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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 September 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 October 31, 2003 was 6,498,543 shares.
TABLE OF CONTENTS
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2003 (unaudited) and December 31, 2002..............................3
Condensed Consolidated Statements of Operations
Quarter and nine months ended September 30, 2003 and 2002 (unaudited).............4
Condensed Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 2003 and 2002 (unaudited).........................6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002 (unaudited).........................7
Notes to Condensed Consolidated Financial Statements....................................8
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 6. Exhibits and Reports on Form 8-K........................................................30
SIGNATURES............................................................................................32
2
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share information)
September 30, December 31,
2003 2002
------------------- ------------------
(Unaudited)
Assets
Cash and cash equivalents........................................................ $ 58,706 $ 58,725
Interest-earning deposits and federal funds sold................................. 2,151 3,687
Securities available for sale.................................................... 63,037 29,073
Loans held for sale, net......................................................... 995,345 1,107,926
Loans held for investment, net................................................... 287,493 285,891
Mortgage servicing rights, net................................................... 43,188 63,200
Other receivables ............................................................... 41,434 54,811
Federal Home Loan Bank stock, at cost............................................ 32,336 30,379
Foreclosed real estate........................................................... 6,081 8,343
Premises and equipment, net...................................................... 25,141 27,705
Bank owned life insurance........................................................ 20,354 -
Other assets, net................................................................ 26,074 31,857
------------------- ------------------
Total assets..................................................................... $ 1,601,340 $ 1,701,597
=================== ==================
Liabilities and shareholders' equity
Liabilities:
Deposits...................................................................... $ 996,275 $ 933,957
Custodial escrow balances..................................................... 134,655 151,790
Draft payable................................................................. - 7,097
Federal Home Loan Bank borrowings............................................. 267,225 385,785
Borrowed money................................................................ 49,045 61,403
Guaranteed preferred beneficial interests..................................... 64,500 64,500
Other liabilities............................................................. 18,745 23,357
Income taxes payable and deferred income tax liability........................ 2,596 6,772
------------------- ------------------
Total liabilities................................................................ 1,533,041 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 6,498,543 and 6,489,543 shares at September 30, 2003 and
December 31, 2002, respectively............................................. 1 1
Additional paid in capital.................................................... 20,451 20,375
Retained earnings............................................................. 47,835 46,534
Accumulated other comprehensive income........................................ 12 26
------------------- ------------------
Total shareholders' equity....................................................... 68,299 66,936
------------------- ------------------
Total liabilities and shareholders' equity....................................... $ 1,601,340 $ 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Interest income
Loans and securities........................................ $ 17,846 $ 20,452 $ 55,532 $ 61,426
Interest-earning deposits................................... 237 378 764 937
--------------- --------------- --------------- ---------------
Total interest income....................................... 18,083 20,830 56,296 62,363
--------------- --------------- --------------- ---------------
Interest expense
Deposits.................................................... 3,200 4,656 10,664 16,551
Borrowed money and guaranteed preferred beneficial interests 4,588 4,837 13,889 14,574
--------------- --------------- --------------- ---------------
Total interest expense...................................... 7,788 9,493 24,553 31,125
--------------- --------------- --------------- ---------------
Net interest income before provision for loan and valuation
losses.................................................... 10,295 11,337 31,743 31,238
Provision for loan and valuation losses..................... 1,114 1,308 2,651 3,008
--------------- --------------- --------------- ---------------
Net interest income after provision for loan and valuation
losses.................................................... 9,181 10,029 29,092 28,230
--------------- --------------- --------------- ---------------
Noninterest income
Loan administration......................................... 6,373 7,157 25,430 24,161
Brokerage................................................... 2,298 3,728 7,522 6,555
Trust services.............................................. 1,680 1,188 4,977 3,930
Real estate disposition services............................ 1,786 1,049 4,608 2,944
Gain on sale of loans and securities........................ 1,711 135 2,201 284
Gain on sale of mortgage servicing rights, net.............. - - - 1,054
Loan origination............................................ 245 338 87 1,011
School services............................................. 520 882 1,786 3,702
Other....................................................... (65) 1,557 6,190 3,764
--------------- --------------- --------------- ---------------
Total noninterest income.................................... 14,548 16,034 52,801 47,405
--------------- --------------- --------------- ---------------
Noninterest expense
Compensation and employee benefits.......................... 8,338 9,555 26,541 27,973
Amortization of mortgage servicing rights................... 8,263 6,037 27,517 17,073
Occupancy and equipment..................................... 1,575 1,897 4,568 4,304
Postage and communication................................... 572 692 1,881 2,004
Professional fees........................................... 557 910 2,381 2,086
Data processing............................................. 689 721 2,114 2,108
Impairment (recovery) on mortgage servicing rights.......... (5,100) 8,000 (2,700) 9,219
Other general and administrative............................ 8,804 9,117 23,630 21,371
--------------- --------------- --------------- ---------------
Total noninterest expense................................... 23,698 36,929 85,932 86,138
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations before income taxes 31 (10,866) (4,039) (10,503)
Income tax benefit.......................................... (289) (4,675) (2,391) (5,015)
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations.................... 320 (6,191) (1,648) (5,488)
Discontinued Operations:
(Loss) income from discontinued operations (sale of
wholesale mortgage origination platform), net of income
tax (benefit) provision of $(1,528), $640, $1,908 and
$2,089, respectively..................................... (2,360) 990 2,949 3,229
--------------- --------------- --------------- ---------------
Net (loss) income........................................... $ (2,040) $ (5,201) $ 1,301 $ (2,259)
=============== =============== =============== ===============
Continued
4
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations - continued
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations per share -
basic.................................................... $ 0.05 $ (0.96) $ (0.25) $ (0.85)
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations per share -
assuming dilution........................................ $ 0.05 $ (0.96) $ (0.25) $ (0.85)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
(Loss) income from discontinued operations per share -
basic.................................................... $ (0.36) $ 0.15 $ 0.45 $ 0.50
--------------- --------------- --------------- ---------------
(Loss) income from discontinued operations per share -
assuming dilution........................................ $ (0.36) $ 0.15 $ 0.45 $ 0.50
--------------- --------------- --------------- ---------------
=============== =============== =============== ===============
Net (loss) income per share - basic......................... $ (0.31) $ (0.81) $ 0.20 $ (0.35)
=============== =============== =============== ===============
Net (loss) income per share - assuming dilution............. $ (0.31) $ (0.81) $ 0.20 $ (0.35)
=============== =============== =============== ===============
=============== =============== =============== ===============
Weighted average shares - basic............................. 6,496,554 6,454,244 6,492,959 6,465,083
=============== =============== =============== ===============
Weighted average shares - assuming dilution................. 6,496,554 6,454,244 6,539,206 6,465,083
=============== =============== =============== ===============
See accompanying notes.
