-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PdJc/oG6meiYkJgxSojR5j0bfHsM54rlhptXXHd0CnfzBXHtNstlzqcqoz2uFu+c h3fHu4NX67neY0jvq4m3Tw== 0000950134-05-020618.txt : 20051107 0000950134-05-020618.hdr.sgml : 20051107 20051107060824 ACCESSION NUMBER: 0000950134-05-020618 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051107 DATE AS OF CHANGE: 20051107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX BANCORP INC CENTRAL INDEX KEY: 0000944725 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 841233716 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21231 FILM NUMBER: 051182032 MAIL ADDRESS: STREET 1: 700 17TH STREET STREET 2: SUITE 2100 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: MATRIX CAPITAL CORP /CO/ DATE OF NAME CHANGE: 19960711 10-Q 1 d30041e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ______________ COMMISSION FILE NUMBER: 0-21231 MATRIX BANCORP, INC. (Exact name of registrant as specified in its charter) COLORADO 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 17TH STREET, SUITE 2100, DENVER, CO 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of Common Stock ($.0001 par value) outstanding at the close of business on October 31, 2005 was 6,620,850 shares. 1 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets September 30, 2005 (unaudited) and December 31, 2004......................................3 Consolidated Statements of Income Quarter and Nine Months Ended September 30, 2005 and 2004 (unaudited).....................4 Consolidated Statements of Shareholders' Equity Nine Months Ended September 30, 2005 and 2004 (unaudited).................................6 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2005 and 2004 (unaudited).................................7 Notes to Consolidated Financial Statements (unaudited)......................................9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................................19 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..................................31 ITEM 4. Controls and Procedures.....................................................................31 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings...........................................................................32 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................32 ITEM 4. Submissions of Matters to a Vote of Security Holders........................................32 ITEM 6. Exhibits....................................................................................32 SIGNATURES ............................................................................................33
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MATRIX BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share information)
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ ASSETS (Unaudited) Cash and cash equivalents $ 16,703 $ 40,471 Interest-earning deposits and federal funds sold 20,826 2,398 Investment securities 472,096 316,367 Loans held for sale, net 954,514 989,822 Loans held for investment, net 415,782 379,717 Mortgage servicing rights, net 21,905 26,574 Other receivables 29,262 35,139 FHLBank stock, at cost 33,584 33,481 Premises and equipment, net 17,689 19,037 Bank owned life insurance 22,233 21,569 Other assets, net 19,879 21,330 Foreclosed real estate, net 3,482 2,955 ---------- ---------- TOTAL ASSETS $2,027,955 $1,888,860 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $1,183,769 $1,119,159 Custodial escrow balances 58,789 51,598 FHLBank borrowings 575,051 506,118 Borrowed money 30,606 31,573 Junior subordinated debentures owed to unconsolidated subsidiary trusts 61,372 61,835 Other liabilities 16,902 23,955 Income taxes payable and deferred income tax liability 1,706 2,307 ---------- ---------- Total liabilities 1,928,195 1,796,545 ========== ========== 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 6,620,850 shares at September 30, 2005 and December 31, 2004 1 1 Additional paid-in capital 21,432 21,432 Retained earnings 78,321 70,756 Accumulated other comprehensive income 6 126 ---------- ---------- Total shareholders' equity 99,760 92,315 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,027,955 $1,888,860 ========== ========== See accompanying notes.
3 MATRIX BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except share information) (Unaudited)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Interest and dividend income: Loans and securities $ 22,437 $ 18,664 $ 64,143 $ 53,521 Interest-earning deposits 534 262 1,290 724 ---------- ---------- ---------- ---------- Total interest and dividend income 22,971 18,926 65,433 54,245 ---------- ---------- ---------- ---------- Interest expense: Deposits 4,163 2,681 11,372 7,686 Borrowed money and junior subordinated debentures 7,284 5,659 19,680 15,338 ---------- ---------- ---------- ---------- Total interest expense 11,447 8,340 31,052 23,024 ---------- ---------- ---------- ---------- Net interest income before provision for loan and loan valuation losses 11,524 10,586 34,381 31,221 Provision for loan and loan valuation losses 50 543 1,235 2,288 ---------- ---------- ---------- ---------- Net interest income after provision for loan and loan valuation losses 11,474 10,043 33,146 28,933 ---------- ---------- ---------- ---------- Noninterest income: Loan administration 2,358 3,549 7,892 11,944 Brokerage 3,458 2,427 7,769 7,886 Trust services 1,441 1,927 5,741 5,765 Real estate disposition services 328 1,985 1,172 7,451 Gain on sale of loans and securities 359 1,398 1,642 4,385 Gain on sale of assets -- 13,500 302 18,588 School services 481 810 