UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number: 0-21231
MATRIX BANCORP, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1233716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 17th Street, Suite 2100
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Number of shares of Common Stock ($.0001 par value) outstanding at the
close of business on April 29, 2004 was 6,518,981 shares.
TABLE OF CONTENTS
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003..................................3
Condensed Consolidated Statements of Income
Three months ended March 31, 2004 and 2003 (unaudited)............................4
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2004 and 2003 (unaudited)............................6
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003 (unaudited)............................7
Notes to Condensed Consolidated Financial Statements (unaudited)........................9
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................25
ITEM 4. Controls and Procedures.................................................................25
PART II - Other Information
ITEM 1. Legal Proceedings.......................................................................26
ITEM 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities..........................................................26
ITEM 6. Exhibits and Reports on Form 8-K........................................................26
SIGNATURES............................................................................................28
2
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share information)
March 31, December 31,
2004 2003
------------------------------------------
Assets (Unaudited)
Cash and cash equivalents $ 54,625 $ 32,538
Interest-earning deposits and federal funds sold 6,929 1,972
Investment securities 233,315 152,508
Loans held for sale, net 934,300 999,454
Loans held for investment, net 346,980 344,802
Mortgage servicing rights, net 34,559 39,744
Other receivables 37,181 43,884
FHLBank stock, at cost 29,908 30,682
Foreclosed real estate 8,372 8,538
Premises and equipment, net 24,378 24,981
Bank owned life insurance 20,870 20,613
Other assets, net 22,406 24,208
------------------------------------------
Total assets $ 1,753,823 $ 1,723,924
==========================================
Liabilities and shareholders' equity
Liabilities:
Deposits $ 948,690 $ 974,059
Custodial escrow balances 95,248 85,466
FHLBank borrowings 498,183 458,204
Borrowed money 56,869 47,970
Junior subordinated debentures owed to unconsolidated subsidiary trusts 66,525 66,525
Other liabilities 14,138 18,508
Income taxes payable and deferred income tax liability 2,901 3,508
------------------------------------------
Total liabilities 1,682,554 1,654,240
------------------------------------------
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 6,518,981 shares at March 31, 2004 and December 31, 2003 1 1
Additional paid-in capital 20,615 20,615
Retained earnings 50,161 48,859
Accumulated other comprehensive income 492 209
------------------------------------------
Total shareholders' equity 71,269 69,684
------------------------------------------
Total liabilities and shareholders' equity $ 1,753,823 $ 1,723,924
==========================================
See accompanying notes.
3
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended
March 31,
2004 2003
-----------------------------------
Interest and dividend income:
Loans and securities $ 17,597 $ 19,168
Interest-earning deposits 229 276
-----------------------------------
Total interest and dividend income 17,826 19,444
-----------------------------------
Interest expense:
Deposits 2,660 4,023
Borrowed money and junior subordinated debentures 4,817 4,684
-----------------------------------
Total interest expense 7,477 8,707
-----------------------------------
Net interest income before provision for loan and valuation losses 10,349 10,737
Provision for loan and valuation losses 1,299 695
-----------------------------------
Net interest income after provision for loan and valuation losses 9,050 10,042
-----------------------------------
Noninterest income:
Loan administration 4,668 6,269
Brokerage 2,952 2,340
Trust services 1,951 1,613
Real estate disposition services 2,389 1,364
Gain on sale of loans and securities 2,084 3,446
School services 671 616
Other 2,695 2,177
-----------------------------------
Total noninterest income 17,410 17,825
-----------------------------------
Noninterest expense:
Compensation and employee benefits 8,960 9,066
Amortization of mortgage servicing rights 4,671 8,899
Occupancy and equipment 1,559 1,518
Postage and communication 587 707
Professional fees 737 975
Data processing 623 659
Impairment on mortgage servicing rights 1,156 -
Other general and administrative 6,842 6,927
-----------------------------------
Total noninterest expense 25,135 28,751
-----------------------------------
Income (loss) from continuing operations before income taxes 1,325 (884)
Income tax provision (benefit) 160 (544)
-----------------------------------
Income (loss) from continuing operations 1,165 (340)
-----------------------------------
Discontinued operations:
Income from discontinued operations, net of income tax provision
of $89 and $1,457, respectively 137 2,252
-----------------------------------
Net income $ 1,302 $ 1,912
===================================
See accompanying notes.
4
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended
March 31,
2004 2003
-----------------------------------
Income (loss) from continuing operations per share - basic $ 0.18 $ (0.05)
-----------------------------------
Income (loss) from continuing operations per share -
assuming dilution $ 0.18 $ (0.05)
-----------------------------------
Income from discontinued operations per share - basic $ 0.02 $ 0.35
-----------------------------------
Income from discontinued operations per share -
assuming dilution $ 0.02 $ 0.34
-----------------------------------
Net income per share - basic $ 0.20 $ 0.30
===================================
Net income per share - assuming dilution $ 0.20 $ 0.29
===================================
Weighted average shares - basic 6,518,981 6,490,776
===================================
Weighted average shares - assuming dilution 6,582,303 6,531,406
===================================
See accompanying notes.