5
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
---------- ---------- ---------- --------- --------- ------------- -------------- ---------------
Nine Months Ended
September 30, 2003
- -------------------------
Balance at December 31,
2002..................... 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936
Comprehensive income:
Net income............. - - - - 1,301 - 1,301 $ 1,301
Unrealized holding loss
on securities (1)...... - - - - - (14) (14) (14)
---------------
Comprehensive income...... $ 1,287
===============
Issuance of stock related
to employee stock
purchase plan and
options................ 9,000 - 76 - - - 76
---------- ---------- ---------- --------- --------- ------------- --------------
Balance at September 30,
2003................... 6,498,543 $ 1 $ 20,451 $ - $ 47,835 $ 12 $ 68,299
========== ========== ========== ========= ========= ============= ==============
Nine Months Ended
September 30, 2002
- -------------------------
Balance at December 31,
2001.................. 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312
Comprehensive income:
Net loss.............. - - - - (2,259) - (2,259) $ (2,259)
Unrealized gains on
securities, net of
reclassification
adjustment............. - - - - - 4 4 4
-----------
Comprehensive loss........ $ (2,255)
===========
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 September 30,
2002................... 6,454,244 $ 1 $ 20,080 $ - $ 48,227 $ 29 $ 66,337
========== ========== ========== ========= ========= ============= ==============
(1) Disclosure of
reclassification amount
Nine Months Ended
September 30, 2003
- -------------------------
Unrealized holding
loss arising during
period.............. $ (14)
Less: reclassification
adjustment of losses
included in net income
(loss).............. -
------------
Net unrealized loss
on securities....... $ (14)
============
See accompanying notes.
6
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------- -------------
Operating activities
Net (loss) from continuing operations....................................... $ (1,648) $ (5,488)
Adjustments to reconcile net (loss) from continuing operations
to net cash (used in) operating activities:
Depreciation and amortization............................................ 2,943 2,729
Provision for loan and valuation losses.................................. 2,651 3,008
Amortization of mortgage servicing rights................................ 27,517 17,073
Impairment (recovery) on mortgage servicing rights....................... (2,700) 9,219
Gain on sale of loans and securities..................................... (2,201) (285)
Gain on sale of mortgage servicing rights................................ - (1,054)
Gain on sale of foreclosed real estate................................... (739) (16)
Changes in assets and liabilities:
Loans originated for sale, net of loans sold............................. 31,601 14,320
Loans purchased for sale................................................. (1,325,324) (730,076)
Proceeds from sale of loans held for sale................................ 589,165 463,829
Increase in securities held for sale.................................... (33,978) (18,235)
Originated mortgage servicing rights, net................................ (4,467) (32,589)
(Increase) decrease in other receivables and other assets................ (8,448) 6,847
(Decrease) increase in other liabilities, income taxes payable and
deferred income tax liability.......................................... (6,880) 15,192
------------- -------------
Net cash (used in) operating activities from continuing operations.......... (732,508) (255,526)
Net cash provided by discontinued operations............................. 133,455 6,042
------------- -------------
Net cash (used in) operating activities..................................... (599,053) (249,484)
Investing activities
Loans originated and purchased for investment............................... (101,771) (177,346)
Principal repayments on loans............................................... 786,162 304,065
Purchase of Federal Home Loan Bank stock.................................... (1,957) (12,798)
Purchases of premises and equipment......................................... (4,734) (16,131)
Acquisition of mortgage servicing rights.................................... (338) -
Proceeds from sale of mortgage servicing rights............................. - 11,047
Proceeds from sale of foreclosed real estate................................ 5,795 16
------------- -------------
Net cash provided by investing activities................................... 683,157 108,853
Financing activities
Net increase in deposits.................................................... 62,318 89,320
Net increase (decrease) in custodial escrow balances........................ (17,135) 19,909
(Decrease) increase in revolving lines, net................................. (129,818) 25,938
Payment of notes payable.................................................... (1,071) (1,624)
Proceeds from issuance of guaranteed preferred beneficial interests......... - 5,000
Payment of financing arrangements........................................... (29) (45)
Treasury shares repurchased................................................. - (726)
Proceeds from issuance of common stock related to employee stock
option plan.............................................................. 76 6
------------- -------------
Net cash (used in) provided by financing activities......................... (85,659) 137,778
------------- -------------
Decrease in cash and cash equivalents....................................... (1,555) (2,853)
Cash and cash equivalents at beginning of period............................ 62,412 84,460
------------- -------------
Cash and cash equivalents at end of period.................................. $60,857 $81,607
============= =============
Supplemental disclosure of cash flow information
Cash paid for interest...................................................... $ 25,442 $ 32,142
============= =============
Cash paid (received) for income taxes....................................... $ 3,734 $ (3,278)
============= =============
See accompanying notes.
7
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Matrix
Bancorp, Inc. and subsidiaries (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 September 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 (loss) and income (loss) per share would have been
changed to the pro forma amounts indicated below:
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
(Dollars in thousands)
Net income (loss):
Net income (loss) as reported $ (2,040) $ (5,201) $ 1,301 $ (2,259)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards, net
of related tax effects (67) (89) (200) (267)
------------------------------------------------
Pro forma $ (2,107) $ (5,290) $ 1,101 $ (2,526)
================================================
Income (loss) per share:
================================================
Basic, as reported $ (0.31) $ (0.81) $ 0.20 $ (0.35)
================================================
Basic, pro forma $ (0.32) $ (0.82) $ 0.17 $ (0.39)
================================================
Diluted, as reported $ (0.31) $ (0.81) $ 0.20 $ (0.35)
================================================
Diluted, pro forma $ (0.32) $ (0.82) $ 0.17 $ (0.39)
================================================
8
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2003
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to prior periods condensed consolidated
financial statements and related notes to conform with the current period
presentation.
2. Discontinued Operations
On September 2, 2003, the Company announced the final closing, and substantial
completion of the sale by Matrix Financial Services Corporation of substantially
all of its assets associated with its wholesale mortgage origination platform.
On February 23, 2003, the Company announced that its subsidiaries, Matrix
Financial and Matrix Capital Bank, 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") to AmPro Mortgage Corporation ("AmPro" or the "Buyer").
The Company intends, for the foreseeable future, to retain Matrix Financial's
servicing function, service loans for third parties and operate it in the
ordinary course of business. Included in the sale were 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 consist primarily 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, contemplated a
two-staged closing. The first closing ("Initial Closing Date") occurred on the
date the Purchase Agreement was signed and was the effective date for the sale
of the fixed assets, and the final or second closing ("Final Closing Date")
occurred six months following the Initial Closing Date, or August 31, 2003. The
effective sale date for accounting purposes was considered to be the Final
Closing Date. The period of operation of the Platform in between the Initial
Closing Date and the Final Closing Date is referred to as the "Transition
Period."
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 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.
At the Final Closing Date, the Buyer purchased any tangible and intangible
personal property of the Platform that was 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.
9
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2003
(Unaudited)
2. Sale of Wholesale Production Platform (continued)
The purchase price was 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 was
approximately $600 thousand in payment for 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 Matrix Financial loan
production offices purchased by Buyer. The production premium is
"capped" at $9.1 million. Through September 30, 2003, the production
premium earned and reflected in discontinued operations loss on sale
is $6.2 million before tax; 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 and
which was approximately $160 thousand before tax; 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. Because
the Platform generated a profit during the transition period of
approximately $11.5 million before tax, Matrix Financial was required
to pay such profit into an escrow account, and has reflected the
amount as a component of the loss on sale of discontinued operations.
