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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
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.)
700 17th Street, Suite 2100
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898
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 [ ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ]
Number of shares of Common Stock ($.0001 par value) outstanding at the
close of business on April 30, 2003 was 6,491,043 shares.
TABLE OF CONTENTS
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 (unaudited) and December 31, 2002..................................3
Condensed Consolidated Statements of Operations
Quarters ended March 31, 2003 and 2002 (unaudited)................................4
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2003 and 2002 (unaudited)............................5
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2003 and 2002 (unaudited).............................6
Notes to Condensed Consolidated Financial Statements (unaudited).........................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................24
ITEM 4. Controls and Procedures.................................................................24
PART II - Other Information
ITEM 1. Legal Proceedings.......................................................................24
ITEM 6. Exhibits and Reports on Form 8-K........................................................26
SIGNATURES............................................................................................27
CERTIFICATIONS........................................................................................28
2
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
2003 2002
------------------ ------------------
Assets (Unaudited)
Cash and cash equivalents ....................................................... $ 58,883 $ 58,725
Interest-earning deposits and federal funds sold................................. 2,100 3,687
Securities available for sale.................................................... 59,679 29,073
Loans held for sale, net......................................................... 1,088,521 1,107,926
Loans held for investment, net................................................... 287,865 285,891
Mortgage servicing rights, net................................................... 57,012 63,200
Other receivables ............................................................... 51,460 54,811
Federal Home Loan Bank stock, at cost............................................ 30,469 30,379
Foreclosed real estate........................................................... 6,824 8,343
Premises and equipment, net...................................................... 25,071 27,705
Other assets, net................................................................ 29,591 31,857
------------------ ------------------
Total assets..................................................................... $ 1,697,475 $ 1,701,597
================== ==================
Liabilities and shareholders' equity
Liabilities:
Deposits...................................................................... $ 945,627 $ 933,957
Custodial escrow balances..................................................... 148,149 151,790
Draft payable................................................................. 10,629 7,097
Payable for purchase of mortgage servicing rights............................. 733 782
Federal Home Loan Bank borrowings............................................. 378,265 385,785
Borrowed money................................................................ 54,673 61,403
Guaranteed preferred beneficial interests..................................... 64,500 64,500
Other liabilities............................................................. 18,367 22,575
Income taxes payable and deferred income tax liability........................ 7,676 6,772
------------------ ------------------
Total liabilities................................................................ 1,628,619 1,634,661
------------------ ------------------
Commitments and contingencies
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 6,491,043 and 6,489,543 shares at March 31, 2003 and December
31, 2002, respectively...................................................... 1 1
Additional paid in capital.................................................... 20,387 20,375
Retained earnings............................................................. 48,446 46,534
Accumulated other comprehensive income........................................ 22 26
------------------ ------------------
Total shareholders' equity....................................................... 68,856 66,936
------------------ ------------------
Total liabilities and shareholders' equity....................................... $ 1,697,475 $ 1,701,597
================== ==================
See accompanying notes.
3
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended
March 31,
2003 2002
---------------------------------
Interest income
Loans and securities......................................................................$ 20,317 $ 22,571
Interest-earning deposits................................................................. 276 243
---------------- ----------------
Total interest income..................................................................... 20,593 22,814
---------------- ----------------
Interest expense
Deposits.................................................................................. 4,023 6,498
Borrowed money and guaranteed preferred beneficial interests.............................. 4,684 4,693
---------------- ----------------
Total interest expense.................................................................... 8,707 11,191
---------------- ----------------
Net interest income before provision for loan and valuation losses........................ 11,886 11,623
Provision for loan and valuation losses................................................... 695 1,058
---------------- ----------------
Net interest income after provision for loan and valuation losses......................... 11,191 10,565
---------------- ----------------
Noninterest income
Loan administration....................................................................... 9,390 8,738
Brokerage................................................................................. 2,340 1,689
Trust services............................................................................ 1,613 1,393
Real estate disposition services.......................................................... 1,364 782
Gain on sale of loans and securities...................................................... 325 --
Loan origination.......................................................................... 13,051 8,172
School services........................................................................... 616 1,441
Other..................................................................................... 1,954 1,211
---------------- ----------------
Total noninterest income.................................................................. 30,653 23,426
---------------- ----------------
Noninterest expense
Compensation and employee benefits........................................................ 15,306 14,661
Amortization of mortgage servicing rights................................................. 8,899 5,873
Occupancy and equipment................................................................... 2,053 1,689
Postage and communication................................................................. 1,251 1,140
Professional fees......................................................................... 1,297 712
Data processing........................................................................... 730 876
Other general and administrative.......................................................... 9,483 5,942
---------------- ----------------
Total noninterest expense................................................................. 39,019 30,893
---------------- ----------------
Income before income taxes................................................................ 2,825 3,098
Provision for income taxes................................................................ 913 1,060
---------------- ----------------
Net income................................................................................$ 1,912 $ 2,038
================ ================
Net income per share - basic..............................................................$ 0.30 $ 0.31
================ ================
Net income per share - assuming dilution..................................................$ 0.29 $ 0.31
================ ================
Weighted average shares - basic........................................................... 6,490,776 6,487,099
================ ================
Weighted average shares - assuming dilution............................................... 6,531,406 6,583,159
================ ================
See accompanying notes.
4
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(Unaudited)
Accumulated
Additional Other Total
Common Stock Paid In Treasury Retained Comprehensive Shareholders' Comprehensive
-------------------
Shares Amount Capital Shares Earnings Income Equity Income (loss)
--------- -------- ----------- --------- --------- ------------- ------------- --------------
Quarter Ended
March 31, 2003
- -----------------------
Balance at
December 31, 2002....... 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936
Comprehensive income:
Net income........... - - - - 1,912 - 1,912 $ 1,912
Unrealized holding
loss on securities (1) - - - - - (4) (4) (4)
------------
Comprehensive income.... $ 1,908
============
Issuance of stock
related to employee
stock purchase plan
and options.......... 1,500 - 12 - - - 12
--------- --------- --------- ---------- -------- ----------- ---------
Balance at
March 31, 2003.......... 6,491,043 $ 1 $ 20,387 $ - $ 48,446 $ 22 $ 68,856
========= ========= ========= ========== ======== =========== =========
Quarter Ended
March 31, 2002
- ------------------------
Balance at
December 31, 2001....... 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312
Comprehensive income:
Net income........... - - - - 2,038 - 2,038 $ 2,038
Unrealized losses on
securities, net of
reclassification
adjustment........... - - - - - (5) (5) (5)
------------
Comprehensive income.... $ 2,033
============
Issuance of stock related
to employee stock
purchase plan and
options.............. 700 - 6 - - - 6
Shares repurchased...... (66,060) - - (726) - - (726)
Shares retired.......... - - - - - -
--------- --------- --------- ---------- -------- ----------- ---------
Balance at
March 31, 2002.......... 6,453,244 $ 1 $ 20,806 $ (726) $ 52,524 $ 20 $ 72,625
========= ========= ========= ========== ======== =========== =========
(1) Disclosure of
reclassification
amount
Quarter Ended
March 31, 2003
- ------------------------
Unrealized holding
gain arising during
period............. $ (4)
Less: reclassification
adjustment of gains
included in net loss -
------------
Net unrealized loss on
securities.......... $ (4)
============
See accompanying notes.