1,335 2,279 Other 1,542 737 3,941 3,927 ---------- ---------- ---------- ---------- Total noninterest income 9,967 26,333 29,794 62,225 ---------- ---------- ---------- ---------- Noninterest expense: Compensation and employee benefits 6,153 8,203 18,889 25,950 Amortization of mortgage servicing rights 2,004 3,615 6,130 12,779 Occupancy and equipment 1,231 1,530 3,789 4,651 Postage and communication 307 511 1,053 1,630 Professional fees 802 892 2,126 2,535 Mortgage servicing rights subservicing fees 755 -- 2,351 -- Data processing 208 555 744 1,814 Subaccounting fees 3,609 1,933 9,460 5,479 (Recovery of) impairment on mortgage servicing rights (885) 500 (830) (444) Other general and administrative 3,220 7,254 8,770 18,206 ---------- ---------- ---------- ---------- Total noninterest expense 17,404 24,993 52,482 72,600 ---------- ---------- ---------- ---------- Income from continuing operations before income taxes 4,037 11,383 10,458 18,558 Income tax provision 1,102 4,271 2,893 6,418 ---------- ---------- ---------- ---------- Income from continuing operations 2,935 7,112 7,565 12,140 ---------- ---------- ---------- ---------- Discontinued operations: Income from discontinued operations, net of income tax provision of $89 -- -- -- 137 ---------- ---------- ---------- ---------- NET INCOME $ 2,935 $ 7,112 $ 7,565 $ 12,277 ========== ========== ========== ==========
Continued 4 MATRIX BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income - continued (Dollars in thousands, except share information) (Unaudited)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Income from continuing operations per share -- basic $ 0.44 $ 1.09 $ 1.14 $ 1.86 ------------- ------------- ------------- ------------- Income from continuing operations per share -- assuming dilution $ 0.44 $ 1.07 $ 1.13 $ 1.83 ------------- ------------- ------------- ------------- Income from discontinued operations -- basic and assuming dilution $ -- $ -- $ -- $ 0.02 ------------- ------------- ------------- ------------- Net income per share -- basic $ 0.44 $ 1.09 $ 1.14 $ 1.88 ============= ============= ============= ============= Net income per share -- assuming dilution $ 0.44 $ 1.07 $ 1.13 $ 1.85 ============= ============= ============= ============= Weighted average shares -- basic 6,620,850 6,520,181 6,620,850 6,519,563 Weighted average shares -- assuming dilution 6,706,745 6,647,369 6,698,668 6,621,368
See accompanying notes. 5 MATRIX BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Dollars in thousands) (Unaudited)
Accumulated Additional Other Common Stock paid in Retained comprehensive Comprehensive Shares Amount capital earnings income (loss) Total income --------- -------- ----------- ----------- ------------ -------- ------------- NINE MONTHS ENDED SEPTEMBER 30, 2005 Balance at December 31, 2004 6,620,850 $ 1 $ 21,432 $ 70,756 $ 126 $ 92,315 Comprehensive income: Net income 7,565 7,565 $ 7,565 Net unrealized holding loss, net of income tax(1) (120) (120) (120) ----------- Comprehensive income $ 7,445 --------- -------- ----------- ----------- ------- -------- =========== Balance at September 30, 2005 6,620,850 $ 1 $ 21,432 $ 78,321 $ 6 $ 99,760 --------- -------- ----------- ----------- ------- -------- NINE MONTHS ENDED SEPTEMBER 30, 2004 Balance at December 31, 2003 6,518,981 $ 1 $ 20,615 $ 48,859 $ 209 $ 69,684 Comprehensive income: Net income 12,277 12,277 $ 12,277 Net unrealized holding gain, net of income tax 87 87 87 ----------- Comprehensive income $ 12,364 =========== Issuance of stock related to employee stock purchase plan and options 1,200 10 10 --------- -------- ----------- ----------- ------- -------- Balance at September 30, 2004 6,520,181 $ 1 $ 20,625 $ 61,136 296 82,058 --------- -------- ----------- ----------- ------- -------- (1) Disclosure of reclassification amount Nine-Months Ended September 30, 2005 - ----------------------------------------------------- Unrealized holding losses arising during period $ (120) Less: reclassification adjustment of gains included in net Income -- -------------- Net unrealized holding losses on securities $ (120) ==============
See accompanying notes 6 MATRIX BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ------------------------------- OPERATING ACTIVITIES Income from continuing operations $ 7,565 $ 12,140 Adjustments to reconcile income from continuing operations to net cash used in operating activities: Depreciation and amortization 2,591 3,312 Provision for loan and valuation losses 1,235 2,288 Amortization of mortgage servicing rights 6,130 12,779 Recovery on mortgage servicing rights (830) (444) Gain on sale of loans and securities (1,642) (4,385) Loss on sale of building and equipment 33 -- Gain on sale of other assets (302) (18,588) (Gain) loss on sale of foreclosed real estate (69) 60 Changes in assets and liabilities: Proceeds from the sale of trading securities 435,861 -- Loans originated for sale, net of loans sold (26,112) (46,589) Loans purchased for sale (943,070) (1,325,682) Principal payments on, and proceeds from sale of loans held for sale 484,762 480,791 Originated mortgage servicing rights, net (527) (787) Decrease in other receivables and other assets 7,187 20,727 (Decrease) increase in other liabilities, income taxes payable and (7,654) 7,949 deferred income tax liability ----------- ----------- Net cash used in operating activities from continuing operations (34,842) (856,429) Net cash provided by discontinued operations -- 226 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES $ (34,842) $ (856,203) ----------- ----------- INVESTING ACTIVITIES Loans originated and