As a result of the sale, the Company recorded an after tax loss on the sale of
the platform of $3.2 million, or $0.48 per diluted share, which is included in
the net income (loss) from discontinued operations on the condensed consolidated
financial statements. The operating income of the discontinued production
platform is reflected in discontinued operations beginning in the first quarter
of 2002, and the condensed consolidated financial statements have been restated
to reflect the production platform as a discontinued operation. Operating
results of the discontinued operations, previously included in our mortgage
banking segment, were as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
---------------------------- ---------------------------
(Dollars in thousands, except share information)
Net interest income after provision for loan
and valuation losses $ 973 $ 1,240 $ 3,477 $ 5,241
Noninterest income 9,634 7,840 39,163 23,393
Noninterest expense 9,281 7,450 32,571 23,316
------------ ----------- ----------- -----------
Operating income before taxes from
discontinued operations 1,326 1,630 10,069 5,318
Income tax provision 521 640 3,955 2,089
------------ ----------- ----------- -----------
Operating income from discontinued operations 805 990 6,114 3,229
Loss on sale of production platform, net of
income tax benefit of $2,048 (3,165) - (3,165) -
------------ ----------- ----------- -----------
(Loss) income from discontinued operations,
net of income tax (benefit) provision $ (2,360) $ 990 $ 2,949 $ 3,229
============ =========== =========== ===========
(Loss) income from discontinued operations
per share - basic $ (0.36) $ 0.15 $ 0.45 $ 0.50
============ =========== =========== ===========
(Loss) income from discontinued operations
per share - diluted $ (0.36) $ 0.15 $ 0.45 $ 0.50
============ =========== =========== ===========
10
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 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.
3. New Accounting Standards
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. Initially, FIN 46 was to apply
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. At its October 8, 2003 meeting, the FASB
agreed to defer the effective date of FIN 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of FIN 46
for periods ending after December 15, 2003. The Company does not expect the
requirements of FIN 46 to have a material impact on the consolidated financial
statements. As discussed in Note 10 of the consolidated financial statements on
Form 10-K as of December 31, 2002, the Company has guaranteed preferred
beneficial interests in the Company's Junior Subordinated Debentures (Capital
Trusts) which are currently consolidated in the Company's consolidated financial
statements. We believe the continued consolidation of the Capital Trusts is
appropriate under FIN 46. However, the application of the FIN 46 to these types
of trusts is an emerging issue and a possible unintended consequence of the
interpretation of FIN 46 may be the deconsolidation of these types of trusts.
The Company is currently evaluating the impact that deconsolidation of these
trusts would have on the consolidated financial statements.
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 did not have an 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 FASB has proposed to defer provisions related to mandatorily
redeemable financials instruments to periods beginning after December 15, 2004.
The adoption of SFAS 150 on July 1, 2003 did not have a material impact on the
consolidated financial statements, and the adoption of deferred provisions at
January 1, 2005 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)
September 30, 2003
(Unaudited)
4. Net Income (Loss) Per Share
The following table sets forth the computation of net income (loss) per share
and net income (loss) per share assuming dilution:
Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- --------------- -------------- ---------------
(Dollars in thousands)
Numerator:
Income (loss) from continuing
operations........................... $ 320 $ (6,191) $ (1,648) $ (5,488)
============= =============== ============== ===============
Income (loss) from discontinued
operations, net of tax effects....... $ (2,360) $ 990 $ 2,949 $ 3,229
============= =============== ============== ===============
Net (loss) income....................... $ (2,040) $ (5,201) $ 1,301 $ (2,259)
============= =============== ============== ===============
Denominator:
Weighted average shares outstanding..... 6,496,554 6,454,244 6,492,959 6,465,083
Effect of potentially dilutive securities:
Common stock options................ - - 46,247 -
------------- --------------- -------------- ---------------
Denominator for net income (loss) per
share assuming dilution........... 6,496,554 6,454,244 6,539,206 6,465,083
============= =============== ============== ===============
For the quarter ended September 30, 2003 and September 30, 2002, and the nine
months ended September 30, 2002, there were stock options and warrants
outstanding of 48,133, 85,916 and 109,457, respectively, which are potentially
convertible to common stock. These securities are anti-dilutive due to the net
loss for the quarters ended September 30, 2003 and September 30, 2002, and the
nine months ended September 30, 2002. As such, these potentially dilutive
securities have not been used in the calculation of diluted loss per share for
the quarters ended September 30, 2003 or September 30, 2002, or for the nine
months ended September 30, 2002.
5. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
Nine Months Ended Year Ended
September 30, December 31, 2002
2003
---------------------- --------------------
(In thousands)
Mortgage servicing rights
Balance at beginning of period, gross........................... $ 79,234 $ 78,893
Purchases....................................................... 338 -
Originations.................................................... 4,033 34,511
Amortization.................................................... (27,517) (24,176)
Sales........................................................... - (9,994)
Application of valuation allowance to permanently
impaired MSRs................................................. (5,000) -
---------------------- --------------------
Balance before valuation allowance at end of period................ 51,088 79,234
12
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2003
(Unaudited)
5. Mortgage Servicing Rights (continued)
Nine Months Ended Year Ended
September 30, December 31, 2002
2003
---------------------- --------------------
(In thousands)
Valuation allowance for impairment of mortgage servicing rights
Balance at beginning of period..................................... (14,400) (181)
Additions.......................................................... (2,400) (14,219)
Application of valuation allowance to write down permanently
impaired MSRs................................................... 5,000 -
Recovery........................................................... 5,100 -
---------------------- --------------------
Balance at end of period........................................... (6,700) (14,400)
Valuation allowance for foreclosure costs.......................... (1,200) (1,634)
---------------------- --------------------
Mortgage servicing rights, net..................................... $ 43,188 $ 63,200
====================== ====================
The Company's servicing portfolio (excluding subserviced loans), is comprised of
the following:
September 30, 2003 December 31, 2002
------------------------------- ----------------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding Of Loans Outstanding
------------ -------------- --------------- ---------------
(Dollars in thousands)
Freddie Mac................................ 6,725 $ 281,291 9,027 $ 417,583
Fannie Mae................................. 20,919 1,295,100 27,678 1,832,276
Ginnie Mae................................. 17,589 1,162,806 25,453 1,823,706
VA, FHA, conventional and other loans...... 9,246 690,862 13,489 1,260,062
------------ -------------- --------------- ---------------
54,479 $ 3,430,059 75,647 $ 5,333,627
============ ============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at September 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 MSRs for each of the next twelve
month period ending September 30, 2004, 2005, 2006, 2007 and 2008 is $13.8
million, $10.4 million, $6.8 million, $3.4 million, and $1.6 million,
respectively. The estimated amortization is based on several assumptions as of
September 30, 2003 with the most significant being the anticipated prepayment
speeds of the underlying mortgages. It is reasonably possible the actual
repayment speeds of the underlying mortgage loans may differ materially from the
estimated repayment speeds, and thus, the actual amortization may be
significantly different than the amounts estimated.
13
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2003
(Unaudited)
6. Deposits
Deposit account balances are summarized as follows:
September 30, 2003 December 31, 2002
--------------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
---------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
Passbook accounts..........$ 6,113 0.61 % 1.29 % $ 5,514 0.59 % 1.95 %
NOW accounts............... 158,984 15.96 0.21 145,465 15.57 0.48
Money market accounts...... 514,605 51.65 0.84 334,508 35.82 1.22
---------- ----------- ----------- ---------- ----------- -----------
679,702 68.22 0.67 485,487 51.98 1.02
Certificate accounts....... 316,573 31.78 2.69 448,470 48.02 3.65
---------- ----------- ----------- ---------- ----------- -----------
$ 996,275 100.00 % 1.48 % $ 933,957 100.00 % 2.40 %
========== =========== =========== ========== =========== ===========
At September 30, 2003 and December 31, 2002, brokered deposits accounted for
approximately $182.0 million and $361.2 million, respectively, of the total
certificate accounts shown above.