5
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(Unaudited)
Accumulated
Additional other
Common stock paid-in Treasury Retained comprehensive Comprehensive
Shares Amount capital shares earnings income Total income
Quarter Ended ----------------------------------------------------------------------------------------------
March 31, 2004
- -----------------------
Balance at December 31, 2003 6,518,981 $ 1 $ 20,615 $ - $ 48,859 $ 209 $ 69,684
Comprehensive income:
Net income 1,302 1,302 $ 1,302
Net unrealized holding
gains(1) 283 283 283
------------
Comprehensive income $ 1,585
---------------------------------------------------------------------------------============
Balance at March 31, 2004 6,518,981 $ 1 $ 20,615 $ - $ 50,161 $ 492 $ 71,269
---------------------------------------------------------------------------------
Quarter Ended
March 31, 2003
- -----------------------
Balance at December 31, 2002 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936
Comprehensive income:
Net income 1,912 1,912 $ 1,912
Net unrealized holding loss (4) (4) (4)
------------
Comprehensive income $ 1,908
============
Issuance of stock related to
employee stock purchase
plan and options 1,500 - 12 - - - 12
--------------------------------------------------------------------------------
Balance at March 31, 2003 6,491,043 $ 1 $ 20,387 $ - $ 48,446 $ 22 $ 68,856
--------------------------------------------------------------------------------
(1) Disclosure of reclassification amount
Quarter Ended
March 31, 2004
- ------------------------
Unrealized holding gain arising during period $ 283
Less: reclassification adjustment of gains included in net income -
-------------
Net unrealized holding gain on securities $ 283
=============
6
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Quarters Ended
March 31,
2004 2003
-------------------------
Operating activities
Income (loss) from continuing operations $ 1,165 $ (340)
Adjustments to reconcile income (loss) from continuing operations to
net cash used in operating activities:
Depreciation and amortization 864 910
Provision for loan and valuation losses 1,299 695
Amortization of mortgage servicing rights 4,671 8,899
Impairment on mortgage servicing rights 1,156 -
Gain on sale of loans and securities (2,084) (3,446)
Loss on sale of foreclosed real estate 211 193
Changes in assets and liabilities:
Loans originated for sale, net of loans sold (22,188) (6,689)
Loans purchased for sale (427,108) (411,564)
Principal payments on, and proceeds from sale of loans held for sale 200,175 297,000
Originated mortgage servicing rights, net (424) (2,277)
Decrease in other receivables and other assets 8,487 5,003
Decrease in payable for purchase of mortgage servicing rights (201) (49)
Decrease in other liabilities, income taxes payable and
deferred income tax liability (4,865) (8,293)
---------------------------
Net cash used in operating activities from continuing operations (238,842) (119,958)
Net cash provided by (used in) discontinued operations 226 (1,504)
---------------------------
Net cash used in operating activities (238,616) (121,462)
---------------------------
Investing activities
Loans originated and purchased for investment (46,472) (30,075)
Principal repayments on loans held for investment 13,243 13,370
Purchase of available for sale securities (63,970) -
Proceeds from sale of available for sale securities 321,851 139,742
Proceeds from maturity and prepayment of available for sale securities 6,975 222
Redemption (purchase) of FHLBank stock, net 774 (90)
Purchases of building and equipment (244) (24)
Acquisition of mortgage servicing rights (218) -
Proceeds from sale of building and equipment - 1,671
Proceeds from sale of foreclosed real estate 670 1,426
--------------------------
Net cash provided by investing activities 232,609 126,242
--------------------------
7
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - continued
(Dollars in thousands)
(Unaudited)
Quarters Ended
March 31,
2004 2003
--------------------------
Financing activities
Net (decrease) increase in deposits $ (25,369) $ 11,670
Net increase (decrease) in custodial escrow balances 9,782 (3,641)
Increase (decrease) in revolving lines, net 39,639 (13,878)
Payments of notes payable (357) (357)
Payment of financing arrangements (404) (15)
Proceeds from issuance of subordinated debt 9,760 -
Proceeds from issuance of common stock related to employee stock
option purchase plan and options - 12
-----------------------------
Net cash provided by (used in) financing activities 33,051 (6,209)
-----------------------------
Increase (decrease) in cash and cash equivalents 27,044 (1,429)
Cash and cash equivalents at beginning of period 34,510 62,412
-----------------------------
Cash and cash equivalents at end of period $ 61,554 $ 60,983
=============================
Supplemental disclosure of non-cash activity
Loans transferred to foreclosed real estate $ 1,046 $ 286
=============================
Loans transferred to securities available for sale $ 345,455 $ 170,570
=============================
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 8,066 $ 9,033
=============================
Cash paid for income taxes $ 855 $ 61
=============================
See accompanying notes.
8
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Matrix
Bancorp, Inc. (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals, unless otherwise
disclosed in this Form 10-Q) necessary for a fair presentation have been
included. For discussion of our organization and business, the accounting
policies we follow and further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2003. This quarterly report should be read
in conjunction with that annual report.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities at the date of the condensed consolidated financial
statements, and disclosures of contingent assets and liabilities, and the
reported amounts of income and expenses during the reporting period and the
accompanying notes. Actual results could differ from these estimates.
Stock-Based Compensation
At March 31, 2004, the Company has one stock-based employee compensation plan,
which is described more fully in Note 15 to the audited financial statements in
Form 10-K for December 31, 2003. 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. Statement of Financial Accounting
Standards ("SFAS") No. 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 because we do not issue options at
exercise prices below the market value at the date of the grant. Had
compensation cost for our stock-based plans been determined consistent with SFAS
No. 123, our net income and income per share would have been reduced to the pro
forma amounts indicated below:
Quarter Ended March 31,
2004 2003
-------------------------------------
(Dollars in thousands, except share information)
Net income:
Net income as reported $ 1,302 $ 1,912
Deduct: Total stock-based employee compensation determined under fair
value based method for awards, net of related tax effects (69) (78)
-------------------------------------
Pro forma $ 1,233 $ 1,834
=====================================
Net income per share:
Basic, as reported $ 0.20 $ 0.30
=====================================
Basic, pro forma $ 0.19 $ 0.28
=====================================
Diluted, as reported $ 0.20 $ 0.29
=====================================
Diluted, pro forma $ 0.19 $ 0.28
=====================================
9
Reclassifications
Certain reclassifications have been made to the prior periods' condensed
consolidated financial statements and related notes to conform with the current
period presentation.
2. Sale of Wholesale Production Platform
On September 2, 2003, the Company announced the final closing and substantial
completion of the sale by Matrix Financial Services Corporation ("Matrix
Financial") of substantially all of its assets associated with its wholesale
mortgage origination platform pursuant to the Purchase and Assumption Agreement,
as amended ("Purchase Agreement"), of February 28, 2003. 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.
Under terms of the Purchase Agreement, Matrix Financial continued to earn a
production premium through February 2004, generally 20 basis points times the
original principal balance of all loans originated through February 23, 2004.
For the quarter ended March 31, 2004, the production premium earned and
reflected in income from discontinued operations was $226 thousand, before tax.
The operating income of the discontinued production platform is reflected in
income from discontinued operations, and the consolidated statements of income
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 March 31,
2004 2003
---------------------------------------
(Dollars in thousands, except share information)
Net interest income after provision for loan and
and valuation losses $ - $ 1,149
Noninterest income - 12,829
Noninterest expense - 10,269
---------------------------------------
Operating income before taxes from
discontinued operations - 3,709
Income tax provision - 1,457
---------------------------------------
Operating income from discontinued operations - 2,252
Gain on sale of production platform, net
of income tax benefit of $89 137 -
---------------------------------------
Income from discontinued operations, net of income taxes $ 137 $ 2,252
=======================================
Income from discontinued operations per share - basic $ 0.02 $ 0.35
=======================================
Income from discontinued operations per
share - assuming dilution $ 0.02 $ 0.34
=======================================
For a period of two years from February 28, 2003, Matrix Capital Bank ("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 February 28, 2003. However, this non-compete provision does not
prohibit Matrix Bank or their affiliates from engaging in such business in order
to comply with applicable law, rule, regulation, directive, agreement or order
from the Office of Thrift Supervision ("OTS") or other party where it is
necessary to resolve regulatory or supervisory concerns.
