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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 June 30, 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, CO 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 August 7, 2003 was 6,497,543 shares.
TABLE OF CONTENTS
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2003 (unaudited) and December 31, 2002...................................3
Condensed Consolidated Statements of Operations
Quarters and six months ended June 30, 2003 and 2002 (unaudited)..................4
Condensed Consolidated Statements of Shareholders' Equity
Six months ended June 30, 2003 and 2002 (unaudited)...............................5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002 (unaudited)...............................6
Notes to Condensed Consolidated Financial Statements....................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................29
ITEM 4. Controls and Procedures.................................................................29
PART II - Other Information
ITEM 1. Legal Proceedings.......................................................................29
ITEM 4. Submissions of Matters to a Vote of Security Holders....................................30
ITEM 6. Exhibits and Reports on Form 8-K........................................................31
SIGNATURES.......................................................................................32
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
2003 2002
------------------ ------------------
(Unaudited)
Assets
Cash and cash equivalents........................................................ $ 110,650 $ 58,725
Interest-earning deposits and federal funds sold................................. 2,520 3,687
Securities available for sale.................................................... 41,166 29,073
Loans held for sale, net......................................................... 1,092,590 1,107,926
Loans held for investment, net................................................... 292,052 285,891
Mortgage servicing rights, net................................................... 45,593 63,200
Other receivables ............................................................... 50,496 54,811
Federal Home Loan Bank stock, at cost............................................ 30,561 30,379
Foreclosed real estate........................................................... 5,334 8,343
Premises and equipment, net...................................................... 25,102 27,705
Bank owned life insurance........................................................ 20,092 -
Other assets, net................................................................ 28,514 31,857
------------------ ------------------
Total assets..................................................................... $ 1,744,670 $ 1,701,597
================== ==================
Liabilities and shareholders' equity
Liabilities:
Deposits...................................................................... $ 951,280 $ 933,957
Custodial escrow balances..................................................... 155,732 151,790
Draft payable................................................................. 11,741 7,097
Federal Home Loan Bank borrowings............................................. 407,245 385,785
Borrowed money................................................................ 60,444 61,403
Guaranteed preferred beneficial interests..................................... 64,500 64,500
Other liabilities............................................................. 18,581 23,357
Income taxes payable and deferred income tax liability........................ 4,823 6,772
------------------ ------------------
Total liabilities................................................................ 1,674,346 1,634,661
------------------ ------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $0.0001; authorized 5,000,000 shares; no shares
outstanding................................................................. - -
Common stock, par value $0.0001; authorized 50,000,000 shares; issued and
outstanding 6,496,043 and 6,489,543 shares at June 30, 2003 and December
31, 2002, respectively...................................................... 1 1
Additional paid in capital.................................................... 20,430 20,375
Retained earnings............................................................. 49,875 46,534
Accumulated other comprehensive income........................................ 18 26
------------------ ------------------
Total shareholders' equity....................................................... 70,324 66,936
------------------ ------------------
Total liabilities and shareholders' equity....................................... $ 1,744,670 $ 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Interest income
Loans and securities........................................ $ 19,914 $ 22,403 $ 40,232 $ 44,974
Interest-earning deposits................................... 250 316 526 559
--------------- --------------- --------------- ---------------
Total interest income....................................... 20,164 22,719 40,758 45,533
--------------- --------------- --------------- ---------------
Interest expense
Deposits.................................................... 3,441 5,397 7,464 11,894
Borrowed money and guaranteed preferred beneficial interests 4,657 5,043 9,342 9,737
--------------- --------------- --------------- ---------------
Total interest expense...................................... 8,098 10,440 16,806 21,631
--------------- --------------- --------------- ---------------
Net interest income before provision for loan and valuation
losses.................................................... 12,066 12,279 23,952 23,902
Provision for loan and valuation losses..................... 842 642 1,537 1,700
--------------- --------------- --------------- ---------------
Net interest income after provision for loan and valuation
losses.................................................... 11,224 11,637 22,415 22,202
--------------- --------------- --------------- ---------------
Noninterest income
Loan administration......................................... 9,667 8,266 19,057 17,005
Brokerage................................................... 2,883 1,138 5,223 2,827
Trust services.............................................. 1,685 1,348 3,297 2,741
Real estate disposition services............................ 1,458 1,113 2,823 1,895
Gain on sale of loans and securities........................ 34 149 359 149
Gain on sale of mortgage servicing rights, net.............. - 1,066 - 1,066
Loan origination............................................ 16,450 8,054 29,501 16,226
School services............................................. 650 1,379 1,266 2,820
Other....................................................... 4,301 984 6,255 2,194
--------------- --------------- --------------- ---------------
Total noninterest income.................................... 37,128 23,497 67,781 46,923
--------------- --------------- --------------- ---------------
Noninterest expense
Compensation and employee benefits.......................... 16,505 14,950 31,810 29,612
Amortization of mortgage servicing rights................... 10,356 5,162 19,254 11,035
Occupancy and equipment..................................... 1,906 1,830 3,959 3,519
Postage and communication................................... 1,092 1,148 2,344 2,287
Professional fees........................................... 1,319 597 2,616 1,309
Data processing............................................. 846 769 1,577 1,645
Impairment on mortgage servicing rights..................... 2,400 1,400 2,400 1,219
Other general and administrative............................ 12,079 8,326 21,562 14,449
--------------- --------------- --------------- ---------------
Total noninterest expense................................... 46,503 34,182 85,522 65,075
--------------- --------------- --------------- ---------------
Income before income taxes.................................. 1,849 952 4,674 4,050
Provision for income taxes.................................. 420 48 1,333 1,108
--------------- --------------- --------------- ---------------
Net income.................................................. $ 1,429 $ 904 $ 3,341 $ 2,942
=============== =============== =============== ===============
--------------- --------------- --------------- ---------------
Net income per share - basic................................ $ 0.22 $ 0.14 $ 0.51 $ 0.45
=============== =============== =============== ===============
Net income per share - assuming dilution.................... $ 0.22 $ 0.14 $ 0.51 $ 0.45
=============== =============== =============== ===============
=============== =============== =============== ===============
Weighted average shares - basic............................. 6,491,483 6,453,560 6,491,131 6,470,237
=============== =============== =============== ===============
Weighted average shares - assuming dilution................. 6,541,899 6,601,209 6,536,258 6,591,262
=============== =============== =============== ===============
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
--------- --------- ---------- --------- --------- -------------- ------------- ---------------
Six Months Ended
June 30, 2003
- -----------------------------
Balance at December 31, 2002.. 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936
Comprehensive income:
Net income................. - - - - 3,341 - 3,341 $ 3,341
Unrealized holding loss
on securities (1).......... - - - - - (8) (8) (8)
-------------
Comprehensive income.......... $ 3,333
=============
Issuance of stock related
to employee stock
purchase plan and options.. 6,500 - 55 - - - 55
--------- --------- ---------- --------- --------- ------------- -------------
Balance at June 30, 2003..... 6,496,043 $ 1 $ 20,430 $ - $ 49,875 $ 18 $ 70,324
========= ========= ========== ========= ========= ============= =============
Six Months Ended
June 30, 2002
- -----------------------------
Balance at December 31, 2001. 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312
Comprehensive income:
Net income................ - - - - 2,942 - 2,942 $ 2,942
Unrealized gains on
securities, net of
reclassification
adjustment................ - - - - - 6 6 6
-------------
Comprehensive income......... $ 2,948
=============
Issuance of stock related
to employee stock
purchase plan and options.. 1,700 - 6 - - - 6
Shares repurchased............ (66,060) - - (726) - - (726)
Shares retired................ - - (726) 726 - - -
--------- --------- ---------- --------- --------- ------------- -------------
Balance at June 30, 2002...... 6,454,244 $ 1 $ 20,080 $ - $ 53,428 $ 31 $ 73,540
========= ========= ========== ========= ========= ============= =============
(1) Disclosure of reclassification
amount
Six Months Ended
June 30, 2003
- --------------------------------------
Unrealized holding
loss arising during $ (8)
period............................