purchased for investment (140,341) (112,949) Principal repayments on loans held for investment 105,822 144,060 Loans sold in the sale of Matrix Bank branches -- 24,227 Purchase of available for sale securities (2,154) (145,429) Proceeds from sale of available for sale securities 81,407 777,296 Proceeds from maturity and prepayment of available for sale securities 24,310 33,063 Purchase of held to maturity securities (215,847) (2,482) Proceeds from the maturity and prepayment of held to maturity securities 34,698 -- Purchase of FHLBank stock, net (103) -- Purchases of premises and equipment (1,265) (1,297) Proceeds from the sale of other assets -- 10,000 Acquisition of mortgage servicing rights (187) (220) Proceeds from the sale of mortgage servicing rights 83 -- Proceeds from the sale of Matrix Bank branches premises and equipment -- 3,058 Proceeds from sale of foreclosed real estate 4,007 8,840 ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (109,570) 738,167 ----------- -----------
Continued 7 MATRIX BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows - continued (Dollars in thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 -------------------------------- FINANCING ACTIVITIES Net increase in deposits $ 64,610 $ 82,927 Net deposits sold with Matrix Bank branches -- (73,574) Net increase (decrease) in custodial escrow balances 7,191 (10,277) Increase in FHLBank borrowings, net 68,933 142,936 Borrowed money - repayments of notes payable with banks (2,427) (1,271) Borrowed money -- repayment of senior notes -- (9,545) Borrowed money -- proceeds from school financing agreements 22,817 1,125 Borrowed money -- repayment of school financing agreements (21,357) (15,320) Borrowed money - proceeds from issuance of subordinated debt securities -- 9,760 Proceeds from issuance of capital securities of subsidiary trusts 7,500 10,310 Redemption of capital securities of subsidiary trusts (8,195) -- Proceeds from issuance of common stock related to employee stock option purchase -- 10 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 139,072 137,081 ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,340) 19,045 Cash and cash equivalents at beginning of the period 42,869 34,510 ------------ ------------ Cash and cash equivalents at end of the period $ 37,529 $ 53,555 ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY Loans transferred to foreclosed real estate and other assets $ 5,329 $ 13,370 ============ ============ Loans securitized and transferred to securities available for sale $ 90,762 $ 749,199 ============ ============ Loans securitized and transferred to trading securities $ 422,811 $ -- ============ ============ Loans held for investment transferred to loans held for sale $ 4,600 $ -- ============ ============ Loans held for sale transferred to loans held for investment $ 5,856 $ -- ============ ============ Securities available for sale transferred to held to maturity securities $ 85,682 $ -- ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 31,263 $ 23,298 ============ ============ Cash paid for income taxes $ 2,965 $ 4,616 ============ ============
See accompanying notes. 8 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 2005 (Unaudited) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements of Matrix Bancorp, Inc. and subsidiaries (referred to in these notes, on a consolidated basis, as "us", "we", the "Company", or similar terms) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals and certain adjustments considered necessary as discussed herein) necessary for a fair presentation have been included. The results of operations for the quarter and nine months ended September 30, 2005 may not be indicative of results for the full year. For discussion of our organization and business, the accounting policies we follow and further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. This quarterly report should be read in conjunction with that annual report. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the consolidated financial statements, and disclosures of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period and the accompanying notes. Actual results could differ from these estimates. STOCK-BASED COMPENSATION At September 30, 2005, the Company has one stock-based employee compensation plan, which is described more fully in Note 18 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plan. As allowed by SFAS 123 and SFAS 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of SFAS 123", we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS 123. Accordingly, we do not recognize compensation expense for our stock-based plan, as we do not issue options at exercise prices below the market value at the date of the grant. In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS 123 with SFAS 123(R), "Share-Based Payment," ("SFAS 123(R)") which eliminates the intrinsic value-based method and requires all entities to recognize compensation expense in an amount equal to the fair value of share based payments granted to employees. The Securities and Exchange Commission ("SEC") issued guidance in March 2005 which delays the implementation of the provisions of SFAS 123(R) until the fiscal year beginning January 1, 2006. The Company currently expects to adopt SFAS 123(R) with the fiscal year beginning January 1, 2006 under the modified prospective method. As a result, the Company will have compensation expense for any awards granted after the date of adoption, and will include compensation expense for the unvested portions of previously granted awards that remain outstanding at the date of adoption. Had compensation cost for our stock-based plan been determined consistent with SFAS No. 123, our net income and income per share would have been changed to the pro forma amounts indicated below: 9 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 2005 (Unaudited)
