-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MvGk91DHTlMm9qU7IGhjWMvYP7Wd2c45LAl0+OKYip3e1G8Rt75VMW7KFl9AfS5Z x/tOkNA+DiU78+k0f71mrw== 0000899078-03-000273.txt : 20030502 0000899078-03-000273.hdr.sgml : 20030502 20030502154354 ACCESSION NUMBER: 0000899078-03-000273 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX BANCORP INC CENTRAL INDEX KEY: 0000944725 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 841233716 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21231 FILM NUMBER: 03679747 MAIL ADDRESS: STREET 1: 700 17TH STREET STREET 2: SUITE 2100 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: MATRIX CAPITAL CORP /CO/ DATE OF NAME CHANGE: 19960711 10-Q 1 march312003-10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 0-21231 MATRIX BANCORP, INC. (Exact name of registrant as specified in its charter) Colorado 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 17th Street, Suite 2100 Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ] Number of shares of Common Stock ($.0001 par value) outstanding at the close of business on April 30, 2003 was 6,491,043 shares. TABLE OF CONTENTS
PART I - Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 2003 (unaudited) and December 31, 2002..................................3 Condensed Consolidated Statements of Operations Quarters ended March 31, 2003 and 2002 (unaudited)................................4 Condensed Consolidated Statements of Shareholders' Equity Three months ended March 31, 2003 and 2002 (unaudited)............................5 Condensed Consolidated Statements of Cash Flows Nine months ended March 31, 2003 and 2002 (unaudited).............................6 Notes to Condensed Consolidated Financial Statements (unaudited).........................7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................15 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................24 ITEM 4. Controls and Procedures.................................................................24 PART II - Other Information ITEM 1. Legal Proceedings.......................................................................24 ITEM 6. Exhibits and Reports on Form 8-K........................................................26 SIGNATURES............................................................................................27 CERTIFICATIONS........................................................................................28
2 Part I - Financial Information Item 1. Financial Statements Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in thousands)
March 31, December 31, 2003 2002 ------------------ ------------------ Assets (Unaudited) Cash and cash equivalents ....................................................... $ 58,883 $ 58,725 Interest-earning deposits and federal funds sold................................. 2,100 3,687 Securities available for sale.................................................... 59,679 29,073 Loans held for sale, net......................................................... 1,088,521 1,107,926 Loans held for investment, net................................................... 287,865 285,891 Mortgage servicing rights, net................................................... 57,012 63,200 Other receivables ............................................................... 51,460 54,811 Federal Home Loan Bank stock, at cost............................................ 30,469 30,379 Foreclosed real estate........................................................... 6,824 8,343 Premises and equipment, net...................................................... 25,071 27,705 Other assets, net................................................................ 29,591 31,857 ------------------ ------------------ Total assets..................................................................... $ 1,697,475 $ 1,701,597 ================== ================== Liabilities and shareholders' equity Liabilities: Deposits...................................................................... $ 945,627 $ 933,957 Custodial escrow balances..................................................... 148,149 151,790 Draft payable................................................................. 10,629 7,097 Payable for purchase of mortgage servicing rights............................. 733 782 Federal Home Loan Bank borrowings............................................. 378,265 385,785 Borrowed money................................................................ 54,673 61,403 Guaranteed preferred beneficial interests..................................... 64,500 64,500 Other liabilities............................................................. 18,367 22,575 Income taxes payable and deferred income tax liability........................ 7,676 6,772 ------------------ ------------------ Total liabilities................................................................ 1,628,619 1,634,661 ------------------ ------------------ 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 6,491,043 and 6,489,543 shares at March 31, 2003 and December 31, 2002, respectively...................................................... 1 1 Additional paid in capital.................................................... 20,387 20,375 Retained earnings............................................................. 48,446 46,534 Accumulated other comprehensive income........................................ 22 26 ------------------ ------------------ Total shareholders' equity....................................................... 68,856 66,936 ------------------ ------------------ Total liabilities and shareholders' equity....................................... $ 1,697,475 $ 1,701,597 ================== ==================
See accompanying notes. 3 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Dollars in thousands, except share information) (Unaudited)
Quarter Ended March 31, 2003 2002 --------------------------------- Interest income Loans and securities......................................................................$ 20,317 $ 22,571 Interest-earning deposits................................................................. 276 243 ---------------- ---------------- Total interest income..................................................................... 20,593 22,814 ---------------- ---------------- Interest expense Deposits.................................................................................. 4,023 6,498 Borrowed money and guaranteed preferred beneficial interests.............................. 4,684 4,693 ---------------- ---------------- Total interest expense.................................................................... 8,707 11,191 ---------------- ---------------- Net interest income before provision for loan and valuation losses........................ 11,886 11,623 Provision for loan and valuation losses................................................... 695 1,058 ---------------- ---------------- Net interest income after provision for loan and valuation losses......................... 11,191 10,565 ---------------- ---------------- Noninterest income Loan administration....................................................................... 9,390 8,738 Brokerage................................................................................. 2,340 1,689 Trust services............................................................................ 1,613 1,393 Real estate disposition services.......................................................... 1,364 782 Gain on sale of loans and securities...................................................... 325 -- Loan origination.......................................................................... 13,051 8,172 School services........................................................................... 616 1,441 Other..................................................................................... 1,954 1,211 ---------------- ---------------- Total noninterest income.................................................................. 30,653 23,426 ---------------- ---------------- Noninterest expense Compensation and employee benefits........................................................ 15,306 14,661 Amortization of mortgage servicing rights................................................. 8,899 5,873 Occupancy and equipment................................................................... 2,053 1,689 Postage and communication................................................................. 1,251 1,140 Professional fees......................................................................... 1,297 712 Data processing........................................................................... 730 876 Other general and administrative.......................................................... 9,483 5,942 ---------------- ---------------- Total noninterest expense................................................................. 39,019 30,893 ---------------- ---------------- Income before income taxes................................................................ 2,825 3,098 Provision for income taxes................................................................ 913 1,060 ---------------- ---------------- Net income................................................................................$ 1,912 $ 2,038 ================ ================ Net income per share - basic..............................................................$ 0.30 $ 0.31 ================ ================ Net income per share - assuming dilution..................................................$ 0.29 $ 0.31 ================ ================ Weighted average shares - basic........................................................... 6,490,776 6,487,099 ================ ================ Weighted average shares - assuming dilution............................................... 6,531,406 6,583,159 ================ ================
See accompanying notes. 4 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Shareholders' Equity (Dollars in thousands) (Unaudited)
Accumulated Additional Other Total Common Stock Paid In Treasury Retained Comprehensive Shareholders' Comprehensive ------------------- Shares Amount Capital Shares Earnings Income Equity Income (loss) --------- -------- ----------- --------- --------- ------------- ------------- -------------- Quarter Ended March 31, 2003 - ----------------------- Balance at December 31, 2002....... 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936 Comprehensive income: Net income........... - - - - 1,912 - 1,912 $ 1,912 Unrealized holding loss on securities (1) - - - - - (4) (4) (4) ------------ Comprehensive income.... $ 1,908 ============ Issuance of stock related to employee stock purchase plan and options.......... 1,500 - 12 - - - 12 --------- --------- --------- ---------- -------- ----------- --------- Balance at March 31, 2003.......... 6,491,043 $ 1 $ 20,387 $ - $ 48,446 $ 22 $ 68,856 ========= ========= ========= ========== ======== =========== ========= Quarter Ended March 31, 2002 - ------------------------ Balance at December 31, 2001....... 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312 Comprehensive income: Net income........... - - - - 2,038 - 2,038 $ 2,038 Unrealized losses on securities, net of reclassification adjustment........... - - - - - (5) (5) (5) ------------ Comprehensive income.... $ 2,033 ============ Issuance of stock related to employee stock purchase plan and options.............. 700 - 6 - - - 6 Shares repurchased...... (66,060) - - (726) - - (726) Shares retired.......... - - - - - - --------- --------- --------- ---------- -------- ----------- --------- Balance at March 31, 2002.......... 6,453,244 $ 1 $ 20,806 $ (726) $ 52,524 $ 20 $ 72,625 ========= ========= ========= ========== ======== =========== ========= (1) Disclosure of reclassification amount Quarter Ended March 31, 2003 - ------------------------ Unrealized holding gain arising during period............. $ (4) Less: reclassification adjustment of gains included in net loss - ------------ Net unrealized loss on securities.......... $ (4) ============
