-----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, A4rm2Fzzu7BNURKj/FtZvI7M6ck2SLb9o6HJL80Cn7RFg8SvHe3/E5E0vMAfdTCC TBSgTjpHCSh+8BEnyuG7mg== 0000899078-05-000350.txt : 20050505 0000899078-05-000350.hdr.sgml : 20050505 20050505154606 ACCESSION NUMBER: 0000899078-05-000350 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050505 DATE AS OF CHANGE: 20050505 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: 05803541 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 firstquarter2005-10q.txt FORM 10-Q, FIRST QUARTER 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 0-21231 MATRIX BANCORP, INC. (Exact name of registrant as specified in its charter) Colorado 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 17th Street, Suite 2100 Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of Common Stock ($0.0001 par value) outstanding at the close of business on May 2, 2005 was 6,620,850 shares. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets March 31, 2005 (unaudited) and December 31, 2004.................3 Consolidated Statements of Income Three months ended March 31, 2005 and 2004 (unaudited)...........4 Consolidated Statements of Shareholders' Equity Three months ended March 31, 2005 and 2004 (unaudited)...........5 Consolidated Statements of Cash Flows Three months ended March 31, 2005 and 2004 (unaudited)...........6 Notes to Consolidated Financial Statements (unaudited).............8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................17 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........26 ITEM 4. Controls and Procedures...........................................26 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings.................................................26 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.......27 ITEM 6. Exhibits..........................................................27 SIGNATURES...................................................................28 2 Part I - Financial Information Item 1. Financial Statements
Matrix Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share information) March 31, December 31, 2005 2004 ------------------ ------------------ (Unaudited) Assets Cash and cash equivalents $ 38,299 $ 40,471 Interest-earning deposits and federal funds sold 2,355 2,398 Investment securities 322,138 316,367 Loans held for sale, net 938,980 989,822 Loans held for investment, net 405,983 379,717 Mortgage servicing rights, net 25,362 26,574 Other receivables 33,029 35,139 FHLBank stock, at cost 33,819 33,481 Premises and equipment, net 18,534 19,037 Bank owned life insurance 21,792 21,569 Other assets, net 20,953 21,330 Foreclosed real estate, net 3,999 2,955 ------------------ ------------------ Total assets $ 1,865,243 $ 1,888,860 ================== ================== Liabilities and shareholders' equity Liabilities: Deposits $ 1,139,617 $ 1,119,159 Custodial escrow balances 40,436 51,598 FHLBank borrowings 479,096 506,118 Borrowed money 30,446 31,573 Junior subordinated debentures owed to unconsolidated subsidiary trusts 61,835 61,835 Other liabilities 16,063 23,955 Income taxes payable and deferred income tax liability 3,153 2,307 ------------------ ------------------ Total liabilities 1,770,646 1,796,545 ------------------ ------------------ 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; outstanding 6,620,850 shares at March 31, 2005 and December 31, 2004 1 1 Additional paid-in capital 21,432 21,432 Retained earnings 73,676 70,756 Accumulated other comprehensive (loss) income (512) 126 ------------------ ------------------ Total shareholders' equity 94,597 92,315 ------------------ ------------------ Total liabilities and shareholders' equity $ 1,865,243 $ 1,888,860 ================== ==================
See accompanying notes. 3
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Dollars in thousands, except share information) (Unaudited) Quarter Ended March 31, 2005 2004 ----------------- ----------------- Interest and dividend income: Loans and securities $ 20,315 $ 17,597 Interest-earning deposits 351 229 ----------------- ----------------- Total interest and dividend income 20,666 17,826 ----------------- ----------------- Interest expense: Deposits 3,268 2,660 Borrowed money and junior subordinated debentures 5,909 4,817 ----------------- ----------------- Total interest expense 9,177 7,477 ----------------- ----------------- Net interest income before provision for loan and valuation losses 11,489 10,349 Provision for loan and loan valuation losses 833 1,299 ----------------- ----------------- Net interest income after provision for loan and valuation losses 10,656 9,050 ----------------- ----------------- Noninterest income: Loan administration 3,035 4,668 Brokerage 2,752 2,952 Trust services 2,515 1,951 Real estate disposition services 422 2,389 Gain on sale of loans and securities 746 2,114 School services 483 671 Other 1,273 2,665 ----------------- ----------------- Total noninterest income 11,226 17,410 ----------------- ----------------- Noninterest expense: Compensation and employee benefits 6,876 8,960 Amortization of mortgage servicing rights 1,774 4,671 Occupancy and equipment 1,272 1,559 Postage and communication 408 587 Professional fees 726 737 Mortgage rights subservicing fees 825 - Data processing 315 623 Subaccounting fees 2,652 1,851 (Recovery of) impairment on mortgage servicing rights (175) 1,156 Other general and administrative 2,991 4,991 ----------------- ----------------- Total noninterest expense 17,664 25,135 ----------------- ----------------- Income from continuing operations before income taxes 4,218 1,325 Income tax provision 1,298 160 ----------------- ----------------- Income from continuing operations 2,920 1,165 ----------------- ----------------- Discontinued operations: Income from discontinued operations, net of income tax provision of $89 - 137 ----------------- ----------------- Net income $ 2,920 $ 1,302 ================= ================= Income from continuing operations per share - basic and assuming dilution $ 0.44 $ 0.18 ----------------- ----------------- Income from discontinued operations per share - basic and assuming dilution $ - $ 0.02 ----------------- ----------------- Net income per share - basic and assuming dilution $ 0.44 $ 0.20 ================= ================= Weighted average shares - basic 6,620,850 6,518,981 ================= ================= Weighted average shares - assuming dilution 6,697,884 6,582,303 ================= =================
See accompanying notes. 4
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (Dollars in thousands) (Unaudited) Common Stock Additional Other ------------------ paid in Retained comprehensive Comprehensive Shares Amount capital earnings income (loss) Total income ------------------------------------------------------------------------------------------- Quarter Ended March 31, 2005 - --------------------------- Balance at December 31, 2004 6,620,850 $ 1 $ 21,432 $ 70,756 $ 126 $ 92,315 Comprehensive income: Net income 2,920 2,920 $ 2,920 Net unrealized holding losses, net of income tax(1) (638) (638) (638) -------------- Comprehensive income $ 2,282 --------------------------------------------------------------------------- ============== Balance at March 31, 2005 6,620,850 $ 1 $ 21,432 $ 73,676 $ (512) $ 94,597 Quarter Ended March 31, 2004 - --------------------------- Balance at December 31, 2003 6,518,981 $ 1 $ 20,615 $ 48,859 $ 209 $ 69,684 Comprehensive income: Net income 1,302 1,302 $ 1,302 Net unrealized holding gains, net of income tax 283 283 283 -------------- Comprehensive income $ 1,585 --------------------------------------------------------------------------- ============== Balance at March 31, 2004 6,518,981 $ 1 $ 20,615 $ 50,161 $ 492 $ 71,269 (1) Disclosure of reclassification amount Quarter Ended March 31, 2005 - ----------------------------------------------------- Unrealized holding loss arising during period $ (638) Less: reclassification adjustment of gains included in net Income - -------------- Net unrealized holding loss on securities $ (638) ==============
See accompanying notes. 5
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Quarter Ended March 31, 2005 2004 ------------------------------------------ Operating activities Income from continuing operations $ 2,920 $ 1,165 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 790 864 Provision for loan and valuation losses 833 1,299 Amortization of mortgage servicing rights 1,774 4,671 (Recovery) impairment on mortgage servicing rights (175) 1,156 Gain on sale of loans and securities (746) (2,114) Loss on sale of building and equipment 18 - (Gain) loss on sale of foreclosed real estate (34) 211 Changes in assets and liabilities: Proceeds from the sale of trading securities 187,028 - Loans originated for sale, net of loans sold (7,729) (22,188) Loans purchased for sale (261,731) (427,108) Principal payments on, and proceeds from sale of loans held for sale 144,516 200,205 Originated mortgage servicing rights, net (213) (424) Decrease in other receivables and other assets 2,218 8,487 Decrease in other liabilities, income taxes payable and deferred (7,046) (5,066) income tax liability ------------------- ------------------ Net cash provided by (used in) operating activities from continuing operations 62,423 (238,842) Net cash provided by discontinued operations - 226 ------------------- ------------------ Net cash provided by ( used in) operating activities $ 62,423 $ (238,616) ------------------ ------------------ Investing activities Loans originated and purchased for investment (47,519) (46,472) Principal repayments on loans held for investment 21,411 13,243 Purchase of available for sale securities (31,324) (63,970) Proceeds from sale of available for sale securities - 321,851 Proceeds from maturity and prepayment of available for sale securities 7,527 6,975 Proceeds from the maturity and prepayment of held to maturity 3,895 - securities (Purchase) redemption of FHLBank stock, net (338) 774 Purchases of premises and equipment (259) (244) Acquisition of mortgage servicing rights (174) (218) Proceeds from sale of foreclosed real estate 996 670 ------------------ ------------------ Net cash(used in) provided by investing activities (45,785) 232,609 ------------------ ------------------ Financing activities Net increase (decrease) in deposits 20,458 (25,369) Net (decrease) increase in custodial escrow balances (11,162) 9,782 (Decrease) increase in revolving lines and FHLBank borrowings, net (28,149) 39,639 Payments of notes payable - (357) Payment of financing arrangements - (404) Proceeds from issuance of subordinated debt - 9,760 ------------------ ------------------ Net cash(used in) provided by financing activities (18,853) 33,051 ------------------ ------------------ (Decrease) increase in cash and cash equivalents (2,215) 27,044 Cash and cash equivalents at beginning of the period 42,869 34,510 ------------------ ------------------ Cash and cash equivalents at end of the period $ 40,654 $ 61,554 ================== ================== Continued