5
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Quarters Ended
March 31,
2003 2002
-------------- ---------------
Operating activities
Net income ..................................................................... $ 1,912 $ 2,038
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization................................................ 1,067 1,752
Provision for loan and valuation losses...................................... 695 1,058
Amortization of mortgage servicing rights.................................... 8,899 5,873
Recovery of impairment of mortgage servicing rights.......................... - (181)
Gain on sale of loans and securities......................................... (325) -
Loss on sale of foreclosed real estate....................................... 93 -
Changes in assets and liabilities...............................................
Loans originated for sale, net of loans sold................................. (15,591) 129,233
Loans purchased for sale..................................................... (411,564) (62,685)
Proceeds from sale of loans held for sale.................................... 338,447 28,977
Increase in securities held for sale........................................ (30,610) (4,870)
Originated mortgage servicing rights, net.................................... (2,277) (13,681)
Decrease in other receivables and other assets............................... 5,103 11,811
Decrease in payable for purchase of mortgage servicing rights................ (49) -
(Decrease) increase in other liabilities, income taxes payable and deferred
income tax liability....................................................... (3,304) 12,910
-------------- ---------------
Net cash (used in) provided by operating activities................. (107,504) 112,235
-------------- ---------------
Investing activities
Loans originated and purchased for investment................................... (30,075) (35,582)
Principal repayments on loans................................................... 139,376 78,703
Purchase of Federal Home Loan Bank stock........................................ (90) (6,303)
Purchases of premises and equipment............................................. (24) (1,693)
Acquisition of mortgage servicing rights........................................ - (801)
Proceeds from sale of premises and equipment.................................... 1,671 -
Proceeds from sale of foreclosed real estate.................................... 1,426 -
-------------- ---------------
Net cash provided by investing activities........................... 112,284 34,324
-------------- ---------------
Financing activities
Net increase in deposits........................................................ 11,670 31,318
Net decrease in custodial escrow balances....................................... (3,641) (13,115)
Decrease in revolving lines and repurchase agreements, net...................... (13,878) (109,178)
Payments of notes payable....................................................... (357) -
Payment of financing arrangements............................................... (15) (17)
Treasury shares repurchased..................................................... - (726)
Proceeds from issuance of common stock related to employee stock option plan.... 12 6
-------------- ---------------
Net cash used in financing activities............................... (6,209) (91,712)
-------------- ---------------
(Decrease) increase in cash and cash equivalents................................ (1,429) 54,847
Cash and cash equivalents at beginning of period................................ 62,412 84,460
-------------- ---------------
Cash and cash equivalents at end of period...................................... $ 60,983 $139,307
============== ===============
Supplemental disclosure of cash flow information
Cash paid for interest expense.................................................. $ 9,033 $ 12,550
============== ===============
Cash paid (received) for income taxes........................................... $ 61 $ (2,980)
============== ===============
See accompanying notes.
6
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Matrix
Bancorp, Inc. (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals, unless otherwise
disclosed in this Form 10-Q) necessary for a fair presentation have been
included. For discussion of our organization and business, the accounting
policies we follow and further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2002. This quarterly report should be read
in conjunction with that annual report.
The preparation of 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 condensed consolidated financial statements, and disclosures of
contingent assets and liabilities, and the reported amounts of income and
expenses during the reporting period and the accompanying notes. Actual results
could differ from these estimates.
Stock-Based Compensation
At March 31, 2003, the Company has one stock-based employee compensation plan,
which is described more fully in Note 14 to the audited financial statements in
Form 10-K for December 31, 2002. We apply the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS 123, "Accounting for
Stock-Based Compensation" established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plan. As allowed by SFAS 123 (and SFAS 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
123"), we have elected to continue to apply the intrinsic value-based method of
accounting described above, and have adopted the disclosure requirements of SFAS
123. Accordingly, we do not recognize compensation expense for our stock-based
plan, as we do not issue options at exercise prices below the market value at
the date of the grant. Had compensation cost for our stock-based plans been
determined consistent with SFAS No. 123, our net income and income per share
would have been reduced to the pro forma amounts indicated below:
Quarter Ended March 31,
------------------------------
2003 2002
------------------------------
(Dollars in thousands)
Net income:
As reported $ 1,912 $ 2,038
Deduct: Total stock-based employee compensation expense determined
under fair value based method for awards, net of related tax effects (78) (89)
------------------------------
Pro forma $ 1,834 $ 1,949
==============================
Income per share:
Basic, as reported $ 0.30 $ 0.31
==============================
Basic, pro forma $ 0.28 $ 0.30
==============================
Diluted, as reported $ 0.29 $ 0.31
==============================
Diluted, pro forma $ 0.28 $ 0.30
==============================
7
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the prior periods' condensed
consolidated financial statements and related notes to conform with the current
period presentation.
2. Sale of Wholesale Production Platform
On February 28, 2003, Matrix Capital Bank and Matrix Financial Services
Corporation entered into a Purchase and Assumption Agreement, as amended
("Purchase Agreement"), to sell substantially all of Matrix Financial's assets
associated with its wholesale mortgage origination platform ("Platform"). The
purchaser ("Buyer") is a newly formed corporation whose principals are long-time
participants in the mortgage banking industry. The Company intends, for the
foreseeable future, to retain Matrix Financial's servicing platform and operate
it in the ordinary course of business. Included in the sale are the wholesale
production offices, the back office personnel that process the loan originations
and a significant portion of the corporate operations and personnel. After the
sale, our remaining operations will primarily consist of Matrix Financial's
mortgage servicing platform and a limited amount of corporate personnel and
operations.
The following discussion is a summary of the terms of the sale of the Platform
and is not intended to be complete. For a more complete description of the terms
of the Purchase Agreement, the reader is invited to review the Purchase
Agreement, which was filed as an exhibit to the Company's Current Report on Form
8-K filed March 4, 2003. The first amendment thereto is filed as an exhibit to
this report.
The Buyer is not yet licensed to engage in any mortgage banking activities under
state or federal law. It was anticipated that it would take approximately six
months from execution of the Purchase Agreement for the Buyer to obtain the
necessary licensing. Accordingly, Matrix Financial, Matrix Bank and the Buyer
desired to structure the transaction in a manner that transferred substantially
all the economic risks and benefits of the operation of the Platform during the
Transition Period (defined below) to the Buyer, while at the same time having
Matrix Financial and Matrix Bank maintain continuous effective control over the
operations of the Platform for regulatory purposes. The Purchase Agreement,
therefore, contemplates a two-staged closing. The first closing ("Initial
Closing Date") occurred on the date the Purchase Agreement was signed and is the
effective date for the sale of the fixed assets, and the final or second closing
("Final Closing Date") will occur six months following the Initial Closing Date.
The period of operation of the Platform in between the Initial Closing Date and
the Final Closing Date is referred to as the "Transition Period."
As Matrix Financial will maintain effective control at all times during the
Transition Period, Matrix Financial will continue to be an operating subsidiary
of Matrix Bank. The Platform will be operated, for accounting purposes, during
the Transition Period as a division of Matrix Financial.
On the Initial Closing Date, the Buyer purchased substantially all of the
tangible personal property and intangible property associated with the Platform.
There was no gain or loss on the sale of the assets, which had a net book value
of $3.3 million. The Buyer additionally has taken or will take, as the case may
be, the transfer and assignment of certain contract rights, real property leases
and equipment leases from Matrix Financial as soon as the necessary consents
were or are obtained.