See accompanying notes. 5 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Quarters Ended March 31, 2003 2002 -------------- --------------- Operating activities Net income ..................................................................... $ 1,912 $ 2,038 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization................................................ 1,067 1,752 Provision for loan and valuation losses...................................... 695 1,058 Amortization of mortgage servicing rights.................................... 8,899 5,873 Recovery of impairment of mortgage servicing rights.......................... - (181) Gain on sale of loans and securities......................................... (325) - Loss on sale of foreclosed real estate....................................... 93 - Changes in assets and liabilities............................................... Loans originated for sale, net of loans sold................................. (15,591) 129,233 Loans purchased for sale..................................................... (411,564) (62,685) Proceeds from sale of loans held for sale.................................... 338,447 28,977 Increase in securities held for sale........................................ (30,610) (4,870) Originated mortgage servicing rights, net.................................... (2,277) (13,681) Decrease in other receivables and other assets............................... 5,103 11,811 Decrease in payable for purchase of mortgage servicing rights................ (49) - (Decrease) increase in other liabilities, income taxes payable and deferred income tax liability....................................................... (3,304) 12,910 -------------- --------------- Net cash (used in) provided by operating activities................. (107,504) 112,235 -------------- --------------- Investing activities Loans originated and purchased for investment................................... (30,075) (35,582) Principal repayments on loans................................................... 139,376 78,703 Purchase of Federal Home Loan Bank stock........................................ (90) (6,303) Purchases of premises and equipment............................................. (24) (1,693) Acquisition of mortgage servicing rights........................................ - (801) Proceeds from sale of premises and equipment.................................... 1,671 - Proceeds from sale of foreclosed real estate.................................... 1,426 - -------------- --------------- Net cash provided by investing activities........................... 112,284 34,324 -------------- --------------- Financing activities Net increase in deposits........................................................ 11,670 31,318 Net decrease in custodial escrow balances....................................... (3,641) (13,115) Decrease in revolving lines and repurchase agreements, net...................... (13,878) (109,178) Payments of notes payable....................................................... (357) - Payment of financing arrangements............................................... (15) (17) Treasury shares repurchased..................................................... - (726) Proceeds from issuance of common stock related to employee stock option plan.... 12 6 -------------- --------------- Net cash used in financing activities............................... (6,209) (91,712) -------------- --------------- (Decrease) increase in cash and cash equivalents................................ (1,429) 54,847 Cash and cash equivalents at beginning of period................................ 62,412 84,460 -------------- --------------- Cash and cash equivalents at end of period...................................... $ 60,983 $139,307 ============== =============== Supplemental disclosure of cash flow information Cash paid for interest expense.................................................. $ 9,033 $ 12,550 ============== =============== Cash paid (received) for income taxes........................................... $ 61 $ (2,980) ============== ===============
See accompanying notes. 6 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 1. Basis of Presentation and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of Matrix Bancorp, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation have been included. For discussion of our organization and business, the accounting policies we follow and further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. This quarterly report should be read in conjunction with that annual report. 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 March 31, 2003, the Company has one stock-based employee compensation plan, which is described more fully in Note 14 to the audited financial statements in Form 10-K for December 31, 2002. We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS 123, "Accounting for Stock-Based Compensation" established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plan. As allowed by SFAS 123 (and SFAS 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS 123"), we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS 123. Accordingly, we do not recognize compensation expense for our stock-based plan, as we do not issue options at exercise prices below the market value at the date of the grant. Had compensation cost for our stock-based plans been determined consistent with SFAS No. 123, our net income and income per share would have been reduced to the pro forma amounts indicated below:
Quarter Ended March 31, ------------------------------ 2003 2002 ------------------------------ (Dollars in thousands) Net income: As reported $ 1,912 $ 2,038 Deduct: Total stock-based employee compensation expense determined under fair value based method for awards, net of related tax effects (78) (89) ------------------------------ Pro forma $ 1,834 $ 1,949 ============================== Income per share: Basic, as reported $ 0.30 $ 0.31 ============================== Basic, pro forma $ 0.28 $ 0.30 ============================== Diluted, as reported $ 0.29 $ 0.31 ============================== Diluted, pro forma $ 0.28 $ 0.30 ==============================
7 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 1. Basis of Presentation and Significant Accounting Policies (continued) Reclassifications Certain reclassifications have been made to the prior periods' condensed consolidated financial statements and related notes to conform with the current period presentation. 2. Sale of Wholesale Production Platform On February 28, 2003, Matrix Capital Bank and Matrix Financial Services Corporation entered into a Purchase and Assumption Agreement, as amended ("Purchase Agreement"), to sell substantially all of Matrix Financial's assets associated with its wholesale mortgage origination platform ("Platform"). The purchaser ("Buyer") is a newly formed corporation whose principals are long-time participants in the mortgage banking industry. The Company intends, for the foreseeable future, to retain Matrix Financial's servicing platform and operate it in the ordinary course of business. Included in the sale are the wholesale production offices, the back office personnel that process the loan originations and a significant portion of the corporate operations and personnel. After the sale, our remaining operations will primarily consist of Matrix Financial's mortgage servicing platform and a limited amount of corporate personnel and operations. The following discussion is a summary of the terms of the sale of the Platform and is not intended to be complete. For a more complete description of the terms of the Purchase Agreement, the reader is invited to review the Purchase Agreement, which was filed as an exhibit to the Company's Current Report on Form 8-K filed March 4, 2003. The first amendment thereto is filed as an exhibit to this report. The Buyer is not yet licensed to engage in any mortgage banking activities under state or federal law. It was anticipated that it would take approximately six months from execution of the Purchase Agreement for the Buyer to obtain the necessary licensing. Accordingly, Matrix Financial, Matrix Bank and the Buyer desired to structure the transaction in a manner that transferred substantially all the economic risks and benefits of the operation of the Platform during the Transition Period (defined below) to the Buyer, while at the same time having Matrix Financial and Matrix Bank maintain continuous effective control over the operations of the Platform for regulatory purposes. The Purchase Agreement, therefore, contemplates a two-staged closing. The first closing ("Initial Closing Date") occurred on the date the Purchase Agreement was signed and is the effective date for the sale of the fixed assets, and the final or second closing ("Final Closing Date") will occur six months following the Initial Closing Date. The period of operation of the Platform in between the Initial Closing Date and the Final Closing Date is referred to as the "Transition Period." As Matrix Financial will maintain effective control at all times during the Transition Period, Matrix Financial will continue to be an operating subsidiary of Matrix Bank. The Platform will be operated, for accounting purposes, during the Transition Period as a division of Matrix Financial. On the Initial Closing Date, the Buyer purchased substantially all of the tangible personal property and intangible property associated with the Platform. There was no gain or loss on the sale of the assets, which had a net book value of $3.3 million. The Buyer additionally has taken or will take, as the case may be, the transfer and assignment of certain contract rights, real property leases and equipment leases from Matrix Financial as soon as the necessary consents were or are obtained. The parties intend for the Final Closing Date to occur within six months after the Initial Closing Date. At that time, the Buyer will purchase any tangible and intangible personal property of the Platform that is acquired during the Transition Period in the ordinary course of business or otherwise inadvertently not purchased on the Initial 8 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 2. Sale of Wholesale Production Platform (continued) Closing Date (the "Subsequently Acquired Assets"), as well as Matrix Financial's loan files, pipeline applications and sales commitments. Due to the fact the Matrix Financial will maintain effective control of the operation, the effective sale date for accounting purposes will be the Final Closing Date. The purchase price is determined as follows: o The Asset Payment Amount, which is approximately $3.3 million in payment for the tangible and intangible assets of the Platform as of the Initial Closing Date; plus o The Subsequently Acquired Assets Payment Amount, which is the book value of the Subsequently Acquired Assets as of the Final Closing Date; plus o The Production Premium, which is generally 20 basis points times the original principal balance of all loans originated during the 12 months following the Initial Closing Date at the Matrix Financial loan production offices purchased by Buyer. The Production Premium is "floored" at $4.9 million and is "capped" at $9.1 million plus; o The Aggregate Locked Loan Profitability Amount, which pays Matrix Financial one-half of the profit over a specified threshold amount (the threshold being generally 30 basis points) on loans that fund during the first two months after the Initial Closing Date which have resulted from its locked pipeline as of the Initial Closing Date; plus or minus o The Transition Period Gain or Loss, which is a mechanism that provides for an approximation of the accounting for the transaction as if the entire sale and transfer occurs on the Initial Closing Date. For example, if the Platform generates a loss during the first month of the six-month Transition Period, then the Buyer is required to fund such loss by paying the loss into an escrow account. If the Platform generates a profit during the first month of the six-month Transition Period, then Matrix Financial is required to pay such profit into an escrow account. On the Initial Closing Date, the Buyer and Matrix Financial established an escrow account (the "Escrow") with an Escrow Agent to act as a repository for the escrow amounts described above and certain other payments contemplated by the Purchase Agreement. On the Initial Closing Date, the Buyer deposited into the Escrow $3.5 million as an advance against the Production Premium and paid directly to Matrix Financial one-half of the Asset Payment Amount. On the Final Closing Date, the Buyer will pay Matrix Financial the remaining one-half of the Asset Payment Amount and will pay Matrix Financial the book value of the Subsequently Acquired Assets. The Production Premium will be paid over the 12 months following the Initial Closing Date and the Aggregate Locked Loan Profitability Amount will be paid over the two months following the Initial Closing Date. The Company estimates that the aggregate sales price for the Platform will be between $8.0 million and $13.0 million. During the six-month Transition Period, Matrix Financial will lease-back from the Buyer the tangible and intangible assets that have been transferred to Buyer, including any contract rights, real property leases and equipment leases. Lease expense related to the lease-back for the quarter ended March 31, 2003 was approximately $100 thousand. The operations of the Platform during the six-month Transition Period will be governed by the terms of an Operating Plan, which is incorporated into the Purchase Agreement. The Operating Plan requires Matrix Financial to, among other things, continue to operate the Platform substantially in the manner in which it currently operates and in conformity with its current policies and procedures. Any changes to the Operating Plan must be approved in 9 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 2. Sale of Wholesale Production Platform (continued) advance by an Executive Committee consisting of the following three individuals: (a) the President of Matrix Bank, (b) the President of Matrix Financial, and (c) another individual selected by the Board of Directors of Matrix Financial. By establishing this structure, the Company believes it will be able to maintain, for regulatory purposes, continuous effective control over the Platform during the six-month Transition Period. For a period of two years from the Initial Closing Date, Matrix Bank has agreed that neither Matrix Bank nor any of its affiliates will engage in, directly or indirectly, the single-family retail or wholesale mortgage origination business in those states in which the acquired division operates or is located as of the Initial Closing Date. However, this non-compete provision does not prohibit Matrix Bank or their affiliates from engaging in such business in order to comply with applicable law, rule, regulation, directive, agreement or order from the Office of Thrift Supervision ("OTS") or other party where it is necessary to resolve regulatory or supervisory concerns. Additionally, the non-compete provision does not apply in the event of a change in control of the Matrix Bank or the Company. The Purchase Agreement requires Matrix Bank to guarantee Matrix Financial's obligations under the Purchase Agreement if certain events occur, such as Matrix Financial's bankruptcy, failure to maintain a minimum net worth, or loss of voting control of Matrix Financial. 