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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 October 29, 2004 was 6,520,181 shares.
TABLE OF CONTENTS
PART I - Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2004 (unaudited) and December 31, 2003......................................3
Condensed Consolidated Statements of Operations
Quarter and nine months ended September 30, 2004 and 2003 (unaudited).....................4
Condensed Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 2004 and 2003 (unaudited).................................6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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.....................................................................20
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..................................36
ITEM 4. Controls and Procedures.....................................................................36
PART II - Other Information
ITEM 1. Legal Proceedings...........................................................................36
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................37
ITEM 4. Submissions of Matters to a Vote of Security Holders........................................37
ITEM 6. Exhibits....................................................................................38
SIGNATURES ............................................................................................39
2
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share information)
September 30, December 31,
2004 2003
---------- ----------
Assets (Unaudited)
Cash and cash equivalents $ 49,567 $ 32,538
Interest-earning deposits and federal funds sold 3,988 1,972
Investment securities 236,777 152,508
Loans held for sale, net 1,132,032 999,454
Loans held for investment, net 289,099 344,802
Mortgage servicing rights, net 29,416 39,744
Other receivables 32,762 43,884
FHLBank stock, at cost 33,164 30,682
Foreclosed real estate 4,810 8,538
Premises and equipment, net 20,694 24,981
Bank owned life insurance 21,341 20,613
Other assets, net 23,686 24,208
---------- ----------
Total assets $1,877,336 $1,723,924
========== ==========
Liabilities and shareholders' equity
Liabilities:
Deposits $ 978,440 $ 974,059
Custodial escrow balances 75,189 85,466
FHLBank borrowings 601,140 458,204
Borrowed money 32,959 47,970
Junior subordinated debentures owed to unconsolidated subsidiary trusts 76,835 66,525
Other liabilities 25,081 18,508
Income taxes payable and deferred income tax liability 5,634 3,508
---------- ----------
Total liabilities 1,795,278 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 September 30, 2004 and
December 31, 2003, respectively 1 1
Additional paid-in capital 20,625 20,615
Retained earnings 61,136 48,859
Accumulated other comprehensive income 296 209
---------- ----------
Total shareholders' equity 82,058 69,684
---------- ----------
Total liabilities and shareholders' equity $1,877,336 $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 Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Interest and dividend income:
Loans and securities $ 18,664 $ 17,846 $ 53,521 $ 55,532
Interest-earning deposits 262 237 724 764
-------- -------- -------- --------
Total interest and dividend income 18,926 18,083 54,245 56,296
-------- -------- -------- --------
Interest expense:
Deposits 2,681 3,200 7,686 10,664
Borrowed money and junior subordinated debentures 5,659 4,588 15,338 13,889
-------- -------- -------- --------
Total interest expense 8,340 7,788 23,024 24,553
-------- -------- -------- --------
Net interest income before provision for loan and
valuation losses 10,586 10,295 31,221 31,743
Provision for loan and valuation losses 543 1,114 2,288 2,651
-------- -------- -------- --------
Net interest income after provision for loan and
valuation losses 10,043 9,181 28,933 29,092
-------- -------- -------- --------
Noninterest income:
Loan administration 3,549 5,174 11,944 16,975
Brokerage 2,427 2,298 7,886 7,522
Trust services 1,927 1,680 5,765 4,977
Real estate disposition services 1,985 1,786 7,451 4,608
Gain on sale of loans and securities 1,398 4,478 4,367 12,355
Gain on sale of other assets 13,500 - 18,588 -
School services 810 520 2,279 1,785
Other 737 (1,153) 3,945 5,432
-------- -------- -------- --------
Total noninterest income 26,333 14,783 62,225 53,654
-------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 8,203 8,338 25,950 26,541
Amortization of mortgage servicing rights 3,615 8,263 12,779 27,517
Occupancy and equipment 1,530 1,575 4,651 4,568
Postage and communication 511 572 1,630 1,881
Professional fees 892 557 2,535 2,381
Data processing 555 689 1,814 2,114
Impairment on (recovery of) mortgage servicing rights 500 (5,100) (444) (2,700)
Other general and administrative 9,187 9,039 23,685 24,483
-------- -------- -------- --------
Total noninterest expense 24,993 23,933 72,600 86,785
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes 11,383 31 18,558 (4,039)
Income tax provision (benefit) 4,271 (289) 6,418 (2,391)
-------- -------- -------- --------
Income (loss) from continuing operations 7,112 320 12,140 (1,648)
-------- -------- -------- --------
Discontinued operations:
Income (loss) from discontinued operations, net of
income tax
provision (benefit) of $0, $(1,528), $89 and $1,908,
respectively - (2,360) 137 2,949
-------- -------- -------- --------
Net income (loss) $ 7,112 $ (2,040) $ 12,277 $ 1,301
======== ======== ======== ========
Continued
4
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations - continued
(Dollars in thousands, except share information)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
---------------- --------------- --------------- ----------------
Income (loss) from continuing operations
per share - basic $ 1.09 $ 0.05 $ 1.86 $ (0.25)
---------------- --------------- --------------- ----------------
Income (loss) from continuing operations
per share - assuming dilution $ 1.07 $ 0.05 $ 1.83 $ (0.25)
---------------- --------------- --------------- ----------------
Income (loss) from discontinued operations
per share - basic $ - $ (0.36) $ 0.02 $ 0.45
---------------- --------------- --------------- ----------------
Income (loss) from discontinued operations
per share - assuming dilution $ - $ (0.36) $ 0.02 $ 0.45
---------------- --------------- --------------- ----------------
Net income (loss) per share - basic $ 1.09 $ (0.31) $ 1.88 $ 0.20
================ =============== =============== ================
Net income (loss) per share - assuming dilution $ 1.07 $ (0.31) $ 1.85 $ 0.20
================ =============== =============== ================
Weighted average shares - basic 6,520,181 6,496,554 6,519,563 6,492,959
================ =============== =============== ================
Weighted average shares - assuming dilution 6,647,369 6,496,554 6,621,368 6,539,206
================ =============== =============== ================
See accompanying notes.
5
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(Unaudited)
Accumulated
Additional other
Common Stock paid in Retained comprehensive Comprehensive
Shares Amount capital earnings income (loss) Total income
--------- --------- ---------- -------- -------------- -------- --------------
Nine Months Ended
September 30, 2004
- -----------------------------
Balance at December 31, 2003 6,518,981 $ 1 $ 20,615 $ 48,859 $ 209 $ 69,684
Comprehensive income:
Net income 12,277 12,277 $ 12,277
Net unrealized holding 87 87 87
gains(1)
--------------
Comprehensive income $ 12,364
==============
Issuance of stock related to
employee stock purchase
plan and options 1,200 10 10
--------- --------- ------------- ----------- -------------- -----------
Balance at September 30, 6,520,181 $ 1 $ 20,625 $ 61,136 $ 296 $ 82,058
2004
--------- --------- ------------- ----------- -------------- -----------
Nine Months Ended
September 30, 2003
- -----------------------------
Balance at December 31, 2002 6,489,543 $ 1 $ 20,375 $ 46,534 $ 26 $ 66,936
Comprehensive income:
Net income 1,301 1,301 $ 1,301
Net unrealized holding (14) (14) (14)
loss
--------------
Comprehensive income $ 1,287
==============
Issuance of stock related to
employee stock purchase
plan and options 9,000 - 76 - - 76
--------- --------- ------------- ----------- -------------- -----------
Balance at September 30, 6,498,543 $ 1 $ 20,451 $ 47,835 $ 12 $ 68,299
2003
--------- --------- ------------- ----------- -------------- -----------
(1) Disclosure of reclassification amount
Nine months ended
September 30, 2004
- ----------------------------------------------------
Unrealized holding gain arising during period $ 87
Less: reclassification adjustment of gains -
included in net income
--------------
Net unrealized holding gain on securities $ 87
==============
See accompanying notes.
