10-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 1380 Lawrence Street, Suite 1400 80204 Denver, Colorado (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (303) 595-9898 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share (Title of class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of March 2, 2001, 6,525,904 shares of common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing sales price of such stock on the NASDAQ National Market on March 1, 2001, was $23,967,808. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held May 11, 2001 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS Page ---- PART I Item 1. Business...............................................................3 Item 2. Properties............................................................23 Item 3. Legal Proceedings.....................................................24 Item 4. Submission of Matters to a Vote of Security Holders...................26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................................................26 Item 6. Selected Financial Data...............................................27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................28 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............49 Item 8. Financial Statements and Supplementary Data...........................49 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................................49 PART III Item 10. Directors and Executive Officers of the Registrant....................49 Item 11. Executive Compensation................................................49 Item 12. Security Ownership of Certain Beneficial Owners and Management........49 Item 13. Certain Relationships and Related Transactions........................49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......49
PART I Item 1. Business Matrix Bancorp, Inc. General. Matrix Bancorp, Inc. (occasionally referred to in this document, on a consolidated basis, as "us," "we," the "Company" or similar terms), is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, mortgage banking, trust and clearing activities and other fee-based services and lending activities. Our traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository services. Our mortgage banking activities consist of purchasing and selling residential mortgage loans and residential mortgage servicing rights; offering brokerage, consulting and analytical services to financial services companies and financial institutions; servicing residential mortgage portfolios for investors; originating residential mortgages; and providing real estate management and disposition services. Our trust and clearing activities focus primarily on the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts, as well as offering specialized custody and clearing services to banks, trust companies, broker-dealers, third party administrators and investment professionals. Our other fee-based services and lending activities include providing outsourced business services, such as budgeting, governmental reporting, accounts payable, payroll, facility and safety management and comprehensive insurance programs to charter schools. We also offer financing to charter schools for the purchase of school sites and equipment. Matrix Bancorp was incorporated in Colorado in June 1993 and was formerly called "Matrix Capital Corporation." The trading symbol for our common stock on the NASDAQ National Market is "MTXC." The Subsidiaries Our core business operations are conducted through the seven operating subsidiaries and an investment in a settlement and clearing operation described below. See Note 22 to the consolidated financial statements included elsewhere in this document for a presentation of financial information by industry segment. Matrix Capital Bank. With its main office in Las Cruces, New Mexico, full service branches in Sun City, Arizona and Las Cruces, New Mexico, and loan offices in Phoenix, Arizona and Denver and Evergreen, Colorado, Matrix Bank serves its local communities by providing a broad range of personal and business depository services, offering residential loans and providing consumer and commercial real estate loans, including Small Business Administration loans. For a discussion of the depository services offered by Matrix Bank, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." For a discussion of the historical loan portfolio of the Company, including that of Matrix Bank, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Lending Activities." Matrix Bank holds the noninterest-bearing custodial escrow deposits related to the residential mortgage loan portfolio serviced by Matrix Financial Services Corporation, the interest-bearing money market accounts administered by Sterling Trust Company and the deposits resulting from transactions in which Matrix Bank acts as the clearing bank for clients of Matrix Settlement & Clearance Services, L.L.C. These deposits, generated through activities of affiliates, as well as other traditional deposits, are used primarily to fund bulk purchases of residential mortgage loan portfolios throughout the United States, a substantial portion of which are serviced for Matrix Bank by Matrix Financial following their purchase. As of December 31, 2000, Matrix Bank had total assets of $1.3 billion. Matrix Bank and our other subsidiaries have significant experience in purchasing and originating mortgage loans, have familiarity with real estate markets throughout the United States and have traditionally had access to relatively low-cost deposits. We believe that the resulting knowledge and activities permit Matrix Bank to manage its funding and capital position in a way that enhances its performance. Matrix Financial Services Corporation. Matrix Financial, which became a direct, wholly owned subsidiary of Matrix Bank in August 2000, acquires mortgage servicing rights on a nationwide basis through purchases in the secondary market, services the loans underlying the mortgage servicing rights and originates mortgage loans through its wholesale loan origination network. As of December 31, 2000, Matrix Financial serviced 92,404 borrower accounts representing $5.5 billion in principal balances, excluding $1.2 billion in subservicing for companies that are unaffiliated with us. Many of these accounts were seasoned loans having lower principal and higher custodial escrow balances than newly originated mortgage loans. As a servicer of mortgage loans, Matrix Financial is required to establish custodial escrow accounts for the deposit of borrowers' payments. These custodial accounts are maintained at Matrix Bank. At December 31, 2000, the custodial escrow accounts related to our servicing portfolio maintained at Matrix Bank were $77.6 million. During 2000, Matrix Financial originated $512.5 million in residential mortgage loans primarily through its regional wholesale production offices located in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Santa Ana and St. Louis. The mortgage loans originated by Matrix Financial are typically sold in the secondary market. United Financial, Inc. United Financial provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry. These services include: o the brokering and analysis of residential mortgage loan servicing rights and residential mortgage loans; o corporate and mortgage loan servicing portfolio valuations, which includes the "mark-to-market" valuation and analysis required under Statements of Financial Accounting Standards No. 125 and No. 140; o assisting companies with the development of mortgage loan servicing retention programs in lower interest rate environments; and o to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. United Financial provides brokerage services to the mortgage banking entities of several of the nation's largest financial institutions. During 2000, United Financial brokered the sale of 143 mortgage loan servicing portfolios totaling $36.4 billion in outstanding mortgage loan principal balances. United Financial's volume of brokerage activity and the expertise of its analytics department give us access to a wide array of information relating to the mortgage banking industry, including emerging market trends, prevailing market prices, pending regulatory changes and changes in levels of supply and demand. Consequently, we are often able to identify certain types of mortgage loan and mortgage loan servicing portfolios that are well suited to our particular servicing platform, investment objectives and unique corporate structure. Matrix Asset Management Corporation. Matrix Asset Management, formerly known as United Special Services, Inc., provides nationwide real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions. In addition to the unaffiliated clients currently served by Matrix Asset Management, Matrix Financial utilizes these outsourced services offered by Matrix Asset Management exclusively in handling the disposition of foreclosed real estate for which it is responsible. As of December 31, 2000, Matrix Asset Management had approximately 950 foreclosed properties under its management. Matrix Asset Management also provides limited collateral valuation opinions to clients that are interested in assessing the value of the collateral underlying mortgage loans, as well as to clients such as Matrix Bank and other third party mortgage loan buyers evaluating potential bulk purchases of mortgage loans. Sterling Trust Company. Sterling Trust, headquartered in Waco, Texas, was incorporated in 1984 as a Texas non-bank trust company specializing in the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. As of December 31, 2000, Sterling Trust administered approximately 39,200 accounts with fiduciary assets under administration of over $3.8 billion, of which approximately $121.4 million represented deposits under administration held at Matrix Bank. First Matrix Investment Services Corporation. First Matrix is registered with the NASD as a fully disclosed broker-dealer with its headquarters in Fort Worth, Texas and a branch office in Denver, Colorado. First Matrix offers a wide range of investment options for both individual and institutional investors, including stocks, bonds, mutual funds and fixed income and debt securities. Currently, First Matrix has over $100 million in assets under management. The Fort Worth office focuses primarily on long-term investing and retirement planning. The Denver office assists primarily financial institutions in managing their investment portfolios. Denver's client base currently consists of more than 85 banks throughout the United States. ABS School Services, L.L.C. ABS provides outsourced business services to charter schools. Charter schools are public schools that are an alternative to traditional public schools. As of December 31, 2000, ABS was providing its services to approximately 150 schools. The primary services offered include fund accounting, cash management, budgeting, governmental reporting, payroll and accounts payable. Additionally, ABS offers administrative and instructional leadership, as well as consults with schools and offers assistance in the following areas: facility and safety management, technology, policy development, grant administration and comprehensive insurance programs. ABS also has a financing division, which offers financing to charter schools for the purchase of school sites and equipment. Matrix Settlement & Clearance Services, L.L.C. Much of our efforts to expand our trust, custody and clearing services have centered on a recent joint venture, Matrix Settlement & Clearance Services, in which we own a 45% equity stake. Matrix Settlement & Clearance Services provides automated clearing of mutual funds utilizing the National Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance & Settlement platform for banks, trust companies, third party administrators and registered investment advisors. For the year ended December 31, 2000, Matrix Settlement & Clearance Services had $1.5 million of revenues and a net loss of $955,000. We currently expect that Matrix Settlement & Clearance Services will become a member of the NASD and a registered broker-dealer, and we are currently evaluating our alternatives for accomplishing this result. As of December 31, 2000, Matrix Settlement & Clearance Services had 33 clients under contract after its first full year of operations. These clients administer approximately $8.9 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. Matrix Settlement & Clearance Services has developed relationships with several Matrix Bancorp subsidiaries to assist in the performance of services for its customers. For example, Matrix Bank is the National Securities Clearing Corporation member, serves as the settlement bank for Fund/SERV transactions and provides banking services for certain Matrix Settlement & Clearance Services customers. This relationship helps generate low-cost deposits for Matrix Bank. As of December 31, 2000, Matrix Settlement & Clearance Services' clients had $25.9 million of deposits at Matrix Bank. Sale of United Capital Markets, Inc. As previously disclosed, on August 1, 2000, we sold one of our wholly owned subsidiaries, United Capital Markets, to an officer of that company. United Capital Markets is a registered investment advisor that focuses on interest rate management services for institutional clients. Lending Activities Purchase and Sale of Bulk Loan Portfolios. In addition to our mortgage loan origination and servicing-related activities, which are discussed under "--Residential Mortgage Loan Origination" and "Mortgage Servicing Activities," respectively, we traditionally make bulk purchases of residential mortgage loans in the secondary market through Matrix Bank. We believe that our structure provides advantages over our competitors in the purchase of bulk mortgage loan packages. In particular: o United Financial, through its networking within the mortgage banking and financial services industries, is able to refer companies that are interested in selling mortgage loan portfolios directly to Matrix Bank. This direct contact reduces the number of portfolios that must be purchased through competitive bid situations, thereby reducing the cost associated with the acquisition of bulk residential mortgage loan portfolios. o Matrix Bank's subsidiary, Matrix Financial, provides servicing advantages that a typical community bank does not possess. Matrix Financial acts as a subservicer for a majority of Matrix Bank's mortgage loan portfolio. Because Matrix Financial services loans throughout the entire United States, Matrix Bank can acquire various types of loans secured by property located in any of the fifty states. Substantially all of the residential mortgage loans that Matrix Bank acquires are classified as held for sale. This accounting classification requires Matrix Bank to carry the loans at the lower of aggregate cost or market. The purchased loan portfolios typically include both fixed and adjustable rate mortgage loans. Although Matrix Bank reviews many loan portfolios for prospective acquisition, it focuses on acquiring seasoned first lien priority loans secured primarily by one-to-four single-family residential properties with unpaid principal balances of less than $350,000. To the extent that adjustable rate loans are available, Matrix Bank generally targets adjustable over fixed rate portfolios. Due to the accounting treatment required, we believe that the focus on seasoned and adjustable rate products is generally expected to reduce the effect of rising interest rates on the portfolio's market value. Matrix Bank purchases mortgage loan portfolios from various sellers who have either originated the loans or, more typically, acquired the loan portfolios in bulk purchases. Matrix Bank considers several factors prior to a purchase. Among other factors, Matrix Bank considers the product type, the current loan balance, the current interest rate environment, the seasoning of the mortgage loans, payment histories, geographic location of the underlying collateral, price, the current liquidity of Matrix Bank and the product mix in its existing mortgage loan portfolio. In some cases, the mortgage loan portfolios that Matrix Bank acquires are purchased at yields that exceed market. Some of the loans in these portfolios are considered performing loans that have had payment problems in the past or have had document deficiencies. These types of portfolios afford Matrix Bank with an opportunity to resell the loans at a higher price if the discount to market on these portfolios accurately reflects the additional risks associated with purchasing these types of loans. Loan document deficiencies are identified in the due diligence process and, to the extent practical, are cured by Matrix Bank prior to reselling the loans. Matrix Bank also analyzes the payment history on each mortgage loan portfolio. Many prior problems may be a result of inefficient servicing or may be attributable to several servicing transfers of the loans over a short period of time. Because many considerations may impact pricing or yield, Matrix Bank prices each loan package based on the specific underlying loan characteristics. In the past, Matrix Bank has purchased nonperforming Federal Housing Administration and Veteran's Administration loans from third party sellers. The Department of Housing and Urban Development generally guarantees the majority of principal and interest on these nonperforming loans. These loans are at fixed rates and generally have a short average life as the loans are typically liquidated through the foreclosure and claim process. As of December 31, 2000, Matrix Bank owned $101.1 million of these loans. Matrix Bank performs due diligence on each mortgage loan portfolio that it desires to purchase on a bulk basis. These procedures consist of analyzing a representative sample of the mortgage loans in the portfolio and are typically performed by Matrix Bank employees, but occasionally are outsourced to third party contractors. The underwriter takes into account many factors and statistics in analyzing the sample of mortgage loans in the subject portfolio, including: the general economic conditions in the geographic area or areas in which the underlying residential properties are located; the loan-to-value ratios on the underlying loans; and the payment histories of the borrowers. In addition, the underwriter attempts to verify that each sample loan conforms to the standards for loan documentation set by Fannie Mae and Freddie Mac. In cases where a significant portion of the sample loans contain non-conforming documentation, Matrix Bank assesses the additional risk involved in purchasing the loans. This process helps Matrix Bank determine whether the mortgage loan portfolio meets its investment criteria and, if it does, the range of pricing that is appropriate. As noted earlier, in August 2000, Matrix Financial became a direct, wholly owned subsidiary of Matrix Bank. Prior to that time, Matrix Financial was a direct, wholly owned subsidiary of Matrix Bancorp and accordingly, a "sister" company of Matrix Bank. This new structure allows Matrix Bank to fund Matrix Financial's residential loan production activities without the prior "affiliate" restrictions imposed by Office of Thrift Supervision regulations. Much of the Company's loan growth in late 2000 and projected loan growth in 2001 is due to Matrix Financial's loan origination initiatives. See "--Residential Mortgage Loan Origination" for additional discussion. Matrix Bank continually monitors the secondary market for purchases and sales of mortgage loan portfolios and typically undertakes a sale of a particular loan portfolio in an attempt to "match" an anticipated bulk purchase of a particular mortgage loan portfolio or to generate current period earnings and cash flow. To the extent that Matrix Bank is unsuccessful in matching its purchases and sales of mortgage loans, Matrix Bank may have excess capital, resulting in less leverage and higher capital ratios. During the year ended December 31, 2000, we made bulk purchases of mortgage loans of approximately $225.9 million and made bulk sales of approximately $108.5 million for a net gain on sale of bulk mortgage loans of $982,000. Residential Mortgage Loan Origination. We originate residential mortgage loans on a wholesale basis through Matrix Financial and on a retail basis through both Matrix Financial and Matrix Bank. Matrix Financial originated a total of $512.5 million in residential mortgage loans for the year ended December 31, 2000. Wholesale Originations. Matrix Financial's primary source of mortgage loan originations is its wholesale division, which originates mortgage loans through approved independent mortgage loan brokers. These brokers qualify to participate in Matrix Financial's program through a formal application process that includes an analysis of the broker's financial condition and sample loan files, as well as the broker's reputation, general lending expertise and references. As of December 31, 2000, Matrix Financial had approved relationships with approximately 1,480 mortgage loan brokers. From Matrix Financial's offices in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Santa Ana and St. Louis, the sales staff solicit mortgage loan brokers throughout the Southeastern, Western, Midwestern and Rocky Mountain areas of the United States for mortgage loans that meet Matrix Financial's criteria. In January 2001, Matrix Financial opened an additional office in Sacramento. Mortgage loan brokers act as intermediaries between borrowers and Matrix Financial in arranging mortgage loans. Matrix Financial, as an approved seller/servicer for Fannie Mae, Freddie Mac, the Government National Mortgage Association and a multitude of private investors, provides these brokers access to the secondary market for the sale of mortgage loans that they otherwise cannot access because they do not meet the applicable seller/servicer net worth requirements. Matrix Financial attracts and maintains relationships with mortgage loan brokers by offering a variety of services and products. To supplement our product offerings made through our wholesale loan origination network, we offer a program tailored to borrowers who are unable or unwilling to obtain mortgage financing from conventional mortgage sources. The borrowers who need this type of loan product often have impaired or unsubstantiated credit histories and/or unverifiable income and require or seek a high degree of personalized service and swift response to their loan applications. As a result, these borrowers generally are not averse to paying higher interest rates for this loan product type, as compared to the interest rates charged by conventional lending sources. We have established classifications with respect to the credit profiles of these borrowers. The classifications range from A- through D depending upon a number of factors, including the borrower's credit history and employment status. During 2000, Matrix Financial originated $97.7 million of A- through D credit residential mortgage loans, the majority of which were sold to unaffiliated third party investors on a nonrecourse basis under standard industry representations and warranties. All current originations of A- through lesser quality credit loans are originated under third party investor guidelines and are generally sold monthly in bulk loan portfolios. This method of sale generally provides better execution as compared to selling individual loans. In 2000, Matrix Financial acquired a servicing portfolio and production platform in Missouri. The production platform specializes in the origination of loans under a first-time home buyer program. Under this program, first-time home buyers are able to obtain loans at rates that are generally below market. The funding for the loans is available as a result of bond issues through various state and local governmental units. As master servicer under the bond programs, Matrix Financial purchases the loans from the originator, principally other financial institutions or mortgage brokers. Once acquired by Matrix Financial, the loans under the specific bond programs are packaged and Government National Mortgage Association securities are issued to the bond trustees under the programs. For strategic purposes, Matrix Financial's management has increased its emphasis on wholesale originations through opening two new production offices in 2000 and another in January 2001, acquiring a servicing and production platform and hiring additional administrative and production staff at existing offices. In low or decreasing interest rate environments, increased loan origination volumes, which generally result in increased fee income, can act as an economic hedge against decreases in interest income and the decreasing value of mortgage servicing portfolios caused by increased prepayments, which reduces revenues. Retail Originations.Matrix Bank originates residential loans on a retail basis through its branches in Las Cruces, New Mexico and Sun City, Arizona. In early 1997, Matrix Bank opened a lending office in Evergreen, Colorado. This location primarily originates residential construction loans and commercial loans in the local market place. We attempt to convert the construction loans funded through the Evergreen office into permanent mortgage loans. The retail loans originated by Matrix Bank consist of a broad range of residential loans, at both fixed and adjustable rates, consumer loans and commercial real estate loans. Matrix Financial has also developed a retention center that focuses on the solicitation of our portfolio and others' owned servicing portfolios for refinancing opportunities. The goal is to identify those mortgagees which are likely to refinance and have them refinance with Matrix Financial. If the borrower is from our servicing portfolio, we have effectively preserved a portion of our servicing portfolio, as the borrower would have been likely to refinance with another lender. Quality Control. We have a loan quality control process designed to ensure sound lending practices and compliance with Fannie Mae, Freddie Mac and applicable private investor guidelines. Prior to funding any wholesale or retail loan, we perform a verbal or written verification of employment as required by investor programs and utilize a detailed checklist to ensure accuracy of documentation. In addition, on a monthly basis, we select 10% of all closed loans for a detailed audit conducted by our own personnel or a third party service provider. The quality control process entails performing a complete underwriting review and independent re-verification of all employment information, tax returns, source of down payment funds, bank accounts and credit. Furthermore, 10% of the audited loans are chosen for an independent field review and standard factual credit report. All discovered deficiencies in these audits are reported to our senior management to determine trends and additional training needs. We then address and cure all resolvable issues. We also perform a quality control audit on all early payment defaults, first payment defaults and 60-day delinquent loans, the findings of which are reported to the appropriate investor and/or senior management. Sale of Originated Loans. We generally sell the residential mortgage loans that we originate. Under ongoing programs established with Fannie Mae and Freddie Mac, conforming conventional loans may be sold on a cash basis or pooled by us and exchanged for securities guaranteed by Fannie Mae or Freddie Mac. We then sell these securities to national or regional broker-dealers. Mortgage loans sold to Fannie Mae or Freddie Mac are sold on a nonrecourse basis, except for standard representations and warranties, so that foreclosure losses are generally borne by Fannie Mae or Freddie Mac and not by us. We also sell nonconforming and conforming residential mortgage loans on a nonrecourse basis to other secondary market investors. Nonconforming loans are typically first lien mortgage loans that do not meet all of the agencies' underwriting guidelines, and are originated instead for other institutional investors with whom we have previously negotiated purchase commitments and for which we occasionally pay a fee. We sell residential mortgage loans on a servicing-retained or servicing-released basis. Certain purchasers of mortgage loans require that the loan be sold to them servicing-released. We sell nonconforming loans on a servicing-released basis and may sell conforming loans on a servicing-retained or servicing-released basis. See "Mortgage Servicing Activities --Residential Mortgage Loan Servicing." In connection with our residential mortgage loan originations and sales, we make customary representations and warranties, similar in nature and scope to those provided in connection with sales of mortgage servicing rights. Our experience has been that giving such representations and warranties has not resulted in material repurchases. However, there can be no assurance that we will not be required to make a significant repurchase in the future or that losses will not occur in the future due to the representations and warranties issued. The sale of mortgage loans may generate a gain or loss for us. Gains or losses result primarily from two factors. First, we may make a loan to a borrower at a rate resulting in a price that is higher or lower than we would receive if we had immediately sold the loan in the secondary market. These price differences occur primarily as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses may result from changes in interest rates that result in changes in the market value of the mortgage loans from the time that the price commitment is given to the borrower until the time that the mortgage loan is sold to the investor. Net gains and losses on originated loans sold are recorded in loan origination income. In order to hedge against the interest rate risk resulting from these timing differences, we historically have committed to sell all closed originated mortgage loans held for sale and a portion of the mortgage loans that are not yet closed but for which the interest rate has been established, sometimes referred to in this document as "pipeline loans." We adjust our net commitment position daily either by entering into new commitments to sell or by buying back commitments to sell depending upon our projection of the portion of the pipeline loans that we expect to close. These projections are based on numerous factors, including changes in interest rates and general economic trends. The accuracy of the underlying assumptions bears directly upon the effectiveness of our use of forward commitments and subsequent profitability. In addition, during the second half of 2000, we began selling the majority of our pipeline loans, both conforming and nonconforming, to third party investors on a best efforts basis. By selling the loans on a best efforts basis, we significantly reduce our hedging risk. The market value of loans committed for sale is determined based on the related forward loan sale commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Risk Sensitive Assets and Liabilities" for information on our adoption of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. Commercial and Other Lending. We have sought to diversify and enhance the yield of our loan portfolio by originating commercial and consumer loans and by offering a full range of lending products to our customers. The Company offers a variety of commercial loan products, including: single-family construction loans; commercial real estate loans; business and Small Business Administration loans; and financing to charter schools for the purchase of real estate and equipment. Matrix Bank's loan production office in Evergreen, Colorado, a suburb of Denver, principally originates single-family construction and commercial real estate loans. Matrix Bank's main office in Las Cruces, New Mexico also originates a portion of these loans. ABS performs underwriting and funding of financings for charter schools. Matrix Bank originates loans to builders for the construction of single-family properties, and to a lesser extent, for the acquisition and development of improved residential lots. Matrix Bank generally makes these loans on commitment terms that last from nine to eighteen months and typically adjust with the prime rate of interest. In many cases, the residential properties have been pre-sold to the homeowner. It is generally considered that construction lending involves a higher level of risk than secured lending on existing properties because the properties securing construction loans are usually more speculative and more difficult to evaluate and monitor. Matrix Bank generally limits its commercial lending to income-producing real estate properties. The repayment of loans collateralized by income-producing properties depends upon the successful operation of the related real estate property and also on the credit and net worth of the borrower. Thus, repayment is subject to the profitable operation of the borrower's business, conditions in the real estate market, interest rate levels and overall economic conditions. Loans on income-producing properties must generally meet internal underwriting guidelines that include: a limit on the loan-to-value ratio of 75%; a review of the borrower with regard to management talent, integrity, experience and available financial resources; and, in most instances, a personal guarantee from the borrower. In addition to origination, Matrix Bank also buys participations in commercial real estate loans primarily from banks located in the Colorado market. The loans that we acquire through participations are underwritten with the same diligence and standards as though we were originating them directly. Matrix Bank's SBA division offers the following loan products: SBA 7a loans; first trust deed loans under the SBA 504 program; first trust deed companion loans, also known as "piggyback" loans; and Business and Industry Guaranteed Loans offered through the United States Department of Agriculture. Matrix Bank has received preferred lender status under the SBA program in the Denver, Colorado market area. Preferred lender status allows Matrix Bank to approve SBA-guaranteed loan applications without prior review from the SBA, thereby accelerating the approval process for small business loan applications. Preferred lenders also receive priority funding and service from the SBA. Matrix Bank plans to apply for preferred lender status in other market areas such as Arizona, New Mexico, Texas and Utah in 2001. During 2000, Matrix Bank originated $27.7 million SBA loans. ABS offers financing to charter schools located primarily in Arizona, Colorado, Florida and Texas for the purchase of real estate, modular space and equipment. As previously mentioned, charter schools are public schools that serve as an alternative to traditional public schools, thereby providing additional academic choices for parents and students. The offered financing is generally fully amortizing and completed on a tax-exempt basis. On occasion, we also provide cash flow loans to charter schools. During 2000, we funded $30.5 million loans to charter schools and, as of December 31, 2000, we had a total of $51.9 million loans to charter schools. Charter school financing involves inherent risks such as: o the loan-to-value ratio for real estate transactions can be as high as 90% and for furniture, fixtures and equipment and modular space it is 100%; o there are no personal guarantees; and o cash flow to service the financing is derived from the school's student count. If the school's student count decreases, or is less than projected, the school's ability to make scheduled payments on the financing may be impaired. In addition, Matrix Bank offers a variety of lending products to meet the specific needs of its customers. These products include fully amortizing secured installment loans, manufactured housing financing, credit card programs, home equity loans, business loans and share loans. In addition to the secured consumer loans, Matrix Bank extends unsecured loans, on a limited basis, to qualified borrowers based on their financial statements and creditworthiness. Matrix Bank originates the majority of its consumer lending within the Las Cruces, New Mexico market area. Mortgage Servicing Activities Residential Mortgage Loan Servicing. We conduct our residential mortgage loan servicing activities exclusively through Matrix Financial. At December 31, 2000, Matrix Financial serviced approximately $5.5 billion of mortgage loans, excluding $1.2 billion subserviced for companies that are not affiliated with us. Servicing mortgage loans involves a contractual right to receive a fee for processing and administering loan payments. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. These payments are held in custodial escrow accounts at Matrix Bank. Matrix Bank invests this money in interest-earning assets with returns that historically have been greater than could be realized by Matrix Financial using the custodial escrow deposits as compensating balances to reduce the effective borrowing cost on its warehouse credit facilities. As compensation for its mortgage servicing activities, Matrix Financial receives servicing fees, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of default by the borrower, Matrix Financial receives no servicing fees until the default is cured. At December 31, 2000, Matrix Financial's annual weighted-average servicing fee was 0.40%. Servicing is provided on mortgage loans on a recourse or nonrecourse basis. Our policy is to accept only a limited number of servicing assets on a recourse basis. As of December 31, 2000, on the basis of outstanding principal balances, less than 1% of our owned mortgage servicing contracts involved recourse servicing. To the extent that servicing is done on a recourse basis, we are exposed to credit risk with respect to the underlying loan in the event of a repurchase. Additionally, many of our nonrecourse mortgage servicing contracts owned require us to advance all or part of the scheduled payments to the owner of the mortgage loan in the event of a default by the borrower. Many owners of mortgage loans also require the servicer to advance insurance premiums and tax payments on schedule even though sufficient escrow funds may not be available. Therefore, we must bear the funding costs associated with making such advances. If the delinquent loan does not become current, these advances are typically recovered at the time of the foreclosure sale. Foreclosure expenses, which may include legal fees or property maintenance, are generally not fully reimbursable by Fannie Mae, Freddie Mac or the Government National Mortgage Association, for which we provide significant amounts of mortgage loan servicing. As of December 31, 2000, we had advanced approximately $14.2 million in funds on behalf of third party investors. For the Veteran's Administration loans sold and serviced for the Government National Mortgage Association, which are sold on a nonrecourse basis, the Veteran's Administration loan guarantees may not cover the entire principal balance and, in that case, the Company is responsible for the losses which exceed the Veteran's Administration's guarantee. Mortgage servicing rights represent a contractual right to service, and not a beneficial ownership interest in, underlying mortgage loans. Failure to service the loans in accordance with contract or other applicable requirements may lead to the termination of the mortgage servicing rights and the loss of future servicing fees. To date, there have been no terminations of mortgage servicing rights by any mortgage loan owners because of our failure to service the loans in accordance with our obligations. In order to track information on our servicing portfolio, Matrix Financial utilizes a data processing system provided by Alltel Information Services, Inc. Because Alltel is one of the largest mortgage banking service bureaus in the United States, we believe that this system gives Matrix Financial capacity to support expansion of our residential mortgage loan servicing portfolio. The following table sets forth certain information regarding the composition of our mortgage servicing portfolio, excluding loans subserviced for others, as of the dates indicated:
As of December 31, ----------------------------------------------------------- 2000 1999 1998 ----------------- ---------------- ------------------ (In thousands) FHA insured/VA guaranteed residential................................. $1,608,115 $ 926,179 $ 960,053 Conventional loans.................................................... 3,764,586 4,891,809 4,338,308 Other loans........................................................... 145,262 71,727 59,368 --------------- ---------------- -------------- Total mortgage servicing portfolio.............................. $5,517,963 $5,889,715 $5,357,729 =============== ================ =============== Fixed rate loans...................................................... $4,346,813 $4,926,055 $4,234,349 Adjustable rate loans................................................. 1,171,150 963,660 1,123,380 ----------------- ----------------- --------------- Total mortgage servicing portfolio.............................. $5,517,963 $5,889,715 $5,357,729 ================= ================= ===============
The following table shows the delinquency statistics for the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, compared with national average delinquency rates as of the dates presented. Delinquencies and foreclosures for the mortgage loans serviced by us generally exceed the national average due to high rates of delinquencies and foreclosures on certain bulk loan and bulk servicing portfolios that we acquired at a discount. In September 1999, we acquired a servicing portfolio with higher loan delinquency. The majority of loans in that portfolio were in active bankruptcy or foreclosure. This portfolio was responsible for the majority of the increase in the percentage of our servicing portfolio that was delinquent at both December 31, 1999 and 2000.