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2005 2004 ---------------------------------------------------------- Net income: (Dollars in thousands, except share information) Net income as reported $ 2,935 $ 7,112 $ 7,565 $ 12,277 Deduct: Total stock-based employee compensation determined under fair value based method for awards, net of related tax effects (44) (63) (134) (196) -------------------------- -------------------------- Pro forma $ 2,891 $ 7,049 $ 7,431 $ 12,081 ========================== ========================== Income per share: Basic, as reported $ 0.44 $ 1.09 $ 1.14 $ 1.88 ========================== ========================== Basic, pro forma $ 0.44 $ 1.08 $ 1.12 $ 1.85 ========================== ========================== Diluted, as reported $ 0.44 $ 1.07 $ 1.13 $ 1.85 ========================== ========================== Diluted, pro forma $ 0.43 $ 1.06 $ 1.11 $ 1.82 ========================== ==========================
RECLASSIFICATIONS Certain reclassifications have been made to prior periods condensed consolidated financial statements and related notes to conform with the current period presentation. 2. SALE OF WHOLESALE PRODUCTION PLATFORM On September 2, 2003, the Company announced the final closing and substantial completion of the sale by Matrix Financial Services Corporation ("Matrix Financial") of substantially all of its assets associated with its wholesale mortgage origination platform pursuant to the Purchase and Assumption Agreement dated February 28, 2003, as amended ("Purchase Agreement"). Under the terms of the Purchase Agreement, Matrix Financial continued to earn a production premium through February 2004, generally 20 basis points times the original principal balance of all loans originated through February 23, 2004. For the nine months ended September 30, 2004, the production premium earned and reflected in income from discontinued operations was $226,000, before tax. The accounting for the sale of the production platform is more fully described in Note 6 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 3. SALE OF MAJORITY INTEREST IN MATRIX ASSET MANAGEMENT CORPORATION On September 10, 2004, the Company announced the sale by Matrix Asset Management Corporation ("MAMC") of substantially all of its assets related to its real estate management and disposition business. After the sale, we have retained a 25% interest in the new company created by the purchaser, Matrix Asset Management, LLC, ("MAM, LLC"), as well as our remaining operations in MAMC, renamed MTXC Realty Corp., of a real estate brokerage office operating exclusively in the Denver metro area. The 25% ownership is accounted for using the equity method of accounting. We will continue to reflect the operations of MTXC Realty, including the future equity earnings in MAM, LLC, as continuing operations. At September 30, 2005, the investment in MAM, LLC included in other assets in the consolidated balance sheet is approximately $610,000. The sale of the majority interest in MAM, LLC is more fully described in Note 3 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 4. SALE OF INTEREST IN MATRIX SETTLEMENT AND CLEARANCE SERVICES, LLC On November 30, 2004, the Company, through certain of its subsidiaries, entered into definitive agreements to sell the 45% membership interest in Matrix Settlement and Clearance Services, LLC ("MSCS"), as well as substantially all of the assets of the trust operations of Matrix Capital Bank ("Matrix Bank"). In consideration of the sale of the 45% membership interest in MSCS, the Company received approximately 5% of the outstanding common stock of the purchaser. This portion of the transaction closed December 1, 2004. In consideration of the sale of substantially all of the assets of the trust operations of Matrix Bank, the purchaser issued additional common stock of 10 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 2005 (Unaudited) approximately 2% of its outstanding common stock. Consummation of the sale of the assets of the trust operations of Matrix Bank occurred April 30, 2005, and the gain on sale of approximately $300,000 is included in noninterest income as gain on sale of assets for the nine months ended September 30, 2005. The ownership interest retained is accounted for using the cost basis of accounting. At September 30, 2005, the investment in the new company included in other assets in the consolidated balance sheet is $750,000. The sale of the interest in MSCS is more fully described in Note 4 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 5. SALE OF MATRIX CAPITAL BANK BRANCHES On January 30, 2004, the Company, through its wholly owned subsidiary Matrix Bank, entered into a definitive agreement to sell its two branches in Las Cruces, New Mexico. The sale closed on May 1, 2004. The sale included deposits of the Las Cruces branches that totaled approximately $78,500,000, and loans of approximately $22,800,000, as well as the real estate and leases associated with the Las Cruces branches. The gain on the sale of the branches of $5,088,000 is included as gain on sale of assets in noninterest income for the nine months ended September 30, 2004. On July 12, 2004, the Company, through its wholly owned subsidiary Matrix Bank, entered into a definitive agreement to sell its branch in Sun City, Arizona. The sale closed on November 1, 