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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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, 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 [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 July 30, 2004 was 6,520,181 shares.
TABLE OF CONTENTS
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2004 (unaudited) and December 31, 2003...................................3
Condensed Consolidated Statements of Operations
Quarter and six months ended June 30, 2004 and 2003 (unaudited)...................4
Condensed Consolidated Statements of Shareholders' Equity
Six months ended June 30, 2004 and 2003 (unaudited)...............................6
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 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.................................................................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 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities..........................................................30
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)
June 30, December 31,
2004 2003
________________ ________________
(Unaudited)
Assets
Cash and cash equivalents $ 57,243 $ 32,538
Interest-earning deposits and federal
funds sold 2,111 1,972
Investment securities 202,047 152,508
Loans held for sale, net 1,015,389 999,454
Loans held for investment, net 291,825 344,802
Mortgage servicing rights, net 32,450 39,744
Other receivables 33,389 43,884
FHLBank stock, at cost 30,136 30,682
Foreclosed real estate 7,677 8,538
Premises and Equipment, net 21,847 24,981
Bank owned life insurance 21,113 20,613
Other assets, net 21,578 24,208
---------------- ----------------
Total assets $ 1,736,805 $ 1,723,924
================ ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 907,749 $ 974,059
Custodial escrow balances 84,836 85,466
FHLBank borrowings 526,162 458,204
Borrowed money 54,523 47,970
Junior subordinated debentures owed to
unconsolidated subsidiary trusts 66,525 66,525
Other liabilities 21,998 18,508
Income taxes payable and deferred
income tax liability 815 3,508
--------------- ----------------
Total liabilities 1,662,608 1,654,240
--------------- ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.0001;
authorized 5,000,000 shares;
no shares outstanding - -
Common stock, par value $.0001;
authorized 50,000,000 shares; issued
and outstanding 6,520,181 and 6,518,981
shares at June 30, 2004 and
December 31, 2003, respectively l 1
Additional paid-in capital 20,625 20,615
Retained earnings 54,024 48,859
Accummulated other comprehensive (loss)
income (453) 209
--------------- ----------------
Total shareholders' equity 74,197 69,684
--------------- ----------------
Total liabilities and shareholders'
equity $ 1,736,805 $ 1,723,924
=============== ===============
See accompanying notes.
3
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- -------- -------- -------
Interest and dividend income:
Loans and securities $ 17,260 $ 18,518 $ 34,856 $ 37,686
Interest-earning deposits 233 250 462 526
-------- -------- ------- -------
Total interest and dividend
income 17,493 18,768 35,318 38,212
-------- -------- -------- -------
Interest expense:
Deposits 2,345 3,442 5,005 7,464
Borrowed money and junior
subordinated debentures 4,863 4,616 9,679 9,301
-------- -------- -------- -------
Total interest expense 7,208 8,058 14,684 16,765
-------- -------- -------- -------
Net interest income before
provision for loan and
valuation losses 10,285 10,710 20,634 21,447
Provision for loan and
valuation losses 445 842 1,744 1,537
------- -------- -------- -------
Net interest income after
provision for loan and
valuation losses 9,840 9,868 18,890 19,910
------- -------- -------- -------
Noninterest income:
Loan administration 3,727 5,532 8,395 11,801
Brokerage 2,507 2,883 5,459 5,223
Trust services 1,887 1,685 3,839 3,297
Real estate disposition services 3,078 1,458 5,466 2,823
Gain on sale of loans and
securities 285 4,300 2,369 7,746
School Services 799 650 1,470 1,266
Other 6,199 4,539 8,894 6,716
------- -------- -------- -------
Total noninterest income 18,482 21,047 35,892 38,872
------- -------- -------- -------
Noninterest expense:
Compensation and employee benefits 8,786 9,138 17,746 18,204
Amortization of mortgage
servicing rights 4,493 10,356 9,164 19,254
Occupancy and equipment 1,562 1,475 3,122 2,993
Postage and communication 532 601 1,118 1,308
Professional fees 906 848 1,643 1,824
Data processing 636 766 1,259 1,425
(Recovery of) impairment on
mortgage servicing rights (2,100) 2,400 (944) 2,400
Other general and administrative 7,657 8,517 14,499 15,444
-------- -------- -------- -------
Total noninterest expense 22,472 34,101 47,607 62,852
-------- -------- -------- -------
Income (loss) from continuing
operations before income taxes 5,850 (3,186) 7,175 (4,070)
Income tax provision (benefit) 1,988 (1,558) 2,147 (2,102)
-------- -------- -------- -------
Income (loss) from continuing
operations 3,862 (1,628) 5,028 (1,968)
-------- -------- -------- -------
Discontinued operations:
Income from discontinued
operations, net of income
tax provision of $0, $1,978,
$89 and $3,435, respectively - 3,057 137 5,309
-------- -------- -------- -------
Net income $ 3,862 $ 1,429 $ 5,165 $ 3,341
======== ======== ======== =======
Continued
4
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations - continued
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- -------- -------- -------
Income (loss) from continuing
operations per share - basic $ 0.59 $ (0.25) $ 0.77 $ (0.30)
--------- --------- --------- --------
Income (loss) from continuing
operations per share -
assuming dilution $ 0.58 $ (0.25) $ 0.76 $ (0.30)
--------- --------- --------- --------
Income from discontinued
operations per share - basic $ - $ 0.47 $ 0.02 $ 0.81
--------- --------- --------- --------
Income from discontinued
operations per share -
assuming dilution $ - $ 0.47 $ 0.02 $ 0.81
--------- --------- --------- --------
Net income per share - basic $ 0.59 $ 0.22 $ 0.79 $ 0.51
========= ========= ========= =========
Net income per share -
assuming dilution $ 0.58 $ 0.22 $ 0.78 $ 0.51
========= ========= ========= =========
Weighted average shares - basic 6,519,522 6,491,483 6,519,251 6,491,131
========= ========= ========= =========
Weighted average shares -
assuming dilution 6,633,954 6,541,899 6,607,047 6,536,258
========= ========= ========= =========
See accompanying notes.
5
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(Unaudited)
Accumulated
Common stock Additional other
------------------- Paid-in Retained comprehensive Comprehensive
Shares Amount Capital Earnings income (loss) Total income
------------------------------------------------------------------------------------
Six Months Ended
June 30, 2004
- ----------------------
Balance at Dec 31, 2003 6,518,981 $ 1 $ 20,615 $ 48,859 $ 209 $ 69,684
Comprehensive income:
Net income 5,165 5,165 $ 5,165
Net unrealized holding
gains (1) (662) (662) (662)
----------
Comprehensive income $ 4,503
==========
Issuance of stock
related to employee
stock purchase plan
and options 1,200 10 10
----------------------------------------------------------------------
Balance at June 30, 2004 6,520,181 $ 1 $ 20,625 $ 54,024 $ (453) $ 74,197
======================================================================
Six Months Ended
June 30, 2003
- ----------------------
Balance at Dec 31, 2002 6,489,543 $ 1 $ 20,375 $ 46,534 $ 26 $ 66,936
Comprehensive income:
Net income 3,341 3,341 $ 3,341
Net unrealized holding
loss (8) (8) (8)
----------
Comprehensive income $ 3,333
==========
Issuance of stock
related to employee
stock purchase plan
and options 6,500 - 55 - - 55
-----------------------------------------------------------------------
Balance at June 30, 2003 6,496,043 $ 1 $ 20,430 $ 49,875 $ 18 $ 70,324
-----------------------------------------------------------------------
(1) Disclosure of reclassification amount
Six Months Ended
June 30, 2004
- ----------------------
Unrealized holding loss arising during period $ (662)
Less: reclassification adjustment of gains included in net income -
----------
Net unrealized holding loss on securities $ (662)
==========
See accompanying notes.