3. New Accounting Standards In November 2002, the Financial Accountings Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of SFAS 5, "Accounting for Contingencies," relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this interpretation, including, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, subordinated interests in an special purpose entity, and guarantees of a company's own performance. Other guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS 133, a parent's guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance not price. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002, and required disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in Note 8 to the condensed consolidated financial statements included herein and in Note 15 to the Financial Statements filed with the Form 10-K for December 31, 2002. The adoption of the requirements of FIN 45 did not have a material impact on the consolidated financial statements as of or for the quarter ended March 31, 2003. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities (selected entities with related contractual, ownership, voting or other monetary interests, including certain special 10 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 3. New Accounting Standards (continued) purpose entities), and requires certain additional disclosure with respect to these entities. The provisions of FIN 46 are immediately applicable to variable interest entities created after January 31, 2003 and for entities that existed prior to February 1, 2003. The Company does not expect the requirements of FIN 46 to have a material impact on the consolidated financial statements. The disclosure requirements, as applicable, are included in our condensed consoloidated financial statements and notes hereto. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires recognition of liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to being recognized at the date an entity commits to an exit plan under EITF 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 on January 1, 2003 did not have a material impact on the consolidated financial statements. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This amendment to FASB Statement No. 123 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of FASB Statement No. 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this statement are effective for financial statements of interim or annual periods after December 15, 2002. The Company does not intend, at this time, to change to the fair value method of accounting. The required disclosures of this statement are included in Note 1 to the condensed consolidated financial statements herein and Notes 2 and 14 of the consolidated financial statements filed with the Form 10-K for December 31, 2002 for the Company. 4. Net Income Per Share The following table sets forth the computation of net income per share and net income per share assuming dilution:
Quarter Ended March 31, 2003 2002 --------------------- ------------------- (Dollars in thousands) Numerator: Net income........................................................ $ 1,912 $ 2,038 ===================== =================== Denominator: Weighted average shares outstanding............................... 6,490,776 6,487,099 Effect of dilutive securities:.................................... Common stock options......................................... 40,630 96,060 --------------------- ------------------- Potential dilutive common shares.................................. 40,630 96,060 --------------------- ------------------- Denominator for net income per share assuming dilution............ 6,531,406 6,583,159 ===================== ===================
11 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 5. Mortgage Servicing Rights The activity in the mortgage servicing rights is summarized as follows:
Quarter Ended Year Ended March 31, December 31, 2002 2003 ---------------------- -------------------- (In thousands) Mortgage servicing rights Balance at beginning of period.................................. $ 79,234 $ 78,893 Purchases....................................................... - - Originations.................................................... 2,277 34,511 Amortization.................................................... (8,899) (24,176) Sales........................................................... - (9,994) ---------------------- -------------------- Balance before valuation allowance at end of period................ 72,612 79,234 ---------------------- -------------------- Valuation allowance for impairment of mortgage servicing rights Balance at beginning of period..................................... (14,400) (181) Additions.......................................................... - (14,219) ---------------------- -------------------- Balance at end of period........................................... (14,400) (14,400) ---------------------- -------------------- ---------------------- -------------------- Valuation allowance for foreclosure costs.......................... (1,200) (1,634) ---------------------- -------------------- ---------------------- -------------------- Mortgage servicing rights, net..................................... $ 57,012 $ 63,200 ====================== ====================
The Company's servicing portfolio (excluding subserviced loans), is comprised of the following:
March 31, 2003 December 31, 2002 ------------------------------- ---------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding Of Loans Outstanding ------------- --------------- --------------- --------------- (Dollars in thousands) Freddie Mac................................. 8,265 $ 372,914 9,027 $ 417,583 Fannie Mae.................................. 26,058 1,737,848 27,678 1,832,276 Ginnie Mae.................................. 23,108 1,629,860 25,453 1,823,706 VA, FHA, conventional and other loans....... 12,307 1,090,254 13,489 1,260,062 ------------- --------------- --------------- --------------- 69,738 $4,830,876 75,647 $ 5,333,627 ============= =============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed consolidated balance sheets at March 31, 2003 and December 31, 2002 pertain to payments held in escrow in respect of taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company. The custodial accounts are maintained at Matrix Bank, a subsidiary of Matrix Bancorp, in noninterest-bearing accounts. The balance of custodial accounts fluctuates from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of taxes and insurance payments. 12 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 5. Mortgage Servicing Rights (continued) The estimated aggregate amortization of our MSR's for each of the next twelve month period ending March 31, 2004, 2005, 2006, 2007 and 2008 is $18,200,000, $13,700,000, $9,700,000, $7,000,000, and $4,500,000, respectively. The estimated amortization is based on several assumptions as of March 31, 2003 with the most significant being the anticipated prepayment speeds of the underlying mortgages. It is reasonably possible the actual repayment speeds of the underlying mortgage loans may differ materially from the estimated repayment speeds, and thus, the actual amortization may be significantly different than the amounts estimated. 6. Deposits Deposit account balances are summarized as follows:
March 31, 2003 December 31, 2002 ----------------------------------- ------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate --------- --------- ----------- --------- ---------- ----------- (Dollars in thousands) Passbook accounts...... $ 5,401 0.57 % 1.31 % $ 5,514 0.59 % 1.95 % NOW accounts........... 160,099 16.93 0.20 145,465 15.57 0.48 Money market accounts.. 381,905 40.39 0.93 334,508 35.82 1.22 --------- --------- ----------- --------- ---------- ----------- 547,405 57.89 0.71 485,487 51.98 1.02 Certificate accounts... 398,222 42.11 2.76 448,470 48.02 3.65 --------- --------- ----------- --------- ---------- ----------- $945,627 100.00 % 1.65 % $933,957 100.00 % 2.40 % ========= ========= =========== ========= ========== ===========
At March 31, 2003 and December 31, 2002, brokered deposits accounted for approximately $250.5 million and $327.3 million, respectively, of the total certificate accounts shown above. 7. Federal Home Loan Bank Stock and Borrowings In connection with Matrix Bank's change in domicile in 2002, Matrix Bank obtains Federal Home Loan Bank (FHLB) advances from FHLB of Topeka, which is the FHLB that serves Denver, Colorado, and utilizes FHLB of Topeka as its primary correspondent bank. This change was approved March 25, 2002. Long-term advances that existed at March 25, 2002 with FHLB of Dallas are still outstanding under their original terms. The balances of FHLB stock are as follows:
March 31, December 31, 2003 2002 -------------------- -------------------- (In thousands) FHLB of Dallas stock, at cost......................... $ 14,719 $ 14,629 FHLB of Topeka stock, at cost......................... 15,750 15,750 -------------------- -------------------- Total FHLB stock.................................... $ 30,469 $ 30,379 ==================== ==================== The balances of FHLB borrowings are as follows: March 31, December 31, 2003 2002 -------------------- -------------------- (In thousands) FHLB of Dallas borrowings............................. $ 147,265 $ 147,285 FHLB of Topeka borrowings............................. 231,000 238,500 -------------------- -------------------- Total FHLB borrowing................................ $ 378,265 $ 385,785 ==================== ====================
13 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2003 (Unaudited) 7. Federal Home Loan Bank Stock and Borrowings (continued) Available unused borrowings from FHLB of Topeka totaled $121.8 million at March 31, 2003. 8. Commitments and Contingencies At March 31, 2003, the Company had $1.1 billion in pipeline and funded loans offset with mandatory forward commitments of $736.6 million and best effort forward commitments of $110.2 million. 9. Segment Information
Servicing Traditional Mortgage Brokerage and School All Others Banking Banking Consulting Services Total ------------- ------------ ---------------- ----------- ----------- ----------- (In thousands) Quarter ended March 31, 2003: Revenues from external customers: Interest income......... $ 12,929 6,093 $ 36 $ 1,459 $ 76 $ 20,593 Noninterest income...... 1,579 22,152 2,290 539 4,093 30,653 Intersegment revenues....... 4,131 1,821 381 3 485 6,821 Segment profit (loss) before income taxes....... 5,294 1,692 536 (1,432) (3,265) 2,825 Quarter ended March 31, 2002: Revenues from external customers: Interest income......... $ 12,958 8,211 $ 2 $ 1,550 93 $ 22,814 Noninterest income...... 1,649 15,555 1,862 2,110 2,250 23,426 Intersegment revenues....... 5,068 713 -- 3 1,338 7,122 Segment profit (loss) before income taxes....... 5,869 1,625 97 (1,756) (2,737) 3,098 Quarter Ended March 31, -------------------------------------- 2003 2002 ------------------ ---------------- Income: Total income for reportable segments.................................... $ 6,090 $ 5,835 Other loss.............................................................. (2,993) (2,707) Adjustment of intersegment loss in consolidation........................ (272) (30) ------------------ ---------------- Income before income taxes.............................................. $ 2,825 $ 3,098 ================== ================
