debt covenants.
As discussed in "--Item 3. Legal Proceedings," we are from time to time
party to various litigation matters, in most cases, involving ordinary routine
claims incidental to our business. With respect to all pending litigation
matters, our ultimate legal and financial responsibility, if any, cannot be
estimated with certainty. As such, the impact on our liquidity and capital
cannot be estimated with certainty. We have not made an accrual for any losses
in the financial statements as of December 31, 2001 related to these matters.
One item of particular note, as discussed in the section noted above and in Note
14 of our consolidated financial statements, as of December 31, 2001, a
subsidiary of the Company has been named a defendant in an action that was tried
in Tarrant County, Texas District Court in the spring of 2000. The jury returned
a verdict adverse to the Company with respect to 2 of 12 theories of liability
posed by the plaintiffs, and the court has signed a judgment for certain of the
plaintiffs in the amount of approximately $6.4 million. The Company has filed an
appeal of this judgment and believes it has meritorious points of appeal and
intends to vigorously prosecute the appeal of this action. The ultimate
resolution of this matter could result in a loss of up to $6.4 million plus
post-judgment interest and additional attorneys' fees. The ultimate legal and
financial liability, if any, of the Company cannot be estimated with certainty.
To the extent additional information arises or our strategies change, it is
possible that our liability in any of these matters may change.
Inflation and Changing Prices
The consolidated financial statements and related data presented in this
document 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. Unlike most industrial companies, substantially all of our assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as prices of goods and services.
Critical Accounting Policies
The Company and its subsidiaries have established various accounting
policies which govern the application of accounting principles generally
accepted in the United States of America in the preparation and presentation of
the Company's consolidated financial statements. The significant accounting
policies of the Company are described in Note 2 of the consolidated financial
statements. Certain accounting policies involve significant judgments,
assumptions and estimates by management that have a material impact on the
carrying value of certain assets and liabilities, which management considers to
be critical accounting policies. The judgments, assumptions and estimates used
by management are based on historical experience, knowledge of the accounts and
other factors, which are believed to be reasonable under the circumstances.
Because of the nature of the judgments and assumptions made by management,
actual results could differ from these judgments and estimates, which could have
a material impact on the carrying values of assets and liabilities and the
results of operations of the Company.
The Company believes the allowance for loan and valuation losses is a
critical accounting policy that requires the most significant judgments,
assumptions and estimates used in preparation of its consolidated financial
statements. See discussion at "--Asset and Liability Management, Analysis of
Allowance for Loan and Valuation Losses" for a detailed description of the
Company's process and methodology related to the allowance for loan and
valuation losses.
50
The Company also considers the valuation of mortgage servicing rights to be
a critical accounting policy that requires judgments, assumptions and estimates
concerning impairment of their value in certain interest rate environments. See
"--Business, Mortgage Servicing Activities" for a detailed discussion of the
nature of the servicing rights, and see Note 2 of the consolidated financial
statements for a detailed discussion concerning the use of estimates in the
valuation of mortgage servicing rights.
The Company also considers the judgments and assumptions concerning
litigation as a critical accounting policy. The Company has been notified that
we are a defendant in a number of legal proceedings. Most of these cases involve
ordinary and routine claims incidental to our business. Based on management's
analysis, no accrual for loss has been made as of December 31, 2001 for any such
cases. See a full description of such proceedings at "--Legal Proceedings". With
respect to all pending litigation matters, our ultimate legal responsibility, if
any, cannot be estimated with certainty. Based on the ultimate outcome of such
proceedings, it is possible that future results of operations for any particular
quarterly or annual period could be materially affected by changes in our
assumptions related to such proceedings.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, which requires all
derivative instruments to be carried at fair value on the balance sheet. At the
time of adoption, the Company designated anew certain derivative instruments
used for risk management into hedging relationships in accordance with the
requirements of the new standard.
Derivative instruments used to hedge changes in the fair value of assets
and liabilities due to changes in interest rates were designated in fair value
hedge relationships. As a result of adopting the new standard, the Company
recorded transition amounts associated with establishing the fair value of the
derivatives and hedged items on the consolidated balance sheet. At January 1,
2001, a pre-tax transition loss of $550,000, or $360,000 after tax, was recorded
as a cumulative effect of a change in accounting principle.
In September 2000, the FASB issued Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
that replaces, in its entirety, SFAS 125. SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. SFAS 140 is effective for transfers
occurring after March 31, 2001 and the expanded disclosure requirements
regarding securitizations and collateral are effective for fiscal years ended
after December 15, 2000. The adoption of SFAS 140 did not have an impact on our
consolidated financial statements.
In June 2001, the FASB issued Statement No. 141, Business Combinations,
that supersedes APB Opinion No. 16 and FASB Statement No. 38. SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations except for certain qualifying combinations that were initiated
prior to July 1, 2001, and requires that intangible assets associated with a
business combination be recorded apart from goodwill if they meet certain
criteria. SFAS 141 also significantly increases the disclosures required about
business combinations. SFAS 141 is effective for all business combinations
completed after June 30, 2001. The adoption of SFAS 141 did not have an impact
on our consolidated financial statements.
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets, that supersedes APB Opinion No. 17. Under SFAS 142 goodwill
and intangible assets deemed to have indefinite lives are no longer amortized,
but are to be reviewed at least annually for impairment under impairment
guidelines established in the statement. SFAS 142 also changes the amortization
methodology on intangible assets that are deemed to have finite lives. Finally,
SFAS 142 adds to required disclosures regarding goodwill and intangible assets.
SFAS 142 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 142 at January 1, 2002 did not have a material impact on our
consolidated financial statements. Our goodwill balance at December 31, 2001 was
$1 million, and amortization expense was less than $100,000 per year.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that supersedes FASB Statement No.
121 and APB Opinion No. 30. SFAS 144 provides guidance on differentiating
between assets held and used, held for sale, and held for disposal other than by
sale, and the required valuation of such assets based on the criteria. SFAS 144
is effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 144 at January 1, 2002 did not have a material impact on our
consolidated financial statements.
51
Forward Looking Statements
Certain statements contained in this annual report that are not historical
facts, including, but not limited to, statements that can be identified by the
use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," "predict," "believe," "plan," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and involve a number of risks and uncertainties.
The actual results of the future events described in such forward-looking
statements in this annual report could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are: third party claims or actions in relation to
the ongoing or future bankruptcies of the Company's customers; interest rate
fluctuations; level of delinquencies; defaults and prepayments; general economic
conditions; competition; government regulation; possible future litigation; the
actions or inactions of third parties, including those that are parties to the
existing bankruptcies of the Company's customers or litigation related thereto;
unanticipated developments in connection with the bankruptcy actions or
litigation described above, including judicial variation from existing legal
precedent and the decision by one or more parties to appeal decisions rendered;
the risks and uncertainties discussed elsewhere in this annual report and in the
Company's current report on Form 8-K, filed with the Securities and Exchange
Commission on March 14, 2001; and the uncertainties set forth from time to time
in the Company's periodic reports, filings and other public statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Item 7."Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset and Liability Management - Risk Sensitive
Assets and Liabilities" and Item 1."Business Mortgage Servicing Activities -
Hedging of Servicing Rights."
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On April 3, 2001, our Audit Committee recommended to our Board of
Directors that we not renew our engagement with Ernst & Young LLP as our
independent auditors and to appoint KPMG LLP to be our principal independent
auditors and to audit our consolidated financial statements for the fiscal year
ending December 31, 2001. Our Board of Directors accepted the recommendation of
the Audit Committee on April 3, 2001. The Audit Committee and the Board of
Directors based their decisions on competitive bids submitted by the two firms.
The dismissal of Ernst & Young and the appointment of KPMG both were effective
as of April 16, 2001.
Ernst & Young's reports on our consolidated financial statements for
fiscal years of 1999 and 2000 did not contain an adverse opinion or disclaimer
of opinion, nor were the reports qualified or modified as to uncertainty, audit
scope or accounting principles. During fiscal years 1999 and 2000 and the
subsequent interim period, there were no disagreements between us and Ernst &
Young on any matter of accounting principle or practices, financial statement
disclosure, or auditing scope or procedure, which would have caused Ernst &
Young to make a reference to the subject matter of the disagreements in
connection with their reports. Ernst & Young further has not performed any work
on any subsequent period to December 31, 2000.
We did not consult with KPMG with regard to any matter concerning the
application of accounting principles to any specific transactions, either
completed or proposed, or the type of audit opinion that might be rendered with
respect to our financial statements prior to engaging the firm.
PART III
Items 10 through 13.
The information for these items is incorporated from the definitive proxy
statement to be filed with the Commission.
52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (a) (2) Financial statements and financial statement
schedules
See Index to Financial Statements on page F-1.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Exhibit Index, beginning on page II-1.
(d) Financial Statement Schedules
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 13th day of
March, 2002.
Matrix Bancorp, Inc.
By: /s/ Guy A. Gibson
-----------------------------------
Guy A. Gibson
President and Chief Executive
Officer
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 dates indicated.
Signatures Title Date
/s/ Guy A. Gibson President, Chief Executive March 13, 2002
- ------------------------------------
Guy A. Gibson Officer and a Director
(Principal Executive Officer)
/s/ Richard V. Schmitz Chairman of the Board March 13, 2002
- ------------------------------------
Richard V. Schmitz
/s/ D. Mark Spencer Vice Chairman and Director March 13, 2002
- ------------------------------------
D. Mark Spencer
/s/ David W. Kloos Senior Vice President, Chief March 13, 2002
- ------------------------------------ Financial Officer and a Director
David W. Kloos (Principal Accounting and
Financial Officer)
/s/ David A. Frank Director March 13, 2002
- ------------------------------------
David A. Frank
/s/ Robert T. Slezak Director March 13, 2002
- ------------------------------------
Robert T. Slezak
/s/ Lester Ravitz Director March 13, 2002
- ------------------------------------
Lester Ravitz
INDEX TO EXHIBITS
3.1 /// Amended and Restated Articles of Incorporation of the Registrant (3.1)
3.2 + Bylaws, as amended, of the Registrant (3.2)
4.1 ++ Indenture by and among the Registrant and First Trust National Association, as trustee, relating
to 11.50% Senior Notes due 2004 (4.1)
4.2 * First Amendment to the Indenture, dated as of December 5, 2001, by and between the Registrant and
U.S. Bank National Association (the successor to First Trust National Association), as
trustee, relating to 11.50% Senior Notes due 2004
4.3 + Specimen certificate for Common Stock of the Registrant (4.1)
4.4 + o Amended and Restated 1996 Stock Option Plan (4.2)
4.5 ******o Amendment No. 1 to the 1996 Amended and Restated Employee Stock Option Plan of the Registrant
(4.1)
4.6 ******o Amendment No. 2 to the 1996 Amended and Restated Employee Stock Option Plan of the Registrant
(4.2)
4.7 // o Employee Stock Purchase Plan, as amended (4.4)
4.8 ^ Indenture by and among the Registrant and State Street Bank and Trust Company, as trustee,
relating to the 10% Junior Subordinated Debentures due 2029 (4.7)
4.9 ^ Form of Junior Subordinated Debentures (4.8)
4.10 ^ Certificate of Trust of Matrix Bancorp Capital Trust I (4.9)
4.11 ^ Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust I (4.10)
4.12 ^ Preferred Security Certificate for Matrix Bancorp Capital Trust I (4.11)
4.13 ^ Preferred Securities Guarantee Agreement of the Company relating to the Preferred Securities
(4.12)
4.14 ^ Agreement as to the Expenses and Liabilities (4.13)
4.15 ^^o Matrix Bancorp, Inc. Executive Deferred Compensation Plan (4.1)
4.16 ^^ Trust Agreement, dated December 7, 2000 between Matrix Bancorp, Inc. and Matrix Bancorp, Inc., as
Trustee (4.2)
4.17 ^^^ Amended and Restated Trust Agreement, dated May 11, 2001, between Matrix Bancorp, Inc. and Matrix
Bancorp, Inc., as Trustee (14.2)
4.18 **** Indenture between the Registrant and Wilmington Trust Company, as debenture trustee, dated as of
March 28, 2001, relating to the 10.18% junior subordinated deferrable interest debentures
due June 8, 2031 (10.5)
4.19 **** Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust II, dated as of March
28, 2001 (10.6)
4.20 **** Common Securities Guarantee Agreement of the Registrant, dated as of March 28, 2001 (10.7)
4.21 **** Capital Securities Agreement of the Registrant, dated as of March 28, 2001 (10.8)
4.22 ***** Indenture between the Registrant and The Bank of New York, as debenture trustee, dated as of July
16, 2001, relating to the 10.25% junior subordinated deferrable interest debentures due
July 25, 2031 (10.3)
4.23 ***** Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust III, dated as of July
16, 2001 (10.4)
4.24 ***** Common Securities Subscription Agreement of the Registrant, dated as of July 16, 2001 (10.5)
4.25 ***** Capital Securities Agreement of the Registrant, dated as of June 28, 2001 (10.6)
4.26 * Indenture between the Registrant and Wilmington Trust Company, as trustee, dated as of November
28, 2001, relating to Floating Rate Junior Subordinated Debt Securities due 2031
4.27 * Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust IV, dated as of
November 28, 2001
4.28 * Guarantee Agreement of the Registrant, dated as of November 28, 2001
4.29 *****o Amended and Restated Executive Deferred Compensation Plan of Registrant (4.1)
10.1 * Lease dated as of December 21, 2001 by and between Matrix Bancorp, Inc. and WXI/SEV Realty, LLC
10.2 + Assignment and Assumption Agreement, dated as of June 28, 1996, by and among Mariano C. DeCola,
William M. Howdon, R. James Nicholson and Matrix Funding Corp. (10.30)
10.3 + Development Management Agreement, dated as of June 28, 1996, by and among Fort Lupton, L.L.C. and
Matrix Funding Corp. (10.31)
10.4 /// Coyote Creek Planned Unit Development Agreement, dated as of July 1, 1998, by and among Fort
Lupton, L.L.C. and Matrix Funding Corp. (10.12)
10.5 + Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as of November
28, 1995 (10.36)
10.6 *** Credit Agreement, dated as of September 29, 2000, between Matrix Financial Services Corporation,
as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders
(10.2)
10.7 **** First Amendment to Credit Agreement, dated as of March 5, 2001, by and between Matrix Financial
Services Corporation, as borrower, and U.S. Bank National Association, as agent, and
certain lenders, as lenders (10.1)
10.8 **** Second Amendment to Credit Agreement, dated as of April 11, 2001, by and between Matrix Financial
Services Corporation, as borrower, and U.S. Bank National Association, as agent, and
certain lenders, as lenders (10.2)
10.9 ***** Third Amendment to Credit Agreement, dated as of June 29, 2001, by and between Matrix Financial
Services Corporation, as borrower, and U.S. Bank National Association, as agent, and
certain lenders, as lenders (10.1)
10.10 ****** Fourth Amendment to Credit Agreement, dated as of September 28, 2001, by and between Matrix
Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent,
and certain lenders, as lenders (10.1)
10.11 * Fifth Amendment to Credit Agreement, dated as of November 20, 2001, by and between Matrix
Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent,
and certain lenders, as lenders
10.12 *** Guaranty, dated as of September 29, 2000, from the Registrant to U.S. Bank National Association,
as agent (10.3)
10.13 / o Employment Agreement, dated as of February 4, 1997, by and between The Vintage Group, Inc. and
Paul Skretny (10.38)
10.14 +o Amendment of Employment Agreement (dated as of February 4, 1997) dated as of February 4, 2000, by
and between The Vintage Group, Inc. and Paul E. Skretny (10.32)
10.15 *o Amendment of Employment Agreement (dated as of February 4, 1997) dated as of February 4, 2002, by
and between The Vintage Group, Inc. and Paul E. Skretny
10.16 //// Credit Agreement, dated as of December 27, 2000, by and between Registrant, as borrower, and U.S.