Additionally, the non-compete provision does not apply in the event of a change
in control of Matrix Bank or the Company.
10
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
The Purchase Agreement requires Matrix Bank to guarantee Matrix Financial's
obligations under the Purchase Agreement if certain events occur, such as Matrix
Financial's bankruptcy, failure to maintain a minimum net worth, or loss of
voting control of Matrix Financial.
3. New Accounting Standards
On December 11, 2003, the SEC staff announced its intention to release a Staff
Accounting Bulletin that would require all registrants to account for mortgage
loan interest rate lock commitments related to loans held for sale as written
options, effective no later than for commitments entered into after March 31,
2004. The Company enters into such commitments with customers in connection with
residential mortgage loan applications, however, the amount of these commitments
is not material to the Company's consolidated financial statements. This
guidance, if issued, would require the Company to recognize a liability on its
consolidated balance sheet equal to the fair value of the commitment at the time
the loan commitment is issued. As a result, this guidance would delay the
recognition of any revenue related to these commitments until such time as the
loan is sold, however, it would have no effect on the ultimate amount of revenue
or cash flows recognized over time. The Company is currently assessing the
impact of this pending guidance on its consolidated results of operations and
financial position, but does not expect the implementation to have a significant
impact on the consolidated financial statements.
4. Net Income Per Share.
The following table sets forth the computation of net income per share and net
income per share assuming dilution:
Quarter Ended March 31,
2004 2003
--------------------------------------------
(Dollars in thousands)
Numerator:
Net income (loss) from continuing operations, net of tax $ 1,165 $ (340)
Income from discontinued operations, net of tax 137 2,252
--------------------------------------------
Net income $ 1,302 $ 1,912
============================================
Denominator:
Weighted average shares outstanding 6,518,981 6,490,776
Effect of dilutive securities:
Common stock options 63,322 40,630
--------------------------------------------
Denominator for net income per share assuming dilution 6,582,303 6,531,406
============================================
11
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
5. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
March 31, December 31,
2004 2003
--------------------------------------
(In thousands)
Mortgage servicing rights
Balance at beginning of period $ 47,194 $ 79,234
Purchases 218 375
Originations 424 5,082
Amortization (4,671) (32,497)
Sales - -
Application of valuation allowance to write down
impaired MSRs - (5,000)
---------------------------------------
Balance before valuation allowance at end of period 43,165 47,194
Valuation allowance for impairment of mortgage servicing
rights
Balance at beginning of period (6,450) (14,400)
Additions (1,156) (2,400)
Application of valuation allowance to write down
impaired MSRs - 5,000
Recovery - 5,350
---------------------------------------
Balance at end of period (7,606) (6,450)
Valuation allowance for foreclosure costs (1,000) (1,000)
---------------------------------------
Mortgage servicing rights, net $ 34,559 $ 39,744
=======================================
The Company's servicing portfolio (excluding subserviced loans), is comprised of
the following:
March 31, 2004 December 31, 2003
------------------------------ -------------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding Of Loans Outstanding
----------------------------------------------------------------
(Dollars in thousands)
Freddie Mac 5,771 $ 231,131 6,194 $ 253,245
Fannie Mae 17,822 1,054,160 19,257 1,164,589
Ginnie Mae 14,591 933,556 16,370 1,068,975
VA, FHA, conventional and other loans 9,074 691,575 9,034 696,727
-------------------------------- -------------------------------
47,258 $ 2,910,422 50,855 $ 3,183,536
================================ ===============================
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at March 31, 2004 and December 31, 2003 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 in noninterest-bearing
12
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
accounts. The balance of custodial accounts fluctuates from month to month based
on the pass-through of the principal and interest payments to the ultimate
investors and the timing of taxes and insurance payments.
The estimated aggregate amortization of our MSR's for each of the next twelve
month period ending March 31, 2005, 2006, 2007, 2008 and 2009 is $8,133,000,
$6,068,000, $4,565,000, $3,482,000, and $2,672,000, respectively. The estimated
amortization is based on several assumptions as of March 31, 2004 with the most
significant being the anticipated prepayment speeds of the underlying mortgages.
It is reasonably possible the actual repayment speeds of the underlying mortgage
loans may differ materially from the estimated repayment speeds, and thus, the
actual amortization may be significantly different than the amounts estimated.
6. Deposits
Deposit account balances are summarized as follows:
March 31, 2004 December 31, 2003
--------------------------------------------- ------------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Passbook accounts $ 5,846 0.62 % 1.28 % $ 5,675 0.58 % 1.28 %
NOW accounts 196,519 20.71 0.17 180,733 18.56 0.15
Money market accounts 573,034 60.40 0.69 576,088 59.14 0.71
--------------------------------------------- -----------------------------------------
775,399 81.73 0.56 762,496 78.28 0.58
Certificate accounts 173,291 18.27 3.07 211,563 21.72 2.89
--------------------------------------------- -----------------------------------------
Deposits $ 948,690 100.00 % 1.08 % $ 974,059 100.00 % 1.07 %
============================================= =========================================
At March 31, 2004 and December 31, 2003, brokered deposits accounted for
approximately $67.3 million and $104.6 million, respectively, of the total
certificate accounts shown above.
7. FHLBank Stock and Borrowings
In connection with Matrix Bank's change in domicile in 2002, Matrix Bank obtains
FHLBank advances from FHLBank of Topeka, which is the FHLBank that serves
Denver, Colorado, and utilizes FHLBank of Topeka as its primary correspondent
bank. This change was approved March 25, 2002. Long-term advances that existed
at March 25, 2002 with FHLBank of Dallas are still outstanding under their
original terms.
The balances of FHLBank stock are as follows:
March 31, 2004 December 31, 2003
----------------------------------------------
(In thousands)
FHLBank of Topeka stock, at cost $ 23,325 $ 23,124
FHLBank of Dallas stock, at cost 6,583 7,558
----------------------------------------------
FHLBank stock $ 29,908 $ 30,682
==============================================
13
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
The balances of FHLB borrowings are as follows:
March 31, 2004 December 31, 2003
------------------------------------
(In thousands)
FHLBank of Topeka borrowings $ 351,000 $ 311,000
FHLBank of Dallas borrowings 147,183 147,204
------------------------------------
FHLBank borrowings $ 498,183 $ 458,204
====================================
Available unused borrowings from FHLBank of Topeka total $146.8 million at March
31, 2004.