Less:
reclassification
adjustment of -
lossesincluded in net
income............................
-------------
Net unrealized loss
on securities..................... $ (8)
=============
See accompanying notes.
5
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------- -------------
Operating activities
Net income.................................................................. $ 3,341 $ 2,942
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization............................................ 1,995 1,665
Provision for loan and valuation losses.................................. 1,537 1,700
Amortization of mortgage servicing rights................................ 19,254 11,035
Impairment on mortgage servicing rights.................................. 2,400 1,219
Gain on sale of loans and securities..................................... (359) (149)
Gain on sale of mortgage servicing rights................................ - (1,066)
Gain on sale of foreclosed real estate................................... (453) -
Changes in assets and liabilities:
Loans originated for sale, net of loans sold............................. 36,792 220,820
Loans purchased for sale................................................. (880,684) (249,691)
Proceeds from sale of loans held for sale................................ 469,880 35,843
Increase in securities held for sale..................................... (12,101) (7,602)
Originated mortgage servicing rights, net................................ (4,047) (23,485)
(Increase) decrease in other receivables and other assets................ (13,661) 12,015
(Decrease) increase in other liabilities, income taxes payable and
deferred income tax liability.................................... (6,725) 14,222
------------- -------------
Net cash (used in) provided by operating activities......................... (382,831) 19,468
Investing activities
Loans originated and purchased for investment............................... (64,879) (72,389)
Principal repayments on loans............................................... 451,532 104,941
Purchase of Federal Home Loan Bank stock.................................... (182) (13,070)
Purchases of premises and equipment......................................... (871) (16,668)
Acquisition of mortgage servicing rights.................................... - (1,888)
Proceeds from sale of premises and equipment................................ 1,671 -
Proceeds from sale of mortgage servicing rights............................. - 4,242
Proceeds from sale of foreclosed real estate................................ 4,497 -
------------- -------------
Net cash provided by investing activities................................... 391,768 5,168
Financing activities
Net increase (decrease) in deposits......................................... 17,323 (76,893)
Net increase (decrease) in custodial escrow balances........................ 3,942 (12,102)
Increase in revolving lines, net............................................ 21,237 55,493
Payment of notes payable.................................................... (714) (357)
Payment of financing arrangements........................................... (22) (31)
Treasury shares repurchased................................................. - (726)
Proceeds from issuance of common stock related to employee stock option
plan..................................................................... 55 6
------------- -------------
Net cash provided by (used in) financing activities......................... 41,821 (34,610)
------------- -------------
Increase (decrease) in cash and cash equivalents............................ 50,758 (9,974)
Cash and cash equivalents at beginning of period............................ 62,412 84,460
------------- -------------
Cash and cash equivalents at end of period.................................. $ 113,170 $ 74,486
============= =============
Supplemental disclosure of cash flow information
Cash paid for interest expense.............................................. $ 17,228 $ 24,055
============= =============
Cash paid (received) for income taxes....................................... $ 3,323 $ (2,970)
============= =============
See accompanying notes.
6
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 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) necessary for a fair
presentation have been included. For 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.
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 June 30, 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 Six Months Ended
June 30, June 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
(Dollars in thousands)
Net income:
As reported $ 1,429 $ 904 $ 3,341 $ 2,942
Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards, net
of related tax effects
(75) (89) (153) (178)
------------------------------------------------
Pro forma $ 1,354 $ 815 $ 3,188 $ 2,764
================================================
Income per share:
Basic, as reported $ 0.22 $ 0.14 $ 0.51 $ 0.45
================================================
Basic, pro forma $ 0.21 $ 0.13 $ 0.49 $ 0.43
================================================
Diluted, as reported $ 0.22 $ 0.14 $ 0.51 $ 0.45
================================================
Diluted, pro forma $ 0.21 $ 0.12 $ 0.49 $ 0.42
================================================
7
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 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 at Matrix Financial will primarily consist of the
mortgage servicing platform and a limited amount of corporate personnel and
operations.
Upon signing of the Purchase Agreement, the Buyer was 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") should
occur six months following the Initial Closing Date (August 31, 2003). 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 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.
8
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
2. Sale of Wholesale Production Platform (continued)
The purchase price is determined as follows:
o The asset payment amount, which was 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 funded
during the first two months after the Initial Closing Date which
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 $11.0 million and $13.0 million. See further discuss ion at Item 2. Sale
of Wholesale Production Platform.
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 and six months ended
June 30, 2003 was approximately $300 thousand and $400 thousand, respectively.
The operations of the Platform during the six-month Transition Period are
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 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.
9
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
2. Sale of Wholesale Production Platform (continued)
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 its affiliates from engaging in such business in order to comply
with applicable law, rules, regulations, directives, agreements or orders from
the Office of Thrift Supervision ("OTS") or other parties 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 or six months ended
June 30, 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 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.
10
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
3. New Accounting Standards (continued)
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, an Amendment of FASB Statement No.
123." 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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS 133 on
Derivative Instruments and Hedging Activities." This amendment to SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133. The amendments (i) reflect decisions of the
Derivatives Implementation Group (DIG); (ii) reflect decisions made by the FASB
in conjunction with other projects dealing with financial instruments; and (iii)
address implementation issues related to the application of the definition of a
derivative. SFAS 149 also modifies various other existing pronouncements to
conform with the changes made to SFAS 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003, with all provisions applied prospectively. The
adoption of SFAS 149 on July 1, 2003 is not expected to have a material impact
on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how a business enterprise classifies, measures and
discloses in its financial statements certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 requires that a
business enterprise classify financial instruments that are within its scope as
liabilities (or as assets in some circumstances). SFAS 150 is effective for
contracts entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 on July 1, 2003 is not expected to have a
material impact on the consolidated financial statements.
11
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------- --------------- -------------- ---------------
(Dollars in thousands)
Numerator:
Net income............................. $ 1,429 $ 904 $ 3,341 $ 2,942
============= =============== ============== ===============
Denominator:
Weighted average shares outstanding.... 6,491,483 6,453,560 6,491,131 6,470,237
Effect of dilutive securities:
Common stock options............... 50,416 147,649 45,127 121,025
------------- --------------- -------------- ---------------
Potential dilutive common shares....... 50,416 147,649 45,127 121,025
------------- --------------- -------------- ---------------
Denominator for net income per
share assuming dilution.............. 6,541,899 6,601,209 6,536,258 6,591,262
============= =============== ============== ===============
5. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
Six Months Ended Year Ended
June 30, December 31, 2002
2003
---------------------- --------------------
(In thousands)
Mortgage servicing rights
Balance at beginning of period.......... $ 79,234 $ 78,893
Purchases............................... - -
Originations............................ 3,613 34,511
Amortization............................ (19,254) (24,176)
Sales................................... - (9,994)
---------------------- --------------------
Balance before valuation allowance at
end of period........................... 63,593 79,234
Valuation allowance for impairment of
mortgage servicing rights
Balance at beginning of period............. (14,400) (181)
Additions.................................. (2,400) (14,219)
---------------------- --------------------
Balance at end of period................... (16,800) (14,400)
Valuation allowance for foreclosure costs.. (1,200) (1,634)
---------------------- --------------------
Mortgage servicing rights, net............. $ 45,593 $ 63,200
====================== ====================
12
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
5. Mortgage Servicing Rights (continued)
The Company's servicing portfolio (excluding subserviced loans), is comprised of
the following:
June 30, 2003 December 31, 2002
------------------------------- ----------------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding Of Loans Outstanding
------------ -------------- --------------- ---------------
(Dollars in thousands)
Freddie Mac................................ 7,507 $ 327,095 9,027 $ 417,583
Fannie Mae................................. 23,468 1,509,041 27,678 1,832,276
Ginnie Mae................................. 20,203 1,381,846 25,453 1,823,706
VA, FHA, conventional and other loans...... 12,410 1,121,419 13,489 1,260,062
------------ -------------- --------------- ---------------
63,588 $ 4,399,401 75,647 $ 5,333,627
============ ============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at June 30, 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.