As of December 31, ---------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------- National National Company Average(1) Company Average(1) ---------------------------------------------------------------------------------- Number Percentage Percentage Number Percentage Percentage of of Servicing of of of Servicing of Loans Portfolio Loans Loans Portfolio Loans -------------------------------------------------------------------------------- Loans delinquent for: 30-59 days........ 5,214 5.64% 2.84% 4,079 4.50% 2.74% 60-89 days........ 992 1.07 0.64 1,120 1.24 0.63 90 days and over.. 530 0.58 0.56 2,426 2.68 0.56 ------------ ---------- ---------- ------------ ------- ---------- Total delinquencies........ 6,736 7.29% 4.04% 7,625 8.42% 3.93% ============ ========== ========== ============ ======= ========== Foreclosures...... 1,027 1.11% 0.84% 905 1.00% 0.98% ============ ========== ========== ============ ======= ========== [Table Continued] As of December 31, ------------------------------------- 1998 --------------------------------------- National Company Average(1) --------------------------------------- Number Percentage Percentage of of Servicing of Loans Portfolio Loans --------------------------------------- Loans delinquent for: 30-59 days........ 3,120 3.98% 2.96% 60-89 days........ 612 0.78 0.68 90 days and over.. 712 0.91 0.60 Total ---------- ------------ ---------- delinquencies........ 4,444 5.67% 4.24% ========== ============ ========== Foreclosures...... 727 0.93% 1.11% ========== ============ ==========
---------- [FN] (1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit Residential Mortgage Loans" (Seasonally Adjusted) (Data as of September 30, 2000, December 31, 1999 and December 31, 1998, respectively. Data as of December 31, 2000 was not yet available). The following table sets forth certain information regarding the number and aggregate principal balance of the mortgage loans serviced by Matrix Financial, including both fixed and adjustable rate loans, excluding loans subserviced for others, at various interest rates:
As of December 31, ------------------------------------------------------------------------------------ 2000 1999 ---------------------------------------- -------------------------------------------- Percentage Percentage Number Aggregate of Aggregate Number Aggregate of Aggregate Rate of Principal Principal of Principal Principal Loans Balance Balance Loans Balance Balance ---------- ------------- ------------- ----------- ------------ -------------- (Dollars in thousands) Less than 7.00%........ 6,317 $ 474,596 8.60% 7,301 $ 618,659 10.50% 7.00%--7.99%......... 18,424 1,335,738 24.21 30,848 2,467,177 41.89 8.00%--8.99%......... 27,691 1,801,131 32.64 28,620 1,822,777 30.95 9.00%--9.99%......... 19,369 1,002,226 18.16 15,892 647,918 11.00 10.00%--10.99%.......... 20,603 904,272 16.39 7,898 333,184 5.66 11.00%--11.99%.......... - - - - - - 12.00% and over........ - - - - - - ----------- ------------ ----------- ----------- ---------- ----------- Total............... 92,404 $5,517,963 100.00% 90,559 $ 5,889,715 100.00% =========== ============= ============ ============ =========== ============ [Table Continued] ---------------------------------------- 1998 ---------------------------------------- Percentage Number Aggregate of Aggregate of Principal Principal Loans Balance Balance ---------------------------------------- Less than 7.00%........ 7,123 $ 662,491 12.36% 7.00%--7.99%......... 22,341 1,799,472 33.59 8.00%--8.99%......... 26,702 1,859,471 34.71 9.00%--9.99%......... 15,557 731,586 13.65 10.00%--10.99%.......... 6,067 284,637 5.31 11.00%--11.99%.......... 251 9,441 0.18 12.00% and over........ 305 10,631 0.20 ---------- ------------- ---------- Total............... 78,346 $ 5,357,729 100.00% ========== ============= ==========
Loan administration fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens. The following table sets forth certain information regarding the remaining contractual maturity of the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, as of the dates shown. The changes in the remaining maturities as a percentage of unpaid principal between 2000, 1999 and 1998, as reflected below, are the result of acquisitions of mortgage servicing rights completed during 2000 and 1999.
As of December 31, ------------------------------------------------------------------------------------------- 2000 1999 --------------------------------------------- --------------------------------------------- Percentage Percentage Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid of of Number Principal Principal of of Number Principal Principal Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount ------- ---------- ---------- ---------- -------- ---------- --------- ----------- (Dollars in thousands) 1--5 years.... 19,489 21.09% $ 321,196 5.82% 34,990 38.64% $ 1,043,559 17.72% 6--10 years.... 15,891 17.20 411,152 7.45 10,364 11.44 577,077 9.80 11--15 years..... 14,981 16.21 779,922 14.13 8,691 9.60 560,212 9.51 16--20 years..... 27,779 30.06 2,505,728 45.41 18,624 20.57 1,766,824 30.00 21--25 years..... 4,522 4.90 444,679 8.06 3,417 3.77 381,663 6.48 More than 25 years 9,742 10.54 1,055,286 19.13 14,473 15.98 1,560,380 26.49 ------ ------ ---------- ----- ------ ------ ------------ ------- Total........ 92,404 100.00% $5,517,963 100.00% 90,559 100.00% $ 5,889,715 100.00% ====== ====== ========= ====== ====== ====== ============ ====== [Table Continued] -------------------------------------------- 1998 -------------------------------------------- Percentage Number Percentage Unpaid Unpaid of of Number Principal Principal Loans of Loans Amount Amount --------- ------- ------ ------ 1--5 years.... 9,478 12.10% $ 216,441 4.04% 6--10 years.... 21,320 27.21 943,428 17.61 11--15 years..... 10,231 13.06 534,187 9.97 16--20 years..... 7,870 10.04 545,628 10.18 21--25 years..... 12,524 15.99 1,184,562 22.11 More than 25 years 16,923 21.60 1,933,483 36.09 ------- ------- ---------- ------- Total........ 78,346 100.00% $ 5,357,729 100.00% ====== ======= =========== ======
Our servicing activity is diversified throughout all 50 states with concentrations at December 31, 2000 in California, Texas, Missouri and Florida of approximately 18.9%, 13.7%, 12.8% and 7.3%, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. Acquisition of Servicing Rights. Our strategy with respect to mortgage servicing focuses on acquiring servicing for which the underlying mortgage loans tend to be more seasoned and to have higher interest rates, lower principal balances and higher custodial escrow balances than newly originated mortgage loans. We believe this strategy allows us to reduce our prepayment risk, while allowing us to capture relatively high custodial escrow balances in relation to the outstanding principal balance. During periods of declining interest rates, prepayments of mortgage loans usually increase as homeowners seek to refinance at lower interest rates, resulting in a decrease in the value of the servicing portfolio. Mortgage loans with higher interest rates and/or higher principal balances are more likely to result in prepayments since the cost savings to the borrower from refinancing can be significant. Despite the strategy mentioned above, we remain opportunistic in our acquisition philosophy. If higher balance, less seasoned portfolios are available at our desired internal rate of return, we may, from time to time, pursue such acquisitions. The following table shows quarterly and annual average prepayment rate experience on the mortgage loans serviced by Matrix Financial, excluding loans subserviced by and for others: For the Year Ended December 31, ------------------------------------ 2000(1)(4) 1999(2)(4) 1998(3)(4) ----------- ----------- ----------- Quarter ended: December 31 .......... 12.50% 13.63% 28.36% September 30 ......... 12.70 17.43 23.60 June 30............... 12.70 24.70 21.53 March 31.............. 10.50 26.47 17.00 ----------- ----------- ----------- Annual average.......... 12.10% 20.56% 22.62% =========== =========== =========== ----------------- [FN] (1) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $447 million, $0, $16 million and $0 for the quarters ended December 31, September 30, June 30, and March 31, 2000, respectively. (2) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $0, $576 million, $1.0 billion and $ 238 million for the quarters ended December 31, September 30, June 30 and March 31, 1999, respectively. (3) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $930 million, $703 million, $0 and $1.3 billion for the quarters ended December 31, September 30, June 30, and March 31, 1998, respectively. (4) These prepayment rates do not include prepayments that resulted from us targeting our own servicing portfolio for refinance opportunities. We acquire substantially all of our mortgage servicing rights in the secondary market. The industry expertise of United Financial and Matrix Financial allows us to capitalize upon inefficiencies in this market when acquiring mortgage servicing rights. Prior to acquiring mortgaging servicing rights, we analyze a wide range of characteristics of each portfolio considered for purchase. This analysis includes projecting revenues and expenses and reviewing geographic distribution, interest rate distribution, loan-to-value ratios, outstanding balances, delinquency history and other pertinent statistics. Due diligence is performed either by our employees or a designated independent contractor on a representative sample of the mortgages involved. The purchase price is based on the present value of the expected future cash flow, calculated by using a discount rate, loan prepayment, default rate and other assumptions that we consider to be appropriate to reflect the risk associated with the investment. In 2000, we began to retain the mortgage servicing rights generated from the origination of loans sold to the Government National Mortgage Association. As of December 31, 2000, in terms of unpaid principal amount, approximately $111 million of the mortgage servicing rights in our portfolio were from loans originated and sold by Matrix Financial. Sales of Servicing Rights. We periodically sell our purchased mortgage servicing portfolios and generally sell all mortgage servicing rights on new loans that we originate, except as mentioned above with regard to loans sold to the Government National Mortgage Association. These sales increase current revenue, which is reflected in loan origination income for originated servicing and gain on sale of servicing for purchased servicing, and generate cash at the time of sale, but reduce future servicing fee income. We sold mortgage servicing rights on loans that we originated having an aggregate principal amount of $412.5 million during the year ended December 31, 2000. Periodically, we may also sell purchased mortgage servicing rights to restructure our portfolio or generate revenues. Purchased mortgage servicing rights were sold on loans having an aggregate principal amount of $1.1 billion during the year ended December 31, 2000 for net gains of $2.6 million. We anticipate that we will continue to sell substantially all originated mortgage servicing rights on new loans that we originate, except as noted above. We also may sell purchased mortgage servicing rights. We intend to base decisions regarding future mortgage servicing sales upon our cash requirements, purchasing opportunities, capital needs, earnings and the market price for mortgage servicing rights. During a quarter in which we sell purchased mortgage servicing rights, reported income will tend to be greater than if we had not made the sale during that quarter. Prices obtained for mortgage servicing rights vary depending on servicing fee rates, anticipated prepayment rates, average loan balances, remaining time to maturity, servicing costs, custodial escrow balances, delinquency and foreclosure experience and purchasers' required rates of return. In the ordinary course of selling mortgage servicing rights in accordance with industry standards, we make certain representations and warranties to purchasers of mortgage servicing rights. If a borrower defaults and there has been a breach of representations or warranties and we have no third party recourse, we may become liable for the unpaid principal and interest on defaulted loans. In such a case, we may be required to repurchase the mortgage loan and bear any subsequent loss on the loan. In connection with any purchases of mortgage servicing rights that we make, we also are exposed to liability to the extent that an originator or seller of the mortgage servicing rights is unable to honor its representations and warranties. Historically, we have not incurred material losses due to breaches of representations and warranties and we do not anticipate any future material losses due to breaches of representations and warranties; however, there can be no assurance that we will not experience such losses. Hedging of Servicing Rights. Our investment in mortgage servicing rights is exposed to potential impairment in certain interest rate environments. As previously discussed, the prepayment of mortgage loans increases during periods of declining interest rates as homeowners seek to refinance their loan to lower interest rates. If the level of prepayment on segments of our mortgage servicing portfolio reaches a level higher than we projected for an extended period of time, the associated basis in the mortgage servicing rights may be impaired. To mitigate this risk of impairment due to declining interest rates, we initiated a hedging strategy during 1997 that uses a program of exchange-traded futures and options. In terms of unpaid principal amount, we had hedged approximately 6.4% of our servicing portfolio as of December 31, 2000. Through December 31, 2000, our hedging program qualified for hedge accounting treatment based on a high degree of statistical correlation and current accounting guidance. With the required adoption of SFAS 133 on January 1, 2001, we will not attempt to qualify for hedge accounting treatment due to the requirements in the standard that are necessary to do so. Despite this, we have not made any changes to our hedging program and, as such, we will have to record our outstanding derivatives at their fair values on January 1, 2001, with subsequent changes in value recognized in earnings. See additional information regarding the impact of SFAS 133 in Note 2 to the consolidated financial statements included elsewhere in this document. Brokerage, Consulting and Outsourcing Services Brokerage Services. United Financial operates as one of the nation's leading full-service mortgage servicing and mortgage loan brokers. It is capable of analyzing, packaging, marketing and closing transactions involving mortgage servicing and loan portfolios and selected merger and acquisition transactions for mortgage banking entities. United Financial markets its services to all types and sizes of market participants, thereby developing diverse relationships. Mortgage servicing rights are sold either on a bulk basis or a flow basis. In a bulk sale, the seller identifies, packages and sells a portfolio of mortgage servicing rights to a buyer in a single transaction. In a flow sale, the seller agrees to sell to a specified buyer from time to time, at a predetermined price, the mortgage servicing rights originated by the seller that meet certain criteria. United Financial is capable of helping both buyers and sellers with respect to bulk and flow sales of mortgage servicing rights. We believe that the client relationships developed by United Financial through its national network of contacts with commercial banks, mortgage companies, savings associations and other institutional investors represent a significant competitive advantage and form the basis for United Financial's national market presence. These contacts also enable United Financial to identify prospective clients for our other subsidiaries and make referrals when appropriate. See "--Consulting and Analytic Services." The secondary market for purchasing and selling mortgage servicing rights has become increasingly more active since its inception during the early 1980s. Most institutions that own mortgage servicing rights have found that careful management of these assets is necessary due to their susceptibility to interest rate cycles, changing prepayment patterns of mortgage loans and fluctuating earnings rates achieved on custodial escrow balances. Since companies must capitalize originated mortgage servicing rights, management of mortgage servicing assets has become even more critical. These management efforts, combined with interest rate sensitivity of assets and the growth strategies of market participants, create constantly changing supply and demand and, therefore, constantly changing price levels in the secondary market for mortgage servicing rights. The sale and transfer of mortgage servicing rights occurs in a market that is inefficient and often requires an intermediary to match buyers and sellers. Prices are unpublished and closely guarded by market participants, unlike most other major financial secondary markets. This lack of pricing information complicates an already difficult process of differentiating between servicing product types, evaluating regional, economic and socioeconomic trends and predicting the impact of interest rate movements. Due to its significant contacts, reputation and market penetration, United Financial has access to information on the availability of mortgage servicing portfolios, which helps it bring interested buyers and sellers together. In addition, United Financial provides brokerage services to buyers and sellers of all types of loan products. United Financial provides loan brokerage services to both servicing brokerage clients and non-servicing brokerage clients. During 2000, United Financial significantly enhanced its ability in the areas of analyzing, brokering and acquisition of all loan products. This was accomplished through hiring additional personnel and cross-training of existing staff. Consulting and Analytic Services. United Financial continues to make significant commitments to its analytics department, which has developed expertise in helping companies implement and track their "mark-to-market" valuations and analyses. United Financial has enhanced its existing valuation models and has created a software program that can be customized to fit its customers' many different needs and unique situations in performing valuations and analyses. In addition, United Financial has the infrastructure and management information system capabilities necessary to undertake the complex analyses required by SFAS 125/SFAS 140. Many of the companies affected by the implementation of SFAS 125/SFAS 140 have outsourced this function to a third party rather than dedicate the resources necessary to develop systems for and perform their own SFAS 125/SFAS 140 valuations. Because SFAS 125/SFAS 140 requires that mortgage servicing portfolios be valued at the lower of cost or market value on a quarterly basis, active management of servicing assets has become a critical component to holders of mortgage servicing rights. Due to the risk of impairment of mortgage servicing rights as a result of constantly changing interest rates and prepayment speeds on the underlying mortgage portfolio, risk management of mortgage servicing rights by holders of mortgage servicing rights portfolios, which typically takes the form of hedging the portfolio, has become more prevalent. The SFAS 125/SFAS 140 "mark-to-market" analyses done by United Financial help clients assess which of their portfolios of mortgage servicing rights are most susceptible to impairment due to interest rate and prepayment risk. In 2000, United Financial expanded its analytic and consulting services to include advisory services on business performance, including the risks and rewards of various business lines, and loan retention programs. We believe that the services offered by the analytics department of United Financial provide us with a competitive advantage in attracting and retaining clients because we are able to offer financial services companies and financial institutions a more complete package of services than our competitors. In addition, United Financial is able to refer clients to Matrix Bank for financing opportunities and bulk loan acquisitions and to Matrix Asset Management for real estate management and disposition services. The full range of services offered by United Financial and its affiliates further strengthens United Financial's client relationships. Real Estate Management and Disposition Services. Matrix Asset Management, formerly called United Special Services, recently changed its name to better identify itself as affiliated with the Matrix family of companies. Matrix Asset Management provides real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions across the United States. In addition to the unaffiliated clients currently served by Matrix Asset Management, many of which are also clients of United Financial, Matrix Financial uses Matrix Asset Management exclusively in handling the disposition of foreclosed real estate for which it is responsible. Having Matrix Asset Management, rather than Matrix Financial, provide this service transforms the disposition process into a revenue generator for us, since Matrix Asset Management typically collects a referral fee based on the value of the foreclosed real estate from the real estate broker involved in the sale transaction. Because Matrix Asset Management typically collects a portion of its fee from the real estate broker, Matrix Asset Management is able to provide this disposition service on an outsourced basis at a reduced cost to the mortgage loan servicer. Matrix Asset Management is able to pass a portion of the cost of the disposition on to the real estate broker because of the volume it generates. In addition, Matrix Asset Management provides limited collateral valuation opinions to clients who are interested in assessing the value of the underlying collateral on nonperforming mortgage loans, as well as to clients such as Matrix Bank and other third party mortgage loan originators and buyers interested in evaluating potential bulk purchases of mortgage loans. School Services. In addition to providing financing to charter schools as mentioned in "Lending Activities --Commercial and Other Lending," ABS also provides a wide variety of outsourced business and consulting services to charter schools. The most basic services offered by ABS include fund accounting, cash management, budgeting, governmental reporting and payroll and accounts payable processing. Additionally, ABS consults with and offers programs to charter schools in the following areas: o facility and safety management; o technology; o policy development; o grant administration; and o comprehensive insurance coverage. ABS also provides administrative and instructional leadership to some charter schools by placing administrators on-site at the charter schools to take a hands-on approach and work with the schools with regard to curriculum development, special education and personnel management. The business services provided by ABS are integral to the financing division, as these services allow ABS to use their knowledge of the school's financial condition and the capability of the schools' operators to make informed decisions in the underwriting of charter school financing. The services also give ABS a significant advantage in the servicing and ongoing monitoring of the schools, which we believe is imperative to the collection process and the overall success of our financing efforts. Self-Directed Trust, Custody and Clearing Activities Sterling Trust provides administrative services for self-directed individual retirement accounts, qualified business retirement plans and personal custodial accounts, as well as corporate escrow and paying agent services. In addition, Sterling Trust offers specialized custody and clearing services to investment professionals. These services are marketed on a nationwide basis to the financial services industry, specifically broker-dealers, registered representatives, financial planners and advisors, tax professionals, insurance agents and investment product sponsors. The advantage offered by Sterling Trust is the ability to hold a wide array of publicly-traded investments, as well as nonstandard assets and private placement offerings. Sterling Trust does not offer financial planning or advising services, nor does it recommend, sell or solicit any investments. Sterling Trust acts only as a directed custodian and is not affiliated with any investment. It has always been Sterling Trust's mission to keep this independence to ensure that high quality services are offered without any conflicting interests. Sterling Trust executes no investment transaction without the direction of the account holder or the account holder's authorized representative. At December 31, 2000, Sterling Trust had assets under administration of over $3.8 billion. Individual Retirement Account Services. Account holders have complete control in the selection and management of all investments. Because investment decisions are involved, account holders may choose to appoint their financial planner, stockbroker or other individual to be their authorized representative. The advantages offered by a Sterling Trust self-directed IRA include the freedom to hold a wide array of investments and the convenience of consolidation. A Sterling Trust self-directed IRA offers the ability to invest in all types of publicly-offered investments such as mutual funds, stocks, annuities and limited partnerships. In addition, a Sterling Trust IRA allows an account holder to hold nonstandard investments such as real estate, trust deeds and promissory notes, as well as private placement offereings of closely-held stock, limited partnerships, limited liability companies and debt instruments. With this high degree of investment flexiblity, a Sterling Trust self-directed IRA may enable account holders to meet their retirement objectives. With a Sterling Trust self-directed IRA, several IRA accounts may be consolidated into one IRA. This consolidation may potentially reduce administrative fees, as well as save account holders time spent managing their investments. Sterling Trust's quarterly statements allow account holders to view their IRA holdings on one comprehensive, easy-to-read statement. Qualified Business Retirement Plan Services. Sterling Trust offers quality record keeping and administration services on 401(k) plans, profit sharing plans, money purchase pension plans and other types of defined contribution and defined benefit plans. Prototype plan documents that provide cost-effective compliance with the tax codes are available for employers of all sizes, from sole proprietors to large corporations. Sterling Trust's qualified business retirement plans are designed to allow the employer to choose the level of service needed, from simple bookkeeping and government reporting, to complete, comprehensive services. No matter what level of service an employer selects, Sterling Trust offers complete independence from investment products, which allows the employer to choose among a full range of investment options. In addition to choosing a plan that meets their service needs and provides investment flexibility, the employer can also select from among a wide range of plan features, which include daily valuation, participant loans, integration with social security and the ability to hold life insurance within the plan. Custodial Services. Sterling Trust offers custodial services on both qualified business retirement plans and personal custodial accounts. Custodial services are also offered on 403(b) plans. By using Sterling Trust's custodial services, individuals and businesses nationwide can monitor and track all investments held within their portfolio. Sterling Trust will execute trades at the direction of the account holder, hold title to the assets as custodian, receive and process periodic reports and earnings and then summarize this activity on quarterly account statements. At year-end, all tax reporting data is prepared and sent to the account holder for income tax preparation purposes. Custodial accounts are provided the same investment flexibility as that which is offered on other types of accounts. Corporate Trust/Escrow Services. Sterling Trust offers escrow and paying agent services for a variety of business transactions, primarily to investment product sponsors. Sterling Trust will provide escrow and/or paying agent services under service agreements, provided that it has no discretion with regard to the investment of assets. Typical administrative services include holding funds in escrow, maintenance of investor records and processing of fund disbursements in accordance to the service agreement. Clearing Services. Matrix Settlement & Clearance Services, our joint venture, provides automated clearing of mutual funds utilizing the National Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance & Settlement platform for banks, trust companies, third party administrators and registered investment advisors. In performing services for its customers, Matrix Settlement & Clearance Services generates low-cost deposits and trust and custodial fees for the Company. As of December 31, 2000, Matrix Settlement & Clearance Services had 33 clients under contract with those clients administering approximately $8.9 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. Competition We compete for the acquisition of mortgage servicing rights and bulk loan portfolios mainly with mortgage companies, savings associations, commercial banks and other institutional investors. We believe that we have competed successfully for the acquisition of mortgage servicing rights and bulk loan portfolios by relying on the advantages provided by our unique corporate structure and the secondary market expertise of our employees. We believe that Matrix Bank's most direct competition for deposits comes from local financial institutions. Customers distinguish between market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Matrix Bank's cost of funds fluctuates with general market interest rates. During certain interest rate environments, we expect additional significant competition for deposits from corporate and governmental debt securities, as well as from money market mutual funds. Matrix Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing. For mortgage loan and mortgage servicing rights brokerage and consulting, we compete mainly with other mortgage banking consulting firms and national and regional investment banking companies. We believe that the customers distinguish between market participants based primarily on customer service. United Financial competes for its brokerage and consulting activities by: o recruiting qualified and experienced sales people; o developing innovative sales techniques; o offering superior analytical services; o providing financing opportunities to its customers through its affiliation with Matrix Bank; and o seeking to provide a higher level of service than is furnished by its competitors. In originating mortgage loans, Matrix Financial and Matrix Bank compete mainly with other mortgage companies, finance companies, savings associations and commercial banks. Customers distinguish among market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Aggressive pricing policies of our competitors, especially during a declining period of mortgage loan originations, could in the future result in a decrease in our mortgage loan origination volume and/or a decrease in the profitability of our loan originations, thereby reducing our revenues and net income. We compete for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to mortgage brokers and borrowers than is furnished by our competitors. However, we do not have a significant market share of the lending markets in which we conduct operations. Sterling Trust faces considerable competition in all of the services and products that it offers, mainly from other self-directed trust companies and broker-dealers. Sterling Trust also faces competition from other trust companies and trust divisions of financial institutions. Sterling Trust's niche has been, and will continue to be, providing high quality customer service and servicing nonstandard retirement products. In an effort to increase market share, Sterling Trust will endeavor to provide superior service, offer technologically advanced solutions, expand its marketing efforts, provide competitive pricing and continue to diversify its product mix. Matrix Asset Management competes against other companies that specialize in providing real estate management and disposition services on foreclosed property. Additionally, clients or potential clients that opt to perform these services in-house diminish Matrix Asset Management's market. ABS competes with other outsourcing companies and Educational Management Organizations, as well as schools that prefer to perform the services offered by ABS in-house. Employees At December 31, 2000, the Company had 735 employees. We believe that our relations with our employees are good. The Company is not party to any collective bargaining agreement. Regulation and Supervision Set forth below is a brief description of various laws and regulations affecting our operations. The description of laws and regulations contained in this document does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Any change in applicable laws, regulations or regulatory policies may have a material effect on our business, operations and prospects. Matrix Bancorp. We are a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act of 1933. As such, we have registered with the Office of Thrift Supervision and are subject to Office of Thrift Supervision regulation, examination, supervision and reporting requirements. In addition, the Office Thrift Supervision has enforcement authority over us and our savings association and non-savings association subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of our subsidiary savings institution, Matrix Bank. In addition, Matrix Bank must notify the Office of Thrift Supervision at least 30 days before making any capital distribution to us. As a unitary savings and loan holding company, we generally are not restricted under existing laws as to the types of business activities in which we may engage, provided that Matrix Bank continues to be a "qualified thrift lender" under the Home Owners' Loan Act. To maintain its status as a qualified thrift lender, Matrix Bank must maintain a minimum percentage of its assets in qualified thrift investments unless the Office of Thrift Supervision grants an exception to this requirement. In general, qualified thrift investments include certain types of residential mortgage loans and mortgage-backed securities. Upon any nonsupervisory acquisition by us of another savings association or of a savings bank or a cooperative bank that is an insured bank that meets the qualified thrift lender test and is deemed to be a savings association by the Office of Thrift Supervision, we would become a multiple savings and loan holding company if the acquired institution is held as a separate subsidiary. Multiple savings and loan holding companies are subject to extensive limitations on the types of business activities in which they may engage. The Home Owners' Loan Act limits the activities of a multiple savings and loan holding company and its uninsured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, subject to the prior approval of the Office of Thrift Supervision, and activities authorized by Office of Thrift Supervision regulation. In addition, if Matrix Bank fails to maintain its status as a qualified thrift lender, the Home Owners' Loan Act would limit the types of business activities in which we may engage to those permissible for a multiple savings and loan holding company, and, except in limited circumstances, it would impose significant limitations on the types of activities in which Matrix Bank would be permitted to engage, on the ability of Matrix Bank to establish additional branch offices and on the types of investments that Matrix Bank would be permitted to make and retain. Federal law imposes limitations on who may control us. Specifically, the Change in Bank Control Act prohibits a person or group of persons from acquiring control of a savings association directly, or indirectly by acquiring control of a savings and loan holding company, unless the Office of Thrift Supervision has been given 60 days prior written notice of the proposed acquisition and within that time the Office of Thrift Supervision has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which the Office of Thrift Supervision may issue such a disapproval. The Office of Thrift Supervision may further extend the disapproval period under certain circumstances. A proposed acquisition may be made prior to the expiration of the disapproval period if the Office of Thrift Supervision issues written notice of its intent not to disapprove the action. Notwithstanding the above, except in certain limited circumstances, the Home Owners' Loan Act also requires that any "company" obtain the prior approval of the Office of Thrift Supervision prior to acquiring control of a savings association directly or indirectly by acquiring control of a savings and loan holding company. In considering whether to approve such an acquisition, the Office of Thrift Supervision must consider a number of factors, including: the financial and managerial resources and future prospects of the acquirer and the savings association involved, the effect of the acquisition on the savings association, the insurance risk to the deposit insurance funds of the Federal Deposit Insurance Corporation and the convenience and needs of the community to be served. The Office of Thrift Supervision may not approve a proposed acquisition which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the savings and loan business in any part of the United States. The Office of Thrift Supervision also may not approve any proposed acquisition the effect of which in any part of the United States may be substantially to lessen competition, or tend to create a monopoly, or which in any other manner would be in restraint of trade, unless the Office of Thrift Supervision finds that the anticompetitive effects of the proposed acquisition are clearly outweighed in the public interest by the probable effect of the acquisition in meeting the convenience and needs of the community to be served. Among other circumstances, under a conclusive presumption established by the Office of Thrift Supervision regulations, an acquirer will be deemed to have acquired control of a savings and loan holding company if the acquirer, directly or indirectly, through one or more subsidiaries or transactions, or acting in concert with one or more persons or companies, acquires control of more than 25 percent of any class of voting stock of the savings and loan holding company or controls in any manner the election of a majority of the board of directors of the savings and loan holding company. The Office of Thrift Supervision regulations also establish other presumptions of control with respect to acquisitions of interest in savings and loan holding companies. Gramm-Leach-Bliley. The Gramm-Leach-Bliley Act of 1999 (otherwise known as the "Financial Services Modernization Act") eliminated many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The law revised and expanded the Bank Holding Company Act framework to permit a holding company structure to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determined to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Financial Services Modernization Act prohibits unitary savings and loan holding companies formed after May 4, 1999 from engaging in nonfinancial activities, and also prohibits purchase of unitary thrift holding companies by commercial firms. The Financial Services Modernization Act grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 (or has or will become a unitary savings and loan holding company pursuant to an application pending on that date). Such a company may continue to operate under present law as long as the company continues to control only one savings institution, excluding supervisory acquisitions, and each controlled institution must meet the qualified thrift lender test. It further requires that a granfathered unitary savings and loan holding compnay must continue to control at least one savings association, or a successor institution, that it controlled on May 4, 1999. We are a grandfathered unitary savings and loan holding company. The Financial Services Modernization Act has not had a material adverse effect on our operations. However, the act permits banks, securities firms and insurance companies to affiliate. This has continued a trend in the financial services industry toward further consolidation. The Financial Services Modernization Act could result in an increasing amount of competition from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources. In addition, the Financial Services Modernization Act may have an anti-takeover effect because it may tend to limit our attractiveness as an acquisition candidate to other savings and loan holding companies and Financial Holding Companies. The Office of Thrift Supervision is proposing to require certain savings and loan holding companies to notify the Office of Thrift Supervision 30 days before undertaking certain significant new business activities. According to the Office of Thrift Supervision, the notice will enable the agency to assess the potential impact on the risk profile of the consolidated entity and subsidiary thrifts. The Office of Thrift Supervision also seeks comment on its proposal to codify its current practices for reviewing the capital adequacy of savings and loan holding companies and, when necessary, requiring additional capital on a case-by-case basis. The Office of Thrift Supervision could object to or conditionally approve an activity or transaction if it finds a material risk to the safety and soundness and stability of the thrift. It is possible that such regulations, if adopted, would impose time delays and potential increased capital costs to the operations of Matrix Bank. Federal Savings Bank Operations. Matrix Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its chartering authority and primary regulator, and potentially by the Federal Deposit Insurance Corporation, which insures its deposits up to applicable limits. Such regulation and supervision: o establishes a comprehensive framework of activities in which Matrix Bank can engage; o limits the types and amounts of investments permissible for Matrix Bank; o limits the ability of Matrix Bank to extend credit to any given borrower; o imposes specified liquidity requirements; o significantly limits the transactions in which Matrix Bank may engage with its affiliates; o requires Matrix Bank to meet a qualified thrift lender test that imposes a level of portfolio assets in which Matrix Bank must invest in qualified thrift investments, which include primarily residential mortgage loans and related investments; o places limitations on capital distributions by savings associations such as Matrix Bank, including cash dividends; o imposes assessments to the Office of Thrift Supervision to fund its operations; o establishes a continuing and affirmative obligation, consistent with Matrix Bank's safe and sound operation, to help meet the credit needs of its community, including low and moderate income neighborhoods; o requires Matrix Bank to maintain certain noninterest-bearing reserves against its transaction accounts; o establishes various capital categories resulting in various levels of regulatory scrutiny applied to the institutions in a particular category; and o establishes standards for safety and soundness. Matrix Bank must submit annual audit reports prepared by independent auditors to federal and state regulators. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted to the Office of Thrift Supervision. The audit committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. The regulatory structure is designed primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in these regulations, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material impact on Matrix Bank and its operations. Transactions with Affiliates. Under current federal law, Sections 23A and 23B of the Federal Reserve Act govern transactions between depository institutions and their affiliates. These provisions are made applicable to savings associations such as Matrix Bank by the Home Owners' Loan Act. In a holding company context, in general, the parent holding company of a savings association and any companies that are controlled by the parent holding company are affiliates of the savings association. In addition, any companies that are sponsored and advised on a controlled basis by a savings association or its affiliates and any investment companies to which a savings association or its affiliates act as investment advisors are deemed to be affiliates. Section 23A limits the extent to which the savings association or its subsidiaries may engage in certain transactions with its affiliates. These transactions include, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Generally, these transactions between the savings association and any one affiliate cannot exceed 10% of the savings association's capital stock and surplus, and these transactions between the savings institution and all of its affiliates cannot, in the aggregate, exceed 20% of the savings institution's capital stock and surplus. Section 23A also establishes specific collateral requirements for loans or extensions of credit to an affiliate, and for guarantees or acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that transactions covered by Section 23A and a broad list of other specified transactions be on terms and under circumstances substantially the same, or no less favorable to the savings association or its subsidiary, as similar transactions with non-affiliates. In addition to the restrictions on transactions with affiliates that Sections 23A and 23B of the Federal Reserve Act impose on depository institutions, the regulations of the Office of Thrift Supervision also generally prohibit a savings association from purchasing or investing in securities issued by an affiliate. Matrix Bank engages in transactions with its affiliates, which are structured with the intent of complying with these regulations. Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation. Matrix Bank is a member of the Savings Association Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The deposits of Matrix Bank are insured up to $100,000 per depositor by the Federal Deposit Insurance Corporation. This insurance is backed by the full faith and credit of the United States. As insurer, the Federal Deposit Insurance Corporation imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the Federal Deposit Insurance Corporation. It also may prohibit any Federal Deposit Insurance Corporation-insured institution from engaging in any activity the Federal Deposit Insurance Corporation determines by regulation or order to pose a serious risk to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also may initiate enforcement actions against savings associations and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The Federal Deposit Insurance Corporation Improvement Act of 1991 required the Federal Deposit Insurance Corporation to implement a risk-based deposit insurance assessment system. Under this risk-based assessment system, all depository associations insured by the Savings Association Insurance Fund are placed into one of nine categories and assessed based upon their level of capital and supervisory evaluation. Under this system, associations classified as well capitalized and considered healthy pay the lowest assessment, which is currently 0 basis points (or, hundredths of one percent), while associations that are less than adequately capitalized and considered of substantial supervisory concern pay the highest assessment, which is currently 27 basis points. Matrix Bank currently qualifies for the lowest assessment rate. In addition, under the Federal Deposit Insurance Corporation Improvement Act, the Federal Deposit Insurance Corporation may impose special assessments on Savings Association Insurance Fund members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation may increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the Savings Association Insurance Fund will be less than the designated reserve ratio of 1.25% of deposits insured by the Savings Association Insurance Fund. In setting these increased assessments, the Federal Deposit Insurance Corporation must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the Federal Deposit Insurance Corporation. The Financing Corporation is a government agency-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. Matrix Bank's portion of the payment on the Financing Corporation bonds was .0202% of deposits for the fourth quarter of 2000 and will be .0196% of the deposits for the first quarter of 2001. The financing corporations created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Competitive Equality Banking Act of 1987 are also empowered to assess premiums on savings associations to help fund the liquidation or sale of troubled associations. Such premiums cannot, however, exceed the amount of Savings Association Insurance Fund assessments and are paid in lieu thereof. Brokered Deposits. Under the Federal Deposit Insurance Corporation regulations governing brokered deposits, well capitalized associations, such as Matrix Bank, are not subject to brokered deposit limitations, while adequately capitalized associations are subject to certain brokered deposit limitations and undercapitalized associations may not accept brokered deposits. At December 31, 2000, Matrix Bank had $203.6 million of brokered deposits. In the event Matrix Bank is not permitted to accept brokered deposits in the future, it would have to find replacement sources of funding. It is possible that such alternatives, if available, would result in a higher cost of funds. Matrix Bank's Capital Ratios. Federal law requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to savings institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Office of Thrift Supervision has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be: o "well capitalized" if it has a total risk-based capital ratio of 10% or greater and a leverage ratio of 5% or greater; o "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater and generally a leverage ratio of 4% or greater; o "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%; o "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and o "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of December 31, 2000, Matrix Bank was a "well capitalized" institution. "Undercapitalized" institutions must adhere to growth, capital distribution and dividend and other limitations and are required to submit a capital restoration plan with the Office of Thrift Supervision within 45 days after an association receives notice of such undercapitalization. A savings institution's compliance with its capital restoration plan is required to be guaranteed by any company that controls the "undercapitalized" institution in an amount equal to the lesser of 5% of total assets when deemed "undercapitalized" or the amount necessary to achieve the status of "adequately capitalized." If an "undercapitalized" savings institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" institutions must comply with one or more of a number of additional restrictions, including an order by the Office of Thrift Supervision to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restriction on interest rates paid on deposits, compensation of executive officers and capital distributions to the parent holding company. "Critically undercapitalized" institutions must comply with additional sanctions, including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains this status. The following table indicates Matrix Bank's regulatory capital ratios at December 31, 2000: As of December 31, 2000 ------------------------ Core Risk-Based Capital Capital ------------ ------------ (Dollars in thousands) Shareholder's equity/GAAP capital.................... $ 98,920 $ 98,920 Disallowed assets.................................... 3,812 3,812 Gain on available for sale securities................ (819) (819) Additional capital items: General valuation allowances..................... -- 5,802 ------------ ------------ Regulatory capital as reported to the Office of Thrift Supervision................................... 94,289 100,091 Minimum capital requirement as reported to the Office of Thrift Supervision......................... 53,694 65,387 ------------ ------------ Regulatory capital--excess............................ $ 40,595 $ 34,704 ============ ============ Capital ratios....................................... 7.02% 12.25% Well capitalized requirement......................... 5.00% 10.00% Federal Home Loan Bank System. Matrix Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. The Federal Home Loan Bank advances must be secured by specified types of collateral and may only be obtained for the purpose of providing funds for residential housing finance. The Federal Home Loan Bank funds its operations primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank system. Matrix Bank, as a member of the Federal Home Loan Bank system, must acquire and hold shares of capital stock in its regional Federal Home Loan Bank in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 0.3% of total assets, or 5% of its advances (borrowings) from the Federal Home Loan Bank. Matrix Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2000 of $27.8 million. Federal Reserve System. The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: o for that portion of transaction accounts aggregating $44.3 million or less, which may be adjusted by the Federal Reserve Board, the reserve requirement is 3%; and o for accounts greater than $44.3 million, the reserve requirement is $1.329 million plus 10% of amounts over $44.3 million, which may be adjusted by the Federal Reserve Board between 8% and 14%, against that portion of total transaction accounts in excess of $44.3 million. At December 31, 2000, Matrix Bank had $8.7 million of reserves with the Federal Reserve System and was in compliance with the Federal Reserve Board's reserve requirements. Mortgage Banking Operations. The rules and regulations applicable to our mortgage banking operations establish underwriting guidelines that, among other things, include anti-discrimination provisions, require provisions for inspections, appraisals and credit reports on prospective borrowers and fix maximum loan amounts. Moreover, we are required annually to submit audited financial statements to the Department of Housing and Urban Development, Fannie Mae, Freddie Mac and the Government National Mortgage Association, and each regulatory entity maintains its own financial guidelines for determining net worth and eligibility requirements. Our operations are also subject to examination by the Department of Housing and Urban Development, Fannie Mae, Freddie Mac and the Government National Mortgage Association at any time to assure compliance with the applicable regulations, policies and procedures. Mortgage loan origination activities are subject to, among other laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974, and the regulations promulgated under these laws that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Moreover, the Office of Thrift Supervision, as primary regulatory authority over Matrix Bank (the parent of Matrix Financial), examines our mortgage banking operations as well. Additionally, there are various state and local laws and regulations affecting our operations. We are licensed in those states in which we do business requiring such a license where the failure to be licensed would have a material adverse effect on us, our business, or our assets. Mortgage origination operations also may be subject to state usury statutes. Regulation of Sterling Trust Company. Sterling Trust provides custodial services and directed, non-discretionary trustee services. Sterling Trust was chartered under the laws of the State of Texas, and as a Texas trust company is subject to supervision, regulation and examination by the Texas Department of Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is subject to virtually all provisions of the Texas Finance Code as if the trust company were a state chartered bank. The activities of a Texas trust company are limited by applicable law generally to acting as a trustee, executor, administrator, guardian or agent for the performance of any lawful act, and to lend and accumulate money when authorized under applicable law. In addition, a Texas trust company with capital of $1 million or more, such as Sterling Trust, has the power to: o purchase, sell, discount and negotiate notes, drafts, checks and other evidences of indebtedness; o purchase and sell securities; o issue subordinated debentures and capital notes with the written consent of the Texas Banking Commissioner; and o exercise powers incidental to the enumerated powers described in the Texas Finance Code. A Texas trust company, such as Sterling Trust, is generally prohibited from accepting demand or time deposits if not insured by the Federal Deposit Insurance Corporation. Limitation on Capital Distributions. The Texas Finance Code prohibits a Texas trust company from reducing its outstanding capital and restricted surplus through redemption or other capital distribution without the prior written approval of the Texas Banking Commissioner. The Texas Finance Code does not prohibit the declaration and payment of pro rata share dividends consistent with the Texas Business Corporation Act. Moreover, Sterling Trust anticipates that it will not pay cash dividends during 2001. Investments. A Texas trust company is generally obligated to maintain an amount equal to 40% of its capital and surplus in investments that are readily marketable and that can be converted into cash within four business days. So long as it complies with those requirements, a Texas trust company generally is permitted to invest its corporate assets in any investment permitted by law. However, unless otherwise permitted by the Texas Finance Code, a Texas trust company cannot invest an amount in excess of 15% of its capital and certified surplus in the securities of a single issuer without the prior written consent of the Texas Banking Commissioner. Branching. The Texas Finance Code permits a Texas trust company to establish and maintain branch offices at any location within the state if it first obtains written approval of the Texas Banking Commissioner. Transactions with Related Parties. The Texas Finance Code prohibits the sale or lease of an asset of a Texas trust company, or the purchase or lease of an asset by a Texas trust company, where the transaction involves an officer, director, principal shareholder or affiliate, unless the transaction is approved by a disinterested majority of the board of directors or the written approval of the Texas Banking Commissioner is first obtained. Enforcement. Under applicable provisions of the Texas Finance Code, the Texas Banking Commissioner has the power to issue enforcement actions against a Texas trust company or any officer, employee or director of a Texas trust company. In addition, in certain circumstances, the Texas Banking Commissioner may remove a present or former officer, director or employee of a Texas trust company from office or employment, and may prohibit a shareholder or other persons participating in the affairs of a Texas trust company from such participation. The Texas Banking Commissioner has the authority to assess civil penalties of up to $500 per day for violations of a cease and desist, removal or prohibition order. Capital Requirements. Applicable law generally requires a Texas trust company to have and maintain minimum restricted capital of at least $1 million. The Texas Banking Commissioner may require additional capital of a Texas trust company if the Texas Banking Commissioner determines it necessary to protect the safety and soundness of such company. If the Texas Banking Commissioner were to do so, there is no assurance that Sterling Trust would be able to meet such additional requirements. In such case, the Texas Banking Commissioner could pursue various enforcement actions, such as appointing either a conservator or a receiver for Sterling Trust. Currently, however, Sterling Trust is in compliance with all capital requirements under Texas law. The foregoing is an attempt to summarize some of the relevant laws, rules and regulations governing unitary savings and loan holding companies and savings institutions but does not purport to be a complete summary of all applicable laws, rules and regulations governing such financial institutions. Item 2. Properties We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion on acceptable terms. The following table sets forth certain information concerning the real estate that we own or lease:
Monthly Rent or Location Square Feet Owned/Leased Occupant Mortgage Payment -------------------------- -------------- ------------------------------------- -------------------------------- ------------------ Denver, CO.............. 29,298 Leased through July 31, 2006 Matrix Bancorp, United $ 44,168 Financial, Matrix Asset Management, Matrix Bank, First Matrix and Matrix Settlement & Clearance Services Denver, CO.............. 8,100 Leased through June 30, 2001 Matrix Asset Management $ 8,746 Newtown, PA............. 1,365 Leased through June 30, 2003 Matrix Asset Management $ 2,446 Phoenix, AZ............. 62,771 Leased through February 28, 2007 Matrix Financial, Matrix Bank, $50,133 ABS and Matrix Bancorp Atlanta, GA............. 4,129 Leased through August 31, 2003 Matrix Financial $ 4,843 Chesterfield, MO........ 1,570 Leased through May 1, 2001 Matrix Financial $ 2,355 Chicago, IL............. 294 Leased through April 30, 2003 Matrix Financial $ 2,729 Clayton, MO............. 6,718 Leased through June 30, 2003 Matrix Financial $13,996 Dallas, TX.............. 6,205 Leased through May 31, 2004 Matrix Financial $ 7,756 Denver, CO.............. 9,549 Leased through June 30, 2002 Matrix Financial $11,401 Houston, TX............. 4,011 Leased through October 31, 2003 Matrix Financial $ 5,682 Phoenix, AZ............. 4,040 Leased through June 14, 2002 Matrix Financial $ 6,902 Sacramento, CA.......... 4,202 Leased through December 31, 2003 Matrix Financial $ 7,353 Santa Ana, CA........... 8,851 Leased through August 31, 2003 Matrix Financial $13,277 Albuquerque, NM......... 143 Leased through August 15, 2001 Matrix Bank $ 450 Evergreen, CO........... 1,855 Leased through February 1, 2003 Matrix Bank $ 4,085 Las Cruces, NM.......... 1,800 Owned Matrix Bank N/A Las Cruces, NM.......... 30,000(1) Owned Matrix Bank N/A Sandy, UT............... 245 Leased through July 1, 2001 Matrix Bank $ 1,255 Sun City, AZ............ 3,000 Owned Matrix Bank N/A Westminster, CO......... 823 Leased through March 1, 2003 Matrix Bank $ 1,419 Waco, TX................ 11,300 Leased through June 30, 2001(2)(3) Sterling Trust $13,553 Waco, TX................ 928 Leased through June 30, 2001(3) Sterling Trust $ 1,021 Fort Worth, TX.......... 1,148 Leased through November 30, 2004 First Matrix $ 1,579 Cottonwood, AZ.......... 2,400 Owned ABS N/A Cottonwood, AZ.......... 600 Leased month to month ABS $ 365 Peoria, AZ.............. 3,319 Leased through June 6, 2002 ABS $ 5,360 Tuscon, AZ.............. 1,879 Leased through September 30, 2002 ABS $ 2,322 Snowflake, AZ........... 2,850 Leased month to month ABS $ 2,760 Deerfield Beach, FL 500 Leased month to month ABS $ 795
[FN] (1)Of this 30,000 square feet, approximately 17,800 square feet serve as the headquarters for Matrix Bank. Substantially all of the remaining space is rented to unaffiliated third parties at market prices. (2)The lease agreement provides for renewal options and allocation of certain expenses the lessee would reimburse over a specified amount during the life of the lease. (3)Management anticipates renewal of this lease at its expiration. Item 3. Legal Proceedings General. We are from time to time party to various litigation matters, in most cases, involving ordinary and routine claims incidental to our business. With respect to all litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. Nevertheless, we do not believe any of such litigation matters will result in a material adverse impact on our consolidated financial condition, results of operations or cash flows, except that no such assurances can be given with respect to the litigation matters set forth below, against which no accrual for loss has been made as of December 31, 2000. Matrix Bancorp. In early 1999, Matrix Bancorp and Matrix Bank instituted an arbitration action with the American Arbitration Association in Phoenix, Arizona against Fidelity National Financial, Inc. The arbitration action arose out of an alleged breach by Fidelity of a Merger Termination Agreement entered into between Matrix Bancorp and Fidelity in connection with the termination of their proposed merger. The arbitration panel has ruled that the entire Merger Termination Agreement was unenforceable. Matrix Bancorp and Matrix Bank have filed an appeal of the arbitration panel's decision in federal district court in Phoenix, Arizona. Matrix Bancorp and Matrix Bank believe they have meritorious points of appeal and intend to prosecute the appeal vigorously. Matrix Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings, Inc., Matrix Bank, and Guy A. Gibson, President and Chief Executive Officer of Matrix Bancorp, Richard V. Schmitz, Chairman of the Board of Matrix Bancorp, and D. Mark Spencer, Vice Chairman of Matrix Bancorp, have been named defendants in an action styled Roderick Adderley, et. al. v. Guy A. Gibson, et. al. pending in the District Court of Tarrant County, Texas, seeking to impose joint and several liability on these defendants for the judgment against Sterling Trust in Roderick Adderley, et. al. v. Advance Financial Services, Inc., et. al. See "--Sterling Trust" below. The plaintiffs have asserted various theories of liability, including control person theories of liability under the Texas Securities Act and fraudulent transfer theories of liability. The defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Matrix Bancorp and Sterling Trust have been named defendants in an action styled Victor Doroski v. David M. Mobley, et. al. pending before the American Arbitration Association in Waco, Texas. This action was initially filed by the plaintiff in the United States District Court for the Southern District of California, but was ordered to arbitration by the court in July 2000. In this action, the plaintiff has alleged that Sterling Trust and Matrix Bancorp violated various provisions of the Commodities Exchange Act in connection with plaintiff's investment of certain monies in his self-directed IRA in various funds allegedly affiliated with Mr. Doroski's appointed representative, David M. Mobley (the "Mobley Funds"). Sterling Trust acted only as self-directed custodian for Mr. Doroski's IRA. Matrix Bancorp never had any dealings with Mr. Mobley, the Mobley Funds or Mr. Doroski. The arbitration hearing is set for June 2001. The defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Matrix Bank. A former customer of Matrix Bank is a debtor in a Chapter 11 proceeding under the Bankruptcy Code styled In re Apponline.com, Inc. and Island Mortgage Network, Inc. pending in the United States Bankruptcy Court for the Eastern District of New York. Prior to the bankruptcy filing, Matrix Bank had provided the customer, Island Mortgage Network, Inc., with a purchase/repurchase facility under which Matrix Bank purchased residential mortgage loans from Island Mortgage, with Island Mortgage having the right or obligation to repurchase such mortgage loans within a specified period of time. Several other financial institutions had provided Island Mortgage with warehouse financing or additional purchase/repurchase facilities (the "Origination Facilities"). At this time, it appears that no other financial institution that provided an Origination Facility to Island Mortgage has a conflicting interest with Matrix Bank in respect of the loans purchased by Matrix Bank, which were approximately $12.4 million in original principal amount (the "Purchased Loans"). However, several third parties have instituted lawsuits against Matrix Bank claiming an equitable interest in a portion of the Purchased Loans (approximately $2.4 million in original principal amount). These third parties consist primarily of title companies, closing attorneys and other closing agents that provided settlement funds in connection with the funding of a borrower's mortgage loan, in many cases, we believe in violation of various "good funds" laws, which typically require a closing agent to wait for receipt of "good funds" prior to disbursement of settlement funds on the origination of a loan. After providing settlement funds, these closing agents discovered that Island Mortgage had either provided company checks with insufficient funds or had inappropriately placed a stop payment on the checks. In addition, parties in the chain of title to property securing approximately $2.5 million loans, including sellers and prior lienholders are seeking to void or rescind their transactions on the theory that they never received consideration. Matrix Bank believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. The trustee for Island Mortgage has received an order from the Bankruptcy Court finding that the Purchased Loans are a part of the estate of Island Mortgage. Nevertheless, the trustee and Matrix Bank have reached an agreement, in principle, whereby the trustee will release all of its right in and to the Purchased Loans if the trustee, after performance of a "due diligence" review, determines that Matrix Bank owns the Purchased Loans or, would otherwise have a perfected security interest in the Purchased Loans. Matrix Bank believes it can adequately demonstrate to the trustee that it is the owner of the Purchased Loans, or otherwise has a perfected security interest in the Purchased Loans. The Company intends to vigorously defend its position in this matter. The ultimate legal and financial liability of the Company, if any, in this bankruptcy cannot be estimated with certainty at this time. For a description of Roderick Adderley, et al. v. Guy A. Gibson, et al., please see "Matrix Bancorp" above. Sterling Trust. Sterling Trust has been named a defendant in an action styled Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. that was tried in Tarrant County, Texas district court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of 12 theories of liability posed by the plaintiffs, and the court has signed a judgment for certain of the plaintiffs in the amount of approximately $6.4 million. Sterling Trust has filed an appeal of this judgment and believes it has meritorious points of appeal. It intends to vigorously prosecute the appeal of this action against which no accrual for loss has been made. The ultimate resolution of this matter, which is expected to occur in nine to 18 months, could result in a loss of up to $6.4 million plus post-judgment interest and additional attorneys' fees. The ultimate legal and financial liability, if any, of Sterling Trust cannot be estimated with certainty at this time. Sterling Trust has been named a defendant in an action styled John A. Redin, et. al. v. Sterling Trust Company, et. al. pending in the Superior Court of the State of California for the County of Los Angeles. The plaintiffs in this action seek to certify a class action on behalf of all persons and entities that invested in promissory notes issued by Personal Choice Opportunities. The plaintiffs allege, among other things, that Sterling Trust, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. Sterling Trust believes it has adequate defenses and intends to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Sterling Trust has been named a defendant in several lawsuits pending in the United States District Court for the Western District of Pennsylvania. All of such actions have been instituted by one law firm. The style of these actions are as follows: Douglas Wheeler, et. al. v. Pacific Air Transport, et. al.; Paul C. Jared, et. al. v. South Mountain Resort and Spa, Inc., et. al.; Lawrence Rehrig, et. al. v. Caffe Diva, et. al.; Merrill B. Christman, et. al. v. Millennium 2100, Inc., et. al.; David M. Veneziale, et. al. v. Sun Broadcasting Systems, Inc., et. al.; Don Glazer, et. al. v. Technical Support Servs., Inc., et. al.; and Donald Maudlin, et. al. v. World Vision Entertainment, Inc., et. al. Each case seeks certification of a class action and alleges negligent misrepresentation, breach of fiduciary duty, negligence and civil conspiracy against Sterling Trust in connection with Sterling Trust's performance of its duties as self-directed custodian for the plaintiffs' IRAs, which participated in promissory note programs issued by the various companies named in the style of the cases above. Sterling Trust believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. For a description of the Doroski arbitration, please see "-Matrix Bancorp" above. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock, $.0001 par value, is traded on the NASDAQ National Market under the symbol "MTXC." The following table sets forth the high and low sales prices for our common stock on the NASDAQ National Market for the periods indicated.
Market Price -------------------- Quarter Ended: High Low -------- --------- December 31, 2000............................ $ 8.250 $ 6.031 September 30, 2000........................... 12.938 5.500 June 30, 2000................................ 9.000 6.750 March 31, 2000 .............................. 14.125 7.875 December 31, 1999............................$ 15.125 $ 11.000 September 30, 1999........................... 16.063 11.250 June 30, 1999................................ 18.000 7.625 March 31, 1999............................... 18.500 11.625
On March 1, 2001, the closing price of our common stock was $8.813 per share. Also, as of that date, the approximate number of holders of record of our common stock was 48. This number does not include beneficial owners who hold their shares in a depository trust in "street" name. In May 2000, we announced the adoption of a Common Stock Repurchase Program. Under this program, we repurchased a total of 237,000 shares through December 31, 2000, for a total purchase price of approximately $1.8 million. Our ability to repurchase stock is limited due to various provisions in Matrix Bancorp's debt instruments, the most restrictive of which is our bank stock loan. Under the bank stock loan, Matrix Bancorp is allowed to make certain restricted payments, which includes repurchases of stock and payments of dividends to shareholders, in an amount of up to $3 million plus 25% of the Company's cumulative consolidated net income for fiscal quarters beginning with the quarter ending March 31, 2001. We have not paid any dividends on our equity for the last two fiscal years. Any future determination as to dividend policy will be made at the discretion of the Board of Directors of the Company and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors the Board of Directors may deem relevant. Our ability to pay dividends is restricted by the same provisions that restrict our ability to repurchase our stock, as described in the immediately preceding paragraph. Additionally, Matrix Bancorp is prohibited from paying dividends on its common stock if the scheduled payments on our junior subordinated debentures and trust preferred securities have not been made. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 9 to the consolidated financial statements included elsewhere in this document. In addition, the ability of Sterling Trust and Matrix Bank to pay dividends to Matrix Bancorp may be restricted in certain instances. See "Regulation and Supervision." Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF MATRIX BANCORP, INC. The following selected consolidated financial data and operating information of Matrix Bancorp, Inc. should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each of which is included elsewhere in this document. In February 1997, we completed our acquisition of The Vintage Group in a transaction accounted for as a pooling of interests. As a result of the pooling, our historical financial and other information has been restated to include the financial and other information of The Vintage Group.