14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Matrix Bancorp, Inc. (occasionally referred to in this document, on a consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, mortgage banking, trust and clearing activities, lending activities and other fee-based services. Our traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository services. Our mortgage banking activities consist of purchasing and selling residential mortgage loans and residential mortgage servicing rights; offering brokerage, consulting and analytical services to financial services companies and financial institutions; servicing residential mortgage portfolios for investors; originating residential mortgages; and providing real estate management and disposition services. Our trust and clearing activities focus primarily on offering specialized custody and clearing services to banks, trust companies, broker-dealers, third party administrators and investment professionals, as well as the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. Our other fee-based services and lending activities include providing outsourced business services, such as budgeting, governmental reporting, accounts payable, payroll, facility and safety management and comprehensive insurance programs to charter schools. We also offer financing to charter schools for the purchase of school sites and equipment. Our primary operating subsidiaries are: Matrix Capital Bank; Matrix Financial Services Corporation; Matrix Capital Markets, Inc.; Matrix Asset Management Corporation; ABS School Services, L.L.C.; Matrix Advisory Services, L.L.C.; Sterling Trust Company; First Matrix Investment Services Corp.; Matrix Tower Holdings, LLC; plus an equity interest in Matrix Settlement & Clearance Services, LLC. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank, Matrix Financial and ABS; o loan origination fees generated by Matrix Financial, and to a lesser extent, Matrix Bank; o brokerage and consulting fees generated by Matrix Capital Markets and First Matrix; o disposition services fees generated by Matrix Asset Management; o gain on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust and Matrix Capital Bank; and o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates, and the effect of these changes on our interest margins, the volume of loan originations, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are affected to a lesser extent by interest rates and more by competition and general market conditions. Sale of Wholesale Production Platform In February 2003, we entered into an agreement to sell our wholesale mortgage origination platform at Matrix Financial. See Note 2 to Condensed Consolidated Financial Statements included herein. The effective sale date for accounting purposes will be the Final Closing Date which is anticipated to be approximately six months after the Initial Closing Date. As of the Initial Closing Date and during the Transition Period, due to our continuing involvement, we will continue to account for the operations of the Platform. At the Final Closing Date the net earnings from the Wholesale Platform will be compared to the purchase price earned through the Transition Period and any difference will be an adjustment to the purchase price and the associated gain or loss will be recorded. We were concerned that over an extended period of time we would find it difficult to compete in this highly competitive industry that generally operates on high volume and low margins. Based on the size of our wholesale production platform, we were required to commit a significant percentage of our capital to a line of business that is fairly cyclical and the earnings were difficult for us to estimate. The decision to sell the platform will allow us to 15 reduce our operational risks and costs associated with the origination platform. We intend to reinvest the liquidity that will be created from the sale into predominately adjustable rate loans, SBA loans and potentially mortgage-backed securities. To the extent that we are not able to reinvest the liquidity in a timely manner, we will experience a decrease in our net interest income. Initially, the liquidity will be used to pay down borrowings from the FHLB or brokered certificates of deposit. Critical Accounting Policies The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in Note 2 of the consolidated financial statements on Form 10-K as of December 31, 2002. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgment and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan and valuation losses is a critical accounting policy that requires the most significant judgments, assumptions and estimates used in preparation of its consolidated financial statements. See discussion at "Asset and Liability Management, Analysis of Allowance for Loan and Valuation Losses" in the Form 10-K for December 31, 2002 for a detailed description of the Company's process and methodology related to the allowance for loan and valuation losses. The Company also considers the valuation of mortgage servicing rights to be a critical accounting policy that requires judgments, assumptions and estimates concerning impairment of their value in certain interest rate environments. See discussion at "Business-- Mortgage Servicing Activities" in the Form 10-K for December 31, 2002 for a detailed discussion of the nature of servicing rights, and see Note 2 of the consolidated financial statements on Form 10-K as of December 31, 2002 for a detailed discussion concerning the valuation of mortgage servicing rights. The Company also considers the judgments and assumptions concerning litigation as a critical accounting policy. The Company has been notified that we are a defendant in a number of legal proceedings. Most 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, 2002, and additional discussion at Part II. Item I. "--Legal Proceedings" of this Form 10-Q. With respect to all pending litigation matters, our ultimate legal responsibility, if any, cannot be estimated with certainty. Based on the ultimate outcome of such proceedings, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to such proceedings. Forward-Looking Statements Certain statements contained in this interim report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this interim report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to the ongoing or future bankruptcies of the Company's customers; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; the outcome of pending or possible future litigation; the actions or inactions of third parties, including failure of the Buyer to perform its obligations under the Purchase Agreement (see "Item 1. Business-Sale of Wholesale Production Platform" in the Form 10-K 16 as of December 31, 2002), and actions or inactions of those that are parties to the existing or future bankruptcies of the Company's customers or litigation related thereto; unanticipated developments in connection with the bankruptcy actions or litigation described above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in the Company's annual report on Form 10-K, filed on March 14, 2003; and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission ("SEC") on March 14, 2001; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. Comparison of Results of Operations for the Quarters Ended March 31, 2003 and 2002 Net Income; Return on Average Equity. For the quarter ended March 31, 2003, we reported net income of $1.9 million, or $0.29 per diluted share, as compared to net income of $2.0 million, or $0.31 per diluted share, for the quarter ended March 31, 2002. Return on average equity was comparable at 11.3% for the quarter ended March 31, 2003 as compared to 11.4% for the quarter ended March 31, 2002. Net Interest Income. Net interest income before provision for loan and valuation losses increased $300 thousand, or 2.3%, to $11.9 million for the quarter ended March 31, 2003 as compared to $11.6 million for the quarter ended March 31, 2002. The increase is despite the fact that our net interest margin decreased 21 basis points (equivalent to 0.0021 percentage points) to 3.24% for the quarter ended March 31, 2003 from 3.45% for the quarter ended March 31, 2002, and interest rate spread decreased to 2.88% for the quarter ended March 31, 2003 from 3.01% for the quarter ended March 31, 2002. The increase in net interest income before provision for loan valuation losses was primarily due to a 104 basis point decrease in the cost of our interest-bearing liabilities, driven by decreases in interest rates, which effect was offset slightly by an increase in our average interest-bearing liabilities to $1.3 billion for the quarter ended March 31, 2003 from $1.2 billion for the quarter ended March 31, 2002. The interest rate on short-term borrowings fluctuates with the federal funds rate, which remain at 40-year lows. The effects of the decrease in our cost of interest-bearing liabilities was partially offset by a decrease in the yield earned on our average loan portfolio to 5.77% for the quarter ended March 31, 2003 as compared to 6.96% for the quarter ended March 31, 2002. This decrease, however, was slightly offset by a small increase in our average noninterest-bearing deposits between the two comparable quarters, combined with a slight increase in our average interest-earning assets to $1.5 billion for the quarter ended March 31, 2003 as compared to $1.4 billion for the quarter ended March 31, 2002. For a tabular presentation of the changes in net interest income due to changes in the volume of interest-earning assets and interest-bearing liabilities, as well as changes in interest rates, see "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses decreased $400 thousand to $700 thousand for the quarter ended March 31, 2003 as compared to $1.1 million for the quarter ended March 31, 2002. The decrease in the provision was mainly due to incremental charge-offs recorded at ABS School Services in the quarter ended March 31, 2002 which were not present in the quarter ended March 31, 2003. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "Asset Quality--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees, gains on sales of repurchased Federal Housing Administration (FHA) and Veteran's Administration (VA) loans and other ancillary charges. Loan administration fees increased $650 thousand, or 7.5%, to $9.4 million for the quarter ended March 31, 2003 as compared to $8.7 million for the quarter ended March 31, 2002. The increase includes gains on sale of previously repurchased FHA and VA loans of $3.1 million for the quarter ended March 31, 2003 as compared to $1.8 million for the quarter ended March 31, 2002. Gains on sale of previously repurchased FHA and VA loans relate to delinquent loans which are purchased out of loan pools on which the Company acts as servicer and then resells into the secondary market. Loan service fees are also affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage 17 loan servicing portfolio decreased, with an average balance of $5.1 billion for the quarter ended March 31, 2003 as compared to an average balance of $5.8 billion for the quarter ended March 31, 2002. The decrease in portfolio size was offset by a slight increase in the average service fee rate (including all ancillary income) to 0.49% for the first quarter of 2003 as compared to 0.48% for the first quarter of 2002. The decrease in the servicing portfolio and corresponding service fees is due to the Company's decision in the third quarter of 2002 to begin to sell the majority of its newly originated servicing under an assignment of trade contract. In the near term, the Company anticipates it will continue to sell the majority of its newly originated servicing. As a result, the Company anticipates loan administration fees to decrease as its servicing portfolio decreases through normal prepayments. Loan Origination. Loan origination income includes all mortgage loans fees, secondary marketing activity on new loan originations and servicing released premiums on new originations sold, net of origination costs. Loan origination income increased $4.9 million, or 59.7%, to $13.1 million for the quarter ended March 31, 2003 as compared to $8.2 million for the quarter ended March 31, 2002. The increase in loan origination income resulted from an increase in our wholesale originations to $1.2 billion for the quarter ended March 31, 2003 as compared to $874.2 million for the quarter