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:
September 30, December 31,
2003 2002
-------------------- --------------------
(In thousands)
FHLB of Dallas stock, at cost......................... $ 14,886 $ 14,629
FHLB of Topeka stock, at cost......................... 17,450 15,750
-------------------- --------------------
Total FHLB stock.................................... $ 32,336 $ 30,379
==================== ====================
The balances of FHLB borrowings are as follows:
September 30, December 31,
2003 2002
-------------------- --------------------
(In thousands)
FHLB of Dallas borrowings............................. $ 147,225 $ 147,285
FHLB of Topeka borrowings............................. 120,000 238,500
-------------------- --------------------
Total FHLB borrowings............................... $ 267,225 $ 385,785
==================== ====================
Available unused borrowings from the FHLB of Topeka totaled $377.0 million at
September 30, 2003.
14
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2003
(Unaudited)
8. Commitments and Contingencies
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. The Petition for Review was filed with the Supreme
Court of Texas on October 31, 2003. Because management has determined that the
loss in this matter is not probable, no accrual for loss has been recorded in
these financial statements.
9. Segment Information
Servicing
Brokerage
Traditional Mortgage and School
Banking Banking Consulting Services All Others Total
------------- ------------ -------------- ----------- ----------- ---------------
(In thousands)
Quarter ended
September 30, 2003:
Revenues from external
customers:
Net interest income..... $ 12,078 $ 4,277 $ 64 $ 1,443 $ 221 $ 18,083
Noninterest income...... 3,381 4,601 2,300 517 3,749 14,548
Intersegment revenues....... 3,708 913 629 3 321 5,574
Segment profit (loss)....... 6,534 (2,228) 833 (2,248) (2,860) 31
Quarter ended
September 30, 2002:
Revenues from external
customers:
Net Interest income..... $ 14,345 $ 5,223 $ 2 $ 1,499 $ (239) $ 20,830
Noninterest income...... 731 7,103 3,338 1,365 3,497 16,034
Intersegment revenues....... 4,692 803 219 9 707 6,430
Segment profit (loss)....... 3,812 (11,125) 1,535 (1,772) (3,316) (10,866)
Nine months ended
September 30, 2003:
Revenues from external
customers:
Net interest income..... $ 37,304 $ 14,190 $ 180 $ 4,231 $ 391 $ 56,296
Noninterest income...... 6,664 25,909 7,381 1,610 11,237 52,801
Intersegment revenues....... 12,203 2,890 1,337 8 1,278 17,716
Segment profit (loss)....... 17,475 (9,251) 2,189 (4,719) (9,733) (4,039)
15
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2003
(Unaudited)
9. Segment Information (continued)
Servicing
Traditional Mortgage Brokerage School All Others
Banking Banking and Services Total
Consulting
------------- ------------ -------------- ----------- ----------- ---------------
(In thousands)
Nine months ended
September 30, 2002:
Revenues from external
customers:
Net interest income..... $ 41,534 $ 15,848 $ 2 $ 4,991 $ (12) $ 62,363
Noninterest income...... 3,449 23,603 5,239 5,281 9,833 47,405
Intersegment revenues....... 14,322 2,186 635 27 2,134 19,304
Segment profit (loss)....... 15,401 (12,499) 1,785 (4,825) (10,365) (10,503)
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- ------------- --------------- ------------
(In thousands)
Profit:
Total profit (loss) for reportable segments....... $ 2,891 $ (7,550) $ 5,694 $ (138)
Other loss (loss)................................. (2,804) (3,203) (9,373) (9,996)
Adjustment of intersegment loss in consolidation.. (56) (113) (360) (369)
-------------- ------------- --------------- ------------
Income (loss) before income taxes................. $ 31 $ (10,866) $ (4,039) $ (10,503)
============== ============= =============== ============
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 mortgages; offering brokerage, consulting and
analytical services to financial services companies and financial institutions;
servicing residential mortgage portfolios for investors; 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.
16
The principal components of our revenues consist of:
o net interest income earned by Matrix Bank, Matrix Financial and ABS;
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, 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.
Discontinued Operations
On September 2, 2003, the Company announced the final closing, and substantial
completion of the sale by Matrix Financial of substantially all of its assets
associated with its wholesale mortgage origination platform. See Note 2 to
Condensed Consolidated Financial Statements included herein. The effective sale
date for accounting purposes was the Final Closing Date, or August 31, 2003. At
that time, we recorded an after-tax loss on the sale of the production platform
of $3.2 million, and reflected the operating results of the production platform
as discontinued operations. With regards to the sale, the purchase price
includes a production premium that is calculated by multiplying 20 basis points
by the original principal balance of all of the loans originated in wholesale
production branches until February 2004. The production premium is "capped" at
$9.1 million. Through September 30, 2003, Matrix Financial has earned $6.2
million of the production premium, which is included in the loss on sale amount.
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 are difficult to estimate. The decision to
sell the Platform allows us to reduce operational risks and the costs associated
with the platform. The Company intends to reinvest the liquidity created from
the sale into predominately adjustable rate loans, SBA loans and high quality
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 was used to pay
down borrowings from the FHLB and 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
17
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,"
"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 September 30, 2003
and 2002
Income (Loss) from Continuing Operations. For the quarter ended September 30,
2003, there was income of $300 thousand, or $0.05 per basic and diluted share as
compared to a loss of $6.2 million, or $(0.96) per basic and diluted share, for
the quarter ended September 30, 2002. It should be noted that the income from
continuing operations are based upon the Company's historical results from
operations, adjusted to reflect the impact of the sale of the production
platform, and are not necessarily indicative of the results that might have
occurred if the disposition had actually been completed on the indicated date,
and are not necessarily indicative of any future results.
Net Interest Income. Net interest income before provision for loan and valuation
losses decreased $1.0 million, or 9.2%, to $10.3 million for the quarter ended
September 30, 2003 as compared to $11.3 million for the quarter ended September
30, 2002. Our net interest margin decreased 35 basis points to 2.84% for the
quarter ended September 30, 2003 from 3.19% for the quarter ended September 30,
2002 and interest rate spread decreased to 2.59% for the quarter ended September
30, 2003 from 2.80% for the quarter ended September 30, 2002. The decrease in
net interest income before provision for loan valuation losses was primarily due
to a 88 basis point decrease in the yield earned on our interest-earning assets,
18
driven by declining market interest rates, which effect was slightly offset by a
$30.2 million increase in the average balance of our interest-earning assets to
$1.45 billion at September 30, 2003 as compared to $1.42 billion at September
30, 2002. Additionally, we had a 67 basis point decrease in the cost of our
interest-bearing liabilities, driven by decreases in interest rates, which
effect was offset slightly by a $58.9 million increase in our average
interest-bearing liabilities to $1.30 billion for the quarter ended September
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. Due to our policy of acquiring
predominately adjustable rate loans, we will continue to experience compression
in our interest rate margins in the current interest rate environment as our
loan portfolio will continue to experience greater decreases than our interest
bearing liabilities.