As of and for the Year Ended December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- --------- --------- ---------- -------- (Dollars in thousands, except per share data) Statement of Income Data Net interest income before provision for loan and valuation losses....... $ 29,785 $ 29,463 $ 24,190 $ 13,888 $ 6,059 Provision for loan and valuation losses.......... 4,235 3,180 4,607 874 143 -------- --------- --------- ---------- -------- Net interest income after provision for loan and valuation losses...... 25,550 26,283 19,583 13,014 5,916 Noninterest income: -------- --------- --------- ---------- -------- Loan administration........ 23,850 23,686 17,411 16,007 8,827 Brokerage.................. 5,476 6,156 7,054 3,921 4,364 Trust services............. 4,923 4,840 4,169 3,561 3,061 Real estate disposition services................. 3,677 3,659 2,036 1,121 564 Gain on sale of loans and mortgage-backed securities............... 982 3,247 3,108 2,441 3,121 Gain on sale of mortgage servicing rights......... 2,634 363 803 3,365 3,232 Loan origination........... 7,587 6,218 5,677 4,694 1,809 School services............ 4,240 2,813 46 - - Other...................... 5,423 9,378 6,441 2,919 1,609 -------- --------- --------- ---------- -------- Total noninterest income.. 58,792 60,360 46,745 38,029 26,587 Noninterest expense.......... 77,841 69,586 52,939 37,746 26,655 -------- --------- --------- ---------- -------- Income before income taxes... 6,501 17,057 13,389 13,297 5,848 Income taxes................. 2,243 6,278 4,876 5,159 2,278 -------- --------- --------- ---------- ------- Net income................... $ 4,258 $ 10,779 $ 8,513 $ 8,138 $ 3,570 ======== ========= ========= ========== ======= Net income per share assuming dilution(1) ..... $ 0.63 $ 1.58 $ 1.24 $ 1.20 $ 0.68 Weighted average common shares assuming dilution.. 6,748,857 6,833,546 6,881,890 6,781,808 5,077,321 Cash dividends(2)............ $ -- $ -- $ -- $ -- $ 201 Balance Sheet Data Total assets.................$1,418,795 $1,283,746 $1,012,155 $ 606,581 $ 274,559 Mortgage-backed securities... 66,616 -- -- -- -- Total loans, net............. 1,116,021 1,103,515 848,448 511,372 212,361 Mortgage servicing rights, net....................... 71,529 63,479 57,662 36,276 23,680 Deposits(3)(4)............... 602,669 562,194 490,516 224,982 90,179 Custodial escrow balances.... 77,647 94,206 96,824 53,760 37,881 FHLB borrowings.............. 519,433 405,000 168,000 171,943 51,250 Borrowed money(5)............ 124,503 142,101 178,789 89,909 42,431 Total shareholders' equity... 64,023 60,497 49,354 40,610 32,270 Operating Ratios and Other Selected Data Return on average assets(6).. 0.32 % 1.02 % 1.02 % 1.78% 1.69% Return on average equity(6).. 6.79 19.79 18.92 22.71 24.30 Average equity to average assets(6)................. 4.75 5.16 5.41 7.86 6.97 Net interest margin(6)(7).... 2.51 3.25 3.37 3.70 3.45 Operating efficiency ratio(8) 76.76 59.21 59.74 60.14 74.20 Total amount of loans purchased................ $ 225,898 $ 701,952 $ 678,150 $493,693 $159,015 Balance of owned servicing portfolio (end of period). 5,517,963 5,889,715 5,357,729 3,348,062 2,505,036 Trust assets under administration (end of period) .................. 3,847,038 2,545,060 2,089,562 1,437,478 1,162,231 Wholesale loan origination volume.................... 512,541 443,363 574,963 402,984 583,279 Ratios of Earnings to Fixed Charges(9) Including interest on deposits.................. 1.09x 1.38x 1.36x 1.71x 1.54x Excluding interest on deposits.................. 1.15x 1.75x 1.64x 2.30x 1.84x Loan Performance Ratios and Data Allowance for loan and valuation losses.......... $ 8,581 $ 6,354 $ 3,710 $ 1,756 $ 1,039 Nonperforming loans(10) ..... 28,516 25,641 13,209 4,990 3,903 Nonperforming loans/total loans(10) ................ 2.54 % 2.31% 1.55 % 0.97% 1.83% Nonperforming assets/total assets(10) ............... 2.20 2.06 1.40 1.03 1.89 Net loan charge-offs/average loans(6) .................... 0.18 0.06 0.38 0.04 0.03 Allowance for loan and valuation losses/ total loans ............. 0.72 0.57 0.44 0.34 0.49 Allowance for loan and valuation losses/ nonperforming loans ...... 30.09 24.78 28.09 35.19 26.62
---------- [FN] (1) Net income per common share assuming dilution is based on the weighted average number of common shares outstanding during each period and the dilutive effect, if any, of stock options and warrants outstanding. There are no other dilutive securities. (2) Represents dividends paid by The Vintage Group prior to its acquisition by us. (3) Following our acquisition of The Vintage Group in February 1997, Sterling Trust moved approximately $80.0 million of fiduciary deposits from a third party institution to Matrix Bank. (4) Beginning in February 1998, Matrix Bank began accepting brokered deposits. At December 31, 2000, 1999 and 1998, the total balance of brokered deposits was $203.6 million, $221.5 million and $148.7 million, respectively. (5) Included in borrowed money at December 31, 2000 and 1999, is $27.5 million pertaining to the guaranteed preferred beneficial interests in the Matrix Bancorp's 10% junior subordinated debentures. See additional discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." (6) Calculations are based on average daily balances where available and monthly averages otherwise. (7) Net interest margin has been calculated by dividing net interest income before loan and valuation loss provision by average interest-earning assets. (8) The operating efficiency ratio has been calculated by dividing noninterest expense, excluding amortization of mortgage servicing rights, by operating income. Operating income is equal to net interest income before provision for loan and valuation losses plus noninterest income. (9) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense. (10)See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Nonperforming Assets" for a discussion of the impact of certain bulk purchases of mortgage loan portfolios on the level of nonperforming loans and the effect of repurchasing sub-prime automobile loans. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following management's discussion and analysis of the financial condition and results of operations in conjunction with the preceding "Selected Consolidated Financial and Operating Information." Additionally, our consolidated financial statements and the notes thereto, as well as other data included in this document, should be read and analyzed in combination with the analysis below. General Matrix Bancorp was formed in June 1993 when the founding shareholders of Matrix Financial and United Financial, two of our subsidiaries, exchanged all of their outstanding capital stock for shares of our stock in a series of transactions that were each accounted for as a pooling of interests. In September 1993, we acquired Dona Ana Savings and Loan Association, FSB, which was subsequently renamed Matrix Capital Bank. The acquisition was accounted for using the purchase method of accounting. We formed Matrix Asset Management, formerly United Special Services, in June 1995 and United Capital Markets in December 1996. In February 1997, we acquired The Vintage Group in a pooling of interests and, accordingly, no goodwill was recorded and our consolidated financial statements for the prior periods have been restated. Additionally, we acquired ABS in March 1999. The acquisition was accounted for using the purchase method of accounting. On August 1, 2000, we sold the stock of United Capital Markets to one of the officers of that company, as previously disclosed. Additionally, on August 1, 2000, Matrix Financial, our mortgage banking operation, became an operating subsidiary of Matrix Bank. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank; o loan administration fees generated by Matrix Financial; o brokerage and consulting and disposition services fees realized by United Financial and Matrix Asset Management, respectively; o loan origination fees and gains on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; o trust service fees generated by Sterling Trust; 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 spreads, the volume of loan originations, mortgage loan prepayments and the value of mortgage servicing portfolios. Comparison of Results of Operations for Fiscal Years 2000 and 1999 Net Income; Return on Average Equity. Net income decreased $6.5 million to $4.3 million for fiscal year 2000 as compared to $10.8 million for fiscal year 1999. On a per share basis, net income was $.63 per share for fiscal year 2000 and $1.58 for fiscal year 1999. Return on average equity decreased to 6.8% for fiscal year 2000 as compared to 19.8% for fiscal year 1999. The decreases in net income, earnings per share and return on average equity were caused primarily by the substantial increase in the cost of our interest-bearing liabilities, which resulted from the higher interest rate environment of fiscal year 2000 as compared to fiscal year 1999. Additionally, we incurred losses related to loans that we acquired under a previously existing purchase/repurchase facility, as well as related to the settlement of the Harbor Financial Mortgage Corporation bankruptcy. Our legal expenses in fiscal year 2000 were substantially higher than the prior fiscal year relating to litigation at Sterling Trust and the two losses mentioned above. See "Legal Proceedings." Net Interest Income. Net interest income before provision for loan and valuation losses increased $322,000 to $29.8 million for fiscal year 2000 as compared to $29.5 million for fiscal year 1999. Our net interest income before provision for loan and valuation losses increased only slightly in spite of the $276.9 million, or 30.5%, increase in our interest-earning assets. The reason for the small increase in net interest income before provision for loan and valuation losses was due to the interest rate environment, which caused the cost of our interest-bearing liabilities to increase significantly more than the yield on our interest-earning assets. The cost of our interest-bearing liabilities increased by 87 basis points, whereas the yield on our interest-earning assets only increased 9 basis points between the comparable periods. The increase in the cost of our interest-bearing liabilities caused our net interest margin to decrease to 2.51% for fiscal year 2000 as compared to 3.25% for fiscal year 1999 and our interest rate spread to decrease to 2.07% for fiscal year 2000 as compared to 2.85% for fiscal year 1999. As noted above, the compression in our net interest margin was a result of the interest rate environment during 2000 and our continued philosophy of acquiring adjustable-rate mortgages. For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses increased $1.0 million, or 33.2%, to $4.2 million for fiscal year 2000 as compared to $3.2 million for fiscal year 1999. This increase was primarily attributable to ABS' charge-off of a $768,000 loan during 2000 due to the closing of one of its school customers. The remaining increase was due to increases in the provision at ABS, Matrix Bank and Matrix Financial. For a discussion of the components of the allowance for loan losses, see "--Asset and Liability Management--Analysis of Allowance for Loan and Valuation Losses." For a discussion on the allowance as it relates to nonperforming assets, see "--Asset and Liability Management--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 were consistent with an increase of only $164,000 to $23.9 million for fiscal year 2000 as compared to $23.7 million for fiscal year 1999. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio decreased to an average balance of $5.4 billion for fiscal year 2000 as compared to an average balance of $5.6 billion for fiscal year 1999. This decrease was offset by a small increase in the average service fee rate, including all ancillary income, to 0.44% for fiscal year 2000 as compared to 0.43% for fiscal year 1999. Brokerage fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights. Brokerage fees decreased $680,000, or 11.0%, to $5.5 million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999. This decrease was the result of a decrease in the balance of residential mortgage servicing portfolios brokered by United Financial, which in terms of aggregate unpaid principal balances on the underlying loans, decreased $11.3 billion to $36.4 billion for fiscal year 2000 as compared to $47.7 billion for fiscal year 1999. Brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon the seller's need to recognize a sale or to receive cash flows. Trust Services. Trust service fees increased $83,000, or 1.7%, to $4.9 million for fiscal year 2000 as compared to $4.8 million for fiscal year 1999. Trust accounts under administration at Sterling Trust increased to 39,220 accounts at December 31, 2000 from 36,546 accounts at December 31, 1999 and total fiduciary assets under administration increased to $3.8 billion at December 31, 2000 from $2.5 billion at December 31, 1999. Most of the growth in accounts and assets under administration occurred in third party administrator accounts, which are generally priced at lower fees based on the level of administration required. Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition service income was consistent between the fiscal years 2000 and 1999, with only an $18,000 increase in fiscal year 2000 over fiscal year 1999. Gain on Sale of Loans and Mortgage-Backed Securities. Gain on sale of loans and mortgage-backed securities decreased $2.3 million to $982,000 for fiscal year 2000 as compared to $3.2 million for fiscal year 1999. These loan sales were completed under standard purchase and sale agreements, with standard representations and warranties and without recourse. The gains from these sales represent cash gains. Gain on sale of loans can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights increased $2.3 million to $2.6 million for fiscal year 2000 as compared to $363,000 for fiscal year 1999. In terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights, we sold $1.1 billion in purchased mortgage servicing rights during fiscal year 2000 as compared to $161.2 million during fiscal year 1999. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to, at times, pursue opportunistic sales of mortgage servicing rights. The current year sale was undertaken to take advantage of aggressive pricing in the marketplace. Loan Origination. Loan origination income includes all mortage loan fees, secondary marketing activity on new loan originations and servicing release premiums on new originations sold, net of origination costs. Loan origination income increased $1.4 million, or 22.0%, to $7.6 million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999. Approximately $806,000 of this increase related to loans originated loans as a result of increased originated and sold by Matrix Bank's SBA loan department. The remainder of the increase is attributable to an increase in wholesale residential mortgage loan production by $69.1 million, or 15.6%, to $512.5 million during fiscal year 2000 as compared to $443.4 million during fiscal year 1999. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided to scdhools. School services income increased $1.7 million, or 50.7%, to $4.2 million for fiscal year 2000 as compared to $2.8 million for fiscal year 1999. This increase was primarily due to an increase in the pricing for ABS services, the addition of new school customers and our acquisition of ABS in March 1999, which resulted in less than a full year of revenues being recognized in 1999. Other Income. Other income decreased $4.0 million, or 42.2%, to $5.4 million for fiscal year 2000 as compared to $9.4 million for fiscal year 1999. The decrease in other income was primarily due to: o a $1.9 million decrease in consulting income from United Capital Markets because of its August sale and an overall slower year for that company; and o a decrease in Matrix Bank's income from certain financing transactions, which decreased miscellaneous fee income by $1.7 million compared to the prior fiscal year. Noninterest Expense. Noninterest expense increased $8.2 million, or 11.9%, to $77.8 million for fiscal year 2000 as compared to $69.6 million for fiscal year 1999. This increase was primarily due to increased compensation and benefits expense, increased other general and administrative expense and increased professional fees. These increases were offset by a decrease in the amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated:
Year Ended December 31, ------------------------------ 2000 1999 -------------- ------------- (In thousands) Compensation and employee benefits.................................... $ 34,245 $ 29,336 Amortization of mortgage servicing rights ............................ 9,851 16,403 Occupancy and equipment............................................... 4,785 3,727 Postage and communication............................................. 2,812 2,688 Professional fees..................................................... 4,687 2,385 Data processing....................................................... 2,413 1,688 Other general and administrative...................................... 19,048 13,359 -------------- ------------- Total........................................................... $ 77,841 $ 69,586 ============== =============
Compensation and employee benefits increased $4.9 million, or 16.7%, to $34.2 million for fiscal year 2000 as compared to $29.3 million for fiscal year 1999. This increase was primarily the result of increased salary expense at Matrix Financial, ABS, Matrix Bancorp and Matrix Bank. Matrix Financial's salary expense increased towards the later half of 2000 related to its initiative to build a production platform. This initiative involved opening two new production offices, acquiring a servicing and production platform and hiring additional administrative and production staff. We had an overall increase of 135 employees, or 22.5%, to 735 employees at December 31, 2000 as compared to 600 employees at December 31, 1999. Amortization of mortgage servicing rights decreased $6.5 million, or 39.9%, to $9.9 million for fiscal year 2000 as compared to $16.4 million for fiscal year 1999. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. In response to the higher interest rates prevalent in the market, prepayment speeds on our servicing portfolio decreased to an average of 12.1% during fiscal year 2000 as compared to 20.6% during fiscal year 1999. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $9.9 million, or 41.5%, to $33.7 million for fiscal year 2000 as compared to $23.8 million for fiscal year 1999. The $5.7 million increase in other general and administrative expense increase was primarily attributable to previously mentioned losses from a purchase/repurchase facility and the Harbor settlement. Additionally, we experienced a $2.3 million increase in professional fees related mainly to litigation at Sterling Trust and legal expenses associated with the Harbor settlement. Provision for Income Taxes. Our provision for income taxes decreased $4.1 million to $2.2 million for fiscal year 2000 as compared to $6.3 million for fiscal year 1999. The decrease in pre-tax income was further enhanced by a reduction in our effective tax rate to 34.5% for fiscal year 2000 from 36.8% for fiscal year 1999. The decrease in the effective tax rate was the result of our reduced earnings and our origination of tax-exempt financing. Comparison of Results of Operations for Fiscal Years 1999 and 1998 Net Income; Return on Average Equity. Net income increased $2.3 million, or 26.6%, to $10.8 million for fiscal year 1999 as compared to $8.5 million for fiscal year 1998. On a per share basis, net income was $1.58 per share for fiscal year 1999 and $1.24 for fiscal year 1998. Return on average equity increased to 19.8% for fiscal year 1999 as compared to 18.9% for fiscal year 1998. Excluding 1998 non-recurring charges, net income increased $869,000, or 8.8%, to $10.8 million for fiscal year 1999 as compared to $9.9 million for fiscal year 1998. Non-recurring charges in 1998, on a pre-tax basis, consisted of a $2.3 million loss recorded related to alleged fraud committed by MCA Mortgage Corporation ("MCA"). The alleged fraud involved loans acquired by Matrix Financial from MCA for which MCA continued to provide servicing on Matrix Financial's behalf. Excluding non-recurring charges, earnings per share and return on average equity for fiscal year 1998 were $1.44 and 22.0%, respectively. Net Interest Income. Net interest income before provision for loan and valuation losses increased $5.3 million, or 21.8%, to $29.5 million for fiscal year 1999 as compared to $24.2 million for fiscal year 1998. The increase in net interest income before provision for loan and valuation losses was due to a 26.7% increase in our average loans, which was offset by a decrease in our average yield on loans to 8.25% in 1999 from 8.59% in 1998, primarily due to the continuation of lower interest rates in the market during the first half of 1999, as well as our acquisition of fewer discounted loans. The decrease in the average yield on loans was offset by a reduction in the cost of our interest-bearing liabilities to 5.28% in 1999 from 5.50% in 1998, as we experienced significant decreases in our costs for deposits and Federal Home Loan Bank borrowings. Average interest-earning assets and average interest-bearing liabilities both increased 26.3% in fiscal year 1999 as compared to the prior year. Our net interest margin decreased to 3.25% for fiscal year 1999 as compared to 3.37% for fiscal year 1998. For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses decreased $1.4 million to $3.2 million for fiscal year 1999 as compared to $4.6 million for fiscal year 1998. This decrease was primarily attributable to the $2.2 million pre-tax provision recorded in 1998, related to MCA, but was offset by increases made to the provision due to the increase in the balance of net loans receivable, which increased to $1.1 billion at December 31, 1999 as compared to $848.4 million at December 31, 1998 and our origination of additional non-residential mortgage loans. For a discussion of the components of the allowance for loan losses, see "--Asset and Liability Management--Analysis of Allowance for Loan and Valuation Losses." For a discussion on the allowance as it relates to nonperforming assets, see "--Asset and Liability Management--Nonperforming Assets." Loan Administration. Loan administration fees increased $6.3 million, or 36.0%, to $23.7 million for fiscal year 1999 as compared to $17.4 million for fiscal year 1998. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. The mortgage loan servicing portfolio increased to an average balance of $5.6 billion for fiscal year 1999 as compared to an average balance of $4.0 billion for fiscal year 1998. Our average service fee rates (including all ancillary income) were comparable during the two years with 0.43% for fiscal year 1999 as compared to 0.44% for fiscal year 1998. Brokerage Fees. Brokerage fees decreased $898,000, or 12.7%, to $6.2 million for fiscal year 1999 as compared to $7.1 million for fiscal year 1998. This decrease is the result of a decrease in the balance of residential mortgage servicing portfolios brokered by United Financial, which in terms of aggregate unpaid principal balances on the underlying loans, decreased $18.7 billion to $47.7 billion for fiscal year 1999 as compared to $66.4 billion for fiscal year 1998. The decrease is attributable to a slow down in the market for the purchase and sale of mortgage servicing rights, which was seen primarily in the last quarter of 1999. Brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon the seller's need to recognize a sale or to receive cash flows. Trust Services. Trust service fees increased $671,000, or 16.1%, to $4.8 million for fiscal year 1999 as compared to $4.2 million for fiscal year 1998. This increase is associated with the growth in total assets under administration to over $2.5 billion at December 31, 1999 from $2.1 billion at December 31, 1998, primarily as a result of increased mutual fund values at year-end 1999. The number of trust accounts remained fairly constant with 36,546 accounts at December 31, 1999 and 36,374 accounts at December 31, 1998. Most of the growth in accounts and assets under administration occurred in third party administrator accounts, which aregenerally priced at lower fees based on the level of administration required. Real Estate Disposition Services. Real estate disposition service income increased $1.7 million, or 79.7%, to $3.7 million for fiscal year 1999 as compared to $2.0 million for fiscal year 1998. Gain on Sale of Loans and Mortgage-Backed Securities. During fiscal years 1999 and 1998, we made bulk loan sales of approximately $192.7 million and $319.4 million, for gains on sale of bulk mortgage loans of $3.2 million and $3.1 million, respectively. Gain on sale of loans can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights decreased $440,000, or 54.8%, to $363,000 for fiscal year 1999 as compared to $803,000 for fiscal year 1998. In terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights, we sold $161.2 million in purchased mortgage servicing rights during fiscal year 1999 as compared to $175.3 million during fiscal year 1998. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we will at times pursue opportunistic sales of mortgage servicing rights. Loan Origination. Loan origination income increased $541,000, or 9.5%, to $6.2 million for fiscal year 1999 as compared to $5.7 million for fiscal year 1998. Approximately $391,000 of this increase related to loans originated and sold by Matrix Bank's SBA loan department. The remaining increase resulted primarily from differences in the pricing and mix of loans originated, which offset the $131.6 million decrease in wholesale residential mortgage loan production. We originated $443.4 million of wholesale residential mortgage loans in 1999 as compared to $575.0 million in 1998. We attribute the decrease in wholesale originations primarily to the effects of rising interest rates in the last half of 1999. School Services. School services income increased to $2.8 million for fiscal year 1999 as compared to $46,000 for fiscal year 1998. The increase was due to our acquisition of ABS in March 1999. Other Income. Other income increased $3.0 million, or 45.6%, to $9.4 million for fiscal year 1999 as compared to $6.4 million for fiscal year 1998. The increase in other income was primarily due to certain of our financing transactions which increased miscellaneous fee income approximately $2.3 million over the prior fiscal year. Noninterest Expense. Noninterest expense increased $16.7 million, or 31.4%, to $69.6 million for fiscal year 1999 as compared to $52.9 million for fiscal year 1998. This increase was primarily due to our overall growth and expansion, including the acquisition of ABS, and an increase in the amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated:
Year Ended December 31, ------------------------------ 1999 1998 -------------- ------------- (In thousands) Compensation and employee benefits........................... $ 29,336 $ 22,194 Amortization of mortgage servicing rights ................... 16,403 10,563 Occupancy and equipment...................................... 3,727 3,059 Postage and communication.................................... 2,688 2,393 Professional fees............................................ 2,385 1,439 Data processing.............................................. 1,688 1,344 Other general and administrative............................. 13,359 11,947 -------------- ------------ Total.................................................. $ 69,586 $52,939 ============== ============
Compensation and employee benefits increased $7.1 million, or 32.2%, to $29.3 million for fiscal year 1999 as compared to $22.2 million for fiscal year 1998. This increase was primarily the result of our acquisition of ABS, which resulted in increased compensation expense of $2.3 million. Additionally, expansions in the operations of Matrix Financial, Matrix Bank and Sterling Trust also increased compensation expense. We had an overall increase of 153 employees, or 34.2%, to 600 employees at December 31, 1999 as compared to 447 employees at December 31, 1998, of which 84 were at ABS. Amortization of mortgage servicing rights increased $5.8 million, or 55.3%, to $16.4 million for fiscal year 1999 as compared to $10.6 million for fiscal year 1998. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced. Our prepayment rates on our servicing portfolio averaged 20.6% during fiscal year 1999 as compared to 22.6% during fiscal year 1998. In response to the lower interest rates prevalent in the market during the first half of 1999, prepayment speeds remained high due to borrowers refinancing into lower interest rate mortgages. However, we have seen significant decreases in our prepayment speeds in the latter half of 1999. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $3.6 million, or 18.2%, to $23.8 million for fiscal year 1999 as compared to $20.2 million for fiscal year 1998. The increase was generally attributable to increased legal expenses and increased servicing costs associated with the nonperforming Federal Housing Administration/Veteran's Administration loans that were transferred to us in September 1999 as part of the loans acquired from Harbor. See "--Asset and Liability Management--Nonperforming Assets." Provision for Income Taxes. Our provision for income taxes increased $1.4 million to $6.3 million for fiscal year 1999 as compared to $4.9 million for fiscal year 1998. The increase was a result of our increased pre-tax income, as well as a slight increase in the effective tax rate to 36.8% for fiscal year 1999 from 36.4% for fiscal year 1998. 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. 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.
Year Ended December 31, ----------------------------------------------------------------- 2000 1999 ------------------------------- ------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- --------- --------- ----------- --------- ---------- (Dollars in thousands) Assets Interest-earning assets: Loans receivable, net ....................... $ 1,086,041 $ 90,591 8.34 % $ 877,117 $ 72,355 8.25 Mortgage-backed securities................... 45,253 3,374 7.46 -- -- -- Interest-earning deposits.................... 28,831 1,508 5.23 16,326 629 3.85 Federal Home Loan Bank stock................. 24,199 1,913 7.91 13,934 766 5.50 ----------- --------- --------- ----------- --------- ---------- Total interest-earning assets.............. 1,184,324 97,386 8.22 907,377 73,750 8.13 Noninterest-earning assets: Cash......................................... 16,305 18,090 Allowance for loan and valuation losses...... (7,302) (4,392) Premises and equipment....................... 10,318 10,765 Other assets................................. 116,602 122,705 ----------- ----------- Total noninterest-earning assets........... 135,923 147,168 ----------- ----------- Total assets............................... $ 1,320,247 $ 1,054,545 =========== =========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts............................ $ 2,981 102 3.42 $ 2,758 96 3.48 Money market and NOW accounts................ 156,649 3,671 2.34 213,192 6,356 2.98 Certificates of deposit...................... 361,084 22,502 6.23 287,347 15,137 5.27 Federal Home Loan Bank borrowings............ 430,331 27,242 6.33 175,619 9,184 5.23 Borrowed money............................... 147,377 14,084 9.56 159,272 13,514 8.48 ----------- --------- --------- ----------- --------- ----------- Total interest-bearing liabilities......... 1,098,422 67,601 6.15 838,188 44,287 5.28 ----------- --------- --------- ----------- --------- ----------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances).................................... 140,615 140,847 Other liabilities............................ 18,505 21,054 ----------- ----------- Total noninterest-bearing liabilities........ 159,120 161,901 Shareholders' equity......................... 62,705 54,456 ----------- ----------- Total liabilities and shareholders' equity. $ 1,320,247 $ 1,054,545 =========== =========== Net interest income before provision for loan and valuation losses....................... $ 29,785 $ 29,463 ========= ========= Interest rate spread........................... 2.07 % 2.85 % ========= ========== Net interest margin............................ 2.51 % 3.25 % ========= ========== Ratio of average interest-earning assets to average interest-bearing liabilities............... 107.82 % 108.25% ========= ========== [Table Continued] Year Ended December 31, ---------------------------------- 1998 -------------------------------- Average Average Balance Interest Rate ----------- -------------------- Assets Interest-earning assets: Loans receivable, net .......................$ 692,443 $ 59,452 8.59 % Mortgage-backed securities................... -- -- -- Interest-earning deposits.................... 15,042 627 4.17 Federal Home Loan Bank stock................. 10,719 615 5.74 -------------------------------- Total interest-earning assets.............. 718,204 60,694 8.45 Noninterest-earning assets: Cash......................................... 13,241 Allowance for loan and valuation losses...... (2,223) Premises and equipment....................... 9,913 Other assets................................. 93,208 ------------ Total noninterest-earning assets........... 114,139 ------------ Total assets...............................$ 832,343 ============ Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts............................$ 2,859 102 3.57 Money market and NOW accounts................ 142,382 4,432 3.11 Certificates of deposit...................... 211,592 11,687 5.52 Federal Home Loan Bank borrowings............ 159,381 8,554 5.37 Borrowed money............................... 147,368 11,729 7.96 -------------------------------- Total interest-bearing liabilities......... 663,582 36,504 5.50 -------------------------------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances).................................. 106,247 Other liabilities............................ 17,518 ------------ Total noninterest-bearing liabilities........ 123,765 Shareholders' equity......................... 44,996 ------------ Total liabilities and shareholders' equity.$ 832,343 ============ Net interest income before provision for loan and valuation losses....................... $ 24,190 ========== Interest rate spread........................... 2.95 % ========== Net interest margin............................ 3.37 % ========== Ratio of average interest-earning assets to average interest-bearing liabilities........... 108.23 % ==========
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 old rate; and o changes in rate, in other words, changes in rate multiplied by old 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.
Year Ended December 31, 2000 vs. 1999 Year Ended December 31, 1999 vs. 1998 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in --------------------------------------------- --------------------------------------------- Volume Rate Total Volume Rate Total ------------ -------------- --------------- ------------- -------------- -------------- (In thousands) Interest-earning assets: Loans receivable, net................. $ 17,438 $ 798 $ 18,236 $ 15,308 $ (2,405) $ 12,903 Mortgage-backed securities........... 3,374 -- 3,374 -- -- -- Interest-earning deposits............. 599 280 879 52 (50) 2 Federal Home Loan Bank stock.......... 719 428 1,147 177 (26) 151 ---------- ----------- ------------ ----------- ----------- ----------- Total interest-earning assets....... 22,130 1,506 23,636 15,537 (2,481) 13,056 ----------- ----------- ------------ ----------- ----------- ----------- Interest-bearing liabilities: Passbook accounts..................... 8 (2) 6 (5) (1) (6) Money market and NOW accounts......... (1,886) (799) (2,685) 2,120 (196) 1,924 Certificates of deposit............... 4,307 3,058 7,365 4,009 (559) 3,450 Federal Home Loan Bank advances....... 15,770 2,288 18,058 853 (223) 630 Borrowed money........................ (957) 1,527 570 986 799 1,785 ----------- ----------- ------------ ----------- ----------- ----------- Total interest-bearing liabilities.. 17,242 6,072 23,314 7,963 (180) 7,783 ----------- ----------- ------------ ----------- ----------- ----------- Change in net interest income before provision for loan and valuation losses......................$ 4,888 $ (4,566) $ 322 $ 7,574 $ (2,301) $ 5,273 =========== =========== ============ =========== =========== ===========
Asset and Liability Management General. A significant portion of our revenues and net income is derived from net interest income and, accordingly, we strive to manage our interest-earning assets and interest-bearing liabilities to generate what we believe to be an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of our performance due to changes in interest rates. We constantly attempt to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. We have responded to interest rate volatility by developing and implementing asset and liability management strategies designed to increase noninterest income and improve the match between interest-earning assets and interest-bearing liabilities. These strategies include: o Utilizing mortgage servicing rights as a source of noninterest income and as a countermeasure against the decline in the value of mortgage loans during a rising interest rate environment. Increases in interest rates tend to increase the value of mortgage servicing rights because of the resulting decrease in prepayment rates on the underlying loans; o Focusing on noninterest-bearing custodial escrow balances related to our mortgage servicing rights; o Increasing focus on lines of business that are less interest rate sensitive, such as brokerage activities, consulting services, self-directed trust services, real estate disposition and school business services; o Maintaining a wholesale loan origination operation. Wholesale originations provide a form of hedge against the balance of mortgage servicing rights. In a decreasing interest rate environment, the value of the servicing portfolio tends to decrease due to increased prepayments of the underlying loans. During this same environment, however, the volume of loan originations generally increases; o Originating and purchasing adjustable rate mortgages and selling newly originated fixed rate residential mortgages in the secondary market; o Increasing emphasis on the origination of construction and commercial real estate lending, including SBA loans, which tend to have higher interest rates with shorter loan maturities than residential mortgage loans and generally are at adjustable rates; o Increasing retail deposits, which are less susceptible to changes in interest rates than other funding sources; o Pursuing strategic acquisitions or alliances that provide fee-based income or generate liabilities that are less expensive or less interest rate sensitive than retail deposits or borrowings from third party institutions to fund our investing activities; o Using Matrix Bank as the settlement bank for settlement and clearing services offered by Sterling Trust and Matrix Settlement & Clearance Services to generate low-cost deposits; and o Hedging segments of our servicing portfolio and selling forward commitments on our loan pipeline. Lending Activities. Our major interest-earning asset is our loan portfolio. Consequently, a significant part of our asset and liability management involves monitoring the composition of our loan portfolio, including the corresponding maturities. The following table sets forth the composition of our loan portfolio by loan type as of the dates indicated. The amounts in the table below are shown net of discounts and other deductions.
As of December 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 -------------------------- ------------------------ ---------------------- --------------------- Amount Percent Amount Percent Amount Percent Amount Percent -------------- ---------- ------------- ---------- ----------- ---------- ----------- --------- (Dollars in thousands) Residential................. $ 903,955 81.00% $ 954,424 86.49 % $ 732,512 86.34% $ 462,604 90.46% Multi-family, commercial real estate and commercial.................. 123,491 11.07 78,046 7.07 52,689 6.21 29,492 5.77 School financing................... 51,909 4.65 31,748 2.88 24,429 2.88 2,708 0.53 Construction ............... 36,768 3.29 36,056 3.26 27,648 3.26 7,591 1.48 Consumer.................... 8,479 0.76 9,595 0.87 14,880 1.75 10,733 2.10 --------- -------- ---------- ---------- ------- ------- --------- --------- Total loans........... 1,124,602 100.77 1,109,869 100.57 852,158 100.44 513,128 100.34 Less allowance for loan and valuation losses..... 8,581 0.77 6,354 0.57 3,710 0.44 1,756 0.34 --------- -------- ----------- ---------- --------- ------- --------- --------- Loans receivable, net....... $ 1,116,021 100.00% $ 1,103,515 100.00% $ 848,448 100.00% $ 511,372 100.00% ========= ======== =========== ========== ========= ======= ========== ========= [Table Continued] As of December 31, ------------------------- 1996 ------------------------ Amount Percent ------------- ---------- Residential................. $ 192,118 90.47 % Multi-family, commercial real estate and commercial................ 15,352 7.23 School financing............ -- -- Construction ............... 1,061 0.50 Consumer.................... 4,869 2.29 ---------- ---------- Total loans........... 213,400 100.49 Less allowance for loan and valuation losses..... 1,039 0.49 ---------- ---------- Loans receivable, net....... $ 212,361 100.00 % ========== ==========
The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2000, excluding the allowance for loan losses. Loans held for sale are classified as maturing over five years. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments or the timing of loan sales.
As of December 31, 2000 ------------------------------------------------------------- Less than One to Over Five One Year Five Years Years Total ----------------- -------------- ---------------------------- (In thousands) Residential............................................. $ 302,206 $ 593,873 $ 7,876 $ 903,955 Multi-family, commercial real estate and commercial..... 23,911 30,982 68,598 123,491 School financing........................................ 3,400 48,509 - 51,909 Construction............................................ 29,385 6,078 1,305 36,768 Consumer 2,915 3,964 1,600 8,479 ------------- ------------ ------------ ------------ Total loans ...................................... $ 361,817 $ 683,406 $ 79,379 $ 1,124,602 ============= ============ ============= =============
Loans held for sale, which are contractually due in less than one to five years, are split between fixed and adjustable rates as follows:
As of December 31, 2000 ------------------------------------------------ Less than One to Five One Year Years Total ----------------- -------------- --------------- (In thousands) Fixed.....................................................$ 182,290 $ 242,447 $ 424,737 Adjustable................................................ 123,521 400,712 524,233 ------------- ------------ --------------- Total loans.........................................$ 305,811 $ 643,159 $ 948,970 ============= ============ ===============
Loans held for investment, which are contractually due in one or more years, are split between fixed and adjustable rates as follows:
As of December 31, 2000 ------------------------------------------------ One to Five Over Five Years Years Total ----------------- -------------- --------------- (In thousands) Fixed.................................................. $ 28,759 $ 16,632 $ 45,391 Adjustable............................................. 68,524 61,717 130,241 ------------- ------------ --------------- Total loans...................................... $ 97,283 $ 78,349 $ 175,632 ============= ============ ===============
Nonperforming Assets. As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate arises primarily through foreclosure on mortgage loans owned. The following table sets forth our nonperforming assets as of the dates indicated:
As of December 31, ----------------------------------------------------------------------- 2000 1999 1998 1997 ------------ ------------ ------------ ------------ (Dollars in thousands) Nonaccrual mortgage loans................................ $ 23,160 $ 20,185 $ 8,208 $ 4,796 Nonaccrual commercial loans and school financing ............................................ 5,224 5,301 4,349 -- Nonaccrual consumer loans................................ 132 155 652 194 ------------ ------------ ------------ ------------ Total nonperforming loans.......................... 28,516 25,641 13,209 4,990 Foreclosed real estate................................... 2,646 800 916 1,242 Repossessed automobiles.................................. -- -- -- -- ------------ ------------ ------------ ------------ Total nonperforming assets......................... $ 31,162 $ 26,441 $ 14,125 $ 6,232 ============ ============ ============ ============ Total nonperforming loans to total loans........................................ 2.54 % 2.31 % 1.55 % 0.97 % Total nonperforming assets to total assets............... 2.20 % 2.06 % 1.40 % 1.03 % Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 30.09 % 24.78 % 28.09 % 35.19 % Interest income on nonperforming loans not included in interest income.......................................... $ 1,016 $ 979 $ 524 $ 89 [Table Continued] As of December 31, --------------------- 1996 ------------ (Dollars in Thousands) Nonaccrual mortgage loans................................ $ 3,031 Nonaccrual commercial loans and school financing ............................................ -- Nonaccrual consumer loans................................ 872 ------------ Total nonperforming loans.......................... 3,903 Foreclosed real estate................................... 788 Repossessed automobiles.................................. 506 ------------ Total nonperforming assets......................... $ 5,197 ============ Total nonperforming loans to total loans........................................ 1.83 % Total nonperforming assets to total assets............... 1.89 % Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 26.62 % Interest income on nonperforming loans not included in interest income.......................................... $ 120
As of December 31, 2000, we had approximately $89,000 of non-government accruing loans that were contractually past due 90 days or more. We accrue for interest on government-sponsored loans such as Federal Housing Administration insured and Veteran's Administration guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $101.1 million, $147.9 million and $165.7 million as of December 31, 2000, 1999 and 1998, respectively. Nonaccrual mortgage loans as a percentage of total loans were 2.1% at December 31, 2000, 1.8% at December 31, 1999, 1.0% at December 31, 1998, 0.9% at December 1997 and 1.4% at December 31, 1996. A significant portion of the increases in 1999 and 2000 can be primarily attributed to several portfolios. The first is a sub-prime residential portfolio that we acquired on a scheduled interest and scheduled principal remittance with full recourse to the seller/servicer. In October 1999, however, the seller/servicer declared bankruptcy and the servicing was transferred to us. The total principal balance of the sub-prime portfolio was $12.2 million at December 31, 2000 and approximately $3.1 million was 90 or more days delinquent at that time. Associated with these loans, we have a $303,000 specific reserve. The second portfolio was principally associated with the Harbor settlement and consists of $11.2 million of loans at December 31, 2000, of which $5.0 million loans were 90 days or more delinquent at that time. Recorded against the $11.2 million of loans, we have $1.9 million of discounts. The increase in nonaccrual commercial loans and school financing in 1999 and 1998 is primarily the result of our origination of tax-exempt financing for charter schools for the purchase of real estate and equipment. Several of the charter schools for which we have provided financing have encountered enrollment and/or state funding delays, which has caused them to become delinquent on their obligations to us. With the start of the new fiscal year for the schools, which began on July 1, 2000, and through the efforts of ABS employees who have worked with several of the schools on their cash flow issues, we were able to remove several schools from nonaccrual status during 2000. Offsetting the decrease in nonaccrual commercial loans and school financing related to charter schools were several SBA loans that went into nonaccrual status during 2000. The prior delinquency and anticipated future delinquencies are taken into consideration in the pricing of the loans acquired. We generally purchase such loans at discounts and, in limited instances, receive recourse from the seller to further reduce our risk of loss associated with the loans' nonaccrual status. At December 31, 2000, $15.4 million, or 54.1%, of the nonaccrual loans were loans that were residential loans purchased in bulk loan portfolios and remain classified as "held for sale." Total loans held for sale at December 31, 2000, were $942.5 million, of which $25.4 million, or 2.7%, were nonaccrual loans. The percentage of the allowance for loan and valuation losses to nonaccrual loans varies widely due to the nature of our portfolio of mortgage loans, which are collateralized primarily by residential real estate. We analyze the collateral for each nonperforming mortgage loan to determine potential loss exposure. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. Analysis of Allowance for Loan and Valuation Losses. The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated. The table includes the allowance for both loans held for investment and loans held for sale.