6
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows - continued (Dollars in thousands) (Unaudited) Quarter Ended March 31, 2005 2004 ------------------------------------------ Supplemental disclosure of non-cash activity Loans transferred to foreclosed real estate and other assets $ 2,202 $ 1,046 ================== ================== Loans securitized and transferred to securities available for sale $ - $ 345,455 ================== ================== Loans securitized and transferred to trading securities $ 173,712 $ - ================== ================== Supplemental disclosure of cash flow information Cash paid for interest $ 9,300 $ 8,066 ================== ================== Cash paid for income taxes $ 122 $ 855 ================== ==================
See accompanying notes. 7 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements March 31, 2005 (Unaudited) 1. Basis of Presentation and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of Matrix Bancorp, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation have been included. The results of operations for the quarter ended March 31, 2005 may not be indicative of results for the full year. For discussion of our organization and business, the accounting policies we follow and further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. This quarterly report should be read in conjunction with that annual report. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the condensed consolidated financial statements, and disclosures of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period and the accompanying notes. Actual results could differ from these estimates. Stock-Based Compensation At March 31, 2005, the Company has one stock-based employee compensation plan, which is described more fully in Note 18 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") 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. In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS 123 with SFAS 123(R), "Share-Based Payment," ("SFAS 123(R)") which eliminates the intrinsic value-based method and requires all entities to recognize compensation expense in an amount equal to the fair value of share based payments granted to employees. The Securities and Exchange Commission ("SEC") issued guidance in March 2005 which delays the implementation of the provisions of SFAS 123(R) until the fiscal year beginning January 1, 2006. The Company currently expects to adopt SFAS 123(R) with the fiscal year beginning January 1, 2006 under the modified prospective method. As a result, the Company will have compensation expense for any awards granted after the date of adoption, and will include compensation expense for the unvested portions of previously granted awards that remain outstanding at the date of adoption. Had compensation cost for our stock-based plan been determined consistent with SFAS No. 123, our net income and income per share would have been changed to the pro forma amounts indicated below: 8 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited)
Quarter Ended March 31, 2005 2004 ----------------------------------------- (Dollars in thousands, except share data) Net income: Net income as reported $ 2,920 $ 1,302 Deduct: Total stock-based employee compensation determined under fair value based method for awards, net of related tax effects (45) (69) ----------------------------------------- Pro forma $ 2,875 $ 1,233 ========================================= Income per share: Basic, as reported $ 0.44 $ 0.20 ========================================= Basic, pro forma $ 0.43 $ 0.19 ========================================= Diluted, as reported $ 0.44 $ 0.20 ========================================= Diluted, pro forma $ 0.43 $ 0.19 =========================================
Reclassifications Certain reclassifications have been made to the condensed consolidated financial statements and related notes of prior periods to conform to the current period presentation. 2. Sale of Wholesale Production Platform On September 2, 2003, the Company announced the final closing and substantial completion of the sale by Matrix Financial Services Corporation ("Matrix Financial") of substantially all of its assets associated with its wholesale mortgage origination platform pursuant to the Purchase and Assumption Agreement dated February 28, 2003, as amended ("Purchase Agreement"). Under the terms of the Purchase Agreement, Matrix Financial continued to earn a production premium through February 2004, generally 20 basis points times the original principal balance of all loans originated through February 23, 2004. For the quarter ended March 31, 2004, the production premium earned and reflected in income from discontinued operations was $226,000, before tax. The accounting for the sale of the production platform is more fully described in Note 6 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 3. Sale of Majority Interest in Matrix Asset Management Corporation On September 10, 2004, the Company announced the sale by Matrix Asset Management Corporation ("MAMC") of substantially all of its assets related to its real estate management and disposition business. After the sale, we have retained a 25% interest in the new company created by the purchaser, Matrix Asset Management, LLC, ("MAM, LLC"), as well as our remaining operations in MAMC, renamed MTXC Realty Corp., of a real estate brokerage office operating exclusively in the Denver metro area. The 25% ownership will be accounted for using the equity method of accounting. Due to our 25% ownership, we will continue to reflect the operations of MTXC Realty, including the future equity earnings in MAM, LLC, as continuing operations. At March 31, 2005, the investment in MAMC included in other assets in the condensed consolidated balance sheet is $622,000. The sale of the majority interest in MAMC is more fully described in Note 3 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 4. Sale of Interest in Matrix Settlement and Clearance Services, LLC On November 30, 2004, the Company through certain of its subsidiaries, entered into definitive agreements to sell the 45% membership interest in Matrix Settlement and Clearance Services, LLC ("MSCS"), as well as all of the assets of the trust operations of Matrix Capital Bank ("Matrix Bank"). In consideration of the sale of the 45% membership interest in MSCS, the Company has received approximately 5% of the outstanding common stock of the purchaser. This portion of the transaction closed December 1, 2004. The 5% ownership interest retained is accounted for using the cost basis of accounting. In consideration of the 9 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited) sale of the assets of the trust operations of Matrix Bank, the purchaser will issue common stock of approximately 2% of its outstanding common stock. Consummation of the sale of the assets of the trust operations of Matrix Bank occurred April 30, 2005, for a gain on sale of approximately $300,000. The sale of the interest in MSCS is more fully described in Note 4 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 5. Sale of Matrix Capital Bank Branches On January 30, 2004, the Company, through its wholly owned subsidiary Matrix Bank, entered into a definitive agreement to sell its two branches in Las Cruces, New Mexico. The sale closed on May 1, 2004. The sale included deposits of the Las Cruces branches that totaled approximately $78,500,000, and loans of approximately $22,800,000, as well as the real estate and leases associated with the Las Cruces branches. On July 12, 2004, the Company, through its wholly owned subsidiary Matrix Bank, entered into a definitive agreement to sell its branch in Sun City, Arizona. The sale closed on November 1, 2004. The sale included deposits of the Sun City branch that totaled approximately $104,000,000, a nominal amount of loans, as well as the real estate and leases associated with the branch. The sale of the branches is more fully described in Note 5 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 6. Net Income Per Share The following table sets forth the computation of net income per share and net income per share assuming dilution:
Quarter Ended March 31, 2005 2004 ------------------------------------- (Dollars in thousands) Numberator: Income from continuing operations $ 2,920 $ 1,165 Income from discontinued operations - 137 ------------------------------------- Net income $ 2,920 $ 1,302 ===================================== Denominator: Weighted average shares outstanding 6,620,850 6,518,981 Effect of dilutive securities: Common stock options 77,034 63,322 ------------------------------------- Denominator for net income per share assuming dilution 6,697,884 6,582,303 =====================================
7. Investment Securities Investment securities available for sale were as follows:
March 31, 2005 December 31, 2004 ----------------------------------------------- ----------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Carrying Amortized Unrealized Unrealized Carrying Cost Gains Losses Value Cost Gains Losses Value ----------- ----------- ------------ ---------- ----------- ------------ ----------- ---------- (Dollars in thousands) Mortgage-backed securities $ 142,098 $ 274 $ (1,047) $ 141,325 $ 117,316 $ 339 $ (145) $ 117,510 SBA securities 910 - (2) 908 930 - (3) 927 ----------- ----------- ------------ ---------- ------------ ----------- ----------- ---------- Total $ 143,008 $ 274 $ (1,049) $ 142,233 $ 118,246 $ 339 $ (148) $ 118,437 =========== =========== ============ ========== ============ =========== =========== ==========
10 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited) Investment securities held to maturity were as follows:
March 31, 2005 December 31, 2004 ----------------------------------------------- -------------------------------------------------- Amortized Amortized Cost and Gross Gross Cost and Gross Gross Carrying Unrealized Unrealized Estimated Carrying Unrealized Unrealized Estimated Value Gains Losses Fair Value Value Gains Losses Fair Value ----------- ----------- ----------- ----------- ------------ ----------- ----------- ------------- (Dollars in thousands) Mortgage-backed securities $ 67,661 $ - $ (723) $ 66,938 $ 71,555 $ 34 $ (174) $ 71,415 ----------- ----------- ----------- ----------- ------------ ----------- ----------- ------------- Total $ 67,661 $ - $ (723) $ 66,938 $ 71,555 $ 34 $ (174) $ 71,415 =========== =========== =========== =========== ============ =========== =========== =============
Trading securities were as follows:
March 31, 2005 December 31, 2004 ---------------------------- ---------------------------- Estimated Fair Value Estimated Fair Value and carrying value and carrying value ---------------------------- ---------------------------- (Dollars in thousands) SBA securities $ 112,244 $ 126,375 ---------------------------- ---------------------------- Total $ 112,244 $ 126,375 ============================ ============================
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At March 31, 2005, the Company does not believe that any individual unrealized loss represents other-than-temporary impairment. The unrealized losses are attributable to changes in interest rates. The Company has both the intent and ability to hold the securities with gross unrealized losses for a time necessary to recover the amortized cost. 8. Loans Held for Sale and Investment Loans Held for Investment Loans held for investment consist of the following:
March 31, December 31, 2005 2004 ------------------------------------- (Dollars in thousands) Residential loans $ 232,209 $ 227,609 Multi-family, commercial real estate, SBA commercial 145,681 134,782 Construction loans 35,206 24,753 Consumer loans and other 546 581 (Discounts) premium, net (955) (1,194) Unearned fees (888) (840) ------------------------------------- 411,799 385,691 Less: Allowance for loan and valuation losses 5,816 5,974 ------------------------------------- Loans held for investment, net $ 405,983 $ 379,717 =====================================
11 Activity in the allowance for loan and valuation losses on loans held for investment is summarized as follows:
Quarter Ended Year Ended March 31, December 31, 2005 2004 ------------------------------------- (Dollars in thousands) Balance at beginning of year $ 5,974 $ 4,986 Provision for loan and valuation losses 408 2,089 Charge-offs and transfers (579) (1,264) Recoveries 13 163 ------------------------------------- Balance at end of year $ 5,816 $ 5,974 ===================================== Loans Held for Sale Loans held for sale consist of the following: March 31, December 31, 2005 2004 -------------------------------------- (Dollars in thousands) Residential loans $ 776,734 $ 758,543 SBA guaranteed commercial loans, school financing and other 154,526 218,231 Purchase premiums, net 13,325 18,246 -------------------------------------- 944,585 995,020 Less: Allowance for loan and valuation losses 5,605 5,198 -------------------------------------- Loans held for sale, net $ 938,980 $ 989,822 ====================================== Activity in the allowance for loan and valuation losses on loans held for sale is summarized as follows: Quarter Ended Year Ended March 31, December 31, 2005 2004 -------------------------------------- (Dollars in thousands) Balance at beginning of year $ 5,198 $ 4,803 Provision for loan losses 425 1,180 Charge-offs and transfers (32) (785) Recoveries 14 - -------------------------------------- Balance at end of year $ 5,605 $ 5,198 ======================================
12 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited) 9. Mortgage Servicing Rights The activity in the mortgage servicing rights is summarized as follows:
Quarter Ended Year Ended March 31, December 31, 2005 2004 ------------------ ----------------- (Dollars in thousands) Mortgage servicing rights Balance at beginning of period $ 29,980 $ 47,194 Purchases 174 871 Originations 213 615 Amortization (1,774) (16,100) Application of valuation allowance to write down impaired MSRs - (2,600) ------------------ ----------------- Balance before valuation allowance at end of period 28,593 29,980 Valuation allowance for impairment of mortgage servicing rights Balance at beginning of period (3,406) (6,450) Additions - (1,656) Application of valuation allowance to write down impaired MSRs - 2,600 Recovery 175 2,100 ------------------ ----------------- Balance at end of period (3,231) (3,406) Mortgage servicing rights, net $ 25,362 $ 26,574 ================== =================
The Company's servicing portfolio (excluding subserviced loans), is comprised of the following:
March 31, 2005 December 31, 2004 ---------------------------------- -------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding ----------------------------------------------------------------------- (Dollars in thousands) Freddie Mac 4,475 $ 182,593 4,783 $ 196,637 Fannie Mae 12,677 693,182 13,390 722,749 Ginnie Mae 10,323 617,381 11,098 675,067 VA, FHA, conventional and other loans 8,234 668,875 8,687 664,387 ---------------- ---------------- --------------- -------------- 35,709 $ 2,162,031 37,958 $ 2,258,840 ================ ================ =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed consolidated balance sheets at March 31, 2005 and December 31, 2004 pertain to payments held in escrow in respect of taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company. The custodial accounts are maintained at Matrix Bank in noninterest-bearing 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. 13 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited) 10. Deposits Deposit account balances are summarized as follows:
March 31, 2005 December 31, 2004 -------------------------------------------- ------------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------------------------------------------------------------------------------------------- (Dollars in Thousands) Passbook accounts $ 457 0.04 % 1.34 % $ 455 0.04 % 1.26 % NOW accounts 207,380 18.20 0.14 189,671 16.95 0.11 Money market accounts 765,253 67.15 1.04 676,848 60.48 0.91 ------------- ------------- ------------ ------------- ------------ ------------ 973,090 85.39 0.82 866,974 77.47 0.71 Certificate accounts 166,527 14.61 2.93 252,185 22.53 2.48 ------------- ------------- ------------ ------------- ------------ ----------- Deposits $ 1,139,617 100.00 % 1.18 % $ 1,119,159 100.00 % 1.09 % ============= ============= ============ ============= ============ ============
Approximately $253,823,000 and $236,007,000 of fiduciary assets under administration by Sterling Trust are included in NOW and money market accounts as of March 31, 2005 and December 31, 2004, respectively. Approximately $116,423,000 and $118,129,000 of MSCS customer assets under administration are included in NOW and money market accounts as of March 31, 2005 and December 31, 2004, respectively. Approximately $525,961,000 and $449,517,000 of deposits represent funds from 5 significant institutional relationships maintained by Matrix Bank as of March 31, 2005 and December 31, 2004, respectively. Included in certificate accounts are $161,517,000 and $247,868,000 of brokered deposits as of March 31, 2005 and December 31, 2004, respectively. 11. FHLBank Stock and Borrowings Matrix Bank obtains FHLBank advances from FHLBank of Topeka, which is the FHLBank that serves Denver, Colorado, and utilizes FHLBank of Topeka as its primary correspondent bank. Long-term advances with FHLBank of Dallas that existed at March 25, 2002, when Matrix Bank changed its domicile to Denver, Colorado, are still outstanding under their original terms. The balances of FHLBank stock are as follows:
March 31, 2005 December 31, 2004 -------------------------------------------------------- (Dollars in thousands) FHLBank of Topeka stock, at cost $ 27,090 $ 26,800 FHLBank of Dallas stock, at cost 6,729 6,681 --------------------------- ------------------------ FHLBank stock $ 33,819 $ 33,481 =========================== ======================== The balances of FHLB borrowings are as follows: March 31, 2005 December 31, 2004 -------------------------------------------------------- (Dollars in thousands) FHLBank of Topeka borrowings $ 342,000 $ 359,000 FHLBank of Dallas borrowings 137,096 147,118 --------------------------- ------------------------ FHLBank borrowings $ 479,096 $ 506,118 =========================== ========================
Available unused borrowings from FHLBank of Topeka totaled $321,007,000 at March 31, 2005. 12. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts The Company has sponsored six trusts, Matrix Bancorp Capital Trust I, Matrix Bancorp Capital Trust II, Matrix Bancorp Capital Trust III, Matrix Bancorp 14 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited) Capital Trust IV, Matrix Bancorp Capital Trust V, and Matrix Bancorp Capital Trust VI of which 100% of the common equity is owned by the Company. The trusts were formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the "capital securities") to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company (the "debentures"). The debentures held by each trust are the sole assets of that trust. Distributions on the capital securities issued by each trust are payable at either quarterly or semiannually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by the trusts are redeemable as noted below. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts are summarized as follows:
March 31, December 31, ------------------------------------ 2005 2004 ------------------------------------ (Dollars in thousands) Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts Junior subordinated debentures owed to Matrix Bancorp Capital Trust I, 10% junior subordinated debentures payable quarterly, unsecured and maturing September 30, 2029 $ 13,351 $ 13,351 Junior subordinated debentures owed to Matrix Bancorp Capital Trust II, 10.18% junior subordinated debentures payable semi-annually, unsecured and maturing June 8, 2031 12,400 12,400 Junior subordinated debentures owed to Matrix Bancorp Capital Trust III, 10.25% junior subordinated debentures payable semi-annually, unsecured and maturing July 25, 2031 15,464 15,464 Junior subordinated debentures owed to Matrix Bancorp Capital Trust IV, six-month LIBOR plus 3.75% (6.525% at December 31, 2004) junior subordinated debentures payable semi-annually, unsecured and maturing December 8, 2031 5,155 5,155 Junior subordinated debentures owed to Matrix Bancorp Capital Trust V, six-month LIBOR plus 3.625% (6.400% at December 31, 2004) junior subordinated debentures payable semi-annually, unsecured and maturing January 25, 2032 5,155 5,155 Junior subordinated debentures owed to Matrix Bancorp Capital Trust VI, interest fixed at 6.425% through October 2009, then three-month LIBOR plus 3.625%, junior subordinated debentures payable semi-annually, unsecured and maturing October 18, 2034 10,310 10,310 ------------------------------------ Total $ 61,835 $ 61,835 ====================================
The junior subordinated debentures owed to unconsolidated subsidiary trusts are more fully described in Note 14 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 13. Segment Information The Company has four reportable segments under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information": a traditional banking subsidiary, a mortgage banking subsidiary, two brokerage and consulting subsidiaries and a school services subsidiary. The remaining subsidiaries are included in the "all other" category and consist primarily of the Company's trust operations, real estate disposition services and the Parent company operations. The Company's segments are more fully described in Note 24 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 15 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) March 31, 2005 (Unaudited)
Servicing Brokerage Traditional Mortgage and School All Banking Banking Consulting Services Others Total -------------------------------------------------------------------------------------- (Dollars in thousands) Quarter ended March 31, 2005: Revenues from external customers: Interest income $ 19,248 $ 417 $ 15 $ 755 $ 231 $ 20,666 Noninterest income 2,203 3,323 2,391 483 2,826 11,226 Intersegment revenues 483 283 811 - 503 2,080 Segment income (loss) from continuing operations before income taxes 6,686 (511) 666 86 (2,709) 4,218 Quarter ended March 31, 2004: Revenues from external customers: Interest income $ 15,587 $ 1,150 $ 42 $ 1,044 $ 3 $ 17,826 Noninterest income 1,538 7,596 2,843 668 4,765 17,410 Intersegment revenues 852 270 378 3 546 2,049 Segment income (loss) from continuing operations before income taxes 5,430 (2,408) 574 63 (2,334) 1,325
14. Contingencies - Legal The Company and its subsidiaries are from time to time party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. The Company accrues liabilities when it is probable that the future costs will be incurred and such costs can be reasonably estimated. Such accruals are based upon developments to date, the Company's estimates of the outcome of these matters and its experience in contesting, litigating and settling other matters. Because the outcome of most litigation matters is inherently uncertain, the Company will generally only accrue a loss for a pending litigation matter if, for example, the parties to the matter have entered into definitive settlement agreements or a final judgment adverse to the Company has been entered. Based on evaluation of the Company's litigation matters and discussions with internal and external legal counsel, management believes than an adverse outcome on one or more of the matters noted, against which no accrual for loss has been made at March 31, 2005 unless otherwise noted, is reasonably possible but not probable, and that 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. The legal contingencies of the Company are more fully described in Note 19 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. During the quarter ended March 31, 2005, there were no material changes to the information previously reported. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Matrix Bancorp, Inc. (occasionally referred to in this document, on a consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, trust activities, lending activities, mortgage banking and other fee-based services. Our traditional banking activities include originating and servicing commercial, multi-family, construction and Small Business Administration ("SBA") loans, purchasing and servicing residential and SBA loans, and providing a broad range of depository services. Our trust activities focus primarily on the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. Our mortgage banking activities consist of purchasing and selling residential mortgage loans; offering brokerage, consulting and analytical services to financial services companies and financial institutions, and servicing residential mortgage portfolios for investors through a subservicing arrangement. Our other fee-based services and lending activities include providing real estate brokerage services, primarily on foreclosed residential real estate on behalf of unaffiliated financial institutions, and providing outsourced business services to charter schools. We also offer a limited amount of financing to charter schools for the purchase of school sites and equipment. Our primary operating subsidiaries are: Matrix Capital Bank; Matrix Financial Services Corporation; Matrix Bancorp Trading, Inc.; MTXC Realty Corp. (formerly known and Matrix Asset Management Corporation); ABS School Services, L.L.C, operating as The GEO Group; Sterling Trust Company; and First Matrix Investment Services Corp. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank, Matrix Financial and ABS; o brokerage and consulting fees generated by Matrix Bancorp Trading and First Matrix; o gains on sales of mortgage loans generated by Matrix Bank and Matrix Financial; o gain on sales of multi-family and SBA loans and pools at Matrix Bank; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust and Matrix Bank; o service fees generated by MTXC Realty and our equity earnings under the equity method of accounting of our minority interest in Matrix Asset Management, LLC; and o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates and the effect of these changes on our interest margins, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are affected to a lesser extent by interest rates and more by competition and general market conditions. Sale of Majority Interest in Matrix Asset Management Corporation On September 10, 2004, the Company entered into a Contribution and Sale Agreement to sell substantially all of the assets and operations of its real estate disposition and management services business line. After the sale, we retained a 25% interest in the new company, as well as our remaining operations in Matrix Asset Management Corporation, now known as MTXC Realty Corp. See complete discussion of the sale and impact on continuing operations in "Item 1. 17 Business - Sale of Majority Interest in Matrix Asset Management Corporation," and Note 3 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. The 25% ownership interest retained is accounted for using the equity method of accounting, and the equity earnings reflected in other income for the quarter ended March 31, 2005 are $110 thousand. Sale of Interest in Matrix Settlement and Clearance Services, LLC On November 30, 2004, the Company and certain of its subsidiaries entered into definitive agreements to sell our 45% membership interest in Matrix Settlement and Clearance Services, LLC, as well as substantially all of the assets of the trust operations of Matrix Bank. In consideration for the sale of our 45% membership interest, the Company has received approximately 5% of the outstanding common stock of the new company. This portion of the transaction closed December 1, 2004. The 5% ownership interest retained is accounted for using the cost basis of accounting. See complete discussion of the sale and impact on continuing operations in "Item 1. Business - Sale of Interest in Matrix Settlement and Clearance Services, LLC," and Note 4 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. In consideration of the sale of the assets of the trust operations of Matrix Bank, the new company will issue common stock of approximately 2% of their outstanding common stock. Consummation of the sale of the assets of the trust operations of Matrix Bank closed April 30, 2005, for a gain on sale of approximately $300 thousand. Sale of Matrix Capital Bank Branches The Company, through its wholly owned subsidiary Matrix Bank, closed the sale of its two branches in Las Cruces, New Mexico on May 1, 2004. The sale included deposits of the Las Cruces branches that totaled approximately $78.5 million, and loans of approximately $22.8 million, as well as the real estate, equipment and leases associated with the Las Cruces branches. The Company through its wholly owned subsidiary Matrix Bank, closed the sale of its branch in Sun City, Arizona on November 1, 2004. The sale included deposits of the Sun City branch that totaled approximately $104.0 million, a nominal amount of loans, as well as the real estate, equipment and leases associated with the branch. See complete discussion of the sale and impact on continuing operations in "Item 1. Business - Sale of Matrix Capital Bank Branches," and Note 5 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. Discontinued Operations - Sale of Wholesale Production Platform On September 2, 2003, we announced the final closing and substantial completion of the sale by Matrix Financial of substantially all of its assets associated with its wholesale mortgage origination platform. See complete discussion of the sale and impact on continuing and discontinued operations in "Item 1. Business - Discontinued Operations" and Note 6 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. The operations of the production platform, included in income from discontinued operations, net of tax effect totaled approximately $140 thousand for the quarter ended March 31, 2004. There is no income from discontinued operations for the quarter ended March 31, 2005. Critical Accounting Policies The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in "Item 7. Critical Accounting Policies" and Note 2 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004, and along with the disclosures presented in other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgment and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. 