8. Borrowed Money
On February 13, 2004, Matrix Bancorp issued $10,000,000 floating rate
subordinated debt securities due February 13, 2014. Interest on the securities
is at the floating rate of LIBOR plus 2.75% (3.86% at March 31, 2004). Interest
payments are due quarterly.
9. Segment Information
Servicing
Brokerage
Traditional Mortgage and School
Banking Banking Consulting Services All Others Total
----------------------------------------------------------------------------------
(In thousands)
Quarter ended March 31, 2004:
Revenues from external customers:
Interest income $ 15,587 $ 1,150 $ 42 $ 1,044 $ 3 $ 17,826
Noninterest income 1,538 7,596 2,843 668 4,765 17,410
Intersegment revenues 852 270 378 3 546 2,049
Segment income (loss) from
continuing operations before
income taxes 5,430 (2,408) 574 63 (2,334) 1,325
Quarter ended March 31, 2003:
Revenues from external customers:
Interest income $ 16,264 $ 1,609 $ 36 $ 1,459 $ 76 $ 19,444
Noninterest income 1,579 9,324 2,290 539 4,093 17,825
Intersegment revenues 796 1,821 381 3 485 3,486
Segment income (loss) from
continuing operations before
income taxes 5,294 (2,017) 536 (1,432) (3,265) (884)
10. Subsequent Event - Sale of Matrix Capital Bank Branches
On January 30, 2004, Matrix Bank entered into a definitive agreement to sell its
two branches in Las Cruces, New Mexico to FirstBank, a subsidiary of Access
Anytime Bancorp, Inc. The sale received regulatory approval on April 7, 2004 and
closed on May 1, 2004. The sale included approximately $78.5 million of deposits
and $22.7 million of loans, as well as the real estate and leases associated
with the branches, for a gain on sale of approximately $4.9 million.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Matrix Bancorp, Inc. (occasionally referred to in this document, on a
consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary
thrift holding company that, through our subsidiaries, focuses on traditional
banking, trust and clearing activities, lending activities, mortgage banking 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 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
mortgage banking activities consist of purchasing and selling residential
mortgage loans; offering brokerage, consulting and analytical services to
financial services companies and financial institutions; and servicing
residential mortgage portfolios for investors. Our other fee-based services and
lending activities include providing nationwide real estate management and
disposition services to financial service companies and financial institutions;
and 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 a limited
amount of 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, operating as The GEO Group.; Sterling Trust Company; First
Matrix Investment Services Corp.; Matrix Tower Holdings, LLC; plus an equity
interest in Matrix Settlement & Clearance Services, LLC.
The principal components of our revenues consist of:
o net interest income recorded by Matrix Bank, Matrix Financial and ABS;
o brokerage and consulting fees generated by Matrix Bancorp Trading and First
Matrix;
o real estate disposition services fees generated by Matrix Asset Management;
o gain on sales of mortgage loans 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 - Sale of Wholesale Production Platform
On September 2, 2003, we 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 complete discussion of the
sale and impact on continuing and discontinued operations in "Item 1. Business -
Discontinued Operations" and Note 3 of the consolidated financial statements on
Form 10-K as of December 31, 2003. We agreed to sell the platform because we
were concerned that, over an extended period of time, we would find it difficult
to compete in the highly competitive mortgage origination industry that
generally operates on high volume and low margins. Based on the size of our
wholesale production platform, we were required to commit a significant
percentage of our capital to a line of business that is somewhat cyclical and
the earnings were difficult for us to estimate. The sale of the platform has
allowed us to reduce our operational risks and the costs associated with the
platform. We were successful in reinvesting the liquidity created from the sale
into predominately adjustable rate loans, SBA loans and high quality
mortgage-backed securities.
The operations of the production platform, which reflect income from
discontinued operations, net of tax effect of approximately $140 thousand for
the quarter ended March 31, 2004 and $2.3 million for the quarter ended March
31, 2003, are reported as income from discontinued operations in the condensed
consolidated financial statements, and will be presented as such in future
releases and filings, and as such are not included in the discussion of results
15
from continuing operations below. It should be noted that discontinued
operations are based upon the Company's historical results from operations of
the production platform, adjusted to reflect the impact of the sale of the
production platform. Because there was an opportunity cost of owning the
production platform, the historical results 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 indicative of any future results.
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 "Item 7. Critical Accounting Policies" and Note 2 of
the consolidated financial statements on Form 10-K as of December 31, 2003, and
along with the disclosures presented in other financial statement notes, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. 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 views the determination of the allowance for loan and valuation
losses as a critical accounting policy that requires the most significant
judgments, assumptions and estimates used in the preparation of its consolidated
financial statements. See discussion as noted above and at "Asset and Liability
Management, Analysis of Allowance for Loan and Valuation Losses" in the Form
10-K for December 31, 2003 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 "Item 1. Business-- Mortgage Servicing Activities" in the Form
10-K for December 31, 2003 for a detailed discussion of the nature of servicing
rights, and see discussion as noted above and in Note 2 of the consolidated
financial statements on Form 10-K as of December 31, 2003 for a detail
concerning the valuation of mortgage servicing rights.
The Company also considers the judgments and assumptions concerning litigation
as a critical accounting policy. The Company has been notified that we are a
defendant in a number of legal proceedings. Most of these cases involve ordinary
and routine claims incidental to our business. For a full description of such
proceedings, see the Legal Proceedings section in the Form 10-K for December 31,
2003, and additional discussion at Part II. Item I. "--Legal Proceedings" of
this Form 10-Q. With respect to all pending litigation matters, our ultimate
legal responsibility, if any, cannot be estimated with certainty. Based on the
ultimate outcome of such proceedings, it is possible that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in our assumptions related to such proceedings.
Forward-Looking Statements
Certain statements contained in this interim report that are not historical
facts, including, but not limited to, statements that can be identified by the
use of forward-looking terminology such as "may," "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; 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 -Discontinued
16
Operations" in the Form 10-K as of December 31, 2003), 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 12, 2004;
and in the Company's current report on Form 8-K, filed with the Securities and
Exchange Commission ("SEC") on March 14, 2001; and the uncertainties set forth
from time to time in the Company's periodic reports, filings and other public
statements.