For a tabular presentation of the changes in net interest income due to changes
in the volume of interest-earning assets and interest-bearing liabilities, as
well as changes in interest rates, see "Analysis of Changes in Net Interest
Income Due to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and valuation
losses decreased $200 thousand to $1.1 million for the quarter ended September
30, 2003 as compared to $1.3 million for the quarter ended September 30, 2002.
The decrease in the provision was mainly due lower levels of write-offs recorded
at Matrix Capital Bank and Matrix Financial, partially offset by higher levels
of write-offs at ABS. 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 decreased $800 thousand, or 10.9%, to $6.4 million for the
quarter ended September 30, 2003 as compared to $7.2 million for the quarter
ended September 30, 2002. The income includes gains on sales of repurchased FHA
and VA loans of $1.2 million for the quarter ended September 30, 2003 as
compared to $400 thousand for the quarter ended September 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 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 $4.0 billion for the quarter ended September 30, 2003 as
compared to an average balance of $5.7 billion for the quarter ended September
30, 2002. Actual service fee rate (including all ancillary income) of 0.50% for
the quarter ended September 30, 2003, as compared to 0.48% for the quarter ended
September 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 does not anticipate
that it will significantly add to its residential servicing portfolio through
either acquisitions or originations. As a result, the Company anticipates loan
administration fees to decrease as its servicing portfolio decreases through
normal prepayments.
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) brokerage fees. Brokerage
fees decreased $1.4 million, or 38.3%, to $2.3 million for the quarter ended
September 30, 2003 as compared to $3.7 million for the quarter ended September
30, 2002. The decrease is primarily the result of the quarter ended September
30, 2002 including one large transaction which did not occur in the current year
quarter, offset by slight increases in the revenue generated from the
acquisition, pooling and selling of SBA loans and securities.
Trust Services. Trust service fees increased $500 thousand, or 41.4% to $1.7
million for the quarter ended September 30, 2003 as compared to $1.2 million for
the same quarter of the prior year. Trust accounts under administration at
Sterling Trust and Matrix Capital Bank increased to 48,487 at September 30, 2003
from 44,673 at September 30, 2002 and total assets under administration
increased to approximately $12.1 billion at September 30, 2003 from
approximately $6.5 billion at September 30, 2002. The majority of the growth is
the result of business referred to Matrix Bank's trust department by Matrix
Settlement & Clearance Services.
19
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 $700 thousand, or 70.2%, to $1.8 million for the
quarter ended September 30, 2003 as compared to $1.1 million for the quarter
ended September 30, 2002. The increase is due to an increase in the number of
properties closed during the quarter ended September 30, 2003 of 920 as compared
to 610 for the same quarter of the prior year, an increase of 50.8%.
Additionally, the increase is due to an increase in the number of properties
under management, which is 2,815 at September 30, 2003 as compared to 2,007 at
September 30, 2002, an increase of 40.3%.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
increased $1.6 milllion to $1.7 million for the quarter ended September 30, 2003
as compared to $100 thousand for the quarter ended September 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. Current quarter amounts results
from an increase in gains on sales of originated multi-family and guaranteed
portions of SBA loans.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing
rights was $0 for both the quarter ended September 30, 2003 and September 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.
Loan Origination. Loan origination relates primarily to retail originations at
Matrix Capital Bank and the housing authority program at Matrix Financial which
was not included in the sale of the production platform. 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 decreased $100 thousand, or 27.5% to
$200 thousand for the quarter ended September 30, 2003 as compared to $300
thousand for the quarter ended September 30, 2002. The decrease in loan
origination income resulted from lower levels of origination volume. See Note 2
to the condensed consolidated financial statements herein for a discussion of
the Sale of the Wholesale Production Platform at Matrix Financial.
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 $400 thousand, or 41.0%, to $500
thousand for the quarter ended September 30, 2003 as compared to $900 thousand
for the quarter ended September 30, 2002. The decrease is a result of a decrease
in the number of core business service clients. As of September 30, 2003, ABS
provided core business services to 71 schools as compared to 97 schools at
September 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,
mortgage servicing asset hedging gains and losses, and other miscellaneous
income items. Other income decreased $1.6 million to a loss of $(100) thousand
for the quarter ended September 30, 2003 as compared to income of $1.5 million
for the quarter ended September 30, 2002. The decrease in other income was
primarily due to the inclusion of approximately $1.6 million loss on our
mortgage servicing asset hedge at Matrix Financial during the quarter ended
September 30, 2003, offset by a $300 thousand increase in our equity investment
at our 45% owned subsidiary, Matrix Settlement & Clearance Services.
Noninterest Expense. Noninterest expense decreased $13.2 million, or 35.8%, to
$23.7 million for the quarter ended September 30, 2003 as compared to $36.9
million for the quarter ended September 30, 2002. This decrease was mainly the
result of a recovery of impairment of our mortgage servicing rights in 2003 as
compared to a charge for impairment on the mortgage servicing rights in 2002,
decreases in compensation and benefits expense primarily due to a reduction in
number of employees as well as a reduction in medical benefits expense, offset
by increases in the amortization of mortgage servicing rights. The following
table details the major components of noninterest expense for the periods
indicated:
20
Quarter Ended
September 30,
----------------------------
2003 2002
-------------- -------------
(In thousands)
Compensation and employee benefits............ $ 8,338 $ 9,555
Amortization of mortgage servicing 8,263 6,037
rights........................................
Occupancy and equipment....................... 1,575 1,897
Postage and communication..................... 572 692
Professional fees............................. 557 910
Data processing............................... 689 721
Impairment (recovery) on mortgage servicing
rights........................................ (5,100) 8,000
Other general and administrative.............. 8,804 9,117
------------ -----------
Total..................................... $ 23,698 $ 36,929
============ ===========
Compensation and employee benefits expense decreased $1.2 million, or 12.7%, to
$8.3 million for the quarter ended September 30, 2003 as compared to $9.6
million for the quarter ended September 30, 2002. This decrease was primarily
due to decreased salaries and wages associated with reductions in number of
employees, primarily at ABS, and by decreases in medical benefits expense
associated with the structural rate changes implemented for the 2003 benefit
year. The Company has 514 employees at September 30, 2003.
Amortization of mortgage servicing rights increased $2.2 million, or 36.9%, to
$8.2 million for the quarter ended September 30, 2003 as compared to $6.0
million for the quarter ended September 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 41.5% for the quarter ended September 30,
2003 as compared to 23.3% for the quarter ended September 30, 2002. The average
balance in our mortgage servicing rights decreased to $4.0 billion at September
30, 2003 as compared to $5.7 billion at September 30, 2002.
Impairment on mortgage servicing rights reflects a recovery for the quarter
ended September 30, 2003 of $(5.1) million as compared to an impairment charge
of $8.0 million for the quarter ended September 30, 2002, a change of $13.1
million, or 163.8%. 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, decreased $1.1 million, or
8.5%, to $12.2 million for the quarter ended September 30, 2003 as compared to
$13.3 million for the quarter ended September 30, 2002. The decrease was
primarily due to reductions in the levels of reserves and charges related to
both loan and servicing related assets, offset by increases in expenses at
Matrix Financial related to settlement of various litigation, and certain
charge-offs of assets at ABS, including real estate.
As discussed in footnote 8 to the condensed consolidated financial statements
included herein, no accrual for loss had been recorded as of September 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 of
this Quarterly Report on Form 10-Q.