6
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
---------- ---------
Operating activities
Net income (loss) from continuing operations $ 5,028 $ (1,968)
Adjustments to reconcile net income (loss) from
continuing operations to net cash used in
operating activities:
Depreciation and amorization 1,859 1,819
Provision for loan and valuation losses 1,744 1,537
Amortization of mortgage servicing rights 9,164 19,254
(Recovery of) impairment on mortgage servicing rights (944) 2,400
Gain on sale of loans and securities (2,369) (7,746)
Gain on sale of Matrix Bank branches (5,088) -
Loss (gain) on sale of foreclosed real estate 208 (453)
Changes in assets and liabilities
Loans originated for sale, net of loans sold (32,707) 64,161
Loans purchased for sale (851,142) (880,684)
Principal payments on, and proceeds from sale
of loans held for sale 465,352 496,270
Originated mortgage servicing rights, net (680) (4,047)
(Increase) decrease in other receivables and
other assets 11,662 (13,661)
(Decrease) increase in other liabilities, income
taxes payable and deferred income tax 708 (14,804)
---------- --------
Net cash used in operating activities from continuing
operations (397,205) (337,922)
Net cash provided by (used in) discontinued
operations 226 (13,805)
---------- ---------
Net cash used in operating activities (396,979) (351,727)
========== =========
Investing activities
Loans originated and purchased for investment (83,960) (64,879)
Principal repayments on loans held for investment 17,070 51,663
Loans sold in sale of Matrix Bank branches 24,227 -
Purchase of available for sale securities (136,450) -
Proceeds from sale of available for sale securities 554,086 368,443
Proceeds from maturity and prepayment of available
for sale securities 27,094 322
Redemption (purchase) of FHLBank stock, net 546 (182)
Purchases of building and equipment (1,459) (871)
Acquisition of mortgage servicing rights (246) -
Proceeds from sale of building and equipment - 1,671
Proceeds from sale of Matrix Bank branches
premises and equipment 3,058 -
Proceeds from sale of foreclosed real estate 5,544 4,497
---------- ---------
Net cash provided by investing activities $ 409,510 $ 360,664
=========== =========
7
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - continued
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
--------- ---------
Financing activities
Net increase in deposits $ 12,236 $ 17,323
Net deposits sold with Matrix Bank branches (73,574) -
Net (decrease) increase in custodial escrow balances (630) 3,942
Increase in revolving lines, net 65,630 21,237
Payments of notes payable (714) (714)
Payment of financing arrangements (405) (22)
Proceeds from issuance of capital securities of
subsidiary trusts 9,760 -
Proceeds from issuance of common stock related to
employee stock option purchase plan and options 10 55
--------- ---------
Net cash provided by financing activities 12,313 41,821
--------- ---------
Increase in cash and cash equivalents 24,844 50,758
Cash and cash equivalents at beginning of period 34,510 62,412
-------- ---------
Cash and cash equivalents at end of period $ 59,354 $ 113,170
======== =========
Supplemental disclosure of non-cash activity
Loans transferred to foreclosed real estate $ 6,589 $ 454
======== ========
Loans transferred to securities available for sale $493,755 $380,858
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 14,964 $ 17,228
======== ========
Cash paid for income taxes $ 4,929 $ 3,323
-------- --------
See accompanying notes.
8
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(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, 2003.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts of assets and liabilities at
the date of the condensed consolidated financial statements, and disclosures of
contingent assets and liabilities, and the reported amounts of income and
expenses during the reporting period and the accompanying notes. Actual results
could differ from these estimates.
Stock-Based Compensation
At June 30, 2004, 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, 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. SFAS 123, "Accounting for
Stock-Based Compensation" established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plan. As allowed by SFAS 123 (and SFAS 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
123"), we have elected to continue to apply the intrinsic value-based method of
accounting described above, and have adopted the disclosure requirements of SFAS
123. Accordingly, we do not recognize compensation expense for our stock-based
plan, as we do not issue options at exercise prices below the market value at
the date of the grant. Had compensation cost for our stock-based plans been
determined consistent with SFAS No. 123, our net income and income per share
would have been changed to the pro forma amounts indicated below:
Quarter Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------- -----------------
Net Income: (Dollars in thousands, except share information)
Net income as reported $ 3,862 $ 1,429 $ 5,165 $ 3,341
Deduct: Total stock-based
employee compensation deter-
mined under fair value based
method for awards, net of
related tax effects (64) (75) (133) (153)
---------------- -----------------
Pro forma $ 3,798 $ 1,354 $ 5,032 $ 3,188
================ =================
Income per share:
Basic, as reported $ 0.59 $ 0.22 $ 0.79 $ 0.51
================ ===============
Basic, pro forma $ 0.58 $ 0.21 $ 0.77 $ 0.49
================ ===============
Diluted, as reported $ 0.58 $ 0.22 $ 0.78 $ 0.51
================ ===============
Diluted, pro forma $ 0.57 $ 0.21 $ 0.76 $ 0.49
================ ===============
9
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2004
(Unaudited)
Reclassifications
Certain reclassifications have been made to 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 of
substantially all of its assets associated with its wholesale mortgage
origination platform pursuant to the Purchase and Assumption Agreement of
February 28, 2003, as amended ("Purchase Agreement"). After the sale, our
remaining operations at Matrix Financial consist primarily of the mortgage
servicing investment 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.
There was no premium earned during the quarter ended June 30, 2004; for the six
months ended June 30, 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 condensed consolidated statements
of operations 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------- -----------------
(Dolllars in thousands, except share information)
Net interest income after
provision for loan and
valuation losses $ - $ 1,355 $ - $ 2,504
Noninterest income - 16,081 - 28,910
Noninterest expense - 12,401 - 22,670
----------------- ----------------
Operating income before taxes
from discontinued operations - 5,035 - 8,744
Income tax provision - 1,978 - 3,435
--------------- ----------------
Operating income from
discontinued operations - 3,057 - 5,309
Gain on sale of production platform,
net of income tax benefit of $0,
$0, $89 and $0, respectively - - 137 -
---------------- ----------------
Income from discontinued opera-
tions, net of income taxes $ - $ 3,057 $ 137 $ 5,309
================= =================
Income from discontinued opera-
tions per share - basic $ - $ 0.47 $ 0.02 $ 0.81
================= =================
Income from discontinued opera-
tions per share - assuming dilution $ - $ 0.47 $ 0.02 $ 0.81
================= =================
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 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
Matrix Bank or the Company.