The estimated aggregate amortization of our MSR's for each of the next twelve
month period ending June 30, 2004, 2005, 2006, 2007 and 2008 is $17.3 million,
$11.2 million, $4.9 million, $2.0 million, and $743.1 thousand, respectively.
The estimated amortization is based on several assumptions as of June 30, 2003
with the most significant being the anticipated prepayment speeds of the
underlying mortgages. It is reasonably possible the actual repayment speeds of
the underlying mortgage loans may differ materially from the estimated repayment
speeds, and thus, the actual amortization may be significantly different than
the amounts estimated.
6. Deposits
Deposit account balances are summarized as follows:
June 30, 2003 December 31, 2002
--------------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
---------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
Passbook accounts..........$ 6,078 0.64 % 1.32 % $ 5,514 0.59 % 1.95 %
NOW accounts............... 191,229 20.10 0.20 145,465 15.57 0.48
Money market accounts...... 443,179 46.59 0.91 334,508 35.82 1.22
---------- ----------- ----------- ---------- ----------- -----------
640,486 67.33 0.71 485,487 51.98 1.02
Certificate accounts....... 310,794 32.67 2.73 448,470 48.02 3.65
---------- ----------- ----------- ---------- ----------- -----------
$ 951,280 100.00 % 1.56 % $ 933,957 100.00 % 2.40 %
========== =========== =========== ========== =========== ===========
At June 30, 2003 and December 31, 2002, brokered deposits accounted for
approximately $172.3 million and $361.2 million, respectively, of the total
certificate accounts shown above.
13
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
7. Federal Home Loan Bank Stock and Borrowings
In connection with Matrix Bank's change of 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:
June 30, December 31,
2003 2002
-------------------- --------------------
(In thousands)
FHLB of Dallas stock, at cost......................... $ 14,811 $ 14,629
FHLB of Topeka stock, at cost......................... 15,750 15,750
-------------------- --------------------
Total FHLB stock.................................... $ 30,561 $ 30,379
==================== ====================
The balances of FHLB borrowings are as follows:
June 30, December 31,
2003 2002
-------------------- --------------------
(In thousands)
FHLB of Dallas borrowings............................. $ 147,245 $ 147,285
FHLB of Topeka borrowings............................. 260,000 238,500
-------------------- --------------------
Total FHLB borrowings............................... $ 407,245 $ 385,785
==================== ====================
Available unused borrowings from the FHLB of Topeka totaled $113.7 million at
June 30, 2003.
8. Commitments and Contingencies
At June 30, 2003, the Company had $933.4 million of commitments to originate
mortgage loans and $365.7 of funded loans, offset with mandatory forward
commitments of $894.6 million and best effort forward commitments of $107.6
million.
Sterling Trust Company has been named a defendant in an action filed in July
1999 styled Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et.
al. that was tried in Tarrant County, Texas District Court in the spring of
2000. The jury returned a verdict adverse to Sterling Trust with respect to two
of 12 theories of liability posed by the plaintiffs, and a judgment was entered
against Sterling Trust in the amount of approximately $6.4 million, plus
post-judgment interest and conditional attorneys' fees for the plaintiffs in
connection with any appeals. Sterling Trust appealed the judgment to the Court
of Appeals for the Second District of Texas (Fort Worth). On July 31, 2003, the
Court of Appeals affirmed and reversed in part the jury's verdict. The Court of
Appeals affirmed the jury's award for actual damages of approximately $6.2
million (plus post-judgment interest and attorneys' fees currently estimated to
be approximately $2.3 million), but denied the punitive damage award of
approximately $250 thousand. Sterling Trust continues to believe that it has
meritorious points of appeal and intends to vigorously appeal this decision to
the Supreme Court of Texas. An appeal to the Supreme Court of Texas is
discretionary in nature, meaning that the Supreme Court of Texas does not
automatically have to hear the case. There can be no assurances that the Supreme
Court of Texas will agree to hear the case or that, if heard, Sterling Trust's
appeal will be successful. Because management has determined that the loss in
this matter is not probable, no accrual for loss has been recorded in these
financial statements.
14
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2003
(Unaudited)
9. Segment Information
Servicing
Traditional Mortgage Brokerage School All Others
Banking Banking and Services Total
Consulting
------------- ------------ -------------- ----------- ----------- ----------
(In thousands)
Quarter ended
June 30, 2003:
Revenues from external
customers:
Net interest income..... $ 12,297 6,365 80 $ 1,329 $ 93 $ 20,164
Noninterest income...... 1,704 28,684 2,791 554 3,395 37,128
Intersegment revenues....... 4,364 156 327 2 472 5,321
Segment profit (loss)....... 5,647 29 820 (1,039) (3,608) 1,849
Quarter ended
June 30, 2002:
Revenues from external
customers:
Net Interest income..... $ 14,231 6,415 5 $ 1,942 $ 126 $ 22,719
Noninterest income...... 1,069 16,499 1,604 1,821 2,504 23,497
Intersegment revenues....... 4,562 667 416 - 105 5,750
Segment profit (loss)....... 5,721 688 166 (1,297) (4,326) 952
Six months ended
June 30, 2003:
Revenues from external
customers:
Net interest income..... $ 25,226 12,458 116 $ 2,788 $ 170 $ 40,758
Noninterest income...... 3,283 50,836 5,081 1,093 7,488 67,781
Intersegment revenues....... 8,495 1,977 708 5 957 12,142
Segment profit (loss)....... 10,941 1,721 1,356 (2,471) (6,873) 4,674
Six months ended
June 30, 2002:
Revenues from external
customers:
Net interest income..... $ 27,189 14,626 7 $ 3,492 $ 219 $ 45,533
Noninterest income...... 2,718 32,054 3,466 3,934 4,751 46,923
Intersegment revenues....... 9,630 1,383 416 - 1,445 12,874
Segment profit (loss)....... 11,590 2,313 263 (3,053) (7,063) 4,050
Quarter Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- ------------- --------------- ------------
(In thousands)
Profit:
Total profit for reportable segments...... $ 5,457 $ 5,278 $ 11,547 $ 11,113
Other loss................................ (3,576) (4,086) (6,569) (6,793)
Adjustment of intersegment loss in
consolidation.......................... (32) (240) (304) (270)
-------------- ------------- --------------- ------------
Income before income taxes................ $ 1,849 $ 952 $ 4,674 $ 4,050
============== ============= =============== ============
15
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 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 Bancorp Trading, Inc. (formerly known as 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.; 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 Bancorp Trading 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 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, anticipated to be August 31, 2003. 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. The purchase price includes a production premium
that is calculated by multiplying 20 basis points by the original principal
16
balance of all of the loans originated in wholesale production branches until
February 2004. The production premium is "floored" at $4.9 million and "capped"
at $9.1 million. For the second quarter of 2003, the Company recorded $7.5
million of net earnings before income taxes from the wholesale production
platform revenue. The total originations of the wholesale platform eligible for
production premium were approximately $1.5 billion, or $3.0 million of
production premium. Since the Initial Closing Date through June 30, 2003, the
Company has recorded $8.5 million of earnings from the wholesale platform while
earning approximately $3.7 million of production premium. Due to the overall
profitability of the wholesale platform in relation to the production premium
earned pursuant to the definitive agreement, it is likely that a loss will be
recorded upon the final closing. At this time, the loss cannot be reasonably
estimated. Despite its profitability, the decision to sell the wholesale
platform was in part based on the Company's concern that over an extended period
of time it 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 the Company's wholesale production platform, the Company was required to
commit a significant percentage of its capital to a line of business that is
fairly cyclical and the earnings of which were difficult to estimate. The
decision to sell the Platform will allow us to reduce operational risks and the
costs associated with the platform. The Company intends 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
the Company is not able to reinvest the liquidity in a timely manner, the
Company 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, but not all, of these cases
involve ordinary and routine claims incidental to our business. 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 Information
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,"
17
"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
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 June 30, 2003 and
2002
Net Income. Net income increased $500 thousand to $1.4 million or $0.22 per
diluted share for the quarter ended June 30, 2003 as compared to $900 thousand,
or $0.14 per diluted share, for the quarter ended June 30, 2002.