Income Taxes. Income taxes reflect a benefit of $300 thousand for the quarter
ended September 30, 2003 as compared to a benefit of $4.7 million for the
quarter ended September 30, 2002. Our 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 (loss).
21
Comparison of Results of Operations for the Nine months Ended September 30, 2003
and 2002
Loss from Continuing Operations. The loss from continuing operations decreased
$3.8 million to a loss of $(1.7) million, or $(0.25) per basic and diluted
share, for the nine months ended September 30, 2003 as compared to $(5.5)
million, or $(0.85) per basic and diluted share for the nine months ended
September 30, 2002. It should be noted that the loss from continuing operations
is based upon the Company's historical results from operations, adjusted to
reflect the impact of the sale of the production platform, and are not
necessarily indicative of the results that might have occurred if the
disposition had actually been completed on the indicated date, and are not
necessarily indicative of any future results.
Net Interest Income. Net interest income before provision for loan and valuation
losses increased $500 thousand, or 1.6% to $31.7 million for the nine months
ended September 30, 2003 as compared to $31.2 million for the nine months ended
September 30, 2002. The factors which impact net interest income, and led to the
slight increase in revenue, are as follows: our average interest-earning assets
were $1.5 billion for the nine months ended September 30, 2003 as compared to
$1.4 billion for the nine months ended September 30, 2002. The increase in
average balance was offset, however, by a decrease in the average yield on the
net interest-earning assets to 5.13% for the nine months ended September 30,
2003 as compared to 6.06% for nine months ended September 30, 2002. The
Company's interest-bearing liabilities also increased slightly to $1.3 billion
for the nine months ended September 30, 2003 as compared to $1.2 billion for the
nine months ended September 30, 2002. This increase was offset, however, as the
average yield on interest-bearing liabilities decreased to 2.58% for the nine
months ended September 30, 2003, as compared to 3.48% for the nine months ended
September 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 2.89% for the nine months ended
September 30, 2003 as compared to 3.03% for the nine months ended September 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
September 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 $400 thousand, or 11.9%, to $2.6 million for the nine months ended
September 30, 2003 as compared to $3.0 million for the nine months ended
September 30, 2002. This decrease was primarily attributable to incremental
charge-offs and reserves recorded at ABS in the nine months ended September 30,
2002 at levels that are not present in the nine months ended September 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 $1.2 million, or 5.3%,
to $25.4 million for the nine months ended September 30, 2003 as compared to
$24.2 million for the nine months ended September 30, 2002. Included in loan
administration income was approximately $8.4 million for the nine months ended
September 30, 2003 as compared to $3.4 million for the nine months ended
September 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 $4.5 billion for the nine months ended
September 30, 2003 as compared to an average balance of $5.8 billion for the
nine months ended September 30, 2002. The actual service fee rate (including all
ancillary income) increased slightly to 0.50% for the nine months ended
September 30, 2003 as compared to 0.48% for the nine months ended September 30,
2002.
Brokerage Fees. Brokerage fees increased $1.0 million, or 14.8%, to $7.5 million
for the nine months ended September 30, 2003 as compared to $6.5 million for the
nine months ended September 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 September 30, 2003 and 2002--Brokerage Fees."
22
Trust Services. Trust service fees increased $1.1 million, or 26.7%, to $5.0
million for the nine months ended September 30, 2003 as compared to $3.9 million
for the nine months ended September 30, 2002. Please see additional discussion
under "Comparison of Results of Operations for the Quarters Ended September 30,
2003 and 2002--Trust Services."
Real Estate Disposition Services. Real estate disposition services income
increased $1.7 million, or 56.5%, to $4.6 million for the nine months ended
September 30, 2003 as compared to $2.9 million for the nine months ended
September 30, 2002. Please see additional discussion under "Comparison of
Results of Operations for the Quarters Ended September 30, 2003 and 2002--Real
Estate Disposition Services."
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
increased $1.9 million to $2.2 million for the nine months ended September 30,
2003 as compared to $300 thousand for the nine months ended September 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. Included in the current year are
gains on sales of multi-family and guaranteed portions of SBA loans which were
not present in the prior year period.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing
rights decreased to $0 for the nine months ended September 30, 2003 as compared
to $1.1 million for the nine months ended September 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.
Loan Origination. Loan origination income decreased $900 thousand, or 91.4%, to
$100 thousand for the nine months ended September 30, 2003 as compared to $1.0
million for the nine months ended September 30, 2002. The decrease resulted from
a decrease in gains on sales of originated loans in the ordinary course of
business that are held for sale. The results do not include operations of the
production platform at Matrix Financial which are included in discontinued
operations. See Note 2 to the condensed consolidated financial statements herein
for a discussion of the Sale of the Wholesale Production Platform.
School Services. School services income decreased $1.9 million, or 51.8%, to
$1.8 million for the nine months ended September 30, 2003 as compared to $3.7
million for the nine months ended September 30, 2002. Please see additional
discussion under "Comparison of Results of Operations for the Quarters Ended
September 30, 2003 and 2002--School Services."
Other Income. Other income increased $2.4 million, or 64.5%, to $6.2 million for
the nine months ended September 30, 2003 as compared to $3.8 million for the
nine months ended September 30, 2002. The increase in other income was primarily
due to approximately $1.5 million net gain on our mortgage servicing asset hedge
realized at Matrix Financial, an increase in rental income of approximately $700
thousand from operations of Matrix Financial Center, a $700 thousand increase in
our equity investment in Matrix Settlement and Clearance, and a $400 thousand
increase in income generated from the bank owned life insurance asset, offset by
a $500 thousand decrease in certain lease income generated at ABS.
Noninterest Expense. Noninterest expense decreased $200 thousand, or 0.2%, to
$85.9 million for the nine months ended September 30, 2003 as compared to $86.1
million for the nine months ended September 30, 2002. This decrease was
primarily a combination of a decrease in the impairment charge to a current
period recovery on the mortgage servicing rights assets, offset by increases in
the level of amortization of mortgage servicing rights. The total was also
impacted by reductions in compensation and benefits, offset by increase in other
general and administrative expenses. The following table details the major
components of noninterest expense for the periods indicated:
23
Nine months Ended
September 30,
---------------------------
2003 2002
-------------- ------------
(In thousands)
Compensation and employee benefits............. $ 26,541 $ 27,973
Amortization of mortgage servicing
rights......................................... 27,517 17,073
Occupancy and equipment........................ 4,568 4,304
Postage and communication...................... 1,881 2,004
Professional fees.............................. 2,381 2,086
Data processing................................ 2,114 2,108
Impairment (recovery) on mortgage
servicing rights............................. (2,700) 9,219
Other general and administrative............... 23,630 21,371
------------ ----------
Total...................................... $ 85,932 $ 86,138
============ ==========
Compensation and employee benefits decreased $1.5 million, or 5.1%, to $26.5
million for the nine months ended September 30, 2003 as compared to $28.0
million for the nine months ended September 30, 2002. Please see additional
discussion under "Comparison of Results of Operations for the Quarters Ended
September 30, 2003 and 2002--Noninterest Expense."