10
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 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. 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. The transaction was approved by Matrix
Bank's regulator 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 fixed assets associated with the branches. There was a
pre-tax gain on the sale of approximately $5.1 million reflected in other income
in the condensed consolidated statements of operations for the quarter and six
months ended June 30, 2004.
4. New Accounting Standards
On March 9, 2004, the SEC staff issued Staff Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments", which provides
guidance regarding mortgage loan interest rate lock commitments related to loans
held for sale as written options, effective 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. The impact of implementing this guidance did not have a significant
impact on the consolidated financial statements.
5. 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------------ --------------------
(Dolllars in thousands)
Numerator:
Income (loss) from continuing
operations, net of tax $ 3,862 $(1,628) $ 5,028 $ (1,968)
Income from discontinued
operations, net of tax - 3,057 137 5,309
------------------- --------------------
Net income $ 3,862 $ 1,429 $ 5,165 $ 3,341
=================== ====================
Denominator:
Weighted average shares
outstanding 6,519,522 6,491,483 6,519,251 6,491,131
Effrect of dilutive securites:
Common stock options 114,432 50,416 87,796 45,127
---------------------- ---------------------
Denominator for net income
per share assuming dilution 6,633,954 6,541,899 6,607,047 6,536,258
====================== =====================
11
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2004
(Unaudited)
6. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
Six Months Ended Year Ended
June 30, December 31,
2004 2003
---------------- ----------------
(In thousands)
Mortgage servicing rights
Balance at beginning of period $ 47,194 $ 79,234
Purchases 220 375
Originations 456 5,082
Amortization (9,164) (32,497)
Sales - -
Appreciation of valuation allowance to
write down impaired MSRs - (5,000)
---------------- ----------------
Balance before valuation allowance at
end of period 38,706 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 2,100 5,350
---------------- ----------------
Balance at end of period (5,506) (6,450)
Valuation allowance for foreclosure costs (750) (1,000)
---------------- ----------------
Mortgaging servicing rights, net $ 32,450 $ 39,744
================ ================
The Company's servicing portfolio (excluding subserviced loans), is comprised of
the following:
June 30, 2004 December 31, 2003
---------------------- ---------------------
Number Principal Number Principal
of Balance of Balance
Loans Outstanding Loans Outstanding
------------------------------------------------
(Dollars in thousands)
Freddie Mac 5,327 $ 208,382 6,194 $ 253,245
Fannie Mae 16,231 937,100 19,257 1,164,589
Ginnie Mae 13,006 815,532 16,370 1,068,975
VA, FHA, conventional and
other loans 8,275 629,799 9,034 696,727
---------------------- ---------------------
42,839 $2,590,813 50,855 $3,183,536
====================== =====================
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at June 30, 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, a subsidiary of Matrix
Bancorp, in noninterest-bearing accounts. The balance of
12
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2004
(Unaudited)
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 periods ending June 30, 2005, 2006, 2007, 2008 and 2009 is $7.1 million,
$5.4 million, $4.2 million, $3.2 million, and $2.5 million, respectively. The
estimated amortization is based on several assumptions as of June 30, 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.
7. Deposits
Deposit account balances are summarized as follows:
June 30, 2004 Decmeber 31, 2003
---------------------------- -------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
--------------------------- -------------------------
(Dollars in thousands)
Passbook accounts $ 1,621 0.18 % 1.28 % 5,675 0.58 % 1.28 %
NOW accounts 164,503 18.12 0.16 180,733 18.56 0.15
Money market accounts 590,952 65.10 0.65 576,088 59.14 0.71
--------------------------- -------------------------
757,076 83.40 0.54 762,496 78.28 0.58
Certificate accounts 150,673 16.60 3.25 211,563 21.72 2.89
--------------------------- --------------------------
Deposits $907,749 100.00 % 1.04 % $974,059 100.00 % 1.07 %
=========================== ==========================
At June 30, 2004 and December 31, 2003, brokered deposits accounted for
approximately $80.8 million and $104.6 million, respectively, of the total
certificate accounts shown above.
8. FHLBank Stock and Borrowings
In connection with Matrix Bank's change of 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:
June 30, 2004 December 31, 2003
------------------- ------------------
(In thousands)
FHLBank of Topeka stock, at cost $ 23,528 $ 23,124
FHLBank of Dallas stock, at cost 6,608 7,558
------------------ -----------------
FHLBank stock $ 30,136 $ 30,682
================== =================
13
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2004
(Unaudited)
The balances of FHLBank borrowings are as follows:
June 30, 2004 December 31, 2003
------------------- ------------------
(In thousands)
FHLBank of Topeka borrowings $ 379,000 $ 311,000
FHLBank of Dallas borrowings 147,162 147,204
------------------ -----------------
FHLBank borrowings $ 526,162 $ 458,204
================== =================
Available unused borrowings from the FHLBank of Topeka totaled $174.0 million at
June 30, 2004.
10. Segment Information
Servicing
Brokerage
Traditional Mortgage and School
Banking Banking Consulting Services All Others Total
--------------- -------------- -------------- ---------- ------------ ---------------
(Dollars in thousands)
Quarter ended ended June 30, 2004:
Revenues from external customers:
Interest income $ 15,153 $ 987 $ 30 $ 1,094 $ 229 $ 17,493
Noninterest income 6,785 2,816 2,615 797 5,469 18,482
Intersegment revenues 620 226 666 2 331 1,845
Segment income (loss) from
continuing operations before
income taxes 11,631 (4,753) 578 113 (1,719) 5,850
Quarter ended June 30, 2003:
Revenues from external customers:
Interest income $ 15,847 $ 1,418 $ 80 $ 1,329 $ 94 $ 18,768
Noninterest income 1,704 12,602 2,791 554 3,396 21,047
Intersegment revenues 814 156 327 2 472 1,771
Segment income (loss) from
continuing operations before
income taxes 5,647 (5,006) 820 (1,039) (3,608) (3,186)
Six months ended June 30, 2004:
Revenues from external customers:
Interest income $ 30,740 $ 2,137 $ 72 $ 2,138 $ 231 $ 35,318
Noninterest income 8,323 10,412 5,458 1,465 10,234 35,892
Intersegment revenues 1,472 496 1,044 5 877 3,894
Segment income (loss) from
continuing operations before
income taxes 17,061 (7,161) 1,152 176 (4,053) 7,175
14
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2004
(Unaudited)
Servicing
Brokerage
Traditional Mortgage and School
Banking Banking Consulting Services All Others Total
--------------- -------------- -------------- ---------- ------------ ---------------
(Dollars in thousands)
Six months ended June 30, 2003:
Revenues from external customers:
Interest income $ 32,111 $ 3,027 $ 116 $ 2,788 $ 170 $ 38,212
Noninterest income 3,283 21,926 5,081 1,093 7,489 38,872
Intersegment revenues 1,610 1,977 708 5 957 5,257
Segment income (loss) from
continuing operations before
income taxes 10,941 (7,023) 1,356 (2,471) (6,873) (4,070)
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Matrix Bancorp, Inc. (occasionally referred to in this document, on a
consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary
thrift holding company that, through our subsidiaries, focuses on traditional
banking, trust and clearing activities, lending activities, mortgage banking and
other fee-based services. Our traditional banking activities include originating
and servicing residential, commercial and Small Business Administration ("SBA")
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 and educational
services 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 "Item 1. Business -
Discontinued Operations" and Note 3 of the consolidated financial statements on
Form 10-K as of December 31, 2003 for a discussion of the sale and impact on
continuing and discontinued operations. 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 $137 thousand for
the six months ended June 30, 2004 and $3.1 million and $5.3 million for the
quarter and six months ended June 30, 2003, respectively, 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 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
16
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
"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 the
discussion above and in Note 2 of the consolidated financial statements on Form
10-K as of December 31, 2003 for 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 the 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
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
17
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 June 30, 2004 and
2003
Income (Loss) from Continuing Operations. For the quarter ended June 30, 2004,
there was income of $3.9 million, or $0.59 per basic share and $0.58 per diluted
share as compared to a loss of $(1.6) million, or $(0.25) per basic and diluted
share, for the quarter ended June 30, 2003. Our income from continuing
operations for the quarter ended June 30, 2004 includes a $5.1 million pre-tax
gain on sale of the Matrix Bank Branches as discussed in Note 3 to the condensed
consolidated financial statements.