Comparison of Results of Operations for the Quarters Ended March 31, 2004 and
2003
Income (Loss) from Continuing Operations. For the quarter ended March 31, 2004,
we reported income from continuing operations of $1.2 million, or $0.18 per
diluted share, as compared to a loss of $(300) thousand, or $(0.05) per diluted
share, for the quarter ended March 31, 2003. Our income for the quarter ended
March 31, 2004 is primarily due to strong performance in our traditional
banking, real estate disposition business and our trust and clearing operations.
Net Interest Income. Net interest income before provision for loan and valuation
losses decreased $400 thousand, or 3.6%, to $10.3 million for the quarter ended
March 31, 2004 as compared to $10.7 million for the quarter ended March 31,
2003. The decrease in net interest income is a result of continued compression
in our net interest margins, which was partially offset by an increase in our
interest-earning assets. Our net interest margin decreased 23 basis points to
2.70% for the quarter ended March 31, 2004 from 2.93% for the quarter ended
March 31, 2003, and interest rate spread decreased to 2.44% for the quarter
ended March 31, 2004 from 2.56% for the quarter ended March 31, 2003. The
decrease in net interest margin and the interest rate spread is due to a
combination of a 66 basis point decrease in the average rate earned on average
interest-earning assets to 4.64% for the quarter ended March 31, 2004 as
compared to 5.30% for the quarter ended March 31, 2003, which was partially
offset by an increase in the average balance of our interest-earnings assets of
$68.0 million to $1.54 billion at March 31, 2004 as compared to $1.47 billion
for the quarter ended March 31, 2003. The cost of our average interest-bearing
liabilities decreased 53 basis points to 2.20% for the quarter ended March 31,
2004 as compared to 2.73% for the quarter ended March 31, 2003, which was
partially offset by an increase in the average balance of our interest-bearing
liabilities of $85.9 million to $1.36 billion at March 31, 2004 as compared to
$1.27 billion at March 31, 2003. Both the decrease in the rate earned on our
average interest-earning assets and the decrease in the cost of our average
interest-bearing liabilities are driven by the continued low interest rate
environment. The increase in interest earning assets was primarily in investment
securities. The growth was primarily funded through short term borrowings at the
FHLBank. For a tabular presentation of the changes in net interest income due to
changes in the volume of interest-earning assets and interest-bearing
liabilities, as well as changes in interest rates, see "Analysis of Changes in
Net Interest Income Due to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and valuation
losses increased $600 thousand to $1.3 million for the quarter ended March 31,
2004 as compared to $700 thousand for the quarter ended March 31, 2003. The
increase in the provision was mainly due to impairments on one commercial real
estate loan at Matrix Bank and additional reserves recorded as a result of
increases in our historical loss factors related to our homogeneous residential
loan portfolio at Matrix Financial. The Company's historical experience is that
our homogeneous residential loan portfolio has slightly greater losses than
mortgage loans that are sold within 45 days of origination. 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 and other
ancillary charges. Loan administration fees decreased $1.6 million, or 25.5%, to
$4.7 million for the quarter ended March 31, 2004 as compared to $6.3 million
for the quarter ended March 31, 2003. 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
decreased, with an average balance of $3.1 billion for the quarter ended March
31, 2004 as compared to an average balance of $5.1 billion for the quarter ended
March 31, 2003. The decrease in portfolio size was offset by an increase in the
average service fee rate (including all ancillary income) to 0.58% for the first
quarter of 2004 as compared to 0.49% for the first quarter of 2003. The Company
anticipates loan administration fees to continue to decrease as its servicing
portfolio decreases through normal prepayments.
17
Brokerage Fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to mortgage servicing rights, as well
as brokerage income earned from whole loan activities, retail and fixed income
activities and Small Business Administration (SBA) trading fees. Brokerage fees
increased $600 thousand, or 26.2%, to $2.9 million for the quarter ended March
31, 2004 as compared to $2.3 million for the quarter ended March 31, 2003. The
increase was the result of increased activity at First Matrix in the
acquisition, pooling and selling of SBA loans and securities.
Trust Services. Trust service fees increased $300 thousand, or 21.0%, to $1.9
million for the quarter ended March 31, 2004 as compared to $1.6 million for the
quarter ended March 31, 2003. Trust accounts under administration at Sterling
Trust and Matrix Capital Bank increased to 52,470 at March 31, 2004 from 46,651
at March 31, 2003 and total assets under administration increased to over $14.1
billion at March 31, 2004 from $8.5 billion at March 31, 2003. Most of the
growth is driven by business referred to Matrix Bank's trust department by
Matrix Settlement & Clearance Services.
Real Estate Disposition Services. Real estate disposition services represents
fees earned by Matrix Asset Management for real estate management and
disposition services provided on foreclosed properties owned by third party
financial services companies and financial institutions. Real estate disposition
services income increased $1.0 million, or 75.1%, to $2.4 million for the
quarter ended March 31, 2004 as compared to $1.4 million for the quarter ended
March 31, 2003. The increase is due to an increase in the number of properties
closed during the quarter ended March 31, 2004 to 1,210, an increase of 55.5%
when compared to the quarter ended March 31, 2003. The increase is due to new
clients obtained and growth from existing clients in the properties under
management, which were 3,240 at March 31, 2004 as compared to 2,142 at March 31,
2003.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
decreased $1.3 million to $2.1 million for the quarter ended March 31, 2004 as
compared to $3.4 million for the quarter ended March 31, 2003. Gains on sale of
loans and securities include gains on the sale of repurchased FHA and VA loans
which represent delinquent loans purchased out of loan pools on which Matrix
Financial acts as servicer, and then re-sells into the secondary market, gains
on the sale of originated SBA and multi-family loans primarily from the
portfolio at Matrix Bank, and gains on the sale of SBA pooled securities at
Matrix Bank. The activity for the first quarter of 2004 is primarily gains on
sale of repurchased FHA and VA loans previously sold from our mortgage servicing
rights portfolio of $2.1 million for the quarter ended March 31, 2004 as
compared to $3.1 million for the quarter ended March 31, 2003. Gains on sale of
loans and securities can fluctuate significantly from quarter to quarter based
on a variety of factors, such as the current interest rate environment, the
supply and mix of loan or securities portfolios available in the market, and as
market conditions dictate, the particular loan portfolios we elect to sell.
School Services. School services income represents fees earned by ABS, operating
as The GEO Group, for outsourced business and consulting services provided
primarily to charter schools. School services income increased approximately
$100 thousand, to $700 thousand for the quarter ended March 31, 2004 as compared
to $600 thousand for the quarter ended March 31, 2003.