Amortization of mortgage servicing rights increased $10.4 million, or 61.2%, to
$27.5 million for the nine months ended September 30, 2003 as compared to $17.1
million for the nine months ended September 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 37.5% for the nine months
ended September 30, 2003 as compared to 21.0% for the nine months ended
September 30, 2002, offset by a decrease in the average balance of our mortgage
servicing rights to $4.5 billion at September 30, 2003 as compared to $5.8
billion at September 30, 2002.
Impairment of mortgage servicing rights decreased $11.9 million, or 129.3%, to a
recovery of $(2.7) million for the nine months ended September 30, 2003 as
compared to a charge of $9.2 million for the nine months ended September 30,
2002. Please see additional discussion under "Comparison of Results of
Operations for the Quarters Ended September 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 $2.7 million, or
8.5%, to $34.6 million for the nine months ended September 30, 2003 as compared
to $31.9 million for the nine months ended September 30, 2002. Please see
additional discussion under "Comparison of Results of Operations for the
Quarters Ended September 30, 2003 and 2002--Noninterest Expense."
Income Taxes. Income taxes reflect a benefit of $(2.4) million for the nine
months ended September 30, 2003 as compared to a benefit of $(5.0) million for
the nine months ended September 30, 2002. Our effective tax benefit was 59.2%
for the nine months ended September 30, 2003 as compared to 47.7% for the nine
months ended September 30, 2002. The effective tax rates are affected by the
level of tax-exempt income at ABS and Matrix Capital Bank in proportion to the
level of net income (loss).
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 nine months ended
September 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 September 30,
-------------------------------------------------------------------------
2003 2002
---------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- -------- ---------- ---------- -------
(Dollars in thousands)
Interest-earning assets:
Loans, net.................. $1,399,567 $ 17,758 5.08% $ 1,350,569 $ 20,143 5.97%
Securities.................. 13,695 87 2.54 23,919 310 5.18
Interest-earning deposits... 6,934 12 0.69 17,047 76 1.78
Federal Home Loan Bank stock 31,978 226 2.83 30,415 301 3.96
------------ ---------- -------- ---------- ---------- -------
Total interest-earning
assets.................. 1,452,174 18,083 4.98 1,421,950 20,830 5.86
Noninterest-earning assets:
Cash........................ 46,030 47,542
Allowance for loan and
valuation losses.......... (8,961) (9,505)
Premises and equipment...... 25,173 28,810
Other assets................ 146,812 172,243
------------ ----------
Total noninterest-
earning assets........... 209,054 239,090
------------ ----------
Total assets.............. $1,661,228 $ 1,661,040
============ ==========
Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts........... $ 6,176 19 1.23% $ 6,816 38 2.23%
Money market and NOW accounts 478,002 958 0.80 271,890 1,087 1.60
Certificates of deposit..... 343,318 2,223 2.59 429,280 3,531 3.29
Federal Home Loan Bank
Borrowings................ 354,547 2,305 2.60 394,279 2,727 2.77
Borrowed money and
guaranteed preferred
beneficial interests...... 119,702 2,283 7.63 140,606 2,110 6.00
------------ ---------- -------- ---------- ---------- ---------
Total interest-bearing
liabilities.............. 1,301,745 7,788 2.39 1,242,871 9,493 3.06
------------ ---------- -------- ---------- ---------- ---------
Noninterest-bearing
liabilities:
Demand deposits (including
custodial escrow balances) 154,904 270,991
Other liabilities........... 134,246 75,708
------------ ----------
Total noninterest-bearing
liabilities.............. 289,150 346,699
Shareholders' equity.......... 70,333 71,470
------------ ----------
Total liabilities and
shareholders' Equity.......... $1,661,228 $ 1,661,040
============ ==========
Net interest income before
provision for loan and
valuation losses.......................... $ 10,295 11,337
========== ===========
Interest rate spread.........................................2.59 % 2.80%
======== =========
Net interest margin..........................................2.84 % 3.19%
======== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities....................111.56 % 114.41%
======== ==========
Table continued.....
Nine Months Ended September 30,
---------------------------------------------------------------------------
2003 2002
---------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- -------- ----------- ---------- --------
(Dollars in Thousands)
Assets
- ------------------------------
Interest-earning assets:
Loans, net.................. $ 1,399,067 $ 55,044 5.25 % 1,315,970 $ 61,013 6.18 %
Securities.................. 20,712 488 3.14 10,044 412 5.47
Interest-earning deposits... 11,601 83 0.95 21,643 248 1.52
Federal Home Loan Bank stock 30,949 681 2.93 25,167 690 3.66
----------- ---------- -------- ----------- ----------- -----------
Total interest-earning
assets.................. 1,462,329 56,296 5.13 1,372,824 62,363 6.06
Noninterest-earning assets:
Cash........................ 45,433 41,586
Allowance for loan and
valuation losses.......... (8,952) (9,460)
Premises and equipment...... 25,685 20,718
Other assets................ 147,487 171,543
-----------
Total noninterest-
earning assets........... 209,653 224,387
----------- -----------
Total assets.............. $ 1,671,982 $ 1,597,211
=========== ===========
Liabilities & Shareholders' Equit
Interest-bearing liabilities:
Passbook accounts........... $ 5,693 55 1.29 % 5,948 93 2.08 %
Money market and NOW accounts 415,452 2,863 0.92 252,612 3,291 1.74
Certificates of deposit..... 383,735 7,746 2.69 459,957 13,167 3.82
Federal Home Loan Bank
Borrowings................ 342,236 6,812 2.65 328,959 7,156 2.90
Borrowed money and
guaranteed preferred
beneficial interests...... 122,686 7,077 7.69 144,998 7,418 6.82
----------- ---------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities.............. 1,269,802 24,553 2.58 1,192,474 31,125 3.48
----------- ---------- ----------- ----------- ----------- -----------
Noninterest-bearing
liabilities:
Demand deposits (including
custodial escrow balances) 158,583 265,896
Other liabilities........... 174,271 66,928
----------- -----------
Total noninterest-bearing
liabilities.............. 332,854 332,824
Shareholders' equity.......... 69,326 71,913
----------- -----------
Total liabilities and
shareholders' Equity.......... $ 1,671,982 $ 1,597,211
=========== ===========
Net interest income before
provision for loan and
valuation losses............. $ 31,743 $ 31,238
========== ===========
Interest rate spread............ 2.55 % 2.58 %
======== ===========
Net interest margin............. 2.89 % 3.39 %
======== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 115.16 % 115.12 %
======== =========
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 Nine Months Ended
September 30, September 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 $ 709 $ (3,094) $ (2,385) $ 3,662 $ (9,631) $ (5,969)
Securities (102) (121) (223) 388 (312) 76
Interest-earning deposits (32) (32) (64) (90) (75) (165)
FHLB stock 14 (89) (75) 106 (115) (9)
------------ ------------ --------- ------------ ------------ ------------
Total interest-earning assets 589 (3,336) (2,747) 4,066 (10,133) (6,067)
Interest-bearing liabilities:
Passbook accounts (4) (15) (19) (4) (34) (38)
Money market and NOW accounts 578 (707) (129) 1,548 (1,976) (428)
Certificates of deposit (634) (674) (1,308) (1,947) (3,474) (5,421)
FHLB borrowings (262) (160) (422) 284 (628) (344)
Borrowed money and guaranteed
preferred beneficial interests
(344) 517 173 (1,221) 880 (341)
------------ ------------ --------- ------------ ------------ ------------
Total interest-bearing
liabilities (666) (1,039) (1,705) (1,340) (5,232) (6,572)
------------ ------------ --------- ------------ ------------ ------------
Change in net interest income
before provision for loan and
valuation losses $ 1,255 $ (2,297) $ (1,042) $ 5,406 $ (4,901) $ 505
============ ============ ========= ============ ============ ============
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
September 30, December 31, September 30,
2003 2002 2002
--------------- --------------- ----------------
(Dollars in thousands)
Nonaccrual residential mortgage loans................ $ 18,035 $ 15,123 $ 14,038
Nonaccrual commercial real estate, commercial loans
and school financing.............................. 15,573 15,649 11,539
Nonaccrual consumer loans............................ 4 46 19
--------------- --------------- ----------------
Total nonperforming loans......................... 33,612 30,818 25,596
Foreclosed real estate............................... 6,081 8,343 7,948
--------------- --------------- ----------------
Total nonperforming assets........................ $ 39,693 $ 39,161 $ 33,544
=============== =============== ================
Total nonperforming loans to total loans............. 2.64 % 2.23 % 1.78 %
=============== =============== ================
Total nonperforming assets to total assets........... 2.48 % 2.30 % 1.89 %
=============== =============== ================
Ratio of allowance for loan and valuation losses to
total nonperforming loans......................... 26.78 % 30.32 % 37.19 %
=============== =============== ================
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 $14.4 million, $34.8 million and $40.7 million at September 30,
2003, December 31, 2002 and September 30, 2002, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were 1.4%
at September 30, 2003, 1.1% at December 31, 2002, and 0.96% at September 30,
2002. The nonaccrual residential mortgage loans have slightly deteriorated at
September 30, 2003 as compared to December 31, 2002 and September 30, 2002. We
do not believe that the slight increase in delinquency will necessarily continue
or is a continuing trend, as the increase relates primarily to loans originated
at Matrix Financial and we are no longer originating the volume of loans at our
mortgage banking operation due to the sale of the production platform.