As of and for the ---------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ------------ ------------ ------------ ----------- (Dollars in thousands) Balance at beginning of period................... $ 6,354 $ 3,710 $ 1,756 $ 1,039 $ 943 Charge-offs: Real estate-mortgage....................... 434 98 1,922 22 64 Real estate-construction................... 320 -- -- -- -- Commercial loans and school financing ..... 819 -- -- -- -- Consumer................................... 476 509 789 166 6 ------------- ------------ ------------ ------------ ------------ Total charge-offs.................... 2,049 607 2,711 188 70 Recoveries: Real estate-mortgage....................... 1 2 2 -- 8 Consumer................................... 40 69 56 31 15 ------------- ------------ ------------ ------------ ------------ Total recoveries..................... 41 71 58 31 23 ------------- ------------ ------------ ------------ ------------ Net charge-offs.................................. 2,008 536 2,653 157 47 Provision for loan losses charged to operations.. 4,235 3,180 4,607 874 143 ------------- ------------ ------------ ------------ ------------ Balance at end of period......................... $ 8,581 $ 6,354 $ 3,710 $ 1,756 $ 1,039 ============= ============ ============ ============ ============ Ratio of net charge-offs to average loans(1)..... 0.18 % 0.06 % 0.38 % 0.04 % 0.03 % ============= ============ ============ ============ ============ Average loans outstanding during the period...... $ 1,086,041 $ 877,117 $ 692,443 $ 355,848 $ 162,648 ============= ============ ============ ============ ============
------------ [FN] (1) Excluding charge-offs related to charter schools and our credit card operations in 2000, our credit card operations in 1999 and related to MCA and our credit card operations in 1998, the ratio of net charge-offs to average loans was 0.09%, 0.02% and 0.03%, respectively. A majority of the increase in real estate-mortgage charge-offs for 1998 as compared to 1997 is due to the loss recognized related to MCA. See "--Comparison of Results of Operations for Fiscal Years 1999 and 1998--Net Income; Return on Average Equity" for additional information. Additionally, the increases in consumer charge-offs in 2000, 1999 and 1998 pertains to losses experienced on our credit card portfolio. Credit card loans accounted for 0.12%, 0.27% and 0.53% of our total loan portfolio as of December 31, 2000, 1999 and 1998, respectively. The majority of our credit card portfolio was originated in 1996 and the balance of our unsecured credit card portfolio at December 31, 2000 was $1.4 million. The allowance for loan and valuation losses is increased by the provision for loan and valuation losses (which is charged to operations) for particular loans where management considers ultimate collection to be questionable. We evaluate all other loans as part of their respective categories and not on an individual basis. Each category of loans in the loan portfolio is assigned a loss factor based on: o the assessed risk inherent in each loan category; o certain qualitative evaluations of individual classified assets; o trends in the portfolio; o geographic and portfolio concentrations; o new products or markets; and o evaluations of the changes in the historical loss experience component and projections of this component into the current and future periods based on current knowledge and conditions. These loss factors range from 0.10% for Federal Housing Administration/Veteran's Administration loans guaranteed by the Department of Housing and Urban Development to 8.00% for credit card loans. Additionally substandard and doubtful loans of homogeneous loan portfolios are assigned loss factors of 5.00% to 50.00% and 50.00%, respectively. We had $5.2 million, $5.3 million and $4.3 million of impaired commercial loans and school financing at December 31, 2000, 1999, and 1998, respectively. We had no impaired loans as of December 31, 1997 and 1996. The loss factors are applied to the outstanding principal balance of loans in their respective categories, and the total for all categories determines our allowance for loan and valuation losses. The following table shows information regarding the components of our allowance for loan and valuation losses as of the dates indicated.
As of December 31, ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ ------------------------ Percentage Percentage Percentage of Loans of Loans of Loans in each in each in each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ---------- ------------ ---------- ------------ ---------- ------------ (Dollars in thousands) Residential.................. $ 4,133 80.39 % $ 3,591 86.00 % $ 2,295 85.96 % Multi-family, commercial real estate and commercial ...... 1,684 11.28 835 7.02 564 6.18 School financing............. 2,329 4.31 1,320 2.86 275 2.87 Construction................. 302 3.27 286 3.25 207 3.24 Consumer 133 0.75 322 0.87 369 1.75 ------- ------------ ------- ------------ ------- ------------ $ 8,581 100.00 % $ 6,354 100.00 % $ 3,710 100.00 % ======= ============ ======= ============ ======= ============ [Table Continued] As of December 31, ---------------------------------------------------- 1997 1996 ------------------------ ------------------------ Percentage Percentage of Loans of Loans in each in each Category to Category to Amount Total Loans Amount Total Loans ---------- ------------ ---------- ------------ Residential.................. $ 1,234 90.15 % $ 911 90.03 % Multi-family, commercial real estate and commercial ...... 91 5.75 51 7.19 School financing............. -- 0.53 -- -- Construction................. 23 1.48 6 0.50 Consumer 408 2.09 71 2.28 ------- ------------ ------- ------------ $ 1,756 100.00 % $ 1,039 100.00 % ======= ============ ======= ============
The ratio of the allowance for loan and valuation losses to total loans was 0.77% at December 31, 2000; 0.57% at December 31, 1999; 0.44% at December 31, 1998; 0.34% at December 31, 1997; and 0.49% at December 31, 1996. The allowance for loan and valuation losses is reduced by loans charged off, net of recoveries. The balance of the allowance for loan and valuation losses allocated to residential, multi-family, commercial real estate, commercial, school financing and construction loans has increased mainly due to the increased outstanding loan principal balances in these loan categories. In addition, we have increased our origination of non 1-4 family loans, which are perceived to be higher risk and also is a contributor to the overall increase in the balance of the allowance. As of December 31, 2000, we believe that the allowance, when taken as a whole, is adequate to absorb the inherent losses in the current loan portfolio. Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability Management - General" a significant portion of our earnings and ultimate success is partially dependent upon our ability to manage our interest rate risk. Interest rate risk can be defined as the exposure of our net interest income to adverse movements in interest rates. Although we manage other risks, such as credit, operational and liquidity risk in the normal course of business, we consider interest rate risk to be a significant market risk which could potentially have the largest material effect on our financial condition and results of operations. The majority of our market risk related to interest rates exists within the operations of Matrix Bank. However, Matrix Financial also has interest rate risk related to its primary asset, mortgage servicing rights, and also related to its loan origination volumes, as well as the net interest income earned on its originated loans that are funded through warehouse lines of credit. With the majority of Matrix Financial's operations being funded by Matrix Bank, this is a smaller risk to the Company as compared to when Matrix Financial's operations were funded entirely by unaffiliated financial institutions. The susceptibility to movements in interest rates affects the cash flows generated from the mortgage servicing rights which are recorded in other income versus interest income. In a decreasing interest rate environment, the underlying servicing portfolio tends to prepay faster which reduces future servicing income; while in an increasing interest rate environment, prepayments tend to decrease, which increases expected future servicing income. As it relates to Matrix Financial's lending activities, Matrix Financial originates residential mortgage loans, which are generally pre-sold. However, between the time that the loan is originated and sold to the ultimate investor, Matrix Financial earns interest income. The loans are funded through the use of warehouse credit facilities or borrowings from Matrix Bank, both of which are generally priced based on short-term interest rates. Therefore, the net interest income that is earned by Matrix Financial is generally dependent on the spread between long-term mortgage rates and short-term interest rates. Additionally, rising interest rate environments typically decrease loan origination volumes, whereas falling interest rate environments typically increase loan origination volumes. We currently do not maintain a trading portfolio. As a result, we are not exposed to market risk as it relates to trading activities. The majority of our residential loan portfolio is held for sale which requires us to perform quarterly market valuations of the portfolio in order to properly record the portfolio at the lower of aggregate cost or market. Therefore, we continually monitor the interest rates of our loan portfolio as compared to prevalent interest rates in the market. Interest rate risk management at Matrix Bank is the responsibility of the Asset and Liability Committee, which reports to the board of directors of Matrix Bank. The Asset and Liability Committee establishes policies that monitor and coordinate our sources, uses and pricing of funds. The Asset and Liability Committee is also involved in formulating our budget and strategic plan as it relates to investment objectives. Due to the historical size of Matrix Bank's loan portfolio and the high degree of purchase and sale activity, the Asset and Liability Committee has relied on the Office of Thrift Supervision interest rate risk exposure report to assist in the overall monitoring of Matrix Bank's interest rate sensitivity. Based on the information and assumptions used in the Office of Thrift Supervision exposure report as of December 31, 2000, a downward 200 basis point shock over a twelve month period would decrease Matrix Bank's capital by approximately 6%, and an upward 200 basis point shock over a twelve month period would decrease Matrix Bank's capital by approximately 12%. As Matrix Bank grew to in excess of $1 billion in total assets in 1999, we can no longer rely on the Office of Thrift Supervision reports to manage our interest rate risk. We have engaged a third party to provide consulting services that assists us with our asset/liability management. We meet with this consulting firm quarterly to review the results of our interest rate risk analysis and to discuss strategies. We are also researching various asset/liability software packages for possible future acquisition by Matrix Bank. We continue to attempt to reduce the volatility in net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate residential mortgages and have increased our efforts regarding the origination of residential construction loans, commercial real estate loans, SBA loans and limited consumer lending, which re-price or mature more quickly than fixed rate residential real estate loans. The other significant asset that we invest in is residential mortgage servicing rights. The value and cash flows from residential mortgage servicing rights respond counter-cyclically to the value of fixed rate mortgages. When interest rates increase and the value of fixed rate mortgages decrease, in turn decreasing net interest income, the value of the mortgage servicing rights increase. In a decreasing interest rate environment, the inverse occurs. It is important to note, however, that an equal increase or decrease in interest rates will not affect the value of our mortgage servicing rights portfolio equally. A decrease in interest rates causes a greater reduction in the value of the portfolio as compared to the increase in value in the portfolio from an equal increase in interest rates. Another significant strategy that we focus on in managing interest rate risk is identifying lines of business that generate noninterest rate sensitive liabilities. Examples of this strategy are the investment in mortgage servicing rights, which generate no cost escrow deposits; Sterling Trust's operations, which administer deposits with relatively low costs; and our investment in Matrix Settlement & Clearance Services, which uses Matrix Bank as the clearing bank, which creates low-cost deposits. In the ordinary course of business, we make commitments to originate residential mortgage loans and hold originated loans until delivery to an investor. Inherent in this business are risks associated with changes in interest rates and the resulting change in the market value of the pipeline loans. We mitigate this risk through the use of mandatory and best effort forward commitments to sell loans and mortgage-backed securities. As of December 31, 2000, we had $109.5 million and $132.0 million in pipeline and funded loans, respectively, offset with mandatory forward commitments of $70.7 million and best effort forward commitments of $122.0 million. The market value of loans committed for sale is determined based on the related forward loan sale commitments. Effective January 1, 2001, with the adoption of SFAS 133, we are required to treat substantially all mortgage loan commitments and loan sale commitments (both mandatory and best effort) as derivatives and record the fair value of those derivatives on the balance sheet and any subsequent changes in the fair value of those derivatives through current earnings. As the changes in fair value of the loan commitments and the loan sale commitments are generally expected to offset one another, we do not anticipate any material impact to our future earnings from pipeline loans as a result of the adoption of SFAS 133. Ownership of mortgage servicing rights exposes us to impairment of their value in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of our mortgage servicing portfolio achieves a level higher than we projected for an extended period of time, then an impairment in the associated basis in the mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, we hedged a segment of our portfolio beginning in September 1997. We had identified and hedged $353.2 million as of December 31, 2000 and $604 million as of December 31, 1999 of our mortgage servicing portfolio using a program of exchange-traded futures and options. As discussed in the notes to the consolidated financial statements presented elsewhere in this document, we are currently not seeking hedge accounting treatment following our adoption of SFAS 133 on January 1, 2001. As a result, interest rate fluctuation will impact the value of our hedging instruments and the resulting change in value will be reflected in our current operating results. Under prior accounting methods, the gain or loss associated with the change in the value of the hedging instruments would be included as an adjustment in the basis of our investment in mortgage servicing rights. Following the adoption of SFAS 133, economically, and from a cash flow perspective, we are in the same position as under the prior accounting method. However, the recognition of the change in the value of the hedging instruments is required to be recognized currently in earnings as opposed to over the life of the servicing asset. As a result, SFAS 133 may cause fluctuations in quarterly earnings that we did not incur under the prior accounting method. The following tables represent, in tabular form, contractual balances of our on balance sheet financial instruments in dollars at the expected maturity dates, as well as the fair value of those on balance sheet financial instruments for the periods ended December 31, 2000 and 1999. The expected maturity categories take into consideration historical and anticipated prepayment speeds, as well as actual amortization of principal and do not take into consideration the reinvestment of cash. Our assets and liabilities that do not have a stated maturity date, such as interest-earning deposits, Federal Home Loan Bank stock and certain other deposits, are considered to be long term in nature and are reported in the thereafter column. We are very active in the secondary market as it relates to the purchase and sale of mortgage loans. In the past, we have made the assumption that the entire portfolio of loans held for sale will mature in the first three years, as the total amount of loans sold generally represent a significant portion of our held for sale portfolio. In the past year, loans sold as a percentage of the held for sale portfolio has decreased. The total amount of loans sold by Matrix Bank in 2000 and 1999 approximated 10% and 30%, respectively, of Matrix Bank's total held for sale portfolio at December 31, 1999 and 1998. This proves our intent to sell the loans classified as held for sale, but no longer supports our three-year maturity assumption. We will now use a five-year maturity assumption for all of Matrix Bank's held for sale loans and school financing in 2000, and we will continue to use a one-year maturity assumption for Matrix Financial's originated loans held for sale. We also treat the Federal Home Loan Bank and revolving borrowings as long term in nature, as the continued availability of these amounts is anticipated indefinitely. Third party servicers service a portion of our loan portfolio; as a result, a portion of the information presented is based on the best available information. For the most part, the carrying amounts of interest-earning deposits, Federal Home Loan Bank stock, Federal Home Loan Bank borrowings and borrowed money approximate those assets' and liabilities' fair values. The fair values of the loan portfolios for held for sale and held for investment are based on quoted market prices or outstanding commitments from investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The fair values of demand deposits are, by definition, equal to the amount payable upon demand at the reporting date. The fair value of time deposits are based upon the discounted value of contractual cash flows, which is estimated using interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. Mortgage servicing rights are not included in the tabular presentation, as the investment does not directly affect interest income. As noted, however, earnings from mortgage servicing rights directly correlate with market risk as it relates to interest rate fluctuations. We mitigate this risk through both the type of mortgage servicing rights acquired and hedging of mortgage servicing rights. The loans underlying the servicing rights acquired tend to be more seasoned and have lower principal balances. Management believes that the more seasoned, lower balance servicing portfolios carry less prepayment risk than less seasoned, higher balance mortgage servicing, because the cost savings of refinancing a lower balance loan tend to be less than for a higher balance loan with a comparable interest rate. We also believe that if a loan has been outstanding for a period of time and has been through several declining interest rate cycles without refinancing, the risk of prepayment in the future is less than a newly originated loan. Although significantly higher in 1999 and 1998, the prepayment percentages which we have experienced over the past three years have been lower than experienced in the industry, as a whole. The prepayment speeds for the years ended December 31, 2000, 1999 and 1998 were 12.1%, 20.6% and 22.6%, respectively. In the tables below, prepayment speeds of 12% were used for all loan types to project expected cash flows. These assumptions are based on our historical prepayment speeds, as well as our knowledge and experience in the market. The Company's on balance sheet financial instruments for the period ended December 31, 2000:
Expected Maturity Date - Fiscal Year Ended December 31, ----------------------------------------------------------------------------------------- Fair 2001 2002 2003 2004 2005 There-after Total Value ----------- ---------- ---------- ---------- ---------- ----------- --------- ---------- (Dollars in thousands) Interest-earning assets: Available for sale: Fixed-rate mortgage- backed securities..................$ 4,540 $ --- $ --- $ --- $ --- $ --- $ 4,540 $ 4,540 Average interest rate.............. 7.54% --- % --- % --- % --- % --- % 7.54% Adjustable rate mortgage- backed securities..................$ 62,076 $ --- $ --- $ --- $ --- $ --- $ 62,076 $ 62,076 Average interest rate.............. 8.31% --- % --- % --- % --- % --- % 8.31% Held for sale (1)(2): Fixed-rate residential loans..........$176,811 $ 48,130 $ 48,130 $ 48,130 $ 48,130 $ --- $369,331 $371,637 Average interest rate............. 8.28% 8.56% 8.56% 8.56% 8.56% --- % 8.42% Adjustable-rate residential loans.....$124,104 $ 99,858 $ 99,858 $ 99,857 $ 99,857 $ --- $523,534 $526,802 Average interest rate............. 8.51% 8.47% 8.47% 8.47% 8.47% --- % 8.47% Fixed-rate commercial loans...........$ 9,926 $ 9,926 $ 9,926 $ 9,926 $ 9,926 $ --- $ 49,630 $ 49,630 Average interest rate............. 10.65% 10.65% 10.65% 10.65% 10.65% --- % 10.65% Held for investment(2): Fixed-rate residential loans..........$ 602 $ 526 $ 460 $ 402 $ 351 $ 2,139 $ 4,480 $ 4,665 Average interest rate(3).......... 8.10% 8.10% 8.10% 8.10% 8.10% 8.10% 8.10% Adjustable-rate residential loans(4)..$ 495 $ 432 $ 377 $ 329 $ 287 $ 1,608 $ 3,528 $ 3,673 Average interest rate(3).......... 8.47% 8.47% 8.47% 8.47% 8.47% 8.47% 8.47% Fixed-rate consumer loans.............$ 2,513 $ 2,170 $ 1,870 $ --- $ --- $ --- $ 6,553 $ 6,538 Average interest rate(3).......... 10.93% 10.93% 10.93% ---% --- % --- % 10.93% Adjustable-rate consumer loans(4).....$ 351 $ 306 $ 265 $ 230 $ 199 $ 322 $ 1,673 $ 1,669 Average interest rate(3).......... 11.04% 11.04% 11.04% 11.04% 11.04% 11.04% 11.04% Fixed-rate other loans(5).............$ 9,064 $ 7,787 $ 6,670 $ 5,694 $ 4,842 $ --- $ 34,057 $ 34,182 Average interest rate(3).......... 9.31% 9.31% 9.31% 9.31% 9.31% --- % 9.31% Adjustable-rate other loans(4)(5).....$ 24,048 $ 20,919 $ 18,172 $ 15,761 $ 13,646 $ 30,688 $123,234 $123,688 Average interest rate(3).......... 10.66% 10.66% 10.66% 10.66% 10.66% 10.66% 10.66% Federal funds sold.......................$ 20,000 $ --- $ --- $ --- $ --- $ --- $ 20,000 $ 20,000 Average interest rate............. 5.94% --- % --- % --- % --- % --- % 5.94% Interest-earning deposits................$ --- $ --- $ --- $ --- $ --- $ 15,631 $ 15,631 $ 15,631 Average interest rate............. --- % --- % --- % --- % --- % 4.27% 4.27% Federal Home Loan Bank stock.............$ --- $ --- $ --- $ --- $ --- $ 27,814 $ 27,814 $ 27,814 Average interest rate............. --- % --- % --- % --- % --- % 6.52% 6.52% Total interest-earning assets.........$434,530 $190,054 $185,728 $180,329 $177,238 $ 78,202 $1,246,081 $1,252,545 ======== ======== ======== ======== ======== ======== ========== ========== Interest-bearing liabilities: Passbook accounts........................$ --- $ --- $ --- $ --- $ --- $ 3,010 $ 3,010 $ 3,010 Average interest rate............. --- % --- % --- % --- % --- % 3.44% 3.44% NOW accounts(6)..........................$ --- $ --- $ --- $ --- $ --- $ 33,000 $ 33,000 $ 33,000 Average interest rate............. --- % --- % --- % --- % --- % 2.01% 2.01% Money market accounts....................$ --- $ --- $ --- $ --- $ --- $122,992 $122,992 $122,992 Average interest rate............. --- % --- % --- % --- % --- % 2.37% 2.37% Certificates of deposit over $100,000....$ 11,382 $ 5,161 $ 871 $ --- $ 1,401 $ --- $ 18,815 $ 18,916 Average interest rate............. 6.54% 6.67% 6.47% --- % 6.58% --- % 6.57% Brokered certificates of deposit..........$175,600 $ 28,000 $ --- $ --- $ --- $ --- $203,600 $204,129 Average interest rate................. 6.42% 6.53% --- % --- % --- % --- % 6.44% Other certificates of deposit............$120,968 $ 33,448 $ 4,870 $ 1,440 $ 7,540 $ --- $168,266 $169,390 Average interest rate............. 6.48% 6.58% 6.13% 5.59% 6.68% --- % 6.49% Federal Home Loan Bank borrowings(7).....$ --- $ --- $ --- $ --- $ --- $519,433 $519,433 $521,194 Average interest rate............. --- % --- % --- % --- % --- % 6.29% 6.29% Revolving borrowings.....................$ --- $ --- $ --- $ --- $ --- $ 66,288 $ 66,288 $ 66,288 Average interest rate............. --- % --- % --- % --- % --- % 8.26% 8.26% Term borrowings..........................$ 3,793 $ 1,468 $ 5,398 $ 20,056 $ --- $ 27,500 $ 58,215 $ 52,965 Average interest rate............. 9.65% 8.28% 8.28% 11.50% --- % 10.00% 10.29% Total interest-bearing liabilities....$311,743 $ 68,077 $ 11,139 $ 21,496 $ 8,941 $772,223 $1,193,619 $1,191,884 ======== ======== ======== ======== ======== ======== ========== ==========
---------- (1) Loans held for sale are assumed to mature within one year, as the intent is to sell the loans. (2) Balances are stated net of discounts and other deductions. (3) For the fixed-rate loans held for investment, we computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 12% in determining the cash flows. The same approach was used for the adjustable-rate loans, which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3-, 5- and 7-year treasury. (5) Other consists of multi-family, commercial real estate, commercial, land and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $53.0 million. (7) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings. The Company's on balance sheet financial instruments for the period ended December 31, 1999 were:
Expected Maturity Date - Fiscal Year Ended December 31, ---------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 There-after ----------- ------------- ------------- ------------- ------------ ------------- (Dollars in thousands) Interest-earning assets: Held for sale (1)(2): Fixed-rate residential loans........ $ 131,830 $ 91,413 $ 91,413 $ -- $ -- $ -- Average interest rate........... 8.60 % 8.56 % 8.56 % -- % -- % -- % Adjustable-rate residential loans... $ 210,472 $ 209,606 $ 209,606 $ $ -- $ -- Average interest rate........... 7.55 % 7.55 % 7.55 % -- % -- % -- % Fixed-rate commercial loans......... $ 33,411 $ -- $ -- $ -- $ -- $ -- Average interest rate........... 11.35 % -- % -- % -- % -- % -- % Held for investment(2): Fixed-rate residential loans........ $ 598 $ 524 $ 459 $ 402 $ 352 $ 2,177 Average interest rate(3)........ 9.01 % 9.01 % 9.01 % 9.01 % 9.01 % 9.01 % Adjustable-rate residential loans(4) $ 365 $ 319 $ 278 $ 243 $ 211 $ 1,248 Average interest rate(3)........ 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % Fixed-rate consumer loans........... $ 3,256 $ 2,797 $ 2,394 $ -- $ -- $ -- Average interest rate(3)........ 10.17 % 10.17 % 10.17 % -- % -- % -- % Adjustable-rate consumer loans(4)... $ 162 $ 142 $ 125 $ 109 $ 95 $ 402 Average interest rate(3)........ 11.83 % 11.83 % 11.83 % 11.83 % 11.83 % 11.83 % Fixed-rate other loans(5)........... $ 11,851 $ 10,120 $ 8,611 $ 7,294 $ -- $ -- Average interest rate(3)........ 8.84 % 8.84 % 8.84 % 8.84 % -- % -- % Adjustable-rate other loans(4)(5)... $ 27,587 $ 23,574 $ 20,069 $ -- $ -- $ -- Average interest rate(3)........ 9.45 % 9.45 % 9.45 % -- % -- % -- % Interest-earning deposits.............. $ -- $ -- $ -- $ -- $ -- $ 13,172 Average interest rate........... -- % -- % -- % -- % -- % 4.77 % Federal Home Loan Bank stock........... $ -- $ -- $ -- $ -- $ -- $ 22,414 Average interest rate........... -- % -- % -- % -- % -- % 5.75 % Total interest-earning assets....... $ 419,532 $ 338,495 $ 332,955 $ 8,048 $ 658 $ 39,413 =========== ============ ============ =========== ========== ========== Interest-bearing liabilities: Passbook accounts...................... $ -- $ -- $ -- $ -- $ -- $ 2,793 Average interest rate........... -- % -- % -- % -- % -- % 3.40 % NOW accounts(6)........................ $ -- $ -- $ -- $ -- $ -- $ 21,609 Average interest rate........... -- % -- % -- % -- % -- % 2.45 % Money market accounts.................. $ -- $ -- $ -- $ -- $ -- $ 141,641 Average interest rate........... -- % -- % -- % -- % -- % 2.56 % Certificates of deposit over $100,000.. $ 11,179 $ 773 $ 1,032 $ 666 $ 223 $ -- Average interest rate........... 5.50 % 5.91 % 6.18 % 5.89 % 5.77 % -- % Brokered certificates of deposit........ $ 221,510 $ -- $ -- $ -- $ -- $ -- Average interest rate............... 5.71 % -- % -- % -- % -- % -- % Other certificates of deposit.......... $ 112,544 $ 10,647 $ 9,432 $ 4,646 $ 2,321 $ -- Average interest rate........... 5.49 % 5.61 % 6.04 % 5.79 % 5.45 % -- % Federal Home Loan Bank borrowings(7)... $ -- $ -- $ -- $ -- $ -- $ 405,000 Average interest rate........... -- % -- % -- % -- % -- % 5.64 % Revolving borrowings................... $ -- $ -- $ -- $ -- $ -- $ 54,180 Average interest rate........... -- % -- % -- % -- % -- % 7.30 % Term borrowings........................ $ 5,991 $ 13,877 $ 6,003 $ 5,962 $ 4,807 $ 51,281 Average interest rate........... 7.56 % 7.97 % 7.29 % 7.30 % 7.31 % 10.35 % Total interest-bearing liabilities.. $ 351,224 $ 25,297 $ 16,467 $ 11,274 $ 7,351 $ 676,504 =========== ============ ============ =========== ========== ========== [Table Continued] Expected Maturity Date - Fiscal Year Ended December 31, ---------------------------------------------------------------- Fair Total Value -------------- -------------- Interest-earning assets: Held for sale (1)(2): Fixed-rate residential loans....... $ 314,656 $ 316,241 Average interest rate.......... 8.58 % Adjustable-rate residential loans.. $ 629,684 $ 632,873 Average interest rate.......... 7.55 % Fixed-rate commercial loans........ $ 33,411 $ 33,411 Average interest rate.......... 11.35 % Held for investment(2): Fixed-rate residential loans....... $ 4,512 $ 4,429 Average interest rate(3)....... 9.01 % Adjustable-rate residential loans(4 $ 2,664 $ 2,616 Average interest rate(3)....... 7.45 % Fixed-rate consumer loans.......... $ 8,447 $ 8,691 Average interest rate(3)....... 10.17 % Adjustable-rate consumer loans(4).. $ 1,035 $ 1,064 Average interest rate(3)....... 11.83 % Fixed-rate other loans(5).......... $ 37,876 $ 38,199 Average interest rate(3)....... 8.84 % Adjustable-rate other loans(4)(5).. $ 71,230 $ 71,837 Average interest rate(3)....... 9.45 % Interest-earning deposits............. $ 13,172 $ 13,172 Average interest rate.......... 4.77 % Federal Home Loan Bank stock.......... $ 22,414 $ 22,414 Average interest rate.......... 5.75 % Total interest-earning assets...... $ 1,139,101 $ 1,144,947 ============ ============= Interest-bearing liabilities: Passbook accounts..................... $ 2,793 $ 2,793 Average interest rate.......... 3.40 % NOW accounts(6)....................... $ 21,609 $ 21,609 Average interest rate.......... 2.45 % Money market accounts................. $ 141,641 $ 141,641 Average interest rate.......... 2.56 % Certificates of deposit over $100,000. $ 13,873 $ 13,449 Average interest rate.......... 5.59 % Brokered certificates of deposit....... $ 221,510 $ 219,619 Average interest rate.............. 5.71 % Other certificates of deposit......... $ 139,590 $ 143,073 Average interest rate.......... 5.54 % Federal Home Loan Bank borrowings(7).. $ 405,000 $ 405,067 Average interest rate.......... 5.64 % Revolving borrowings.................. $ 54,180 $ 54,180 Average interest rate.......... 7.30 % Term borrowings....................... $ 87,921 $ 87,921 Average interest rate.......... 9.20 % Total interest-bearing liabilities. $ 1,088,117 $ 1,089,352 ============ =============
---------- [FN] (1) Loans held for sale are assumed to mature within one year, as the intent is to sell the loans. (2) Balances are stated net of discounts and other deductions. (3) For the fixed-rate loans held for investment, we computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 12% in determining the cash flows. The same approach was used for the adjustable-rate loans, which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3,5 and 7-year treasury. (5) Other consists of multi-family, commercial real estate, commercial (including SBA), land and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $21.2 million. (7) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings. Short-term Borrowings. A primary function of asset and liability management is to ensure adequate liquidity. In addition to cash and cash equivalents, we rely heavily on short-term borrowing capabilities for liquidity and as a funding vehicle. The primary sources for short-term borrowings are the Federal Home Loan Bank for Matrix Bank, and Matrix Bank and unaffiliated financial institutions for Matrix Financial. See "Liquidity and Capital Resources." The following table sets forth a summary of our short-term borrowings during 2000, 1999 and 1998 and as of the end of each such period:
Average Amount Amount Maximum Weighted Outstanding Outstanding Outstanding Average Interest at During the at any Rate During Year End Year(1) Month End the Year ------------------- ------------------ -------------------- ------------------ (Dollars in thousands) At or for the year ended December 31, 2000: Federal Home Loan Bank borrowings (2)........... $519,433 $430,331 $526,450 6.33% Revolving lines of credit....................... 21,956 40,701 52,750 8.23 Repurchase agreements........................... 385 3,240 6,906 10.70 School financing................................ 44,308 30,262 44,308 8.18 At or for the year ended December 31, 1999: Federal Home Loan Bank borrowings(3)............ 405,000 175,619 417,606 5.23 Revolving lines of credit....................... 28,205 49,762 73,878 6.38 Repurchase agreements........................... 3,156 7,157 12,467 10.11 School financing................................ 22,819 21,853 25,379 7.56 At or for the year ended December 31, 1998: Federal Home Loan Bank borrowings(4)............ 168,000 159,381 271,000 5.37 Revolving lines of credit....................... 86,936 74,973 92,507 6.55 Repurchase agreements........................... 7,350 1,445 7,350 9.06 School financing................................ 22,559 9,304 22,559 7.32 [Table Continued] Weighted Average Interest Rate at Year End ---------------------- (Dollars in thousands) At or for the year ended December 31, 2000: Federal Home Loan Bank borrowings (2)........... 6.29% Revolving lines of credit....................... 7.63 Repurchase agreements........................... 8.75 School financing................................ 8.56 At or for the year ended December 31, 1999: Federal Home Loan Bank borrowings(3)............ 5.64 Revolving lines of credit....................... 6.71 Repurchase agreements........................... 8.67 School financing................................ 7.77 At or for the year ended December 31, 1998: Federal Home Loan Bank borrowings(4)............ 4.90 Revolving lines of credit....................... 6.23 Repurchase agreements........................... 9.02 School financing................................ 7.27