Other Income. Other income, which includes loan origination income, equity in
earnings of unconsolidated subsidiaries, hedging gains, income earned on bank
owned life insurance, rental income, and other miscellaneous items, increased
$500 thousand, or 23.8%, to $2.7 million for the quarter ended March 31, 2004 as
compared to $2.2 million for the quarter ended March 31, 2003. The increase is
due to increased income generated through our equity investment in our 45% owned
joint venture, Matrix Settlement and Clearance Services, to $400 thousand for
the quarter ended March 31, 2004 as compared to $200 thousand for the quarter
ended March 31, 2003, as well as increased hedging gains and other miscellaneous
income at Matrix Financial of $1.3 million for the quarter ended March 31, 2003,
as compared to $900 thousand for the quarter ended March 31, 2003, which
increases are driven by market conditions.
Noninterest Expense. Noninterest expense decreased $(3.6) million, or 12.6%, to
$25.1 million for the quarter ended March 31, 2004 as compared to $28.8 million
for the quarter ended March 31, 2003. This decrease was predominantly due to
decreases in the level of amortization of mortgage servicing rights asset,
offset by an impairment charge on our mortgage servicing asset.
18
The following table details the major components of noninterest expense for the
periods indicated:
Quarters Ended
March 31,
-----------------------------------------
2004 2003
-----------------------------------------
(Dollars in thousands)
Compensation and employee benefits $ 8,960 $ 9,066
Amortization of mortgage servicing rights 4,671 8,899
Occupancy and equipment 1,559 1,518
Postage and communication 587 707
Professional fees 737 975
Data processing 623 659
Impairment on mortgage servicing rights, net 1,156 -
Other general and administrative 6,842 6,927
-----------------------------------------
Total $ 25,135 $ 28,751
=========================================
Compensation and employee benefits expense decreased $100 thousand, or 1.2%, to
$9.0 million for the quarter ended March 31, 2004 as compared to $9.1 million
for the quarter ended March 31, 2003. This decrease was primarily due to
decreases in the overall number of employees, with reductions at Matrix
Financial and ABS, offset by increases at Matrix Asset Management. Overall,
there was a decrease of 39 employees to 534 employees at March 31, 2004 as
compared to approximately 573 employees at March 31, 2003.
Amortization of mortgage servicing rights decreased $4.2 million, or 47.5%, to
$4.7 million for the quarter ended March 31, 2004 as compared to $8.9 million
for the quarter ended March 31, 2003. 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 primary cause of the decrease was a decrease in the average
balance in our mortgage servicing rights and our corresponding underlying
servicing portfolio to $3.1 billion at March 31, 2004 as compared to $5.1
billion at March 31, 2003. In response to the continued low interest rates
prevalent in the market, prepayment speeds on our servicing portfolio remained
high at an average of 27.4% for the quarter ended March 31, 2004, but were lower
than the prepayment speeds experienced of 31.6% for the quarter ended March 31,
2003.
Impairment on mortgage servicing rights reflects a charge for the quarter ended
March 31, 2004 of $1.2 million as compared to $0 for the quarter ended March 31,
2003. The Company is required to record its investment in mortgage servicing
rights at the lower of cost or fair value. The fair value of mortgage servicing
rights is determined based on the discounted future servicing income stratified
based on one or more predominant risk characteristics of the underlying loans.
The Company stratifies its mortgage servicing rights by product type and
investor to reflect the predominant risks. To determine the fair value of its
investment, the Company uses a valuation model that calculates the present value
of future cash flows. Due to continued low interest rates, among other factors,
an impairment was recorded decreasing the carrying basis to fair value. It is
not possible to estimate if future impairments or recoveries of those
impairments will occur, and further changes in market interest rates, or
increases in anticipated future prepayment speeds, may cause additional
impairment charges in future periods.
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 approximately
$400 thousand, or 4.1%, to $10.4 million for the quarter ended March 31, 2004 as
compared to $10.8 million for the quarter ended March 31, 2003.
Income Taxes. Provision for income taxes is $160 thousand for the quarter ended
March 31, 2004 as compared to a benefit of $(500) thousand for the quarter ended
March 31, 2003. Our effective tax rate is 12.1% for the quarter ended March 31,
2004. The effective tax rates are affected by the level of tax-exempt income at
ABS and Matrix Bank in proportion to the level of net income (loss) from
continuing operations. The net tax exempt interest income was approximately $1.0
million and $800 thousand for the quarters ended March 31, 2004 and 2003,
respectively.
19
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding our average balances of assets and liabilities, as well as
the dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities and the resultant yields or costs.
Average interest rate information for the quarters ended March 31, 2004 and 2003
have been annualized. Ratio, yield and rate information is based on average
daily balances where available; otherwise, average monthly balances have been
used. Nonaccrual loans are included in the calculation of average balances for
loans for the periods indicated.
Quarters Ended
March 31,
------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans receivable $ 1,368,959 $ 16,059 4.69 % $ 1,392,723 $ 18,952 5.44 %
Securities 134,805 1,538 4.56 25,576 216 3.38
Interest-earning deposits 2,316 3 0.52 19,267 50 1.04
FHLBank stock 29,817 226 3.03 30,380 226 2.98
------------------------------------------------------------------------
Total interest-earning assets 1,535,897 17,826 4.64 1,467,946 19,444 5.30
Noninterest-earning assets:
Cash 55,855 43,808
Allowance for loan and valuation losses (9,923) (9,187)
Premises and equipment 24,818 26,816
Other assets 132,795 151,891
-------------- -------------
Total noninterest-earning assets 203,545 213,328
-------------- -------------
Total assets $ 1,739,442 $ 1,681,274
============== =============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts $ 5,930 19 1.28 % $ 5,494 18 1.31 %
Money market and NOW accounts 584,794 1,092 0.75 354,669 908 1.02
Certificates of deposit 201,968 1,549 3.07 449,421 3,097 2.76
FHLBank borrowings 452,037 2,562 2.27 334,045 2,239 2.68
Borrowed money and guaranteed
preferred beneficial interests 114,813 2,255 7.86 130,000 2,445 7.52
------------------------------------------------------------------------
Total interest-bearing liabilities 1,359,542 7,477 2.20 1,273,629 8,707 2.73
------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances) 286,950 312,015
Other liabilities 22,859 27,867
-------------- -------------
Total noninterest-bearing liabilities 309,809 339,882
Shareholders' equity 70,091 67,763
-------------- -------------
Total liabilities and shareholders'
equity $ 1,739,442 $ 1,681,274
============== =============
Net interest income before provision for loan and
valuation losses $ 10,349 $ 10,737
=========== ============
Interest rate spread 2.44 % 2.56 %
=========== ===========
Net interest margin 2.70 % 2.93 %
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.97 % 115.26 %
=========== ===========
20
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
o changes in volume, in other words, changes in volume multiplied by prior
period rate; and
o changes in rate, in other words, changes in rate multiplied by prior period
volume.