The parties intend for the Final Closing Date to occur within six months after
the Initial Closing Date. At that time, the Buyer will purchase any tangible and
intangible personal property of the Platform that is acquired during the
Transition Period in the ordinary course of business or otherwise inadvertently
not purchased on the Initial
8
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
2. Sale of Wholesale Production Platform (continued)
Closing Date (the "Subsequently Acquired Assets"), as well as Matrix Financial's
loan files, pipeline applications and sales commitments. Due to the fact the
Matrix Financial will maintain effective control of the operation, the effective
sale date for accounting purposes will be the Final Closing Date.
The purchase price is determined as follows:
o The Asset Payment Amount, which is approximately $3.3 million in
payment for the tangible and intangible assets of the Platform as of
the Initial Closing Date; plus
o The Subsequently Acquired Assets Payment Amount, which is the book
value of the Subsequently Acquired Assets as of the Final Closing
Date; plus
o The Production Premium, which is generally 20 basis points times the
original principal balance of all loans originated during the 12
months following the Initial Closing Date at the Matrix Financial loan
production offices purchased by Buyer. The Production Premium is
"floored" at $4.9 million and is "capped" at $9.1 million plus;
o The Aggregate Locked Loan Profitability Amount, which pays Matrix
Financial one-half of the profit over a specified threshold amount
(the threshold being generally 30 basis points) on loans that fund
during the first two months after the Initial Closing Date which have
resulted from its locked pipeline as of the Initial Closing Date; plus
or minus
o The Transition Period Gain or Loss, which is a mechanism that provides
for an approximation of the accounting for the transaction as if the
entire sale and transfer occurs on the Initial Closing Date. For
example, if the Platform generates a loss during the first month of
the six-month Transition Period, then the Buyer is required to fund
such loss by paying the loss into an escrow account. If the Platform
generates a profit during the first month of the six-month Transition
Period, then Matrix Financial is required to pay such profit into an
escrow account.
On the Initial Closing Date, the Buyer and Matrix Financial established an
escrow account (the "Escrow") with an Escrow Agent to act as a repository for
the escrow amounts described above and certain other payments contemplated by
the Purchase Agreement. On the Initial Closing Date, the Buyer deposited into
the Escrow $3.5 million as an advance against the Production Premium and paid
directly to Matrix Financial one-half of the Asset Payment Amount.
On the Final Closing Date, the Buyer will pay Matrix Financial the remaining
one-half of the Asset Payment Amount and will pay Matrix Financial the book
value of the Subsequently Acquired Assets.
The Production Premium will be paid over the 12 months following the Initial
Closing Date and the Aggregate Locked Loan Profitability Amount will be paid
over the two months following the Initial Closing Date.
The Company estimates that the aggregate sales price for the Platform will be
between $8.0 million and $13.0 million.
During the six-month Transition Period, Matrix Financial will lease-back from
the Buyer the tangible and intangible assets that have been transferred to
Buyer, including any contract rights, real property leases and equipment leases.
Lease expense related to the lease-back for the quarter ended March 31, 2003 was
approximately $100 thousand.
The operations of the Platform during the six-month Transition Period will be
governed by the terms of an Operating Plan, which is incorporated into the
Purchase Agreement. The Operating Plan requires Matrix Financial to, among other
things, continue to operate the Platform substantially in the manner in which it
currently operates and in conformity with its current policies and procedures.
Any changes to the Operating Plan must be approved in
9
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
2. Sale of Wholesale Production Platform (continued)
advance by an Executive Committee consisting of the following three individuals:
(a) the President of Matrix Bank, (b) the President of Matrix Financial, and (c)
another individual selected by the Board of Directors of Matrix Financial. By
establishing this structure, the Company believes it will be able to maintain,
for regulatory purposes, continuous effective control over the Platform during
the six-month Transition Period.
For a period of two years from the Initial Closing Date, Matrix Bank has agreed
that neither Matrix Bank nor any of its affiliates will engage in, directly or
indirectly, the single-family retail or wholesale mortgage origination business
in those states in which the acquired division operates or is located as of the
Initial Closing Date. However, this non-compete provision does not prohibit
Matrix Bank or their affiliates from engaging in such business in order to
comply with applicable law, rule, regulation, directive, agreement or order from
the Office of Thrift Supervision ("OTS") or other party where it is necessary to
resolve regulatory or supervisory concerns. Additionally, the non-compete
provision does not apply in the event of a change in control of the Matrix Bank
or the Company.
The Purchase Agreement requires Matrix Bank to guarantee Matrix Financial's
obligations under the Purchase Agreement if certain events occur, such as Matrix
Financial's bankruptcy, failure to maintain a minimum net worth, or loss of
voting control of Matrix Financial.
3. New Accounting Standards
In November 2002, the Financial Accountings Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of
FASB Interpretation No. 34." This interpretation expands the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees and requires the guarantor to recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 clarifies the
requirements of SFAS 5, "Accounting for Contingencies," relating to guarantees.
In general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or
equity security of the guaranteed party. Certain guarantee contracts are
excluded from both the disclosure and recognition requirements of this
interpretation, including, among others, guarantees relating to employee
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in an
special purpose entity, and guarantees of a company's own performance. Other
guarantees are subject to the disclosure requirements of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted for as a
derivative instrument under SFAS 133, a parent's guarantee of debt owed to a
third party by its subsidiary or vice versa, and a guarantee which is based on
performance not price. The disclosure requirements of FIN 45 were effective for
the Company as of December 31, 2002, and required disclosure of the nature of
the guarantee, the maximum potential amount of future payments that the
guarantor could be required to make under the guarantee, and the current amount
of the liability, if any, for the guarantor's obligations under the guarantee.
The recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. Significant guarantees
that have been entered into by the Company are disclosed in Note 8 to the
condensed consolidated financial statements included herein and in Note 15 to
the Financial Statements filed with the Form 10-K for December 31, 2002. The
adoption of the requirements of FIN 45 did not have a material impact on the
consolidated financial statements as of or for the quarter ended March 31, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
This interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities (selected entities with related contractual,
ownership, voting or other monetary interests, including certain special
10
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
3. New Accounting Standards (continued)
purpose entities), and requires certain additional disclosure with respect to
these entities. The provisions of FIN 46 are immediately applicable to variable
interest entities created after January 31, 2003 and for entities that existed
prior to February 1, 2003. The Company does not expect the requirements of FIN
46 to have a material impact on the consolidated financial statements. The
disclosure requirements, as applicable, are included in our condensed
consoloidated financial statements and notes hereto.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires
recognition of liability for a cost associated with an exit or disposal activity
when the liability is incurred, as opposed to being recognized at the date an
entity commits to an exit plan under EITF 94-3. SFAS 146 also establishes that
fair value is the objective for initial measurement of the liability. SFAS 146
is effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of SFAS 146 on January 1, 2003 did not have a material
impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This amendment to FASB Statement No.
123 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of FASB Statement
No. 123 to require disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of this statement
are effective for financial statements of interim or annual periods after
December 15, 2002. The Company does not intend, at this time, to change to the
fair value method of accounting. The required disclosures of this statement are
included in Note 1 to the condensed consolidated financial statements herein and
Notes 2 and 14 of the consolidated financial statements filed with the Form 10-K
for December 31, 2002 for the Company.
4. Net Income Per Share
The following table sets forth the computation of net income per share and net
income per share assuming dilution:
Quarter Ended March 31,
2003 2002
--------------------- -------------------
(Dollars in thousands)
Numerator:
Net income........................................................ $ 1,912 $ 2,038
===================== ===================
Denominator:
Weighted average shares outstanding............................... 6,490,776 6,487,099
Effect of dilutive securities:....................................