Bank National Association, as agent, and certain lenders, as lenders (10.15)
10.17 **** First Amendment to Credit Agreement, dated as of March 5, 2001, by and between Registrant, as
borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders
(10.3)
10.18 ***** Second Amendment to Credit Agreement, dated as of July 27, 2001, by and between Registrant, as
borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders
(10.2)
10.19 * Third Amendment to Credit Agreement, dated as of December 26, 2001, by and between Registrant, as
borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders
10.20 +++ Agreement and Plan of Merger, dated as of March 25, 1998, among Fidelity National Financial,
Inc., MCC Merger, Inc. and Matrix Capital Corporation (99.2)
10.21 ++ Merger Termination Agreement between Matrix Capital Corporation, Fidelity National Financial,
Inc., and MCC Merger Sub, Inc., dated August 28, 1998 (10.1)
10.22 ** Executive Employment Agreement, dated as of April 20, 2000, by and between United Financial, Inc.
and Carl G. de Rozario (10.6)
10.23 //// Lease dated as of September 1, 1999, by and between Matrix Financial Services Corporation and
Suncor Development Company (10.22)
10.24 //// Lease with a reference date of 1999, by and between the Registrant and the Regents of the
University of Colorado (10.23)
10.25 //// First Amendment to Lease, dated as of July, 2000, by and between the Registrant and the Regents
of the University of Colorado, amending the Lease with a reference date of 1999 between the
parties (10.24)
10.26 //// Second Amendment to Lease, dated as of October, 2000, by and between the Registrant and the
Regents of the University of Colorado, amending the Lease with a reference date of 1999
between the parties (10.25)
10.27 ////o Matrix Bancorp, Inc. Executive Incentive Plan (10.27)
10.28 * Promissory Note, dated as of January 31, 2002, from D. Mark Spencer, as maker, to the Registrant,
as payee
10.29 *o Matrix Bancorp, Inc. (f/k/a Matrix Capital Corporation) 401(k) Profit Sharing Plan
10.30 *o Amendment No. 1, effective as of January 1, 1994, to the Registrant's 401(k) Profit Sharing Plan
10.31 *o Amendment No. 2, effective as of May 20, 1996, to the Registrant's 401(k) Profit Sharing Plan
10.32 *o Amendment No. 3, effective as of July 20, 1998, to the Registrant's 401(k) Profit Sharing Plan
10.33 *o Amendment No. 4, effective as of December 30, 2001, to the Registrant's 401(k) Profit Sharing Plan
12 * Statement Re: Computations of Ratios
21 * Subsidiaries of the Registrant
23 * Consent of KPMG LLP
- ----------
* Filed herewith
+ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's registration statement on Form S-1 (No. 333-10223), filed
by the Registrant with the Commission on August 15, 1996.
++ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's registration statement on Form S-1 (No. 333-34977), filed
by the Registrant with the Commission on September 4, 1997.
+++ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's report on Form 8-K, filed by the Registrant with the
Commission on April 8, 1998.
/ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1996, filed by the Registrant with the Commission.
// Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1997, filed by the Registrant with the Commission.
/// Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1998, filed by the Registrant with the Commission.
////Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 2000, filed by the Registrant with the Commission.
+ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's current report on Form 8-K filed by the Registrant with the
Commission on June 30, 2000.
++ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 1998, filed by the Registrant with the Commission.
** Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended June
30, 2000, filed by the Registrant with the Commission.
*** Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 2000, filed by the Registrant with the Commission.
****Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended March
31, 2001, filed by the Registrant with the Commission.
***** Incorporated by reference from the exhibit number shown in parenthesis
from the Registrant's quarterly report on Form 10-Q for the quarter ended
June 30, 2001, filed by the Registrant with the Commission.
****** Incorporated by reference from the exhibit number shown in parenthesis
from the Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 2001, filed by the Registrant with the Commission.
^ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's registration statement on Form S-1 (No. 333-79731), filed
by the Registrant with the Commission on June 1, 1999.
^^ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's registration statement on Form S-8 (No. 333-51516), filed
by the Registrant with the Commission on December 8, 2000.
^^^ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's registration statement on Form S-8 (No. 75000), filed by
the Registrant with the Commission on December 12, 2001.
o Management contract or compensatory plan or arrangement.
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Matrix Bancorp, Inc. and Subsidiaries
Independent Auditors' Report, December 31, 2001.............................F-1
Report of Independent Auditors, December 31, 2000 and 1999..................F-2
Consolidated Balance Sheets--December 31, 2001 and 2000.....................F-3
Consolidated Statements of Income--for the years ended
December 31, 2001, 2000 and 1999............................................F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income--
for the years ended December 31, 2001, 2000 and 1999........................F-6
Consolidated Statements of Cash Flows--for the years ended
December 31, 2001, 2000 and 1999............................................F-7
Notes to Consolidated Financial Statements..................................F-9
Independent Auditors' Report
The Board of Directors and Shareholders
Matrix Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Matrix Bancorp,
Inc. and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Matrix Bancorp, Inc.
and subsidiaries as of December 31, 2001, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities.
/s/ KPMG LLP
KPMG LLP
Denver, Colorado
February 7, 2002
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Matrix Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Matrix Bancorp,
Inc. and subsidiaries as of December 31, 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 2000. These consolidated financial
statements are the responsibility of Matrix Bancorp, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Matrix
Bancorp, Inc. and subsidiaries at December 31, 2000, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Phoenix, Arizona
February 23, 2001
F-2
Matrix Bancorp, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
December 31
2001 2000
------------------------------------
Assets
Cash and cash equivalents $ 52,501 $ 17,539
Interest-earning deposits and federal funds sold 31,959 35,631
Securities available for sale 6,963 66,616
Loans held for sale, net 1,157,989 942,496
Loans held for investment, net 191,161 173,525
Mortgage servicing rights, net 78,712 71,529
Other receivables 71,239 58,262
Federal Home Loan Bank of Dallas stock, at cost 18,181 27,814
Premises and equipment, net 13,631 13,189
Other assets, net 24,451 12,194
------------------------------------
Total assets $ 1,646,787 $ 1,418,795
====================================
Liabilities and shareholders' equity
Liabilities:
Deposits $ 866,235 $ 602,669
Custodial escrow balances 129,665 77,647
Draft Payable 28,875 656
Payable for purchase of mortgage servicing rights 4,738 12,666
Federal Home Loan Bank of Dallas borrowings 303,361 519,433
Borrowed money 162,532 97,003
Guaranteed preferred beneficial interests 59,500 27,500
Other liabilities 8,348 13,848
Income taxes payable 12,221 3,350
------------------------------------
Total liabilities 1,575,475 1,354,772
------------------------------------
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred stock, par value $.0001; authorized
5,000,000 shares; no shares outstanding - -
Common stock, par value $.0001; authorized 50,000,000 shares;
issued and outstanding 6,518,604 shares at
December 31, 2001 and issued 6,795,904 shares
and outstanding 6,558,904 shares at December 31,2000 1 1
Additional paid-in capital 20,800 23,004
Treasury shares at cost, 237,000 shares at December 31, 2000 - (1,775)
Retained earnings 50,486 41,974
Accumulated other comprehensive income 25 819
------------------------------------
Total shareholders' equity 71,312 64,023
------------------------------------
Total liabilities and shareholders' equity $ 1,646,787 $ 1,418,795
====================================
See accompanying notes to consolidated financial statements.
F-3
Matrix Bancorp, Inc.
Consolidated Statements of Income
(Dollars in thousands except share information)
Year Ended December 31
2001 2000 1999
------------------------------------------------------
Interest income:
Loans, mortgage-backed and SBA securities $ 103,393 $ 93,965 $ 72,355
Interest-earning deposits 2,004 3,421 1,395
------------------------------------------------------
Total interest income 105,397 97,386 73,750
Interest expense:
Savings and time deposits 29,652 22,603 15,233
Demand and money market deposits 5,220 3,672 6,356
Federal Home Loan Bank of Dallas borrowings
16,071 27,242 9,184
Borrowed money 13,944 14,084 13,514
------------------------------------------------------
Total interest expense 64,887 67,601 44,287
------------------------------------------------------
Net interest income before provision for loan and
valuation losses 40,510 29,785 29,463
Provision for loan and valuation losses 2,980 4,235 3,180
------------------------------------------------------
Net interest income after provision for loan and
valuation losses 37,530 25,550 26,283
Noninterest income:
Loan administration 30,113 23,850 23,686
Brokerage 2,959 5,476 6,156
Trust services 4,036 4,923 4,840
Real estate disposition services 2,572 3,677 3,659
Gain on sale of loans, mortgage-backed and SBA
securities 1,475 982 3,247
Gain on sale of mortgage servicing rights, net 167 2,634 363
Loan origination 35,483 7,587 6,218
School services 5,427 4,240 2,813
Other 9,474 5,423 9,378
------------------------------------------------------
Total noninterest income 91,706 58,792 60,360
Noninterest expense:
Compensation and employee benefits 52,573 34,245 29,336
Amortization of mortgage servicing rights 21,862 9,851 16,403
Occupancy and equipment 6,525 4,785 3,727
Postage and communication 4,063 2,812 2,688
Professional fees 2,883 4,687 2,385
Data processing 2,907 2,413 1,688
Other general and administrative 25,086 19,048 13,359
------------------------------------------------------
Total noninterest expense 115,899 77,841 69,586
------------------------------------------------------
Income before income taxes 13,337 6,501 17,057
Provision for income taxes 4,465 2,243 6,278
------------------------------------------------------
F-4
Matrix Bancorp, Inc.
Consolidated Statements of Income (continued)
(Dollars in thousands except share information)
Year Ended December 31
2001 2000 1999
------------------------------------------------------
Income before cumulative effect of a change in
accounting principle 8,872 4,258 10,779
Less cumulative effect of a change in accounting
principle, net of tax benefit of $190,000 360 - -
======================================================
Net income $ 8,512 $ 4,258 $ 10,779
======================================================
Net income per common share before accounting
change $ 1.36 $ 0.63 $ 1.60
Less cumulative effect of a change in accounting
principle 0.05 - -
------------------------------------------------------
Net income per common share $ 1.31 $ 0.63 $ 1.60
======================================================
Net income per common share assuming dilution before
accounting change 1.35 0.63 1.58
Less cumulative effect of a change in accounting
principle 0.05 - -
------------------------------------------------------
Net income per common share - assuming dilution
$ 1.30 $ 0.63 $ 1.58
======================================================
Weighted average common shares 6,495,583 6,713,251 6,728,211
======================================================
Weighted average common shares - assuming
dilution 6,560,454 6,748,857 6,833,546
======================================================
See accompanying notes to consolidated financial statements.
F-5
Matrix Bancorp, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Dollars in thousands)
Accumulated
Common Stock Additional Other
------------------------- Paid-In Treasury Retained Comprehensive Comprehensive
Shares Amount Capital Shares Earnings Income Total Income
-------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,723,911 $ 1 $ 22,416 - $ 26,937 - $ 49,354
Issuance of stock related to
employee stock purchase
plan and options 35,330 - 364 - - - 364
-------------
Net income - - - - 10,779 - 10,779 $ 10,779
-----------------------------------------------------------------------------------=============
Balance at December 31, 1999 6,759,241 1 22,780 - 37,716 - 60,497
-----------------------------------------------------------------------------------
Shares repurchased (237,000) - - (1,775) - - (1,775)
Issuance of stock related to
employee stock purchase
plan and options 36,663 - 224 - - - 224
Comprehensive income:
Net income - - - - 4,258 - 4,258 4,258
Net unrealized holding gains - - - - 819 819 819
-------------
Comprehensive income $ 5,077
-----------------------------------------------------------------------------------=============
Balance at December 31, 2000 6,558,904 1 23,004 (1,775) 41,974 819 64,023
------------------------------------------------------------------------------------------------
Shares repurchased (86,500) (746) (746)
Shares retired (323,500 shares) (1,775) 1,775
Issuance of stock related to
employee stock purchase
plan and options 46,200 317 317
Comprehensive income:
Net income 8,512 8,512 $ 8,512
Net unrealized holding losses(1) - - - - (794) (794) (794)
-------------
Comprehensive income $ 7,718
----------------------------------------------------------------------------------=============
Balance at December 31, 2001 6,518,604 $ 1 $ 20,800 - $ 50,486 $ 25 $ 71,312
===============================================================================================
(1) Disclosure of reclassification amount
Unrealized holding loss arising during year ended December 31, 2001 $ (4)
Less: reclassification adjustment of gains included in net income (790)
-------------
Net unrealized holding losses $ (794)
=============
See accompanying notes to consolidated financial statements.
