-----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, UmaaqKmZzpyEs4dbCtMiKiNxR03GnS5x+r8fEzOo2scTzsr2kFWoFVgNY/J8vtoF eEcHBTBcKnyLp81NAtAORg== 0000899078-03-000590.txt : 20031104 0000899078-03-000590.hdr.sgml : 20031104 20031104165210 ACCESSION NUMBER: 0000899078-03-000590 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031104 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: 03976895 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 sept302003-10q.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 September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 0-21231 MATRIX BANCORP, INC. (Exact name of registrant as specified in its charter) Colorado 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 17th Street, Suite 2100, Denver, CO 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ] Number of shares of Common Stock ($.0001 par value) outstanding at the close of business on October 31, 2003 was 6,498,543 shares.
TABLE OF CONTENTS PART I - Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 2003 (unaudited) and December 31, 2002..............................3 Condensed Consolidated Statements of Operations Quarter and nine months ended September 30, 2003 and 2002 (unaudited).............4 Condensed Consolidated Statements of Shareholders' Equity Nine months ended September 30, 2003 and 2002 (unaudited).........................6 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2003 and 2002 (unaudited).........................7 Notes to Condensed Consolidated Financial Statements....................................8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................16 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................29 ITEM 4. Controls and Procedures.................................................................29 PART II - Other Information ITEM 1. Legal Proceedings.......................................................................29 ITEM 6. Exhibits and Reports on Form 8-K........................................................30 SIGNATURES............................................................................................32
2 Part I - Financial Information Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in thousands, except share information) September 30, December 31, 2003 2002 ------------------- ------------------ (Unaudited) Assets Cash and cash equivalents........................................................ $ 58,706 $ 58,725 Interest-earning deposits and federal funds sold................................. 2,151 3,687 Securities available for sale.................................................... 63,037 29,073 Loans held for sale, net......................................................... 995,345 1,107,926 Loans held for investment, net................................................... 287,493 285,891 Mortgage servicing rights, net................................................... 43,188 63,200 Other receivables ............................................................... 41,434 54,811 Federal Home Loan Bank stock, at cost............................................ 32,336 30,379 Foreclosed real estate........................................................... 6,081 8,343 Premises and equipment, net...................................................... 25,141 27,705 Bank owned life insurance........................................................ 20,354 - Other assets, net................................................................ 26,074 31,857 ------------------- ------------------ Total assets..................................................................... $ 1,601,340 $ 1,701,597 =================== ================== Liabilities and shareholders' equity Liabilities: Deposits...................................................................... $ 996,275 $ 933,957 Custodial escrow balances..................................................... 134,655 151,790 Draft payable................................................................. - 7,097 Federal Home Loan Bank borrowings............................................. 267,225 385,785 Borrowed money................................................................ 49,045 61,403 Guaranteed preferred beneficial interests..................................... 64,500 64,500 Other liabilities............................................................. 18,745 23,357 Income taxes payable and deferred income tax liability........................ 2,596 6,772 ------------------- ------------------ Total liabilities................................................................ 1,533,041 1,634,661 ------------------- ------------------ Commitments and contingencies Shareholders' equity: Preferred stock, par value $0.0001; authorized 5,000,000 shares; no shares outstanding................................................................. - - Common stock, par value $0.0001; authorized 50,000,000 shares; issued and outstanding 6,498,543 and 6,489,543 shares at September 30, 2003 and December 31, 2002, respectively............................................. 1 1 Additional paid in capital.................................................... 20,451 20,375 Retained earnings............................................................. 47,835 46,534 Accumulated other comprehensive income........................................ 12 26 ------------------- ------------------ Total shareholders' equity....................................................... 68,299 66,936 ------------------- ------------------ Total liabilities and shareholders' equity....................................... $ 1,601,340 $ 1,701,597 =================== ==================
See accompanying notes. 3 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Dollars in thousands, except share information) (Unaudited)
Quarter Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Interest income Loans and securities........................................ $ 17,846 $ 20,452 $ 55,532 $ 61,426 Interest-earning deposits................................... 237 378 764 937 --------------- --------------- --------------- --------------- Total interest income....................................... 18,083 20,830 56,296 62,363 --------------- --------------- --------------- --------------- Interest expense Deposits.................................................... 3,200 4,656 10,664 16,551 Borrowed money and guaranteed preferred beneficial interests 4,588 4,837 13,889 14,574 --------------- --------------- --------------- --------------- Total interest expense...................................... 7,788 9,493 24,553 31,125 --------------- --------------- --------------- --------------- Net interest income before provision for loan and valuation losses.................................................... 10,295 11,337 31,743 31,238 Provision for loan and valuation losses..................... 1,114 1,308 2,651 3,008 --------------- --------------- --------------- --------------- Net interest income after provision for loan and valuation losses.................................................... 9,181 10,029 29,092 28,230 --------------- --------------- --------------- --------------- Noninterest income Loan administration......................................... 6,373 7,157 25,430 24,161 Brokerage................................................... 2,298 3,728 7,522 6,555 Trust services.............................................. 1,680 1,188 4,977 3,930 Real estate disposition services............................ 1,786 1,049 4,608 2,944 Gain on sale of loans and securities........................ 1,711 135 2,201 284 Gain on sale of mortgage servicing rights, net.............. - - - 1,054 Loan origination............................................ 245 338 87 1,011 School services............................................. 520 882 1,786 3,702 Other....................................................... (65) 1,557 6,190 3,764 --------------- --------------- --------------- --------------- Total noninterest income.................................... 14,548 16,034 52,801 47,405 --------------- --------------- --------------- --------------- Noninterest expense Compensation and employee benefits.......................... 8,338 9,555 26,541 27,973 Amortization of mortgage servicing rights................... 8,263 6,037 27,517 17,073 Occupancy and equipment..................................... 1,575 1,897 4,568 4,304 Postage and communication................................... 572 692 1,881 2,004 Professional fees........................................... 557 910 2,381 2,086 Data processing............................................. 689 721 2,114 2,108 Impairment (recovery) on mortgage servicing rights.......... (5,100) 8,000 (2,700) 9,219 Other general and administrative............................ 8,804 9,117 23,630 21,371 --------------- --------------- --------------- --------------- Total noninterest expense................................... 23,698 36,929 85,932 86,138 --------------- --------------- --------------- --------------- Income (loss) from continuing operations before income taxes 31 (10,866) (4,039) (10,503) Income tax benefit.......................................... (289) (4,675) (2,391) (5,015) --------------- --------------- --------------- --------------- Income (loss) from continuing operations.................... 320 (6,191) (1,648) (5,488) Discontinued Operations: (Loss) income from discontinued operations (sale of wholesale mortgage origination platform), net of income tax (benefit) provision of $(1,528), $640, $1,908 and $2,089, respectively..................................... (2,360) 990 2,949 3,229 --------------- --------------- --------------- --------------- Net (loss) income........................................... $ (2,040) $ (5,201) $ 1,301 $ (2,259) =============== =============== =============== =============== Continued
4 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Operations - continued (Dollars in thousands, except share information) (Unaudited)
Quarter Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- Income (loss) from continuing operations per share - basic.................................................... $ 0.05 $ (0.96) $ (0.25) $ (0.85) --------------- --------------- --------------- --------------- Income (loss) from continuing operations per share - assuming dilution........................................ $ 0.05 $ (0.96) $ (0.25) $ (0.85) --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- (Loss) income from discontinued operations per share - basic.................................................... $ (0.36) $ 0.15 $ 0.45 $ 0.50 --------------- --------------- --------------- --------------- (Loss) income from discontinued operations per share - assuming dilution........................................ $ (0.36) $ 0.15 $ 0.45 $ 0.50 --------------- --------------- --------------- --------------- =============== =============== =============== =============== Net (loss) income per share - basic......................... $ (0.31) $ (0.81) $ 0.20 $ (0.35) =============== =============== =============== =============== Net (loss) income per share - assuming dilution............. $ (0.31) $ (0.81) $ 0.20 $ (0.35) =============== =============== =============== =============== =============== =============== =============== =============== Weighted average shares - basic............................. 6,496,554 6,454,244 6,492,959 6,465,083 =============== =============== =============== =============== Weighted average shares - assuming dilution................. 6,496,554 6,454,244 6,539,206 6,465,083 =============== =============== =============== ===============
See accompanying notes. 5 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Shareholders' Equity (Dollars in thousands) (Unaudited)
Accumulated Additional Other Total Common Stock Paid In Treasury Retained Comprehensive Shareholders' Comprehensive ---------------------- Shares Amount Capital Shares Earnings Income Equity Income ---------- ---------- ---------- --------- --------- ------------- -------------- --------------- Nine Months Ended September 30, 2003 - ------------------------- Balance at December 31, 2002..................... 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936 Comprehensive income: Net income............. - - - - 1,301 - 1,301 $ 1,301 Unrealized holding loss on securities (1)...... - - - - - (14) (14) (14) --------------- Comprehensive income...... $ 1,287 =============== Issuance of stock related to employee stock purchase plan and options................ 9,000 - 76 - - - 76 ---------- ---------- ---------- --------- --------- ------------- -------------- Balance at September 30, 2003................... 6,498,543 $ 1 $ 20,451 $ - $ 47,835 $ 12 $ 68,299 ========== ========== ========== ========= ========= ============= ============== Nine Months Ended September 30, 2002 - ------------------------- Balance at December 31, 2001.................. 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312 Comprehensive income: Net loss.............. - - - - (2,259) - (2,259) $ (2,259) Unrealized gains on securities, net of reclassification adjustment............. - - - - - 4 4 4 ----------- Comprehensive loss........ $ (2,255) =========== Issuance of stock related to employee stock purchase plan and options................ 1,700 - 6 - - - 6 Shares repurchased........ (66,060) - - (726) - - (726) Shares retired............ - - (726) 726 - - - ---------- ---------- ---------- --------- --------- ------------- -------------- Balance at September 30, 2002................... 6,454,244 $ 1 $ 20,080 $ - $ 48,227 $ 29 $ 66,337 ========== ========== ========== ========= ========= ============= ============== (1) Disclosure of reclassification amount Nine Months Ended September 30, 2003 - ------------------------- Unrealized holding loss arising during period.............. $ (14) Less: reclassification adjustment of losses included in net income (loss).............. - ------------ Net unrealized loss on securities....... $ (14) ============