Common stock options......................................... 40,630 96,060
--------------------- -------------------
Potential dilutive common shares.................................. 40,630 96,060
--------------------- -------------------
Denominator for net income per share assuming dilution............ 6,531,406 6,583,159
===================== ===================
11
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
5. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
Quarter Ended Year Ended
March 31, December 31, 2002
2003
---------------------- --------------------
(In thousands)
Mortgage servicing rights
Balance at beginning of period.................................. $ 79,234 $ 78,893
Purchases....................................................... - -
Originations.................................................... 2,277 34,511
Amortization.................................................... (8,899) (24,176)
Sales........................................................... - (9,994)
---------------------- --------------------
Balance before valuation allowance at end of period................ 72,612 79,234
---------------------- --------------------
Valuation allowance for impairment of mortgage servicing rights
Balance at beginning of period..................................... (14,400) (181)
Additions.......................................................... - (14,219)
---------------------- --------------------
Balance at end of period........................................... (14,400) (14,400)
---------------------- --------------------
---------------------- --------------------
Valuation allowance for foreclosure costs.......................... (1,200) (1,634)
---------------------- --------------------
---------------------- --------------------
Mortgage servicing rights, net..................................... $ 57,012 $ 63,200
====================== ====================
The Company's servicing portfolio (excluding subserviced loans), is comprised of
the following:
March 31, 2003 December 31, 2002
------------------------------- ----------------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding Of Loans Outstanding
------------- --------------- --------------- ---------------
(Dollars in thousands)
Freddie Mac................................. 8,265 $ 372,914 9,027 $ 417,583
Fannie Mae.................................. 26,058 1,737,848 27,678 1,832,276
Ginnie Mae.................................. 23,108 1,629,860 25,453 1,823,706
VA, FHA, conventional and other loans....... 12,307 1,090,254 13,489 1,260,062
------------- --------------- --------------- ---------------
69,738 $4,830,876 75,647 $ 5,333,627
============= =============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at March 31, 2003 and December 31, 2002 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. The
custodial accounts are maintained at Matrix Bank, a subsidiary of Matrix
Bancorp, in noninterest-bearing accounts. The balance of 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.
12
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
5. Mortgage Servicing Rights (continued)
The estimated aggregate amortization of our MSR's for each of the next twelve
month period ending March 31, 2004, 2005, 2006, 2007 and 2008 is $18,200,000,
$13,700,000, $9,700,000, $7,000,000, and $4,500,000, respectively. The estimated
amortization is based on several assumptions as of March 31, 2003 with the most
significant being the anticipated prepayment speeds of the underlying mortgages.
It is reasonably possible the actual repayment speeds of the underlying mortgage
loans may differ materially from the estimated repayment speeds, and thus, the
actual amortization may be significantly different than the amounts estimated.
6. Deposits
Deposit account balances are summarized as follows:
March 31, 2003 December 31, 2002
----------------------------------- -------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
--------- --------- ----------- --------- ---------- -----------
(Dollars in thousands)
Passbook accounts...... $ 5,401 0.57 % 1.31 % $ 5,514 0.59 % 1.95 %
NOW accounts........... 160,099 16.93 0.20 145,465 15.57 0.48
Money market accounts.. 381,905 40.39 0.93 334,508 35.82 1.22
--------- --------- ----------- --------- ---------- -----------
547,405 57.89 0.71 485,487 51.98 1.02
Certificate accounts... 398,222 42.11 2.76 448,470 48.02 3.65
--------- --------- ----------- --------- ---------- -----------
$945,627 100.00 % 1.65 % $933,957 100.00 % 2.40 %
========= ========= =========== ========= ========== ===========
At March 31, 2003 and December 31, 2002, brokered deposits accounted for
approximately $250.5 million and $327.3 million, respectively, of the total
certificate accounts shown above.
7. Federal Home Loan Bank Stock and Borrowings
In connection with Matrix Bank's change in domicile in 2002, Matrix Bank obtains
Federal Home Loan Bank (FHLB) advances from FHLB of Topeka, which is the FHLB
that serves Denver, Colorado, and utilizes FHLB of Topeka as its primary
correspondent bank. This change was approved March 25, 2002. Long-term advances
that existed at March 25, 2002 with FHLB of Dallas are still outstanding under
their original terms.
The balances of FHLB stock are as follows:
March 31, December 31,
2003 2002
-------------------- --------------------
(In thousands)
FHLB of Dallas stock, at cost......................... $ 14,719 $ 14,629
FHLB of Topeka stock, at cost......................... 15,750 15,750
-------------------- --------------------
Total FHLB stock.................................... $ 30,469 $ 30,379
==================== ====================
The balances of FHLB borrowings are as follows:
March 31, December 31,
2003 2002
-------------------- --------------------
(In thousands)
FHLB of Dallas borrowings............................. $ 147,265 $ 147,285
FHLB of Topeka borrowings............................. 231,000 238,500
-------------------- --------------------
Total FHLB borrowing................................ $ 378,265 $ 385,785
==================== ====================
13
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)
7. Federal Home Loan Bank Stock and Borrowings (continued)
Available unused borrowings from FHLB of Topeka totaled $121.8 million at March
31, 2003.
8. Commitments and Contingencies
At March 31, 2003, the Company had $1.1 billion in pipeline and funded loans
offset with mandatory forward commitments of $736.6 million and best effort
forward commitments of $110.2 million.
9. Segment Information
Servicing
Traditional Mortgage Brokerage and School All Others
Banking Banking Consulting Services Total
------------- ------------ ---------------- ----------- ----------- -----------
(In thousands)
Quarter ended March 31, 2003:
Revenues from external
customers:
Interest income......... $ 12,929 6,093 $ 36 $ 1,459 $ 76 $ 20,593
Noninterest income...... 1,579 22,152 2,290 539 4,093 30,653
Intersegment revenues....... 4,131 1,821 381 3 485 6,821
Segment profit (loss)
before income taxes....... 5,294 1,692 536 (1,432) (3,265) 2,825
Quarter ended March 31, 2002:
Revenues from external
customers:
Interest income......... $ 12,958 8,211 $ 2 $ 1,550 93 $ 22,814
Noninterest income...... 1,649 15,555 1,862 2,110 2,250 23,426
Intersegment revenues....... 5,068 713 -- 3 1,338 7,122
Segment profit (loss)
before income taxes....... 5,869 1,625 97 (1,756) (2,737) 3,098
Quarter Ended March 31,
--------------------------------------
2003 2002
------------------ ----------------
Income:
Total income for reportable segments.................................... $ 6,090 $ 5,835
Other loss.............................................................. (2,993) (2,707)
Adjustment of intersegment loss in consolidation........................ (272) (30)
------------------ ----------------
Income before income taxes.............................................. $ 2,825 $ 3,098
================== ================
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. Our primary operating subsidiaries are: Matrix Capital Bank; Matrix
Financial Services Corporation; Matrix Capital Markets, Inc.; Matrix Asset
Management Corporation; ABS School Services, L.L.C.; Matrix Advisory Services,
L.L.C.; Sterling Trust Company; First Matrix Investment Services Corp.; Matrix
Tower Holdings, LLC; plus an equity interest in Matrix Settlement & Clearance
Services, LLC.
The principal components of our revenues consist of:
o net interest income recorded by Matrix Bank, Matrix Financial and ABS;
o loan origination fees generated by Matrix Financial, and to a lesser
extent, Matrix Bank;
o brokerage and consulting fees generated by Matrix Capital Markets and First
Matrix;
o disposition services fees generated by Matrix Asset Management;
o gain 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 Matrix Capital Bank; 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 affected to a lesser extent by interest
rates and more by competition and general market conditions.