ended March 31, 2002; an increase in sales of our wholesale production to $1.2 billion during the quarter ended March 31, 2003 as compared to $1.0 billion during the quarter ended March 31, 2002; and an increase in the net income spread to 82.7 basis points for the quarter ended March 31, 2003 as compared to 54.6 basis points for the quarter ended March 31, 2002. The increase in net income spread is a result of the effectiveness in the loan origination hedging program during the quarter ended March 31, 2003, and the overall market conditions. See Note 2 to the condensed consolidated financial statements herein for a discussion of the Sale of the Wholesale Production Platform. Brokerage Fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights, as well as brokerage income earned from whole loan activities, retail and fixed income activities and Small Business Administration (SBA) trading fees. Brokerage fees increased $600 thousand, or 38.6%, to $2.3 million for the quarter ended March 31, 2003 as compared to $1.7 million for the quarter ended March 31, 2002. The increase was the result of a strong quarter at First Matrix Investment Services Corp. where revenue increased to $1.1 million for the quarter ended March 31, 2003 from $500 thousand for the quarter ended March 31, 2002, as a result of the Company's focus on the acquisition, pooling and selling of SBA loans and securities as well as increased retail brokerage activity. Trust Services. Trust service fees increased $200 thousand, or 15.8%, to $1.6 million for the quarter ended March 31, 2003 as compared to $1.4 million for the quarter ended March 31, 2002. Trust accounts under administration at Sterling Trust and Matrix Capital Bank increased to 46,651 at March 31, 2003 from 41,958 at March 31, 2002 and total assets under administration increased to over $8.5 billion at March 31, 2003 from $6.0 billion at March 31, 2002. Most of the growth is driven by business referred to Matrix Bank's trust department by Matrix Settlement & Clearance Services. Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition services income increased $600 thousand, or 74.6%, to $1.4 million for the quarter ended March 31, 2003 as compared to $800 thousand for the quarter ended March 31, 2002. The increase is due to an increase in the number of properties closed during the quarter ended March 31, 2003, which was 778, an increase of 81.8% when compared to the quarter ended March 31, 2002. The increase is due to new clients obtained as a result of prior marketing efforts. Properties under management were 2,142 at March 31, 2003 as compared to 1,588 at March 31, 2002. Gain on Sale of Loans and Securities. Gain on sale of loans and securities increased to $325 thousand for the quarter March 31, 2003 as compared to $0 for the quarter ended March 31, 2002. Gain on sale of loans and securities can fluctuate significantly from quarter to quarter based on a variety of factors, such as the current interest rate environment, the supply and mix of loan or securities portfolios available in the market, and as market conditions dictate, the particular loan portfolios we elect to sell. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided primarily to charter schools. School services income decreased $800 thousand or 57.2% to $600 18 thousand for the quarter ended March 31, 2003 as compared to $1.4 million for the quarter ended March 31, 2002. The decrease is due to a decrease in the number of core business service clients at March 31, 2003. We have made the strategic decision to focus our efforts on servicing our existing clients and to concentrate our marketing efforts in our current market. We do not anticipate a significant increase in school services income for the coming year. Other Income. Other income increased $700 thousand to $1.9 million for the quarter ended March 31, 2003 as compared to $1.2 million for the quarter ended March 31, 2002. Other income includes service and ATM fees, rental income, structured finance trading activities, along with other miscellaneous income. Increases in the current quarter is due to increased ATM fee income at Matrix Bank, increased rental income from real estate properties rented and/or leased, and increased equity investment in our 45% owned subsidiary, Matrix Settlement and Clearance Services. Noninterest Expense. Noninterest expense increased $8.1 million, or 26.3%, to $39.0 million for the quarter ended March 31, 2003 as compared to $30.9 million for the quarter ended March 31, 2002. This increase was predominantly due to increases in the amortization of mortgage servicing rights asset and increases in other general and administrative expenses. The following table details the major components of noninterest expense for the periods indicated: Quarters Ended March 31, --------------------------------- 2003 2002 --------------- -------------- (In thousands) Compensation and employee benefits.... $ 15,306 $ 14,661 Amortization of mortgage servicing rights................................ 8,899 5,873 Occupancy and equipment............... 2,053 1,689 Postage and communication............. 1,251 1,140 Professional fees..................... 1,297 712 Data processing....................... 730 876 Other general and administrative...... 9,483 5,942 --------------- -------------- Total............................. $ 39,019 $ 30,893 =============== ============== Compensation and employee benefits expense increased $600 thousand, or 4.4%, to $15.3 million for the quarter ended March 31, 2003 as compared to $14.7 million for the quarter ended March 31, 2002. This increase was primarily due to increased costs associated with incentive and commission pay, consistent with the increase in revenues, offset by slight decreases in salaries and medical benefits expense associated with the reduced number of employees. The Company experienced an overall decrease of 26 employees to 919 employees at March 31, 2003 as compared to 945 employees at March 31, 2002. Included in the employees at March 31, 2003 are approximately 346 employees who we anticipate that the Buyer of the production platform will hire, thereby reducing our employee count to approximately 600 as of the Final Closing Date. See Note 2 to the condensed consolidated financial statements herein for a discussion of the Sale of the Wholesale Production Platform. Amortization of mortgage servicing rights increased $3.0 million or 51.5% to $8.9 million for the quarter ended March 31, 2003 as compared to $5.9 million for the quarter ended March 31, 2002. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. In response to the continued low interest rates prevalent in the market, prepayment speeds on our servicing portfolio increased to an average of 31.6% for the quarter ended March 31, 2003 as compared to 21.6% for the quarter ended March 31, 2002. Additionally, the average balance in our mortgage servicing rights decreased to $5.1 million at March 31, 2003 as compared to $5.8 million at March 31, 2002. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other general and administrative expenses, increased approximately $4.5 million, or 43.0%, to $14.8 million for the quarter ended March 31, 2003 as compared to $10.3 million for the quarter ended March 31, 2002. The increase was 19 primarily due to an increase in subaccounting fees paid by Matrix Bank to third parties and an increase in reserves related to both production and servicing related assets. Provision for Income Taxes. Provision for income taxes decreased by $150 thousand to $900 thousand for the quarter ended March 31, 2003 as compared to $1.1 million for the quarter ended March 31, 2002. Our effective tax rate was 32.3% for the quarter ended March 31, 2003 as compared to 34.2% for the quarter ended March 31, 2002. The effective tax rates are affected by the level of tax-exempt income at ABS in proportion to the level of net income. Average Balance Sheet The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Average interest rate information for the quarters ended March 31, 2003 and 2002 have been annualized. Ratio, yield and rate information is based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated.
Quarters Ended March 31, --------------------------------------------------------------------------------- 2003 2002 ------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------------- ----------- ------- -------------- ----------- --------- Assets Interest-earning assets: Loans receivable........................... $ 1,392,723 $ 20,101 5.77 % $ 1,289,945 $ 22,442 6.96 % Securities................................. 25,576 216 3.38 10,035 129 5.14 Interest-earning deposits.................. 19,267 50 1.04 28,966 99 1.37 Federal Home Loan Bank stock............... 30,380 226 2.98 18,827 144 3.06 ------------- ----------- ------- -------------- ----------- --------- Total interest-earning assets............ 1,467,946 20,593 5.61 1,347,773 22,814 6.77 Noninterest-earning assets: Cash....................................... 43,808 31,794 Allowance for loan and valuation losses.... (9,187) (9,455) Premises and equipment..................... 26,816 13,672 Other assets............................... 151,891 171,297 ------------- -------------- Total noninterest-earning assets......... 213,328 207,308 ------------- -------------- Total assets............................. $ 1,681,274 $ 1,555,081 ============= ============== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts.......................... $ 5,494 18 1.31 % $ 4,638 27 2.33 % Money market and NOW accounts ............ 354,669 908 1.02 260,079 1,086 1.67 Certificates of deposit.................... 449,421 3,097 2.76 511,967 5,385 4.21 Federal Home Loan Bank borrowings.......... 334,045 2,239 2.68 255,449 1,972 3.09 Borrowed money and guaranteed preferred beneficial interests........... 130,000 2,445 7.52 156,719 2,721 6.94 ------------- ----------- ------- -------------- ----------- --------- Total interest-bearing liabilities....... 1,273,629 8,707 2.73 1,188,852 11,191 3.77 ------------- ----------- ------- -------------- ----------- --------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances)............... 312,015 253,580 Other liabilities.......................... 27,867 40,987 ------------- -------------- Total noninterest-bearing liabilities 339,882 294,567 Shareholders' equity......................... 67,763 71,662 ------------- -------------- Total liabilities and shareholders' equity... $ 1,681,274 $ 1,555,081 ============= ============== Net interest income before provision for loan and valuation losses.................... $ 11,886 $ 11,623 =========== =========== Interest rate spread......................... 2.88 % 3.01 % ======= ========= Net interest margin.......................... 3.24 % 3.45 % ======= ========= Ratio of average interest-earning assets to average interest-bearing liabilities......... 115.26 % 113.37 % ======= =========
20 Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: o changes in volume, in other words, changes in volume multiplied by prior period rate; and o changes in rate, in other words, changes in rate multiplied by prior period volume. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Quarter Ended March 31, 2003 vs. 2002 --------------------------------------------- Increase (Decrease) Due to Change in --------------------------------------------- Volume Rate Total ------------- ------------- --------------- (In thousands) Interest-earning assets: Loans receivable, net.......................................... $ 1,695 $ (4,036) $ (2,341) Securities..................................................... 143 (56) 87 Interest-earning deposits...................................... (28) (21) (49) FHLB stock..................................................... 86 (4) 82 ------------- ------------- --------------- Total interest-earning assets............................... 1,896 (4,117) (2,221) Interest-bearing liabilities: Passbook accounts.............................................. 4 (13) (9) Money market and NOW accounts.................................. 323 (501) (178) Certificates of deposit........................................ (600) (1,688) (2,288) FHLB borrowings................................................ 551 (284) 267 Borrowed money................................................. (489) 213 (276) ------------- ------------- --------------- Total interest-bearing liabilities.......................... (211) (2,273) (2,484) ------------- ------------- --------------- Change in net interest income before provision for loan and valuation losses................................ $ 2,107 $ (1,844) $ 263 ============= ============= ==============
Asset Quality Nonperforming Assets As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are generally placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate arises primarily through foreclosure on mortgage loans owned.