F-6
Matrix Bancorp, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31
2001 2000 1999
-------------------------------------------------
Operating activities
Net income $ 8,512 $ 4,258 $ 10,779
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 3,116 2,583 4,424
Provision for loan and valuation losses 2,980 4,235 3,180
Amortization of mortgage servicing rights 21,862 9,851 16,403
Impairment of mortgage servicing rights 181 - -
Unrealized gain on securities - 819 -
Deferred income taxes 12,003 (518) (391)
Gain on sale of loans, mortgage-backed and SBA
securities (1,475) (982) (3,247)
Gain on sale of mortgage servicing rights (167) (2,634) (363)
Gain on sale of building and equipment (3,425) (1,159) -
Loans originated for sale, net of loans sold (364,857) (125,944) 69,722
Loans purchased for sale (105,936) (225,898) (701,952)
Proceeds from sale of loans purchased for sale 76,074 108,466 192,722
Proceeds from sale of securities 59,586 - -
Originated mortgage servicing rights, net (30,266) (16) (1,514)
(Increase) decrease in other receivables and other
assets (22,513) 6,777 (6,796)
(Decrease) increase in other liabilities and income
taxes payable (8,483) (3,682) 2,369
-------------------------------------------------
Net cash used in operating activities (352,808) (216,480) (414,664)
Investing activities
Loans originated and purchased for investment (159,619) (202,300) (118,327)
Principal repayments on loans 345,031 353,713 303,026
Redemption (purchase) of Federal Home Loan Bank of Dallas
stock 9,633 (5,400) (6,771)
Purchases of premises and equipment (14,415) (7,089) (2,615)
Hedging of servicing portfolio, net - 95 (3,257)
Acquisition of mortgage servicing rights (8,321) (22,380) (28,694)
Proceeds from the sale of building and equipment 14,601 3,664 -
Proceeds from sale of mortgage servicing rights 1,600 3,537 2,827
-------------------------------------------------
Net cash provided by investing activities 188,510 123,840 146,189
F-7
Matrix Bancorp, Inc.
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
Year Ended December 31
2001 2000 1999
-------------------------------------------------
Financing activities
Net increase in deposits $ 263,566 $ 40,475 $ 71,678
Net increase (decrease) in custodial escrow balances 52,018 (16,559) (2,618)
(Decrease) increase in revolving lines and repurchase
agreements, net (138,946) 125,743 174,334
Payments of notes payable (13,298) (31,169) (31,890)
Proceeds from notes payable 1,786 2,325 33,395
Payment of financing arrangements (86) (63) (117)
Payment of subordinated debt - - (2,910)
Proceeds from junior subordinated debentures 30,977 - 26,063
Treasury shares repurchased (746) (1,775) -
Proceeds from issuance of common stock related to
employee stock purchase plan and options 317 224 364
-------------------------------------------------
Net cash provided by financing activities 195,588 119,201 268,299
-------------------------------------------------
Increase (decrease) in cash and cash equivalents 31,290 26,561 (176)
Cash and cash equivalents at beginning of the year 53,170 26,609 26,785
-------------------------------------------------
Cash and cash equivalents at end of the year $ 84,460 $ 53,170 $ 26,609
=================================================
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 62,520 $ 68,298 $ 41,139
=================================================
Cash paid for income taxes $ 4,557 $ 1,592 $ 5,248
=================================================
See accompanying notes to consolidated financial statements.
F-8
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements
1. Organization
Matrix Bancorp, Inc. (the Company) is a unitary thrift holding company that,
through its subsidiaries, is a diversified financial services company
headquartered in Denver, Colorado. The Company's operations are conducted
primarily through Matrix Capital Bank (Matrix Bank), Matrix Financial Services
Corporation (Matrix Financial), Matrix Capital Markets, Inc. (Matrix Capital),
Matrix Asset Management Corporation (Matrix Asset Management), ABS School
Services, L.L.C. (ABS), Sterling Trust Company (Sterling) and First Matrix
Investment Services Corporation (First Matrix), all of which are wholly owned
subsidiaries of the Company.
Matrix Bank, a federally chartered savings and loan association, serves its
local communities of Las Cruces, New Mexico, and Phoenix, Arizona, by providing
personal and business depository services, offering residential loans and
providing, on a limited basis, commercial real estate and consumer loans. During
2001, Matrix Bank announced the relocation of its domicile from Las Cruces to
Denver, Colorado. The relocation will be completed in the second quarter of
2002. Matrix Bank intends to offer all of its existing banking services in the
Denver market.
The Company's mortgage banking business is primarily conducted through Matrix
Financial, and was established with the primary objective of originating,
acquiring and servicing residential mortgage loan servicing rights. Matrix
Financial originates residential loans primarily through its wholesale loan
origination offices in Atlanta, Dallas, Denver, Chicago, Houston, Phoenix, Santa
Ana and St. Louis. Servicing mortgage loans involves the contractual right to
receive a fee for processing and administering mortgage loan payments.
Matrix Capital Markets, formerly known as United Financial, Inc., provides
brokerage and consulting services to financial institutions and financial
services companies in the mortgage banking industry, primarily related to the
brokerage and analysis of residential mortgage loan servicing rights and
residential mortgage loans, corporate and mortgage loan servicing portfolio
valuations and, to a lesser extent, consultation and brokerage services in
connection with mergers and acquisitions of mortgage banking entities.
Matrix Asset Management provides real estate management and disposition services
on foreclosed properties owned by financial services companies and financial
institutions.
ABS provides outsourced business services and financing primarily to charter
schools.
Sterling is a nonbank trust company specializing in the administration of
self-directed individual retirement accounts, qualified business retirement
plans and personal custodial
F-9
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
accounts, as well as corporate escrow and paying agent services.
First Matrix is registered with the National Association of Securities Dealers
as a fully disclosed broker-dealer. First Matrix relocated its headquarters to
Denver, Colorado from Fort Worth, Texas in June of 2001, and has branch offices
in Fort Worth, Texas and Memphis, Tennessee, which was opened in late 2001.
First Matrix offers a wide range of investment options for both individual and
institutional investors, long-term investing and retirement planning, and the
acquisition, brokering and sale of Small Business Administration (SBA) loan
pools.
The accounting and reporting policies of the Company and its subsidiaries
conform to accounting principles generally accepted in the United States of
America. The following is a description of the more significant policies that
the Company follows in preparing and presenting its consolidated financial
statements.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant inter-company accounts
and transactions have been eliminated in consolidation.
The Company contributed 100 percent of Matrix Financial's stock to Matrix Bank
on August 1, 2000. All of Matrix Financial's assets and liabilities were
transferred at their carrying or book basis. This transaction had no impact on
the consolidated financial statements.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities at the date of the consolidated financial statements, and
disclosures of contingent assets and liabilities and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
Derivative Instruments and Hedging Activities
In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities." In June 2000, the FASB issued SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activity, an Amendment of SFAS 133." SFAS 133 and SFAS 138 require that all
derivative instruments be recorded on the balance sheet at their respective fair
values. SFAS 133 and SFAS
F-10
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
138 are effective for all fiscal quarters of all fiscal years beginning after
June 30, 2000; the Company adopted SFAS 133 and SFAS 138 on January 1, 2001. The
adoption of SFAS 133 resulted in a pre-tax transition loss of $550,000, or
$360,000 after tax which was recorded as a cumulative effect of a change in
accounting principle for the year ended December 31, 2001. Gains and losses on
derivatives that were previously deferred as adjustments to the carrying amount
of hedged items were not adjusted. Due to the nature of the asset hedged and the
derivative relationship, the transition loss recorded effective January 1, 2001,
reversed and was recorded as loan origination income during the quarter ended
March 31, 2001.
All derivatives are recognized on the balance sheet at their fair value. On the
date the derivative contract is entered into, the Company designates the
derivative as a hedge of the fair value of a recognized asset or liability or of
an unrecognized firm commitment ("fair value" hedge.) The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are designated
as fair-value hedges to specific assets and liabilities on the consolidated
balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values of hedged items.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk are recorded in earnings. Changes in the
fair value of derivative trading instruments are reported in current-period
earnings.
The Company discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value of the hedged item, the derivative expires or is sold, terminated, or
exercised, the derivative is dedesignated as a hedging instrument, because it is
unlikely that a forecasted transaction will occur, a hedged firm commitment no
longer meets the definition of a firm commitment, or management determines that
designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
continues to carry the derivative on the consolidated balance sheet at its fair
value, and no longer adjusts the hedged asset or liability for changes in fair
value. The adjustment of the carrying amount of the hedged asset or liability is
F-11
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
accounted for in the same manner as other components of the carrying amount of
that asset or liability. When hedge accounting is discontinued because the
hedged item no longer meets the definition of a firm commitment, the Company
continues to carry the derivative on the consolidated balance sheet at its fair
value, removes any asset or liability that was recorded pursuant to recognition
of the firm commitment from the consolidated balance sheet and recognizes any
gain or loss in earnings. In all other situations in which hedge accounting is
discontinued, the Company continues to carry the derivative at its fair value on
the balance sheet, and recognizes any changes in its fair value in earnings.
For the year ended December 31, 2000, prior to the adoption of SFAS No, 133, the
Company used a program of exchange-traded futures and options to hedge
approximately 6.4% of its mortgage servicing portfolio. Prior to January 1,
2001, unrealized gains and losses on derivatives used for hedging purposes were
generally not required to be recorded in the consolidated financial statements.
Realized gains and losses on futures or options contracts either settled or
terminated were recorded as a adjustment to the mortgage servicing rights being
hedged and amortized into the income statement over either the remaining life of
the derivative instrument or the expected life of the mortgage servicing assets.
Due to the cost of the requirements that must be met to achieve hedge accounting
under SFAS No. 133 for mortgage servicing rights, the Company did not attempt to
qualify for hedge accounting and effective March 31, 2001 the Company sold,
repurchased or allowed to mature all derivative instruments recorded on the
books associated with mortgage servicing.
SFAS No. 133 requires the Company to record its best effort and mandatory
commitments associated with its mortgage loan origination activities on the
consolidated balance sheet. In order to hedge against the changes in the fair
value of mortgage loans the Company enters into best effort and mandatory
commitments to deliver mortgage loans, which locks the price at which the loan
will be sold into the secondary market. These derivatives are recorded on the
consolidated balance sheet and qualify for hedge accounting, as the commitments
are highly effective in offsetting changes in fair values of the hedged items.
Securities Available for Sale
Securities available for sale include mortgage-backed securities and SBA
securities. Securities available for sale are carried at estimated fair values
with the net unrealized gains or losses reported in accumulated other
comprehensive income, which is included as a separate component in shareholders'
equity. The Company records its securities
F-12
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
portfolio at estimated fair value at the end of each quarter based on public
market quotes. At disposition, the realized gain or loss is included in earnings
on a specific identification basis.
Loans Held for Sale
Loans originated or purchased with the intent for sale in the secondary market
are carried at the lower of aggregate cost, net of discounts or premiums and a
valuation allowance, or estimated fair market value. Estimated fair market value
is determined using forward commitments to sell loans or mortgage-backed
securities to permanent investors or current market rates for loans of similar
quality and type. Net unrealized losses, if any, are recognized in a valuation
allowance by charges to income. Discounts or premiums on loans held for sale are
not accreted or amortized into income on the interest method; however, discounts
and premiums related to payments of loan principal are recorded in interest
income. The loans are primarily secured by one-to-four family residential real
estate located throughout the United States.
Loans are considered sold when the Company surrenders control over the
transferred assets to the purchaser, with standard representations and
warranties. At such time, the loan is removed from the loan portfolio and a gain
or loss is recorded on the sale. Gains and losses on loan sales are determined
based on the difference between the allocated cost basis of the assets sold and
the proceeds, which includes the estimated fair value of any assets or
liabilities that are newly created as a result of the transaction. Losses
related to recourse provisions in excess of the amount originally provided are
accrued as a liability at the time such additional losses are determined, and
recorded as part of noninterest expense.
Loans Held for Investment
Loans held for investment are stated at unpaid principal balances, less unearned
discounts and premiums, deferred loan fees, loans in process and allowance for
loan losses. The loans are residential mortgage loans, commercial and SBA loans,
and school financing loans, and are primarily secured by real estate.
Allowance for Loan Losses
The allowance for loan losses is calculated, in part, based on historical loss
experience. In addition, management takes into consideration other factors such
as any qualitative evaluations of individual classified assets, geographic
portfolio concentrations, new products or markets, evaluations of the changes in
the historical loss experience component, and projections of this component into
the current and future periods based on current knowledge and conditions. The
loss factors are applied to the outstanding principal balance of loans in their
F-13
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
respective categories, plus additional loan review is performed on all
significant commercial and school finance loans. After an allowance has been
established for the loan portfolio, management establishes a portion of the
allowance for loan losses, which is attributable to factors that cannot be
associated with a specific loan or loan portfolio. The Company evaluates its
residential loans collectively due to their homogeneous nature. These factors
include general economic conditions, recognition of specific regional geographic
concerns, loan type and trends in portfolio growth. Loan losses are charged
against the allowance when the probability of collection is considered remote.
In the opinion of management, the allowance is adequate to absorb the inherent
losses in the current loan portfolio.
The Company considers a loan impaired when, based on current information and
events, it is probable that it will be unable to collect all amounts due
according to the contractual terms of the loan and the recorded investment in
the loan exceeds its fair value. Fair value is measured using either the present
value of expected future cash flows discounted using loan rate, market price of
the loan or fair value of the collateral, if collateral dependent. All loans
considered impaired are included in nonperforming loans. The Company evaluates
its residential loans collectively due to their homogeneous nature. Accordingly,
potential impaired loans of the Company include only commercial loans, real
estate construction loans, commercial real estate mortgage loans and school
financing classified as nonperforming loans. Impairment allowances are
considered by the Company in determining the overall adequacy of the allowance
for loan losses.
Loans are placed on nonaccrual status when full payment of principal or interest
is in doubt, or generally when they are past due 90 days as to either principal
or interest, unless the interest is guaranteed by a creditworthy entity through
recourse provisions. Previously accrued but unpaid interest is reversed and
charged against interest income, if not collectible, and future accruals are
discontinued. Interest payments received on nonaccrual loans are recorded as
interest income unless there is doubt as to the collectibility of the recorded
investment. In those cases, cash received is recorded as a reduction in
principal.
Mortgage Servicing Rights
The Company recognizes mortgage servicing rights (MSRs) as an asset separate
from the underlying originated mortgage loan. Upon sale of a loan, the Company
measures retained MSRs by allocating the previous carrying amount of the
originated mortgage loan between the loan and the servicing right based on their
estimated fair values. Purchased MSRs are initially measured at cost. MSRs are
carried at the lower of cost (allocated cost for originated MSRs), less
accumulated amortization, or estimated fair value. MSRs are amortized in
proportion to and over the period of the estimated future net servicing income.