18 The Company views the determination of the allowance for loan and valuation losses as a critical accounting policy that requires significant judgments, assumptions and estimates used in the preparation of its consolidated financial statements. See discussion as noted above and at "Asset and Liability Management, Analysis of Allowance for Loan and Valuation Losses" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed description of the Company's process and methodology related to the allowance for loan and valuation losses. The Company considers the valuation of mortgage servicing rights and loans held for sale to be a critical accounting policy that requires judgments, assumptions and estimates used in the preparation of its consolidated financial statements. See discussion at "Item 1. Business - Mortgage Servicing Activities" and "Item 7. - Asset and Liability Management" in the Company's Form 10-K for the year ended December 31, 2004, and see discussion as noted above and in Note 2 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004 for a detail concerning the valuation of mortgage servicing rights and the lower of cost or market valuation of loans held for sale. The Company also considers the judgments and assumptions concerning litigation as a critical accounting policy. The Company has been notified that we are a defendant in a number of legal proceedings. Most of these cases involve ordinary and routine claims incidental to our business. For a full description of such proceedings, see "Item 3. Legal Proceedings" in the Company's Form 10-K for the year ended December 31, 2004. With respect to all pending litigation matters, our ultimate legal responsibility, if any, cannot be estimated with certainty. Based on the ultimate outcome of such proceedings, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to such proceedings. Forward-Looking Statements Certain statements contained in this interim report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this interim report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to ongoing or future litigation or bankruptcy matters; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; unanticipated developments in connection with the bankruptcy actions or litigation mentioned 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 Form 10-K for the year ended December 31, 2004 and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on March 14, 2005; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. Comparison of Results of Operations for the Quarters Ended March 31, 2005 and 2004 Income from Continuing Operations. For the quarter ended March 31, 2005, we reported income from continuing operations of $2.9 million, or $0.44 per diluted share, as compared to $1.2 million, or $0.18 per diluted share, for the quarter ended March 31, 2004. Our income for the quarter ended March 31, 2005 is primarily due to positive performance in our traditional banking and other core operations. 19 Net Interest Income. Net interest income before provision for loan and valuation losses increased $1.2 million, or 11.0%, to $11.5 million for the quarter ended March 31, 2005 as compared to $10.3 million for the quarter ended March 31, 2004. Our net interest margin, however, decreased 5 basis points to 2.65% for the quarter ended March 31, 2005 from 2.70% for the quarter ended March 31, 2004. The increase in net interest income before provision for loan valuation losses was attributable to an overall increase in the Company's average balance of interest-earning assets to $1.74 billion for the quarter ended March 31, 2005 as compared to $1.54 billion for the quarter ended March 31, 2004, and an increase in the yield on those interest-earning assets of 12 basis points to 4.76% for the quarter ended March 31, 2005 as compared to 4.64% for the quarter ended March 31, 2004. The effect of the increase in the net interest-earning assets was offset by an increase in our average interest-bearing liabilities to $1.52 billion for the quarter ended March 31, 2005 as compared to $1.36 billion at March 31, 2004, and on which we had a 21 basis point increase in the cost of our interest-bearing liabilities to 2.41% for the quarter ended March 31, 2005 as compared to 2.20% for the quarter ended March 31, 2004. The greater increase in our cost of interest-bearing liabilities than the yield on interest-earning assets caused our interest rate spread to decrease to 2.35% for the quarter ended March 31, 2005 from 2.44% for the quarter ended March 31, 2004. The increases in the yields were in response to the increase in the overall interest rate environment. The compression of our interest rate margin is due primarily to our focus on the acquisition of adjustable rate loans which tend to have lower initial interest rates, but are a strategically positive match from an interest rate risk perspective to our liability base. See further discussion at "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 $470 thousand to $830 thousand for the quarter ended March 31, 2005 as compared to $1.3 million for the quarter ended March 31, 2004. The decrease in the provision was mainly due to the quarter ended March 31, 2004 including additional loan reserves at Matrix Bank and Matrix Financial that are not present in the quarter ended March 31, 2005 as nonperforming assets are declining at both subsidiaries. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "Asset Quality--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Loan administration fees decreased $1.7 million, or 35.0%, to $3.0 million for the quarter ended March 31, 2005 as compared to $4.7 million for the quarter ended March 31, 2004. Loan service fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio decreased to an average balance of $2.21 billion for the quarter ended March 31, 2005 as compared to an average balance of $3.06 billion for the quarter ended March 31, 2004. The decrease was also due to a decrease in the average service fee rate (including all ancillary income) to 0.52% for the first quarter of 2005 as compared to 0.58% for the first quarter of 2004. The Company anticipates loan administration fees to continue to decrease as its servicing portfolio decreases through normal prepayments. Effective December 1, 2004, the servicing functions of Matrix Financial were transferred and are performed by a third-party subservicer which allows us to control our overall cost structure but is not expected to impact loan administration fees. Brokerage Fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage loans and mortgage servicing rights and SBA trading fees. Brokerage fees decreased by $200 thousand, or 6.8%, to $2.7 million for the quarter ended March 31, 2005 as compared to $2.9 million for the quarter ended March 31, 2004. The decrease was primarily the result of lower activity at First Matrix in the acquisition, pooling and selling of SBA loans and securities due to market conditions. Trust Services. Trust service fees increased $560 thousand, or 28.9%, to $2.5 million for the quarter ended March 31, 2005 as compared to $1.9 million for the quarter ended March 31, 2004. Trust accounts under administration at Sterling Trust and Matrix Bank increased to 62,282 at March 31, 2005 from 52,470 at March 31, 2004 and total assets under administration increased to over $18.3 billion at March 31, 2005 from $14.1 billion at March 31, 2004. Most of the growth is driven by business referred to Matrix Bank's trust department by Matrix Settlement & Clearance Services, LLC. As noted in Item 2. "Sale of Interest in Matrix Settlement and Clearance Services, LLC" above, the assets and operations of the trust department at Matrix Bank were sold, effective April 30, 2005, to the purchaser of our interest in Matrix Settlement and Clearance Services, LLC. As a result, we anticipate our future trust services revenues will decrease. Real Estate Disposition Services. Real estate disposition services for the quarter ended March 31, 2005 total $420 thousand, and represent fees earned by MTXC Realty Corp. for real estate brokerage services provided on foreclosed properties owned by third party financial services companies and financial 20 institutions in the Denver metro area. Real estate disposition services income for the quarter ended March 31, 2004 of $2.4 million represented fees earned by Matrix Asset Management Corporation for real estate management and disposition services provided to third party financial services companies. As discussed in Item 2, "Sale of Majority Interest in Matrix Asset Management Corporation" above, the decrease in revenue of $2.0 million, or 82.3% represents the impact of the sale of our majority interest in Matrix Asset Management Corporation. As noted, the sale is expected to cause real estate disposition services revenues to continue to decrease in 2005 when compared to 2004 levels. Gain on Sale of Loans and Securities. Gain on sale of loans and securities decreased $1.4 million to $750 thousand for the quarter ended March 31, 2005 as compared to $2.1 million for the quarter ended March 31, 2004. Gains on sale of loans and securities include gains on the sale of repurchased FHA and VA loans which represent delinquent loans purchased out of loan pools on which Matrix Financial acts as servicer, and then re-sells into the secondary market, gains on the sale of originated SBA and multi-family loans primarily from the portfolio at Matrix Bank. Gains on sale of loans and securities can fluctuate significantly from quarter to quarter based on a variety of factors, such as the current interest rate environment, the supply and mix of loan or securities portfolios available in the market, and as market conditions dictate, the particular loan portfolios we elect to sell. School Services. School services income represents fees earned by ABS, operating as The GEO Group, for outsourced business and consulting services provided primarily to charter schools. School services income decreased approximately $190 thousand, or 28.0%, to $480 thousand for the quarter ended March 31, 2005 as compared to $670 thousand for the quarter ended March 31, 2004. The decrease is due to a lesser number of clients served. Other