6
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2004 2003
----------- -----------
Operating activities
Income (loss) from continuing operations $ 12,140 $ (1,648)
Adjustments to reconcile income (loss) from continuing operations to net cash
used in operating activities:
Depreciation and amortization 3,312 2,943
Provision for loan and valuation losses 2,288 2,651
Amortization of mortgage servicing rights 12,779 27,517
(Recovery of) impairment on mortgage servicing rights (444) (2,700)
Gain on sale of loans and securities (4,367) (12,355)
Gain on sale of other assets (18,588) -
Loss (gain) on sale of foreclosed real estate 60 (739)
Changes in assets and liabilities
Loans originated for sale, net of loans sold (46,589) 31,601
Loans purchased for sale (1,325,682) (1,325,324)
Principal payments on, and proceeds from sale of loans held for sale 480,773 774,967
Originated mortgage servicing rights, net (787) (4,467)
Decrease (increase) in other receivables and other assets 20,727 (8,448)
Increase (decrease) in other liabilities, income taxes payable and deferred
income tax liability 7,949 (6,880)
----------- -----------
Net cash used in operating activities from continuing operations (856,429) (522,882)
Net cash provided by discontinued operations 226 133,455
----------- -----------
Net cash used in operating activities (856,203) (389,427)
----------- -----------
Investing activities
Loans originated and purchased for investment (112,949) (155,979)
Principal repayments on loans held for investment 144,060 99,523
Loans sold in sale of Matrix Bank branches 24,227 -
Purchase of available for sale securities (145,429) -
Proceeds from sale of available for sale securities 777,296 530,731
Proceeds from maturity and prepayment of available for sale securities 33,063 490
Purchase of FHLBank stock (2,482) (1,957)
Purchases of premises and equipment (1,297) (4,734)
Acquisition of mortgage servicing rights (220) (338)
Proceeds from sale of Matrix Bank branches premises and equipment 3,058 -
Proceeds from the sale of other assets 10,000 -
Proceeds from sale of foreclosed real estate 8,840 5,795
----------- -----------
Net cash provided by investing activities 738,167 473,531
----------- -----------
Continued
7
Matrix Bancorp, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - continued
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2004 2003
--------- ---------
Financing activities
Net increase in deposits $ 82,927 $ 62,318
Net deposits sold with Matrix Bank branches (73,574) -
Net decrease in custodial escrow balances (10,277) (17,135)
Increase (decrease) in revolving lines, net 128,741 (129,818)
Payments of notes payable (1,271) (1,071)
Repayments of junior subordinated debentures (9,545) -
Proceeds from (payment of) financing arrangements 9,760 (29)
Proceeds from issuance of capital securities of subsidiary trusts 10,310 -
Proceeds from issuance of common stock related to employee stock option purchase
plan and options 10 76
--------- ---------
Net cash provided by (used in) financing activities 137,081 (85,659)
--------- ---------
Increase (decrease) in cash and cash equivalents 19,045 (1,555)
Cash and cash equivalents at beginning of period 34,510 62,412
--------- ---------
Cash and cash equivalents at end of period $ 53,555 $ 60,857
========= =========
Supplemental disclosure of non-cash activity
Loans transferred to foreclosed real estate and other assets $ 13,370 $ 4,896
========= =========
Loans transferred to investment securities $ 749,199 $ 565,185
========= =========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 23,298 $ 25,442
========= =========
Cash paid for income taxes $ 4,616 $ 3,734
========= =========
See accompanying notes.
8
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 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 and
certain adjustments considered necessary as discussed herein) 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 September 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 (loss) and income (loss) per share would have been
changed to the pro forma amounts indicated below:
9
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
---------------- --------------- --------------- ----------------
Net income (loss): (Dollars in thousands, except share information)
Net income (loss) as reported $ 7,112 $ (2,040) $ 12,277 $ 1,301
Deduct: Total stock-based employee compensation
determined under fair value based method for
awards, net of related tax effects (63) (67) (196) (220)
---------------- --------------- --------------- ----------------
Pro forma $ 7,049 $ (2,107) $ 12,081 $ 1,081
================ =============== =============== ================
Income (loss) per share:
Basic, as reported $ 1.09 $ (0.31) $ 1.88 $ 0.20
================ =============== =============== ================
Basic, pro forma $ 1.08 $ (0.32) $ 1.85 $ 0.17
================ =============== =============== ================
Diluted, as reported $ 1.07 $ (0.31) $ 1.85 $ 0.20
================ =============== =============== ================
Diluted, pro forma $ 1.06 $ (0.32) $ 1.82 $ 0.17
================ =============== =============== ================
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 Majority Interest in Real Estate Disposition Services Subsidiary
On September 10, 2004, the Company announced the sale by Matrix Asset Management
Corporation ("MAMC") of substantially all of its assets related to its real
estate management and disposition business. After the sale, we have retained a
25% interest in the new company created by the purchaser, Matrix Asset
Management, LLC, as well as our remaining operations in MAMC of a real estate
brokerage office operating exclusively in the Denver metro area. As part of the
transaction, referrals for the sale of real estate managed by Matrix Asset
Management, LLC in the Denver metro area generally will be referred to MAMC.
During the quarter ended September 30, 2004, MAMC recorded a gain on sale of
approximately $13.5 million. The 25% ownership will be accounted for using the
equity method of accounting. Due to our 25% ownership, we will continue to
reflect the operations of MAMC as continuing operations. The Company may require
the purchaser to purchase its 25% interest in Matrix Asset Management LLC at
anytime, the purchase price of which maybe paid by the purchaser, at its option,
in cash or a combination of cash and an unsecured promissory note. The
purchaser, in turn, may require the Company to sell its 25% interest to the
purchaser for cash at any time during the 30-calendar day period beginning on
December 26th of each year, commencing December 26, 2007. The purchase price for
the 25% interest will be determined in accordance with a fair value formula that
considers the earnings and net worth of Matrix Asset Management, LLC, as set
forth in Matrix Asset Management, LLC's Operating Agreement.
For as long as the Company owns an interest in Matrix Asset Management, LLC and
for a period of one year thereafter, the Company has agreed that, except in
limited circumstances, neither the Company nor any of its affiliates will engage
in, directly or indirectly, the real estate disposition services business.
10
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
The following pro forma condensed consolidated financial information presented
for the quarter and nine months ended September 30, 2004 and 2003, is based upon
the Company's historical results from operations, adjusted to reflect the impact
of the sale of substantially all of the assets of MAMC and the retention of the
25% minority interest in Matrix Asset Management, LLC as if the sale had
occurred January 1, 2003. The $13.5 pre-tax gain on the sale of the assets of
MAMC during the quarter and nine months ended September 30, 2004 is also
excluded from the pro forma balances as this gain is a nonrecurring item that is
the direct result of the transaction. The pro forma condensed consolidated
financial information is presented for illustrative purposes only and is not
indicative of any future results of operations or the results that might have
occurred if the disposition had actually been completed on the indicated dates.
MAMC had net assets of $1 million, which were sold to the purchaser. For all
periods for which pro forma financial information is required, MAMC had total
assets of less than $10 million, and accordingly, presentation of consolidated
balance sheet information is unnecessary.
Quarter Ended Nine Months Ended
September 30, 2004 September 30, 2004
------------------------ -------------------------
As Reported Pro Forma As Reported Pro Forma
-------- -------- -------- --------
(Dollars in thousands, except share information)
Total interest and dividend income $ 18,926 $ 18,926 $ 54,245 $ 54,245
Total interest expense 8,340 8,340 23,024 23,024
-------- -------- -------- --------
Net interest income before provision
for loan and valuation losses 10,586 10,586 31,221 31,221
Provision for loan and valuation losses 543 543 2,288 2,288
-------- -------- -------- --------
Net interest income after provision
for loan and valuation losses 10,043 10,043 28,933 28,933
-------- -------- -------- --------
Noninterest income:
Loan administration 3,549 3,549 11,944 11,944
Brokerage 2,427 2,427 7,886 7,886
Trust services 1,927 1,927 5,765 5,765
Real estate disposition services 1,985 191 7,451 528
Gain on sale of loans and securities 1,398 1,398 4,367 4,367
Gain on sale of other assets 13,500 - 18,588 5,088
School services 810 810 2,279 2,279
Other 737 871 3,945 4,470
-------- -------- -------- --------
Total noninterest income 26,333 11,173 62,225 42,327
-------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 8,203 7,217 25,950 22,278
Amortization of mortgage servicing
rights 3,615 3,615 12,779 12,779
Occupancy and equipment 1,530 1,451 4,651 4,359
Postage and communication 511 459 1,630 1,457
Professional fees 892 851 2,535 2,415
Data processing 555 552 1,814 1,804
Impairment on (recovery of)
mortgage servicing rights 500 500 (444) (444)
Other general and administrative 9,187 9,105 23,685 23,199
-------- -------- -------- --------
Total noninterest expense 24,993 23,750 72,600 67,847
-------- -------- -------- --------
11
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
Quarter Ended Nine Months Ended
September 30, 2004 September 30, 2004
---------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma
------------- -------------- ------------- --------------
(Dollars in thousands, except share information)
Income (loss) from continuing
operations before income taxes $ 11,383 $ (2,534) $ 18,558 $ 3,413
Income tax provision (benefit) 4,271 (1,204) 6,418 432
---------------------------- ----------------------------
Income (loss) from continuing operations 7,112 (1,330) 12,140 2,981
---------------------------- ----------------------------
Discontinued operations, net of income
tax - - 137 137
---------------------------- ----------------------------
Net income (loss) $ 7,112 $ (1,330) $ 12,277 $ 3,118
============================ ============================
Income (loss) from continuing
operations per share - basic $ 1.09 $ (0.20) $ 1.86 $ 0.46
---------------------------- ----------------------------
Income (loss) from continuing
operations per share - assuming
dilution $ 1.07 $ (0.20) $ 1.83 $ 0.45
---------------------------- ----------------------------