See accompanying notes. 6 Matrix Bancorp, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Nine Months Ended September 30, 2003 2002 ------------- ------------- Operating activities Net (loss) from continuing operations....................................... $ (1,648) $ (5,488) Adjustments to reconcile net (loss) from continuing operations to net cash (used in) operating activities: Depreciation and amortization............................................ 2,943 2,729 Provision for loan and valuation losses.................................. 2,651 3,008 Amortization of mortgage servicing rights................................ 27,517 17,073 Impairment (recovery) on mortgage servicing rights....................... (2,700) 9,219 Gain on sale of loans and securities..................................... (2,201) (285) Gain on sale of mortgage servicing rights................................ - (1,054) Gain on sale of foreclosed real estate................................... (739) (16) Changes in assets and liabilities: Loans originated for sale, net of loans sold............................. 31,601 14,320 Loans purchased for sale................................................. (1,325,324) (730,076) Proceeds from sale of loans held for sale................................ 589,165 463,829 Increase in securities held for sale.................................... (33,978) (18,235) Originated mortgage servicing rights, net................................ (4,467) (32,589) (Increase) decrease in other receivables and other assets................ (8,448) 6,847 (Decrease) increase in other liabilities, income taxes payable and deferred income tax liability.......................................... (6,880) 15,192 ------------- ------------- Net cash (used in) operating activities from continuing operations.......... (732,508) (255,526) Net cash provided by discontinued operations............................. 133,455 6,042 ------------- ------------- Net cash (used in) operating activities..................................... (599,053) (249,484) Investing activities Loans originated and purchased for investment............................... (101,771) (177,346) Principal repayments on loans............................................... 786,162 304,065 Purchase of Federal Home Loan Bank stock.................................... (1,957) (12,798) Purchases of premises and equipment......................................... (4,734) (16,131) Acquisition of mortgage servicing rights.................................... (338) - Proceeds from sale of mortgage servicing rights............................. - 11,047 Proceeds from sale of foreclosed real estate................................ 5,795 16 ------------- ------------- Net cash provided by investing activities................................... 683,157 108,853 Financing activities Net increase in deposits.................................................... 62,318 89,320 Net increase (decrease) in custodial escrow balances........................ (17,135) 19,909 (Decrease) increase in revolving lines, net................................. (129,818) 25,938 Payment of notes payable.................................................... (1,071) (1,624) Proceeds from issuance of guaranteed preferred beneficial interests......... - 5,000 Payment of financing arrangements........................................... (29) (45) Treasury shares repurchased................................................. - (726) Proceeds from issuance of common stock related to employee stock option plan.............................................................. 76 6 ------------- ------------- Net cash (used in) provided by financing activities......................... (85,659) 137,778 ------------- ------------- Decrease in cash and cash equivalents....................................... (1,555) (2,853) Cash and cash equivalents at beginning of period............................ 62,412 84,460 ------------- ------------- Cash and cash equivalents at end of period.................................. $60,857 $81,607 ============= ============= Supplemental disclosure of cash flow information Cash paid for interest...................................................... $ 25,442 $ 32,142 ============= ============= Cash paid (received) for income taxes....................................... $ 3,734 $ (3,278) ============= =============
See accompanying notes. 7 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2003 (Unaudited) 1. Basis of Presentation and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of Matrix Bancorp, Inc. and subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the condensed consolidated financial statements, and disclosures of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period and the accompanying notes. Actual results could differ from these estimates. Stock-Based Compensation At September 30, 2003, the Company has one stock-based employee compensation plan, which is described more fully in Note 14 to the audited financial statements in Form 10-K for December 31, 2002. We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS 123, "Accounting for Stock-Based Compensation" established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plan. As allowed by SFAS 123 (and SFAS 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS 123"), we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS 123. Accordingly, we do not recognize compensation expense for our stock-based plan, as we do not issue options at exercise prices below the market value at the date of the grant. Had compensation cost for our stock-based plans been determined consistent with SFAS No. 123, our net income (loss) and income (loss) per share would have been changed to the pro forma amounts indicated below:
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------------------------ 2003 2002 2003 2002 ------------------------------------------------ (Dollars in thousands) Net income (loss): Net income (loss) as reported $ (2,040) $ (5,201) $ 1,301 $ (2,259) Deduct: Total stock-based employee compensation expense determined under fair value based method for awards, net of related tax effects (67) (89) (200) (267) ------------------------------------------------ Pro forma $ (2,107) $ (5,290) $ 1,101 $ (2,526) ================================================ Income (loss) per share: ================================================ Basic, as reported $ (0.31) $ (0.81) $ 0.20 $ (0.35) ================================================ Basic, pro forma $ (0.32) $ (0.82) $ 0.17 $ (0.39) ================================================ Diluted, as reported $ (0.31) $ (0.81) $ 0.20 $ (0.35) ================================================ Diluted, pro forma $ (0.32) $ (0.82) $ 0.17 $ (0.39) ================================================
8 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 1. Basis of Presentation and Significant Accounting Policies (continued) Reclassifications Certain reclassifications have been made to prior periods condensed consolidated financial statements and related notes to conform with the current period presentation. 2. Discontinued Operations On September 2, 2003, the Company announced the final closing, and substantial completion of the sale by Matrix Financial Services Corporation of substantially all of its assets associated with its wholesale mortgage origination platform. On February 23, 2003, the Company announced that its subsidiaries, Matrix Financial and Matrix Capital Bank, entered into a Purchase and Assumption Agreement, as amended ("Purchase Agreement"), to sell substantially all of Matrix Financial's assets associated with its wholesale mortgage origination platform ("Platform") to AmPro Mortgage Corporation ("AmPro" or the "Buyer"). The Company intends, for the foreseeable future, to retain Matrix Financial's servicing function, service loans for third parties and operate it in the ordinary course of business. Included in the sale were the wholesale production offices, the back office personnel that process the loan originations and a significant portion of the corporate operations and personnel. After the sale, our remaining operations at Matrix Financial consist primarily of the mortgage servicing platform and a limited amount of corporate personnel and operations. Upon signing of the Purchase Agreement, the Buyer was not yet licensed to engage in any mortgage banking activities under state or federal law. It was anticipated that it would take approximately six months from execution of the Purchase Agreement for the Buyer to obtain the necessary licensing. Accordingly, Matrix Financial, Matrix Bank and the Buyer desired to structure the transaction in a manner that transferred substantially all the economic risks and benefits of the operation of the Platform during the Transition Period (defined below) to the Buyer, while at the same time having Matrix Financial and Matrix Bank maintain continuous effective control over the operations of the Platform for regulatory purposes. The Purchase Agreement, therefore, contemplated a two-staged closing. The first closing ("Initial Closing Date") occurred on the date the Purchase Agreement was signed and was the effective date for the sale of the fixed assets, and the final or second closing ("Final Closing Date") occurred six months following the Initial Closing Date, or August 31, 2003. The effective sale date for accounting purposes was considered to be the Final Closing Date. The period of operation of the Platform in between the Initial Closing Date and the Final Closing Date is referred to as the "Transition Period." On the Initial Closing Date, the Buyer purchased substantially all of the tangible personal property and intangible property associated with the Platform. There was no gain or loss on the sale of the assets, which had a net book value of $3.3 million. The Buyer additionally has taken the transfer and assignment of certain contract rights, real property leases and equipment leases from Matrix Financial as soon as the necessary consents were or are obtained. At the Final Closing Date, the Buyer purchased any tangible and intangible personal property of the Platform that was acquired during the Transition Period in the ordinary course of business or otherwise inadvertently not purchased on the Initial Closing Date (the "Subsequently Acquired Assets"), as well as Matrix Financial's loan files, pipeline applications and sales commitments. 9 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 2. Sale of Wholesale Production Platform (continued) The purchase price was determined as follows: o The asset payment amount, which was approximately $3.3 million in payment for the tangible and intangible assets of the Platform as of the Initial Closing Date; plus o The Subsequently Acquired Assets payment amount, which was approximately $600 thousand in payment for the book value of the Subsequently Acquired Assets as of the Final Closing Date; plus o The production premium, which is generally 20 basis points times the original principal balance of all loans originated during the 12 months following the Initial Closing Date at Matrix Financial loan production offices purchased by Buyer. The production premium is "capped" at $9.1 million. Through September 30, 2003, the production premium earned and reflected in discontinued operations loss on sale is $6.2 million before tax; plus; o The aggregate locked loan profitability amount, which pays Matrix Financial one-half of the profit over a specified threshold amount (the threshold being generally 30 basis points) on loans that funded during the first two months after the Initial Closing Date which resulted from its locked pipeline as of the Initial Closing Date and which was approximately $160 thousand before tax; plus or minus o The transition period gain or loss, which is a mechanism that provides for an approximation of the accounting for the transaction as if the entire sale and transfer occurs on the Initial Closing Date. Because the Platform generated a profit during the transition period of approximately $11.5 million before tax, Matrix Financial was required to pay such profit into an escrow account, and has reflected the amount as a component of the loss on sale of discontinued operations. As a result of the sale, the Company recorded an after tax loss on the sale of the platform of $3.2 million, or $0.48 per diluted share, which is included in the net income (loss) from discontinued operations on the condensed consolidated financial statements. The operating income of the discontinued production platform is reflected in discontinued operations beginning in the first quarter of 2002, and the condensed consolidated financial statements have been restated to reflect the production platform as a discontinued operation. Operating results of the discontinued operations, previously included in our mortgage banking segment, were as follows:
Quarter Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 2003 2002 2003 2002 ---------------------------- --------------------------- (Dollars in thousands, except share information) Net interest income after provision for loan and valuation losses $ 973 $ 1,240 $ 3,477 $ 5,241 Noninterest income 9,634 7,840 39,163 23,393 Noninterest expense 9,281 7,450 32,571 23,316 ------------ ----------- ----------- ----------- Operating income before taxes from discontinued operations 1,326 1,630 10,069 5,318 Income tax provision 521 640 3,955 2,089 ------------ ----------- ----------- ----------- Operating income from discontinued operations 805 990 6,114 3,229 Loss on sale of production platform, net of income tax benefit of $2,048 (3,165) - (3,165) - ------------ ----------- ----------- ----------- (Loss) income from discontinued operations, net of income tax (benefit) provision $ (2,360) $ 990 $ 2,949 $ 3,229 ============ =========== =========== =========== (Loss) income from discontinued operations per share - basic $ (0.36) $ 0.15 $ 0.45 $ 0.50 ============ =========== =========== =========== (Loss) income from discontinued operations per share - diluted $ (0.36) $ 0.15 $ 0.45 $ 0.50 ============ =========== =========== ===========
10 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 2. Sale of Wholesale Production Platform (continued) For a period of two years from the Initial Closing Date, Matrix Bank has agreed that neither Matrix Bank nor any of its affiliates will engage in, directly or indirectly, the single-family retail or wholesale mortgage origination business in those states in which the acquired division operates or is located as of the Initial Closing Date. However, this non-compete provision does not prohibit Matrix Bank or its affiliates from engaging in such business in order to comply with applicable law, rules, regulations, directives, agreements or orders from the Office of Thrift Supervision ("OTS") or other parties where it is necessary to resolve regulatory or supervisory concerns. Additionally, the non-compete provision does not apply in the event of a change in control of the Matrix Bank or the Company. 3. New Accounting Standards In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities (selected entities with related contractual, ownership, voting or other monetary interests, including certain special purpose entities), and requires certain additional disclosure with respect to these entities. The provisions of FIN 46 are immediately applicable to variable interest entities created after January 31, 2003. Initially, FIN 46 was to apply in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. At its October 8, 2003 meeting, the FASB agreed to defer the effective date of FIN 46 for variable interests held by public companies in all entities that were acquired prior to February 1, 2003. The deferral will require that public companies adopt the provisions of FIN 46 for periods ending after December 15, 2003. The Company does not expect the requirements of FIN 46 to have a material impact on the consolidated financial statements. As discussed in Note 10 of the consolidated financial statements on Form 10-K as of December 31, 2002, the Company has guaranteed preferred beneficial interests in the Company's Junior Subordinated Debentures (Capital Trusts) which are currently consolidated in the Company's consolidated financial statements. We believe the continued consolidation of the Capital Trusts is appropriate under FIN 46. However, the application of the FIN 46 to these types of trusts is an emerging issue and a possible unintended consequence of the interpretation of FIN 46 may be the deconsolidation of these types of trusts. The Company is currently evaluating the impact that deconsolidation of these trusts would have on the consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS 133 on Derivative Instruments and Hedging Activities." This amendment to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. The amendments (i) reflect decisions of the Derivatives Implementation Group (DIG); (ii) reflect decisions made by the FASB in conjunction with other projects dealing with financial instruments; and (iii) address implementation issues related to the application of the definition of a derivative. SFAS 149 also modifies various other existing pronouncements to conform with the changes made to SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, with all provisions applied prospectively. The adoption of SFAS 149 on July 1, 2003 did not have an impact on the consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how a business enterprise classifies, measures and discloses in its financial statements certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that a business enterprise classify financial instruments that are within its scope as liabilities (or as assets in some circumstances). SFAS 150 is effective for contracts entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The FASB has proposed to defer provisions related to mandatorily redeemable financials instruments to periods beginning after December 15, 2004. The adoption of SFAS 150 on July 1, 2003 did not have a material impact on the consolidated financial statements, and the adoption of deferred provisions at January 1, 2005 is not expected to have a material impact on the consolidated financial statements. 11 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 4. Net Income (Loss) Per Share The following table sets forth the computation of net income (loss) per share and net income (loss) per share assuming dilution:
Quarter Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------------- --------------- -------------- --------------- (Dollars in thousands) Numerator: Income (loss) from continuing operations........................... $ 320 $ (6,191) $ (1,648) $ (5,488) ============= =============== ============== =============== Income (loss) from discontinued operations, net of tax effects....... $ (2,360) $ 990 $ 2,949 $ 3,229 ============= =============== ============== =============== Net (loss) income....................... $ (2,040) $ (5,201) $ 1,301 $ (2,259) ============= =============== ============== =============== Denominator: Weighted average shares outstanding..... 6,496,554 6,454,244 6,492,959 6,465,083 Effect of potentially dilutive securities: Common stock options................ - - 46,247 - ------------- --------------- -------------- --------------- Denominator for net income (loss) per share assuming dilution........... 6,496,554 6,454,244 6,539,206 6,465,083 ============= =============== ============== ===============
For the quarter ended September 30, 2003 and September 30, 2002, and the nine months ended September 30, 2002, there were stock options and warrants outstanding of 48,133, 85,916 and 109,457, respectively, which are potentially convertible to common stock. These securities are anti-dilutive due to the net loss for the quarters ended September 30, 2003 and September 30, 2002, and the nine months ended September 30, 2002. As such, these potentially dilutive securities have not been used in the calculation of diluted loss per share for the quarters ended September 30, 2003 or September 30, 2002, or for the nine months ended September 30, 2002. 5. Mortgage Servicing Rights The activity in the mortgage servicing rights is summarized as follows:
Nine Months Ended Year Ended September 30, December 31, 2002 2003 ---------------------- -------------------- (In thousands) Mortgage servicing rights Balance at beginning of period, gross........................... $ 79,234 $ 78,893 Purchases....................................................... 338 - Originations.................................................... 4,033 34,511 Amortization.................................................... (27,517) (24,176) Sales........................................................... - (9,994) Application of valuation allowance to permanently impaired MSRs................................................. (5,000) - ---------------------- -------------------- Balance before valuation allowance at end of period................ 51,088 79,234
12 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 5. Mortgage Servicing Rights (continued)
Nine Months Ended Year Ended September 30, December 31, 2002 2003 ---------------------- -------------------- (In thousands) Valuation allowance for impairment of mortgage servicing rights Balance at beginning of period..................................... (14,400) (181) Additions.......................................................... (2,400) (14,219) Application of valuation allowance to write down permanently impaired MSRs................................................... 5,000 - Recovery........................................................... 5,100 - ---------------------- -------------------- Balance at end of period........................................... (6,700) (14,400) Valuation allowance for foreclosure costs.......................... (1,200) (1,634) ---------------------- -------------------- Mortgage servicing rights, net..................................... $ 43,188 $ 63,200 ====================== ====================
The Company's servicing portfolio (excluding subserviced loans), is comprised of the following:
September 30, 2003 December 31, 2002 ------------------------------- ---------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding Of Loans Outstanding ------------ -------------- --------------- --------------- (Dollars in thousands) Freddie Mac................................ 6,725 $ 281,291 9,027 $ 417,583 Fannie Mae................................. 20,919 1,295,100 27,678 1,832,276 Ginnie Mae................................. 17,589 1,162,806 25,453 1,823,706 VA, FHA, conventional and other loans...... 9,246 690,862 13,489 1,260,062 ------------ -------------- --------------- --------------- 54,479 $ 3,430,059 75,647 $ 5,333,627 ============ ============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed consolidated balance sheets at September 30, 2003 and December 31, 2002 pertain to payments held in escrow in respect of taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company. The custodial accounts are maintained at Matrix Bank, a subsidiary of Matrix Bancorp, in noninterest-bearing accounts. The balance of custodial accounts fluctuates from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of taxes and insurance payments. The estimated aggregate amortization of our MSRs for each of the next twelve month period ending September 30, 2004, 2005, 2006, 2007 and 2008 is $13.8 million, $10.4 million, $6.8 million, $3.4 million, and $1.6 million, respectively. The estimated amortization is based on several assumptions as of September 30, 2003 with the most significant being the anticipated prepayment speeds of the underlying mortgages. It is reasonably possible the actual repayment speeds of the underlying mortgage loans may differ materially from the estimated repayment speeds, and thus, the actual amortization may be significantly different than the amounts estimated. 13 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 6. Deposits Deposit account balances are summarized as follows:
September 30, 2003 December 31, 2002 --------------------------------------- --------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------- ----------- ----------- ---------- ----------- ----------- (Dollars in thousands) Passbook accounts..........$ 6,113 0.61 % 1.29 % $ 5,514 0.59 % 1.95 % NOW accounts............... 158,984 15.96 0.21 145,465 15.57 0.48 Money market accounts...... 514,605 51.65 0.84 334,508 35.82 1.22 ---------- ----------- ----------- ---------- ----------- ----------- 679,702 68.22 0.67 485,487 51.98 1.02 Certificate accounts....... 316,573 31.78 2.69 448,470 48.02 3.65 ---------- ----------- ----------- ---------- ----------- ----------- $ 996,275 100.00 % 1.48 % $ 933,957 100.00 % 2.40 % ========== =========== =========== ========== =========== ===========
At September 30, 2003 and December 31, 2002, brokered deposits accounted for approximately $182.0 million and $361.2 million, respectively, of the total certificate accounts shown above. 7. Federal Home Loan Bank Stock and Borrowings In connection with Matrix Bank's change of domicile in 2002, Matrix Bank obtains Federal Home Loan Bank (FHLB) advances from FHLB of Topeka, which is the FHLB that serves Denver, Colorado, and utilizes FHLB of Topeka as its primary correspondent bank. This change was approved March 25, 2002. Long-term advances that existed at March 25, 2002 with FHLB of Dallas are still outstanding under their original terms. The balances of FHLB stock are as follows:
September 30, December 31, 2003 2002 -------------------- -------------------- (In thousands) FHLB of Dallas stock, at cost......................... $ 14,886 $ 14,629 FHLB of Topeka stock, at cost......................... 17,450 15,750 -------------------- -------------------- Total FHLB stock.................................... $ 32,336 $ 30,379 ==================== ====================
The balances of FHLB borrowings are as follows:
September 30, December 31, 2003 2002 -------------------- -------------------- (In thousands) FHLB of Dallas borrowings............................. $ 147,225 $ 147,285 FHLB of Topeka borrowings............................. 120,000 238,500 -------------------- -------------------- Total FHLB borrowings............................... $ 267,225 $ 385,785 ==================== ====================
Available unused borrowings from the FHLB of Topeka totaled $377.0 million at September 30, 2003. 14 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 8. Commitments and Contingencies Sterling Trust Company has been named a defendant in an action filed in July 1999 styled Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. that was tried in Tarrant County, Texas District Court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of 12 theories of liability posed by the plaintiffs, and a judgment was entered against Sterling Trust in the amount of approximately $6.4 million, plus post-judgment interest and conditional attorneys' fees for the plaintiffs in connection with any appeals. Sterling Trust appealed the judgment to the Court of Appeals for the Second District of Texas (Fort Worth). On July 31, 2003, the Court of Appeals affirmed and reversed in part the jury's verdict. The Court of Appeals affirmed the jury's award for actual damages of approximately $6.2 million (plus post-judgment interest and attorneys' fees currently estimated to be approximately $2.3 million) but denied the punitive damage award of approximately $250 thousand. Sterling Trust continues to believe that it has meritorious points of appeal and intends to vigorously appeal this decision to the Supreme Court of Texas. An appeal to the Supreme Court of Texas is discretionary in nature, meaning that the Supreme Court of Texas does not automatically have to hear the case. There can be no assurances that the Supreme Court of Texas will agree to hear the case or that, if heard, Sterling Trust's appeal will be successful. The Petition for Review was filed with the Supreme Court of Texas on October 31, 2003. Because management has determined that the loss in this matter is not probable, no accrual for loss has been recorded in these financial statements. 9. Segment Information
Servicing Brokerage Traditional Mortgage and School Banking Banking Consulting Services All Others Total ------------- ------------ -------------- ----------- ----------- --------------- (In thousands) Quarter ended September 30, 2003: Revenues from external customers: Net interest income..... $ 12,078 $ 4,277 $ 64 $ 1,443 $ 221 $ 18,083 Noninterest income...... 3,381 4,601 2,300 517 3,749 14,548 Intersegment revenues....... 3,708 913 629 3 321 5,574 Segment profit (loss)....... 6,534 (2,228) 833 (2,248) (2,860) 31 Quarter ended September 30, 2002: Revenues from external customers: Net Interest income..... $ 14,345 $ 5,223 $ 2 $ 1,499 $ (239) $ 20,830 Noninterest income...... 731 7,103 3,338 1,365 3,497 16,034 Intersegment revenues....... 4,692 803 219 9 707 6,430 Segment profit (loss)....... 3,812 (11,125) 1,535 (1,772) (3,316) (10,866) Nine months ended September 30, 2003: Revenues from external customers: Net interest income..... $ 37,304 $ 14,190 $ 180 $ 4,231 $ 391 $ 56,296 Noninterest income...... 6,664 25,909 7,381 1,610 11,237 52,801 Intersegment revenues....... 12,203 2,890 1,337 8 1,278 17,716 Segment profit (loss)....... 17,475 (9,251) 2,189 (4,719) (9,733) (4,039)
15 Matrix Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) September 30, 2003 (Unaudited) 9. Segment Information (continued)
Servicing Traditional Mortgage Brokerage School All Others Banking Banking and Services Total Consulting ------------- ------------ -------------- ----------- ----------- --------------- (In thousands) Nine months ended September 30, 2002: Revenues from external customers: Net interest income..... $ 41,534 $ 15,848 $ 2 $ 4,991 $ (12) $ 62,363 Noninterest income...... 3,449 23,603 5,239 5,281 9,833 47,405 Intersegment revenues....... 14,322 2,186 635 27 2,134 19,304 Segment profit (loss)....... 15,401 (12,499) 1,785 (4,825) (10,365) (10,503) Quarter Ended September 30, Nine Months Ended September 30, -------------------------------- -------------------------------- 2003 2002 2003 2002 -------------- ------------- --------------- ------------ (In thousands) Profit: Total profit (loss) for reportable segments....... $ 2,891 $ (7,550) $ 5,694 $ (138) Other loss (loss)................................. (2,804) (3,203) (9,373) (9,996) Adjustment of intersegment loss in consolidation.. (56) (113) (360) (369) -------------- ------------- --------------- ------------ Income (loss) before income taxes................. $ 31 $ (10,866) $ (4,039) $ (10,503) ============== ============= =============== ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Matrix Bancorp, Inc. (occasionally referred to in this document, on a consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, mortgage banking, trust and clearing activities, lending activities and other fee-based services. Our traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository services. Our mortgage banking activities consist of purchasing and selling residential mortgages; offering brokerage, consulting and analytical services to financial services companies and financial institutions; servicing residential mortgage portfolios for investors; and providing real estate management and disposition services. Our trust and clearing activities focus primarily on offering specialized custody and clearing services to banks, trust companies, broker-dealers, third party administrators and investment professionals, as well as the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. Our other fee-based services and lending activities include providing outsourced business services, such as budgeting, governmental reporting, accounts payable, payroll, facility and safety management and comprehensive insurance programs to charter schools. We also offer financing to charter schools for the purchase of school sites and equipment. Our primary operating subsidiaries are: Matrix Capital Bank; Matrix Financial Services Corporation; Matrix Bancorp Trading, Inc. (formerly known as Matrix Capital Markets, Inc.); Matrix Asset Management Corporation; ABS School Services, L.L.C.; Matrix Advisory Services, L.L.C.; Sterling Trust Company; First Matrix Investment Services Corp.; plus an equity interest in Matrix Settlement & Clearance Services, LLC. 16 The principal components of our revenues consist of: o net interest income earned by Matrix Bank, Matrix Financial and ABS; o brokerage and consulting fees generated by Matrix Bancorp Trading and First Matrix; o disposition services fees generated by Matrix Asset Management; o gain on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust and Matrix Bank; and o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates, and the effect of these changes on our interest margins, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are affected to a lesser extent by interest rates and more by competition and general market conditions. Discontinued Operations On September 2, 2003, the Company announced the final closing, and substantial completion of the sale by Matrix Financial of substantially all of its assets associated with its wholesale mortgage origination platform. See Note 2 to Condensed Consolidated Financial Statements included herein. The effective sale date for accounting purposes was the Final Closing Date, or August 31, 2003. At that time, we recorded an after-tax loss on the sale of the production platform of $3.2 million, and reflected the operating results of the production platform as discontinued operations. With regards to the sale, the purchase price includes a production premium that is calculated by multiplying 20 basis points by the original principal balance of all of the loans originated in wholesale production branches until February 2004. The production premium is "capped" at $9.1 million. Through September 30, 2003, Matrix Financial has earned $6.2 million of the production premium, which is included in the loss on sale amount. Despite its profitability, the decision to sell the wholesale platform was in part based on the Company's concern that over an extended period of time it would find it difficult to compete in this highly competitive industry that generally operates on high volume and low margins. Based on the size of the Company's wholesale production platform, the Company was required to commit a significant percentage of its capital to a line of business that is fairly cyclical and the earnings of which are difficult to estimate. The decision to sell the Platform allows us to reduce operational risks and the costs associated with the platform. The Company intends to reinvest the liquidity created from the sale into predominately adjustable rate loans, SBA loans and high quality mortgage-backed securities. To the extent that the Company is not able to reinvest the liquidity in a timely manner, the Company will experience a decrease in our net interest income. Initially, the liquidity was used to pay down borrowings from the FHLB and brokered certificates of deposit. Critical Accounting Policies The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in Note 2 of the consolidated financial statements on Form 10-K as of December 31, 2002. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgment and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan and valuation losses is a critical accounting policy that requires the most significant judgments, assumptions and estimates used in preparation of its consolidated financial statements. See discussion at "Asset and Liability Management, Analysis of Allowance for Loan 17 and Valuation Losses" in the Form 10-K for December 31, 2002 for a detailed description of the Company's process and methodology related to the allowance for loan and valuation losses. The Company also considers the valuation of mortgage servicing rights to be a critical accounting policy that requires judgments, assumptions and estimates concerning impairment of their value in certain interest rate environments. See discussion at "Business, Mortgage Servicing Activities" in the Form 10-K for December 31, 2002 for a detailed discussion of the nature of servicing rights, and see Note 2 of the consolidated financial statements on Form 10-K as of December 31, 2002 for a detailed discussion concerning the valuation of mortgage servicing rights. The Company also considers the judgments and assumptions concerning litigation as a critical accounting policy. The Company has been notified that we are a defendant in a number of legal proceedings. Most, but not all, of these cases involve ordinary and routine claims incidental to our business. With respect to all pending litigation matters, our ultimate legal responsibility, if any, cannot be estimated with certainty. Based on the ultimate outcome of such proceedings, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to such proceedings. Forward-Looking Information Certain statements contained in this interim report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this interim report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to the ongoing or future bankruptcies of the Company's customers; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; the outcome of pending or possible future litigation; the actions or inactions of third parties, including failure of the Buyer to perform its obligations under the Purchase Agreement (see "Item 1. Business, Sale of Wholesale Production Platform" in the Form 10-K as of December 31, 2002), and actions or inactions of those that are parties to the existing or future bankruptcies of the Company's customers or litigation related thereto; unanticipated developments in connection with the bankruptcy actions or litigation described above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in the Company's annual report on Form 10-K, filed on March 14, 2003; and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission ("SEC") on March 14, 2001; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002 Income (Loss) from Continuing Operations. For the quarter ended September 30, 2003, there was income of $300 thousand, or $0.05 per basic and diluted share as compared to a loss of $6.2 million, or $(0.96) per basic and diluted share, for