Net Interest Income. Net interest income before provision for loan and valuation
losses decreased $200 thousand, or 1.7%, to $12.1 million for the quarter ended
June 30, 2003 as compared to $12.3 million for the quarter ended June 30, 2002.
Our net interest margin decreased 36 basis points to 3.29% for the quarter ended
June 30, 2003 from 3.65% for the quarter ended June 30, 2002 and interest rate
spread decreased to 2.87% for the quarter ended June 30, 2003 from 3.31% for the
quarter ended June 30, 2002. The decrease in net interest income before
provision for loan valuation losses was primarily due to a 125 basis point
decrease in the yield earned on our interest-earning assets, driven by declining
market interest rates, which effect was slightly offset by a $121.8 million
increase in the average balance of our interest-earning assets to $1.5 billion
at June 30, 2003 as compared to $1.4 billion at June 30, 2002. Additionally, we
had an 81 basis point decrease in the cost of our interest-bearing liabilities,
driven by decreases in interest rates, which effect was offset slightly by a
$21.0 million increase in our average interest-bearing liabilities to $1.2
billion for the quarter ended June 30, 2003. The significant decrease in the
overall yield on our interest-earning assets and cost of interest-bearing
liabilities was due to the prevalent historically low interest rate environment.
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 increased $200 thousand to $800 thousand for the quarter ended June 30,
2003 as compared to $600 thousand for the quarter ended June 30, 2002. The
increase in the provision was mainly due to reserves recorded against
specifically identified loans at Matrix Bank, and reserves recorded at Matrix
Financial due to growth in the loan portfolio. 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 made during the quarter, and other ancillary charges. Loan
administration fees increased $1.4 million, or 17.0%, to $9.7 million for the
quarter ended June 30, 2003 as compared to $8.3 million for the quarter ended
June 30, 2002. The increase includes gains on sales of repurchased FHA and VA
loans of $4.1 million for the quarter ended June 30, 2003 as compared to $1.2
million for the quarter ended June 30, 2002. Gains on sale of 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
18
residential mortgage loan servicing portfolio, the servicing spread, the timing
of payment collections and the amount of ancillary fees received. Our mortgage
loan servicing portfolio had an average balance of $4.6 billion for the quarter
ended June 30, 2003 as compared to an average balance of $5.3 billion for the
quarter ended June 30, 2002. Actual service fee rate (including all ancillary
income) of 0.47% for the quarter ended June 30, 2003, consistent with the
quarter ended June 30, 2002. The decrease in the servicing portfolio and
corresponding direct 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 $8.4 million, or 104.3% to $16.4 million for the quarter ended
June 30, 2003 as compared to $8.0 million for the quarter ended June 30, 2002.
The increase in loan origination income resulted from an increase in our
wholesale originations to $1.5 billion for the quarter ended June 30, 2003 as
compared to $786.7 million for the quarter ended June 30, 2002; an increase in
sales of our wholesale production to $1.5 billion during the quarter ended June
30, 2003 as compared to $885.9 million during the quarter ended June 30, 2002;
and an increase in the net income spread to 83.8 basis points for the quarter
ended June 30, 2003 as compared to 65.5 basis points for the quarter ended June
30, 2002. The increase in net income spread during the quarter ended June 30,
2003 as compared to the quarter ended June 30, 2002, is a result of overall
market conditions and a decline in hedging costs incurred. 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 $1.8 million, or 153.3%, to $2.9 million for the quarter ended June
30, 2003 as compared to $1.1 million for the quarter ended June 30, 2002. The
increase is primarily the result of an increase in the whole loan brokerage
transactions at Matrix Bancorp Trading, as well as the Company's focus on the
acquisition, pooling and selling of SBA loans and securities.
Trust Services. Trust service fees increased $300 thousand, or 25.0% to $1.7
million for the quarter ended June 30, 2003 as compared to $1.3 million for the
same quarter of the prior year. Trust accounts under administration at Sterling
Trust and Matrix Bank increased to 47,401 at June 30, 2003 from 43,204 at June
30, 2002 and total assets under administration increased to over $11.3 billion
at June 30, 2003 from approximately $6.4 billion at June 30, 2002. The majority
of the growth is the result of 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 $400 thousand, or 31.0%, to $1.5 million for the
quarter ended June 30, 2003 as compared to $1.1 million for the quarter ended
June 30, 2002. The increase is due to an increase in the number of properties
closed during the quarter ended June 30, 2003 of 788 as compared to 568 for the
same quarter of the prior year. Additionally, the increase is due to increased
numbers of property under management, which is 2,487 at June 30, 2003 as
compared to 1,865 at June 30, 2002.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
decreased $100 thousand to approximately $50 thousand for the quarter ended June
30, 2003 as compared to $150 thousand for the quarter ended June 30, 2002. Gain
on sale of loans can fluctuate significantly from quarter to quarter and year to
year based on a variety of factors, such as the current interest rate
environment, the supply and mix of loan portfolios available in the market, and
the particular loan portfolios we elect to sell.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing
rights was $0 for the quarter ended June 30, 2003 as compared to $1.1 million
for the quarter ended June 30, 2002. Gains from the sale of mortgage servicing
19
rights can fluctuate significantly from quarter to quarter and year-to-year
based on the market value of our servicing portfolio, the particular servicing
portfolios we elect to sell and the availability of similar portfolios in the
market. Due to our position in and knowledge of the market, we expect to at
times pursue opportunistic sales of mortgage servicing rights.
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 $700 thousand, or 52.9%, to $700
thousand for the quarter ended June 30, 2003 as compared to $1.4 million for the
quarter ended June 30, 2002. The decrease is a result of a decrease in the
number of core business service clients. As of June 30, 2003 ABS provided core
business services to 82 schools as compared to 106 schools at June 30, 2002.
Much of the decrease was anticipated by the Company as part of its initiative to
focus on its core competencies. The Company does not anticipate a significant
increase in school services income for the foreseeable future.
Other Income. Other income includes service and ATM fees, rental income,
servicing hedging gains, and other miscellaneous income items. Other income
increased $3.3 million to $4.3 million for the quarter ended June 30, 2003 as
compared to $1.0 million for the quarter ended June 30, 2002. The increase in
other income was primarily due to approximately $2.1 million gain on hedging
realized at Matrix Financial during the quarter, and a $300 thousand increase in
our equity investment at our 45% owned subsidiary, Matrix Settlement & Clearance
Services.