Income. Other income, which includes equity in earnings of unconsolidated subsidiaries, income earned on bank owned life insurance, rental income, mortgage servicing net hedging gains and losses and other miscellaneous items, decreased $1.4 million, or 52.2%, to $1.3 million for the quarter ended March 31, 2005 as compared to $2.7 million for the quarter ended March 31, 2004. The decrease is primarily due to decreased income generated due to the sale of our equity investment in Matrix Settlement and Clearance Services discussed above which was approximately $380 thousand in the first quarter of 2004, offset by equity income generated by our 25% investment in the new company formed from the sale of our majority interest in Matrix Asset Management Corporation discussed above, which generated $110 thousand of revenue for the first quarter of 2005. Other fluctuations for the quarter ended March 31, 2005 included decreased hedging gains and other miscellaneous income at Matrix Financial due to the removal of our hedge on mortgage servicing rights asset in 2004, which were approximately $1.3 million in the first quarter of 2004. Remaining fluctuations are based on the nature of the accounts reflected in other income driven primarily by market conditions. Noninterest Expense. Noninterest expense decreased $7.4 million, or 29.7%, to $17.7 million for the quarter ended March 31, 2005 as compared to $25.1 million for the quarter ended March 31, 2004. This decrease was predominantly due to decreases in the level of amortization of mortgage servicing rights asset and a recovery of the previously recorded impairment charge on our mortgage servicing asset, as well as reductions in compensation and benefits costs and other general and administrative expenses due to the restructuring the Company implemented in 2004. The following table details the major components of noninterest expense for the periods indicated:
Quarter Ended March 31, ------------------------------------------------------ 2005 2004 ------------------------------------------------------ (Dollars in thousands) Compensation and employee benefits $ 6,876 $ 8,960 Amortization of mortgage servicing rights 1,774 4,671 Occupancy and equipment 1,272 1,559 Postage and communication 408 587 Professional fees 726 737 Mortgage rights subservicing fees 825 - Data processing 315 623 Subaccounting fees 2,652 1,851 (Recovery of) impairment on mortgage servicing rights, net (175) 1,156 Other general and administrative 2,991 4,991 -------------------------- -------------------------- Total $ 17,664 $ 25,135 ========================== ==========================
21 Compensation and employee benefits expense decreased $2.1 million, or 23.3%, to $6.9 million for the quarter ended March 31, 2005 as compared to $9.0 million for the quarter ended March 31, 2004. This decrease was primarily due to a decrease in the overall number of employees by 220 employees to 314 employees at March 31, 2005 as compared to 534 employees at March 31, 2004. The decrease was principally due to employees who worked for Matrix Financial Services whose positions were eliminated with the transfer of servicing to a third party subservicer, and former employees of Matrix Asset Management Corporation who moved to the new company formed from the sale of our majority interest in Matrix Asset Management Corporation as discussed above. Amortization of mortgage servicing rights decreased $2.9 million, or 62.0%, to $1.8 million for the quarter ended March 31, 2005 as compared to $4.7 million for the quarter ended March 31, 2004. 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 cause of the decrease was a combination of a decrease in the average balance in our mortgage servicing rights portfolio to $2.2 billion at March 31, 2005 as compared to $3.1 billion at March 31, 2004, and in response to the increasing interest rate environment, prepayment speeds on our servicing portfolio decreased to an average of 19.8% for the quarter ended March 31, 2005 as compared to 28.2% for the quarter ended March 31, 2004. Impairment on mortgage servicing rights reflects a recovery of the impairment for the quarter ended March 31, 2005 of $175 thousand as compared to an impairment charge of $1.2 million for the quarter ended March 31, 2004. The Company is required to record its investment in mortgage servicing rights at the lower of cost or fair value. The fair value of mortgage servicing rights is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its mortgage servicing rights by product type and investor, among other things, to reflect the predominant risks. To determine the fair value of its investment, the Company uses a valuation model that calculates the present value of future cash flows. Due to changes in the interest rate environment, among other factors, a recovery of the impairment was recorded during the quarter ended March 31, 2005. It is not possible to estimate if future impairments or recoveries of those impairments will occur, and further changes in market interest rates, or increases in anticipated future prepayment speeds, may cause additional impairment charges in future periods. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, mortgage rights subservicing fees, data processing costs, subaccounting fees and other general and administrative expenses, decreased approximately $1.2 million, or 11.2%, to $9.2 million for the quarter ended March 31, 2005 as compared to $10.4 million for the quarter ended March 31, 2004. The decrease was primarily due to decreases in other general and administrative expenses as a result of the impact of the restructuring undergone by the Company in 2004, including the sales of subsidiaries and Matrix Bank branches noted above, and due to the first quarter of 2004 including certain charges in other general and administrative expenses due to market conditions that are not present in 2005. These decreases were partially offset by increases in subaccounting fees at Matrix Bank due to increases in the levels of institutional deposits held on which subaccounting services are incurred and in the level of fees, which generally move with balances and changes in the targeted Fed Funds rate. Income Taxes. Provision for income taxes is $1.3 million for the quarter ended March 31, 2005 as compared to $160 thousand for the quarter ended March 31, 2004. Our effective tax rate is 30.8% for the quarter ended March 31, 2005. The effective tax rates are affected by the level of tax-exempt income at ABS and Matrix Bank in proportion to the level of net income from continuing operations, as well as utilization of tax credits generated by a subsidiary of Matrix Bank. The net tax exempt income was approximately $730 thousand and $1.0 million for the quarters ended March 31, 2005 and 2004, respectively. Average Balance Sheet The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Average interest rate information for the quarters ended March 31, 2005 and 2004 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. 22
Quarter Ended March 31, 2005 2004 --------------------------------- --------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ---------- ---------- ---------- --------- ---------- (Dollars in thousands) Assets Interest-earning assets: Loans receivable $ 1,381,270 $ 16,319 4.73 % $ 1,368,959 $ 16,059 4.69 % Securities 317,362 3,996 5.04 134,805 1,538 4.56 Interest-earning deposits 3,539 14 1.58 2,316 3 0.52 FHLBank stock 33,485 337 4.03 29,817 226 3.03 ------------ ---------- ---------- ------------ --------- ----------- Total interest-earning assets 1,735,656 20,666 4.76 % 1,535,897 17,826 4.64 % Noninterest-earning assets: Cash 51,091 55,855 Allowance for loan and valuation losses (11,190) (9,923) Premises and equipment 18,873 24,818 Other assets 104,667 132,795 ------------ ------------ Total noninterest-earning assets 163,441 203,545 ------------ ------------ Total assets $ 1,899,097 $ 1,739,442 ============ ============ Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts $ 450 2 1.33 % $ 5,930 19 1.28 % Money market and NOW accounts 697,884 1,893 1.09 584,794 1,092 0.75 Certificates of deposit 187,170 1,373 2.93 201,968 1,549 3.07 FHLBank borrowings 541,604 4,142 3.06 452,037 2,562 2.27 Borrowed money and junior subordinated debentures 93,061 1,767 7.60 114,813 2,255 7.86 ------------ ---------- ---------- ------------ --------- ---------- Total interest-bearing liabilities 1,520,169 9,177 2.41 % 1,359,542 7,477 2.20 % Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances) 272,422 286,950 Other liabilities 13,141 22,859 ------------ ------------ Total noninterest-bearing liabilities 285,563 309,809 Shareholders' equity 93,365 70,091 ------------ ------------ Total liabilities and shareholders' equity $ 1,899,097 $ 1,739,442 ============ ============ Net interest income before provision for loan and valuation losses $ 11,489 $ 10,349 ========== ========= Interest rate spread 2.35 % 2.44 % ========== =========== Net interest margin 2.65 % 2.70 % ========== =========== Ratio of average interest-earning assets to average interest-bearing liabilities 114.18 % 112.97 % ========== ===========
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. 23
Quarter Ended March 31, 2005 vs. 2004 --------------------------------------------- Increase (Decrease) Due to Change in --------------------------------------------- Volume Rate Total ------------- ------------- --------------- (In thousands) Interest-earning assets: Loans receivable, net $ 137 $ 123 $ 260 Securities 2,282 176 2,458 Interest-earning deposits 3 8 11 FHLBank stock 30 81 111 ------------- ------------- --------------- Total interest-earning assets 2,452 388 2,840 Interest-bearing liabilities: Passbook accounts (19) 1 (18) Money market and NOW accounts 237 565 802 Certificates of deposit (109) (67) (176) FHLBank borrowings 572 1,008 1,580 Borrowed money (416) (72) (488) ------------- ------------- --------------- Total interest-bearing liabilities 265 1,435 1,700 ------------- ------------- --------------- Change in net interest income before provision for loan and valuation losses $ 2,187 $ (1,047) $ 1,140 ============= ============= ===============
Asset Quality Nonperforming Assets As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are generally placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate arises primarily through foreclosure on mortgage loans owned.