Income (loss) from discontinued
operations per share - basic $ - $ - $ 0.02 $ 0.02
---------------------------- ----------------------------
Income (loss) from discontinued
Operations per share - assuming
dilution $ - $ - $ 0.02 $ 0.02
---------------------------- ----------------------------
Net income (loss) per share - basic $ 1.09 $ (0.20) $ 1.88 $ 0.48
============================ ============================
Net income (loss) per share - assuming
dilution $ 1.07 $ (0.20) $ 1.85 $ 0.47
============================ ============================
Quarter Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------- -------------- ------------- --------------
As Reported Pro Forma As Reported Pro Forma
------------- -------------- ------------- --------------
(Dollars in thousands, except share information)
Total interest and dividend income $ 18,083 $ 18,083 $ 56,296 $ 56,296
Total interest expense 7,788 7,788 24,553 24,548
---------------------------- ----------------------------
Net interest income before provision
for loan and valuation losses 10,295 10,295 31,743 31,748
Provision for loan and valuation losses 1,114 1,114 2,651 2,651
---------------------------- ----------------------------
Net interest income after provision
for loan and valuation losses 9,181 9,181 29,092 29,097
---------------------------- ----------------------------
Noninterest income:
Loan administration 5,174 5,174 16,975 16,975
Brokerage 2,298 2,298 7,522 7,522
Trust services 1,680 1,680 4,977 4,977
Real estate disposition services 1,786 141 4,608 145
Gain on sale of loans and securities 4,478 4,478 12,355 12,355
Gain on sale of other assets - - - -
School services 520 520 1,785 1,785
Other (1,153) (1,030) 5,432 5,632
---------------------------- ----------------------------
Total noninterest income 14,783 13,261 53,654 49,391
------------------------------------------------------------
12
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
Quarter Ended Nine Months Ended
September 30, 2003 September 30, 2003
---------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma
(Dollars in thousands, except share information)
Noninterest expense:
Compensation and employee benefits $ 8,338 $ 7,509 $ 26,541 $ 24,288
Amortization of mortgage servicing
rights 8,263 8,263 27,517 27,517
Occupancy and equipment 1,575 1,490 4,568 4,348
Postage and communication 572 538 1,881 1,764
Professional fees 557 548 2,381 2,258
Data processing 689 687 2,114 2,109
Impairment on (recovery of)
mortgage servicing rights (5,100) (5,100) (2,700) (2,700)
Other general and administrative 9,039 8,844 24,483 23,543
---------------------------- ----------------------------
Total noninterest expense 23,933 22,779 86,785 83,127
---------------------------- ----------------------------
Income (loss) from continuing
operations before income taxes 31 (337) (4,039) (4,639)
Income tax provision (benefit) (289) (428) (2,391) (2,635)
---------------------------- ----------------------------
Income (loss) from continuing operations 320 91 (1,648) (2,004)
---------------------------- ----------------------------
Discontinued operations, net of income
tax (2,360) (2,360) 2,949 2,949
---------------------------- ----------------------------
Net income (loss) $ (2,040) $ (2,269) $ 1,301 $ 945
============================ ============================
Income (loss) from continuing
operations per share - basic $ 0.05 $ 0.01 $ (0.25) $ (0.31)
---------------------------- ----------------------------
Income (loss) from continuing
operations per share - assuming
dilution $ 0.05 $ 0.01 $ (0.25) $ (0.31)
---------------------------- ----------------------------
Income (loss) from discontinued
operations per share - basic $ (0.36) $ (0.36) $ 0.45 $ 0.45
---------------------------- ----------------------------
Income (loss) from discontinued
Operations per share - assuming
dilution $ (0.36) $ (0.36) $ 0.45 $ 0.45
---------------------------- ----------------------------
Net income (loss) per share - basic $ (0.31) $ (0.35) $ 0.20 $ 0.14
============================ ============================
Net income (loss) per share - assuming
dilution $ (0.31) $ (0.35) $ 0.20 $ 0.14
============================ ============================
3. 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 September 30, 2004; for the
nine months ended September 30, 2004, the production premium earned and
reflected in income from discontinued operations was $226 thousand, before tax.
13
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
---------------- --------------- --------------- ----------------
(Dollars in thousands, except share information)
Net interest income after provision for loan and
and valuation losses $ - $ 973 $ - $ 3,477
Noninterest income - 9,400 226 38,310
Noninterest expense - 9,047 - 31,718
---------------- --------------- --------------- ----------------
Operating income before taxes from
discontinued operations of production platform - 1,326 226 10,069
Income tax provision - 521 89 3,955
---------------- --------------- --------------- ----------------
Operating income from discontinued operations
of production platform - 805 137 6,114
Loss on sale of production platform, net of income
tax benefit of $2,048 - (3,165) - (3,165)
---------------- --------------- --------------- ----------------
Income from discontinued operations of production
platform, net of income taxes $ - $ (2,360) $ 137 $ 2,949
================ =============== =============== ================
Income from discontinued operations of production
platform per share - basic $ - $ (0.36) $ 0.02 $ 0.45
================ =============== =============== ================
Income from discontinued operations of production
platform per share - assuming dilution $ - $ (0.36) $ 0.02 $ 0.45
================ =============== =============== ================
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.
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.
4. 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 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 noninterest income in the condensed consolidated statements of operations
for the nine months ended September 30, 2004.
On July 12, 2004, Matrix Bank entered into a definitive agreement to sell its
branch in Sun City, Arizona. The transaction received regulatory approval on
September 27, 2004 and closed on November 1, 2004. The sale included
approximately $100.0 million of deposits, a nominal amount of loans, as well as
the real estate and fixed assets associated with the branches.
14
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
5. 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.
6. Net Income (Loss) Per Share
The following table sets forth the components of net income (loss) per share and
net income (loss) per share assuming dilution:
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
---------------- --------------- --------------- ----------------
Numerator: (Dollars in thousands)
Income (loss) from continuing operations $ 7,112 $ 320 $ 12,140 $ (1,648)
Income (loss) from discontinued operations - (2,360) 137 2,949
---------------- --------------- --------------- ----------------
Net income (loss) $ 7,112 $ (2,040) $ 12,277 $ 1,301
================ =============== =============== ================
Denominator:
Weighted average shares outstanding 6,520,181 6,496,554 6,519,563 6,492,959
Effect of dilutive securities:
Common stock options 127,188 - 101,805 46,247
---------------- --------------- --------------- ----------------
Denominator for net income per share assuming 6,647,369 6,496,554 6,621,368 6,539,206
dilution
================ =============== =============== ================
For the quarter ended September 30, 2003, there were stock options and warrants
outstanding of 48,133, which were potentially convertible to common stock. These
securities are anti-dilutive due to the net loss for the quarter ended September
30, 2003, and as such, these potentially dilutive securities have not been used
in the calculation of diluted loss per share for the quarter ended September 30,
2003.
15
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
7. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
Nine Months Ended Year Ended
September 30, December 31,
2004 2003
-------- --------
(Dollars in Thousands)
Mortgage servicing rights
Balance at beginning of period $ 47,194 $ 79,234
Purchases 220 375
Originations 787 5,082
Amortization (12,779) (32,497)
Sales - -
Application of valuation allowance to write down impaired MSRs (2,600) (5,000)
-------- --------
Balance before valuation allowance at end of period 32,822 47,194
Valuation allowance for impairment of mortgage servicing rights
Balance at beginning of period (6,450) (14,400)
Additions (1,656) (2,400)
Application of valuation allowance to write down impaired MSRs 2,600 5,000
Recovery 2,100 5,350
-------- --------
Balance at end of period (3,406) (6,450)
Valuation allowance for foreclosure costs - (1,000)
-------- --------
Mortgage servicing rights, net $ 29,416 $ 39,744
======== ========
The Company's servicing portfolio (excluding subserviced loans) is comprised of
the following:
September 30, 2004 December 31, 2003
------------------------ ------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding of Loans Outstanding
---------- ---------- ---------- ----------
(Dollars in thousands)
Freddie Mac 5,011 $ 197,278 6,194 $ 253,245
Fannie Mae 15,086 847,901 19,257 1,164,589
Ginnie Mae 12,045 745,776 16,370 1,068,975
VA, FHA, conventional and other loans 8,064 606,207 9,034 696,727
---------- ---------- ---------- ----------
40,206 $2,397,162 50,855 $3,183,536
========== ========== ========== ==========
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at September 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 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.
16
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
The estimated aggregate amortization of our mortgage servicing rights for each
of the next twelve month periods ending September 30, 2005, 2006, 2007, 2008 and
2009 is $6.7 million, $5.1 million, $3.9 million, $3.0 million, and $2.3
million, respectively. The estimated amortization is based on several
assumptions as of September 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.
8. Deposits
Deposit account balances are summarized as follows:
September 30, 2004 December 31, 2003
-------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
------------- ---------- ------------------- --------------- -------------- --------------
(Dollars in Thousands)
Passbook accounts $ 1,633 0.16 % 1.31 % $ 5,675 0.58 % 1.28 %
NOW accounts 178,640 18.26 0.15 180,733 18.56 0.15
Money market accounts 627,073 64.09 0.67 576,088 59.14 0.71
------------- ---------- ------------------- --------------- -------------- --------------
807,346 82.51 0.55 762,496 78.28 0.58
Certificate accounts 171,094 17.49 3.29 211,563 21.72 2.89
------------- ---------- ------------------- --------------- -------------- --------------
Deposits $ 978,440 100.00 % 1.05 % $ 974,059 100.00 % 1.07 %
============= ========== =================== =============== ============== ==============
At September 30, 2004 and December 31, 2003, brokered deposits accounted for
approximately $100.7 million and $104.6 million, respectively, of the total
certificate accounts shown above.