Nonaccrual commercial loans and school financing are consistent between
September 30, 2003 and December 31, 2002. The increase in nonaccrual commercial
loans and school financing at September 30, 2003 and December 31, 2002 as
compared to September 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 $1.0 million to $10.3 million at September
30, 2003 as compared to $9.3 million at December 31, 2002 and $8.6 million at
September 30, 2002. It should be noted, however, that approximately $7.8 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 since December 31, 2002, 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 September 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 September 30, 2003, a liability
of $300 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 September 30, 2003 and 2002."
27
Liquidity and Capital Resources
Liquidity is our ability to generate funds to support asset growth, satisfy
disbursement needs, maintain reserve requirements and otherwise operate on an
ongoing basis.
The trend of net cash used by our operating activities experienced over the
reported 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, and it is anticipated that the
liquidity created will be used to re-invest primarily in residential loans. 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 September 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 September 30, 2003, Matrix Bank had overnight
and term borrowings of $267.2 million from the FHLB of Topeka and Dallas.
Available unused borrowings from the FHLB of Topeka totaled $377.0 million at
September 30, 2003. Matrix Bank also utilizes brokered deposits as a source of
liquidity. The balance of brokered deposits at September 30, 2003 was $182.0
million. The custodial escrow balances held by Matrix Bank fluctuate based upon
the mix and size of the related mortgage servicing portfolios and the timing of
payments for taxes and insurance, as well as the level of prepayments which
occur.
Matrix Bank, a well capitalized institution, had a leverage capital ratio of
6.49% at September 30, 2003. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $22.7 million. Matrix Bank's
risk-based capital ratio was 12.32% at September 30, 2003, which currently
exceeds the well capitalized risk-based capital requirement of 10.0% of
risk-weighted assets by $19.8 million.
Matrix Bancorp Trading's principal source of funding to acquire loan portfolios
with the intent of selling over a short period of time is internal capital. In
the past, Matrix Bancorp Trading had a $40.0 million warehouse line from a third
party financial institution unconditionally guaranteed by the Company. Due to
the lack of utilization of this warehouse line, we did not renew the facility
when it came 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.
28
Through a Purchase and Sale Agreement, the Company has sold school financing
loans to a third party financial institution. The Company provides scheduled
interest and principal plus full recourse in the case of loss or default. The
transaction was treated as a sale due to the transfer of ownership over the
school financing loans. No gain or loss was recorded at the time of sale. The
balance of the school financing loans sold with recourse was approximately $11.0
million at September 30, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter ended September 30, 2003 and the nine-month period ended
September 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 September 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.
Sterling Trust was named a defendant in an arbitration claim filed in 2003 with
the American Arbitration Association in Fresno, California styled Gilbert R.
Allenby, et. al. v. Sterling Trust Company. Approximately 670 plaintiffs claimed
that Sterling Trust was responsible for losses in their self-directed IRAs
realized when their IRA funds invested funds through Advisors Capital
Investments, Inc., a registered investment advisor, in a mutual funds trading
program. In September 2003, the arbitrator in this matter granted summary
judgment in favor of Sterling Trust in this matter. Unless the plaintiffs appeal
the arbitrator's disposition of this matter in favor of Sterling, this case will
be closed.
Matrix Financial was named a defendant in an arbitration claim that was pending
before the American Arbitration Association in Denver, Colorado. The claimant
claimed that he was not terminated "for cause" as specified in his employment
agreement and claimed, 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 the third
quarter of 2003, this matter was settled, requiring the Company to accrue an
additional $1.1 million in the third quarter of 2003 in order to provide for the
full settlement payment to the claimant. This matter has been closed. This
matter is also discussed in our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003.
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. The Petition for Review was filed with the Supreme Court of Texas on
October 31, 2003. Because management has determined that the loss in this matter
is not probable, no accrual for loss has been recorded in the financial
statements. This matter is also discussed in our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, and our Current Report on Form 8-K filed
with the SEC on August 12, 2003, releasing the Company's results of operations
for the second quarter of 2003.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
*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.
30
b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission on September 15, 2003 (Items 2 and 7), which contained pro
forma financial statements related to the sale of the production
platform.
The Company filed a Form 8-K with the Securities and Exchange
Commission on September 3, 2003 (Items 5 and 7) , which contained a
press release announcing the final closing of the sale of the
production platform.
The Company filed a Form 8-K with the Securities and Exchange
Commission on August 12, 2003 (Items 12 and 7), which contained a
press release announcing the second quarter 2003 earnings of the
Company.
The Company filed a Form 8-K with the Securities and Exchange
Commission on August 4, 2003 (Items 5 and 7), which contained a press
release announcing the verdict of the appellate court in the Adderley
litigation.
The Company filed a Form 8-K with the Securities and Exchange
Commission on July 21, 2003 (Item 5), which contained a press release
announcing the resignation of the CEO of Matrix Capital Bank.
The Company filed a Form 8-K with the Securities and Exchange
Commission on July 2, 2003 (Items 5 and 7), which contained a press
release announcing the addition of Dr. James Bullock to the Board of
Directors.
- ---------------------
* 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: November 4, 2003 /s/ D. Mark Spencer
----------------------------- ---------------------------------
D. Mark Spencer
President and
Co-Chief Executive Officer
(Principal Executive Officer)
Dated: November 4, 2003 /s/ Richard V. Schmitz
----------------------------- ---------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
Dated: November 4, 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
- ------------- --------------------------------------------------------------
*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.
33