Noninterest Expense. Noninterest expense increased $12.3 million, or 36.0%, to
$46.5 million for the quarter ended June 30, 2003 as compared to $34.2 million
for the quarter ended June 30, 2002. This increase was mainly the result of
increases in the amortization of mortgage servicing rights, an additional
impairment charge on mortgage servicing rights, increases in compensation and
benefits, and an increase in professional fees. The following table details the
major components of noninterest expense for the periods indicated:
Quarter Ended
June 30,
------------------------------
2003 2002
--------------- --------------
(In thousands)
Compensation and employee benefits............$ 16,505 $ 14,950
Amortization of mortgage servicing rights..... 10,356 5,162
Occupancy and equipment........................ 1,906 1,830
Postage and communication...................... 1,092 1,148
Professional fees.............................. 1,319 597
Data processing................................ 846 769
Impairment on mortgage servicing rights........ 2,400 1,400
Other general and administrative............... 12,079 8,326
------------ ------------
Total.....................................$ 46,503 $ 34,182
============ ============
Compensation and employee benefits expense increased $1.6 million, or 10.4%, to
$16.5 million for the quarter ended June 30, 2003 as compared to $14.9 million
for the quarter ended June 30, 2002. This increase was primarily due to
increased costs associated with incentive and commission pay, consistent with
the increase in revenues, offset by decreases in medical benefits expense
associated with the structural rate changes implemented for the 2003 benefit
year. Overall, the Company experienced a small increase of 14 employees to 930
employees, as compared to 916 employees at June 30, 2002. Included in the
employees at June 30, 2003 are approximately 424 employees who we anticipate
that the Buyer of the Platform will hire, thereby reducing our employee count to
approximately 506 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 $5.2 million, or 100.6%, to
$10.4 million for the quarter ended June 30, 2003 as compared to $5.2 million
for the quarter ended June 30, 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 during the quarter, prepayment speeds on our servicing portfolio
increased to an average of 39.3% for the quarter ended June 30, 2003 as compared
to 17.1% for the quarter ended June 30, 2002. The average balance in our
mortgage servicing rights decreased to $4.6 billion at June 30, 2003 as compared
to $5.9 billion at June 30, 2002.
20
Impairment on mortgage servicing rights increased $1.0 million, or 71.4%, to
$2.4 million for the quarter ended June 30, 2003 as compared to $1.4 million for
the quarter ended June 30, 2002. The Company is required to record its
investment in mortgage servicing rights at the lower of cost or fair value. See
further discussion of the impairment on mortgage servicing rights in "Item 7.
Comparison of Results of Operations for Fiscal Years 2002 and 2001--Noninterest
Expense" in the Form 10-K for the year ended December 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 $4.5 million, or
36.1% to $17.2 million for the quarter ended June 30, 2003 as compared to $12.7
million for the quarter ended June 30, 2002. The increase was primarily due to
increases in subaccounting fees paid by Matrix Bank to third parties, an
increase in reserves and charges related to both production and servicing
related assets, and increases in legal and other outside services primarily at
Matrix Financial related to increased volume of activities and ongoing
litigation.
As discussed in footnote 8 to the condensed consolidated financial statements
included herein, no accrual for loss had been recorded as of June 30, 2003 in
connection with the pending litigation matter styled Roderick Adderley, et. al.
v. Advanced Financial Services, Inc., et. al. For a more detailed discussion of
this particular litigation, please see footnote 8 to the condensed consolidated
financial statements included herein, as well as Part II, Item 1 to this
Quarterly Report on Form 10-Q.
Provision for Income Taxes. Our provision for income taxes increased by $350
thousand to $400 thousand for the quarter ended June 30, 2003 as compared to
$50,000 for the quarter ended June 30, 2002. Our effective tax rate was 22.6%
for the quarter ended June 30, 2003 as compared to 5.0% for the quarter ended
June 30, 2002. The effective tax rate is affected by the level of tax-exempt
income at ABS and Matrix Bank in proportion to the level of net income.
Comparison of Results of Operations for the Six Months Ended June 30, 2003 and
2002
Net Income. Net income increased $400 thousand, or 13.6%, to $3.3 million, or
$0.51 per diluted share, for the six months ended June 30, 2002 as compared to
$2.9 million, or $0.45 per diluted share, for the six months ended June 30,
2002.
Net Interest Income. Net interest income before provision for loan and valuation
losses remained consistent at $23.9 million for the six months ended June 30,
2003 and June 30, 2002. The factors which impact net interest income, and led to
the overall consistency in revenue, are as follows: our average interest-earning
assets were $1.5 billion for the six months ended June 30, 2003 as compared to
$1.3 billion for the six months ended June 30, 2002. The increase in average
balance was offset, however, by a decrease in the average yield on the net
interest-earning assets to 5.56% for the six months ended June 30, 2003 as
compared to 6.78% for six months ended June 30, 2002. The Company's
interest-bearing liabilities remained consistent at $1.2 billion for the six
months ended June 30, 2003 and 2002, however, the average yield on
interest-bearing liabilities decreased to 2.68% for the six months ended June
30, 2003, as compared to 3.60% for the six months ended June 30, 2002. Both the
decrease in the yield on interest-earning assets and the cost of the
interest-bearing liabilities are attributable to the historically low interest
rate environment. The impact of these factors caused the Company's net interest
margin to decrease to 3.26% for the six months ended June 30, 2003 as compared
to 3.56% for the six months ended June 30, 2002. For additional discussion
concerning increases in our average interest-earning assets and decreases in our
cost of interest-bearing liabilities, see "Comparison of Results of Operations
for the Quarters Ended June 30, 2003 and 2002--Net Interest Income."
For a tabular presentation of the changes in net interest income due to changes
in volume of interest-earning assets and changes in interest rates, see
"Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes."
Provision for Loan and Valuation Losses. Provision for loan and valuation losses
decreased $200 thousand, or 9.6%, to $1.5 million for the six months ended June
30, 2003 as compared to $1.7 million for the six months ended June 30, 2002.
This decrease was primarily attributable to incremental charge-offs and reserves
21
recorded at ABS in the six months ended June 30, 2002 at levels that are not
present in the six months ended June 30, 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 fees increased $2.1 million, or 12.1%,
to $19.1 million for the six months ended June 30, 2003 as compared to $17.0
million for the six months ended June 30, 2002. Included in loan administration
income was approximately $7.2 million for the six months ended June 30, 2003 and
$3.0 million for the six months ended June 30, 2002 of gain from the purchase
and subsequent resale of FHA and VA loans from our mortgage servicing rights
portfolio. Loan administration 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 servicing portfolio decreased to an average balance of
$4.8 billion for the six months ended June 30, 2003 as compared to an average
balance of $5.9 billion for the six months ended June 30, 2002. The actual
service fee rate (including all ancillary income) remained basically consistent
at 0.48% for the six months ended June 30, 2003 and June 30, 2002.
Loan Origination. Loan origination income increased $13.3 million, or 81.8%, to
$29.5 million for the six months ended June 30, 2003 as compared to $16.2
million for the six months ended June 30, 2002. The increase resulted as a
combination of effects from an increase in wholesale production to $2.7 billion
for the six months ended June 30, 2003 as compared to $1.7 billion for the six
months ended June 30, 2002, and an increase in the net income spread to 83.3
basis points year-to-date 2003 versus 59.7 basis points year-to-date 2002. 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 increased $2.4 million, or 84.8%, to $5.2 million
for the six months ended June 30, 2003 as compared to $2.8 million for the six
months ended June 30, 2002. Brokerage fees vary from quarter to quarter and year
to year, as the timing of servicing sales, loan sales and SBA pooling activities
is dependent upon, among other things, prevailing market conditions and a
seller's need to recognize a sale or to receive cash flows. Please see
additional discussion under "Comparison of Results of Operations for the
Quarters Ended June 30, 2003 and 2002--Brokerage Fees."