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
Quarter Ended March 31,
2004 vs. 2003
----------------------------------------------------
Increase (Decrease) Due to Change in
----------------------------------------------------
Volume Rate Total
----------------------------------------------------
(In thousands)
Interest-earning assets:
Loans receivable $ (317) $ (2,576) $ (2,893)
Securities 1,222 100 1,322
Interest-earning deposits (30) (17) (47)
FHLBank stock (4) 4 -
----------------------------------------------------
Total interest-earning assets 871 (2,489) (1,618)
----------------------------------------------------
Interest-bearing liabilities:
Passbook accounts 1 - 1
Money market and NOW accounts 474 (290) 184
Certificates of deposit (1,867) 319 (1,548)
FHLBank borrowings 704 (381) 323
Borrowed money and guaranteed preferred beneficial interests (296) 106 (190)
----------------------------------------------------
Total interest-bearing liabilities (984) (246) (1,230)
----------------------------------------------------
Change in net interest income before provision for loan
and valuation losses $ 1,855 $ (2,243) $ (388)
====================================================
Asset Quality
Nonperforming Assets
As part of asset and liability management, we monitor nonperforming assets on a
monthly basis. Nonperforming assets consist primarily of nonaccrual loans and
foreclosed real estate. Loans are generally placed on nonaccrual when full
payment of principal or interest is in doubt or when they are past due 90 days
as to either principal or interest. Foreclosed real estate arises primarily
through foreclosure on mortgage loans owned.
21
March 31, 2004 December 31, 2003 March 31, 2003
-----------------------------------------------------------------
(Dollars in thousands)
Nonaccrual residential mortgage loans $ 17,293 $ 19,599 $ 17,271
Nonaccrual commercial real estate, commercial
loans and school financing 22,892 11,851 16,139
Nonaccrual consumer loans - - -
-----------------------------------------------------------------
Total nonperforming loans 40,185 31,450 33,410
Foreclosed real estate 8,372 8,538 6,824
-----------------------------------------------------------------
Total nonperforming assets $ 48,557 $ 39,988 $ 40,234
=================================================================
Total nonperforming loans to total loans 3.12 % 2.32 % 2.41 %
=================================================================
Total nonperforming assets to total assets 2.77 % 2.32 % 2.37 %
=================================================================
Ratio of allowance for loan and valuation losses to
total nonperforming loans 26.10 % 31.13 % 26.18 %
=================================================================
We accrue for interest on government sponsored loans such as FHA insured and VA
guaranteed loans that are past due 90 or more days, as the majority of the
interest on these loans is insured by the federal government. The aggregate
unpaid principal balance of government sponsored accruing loans that were past
due 90 or more days was $17.9 million, $12.2 million, and $31.8 million at March
31, 2004, December 31, 2003 and March 31, 2003, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were 1.3%
at March 31, 2004, 1.4% at December 31, 2003, and 1.3% at March 31, 2003. The
nonaccrual residential mortgage loans have remained consistent as compared to
March 31, 2003, and have decreased as compared to December 31, 2003. The
decrease as compared to December 31, 2003 is due to residential portfolios added
in the latter part of 2003 at Matrix Financial related to repurchase activity
for a breach of representations or warranties primarily consisting of not
obtaining mortgage insurance from the FHA on loans originated prior to the sale
of the production platform. We do not anticipate significant additions in 2004.
The significant increase in nonaccrual commercial loans and school financing at
March 31, 2004 as compared to December 31, 2003 is attributable to increases at
both ABS, as discussed below, and at Matrix Bank due primarily to increases in
non-accrual construction loans, discussed below.
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.
The balance of these loans in nonaccrual status increased $6.8 million as
compared to December 31, 2003 to $9.8 million at March 31, 2004. Not included in
the March 31, 2004 balance was $3.5 million of delinquent school financing that
was sold to a third party with recourse, of which $2.9 million is related to the
loans discussed herein. During the first quarter of 2004, one school client with
whom we have two loans in the amount of $10.5 million experienced financial
difficulties and the two loans are now in excess of 90 days delinquent and are
in non-accrual status. Of the $10.5 million of loans, a $2.9 million
participation had been sold to a third party. The loan was sold with full
recourse to ABS in the case that a loss is incurred. The loans are secured by
two real estate building facilities. Foreclosure proceedings were initiated
after quarter-end. Based on current information, we believe that reserves are
sufficient for any potential losses.
In addition, Matrix Bank placed two commercial real estate loans that total $2.5
million on non-accrual status. Based on current information, we believe that
there are sufficient reserves for any potential loss.
The percentage of the allowance for loan losses to nonaccrual loans varies due
to the nature of our portfolio of loans. We analyze the collateral for each
nonperforming loan to determine potential loss exposure. In conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and valuation losses. See "--Comparison of
Results of Operations for the Quarters Ended March 31, 2004 and 2003."
22
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 growth at Matrix Asset Management and
regular operating activities. We believe that the trend of net cash used will,
in part, reverse in upcoming quarters as future growth and operations should be
supported by additional revenues generated by the operating subsidiaries. During
the quarter ended March 31, 2004, the Company issued $10.0 million subordinated
debt which funds are targeted to be used to repurchase and repay the the
Company's 11.5% senior notes due September 2004.
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, and in 2003, from Matrix Bancorp
Trading and Matrix Asset Management. The current dividend policy approved by
Matrix Bank is 75% of the consolidated cumulative earnings of Matrix Bank. The
current dividend policy approved by Matrix Bancorp Trading and Matrix Asset
Management is up to 90% of the earnings of those subsidiaries. Absent these
dividend payments, the Company also intends to utilize the line of credit on its
bank stock loan, as needed, to meet its own and the other subsidiaries financial
obligations. As of March 31, 2004, the entire amount of the line of credit of
$12.0 million is available. The line of credit was renewed effective March 31,
2004 which extended the maturity to March 31, 2005. Additionally, under a
strategy implemented in 2003, liquidation of certain loans receivable at ABS are
anticipated to generate cash to be distributed to the Company.