--------- [FN] (1) Calculations are based on daily averages where available and monthly averages otherwise. (2) A total of $26.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2000 were borrowed under a short option advance agreement with the Federal Home Loan Bank. These short option advance borrowings have a term of ten years, but are callable by the Federal Home Loan Bank beginning after a six-month or one-year lockout period depending on the particular short option advance borrowing. After the expiration of the lock-out period, the short option advance borrowings are callable at three month intervals. If the Federal Home Loan Bank exercises its call option on a short option advance borrowing, the Federal Home Loan Bank is required to offer replacement funding to us at a market rate of interest for the remaining term of the short option advance borrowing. The interest rates on the short option advance borrowings ranged from 5.40% to 5.63% at December 31, 2000 and their possible call dates varied from February 20, 2001 to March 26, 2001. Under the terms of the short option advance agreement, we are not permitted to prepay or otherwise retire a callable short option advance borrowing prior to the final maturity date. Additionally, $1.4 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2000 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84% and their maturity date is June 2, 2014. Matrix Bank also had short-term, fixed-term/rate borrowings outstanding at December 31, 2000 from the Federal Home Loan Bank. These short-term, fixed-term/rate borrowings totaled $150.0 million, with interest rates ranging from 6.00% to 6.23% and maturity dates ranging from March 27, 2001 through June 26, 2001. (3) A total of $100.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1999 were borrowed under a short option advance agreement with the Federal Home Loan Bank. The interest rates on the short option advance borrowings ranged from 4.90% to 5.63% at December 31, 1999 and their possible call dates varied from January 14, 2000 to December 26, 2000. Additionally, $1.5 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1999 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2, 2014. (4) A total of $47.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1998 were borrowed under a short option advance agreement with the Federal Home Loan Bank. The interest rates on the short option advance borrowings ranged from 4.85% to 4.94% at December 31, 1998 and their possible call dates varied from January 15, 1999 to April 14, 1999. 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. To date, our principal source of funding for our investing activities has been: o secured senior debt provided by unaffiliated financial institutions; o the issuance of 10% preferred securities through Matrix Bancorp Capital Trust I in July 1999; o the issuance of 11.5% senior notes in September 1997; o a bank stock loan; and o our initial public offering. As of December 31, 2000, Matrix Bancorp had $55.7 million in indebtedness outstanding. The borrowed funds have been used historically as capital injections to Matrix Bank, Matrix Financial and ABS. On December 27, 2000, Matrix Bancorp amended its bank stock loan agreement. The amended bank stock loan agreement has two components, a $10.0 million term loan and a revolving line of credit of $10.0 million. As of December 31, 2000, the balance of the term loan was $8.2 million and there was no outstanding balance on the revolving line of credit. As part of the amended agreement, the balance of the term loan was increased to $10.0 million on January 2, 2001. The amended bank stock loan requires Matrix Bancorp to maintain total shareholders' equity of $60.0 million. On July 30, 1999, Matrix Bancorp Capital Trust I, a Delaware business trust formed by Matrix Bancorp, completed the sale of $27.5 million of 10% preferred securities. Matrix Bancorp Capital Trust I also issued common securities to Matrix Bancorp and used the net proceeds from the offering to purchase $28.6 million in principal amount of 10% junior subordinated debentures of Matrix Bancorp due September 30, 2029. The junior subordinated debentures are the sole assets of Matrix Bancorp Capital Trust I and are eliminated, along with the related income statement effects, in the consolidated financial statements. We used the proceeds from the sale of the junior subordinated debentures to redeem our outstanding senior subordinated notes due July 15, 2002, to make contributions to Matrix Bank, Matrix Financial and ABS to fund their respective operations, to redeem other higher interest rate indebtedness and for other general corporate purposes. Capitalized expenses associated with the offering of approximately $1.4 million are included in other assets at December 31, 2000 and are being amortized on a straight-line basis over the life of the junior subordinated debentures. The preferred securities accrue and pay distributions quarterly at an annual rate of 10% of the stated liquidation amount of $25 per preferred security. We have fully and unconditionally guaranteed all of the obligations of Matrix Bancorp Capital Trust I under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Matrix Bancorp Capital Trust I. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. We have the right to redeem the junior subordinated debentures, in whole or in part on or after September 30, 2004, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. See Note 9 to the consolidated financial statements included elsewhere in this document. Under the indenture, we are prohibited from paying dividends on our common stock if the scheduled payments on our junior debentures and trust preferred securities have not been made. On September 29, 1997, we completed a registered debt offering of $20.0 million in senior notes due 2004, raising net proceeds of approximately $19.1 million. Interest on the senior notes of 11.5% is payable semi-annually on March 31 and September 30 of each year, commenced on March 31, 1998, with a balloon payment for the entire principal balance due in September 2004. The 11.5% senior notes require us to: o maintain consolidated tangible equity capital of not less than $35 million; and o meet the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized" as defined by applicable regulatory guidelines. Additionally, the 11.5% senior notes contain other covenants regarding certain restricted payments, incurrence of indebtedness and issuance of preferred stock, liens, merger, consolidation or sale of assets and transactions with affiliates. The trend of net cash used by our operating activities experienced over the reported periods results primarily from the growth at Matrix Bank. We anticipate the trend of a net use of cash from operations to continue for the foreseeable future. This anticipation results from the expected growth, albeit less than our historical growth at Matrix Bank, which we believe will consist primarily of increased activity in the purchasing of loan portfolios and increased loan production projected at Matrix Financial. However, due to liquidity and capital availability, we do not anticipate growth to be as significant as in prior periods. Matrix Bank's primary source of funds for use in lending, purchasing bulk loan portfolios, investing and other general purposes are: o retail deposits; o trust deposits; o custodial escrow balances; o brokered deposits; o Federal Home Loan Bank borrowings; o sales of loan portfolios; and o proceeds from principal and interest payments on loans. Contractual loan payments and net deposit inflows are a generally predictable source of funds, while loan prepayments and loan sales are significantly influenced by general market interest rates and economic conditions. Borrowings on a short-term basis are used as a cash management vehicle to compensate for seasonal or other reductions in normal sources of funds. Matrix Bank utilizes advances from the Federal Home Loan Bank as its primary source for borrowings. At December 31, 2000, Matrix Bank had overnight and term borrowings from the Federal Home Loan Bank of $519.4 million. To increase its available liquidity, Matrix Bank swapped approximately $27.2 million of residential loans during the first quarter of 2000 and $48.8 million of residential loans during the third quarter of 2000 with the agencies in exchange for agency securities. In combination, these securities had a balance of $66.6 million at December 31, 2000. Matrix Bank is able to pledge these securities with the Federal Home Loan Bank at a higher advance rate. Additionally, the market for securities is more liquid than the market for whole loans. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing rights portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. For a tabular presentation of the our short-term borrowings, see "Asset and Liability Management--Short-term Borrowings." Matrix Bank offers a variety of deposit accounts having a range of interest rates and terms. Matrix Bank's retail deposits principally consist of demand deposits and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. Matrix Bank's retail deposits are obtained from areas in which it is located, as well as through an Internet service. Therefore, its retail deposits are concentrated primarily in Las Cruces and Sun City, except for the Internet deposits, which could be out-of-market retail deposits. Matrix Bank relies principally on customer service, marketing programs and its relationships with customers to attract and retain in-market deposits. Beginning in February 1998, brokered deposits were accepted and have been utilized to support growth at Matrix Bank. In pricing deposit rates, management considers profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by competitors. Matrix Bank intends to continue its efforts to attract deposits as a primary source of funds to support its lending and investing activities. The following table sets forth the average balances for each major category of Matrix Bank's deposit accounts and the weighted-average interest rates paid for interest-bearing deposits for the periods indicated:
Year Ended December 31, -------------------------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------------- ---------------------------------- -------------------------------- Weighted Weighted Weighted Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ----------------- ---------------- ----------------- ---------------- ----------------- -------------- (Dollars in thousands) Passbook accounts.......... $ 2,981 3.42 % $ 2,758 3.48 % $ 2,859 3.58 % NOW accounts............... 64,523 0.96 24,038 2.50 17,586 2.97 Money market accounts...... 130,592 2.34 189,154 3.04 124,796 3.13 Time deposits (except brokered)........ 177,399 6.10 131,054 5.45 108,107 5.79 Brokered deposits.......... 183,685 6.36 156,293 5.11 103,485 5.25 -------------- ------------- -------------- ------------- -------------- ------------- Total deposits....... $ 559,180 4.70 % $ 503,297 4.29 % $ 356,833 4.37 % ============== ============= ============== ============= ============== ==============
The following table sets forth the amount of Matrix Bank's certificates of deposit that are greater than $100,000 by time remaining until maturity as of December 31, 2000:
As of December 31, 2000 -------------------------- Weighted Average Amount Rate Paid ------------ ------------- (Dollars in thousands) Three months or less.......................... $ 2,248 6.13 % Over three months through six months.......... 3,706 6.56 Over six months through twelve months......... 5,428 6.69 Over twelve months............................ 7,433 6.63 ---------- ----------- Total...................................... $ 18,815 6.57 % ========== ===========
We actively monitor Matrix Bank's compliance with regulatory capital requirements. Historically, Matrix Bank has increased its core capital through the retention of a portion of its earnings. Matrix Bank's future growth is expected to be achieved through deposit growth, brokered deposits, borrowings from the Federal Home Loan Bank and custodial deposits from affiliates. We anticipate that such growth will require additional capital. The capital requirements related to the anticipated growth will in part be fulfilled through retention of earnings, potentially increasing our bank stock loan and future possible debt or equity offerings. Prior to Matrix Financial becoming a subsidiary of Matrix Bank, our principal source of funding for our servicing acquisition activities and working capital needs of Matrix Financial consisted of a line of credit facility and a working capital facility provided to Matrix Financial by an unaffiliated financial institution. As noted earlier, effective August 1, 2000, Matrix Financial became a wholly owned subsidiary of Matrix Bank. The contribution of Matrix Financial increased the capital of Matrix Bank by approximately $25 million, which will provide capital for future growth at Matrix Bank. In addition, effective August 1, through financing provided by Matrix Bank, Matrix Financial paid off its line of credit for the financing on its servicing acquisitions. In addition, Matrix Financial paid off approximately $4 million of higher costing borrowings under its purchase/repurchase facilities and paid off its working capital facility. Matrix Financial's principal source of funding for its loan origination business consists of a warehouse line of credit provided to Matrix Financial by Matrix Bank. Additionally, we have a warehouse line of credit provided to Matrix Financial and a sale/repurchase facility provided to ABS by unaffiliated financial institutions. As of September 29, 2000, Matrix Financial's warehouse line of credit facility provided by an unaffiliated financial institution was amended. It aggregates $60.0 million, of which $38.4 million was available to be utilized as of December 31, 2000. The September 29, 2000 warehouse agreement provides financing for Matrix Financial's wholesale lending without sub-limits for such items as servicing acquisitions or working lines of credit. At December 31, 2000, $21.6 million was outstanding under the warehouse line at a weighted average interest rate of 7.63%. Borrowings under the warehouse line of credit are secured by all of the mortgage loans funded with warehouse loan proceeds and bear interest at the LIBOR rate plus a negotiated margin. The sale/repurchase facility provided to ABS houses school financing. As of December 31, 2000, $17.1 million was outstanding under the sale/repurchase facility at a weighted average interest rate of 8.95%. Borrowings under the sale/repurchase facility are secured by all of the school financing funded with sale/repurchase facility proceeds and bear interest at 8.00% on the tax-exempt school financing and 9.00% on all other school financing. Our principal sources of funding for school financing are internal capital, a line of credit facility and a partnership trust with an unaffiliated financial institution. Amounts available under the line of credit facility and the partnership trust are at the lender's sole discretion. During 2000, 1999 and 1998, the Company placed tax-exempt financing it originated to charter schools into several grantor trusts. The trusts then issued Class "A" Certificates and Class "B" Certificates, with the Class "A" Certificates being sold to various third party investors under a private placement at a price of par. The "A" Certificates are guaranteed by a letter of credit issued by a third party investment bank, and the underlying financing. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the investment bank. Generally, the trusts are short-term in nature with an average life of one year or less. The "B" Certificates are owned in part by the Company and in part by the investment bank. The interest rate paid on the "A" Certificates and the "B" Certificates owned by the investment bank is considered the Company's financing cost. The approximate cost of the financing at December 31, 2000 and 1999 was 7.23% and 7.63%, respectively. The interest that the Company receives through its part ownership of the "B" Certificates is tax-exempt. Although the investment bank acts as a guarantor to the "A" Certificates, the Company provides limited recourse to the investment bank in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the trusts, the transactions have been accounted for as a secured financing. Matrix Bank and Sterling Trust are restricted from paying dividends to Matrix Bancorp due to certain regulatory requirements. See "Regulation and Supervision. "Matrix Financial is prohibited from paying dividends to Matrix Bank under its credit agreement dated September 29, 2000. At December 31, 2000, we were in compliance with all debt covenants. Inflation and Changing Prices The consolidated financial statements and related data presented in this document have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as prices of goods and services. We disclose the estimated fair market value of our financial instruments in accordance with Statement of Financial Accounting Standards No. 107. See Note 16 to the consolidated financial statements included elsewhere in this document. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends certain provisions of SFAS 133. These statements establish accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. These statements become effective for the Company on January 1, 2001, and generally, will affect the Company in two principal areas, the hedging activities related to our investment in mortgage servicing rights and certain mortgage banking related commitments made by us in our wholesale mortgage operations, as well as forward loan sale commitments. Currently, in terms of unpaid principal amount, we have approximately 6% of our $71.5 million investment in mortgage servicing rights hedged through an investment in exchange-traded futures and options. We are currently unable to achieve hedge accounting treatment due to the systems and operational issues surrounding the tracking required to do so. The financial impact to future earnings related to our hedging strategies on mortgage servicing rights, assuming that we continue to hedge with exchange-traded futures and options and elect not to achieve hedge accounting treatment, can not be estimated and will largely depend on future market conditions. Based on an October 2000 FASB tentative conclusion, loan commitments that relate to the origination or acquisition of mortgage loans that will be held for resale ("pipeline") will be accounted for as derivatives under SFAS 133. Additionally, we determined that both our mandatory and best effort forward loan sale commitments meet the SFAS 133 derivative definition, and accordingly, are required to be recorded at fair value as an asset or liability upon adoption of SFAS 133. Since the fair values of the pipeline and the forward loan sale commitments (both mandatory and best effort) used to economically hedge all or a portion of the pipeline are generally expected to offset each other, we do not believe the adoption of SFAS 133, with respect to these instruments, will result in a material impact to our operations in the first quarter of 2001 and prospectively. In addition to the pipeline loans, we also use both mandatory and best effort loan sale commitments to hedge our originated loans held for sale. To the extent that we do not receive hedge accounting treatment related to our originated loans held for sale, we will be required to record these loans at the lower of aggregate cost or market with the corresponding loans' sale commitments recorded at fair value. In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that replaces, in its entirety, SFAS 125. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS 140 is effective for transfers occurring after March 31, 2001 and the expanded disclosure requirements regarding securitizations and collateral are effective for fiscal years ended after December 15, 2000. We believe that the adoption of SFAS 140 on April 1, 2001, will have no material impact on our net income. Forward Looking Statements Certain statements contained in this annual 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 annual report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to the ongoing or future bankruptcies of the Company's customers; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; possible future litigation; the actions or inactions of third parties, including those that are parties to the existing bankruptcies of the Company's customers or litigation related thereto; unanticipated developments in connection with the bankruptcy actions or litigation described above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in this annual report and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on March 14, 2001; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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." Item 8. Financial Statements and Supplementary Data See Index to Financial Statements on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PART III Items 10 through 13. The information for these items is incorporated from the definitive proxy statement to be filed with the Commission. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (a) (2) Financial statements and financial statement schedules See Index to Financial Statements on page F-1. (b) Reports on Form 8-K None. (c) Exhibits See Exhibit Index, beginning on page II-1. (d) Financial Statement Schedules None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on the 16th day of March, 2001. Matrix Bancorp, Inc. By: /s/ Guy A. Gibson Guy A. Gibson President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ Guy A. Gibson President, Chief Guy A. Gibson Executive March 16, 2001 Officer and a Director (Principal Executive Officer) /s/ Richard V. Schmitz Chairman of the Board March 16, 2001 Richard V. Schmitz /s/ D. Mark Spencer Vice Chairman and D. Mark Spencer Director March 16, 2001 /s/ Thomas M. Piercy Director March 16, 2001 Thomas M. Piercy /s/ David W. Kloos Senior Vice President, David W. Kloos Chief Financial March 16, 2001 Officer and a Director (Principal Accounting and Financial Officer) /s/ Stephen Skiba Director March 16, 2001 Stephen Skiba /s/ David A. Frank Director March 16, 2001 David A. Frank INDEX TO EXHIBITS 3.1 /// Amended and Restated Articles of Incorporation of the Registrant (3.1) 3.2 + Bylaws, as amended, of the Registrant (3.2) 4.1 ++ Indenture by and among the Registrant and First Trust National Association, as trustee, relating to 11.50% Senior Notes due 2004 (4.1) 4.2 + Specimen certificate for Common Stock of the Registrant (4.1) 4.3 + o Amended and Restated 1996 Stock Option Plan (4.2) 4.4 // o Employee Stock Purchase Plan, as amended (4.4) 4.5 + Form of Common Stock Purchase Warrant by and between the Registrant and Piper Jaffray, Inc. (4.4) 4.6 + Form of Common Stock Purchase Warrant by and between the Registrant and Keefe, Bruyette & Woods, Inc. (4.5) 4.7 ^ Indenture by and among the Registrant and State Street Bank and Trust Company, as trustee, relating to the 10% Junior Subordinated Debentures due 2029 (4.7) 4.8 ^ Form of Junior Subordinated Debentures (4.8) 4.9 ^ Certificate of Trust of Matrix Bancorp Capital Trust I (4.9) 4.10 ^ Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust I (4.10) 4.11 ^ Preferred Security Certificate for Matrix Bancorp Capital Trust I (4.11) 4.12 ^ Preferred Securities Guarantee Agreement of the Company relating to the Preferred Securities (4.12) 4.13 ^ Agreement as to the Expenses and Liabilities (4.13) 4.14 ^^o Matrix Bancorp, Inc. Executive Deferred Compensation Plan (4.1) 4.15 ^^ Trust Agreement, dated December 7, 2000 between Matrix Bancorp, Inc. and Matrix Bancorp, Inc., as Trustee (4.2) 10.1 + o Employment Agreement, dated as of January 1, 1995, between Matrix Capital Bank and Gary Lenzo and as amended January 1, 1996 (10.5) 10.2 + Mortgage Loan Purchase and Servicing Agreement, dated as of August 1, 1993, by and between Argo Federal Savings Bank, FSB, and Matrix Financial Services Corporation (10.11) 10.3 + Assignment and Assumption Agreement, dated as of June 28, 1996, by and among Mariano C. DeCola, William M. Howdon, R. James Nicholson and Matrix Funding Corp. (10.30) 10.4 + Development Management Agreement, dated as of June 28, 1996, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.31) 10.5 /// Coyote Creek Planned Unit Development Agreement, dated as of July 1, 1998, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.12) 10.6 //// Employment Agreement Addendum of Gary Lenzo, dated December 14, 1999 (10.7) 10.7 * Promissory Note, dated as of January 31, 2001, from D. Mark Spencer, as maker, to the Registrant, as payee 10.8 + Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as of November 28, 1995 (10.36) 10.9 + Loan Agreement, dated as of June 21, 1996, by and between Matrix Funding Corporation and The First Security Bank (10.41) 10.10 + Loan Agreement, dated July 10, 1992, by and between American Strategic Income Portfolio, Inc. and Matrix Financial Services Corporation (10.45) 10.11 + Promissory Note, dated as of July 10, 1992, by Matrix Financial Services Corporation, as maker, to American Strategic Income Portfolio, Inc., as payee (10.46) 10.12 *** Credit Agreement, dated as of September 29, 2000, between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.13 *** Guaranty, dated as of September 29, 2000, from the Registrant to U.S. Bank National Association, as agent (10.3) 10.14 / o Employment Agreement, dated as of February 4, 1997, by and between The Vintage Group, Inc. and Paul Skretny (10.38) 10.15 * Credit Agreement, dated as of December 27, 2000, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders 10.16 //o Agreement, dated October 1, 1997, with T. Allen McConnell (10.37) 10.17 +++ Agreement and Plan of Merger, dated as of March 25, 1998, among Fidelity National Financial, Inc., MCC Merger, Inc. and Matrix Capital Corporation (99.2) 10.18 ++ Merger Termination Agreement between Matrix Capital Corporation, Fidelity National Financial, Inc., and MCC Merger Sub, Inc., dated August 28, 1998 (10.1) II-1 10.19 * Promissory Note, dated as of February 21, 2001, from Thomas P. Cronin, as maker, to the Registrant, as payee 10.20 +o Amendment of Employment Agreement dated as of February 4, 1997, dated as of February 4, 2000, by and between The Vintage Group, Inc. and Paul E. Skretny (10.32) 10.21 ** Executive Employment Agreement, dated as of April 20, 2000, by and between United Financial, Inc. and Carl G. de Rozario (10.6) 10.22 * Lease dated as of September 1, 1999, by and between Matrix Financial Services Corporation and Suncor Development Company 10.23 * Lease with a reference date of 1999, by and between the Registrant and the Regents of the University of Colorado 10.24 * First Amendment to Lease, dated as of July, 2000, by and between the Registrant and the Regents of the University of Colorado, amending the Lease with a reference date of 1999 between the parties 10.25 * Second Amendment to Lease, dated as of October, 2000, by and between the Registrant and the Regents of the University of Colorado, amending the Lease with a reference date of 1999 between the parties 10.26 * Promissory Note, dated as of February 21, 2001, from Thomas M. Piercy, as maker, to the Registrant, as payee 10.27 *. Matrix Bancorp, Inc. Executive Incentive Plan 10.28 +. Executive Employment Agreement, dated as of January 1, 1996, by and between the Registrant and David W. Kloos (10.4) 12 * Statement Re: Computations of Ratios 21 * Subsidiaries of the Registrant 23 * Consent of Ernst & Young LLP -------------------------- * Filed herewith + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-10223), filed by the Registrant with the Commission. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-34977), filed by the Registrant with the Commission. +++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K, filed by the Registrant with the Commission on April 8, 1998. / Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1996, filed by the Registrant with the Commission. // Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1997, filed by the Registrant with the Commission. /// Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1998, filed by the Registrant with the Commission. //// Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1999, filed by the Registrant with the Commission. + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's current report on Form 8-K filed by the Registrant with the Commission on June 30, 2000. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1998, filed by the Registrant with the Commission. ** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000, filed by the Registrant with the Commission. *** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2000, filed by the Registrant with the Commission. ^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1/A (No. 333-79731), filed by the Registrant with the Commission. II-2 ^^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-8 (No. 333-51516), filed by the Registrant with the Commission. o Management contract or compensatory plan or arrangement. INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of Matrix Bancorp, Inc. Report of Independent Auditors..............................................F-2 Consolidated Balance Sheets--December 31, 2000 and 1999.....................F-3 Consolidated Statements of Income--for the years ended December 31, 2000, 1999 and 1998............................................F-4 Consolidated Statements of Shareholders' Equity--for the years ended December 31, 2000, 1999 and 1998............................................F-5 Consolidated Statements of Cash Flows--for the years ended December 31, 2000, 1999 and 1998............................................F-6 Notes to Consolidated Financial Statements--December 31, 2000...............F-7 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Matrix Bancorp, Inc. We have audited the accompanying consolidated balance sheets of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of Matrix Bancorp, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Matrix Bancorp, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Phoenix, Arizona /s/ Ernst & Young LLP February 23, 2001 Matrix Bancorp, Inc. Consolidated Balance Sheets (Dollars in thousands) December 31, 2000 1999 ------------------------- Assets Cash.............................................$ 17,539 $ 13,437 Federal funds sold............................... 20,000 - Interest-earning deposits........................ 15,631 13,172 Mortgage-backed securities available for sale.... 66,616 - Loans held for sale, net......................... 942,496 977,751 Loans held for investment, net................... 173,525 125,764 Mortgage servicing rights, net................... 71,529 63,479 Other receivables................................ 58,262 44,933 Federal Home Loan Bank of Dallas stock........... 27,814 22,414 Premises and equipment, net...................... 13,189 10,817 Other assets..................................... 12,194 11,979 ------------------------- Total assets.................................... $1,418,795 $1,283,746 ========================= Liabilities and shareholders' equity Liabilities: Deposits.......................................$ 602,669 $ 562,194 Custodial escrow balances...................... 77,647 94,206 Payable for purchase of mortgage servicing rights....................................... 12,666 3,163 Federal Home Loan Bank of Dallas borrowings.... 519,433 405,000 Borrowed money................................. 97,003 114,601 Guaranteed preferred beneficial interests in company's 10 percent junior subordinated debentures.................................... 27,500 27,500 Other liabilities............................... 14,504 14,826 Income taxes payable............................ 3,350 1,759 ------------------------- Total liabilities................................ 1,354,772 1,223,249 Commitments and contingencies Shareholders' equity: Preferred stock, par value $.0001; authorized 5,000,000 shares; no shares outstanding....... - - Common stock, par value $.0001; authorized 50,000,000 shares; issued and outstanding 6,558,904 and 6,759,241 shares at December 31, 2000 and 1999, respectively...... 1 1 Additional paid-in capital...................... 23,004 22,780 Treasury shares at cost, 237,000 shares at December 31, 2000.......................... (1,775) - Retained earnings............................... 41,974 37,716 Accumulated other comprehensive income.......... 819 - ------------------------- Total shareholders' equity....................... 64,023 60,497 ------------------------- Total liabilities and shareholders' equity.......$1,418,795 $1,283,746 ========================= See accompanying notes. Matrix Bancorp, Inc. Consolidated Statements of Income (Dollars in thousands except per share information) Year Ended December 31, 2000 1999 1998 ------------------------------------- Interest income: Loans and mortgage-backed securities...................... $ 93,965 $ 72,355 $ 59,452 Interest-earning deposits......... 3,421 1,395 1,242 ------------------------------------- Total interest income............ 97,386 73,750 60,694 Interest expense: Savings and time deposits.......... 22,603 15,233 11,789 Demand and money market deposits... 3,672 6,356 4,432 Federal Home Loan Bank of Dallas borrowings....................... 27,242 9,184 8,554 Borrowed money..................... 14,084 13,514 11,729 ------------------------------------- Total interest expense............... 67,601 44,287 36,504 ------------------------------------- Net interest income before provision for loan and valuation losses............................. 29,785 29,463 24,190 Provision for loan and valuation losses............................. 4,235 3,180 4,607 ------------------------------------- Net interest income after provision for loan and valuation losses...... 25,550 26,283 19,583 Noninterest income: Loan administration................ 23,850 23,686 17,411 Brokerage.......................... 5,476 6,156 7,054 Trust services..................... 4,923 4,840 4,169 Real estate disposition services... 3,677 3,659 2,036 Gain on sale of loans and mortgage-backed securities....... 982 3,247 3,108 Gain on sale of mortgage servicing rights................. 2,634 363 803 Loan origination................... 7,587 6,218 5,677 School services.................... 4,240 2,813 46 Other.............................. 5,423 9,378 6,441 ------------------------------------- Total noninterest income............. 58,792 60,360 46,745 Noninterest expense: Compensation and employee benefits.. 34,245 29,336 22,194 Amortization of mortgage servicing rights.................. 9,851 16,403 10,563 Occupancy and equipment............. 4,785 3,727 3,059 Postage and communication........... 2,812 2,688 2,393 Professional fees................... 4,687 2,385 1,439 Data processing..................... 2,413 1,688 1,344 Other general and administrative.... 19,048 13,359 11,947 ------------------------------------- Total noninterest expense............ 77,841 69,586 52,939 ------------------------------------- Income before income taxes........... 6,501 17,057 13,389 Provision for income taxes........... 2,243 6,278 4,876 ------------------------------------- Net income...........................$ 4,258 $ 10,779 $ 8,513 ===================================== Matrix Bancorp, Inc. Consolidated Statements of Income (continued) (Dollars in thousands except per share information) Year Ended December 31 2000 1999 1998 ------------------------------------- Net income per common share..........$ 0.63 $ 1.60 $ 1.27 ===================================== Net income per common share - assuming dilution..................$ 0.63 $ 1.58 $ 1.24 ===================================== Weighted average common shares....... 6,713,251 6,728,211 6,704,991 ===================================== Weighted average common shares - assuming dilution.................. 6,748,857 6,833,546 6,881,890 ===================================== See accompanying notes. Matrix Bancorp, Inc. Consolidated Statements of Shareholders' Equity (Dollars in thousands)
Accumulated Common Stock Additional Other ----------------- Paid In Treasury Retained Comprehensive Comprehensive Shares Amount Capital Shares Earnings Income Total Income --------------------------------------------------------------------------------------- Balance at December 31, 1997..... 6,703,880 $ 1 $22,185 $ - $18,424 $ - $40,610 Issuance of stock related to employee stock purchase plan and options.................. 20,031 - 231 - - - 231 Net income..................... - - - - 8,513 - 8,513 --------------------------------------------------------------------------------------- Balance at December 31, 1998..... 6,723,911 1 22,416 - 26,937 - 49,354 Issuance of stock related to employee stock purchase plan and options.................. 35,330 - 364 - - - 364 Net income..................... - - - - 10,779 - 10,779 --------------------------------------------------------------------------------------- Balance at December 31, 1999..... 6,759,241 1 22,780 - 37,716 - 60,497 Shares repurchased............. (237,000) - - (1,775) - - (1,775) Issuance of stock related to employee stock purchase plan and options.................. 36,663 - 224 - - - 224 Comprehensive income: Net income................... - - - - 4,258 - 4,258 $ 4,258 Net unrealized holding gains - - - - - 819 819 819 ---------- Comprehensive income........... $ 5,077 -----------------------------------------------------------------------------========== Balance at December 31, 2000..... 6,558,904 $ 1 $23,004 $(1,775) $41,974 $ 819 $64,023 ============================================================================= See accompanying notes.