Trust Services. Trust service fees increased $600 thousand, or 20.3%, to $3.3
million for the six months ended June 30, 2003 as compared to $2.7 million for
the six months ended June 30, 2002. Please see additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2003 and
2002--Trust Services."
Real Estate Disposition Services. Real estate disposition services income
increased $900 thousand, or 48.9%, to $2.8 million for the six months ended June
30, 2003 as compared to $1.9 million for the six months ended June 30, 2002.
Please see additional discussion under "Comparison of Results of Operations for
the Quarters Ended June 30, 2003 and 2002--Real Estate Disposition Services."
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
increased $200 thousand to $350 thousand for the six months ended June 30, 2003
as compared to $150 thousand for the six months ended June 30, 2002. Gain on the
sale of loans and securities can fluctuate significantly from quarter to quarter
and from year to year based on a variety of factors, such as the current
interest rate environment, the supply and mix of loan portfolios available in
the market, the type of loan portfolios we purchase and the particular loan
portfolios we elect to sell.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing
rights decreased to $0 for the six months ended June 30, 2003 as compared to
$1.1 million for the six months ended June 30, 2002. Gains from the sale of
mortgage servicing rights can fluctuate significantly from quarter to quarter
and year-to-year based on the market value of our servicing portfolio, the
particular servicing portfolios we elect to sell and the availability of similar
portfolios in the market. Due to our position in and knowledge of the market, we
expect to at times pursue opportunistic sales of mortgage servicing rights.
School Services. School services income decreased $1.5 million, or 55.1%, to
$1.3 million for the six months ended June 30, 2003 as compared to $2.8 million
22
for the six months ended June 30, 2002. Please see additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2003 and
2002--School Services."
Other Income. Other income increased $4.1 million, or 185.0%, to $6.3 million
for the six months ended June 30, 2003 as compared to $2.2 million for the six
months ended June 30, 2002. The increase in other income was primarily due to
approximately $2.1 gain on hedging realized at Matrix Financial, rental income
of approximately $1.0 million from operations of Matrix Financial Center, and a
$400 thousand increase in our equity investment in Matrix Settlement and
Clearance.
Noninterest Expense. Noninterest expense increased $20.4 million, or 31.4%, to
$85.5 million for the six months ended June 30, 2003 as compared to $65.1
million for the six months ended June 30, 2002. This increase was predominantly
due to increases in compensation and employee benefits expense, amortization of
and impairment of mortgage servicing rights, professional fees and other general
and administrative expense. The following table details the major components of
noninterest expense for the periods indicated:
Six Months Ended
June 30,
------------------------------
2003 2002
--------------- --------------
(In thousands)
Compensation and employee benefits............$ 31,810 $ 29,612
Amortization of mortgage servicing rights..... 19,254 11,035
Occupancy and equipment........................ 3,959 3,519
Postage and communication...................... 2,344 2,287
Professional fees.............................. 2,616 1,309
Data processing................................ 1,577 1,645
Impairment on mortgage servicing rights........ 2,400 1,219
Other general and administrative............... 21,562 14,449
------------ ------------
Total.....................................$ 85,552 $ 65,075
============ ============
Compensation and employee benefits increased $2.2 million, or 7.4%, to $31.8
million for the six months ended June 30, 2003 as compared to $29.6 million for
the six months ended June 30, 2002. Please see additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2003 and
2002--Noninterest Expense."
Amortization of mortgage servicing rights increased $8.2 million, or 74.5%, to
$19.3 million for the six months ended June 30, 2003 as compared to $11.0
million for the six months ended June 30, 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. The increase is due to the increase in prepayment
speeds on our servicing portfolio to an average of 35.5% for the six months
ended June 30, 2003 as compared to 20.3% for the six months ended June 30, 2002,
offset slightly by a decrease in the average balance of our mortgage servicing
rights to $4.8 billion at June 30, 2003 as compared to $5.9 billion at June 30,
2002.
Impairment of mortgage servicing rights increased $1.2 million, or 96.9%, to
$2.4 million for the six months ended June 30, 2003 as compared to $1.2 million
for the six months ended June 30, 2002. Please see additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2003 and
2002--Noninterest Expense."
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 $8.8 million, or
38.1%, to $32.0 million for the six months ended June 30, 2003 as compared to
$23.2 million for the six months ended June 30, 2002. Please see additional
discussion under "Comparison of Results of Operations for the Quarters Ended
June 30, 2003 and 2002--Noninterest Expense."
Provision for Income Taxes. The provision for income taxes increased by $200
thousand to $1.3 million for the six months ended June 30, 2003 as compared to
$1.1 million for the six months ended June 30, 2002. Our effective tax rate was
28.5% for the six months ended June 30, 2003 as compared to 27.4% for the six
23
months ended June 30, 2002. The effective tax rates are affected by the level of
tax-exempt income at ABS and Matrix Bank 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 and six months ended June 30,
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.
24
Quarter Ended June 30,
-------------------------------------------------------------------------
2003 2002
---------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- -------- ---------- ---------- -------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans, net.................. $1,405,154 $ 19,729 5.62% $ 1,292,804 $ 22,255 6.89
Securities.................. 22,996 185 3.22 9,951 148 5.94
Interest-earning deposits... 8,736 21 0.96 16,626 70 1.68
Federal Home Loan Bank stock 30,470 229 3.01 26,132 246 3.77
------------ ---------- -------- ---------- ---------- -------
Total interest-earning
assets................... 1,467,356 20,164 5.50 1,345,513 22,719 6.75
Noninterest-earning assets:
Cash........................ 46,437 45,122
Allowance for loan and
valuation losses.......... (8,255) (9,420)
Premises and equipment...... 25,085 19,505
Other assets................ 143,713 175,163
------------ ----------
Total noninterest-earning
assets................. 206,980 230,370
------------ ----------
Total assets.............. $1,674,336 $ 1,575,883
============ ==========
Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts........... $ 5,401 18 1.53 $ 5,731 29 2.02
Money market and NOW accounts 412,331 997 0.97 293,658 1,119 1.52
Certificates of deposit..... 359,631 2,426 2.70 439,466 4,249 3.87
Federal Home Loan Bank
borrowings................ 337,890 2,268 2.68 335,623 2,457 2.93
Borrowed money and
guaranteed preferred
beneficial interests...... 118,469 2,389 8.07 138,255 2,586 7.48
------------ ---------- -------- ---------- ---------- -------
Total interest-bearing
liabilities............. 1,233,722 8,098 2.63 1,212,763 10,440 3.44
------------ ---------- -------- ---------- ---------- -------
Noninterest-bearing
liabilities:
Demand deposits (including
custodial escrow
balances)................. 336,479 252,737
Other liabilities........... 34,255 37,037
------------ ----------
Total noninterest-bearing
liabilities 370,734 289,774
Shareholders' equity........ 69,880 73,346
------------ ----------
Total liabilities and
shareholders' equity........ $1,674,336 $ 1,575,883
============ ==========
Net interest income before
provision for loan and
valuation losses............ $ 12,066 $ 12,279
========== ==========
Interest rate spread.......... 2.87 % 3.31 %
======== =======
Net interest margin........... 3.29 % 3.65 %
======== =======
Ratio of average interest-earning
assets to average interest-bearing
liabilities................... 118.94 % 110.95 %
======== =======
TABLE CONTINUED.......