the quarter ended September 30, 2002. It should be noted that the income from continuing operations are based upon the Company's historical results from operations, adjusted to reflect the impact of the sale of the production platform, and are not necessarily indicative of the results that might have occurred if the disposition had actually been completed on the indicated date, and are not necessarily indicative of any future results. Net Interest Income. Net interest income before provision for loan and valuation losses decreased $1.0 million, or 9.2%, to $10.3 million for the quarter ended September 30, 2003 as compared to $11.3 million for the quarter ended September 30, 2002. Our net interest margin decreased 35 basis points to 2.84% for the quarter ended September 30, 2003 from 3.19% for the quarter ended September 30, 2002 and interest rate spread decreased to 2.59% for the quarter ended September 30, 2003 from 2.80% for the quarter ended September 30, 2002. The decrease in net interest income before provision for loan valuation losses was primarily due to a 88 basis point decrease in the yield earned on our interest-earning assets, 18 driven by declining market interest rates, which effect was slightly offset by a $30.2 million increase in the average balance of our interest-earning assets to $1.45 billion at September 30, 2003 as compared to $1.42 billion at September 30, 2002. Additionally, we had a 67 basis point decrease in the cost of our interest-bearing liabilities, driven by decreases in interest rates, which effect was offset slightly by a $58.9 million increase in our average interest-bearing liabilities to $1.30 billion for the quarter ended September 30, 2003. The significant decrease in the overall yield on our interest-earning assets and cost of interest-bearing liabilities was due to the prevalent historically low interest rate environment. Due to our policy of acquiring predominately adjustable rate loans, we will continue to experience compression in our interest rate margins in the current interest rate environment as our loan portfolio will continue to experience greater decreases than our interest bearing liabilities. For a tabular presentation of the changes in net interest income due to changes in the volume of interest-earning assets and interest-bearing liabilities, as well as changes in interest rates, see "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses decreased $200 thousand to $1.1 million for the quarter ended September 30, 2003 as compared to $1.3 million for the quarter ended September 30, 2002. The decrease in the provision was mainly due lower levels of write-offs recorded at Matrix Capital Bank and Matrix Financial, partially offset by higher levels of write-offs at ABS. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "Asset Quality--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees, gains on sales of repurchased Federal Housing Administration (FHA) and Veteran's Administration (VA) loans made during the quarter, and other ancillary charges. Loan administration fees decreased $800 thousand, or 10.9%, to $6.4 million for the quarter ended September 30, 2003 as compared to $7.2 million for the quarter ended September 30, 2002. The income includes gains on sales of repurchased FHA and VA loans of $1.2 million for the quarter ended September 30, 2003 as compared to $400 thousand for the quarter ended September 30, 2002. Gains on sale of repurchased FHA and VA loans relate to delinquent loans which are purchased out of loan pools on which the Company acts as servicer and then resells into the secondary market. Loan service fees are also affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio had an average balance of $4.0 billion for the quarter ended September 30, 2003 as compared to an average balance of $5.7 billion for the quarter ended September 30, 2002. Actual service fee rate (including all ancillary income) of 0.50% for the quarter ended September 30, 2003, as compared to 0.48% for the quarter ended September 30, 2002. The decrease in the servicing portfolio and corresponding direct service fees is due to the Company's decision in the third quarter of 2002 to begin to sell the majority of its newly originated servicing under an assignment of trade contract. In the near term, the Company does not anticipate that it will significantly add to its residential servicing portfolio through either acquisitions or originations. As a result, the Company anticipates loan administration fees to decrease as its servicing portfolio decreases through normal prepayments. Brokerage Fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights, as well as brokerage income earned from whole loan activities, retail and fixed income activities and Small Business Administration (SBA) brokerage fees. Brokerage fees decreased $1.4 million, or 38.3%, to $2.3 million for the quarter ended September 30, 2003 as compared to $3.7 million for the quarter ended September 30, 2002. The decrease is primarily the result of the quarter ended September 30, 2002 including one large transaction which did not occur in the current year quarter, offset by slight increases in the revenue generated from the acquisition, pooling and selling of SBA loans and securities. Trust Services. Trust service fees increased $500 thousand, or 41.4% to $1.7 million for the quarter ended September 30, 2003 as compared to $1.2 million for the same quarter of the prior year. Trust accounts under administration at Sterling Trust and Matrix Capital Bank increased to 48,487 at September 30, 2003 from 44,673 at September 30, 2002 and total assets under administration increased to approximately $12.1 billion at September 30, 2003 from approximately $6.5 billion at September 30, 2002. The majority of the growth is the result of business referred to Matrix Bank's trust department by Matrix Settlement & Clearance Services. 19 Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition services income increased $700 thousand, or 70.2%, to $1.8 million for the quarter ended September 30, 2003 as compared to $1.1 million for the quarter ended September 30, 2002. The increase is due to an increase in the number of properties closed during the quarter ended September 30, 2003 of 920 as compared to 610 for the same quarter of the prior year, an increase of 50.8%. Additionally, the increase is due to an increase in the number of properties under management, which is 2,815 at September 30, 2003 as compared to 2,007 at September 30, 2002, an increase of 40.3%. Gain on Sale of Loans and Securities. Gain on sale of loans and securities increased $1.6 milllion to $1.7 million for the quarter ended September 30, 2003 as compared to $100 thousand for the quarter ended September 30, 2002. Gain on sale of loans can fluctuate significantly from quarter to quarter and year-to-year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, and the particular loan portfolios we elect to sell. Current quarter amounts results from an increase in gains on sales of originated multi-family and guaranteed portions of SBA loans. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights was $0 for both the quarter ended September 30, 2003 and September 30, 2002. Gains from the sale of mortgage servicing rights can fluctuate significantly from quarter to quarter and year-to-year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to at times pursue opportunistic sales of mortgage servicing rights. Loan Origination. Loan origination relates primarily to retail originations at Matrix Capital Bank and the housing authority program at Matrix Financial which was not included in the sale of the production platform. Loan origination income includes all mortgage loans fees, secondary marketing activity on new loan originations and servicing released premiums on new originations sold, net of origination costs. Loan origination income decreased $100 thousand, or 27.5% to $200 thousand for the quarter ended September 30, 2003 as compared to $300 thousand for the quarter ended September 30, 2002. The decrease in loan origination income resulted from lower levels of origination volume. See Note 2 to the condensed consolidated financial statements herein for a discussion of the Sale of the Wholesale Production Platform at Matrix Financial. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided primarily to charter schools. School services income decreased $400 thousand, or 41.0%, to $500 thousand for the quarter ended September 30, 2003 as compared to $900 thousand for the quarter ended September 30, 2002. The decrease is a result of a decrease in the number of core business service clients. As of September 30, 2003, ABS provided core business services to 71 schools as compared to 97 schools at September 30, 2002. Much of the decrease was anticipated by the Company as part of its initiative to focus on its core competencies. The Company does not anticipate a significant increase in school services income for the foreseeable future. Other Income. Other income includes service and ATM fees, rental income, mortgage servicing asset hedging gains and losses, and other miscellaneous income items. Other income decreased $1.6 million to a loss of $(100) thousand for the quarter ended September 30, 2003 as compared to income of $1.5 million for the quarter ended September 30, 2002. The decrease in other income was primarily due to the inclusion of approximately $1.6 million loss on our mortgage servicing asset hedge at Matrix Financial during the quarter ended September 30, 2003, offset by a $300 thousand increase in our equity investment at our 45% owned subsidiary, Matrix Settlement & Clearance Services. Noninterest Expense. Noninterest expense decreased $13.2 million, or 35.8%, to $23.7 million for the quarter ended September 30, 2003 as compared to $36.9 million for the quarter ended September 30, 2002. This decrease was mainly the result of a recovery of impairment of our mortgage servicing rights in 2003 as compared to a charge for impairment on the mortgage servicing rights in 2002, decreases in compensation and benefits expense primarily due to a reduction in number of employees as well as a reduction in medical benefits expense, offset by increases in the amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated: 20 Quarter Ended September 30, ---------------------------- 2003 2002 -------------- ------------- (In thousands) Compensation and employee benefits............ $ 8,338 $ 9,555 Amortization of mortgage servicing 8,263 6,037 rights........................................ Occupancy and equipment....................... 1,575 1,897 Postage and communication..................... 572 692 Professional fees............................. 557 910 Data processing............................... 689 721 Impairment (recovery) on mortgage servicing rights........................................ (5,100) 8,000 Other general and administrative.............. 8,804 9,117 ------------ ----------- Total..................................... $ 23,698 $ 36,929 ============ =========== Compensation and employee benefits expense decreased $1.2 million, or 12.7%, to $8.3 million for the quarter ended September 30, 2003 as compared to $9.6 million for the quarter ended September 30, 2002. This decrease was primarily due to decreased salaries and wages associated with reductions in number of employees, primarily at ABS, and by decreases in medical benefits expense associated with the structural rate changes implemented for the 2003 benefit year. The Company has 514 employees at September 30, 2003. Amortization of mortgage servicing rights increased $2.2 million, or 36.9%, to $8.2 million for the quarter ended September 30, 2003 as compared to $6.0 million for the quarter ended September 30, 2002. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. In response to the continued low interest rates prevalent in the market during the quarter, prepayment speeds on our servicing portfolio increased to an average of 41.5% for the quarter ended September 30, 2003 as compared to 23.3% for the quarter ended September 30, 2002. The average balance in our mortgage servicing rights decreased to $4.0 billion at September 30, 2003 as compared to $5.7 billion at September 30, 2002. Impairment on mortgage servicing rights reflects a recovery for the quarter ended September 30, 2003 of $(5.1) million as compared to an impairment charge of $8.0 million for the quarter ended September 30, 2002, a change of $13.1 million, or 163.8%. The Company is required to record its investment in mortgage servicing rights at the lower of cost or fair value. See further discussion of the impairment on mortgage servicing rights in "Item 7. Comparison of Results of Operations for Fiscal Years 2002 and 2001--Noninterest Expense" in the Form 10-K for the year ended December 31, 2002. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other general and administrative expenses, decreased $1.1 million, or 8.5%, to $12.2 million for the quarter ended September 30, 2003 as compared to $13.3 million for the quarter ended September 30, 2002. The decrease was primarily due to reductions in the levels of reserves and charges related to both loan and servicing related assets, offset by increases in expenses at Matrix Financial related to settlement of various litigation, and certain charge-offs of assets at ABS, including real estate. As discussed in footnote 8 to the condensed consolidated financial statements included herein, no accrual for loss had been recorded as of September 30, 2003 in connection with the pending litigation matter styled Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. For a more detailed discussion of this particular litigation, please see footnote 8 to the condensed consolidated financial statements included herein, as well as Part II, Item 1 of this Quarterly Report on Form 10-Q. Income Taxes. Income taxes reflect a benefit of $300 thousand for the quarter ended September 30, 2003 as compared to a benefit of $4.7 million for the quarter ended September 30, 2002. Our effective tax rate is affected by the level of tax-exempt income at ABS and Matrix Bank in proportion to the level of net income (loss). 21 Comparison of Results of Operations for the Nine months Ended September 30, 2003 and 2002 Loss from Continuing Operations. The loss from continuing operations decreased $3.8 million to a loss of $(1.7) million, or $(0.25) per basic and diluted share, for the nine months ended September 30, 2003 as compared to $(5.5) million, or $(0.85) per basic and diluted share for the nine months ended September 30, 2002. It should be noted that the loss from continuing operations is based upon the Company's historical results from operations, adjusted to reflect the impact of the sale of the production platform, and are not necessarily indicative of the results that might have occurred if the disposition had actually been completed on the indicated date, and are not necessarily indicative of any future results. Net Interest Income. Net interest income before provision for loan and valuation losses increased $500 thousand, or 1.6% to $31.7 million for the nine months ended September 30, 2003 as compared to $31.2 million for the nine months ended September 30, 2002. The factors which impact net interest income, and led to the slight increase in revenue, are as follows: our average interest-earning assets were $1.5 billion for the nine months ended September 30, 2003 as compared to $1.4 billion for the nine months ended September 30, 2002. The increase in average balance was offset, however, by a decrease in the average yield on the net interest-earning assets to 5.13% for the nine months ended September 30, 2003 as compared to 6.06% for nine months ended September 30, 2002. The Company's interest-bearing liabilities also increased slightly to $1.3 billion for the nine months ended September 30, 2003 as compared to $1.2 billion for the nine months ended September 30, 2002. This increase was offset, however, as the average yield on interest-bearing liabilities decreased to 2.58% for the nine months ended September 30, 2003, as compared to 3.48% for the nine months ended September 30, 2002. Both the decrease in the yield on interest-earning assets and the cost of the interest-bearing liabilities are attributable to the historically low interest rate environment. The impact of these factors caused the Company's net interest margin to decrease to 2.89% for the nine months ended September 30, 2003 as compared to 3.03% for the nine months ended September 30, 2002. For additional discussion concerning increases in our average interest-earning assets and decreases in our cost of interest-bearing liabilities, see "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Net Interest Income." For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. Provision for loan and valuation losses decreased $400 thousand, or 11.9%, to $2.6 million for the nine months ended September 30, 2003 as compared to $3.0 million for the nine months ended September 30, 2002. This decrease was primarily attributable to incremental charge-offs and reserves recorded at ABS in the nine months ended September 30, 2002 at levels that are not present in the nine months ended September 30, 2003. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "Asset Quality --Nonperforming Assets." Loan Administration. Loan administration fees increased $1.2 million, or 5.3%, to $25.4 million for the nine months ended September 30, 2003 as compared to $24.2 million for the nine months ended September 30, 2002. Included in loan administration income was approximately $8.4 million for the nine months ended September 30, 2003 as compared to $3.4 million for the nine months ended September 30, 2002 of gain from the purchase and subsequent resale of FHA and VA loans from our mortgage servicing rights portfolio. Loan administration fees are also affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage servicing portfolio decreased to an average balance of $4.5 billion for the nine months ended September 30, 2003 as compared to an average balance of $5.8 billion for the nine months ended September 30, 2002. The actual service fee rate (including all ancillary income) increased slightly to 0.50% for the nine months ended September 30, 2003 as compared to 0.48% for the nine months ended September 30, 2002. Brokerage Fees. Brokerage fees increased $1.0 million, or 14.8%, to $7.5 million for the nine months ended September 30, 2003 as compared to $6.5 million for the nine months ended September 30, 2002. Brokerage fees vary from quarter to quarter and year-to-year, as the timing of servicing sales, loan sales and SBA pooling activities is dependent upon, among other things, prevailing market conditions and a seller's need to recognize a sale or to receive cash flows. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Brokerage Fees." 22 Trust Services. Trust service fees increased $1.1 million, or 26.7%, to $5.0 million for the nine months ended September 30, 2003 as compared to $3.9 million for the nine months ended September 30, 2002. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Trust Services." Real Estate Disposition Services. Real estate disposition services income increased $1.7 million, or 56.5%, to $4.6 million for the nine months ended September 30, 2003 as compared to $2.9 million for the nine months ended September 30, 2002. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Real Estate Disposition Services." Gain on Sale of Loans and Securities. Gain on sale of loans and securities increased $1.9 million to $2.2 million for the nine months ended September 30, 2003 as compared to $300 thousand for the nine months ended September 30, 2002. Gain on the sale of loans and securities can fluctuate significantly from quarter to quarter and from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Included in the current year are gains on sales of multi-family and guaranteed portions of SBA loans which were not present in the prior year period. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights decreased to $0 for the nine months ended September 30, 2003 as compared to $1.1 million for the nine months ended September 30, 2002. Gains from the sale of mortgage servicing rights can fluctuate significantly from quarter to quarter and year-to-year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to at times pursue opportunistic sales of mortgage servicing rights. Loan Origination. Loan origination income decreased $900 thousand, or 91.4%, to $100 thousand for the nine months ended September 30, 2003 as compared to $1.0 million for the nine months ended September 30, 2002. The decrease resulted from a decrease in gains on sales of originated loans in the ordinary course of business that are held for sale. The results do not include operations of the production platform at Matrix Financial which are included in discontinued operations. See Note 2 to the condensed consolidated financial statements herein for a discussion of the Sale of the Wholesale Production Platform. School Services. School services income decreased $1.9 million, or 51.8%, to $1.8 million for the nine months ended September 30, 2003 as compared to $3.7 million for the nine months ended September 30, 2002. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--School Services." Other Income. Other income increased $2.4 million, or 64.5%, to $6.2 million for the nine months ended September 30, 2003 as compared to $3.8 million for the nine months ended September 30, 2002. The increase in other income was primarily due to approximately $1.5 million net gain on our mortgage servicing asset hedge realized at Matrix Financial, an increase in rental income of approximately $700 thousand from operations of Matrix Financial Center, a $700 thousand increase in our equity investment in Matrix Settlement and Clearance, and a $400 thousand increase in income generated from the bank owned life insurance asset, offset by a $500 thousand decrease in certain lease income generated at ABS. Noninterest Expense. Noninterest expense decreased $200 thousand, or 0.2%, to $85.9 million for the nine months ended September 30, 2003 as compared to $86.1 million for the nine months ended September 30, 2002. This decrease was primarily a combination of a decrease in the impairment charge to a current period recovery on the mortgage servicing rights assets, offset by increases in the level of amortization of mortgage servicing rights. The total was also impacted by reductions in compensation and benefits, offset by increase in other general and administrative expenses. The following table details the major components of noninterest expense for the periods indicated: 23 Nine months Ended September 30, --------------------------- 2003 2002 -------------- ------------ (In thousands) Compensation and employee benefits............. $ 26,541 $ 27,973 Amortization of mortgage servicing rights......................................... 27,517 17,073 Occupancy and equipment........................ 4,568 4,304 Postage and communication...................... 1,881 2,004 Professional fees.............................. 2,381 2,086 Data processing................................ 2,114 2,108 Impairment (recovery) on mortgage servicing rights............................. (2,700) 9,219 Other general and administrative............... 23,630 21,371 ------------ ---------- Total...................................... $ 85,932 $ 86,138 ============ ========== Compensation and employee benefits decreased $1.5 million, or 5.1%, to $26.5 million for the nine months ended September 30, 2003 as compared to $28.0 million for the nine months ended September 30, 2002. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Noninterest Expense." Amortization of mortgage servicing rights increased $10.4 million, or 61.2%, to $27.5 million for the nine months ended September 30, 2003 as compared to $17.1 million for the nine months ended September 30, 2002. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. The increase is due to the increase in prepayment speeds on our servicing portfolio to an average of 37.5% for the nine months ended September 30, 2003 as compared to 21.0% for the nine months ended September 30, 2002, offset by a decrease in the average balance of our mortgage servicing rights to $4.5 billion at September 30, 2003 as compared to $5.8 billion at September 30, 2002. Impairment of mortgage servicing rights decreased $11.9 million, or 129.3%, to a recovery of $(2.7) million for the nine months ended September 30, 2003 as compared to a charge of $9.2 million for the nine months ended September 30, 2002. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Noninterest Expense." The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other general and administrative expenses, increased $2.7 million, or 8.5%, to $34.6 million for the nine months ended September 30, 2003 as compared to $31.9 million for the nine months ended September 30, 2002. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002--Noninterest Expense." Income Taxes. Income taxes reflect a benefit of $(2.4) million for the nine months ended September 30, 2003 as compared to a benefit of $(5.0) million for the nine months ended September 30, 2002. Our effective tax benefit was 59.2% for the nine months ended September 30, 2003 as compared to 47.7% for the nine months ended September 30, 2002. The effective tax rates are affected by the level of tax-exempt income at ABS and Matrix Capital Bank in proportion to the level of net income (loss). Average Balance Sheet The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Average interest rate information for the quarters and nine months ended September 30, 2003 and 2002 have been annualized. Ratio, yield and rate information is based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated. 24