2004. The sale included deposits of the Sun City branch that totaled approximately $104,000,000, a nominal amount of loans, as well as the real estate and leases associated with the branch. The sale of the branches is more fully described in Note 5 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 6. NEW ACCOUNTING STANDARDS In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that the new accounting principle be limited to the direct effects of the change, and indirect effects of a change in accounting principle to be recognized in the period of the accounting change. The statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the implementation to have a significant impact on the consolidated financial statements. In June 2005, the FASB directed its staff to draft FSP FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". FSP 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company does not anticipate the issuance of the final consensus will have a material impact on financial condition, the results of operations, or liquidity. 11 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) 7. NET INCOME PER SHARE The following table sets forth the components of net income per share and net income per share assuming dilution:
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2005 2004 -------------------------- -------------------------- Numerator: (Dollars in thousands) Income from continuing operations $ 2,935 $ 7,112 $ 7,565 $ 12,140 Income from discontinued operations -- -- -- 137 -------------------------- -------------------------- Net income $ 2,935 $ 7,112 $ 7,565 $ 12,277 ========================== ========================== Denominator: Weighted average shares outstanding 6,620,850 6,520,181 6,620,850 6,519,563 Effect of dilutive securities: Common stock options 85,895 127,188 77,818 101,805 -------------------------- -------------------------- Denominator for net income per share assuming dilution 6,706,745 6,647,369 6,698,668 6,621,368 ========================== ==========================
8. INVESTMENT SECURITIES Investment securities available for sale were as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 --------------------------------------------- ---------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Carrying Amortized Unrealized Unrealized Carrying Cost Gains Losses Value Cost Gains Losses Value --------------------------------------------- ---------------------------------------------- (Dollars in thousands) Mortgage-backed securities $ 19,192 $ 17 $ (84) $ 19,125 $117,316 $ 339 $ (145) $117,510 SBA securities 831 -- (2) 829 930 -- (3) 927 --------------------------------------------- ---------------------------------------------- Total $ 20,023 $ 17 $ (86) $ 19,954 $118,246 $ 339 $ (148) $118,437 ============================================= ==============================================
Investment securities held to maturity were as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 ---------------------------------------------- ----------------------------------------------- Amortized Amortized Cost and Gross Gross Cost and Gross Gross Carrying Unrealized Unrealized Estimated Carrying Unrealized Unrealized Estimated Value Gains Losses Fair Value Value Gains Losses Fair Value ---------------------------------------------- ----------------------------------------------- (Dollars in thousands) Mortgage-backed securities $338,386 $ 243 $ (1,690) $336,939 $ 71,555 $ 34 $ (174) $ 71,415 ---------------------------------------------- ----------------------------------------------- Total $338,386 $ 243 $ (1,690) $336,939 $ 71,555 $ 34 $ (174) $ 71,415 ============================================== ===============================================
Trading securities were as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 -------------------- -------------------- Estimated Fair Value Estimated Fair Value and carrying value and carrying value -------------------- -------------------- (Dollars in thousands) SBA securities $ 113,756 $ 126,375 -------------------- -------------------- Total $ 113,756 $ 126,375 ==================== ====================
12 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2005, the Company does not believe that any individual unrealized loss represents other-than-temporary impairment. The unrealized losses are attributable to changes in interest rates. The Company has both the intent and ability to hold the securities with gross unrealized losses for a time necessary to recover the amortized cost. The investment balances held by the Company are 93.5% AAA rated, 6.1% AA rated, and 0.4% A rated. As part of the ongoing review of our balance sheet, during the second quarter 2005, we identified $85.7 million of mortgage backed securities that we have the positive intent and ability to hold to maturity. Based on this review, we transferred this amount of mortgage backed securities from our available for sale portfolio to the held to maturity portfolio. 9. LOANS HELD FOR SALE AND INVESTMENT LOANS HELD FOR SALE Loans held for sale consist of the following:
SEPTEMBER 30, DECEMBER 31, 2005 2004 -------------------------------------- (Dollars in thousands) Residential loans $ 778,278 $ 758,543 SBA guaranteed commercial loans, multi-family loans, school 166,796 218,231 financing and other Purchase premiums, net 14,611 18,246 -------------------------------------- 959,685 995,020 Less: Allowance for loan and valuation losses 5,171 5,198 -------------------------------------- Loans held for sale, net $ 954,514 $ 989,822 ======================================