Six Months Ended June 30,
---------------------------------------------------------------------------
2003 2002
---------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- -------- ----------- ---------- --------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans, net.................. $ 1,398,701 $ 39,831 5.70% $1,291,380 $ 44,698 6.92%
Securities.................. 24,279 401 3.30 9,995 277 5.54
Interest-earning deposits..... 13,972 71 1.02 18,445 169 1.83
Federal Home Loan Bank stock.. 30,426 455 2.99 22,500 390 3.47
----------- ------------ -------- ---------- ----------- --------
Total interest-earning
assets..................... 1,467,378 40,758 5.56 1,342,320 45,534 6.78
Noninterest-earning assets:
Cash.......................... 45,130 38,559
Allowance for loan and
valuation losses............. (8,719) (9,437)
Premises and equipment........ 25,946 16,604
Other assets.................. 147,831 176,434
----------- -----------
Total noninterest-earning
assets.................... 210,188 222,160
----------- -----------
Total assets................ $ 1,677,566 $ 1,564,480
=========== ===========
Liabilities & Shareholders'
Equity
Interest-bearing liabilities:
Passbook accounts.............. $ 5,447 36 1.32 $ 5,506 55 2.00
Money market and NOW accounts 383,659 1,905 0.99 276,681 2,204 1.59
Certificates of deposit....... 404,278 5,523 2.73 475,550 9,635 4.05
Federal Home Loan Bank
borrowings.................. 335,978 4,507 2.68 295,758 4,430 3.00
Borrowed money and
guaranteed preferred
beneficial interests........ 124,202 4,835 7.79 147,411 5,308 7.20
----------- ---------- -------- ----------- --------- --------
Total interest-bearing
liabilities............... 1,253,564 16,806 2.68 1,200,906 21,632 3.60
----------- ---------- -------- ----------- --------- --------
Noninterest-bearing
liabilities:
Demand deposits (including
custodial escrow balances).. 324,315 252,025
Other liabilities............. 30,865 39,045
----------- -----------
Total noninterest-bearing
liabilities 355,180 291,070
Shareholders' equity............ 68,822 72,504
----------- -----------
Total liabilities and
shareholders' equity............ $ 1,677,566 $ 1,564,480
=========== ===========
Net interest income before
provision for loan and
valuation losses.............. $ 23,952 $ 23,902
========== ===========
Interest rate spread............ 2.88 % 3.18 %
======== ========
Net interest margin............. 3.26 % 3.56 %
======== ========
Ratio of average interest-earning
assets to average
interest-bearing liabilities.. 117.06 % 111.78 %
======== ========
25
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
o changes in volume, in other words, changes in volume multiplied by
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 Six Months Ended
June 30, June 30,
2003 vs. 2002 2003 vs. 2002
------------------------------------------ -------------------------------------------
Increase (Decrease) Due to Change in
----------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ ------------ ------------ ------------ -------------
(In thousands)
Interest-earning assets:
Loans, net........................ $ 1,821 $ (4,347) $ (2,526) $ 3,488 $ (8,355) $ (4,867)
Securities........................ 128 (91) 37 446 (322) 124
Interest-earning deposits......... (26) (23) (49) (35) (63) (98)
FHLB stock........................ 37 (54) (17) 86 (21) 65
------------ ------------ ------------ ------------ ------------ -------------
Total interest-earning assets.. 1,960 (4,515) (2,555) 3,985 (8,761) (4,776)
Interest-bearing liabilities:
Passbook accounts................. (2) (9) (11) (1) (18) (19)
Money market and NOW accounts..... 362 (484) (122) 689 (988) (299)
Certificates of deposit........... (684) (1,139) (1,823) (1,295) (2,817) (4,112)
FHLB borrowings................... 17 (206) (189) 573 (496) 77
Borrowed money and guaranteed
preferred beneficial interests.... (390) 193 (197) (883) 187 (473)
------------ ------------ ------------ ------------ ------------ -------------
Total interest-bearing
liabilities.................. (697) (1,645) (2,342) (917) (4,132) (4,826)
------------ ------------ ------------ ------------ ------------ -------------
Change in net interest income
before provision for loan and
valuation losses $ 2,657 $ (2,870) $ (213) $ 4,902 $ (4,852) $ 50
============ ============ ============ ============ ============ =============
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 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.
26
June 30, December 31, June 30,
2003 2002 2002
------------- --------------- ----------------
(Dollars in thousands)
Nonaccrual residential mortgage loans................ $ 18,269 $ 15,123 $ 14,513
Nonaccrual commercial real estate, commercial loans
and school financing.............................. 14,947 15,649 19,139
Nonaccrual consumer loans............................ - 46 19
------------- --------------- ----------------
Total nonperforming loans......................... 33,216 30,818 33,668
Foreclosed real estate............................... 5,334 8,343 4,641
------------- --------------- ----------------
Total nonperforming assets........................ $ 38,550 $ 39,161 $ 38,309
============= =============== ================
Total nonperforming loans to total loans............. 2.41 % 2.20 % 2.58 %
============= =============== ================
Total nonperforming assets to total assets........... 2.21 % 2.30 % 2.36 %
============= =============== ================
Ratio of allowance for loan and valuation losses to
total nonperforming loans......................... 27.11 % 30.32 % 28.20 %
============= =============== ================
We accrue interest on government-sponsored loans such as FHA insured and VA
guaranteed loans which are past due 90 or more days, as the interest on these
loans is generally insured by the federal government. The aggregate unpaid
principal balance of government-sponsored accruing loans that were past due 90
or more days was $20.5 million, $34.8 million and $49.3 million at June 30,
2003, December 31, 2002 and June 30, 2002, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were 1.3%
at June 30, 2003, 1.1% at December 31, 2002, and 1.1% at June 30, 2002. The
nonaccrual residential mortgage loans have slightly deteriorated at June 30,
2003 as compared to December 30, 2002 and June 30, 2002. We do not believe that
the slight increase in delinquency will necessarily continue or is a continuing
trend, as the increase did not occur in any particular loan portfolio acquired
or in any specific geographic area.
The decrease in nonaccrual commercial loans and school financing at June 30,
2003 as compared to December 31, 2002 and June 30, 2002 is primarily
attributable to a decrease in nonaccrual commercial and construction loans at
Matrix Bank due to improvement in the aging of the portfolio, offset by the
overall increased amounts of SBA originated and purchased loans and the
increased amount of those loans in nonaccrual status, which increased $500
thousand to $9.8 million at June 30, 2003 as compared to $9.3 million at
December 31, 2002 and $9.0 million at June 30, 2002. It should be noted,
however, that approximately $6.5 million of the principal of these SBA loans is
guaranteed by the SBA, and as such, our credit risk is reduced despite the
increase in the balances. With regard to our school financing, a majority of our
origination of tax-exempt financing for charter schools is for the purchase of
real estate and equipment. We have noted that many of our charter schools have
encountered enrollment and/or state funding delays with their start-up, which
has delayed their funding and caused the school's loans to us to become
delinquent. We have seen minor improvement in the balance of the nonaccrual
loans, primarily due to the aging of such loans. 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 June 30, 2003 balance was $1.0 million of delinquent school financing 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 June 30,
2003, a liability of $50 thousand was recorded against the delinquent recourse
loans.
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 June 30, 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.
27
The trend of net cash used by our operating activities experienced over the
reported period 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 resumed regular dividend payments under its current policy
during the quarter ended June 30, 2003. The Company also intends to utilize the
$12.0 million line of credit on its bank stock loan, as needed, to meet its own
and the other subsidiaries financial obligations. As of June 30, 2003, $12.0
million of the line of credit 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 June 30, 2003, Matrix Bank had overnight and
term borrowings of $407.2 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 June 30, 2003 was $172.3 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
5.96% at June 30, 2003. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $15.9 million. Matrix Bank's
risk-based capital ratio was 11.90% at June 30, 2003, which currently exceeds
the well capitalized risk-based capital requirement of 10.0% of risk-weighted
assets by $16.8 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 $50.0 million warehouse line of credit
provided to Matrix Financial by an unaffiliated financial institution. As of
June 30, 2003, $40.0 million was available to be utilized under the line of
credit facility.