Quarter Ended September 30, ------------------------------------------------------------------------- 2003 2002 ---------------------------------- --------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ---------- -------- ---------- ---------- ------- (Dollars in thousands) Interest-earning assets: Loans, net.................. $1,399,567 $ 17,758 5.08% $ 1,350,569 $ 20,143 5.97% Securities.................. 13,695 87 2.54 23,919 310 5.18 Interest-earning deposits... 6,934 12 0.69 17,047 76 1.78 Federal Home Loan Bank stock 31,978 226 2.83 30,415 301 3.96 ------------ ---------- -------- ---------- ---------- ------- Total interest-earning assets.................. 1,452,174 18,083 4.98 1,421,950 20,830 5.86 Noninterest-earning assets: Cash........................ 46,030 47,542 Allowance for loan and valuation losses.......... (8,961) (9,505) Premises and equipment...... 25,173 28,810 Other assets................ 146,812 172,243 ------------ ---------- Total noninterest- earning assets........... 209,054 239,090 ------------ ---------- Total assets.............. $1,661,228 $ 1,661,040 ============ ========== Liabilities & Shareholders' Equity Interest-bearing liabilities: Passbook accounts........... $ 6,176 19 1.23% $ 6,816 38 2.23% Money market and NOW accounts 478,002 958 0.80 271,890 1,087 1.60 Certificates of deposit..... 343,318 2,223 2.59 429,280 3,531 3.29 Federal Home Loan Bank Borrowings................ 354,547 2,305 2.60 394,279 2,727 2.77 Borrowed money and guaranteed preferred beneficial interests...... 119,702 2,283 7.63 140,606 2,110 6.00 ------------ ---------- -------- ---------- ---------- --------- Total interest-bearing liabilities.............. 1,301,745 7,788 2.39 1,242,871 9,493 3.06 ------------ ---------- -------- ---------- ---------- --------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances) 154,904 270,991 Other liabilities........... 134,246 75,708 ------------ ---------- Total noninterest-bearing liabilities.............. 289,150 346,699 Shareholders' equity.......... 70,333 71,470 ------------ ---------- Total liabilities and shareholders' Equity.......... $1,661,228 $ 1,661,040 ============ ========== Net interest income before provision for loan and valuation losses.......................... $ 10,295 11,337 ========== =========== Interest rate spread.........................................2.59 % 2.80% ======== ========= Net interest margin..........................................2.84 % 3.19% ======== ========== Ratio of average interest-earning assets to average interest-bearing liabilities....................111.56 % 114.41% ======== ========== Table continued..... Nine Months Ended September 30, --------------------------------------------------------------------------- 2003 2002 ---------------------------------- ------------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ---------- -------- ----------- ---------- -------- (Dollars in Thousands) Assets - ------------------------------ Interest-earning assets: Loans, net.................. $ 1,399,067 $ 55,044 5.25 % 1,315,970 $ 61,013 6.18 % Securities.................. 20,712 488 3.14 10,044 412 5.47 Interest-earning deposits... 11,601 83 0.95 21,643 248 1.52 Federal Home Loan Bank stock 30,949 681 2.93 25,167 690 3.66 ----------- ---------- -------- ----------- ----------- ----------- Total interest-earning assets.................. 1,462,329 56,296 5.13 1,372,824 62,363 6.06 Noninterest-earning assets: Cash........................ 45,433 41,586 Allowance for loan and valuation losses.......... (8,952) (9,460) Premises and equipment...... 25,685 20,718 Other assets................ 147,487 171,543 ----------- Total noninterest- earning assets........... 209,653 224,387 ----------- ----------- Total assets.............. $ 1,671,982 $ 1,597,211 =========== =========== Liabilities & Shareholders' Equit Interest-bearing liabilities: Passbook accounts........... $ 5,693 55 1.29 % 5,948 93 2.08 % Money market and NOW accounts 415,452 2,863 0.92 252,612 3,291 1.74 Certificates of deposit..... 383,735 7,746 2.69 459,957 13,167 3.82 Federal Home Loan Bank Borrowings................ 342,236 6,812 2.65 328,959 7,156 2.90 Borrowed money and guaranteed preferred beneficial interests...... 122,686 7,077 7.69 144,998 7,418 6.82 ----------- ---------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities.............. 1,269,802 24,553 2.58 1,192,474 31,125 3.48 ----------- ---------- ----------- ----------- ----------- ----------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances) 158,583 265,896 Other liabilities........... 174,271 66,928 ----------- ----------- Total noninterest-bearing liabilities.............. 332,854 332,824 Shareholders' equity.......... 69,326 71,913 ----------- ----------- Total liabilities and shareholders' Equity.......... $ 1,671,982 $ 1,597,211 =========== =========== Net interest income before provision for loan and valuation losses............. $ 31,743 $ 31,238 ========== =========== Interest rate spread............ 2.55 % 2.58 % ======== =========== Net interest margin............. 2.89 % 3.39 % ======== =========== Ratio of average interest-earning assets to average interest-bearing liabilities.. 115.16 % 115.12 % ======== =========
25 Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: o changes in volume, in other words, changes in volume multiplied by prior period rate; and o changes in rate, in other words, changes in rate multiplied by prior period volume. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Quarter Ended Nine Months Ended September 30, September 30, 2003 vs. 2002 2003 vs. 2002 ----------------------------------------- -------------------------------------------- Increase (Decrease) Due to Change in --------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ------------ ------------ --------- ------------ ------------ ------------ (In thousands) Interest-earning assets: Loans, net $ 709 $ (3,094) $ (2,385) $ 3,662 $ (9,631) $ (5,969) Securities (102) (121) (223) 388 (312) 76 Interest-earning deposits (32) (32) (64) (90) (75) (165) FHLB stock 14 (89) (75) 106 (115) (9) ------------ ------------ --------- ------------ ------------ ------------ Total interest-earning assets 589 (3,336) (2,747) 4,066 (10,133) (6,067) Interest-bearing liabilities: Passbook accounts (4) (15) (19) (4) (34) (38) Money market and NOW accounts 578 (707) (129) 1,548 (1,976) (428) Certificates of deposit (634) (674) (1,308) (1,947) (3,474) (5,421) FHLB borrowings (262) (160) (422) 284 (628) (344) Borrowed money and guaranteed preferred beneficial interests (344) 517 173 (1,221) 880 (341) ------------ ------------ --------- ------------ ------------ ------------ Total interest-bearing liabilities (666) (1,039) (1,705) (1,340) (5,232) (6,572) ------------ ------------ --------- ------------ ------------ ------------ Change in net interest income before provision for loan and valuation losses $ 1,255 $ (2,297) $ (1,042) $ 5,406 $ (4,901) $ 505 ============ ============ ========= ============ ============ ============
Asset Quality Nonperforming Assets As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate arises primarily through foreclosure on mortgage loans owned. 26
September 30, December 31, September 30, 2003 2002 2002 --------------- --------------- ---------------- (Dollars in thousands) Nonaccrual residential mortgage loans................ $ 18,035 $ 15,123 $ 14,038 Nonaccrual commercial real estate, commercial loans and school financing.............................. 15,573 15,649 11,539 Nonaccrual consumer loans............................ 4 46 19 --------------- --------------- ---------------- Total nonperforming loans......................... 33,612 30,818 25,596 Foreclosed real estate............................... 6,081 8,343 7,948 --------------- --------------- ---------------- Total nonperforming assets........................ $ 39,693 $ 39,161 $ 33,544 =============== =============== ================ Total nonperforming loans to total loans............. 2.64 % 2.23 % 1.78 % =============== =============== ================ Total nonperforming assets to total assets........... 2.48 % 2.30 % 1.89 % =============== =============== ================ Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 26.78 % 30.32 % 37.19 % =============== =============== ================
We accrue interest on government-sponsored loans such as FHA insured and VA guaranteed loans which are past due 90 or more days, as the interest on these loans is generally insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $14.4 million, $34.8 million and $40.7 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively. Nonaccrual residential mortgage loans as a percentage of total loans were 1.4% at September 30, 2003, 1.1% at December 31, 2002, and 0.96% at September 30, 2002. The nonaccrual residential mortgage loans have slightly deteriorated at September 30, 2003 as compared to December 31, 2002 and September 30, 2002. We do not believe that the slight increase in delinquency will necessarily continue or is a continuing trend, as the increase relates primarily to loans originated at Matrix Financial and we are no longer originating the volume of loans at our mortgage banking operation due to the sale of the production platform. Nonaccrual commercial loans and school financing are consistent between September 30, 2003 and December 31, 2002. The increase in nonaccrual commercial loans and school financing at September 30, 2003 and December 31, 2002 as compared to September 30, 2002 is primarily attributable to a decrease in nonaccrual commercial and construction loans at Matrix Bank due to improvement in the aging of the portfolio, offset by the overall increased amounts of SBA originated and purchased loans and the increased amount of those loans in nonaccrual status, which increased $1.0 million to $10.3 million at September 30, 2003 as compared to $9.3 million at December 31, 2002 and $8.6 million at September 30, 2002. It should be noted, however, that approximately $7.8 million of the principal of these SBA loans is guaranteed by the SBA, and as such, our credit risk is reduced despite the increase in the balances. With regard to our school financing, a majority of our origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. We have noted that many of our charter schools have encountered enrollment and/or state funding delays with their start-up, which has delayed their funding and caused the school's loans to us to become delinquent. We have seen minor improvement in the balance of the nonaccrual loans since December 31, 2002, primarily due to the aging of such loans. In many instances, we have historically been able to work with many of the schools on their cash flow issues and eventually removed them from the delinquent lists. Not included in the September 30, 2003 balance was $1.0 million of delinquent school financing that was sold to a third party with recourse. The losses related to the delinquencies and foreclosures are recorded as part of noninterest expense. As of September 30, 2003, a liability of $300 thousand was recorded against the delinquent recourse loans. The percentage of the allowance for loan losses to nonaccrual loans varies due to the nature of our portfolio of loans. We analyze the collateral for each nonperforming loan to determine potential loss exposure. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. See "Comparison of Results of Operations for the Quarters Ended September 30, 2003 and 2002." 27 Liquidity and Capital Resources Liquidity is our ability to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. The trend of net cash used by our operating activities experienced over the reported period results primarily from our regular operating activities. Note, however, that we believe the sale of the wholesale production platform will result in significant liquidity once the warehouse line of credit provided to Matrix Financial by Matrix Bank is repaid, and it is anticipated that the liquidity created will be used to re-invest primarily in residential loans. See Note 2 to the condensed consolidated financial statements herein for a discussion of the Sale of the Wholesale Production Platform. The Company is reliant on dividend and tax payments from its subsidiaries in order to fund operations, meet debt obligations and grow new or developing lines of business. A long-term inability of a subsidiary to make dividend payments could significantly impact the Company's liquidity. Historically, the majority of the dividend payments have been made by Matrix Bank and its consolidated subsidiaries, which include Matrix Financial. The current dividend policy approved by Matrix Bank is 75% of the consolidated cumulative earnings of Matrix Bank. Matrix Bank resumed regular dividend payments under its current policy during the quarter ended June 30, 2003. The Company also intends to utilize the $12.0 million line of credit on its bank stock loan, as needed, to meet its own and the other subsidiaries financial obligations. As of September 30, 2003, $12.0 million of the line of credit is available. Matrix Bank's liquidity needs are expected to be achieved through retail deposit growth, brokered deposits, borrowings from the FHLB, custodial deposits from affiliates, deposits directed to Matrix Bank by third party institutions and deposits generated through its trust operations. Contractual loan payments and net deposit inflows are a generally predictable source of funds, while loan prepayments and loan sales are significantly influenced by general market interest rates and economic conditions. Borrowings on a short-term basis are used as a cash management vehicle to compensate for seasonal or other reductions in normal sources of funds. Matrix Bank utilizes advances from the FHLB as its primary source for borrowings. At September 30, 2003, Matrix Bank had overnight and term borrowings of $267.2 million from the FHLB of Topeka and Dallas. Available unused borrowings from the FHLB of Topeka totaled $377.0 million at September 30, 2003. Matrix Bank also utilizes brokered deposits as a source of liquidity. The balance of brokered deposits at September 30, 2003 was $182.0 million. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. Matrix Bank, a well capitalized institution, had a leverage capital ratio of 6.49% at September 30, 2003. This exceeded the well capitalized leverage capital requirement of 5.0% of adjusted assets by $22.7 million. Matrix Bank's risk-based capital ratio was 12.32% at September 30, 2003, which currently exceeds the well capitalized risk-based capital requirement of 10.0% of risk-weighted assets by $19.8 million. Matrix Bancorp Trading's principal source of funding to acquire loan portfolios with the intent of selling over a short period of time is internal capital. In the past, Matrix Bancorp Trading had a $40.0 million warehouse line from a third party financial institution unconditionally guaranteed by the Company. Due to the lack of utilization of this warehouse line, we did not renew the facility when it came due in the third quarter of 2003. ABS' principal source of funding for school financings are internal capital, sales of loans to a third party institution and partnership trusts with unaffiliated financial institutions. Amounts available to be sold and amounts to be financed are at the purchaser's and lender's sole discretion. We continue to pursue additional third party financing and sales options for ABS although we do not anticipate significantly increasing our current loan portfolio. 28 Through a Purchase and Sale Agreement, the Company has sold school financing loans to a third party financial institution. The Company provides scheduled interest and principal plus full recourse in the case of loss or default. The transaction was treated as a sale due to the transfer of ownership over the school financing loans. No gain or loss was recorded at the time of sale. The balance of the school financing loans sold with recourse was approximately $11.0 million at September 30, 2003. Item 3. Quantitative and Qualitative Disclosures About Market Risk During the quarter ended September 30, 2003 and the nine-month period ended September 30, 2003, there were no material changes to the quantitative and qualitative disclosures about market risk presented in the Annual Report on Form 10-K for the year ended December 31, 2002. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Risk Sensitive Assets and Liabilities" and Item 1. "Business Mortgage Servicing Activities --Hedging of Servicing Rights" in the Form 10-K for December 31, 2002 for a detailed discussion and which is incorporated herein by reference. Item 4. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including the Co-Chief Executive Officer's and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2003 pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Company's management, including the Co-Chief Executive Officer's and Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of management's evaluation. Part II - Other Information Item 1. Legal Proceedings We are from time to time party to various litigation matters, in most cases, involving ordinary and routine claims incidental to our business. With respect to all pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. However, the outcome with respect to one or more of these matters, if adverse, is reasonably likely to have a material, adverse impact on the consolidated financial position, results of operations or cash flows of the Company. Sterling Trust was named a defendant in an arbitration claim filed in 2003 with the American Arbitration Association in Fresno, California styled Gilbert R. Allenby, et. al. v. Sterling Trust Company. Approximately 670 plaintiffs claimed that Sterling Trust was responsible for losses in their self-directed IRAs realized when their IRA funds invested funds through Advisors Capital Investments, Inc., a registered investment advisor, in a mutual funds trading program. In September 2003, the arbitrator in this matter granted summary judgment in favor of Sterling Trust in this matter. Unless the plaintiffs appeal the arbitrator's disposition of this matter in favor of Sterling, this case will be closed. Matrix Financial was named a defendant in an arbitration claim that was pending before the American Arbitration Association in Denver, Colorado. The claimant claimed that he was not terminated "for cause" as specified in his employment agreement and claimed, among other things, breach of good faith and fair dealing, breach of his employment agreement, back pay and other economic loss, violation of the Colorado wage act, and attorneys' fees and costs. In the third quarter of 2003, this matter was settled, requiring the Company to accrue an additional $1.1 million in the third quarter of 2003 in order to provide for the full settlement payment to the claimant. This matter has been closed. This matter is also discussed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. 29 A former customer of Matrix Bank is a debtor in a Chapter 11 proceeding under the Bankruptcy Code entitled In re Apponline.com, Inc. and Island Mortgage Network, Inc. pending in the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Proceeding"). The Chapter 11 trustee in this action had claimed a prior interest in approximately 17 loans (original principal amount of approximately $3.2 million) that Matrix Bank purchased from the debtor pursuant to a purchase/repurchase facility between Matrix Bank and the debtor. Matrix Bank and the Chapter 11 trustee have agreed to settle this dispute, with Matrix Bank paying the trustee approximately $460 thousand. The settlement is subject to approval by the Bankruptcy Court. There can be no assurance that the settlement will be approved by the Court. The amount of the settlement has been fully reserved by the Company. In addition to the claim described above, the Chapter 11 trustee has filed an avoidance action against Matrix Bank for approximately $6.1 million Island Mortgage paid to Matrix Bank. Matrix Bank believes it will successfully demonstrate to the trustee that the monies the trustee seeks to recover were purchase money belonging to Matrix Bank, having been returned to it by Island Mortgage for loans that did not close and were not sold to Matrix Bank. Matrix Bank believes it has meritorious defenses to this avoidance action and intends to vigorously defend it. See Item 3. "Legal Proceedings --Matrix Bank" in the Form 10-K for December 31, 2002 for the Company's previous discussion of this matter. Sterling Trust has been named a defendant in an action filed in July 1999 styled Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. that was tried in Tarrant County, Texas District Court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of 12 theories of liability posed by the plaintiffs, and a judgment was entered against Sterling Trust in the amount of approximately $6.4 million, plus post-judgment interest and conditional attorneys' fees for the plaintiffs in connection with any appeals. Sterling Trust appealed the judgment to the Court of Appeals for the Second District of Texas (Fort Worth). On July 31, 2003, the Court of Appeals affirmed and reversed in part the jury verdict. The Court of Appeals affirmed the jury's award for actual damages of approximately $6.2 million (plus post-judgment interest and attorneys' fees currently estimated to be approximately $2.3 million) but denied the punitive award of approximately $250 thousand. Sterling Trust continues to believe that it has meritorious points of appeal and intends to vigorously appeal this decision to the Supreme Court of Texas. An appeal to the Supreme Court of Texas is discretionary in nature, meaning that the Supreme Court of Texas does not automatically have to hear the case. There can be no assurances that the Supreme Court of Texas will agree to hear the case or that, if heard, Sterling Trust's appeal will be successful. The Petition for Review was filed with the Supreme Court of Texas on October 31, 2003. Because management has determined that the loss in this matter is not probable, no accrual for loss has been recorded in the financial statements. This matter is also discussed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, and our Current Report on Form 8-K filed with the SEC on August 12, 2003, releasing the Company's results of operations for the second quarter of 2003. Item 6. Exhibits and Reports on Form 8-K a) Exhibits *31.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursaunt to Section 302 of the Sarbanes-Oxley Act of 2002. *31.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 30 b) Reports on Form 8-K The Company filed a Form 8-K with the Securities and Exchange Commission on September 15, 2003 (Items 2 and 7), which contained pro forma financial statements related to the sale of the production platform. The Company filed a Form 8-K with the Securities and Exchange Commission on September 3, 2003 (Items 5 and 7) , which contained a press release announcing the final closing of the sale of the production platform. The Company filed a Form 8-K with the Securities and Exchange Commission on August 12, 2003 (Items 12 and 7), which contained a press release announcing the second quarter 2003 earnings of the Company. The Company filed a Form 8-K with the Securities and Exchange Commission on August 4, 2003 (Items 5 and 7), which contained a press release announcing the verdict of the appellate court in the Adderley litigation. The Company filed a Form 8-K with the Securities and Exchange Commission on July 21, 2003 (Item 5), which contained a press release announcing the resignation of the CEO of Matrix Capital Bank. The Company filed a Form 8-K with the Securities and Exchange Commission on July 2, 2003 (Items 5 and 7), which contained a press release announcing the addition of Dr. James Bullock to the Board of Directors. - --------------------- * Filed herewith. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX BANCORP, INC. Dated: November 4, 2003 /s/ D. Mark Spencer ----------------------------- --------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) Dated: November 4, 2003 /s/ Richard V. Schmitz ----------------------------- --------------------------------- Richard V. Schmitz Co-Chief Executive Officer Dated: November 4, 2003 /s/ David W. Kloos ----------------------------- --------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 32 INDEX TO EXHIBITS Exhibit Number Description - ------------- -------------------------------------------------------------- *31.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adoped pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. 33 EX-31.1 3 ex31-1.txt Exhibit 31.1 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-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 is being prepared; b. (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ D. Mark Spencer -------------------------------- D. Mark Spencer President and Co-Chief Executive Officer November 4, 2003 EX-31.2 4 ex31-2.txt Exhibit 31.2 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-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 is being prepared; b. (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Richard V. Schmitz ---------------------------------- Richard V. Schmitz Co-Chief Executive Officer November 4, 2003 EX-31.3 5 ex31-3.txt Exhibit 31.3 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-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 is being prepared; b. (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ David W. Kloos --------------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) November 4, 2003 EX-32.1 6 ex32-1.txt Exhibit 32.1 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 September 30, 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: November 4, 2003 /s/ D. Mark Spencer -------------------------------- Name: D. Mark Spencer Title: President and Co-Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 ex32-2.txt Exhibit 32.2 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 September 30, 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: November 4, 2003 /s/ Richard V. Schmitz ------------------------------ Name: Richard V. Schmitz Title: Co-Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.3 8 ex32-3.txt Exhibit 32.3 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 September 30, 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: November 4, 2003 /s/ David W. Kloos -------------------------------- Name: David W. Kloos Title: Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----