Net Interest Income. Net interest income before provision for loan and valuation
losses decreased $400 thousand, or 4.0%, to $10.3 million for the quarter ended
June 30, 2004 as compared to $10.7 million for the quarter ended June 30, 2003.
Our net interest margin decreased 12 basis points to 2.80% for the quarter ended
June 30, 2004 from 2.92% for the quarter ended June 30, 2003. The decrease in
net interest income before provision for loan valuation losses was primarily due
to a 35 basis point decrease in the yield earned on our interest-earning assets,
which was caused by the historically low interest rate environment. Average
interest-earning assets were relatively unchanged in the periods at $1.47
billion at June 30, 2004 and June 30, 2003. We had a 41 basis point decrease in
the cost of our interest-bearing liabilities, primarily due to the increase of
overnight borrowings at FHLBank Topeka as a percentage of total interest
interest-bearing liabilities. The effect of the decrease in the costs of
liabilities was partially offset by a $78.6 million increase in our average
interest-bearing liabilities to $1.31 billion for the quarter ended June 30,
2004 compared to $1.23 billion at June 30, 2003. This increase occurred
primarily because of a $66.1 million decline in noninterest-bearing custodial
deposit accounts related to mortgage loan servicing. This decrease in the cost
of interest bearing liabilities caused our interest rate spread to increase to
2.57% for the quarter ended June 30, 2004 from 2.5% for the quarter ended June
30, 2003. For a tabular presentation of the changes in net interest income due
to changes in the volume of interest-earning assets and interest-bearing
liabilities, as well as changes in interest rates, see "Analysis of Changes in
Net Interest Income Due to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and valuation
losses decreased $400 thousand to $400 thousand for the quarter ended June 30,
2004 as compared to $800 thousand for the quarter ended June 30, 2003. The
decrease in the provision was mainly due to additional reserves recorded in the
2003 quarter that are not present in current year's quarter end. 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 $1.8 million, or 32.6%, to
$3.7 million for the quarter ended June 30, 2004 as compared to $5.5 million for
the quarter ended June 30, 2003. Loan service fees are affected by factors that
include the size of our residential mortgage loan servicing portfolio, the
servicing spread, the timing of payment collections and the amount of ancillary
fees received. Our mortgage loan servicing portfolio had an average balance of
$2.8 billion for the quarter ended June 30, 2004 as compared to an average
balance of $4.6 billion for the quarter ended June 30, 2003. The impact of the
decrease in our average balance was slightly offset by an increase in our actual
service fee rate (including all ancillary income) to 0.52% for the quarter ended
June 30, 2004, as compared to 0.47% for the quarter ended June 30, 2003. The
Company anticipates loan administration fees to continue 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 whole loan activities, SBA brokerage
fees, retail equity, fixed income and mortgage servicing rights activities.
Brokerage fees decreased by $400 thousand, or 13.0% to $2.5 million for the
quarter ended June 30, 2004 as compared to $2.9 million for the quarter ended
June 30, 2003. The decrease is primarily the result of decreased activity at
First Matrix in the acquisition, pooling and selling of SBA loans and securities
due to the timing of purchases and sales in the marketplace.
Trust Services. Trust service fees increased $200 thousand, or 12.0% to $1.9
million for the quarter ended June 30, 2004 as compared to $1.7 million for the
18
same quarter of the prior year. The total of trust accounts under administration
at Sterling Trust and Matrix Bank increased to 54,602 at June 30, 2004 from
47,401 at June 30, 2003 and total assets under administration increased to
approximately $14.7 billion at June 30, 2004 from approximately $11.3 billion at
June 30, 2003. The growth has been achieved at both the trust operations of
Matrix Bank and Sterling Trust. The growth at Matrix Bank is driven by business
referred 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 $1.6 million, or 111.1%, to $3.1 million for the
quarter ended June 30, 2004 as compared to $1.5 million for the quarter ended
June 30, 2003. The increase is due to an increase in the number of properties
closed during the quarter ended June 30, 2004 of 1,558 as compared to 788 for
the same quarter of the prior year, an increase of 97.7%. Additionally, the
increase is due to an increase in the number of properties under management,
which is 3,302 at June 30, 2004 as compared to 2,487 at June 30, 2003, an
increase of 32.8%.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
decreased $4.0 million to $300 thousand for the quarter ended June 30, 2004 as
compared to $4.3 million for the quarter ended June 30, 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 sale of originated SBA and multi-family loans primarily from the portfolio at
Matrix Bank, and gains on the sale of purchased SBA loans and pooled securities
at Matrix Bank. The quarter ended June 30, 2003 included approximately $4.1
million of gains on the sale of the repurchased FHA and VA loans, compared to a
net of approximately $300 for the quarter ended June 30, 2004. Gains 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.
School Services. School services income represents fees earned by ABS, operating
at The GEO Group, for outsourced business and consulting services provided
primarily to charter schools. School services income increased $100 thousand, or
23.0%, to $800 thousand for the quarter ended June 30, 2004 as compared to $700
thousand for the quarter ended June 30, 2003.