March 31, 2003 December 31, March 31, 2002 2002 --------------- ---------------- --------------- (Dollars in thousands) Nonaccrual residential mortgage loans................ $ 17,271 $ 15,123 $ 17,506 Nonaccrual commercial real estate, commercial loans and school financing.............................. 16,139 15,649 23,741 Nonaccrual consumer loans............................ - 46 28 --------------- ---------------- --------------- Total nonperforming loans......................... 33,410 30,818 41,275 Foreclosed real estate............................... 6,824 8,343 5,401 --------------- ---------------- --------------- Total nonperforming assets........................ $ 40,234 $ 39,161 $ 46,676 =============== ================ =============== Total nonperforming loans to total loans............. 2.44 % 2.20 % 3.41 % =============== ================ =============== Total nonperforming assets to total assets........... 2.37 % 2.30 % 2.90 % =============== ================ =============== Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 24.83 % 30.32 % 22.79 % =============== ================ ===============
21 We accrue for interest on government sponsored loans such as Federal Housing Administration insured and Veteran's Administration guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government sponsored accruing loans that were past due 90 or more days was $31.8 million, $34.8 million, and $58.1 million of March 31, 2003, December 31, 2002 and March 31, 2002, respectively. Nonaccrual residential mortgage loans as a percentage of total loans were 1.3% at March 31, 2002, 1.1% at December 31, 2002, and 1.4% at March 31, 2002. The nonaccrual residential mortgage loans have slightly deteriorated at March 31, 2003 as compared to December 31, 2002. This deterioration is the continued result of the weakened economy and its effects on families, despite the 40-year low interest rates. The slight increase in nonaccrual commercial loans and school financing at March 31, 2003 as compared to December 31, 2002 is primarily attributable to increased amounts of SBA originated and purchased loans in nonaccrual status, which increased $600 thousand to $9.9 million as compared to $9.3 million at December 31, 2002. It should be noted, however, that approximately $6.2 million of the principal of these loans is guaranteed, and as such, our credit risk is minimized despite the increase in the balances. With regard to our school financing, a majority of our origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. We have noted that many of our charter schools have encountered enrollment and/or state funding delays with their start-up, which has delayed their funding and caused the school's loans to us to become delinquent. In many instances, we have historically been able to work with many of the schools on their cash flow issues and eventually removed them from the delinquent lists. Not included in the March 31, 2003 balance was $1.0 million of delinquent school financing and $535 thousand of foreclosed real estate that was sold to a third party with recourse. The losses related to the delinquencies and foreclosures are recorded as part of noninterest expense. As of March 31, 2003, a liability of $250 thousand was recorded against the delinquent recourse loans and foreclosed real estate. The percentage of the allowance for loan losses to nonaccrual loans varies due to the nature of our portfolio of loans. We analyze the collateral for each nonperforming loan to determine potential loss exposure. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. See "--Comparison of Results of Operations for the Quarters Ended March 31, 2003 and 2002." Liquidity and Capital Resources Liquidity is our ability to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. The trend of net cash used by our operating activities experienced over the reported periods results primarily from our regular operating activities. Note, however, that we believe the sale of the wholesale production platform will result in significant liquidity once the warehouse line of credit provided to Matrix Financial by Matrix Bank is repaid. See Note 2 to the condensed consolidated financial statements herein for a discussion of the Sale of the Wholesale Production Platform. The Company is reliant on dividend and tax payments from its subsidiaries in order to fund operations, meet debt obligations and grow new or developing lines of business. A long-term inability of a subsidiary to make dividend payments could significantly impact the Company's liquidity. Historically, the majority of the dividend payments have been made by Matrix Bank and its consolidated subsidiaries, which include Matrix Financial. The current dividend policy approved by Matrix Bank is 75% of the consolidated cumulative earnings of Matrix Bank. Matrix Bank had not paid a dividend since August 2002, which reflected 22 earnings from July 2002, but resumed payments in March 2003 for earnings from November 2002, December 2002 and January 2003. Matrix Bank anticipates that it will resume regular dividend payments under current policy in the second quarter 2003. The Company also intends to utilize the line of credit on its bank stock loan, as needed, to meet its own and the other subsidiaries financial obligations. As of March 31, 2003, $9.0 million of the line of credit of $12.0 million is available. Matrix Bank's liquidity needs are expected to be achieved through retail deposit growth, brokered deposits, borrowings from the FHLB, custodial deposits from affiliates, deposits directed to Matrix Bank by third party institutions and deposits generated through its trust operations. Contractual loan payments and net deposit inflows are a generally predictable source of funds, while loan prepayments and loan sales are significantly influenced by general market interest rates and economic conditions. Borrowings on a short-term basis are used as a cash management vehicle to compensate for seasonal or other reductions in normal sources of funds. Matrix Bank utilizes advances from the FHLB as its primary source for borrowings. At March 31, 2003, Matrix Bank had overnight and term borrowings of $378.3 million from the FHLB of Topeka and Dallas. Matrix Bank also utilizes brokered deposits as a source of liquidity. The balance of brokered deposits at March 31, 2003 was $250.5 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 6.05% at March 31, 2003. This exceeded the well capitalized leverage capital requirement of 5.0% of adjusted assets by $16.9 million. Matrix Bank's risk-based capital ratio was 11.82% at March 31, 2003, which currently exceeds the well capitalized risk-based capital requirement of 10.0% of risk-weighted assets by $15.8 million. Matrix Financial's principal source of funding for its loan origination business consists of a $425.0 million warehouse line of credit provided to Matrix Financial by Matrix Bank, as well as a warehouse line of credit provided to Matrix Financial by an unaffiliated financial institution. As of March 31, 2003, Matrix Financial had a $50.0 million warehouse line of credit facility provided by an unaffiliated financial institution. As of March 31, 2003, $50.0 million was available to be utilized under the line of credit facility. Matrix Capital Markets principal source of funding to acquire loan portfolios with the intent of selling over a short period of time is a $40.0 million warehouse line from a third party financial institution unconditionally guaranteed by the Company. As of March 31, 2003, Matrix Capital Markets $39.3 million was available to be utilized under the line of credit facility. ABS' principal source of funding for school financings are internal capital, sales of loans to a third party institution and partnership trusts with unaffiliated financial institutions. Amounts available to be sold and amounts to be financed are at the purchaser's and lender's sole discretion. We continue to pursue additional third party financing and sales options for ABS although we do not anticipate significantly increasing our current loan portfolio. Through a Purchase and Sale Agreement, the Company has sold school financing loans to a third party financial institution. The Company provides scheduled interest and principal plus full recourse in the case of loss or default. The transaction was treated as a sale due to the transfer of ownership over the school financing loans. No gain or loss was recorded at the time of sale. The balance of the school financing loans sold with recourse was approximately $13.4 million at March 31, 2003. In the ordinary course of business, we make commitments to originate residential mortgage loans and hold originated loans until delivery to an investor. Inherent in this business are risks associated with changes in interest rates and the resulting change in the market value of the loans being held for delivery. We mitigate this risk through the use of mandatory and best effort forward commitments to sell loans. As of March 31, 2003, we had $1.1 billion in pipeline and funded loans offset with mandatory forward commitments of $736.6 million and best effort forward commitments of $110.2 million. See additional discussion under "Comparison of Results of Operations for the Quarters Ended March 31, 2003 and 2002--Loan Origination." 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk During the quarter ended March 31, 2003, there were no material changes to the quantitative and qualitative disclosures about market risk previously reported in the Annual Report on Form 10-K for the year ended December 31, 2002. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Risk Sensitive Assets and Liabilities" and Item 1. "Business Mortgage Servicing Activities --Hedging of Servicing Rights" and "Sale of Production Platform" in the Form 10-K for December 31, 2002 for a detailed discussion and which is incorporated herein by reference. Item 4. Controls and Procedures Within 90 days prior to the date of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Co-CEO's and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Co-CEO's and CFO, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC reports. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. Part II - Other Information Item 1. Legal Proceedings We are from time to time party to various litigation matters, in most cases, involving ordinary and routine claims incidental to our business. With respect to all pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. However, the outcome with respect to one or more of these matters, if adverse, is reasonably likely to have a material, adverse impact on the consolidated financial position, results of operations or cash flows of the Company. Sterling Trust was named a defendant in an action filed in July 2001 in Department 68, Superior Court for the County of San Diego, State of California styled Robert Heyenga, et. al. v. Brian D. Gibbs, et. al. On March 28, 2003, the court granted Sterling Trust's demurrer on the grounds that the plaintiffs' complaint failed to state facts sufficient to constitute a cause of action against Sterling Trust. Sterling Trust, Matrix Bancorp, The Vintage Group, Vintage Delaware Holdings and Matrix Bank have been named defendants in an action filed in December 2001 styled Heraclio A. Munoz, et. al. v. Sterling Trust Company, et. al. that is pending in the Superior Court of the State of California, County of San Bernadino. The complaint seeks class action status, requests unspecified damages and alleges, among other things, breach of contract, breach of fiduciary duty, violations of various laws and that the corporate veils of various companies should be pierced. We believe we have meritorious defenses and intend to defend this matter vigorously. Sterling Trust has been named a defendant in an arbitration claim filed in early 2003 with the American Arbitration Association in Fresno, California styled Gilbert R. Allenby, et. al. v. Sterling Trust Company. Approximately 60 plaintiffs have claimed Sterling Trust is responsible for losses in their self-directed IRAs realized when their IRAs invested funds through Advisors Capital Investments, Inc., a registered investment advisor, in a mutual fund trading program. Sterling Trust believes it had meritorious defenses to the claims and intends to defend the matter vigorously. In addition, Sterling Trust has been the subject of numerous lawsuits and arbitration proceedings in which customers and, in some cases, persons who are not customers allege various theories of liability against the Company for losses suffered by these claimants in connection with their failed investments in several enterprises. To the extent that Sterling Trust has had any relationship with any of such claimants, it has been solely as custodian of such claimants self-directed IRAs pursuant to contracts that specify the limited nature of Sterling Trust's obligations. We believe Sterling Trust has in each case acted in accordance with its obligations under the contracts and/or as 24 otherwise imposed by law. We further believe that the ultimate outcome of each of these cases will not be material to the consolidated financial position and results of operations of Company; but, there can be no assurances that there will not be an adverse outcome in any one or more of these cases or that any such adverse outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company. ABS School Services had been named a defendant in an action filed in the Superior Court of Arizona, Maricopa County on June 3, 2002 by a former employee. The former employee claimed that she was entitled to approximately $450,000 in commissions owed to her at the time of termination of her employment. She has also made claims under the Arizona wage act and for an award of her attorneys' fees. In April 2003, this matter was settled for an amount not materially in excess of the amount accrued for at ABS as of March 31, 2003. 25 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits *10.1 Fifth Amendment to Credit Agreement, dated as of March 29, 2003, by and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders. *10.2 Amendment to Purchase and Assumption Agreement, dated April 18, 2003, by and between Matrix Capital Bank, Matrix Financial Services Corporation and AmPro Mortgage Corp. *99.1 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. *99.2 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. *99.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The Company filed a Form 8-K with the Securities and Exchange Commission on March 4, 2003 (Item 5), which contained a press release announcing the sale of the wholesale mortgage origination planform and the related Purchase and Assumption Agreement. ______________________ * Filed herewith. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX BANCORP, INC. Dated: May 2, 2003 /s/ D. Mark Spencer ------------------------ ------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) Dated: May 2, 2003 /s/ Richard V. Schmitz ------------------------ -------------------------------------- Richard V. Schmitz Co-Chief Executive Officer Dated: May 2, 2003 /s/ David W. Kloos ------------------------ --------------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 27 CERTIFICATION I, David W. Kloos, Senior Vice President and Chief Financial Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether of not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significant affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ David W. Kloos ---------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) May 2, 2003 28 CERTIFICATION I, D. Mark Spencer, President and Co-Chief Executive Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether of not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significant affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ D. Mark Spencer -------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) May 2, 2003 29 CERTIFICATION I, Richard V. Schmitz, Co-Chief Executive Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether of not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significant affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Richard V. Schmitz ----------------------------------- Richard V. Schmitz Co-Chief Executive Officer May 2, 2003 30 INDEX TO EXHIBITS Exhibit Number Description - -------- ---------------------------------------------------------------------- *10.1 Fifth Amendment to Credit Agreement, dated as of March 29, 2003, by and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders. *10.2 Amendment to Purchase and Assumption Agreement, dated April 18, 2003, by and between Matrix Capital Bank, Matrix Financial Services Corporation and AmPro Mortgage Corp. *99.1 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. *99.2 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. *99.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Filed herewith. 31 EX-10.1 3 fifthamendtoca.txt Exhibit 10.1 FIFTH AMENDMENT TO CREDIT AGREEMENT This FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and entered into as of March 29, 2003, is by and between MATRIX BANCORP, INC., a Colorado corporation (the "Borrower"), the lenders from time to time party hereto (each a "Lender" and collectively, the "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, together with any successor agents appointed hereunder, the "Agent"). RECITALS A. The Borrower and U.S. Bank National Association, in its capacities as a Lender and as Agent, entered into a Credit Agreement dated as of December 27, 2000, as amended by a First Amendment to Credit Agreement dated as of March 5, 2001, a Second Amendment to Credit Agreement dated as of July 27, 2001, a Third Amendment to Credit Agreement dated as of December 26, 2001 and a Fourth Amendment to Credit Agreement dated as of March 31, 2002 (as amended, the "Credit Agreement"); and B. The Borrower desires to amend certain provisions of the Credit Agreement, and the Lenders and Agent have agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require. Section 2. Amendments. 2.1 The definition of "Termination Date" contained in Section 1.1 of the Credit Agreement is hereby amended in its entirety to read as follows: "Termination Date": The earliest of (a) March 31, 2004, (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amounts are reduced to zero pursuant to Section 2.8 hereof. 2.2 Section 6.15(c) of the Credit Agreement is hereby amended in its entirety to read as follows: (c) Net Income. The Borrower shall not permit Matrix Bank's Net Income, as of the last day of any fiscal quarter, for the four consecutive fiscal quarters ending on such date, to be less than: (a) $3,500,000 as of March 31, 2003, (b) $2,700,000 as of June 30, 2003, and (c) $7,500,000 as of the end of each fiscal quarter thereafter. 2.3 Section 6.15(f) of the Credit Agreement is hereby amended in its entirety to read as follows: (f) Classified Assets. The Borrower shall not permit Matrix Bank to have a ratio (stated as a percentage) of Classified Assets to total assets at any time greater than: (a) 4% from January 1, 2003 to and including March 31, 2004, and (b) 3% at any time thereafter. Section 3. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective provided the Agent shall have received at least five (5) counterparts of this Amendment, duly executed by the Company and all of the Lenders, and the Agent shall have received the following, each duly executed or certified: 3.1 This Amendment duly executed by the Borrower. 3.2 A copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Certificate of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Borrower dated December 27, 2000, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. 3.3 Certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment. 3.4 The Consent and Agreement of Guarantors, in the form attached hereto as Exhibit A, duly executed by each Guarantor. 3.5 The Borrower shall have satisfied such other conditions as specified by the Agent and the Lenders, including payment of all unpaid legal fees and expenses incurred by the Agent through the date of this Amendment in connection with the Credit Agreement and the Amendment Documents. Section 4. Defaults and Waivers. 4.1 Events of Default and Unmatured Events of Default. (a) Net Income. Under Section 6.15(c) of the Credit Agreement, the Borrower agreed that it would not permit Matrix Bank's Net Income, as of the last day of any fiscal quarter, 2 for the four consecutive fiscal quarters ending on such date, to be less than $7,500,000. The Borrower has informed the Agent that as of December 31, 2002, the Net Income of Matrix Bank was less than $7,500,000. As a result, an Event of Default has occurred under Section 7.1(c) of the Credit Agreement. (b) Capital Expenditures. Under Section 6.15(f) of the Credit Agreement, the Borrower agreed that it would not permit Matrix Bank to have a ratio (stated as a percentage) of Classified Assets to total assets at any time greater than 3% at any time thereafter. The Borrower has informed the Agent that on and after September 30, 2002, such ratio exceeded 3%. As a result, an Event of Default has occurred under Section 7.1(c) of the Credit Agreement. 4.2 Waiver. Upon the date on which this Amendment becomes effective, the Agent and the Banks hereby waive the Borrower's Defaults and Events of Default described in the preceding Sections 4.1(a) and 4.1(b) (the "Existing Defaults"). The waiver of the Existing Defaults set forth above is limited to the express terms thereof, and nothing herein shall be deemed a waiver by the Agent or any Bank of any other term, condition, representation or covenant applicable to the Borrower under the Credit Agreement (including but not limited to any future occurrence similar to the Existing Defaults) or any of the other agreements, documents or instruments executed and delivered in connection therewith, or of the covenants described therein. The waivers set forth herein shall not constitute a waiver by the Agent nor any Bank of any other Default or Event of Default, if any, under the Credit Agreement, and shall not be, and shall not be deemed to be, a course of action with respect thereto upon which the Borrower may rely in the future, and the Borrower hereby expressly waives any claim to such effect. Section 5. Representations, Warranties, Authority, No Adverse Claim. 5.1 Reassertion of Representations and Warranties, No Default. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit Agreement, and (b) there will exist no Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Agent and the Lenders. 5.2 Authority, No Conflict, No Consent Required. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Borrower is a party or a signatory or a provision of the Borrower's Certificate of Incorporation, Bylaws or any other agreement or requirement of law in 3 which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Borrower or any of its property except, if any, in favor of the Agent on behalf of the Lenders. The Borrower represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Borrower of the Amendment Documents or other agreements and documents executed and delivered by the Borrower in connection therewith or the performance of obligations of the Borrower therein described, except for those which the Borrower has obtained or provided and as to which the Borrower has delivered certified copies of documents evidencing each such action to the Agent. 