Sale of Wholesale Production Platform
In February 2003, we entered into an agreement to sell our wholesale mortgage
origination platform at Matrix Financial. See Note 2 to Condensed Consolidated
Financial Statements included herein. The effective sale date for accounting
purposes will be the Final Closing Date which is anticipated to be approximately
six months after the Initial Closing Date. As of the Initial Closing Date and
during the Transition Period, due to our continuing involvement, we will
continue to account for the operations of the Platform. At the Final Closing
Date the net earnings from the Wholesale Platform will be compared to the
purchase price earned through the Transition Period and any difference will be
an adjustment to the purchase price and the associated gain or loss will be
recorded. We were concerned that over an extended period of time we would find
it difficult to compete in this highly competitive industry that generally
operates on high volume and low margins. Based on the size of our wholesale
production platform, we were required to commit a significant percentage of our
capital to a line of business that is fairly cyclical and the earnings were
difficult for us to estimate. The decision to sell the platform will allow us to
15
reduce our operational risks and costs associated with the origination platform.
We intend to reinvest the liquidity that will be created from the sale into
predominately adjustable rate loans, SBA loans and potentially mortgage-backed
securities. To the extent that we are not able to reinvest the liquidity in a
timely manner, we will experience a decrease in our net interest income.
Initially, the liquidity will be used to pay down borrowings from the FHLB or
brokered certificates of deposit.
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 on Form
10-K as of December 31, 2002. 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 judgment 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" in the Form 10-K for December 31, 2002 for a detailed
description of the Company's process and methodology related to the allowance
for loan and valuation losses.
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
discussion at "Business-- Mortgage Servicing Activities" in the Form 10-K for
December 31, 2002 for a detailed discussion of the nature of servicing rights,
and see Note 2 of the consolidated financial statements on Form 10-K as of
December 31, 2002 for a detailed discussion concerning 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. For a full description of such
proceedings, see the Legal Proceedings section in the Form 10-K for December 31,
2002, and additional discussion at Part II. Item I. "--Legal Proceedings" of
this Form 10-Q. 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.
Forward-Looking Statements
Certain statements contained in this interim 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 interim 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; the outcome of pending or
possible future litigation; the actions or inactions of third parties, including
failure of the Buyer to perform its obligations under the Purchase Agreement
(see "Item 1. Business-Sale of Wholesale Production Platform" in the Form 10-K
16
as of December 31, 2002), and actions or inactions of those that are parties to
the existing or future 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 the
Company's annual report on Form 10-K, filed on March 14, 2003; and in the
Company's current report on Form 8-K, filed with the Securities and Exchange
Commission ("SEC") on March 14, 2001; and the uncertainties set forth from time
to time in the Company's periodic reports, filings and other public statements.
Comparison of Results of Operations for the Quarters Ended March 31, 2003 and
2002
Net Income; Return on Average Equity. For the quarter ended March 31, 2003, we
reported net income of $1.9 million, or $0.29 per diluted share, as compared to
net income of $2.0 million, or $0.31 per diluted share, for the quarter ended
March 31, 2002. Return on average equity was comparable at 11.3% for the quarter
ended March 31, 2003 as compared to 11.4% for the quarter ended March 31, 2002.
Net Interest Income. Net interest income before provision for loan and valuation
losses increased $300 thousand, or 2.3%, to $11.9 million for the quarter ended
March 31, 2003 as compared to $11.6 million for the quarter ended March 31,
2002. The increase is despite the fact that our net interest margin decreased 21
basis points (equivalent to 0.0021 percentage points) to 3.24% for the quarter
ended March 31, 2003 from 3.45% for the quarter ended March 31, 2002, and
interest rate spread decreased to 2.88% for the quarter ended March 31, 2003
from 3.01% for the quarter ended March 31, 2002. The increase in net interest
income before provision for loan valuation losses was primarily due to a 104
basis point decrease in the cost of our interest-bearing liabilities, driven by
decreases in interest rates, which effect was offset slightly by an increase in
our average interest-bearing liabilities to $1.3 billion for the quarter ended
March 31, 2003 from $1.2 billion for the quarter ended March 31, 2002. The
interest rate on short-term borrowings fluctuates with the federal funds rate,
which remain at 40-year lows. The effects of the decrease in our cost of
interest-bearing liabilities was partially offset by a decrease in the yield
earned on our average loan portfolio to 5.77% for the quarter ended March 31,
2003 as compared to 6.96% for the quarter ended March 31, 2002. This decrease,
however, was slightly offset by a small increase in our average
noninterest-bearing deposits between the two comparable quarters, combined with
a slight increase in our average interest-earning assets to $1.5 billion for the
quarter ended March 31, 2003 as compared to $1.4 billion for the quarter ended
March 31, 2002.
For a tabular presentation of the changes in net interest income due to changes
in the volume of interest-earning assets and interest-bearing liabilities, as
well as 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 $400 thousand to $700 thousand for the quarter ended March 31,
2003 as compared to $1.1 million for the quarter ended March 31, 2002. The
decrease in the provision was mainly due to incremental charge-offs recorded at
ABS School Services in the quarter ended March 31, 2002 which were not present
in the quarter ended March 31, 2003. For a discussion of the Company's allowance
for loan losses as it relates to nonperforming assets, see "Asset
Quality--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, gains on sales
of repurchased Federal Housing Administration (FHA) and Veteran's Administration
(VA) loans and other ancillary charges. Loan administration fees increased $650
thousand, or 7.5%, to $9.4 million for the quarter ended March 31, 2003 as
compared to $8.7 million for the quarter ended March 31, 2002. The increase
includes gains on sale of previously repurchased FHA and VA loans of $3.1
million for the quarter ended March 31, 2003 as compared to $1.8 million for the
quarter ended March 31, 2002. Gains on sale of previously repurchased FHA and VA
loans relate to delinquent loans which are purchased out of loan pools on which
the Company acts as servicer and then resells into the secondary market. Loan
service fees are also 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
17
loan servicing portfolio decreased, with an average balance of $5.1 billion for
the quarter ended March 31, 2003 as compared to an average balance of $5.8
billion for the quarter ended March 31, 2002. The decrease in portfolio size was
offset by a slight increase in the average service fee rate (including all
ancillary income) to 0.49% for the first quarter of 2003 as compared to 0.48%
for the first quarter of 2002. The decrease in the servicing portfolio and
corresponding service fees is due to the Company's decision in the third quarter
of 2002 to begin to sell the majority of its newly originated servicing under an
assignment of trade contract. In the near term, the Company anticipates it will
continue to sell the majority of its newly originated servicing. As a result,
the Company anticipates loan administration fees to decrease as its servicing
portfolio decreases through normal prepayments.
Loan Origination. Loan origination income includes all mortgage loans fees,
secondary marketing activity on new loan originations and servicing released
premiums on new originations sold, net of origination costs. Loan origination
income increased $4.9 million, or 59.7%, to $13.1 million for the quarter ended
March 31, 2003 as compared to $8.2 million for the quarter ended March 31, 2002.
The increase in loan origination income resulted from an increase in our
wholesale originations to $1.2 billion for the quarter ended March 31, 2003 as
compared to $874.2 million for the quarter ended March 31, 2002; an increase in
sales of our wholesale production to $1.2 billion during the quarter ended March
31, 2003 as compared to $1.0 billion during the quarter ended March 31, 2002;
and an increase in the net income spread to 82.7 basis points for the quarter
ended March 31, 2003 as compared to 54.6 basis points for the quarter ended
March 31, 2002. The increase in net income spread is a result of the
effectiveness in the loan origination hedging program during the quarter ended
March 31, 2003, and the overall market conditions. See Note 2 to the condensed
consolidated financial statements herein for a discussion of the Sale of the
Wholesale Production Platform.