F-14
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The estimated fair value of MSRs is determined based on the discounted future
servicing income stratified based on one or more predominant risk
characteristics of the underlying loans. The Company stratifies its MSRs by
product type, interest rate and investor to reflect the predominant risk
characteristics. To determine the estimated fair value of MSRs, the Company uses
a valuation model that calculates the present value of future cash flows. In
using this valuation model, the Company incorporates assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost of servicing per loan, including incremental interest cost
of servicer advances, the discount rate, float value, an inflation rate,
ancillary income per loan, prepayment speeds and default rates. For purposes of
performing an impairment analysis on MSRs, the Company estimates fair value
using the following primary assumptions: prepayment speeds ranging from 151 PSA
(Public Securities Association prepayment speed measurement) to 835 PSA;
discount rates ranging from 9.00 percent to 21.50 percent; and default rates
ranging from 0 percent to 100 percent. The Company records a valuation allowance
where the estimated fair value is below the carrying amount of individual
stratifications, even though the overall fair value of the servicing assets may
exceed amortized cost. As of December 31, 2001, a valuation allowance of
$181,000 was required, and the fair value of the aggregate MSRs was
approximately $81,900,000. As of December 31, 2000, no valuation allowance was
required, and the estimated fair value of the aggregate MSRs was approximately
$75,185,000.
Gain on sale of MSRs is recognized when title to MSRs and the risks and rewards
inherent in owning the MSRs have been transferred to the buyer.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated lives
of the assets, which range from three to seven years for software, office
furniture and equipment and 30 years for buildings.
Foreclosed Real Estate
Residential or commercial real estate acquired through foreclosure, deed in lieu
of foreclosure or in judgment is carried at the lower of estimated fair value,
less estimated costs to sell, or the related loan balance at the date of
foreclosure. Valuations are periodically performed by management and an
allowance for loss is established by a charge to operations if the carrying
value of a property exceeds its estimated fair value, less estimated costs to
sell. The net carrying value of foreclosed real estate, which is classified in
other assets, was $8,355,000 and $2,646,000 at December 31, 2001 and 2000,
respectively.
F-15
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. The subsidiaries are charged for the taxes applicable to their profits
calculated on the basis of filing separate income tax returns. Matrix Bank
qualifies as a savings and loan association for income tax purposes.
The Company uses the asset and liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Loan Administration Income
Loan administration income represents service fees and other income earned from
servicing loans for various investors, as well as gains from activity in our
Ginnie Mae portfolios. Loan administration income includes service fees that are
based on a contractual percentage of the outstanding principal balance plus late
fees and other ancillary charges. Service fees on loans that are not delinquent
or are delinquent by no more than 60 days are recognized when earned. All other
income is recognized when the related payments are received.
Brokerage Income
Brokerage income represents fees earned related to servicing brokerage and
consulting services. Brokerage income is recognized when services are performed.
Trust Services Income
Trust services income represents fees earned related to services provided for
self-directed individual retirement accounts, qualified benefit plans and escrow
arrangements. Trust services income is recognized over the contract period in
proportion to when the services are performed.
Real Estate Disposition Services Income
Real estate disposition services income represents fees earned related to real
estate management and disposition services. Real estate disposition services
income is recognized when services are performed.
F-16
Loan Origination Income
Loan origination income for loans originated for sale, which includes all
mortgage origination fees, secondary marketing activity including
servicing-released premiums and capitalized servicing on mortgage loans sold,
servicing retained, net of outside origination costs, is recognized as income at
the time the loan is sold and funded by the investor.
Loan origination income for loans originated for investment, which includes
mortgage origination fees and certain direct costs associated with loan
originations, is deferred and amortized as a yield adjustment over the
contractual life of the related loan using the interest method, adjusted for
estimated prepayments.
School Services Income
School services income represents fees earned related to outsourced business and
consulting services provided to schools. School services income is recognized
when services are performed.
Cash and Cash Equivalents
Cash equivalents, for purposes of the consolidated statements of cash flows,
consist of nonrestricted cash, federal funds sold and interest-earning deposits
with banks with original maturities, when purchased, of three months or less.
Net Income Per Common Share
Basic earnings per share (EPS), or net income per common share, excludes
dilution and is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Net income per common share
assuming dilution is computed by dividing net income by the weighted average
number of common shares outstanding for the year and the dilutive effect, if
any, of stock options and warrants outstanding for the year.
Restructuring Charges
During the second quarter of 2001, the Company announced a plan to relocate the
domicile of Matrix Bank to Denver, Colorado from Las Cruces, New Mexico.
Associated with this relocation, the Company accrued expenses of approximately
$984,000 primarily for severance and contract benefits to be paid to certain of
Matrix Bank's employees, mainly consisting of back office, accounting and human
F-17
resources personnel. The expense was charged to other general and administrative
expense on the consolidated income statement. The total number of employees to
be involuntarily terminated was 21. Additionally, the accrued liability includes
the payout of the contract the Company had with Matrix Bank's prior president
and chief executive officer. As of December 31, 2001, approximately $639,000 of
the liability remains.
Also associated with the planned relocation of Matrix Bank's domicile, Matrix
Bank acquired a building in Denver, Colorado for approximately $11.5 million in
June 2001. Subsequent to the acquisition, Matrix Bank was notified of the intent
of the City and County of Denver to condemn the building in connection with its
planned expansion of the Denver Convention Center. In October 2001, the
condemnation proceedings were held. The City and County of Denver was granted
possession of the building in consideration of a payment totaling approximately
$14.9 million. The sale resulted in a $3.4 million pre-tax gain on sale of
assets recorded in the consolidated financial statements. Matrix Bank has
identified an alternative location and is proceeding with relocation of the
domicile and expects such relocation to be completed in the second quarter of
2002.
Investment in Joint Venture
The Company has a 45 percent-owned investment in Matrix Settlement & Clearance
Services, LLC (MSCS) which is accounted for using the equity method. This
investment was classified in other assets, and had a carrying value of $589,000
and $653,000 as of December 31, 2001 and 2000, respectively. For the years ended
December 31, 2001 and 2000, the Company recorded losses of $175,000 and
$478,000, respectively, in other income related to MSCS operations.
As of December 31, 2001 and 2000, respectively, MSCS had total assets of
$1,626,000 and $1,175,000, total liabilities of $499,000 and $68,000 and equity
of $1,127,000 and $1,107,000. For the years ended December 31, 2001 and 2000,
respectively, MSCS had revenues of $3,517,000 and $1,470,000 and pre-tax net
loss of $177,000 and $955,000.
Impact of Recently Issued Accounting Standards.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, that supersedes Accounting Principles Board (APB) Opinion No. 17. Under
SFAS 142 goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are to be reviewed at least annually for impairment, under
impairment guidelines established in the statement. SFAS 142 also changes the
amortization methodology in intangible assets that are deemed to have finite
F-18
lives. Finally, SFAS 142 adds to required disclosures regarding goodwill and
intangible assets. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 142 January 1, 2002 did not have a
material impact on the consolidated financial statements. The goodwill balance
at December 31, 2001 was approximately $1 million, and the amortization expense
has been less than $100,000 per year.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, that superseded SFAS No. 121 and APB Opinion No.
30. SFAS 144 provides guidance on differentiating between assets held and used,
held for sale, and held for disposal other than by sale, and the required
valuation of such assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 January 1, 2002 did not have a
material impact on the consolidated financial statements.
Reclassifications
Certain amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation.
F-19
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
3. Net Income Per Common Share
The following table sets forth the computation of net income per share and net
income per common share, assuming dilution:
Year Ended December 31
2001 2000 1999
------------------------------------------------------
(Dollars in thousands)
Numerator:
Net income available to common
shareholders $ 8,512 $ 4,258 $ 10,779
======================================================
Denominator:
Weighted average shares outstanding 6,495,583 6,713,251 6,728,211
Effect of dilutive securities:
Common stock options 64,871 35,606 95,899
Common stock warrants - - 9,436
------------------------------------------------------
Dilutive potential common shares 64,871 35,606 105,335
------------------------------------------------------
Denominator for net income per share,
assuming dilution 6,560,454 6,748,857 6,833,546
======================================================
4. Securities Available for Sale
Securities available for sale were as follows:
December 31, 2001 December 31, 2000
----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Estimated Amortized Unrealized Estimated
Cost Gains Fair Value Cost Gains Fair Value
----------------------------------------------------------------------------
(In thousands)
Mortgage-backed securities $ 1,961 $ 38 $ 1,999 $ 65,375 $ 1,241 $66,616
SBA securities 4,964 - 4,964 - - -
----------------------------------------------------------------------------
Total $ 6,925 $ 38 $ 6,963 $ 65,375 $ 1,241 $66,616
============================================================================
The Company expects to receive payments on securities over periods that are
considerably shorter than the contractual maturities of the securities, which
range from 6 to 30 years, due to prepayments. Realized gains on the sale of
securities available for sale were approximately $1,198,000, $0 and $0 in 2001,
2000 and 1999, respectively.
F-20
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
5. Loans Held for Sale and Investment
Loans Held for Investment
Loans held for investment consist of the following:
December 31
2001 2000
------------------------------------
(In thousands)
Residential loans $ 6,833 $ 8,382
Multi-family, commercial real estate, SBA guaranteed and
commercial 147,038 123,118
Construction loans 42,865 50,131
Consumer loans and other 5,431 8,438
------------------------------------
202,167 190,069
Less:
Loans in process 7,355 13,146
Purchase discounts, net 361 569
Unearned fees 514 722
Allowance for loan losses 2,776 2,107
------------------------------------
11,006 16,544
------------------------------------
Loans held for investment, net $ 191,161 $ 173,525
====================================
Activity in the allowance for loan losses on loans held for investment is
summarized as follows:
Year Ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Balance at beginning of year $ 2,107 $ 1,433 $ 1,136
Provision for loan losses 935 1,508 735
Charge-offs (347) (874) (509)
Recoveries 81 40 71
------------------------------------------------------
Balance at end of year $ 2,776 $ 2,107 $ 1,433
======================================================
Nonaccrual loans in the loans held for investment portfolio totaled
approximately $13,760,000 and $3,087,000, or 7.2 percent and 1.8 percent, of the
total loans held for investment portfolio at December 31, 2001 and 2000,
respectively.
F-21
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Loans Held for Sale
Loans held for sale consist of the following:
December 31
2001 2000
------------------------------------
(In thousands)
Residential loans $ 1,051,006 $ 893,034
Commercial loans, school financing and other 107,482 54,540
------------------------------------
1,158,488 947,574
Less:
Purchase premiums, net (6,063) (1,396)
Valuation allowance 6,562 6,474
------------------------------------
499 5,078
------------------------------------
Loans held for sale, net $ 1,157,989 $ 942,496
====================================
Activity in the valuation allowance for loans held for sale is summarized as
follows:
Year Ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Balance at beginning of year $ 6,474 $ 4,921 $ 2,574
Provision for loan losses 2,045 2,727 2,445
Charge-offs (1,961) (1,175) (98)
Recoveries 4 1 -
------------------------------------------------------
Balance at end of year $ 6,562 $ 6,474 $ 4,921
======================================================
Nonaccrual loans related to the commercial loans and school financing held for
sale portfolio aggregated approximately $4,743,000 and $2,469,000 at December
31, 2001 and 2000, respectively.
Interest income that would have been recorded for nonaccrual loans was
approximately $1,374,000, $1,016,000 and $979,000 during the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company continues to accrue interest on government-sponsored loans such as
Federal Housing Administration (FHA) insured and Department of Veterans' Affairs
(VA) guaranteed loans which are past due 90 or more days, as the majority of the
interest on these loans is insured or guaranteed by the federal government. The
F-22
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
aggregate unpaid principal balance of government-sponsored accruing loans that
were past due 90 or more days was $55,200,000 and $101,104,000 as of December
31, 2001 and 2000, respectively.
6. Premises and Equipment
Premises and equipment consist of the following:
December 31
2001 2000
------------------------------------
(In thousands)
Land $ 830 $ 830
Buildings 6,324 6,314
Leasehold improvements 1,667 1,590
Office furniture and equipment 15,162 12,216
------------------------------------
23,983 20,950
Less: accumulated depreciation and amortization 10,352 7,761
------------------------------------
Premises and equipment, net $ 13,631 $ 13,189
====================================
Included in occupancy and equipment expense is depreciation and amortization
expense of premises and equipment of approximately $2,797,000, $2,212,000 and
$2,126,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
7. Mortgage Servicing Rights
The activity in the MSRs is summarized as follows:
Year Ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Balance at beginning of year $ 71,529 $ 63,479 $ 57,662
Valuation allowance - -
(181)
Purchases 530 31,883 19,754
Originated, net of MSRs sold 30,129 16 1,514
Hedging (gain) loss - (95) 3,257
Amortization (21,862) (9,851) (16,403)
Sales (1,433) (13,903) (2,305)
------------------------------------------------------
Balance at end of year $ 78,712 $ 71,529 $ 63,479
======================================================
The Company's servicing activity is diversified throughout 50 states with
concentrations at December 31, 2001, in California, Texas, Missouri and Arizona
of approximately 14.5 percent, 14.5 percent, 16.4 percent and 8.3 percent,
respectively, based on aggregate outstanding unpaid principal balances of the
mortgage loans serviced. As of December 31, 2001, 2000 and 1999, the Company
subserviced loans for others of approximately $889,000,000, $1,163,811,000 and
$205,929,000, respectively.
F-23
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The Company's servicing portfolio (excluding subserviced loans) is comprised of
the following:
December 31
2001 2000
--------------------------------------------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding of Loans Outstanding
--------------------------------------------------------------
(Dollars in thousands)
Freddie Mac 12,422 $ 613,527 16,476 $ 836,054
Fannie Mae 31,069 1,885,197 34,706 1,887,925
Ginnie Mae 26,718 1,820,691 20,930 1,106,939
VA, FHA, conventional and other
loans 15,946 1,336,950 20,292 1,687,045
--------------------------------------------------------------
86,155 $ 5,656,365 92,404 $ 5,517,963
==============================================================
The Company's custodial escrow balances shown in the accompanying consolidated
balance sheets at December 31, 2001 and 2000, pertain to payments held in escrow
in respect of taxes and insurance and the float on principal and interest
payments on loans serviced and owned by the Company of approximately
$129,665,000 and $77,647,000, respectively. The custodial accounts are
maintained at Matrix Bank in noninterest-bearing accounts. The balance of the
custodial accounts fluctuates from month to month based on the pass-through of
the principal and interest payments to the ultimate investors and the timing of
taxes and insurance payments.