9. 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:
September 30, 2004 December 31, 2003
--------------------------- ----------------------------
(Dollars in thousands)
FHLBank of Topeka stock, at cost $ 26,524 $ 23,124
FHLBank of Dallas stock, at cost 6,640 7,558
--------------------------- ----------------------------
FHLBank stock $ 33,164 $ 30,682
=========================== ============================
17
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
The balances of FHLBank borrowings are as follows:
September 30, 2004 December 31, 2003
--------------------------- ----------------------------
(Dollars in thousands)
FHLBank of Topeka borrowings $ 454,000 $ 311,000
FHLBank of Dallas borrowings 147,140 147,204
--------------------------- ----------------------------
FHLBank borrowings $ 601,140 $ 458,204
=========================== ============================
Available unused borrowings from the FHLBank of Topeka totaled $221.6 million at
September 30, 2004.
10. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts
On August 30, 2004, the Company formed Matrix Bancorp Capital Trust VI ("Trust
VI"), which completed the sale of $10,000,000 of 6.425% preferred securities.
Trust VI also issued an aggregate amount of $310,000 common securities to the
Company. The net proceeds from the offering were used to purchase $10,310,000 in
principal amount of the Company's 6.425% junior subordinated debentures, due
October 18, 2034. Interest is payable quarterly. The 6.425% coupon will adjust
in October 2009 to a variable rate per annum of LIBOR plus 2.50%. The Company
has the right to redeem the junior subordinated debentures, in whole or in part,
on or after October 18, 2009.
On September 29, 2004, the Company announced the partial redemption of the 10.0%
cumulative trust preferred securities due 2029 issued by Matrix Bancorp Capital
Trust I in July 1999. The Company redeemed an aggregate amount of $15,000,000 of
the trust preferred and common securities in the amount of $25.00 for each trust
preferred security, plus accumulated and unpaid distributions through the
redemption date, which was October 29, 2004.
18
Matrix Bancorp, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2004
(Unaudited)
11. Segment Information
Servicing
Brokerage
Traditional Mortgage and School All
Banking Banking Consulting Service Others Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Quarter ended September 30, 2004:
Revenues from external customers:
Interest income $ 17,196 $ 615 $ 14 $ 914 $ 187 $ 18,926
Noninterest income 1,645 4,340 2,469 806 17,073 26,333
Intersegment revenues 497 312 773 3 418 2,003
Segment income (loss) from
continuing operations before
income taxes 3,965 (3,342) 654 12 10,094 11,383
Quarter ended September 30, 2003:
Revenues from external customers:
Interest income $ 15,151 $ 1,205 $ 64 $ 1,443 $ 220 $ 18,083
Noninterest income 3,381 4,836 2,300 517 3,749 14,783
Intersegment revenues 635 913 629 3 321 2,501
Segment income (loss) from
continuing operations before
income taxes 6,534 (2,228) 833 (2,248) (2,860) 31
Nine months ended September 30, 2004:
Revenues from external customers:
Interest income $ 47,936 $ 2,752 $ 86 $ 3,052 $ 419 $ 54,245
Noninterest income 9,968 14,752 7,927 2,271 27,307 62,225
Intersegment revenues 1,969 808 1,817 8 1,295 5,897
Segment income (loss) from
continuing operations before
income taxes 21,026 (10,503) 1,806 188 6,041 18,558
Nine months ended September 30, 2003:
Revenues from external customers:
Interest income $ 47,262 $ 4,232 $ 180 $ 4,231 $ 391 $ 56,296
Noninterest income 6,664 26,762 7,381 1,610 11,237 53,654
Intersegment revenues 2,245 2,890 1,337 8 1,278 7,758
Segment income (loss) from
continuing operations before
income taxes 17,475 (9,251) 2,189 (4,719) (9,733) (4,039)
19
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 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.; Sterling Trust
Company; First Matrix Investment Services Corp.; Matrix Tower Holdings, LLC; ABS
School Services, L.L.C, operating as The GEO Group; 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 trust service fees generated by Sterling Trust and Matrix Bank, and
related equity pickup of earnings of MSCS;
o gain on sales of mortgage loans generated by Matrix Bank and Matrix
Financial;
o loan administration fees generated by Matrix Financial; 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.
Sale of Majority Interest in Matrix Asset Management Corporation
On September 10, 2004, the Company announced the sale by its wholly owned
subsidiary, Matrix Asset Management Corporation ("MAMC"), of substantially all
of the assets and operations of its real estate disposition and management
services business line for cash and a note receivable payable in quarterly
installments over three years. After the sale, we have retained a 25% interest
in the new company created by the purchaser, Matrix Asset Management, LLC, as
well as our remaining operations in MAMC of a real estate brokerage office
operating exclusively in the Denver metro area. As part of the transaction,
referrals for the sale of real estate managed by Matrix Asset Management, LLC in
the Denver metro area will generally be referred to our brokerage office. During
the quarter ended September 30, 2004, MAMC recorded a pre-tax gain on sale of
$13.5 million. The 25% ownership interest will be accounted for using the equity
method of accounting. Due to our 25% ownership, we will continue to reflect the
operations of MAMC as continuing operations. The Company may require the
purchaser to purchase its 25% interest in Matrix Asset
20
Management LLC at anytime, the purchase price of which maybe paid by the
purchaser, at its option, in cash or a combination of cash and an unsecured
promissory note. The purchaser, in turn, may require the Company to sell its 25%
interest to the purchaser for cash at any time during the 30-calendar day period
beginning on December 26th of each year, commencing December 26, 2007. The
purchase price for the 25% interest will be determined in accordance with a fair
value formula that considers the earnings and net worth of Matrix Asset
Management, LLC, as set forth in Matrix Asset Management, LLC's Operating
Agreement.
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 nine months ended September 30, 2004 and a loss of $(2.4) million and net
income of $2.9 million for the quarter and nine months ended September 30, 2003,
respectively, are reported as income (loss) 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 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.
21
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, and actions or inactions of those that are parties
to the existing or future bankruptcies of the Company's customers or litigation
related thereto; unanticipated developments in connection with the bankruptcy
actions or litigation described above, including judicial variation from
existing legal precedent and the decision by one or more parties to appeal
decisions rendered; the risks and uncertainties discussed elsewhere in the
Company's annual report on Form 10-K, filed on March 12, 2004; and in the
Company's current report on Form 8-K, filed with the Securities and Exchange
Commission ("SEC") on March 14, 2001; and the uncertainties set forth from time
to time in the Company's periodic reports, filings and other public statements.
Comparison of Results of Operations for the Quarters Ended September 30, 2004
and 2003
Income from Continuing Operations. For the quarter ended September 30, 2004,
there was income from continuing operations of $7.1 million, or $1.09 per basic
and $1.07 per diluted share as compared to $320 thousand, or $0.05 per basic and
diluted share, for the quarter ended September 30, 2003. Our income from
continuing operations for the quarter ended September 30, 2004 includes a $13.5
million gain on sale of substantially all of the assets representing the
business of Matrix Asset Management, the impact of which was
22
partially offset by a $3.0 million pre-tax charge for a litigation accrual at
Matrix Bank as discussed in further detail in Part II, Item 1. "Legal
Proceedings" herein.
Net Interest Income. Net interest income before provision for loan and valuation
losses increased $290 thousand, or 2.8%, to $10.6 million for the quarter ended
September 30, 2004 as compared to $10.3 million for the quarter ended September
30, 2003. Our net interest margin, however, decreased 26 basis points to 2.58%
for the quarter ended September 30, 2004 from 2.84% for the quarter ended
September 30, 2003. The slight increase in net interest income before provision
for loan valuation losses was primarily due to an increase in average
interest-earning assets to $1.64 billion for the quarter ended September 30,
2004 as compared to $1.45 billion for the quarter ended September 30, 2003,
which effect was offset by a decrease in the yield on those interest-earning
assets of 37 basis points to 4.61% for the quarter ended September 30, 2004. The
effect of the increase in the net interest-earning assets was partially offset
by a $176.7 million increase in our average interest-bearing liabilities to
$1.48 billion for the quarter ended September 30, 2004 compared to $1.30 billion
at September 30, 2003. We had a 13 basis point decrease in the cost of our
interest-bearing liabilities to 2.26% for the quarter ended September 30, 2004.
The greater decrease in our yield on interest-earning assets than the decrease
in the interest-bearing liabilities caused our interest rate spread to decrease
to 2.35% for the quarter ended September 30, 2004 from 2.59% for the quarter
ended September 30, 2003. The overall decrease in our yield on interest earning
assets is attributed to the overall interest rate environment and our focus on
the acquisition of adjustable rate loans. 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 $570 thousand to $540 thousand for the quarter ended September
30, 2004 as compared to $1.1 million for the quarter ended September 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 at Matrix
Financial and Matrix Bank as nonperforming assets are declining at both
entities. For a discussion of the Company's allowance for loan losses as it
relates to nonperforming assets, see "Asset Quality--Nonperforming Assets."