Other Income. Other income, which includes loan origination income, equity in
earnings of unconsolidated subsidiary, mortgage servicing net hedging gains and
losses, income earned on bank owned life insurance, rental income and other
miscellaneous income items, increased $1.7 million to $6.2 million for the
quarter ended June 30, 2004 as compared to $4.5 million for the quarter ended
June 30, 2003. The increase in other income was due to the inclusion of
approximately $5.1 million pre-tax gain on the sale of the Matrix Bank branches
in Las Cruces, New Mexico, as discussed in Note 3 to the condensed consolidated
financial statements, offset by a decrease in the net hedging activity realized
at Matrix Financial during the quarter of $2.8 million. This change in hedging
activity was substantially offset by a recovery of a portion of previously
recorded impairment charges on our mortgage servicing asset discussed in
noninterest expenses below.
Noninterest Expense. Noninterest expense decreased $11.6 million, or 34.1%, to
$22.5 million for the quarter ended June 30, 2004 as compared to $34.1 million
for the quarter ended June 30, 2003. This decrease was mainly the result of a
decrease in the levels of amortization of mortgage servicing rights, plus a
recovery of impairment of our mortgage servicing rights in the current quarter
as compared to a charge for impairment on the mortgage servicing rights in the
quarter ended June 30, 2003. The following table details the major components of
noninterest expense for the periods indicated:
19
Quarater Ended
June 30,
----------------------
2004 2003
------- -------
(Dollars in thousands)
Compensation and employee benefits $ 8,786 $ 9,138
Amortization of mortgage servicing rights 4,493 10,356
Occupancy and equipment 1,562 1,475
Postage and communication 532 601
Professional fees 906 848
Data processing 636 766
(Recovery of) impairment on mortgage
servicing rights, net (2,100) 2,400
Other general and administrative 7,657 8,517
-------- -------
Total $22,472 $34,101
======== =======
Compensation and employee benefits expense decreased $300 thousand, or 3.8%, to
$8.8 million for the quarter ended June 30, 2004 as compared to $9.1 million for
the quarter ended June 30, 2003. This decrease was primarily due to decreased
salaries and wages associated with reductions in number of employees, primarily
at Matrix Financial and ABS, offset by increases at Matrix Asset Management.
Overall, there was a decrease of 3 employees to 503 employees at June 30, 2004,
as compared to approximately 506 employees at June 30, 2003.
Amortization of mortgage servicing rights decreased $5.9 million, or 56.6%, to
$4.5 million for the quarter ended June 30, 2004 as compared to $10.4 million
for the quarter ended June 30, 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 $2.8 billion at June 30, 2004 as compared to $4.6 billion
at June 30, 2003. In response to the low interest rates prevalent in the market,
prepayment speeds on our servicing portfolio remained high at an average of
32.4% for the quarter ended June 30, 2004, but were lower than the prepayment
speeds experienced of 39.3% for the quarter ended June 30, 2003.
Impairment on mortgage servicing rights reflects a recovery for the quarter
ended June 30, 2004 of $2.1 million as compared to an impairment charge of $2.4
million for the quarter ended June 30, 2003, a change of $4.5 million. 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 increases in interest rates during the quarter, among other
factors, a recovery of a portion of our previously recorded impairment charge
was recorded increasing 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 $900 thousand, or
7.5%, to $11.3 million for the quarter ended June 30, 2004 as compared to $12.2
million for the quarter ended June 30, 2003. The decrease was despite an
increase of approximately $1.1 million in the levels of reserves and charges at
Matrix Financial related primarily to assets previously originated through the
production platform we were required to repurchase under representation and
warranty clauses in sales contracts, and on which losses have been reserved for.
It is possible that a portion of the recorded reserves and losses may be
recovered either through insurance proceeds or litigation against third parties
in the future should the Company decide to initiate such proceedings.
Income Taxes. Provision for income taxes is $2.0 million for the quarter ended
June 30, 2004 as compared to a benefit of $(1.6) million for the quarter ended
June 30, 2003. Our effective tax rate is 34.0% for the quarter ended June 30,
2004. The effective tax rate is affected by the level of tax-exempt income at
20
ABS and Matrix Bank in proportion to the level of net income (loss) from
continuing operations. The net tax-exempt income was approximately $1.0 million
for the quarter ended June 30, 2004.
Comparison of Results of Operations for the Six Months Ended June 30, 2004 and
2003
Income (Loss) from Continuing Operations. The income from continuing operations
increased $7.0 million to $5.0 million, or $0.77 per basic share and $0.76 per
diluted share, for the six months ended June 30, 2004 as compared to a loss of
$(2.0) million, or $(0.30) per basic and diluted share for the six months ended
June 30, 2003. It should be noted that the loss from continuing operations in
2003 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 decreased $800 thousand, or 3.8% to $20.6 million for the six months
ended June 30, 2004 as compared to $21.4 million for the six months ended June
30, 2003. The factors which impact net interest income are as follows: our
average interest-earning assets were $1.50 billion for the six months ended June
30, 2004 as compared to $1.47 billion for the six months ended June 30, 2003.
The increase in average balance was offset, however, by a decrease in the
average yield on the net interest-earning assets to 4.70% for the six months
ended June 30, 2004 as compared to 5.21% for six months ended June 30, 2003. The
Company's interest-bearing liabilities also increased to $1.34 billion for the
six months ended June 30, 2004 as compared to $1.25 billion for the six months
ended June 30, 2003. This increase was offset, however, as the average cost of
interest-bearing liabilities decreased to 2.19% for the six months ended June
30, 2004, as compared to 2.67% for the six months ended June 30, 2003. Both the
decrease in the yield on interest-earning assets and the cost of the
interest-bearing liabilities are attributable to the low interest rate
environment. The impact of these factors caused the Company's net interest
margin to decrease to 2.75% for the six months ended June 30, 2004 as compared
to 2.92% for the six months ended June 30, 2003, and caused the interest rate
spread to decrease to 2.51% for the six months ended June 30, 2004 as compared
to 2.53% for the six months ended June 30, 2003. For additional discussion
concerning increases in our average interest-earning assets and decreases in our
cost of interest-bearing liabilities, see "Comparison of Results of Operations
for the Quarters Ended June 30, 2004 and 2003--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
increased $200 thousand, or 13.5%, to $1.7 million for the six months ended June
30, 2004 as compared to $1.5 million for the six months ended June 30, 2003. The
increase was primarily attributable to additional reserves recorded at Matrix
Financial as a result of increases in historical loss factors related to
uninsured government loans and additional reserves recorded 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 fees decreased $3.4 million, or 28.9%,
to $8.4 million for the six months ended June 30, 2004 as compared to $11.8
million for the six months ended June 30, 2003. Loan administration fees are
affected by factors that include the size of our residential mortgage loan
servicing portfolio, the servicing spread, the timing of payment collections and
the amount of ancillary fees received. Our mortgage servicing portfolio
decreased to an average balance of $2.9 billion for the six months ended June
30, 2004 as compared to an average balance of $4.8 billion for the six months
ended June 30, 2003. The actual service fee rate (including all ancillary
income) increased to 0.55% for the six months ended June 30, 2004 as compared to
0.48% for the six months ended June 30, 2003.