8. Deposits
Deposit account balances are summarized as follows:
December 31
2001 2000
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
----------------------------------------------------------------------------
(Dollars in thousands)
Passbook accounts $ 4,291 0.50% 3.12% $ 3,010 0.50% 3.42%
NOW accounts 107,183 12.37 0.94 85,986 14.27 0.96
Money market accounts 249,234 28.77 2.11 122,992 20.41 2.34
----------------------------------------------------------------------------
360,708 41.64 1.74 211,988 35.18 1.91
Certificate accounts 505,527 58.36 5.98 390,681 64.82 6.23
----------------------------------------------------------------------------
Deposits $ 866,235 100.00% 4.36% $ 602,669 100.00% 4.70%
============================================================================
F-24
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Included in NOW accounts are noninterest-bearing DDA accounts of $67,137,000 and
$52,986,000 for the years ended December 31, 2001 and 2000, respectively.
Contractual maturities of certificate accounts as of December 31, 2001:
Under 12 12 to 36 36 to 60
months months months Total
------------------------------------------------------------------
(In thousands)
2.00-2.99% $ 90,036 $ 38 $ - $ 90,074
3.00-3.99% 127,430 2,930 4 130,364
4.00-4.99% 53,014 23,084 3,233 79,331
5.00-5.99% 70,425 8,138 3,690 82,253
6.00-6.99% 105,451 12,989 421 118,861
7.00-7.99% 3,871 773 - 4,644
------------------------------------------------------------------
$ 450,227 $ 47,952 $7,348 $ 505,527
==================================================================
Approximately $120,428,000 and $131,443,000 of fiduciary assets under
administration by Sterling are included in NOW and money market accounts as of
December 31, 2001 and 2000, respectively. Included in certificate accounts are
$361,271,000 and $203,600,000 of brokered deposits as of December 31, 2001 and
2000, respectively.
Interest expense on deposits is summarized as follows:
Year Ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Passbook accounts $ 108 $ 102 $ 96
NOW accounts 929 619 600
Money market 4,291 3,053 5,756
Certificates of deposit 29,544 22,501 15,137
------------------------------------------------------
Interest expense on deposits $ 34,872 $ 26,275 $ 21,589
======================================================
The aggregate amount of deposit accounts with a balance greater than $100,000
(excluding brokered deposits) was approximately $22,410,000 and $18,815,000 at
December 31, 2001 and 2000, respectively.
F-25
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
9. Borrowed Money and Guaranteed Preferred Beneficial Interests
Borrowed money and guaranteed preferred beneficial interests are summarized as
follows:
December 31
2001 2000
------------------------------------
(In thousands)
Borrowed Money
$120,000,000 revolving warehouse loan agreement,
through March 31, 2002, renewable annually, secured
by mortgage loans held for sale, interest at LIBOR
plus 1.20 percent at December 31, 2001 and plus
1.07 percent at December 31, 2000 (3.05 percent at
December 31, 2001); $24,550,000 available at
December 31, 2001 $ 95,450 $ 21,595
Senior notes, interest at 11.50 percent payable
semiannually, unsecured and maturing September 30, 2004 10,455 20,000
$10,000,000 note payable to a third party financial
institution due in quarterly principal installments
of $357,000 plus interest, through December 31, 2003,
collateralized by the common stock of Matrix Bank;
interest at LIBOR plus 2.65 percent (4.52 percent at
December 31, 2001) 8,572 8,214
$10,000,000 revolving line of credit to a third party
financial institution, through March 31, 2002, renewable
annually, collateralized by the common stock of Matrix
Bank; interest at LIBOR plus 2.65 percent (4.52 percent
at December 31, 2001); $7,000,000 available at
December 31, 2001 3,000 -
Financing agreement with a bank, secured by real estate,
interest at prime plus 1 percent - 2,325
School financing repurchase agreements with a third-party
bank to sell school financing originated by the Company
under various agreements Interest rates are variable from
prime to 8.00 percent. Total commitment is at the
discretion of the third-party bank. 22,807 17,094
School financing agreement, renewable annually,
collateralized by school financing; interest rates are 22,157 27,599
variable. Future commitment is at the discretion of the
third-party lender.
Other financing agreements 91 176
------------------------------------
Total borrowed money $ 162,532 $ 97,003
====================================
Guaranteed Preferred Beneficial Interests
Matrix Bancorp Capital Trust I, 10% junior subordinated
debentures payable quarterly, unsecured and maturing
September 30, 2029 $ 27,500 $ 27,500
Matrix Bancorp Capital Trust II, 10.18% junior
subordinated debentures payable quarterly, unsecured
and maturing June 8, 2031 12,000 -
Matrix Bancorp Capital Trust III, 10.25% junior subordinated
debentures payable quarterly, unsecured and maturing
July 25, 2031 15,000 -
Matrix Bancorp Capital Trust IV, LIBOR plus 3.75% (6.007%
rate at December 31, 2001) junior subordinated debentures
payable quarterly, unsecured and maturing
December 8, 2031 5,000 -
------------------------------------
Total Guaranteed Preferred Beneficial Interests $ 59,500 $ 27,500
====================================
F-26
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2001, the maturities of borrowed money and guaranteed
preferred beneficial interest are as follows:
(In thousands)
2002 $ 144,933
2003 7,144
2004 10,455
Thereafter 59,500
------------------
$ 222,032
==================
The Company must comply with certain financial and other covenants related to
the foregoing debt agreements including, among other things, the maintenance of
specific ratios, net income, net worth and other amounts as defined in the
credit agreements, limiting the Company's and its subsidiaries' ability to
declare dividends or incur additional debt, and requirements to maintain certain
capital levels in certain subsidiaries. These covenants include requirements for
the Company to maintain consolidated tangible capital of not less than
$60,000,000, maintain classified assets of not greater than three percent and
maintain the requirements necessary such that Matrix Bank will not be classified
as other than "well capitalized," as defined.
The credit facility agreement for the $120,000,000 warehouse loan agreement
requires Matrix Financial to maintain, among other things, net worth, as
defined, of at least $30,000,000, a leverage ratio of no more than 14 to 1 and a
minimum cash flow coverage ratio for four consecutive quarters of no less than
1.3 to 1.0.
At December 31, 2001, the Company and its subsidiaries were in compliance with
these covenants.
The Company anticipates that the various borrowed money agreements which are up
for a renewal in 2002 will be renewed with similar terms and conditions as those
currently in effect.
F-27
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
School Financing Agreement
The Company placed approximately $22,200,000 and $27,600,000 at December 31,2001
and 2000, respectively, in tax-exempt financing it originated to charter schools
into several grantor trusts (Trusts). The Trusts then issued Class "A"
Certificates and Class "B" Certificates, with the Class "A" Certificates being
sold to various third party investors under a private placement at a price of
par.
The "A" Certificates are guaranteed by a letter of credit issued by a third
party investment bank (Investment Bank) and the underlying financing. The "A"
Certificates' interest rate may be determined weekly, monthly or for a term for
up to one year. The interest rate and the term of the interest rate are
determined by the Remarking Agent, which is also the Investment Bank. Generally,
the Trusts are short-term in nature with an average life of one year or less.
The "B" Certificates are owned in part by the Company. The interest rate paid on
the "A" Certificates is considered the Company's financing cost. The approximate
cost of the financing at December 31, 2001 and 2000 was 2.75% and 7.23%,
respectively. The interest that the Company receives through its ownership of
the "B" Certificates is tax-exempt.
Although the Investment Bank acts as a guarantor to the "A" Certificates, the
Company provides limited recourse to the Investment Bank in all cases of loss or
default. Due to the nature of the recourse and the ability of the "A"
Certificate holders to put the certificates to the Trusts, the transactions have
been accounted for as a secured financing.
The Company also has in place an agreement to sell and service school financing
loans to a third-party financial institution. The loan agreement provides the
Company with the option to repurchase some or all of the loans at its sole
discretion at a price of par. In addition, the Company provides scheduled
interest and full recourse, in the case of loss, to the third-party financial
institution. Due to the nature of the recourse and the ability to call the
loans, the Company accounts for the transaction as a secured financing.
Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated
Debentures
On July 30, 1999, Matrix Bancorp Capital Trust I (Trust I), a Delaware business
trust formed by the Company, completed the sale of $27,500,000 of 10 percent
preferred securities. Trust I also issued common securities to the Company and
used the net proceeds from the offering to purchase $28,600,000 in principal
amount of 10 percent junior subordinated debentures of the Company due September
30, 2029. The junior subordinated debentures are the sole assets of Trust I and
are eliminated, along with the related income statement effects, in the
consolidated financial statements.
F-28
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The preferred securities accrue and pay distributions quarterly at an annual
rate of 10 percent of the stated liquidation amount of $25 per preferred
security. The Company has fully and unconditionally guaranteed all of the
obligations of Trust I under the preferred securities. The guarantee covers the
quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust I.
The preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the junior subordinated
debentures, in whole or in part on or after September 30, 2004, at a redemption
price specified in the indenture plus any accrued but unpaid interest to the
redemption date.
On March 28, 2001, Matrix Bancorp Capital Trust II (Trust II), a Delaware
business trust formed by the Company, completed the sale of $12,000,000 of 10.18
percent preferred securities. Trust II also issued common securities to the
Company and used the net proceeds from the offering to purchase $12,400,000 in
principal amount of 10.18 percent junior subordinated debentures of the Company
due June 8, 2031. The junior subordinated debentures are the sole assets of
Trust II and are eliminated, along with the related income statement effects, in
the consolidated financial statements.
The preferred securities accrue and pay distributions quarterly at an annual
rate of 10.18 percent of the stated liquidation amount of $1,000 per preferred
security. The Company has fully and unconditionally guaranteed all of the
obligations of Trust II under the preferred securities. The guarantee covers the
quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust II.
F-29
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the junior subordinated
debentures, in whole or in part, on or after June 8, 2011, at a redemption price
specified in the indenture plus any accrued but unpaid interest to the
redemption date.
On July 16, 2001, Matrix Bancorp Capital Trust III (Trust III), a Delaware
business trust formed by the Company, completed the sale of $15,000,000 of 10.25
percent preferred securities. Trust III also issued common securities to the
Company and used the net proceeds from the offering to purchase $15,464,000 in
principal amount of 10.25 percent junior subordinated debentures of the Company
due July 25, 2031. The junior subordinated debentures are the sole assets of
Trust III and are eliminated, along with the related income statement effects,
in the consolidated financial statements.
The preferred securities accrue and pay distributions quarterly at an annual
rate of 10.25 percent of the stated liquidation amount of $1,000 per preferred
security. The Company has fully and unconditionally guaranteed all of the
obligations of Trust III under the preferred securities. The guarantee covers
the quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust III.
The preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the junior subordinated
debentures, in whole or in part, on or after July 25, 2006, at a redemption
price specified in the indenture plus any accrued but unpaid interest to the
redemption date.
On November 28, 2001, Matrix Bancorp Capital Trust IV (Trust IV), a Delaware
business trust formed by the Company, completed the sale of $5,000,000 of
floating rate of six month LIBOR plus 3.75% percent preferred securities. Trust
IV also issued common securities to the Company and used the net proceeds from
the offering to purchase $5,155,000 in principal amount of floating rate of six
month LIBOR plus 3.75 percent junior subordinated debentures of the Company due
December 8, 2031. The junior subordinated debentures are the sole assets of
Trust IV and are eliminated, along with the related income statement effects, in
the consolidated financial statements.
The preferred securities accrue and pay distributions quarterly at the floating
rate as described above percent of the stated liquidation amount of $1,000 per
preferred security. The Company has fully and unconditionally guaranteed all of
the obligations of Trust IV under the preferred securities. The guarantee covers
the quarterly distributions and payments on liquidation or redemption of the
preferred securities, but only to the extent of funds held by Trust IV.
The preferred securities are mandatorily redeemable upon the maturity of the
junior subordinated debentures or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the junior subordinated
debentures, in whole or in part, on or after December 8, 2006, at a redemption
price specified in the indenture plus any accrued but unpaid interest to the
redemption date.
Capitalized expenses associated with all of the offerings of approximately
$2,328,000 and $1,370,000 are included in other assets at December 31, 2001 and
2000, respectively, and are being amortized on a straight-line basis over the
life of the junior subordinated debentures.
F-30
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
10. Federal Home Loan Bank of Dallas Borrowings
Federal Home Loan Bank of Dallas (FHLB) borrowings aggregated $303,361,000 and
$519,433,000 at December 31, 2001 and 2000, respectively. Advances of
$136,000,000 and $26,000,000 at December 31, 2001 and 2000, respectively, were
borrowed under Short Option Advance (SOA) Agreements with the FHLB. These SOA
borrowings have a term of ten years, but are callable by the FHLB beginning
after a one to five year lockout period, depending on the particular SOA
borrowing. After the expiration of the lockout period, the SOA borrowings are
callable at various intervals. If the FHLB exercises its call option on a SOA
borrowing, the FHLB is required to offer replacement funding to the Company at a
market rate of interest for the remaining term of the SOA borrowing.
Additionally, under the terms of the SOA Agreement, the Company is not permitted
to prepay or otherwise retire a callable SOA borrowing prior to the final
maturity date. At December 31, 2001, the interest rates on the SOA borrowings
ranged from 2.69 percent to 5.63 percent and their possible call dates varied
from February 20, 2002 to November 13, 2006. Advances of $1,361,000 and
$151,433,000 at December 31, 2001 and 2000, respectively, were borrowed under a
fixed term and rate. At December 31, 2001, the advances are at a rate of 5.84
percent and mature June 2, 2014. Advances of $166,000,000 and $342,000,000 at
December 31, 2001 and 2000, respectively, were borrowed on a short-term basis.
At December 31, 2001, the advances were at an average rate of 1.97% and mature
January 2, 2002 through January 7, 2002. All advances are secured by first lien
mortgage loans of Matrix Bank and all of its FHLB stock.
Matrix Bank is on full custody status, which requires Matrix Bank to place loan
collateral at the FHLB. At December 31, 2001, loans held for sale of
$339,274,000 and securities held for sale of $4,448,000 were pledged for FHLB
advances. As of December 31, 2001, Matrix Bank had available unused borrowings
from the FHLB for advances of approximately $40,362,000.