Brokerage Fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to mortgage servicing rights, as well
as brokerage income earned from whole loan activities, retail and fixed income
activities and Small Business Administration (SBA) trading fees. Brokerage fees
increased $600 thousand, or 38.6%, to $2.3 million for the quarter ended March
31, 2003 as compared to $1.7 million for the quarter ended March 31, 2002. The
increase was the result of a strong quarter at First Matrix Investment Services
Corp. where revenue increased to $1.1 million for the quarter ended March 31,
2003 from $500 thousand for the quarter ended March 31, 2002, as a result of the
Company's focus on the acquisition, pooling and selling of SBA loans and
securities as well as increased retail brokerage activity.
Trust Services. Trust service fees increased $200 thousand, or 15.8%, to $1.6
million for the quarter ended March 31, 2003 as compared to $1.4 million for the
quarter ended March 31, 2002. Trust accounts under administration at Sterling
Trust and Matrix Capital Bank increased to 46,651 at March 31, 2003 from 41,958
at March 31, 2002 and total assets under administration increased to over $8.5
billion at March 31, 2003 from $6.0 billion at March 31, 2002. Most of the
growth is driven by business referred to Matrix Bank's trust department by
Matrix Settlement & Clearance Services.
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
services income increased $600 thousand, or 74.6%, to $1.4 million for the
quarter ended March 31, 2003 as compared to $800 thousand for the quarter ended
March 31, 2002. The increase is due to an increase in the number of properties
closed during the quarter ended March 31, 2003, which was 778, an increase of
81.8% when compared to the quarter ended March 31, 2002. The increase is due to
new clients obtained as a result of prior marketing efforts. Properties under
management were 2,142 at March 31, 2003 as compared to 1,588 at March 31, 2002.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
increased to $325 thousand for the quarter March 31, 2003 as compared to $0 for
the quarter ended March 31, 2002. Gain on sale of loans and securities can
fluctuate significantly from quarter to quarter based on a variety of factors,
such as the current interest rate environment, the supply and mix of loan or
securities portfolios available in the market, and as market conditions dictate,
the particular loan portfolios we elect to sell.
School Services. School services income represents fees earned by ABS for
outsourced business and consulting services provided primarily to charter
schools. School services income decreased $800 thousand or 57.2% to $600
18
thousand for the quarter ended March 31, 2003 as compared to $1.4 million for
the quarter ended March 31, 2002. The decrease is due to a decrease in the
number of core business service clients at March 31, 2003. We have made the
strategic decision to focus our efforts on servicing our existing clients and to
concentrate our marketing efforts in our current market. We do not anticipate a
significant increase in school services income for the coming year.
Other Income. Other income increased $700 thousand to $1.9 million for the
quarter ended March 31, 2003 as compared to $1.2 million for the quarter ended
March 31, 2002. Other income includes service and ATM fees, rental income,
structured finance trading activities, along with other miscellaneous income.
Increases in the current quarter is due to increased ATM fee income at Matrix
Bank, increased rental income from real estate properties rented and/or leased,
and increased equity investment in our 45% owned subsidiary, Matrix Settlement
and Clearance Services.
Noninterest Expense. Noninterest expense increased $8.1 million, or 26.3%, to
$39.0 million for the quarter ended March 31, 2003 as compared to $30.9 million
for the quarter ended March 31, 2002. This increase was predominantly due to
increases in the amortization of mortgage servicing rights asset and increases
in other general and administrative expenses.
The following table details the major components of noninterest expense for the
periods indicated:
Quarters Ended
March 31,
---------------------------------
2003 2002
--------------- --------------
(In thousands)
Compensation and employee benefits.... $ 15,306 $ 14,661
Amortization of mortgage servicing
rights................................ 8,899 5,873
Occupancy and equipment............... 2,053 1,689
Postage and communication............. 1,251 1,140
Professional fees..................... 1,297 712
Data processing....................... 730 876
Other general and administrative...... 9,483 5,942
--------------- --------------
Total............................. $ 39,019 $ 30,893
=============== ==============
Compensation and employee benefits expense increased $600 thousand, or 4.4%, to
$15.3 million for the quarter ended March 31, 2003 as compared to $14.7 million
for the quarter ended March 31, 2002. This increase was primarily due to
increased costs associated with incentive and commission pay, consistent with
the increase in revenues, offset by slight decreases in salaries and medical
benefits expense associated with the reduced number of employees. The Company
experienced an overall decrease of 26 employees to 919 employees at March 31,
2003 as compared to 945 employees at March 31, 2002. Included in the employees
at March 31, 2003 are approximately 346 employees who we anticipate that the
Buyer of the production platform will hire, thereby reducing our employee count
to approximately 600 as of the Final Closing Date. See Note 2 to the condensed
consolidated financial statements herein for a discussion of the Sale of the
Wholesale Production Platform.
Amortization of mortgage servicing rights increased $3.0 million or 51.5% to
$8.9 million for the quarter ended March 31, 2003 as compared to $5.9 million
for the quarter ended March 31, 2002. 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 continued low interest rates prevalent in the
market, prepayment speeds on our servicing portfolio increased to an average of
31.6% for the quarter ended March 31, 2003 as compared to 21.6% for the quarter
ended March 31, 2002. Additionally, the average balance in our mortgage
servicing rights decreased to $5.1 million at March 31, 2003 as compared to $5.8
million at March 31, 2002.
The remainder of noninterest expense, which includes occupancy and equipment
expense, postage and communication expense, professional fees, data processing
costs and other general and administrative expenses, increased approximately
$4.5 million, or 43.0%, to $14.8 million for the quarter ended March 31, 2003 as
compared to $10.3 million for the quarter ended March 31, 2002. The increase was
19
primarily due to an increase in subaccounting fees paid by Matrix Bank to third
parties and an increase in reserves related to both production and servicing
related assets.
Provision for Income Taxes. Provision for income taxes decreased by $150
thousand to $900 thousand for the quarter ended March 31, 2003 as compared to
$1.1 million for the quarter ended March 31, 2002. Our effective tax rate was
32.3% for the quarter ended March 31, 2003 as compared to 34.2% for the quarter
ended March 31, 2002. The effective tax rates are affected by the level of
tax-exempt income at ABS in proportion to the level of net income.
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.
Average interest rate information for the quarters ended March 31, 2003 and 2002
have been annualized. 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.