March 31, December 31, March 31, 2005 2004 2004 --------------------------------------------------------------------- (Dollars in thousands) Nonaccrual residential mortgage loans $ 13,133 $ 12,157 $ 17,293 Nonaccrual commercial real estate, commercial loans and school financing 15,925 19,148 22,892 Nonaccrual consumer loans 77 40 - ---------------- ---------------- ----------------- Total nonperforming loans 29,135 31,345 40,185 Foreclosed real estate 3,999 2,955 8,372 ---------------- ---------------- ----------------- Total nonperforming assets $ 33,134 $ 34,300 $ 48,557 ================ ================ ================= Total nonperforming loans to total loans 2.15 % 2.27 % 3.12 % Total nonperforming assets to total assets 1.78 % 1.82 % 2.77 % Ratio of allowance for loan and valuation losses to total nonperforming loans 39.20 % 35.64 % 26.10 %
We accrue for interest on government sponsored loans such as FHA insured and VA guaranteed loans that are past due 90 or more days, as generally the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government sponsored accruing loans that were past due 90 or more days was $13.8 million, $18.1 million and $17.9 million at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. Nonaccrual residential mortgage loans as a percentage of total loans were 1.0% at March 31, 2005, 0.9% at December 31, 2004, and 1.3% at March 31, 2004. The nonaccrual residential mortgage loans increased approximately $1.0 million as compared to December 31, 2004. This increase is borrower specific and does not appear to be due to any specific market conditions that affect the remainder of the portfolio. 24 The nonaccrual commercial loans and school financing at March 31, 2005 decreased as compared to December 31, 2004. Nonaccrual school financing and commercial loans are discussed further below. With regard to our school financing, a majority of our origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. The balance of these loans in nonaccrual status decreased to $4.1 million at March 31, 2005 as compared to $5.6 million at December 31, 2004. Based on current information, we believe that reserves are sufficient for any potential losses. The decrease was due to the repayment of one previously held nonaccrual loan during the first quarter of 2005. See further discussion of the nonaccrual school financing loans in "Item 7. - Asset and Liability Management-Nonperforming Assets" in the Company's Form 10-K for the year ended December 31, 2004. With regard to the nonaccrual commercial loans, the balance of these loans in nonaccrual status decreased to $11.9 million at March 31, 2005 as compared to $13.6 million at December 31, 2004. Based on current information, we believe that there are sufficient reserves for any potential loss. The decrease is due to repayments, reinstatements and foreclosures primarily in the SBA portfolio during the first quarter 2005. See further discussion of the nonaccrual commercial loans in "Item 7. - Asset and Liability Management-Nonperforming Assets" in the Company's Form 10-K for the year ended December 31, 2004. The percentage of the allowance for loan losses to nonaccrual loans varies due to the nature of our portfolio of loans. We analyze the allowance for loan losses related to the nonaccrual loans by loan type, historical loss experience and loans measured for impairment. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. See "--Comparison of Results of Operations for the Quarters Ended March 31, 2005 and 2004." 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 Company is reliant on dividend and tax payments from its subsidiaries in order to fund operations, meet debt and tax 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. The current dividend policy approved by Matrix Bank is 75% of the consolidated cumulative earnings of Matrix Bank. Absent these dividend payments, the Company may utilize the line of credit on its bank stock loan, as needed, to meet its own and the other subsidiaries financial obligations. As of March 31, 2005, the entire amount of the line of credit of $12,000,000 is available. The line of credit was renewed effective March 31, 2005, which extended the maturity to March 31, 2006. Additionally, under a strategy implemented in 2003, liquidation of certain loans receivable at ABS are anticipated to generate cash to be distributed to the Company, consistent with the Company's experience in 2004. In the third and fourth quarter of 2004, due to the sale of our majority interest in Matrix Asset Management Corporation and our interest in Matrix Settlement and Clearance Services, as discussed above, dividends of the sales proceeds were paid by these subsidiaries to the Company. This level of dividends for these specific subsidiaries is not anticipated to be repeated in 2005. Matrix Bank's liquidity needs are expected to be met primarily through borrowings from the FHLBank, as well as institutional deposits and custodial escrow deposits held at Matrix Bank. 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. At March 31, 2005, Matrix Bank had overnight and term borrowings of $479.1 million from the FHLBank of Topeka and Dallas. Matrix Bank also utilizes brokered deposits as a source of liquidity. The balance of brokered deposits at March 31, 2005 was $161.5 million. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. Matrix Bank, a well capitalized institution, had a leverage capital ratio of 6.64% at March 31, 2005. This exceeds the well capitalized leverage capital requirement of 5.0% of adjusted assets by $29.5 million. Matrix Bank's risk-based capital ratio was 13.22% at March 31, 2005, which exceeds the well capitalized risk-based capital requirement of 10.0% of risk-weighted assets by $31.0 million. 25 ABS' principal source of funding for school financings are internal capital, sales of loans to third party institutions 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. The facility currently outstanding has a balance of approximately $14.2 million and matures in September 2005. We are in the process of renewing the facility, but there can be no assurances that the facility will be renewed. We continue to pursue additional third party financing and sales options for ABS. We do not anticipate significantly increasing our current loan portfolio. Under a purchase and sale agreement, ABS has sold school financings to an unaffiliated financial institution, with full recourse to ABS. ABS services the school financings on a scheduled/scheduled remittance and in the case of a loss or default, upon the liquidation of the underlying collateral, ABS is required to reimburse the unaffiliated financial institution for any shortfall. Due to the control the unaffiliated financial institution has over the school financing, the transaction was accounted for as a sale. The recourse provisions were considered by us at the time of the sale. No gain or loss was booked at the sale date as the loans were sold at their carrying value. The total balance of the school financings sold with recourse is $7.1 million at March 31, 2005. Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements During the quarter ended March 31, 2005, there were no material changes outside of the normal course of business to the quantitative and qualitative disclosures about contractual obligations, commitments, contingent liabilities and off-balance sheet arrangements previously reported in the Annual Report contained in the Company's Form 10-K for the year ended December 31, 2004. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. See Notes 10 and 11to the Condensed Consolidated Financial Statements herein for detail on the balances of deposit liabilities and FHLBank borrowings as of March 31, 2005. Item 3. Quantitative and Qualitative Disclosures About Market Risk During the quarter ended March 31, 2005, there were no material changes to the quantitative and qualitative disclosures about market risk previously reported in the Annual Report contained in the Company's Form 10-K for the year ended December 31, 2004. 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 Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. Item 4. Controls and Procedures Management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(b) of the Securities Exchange Act of 1934. As of March 31, 2005, an evaluation was performed under the supervision and with the participation of the Company's management, including the Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management concluded that the Company's disclosure controls and procedures as of March 31, 2005 were effective in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported within the time period required by the SEC's rules and forms. There have been no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 26 Part II - Other Information Item 1. Legal Proceedings During the quarter ended March 31, 2005, there were no material changes to the information previously reported in the Company' Annual Report on Form 10-K for the year ended December 31, 2004. See Item 3. "Legal Proceedings" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2005, there were no changes to the information previously reported in the Annual Report contained in the Company's Form 10-K for the year ended December 31, 2004. See Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. Item 6. Exhibits (a) Exhibits *10.1 Seventh Amendment to Credit Agreement, dated as of March 31, 2005, by and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders. *31.1 Certification by D. Mark Spencer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification by Richard V. Schmitz pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.3 Certification by David W. Kloos pursuant to Rule 13a-14(a) or Rule 15d-14(a), 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. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX BANCORP, INC. Dated: May 5, 2005 /s/ D. Mark Spencer ----------- ---------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) Dated: May 5, 2005 /s/ Richard V. Schmitz ----------- ---------------------------------------- Richard V. Schmitz Co-Chief Executive Officer Dated: May 5, 2005 /s/ David W. Kloos ----------- ---------------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 28 INDEX TO EXHIBITS Exhibit Number Description - ------- --------------------------------------------------------------------- *10.1 Seventh Amendment to Credit Agreement, dated as of March 31, 2005, by and between Matrix Bancorp, Inc., as borrower, and U.S. Bank National Associaiton, as agent, and certain lenders, as lenders. *31.1 Certification by D. Mark Spencer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification by Richard V. Schmitz pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.3 Certification by David W. Kloos pursuant to Rule 13a-14(a) or Rule 15d-14(a), 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. EX-31 2 may2005ex-31spencer.txt EXHIBIT 31.1, 302 CERTIFICATION BY CEO 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this 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: 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 controls over financial reporting. /s/ D. Mark Spencer --------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) May 5, 2005 EX-31 3 may2005ex-31schmitz.txt EXHIBIT 31.2, 302 CERTIFICATION BY CEO 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this 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: 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 controls over financial reporting. /s/ Richard V. Schmitz --------------------------------------- Richard V. Schmitz Co-Chief Executive Officer May 5, 2005 EX-31 4 may2005ex-31kloos.txt EXHIBIT 31.3, 302 CERTIFICATION BY CFO 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this 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: 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 controls over financial reporting. /s/ David W. Kloos ------------------------------------------------ David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) May 5, 2005 EX-32 5 may2005ex-32spencer.txt EXHIBIT 32.1, 906 CERTIFICATION BY CEO 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 quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, D. Mark Spencer, President and Co-Chief Executive Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 5, 2005 /s/ D. Mark Spencer --------------------------------------- Name: D. Mark Spencer Title: President and Co-Chief Executive Officer EX-32 6 may2005ex-32schmitz.txt EXHIBIT 32.2, 906 CERTIFICATION BY CEO 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 quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard V. Schmitz, Co-Chief Executive Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 5, 2005 /s/ Richard V. Schmitz ---------------------------------- Name: Richard V. Schmitz Title: Co-Chief Executive Officer EX-32 7 may2005ex-32kloos.txt EXHIBIT 32.3, 906 CERTIFICATION BY CFO 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 quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Kloos, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 5, 2005 /s/ David W. Kloos ----------------------------------------------- Name: David W. Kloos Title: Senior Vice President and Chief Financial Officer EX-10 8 fq2005-exhibit10.txt EXHIBIT 10.1, SECOND AMENDMENT Exhibit 10.1 SEVENTH AMENDMENT TO CREDIT AGREEMENT This SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and entered into as of March 31, 2005, is by and between MATRIX BANCORP, INC., a Colorado corporation (the "Borrower"), the lenders from time to time party hereto (each a "Lender" and collectively, the "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, together with any successor agents appointed hereunder, the "Agent"). RECITALS A. The Borrower, the Agent and the Lenders, entered into a Credit Agreement dated as of December 27, 2000, as amended by a First Amendment to Credit Agreement dated as of March 5, 2001, a Second Amendment to Credit Agreement dated as of July 27, 2001, a Third Amendment to Credit Agreement dated as of December 26, 2001, a Fourth Amendment to Credit Agreement dated as of March 31, 2002, a Fifth Amendment dated as of March 31, 2003 and a Sixth Amendment dated as of March 31, 2004 (as amended, the "Credit Agreement"); and B. The Borrower desires to amend certain provisions of the Credit Agreement, and the Lenders and Agent have agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require. Section 2. Amendments. Section 2.1 Definitions. Section 1.1 of the Credit Agreement is amended by deleting the definition of "Termination Date" as it appears therein and substituting the following in lieu thereof: "Termination Date": The earliest of (a) March 31, 2006, (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amounts are reduced to zero pursuant to Section 2.8 hereof. Section 2.2 Term Loan Maturity Date. Section 2.6(b) of the Credit Agreement is hereby amended by deleting the date "December 31, 2006" contained in the fifth line thereof and replacing such date with "December 31, 2007." Section 2.3 Indebtedness. Section 6.10 of the Credit Agreement is hereby amended to add the following Section 6.10(r): (r) Indebtedness in the form of a guaranty by the Borrower of not more than $20,000,000 of Indebtedness owing from ABS School Services, L.L.C., a subsidiary of the Borrower, to Compass Bank and Vectra Bank. Section 3. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective as of the date first above written provided the Agent shall have received at least two (2) counterparts of this Amendment, duly executed by the Borrower and all of the Lenders, and the Agent shall have received the following, each duly executed or certified: Section 3.1 This Amendment duly executed by the Borrower. Section 3.2 A copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Articles of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were previously delivered to the Lender with a certificate of the secretary of the Borrower and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. Section 3.3 The Consent and Agreement of Guarantors, in the form prescribed by the Agent, duly executed by each Guarantor. Section 3.4 The Borrower shall have satisfied such other conditions as specified by the Agent and the Lenders, including payment of all unpaid legal fees and expenses incurred by the Agent through the date of this Amendment in connection with the Credit Agreement and the Amendment Documents. Section 4. [Reserved]. Section 5. Representations, Warranties, Authority, No Adverse Claim. Section 5.1 Reassertion of Representations and Warranties, No Default. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit Agreement, and (b) there will exist no Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Agent and the Lenders. Section 5.2 Authority, No Conflict, No Consent Required. The Borrower represents and warrants that the Borrower has the power and legal right and -2- authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Borrower is a party or a signatory or a provision of the Borrower's Articles of Incorporation, Bylaws or any other agreement or requirement of law in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Borrower or any of its property except, if any, in favor of the Agent on behalf of the Lenders. The Borrower represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Borrower of the Amendment Documents or other agreements and documents executed and delivered by the Borrower in connection therewith or the performance of obligations of the Borrower therein described, except for those which the Borrower has obtained or provided and as to which the Borrower has delivered certified copies of documents evidencing each such action to the Agent. Section 5.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees that no events have taken place and no circumstances exist at the date hereof which would give the Borrower a basis to assert a defense, offset or counterclaim to any claim of the Agent or the Lenders with respect to the Obligations or the Borrower's obligations under the Credit Agreement as amended by this Amendment. Section 6. Affirmation of Credit Agreement, Further References. The Agent, the Lenders, and the Borrower each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. All of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower. Section 7. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. Section 8. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto -3- shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 9. Successors. The Amendment Documents shall be binding upon the Borrower, the Lenders, and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Lenders, and the Agent and the successors and assigns of the Lenders and the Agent. Section 10. Legal Expenses. As provided in Section 9.2 of the Credit Agreement, the Borrower agrees to reimburse the Agent, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Borrower under the Amendment Documents, and to pay and save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Borrower shall survive any termination of the Credit Agreement. Section 11. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. Section 12. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. Section 13. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] -4- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MATRIX BANCORP, INC. By /s/ David W. Kloos ---------------------------------- Name: David W. Kloos Title: SVP and CFO U.S. BANK NATIONAL ASSOCIATION By /s/ Randy S. Baker ----------------------------------- Name: Randy S. Baker Title: Vice President [Signature Page to Seventh Amendment to Credit Agreement] S - 1 -----END PRIVACY-ENHANCED MESSAGE-----