Matrix Bancorp, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Year Ended December 31, 2000 1999 1998 --------------------------------- Operating activities Net income...............................$ 4,258 $ 10,779 $ 8,513 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization......... 2,583 4,424 2,519 Provision for loan and valuation losses.............................. 4,235 3,180 4,607 Amortization of mortgage servicing rights.............................. 9,851 16,403 10,563 Unrealized gain on securities......... 819 - - Deferred income taxes................. (518) (391) 48 Gain on sale of loans and mortgage-backed securities.......... (982) (3,247) (3,108) Gain on sale of mortgage servicing rights.............................. (2,634) (363) (803) Gain on sale of premises and equipment........................... (1,159) - - Loans originated for sale, net of loans sold.......................... (125,944) 69,722 (76,544) Loans purchased for sale.............. (225,898) (701,952) (678,150) Proceeds from sale of loans purchased for sale.................. 108,466 192,722 319,430 Originated mortgage servicing rights, net......................... (16) (1,514) 24 Decrease(increase) in other receivables and other assets.................... 6,777 (6,796) (23,743) Increase in other liabilities and income taxes payable................ 3,682 2,369 1,935 --------------------------------- Net cash used in operating activities (216,480) (414,664) (434,709) Investing activities Loans originated and purchased for investment............................. (202,300) (118,327) (82,547) Principal repayments on loans............ 353,713 303,026 176,520 Purchase of Federal Home Loan Bank of Dallas stock........................... (5,400) (6,771) (6,943) Purchases of premises and equipment...... (7,089) (2,615) (3,028) Hedging of servicing portfolio, net...... 95 (3,257) 321 Acquisition of mortgage servicing rights. (22,380) (28,694) (31,388) Proceeds from the sale of premises and equipment.............................. 3,664 - - Proceeds from sale of mortgage servicing rights....................... 3,537 2,827 5,160 --------------------------------- Net cash provided by investing activities............................. 123,840 146,189 58,095 Matrix Bancorp, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Year Ended December 31, 2000 1999 1998 --------------------------------- Financing activities Net increase in deposits................ $ 40,475 $ 71,678 $ 265,534 Net (decrease) increase in custodial escrow balances....................... (16,559) (2,618) 43,064 Increase in revolving lines and repurchase agreements, net............ 125,743 174,334 64,564 Payments of notes payable............... (31,169) (31,890) (64,539) Proceeds from notes payable............. 2,325 33,395 85,078 Payment of financing arrangements....... (63) (117) (166) Payment of subordinated debt............ - (2,910) - Proceeds from junior subordinated debentures............................ - 26,063 - Treasury shares repurchased............. (1,775) - - Proceeds from issuance of common stock related to employee stock purchase plan and options...................... 224 364 231 --------------------------------- Net cash provided by financing activities............................ 119,201 268,299 393,766 --------------------------------- Increase (decrease) in cash and cash equivalents........................... 26,561 (176) 17,152 Cash and cash equivalents at beginning of year............................... 26,609 26,785 9,633 --------------------------------- Cash and cash equivalents at end of year.................................. $ 53,170 $ 26,609 $ 26,785 ================================= Supplemental disclosure of cash flow information Cash paid for interest expense.......... $ 68,298 $ 41,139 $ 34,547 ================================= Cash paid for income taxes.............. $ 1,592 $ 5,248 $ 4,664 ================================= See accompanying notes. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements December 31, 2000 1. Organization Matrix Bancorp, Inc. (Company) is a unitary thrift holding company that, through its subsidiaries, is a diversified financial services company headquartered in Denver, Colorado. The Company's operations are conducted primarily through Matrix Capital Bank (Matrix Bank), Matrix Financial Services Corporation (Matrix Financial), United Financial, Inc. (United Financial), Matrix Asset Management Corporation (Matrix Asset Management), ABS School Services, L.L.C. (ABS), Sterling Trust Company (Sterling) and First Matrix Investment Services Corporation (First Matrix), all of which are wholly owned. Matrix Bank, a federally chartered savings and loan association, serves its local communities of Las Cruces, New Mexico, and Phoenix, Arizona, by providing personal and business depository services, offering residential loans and providing, on a limited basis, commercial real estate and consumer loans. The Company's mortgage banking business is primarily conducted through Matrix Financial, and was established with the primary objective of acquiring, originating and servicing residential mortgage loan servicing rights. Servicing mortgage loans involves the contractual right to receive a fee for processing and administering mortgage loan payments. The Company acquires servicing rights primarily in the secondary market. Matrix Financial originates residential loans primarily through its wholesale loan origination offices in the Atlanta, Dallas, Denver, Chicago, Houston, Phoenix, Santa Ana and St. Louis metropolitan areas. United Financial provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry, primarily related to the brokerage and analysis of residential mortgage loan servicing rights and residential mortgage loans, corporate and mortgage loan servicing portfolio valuations, development of mortgage loan servicing retention programs, and, to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Matrix Asset Management, formerly known as United Special Services, Inc., provides real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions. ABS provides outsourced business services and financing to charter schools. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 1. Organization (continued) Sterling's operations, which are located in Texas, consist of a nonbank trust company specializing in the administration of self-directed individual retirement accounts, qualified business retirement plans and personal custodial accounts, as well as corporate escrow and paying agent services. First Matrix is registered with the National Association of Securities Dealers as a fully disclosed broker-dealer with headquarters in Fort Worth, Texas and a branch office in Denver, Colorado. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States and to general practices within the financial services industry. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. 2. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The Company contributed 100 percent of Matrix Financial's stock to Matrix Bank on August 1, 2000. All of Matrix Financial's assets and liabilities were transferred at their carrying or book basis. This transaction had no impact on the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from these estimates. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Mortgage-Backed Securities Available for Sale Securities available for sale include mortgage-backed securities. Securities available for sale are carried at estimated fair values with the net unrealized gains or losses reported in accumulated other comprehensive income, which is included as a separate component in shareholders' equity. The Company records its securities portfolio at estimated fair value at the end of each quarter based on public market quotes. At disposition, the realized gain or loss is included in earnings on a specific identification basis. Loans Held for Sale Loans originated or purchased with the intent for sale in the secondary market are carried at the lower of aggregate cost, net of discounts or premiums and a valuation allowance, or estimated market value. Market value is determined using forward commitments to sell loans or mortgage-backed securities to permanent investors or current market rates for loans of similar quality and type. Net unrealized losses, if any, would be recognized in a valuation allowance by charges to income. Discounts or premiums on loans held for sale are not accreted or amortized into income on an interest method; however, discounts and premiums related to payments of loan principal are recorded in interest income. The loans are primarily secured by one-to-four family residential real estate located throughout the United States. Gains and losses on loan sales are determined based on the difference between the allocated cost basis of the assets sold and the proceeds, which includes the fair value of any assets or liabilities that are newly created as a result of the transaction. Losses related to recourse provisions in excess of the amount originally provided are accrued as a liability at the time such additional losses are determined, and recorded as part of noninterest expense. Loans Held for Investment Loans held for investment are stated at unpaid principal balances, less unearned discounts and premiums, deferred loan fees, loans in process and allowance for loan losses. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Allowance for Loan Losses The allowance for loan losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors such as any qualitative evaluations of individual classified assets, geographic portfolio concentrations, new products or markets, evaluations of the changes in the historical loss experience component, and projections of this component into the current and future periods based on current knowledge and conditions. After an allowance has been established for the loan portfolio, management establishes an unallocated portion of the allowance for loan losses, which is attributable to factors that cannot be associated with a specific loan or loan portfolio. These factors include general economic conditions, recognition of specific regional geographic concerns, loan type and trends in portfolio growth. Loan losses are charged against the allowance when the probability of collection is considered remote. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb the inherent losses in the current loan portfolio. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. The Company evaluates its residential loans collectively due to their homogeneous nature. Accordingly, potential impaired loans of the Company include only commercial loans, real estate construction loans, commercial real estate mortgage loans and school financing classified as nonperforming loans. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. As of December 31, 2000 and 1999, the Company had $5,224,000 and $5,301,000, respectively, of impaired commercial loans and school financing with related specific allowances for loan and valuation losses of $287,000 and $649,000, respectively. Loans are placed on nonaccrual status when full payment of principal or interest is in doubt, or generally when they are past due 90 days as to either principal or interest, unless the interest is guaranteed by a creditworthy entity through recourse provisions. Previously accrued but unpaid interest is reversed and charged against interest income, if not collectible, and future accruals are discontinued. Interest payments received on nonaccrual loans are recorded as interest income unless there is doubt as to the collectibility of the recorded investment. In those cases, cash received is recorded as a reduction in principal. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Mortgage Servicing Rights The Company recognizes mortgage servicing rights (MSRs) as an asset separate from the underlying originated mortgage loan and initially, upon sale of the loans, measures retained MSRs by allocating the previous carrying amount of the originated mortgage loan between the loan and the servicing right based on their respective fair values. Purchased MSRs are initially measured at fair value. MSRs are carried at the lower of cost (allocated cost for originated MSRs), less accumulated amortization, or fair value. MSRs are amortized in proportion to and over the period of the estimated future net servicing income. The fair value of MSRs 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 MSRs by product type and investor to reflect the predominant risk characteristics. To determine the fair value of MSRs, the Company uses a valuation model that calculates the present value of future cash flows. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing per loan, including incremental interest cost of servicer advances, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds and default rates. For purposes of performing an impairment analysis on MSRs, the Company estimated fair value using the following primary assumptions: prepayment speeds ranging from 133 PSA to 2,000 PSA (Public Securities Association prepayment speed measurement), discount rates ranging from 9.50 percent to 22 percent, and default rate's ranging from 0 percent to 50 percent. The Company records a valuation allowance where the estimated fair value is below the carrying amount of individual stratifications, even though the overall fair value of the servicing assets may exceed amortized cost. As of December 31, 2000, no valuation allowance was required, and the fair value of the aggregate MSRs was approximately $75,185,000. Gain on sale of MSRs is recognized when title to MSRs and substantially all the risks and rewards inherent in owning the MSRs have been transferred to the buyer, and any protection provisions retained by the Company are minor and can be reasonably estimated. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated lives of the assets, which range from three to seven years for office furniture, equipment and software and 30 years for buildings. Foreclosed Real Estate Real estate acquired through foreclosure, deed in lieu of foreclosure or in judgment is carried at the lower of fair value, less estimated costs to sell, or the related loan balance at the date of foreclosure. Valuations are periodically performed by management and an allowance for loss is established by a charge to operations if the carrying value of a property exceeds its fair value, less estimated costs to sell. The net carrying value of foreclosed real estate, which is classified in other assets, was $2,646,000 and $800,000 at December 31, 2000 and 1999, respectively. A substantial majority of the Company's foreclosed properties relate to residential real estate as of December 31, 2000 and 1999. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Acquired Real Estate Costs directly attributable to the acquisition, development and construction of land development are capitalized. Such costs include preacquisition costs, direct project costs and holding costs. The investment in land development is carried at the lower of cost, which includes capitalized costs, or net realizable value. Net unrealized losses, if any, would be recognized in a valuation allowance. As of December 31, 2000, there was no valuation allowance necessary for the land development. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. The subsidiaries are charged for the taxes applicable to their profits calculated on the basis of filing separate income tax returns. Matrix Bank qualifies as a savings and loan association for income tax purposes. The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Loan Administration Income Loan administration income represents service fees and other income earned from servicing loans for various investors. Loan administration income includes service fees that are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Service fees on loans that are not delinquent or are delinquent by no more than 60 days are recognized when earned. All other income is recognized when the related payments are received. Brokerage Income Brokerage income represents fees earned related to servicing brokerage and consulting services. Brokerage income is recognized when earned. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Trust Services Income Trust services income represents fees earned related to services provided for self-directed individual retirement accounts, qualified benefit plans and escrow arrangements. Trust services income is recognized when earned. Real Estate Disposition Services Income Real estate disposition services income represents fees earned related to real estate management and disposition services. Real estate disposition services income is recognized when earned. Loan Origination Income Loan origination income for loans originated for sale, which includes all mortgage origination fees, secondary marketing activity and servicing-released premiums on mortgage loans sold, net of outside origination costs, is recognized as income at the time the loan is sold and funded by the investor. Loan origination income for loans originated for investment, which includes mortgage origination fees and certain direct costs associated with loan originations, is deferred and amortized as a yield adjustment over the contractual life of the related loan using the interest method, adjusted for estimated prepayments. School Services Income School services income represents fees earned related to outsourced business and consulting services provided to schools. School services income is recognized when earned. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Cash and Cash Equivalents Cash equivalents, for purposes of the consolidated statements of cash flows, consist of nonrestricted cash, federal funds sold and interest-earning deposits with banks with original maturities, when purchased, of three months or less. Risk Management Activities for MSRs The Company hedges a segment of its servicing portfolio using exchange-traded futures and options. A change in the market value of the futures contract is deferred and amortized in proportion to and over the period of the estimated future net servicing income of the hedged servicing portfolio. The option premium or cost is amortized ratably over the period of the option. If any of the hedged servicing portfolio is sold, then the realized and unrealized gain or loss from the futures and options attributable to the portion sold is included in the basis of the MSRs sold for purposes of calculating gain or loss on sale. These realized and unrealized hedging gains and losses are considered in the determination of the fair value of the MSRs. Effective January 1, 2001, the Company's derivative instruments used in risk management activities for MSRs will be accounted for in accordance with Statement No. 133. Net Income Per Share Basic earnings per share (EPS), or net income per common share, excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Net income per common share assuming dilution is computed by dividing net income by the weighted average number of common shares outstanding for the period and the dilutive effect, if any, of stock options and warrants outstanding for the period. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Investment in Joint Venture The Company's 45 percent-owned investment in Matrix Settlement & Clearance Services, L.L.C. (MSCS) is accounted for using the equity method. This investment was classified in other assets, and had a carrying value of $653,000 and $276,000 as of December 31, 2000 and 1999, respectively. For the years ended December 31, 2000 and 1999, the Company recorded losses of $478,000 and $324,000, respectively, in other income related to MSCS operations. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, generally requires the Company to recognize all free standing and embedded derivative instruments as either assets or liabilities on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. Statement No. 133 allows for hedge accounting treatment for derivatives used to hedge various risks and sets forth specific documentation requirements and qualifying criteria to be used to determine when hedge accounting can be applied. Depending on the nature of the hedging relationship, hedge accounting treatment provides for changes in the fair value of derivatives to be either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Derivative instruments designated and qualifying to hedge the exposure to changes in the fair value of an asset, a liability or a firm commitment, or an identified portion thereof that is attributable to a particular risk, such as interest rate risk, are considered fair value hedges under Statement No.133. Fair value hedges are accounted for by recognizing the changes in fair value of the derivative currently in earnings, offset by a concurrent recognition in earnings of gains or losses on the hedged item attributable to the hedged risk and adjusting the carrying value of the hedged item. Derivative instruments designated and qualifying to hedge the exposure to variability in expected future cash flows, such as forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the derivative instrument on the balance sheet as either an asset or a liability with a corresponding offset, representing the effective portion of the hedge, recorded in other comprehensive income within shareholders' equity, net of related income taxes. Amounts are reclassified from other comprehensive income to earnings in the same period or periods during which the hedged transaction affects earnings. Generally, under both hedging methods, derivative gains and losses which relate to permissible hedge ineffectiveness are recognized currently in earnings. As discussed in Note 14, the Company uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities or on future cash flows. The fair value of these derivatives is currently not recognized on the balance sheet. On January 1, 2001, the Company adopted Statement No. 133, and at that time, designated anew certain of its derivative instruments used for mortgage banking risk management activities into hedging relationships in accordance with the requirements of the new standard. The Company's transition adjustment of $550,000, offset by the related income taxes of $190,000, resulting from the adoption of Statement No. 133 on January 1, 2001 will be recorded as a cumulative effect transition adjustment in earnings in the 2001 consolidated financial statements. This transition adjustment relates primarily to the Company's mortgage banking activities, including mandatory and best effort forward commitments to sell loans, forward commitments to sell mortgage-backed securities, loan origination commitments (interest rate locks), and certain derivative instruments used in risk management activities for MSRs. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards (continued) The transition amount was determined by the Company based on the existing interpretive guidance issued by the Financial Accounting Standards Board (FASB). The FASB continues to issue interpretive guidance that could require changes in the Company's application of Statement No. 133 and may impact future earnings. Statement No. 133, as applied to the Company's risk management strategies in mortgage banking activities, may increase or decrease quarterly or annual net income and shareholders' equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on future cash flows and will not modify the Company's economic risks associated with its activities. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards (continued) In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that replaces, in its entirety, FASB Statement No. 125. Statement No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. Statement No. 140 is effective for transfers occurring after March 31, 2001, and the expanded disclosure requirements regarding securitizations and collateral are effective for fiscal years ended after December 15, 2000. The Company believes that the adoption of Statement No. 140 on April 1, 2001, will have no material impact on net income. Reclassifications Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. 3. Net Income Per Share The following table sets forth the computation of net income per share and net income per share, assuming dilution: Year Ended December 31, 2000 1999 1998 ------------------------------------- (Dollars in thousands) Numerator: Net income available to common shareholders........$ 4,258 $ 10,779 $ 8,513 ===================================== Denominator: Weighted average shares outstanding................ 6,713,251 6,728,211 6,704,991 Effect of dilutive securities: Common stock options......... 35,606 95,899 150,478 Common stock warrants........ - 9,436 26,421 ------------------------------------- Dilutive potential common shares...................... 35,606 105,335 176,899 ------------------------------------- Denominator for net income per share, assuming dilution.................... 6,748,857 6,833,546 6,881,890 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 4. Mortgage-Backed Securities Available for Sale At December 31, 2000, mortgage-backed securities available for sale were as follows: Gross Amortized Unrealized Cost Gains Fair Value ------------------------------------------- (In thousands) Mortgage-backed securities.......... $ 65,375 $ 1,241 $ 66,616 The Company expects to receive payments on securities over periods that are considerably shorter than the contractual maturities of the securities, which range from six to 30 years, due to prepayments. Unrealized gains of $1,241,000 were recorded in other comprehensive income, net of the related income taxes of $422,000, as of December 31, 2000. 5. Loans Receivable Loans Held for Investment Loans held for investment consist of the following: December 31, 2000 1999 ------------------------- (In thousands) Residential loans........................ $ 8,382 $ 7,473 Multi-family, commercial real estate, and commercial............................. 123,118 76,185 Construction loans....................... 50,131 48,819 Consumer loans and other................. 8,438 9,903 ------------------------- 190,069 142,380 Less: Loans in process......................... 13,146 14,167 Purchase discounts, net.................. 569 252 Unearned fees............................ 722 764 Allowance for loan losses................ 2,107 1,433 ------------------------- 16,544 16,616 ------------------------- $ 173,525 $ 125,764 ========================= Activity in the allowance for loan losses is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Balance at beginning of year...$ 1,433 $ 1,136 $ 689 Provision for loan losses...... 1,508 735 1,178 Charge-offs.................... (874) (509) (789) Recoveries..................... 40 71 58 ------------------------------------- Balance at end of year.........$ 2,107 $ 1,433 $ 1,136 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 5. Loans Receivable (continued) Loans Held for Investment (continued) Nonaccrual loans in the loans held for investment portfolio totaled approximately $3,087,000 and $498,000, or 1.8 percent and 0.4 percent, of the total loans held for investment portfolio at December 31, 2000 and 1999, respectively. Loans Held for Sale Loans held for sale consist of the following as of: December 31, 2000 1999 ------------------------- (In thousands) Residential loans......................... $ 893,034 $ 945,095 Commercial loans, school financing and other................................... 54,540 36,911 ------------------------- 947,574 982,006 Less: Purchase premiums, net.................. (1,396) (666) Valuation allowance..................... 6,474 4,921 ------------------------- 5,078 4,255 ------------------------- $ 942,496 $ 977,751 ========================= Activity in the valuation allowance is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Balance at beginning of year...$ 4,921 $ 2,574 $ 1,067 Provision for valuation allowance.................... 2,727 2,445 3,429 Charge-offs.................... (1,175) (98) (1,922) Recoveries..................... 1 - - ------------------------------------- Balance at end of year.........$ 6,474 $ 4,921 $ 2,574 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 5. Loans Receivable (continued) Loans Held for Sale (continued) Nonaccrual loans related to the loans and school financing held for sale portfolio aggregated approximately $25,429,000 and $25,143,000 at December 31, 2000 and 1999, respectively. Interest income that would have been recorded for nonaccrual loans was approximately $1,016,000, $979,000 and $524,000 during the years ended December 31, 2000, 1999 and 1998, respectively. The Company continues to accrue interest on government-sponsored loans such as Federal Housing Administration (FHA) insured and Department of Veterans' Affairs (VA) guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured or guaranteed by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $101,104,000 and $147,869,000 as of December 31, 2000 and 1999, respectively. 6. Premises and Equipment Premises and equipment consist of the following: December 31, 2000 1999 ------------------------- (In thousands) Land................................. $ 830 $ 754 Buildings............................ 6,314 4,775 Leasehold improvements............... 1,590 997 Office furniture and equipment....... 12,216 9,384 Other equipment...................... - 1,381 ------------------------- 20,950 17,291 Less accumulated depreciation and amortization....................... 7,761 6,474 ------------------------- $ 13,189 $ 10,817 ========================= Included in occupancy and equipment expense is depreciation and amortization expense of premises and equipment of approximately $2,212,000, $2,126,000 and $1,712,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 7. Mortgage Servicing Rights The activity in the MSRs is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Balance at beginning of year...$ 63,479 $ 57,662 $ 36,276 Purchases...................... 31,883 19,754 34,831 Originated, net of MSRs sold... 16 1,514 (24) Hedging (gain) loss............ (95) 3,257 (321) Amortization................... (9,851) (16,403) (10,563) Sales.......................... (13,903) (2,305) (2,537) ------------------------------------- Balance at end of year.........$ 71,529 $ 63,479 $ 57,662 ===================================== The Company's servicing activity is diversified throughout 50 states with concentrations at December 31, 2000, in California, Texas, Missouri and Florida of approximately 18.9 percent, 13.7 percent, 12.8 percent and 7.3 percent, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. As of December 31, 2000 and 1999, the Company subserviced loans for others of approximately $1,163,811,000 and $205,929,000, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 7. Mortgage Servicing Rights (continued) The Company's servicing portfolio (excluding subserviced loans) comprised the following: December 31, 2000 1999 ------------------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding ------------------------------------------- (Dollars in thousands) Freddie Mac.............. 16,476 $ 836,054 20,028 $1,334,058 Fannie Mae............... 34,706 1,887,925 38,779 2,427,053 GNMA..................... 20,930 1,106,939 11,720 558,086 VA, FHA, conventional and other loans........ 20,292 1,687,045 20,032 1,570,518 ------------------------------------------- 92,404 $5,517,963 90,559 $5,889,715 =========================================== The Company's custodial escrow balances shown in the accompanying consolidated balance sheets at December 31, 2000 and 1999, pertain 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 of approximately $77,647,000 and $94,045,000, respectively. The Company also has custodial accounts on deposit from other mortgage companies aggregating approximately $0 and $161,000 at December 31, 2000 and 1999, respectively. The custodial accounts are maintained at Matrix Bank in noninterest-bearing accounts. The balance of the 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. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 8. Deposits Deposit account balances are summarized as follows: December 31, 2000 1999 ---------------------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------------------------------------------------- (Dollars in thousands) Passbook accounts... $ 3,010 0.50% 3.43% $ 2,793 0.50% 3.48% NOW accounts ....... 85,986 14.27 0.96 42,787 7.61 1.33 Money market accounts ......... 122,992 20.41 2.34 141,641 25.19 3.04 ---------------------------------------------------- 211,988 35.18 1.91 187,221 33.30 2.72 Certificate accounts 390,681 64.82 6.23 374,973 66.70 5.27 ---------------------------------------------------- $602,669 100.00% 4.70% $562,194 100.00% 4.12% ==================================================== Included in NOW accounts are noninterest-bearing demand deposit accounts of $52,986,000 and $21,178,000 at December 31, 2000 and 1999, respectively. Contractual maturities of certificate accounts as of December 31, 2000: Under 12 12 to 36 36 to 60 months months months ------------------------------------- (In thousands) 4.00-4.99% ................... $ 968 $ 387 $ 140 5.00-5.99% ................... 16,078 5,563 1,117 6.00-6.99% ................... 282,503 63,536 8,462 7.00-7.99% ................... 8,401 2,865 661 ------------------------------------- $ 307,950 $ 72,351 $ 10,380 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 8. Deposits (continued) Approximately $131,443,000 and $133,589,000 of fiduciary assets under administration by Sterling are included in NOW and money market accounts as of December 31, 2000 and 1999, respectively. Of the $131,443,000 at December 31, 2000, $10,028,000 was held by Sterling under a temporary paying agent agreement. Included in certificate accounts is $203,600,000 and $221,510,000 of brokered deposits as of December 31, 2000 and 1999, respectively. Interest expense on deposits is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Passbook accounts ........... $ 102 $ 96 $ 102 NOW accounts ............... 619 600 522 Money market ............... 3,053 5,756 3,910 Certificates of deposit ..... 22,501 15,137 11,687 ------------------------------------- $ 26,275 $ 21,589 $ 16,221 ===================================== The aggregate amount of deposit accounts with a balance greater than $100,000 (excluding brokered deposits) was approximately $18,815,000 and $13,873,000 at December 31, 2000 and 1999, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests Borrowed money and guaranteed preferred beneficial interests are summarized as follows: December 31 2000 1999 ------------------------- (In thousands) Revolving Lines $120,000,000 revolving warehouse loan agreement with banks, secured by mortgage loans held for sale, interest at federal funds rate plus 0.85 percent to 1.50 percent ................. $ - $ 25,864 $10,000,000 working capital facility with banks secured by mortgage loans held for sale, MSRs, eligible servicing advance receivables and eligible delinquent mortgage receivables; interest at federal funds rate plus 1.5 percent ....... - 541 $10,000,000 revolving line of credit with a third party financial institution, secured by common stock of Matrix Bank; interest due monthly at LIBOR plus 2.65 percent; $10,000,000 available at December 31, 2000 ............... - 1,800 $60,000,000 revolving warehouse loan agreement (which was increased to $80,000,000 on March 5, 2001), secured by mortgage loans held for sale, interest at LIBOR plus 1.07 percent (7.63 percent rate at December 31, 2000); $38,405,000 available at December 31, 2000 ............... 21,595 - ------------------------- Total revolving lines ........................... 21,595 28,205 Term Notes Payable $45,000,000 servicing acquisition loan agreement with a bank, secured by MSRs, due at the earlier of the maturity of the MSRs or amortized over five to six years from the date of the borrowing through June 30, 2005; interest at federal funds rate plus 2 percent ........... - 28,088 Senior notes, interest at 11.50 percent payable semiannually, unsecured and maturing September 30, 2004 ................. 20,000 20,000 $10,000,000 note payable to a third party financial institution due in quarterly installments of $357,000 plus interest, through December 31, 2003, collateralized by the common stock of Matrix Bank; interest at LIBOR plus 2.65 percent at December 31, 2000 ................. 8,214 9,286 Financing agreement with a bank, secured by real estate, interest at prime plus 1 percent ......................... 2,325 - Other ......................................... - 2,008 ------------------------- Total term notes.................................. 30,539 59,382 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests (continued) December 31 2000 1999 ------------------------- (In thousands) Other Agreements with a bank to sell school financing originated by the Company under agreements to repurchase. The agreement can be terminated upon 90 days written notice by either party; interest rates are variable from 8 percent to 9.50 percent. Total commitment is at the option of the bank. Increases are at the discretion of the bank ................................. $ 17,094 $ 11,545 Financing agreement, collateralized by school financing; interest variable ......... 27,599 14,430 Other financing agreements ................... 176 1,039 ----------- --------- Total other ..................................... 44,869 27,014 --------------------- Total borrowed money ........................... $97,003 $114,601 ===================== Guaranteed preferred beneficial interests in Company's 10 percent junior subordinated debentures payable quarterly, unsecured and maturing September 30, 2029 ........................... $ 27,500 $ 27,500 ===================== As of December 31, 2000, the maturities of term notes payable are as follows: (In thousands) 2001 ................................................. $ 3,753 2002 ................................................. 1,428 2003 ................................................. 5,358 2004 ................................................. 20,000 ------------- $ 30,539 ============= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests (continued) The Company must comply with certain financial and other covenants related to the foregoing debt agreements including, among other things, the maintenance of specific ratios, net income, net worth and other amounts as defined in the credit agreements, limiting the Company's and its subsidiaries' ability to declare dividends or incur additional debt, and requirements to maintain certain capital levels in certain subsidiaries. These covenants include requirements for the Company to maintain consolidated tangible capital of not less than $60,000,000, maintain classified assets of not greater than three percent and maintain the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized," as defined. The credit facility agreement for the $60,000,000 warehouse loan agreement requires Matrix Financial to maintain, among other things, net worth, as defined, of at least $25,000,000, a leverage ratio of no more than eight to one and a minimum cash flow coverage ratio for four consecutive quarters of no less than 1.3 to 1.0. At December 31, 2000, the Company and its subsidiaries were in compliance with these covenants. School Financing Agreement During 2000 and 1999, the Company placed tax-exempt financing it originated to charter schools into several grantor trusts (Trusts). The Trusts then issued Class "A" Certificates and Class "B" Certificates, with the Class "A" Certificates being sold to various third party investors under a private placement at a price of par. The "A" Certificates are guaranteed by a letter of credit issued by a third party investment bank (Investment Bank) and the underlying financing. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the Investment Bank. Generally, the Trusts are short-term in nature with an average life of one year or less. The "B" Certificates are owned in part by the Company and in part by the Investment Bank. The interest rate paid on the "A" Certificates and the "B" Certificates owned by the Investment Bank is considered the Company's financing cost. The approximate cost of the financing at December 31, 2000 and 1999 was 7.23% and 7.63%, respectively. The interest that the Company receives through its part ownership of the "B" Certificates is tax-exempt. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests (continued) School Financing Agreement (continued) Although the Investment Bank acts as a guarantor to the "A" Certificates, the Company provides limited recourse to the Investment Bank in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the Trusts, the transactions have been accounted for as a secured financing. Guaranteed Preferred Beneficial Interests in Company's 10 Percent Junior Subordinated Debentures On July 30, 1999, Matrix Bancorp Capital Trust I (MBC Trust), a Delaware business trust formed by the Company, completed the sale of $27,500,000 of 10 percent preferred securities. The MBC Trust also issued common securities to the Company and used the net proceeds from the offering to purchase $28,600,000 in principal amount of 10 percent junior subordinated debentures of the Company due September 30, 2029. The junior subordinated debentures are the sole assets of MBC Trust and are eliminated, along with the related income statement effects, in the consolidated financial statements. Capitalized expenses associated with the offering of approximately $1,370,000 are included in other assets at December 31, 2000 and are being amortized on a straight-line basis over the life of the junior subordinated debentures. The preferred securities accrue and pay distributions quarterly at an annual rate of 10 percent of the stated liquidation amount of $25 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of MBC Trust under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by MBC Trust. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part on or after September 30, 2004, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 10. Federal Home Loan Bank of Dallas Borrowings Federal Home Loan Bank of Dallas (FHLB) borrowings aggregated $519,433,000 and $405,000,000 at December 31, 2000 and 1999, respectively. Advances of $26,000,000 and $100,000,000 at December 31, 2000 and 1999, respectively, were borrowed under a Short Option Advance (SOA) Agreement with the FHLB. These SOA borrowings have a term of ten years, but are callable by the FHLB beginning after a six month or one year lock-out period depending on the particular SOA borrowing. After the expiration of the lock-out period, the SOA borrowings are callable at three-month intervals. If the FHLB exercises its call option on a SOA borrowing, the FHLB is required to offer replacement funding to the Company at a market rate of interest for the remaining term of the SOA borrowing. Additionally, under the terms of the SOA Agreement, the Company is not permitted to prepay or otherwise retire a callable SOA borrowing prior to the final maturity date. At December 31, 2000, the interest rates on the SOA borrowings ranged from 5.40 percent to 5.63 percent and their possible call dates varied from February 20, 2001 to March 26, 2001. At December 31, 1999, the interest rates on the SOA borrowings ranged from 4.90 percent to 5.63 percent and their possible call dates varied from January 14, 2000 to December 26, 2000. Advances of $151,433,000 and $1,501,000 at December 31, 2000 and 1999, respectively, were borrowed under a fixed term and rate. These advances are at a rate from 5.84 percent to 6.23 percent and mature from March 27, 2001 through June 2, 2014. All advances are secured by first lien mortgage loans of Matrix Bank and all of its FHLB stock. Matrix Bank is on full custody status, which requires Matrix Bank to place loan collateral at the FHLB. As of December 31, 2000, Matrix Bank had available unused borrowings from the FHLB for advances of approximately $31,041,000. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes The income tax provision consists of the following: Year ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Current: Federal ................... $ 2,350 $ 5,340 $ 3,837 State ..................... 411 1,329 991 Deferred: Federal ................... (451) (341) 42 State ..................... ( 67) (50) 6 ------------------------------------- $ 2,243 $ 6,278 $ 4,876 ===================================== A reconciliation of the provision for income taxes with the expected income taxes based on the statutory federal income tax rate follows: Year ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Expected income tax provision .$ 2,210 $ 5,799 $ 4,552 Effect of federal tax brackets. - 52 13 State income taxes ........... 343 827 660 Other ......................... (310) (400) (349) ------------------------------------- $ 2,243 $ 6,278 $ 4,876 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes (continued) Deferred tax assets and liabilities result from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes shown below. December 31, 2000 1999 ------------------------- (In thousands) Deferred tax assets: Allowance for loan and valuation losses .$ 5,400 $ 2,713 Discounts and premiums ................. 71 141 Deferred fees ........................... 1,141 1,145 Delinquent interest ..................... 413 287 Other ................................... 197 - ------------------------- Total deferred tax assets 7,222 4,286 Deferred tax liabilities: Gain on sale of loans ................... (2,773) (1,436) Amortization of mortgage servicing rights (3,178) (1,814) Depreciation ........................... (354) (539) Other ................................... - (98) ------------------------- Total deferred tax liabilities ........... (6,305) (3,887) ========================= Net deferred tax asset ...................$ 917 $ 399 ========================= 12. Regulatory The Company is a unitary thrift holding company and, as such, is subject to the regulation, examination and supervision of the Office of Thrift Supervision (OTS). Matrix Bank is also subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Matrix Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Matrix Bank must meet specific capital guidelines that involve quantitative measures of Matrix Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Matrix Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 12. Regulatory (continued) Quantitative measures established by regulation to ensure capital adequacy require Matrix Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to total assets (as defined). Management believes, as of December 31, 2000 and 1999, that Matrix Bank met all applicable capital adequacy requirements. As of December 31, 2000, the most recent notification from the OTS categorized Matrix Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Matrix Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There have been no conditions or events since that notification that management believes have changed the institution's category.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------- (Dollars in thousands) As of December 31, 2000 Total Capital (to Risk Weighted Assets) ...........$100,091 12.2% $65,387 8.0% $81,734 10.0% Core Capital (to Adjusted Tangible Assets)... 94,289 7.0 53,694 4.0 67,117 5.0 Tier I Capital (to Risk Weighted Assets) ........... 94,289 11.5 N/A 49,041 6.0 As of December 31, 1999 Total Capital (to Risk Weighted Assets) ........... 70,236 10.5 53,397 8.0 66,746 10.0 Core Capital (to Adjusted Tangible Assets)... 65,987 5.8 45,548 4.0 56,935 5.0 Tier I Capital (to Risk Weighted Assets) ........... 65,987 9.9 N/A 40,048 6.0 The various federal banking statutes to which Matrix Bank is subject also include other limitations regarding the nature of the transactions in which it can engage or assets it may hold or liabilities it may incur.
Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 12. Regulatory (continued) Matrix Bank is required to maintain vault cash or balances with the Federal Reserve Bank of Dallas in a noninterest-earning account based on a percentage of deposit liabilities. Such balances averaged $13,168,000 and $14,720,000 in 2000 and 1999, respectively. Matrix Bank is required by Federal regulations to maintain a minimum level of liquid assets of four percent. Matrix Bank exceeded the Federal requirement at December 31, 2000 and 1999. As a wholly owned subsidiary of Matrix Bank, Matrix Financial is subject to OTS regulation. In addition, Matrix Financial is also subject to examination by various regulatory agencies involved in the mortgage banking industry. Each regulatory agency requires the maintenance of a certain amount of net worth, the most restrictive of which required $4,566,000 at December 31, 2000 and $5,104,000 at December 31, 1999. At December 31, 2000 and 1999, Matrix Financial was in compliance with these regulatory requirements. Sterling, a Texas trust company, is generally required to maintain minimum restricted capital of at least $1,000,000, and may be required to maintain additional capital if the Texas Banking Commissioner determines that it is necessary to protect the safety and soundness of Sterling. At December 31, 2000, Sterling was in compliance with all capital requirements under Texas law. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. Under Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In September 1996, the board of directors and shareholders adopted the 1996 Stock Option Plan, which amended and restated the Company's stock option plan adopted in 1995. The Company's 1996 Stock Option Plan, as amended, allows for the grant of options to substantially all of the Company's full-time employees and directors for up to 750,000 shares of the Company's common stock. Options granted generally have ten-year terms and vest based on the determination by the Company's compensation committee. The 1996 Stock Option Plan authorized the granting of incentive stock options (Incentive Options) and nonqualified stock options (Nonqualified Options) to purchase common stock to eligible persons. The 1996 Stock Option Plan is currently administered by the compensation committee (administrator) of the board of directors. The 1996 Stock Option Plan provides for adjustments to the number of shares and to the exercise price of outstanding options in the event of a declaration of stock dividend or any recapitalization resulting in a stock split-up, combination or exchange of shares of common stock. No Incentive Option may be granted with an exercise price per share less than the fair market value of the common stock at the date of grant. The Nonqualified Options may be granted with any exercise price determined by the administrator of the 1996 Stock Option Plan. The expiration date of an option is determined by the administrator at the time of the grant, but in no event may an option be exercisable after the expiration of ten years from the date of grant of the option. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan (continued) The 1996 Stock Option Plan further provides that, in most instances, an option must be exercised by the optionee within 30 days after the termination of the consulting contract between such consultant and the Company or termination of the optionee's employment with the Company, as the case may be, if and to the extent such option was exercisable on the date of such termination. Pro forma information regarding net income and earnings per share is required by Statement No. 123, Accounting for Stock-Based Compensation, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.1 percent, 5.4 percent and 5.4 percent; a dividend yield of zero percent; volatility factors of the expected market price of the Company's common stock of .63, .56 and .39; and a weighted-average expected life of the option of four years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan (continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: Year ended December 31, 2000 1999 1998 ------------------------------------- (Dollars in thousands except per share data) Pro forma net income................ $ 3,980 $ 10,462 $ 8,256 Pro forma earnings per share: Basic............................. 0.59 1.55 1.23 Diluted .......................... 0.59 1.53 1.20 A summary of the Company's stock option activity and related information is as follows: Year ended December 31, 2000 1999 1998 ----------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------------------------------------------------- Outstanding, beginning of year..431,600 $ 11.07 387,700 $ 10.90 330,150 $ 10.55 Granted............. 95,000 7.65 55,500 12.34 63,000 12.96 Exercised........... (500) 10.00 (6,100) 12.36 (1,725) 12.25 Forfeited...........(29,400) 10.77 (5,500) 12.32 (3,725) 14.00 --------- ---------- --------- Outstanding, end of year.............. 496,700 10.54 431,600 11.07 387,700 10.90 ========= ========== ========= Exercisable end of year.............. 286,500 10.34 226,150 9.70 167,350 8.49 Weighted average fair value of options granted during the year... $ 4.86 $ 7.68 $ 6.03 ========= ========== ========= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan (continued) Options outstanding at December 31, 2000, have exercise prices ranging from $5.13 to $26.50 per share, as outlined in the following table: Weighted Weighted Weighted Average Average Average Range of Number of Exercise Remaining Number of Exercise Exercise Options Price Per Contractual Options Price Prices Outstanding Share Life Exercisable Per Share ------------------------------------------------------------------------- $5.13 79,500 $ 5.13 4.00 79,500 $ 5.13 6.50 - 7.13 12,500 6.98 9.88 - - 8.00 - 8.44 97,500 8.31 8.91 11,500 8.11 10.0 98,200 10.00 5.79 83,250 10.00 11.50 - 13.88 113,000 12.88 7.10 51,750 13.09 14.25 - 17.25 93,000 15.17 6.59 57,500 15.16 26.50 3,000 26.50 7.33 3,000 26.50 ----------- ----------- 496,700 10.54 6.68 286,500 10.34 =========== =========== Restricted Net Assets As a result of the regulatory requirements and debt covenants, substantially all of the net assets of the Company are restricted at December 31, 2000 and 1999. Warrants The Company issued warrants exercisable for an aggregate of 75,000 shares of its common stock to its primary underwriters upon the closing of the Company's initial public offering. The warrants are exercisable, from time to timefrom October 1997 to October 2001. The exercise price for the shares of common stock underlying such warrants is $12 per share. The shares of common stock underlying such warrants are entitled to certain demand and incidental registration rights. The warrants expire on October 18, 2001. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Employee Stock Purchase Plan In September 1996, the board of directors and shareholders adopted on Employee Stock Purchase Plan (Purchase Plan) and authorized 125,000 shares of common stock (ESPP Shares) for issuance thereunder. The Purchase Plan became effective upon consummation of the initial public offering. The price at which ESPP Shares are sold under the Purchase Plan is 85 percent of the lower of the fair market value per share of common stock on the enrollment or the purchase date. In May 2000, the authorized number of shares available for issuance under the Purchase Plan was increased to 250,000 shares. As of December 31, 2000, there were 145,552 ESPP Shares available for future issuance. 14. Commitments, Contingencies and Related Party Transactions Leases The Company leases office space and certain equipment under noncancelable operating leases. Annual amounts due under the office and equipment leases as of December 31, 2000, are approximately as follows: (In thousands) 2001.................................................. $ 2,557 2002.................................................. 2,358 2003.................................................. 2,067 2004.................................................. 1,513 2005.................................................. 1,487 Thereafter............................................ 1,320 ------------- $ 11,302 ============= Total rent expense aggregated approximately $2,319,000, $1,327,000 and $955,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and is recorded in occupancy and equipment expense. Off-Balance Sheet Risk and Concentration of Commitments The Company is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include undisbursed commercial mortgage construction loans, commercial lines of credit and letters of credit. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The Company's exposure to credit loss, in the event of nonperformance by the other party, to off-balance sheet financial instruments with credit risk is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk. Commercial credit off-balance sheet instruments are agreements to lend to, or to provide credit guarantee for, a customer as long as there is no violation of any condition established in the contract. Such instruments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of these instruments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management's credit evaluation of the customer. As of December 31, 2000 and 1999, the Company had commercial credit off-balance sheet instruments of $27,905,000 and $40,475,000, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Mortgage Banking Risk Management Activities In the ordinary course of business, the Company makes commitments to originate residential mortgage loans (Pipeline) and holds originated loans until delivery to an investor. Inherent in this business is a risk associated with changes in interest rates and the resulting change in the market value of the Pipeline and funded loans. The Company mitigates this risk through the use of mandatory and best effort forward commitments to sell loans or mortgage-backed securities. At December 31, 2000, the Company had $109,490,000 and $132,000,000 in Pipeline and funded loans, respectively, offset with mandatory forward commitments of $70,730,000 and best effort forward commitments of $121,950,000. At December 31, 1999, the Company had $10,663,000 and $30,515,000 in Pipeline and funded loans, respectively, offset with mandatory forward commitments of $35,127,000 and best effort forward commitments of $3,690,000. Effective January 1, 2001, the Company adopted Statement No. 133, which impacts the accounting for both Pipeline and risk management activities for Pipeline and funded loans. Risk Management Activities for MSRs Ownership of MSRs exposes the Company to impairment of its value in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of the Company's mortgage servicing portfolio achieves a level higher than projected by the Company for an extended period of time, then an impairment in the associated basis in the MSRs may occur. To mitigate this risk of impairment due to declining interest rates, the Company hedges a segment of its mortgage servicing portfolio. As of December 31, 2000, the Company had identified and hedged approximately $353 million of its mortgage servicing portfolio, in terms of principal loan balance outstanding, using a program of exchange-traded futures and options. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Hedging of MSRs (continued) At December 31, 2000, the Company had the following open positions: Unrecognized Open Gain Expiration Positions Notional (Loss) on Date (No. of Amount Open Contracts) Positions -------------------------------------------- Ten year Treasury Note futures ................ March 2001 118 $11,800,000 $ 302,649 Ten year Treasury Note put options ............ March 2001 45 4,500,000 (6,374) Ten year Treasury Note call options............ March 2001 37 3,700,000 8,277 Contingencies The Company and its subsidiaries are parties to various litigation matters, in most cases, involving ordinary and routine claims incidental to the business of the Company. The Company accrues liabilities when it is probable that 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. Based on evaluation of the Company's litigation matters and discussions with internal and external legal counsel, management believes that an adverse outcome on one or more of the matters set forth below, against which no accrual for loss has been made as of December 31, 2000, 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 condition, results of operations or cash flows of the Company. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Contingencies (continued) The Company has been named defendant in an arbitration action in which the plaintiff alleges that the Company violated various provisions of the Commodities Exchange Act in connection with plaintiff's investment of certain monies in his self-directed IRA. The plaintiff seeks compensatory damages of $250,000 plus interest and other costs, including attorneys' fees. The arbitration hearing is set for June 2001. The Company believes it has adequate defenses and intends to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter, cannot be estimated with certainty at this time. A former customer of the Company is a debtor in a Chapter 11 proceeding under the Bankruptcy Code. Prior to the bankruptcy filing, the Company had provided the customer with a purchase/repurchase facility under which the Company purchased residential mortgage loans from the customer, with the customer having the right or obligation to repurchase such mortgage loans within a specified period of time. Several other financial institutions had provided the customer with warehouse financing or additional purchase/repurchase facilities (the Origination Facilities). At this time, it appears that no other financial institution that provided an Origination Facility to the customer has a conflicting interest with the Company in respect of the loans purchased by the Company, which were approximately $12,400,000 in original principal amount (the Purchased Loans). However, several third parties have instituted lawsuits against the Company claiming an equitable interest in a portion of the Purchased Loans (approximately $2,400,000 in original principal amount). In addition, parties in the chain of title to property securing approximately $2,500,000 of loans, including sellers and prior lienholders, are seeking to void or rescind their transactions on the theory that they never received consideration. The Company believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. The trustee for the customer mentioned above has received an order from the Bankruptcy Court finding that the Purchased Loans are a part of the estate of the customer. Nevertheless, the trustee and the Company have reached an agreement, in principle, whereby the trustee will release all of its right in and to the Purchased Loans if the trustee, after performance of a "due diligence" review, determines that the Company owns the Purchased Loans or, would otherwise have a perfected security interest in the Purchased Loans. The Company believes it can adequately demonstrate to the trustee that it is the owner of the Purchased Loans, or otherwise has a perfected security interest in the Purchased Loans. The Company intends to vigorously defend its position in this matter. The ultimate legal and financial liability of the Company, if any, in this bankruptcy cannot be estimated with certainty at this time. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Contingencies (continued) The Company has been named a defendant in an action that was tried in Tarrant County, Texas, district court in the spring of 2000. The jury returned a verdict adverse to the Company with respect to two of 12 theories of liability posed by the plaintiffs, and the court has signed a judgment for certain of the plaintiffs in the amount of approximately $6,400,000. The Company has filed an appeal of this judgment and believes it has meritorious points of appeal. It intends to vigorously prosecute the appeal of this action. The ultimate resolution of this matter, which is expected to occur in nine to 18 months, could result in a loss of up to $6,400,000 plus post-judgment interest and additional attorneys' fees. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty at this time. Related to the matter described in the previous paragraph, the Company and several officers have been named defendants in an action in which the plaintiffs have asserted various theories of liability, including control person theories of liability under the Texas Securities Act and fraudulent transfer theories of liability, to seek to impose liability on the defendants for the judgment described above. The defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. The Company has been named a defendant in approximately nine alleged class actions in which the plaintiffs allege, among other things, that the Company, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. In each case, the plaintiff seeks unspecified damages and costs. The Company believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. Related Party Transactions At December 31, 2000, the Company had unsecured loan receivables from executive officers and a shareholder of $230,000 and approximately $68,000, respectively, which all bear interest at varying rates and are renewable at the Company's option. 15. Defined Contribution Plan The Company has a 401(k) defined contribution plan (Plan) covering all employees who have elected to participate in the Plan. Each participant may make pretax contributions to the Plan up to 15 percent of such participant's earnings with a maximum of $10,500 in 2000. The Company makes a matching contribution of 25 percent of the participant's total contribution. Matching contributions made by the Company vest over six years. The cost of the plan approximated $261,000, $211,000 and $162,000 during the years ended December 31, 2000, 1999 and 1998, respectively, and was recorded in compensation and employee benefits expense in the consolidated statements of income. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 16. Financial Instruments Fair Value of Financial Instruments The carrying amounts and estimated fair value of financial instruments are as follows: December 31, 2000 1999 ------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------- (In thousands) Financial assets: Cash and cash equivalents.......$ 53,170 $ 53,170 $ 26,609 $ 26,609 Mortgage-backed securities...... 66,616 66,616 - - Loans held for sale, net........ 942,496 948,069 977,751 982,525 Loans held for investment, net........................... 173,525 174,581 125,764 126,937 FHLB stock...................... 27,814 27,814 22,414 22,414 Financial liabilities: Deposits........................ 602,669 604,423 562,194 563,473 Custodial escrow balances....... 77,647 77,647 94,206 94,206 Payable for purchase of MSRs.... 12,666 12,666 3,163 3,163 FHLB borrowings................. 519,433 521,194 405,000 405,067 Borrowed money and guaranteed preferred beneficial interests.......... 124,503 119,253 142,101 142,101 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 16. Financial Instruments (continued) Fair Value of Financial Instruments (continued) The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments: The carrying amounts reported in the balance sheet for cash and cash equivalents, FHLB stock, payable for purchase of MSRs and certain components of borrowed money approximate those assets' and liabilities' fair values. The fair values of loans are based on quoted market prices where available or outstanding commitments from reputable investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The fair value disclosed for FHLB borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLB borrowings. The fair value for the remainder of borrowed money, which includes the Company's 11.50 percent senior notes and guaranteed preferred beneficial interests, is based on over the counter (OTC) market prices. The fair value disclosed for demand deposits (e.g., interest and noninterest checking, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. The component commonly referred to as deposit base intangible, was not estimated at December 31, 2000 and 1999, and is not considered in the fair value amount. The fair value disclosed for custodial escrow balances liabilities (noninterest checking) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows: December 31, 2000 1999 ------------------------- (In thousands) Condensed Balance Sheets Assets: Cash......................................$ - $ 2 Other receivables......................... 279 1,801 Premises and equipment, net............... 989 2,254 Other assets.............................. 2,489 2,693 Investment in and advances to subsidiaries............................ 123,755 117,290 ----------------------- Total assets................................$ 127,512 $ 124,040 ======================= Liabilities and shareholders' equity: Borrowed money and guaranteed preferred beneficial interests (a)...............$ 55,714 $ 59,568 Other liabilities........................ 7,775 3,975 ----------------------- Total liabilities.......................... 63,489 63,543 Shareholders' equity: Common stock............................. 1 1 Treasury shares ......................... (1,775) - Additional paid in capital............... 23,004 22,780 Retained earnings........................ 42,793 37,716 ----------------------- Total shareholders' equity................. 64,023 60,497 ----------------------- Total liabilities and shareholders' equity.$ 127,512 $ 124,040 ========================= (a)The Parent's debt is set forth below. The Parent also guarantees the revolving warehouse loan agreement and the financing related to charter schools. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information (continued) December 2000 1999 ------------------------- (In thousands) Senior notes.............................. $ 20,000 $ 20,000 Bank stock loan........................... 8,214 9,286 Other..................................... - 2,782 ------------------------- Total term notes.......................... 28,214 32,068 Guaranteed preferred beneficial interests. 27,500 27,500 ------------------------- Total debt................................ $ 55,714 $ 59,568 ========================= As of December 31, 2000, the maturities of term notes payable are as follows: (In thousands) 2001.................................................. $ 1,428 2002.................................................. 1,428 2003.................................................. 5,358 2004.................................................. 20,000 ------------- $ 28,214 ============= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information (continued) Year ended December 31, 2000 1999 1998 ----------------------------------- (In thousands) Condensed Statements of Income Income: Interest income on loans..... $ 2,202 $ 1,257 $ 17 Other........................ 1,362 616 463 ----------------------------------- Total income................... 3,564 1,873 480 Expenses: Compensation and employee benefits................... 3,686 2,628 2,412 Occupancy and equipment...... 674 718 600 Interest on borrowed money... 6,923 5,521 3,601 Professional fees............ 510 400 295 Other general and administrative............. 2,209 1,948 1,416 ----------------------------------- Total expenses................. 14,002 11,215 8,324 ----------------------------------- Loss before income taxes and equity income of subsidiaries................. (10,438) (9,342) (7,844) Income taxes (a)............... - - - ----------------------------------- Loss before equity income of subsidiaries................. (10,438) (9,342) (7,844) Equity income of subsidiaries.. 14,696 20,121 16,357 ----------------------------------- Net income.....................$ 4,258 $ 10,779 $ 8,513 =================================== (a)The Company's tax-sharing agreement with its subsidiaries provides that the subsidiaries will pay the Parent an amount equal to its individual current income tax provision calculated on the basis of the subsidiary filing a separate return. In the event a subsidiary incurs a net operating loss in future periods, the subsidiary will be paid an amount equal to the current income tax refund the subsidiary would be due as a result of carryback of such loss, calculated on the basis of the subsidiary filing a separate return. Accordingly, the Parent's condensed statements of income do not include any income tax benefit for the current losses. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information (continued) Year ended December 31 2000 1999 1998 ------------------------------------- (In thousands) Condensed Statements of Cash Flows Operating activities: Net income........................$ 4,258 $ 10,779 $ 8,513 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity income of subsidiaries..................(14,696) (20,121) (16,357) Dividend from subsidiaries..... 6,509 11,468 4,534 Depreciation and amortization.................. 621 763 281 Unrealized gain on securities.................... 819 - - Gain on sale of premises....... (823) - - Increase in other liabilities................... 3,800 2,556 169 Decrease (increase) in other receivables and other assets.................. 1,459 (1,754) 945 --------------------------------- Net cash provided by (used in) operating activities.............. 1,947 3,691 (1,915) Investing activities: Purchases of premises and equipment....................... (457) (221) (964) Proceeds from sale of premises.... 2,191 - - Investment in and net change in advances to subsidiaries......... 1,722 (19,846) (14,926) --------------------------------- Net cash provided by (used in) investing activities.............. 3,456 (20,067) (15,890) Financing activities: Repayments of notes payable and revolving line of credit....(39,554) (30,007) (14,774) Proceeds from notes payable and revolving line of credit.... 35,700 19,800 31,047 Shares repurchased................ (1,775) - - Proceeds from junior subordinated debentures......... - 26,063 - Proceeds from issuance of common stock.................... 224 364 231 --------------------------------- Net cash (used in) provided by financing activities.............. (5,405) 16,220 16,504 --------------------------------- Decrease in cash.................... (2) (156) (1,301) Cash at beginning of year........... 2 158 1,459 --------------------------------- Cash at end of year.................$ - $ 2 $ 158 ================================= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 18. Selected Quarterly Financial Data (Unaudited) 2000 --------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter --------------------------------------------- (Dollars in thousands except per share data) Operations Net interest income after provision for loan and valuation losses................... $ 7,084 $ 6,191 $ 6,242 $ 6,033 Noninterest income......... 14,971 15,340 14,705 13,440 Noninterest expense........ 20,234 19,849 20,462 16,960 ------------------------------------------- Income before income taxes. 1,821 1,682 485 2,513 Income taxes............... 513 615 151 964 ------------------------------------------- Net income................. $ 1,308 $ 1,067 $ 334 $ 1,549 =========================================== Net Income Per Share Data Basic...................... $ .20 $ .16 $ .05 $ .23 =========================================== Diluted.................... $ .20 $ .16 $ .05 $ .23 =========================================== Balance Sheet Total assets...............$1,418,795 $1,367,647 $1,293,828 $1,302,593 Total loans, net........... 1,116,021 1,086,388 1,073,630 1,088,170 Shareholders' equity....... 64,023 63,664 62,730 62,051 1999 --------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter --------------------------------------------- (Dollars in thousands except per share data) Operations Net interest income after provision for loan and valuation losses.................$ 6,847 $ 6,454 $ 6,429 $ 6,553 Noninterest income....... 15,383 15,085 15,686 14,206 Noninterest expense...... 17,820 17,091 17,816 16,859 ------------------------------------------- Income before income taxes.................. 4,410 4,448 4,299 3,900 Income taxes............. 1,712 1,662 1,509 1,395 ------------------------------------------- Net income...............$ 2,698 $ 2,786 $ 2,790 $ 2,505 =========================================== Net Income Per Share Data Basic....................$ .40 $ .41 $ .41 $ .37 =========================================== Diluted..................$ .40 $ .41 $ .41 $ .37 =========================================== Balance Sheet Total assets.............$1,283,746 $1,059,815 $1,034,699 $ 996,519 Total loans, net......... 1,103,515 887,032 835,960 803,002 Shareholders' equity..... 60,497 57,500 54,714 51,869 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 19. Transactions with MCA Mortgage Corporation During recent years, the Company entered into several purchase transactions with MCA Mortgage Corporation (MCA), a Michigan-based mortgage banking entity. At December 31, 1998, the Company was carrying approximately $5,000,000 of residential mortgage loans on its balance sheet that were purchased from MCA on a servicing retained basis. The Company also had an outstanding receivable relating to brokerage and consulting services provided to MCA. In January 1999, the Company learned that MCA was closing its operations. Additionally, in February 1999, the Company learned that MCA had declared bankruptcy and it appeared likely that some of the loans purchased by the Company had been sold multiple times or pledged multiple times as security for repayment of various credit facilities. The Company also discovered that there appeared to be servicing issues relating to some of the purchased loans. The servicing issues consisted of instances in which loans owned by the Company and serviced by MCA had previously paid off, but for which MCA had continued to remit monthly principal and interest, rather than the payoff proceeds. As a result of the above MCA issues, the Company recorded a provision for valuation losses of approximately $2,200,000 as of December 31, 1998. Additionally, the Company wrote off approximately $100,000 of accounts receivable and accrued interest relating to MCA as of December 31, 1998. 20. Transactions with Harbor Financial Mortgage Corporation During 1999 and 1998, the Company entered into several transactions with Harbor Financial Mortgage Corporation and its wholly owned subsidiary New America Financial Inc. (collectively Harbor). The transactions included the purchase of nonperforming FHA/VA loans, servicing retained, on a scheduled/actual remittance; the purchase of performing residential mortgage loans including sub-prime loans, servicing retained, on a scheduled/scheduled remittance with full recourse; the acquisition of MSRs; and the purchase of receivables related to servicing sales by Harbor to third parties. In July 1999, Harbor, as servicer for the nonperforming FHA/VA loans, breached its servicing contract. As a result, in September 1999, the Company transferred the servicing of the loans to Matrix Financial. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 20. Transactions with Harbor Financial Mortgage Corporation (continued) In October 1999, Harbor filed for bankruptcy. Subsequent to the bankruptcy there were several lawsuits filed by and against the Company and third parties, generally surrounding the ownership and competing interest in certain of the Harbor assets that the Company had acquired. In August 2000, the Company entered into a global settlement with all of the third parties. As part of the settlement, the Company acquired additional assets from the Harbor estate and was required to make settlement payments. Related to the settlement, curtailments and legal expenses the Company expensed approximately $2,800,000, the majority of which was recorded in other general and administrative expense in the consolidated statement of income for the year ended December 31, 2000. The most significant assets which remain from the Harbor transactions are the nonperforming FHA/VA loans with a balance of $80,025,000 at December 31, 2000. Because the principal and interest is largely insured or guaranteed by the federal government at a stated debenture rate, the Company continues to accrue interest on the loans. However, both the interest and advances made on the loans are subject to certain curtailments. The interest and advances are analyzed quarterly by the Company for collectibility. 21. Transactions with Island Mortgage Network Over the past two years, the Company provided Island Mortgage Network (Island), a New York mortgage banking entity, with a purchase/repurchase facility under which the Company purchased residential mortgage loans from Island, with Island having the right or obligation to repurchase such mortgage loans within a specified period of time. In June 2000, Island breached terms of its agreement with the Company and, in July, Island filed for bankruptcy. At the time of the bankruptcy, the Company had approximately $12,400,000 of loans that it had acquired from Island. Relating to $2,400,000 of the loans, there have been lawsuits initiated by third parties alleging a competing interest in the loans. With respect to an additional $2,500,000 of loans, the Company believes that the loans were never closed with good funds. As of December 31, 2000, the Company had $11,600,000 of loans and receivables originated by Island. As a result of the above Island issues, the Company recorded a provision for losses in other general and administrative expense of approximately $2,600,000 for the year ended December 31, 2000. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 22. Segments of the Company and Related Information The Company has four reportable segments under Statement No. 131, Disclosures about Segments of an Enterprise and Related Information: a traditional banking subsidiary, a mortgage banking subsidiary, a servicing brokerage and consulting subsidiary and a school services subsidiary. The traditional banking subsidiary provides deposit and lending services to its customers and also makes investments in residential mortgage loans and residential MSRs. The mortgage banking subsidiary acquires residential MSRs and services the mortgage loans underlying those MSRs and, in addition, originates residential mortgage loans through its wholesale loan origination offices. The servicing brokerage subsidiary offers brokerage and consulting services for residential MSRs. The school services subsidiary provides outsourced business and consulting services, as well as financing to charter schools. The remaining subsidiaries are included in the "all other" category for purposes of Statement No. 131 disclosures and consist of the Company's trust operations, real estate disposition services, a broker-dealer and the Parent company operations. The Company evaluates performance and allocates resources based on operating profit or loss before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices (i.e., prices that would be paid if the companies were not affiliates). Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 22. Segments of the Company and Related Information (continued) For the years ended December 31: Servicing Brokerage Traditional Mortgage and School All Banking Banking Consulting Services Others Total -------------------------------------------------------- 2000 (In thousands) Revenues from external customers: Interest income.........$86,535 $ 5,973 $ - $ 4,691 $ 187 $97,386 Noninterest income......... 9,144 27,430 6,871 4,240 11,107 58,792 Intersegment revenues.......... 3,620 5,746 220 - 2,233 11,819 Interest expense.... 47,978 8,296 7 4,413 6,907 67,601 Depreciation/ amortization...... 2,447 8,469 155 269 1,094 12,434 Segment income (loss) before income taxes...... 17,170 2,209 1,431 (4,019) (10,290) 6,501 Segment assets (a).............. 1,286,971 259,726 2,304 62,245 30,740 1,641,986 1999 Revenues from external customers: Interest income......... 66,057 4,433 - 3,249 11 73,750 Noninterest income......... 13,903 24,779 9,662 2,813 9,203 60,360 Intersegment revenues.......... (68) 2,782 861 - 3,183 6,758 Interest expense.... 30,812 6,572 1 2,586 4,316 44,287 Depreciation/ amortization...... 3,691 13,498 216 183 942 18,530 Segment income (loss) before income taxes...... 29,047 (4,529) 3,871 (1,895) (9,437) 17,057 Segment assets (a)1,138,650 93,252 1,803 37,640 29,446 1,300,791 1998 Revenues from external customers: Interest income.........52,445 6,566 - 1,661 22 60,694 Noninterest income......... 7,603 21,971 9,993 46 7,132 46,745 Intersegment revenues.......... (133) 991 501 - 1,665 3,024 Interest expense....24,972 6,767 1 1,128 3,636 36,504 Depreciation/ amortization...... 1,516 10,306 227 28 1,005 13,082 Segment income (loss) before income taxes......21,470 (3,983) 4,119 (742) (7,475) 13,389 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Segment assets(a)..821,448 156,523 3,143 24,875 28,304 1,034,293 (a) See reconciliation to total consolidated assets in the following table. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 22. Segments of the Company and Related Information (continued) 2000 1999 1998 ------------------------------------- (In thousands) Revenues for year ended December 31, Interest income for reportable segments...........................$ 97,199 $ 73,739 $ 60,672 Noninterest income for reportable segments........................... 47,685 51,157 39,613 Intersegment revenues for reportable segments........................... 9,586 3,575 1,359 Other revenues....................... 13,527 12,397 8,819 Elimination of intersegment revenues. (11,819) (6,758) (3,024) ------------------------------------- Total consolidated revenues..........$ 156,178 $ 134,110 $ 107,439 ===================================== Profit for year ended December 31, Total profit for reportable segments.$ 16,791 $ 26,494 $ 20,864 Other loss........................... (10,803) (9,152) (7,367) Adjustment to intersegment profit (loss) in consolidation............ 513 (285) (108) ------------------------------------ Income before income taxes...........$ 6,501 $ 17,057 $ 13,389 ==================================== Assets as of December 31, Total assets for reportable segments.$1,611,246 $1,271,345 $1,005,989 Other assets......................... 30,740 29,446 28,304 Elimination of intercompany receivables........................ (215,998) (16,689) (21,905) Other eliminations................... (7,193) (356) (233) ------------------------------------ Total consolidated assets............$1,418,795 $1,283,746 $1,012,155 ==================================== Other Significant Items for the year ended December 31, Depreciation/amortization expense: Segment totals.....................$ 11,340 $ 17,588 $ 12,077 Adjustments........................ 1,094 942 1,005 ------------------------------------ Consolidated totals..................$ 12,434 $ 18,530 $ 13,082 ==================================== Interest expense: Segment totals.....................$ 60,694 $ 39,971 $ 32,868 Adjustments........................ 6,907 4,316 3,636 ------------------------------------ Consolidated totals..................$ 67,601 $ 44,287 $ 36,504 ====================================