Activity in the allowance for loan and valuation losses on loans held for sale is summarized as follows:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 2005 2004 --------------------------------------------- (Dollars in thousands) Balance at beginning of year $ 5,198 $ 4,803 Provision for loan and valuation losses 560 1,180 Charge-offs and transfers (606) (785) Recoveries 19 -- --------------------------------------------- Balance at end of year $ 5,171 $ 5,198 =============================================
13 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) LOANS HELD FOR INVESTMENT Loans held for investment consist of the following:
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------- (Dollars in thousands) Residential loans $ 248,684 $ 227,609 Commercial real estate, SBA and commercial loans 144,780 134,782 Construction loans 29,399 24,753 Consumer loans and other 365 581 Discounts, net (740) (1,194) Unearned fees (1,022) (840) ------------------------------------- 421,466 385,691 Less: Allowance for loan losses 5,684 5,974 ------------------------------------- Loans held for investment, net $ 415,782 $ 379,717 =====================================
Activity in the allowance for loan and valuation losses on loans held for investment is summarized as follows:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 2005 2004 -------------------------------------------- (Dollars in thousands) Balance at beginning of year $ 5,974 $ 4,986 Provision for loan losses 675 2,089 Charge-offs and transfers (1,081) (1,264) Recoveries 116 163 -------------------------------------------- Balance at end of year $ 5,684 $ 5,974 ============================================
14 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) 10. MORTGAGE SERVICING RIGHTS The activity in the mortgage servicing rights is summarized as follows:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 2005 2004 ---------------------------------------- (Dollars in Thousands) Mortgage servicing rights Balance at beginning of period $ 29,980 $ 47,194 Purchases 187 871 Originations 527 615 Sales (83) -- Amortization (6,130) (16,100) Application of valuation allowance to write down impaired MSRs -- (2,600) ---------------------------------------- Balance before valuation allowance at end of period 24,481 29,980 Valuation allowance for impairment of mortgage servicing rights Balance at beginning of period (3,406) (6,450) Additions (230) (1,656) Application of valuation allowance to write down impaired MSRs -- 2,600 Recovery 1,060 2,100 ---------------------------------------- Balance at end of period (2,576) (3,406) Mortgage servicing rights, net $ 21,905 $ 26,574 ========================================
The Company's servicing portfolio (excluding subserviced loans) is comprised of the following:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 ------------------------------- ------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding ------------------------------------------------------------------- (Dollars in thousands) Freddie Mac 3,886 $ 140,871 4,783 $ 196,637 Fannie Mae 11,113 589,426 13,390 722,749 Ginnie Mae 9,527 556,836 11,098 675,067 VA, FHA, conventional and other loans 6,876 578,099 8,687 664,387 ------------------------------- ------------------------------- 31,402 $ 1,865,232 37,958 $ 2,258,840 =============================== ===============================
The Company's custodial escrow balances shown in the accompanying consolidated balance sheets at September 30, 2005 and December 31, 2004 pertain to payments held in escrow in respect to taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company. The custodial accounts are maintained at Matrix Bank in noninterest-bearing accounts. The balance of custodial accounts fluctuates from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of taxes and insurance payments. 15 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) 11. DEPOSITS Deposit account balances are summarized as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 ------------------------------------- ------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Passbook accounts $ 240 0.02% 1.30% $ 455 0.04% 1.26% NOW accounts 461,161 38.96 0.41 189,671 16.95 0.11 Money market accounts 650,045 54.91 1.92 676,848 60.48 0.91 ---------- ---------- ---------- ---------- ---------- ---------- 1,111,446 93.89 1.29 866,974 77.47 0.71 Certificate accounts 72,323 6.11 3.67 252,185 22.53 2.48 ---------- ---------- ---------- ---------- ---------- ---------- Deposits $1,183,769 100.00% 1.39% $1,119,159 100.00% 1.09% ========== ========== ========== ========== ========== ==========
Approximately $285,868,000 and $236,007,000 of customer assets under administration by Sterling Trust are included in NOW and money market accounts as of September 30, 2005 and December 31, 2004, respectively. Approximately $106,550,000 and $118,129,000 of MSCS customer assets under administration are included in NOW and money market accounts as of September 30, 2005 and December 31, 2004, respectively. Approximately $625,557,000 and $449,517,000 of deposits represent funds from 5 significant institutional relationships maintained by Matrix Bank as of September 30, 2005 and December 31, 2004, respectively. Included in certificate accounts are $68,136,000 and $247,868,000 of brokered deposits as of September 30, 2005 and December 31, 2004, respectively. 12. FHLBANK STOCK AND BORROWINGS Matrix Bank obtains FHLBank advances from FHLBank of Topeka, which is the FHLBank that serves Denver, Colorado, and utilizes FHLBank of Topeka as its primary correspondent bank. Several of the long-term advances with FHLBank of Dallas that existed at March 25, 2002, when Matrix Bank changed its domicile to Denver, Colorado, are still outstanding under their original terms. The balances of FHLBank stock are as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 ------------------ ----------------- (Dollars in thousands) FHLBank of Topeka stock, at cost $ 27,742 $ 26,800 FHLBank of Dallas stock, at cost 5,842 6,681 --------------- --------------- FHLBank stock $ 33,584 $ 33,481 =============== ===============