Matrix Bancorp Trading's 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 June 30, 2003, Matrix Bancorp Trading had $39.6
million available to be utilized under the line of credit facility. Due to the
lack of utilization of this warehouse line, we would not anticipate renewing the
facility which comes due in the third quarter of 2003.
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
28
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 $13.3
million at June 30, 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 June 30, 2003, we had $933.4 million of
commitments to originate mortgage loans and $365.7 million of funded loans,
offset with mandatory forward commitments of $894.6 million and best effort
forward commitments of $107.6 million. See additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2003 and
2002--Loan Origination."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter ended June 30, 2003 and the six-month period ended June 30,
2003, there were no material changes to the quantitative and qualitative
disclosures about market risk presented 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" 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
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Co-Chief Executive Officer's and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of June 30, 2003 pursuant to
Exchange Act Rule 13a-14. Based on that evaluation, the Company's management,
including the Co-Chief Executive Officer's and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures are effective,
in all material respects, to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required. 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
management's 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.
Matrix Financial has been named a defendant in an arbitration claim pending
before the American Arbitration Association in Denver, Colorado. The claimant
claims that he was not terminated for "cause", as specified in his employment
agreement and has made claims for, among other things, breach of good faith and
fair dealing, breach of his employment agreement, back pay and other economic
loss, violation of the Colorado wage act and attorneys' fees and costs. In June
2003, the arbitrator made an initial interim decision finding that the
ex-employee was negligent in connection with one of the issues over which his
employment was terminated, but that he was not terminated for "cause" as defined
in the employment agreement. No schedule has yet been set for a hearing as to
what damages, if any, may be payable to or by the ex-employee or as to what
amounts, if any, Matrix Financial may be entitled to offset in connection with
such ex-employee's negligent actions. Matrix Financial continues to believe it
has meritorious defenses to these claims by the ex-employee and intends to
defend the matter vigorously.
29
A former customer of Matrix Bank is a debtor in a Chapter 11 proceeding under
the Bankruptcy Code entitled In re Apponline.com, Inc. and Island Mortgage
Network, Inc. pending in the United States Bankruptcy Court for the Eastern
District of New York (the "Bankruptcy Proceeding"). The Chapter 11 trustee in
this action had claimed a prior interest in approximately 17 loans (original
principal amount of approximately $3.2 million) that Matrix Bank purchased from
the debtor pursuant to a purchase/repurchase facility between Matrix Bank and
the debtor. Matrix Bank and the Chapter 11 trustee have agreed to settle this
dispute, with Matrix Bank paying the trustee approximately $460 thousand. The
settlement is subject to approval by the Bankruptcy Court. There can be no
assurance that the settlement will be approved by the Court. The amount of the
settlement has been fully reserved by the Company.
In addition to the claim described above, the Chapter 11 trustee has filed an
avoidance action against Matrix Bank for approximately $6.1 million Island
Mortgage paid to Matrix Bank. Matrix Bank believes it will successfully
demonstrate to the trustee that the monies the trustee seeks to recover were
purchase money belonging to Matrix Bank, having been returned to it by Island
Mortgage for loans that did not close and were not sold to Matrix Bank. Matrix
Bank believes it has meritorious defenses to this avoidance action and intends
to vigorously defend it. See Item 3. "Legal Proceedings --Matrix Bank" in the
Form 10-K for December 31, 2002 for the Company's previous discussion of this
matter.
Sterling Trust has been named a defendant in an action filed in July 1999 styled
Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. that
was tried in Tarrant County, Texas District Court in the spring of 2000. The
jury returned a verdict adverse to Sterling Trust with respect to two of 12
theories of liability posed by the plaintiffs, and a judgment was entered
against Sterling Trust in the amount of approximately $6.4 million, plus
post-judgment interest and conditional attorneys' fees for the plaintiffs in
connection with any appeals. Sterling Trust appealed the judgment to the Court
of Appeals for the Second District of Texas (Fort Worth). On July 31, 2003, the
Court of Appeals affirmed and reversed in part the jury verdict. The Court of
Appeals affirmed the jury's award for actual damages of approximately $6.2
million (plus post-judgment interest and attorneys' fees currently estimated to
be approximately $2.3 million) but denied the punitive award of approximately
$250 thousand. Sterling Trust continues to believe that it has meritorious
points of appeal and intends to vigorously appeal this decision to the Supreme
Court of Texas. An appeal to the Supreme Court of Texas is discretionary in
nature, meaning that the Supreme Court of Texas does not automatically have to
hear the case. There can be no assurances that the Supreme Court of Texas will
agree to hear the case or that, if heard, Sterling Trust's appeal will be
successful. Because management has determined that the loss in this matter is
not probable, no accrual for loss has been recorded in the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 16, 2003. At the
meeting, the shareholders voted to re-elect two directors of the Company, Lester
Ravitz and Robert T. Slezak, to hold office until the Annual Meeting to be held
in 2006 ("Proposal 1"). The other directors whose terms continue after the
Annual Meeting are D. Mark Spencer, Richard V. Schmitz, Guy A. Gibson and David
A. Frank.
The shareholders were asked to consider and act upon a proposal to amend the
1996 Amended and Restated Employee Stock Option Plan to increase the shares
eligible for issuances upon exercise of stock options from 750,000 shares to
950,000 shares ("Proposal 2").
In addition, the shareholders were asked to consider and act upon a proposal to
ratify the appointment of KPMG LLP as independent auditors for the Company for
the 2002 fiscal year ("Proposal 3"). No other matters were voted on at the
Annual Meeting. A total of 6,275,202 shares were represented at the meeting, in
person or by proxy.
The number of shares that were voted for and that were withheld from, each of
the director nominees in Proposal 1 was as follows:
Director Nominee For Withheld
- ---------------- --- --------
Lester Ravitz 6,058,006 217,196
Robert T. Slezak.. 6,058,006 217,196
30
In Proposal 2, the shares eligible for issuance upon exercise of stock options
was increased to 950,000 shares, with 5,744,034 shares voting for, 530,668
shares voting against, and 500 broker non-votes.
In Proposal 3, KPMG LLP was ratified as the independent auditors for the Company
for fiscal year 2003, with 6,266,515 shares voting for, 7,344 shares voting
against and 1,343 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
*10.1 Second Amendment to Purchase and Assumption Agreement, dated July 22,
2003, by and between Matrix Capital Bank, Matrix Financial Services
Corporation and AmPro Mortgage Corporation.
*31.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350,
as adopted pursaunt to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 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.
*32.2 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.
*32.3 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 May 2, 2003 (Item 12), which contained a press release announcing the
first quarter 2003 earnings of the Company.
- ----------------------
* Filed herewith.
31
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: August 12, 2003 /s/ D. Mark Spencer
--------------------------- --------------------------------------
D. Mark Spencer
President and Co-Chief Executive
Officer
(Principal Executive Officer)
Dated: August 12, 2003 /s/ Richard V. Schmitz
--------------------------- --------------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
Dated: August 12, 2003 /s/ David W. Kloos
--------------------------- --------------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
32
INDEX TO EXHIBITS
Exhibit
Number Description
- ------------- --------------------------------------------------------------
*10.1 Second Amendment Purchase and Assumption Agreement, dated July 22,
2003, by and between Matrix Capital Bank, Matrix Financial
Servcies Corporation and AmPro Mortgage Corporation.
*31.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*31.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*31.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section
1350, as adoped pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*32.1 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.
*32.2 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.
*32.3 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.