Loan Administration. Loan administration income represents service fees earned
from servicing loans for various investors, which are based on a contractual
percentage of the outstanding principal balance plus late fees and other
ancillary charges. Loan administration fees decreased $1.6 million, or 31.4%, to
$3.6 million for the quarter ended September 30, 2004 as compared to $5.2
million for the quarter ended September 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 $2.49 billion for the quarter ended September 30, 2004 as
compared to an average balance of $3.98 billion for the quarter ended September
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 0.54% for the quarter ended September 30, 2004, as compared to 0.50% for the
quarter ended September 30, 2003. The Company anticipates loan administration
fees to continue to decrease as its servicing portfolio decreases through normal
prepayments. The servicing functions currently performed by Matrix Financial are
being transferred to a third party sub-servicer in the fourth quarter of 2004.
We believe that this will allow us to lower our overall cost structure. Loan
administration fees are not expected to be impacted by this transfer.
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 increased by $130 thousand, or 5.6% to $2.4 million for the
quarter ended September 30, 2004 as compared to $2.3 million for the quarter
ended September 30, 2003. The increase is the result of increased servicing
brokerage activity at Matrix Bancorp Trading, offset by decreased activity at
23
First Matrix in the acquisition, pooling and selling of SBA loans and
securities, both due to the timing of purchases and sales in the marketplace.
Trust Services. Trust service fees increased $250 thousand, or 14.7% to $1.9
million for the quarter ended September 30, 2004 as compared to $1.7 million for
the same quarter of the prior year. The total of trust accounts under
administration at Sterling Trust and Matrix Bank increased to 57,472 at
September 30, 2004 from 48,487 at September 30, 2003 and total assets under
administration increased to approximately $16.3 billion at September 30, 2004
from approximately $12.1 billion at September 30, 2003. The growth has been
achieved at both the trust operations of Sterling Trust and Matrix Bank. 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 Corporation for real estate management
and disposition services provided on foreclosed properties owned by third party
financial services companies and financial institutions. The results for the
quarter ended September 30, 2004 include revenues from the operations of Matrix
Asset Management Corporation through August 31, 2004, the effective date of the
sale of the majority interest in Matrix Asset Management Corporation. Effective
September 1, 2004, the Company will account for our portion of the ongoing
earnings of Matrix Asset Management under the equity method of accounting, which
is included in other income. Despite including only two months of operations in
the quarter ending September 30, 2004, the real estate disposition services
income increased $200 thousand, or 11.1% to $2.0 million for the quarter ended
September 30, 2004 as compared to $1.8 million for the quarter ended September
30, 2003. The increase is due to an increase in the number of properties closed
during the period as compared to the same period of the prior year. For further
discussion of the sale of Matrix Asset Management Corporation, see Note 2 to the
Condensed Consolidated Financial Statements herein.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
decreased $3.1 million to $1.4 million for the quarter ended September 30, 2004
as compared to $4.5 million for the quarter ended September 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. 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. In addition, the gains related to the delinquent loans purchased
out of the servicing portfolio will continue to decrease as the opportunity is
less as the servicing portfolio decreases.
Gain on Sale of Other Assets. The gain on sale of other assets of $13.5 million
for the quarter ended September 30, 2004 represents the gain on the sale of the
substantially all of the assets representing the business of Matrix Asset
Management Corporation. For further discussion of the sale of Matrix Asset
Management Corporation, see Note 2 to the Condensed Consolidated Financial
Statements herein.
School Services. School services income represents fees earned by ABS, operating
as The GEO Group, for outsourced business and consulting services provided
primarily to charter schools. School services income increased $290 thousand, or
55.8%, to $810 thousand for the quarter ended September 30, 2004 as compared to
$520 thousand for the quarter ended September 30, 2003.
Other Income. Other income, which includes loan origination income, equity in
earnings of unconsolidated subsidiaries, mortgage servicing net hedging gains
and losses, income earned on bank owned life insurance, rental income and other
miscellaneous income items, increased $1.9 million to $740 thousand for the
quarter ended September 30, 2004 as compared to a loss of $(1.2) million for the
quarter ended September 30, 2003.
24
The increase in other income was primarily due to the quarter ended September
30, 2003 including approximately $(1.6) million loss in the net hedging activity
realized at Matrix Financial. Due to the anticipated rising interest rate
environment and the underlying characteristics of our servicing portfolio,
during the second quarter of 2004, management removed our hedge of mortgage
servicing rights with no replacement and as such, we have no similar activity in
the quarter ended September 30, 2004. Offsetting the impact of the reduction in
hedging loss, was a charge-off of $650 thousand of deferred issuance costs
related to the redemption of the $15.0 million of 10.0% trust preferred
securities discussed in detail in Note 10 to the condensed consolidated
financial statements herein. Other changes were due to miscellaneous operating
activity during the quarter.
Noninterest Expense. Noninterest expense increased $1.1 million, or 4.4%, to
$25.0 million for the quarter ended September 30, 2004, as compared to $23.9
million for the quarter ended September 30, 2003. This increase was mainly the
result of an impairment charge against our mortgage servicing rights of $500
thousand for the quarter ended September 30, 2004, as compared to a recovery of
previously recorded impairment charges of $(5.1) million during the quarter
ended September 30, 2003, which impact was offset by a decrease of $4.6 million
in the levels of amortization of mortgage servicing rights during the quarter.
The following table details the major components of noninterest expense for the
periods indicated:
Quarter Ended
September 30,
-------------------------------------------------------
2004 2003
--------------------------- ---------------------------
(Dollars in thousands)
Compensation and employee benefits $ 8,203 $ 8,338
Amortization of mortgage servicing rights 3,615 8,263
Occupancy and equipment 1,530 1,575
Postage and communication 511 572
Professional fees 892 557
Data processing 555 689
Impairment on (recovery of) mortgage servicing rights, net 500 (5,100)
Other general and administrative 9,187 9,039
--------------------------- ---------------------------
Total $ 24,993 $ 23,933
=========================== ===========================
Compensation and employee benefits expense slightly decreased by $140 thousand,
or 1.6%, to $8.2 million for the quarter ended September 30, 2004 as compared to
$8.3 million for the quarter ended September 30, 2003. This consistency was
despite reductions in number of employees at Matrix Bank as a result of the sale
of Matrix Bank's Las Cruces branches, Matrix Financial and ABS, as well as the
reduction of employees in September 2004 due to the sale of Matrix Asset
Management Corporation, offset by increases at Sterling Trust Company. Overall,
there was a decrease of 137 employees to 377 employees at September 30, 2004, as
compared to 514 employees at September 30, 2003. The financial impact of the
decrease due to the sale of Matrix Asset Management Corporation and the
reduction at Matrix Financial should reduce future expenses.
Amortization of mortgage servicing rights decreased $4.6 million, or 56.3%, to
$3.6 million for the quarter ended September 30, 2004 as compared to $8.3
million for the quarter ended September 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 investment in mortgage servicing rights and our
corresponding underlying servicing portfolio to $2.49 billion at September 30,
2004 as compared to $3.98 billion at September 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 26.6% for the quarter ended September
30,
25
2004, but were significantly lower than the prepayment speeds experienced of
41.5% for the quarter ended September 30, 2003.
Impairment on mortgage servicing rights reflects an impairment charge for the
quarter ended September 30, 2004 of $500 thousand as compared to a recovery of
$(5.1) million for the quarter ended September 30, 2003. The Company is required
to record its investment in mortgage servicing rights at the lower of cost or
fair value. The fair value of mortgage servicing rights is determined based on
the discounted future servicing income stratified based on one or more
predominant risk characteristics of the underlying loans. The Company stratifies
its mortgage servicing rights by product type and investor to reflect the
predominant risks. To determine the fair value of its investment, the Company
uses a valuation model that calculates the present value of future cash flows.
Due to changes in interest rates during the quarter, among other factors, an
impairment charge was recorded. In addition, also based on the valuation, a
portion of our previously recorded impairment charge was charged off as a
permanent impairment against the value of the mortgage servicing rights,
reducing the carrying basis to estimated 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, increased $240 thousand, or
2.0%, to $12.7 million for the quarter ended September 30, 2004 as compared to
$12.4 million for the quarter ended September 30, 2003. The overall consistency
is despite the changes in various balances, including a $3.0 million charge
recorded in the quarter ended September 30, 2004 for a litigation accrual at
Matrix Bank as discussed in further detail in Part II, Item 1. "Legal
Proceedings" herein. The total amount accrued fully reserves for the amount to
be paid in settlement of the award. The impact of this litigation charge to the
increase in non-interest expense is offset somewhat by the $1.1 million accrual
for settlement of various litigation matters at Matrix Financial recorded in the
quarter ended September 30, 2003 that is not present in the quarter ended
September 30, 2004. The Company also experienced an increase of approximately
$540 thousand 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 were previously reserved. The impact of these
increases were offset primarily by a decrease in the level of charge-offs of
assets at ABS which in the quarter ended September 30, 2003 were approximately
$2.0 million, and which are not present in the quarter ended September 30, 2004.
Income Taxes. Income taxes reflect a provision of $4.3 million for the quarter
ended September 30, 2004 as compared to a benefit of $(290) thousand for the
quarter ended September 30, 2003. Our effective tax rate is affected by the
level of tax-exempt income at ABS and Matrix Bank in proportion to the level of
net income from continuing operations. The net tax-exempt income was
approximately $870 thousand for the quarter ended September 30, 2004.