The balances of FHLBank borrowings are as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004 ------------------ ----------------- (Dollars in thousands) FHLBank of Topeka borrowings $ 458,000 $ 359,000 FHLBank of Dallas borrowings 117,051 147,118 --------------- --------------- FHLBank borrowings $ 575,051 $ 506,118 =============== ===============
Available unused borrowings from the FHLBank of Topeka totaled $307,962,000 at September 30, 2005. 13. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY TRUSTS The Company has sponsored seven trusts, Matrix Bancorp Capital Trust I, Matrix Bancorp Capital Trust II, Matrix Bancorp Capital Trust III, Matrix Bancorp Capital Trust IV, Matrix Bancorp Capital Trust V, Matrix Bancorp Capital Trust VI and Matrix Bancorp Capital Trust VIII, of which 100% of the common equity is owned by the Company. The trusts were formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the "capital securities") to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company (the "debentures"). The debentures held by 16 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) each trust are the sole assets of that trust. Distributions on the capital securities issued by each trust are payable either quarterly or semiannually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by the trusts are redeemable as noted below. Matrix Bancorp Capital Trust VIII ("Trust VIII") was formed on June 30, 2005, and completed the sale of $7,500,000 of 5.86% preferred securities. Trust VIII also issued an aggregate amount of $232,000 common securities to the Company. The net proceeds from the offering and the common securities issued were exchanged for $7,732,000 in principal amount of the Company's 5.86% junior subordinated debentures, due July 7, 2035. Interest is payable quarterly. The 5.86% coupon will adjust in July 2010 to a variable rate per annum of three-month Libor plus 1.69%. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after July 7, 2010, at par. On July 20, 2005, the Company completed a partial redemption of the 10.0% cumulative trust preferred securities due 2029 issued by Matrix Bancorp Capital Trust I ("Trust I") in July 1999. The Company redeemed an aggregate amount of $8,195,000 of the trust preferred and common securities in the amount of $25.00 for each trust preferred security, plus accumulated and unpaid distributions through the redemption date. After the redemption, approximately $5,156,000 of Trust I remains outstanding. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts are summarized as follows:
SEPTEMBER 30, DECEMBER 31, 2005 2004 --------------- --------------- (Dollars in thousands) Junior subordinated debentures owed to Matrix Bancorp Capital Trust I, 10% junior subordinated debentures payable quarterly, unsecured and maturing September 30, $ 5,156 $ 13,351 2029 Junior subordinated debentures owed to Matrix Bancorp Capital Trust II, 10.18% junior subordinated debentures payable semi-annually, unsecured and maturing 12,400 12,400 June 8, 2031 Junior subordinated debentures owed to Matrix Bancorp Capital Trust III, 10.25% junior subordinated debentures payable semi-annually, unsecured and maturing 15,464 15,464 July 25, 2031 Junior subordinated debentures owed to Matrix Bancorp Capital Trust IV, six-month LIBOR plus 3.75% (7.41% at September 30, 2005) junior subordinated debentures payable semi-annually, unsecured and maturing December 8, 2031 5,155 5,155 Junior subordinated debentures owed to Matrix Bancorp Capital Trust V, six-month LIBOR plus 3.625% (7.285% at September 30, 2005) junior subordinated debentures payable semi-annually, unsecured and maturing January 25, 2032 5,155 5,155 Junior subordinated debentures owed to Matrix Bancorp Capital Trust VI, interest fixed at 6.425% through October 2009, then three-month LIBOR plus 3.625%, junior subordinated debentures payable quarterly, unsecured and maturing 10,310 10,310 October 18, 2034 Junior subordinated debentures owed to Matrix Bancorp Capital Trust VIII, interest fixed at 5.86% through July 2010, then three-month LIBOR plus 1.69%, junior subordinated debentures payable quarterly, unsecured and maturing July 7, 7,732 -- 2035 --------------- --------------- Total $ 61,372 $ 61,835 =============== ===============
The junior subordinated debentures owed to unconsolidated subsidiary trusts are more fully described in Note 14 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004. 14. SEGMENT INFORMATION The Company has four reportable segments under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information": a traditional banking subsidiary, a mortgage banking subsidiary, two brokerage and consulting subsidiaries and a school services subsidiary. The remaining subsidiaries are included in the "all other" 17 MATRIX BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) September 30, 2005 (Unaudited) category and consist primarily of the Company's trust operations,real estate disposition services and the Parent company operations. The Company's segments are more fully described in Note 24 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004.