Quarters Ended
March 31,
---------------------------------------------------------------------------------
2003 2002
------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------- ----------- ------- -------------- ----------- ---------
Assets
Interest-earning assets:
Loans receivable........................... $ 1,392,723 $ 20,101 5.77 % $ 1,289,945 $ 22,442 6.96 %
Securities................................. 25,576 216 3.38 10,035 129 5.14
Interest-earning deposits.................. 19,267 50 1.04 28,966 99 1.37
Federal Home Loan Bank stock............... 30,380 226 2.98 18,827 144 3.06
------------- ----------- ------- -------------- ----------- ---------
Total interest-earning assets............ 1,467,946 20,593 5.61 1,347,773 22,814 6.77
Noninterest-earning assets:
Cash....................................... 43,808 31,794
Allowance for loan and valuation losses.... (9,187) (9,455)
Premises and equipment..................... 26,816 13,672
Other assets............................... 151,891 171,297
------------- --------------
Total noninterest-earning assets......... 213,328 207,308
------------- --------------
Total assets............................. $ 1,681,274 $ 1,555,081
============= ==============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts.......................... $ 5,494 18 1.31 % $ 4,638 27 2.33 %
Money market and NOW accounts ............ 354,669 908 1.02 260,079 1,086 1.67
Certificates of deposit.................... 449,421 3,097 2.76 511,967 5,385 4.21
Federal Home Loan Bank borrowings.......... 334,045 2,239 2.68 255,449 1,972 3.09
Borrowed money and guaranteed
preferred beneficial interests........... 130,000 2,445 7.52 156,719 2,721 6.94
------------- ----------- ------- -------------- ----------- ---------
Total interest-bearing liabilities....... 1,273,629 8,707 2.73 1,188,852 11,191 3.77
------------- ----------- ------- -------------- ----------- ---------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances)............... 312,015 253,580
Other liabilities.......................... 27,867 40,987
------------- --------------
Total noninterest-bearing liabilities 339,882 294,567
Shareholders' equity......................... 67,763 71,662
------------- --------------
Total liabilities and shareholders' equity... $ 1,681,274 $ 1,555,081
============= ==============
Net interest income before provision for
loan and valuation losses.................... $ 11,886 $ 11,623
=========== ===========
Interest rate spread......................... 2.88 % 3.01 %
======= =========
Net interest margin.......................... 3.24 % 3.45 %
======= =========
Ratio of average interest-earning assets to
average interest-bearing liabilities......... 115.26 % 113.37 %
======= =========
20
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 prior
period rate; and
o changes in rate, in other words, changes in rate multiplied by prior period
volume.
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.
Quarter Ended March 31,
2003 vs. 2002
---------------------------------------------
Increase (Decrease) Due to Change in
---------------------------------------------
Volume Rate Total
------------- ------------- ---------------
(In thousands)
Interest-earning assets:
Loans receivable, net.......................................... $ 1,695 $ (4,036) $ (2,341)
Securities..................................................... 143 (56) 87
Interest-earning deposits...................................... (28) (21) (49)
FHLB stock..................................................... 86 (4) 82
------------- ------------- ---------------
Total interest-earning assets............................... 1,896 (4,117) (2,221)
Interest-bearing liabilities:
Passbook accounts.............................................. 4 (13) (9)
Money market and NOW accounts.................................. 323 (501) (178)
Certificates of deposit........................................ (600) (1,688) (2,288)
FHLB borrowings................................................ 551 (284) 267
Borrowed money................................................. (489) 213 (276)
------------- ------------- ---------------
Total interest-bearing liabilities.......................... (211) (2,273) (2,484)
------------- ------------- ---------------
Change in net interest income before provision for
loan
and valuation losses................................ $ 2,107 $ (1,844) $ 263
============= ============= ==============
Asset Quality
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 generally 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 arises primarily
through foreclosure on mortgage loans owned.
March 31, 2003 December 31, March 31, 2002
2002
--------------- ---------------- ---------------
(Dollars in thousands)
Nonaccrual residential mortgage loans................ $ 17,271 $ 15,123 $ 17,506
Nonaccrual commercial real estate, commercial loans
and school financing.............................. 16,139 15,649 23,741
Nonaccrual consumer loans............................ - 46 28
--------------- ---------------- ---------------
Total nonperforming loans......................... 33,410 30,818 41,275
Foreclosed real estate............................... 6,824 8,343 5,401
--------------- ---------------- ---------------
Total nonperforming assets........................ $ 40,234 $ 39,161 $ 46,676
=============== ================ ===============
Total nonperforming loans to total loans............. 2.44 % 2.20 % 3.41 %
=============== ================ ===============
Total nonperforming assets to total assets........... 2.37 % 2.30 % 2.90 %
=============== ================ ===============
Ratio of allowance for loan and valuation losses to
total nonperforming loans......................... 24.83 % 30.32 % 22.79 %
=============== ================ ===============
21
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 $31.8
million, $34.8 million, and $58.1 million of March 31, 2003, December 31, 2002
and March 31, 2002, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were 1.3%
at March 31, 2002, 1.1% at December 31, 2002, and 1.4% at March 31, 2002. The
nonaccrual residential mortgage loans have slightly deteriorated at March 31,
2003 as compared to December 31, 2002. This deterioration is the continued
result of the weakened economy and its effects on families, despite the 40-year
low interest rates.
The slight increase in nonaccrual commercial loans and school financing at March
31, 2003 as compared to December 31, 2002 is primarily attributable to increased
amounts of SBA originated and purchased loans in nonaccrual status, which
increased $600 thousand to $9.9 million as compared to $9.3 million at December
31, 2002. It should be noted, however, that approximately $6.2 million of the
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. In many instances, we have
historically been able to work with many of the schools on their cash flow
issues and eventually removed them from the delinquent lists. Not included in
the March 31, 2003 balance was $1.0 million of delinquent school financing and
$535 thousand of foreclosed real estate that was sold to a third party with
recourse. The losses related to the delinquencies and foreclosures are recorded
as part of noninterest expense. As of March 31, 2003, a liability of $250
thousand was recorded against the delinquent recourse loans and foreclosed real
estate.
The percentage of the allowance for loan losses to nonaccrual loans varies due
to the nature of our portfolio of loans. We analyze the collateral for each
nonperforming loan to determine potential loss exposure. In conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and valuation losses. See "--Comparison of
Results of Operations for the Quarters Ended March 31, 2003 and 2002."
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.
The trend of net cash used by our operating activities experienced over the
reported periods results primarily from our regular operating activities. Note,
however, that we believe the sale of the wholesale production platform will
result in significant liquidity once the warehouse line of credit provided to
Matrix Financial by Matrix Bank is repaid. See Note 2 to the condensed
consolidated financial statements herein for a discussion of the Sale of the
Wholesale Production Platform.
The Company is reliant on dividend and tax payments from its subsidiaries in
order to fund operations, meet debt obligations and grow new or developing lines
of business. A long-term inability of a subsidiary to make dividend payments
could significantly impact the Company's liquidity. Historically, the majority
of the dividend payments have been made by Matrix Bank and its consolidated
subsidiaries, which include Matrix Financial. The current dividend policy
approved by Matrix Bank is 75% of the consolidated cumulative earnings of Matrix
Bank. Matrix Bank had not paid a dividend since August 2002, which reflected
22
earnings from July 2002, but resumed payments in March 2003 for earnings from
November 2002, December 2002 and January 2003. Matrix Bank anticipates that it
will resume regular dividend payments under current policy in the second quarter
2003. The Company also intends to utilize the line of credit on its bank stock
loan, as needed, to meet its own and the other subsidiaries financial
obligations. As of March 31, 2003, $9.0 million of the line of credit of $12.0
million is available.
Matrix Bank's liquidity needs are expected to be achieved through retail deposit
growth, brokered deposits, borrowings from the FHLB, custodial deposits from
affiliates, deposits directed to Matrix Bank by third party institutions and
deposits generated through its trust operations. 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 FHLB as its
primary source for borrowings. At March 31, 2003, Matrix Bank had overnight and
term borrowings of $378.3 million from the FHLB of Topeka and Dallas. Matrix
Bank also utilizes brokered deposits as a source of liquidity. The balance of
brokered deposits at March 31, 2003 was $250.5 million. The custodial escrow
balances held by Matrix Bank fluctuate based upon the mix and size of the
related mortgage servicing portfolios and the timing of payments for taxes and
insurance, as well as the level of prepayments which occur.