5.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees that no events have taken place and no circumstances exist at the date hereof which would give the Borrower a basis to assert a defense, offset or counterclaim to any claim of the Agent or the Lenders with respect to the Obligations or the Borrower's obligations under the Credit Agreement as amended by this Amendment. Section 6. Affirmation of Credit Agreement, Further References. The Agent, the Lenders, and the Borrower each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. All of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower. Section 7. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. Section 8. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining 4 provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 9. Successors. The Amendment Documents shall be binding upon the Borrower, the Lenders, and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Lenders, and the Agent and the successors and assigns of the Lenders and the Agent. Section 10. Legal Expenses. As provided in Section 9.2 of the Credit Agreement, the Borrower agrees to reimburse the Agent, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Borrower under the Amendment Documents, and to pay and save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Borrower shall survive any termination of the Credit Agreement. Section 11. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. Section 12. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. Section 13. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MATRIX BANCORP, INC. By ------------------------------------ Its --------------------------------- U.S. BANK NATIONAL ASSOCIATION By ------------------------------------ Its --------------------------------- [Signature Page to Fifth Amendment to Credit Agreement] S-1 EX-10.2 4 amendtop-a.txt Exhibit 10.2 AMENDMENT TO PURCHASE AND ASSUMPTION AGREEMENT This Amendment ("Amendment") to the Purchase and Assumption Agreement ("Agreement") is entered into as of this 18th day of April, 2003 by and between MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("Seller"), MATRIX CAPITAL BANK, a federal savings bank ("Parent"), and AMPRO MORTGAGE CORPORATION, a Delaware corporation ("Purchaser"). Capitalized terms used herein and not otherwise defined shall have the meanings given them in the Agreement. WHEREAS, the loan production levels of the Acquired Division have increased to a level where the parties believe it is in the best interests of Seller to enter into the Countrywide Early Purchase Program (as defined below); and WHEREAS, the parties have determined, based on internal business considerations of Seller and Parent, not to expand the limits of the Warehouse Agreement; and WHEREAS, the parties desire to amend certain of the terms of the Agreement in accordance with, and as set forth in, this Amendment. NOW, THEREFORE, in consideration of the premises and the mutual undertakings set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Amendment of Exhibit A-1. Exhibits A-1 of the Agreement shall be and hereby is amended to include (in addition to the contents of Exhibit A-1 immediately prior to the effective date of this Amendment) each of the additional bullet point items set forth below: o all fees, costs and expenses expressly set forth in the Countrywide Early Purchase Program (as defined in the Operating Plan, as amended hereby); o if and only to the extent that the unpaid principal balance of all Mortgage Loans that are subject to the Warehouse Agreement at any particular time exceeds the sum of (A) $425,000,000 plus (B) any additional amounts as may be agreed to periodically (e.g., on a day-by-day basis or week-by-week basis, etc.) by Parent in its sole discretion in writing (the sum of (A) and (B) being referred to herein on each periodic basis as the "Warehouse Limit" for such period), then the interest rate payable by the Acquired Division under the Warehouse Agreement with respect to such excess Mortgage Loans (i.e., the portion of the Mortgage Loans in excess of the Warehouse Limit for that period) shall be deemed to be the weighted average coupon rate on all Mortgage Loans outstanding under the Warehouse Agreement for that particular period of time (for such period or date in question, the "WAC Rate"). For purposes of this provision, the agreement of Parent to accept a Warehouse Limit in excess of $425,000,000 for a period of time may be made only in a writing, which may include e-mail, executed by the President, CEO, CFO or COO of the Parent; and such writing must specify the period of time during which such additional Warehouse Limit in excess of $425,000,000 is effective (otherwise, such writing or agreement shall be ineffective for purposes of this provision). By way of example, if (C) the total unpaid principal balance of all loans that are subject to the Warehouse Agreement on May 1, 2003 is $475,000,000 and (D) through an e-mail from the CFO of Parent to the CFO of the Acquired Division, Parent has agreed that for May 1, 2003 only the Warehouse Limit for that day is $450,000,000, then the weighted average coupon rate on the $475,000,000 outstanding on May 1, 2003 shall be the interest rate payable by the Acquired Division with respect to the excess Mortgage Loans with unpaid principal balance of $25 million. Notwithstanding the foregoing, for the period from (E) the Initial Closing Date to the date through and including April 18, 2003, if and only to the extent that the unpaid principal balance of all Mortgage Loans that are or were the subject of the Warehouse Agreement exceeds $425,000,000, then the interest rate payable by the Acquired Division under the Warehouse Agreement with respect to such excess Mortgage Loans shall be deemed to be the WAC Rate and (F) for the days of April 19, 20, 21 and 22, no such excess shall be deemed to have existed (i.e., the Applicable-Covered Rate and not the WAC Rate shall be the applicable rate charged for such excess Mortgage Loans for those four days). o without limiting the generality of the foregoing, on any Mortgage Loans delivered to Countrywide under the Countrywide Early Purchase Program , the Applicable-Covered Rate (as defined in the Warehouse Agreement) in lieu of the rate charged to Seller under Section 7(a) of the Countrywide Early Purchase Program (which is the sum of (i) the applicable SRP Enhancement Percent plus (ii) the one month LIBOR rate); 2. Amendment of Exhibit B. Exhibit B of the Agreement shall be and hereby is amended to add as a new sixth paragraph to Exhibit B the following: 2 Notwithstanding anything in the immediately previous paragraph to the contrary, the Acquired Division shall enter into that certain Early Purchase Program Addendum to Loan Purchase Agreement with Countrywide Home Loans, Inc. in an initial amount of $100,000,000 (the "Countrywide Early Payment Program"). The Acquired Division will use commercially reasonable efforts to use the financing available under the Warehouse Agreement before submitting loans for sale under the Countrywide Early Purchase Program. Purchaser hereby covenants and agrees that the Acquired Division shall not submit for sale any Mortgage Loans under the Countrywide Early Purchase Program unless at the time in question the unpaid principal balance of all Mortgage Loans subject to the Warehouse Agreement exceeds $420,000,000(or such lesser amount as has been made available at that time to the Acquired Division under the Warehouse Agreement less $5,000,000); provided that the Purchaser shall not be deemed to have violated or breached this covenant if the Executive Committee or the board of directors of Seller specifically directs in writing the Acquired Division to utilize the Countrywide Early Purchase Program notwithstanding the outstanding balance under the Warehouse Agreement at the time in question. 3. Other Terms. (a) Purchaser hereby acknowledges and agrees that the execution, delivery and performance by Seller of the Countrywide Early Purchase Program shall not be deemed to be a breach of any representation, warranty, covenant or agreement on the part of Purchaser, Seller or Parent. Purchaser specifically consents to and approves of the Countrywide Early Purchase Program. (b) In addition to and without limiting the generality of the provisions of Section 7.2 of the Agreement, but subject to the terms and conditions set forth in the Agreement (other than those expressly amended by this Amendment), Purchaser shall indemnify and hold Seller and Parent, and their respective officers, directors, employees, agents and Affiliates (as defined in the Agreement) harmless against and in respect of, and shall reimburse each Indemnified Party (as defined in the Agreement) for, any and all Losses (as defined in the Agreement) arising out of, resulting from or relating to any breach or non-performance by the Acquired Division (through Seller) of any term, condition or provision of the Countrywide Early Purchase Program and/or the agreements and documents delivered in connection therewith. The foregoing indemnification shall not be subject to the "indemnification cap" specified in Section 7.3(c) of the Agreement and shall be subject to the four (4) year limitations period specified in Section 7.3(b) of the Agreement. Notwithstanding the foregoing, the foregoing indemnification shall not apply and shall have no force and effect with respect to any particular indemnified event if the breach or non-performance by the Acquired Division results directly from an action or inaction on the part of the Acquired Division taken or not taken specifically at the written direction of the Executive Committee or the board of directors of Seller. 3 4. No Other Terms Amended. Except to the extent expressly provided in Section 1 of this Amendment, all terms of the Agreement shall remain in full force and effect and unaffected by the terms of this Amendment. 5. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above. MATRIX FINANCIAL SERVICES CORPORATION By:______________________________ Name: Title: MATRIX CAPITAL BANK By:______________________________ Name: Title: AMPRO MORTGAGE CORPORATION By:______________________________ Name: Title: 5 EX-99.1 5 ex99-1tomar200310q.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Matrix Bancorp, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, D. Mark Spencer, President and Co-Chief Executive Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 2, 2003 /s/ D. Mark Spencer -------------------------------- Name: D. Mark Spencer Title: President and Co-Chief Executive Officer EX-99.2 6 ex99-2tomar200310q.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Matrix Bancorp, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard V. Schmitz, Co-Chief Executive Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 2, 2003 /s/ Richard V. Schmitz ------------------------------------- Name: Richard V. Schmitz Title: Co-Chief Executive Officer EX-99.3 7 ex99-3tomar200310q.txt Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Matrix Bancorp, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Kloos, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 2, 2003 /s/ David W. Kloos ------------------------------------ Name: David W. Kloos Title: Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----