Comparison of Results of Operations for the Nine Months Ended September 30, 2004
and 2003
Income (Loss) from Continuing Operations. The income from continuing operations
increased $13.8 million to $12.1 million, or $1.86 per basic share and $1.83 per
diluted share, for the nine months ended September 30, 2004 as compared to a
loss of $(1.6) million, or $(0.25) per basic and diluted share for the nine
months ended September 30, 2003. Income from continuing operations for the nine
months ended September 30, 2004 includes $18.6 million in gains on sale of other
assets, being the sale of Matrix Asset Management Corporation in the third
quarter of 2004 and the sale of the Las Cruces branches of Matrix Bank in the
second quarter of 2004. It should be noted that the results from continuing
operations is based upon the Company's historical results from operations,
adjusted to reflect the impact of the sale of the production
26
platform in 2003 and are not necessarily indicative of the results that might
have occurred if the dispositions 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 $520 thousand, or 1.6% to $31.2 million for the nine months
ended September 30, 2004 as compared to $31.7 million for the nine months ended
September 30, 2003. The factors which impact net interest income include the
following: our average interest-earning assets were $1.55 billion for the nine
months ended September 30, 2004 as compared to $1.46 billion for the nine months
ended September 30, 2003. The increase in average balance was offset, however,
by a decrease in the average yield on the net interest-earning assets to 4.67%
for the nine months ended September 30, 2004 as compared to 5.13% for nine
months ended September 30, 2003. The Company's interest-bearing liabilities also
increased to $1.39 billion for the nine months ended September 30, 2004 as
compared to $1.27 billion for the nine months ended September 30, 2003. This
increase was offset, however, as the average cost of interest-bearing
liabilities decreased to 2.21% for the nine months ended September 30, 2004, as
compared to 2.57% for the nine months ended September 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 all of these factors caused the Company's net
interest margin to decrease to 2.69% for the nine months ended September 30,
2004 as compared to 2.89% for the nine months ended September 30, 2003, and
caused the interest rate spread to decrease to 2.46% for the nine months ended
September 30, 2004, as compared to 2.56% for the nine months ended September 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
September 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
decreased $360 thousand, or 13.7%, to $2.3 million for the nine months ended
September 30, 2004 as compared to $2.7 million for the nine months ended
September 30, 2003. The decrease was primarily attributable to higher levels of
reserves recorded at Matrix Financial, Matrix Bank and ABS for the nine months
ended September 30, 2003 that are not present for the nine months ended
September 30, 2004 as a result of declining levels of nonperforming assets at
Matrix Financial and Matrix Bank. 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 $5.0 million, or 29.6%,
to $11.9 million for the nine months ended September 30, 2004 as compared to
$16.9 million for the nine months ended September 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 $2.77 billion for the nine months
ended September 30, 2004 as compared to an average balance of $4.54 billion for
the nine months ended September 30, 2003. The actual service fee rate (including
all ancillary income) increased to 0.55% for the nine months ended September 30,
2004 as compared to 0.49% for the nine months ended September 30, 2003. Please
see the additional discussion under "Comparison of Results of Operations for the
Quarters Ended September 30, 2004 and 2003--Loan Administration."
Brokerage Fees. Brokerage fees increased $360 thousand, or 4.8%, to $7.9 million
for the nine months ended September 30, 2004 as compared to $7.5 million for the
nine months ended September 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
27
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
September 30, 2004 and 2003--Brokerage Fees."
Trust Services. Trust service fees increased $790 thousand, or 15.8%, to $5.8
million for the nine months ended September 30, 2004 as compared to $5.0 million
for the nine months ended September 30, 2003. Please see additional discussion
under "Comparison of Results of Operations for the Quarters Ended September 30,
2004 and 2003--Trust Services."
Real Estate Disposition Services. Real estate disposition services represents
fees earned by Matrix Asset Management Corporation for real estate management
and disposition services provided on foreclosed properties owned by third party
financial services companies and financial institutions. The results for the
nine months ended September 30, 2004 include revenues from the operations of
Matrix Asset Management Corporation through August 31, 2004, the effective date
of the sale of the majority interest in Matrix Asset Management Corporation.
Effective September 1, 2004, the Company will account for our portion of the
ongoing earnings of Matrix Asset Management under the equity method of
accounting, which is included in other income. Despite including only eight
months of operations in the nine months ending September 30, 2004, the real
estate disposition services income increased $2.8 million, or 61.7% to $7.4
million for the nine months ended September 30, 2004 as compared to $4.6 million
for the nine months ended September 30, 2003. The increase is due to an increase
in the number of properties closed during the period as compared to the same
period of the prior year. For further discussion of the sale of Matrix Asset
Management Corporation, see Note 2 to the Condensed Consolidated Financial
Statements herein.
Gain on Sale of Loans and Securities. Gain on sale of loans and securities
decreased $8.0 million to $4.4 million for the nine months ended September 30,
2004 as compared to $12.4 million for the nine months ended September 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.
Gain on Sale of Other Assets. The gain on sale of other assets of $18.6 million
for the nine months ended September 30, 2004 represents the $13.5 million gain
on the sale of substantially all of the assets representing the business of
Matrix Asset Management Corporation in the third quarter of 2004 and the $5.1
million gain on the sale of the Las Cruces branches of Matrix Bank in the second
quarter of 2004. For further discussion of the sale of Matrix Asset Management
Corporation, see Note 2 to the Condensed Consolidated Financial Statements
herein and for a further discussion of the sale of the Las Cruces branches of
Matrix Bank, see Note 4 to the Condensed Consolidated Financial Statements
herein.
School Services. School services income increased $490 thousand, or 27.7%, to
$2.3 million for the nine months ended September 30, 2004 as compared to $1.8
million for the nine months ended September 30, 2003. Please see the additional
discussion under "Comparison of Results of Operations for the Quarters Ended
September 30, 2004 and 2003--School Services."
Other Income. Other income decreased $1.5 million, or 27.4%, to $3.9 million for
the nine months ended September 30, 2004 as compared to $5.4 million for the
nine months ended September 30, 2003. Please see the additional discussion under
"Comparison of Results of Operations for the Quarters Ended September 30, 2004
and 2003--Other Income."
Noninterest Expense. Noninterest expense decreased $14.2 million, or 16.3%, to
$72.6 million for the nine months ended September 30, 2004 as compared to $86.8
million for the nine months ended September 30, 2003. This decrease was
primarily due to a decrease in the level of amortization of our mortgage
servicing
28
rights, offset by a decrease in the level of recovery of impairment charge on
the mortgage servicing rights assets. The following table details the major
components of noninterest expense for the periods indicated:
Nine Months Ended
September 30,
--------------------------- ---------------------------
2004 2003
--------------------------- ---------------------------
(Dollars in thousands)
Compensation and employee benefits $ 25,950 $ 26,541
Amortization of mortgage servicing rights 12,779 27,517
Occupancy and equipment 4,651 4,568
Postage and communication 1,630 1,881
Professional fees 2,535 2,381
Data processing 1,814 2,114
Recovery of impairment on mortgage servicing rights, net (444) (2,700)
Other general and administrative 23,685 24,483
--------------------------- ---------------------------
Total $ 72,600 $ 86,785
=========================== ===========================
Compensation and employee benefits decreased $590 thousand, or 2.2%, to $25.9
million for the nine months ended September 30, 2004 as compared to $26.5
million for the nine months ended September 30, 2003. Please see the additional
discussion under "Comparison of Results of Operations for the Quarters Ended
September 30, 2004 and 2003--Noninterest Expense."
Amortization of mortgage servicing rights decreased $14.7 million, or 53.6%, to
$12.8 million for the nine months ended September 30, 2004 as compared to $27.5
million for the nine months ended September 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 decrease is due to a decrease in the average
balance of our mortgage servicing rights to $2.77 billion at September 30, 2004
as compared to $4.54 billion at September 30, 2003. We have seen a decrease in
the prepayment speeds on our servicing portfolio to an average of 28.8% for the
nine months ended September 30, 2004 as compared to 37.5% for the nine months
ended September 30, 2003. Please see the additional discussion under "Comparison
of Results of Operations for the Quarters Ended September 30, 2004 and
2003--Noninterest Expense."
Impairment on mortgage servicing rights reflects a recovery of impairment for
the nine months ended September 30, 2004 of $(440) thousand as compared to a
recovery of $(2.7) million for the nine months ended September 30, 2003. Please
see the additional discussion under "Comparison of Results of Operations for the
Quarters Ended September 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 by $1.1 millions,
or 3.1%, to $34.3 million for the nine months ended September 30, 2004 as
compared to $35.4 million for the nine months ended September 30, 2003. Please
see the additional discussion under "Comparison of Results of Operations for the
Quarters Ended September 30, 2004 and 2003--Noninterest Expense."
Income Taxes. Income taxes provision is $6.4 million for the nine months ended
September 30, 2004 as compared to a benefit of $(2.4) million for the nine
months ended September 30, 2003. 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. The net tax-exempt income was
approximately $2.8 million for the nine months ended September 30, 2004.
29
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding our average balances of assets and liabilities, as well as
the dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities and the resultant yields or costs.
Average interest rate information for the quarters and nine months ended
September 30, 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.