Brokerage Fees. Brokerage fees increased $200 thousand, or 4.5%, to $5.5 million
for the six months ended June 30, 2004 as compared to $5.2 million for the six
months ended June 30, 2003. 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 the
additional discussion under "Comparison of Results of Operations for the
Quarters Ended June 30, 2004 and 2003--Brokerage Fees."
21
Trust Services. Trust service fees increased $500 thousand, or 16.4%, to $3.8
million for the six months ended June 30, 2004 as compared to $3.3 million for
the six months ended June 30, 2003. Please see additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2004 and
2003--Trust Services."
Real Estate Disposition Services. Real estate disposition services income
increased $2.6 million, or 93.7%, to $5.5 million for the six months ended June
30, 2004 as compared to $2.8 million for the six months ended June 30, 2003.
Please see additional discussion under "Comparison of Results of Operations for
the Quarters Ended June 30, 2004 and 2003--Real Estate Disposition Services."
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
decreased $5.4 million to $2.4 million for the six months ended June 30, 2004 as
compared to $7.8 million for the six months ended June 30, 2003. 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.
School Services. School services income increased $200 thousand, or 16.1%, to
$1.5 million for the six months ended June 30, 2004 as compared to $1.3 million
for the six months ended June 30, 2003. Please see the additional discussion
under "Comparison of Results of Operations for the Quarters Ended June 30, 2004
and 2003--School Services."
Other Income. Other income increased $2.2 million, or 32.4%, to $8.9 million for
the six months ended June 30, 2004 as compared to $6.7 million for the six
months ended June 30, 2003. The increase in other income was primarily due to
the inclusion of a pre-tax gain of approximately $5.1 million on the sale of the
Matrix Bank Las Cruces, New Mexico branches, offset by approximately $3.0
million decrease in the net earnings on our mortgage servicing asset hedge
activity realized at Matrix Financial. Please see the additional discussion
under "Comparison of Results of Operations for the Quarters Ended June 30, 2004
and 2003--Other Income."
Noninterest Expense. Noninterest expense decreased $15.2 million, or 24.3%, to
$47.6 million for the six months ended June 30, 2004 as compared to $62.8
million for the six months ended June 30, 2003. This decrease was primarily due
to a decrease in the level of amortization of our mortgage servicing rights, and
a decrease in the impairment charge to a current period recovery on the mortgage
servicing rights assets. The following table details the major components of
noninterest expense for the periods indicated:
Six Months Ended
June 30,
-----------------------
2004 2003
-------- --------
(Dollars in thousands)
Compensation and employee benefits $ 17,746 $ 18,204
Amortization of mortgage servicing rights 9,164 19,254
Occupancy and equipment 3,122 2,993
Postage and communication 1,118 1,308
Professional fees 1,643 1,824
Data processing 1,259 1,425
(Recovery of) impairment on mortgage
servicing rights, net (944) 2,400
Other general and administrative 14,499 15,444
--------- --------
Total $ 47,607 $ 62,852
========= ========
Compensation and employee benefits decreased $500 thousand, or 2.5%, to $17.7
million for the six months ended June 30, 2004 as compared to $18.2 million for
the six months ended June 30, 2003. Please see the additional discussion under
"Comparison of Results of Operations for the Quarters Ended June 30, 2004 and
2003--Noninterest Expense."
Amortization of mortgage servicing rights decreased $10.1 million, or 52.4%, to
$9.2 million for the six months ended June 30, 2004 as compared to $19.3 million
for the six months ended June 30, 2003. Amortization of mortgage servicing
rights fluctuates based on the size of our mortgage servicing portfolio and the
22
prepayment rates experienced with respect to the underlying mortgage loan
portfolio. The decrease is due to a decrease in the average balance of our
mortgage servicing rights to $2.90 billion at June 30, 2004 as compared to $4.83
billion at June 30, 2003, offset slightly by a decrease in prepayment speeds on
our servicing portfolio to an average of 29.9% for the six months ended June 30,
2004 as compared to 35.5% for the six months ended June 30, 2003. Please see the
additional discussion under "Comparison of Results of Operations for the
Quarters Ended June 30, 2004 and 2003--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, decreased $1.3 million, or
5.9%, to $21.7 million for the six months ended June 30, 2004 as compared to
$23.0 million for the six months ended June 30, 2003. Please see the additional
discussion under "Comparison of Results of Operations for the Quarters Ended
June 30, 2004 and 2003--Noninterest Expense."
Income Taxes. Provision for income taxes is $2.1 million for the six months
ended June 30, 2004 as compared to a benefit of $(2.1) million for the six
months ended June 30, 2003. Our effective tax rate is 29.9% for the six months
ended June 30, 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 from continuing operations.
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding our average balances of assets and liabilities, as well as
the dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities and the resultant yields or costs.
Average interest rate information for the quarters and six months ended June 30,
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.
23
Quarter Ended
June 30,
----------------------------------------------------------------------------------
2004 2003
---------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------------- ------------ ------------ --------------- ------------ ------------
Assets
Interest-earning assets:
Loans receivable $ 1,295,617 $ 15,704 4.85 % $ 1,405,154 $ 18,333 5.22 %
Securities 137,682 1,556 4.52 22,996 185 3.22
Interest-earning deposits 3,533 5 0.57 8,736 21 0.96
Federal Home Loan Bank stock 29,911 228 3.05 30,470 229 3.01
-------------- ------------ ------------ --------------- ------------ ------------
Total interest-earning assets 1,466,743 17,493 4.77 1,467,356 18,768 5.12
Noninterest-earning assets:
Cash 59,334 46,437
Allowance for loan and valuation losses (10,594) (8,255)
Premises and equipment 22,768 25,085
Other assets 144,190 143,713
-------------- ---------------
Total noninterest-earning assets 215,698 206,980
-------------- ---------------
Total assets $ 1,682,441 $ 1,674,336
============== ===============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts $ 3,138 10 1.27 % $ 5,401 18 1.33 %
Money market and NOW accounts 586,061 986 0.67 412,331 997 0.97
Certificates of deposit 154,430 1,349 3.49 359,631 2,426 2.70
Federal Home Loan Bank borrowings 445,477 2,614 2.35 337,890 2,268 2.68
Borrowed money and guaranteed
preferred beneficial interests 123,259 2,249 7.30 118,469 2,349 7.93
-------------- ------------ ------------ --------------- ------------ ------------
Total interest-bearing liabilities 1,312,365 7,208 2.20 1,233,722 8,058 2.61
-------------- ------------ ------------ --------------- ------------ ------------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances) 280,908 336,479
Other liabilities 16,237 34,255
-------------- ---------------
Total noninterest-bearing liabilities 297,145 370,734
-------------- ---------------
Shareholders' equity 72,931 69,880
-------------- ---------------
Total liabilities and shareholders' equity $ 1,682,441 $ 1,674,336
============== ===============
Net interest income before provision for
loan and valuation losses $ 10,285 $ 10,710
============ ============