11. Income Taxes
The income tax provision consists of the following:
Year ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Current:
Federal $ (7,713) $ 2,350 $ 5,340
State (15) 411 1,329
Deferred:
Federal 11,162 (451) (341)
State 841 (67) (50)
------------------------------------------------------
$ 4,275 $ 2,243 $ 6,278
======================================================
F-31
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
A reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal income tax rate follows:
Year ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Expected income tax provision $ 4,470 $ 2,210 $ 5,799
Effect of federal tax brackets - - 52
State income taxes 545 343 827
Other (740) (310) (400)
------------------------------------------------------
Provision for income taxes $ 4,275 $ 2,243 $ 6,278
======================================================
Deferred tax assets and liabilities result from the tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes shown below.
December 31
2001 2000
------------------------------------
(In thousands)
Deferred tax assets:
Allowance for loan and valuation losses $ 6,614 $ 5,400
Discounts and premiums 71 71
Deferred fees 1,352 1,141
Delinquent interest 552 413
Net operating loss carry-forwards 1,574 -
Other 24 197
------------------------------------
Total deferred tax assets 10,187 7,222
Deferred tax liabilities:
Loss on sale of loans $ (14,711) $ (2,773)
Amortization of mortgage servicing rights (4,351) (3,178)
Gain on sale of building (1,377) -
Depreciation (834) (354)
------------------------------------
Total deferred tax liabilities (21,273) (6,305)
------------------------------------
Net deferred tax (liability) asset $ (11,086) $ 917
====================================
The net deferred tax liability is recorded on the accompanying consolidated
balance sheet in income taxes payable. The current income tax receivable of
$7,445,000 as of December 31, 2001 is recorded in other receivables.
F-32
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
There is no recorded valuation allowance for deferred tax assets as of December
31, 2001 or 2000. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods that the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, and does not believe that a valuation
allowance is necessary. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carry-forward period are reduced.
The net operating loss carry-forward of $2,658,000 at December 31, 2001 expires
in 2021.
12. Regulatory
The Company is a unitary thrift holding company and, as such, is subject to the
regulation, examination and supervision of the Office of Thrift Supervision
(OTS).
Matrix Bank is also subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on Matrix
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Matrix Bank must meet
specific capital guidelines that involve quantitative measures of Matrix Bank's
assets, liabilities and certain off-balance sheet commitments as calculated
under regulatory accounting practices. Matrix Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Matrix Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to total
assets (as defined). Management believes, as of December 31, 2001 and 2000, that
Matrix Bank met all applicable capital adequacy requirements.
F-33
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2001, the most recent notification from the OTS categorized
Matrix Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Matrix Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There have been no conditions or events since that
notification that management believes have changed the institution's category.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------
(Dollars in thousands)
As of December 31, 2001
Total Capital
(to Risk Weighted Assets) $ 106,310 11.7% $ 72,418 8.0% $ 90,522 10.0%
Core Capital
(to Adjusted Tangible Assets) 99,949 6.5 61,671 4.0 77,089 5.0
Tier Capital
(to Risk Weighted Assets) 99,949 11.0 N/A 54,313 6.0
As of December 31, 2000
Total Capital
(to Risk Weighted Assets) $ 100,091 12.2% $ 65,387 8.0% $ 81,734 10.0%
Core Capital
(to Adjusted Tangible Assets) 94,289 7.0 53,694 4.0 67,117 5.0
Tier Capital
(to Risk Weighted Assets) 94,289 11.5 N/A 49,041 6.0
The various federal banking statutes to which Matrix Bank is subject also
include other limitations regarding the nature of the transactions in which it
can engage or assets it may hold or liabilities it may incur.
Matrix Bank is required to maintain vault cash or balances with the Federal
Reserve Bank of Dallas in a noninterest-earning account based on a percentage of
deposit liabilities. Such balances averaged $11,420,000 and $13,168,000 in 2001
and 2000, respectively.
As a wholly owned subsidiary of Matrix Bank, Matrix Financial is subject to OTS
regulation. In addition, Matrix Financial is also subject to examination by
various regulatory agencies involved in the mortgage banking industry. Each
regulatory agency requires the maintenance of a certain amount of net worth, the
most restrictive of which required $4,020,000 at December 31, 2001 and
$4,566,000 at December 31, 2000. At December 31, 2001 and 2000, Matrix Financial
was in compliance with these regulatory requirements.
First Matrix, headquartered in Denver, Colorado, a wholly owned subsidiary of
Matrix Capital Markets, is a broker-dealer registered with the Securities and
Exchange Commission (SEC) under rule 15c3-3(k)(2)(ii). First Matrix is subject
to the SEC's Net Capital Rule which requires the maintenance of minimum net
F-34
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. At December 31, 2001, First Matrix
had net capital of $408,000 which was $395,000 in excess of its required net
capital of $13,000. First Matrix's net capital ratio was 0.46 to 1.
Sterling, a Texas trust company, is generally required to maintain minimum
restricted capital of at least $1,000,000, and may be required to maintain
additional capital if the Texas Banking Commissioner determines that it is
necessary to protect the safety and soundness of Sterling. At December 31, 2001,
Sterling was out of compliance with capital requirements under Texas law.
Subsequent to year end, the Company contributed $900,000 to Sterling to meet
minimum capital requirements.
13. Shareholders' Equity
Stock Option Plan
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its employee
stock options. Under Opinion No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
In September 1996, the board of directors and shareholders adopted the 1996
Stock Option Plan, which amended and restated the Company's stock option plan
adopted in 1995. The Company's 1996 Stock Option Plan, as amended, allows for
the grant of options to substantially all of the Company's full-time employees
and directors for up to 750,000 shares of the Company's common stock. Options
granted generally have ten-year terms and vest based on the determination by the
Company's compensation committee.
The 1996 Stock Option Plan authorized the granting of incentive stock options
(Incentive Options) and nonqualified stock options (Nonqualified Options) to
purchase common stock to eligible persons. The 1996 Stock Option Plan is
currently administered by the compensation committee (administrator) of the
board of directors. The 1996 Stock Option Plan provides for adjustments to the
number of shares and to the exercise price of outstanding options in the event
of a declaration of stock dividend or any recapitalization resulting in a stock
split, combination or exchange of shares of common stock.
No Incentive Option may be granted with an exercise price per share less than
the fair market value of the common stock at the date of grant. The Nonqualified
Options may be granted with any exercise price determined by the administrator
of the 1996 Stock Option Plan. To date, all grant prices have equaled the market
price of the underlying stock on the date of the grant. The expiration date of
F-35
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
an option is determined by the administrator at the time of the grant, but in no
event may an option be exercisable after the expiration of ten years from the
date of grant of the option. All options granted to-date have been
nonqualified.
The 1996 Stock Option Plan further provides that, in most instances, an option
must be exercised by the optionee within 30 days after the termination of the
consulting contract between such consultant and the Company or termination of
the optionee's employment with the Company, as the case may be, if and to the
extent such option was exercisable on the date of such termination. To date, no
options have been granted to consultants.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123, Accounting for Stock-Based Compensation, which also requires
that the information be determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994, under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2001, 2000 and 1999, respectively:
risk-free interest rates of 5.0 percent, 5.1 percent and 5.4 percent; a dividend
yield of zero percent; volatility factors of the expected market price of the
Company's common stock of 0.57, 0.63 and 0.56; and a weighted-average expected
life of the option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
F-36
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Year ended December 31
2001 2000 1999
------------------------------------------------------
(Dollars in thousands except share data)
Pro forma net income $ 8,205 $ 3,980 $ 10,462
Pro forma earnings per share:
Basic 1.26 0.59 1.55
Diluted 1.25 0.59 1.53
A summary of the Company's stock option activity and related information is as
follows:
Year ended December 31
2001 2000 1999
------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------
Outstanding, beginning of
year 496,700 $ 10.54 431,600 $ 11.07 387,700 $ 10.90
Granted 250,000 9.32 95,000 7.65 55,500 12.34
Exercised (16,250) 8.55 (500) 10.00 (6,100) 12.36
Forfeited (118,625) 11.09 (29,400) 10.77 (5,500) 12.32
------------- ------------- -------------
Outstanding, end of year 611,825 9.99 496,700 10.54 431,600 11.07
============= ============= =============
Exercisable end of year 306,683 10.34 286,500 10.34 226,150 9.70
Weighted average fair value
of options granted during
the year $ 5.79 $ 4.86 $ 7.68
============= ============= =============
F-37
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Options outstanding at December 31, 2001, have exercise prices ranging from
$5.13 to $26.50 per share as outlined in the following table:
Number of Weighted Weighted Average Number of Weighted
Range of Options Average Exercise Remaining Options Average Exercise
Exercise Prices Outstanding Price Per Share Contractual Life Exercisable Price Per Share
- ----------------------------------------------------------------------------------------------------------------
$ 5.13 79,500 $ 5.13 3.00 79,500 $ 5.13
7.00 - 7.88 7,500 7.29 9.50 -- --
8.00 - 8.69 127,375 8.54 8.70 17,213 8.32
9.15 - 9.86 140,000 9.67 9.69 -- --
10.00 - 10.37 107,900 10.03 5.33 100,400 10.02
11.50 - 13.88 64,800 12.40 6.51 41,020 12.46
14.25 - 17.25 81,750 15.13 5.58 65,550 15.12
26.50 3,000 26.50 6.33 3,000 26.50
----------------------------------------------------------------------------------------------
611,825 $ 10.54 6.68 306,683 $ 10.34
==============================================================================================
Employee Stock Purchase Plan
In September 1996, the board of directors and shareholders adopted an Employee
Stock Purchase Plan (Purchase Plan) and authorized 125,000 shares of common
stock (ESPP Shares) for issuance thereunder. The Purchase Plan became effective
upon consummation of the initial public offering. The price at which ESPP Shares
are sold under the Purchase Plan is 85 percent of the lower of the fair market
value per share of common stock on the enrollment or the purchase date. In May
2000, the authorized number of shares available for issuance under the Purchase
Plan was increased to 250,000 shares. As of December 31, 2001, there were
115,602 ESPP Shares available for future issuance.
14. Commitments, Contingencies and Related Party Transactions
Leases
The Company leases office space and certain equipment under noncancelable
operating leases. Annual amounts due under the office and equipment leases as of
December 31, 2001, are approximately as follows:
(In thousands)
2002 $ 2,548
2003 2,555
2004 2,173
2005 2,134
2006 1,784
Thereafter 3,700
------------------
$ 14,894
==================
F-38
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Total rent expense aggregated approximately $3,011,000, $2,319,000 and
$1,327,000 for the years ended December 31, 2001, 2000 and 1999, respectively,
and is recorded in occupancy and equipment expense.
Off-Balance Sheet Risk
The Company is party to various financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include undisbursed commercial mortgage
construction loans, commercial lines of credit and letters of credit. These
financial instruments involve, to varying degrees, elements of credit risk in
excess of the amounts recognized in the consolidated financial statements.
The Company's exposure to credit loss, in the event of nonperformance by the
other party, to off-balance sheet financial instruments with credit risk is
represented by the contractual amounts of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it
does for on balance sheet instruments with credit risk.
Commercial credit off-balance sheet instruments are agreements to lend to, or
provide credit guarantee for, a customer as long as there is no violation of any
condition established in the contract. Such instruments generally have fixed
expiration dates or other termination clauses and may require the payment of a
fee. Because many of these instruments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis, and the amount of collateral or other security obtained is
based on management's credit evaluation of the customer.
As of December 31, 2001 and 2000, the Company had commercial credit off-balance
sheet instruments of $40,501,000 and $27,905,000, respectively.
Matrix Bancorp, Inc. has guaranteed, with 50% recourse to the joint venture
partner, the indebtedness of Matrix Settlement and Clearance Services to U.S
Bank, N.A., in an amount of no greater than $3,000,000. There was no balance
outstanding at Matrix Settlement and Clearance Services on such indebtedness at
December 31, 2001.
Mortgage Banking Risk Management Activities
In the ordinary course of business, the Company makes commitments to originate
residential mortgage loans (pipeline) and holds originated loans until delivery
to an investor. Inherent in this business is a risk associated with changes in
interest rates and the resulting change in the market value of the pipeline and
funded loans. The Company mitigates this risk through the use of mandatory and
best effort forward commitments to sell loans or mortgage-backed securities.
F-39
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The Company uses derivative instruments primarily to protect against the risk of
changes in the price or interest rate movements on the value of certain assets
and liabilities. Derivative instruments represent contracts between parties that
usually require no initial net investment and result on one party delivering
cash or another type of asset to the other party based on a notional amount and
underlying as specified in the contract. A notional amount represents the number
of units of a specific item, such as currency units. An underlying represents a
variable, such as an interest rate, security price or price index. The amount of
cash or other asset delivered from one party to the other is determined based on
the interaction of the notional amount of the contract with the underlying.
Derivatives are also implicit in certain contracts and commitments.
The Company's primary use of derivative instruments is in connection with its
mortgage loan origination activities. Management uses derivative instruments to
protect against the risk of changes in fair value caused by changes in market
interest rates of originated mortgage loans and a portion of the mortgage loans
that are not yet closed but for which the interest rate has been established.
These instruments primarily include best effort commitments and mandatory
commitments. The nature and volume of the derivative instruments used to manage
the risk of change in fair value of mortgage loan originations depends on the
level of mortgage loans and commitments to originate mortgage loans on the
consolidated balance sheet.
As discussed in Note 2, on January 1, 2001, the Company adopted SFAS 133, which
requires all derivative instruments to be carried at fair value on the balance
sheet. Prior to 2001, unrealized gains and losses on derivatives used for
hedging purposes were generally not required to be reported in the financial
statements. In order to reduce the earnings volatility that would result from
having to recognize in earnings the fair value of certain derivative instruments
used to hedge risks associated with financial instruments not carried at fair
value, SFAS 133 provides special hedge accounting provisions. These provisions
permit the change in the fair value of the hedged item related to the risk being
hedged to be recognized in earnings in the same period and in the same income
statement line as the change in fair value of the derivative. The Company
usually designates derivative instruments used to manage interest rate risk into
SFAS 133 hedge relationships with the specific assets or liabilities being
hedged.
As with any financial instrument, derivative instruments have inherent risks.
Market risk is the adverse effect a change in interest rates, currency, or
implied volatility has on the value of a financial instrument. The Company
manages market risk associated with derivative instruments by establishing and
monitoring limits as to the amount of mortgage origination commitment coverage
obtained.
F-40
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Credit risk is the risk that a counterparty to a derivative contract with an
unrealized gain fails to perform according to the terms of the agreement. Credit
risk is managed by monitoring the size and maturity structure of the derivative
portfolio and applying uniform credit standards maintained for all activities
with credit risk.