Matrix Bank, a well capitalized institution, had a leverage capital ratio of
6.05% at March 31, 2003. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $16.9 million. Matrix Bank's
risk-based capital ratio was 11.82% at March 31, 2003, which currently exceeds
the well capitalized risk-based capital requirement of 10.0% of risk-weighted
assets by $15.8 million.
Matrix Financial's principal source of funding for its loan origination business
consists of a $425.0 million warehouse line of credit provided to Matrix
Financial by Matrix Bank, as well as a warehouse line of credit provided to
Matrix Financial by an unaffiliated financial institution. As of March 31, 2003,
Matrix Financial had a $50.0 million warehouse line of credit facility provided
by an unaffiliated financial institution. As of March 31, 2003, $50.0 million
was available to be utilized under the line of credit facility.
Matrix Capital Markets principal source of funding to acquire loan portfolios
with the intent of selling over a short period of time is a $40.0 million
warehouse line from a third party financial institution unconditionally
guaranteed by the Company. As of March 31, 2003, Matrix Capital Markets $39.3
million was available to be utilized under the line of credit facility.
ABS' principal source of funding for school financings are internal capital,
sales of loans to a third party institution and partnership trusts with
unaffiliated financial institutions. Amounts available to be sold and amounts to
be financed are at the purchaser's and lender's sole discretion. We continue to
pursue additional third party financing and sales options for ABS although we do
not anticipate significantly increasing our current loan portfolio.
Through a Purchase and Sale Agreement, the Company has sold school financing
loans to a third party financial institution. The Company provides scheduled
interest and principal plus full recourse in the case of loss or default. The
transaction was treated as a sale due to the transfer of ownership over the
school financing loans. No gain or loss was recorded at the time of sale. The
balance of the school financing loans sold with recourse was approximately $13.4
million at March 31, 2003.
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 loans being held for delivery. We
mitigate this risk through the use of mandatory and best effort forward
commitments to sell loans. As of March 31, 2003, we had $1.1 billion in pipeline
and funded loans offset with mandatory forward commitments of $736.6 million and
best effort forward commitments of $110.2 million. See additional discussion
under "Comparison of Results of Operations for the Quarters Ended March 31, 2003
and 2002--Loan Origination."
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter ended March 31, 2003, there were no material changes to the
quantitative and qualitative disclosures about market risk previously reported
in the Annual Report on Form 10-K for the year ended December 31, 2002. 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" and "Sale of Production Platform" in the Form 10-K for
December 31, 2002 for a detailed discussion and which is incorporated herein by
reference.
Item 4. Controls and Procedures
Within 90 days prior to the date of this quarterly report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Co-CEO's and CFO, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the Co-CEO's and CFO, concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
reports. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
Part II - Other Information
Item 1. Legal Proceedings
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. 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 position,
results of operations or cash flows of the Company.
Sterling Trust was named a defendant in an action filed in July 2001 in
Department 68, Superior Court for the County of San Diego, State of California
styled Robert Heyenga, et. al. v. Brian D. Gibbs, et. al. On March 28, 2003, the
court granted Sterling Trust's demurrer on the grounds that the plaintiffs'
complaint failed to state facts sufficient to constitute a cause of action
against Sterling Trust.
Sterling Trust, Matrix Bancorp, The Vintage Group, Vintage Delaware Holdings and
Matrix Bank have been named defendants in an action filed in December 2001
styled Heraclio A. Munoz, et. al. v. Sterling Trust Company, et. al. that is
pending in the Superior Court of the State of California, County of San
Bernadino. The complaint seeks class action status, requests unspecified damages
and alleges, among other things, breach of contract, breach of fiduciary duty,
violations of various laws and that the corporate veils of various companies
should be pierced. We believe we have meritorious defenses and intend to defend
this matter vigorously.
Sterling Trust has been named a defendant in an arbitration claim filed in early
2003 with the American Arbitration Association in Fresno, California styled
Gilbert R. Allenby, et. al. v. Sterling Trust Company. Approximately 60
plaintiffs have claimed Sterling Trust is responsible for losses in their
self-directed IRAs realized when their IRAs invested funds through Advisors
Capital Investments, Inc., a registered investment advisor, in a mutual fund
trading program. Sterling Trust believes it had meritorious defenses to the
claims and intends to defend the matter vigorously.
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
24
otherwise imposed by law. We further believe that the ultimate outcome of each
of these cases will not be material to the consolidated financial position and
results of operations of 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 position and results of operations of the Company.
ABS School Services had been named a defendant in an action filed in the
Superior Court of Arizona, Maricopa County on June 3, 2002 by a former employee.
The former employee claimed that she was entitled to approximately $450,000 in
commissions owed to her at the time of termination of her employment. She has
also made claims under the Arizona wage act and for an award of her attorneys'
fees. In April 2003, this matter was settled for an amount not materially in
excess of the amount accrued for at ABS as of March 31, 2003.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Fifth Amendment to Credit Agreement, dated as of March 29, 2003, by
and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National
Association, as agent, and certain lenders, as lenders.
*10.2 Amendment to Purchase and Assumption Agreement, dated April 18, 2003,
by and between Matrix Capital Bank, Matrix Financial Services
Corporation and AmPro Mortgage Corp.
*99.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*99.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange Commission
on March 4, 2003 (Item 5), which contained a press release announcing the
sale of the wholesale mortgage origination planform and the related
Purchase and Assumption Agreement.
______________________
* Filed herewith.
26
SIGNATURES
Pursuant to the requirements 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.
MATRIX BANCORP, INC.
Dated: May 2, 2003 /s/ D. Mark Spencer
------------------------ -------------------------------------
D. Mark Spencer
President and
Co-Chief Executive Officer
(Principal Executive Officer)
Dated: May 2, 2003 /s/ Richard V. Schmitz
------------------------ --------------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
Dated: May 2, 2003 /s/ David W. Kloos
------------------------ ---------------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
27
CERTIFICATION
I, David W. Kloos, Senior Vice President and Chief Financial Officer of Matrix
Bancorp, Inc. (the "Registrant"), certify that:
1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading as with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report in being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's Board of Directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether of not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significant affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ David W. Kloos
----------------------------------
David W. Kloos
Senior Vice President and Chief
Financial Officer
(Principal Accounting and
Financial Officer)
May 2, 2003
28
CERTIFICATION
I, D. Mark Spencer, President and Co-Chief Executive Officer of Matrix Bancorp,
Inc. (the "Registrant"), certify that:
1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading as with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report in being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's Board of Directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether of not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significant affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ D. Mark Spencer
--------------------------------------
D. Mark Spencer
President and Co-Chief Executive
Officer
(Principal Executive Officer)
May 2, 2003
29
CERTIFICATION
I, Richard V. Schmitz, Co-Chief Executive Officer of Matrix Bancorp, Inc. (the
"Registrant"), certify that:
1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading as with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report in being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's Board of Directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether of not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significant affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Richard V. Schmitz
-----------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
May 2, 2003
30
INDEX TO EXHIBITS
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
*10.1 Fifth Amendment to Credit Agreement, dated as of March 29, 2003, by
and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National
Association, as agent, and certain lenders, as lenders.
*10.2 Amendment to Purchase and Assumption Agreement, dated April 18, 2003,
by and between Matrix Capital Bank, Matrix Financial Services
Corporation and AmPro Mortgage Corp.
*99.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*99.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed herewith.
31