Interest rate spread 2.57 % 2.50 %
============ ============
Net interest margin 2.80 % 2.92 %
============ ============
Ratio of average interest-earning assets to
average interest-bearing liabilities 111.76 % 118.94 %
============ ============
24
Six Months Ended
June 30,
-------------------------------------- -----------------------------------------
2004 2003
-------------------------------------- ----------------------------------------
Average Interest Average Average Interest Average
Balance Rate Balance Rate
-------------------------------------- ----------------------------------------
Assets
Interest-earning assets:
Loans receivable $1,332,299 $ 31,762 4.77 % $1,398,701 $ 37,285 5.33 %
Securities 136,243 3,094 4.54 24,279 401 3.30
Interest-earning deposits 2,925 8 0.55 13,972 71 1.02
Federal Home Loan Bank stock 29,864 454 3.04 30,426 455 2.99
-------------- ------------ ---------- -------------- ------------- ------------
Total interest-earning assets 1,501,331 35,318 4.70 1,467,378 38,212 5.21
Noninterest-earning assets:
Cash 55,705 45,130
Allowance for loan and valuation losses (10,258) (8,719)
Premises and equipment 23,793 25,946
Other assets 149,613 147,831
-------------- --------------
Total noninterest-earning assets 218,853 210,188
-------------- --------------
Total assets $1,720,184 $1,677,566
============== ==============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts $ 4,534 29 1.28 % $ 5,447 36 1.32 %
Money market and NOW accounts 587,979 2,078 0.71 383,659 1,905 0.99
Certificates of deposit 178,199 2,898 3.25 404,278 5,523 2.73
Federal Home Loan Bank borrowings 448,757 5,176 2.31 335,978 4,507 2.68
Borrowed money and guaranteed
preferred beneficial interests 121,652 4,503 7.40 124,202 4,794 7.72
-------------- ------------ ---------- -------------- ------------- ------------
Total interest-bearing liabilities 1,341,121 14,684 2.19 1,253,564 16,765 2.67
-------------- ------------ ---------- -------------- ------------- ------------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances) 289,309 324,315
Other liabilities 18,243 30,865
-------------- -------------
Total noninterest-bearing liabilities 307,552 355,180
-------------- -------------
Shareholders' equity 71,511 68,822
-------------- -------------
Total liabilities and shareholders' equity $ 1,720,184 $ 1,677,566
============== =============
Net interest income before provision for
loan and valuation losses $ 20,634 $ 21,447
============ =============
Interest rate spread 2.51 % 2.53 %
========== =============
Net interest margin 2.75 % 2.92 %
========== =============
Ratio of average interest-earning assets to
average interest-bearing liabilities 111.95 % 117.06 %
========== =============
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 June 30, Six Months Ended June 30,
2004 vs. 2003 2004 vs. 2003
------------------------------------------ ---------------------------------------
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
------------------------------------------ ---------------------------------------
Volume Rate Total Volume Rate Total
----------- ---------- ---------- ------------ ----------- ---------
(Dollars in thousands) (Dollars in thousands)
Interest-earning assets:
Loans receivable $ (1,379) $ (1,250) $ (2,629) $ (1,716) $ (3,807) $ (5,523)
Securities 1,268 103 1,371 2,491 202 2,693
Interest-earning deposits (9) (7) (16) (40) (23) (63)
FHLBank stock (4) 3 (1) (5) 4 (1)
---------- ---------- ---------- --------- --------- ---------
Total interest-earning assets: (124) (1,151) (1,275) 730 (3,624) (2,894)
========== ========== ========== ========= ========= =========
Interest-bearing liabilities:
Passbook accounts (7) (1) (8) (6) (1) (7)
Money market and NOW accounts 348 (359) (11) 820 (647) 173
Certificates of deposit (1,651) 574 (1,077) (3,524) 899 (2,625)
FHLBank Borrowings 655 (309) 346 1,359 (690) 669
Borrowed money and guaranteed
preferred beneficial interests 92 (192) (100) (96) (195) (291)
--------- --------- ---------- --------- --------- --------
Total interest-bearing liabilities (563) (287) (850) (1,447) (634) (2,081)
--------- --------- ---------- --------- --------- --------
Change in net interest income before
provision for loan and valuation losses $ 439 $ (864) $ (425) $ 2,177 $ (2,990) $ (813)
========= ========= ========== ========= ========= ========
Asset Quality
Nonperforming Assets
As part of asset and liability management, we monitor nonperforming assets on a
monthly basis. Nonperforming assets consist primarily of nonaccrual loans and
foreclosed real estate. Loans are placed on nonaccrual when full payment of
principal or interest is in doubt or when they are past due 90 days as to either
principal or interest. Foreclosed real estate arises primarily through
foreclosure on mortgage loans owned.
26
June 30, December 31, June 30,
2004 2003 2003
------------------------------------------------------------
(Dollars in thousands)
Nonaccrual residential mortgage loans $ 10,319 $ 19,599 $ 18,269
Nonaccrual commercial real estate, commercial
loans and school financing 26,286 11,851 14,947
Nonaccrual consumer loans 21 - -
------------------------------------------------------------
Total nonperforming loans 36,626 31,450 33,216
Foreclosed real estate 7,677 8,538 5,334
------------------------------------------------------------
Total nonperforming assets $ 44,303 $ 39,988 $ 38,550
============================================================
Total nonperforming loans to total loans 2.78 % 2.32 % 2.38 %
============================================================
Total nonperforming assets to total assets 2.55 % 2.32 % 2.21 %
============================================================
Ratio of allowance for loan and valuation losses to
total nonperforming loans 28.64 % 31.13 % 27.11 %
============================================================
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 $16.9 million, $12.2 million and $20.5 million at June 30,
2004, December 31, 2003 and June 30, 2003, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were 0.79%
at June 30, 2004, 1.4% at December 31, 2003, and 1.3% at June 30, 2003. The
nonaccrual residential mortgage loans have improved at June 30, 2004 as compared
to December 31, 2003 and June 30, 2003. The improvement as compared to December
31, 2003 is a result of the inclusion in the December 31, 2003 balance of
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, on which nonaccrual
balances have decreased. During the quarter ended June 30, 2004, the Company
sold $14.9 million of delinquent uninsured loans resulting in an overall
decrease in the non-accrual residential loans. Additionally, nonaccrual balances
at Matrix Capital Bank have decreased due to repayments, reinstatements and
foreclosures.
The significant increase in nonaccrual commercial loans and school financing at
June 30, 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 commercial 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 $8.3 million as
compared to December 31, 2003 to $10.7 million at June 30, 2004. Not included in
the June 30, 2004 balance was $3.1 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. During the second quarter, a forbearance
agreement was entered into with required principal and interest payments to be
made. Based on current information, we believe that reserves are sufficient for
any potential losses.
In addition, Matrix Bank placed two commercial real estate loans and one
commercial loan that total $6.6 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
27
nonperforming loan to determine potential loss exposure. In conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and valuation losses. See "Comparison of
Results of Operations for the Quarters Ended June 30, 2004 and 2003."