30
Quarter Ended
----------------------------------------------------------------------
September 30,
----------------------------------------------------------------------
2004 2003
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------- ------------ ------------ ------------ ---------
Assets
Interest-earning assets:
Loans receivable $ 1,384,532 $ 16,414 4.74 % $ 1,399,567 $ 17,758 5.08
Securities 222,904 2,250 4.04 13,695 87 2.54
Interest-earning deposits 3,275 7 0.85 6,934 12 0.69
FHLBank stock 30,354 255 3.36 31,978 226 2.83
------------ ---------- ------------ ------------ ------------ ---------
Total interest-earning
assets 1,641,065 18,926 4.61 1,452,174 18,083 4.98
Noninterest-earning assets:
Cash 48,410 46,030
Allowance for loan and (10,707) (8,961)
valuation losses
Premises and equipment 21,540 25,173
Other assets 154,280 146,812
------------ ------------
Total noninterest-earning
assets 213,523 209,054
Total assets $ 1,854,588 $ 1,661,228
============ ============
Liabilities and Shareholders'
Equity
Interest-bearing liabilities:
Passbook accounts $ 1,633 $ 6 1.47 % $ 6,176 19 1.23
Money market and NOW
accounts 632,400 1,184 0.75 478,002 958 0.80
Certificates of deposit 176,774 1,491 3.37 343,318 2,223 2.59
FHLBank borrowings 546,561 3,313 2.42 354,547 2,305 2.60
Borrowed money and
guaranteed
preferred beneficial
interests 121,084 2,346 7.75 119,702 2,283 7.63
------------ ---------- ------------ ------------ ------------ ---------
Total interest-bearing
liabilities 1,478,482 8,340 2.26 1,301,745 7,788 2.39
------------ ---------- ------------ ------------ ------------ ---------
Noninterest-bearing
liabilities:
Demand deposits (including
custodial escrow balances) 276,278 154,904
Other liabilities 23,871 134,246
------------ ------------
Total noninterest-bearing
liabilities 300,149 289,150
Shareholders' equity 75,957 70,333
------------ ------------
Total liabilities and
shareholders'
equity $ 1,854,588 $ 1,661,228
============ ============
Net interest income before
provision
for loan and valuation
losses $ 10,586 $ 10,295
========== =============
Interest rate spread 2.35 % 2.59 %
=========== ============
Net interest margin 2.58 % 2.84 %
=========== ============
Ratio of average
interest-earning assets
to average 111.00 % 111.56 %
=========== ============
Nine Months Ended
----------------------------------------------------------------------
September 30,
----------------------------------------------------------------------
2004 2003
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------- ----------- ------------- ----------- ----------
Assets
Interest-earning assets:
Loans receivable $ 1,351,524 $ 48,315 4.77 % $ 1,399,067 $ 55,044 5.25 %
Securities 165,337 5,206 4.20 20,712 488 3.14
Interest-earning deposits 3,042 15 0.66 11,601 83 0.95
FHLBank stock 30,028 709 3.15 30,949 681 2.93
------------ ---------- ----------- ------------- ----------- ----------
Total interest-earning
assets 1,549,931 54,245 4.67 1,462,329 56,296 5.13
Noninterest-earning assets:
Cash 53,255 45,433
Allowance for loan and (10,409) (8,952)
valuation losses
Premises and equipment 23,037 25,685
Other assets 151,934 147,487
------------ -------------
Total noninterest-earning
assets 217,817 209,653
Total assets $ 1,767,748 $ 1,671,982
============ =============
Liabilities and Shareholders'
Equity
Interest-bearing liabilities:
Passbook accounts $ 3,570 $ 35 1.31 % $ 5,693 % 55 1.29 %
Money market and NOW
accounts 602,848 3,262 0.72 415,452 2,863 0.92
Certificates of deposit 177,720 4,388 3.29 383,735 7,746 2.69
FHLBank borrowings 481,596 8,489 2.35 342,236 6,812 2.65
Borrowed money and
guaranteed
preferred beneficial
interests 121,462 6,850 7.52 122,686 7,077 7.69
------------ ---------- ----------- ------------- ----------- ----------
Total interest-bearing
liabilities 1,387,196 23,024 2.21 1,269,802 24,553 2.57
------------ ---------- ----------- ------------- ----------- ----------
Noninterest-bearing
liabilities:
Demand deposits (including
custodial escrow balances) 284,939 158,583
Other liabilities 22,620 174,271
------------ -------------
Total noninterest-bearing
liabilities 307,559 332,854
Shareholders' equity 72,993 69,326
------------ -------------
Total liabilities and
shareholders'
equity $ 1,767,748 $ 1,671,982
============ =============
Net interest income before
provision
for loan and valuation
losses $ 31,221 $ 31,743
========== ===========
Interest rate spread 2.46 % 2.56 %
============= ===========
Net interest margin 2.69 % 2.89 %
============= ===========
Ratio of average
interest-earning assets
to average 111.73 % 115.16 %
============= ===========
31
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 September 30, Nine Months Ended September 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 $ (188) (1,156) $(1,344) $(1,834) $(4,895) $(6,729)
Securities 2,083 80 2,163 4,501 217 4,718
Interest-earning deposits (7) 2 (5) (48) (20) (68)
FHLBank stock (12) 41 29 (14) 42 28
------- ------- ------- ------- ------- -------
Total interest-earning asset 1,876 (1,033) 843 2,605 (4,656) (2,051)
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Passbook accounts (16) 3 (13) (21) 1 (20)
Money market and NOW accounts 292 (66) 226 1,107 (708) 399
Certificates of deposit (1,277) 545 (732) (4,811) 1,453 (3,358)
FHLBank borrowings 1,177 (169) 1,008 2,527 (850) 1,677
Borrowed money and guaranteed
preferred beneficial interests 26 37 63 (70) (157) (227)
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 202 350 552 (1,268) (261) (1,529)
------- ------- ------- ------- ------- -------
Change in net interest income before
provision for loan and valuation
losses $ 1,674 (1,383) $ 291 $ 3,873 $(4,395) $ (522)
======= ======= ======= ======= ======= =======
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.
32
September 30, December 31, September 30,
2004 2003 2003
-------------------- --------------------- -------------------------
(Dollars in thousands)
Nonaccrual residential mortgage loans $ 10,651 $ 19,599 $ 18,035
Nonaccrual commercial real estate, commercial
loans and school financing 19,607 11,851 15,573
Nonaccrual consumer loans 31 - 4
-------------------- --------------------- -------------------------
Total nonperforming loans 30,289 31,450 33,612
Foreclosed real estate 4,810 8,538 6,081
-------------------- --------------------- -------------------------
Total nonperforming assets $ 35,099 $ 39,988 $ 39,693
==================== ===================== =========================
Total nonperforming loans to total loans 2.12 % 2.32 % 2.60 %
==================== ===================== =========================
Total nonperforming assets to total assets 1.87 % 2.32 % 2.48 %
==================== ===================== =========================
Ratio of allowance for loan and valuation
losses to
total nonperforming loans 36.13 % 31.13 % 26.78 %
==================== ===================== =========================
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 $13.5 million, $12.2 million and $14.4 million at September 30,
2004, December 31, 2003 and September 30, 2003, respectively.
Nonaccrual residential mortgage loans as a percentage of total loans were 0.75%
at September 30, 2004, 1.4% at December 31, 2003, and 1.4% at September 30,
2003. The nonaccrual residential mortgage loans declined $8.9 million in the
nine months ended September 30, 2004 as compared to December 31, 2003, from
$19.6 million to $10.7 million. This decline is a result of the sale of $5.7
million of delinquent uninsured loans and the balance of the decline is due to
repayments, reinstatements and foreclosures. Due to the historically low
interest rate environment, Matrix Bank has experienced significantly higher
levels of repayments and reinstatements of nonaccrual loans than in prior years.
The significant increase in nonaccrual commercial loans and school financing at
September 30, 2004 as compared to December 31, 2003 is attributable to increases
at both ABS in school financing loans and at Matrix Bank due primarily to
increases in non-accrual commercial loans, both 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 $2.7 million as
compared to December 31, 2003 to $5.7 million at September 30, 2004. Based on
current information, we believe that reserves are sufficient for any potential
losses. During the first quarter of 2004, one school client, with whom we had
loans in the amount of $10.5 million, experienced financial difficulties. Of the
$10.5 million balance, $2.6 million represents a participation sold to a third
party with recourse. During the second quarter of 2004, the $7.9 million of the
loans which were retained, were placed on non-accrual status. The loans were
secured by two parcels of real estate. During the third quarter of 2004, we
entered into a revised forbearance agreement, which included the forgiveness of
$6.1 million of loans for a deed in lieu on one of the two parcels.
Concurrently, the client entered into a market rate lease agreement on the
parcel. We believe that the market value of the real estate supports the balance
of the loan forgiven. The remaining loan balance of approximately $2.0 million
remains on non-accrual. The client is in compliance with the forbearance
agreement and as performance is demonstrated, the loan will be placed on accrual
status. The loan is secured and we believe that there are sufficient reserves in
the case of noncompliance.
33
During the first and second quarter of 2004, Matrix Bank placed two commercial
real estate loans and one commercial loan that total $6.6 million at September
30, 2004 on non-accrual status. Based on current information, we believe that
there are sufficient reserves for any potential loss.