During 2001, the Company used best effort and mandatory commitments to hedge the
change in fair value of mortgage loans and commitments to originate mortgage
loans. At December 31, 2001, the Company had $155,023,000 of commitments to
originate mortgage loans and $492,613,000 of funded loans, respectively, hedged
with mandatory forward commitments of $434,336,000 and best effort forward
commitments of $96,162,000. These commitments mature within 90 days of December
31, 2001. At December 31, 2000, the Company had $109,490,000 and $132,000,000 in
commitments to originate mortgage loans and funded loans, respectively, offset
with mandatory forward commitments of $70,730,000 and best effort forward
commitments of $121,950,000. The fair value of the derivatives of $2,460,000 is
recorded in other assets and is offset by a decline in the fair value of the
mortgage loans of $2,435,000; the difference representing the ineffective
portion of the hedge of $25,000, which was recorded as a charge to loan
origination income in 2001.
Risk Management Activities for MSRs
Ownership of MSRs exposes the Company to impairment of the value of MSRs in
certain interest rate environments. The incidence of prepayment of a mortgage
loan increases during periods of declining interest rates as the homeowner seeks
to refinance the loan to a lower interest rate. If the level of prepayment on
segments of the Company's mortgage servicing portfolio achieves a level higher
than projected by the Company for an extended period of time, then an impairment
in the associated basis in the MSRs may occur. In 2001, the Company implemented
a strategy to mitigate this risk of retaining a portion of originated servicing
as management believes that retaining servicing that was generated in the lower
interest rate environment will incur less prepayment risk. This strategy is
combined with the continued strategy of attempting to acquire mortgage servicing
rights on loans which tend to be more seasoned, lower balance loans.
At December 31, 2000, the Company used a program of exchange-traded futures and
options to hedge approximately 6.4% of its mortgage servicing portfolio. Due to
the cost of the requirements that must be met to achieve hedge accounting under
SFAS 133 for mortgage servicing rights the Company did not attempt to qualify
for hedge accounting and effective March 31, 2001 the Company sold, repurchased
or allowed to mature all derivative instruments recorded on the books associated
with mortgage servicing.
F-41
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Contingencies
The Company and its subsidiaries are parties to various litigation matters, in
most cases, involving ordinary and routine claims incidental to the business of
the Company. The Company accrues liabilities when it is probable that future
costs will be incurred and such costs can be reasonably estimated. Such accruals
are based upon developments to date, the Company's estimates of the outcome of
these matters and its experience in contesting, litigating and settling other
matters. Based on evaluation of the Company's litigation matters and discussions
with internal and external legal counsel, management believes that an adverse
outcome on one or more of the matters set forth below, against which no accrual
for loss has been made as of December 31, 2001, is reasonably possible but not
probable, and that the outcome with respect to one or more of these matters, if
adverse, is reasonably likely to have a material adverse impact on the
consolidated financial condition, results of operations or cash flows of the
Company.
In early 1999, Matrix Bancorp and Matrix Bank instituted an arbitration action
with the American Arbitration Association in Phoenix, Arizona against Fidelity
National Financial, Inc. The arbitration action arose out of an alleged breach
by Fidelity of a Merger Termination Agreement entered into between Matrix
Bancorp and Fidelity in connection with the termination of their proposed
merger. The arbitration panel has ruled that the entire Merger Termination
Agreement was unenforceable. Matrix Bancorp and Matrix Bank filed an appeal of
the arbitration panel's decision in federal district court in Phoenix, Arizona,
which has been denied. In October 2001, Fidelity initiated a second arbitration
to determine the validity of a release given in connection with the Merger
Termination Agreement. Matrix Bancorp and Matrix Bank contest that the releases
are valid and, in the alternative, have filed a counterclaim against Fidelity
demanding restitutional damages for the value of the releases if they are
determined valid .
Sterling Trust has been named a defendant in an action that was tried in Tarrant
County, Texas, district court in the spring of 2000. The jury returned a verdict
adverse to Sterling Trust with respect to two of twelve theories of liability
posed by the plaintiffs, and the court has signed a judgment for certain of the
plaintiffs in the amount of approximately $6,400,000. Sterling Trust has filed
an appeal of this judgment and believes it has meritorious points of appeal. It
intends to vigorously prosecute the appeal of this action. The ultimate
resolution of this appeal, which is expected to occur in mid-2002, could result
in a loss of up to $6,400,000 plus post-judgment interest and additional
attorneys' fees. The ultimate legal and financial liability, if any, of the
Company cannot be estimated with certainty at this time.
Related to the matter described in the previous paragraph, Sterling Trust and
several officers have been named defendants in an action in which the plaintiffs
have asserted various theories of liability, including control person theories
of liability under the Texas Securities Act and fraudulent transfer theories of
F-42
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
liability, to seek to impose liability on the defendants for the judgment
described above. The parties have agreed to abate this action pending the
outcome of the appeal mentioned in the previous paragraph. The defendants
believe they have adequate defenses and intend to vigorously defend this action.
The ultimate legal and financial liability of the Company, if any, in this
matter cannot be estimated with certainty at this time.
Sterling Trust was named a defendant in an action in the Superior Court of the
State of California for the County of Los Angeles. The plaintiffs in this action
sought to certify a class action on behalf of all persons and entities that
invested in promissory notes issued by Personal Choice Opportunities. The
plaintiffs alleged, among other things, that Sterling Trust, as custodian of the
plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent.
In January 2002, this matter was settled. The settlement requires no payment
from Sterling other than the $5,000 retention amount pursuant to the terms of
the Company's insurance policy. The remainder of the settlement consideration is
to be paid the by Company's insurer. The settlement is subject to, among other
things, approval of the settlement by the Court and negotiation and execution of
appropriate releases between Sterling Trust and its insurer. If these conditions
are met, the case will be dismissed with prejudice.
Sterling Trust was named a defendant in several putative class action lawsuits
instituted in November 2000 by one law firm in Pennsylvania. All of such
lawsuits were originally filed in the United States District Court for the
Western District of Pennsylvania. On April 26, 2001, the District Court for the
Western District of Pennsylvania ordered that all of such cases, except as
discussed below, be transferred to the United States District Court for the
Western District of Texas so that Sterling Trust could properly present its
motion to compel arbitration. Sterling Trust filed separate motions to compel
arbitration in these actions, all of which were granted. Each of the six
plaintiffs timely filed arbitration demands with the American Arbitration
Association. The demands seek damages and allege Sterling Trust breached
fiduciary duties and was negligent in administering each claimant's
self-directed individual retirement accounting holding a nine-month promissory
note. Sterling Trust believes it has meritorious defenses and is defending the
matters vigorously.
With respect to one of these actions, Sterling Trust filed a motion to dismiss
because it can find no evidence that the named plaintiff in the case ever had
accounts with Sterling Trust. On December 7, 2001, the Court stayed Sterling
Trust's motion to dismiss and granted the named plaintiff thirty days to file an
amended petition adding a Sterling Trust accountholder as a nominal plaintiff.
The named plaintiff filed an amended petition within the 30-day period,
F-43
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
however, he did not add any additional plaintiffs. On February 5, 2002, the
court granted Sterling Trust's motion to dismiss the case.
In addition to the other litigation matters described above, Sterling Trust has
been the subject of numerous lawsuits and arbitration proceedings in which
customers and, in some cases, persons who are not customers allege various
theories of liability against Sterling Trust for losses suffered by these
claimants in connection with their failed investments in several enterprises. To
the extent that Sterling Trust has had any relationship with any of such
claimants, it has been solely as custodian of such claimant's self-directed IRAs
pursuant to contracts that specify the limited nature of Sterling Trust's
obligations. The Company believes Sterling Trust has in each case acted in
accordance with its obligations under the contracts and/or as otherwise imposed
by law. The Company further believes that the ultimate outcome of each of these
cases will not be material to the consolidated financial statements of the
Company; but, there can be no assurances that there will not be an adverse
outcome in any one or more of these cases or that any such adverse outcome will
not have a material adverse effect on the consolidated financial statements of
the Company.
A former customer of the Company is a debtor in a Chapter 11 proceeding under
the Bankruptcy Code. Prior to the bankruptcy filing, the Company had provided
the customer with a purchase/repurchase facility under which the Company
purchased residential mortgage loans from the customer, with the customer having
the right or obligation to repurchase such mortgage loans within a specified
period of time. Several other financial institutions had provided the customer
with warehouse financing or additional purchase/repurchase facilities (the
Origination Facilities). At this time, it appears that no other financial
institution that provided an Origination Facility to the customer has a
conflicting interest with the Company in respect of the loans purchased by the
Company, which were approximately $12,400,000 in original principal amount (the
Purchased Loans).
Various third parties have instituted lawsuits, adversary proceedings or
competing bankruptcy claims against Matrix Bank claiming an equitable interest
in approximately eighteen of the Purchased Loans (approximately $2.1 million in
original principal amount). These third parties consist primarily of title
companies, closing attorneys and other closing agents that provided settlement
funds in connection with the funding of a borrower's mortgage loan, in many
cases, we believe in violation of various "good funds" laws, which typically
require a closing agent to wait for receipt of "good funds" prior to
disbursement of settlement funds on the origination of a loan. After providing
settlement funds, these closing agents discovered that Island Mortgage had
either provided company checks with insufficient funds or had inappropriately
placed a stop payment on the checks. To date, Matrix Bank has fully resolved one
claim and has reached tentative agreements to settle claims asserted against
five others upon terms satisfactory to Matrix Bank.
F-44
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
Additionally, certain parties in the chain of title to property securing
approximately $2.7 million of loans, including sellers and prior lien holders,
are seeking to void or rescind their transactions on the theory that they never
received consideration. Matrix Bank has reached tentative agreement to settle
claims arising from thirteen of these Purchased Loans upon terms satisfactory to
Matrix Bank and is awaiting approval of the Bankruptcy Court.
The trustee for the customer mentioned above has received an order from the
Bankruptcy Court finding that the Purchased Loans are a part of the estate of
the customer. Nevertheless, the trustee and the Company have reached an
agreement, in principle, whereby the trustee will release all of its right in
and to the Purchased Loans if the trustee, after performance of a "due
diligence" review determines that the Company owns the Purchased Loans or, would
otherwise have a perfected security interest in the Purchased Loans. The Company
believes it can adequately demonstrate to the trustee that it is the owner of
the Purchased Loans, or otherwise has a perfected security interest in the
Purchased Loans. The Company intends to vigorously defend its position in this
matter. The ultimate legal and financial liability of the Company, if any, in
this bankruptcy cannot be estimated with certainty at this time.
Related Party Transactions
At December 31, 2001, the Company had an unsecured loan receivable from an
executive officer of $80,000, which bears interest at prime and is renewable at
the Company's option.
From time to time, Matrix Financial has originated mortgage loans to various
employees, including executive officers of the Company. These mortgage loans
generally are sold to third party investors on a servicing released basis within
30 to 60 days after closing, and are made in the ordinary course of business,
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and do not involve more than the normal risk of collectibility or
present other unfavorable features. At December 31, 2001, the Company had
approximately $874,000 of closed mortgage loans, and approximately $830,000 of
commitments for mortgage loans to related parties.
F-45
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
15. Defined Contribution Plan
The Company has a 401(k) defined contribution plan (Plan) covering all employees
who have elected to participate in the Plan. Each participant may make pretax
contributions to the Plan up to 15 percent of such participant's earnings with a
maximum of $10,500 in 2001. The Company makes a matching contribution of 25
percent of the participant's total contribution. Matching contributions made by
the Company vest over six years. The cost of the plan approximated $324,000,
$261,000 and $211,000 during the years ended December 31, 2001, 2000 and 1999,
respectively, and was recorded in compensation and employee benefits expense in
the consolidated statements of income.
16. Fair Value of Financial Instruments
The carrying amounts and estimated fair value of financial instruments are as
follows:
December 31
2001 2000
------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------
(In thousands)
Financial assets:
Cash and cash equivalents $ 84,460 $ 84,460 $ 53,170 $ 53,170
Mortgage-backed and SBA securities 6,963 6,963 66,616 66,616
Loans held for sale, net 1,157,989 1,161,381 942,496 948,069
Loans held for investment, net 191,161 191,661 173,525 174,581
FHLB stock 18,181 18,181 27,814 27,814
Financial liabilities:
Deposits 866,235 869,215 602,669 604,423
Custodial escrow balances 129,665 129,665 77,647 77,647
Payable for purchase of MSRs 4,738 4,738 12,666 12,666
FHLB borrowings 303,361 309,931 519,433 521,194
Borrowed money and guaranteed preferred
beneficial interests 222,032 222,032 124,503 119,253
The following methods and assumptions were used by the Company in estimating the
fair value of the financial instruments:
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, mortgage-backed and SBA securities, FHLB stock, payable for
purchase of MSRs and certain components of borrowed money approximate those
assets' and liabilities' fair values.
F-46
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The fair values of loans are based on quoted market prices where available or
outstanding commitments from reputable investors. If quoted market prices are
not available, fair values are based on quoted market prices of similar loans
sold in securitization transactions, adjusted for differences in loan
characteristics. The value of derivative financial instruments used to hedge the
loan portfolio is included in the carrying amount and fair value of the loans.
The fair value disclosed for FHLB borrowings is estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
FHLB borrowings. The fair value for the remainder of borrowed money, which
includes the Company's 11.50 percent senior notes and guaranteed preferred
beneficial interests, is based on over the counter (OTC) market prices.
The fair value disclosed for demand deposits (e.g., interest and noninterest
checking, savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected periodic maturities
on time deposits. The component commonly referred to as deposit base intangible,
was not estimated at December 31, 2001 and 2000, and is not considered in the
fair value amount. The fair value disclosed for custodial escrow balances
liabilities (noninterest checking) is, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts).
17. Parent Company Condensed Financial Information
Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows:
December 31
2001 2000
------------------------------------
(In thousands)
Condensed Balance Sheets
Assets:
Cash $ 155 $ -
Loans receivable 3,500 -
Other receivables 9 279
Premises and equipment, net 1,139 989
Other assets 3,168 2,489
Investment in and advances to subsidiaries 151,755 123,755
------------------------------------
Total assets $ 159,726 $ 127,512
====================================
Liabilities and shareholders' equity:
Borrowed money and guaranteed preferred beneficial
interests (a) $ 81,527 $ 55,714
Other liabilities 6,887 7,775
------------------------------------
Total liabilities 88,414 63,489
Shareholders' equity:
Common stock 1 1
Treasury shares - (1,775)
Additional paid-in capital 20,800 23,004
Retained earnings 50,511 42,793
------------------------------------
Total shareholders' equity 71,312 64,023
------------------------------------
Total liabilities and shareholders' equity $ 159,726 $ 127,512
====================================
F-47
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
(a) The Parent's debt is set forth in a table following the condensed
statements of cash flows. The Parent also guarantees the revolving
warehouse loan agreement and the financing related to charter schools.