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. In
February 2004, the Company issued $10.0 million of subordinated debt which funds
are targeted to be used to repurchase and repay 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 June 30, 2004, the entire amount of the line of credit of
$12.0 million is available. Additionally, under a strategy implemented in 2003,
liquidation of certain loans receivable at ABS have generated cash to the
Company.
Matrix Bank's liquidity needs are expected to be met through brokered deposit
growth, borrowings from the FHLBank, 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 June 30, 2004, Matrix Bank had overnight
and term borrowings of $526.2 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 June 30, 2004 was $80.8 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
6.62% at June 30, 2004. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $26.8 million. Matrix Bank's
risk-based capital ratio was 13.55% at June 30, 2004, which currently exceeds
the well capitalized risk-based capital requirement of 10.0% of risk-weighted
assets by $30.8 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 loans. One of
our facilities maintained at a third party institution with a current
outstanding balance of $10.7 million is scheduled to mature in September 2004.
Cash proceeds generated from the sale of refinancing of the underlying loans
used as collateral for the financing are expected to be used to repay the
majority of the financing. 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 $9.6 million at June 30, 2004.
28
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance
Sheet Arrangements
During the quarter and six months ended June 30, 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.
The Company issued $10.0 million of subordinated debt during the quarter ended
March 31, 2004, maturing February 2014. See Note 8 in the Form 10-Q for March
31, 2004 for a detailed discussion.
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 June
30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter and six months ended June 30, 2004, 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,
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 June 30, 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 June 30, 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 June 30, 2004 that have significantly affected, or are likely to
materially affect, the Company's internal controls over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
A former customer of Matrix Bank is a debtor in a Chapter 11 proceeding under
the Bankruptcy Code styled In re Apponline.com, Inc. and Island Mortgage
Network, Inc. pending in the United States Bankruptcy Court for the Eastern
District of New York. Prior to the bankruptcy filing, Matrix Bank had provided
the customer, Island Mortgage Network, Inc., with a purchase/repurchase facility
under which Matrix Bank purchased residential mortgage loans from Island
Mortgage, with Island Mortgage having the right or obligation to repurchase such
mortgage loans within a specified period of time.
The bankruptcy trustee has initiated an adversary action against Matrix Bank
seeking to recover as an avoidable preference the $6.1 million Island Mortgage
paid to Matrix Bank. Matrix Bank believes that it will successfully demonstrate
to the Bankruptcy Court that the $6.1 million the trustee seeks to recover was
purchase money belonging to Matrix Bank returned by Island Mortgage for loans
that did not close and were not sold to Matrix Bank. Matrix Bank believes it has
adequate defenses and intends to vigorously defend this action. Cross motions
for summary judgment have been filed by Matrix Bank and the bankruptcy trustee
in this matter, but no decision has yet been rendered in these cross motions for
summary judgment. The ultimate legal and financial liability of the Company, if
any, in any of these matters cannot be estimated with certainty at this time.
29
Additionally, Matrix Bank has initiated an adversary claim against the State
Bank of Long Island ("State Bank"). State Bank was the depository bank for
Island Mortgage, and Matrix Bank believes that State Bank bears liability for
any loss sustained by Matrix Bank as a result of the fraud perpetrated by Island
Mortgage. State Bank has filed a motion for summary judgment in this matter, but
no decision has yet been rendered on the motion for summary judgment. Matrix
Bank cannot accurately assess at this time whether and to what extent it will
receive compensation from State Bank for any loss it may incur as a result of
its relationship with Island Mortgage.
Sterling Trust has been named a defendant in an action filed July 1999 styled
Roderick Adderley, et al. v. Advanced Financial Services, Inc., et al. that was
tried in Tarrant County, Texas district court in the spring of 2000. The jury
returned a verdict adverse to Sterling Trust with respect to two of 12 theories
of liability posed by the plaintiffs, and the court has signed a judgment for
certain of the plaintiffs in the amount of approximately $6.4 million, 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 conditional attorneys' fees for the
appeals, but denied the punitive award of approximately $250 thousand. Sterling
Trust continues to believe it has meritorious points of appeal to the decision.
On October 31, 2003, Sterling Trust filed its Petition for Review with the
Supreme Court of Texas. The Supreme Court of Texas has granted Sterling Trust's
Petition for Review, meaning that it has agreed to hear the case. Oral argument
has been set for September 29, 2004. Notwithstanding the granting of the
Petition for Review, there can be no assurances that Sterling Trust's appeal
will be successful or that the Supreme Court of Texas will render an opinion
favorable to Sterling Trust. Despite the fact that a final judgment from the
trial court and the intermediate appellate court has been entered against
Sterling in this matter, management has determined that the loss in this matter
is not probable within FAS 5; accordingly, no accrual for loss with respect to
this matter has been recorded in the consolidated financial statements. The
ultimate legal and financial liability of the Company, if any, in this matter
cannot be estimated with certainty at this time.
Sterling Trust, Matrix Bancorp, Matrix Bank, The Vintage Group, Inc. and Vintage
Delaware Holdings, Inc. have been named a defendant in an action filed in
December 2001 styled Heraclio A. Munoz, et al. v. Sterling Trust Company, et.
al. that is pending in Superior Court of the State of California. The complaint
seeks class action status, requests unspecified damages and alleges negligent
misrepresentation, breach of fiduciary duty and breach of written contract on
the part of Sterling Trust. A hearing on the plaintiffs' motion for class
certification was held in July 2004, but no decision on such has yet been
rendered. The Company believes it has meritorious defenses and is defending the
matter vigorously. The ultimate legal and financial liability of the Company, if
any, in this matter cannot be estimated with certainty at this time.
Please see Part II - Item 1 of our Form 10-Q for the quarter ended March 31,
2004 for a discussion of previous developments in these matters, as applicable.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the quarter ended June 30, 2004, there were no material 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
*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.
30
*32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
|X| The Company filed a Form 8-K with the Securities and Exchange Commission on May 4, 2004 (Items 12, 7
and 5), which contained a press release announcing the first quarter 2004 earnings of the Company and the
closing of the sale of two Matrix Bank branches located in Las Cruces, New Mexico.
|X| The Company filed a Form 8-K with the Securities and Exchange Commission on May 28, 2004 (Items 7
and 5), which contained a press release announcing that the Texas Supreme Court granted the petition for
review of Sterling Trust Company vs. Roderick Aderley, et al.
|X| The Company filed a Form 8-K with the Securities and Exchange Commission on July 12, 2004 (Items 7
and 5), which contained a press release announcing the agreement to sell the Matrix Bank branch located in
Sun City, Arizona.
- ---------------------
* 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: July 30, 2004 /s/ D. Mark Spencer
------------------------------------ ---------------------------------------------
D. Mark Spencer
President and
Co-Chief Executive Officer
(Principal Executive Officer)
Dated: July 30, 2004 /s/ Richard V. Schmitz
------------------------------------ ---------------------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
Dated: July 30, 2004 /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.
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