The percentage of the allowance for loan losses to nonaccrual loans varies due
to the nature of our portfolio of loans. We analyze the collateral for each
nonperforming loan to determine potential loss exposure. In conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and valuation losses. See "Comparison of
Results of Operations for the Quarters Ended September 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 Bank 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, and due to cost
reductions that should be realized from, among other items, the transfer of
servicing to a sub-servicer at Matrix Financial, as well as continued return of
capital committed to ABS through dividends to Matrix Bancorp as the loans
receivable continue to be liquidated under a strategy adopted in 2003. The trend
of net cash used by operations is dependent upon the Company's decision to
retain Matrix Bank's earnings at Matrix Bank and leverage the earnings through
the purchase of primarily residential mortgage loans. As long as the Company's
liquidity needs allows the retention of earnings at Matrix Bank, the trend is
expected to continue. It is anticipated that in 2005, the Company will resume
Matrix Bank's historical dividend policy at which time the trend will change. In
February 2004, the Company issued $10.0 million of subordinated debt, and in
August 2004 issued $10.3 million of junior subordinated debentures owed to
unconsolidated subsidiary trusts, which funds were in part used to repay the
Company's 11.5% senior notes, that matured on September 30, 2004, and will in
part be used along with certain of the funds from the sale of the real estate
disposition services subsidiary, to fund $15.0 million of junior subordinated
debentures and common equity securities owed to unconsolidated subsidiary trusts
on October 29, 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 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 September 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 during 2004.
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
34
utilizes advances from the FHLBank as its primary source for borrowings. At
September 30, 2004, Matrix Bank had overnight and term borrowings of $601.1
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
September 30, 2004 was $100.7 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
6.12% at September 30, 2004. This exceeded the well-capitalized leverage capital
requirement of 5.0% of adjusted assets by $20.2 million. Matrix Bank's
risk-based capital ratio was 12.35% at September 30, 2004, which currently
exceeds the well capitalized risk-based capital requirement of 10.0% of
risk-weighted assets by $22.5 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 matured in September
2004. Cash proceeds generated from the sale or refinancing of the underlying
loans used as collateral for the financing were 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 $9.1 million at September 30, 2004.
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance
Sheet Arrangements
During the quarter and nine months ended September 30, 2004, other than as
discussed below, 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 floating rate subordinated debt securities
during the quarter ended March 31, 2004. The debt securities mature February 13,
2014. Quarterly interest on the securities is at the floating rate of Libor plus
2.75%.
The Company issued $10.3 million of junior subordinated debentures owed to
unconsolidated subsidiary trusts during the quarter ended September 30, 2004,
maturing October 2034. See Note 10 in the Condensed Consolidated Financial
Statements herein for a detailed discussion.
The Company announced the redemption of $15.0 million of the 10.0% cumulative
trust preferred and common securities due 2029 issued by Matrix Bancorp Capital
Trust I in July 1999. See Note 10 in the Condensed Consolidated Financial
Statements herein for a detailed discussion.
See Notes 8 and 9 to the Condensed Consolidated Financial Statements herein for
detail on the balances of deposit liabilities and FHLBank borrowings as of
September 30, 2004.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter and nine months ended September 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 September 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 September 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 September 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. The bankruptcy trustee has initiated an adversary action
against Matrix Bank seeking to recover as an avoidable preference the $6.1
million Island Mortgage returned to Matrix Bank in connection with mortgage
loans slated to be purchased by Matrix Bank from Island Mortgage but which never
closed and funded. In October 2004, the Court ruled that the bankruptcy trustee
was entitled to recover approximately $4.5 million of the approximately $6.1
million claimed. Although the Company believes it has meritorious points of
appeal, Matrix Bank has reached an agreement in principal with the Trustee to
settle all claims of the Trustee related to this matter for approximately $3.6
million. The settlement is subject to negotiation and execution of mutually
acceptable definitive agreements and the approval of the settlement by the
Bankruptcy Court. Although we believe the settlement will ultimately be
finalized, approved and consummated, there can be no assurances, for example,
that the parties will be able to reach agreement on the terms of the definitive
agreement, or that any such definitive agreement will be approved by the
Bankruptcy Court. The Company has accrued the approximately $3.6 million, $3.0
million of which was accrued in the third quarter of 2004, as a loss contingency
under SFAS No. 5, and this accrual fully reserves the amount necessary to
satisfy the settlement contemplated by the agreement in principal reached with
the Trustee.
Sterling Trust has been named a defendant in an action filed in July 1999 styled
Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. that
was tried in Tarrant County, Texas district court in the spring of 2000. After
entry of an adverse judgment against Sterling Trust on two counts, 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. Sterling Trust has appealed that portion of the
judgment affirmed by the Court of Appeals to the Supreme Court of Texas. The
Supreme Court of Texas has agreed to hear the appeal of Sterling Trust, and on
September 29, 2004, oral argument was held before the
36
Supreme Court of Texas. Notwithstanding the fact that the Supreme Court of Texas
has agreed to hear this appeal by Sterling Trust, no assurances can be given
that the 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 Trust, management has determined that the loss in this
matter is not probable within the meaning of SFAS 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,
with respect to this matter cannot be estimated with certainty at this time.
Matrix Financial was named in March 2004 as a defendant in a putative class
action lawsuit styled Monica Thigpen v. Matrix Financial Services Corporation
filed in the United States Bankruptcy Court for the Southern District of
Alabama. The plaintiff claims that Matrix Financial filed an improper and false
affidavit in connection with plaintiff's Chapter 13 bankruptcy proceeding
because the signature page on the affidavit was executed separate and apart from
the other pages, and has asked the Court to award the plaintiff actual damages,
punitive damages, injunctive relief, attorneys' fees and other relief as may be
appropriate. Matrix Financial filed a motion to dismiss and demanded a jury
trial, both of which have been denied by the Court. Matrix Financial believes it
has meritorious defenses and intends to defend this action vigorously. The
ultimate legal and financial liability of the Company, if any, in this matter
cannot be estimated with certainty at this point.
Please see Part II - Item 1 of our Form 10-Q's for the quarters ended March 31,
2004 and June 30, 2004 for a discussion of previous developments in these
matters, as applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 14, 2004. At the
meeting, the shareholders voted to re-elect two directors of the Company, D.
Mark Spencer and David A. Frank, for a term expiring with the Annual Meeting to
be held in 2007 ("Proposal 1"). The other directors whose terms continue after
the Annual Meeting are Richard V. Schmitz, Robert T. Slezak, Lester Ravitz and
James H. Bullock.
The shareholders were asked to consider and act upon a proposal to ratify the
appointment of KPMG LLP as independent auditors for the Company for the 2004
fiscal year ("Proposal 2"). No other matters were voted on at the Annual
Meeting. A total of 4,755,626 shares were represented at the meeting, in person
or by proxy.
The number of shares that were voted for and that were withheld from, each of
the director nominees in Proposal 1 were as follows:
Director Nominee
- -----------------
For Withhold
--- --------
D. Mark Spencer 4,651,826 103,800
David A. Frank 4,628,526 127,100
37
In Proposal 2, KPMG LLP was ratified as the independent auditors for the Company
for fiscal year 2004, with 4,726,326 shares voting for, 29,300 shares voting
against, and 0 shares abstaining.
Item 6. Exhibits
10.1 Amended and Restated Trust Agreement, by and among Matrix
Bancorp, Inc., Deutsche Bank Trust Company Americas, and
Deutsche Bank Trust Company Delaware, dated as of August 30,
2004.
10.2 Guarantee Agreement between Matrix Bancorp, Inc. and Deutsche
Bank Trust Company Americas, dated as of August 30, 2004
10.3 Junior Subordinated Indenture between Matrix Bancorp, Inc. and
Deutsche Bank Trust Company Americas, dated as of August 30,
2004
10.4 Branch Purchase and Deposit Assumption Agreement between
Matrix Capital Bank and AccessBank, dated as of July 7, 2004
10.5 Operating Agreement of Matrix Asset Management, LLC, dated as
of September 20, 2004
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 adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX BANCORP, INC.
Dated: November 4, 2004 /s/ D. Mark Spencer
---------------------------------- ---------------------------------------------
D. Mark Spencer
President and
Co-Chief Executive Officer
(Principal Executive Officer)
Dated: November 4, 2004 /s/ Richard V. Schmitz
---------------------------------- ---------------------------------------------
Richard V. Schmitz
Co-Chief Executive Officer
Dated: November 4, 2004 /s/ David W. Kloos
---------------------------------- ---------------------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
39
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------------------------------------------------------------------
10.1 Amended and Restated Trust Agreement, by and among Matrix Bancorp, Inc,
Deutsche Bank Trust Company Americas, and Deutsche Bank Trust Company
Delaware, dated as of August 30, 2004
10.2 Guarantee Agreement between Matrix Bancorp, Inc. and Deutsche Bank
Trust Company Americas, dated as of August 30, 2004
10.3 Junior Subordinated Indenture between Matrix Bancorp, Inc. and Deutsche
Bank Trust Company Americas, dated as of August 30, 2004
10.4 Branch Purchase and Deposit Assumption Agreement between Matrix Capital
Bank and AccessBank, dated as of July 7, 2004.
10.5 Operating Agreement of Matrix Asset Management, LLC dated as of
September 10, 2004.
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
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
40