See Note 9 for additional information regarding the debt.
Year ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Condensed Statements of Income
Income:
Interest income on intercompany advances $ 2,395 $ 2,202 $ 1,257
Other 1,230 1,362 616
------------------------------------------------------
Total income 3,625 3,564 1,873
Expenses:
Compensation and employee benefits 3,529 3,686 2,628
Occupancy and equipment 748 674 718
Interest on borrowed money 8,511 6,923 5,521
Professional fees 437 510 400
Other general and administrative 2,553 2,209 1,948
------------------------------------------------------
Total expenses 15,778 14,002 11,215
------------------------------------------------------
Loss before income taxes and equity income
of subsidiaries (12,153) (10,438) (9,342)
Income taxes (b) - - -
------------------------------------------------------
Loss before equity income of subsidiaries (12,153) (10,438) (9,342)
Equity income of subsidiaries 20,665 14,696 20,121
------------------------------------------------------
Net income $ 8,512 $ 4,258 $ 10,779
======================================================
F-49
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
(b) The Company's tax-sharing agreement with its subsidiaries provides that the
subsidiaries will pay the Parent an amount equal to its individual current
income tax provision calculated on the basis of the subsidiary filing a
separate return. In the event a subsidiary incurs a net operating loss in
future periods, the subsidiary will be paid an amount equal to the current
income tax refund the subsidiary would be due as a result of carry-back of
such loss, calculated on the basis of the subsidiary filing a separate
return. Accordingly, the Parent's condensed statements of income do not
include any income tax benefit for the current losses.
Year ended December 31
2001 2000 1999
------------------------------------------------------
(In thousands)
Condensed Statements of Cash Flows
Operating activities:
Net income $ 8,512 $ 4,258 $ 10,779
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Equity income of subsidiaries (20,665) (14,696) (20,121)
Dividend from subsidiaries 11,996 6,509 11,468
Depreciation and amortization 703 621 763
Unrealized gain (loss) on securities
available for sale (794) 819 -
Gain on sale of building - (823) -
Increase (decrease) in other (888) 3,800 2,556
liabilities
Decrease (increase) in other
receivables and other assets (3,133) 1,459 (1,754)
------------------------------------------------------
Net cash (used) provided by operating
activities (4,269) 1,947 3,691
Investing activities:
Purchases of premises and equipment (606) (457) (221)
Proceeds from sale of building - 2,191 -
Investment in and advances to subsidiaries (19,331) 1,722 (19,846)
------------------------------------------------------
Net cash (used) provided by investing
activities (19,937) 3,456 (20,067)
Financing activities:
Repayments of notes payable and revolving
line of credit (49,437) (39,554) (30,007)
Proceeds from notes payable and revolving
line of credit 43,250 35,700 19,800
Shares repurchased (746) (1,775) -
Proceeds from junior subordinated - 26,063
debentures 30,977
Proceeds from issuance of common stock 317 224 364
------------------------------------------------------
Net cash provided (used) by financing
activities 24,361 (5,405) 16,220
------------------------------------------------------
Increase (decrease) in cash 155 (2) (156)
Cash at beginning of year - 2 158
------------------------------------------------------
Cash at end of year $ 155 $ - $ 2
======================================================
Parent Company Debt is set forth below:
December
2001 2000
------------------------------------
(In thousands)
Senior notes $ 10,455 $ 20,000
Bank stock loan 8,572 8,214
------------------------------------
Total term notes 19,027 28,214
Bank stock revolving line of credit 3,000 -
Guaranteed preferred beneficial interests 59,500 27,500
------------------------------------
Total debt $ 81,527 $ 55,714
====================================
F-50
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2001, the maturities of term notes payable are as follows:
(In thousands)
2002 $ 4,428
2003 7,144
2004 10,455
Thereafter 59,500
------------------
$ 81,527
==================
18. Selected Quarterly Financial Data (Unaudited)
2001
----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------------------------------------------------------------
(In thousands except share data)
Operations
Net interest income before
provision for loan and valuation
losses $ 11,378 $ 9,335 $ 11,133 $ 8,664
Provision for loan and valuation
losses 829 648 526 977
Noninterest income 28,678 22,500 21,951 18,577
Noninterest expense 32,669 30,415 30,006 22,809
----------------------------------------------------------------
Income before income taxes 6,558 772 2,552 3,455
Provision for income taxes 2,250 144 924 1,147
Less cumulative effect of a change
in accounting principle, net of
tax benefit - - - 360
----------------------------------------------------------------
Net income $ 4,308 $ 628 $ 1,628 $ 1,948
================================================================
Net Income per Share Data
Basic before accounting change $ 0.66 $ 0.10 $ 0.25 $ 0.35
Cumulative effect of a change in
accounting principle - - - 0.05
----------------------------------------------------------------
Basic $ 0.66 $ 0.10 $ 0.25 $ 0.30
================================================================
Diluted before accounting change 0.66 0.10 0.25 0.34
Cumulative effect of a change in
accounting principle - - - 0.05
----------------------------------------------------------------
Diluted $ 0.66 $ 0.10 $ 0.25 $ 0.29
================================================================
F-51
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
2001
----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------------------------------------------------------------
(In thousands except share data)
Balance Sheet
Total assets $ 1,637,000 $ 1,530,000 $ 1,685,000 $ 1,692,000
Total loans, net 1,349,000 1,256,000 1,387,000 1,455,000
Shareholders' equity 71,000 67,000 66,000 65,000
2000
----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------------------------------------------------------------
----------------------------------------------------------------
(In thousands except share data)
Operations
Net interest income after provision
for loan and valuation losses $ 7,084 $ 6,191 $ 6,242 $ 6,033
Noninterest income 14,971 15,340 14,705 13,440
Noninterest expense 20,234 19,849 20,462 16,960
----------------------------------------------------------------
Income before income taxes 1,821 1,682 485 2,513
Income taxes 513 615 151 964
----------------------------------------------------------------
Net income $ 1,308 $ 1,067 $ 334 $ 1,549
================================================================
Net Income per Share Data
Basic $ 0.20 $ 0.16 $ 0.05 $ 0.23
================================================================
Diluted $ 0.20 $ 0.16 $ 0.05 $ 0.23
================================================================
Balance Sheet
Total assets $ 1,419,000 $ 1,368,000 $ 1,294,000 $ 1,303,000
Total loans, net 1,116,000 1,086,000 1,074,000 1,088,000
Shareholders' equity 64,000 64,000 63,000 62,000
19. Transactions with Harbor Financial Mortgage Corporation
During 1999 and 1998, the Company entered into several transactions with Harbor
Financial Mortgage Corporation and its wholly owned subsidiary New America
Financial Inc. (collectively Harbor). The transactions included the purchase of
nonperforming FHA/VA loans, servicing retained, on a scheduled/actual
remittance; the purchase of performing residential mortgage loans including
sub-prime loans, servicing retained, on a scheduled/scheduled remittance with
full recourse; the acquisition of MSRs; and the purchase of receivables related
to servicing sales by Harbor to third parties.
In July 1999, Harbor, as servicer for the nonperforming FHA/VA loans, breached
its servicing contract. As a result, in September 1999, the Company transferred
the servicing of the loans to Matrix Financial.
F-52
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
In October 1999, Harbor filed for bankruptcy. Subsequent to the bankruptcy there
were several lawsuits filed by and against the Company and third parties,
generally surrounding the ownership and competing interest in certain of the
Harbor assets that the Company had acquired. In August 2000, the Company entered
into a global settlement with all of the third parties. As part of the
settlement, the Company acquired additional assets from the Harbor estate and
was required to make settlement payments. Related to the settlement,
curtailments and legal expenses, the Company expensed approximately $2,800,000,
the majority of which was recorded in other general and administrative expense
in the consolidated statement of income for the year ended December 31, 2000.
The most significant assets which remain from the Harbor transactions are the
nonperforming FHA/VA loans with a balance of $45,062,000 at December 31, 2001.
Because the principal and interest is largely insured or guaranteed by the
federal government at a stated debenture rate, the Company continues to accrue
interest on the loans. However, both the interest and advances made on the loans
are subject to certain curtailments. The interest and advances are analyzed
quarterly by the Company for collectibility.
20. Transactions with Island Mortgage Network
In 2000 and 1999, the Company provided Island Mortgage Network (Island), a New
York mortgage banking entity, with a purchase/repurchase facility under which
the Company purchased residential mortgage loans from Island, with Island having
the right or obligation to repurchase such mortgage loans within a specified
period of time. In June 2000, Island breached terms of its agreement with the
Company and, in July 2000, Island filed for bankruptcy. At the time of the
bankruptcy, the Company had approximately $12,400,000 of loans that it had
acquired from Island. At December 31, 2001, relating to $2,100,000 of the loans,
there have been lawsuits initiated by third parties alleging a competing
interest in the loans. With respect to an additional $2,700,000 of loans, the
Company believes that the loans were never closed with good funds. As of
December 31, 2001, the Company had $10,100,000 of loans and receivables
originated by Island. The Company has an allowance for loan losses for these
loans of approximately $2,900,000 and $2,600,000 as of December 31, 2001 and
2000, respectively.
21. Segments of the Company and Related Information
The Company has four reportable segments under SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information: a traditional banking
subsidiary, a mortgage banking subsidiary, a servicing brokerage and consulting
subsidiary and a school services subsidiary. The traditional banking subsidiary
provides deposit and lending services to its customers and also makes
investments in residential mortgage loans. The mortgage banking subsidiary
originates residential mortgage loans through its wholesale loan origination
offices, as well as acquires residential MSRs and services the mortgage loans
underlying those MSRs. The servicing brokerage subsidiary offers brokerage and
consulting services for residential MSRs. The school services subsidiary
provides outsourced business and consulting services, as well as financing to
charter schools. The remaining subsidiaries are included in the "all other"
category for purposes of Statement No. 131 disclosures and consist of the
Company's trust operations, real estate disposition services, a broker-dealer
and the Parent company operations.
F-53
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
The Company evaluates performance and allocates resources based on operating
profit or loss before income taxes. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Transactions between affiliates, the resulting revenues of
which are shown in the intersegment revenue category, are conducted at market
prices (i.e., prices that would be paid if the companies were not affiliates).
For the years ended December 31:
Servicing
Brokerage
Traditional Mortgage and School
Banking Banking Consulting Services All Others Total
---------------------------------------------------------------------------------
(In thousands)
2001
Revenues from external
customers:
Interest income $ 67,752 $ 30,602 $ - $ 6,854 $ 189 $ 105,397
Noninterest income 9,651 62,177 4,126 7,252 8,500 91,706
Intersegment revenues 20,821 6,260 411 - 3,345 30,837
Interest expense 51,008 23,548 85 4,931 (14,685) 64,887
Depreciation/amortization 489 22,832 115 360 1,115 24,911
Segment income (loss)
before income taxes 21,529 7,803 (1,293) (1,177) (13,525) 13,337
Segment assets (a) 1,420,812 669,165 5,659 78,027 47,255 2,220,918
2000
Revenues from external
customers:
Interest income $ 86,535 $ 5,973 $ - $ 4,691 $ 187 $ 97,386
Noninterest income 9,144 27,430 6,871 4,240 11,107 58,792
Intersegment revenues 3,620 5,746 220 - 2,233 11,819
Interest expense 47,978 8,296 7 4,413 6,907 67,601
Depreciation/amortization 2,447 8,469 155 269 1,094 12,434
Segment income (loss)
before income taxes 17,170 2,209 1,431 (4,019) (10,290) 6,501
Segment assets (a) 1,286,971 259,726 2,304 62,245 30,740 1,641,986
1999
Revenues from external
customers:
Interest income $ 66,057 $ 4,433 $ - $ 3,249 $ 11 $ 73,750
Noninterest income 13,903 24,779 9,662 2,813 9,203 60,360
Intersegment revenues (68) 2,782 861 - 3,183 6,758
Interest expense 30,812 6,572 1 2,586 4,316 44,287
Depreciation/amortization 3,691 13,498 216 183 942 18,530
Segment income (loss)
before income taxes 29,047 (4,529) 3,871 (1,895) (9,437) 17,057
Segment assets (a) 1,138,650 93,252 1,803 37,640 29,446 1,300,791
F-54
Matrix Bancorp, Inc.
Notes to Consolidated Financial Statements (continued)
(a) See reconciliation to total consolidated assets in the following table.
2001 2000 1999
------------------------------------------------------
(In thousands)
Revenues for year ended December 31:
Interest income for reportable segments $ 105,208 $ 97,199 $ 73,739
Noninterest income for reportable segments 83,206 47,685 51,157
Intersegment revenues for reportable segments 27,492 9,586 3,575
Other revenues 12,034 13,527 12,397
Elimination of intersegment revenues (30,837) (11,819) (6,758)
------------------------------------------------------
Total consolidated revenues $ 197,103 $ 156,178 $ 134,110
======================================================
Income for year ended December 31:
Total profit for reportable segments $ 26,862 $ 16,791 $ 26,494
Other loss (13,858) (10,803) (9,152)
Elimination of intersegment profit (loss) 333 513 (285)
------------------------------------------------------
Income before income taxes $ 13,337 $ 6,501 $ 17,057
======================================================
Assets as of December 31:
Total assets for reportable segments $ 2,173,663 $ 1,611,246 $ 1,271,345
Other assets 47,255 30,740 29,446
Elimination of intersegment receivables (563,277) (215,998) (16,689)
Other intersegment eliminations (10,854) (7,193) (356)
------------------------------------------------------
Total consolidated assets $ 1,646,787 $ 1,418,795 $ 1,283,746
======================================================
Other significant items for the year
ended December 31:
Depreciation/amortization expense:
Segment totals $ 23,796 $ 11,340 $ 17,588
Intersegment adjustments 1,115 1,094 942
------------------------------------------------------
Consolidated totals $ 24,911 $ 12,434 $ 18,530
======================================================
Interest expense:
Segment totals $ 79,572 $ 60,694 $ 39,971
Intersegment adjustments (14,685) 6,907 4,316
------------------------------------------------------
Consolidated totals $ 64,887 $ 67,601 $ 44,287
======================================================
F-55