Matrix Bank's liquidity needs are expected to be met through brokered deposit
growth, 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 FHLBank as its primary source for
borrowings. At March 31, 2004, Matrix Bank had overnight and term borrowings of
$498.2 million from the FHLBank of Topeka and Dallas. Matrix Bank also utilizes
brokered deposits as a source of liquidity. The balance of brokered deposits at
March 31, 2004 was $67.3 million. The custodial escrow balances held by Matrix
Bank fluctuate based upon the mix and size of the related mortgage servicing
portfolios and the timing of payments for taxes and insurance, as well as the
level of prepayments which occur.
Matrix Bank, a well capitalized institution, had a leverage capital ratio of
6.23% at March 31, 2004. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $20.6 million. Matrix Bank's
risk-based capital ratio was 12.41% at March 31, 2004, which currently exceeds
the well capitalized risk-based capital requirement of 10.0% of risk-weighted
assets by $21.9 million.
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. We do not
anticipate significantly increasing our current loan portfolio.
Through a Purchase and Sale Agreement, the Company has sold school financing
loans to a third party financial institution. The Company provides scheduled
interest and principal plus full recourse in the case of loss or default. The
transaction was treated as a sale due to the transfer of ownership and control
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 $10.5 million at March 31, 2004.
23
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance
Sheet Arrangements
During the quarter ended March 31, 2004, there were no material changes outside
of the normal course of business to the quantitative and qualitative disclosures
about contractual obligations, commitments, contingent liabilities and
off-balance sheet arrangements previously reported in the Annual Report on Form
10-K for the year ended December 31, 2003. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Contractual
Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet
Arrangements" in the Form 10-K for December 31, 2003 for a detailed discussion.
As noted in Note 8 to the Condensed Consolidated Financial Statements herein,
the Company issued $10.0 million subordinated debt issued during the quarter
ended March 31, 2004, maturing February 2014. See further discussion at Note 8.
See Notes 6 and 7 to the Condensed Consolidated Financial Statements herein for
detail on the balances of deposit liabilities and FHLBank borrowings as of March
31, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter ended March 31, 2004, there were no material changes to the
quantitative and qualitative disclosures about market risk previously reported
in the Annual Report on Form 10-K for the year ended December 31, 2003. 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, 2003 for a detailed
discussion.
Item 4. Controls and Procedures
Management of the Company is responsible for establishing and maintaining
effective disclosure controls and procedures, as defined under Rules 13a-15(e)
and 15d-15(b) of the Securities Exchange Act of 1934. As of March 31, 2004, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Co-Chief Executive Officers and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management concluded that the Company's disclosure controls and
procedures as of March 31, 2004 were effective in ensuring that information
required to be disclosed in this Quarterly Report on Form 10-Q was recorded,
processed, summarized, and reported within the time period required by the SEC's
rules and forms. There have been no significant changes in the Company's
internal controls over financial reporting that occurred during the quarter
ended March 31, 2004 that have significantly affected, or are likely to
materially affect, the Company's internal controls over financial reporting.
24
Part II - Other Information
Item 1. Legal Proceedings
Matrix Bancorp. In early 1999, the Company and Matrix Bank instituted an
arbitration action with the American Arbitration Association in Phoenix, Arizona
against Fidelity National Financial, Inc. The arbitration action arose out of an
alleged breach by Fidelity of a Merger Termination Agreement entered into
between the Company and Fidelity in connection with the termination of their
proposed merger. The arbitration panel has ruled that the entire Merger
Termination Agreement was unenforceable. The Company and Matrix Bank filed an
appeal of the arbitration panel's decision in federal district court in Phoenix,
Arizona, which has been denied. In October 2001, Fidelity initiated a second
arbitration to determine the validity of a release given in connection with the
Merger Termination Agreement. Matrix Bancorp claimed that the releases were
valid and, in the alternative, made a counterclaim against Fidelity demanding
restitutional damages for the value of the releases if they were determined
valid. The arbitration panel has held the releases to be valid and enforceable
and has denied the Company's claim for restitutional damages. Fidelity has filed
a motion with the arbitration panel requesting that it be awarded its attorney
fees, and the panel has awarded Fidelity approximately $500 thousand. This
matter has been settled during the quarter ended March 31, 2004 in consideration
of the payment by Matrix Bancorp of $310 thousand to Fidelity and the case has
been closed.
Matrix Financial. In March 2004, Matrix Financial was named a defendant in a
putative class action lawsuit styled Monica Thigpen v. Matrix Financial Services
Corporation filed in the United States Bankruptcy Court for the Southern
District of Alabama. The plaintiff claims that Matrix Financial filed an
improper and false affidavit in connection with plaintiff's Chapter 13
bankruptcy proceeding because the signature page on the affidavit was executed
separate and apart from the other pages of the affidavit, and has asked the
Court to award the plaintiff actual damages, punitive damages, injunctive
relief, attorneys' fee and other relief as may be appropriate. Matrix Financial
has filed a motion to dismiss. Matrix Financial believes it has meritorious
defenses and intends to defend this action vigorously. The ultimate legal and
financial liability of Matrix Financial, if any, in this matter cannot be
estimated with certainty at this time.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the quarter ended March 31, 2004, there were no changes to the
information previously reported in the Annual Report on Form 10-K for the year
ended December 31, 2003. See Item 5. "Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" in the
Form 10-K for December 31, 2003 for a detailed discussion.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Sixth Amendment to Credit Agreement, dated as of March 31, 2004, by
and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National
Association, as agent, and certain lenders, as lenders.
*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.
25
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange Commission
on January 30, 2004 (Items 5 and 7), which contained a press release
announcing the sale of two Bank branches located in Las Cruces, New
Mexico to FirstBank, a subsidiary of Access Anytime BanCorp, Inc.
The Company filed a Form 8-K with the Securities and Exchange Commission
on February 10, 2004 (Items 7 and 12), which contained a press release
announcing financial results for the quarter and year ended December 31,
2003.
______________________
* Filed herewith.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX BANCORP, INC.
Dated: May 3, 2004 /s/ D. Mark Spencer
-------------------------- ---------------------------------
D. Mark Spencer
President and
Co-Chief Executive Officer
(Principal Executive Officer)
Dated: May 3, 2004 /s/ Richard V. Schmitz
--------------------------- ---------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
Dated: May 3, 2004 /s/ David W. Kloos
--------------------------- ---------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
27
INDEX TO EXHIBITS
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
*10.1 Sixth Amendment to Credit Agreement, dated as of March 31, 2004, by
and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National
Association, as agent, and certain lenders, as lenders.
*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.
28