Servicing Brokerage Traditional Mortgage and School All Banking Banking Consulting Service Others Total ---------- ---------- ----------- ---------- ------------ ------------ (Dollars in thousands) QUARTER ENDED SEPTEMBER 30, 2005: Revenues from external customers: Interest income $ 21,282 $ 264 $ (4) $ 696 $ 733 $ 22,971 Noninterest income 1,263 2,121 3,466 482 2,635 9,967 Intersegment revenues 278 735 512 -- 75 1,600 Segment income (loss) from continuing operations before income taxes 4,959 (639) 1,269 139 (1,691) 4,037 QUARTER ENDED SEPTEMBER 30, 2004: Revenues from external customers: Interest income $ 17,196 $ 615 $ 14 $ 914 $ 187 $ 18,926 Noninterest income 1,645 4,340 2,469 806 17,073 26,333 Intersegment revenues 497 312 773 3 418 2,003 Segment income (loss) from continuing operations before income taxes 3,965 (3,342) 654 12 10,094 11,383 NINE MONTHS ENDED SEPTEMBER 30, 2005: Revenues from external customers: Interest income $ 60,973 $ 959 $ 19 $ 2,181 $ 1,301 $ 65,433 Noninterest income 5,347 7,768 7,424 1,335 7,920 29,794 Intersegment revenues 1,135 1,267 2,054 -- 968 5,424 Segment income (loss) from continuing operations before income taxes 18,002 (3,137) 2,151 274 (6,832) 10,458 NINE MONTHS ENDED SEPTEMBER 30, 2004: Revenues from external customers: Interest income $ 47,936 $ 2,752 $ 86 $ 3,052 $ 419 $ 54,245 Noninterest income 9,968 14,752 7,927 2,271 27,307 62,225 Intersegment revenues 1,969 808 1,817 8 1,295 5,897 Segment income (loss) from continuing operations before income taxes 21,026 (10,503) 1,806 188 6,041 18,558
15. CONTINGENCIES -- LEGAL The Company and its subsidiaries are from time to time party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. The Company accrues liabilities when it is probable that the future costs will be incurred and such costs can be reasonably estimated. Such accruals are based upon developments to date, the Company's estimates of the outcome of these matters and its experience in contesting, litigating and settling other matters. Because the outcome of most litigation matters is inherently uncertain, the Company will generally only accrue a loss for a pending litigation matter if, for example, the parties to the matter have entered into definitive settlement agreements or a final judgment adverse to the Company has been entered. The legal contingencies of the Company are more fully described in Note 19 to the audited financial statements in the Company's Form 10-K for the year ended December 31, 2004, and Note 15 to the financial statements in the Company's Form 10-Q for the quarter ended June 30, 2005. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Matrix Bancorp, Inc. (occasionally referred to in this report, on a consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, trust activities, lending activities, mortgage banking and other fee-based services. Our traditional banking activities include originating and servicing commercial, multi-family, construction and Small Business Administration ("SBA") loans, purchasing and servicing residential and SBA loans, and providing a broad range of depository services. Our trust activities focus primarily on the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. Our mortgage banking activities consist of purchasing and selling residential mortgage loans; offering brokerage, consulting and analytical services to financial services companies and financial institutions, and servicing residential mortgage portfolios for ourselves and investors through a subservicing arrangement. Our other fee-based services and lending activities include providing real estate brokerage services, primarily on foreclosed residential real estate on behalf of unaffiliated financial institutions, and providing outsourced business services to charter schools. We also offer a limited amount of financing to charter schools for the purchase of school sites and equipment. Our primary operating subsidiaries are: Matrix Capital Bank; Matrix Financial Services Corporation; Matrix Bancorp Trading, Inc.; Sterling Trust Company; First Matrix Investment Services Corp.; ABS School Services, L.L.C, operating as The GEO Group; and MTXC Realty Corp. (formerly known as Matrix Asset Management Corporation). The principal components of our revenues consist of: o net interest income recorded by Matrix Bank, Matrix Financial and ABS; o brokerage and consulting fees generated by Matrix Bancorp Trading and First Matrix; o gains on sales of mortgage loans generated by Matrix Bank and Matrix Financial; o gain on sales of multi-family and SBA loans and securities at Matrix Bank; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust; o service fees generated by MTXC Realty and our equity earnings under the equity method of accounting of our minority interest in Matrix Asset Management, LLC; and o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates and the effect of these changes on our interest margins, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are affected to a lesser extent by interest rates and more by competition and general market conditions. DISCONTINUED OPERATIONS -- SALE OF WHOLESALE PRODUCTION PLATFORM On September 2, 2003, we announced the final closing and substantial completion of the sale by Matrix Financial of substantially all of its assets associated with its wholesale mortgage origination platform. See complete discussion of the sale and impact on continuing and discontinued operations in "Item 1. Business - -- Discontinued Operations" and Note 6 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. The operations of the production platform, included in income from discontinued operations, net of tax effect totaled approximately $140 thousand for the nine months ended September 30, 2004. There is no income from discontinued operations for the quarter or nine months ended September 30, 2005. SALE OF MAJORITY INTEREST IN MATRIX ASSET MANAGEMENT CORPORATION On September 10, 2004, the Company entered into a Contribution and Sale Agreement to sell substantially all of the assets and operations of its real estate disposition and management services business line. After the sale, we retained a 25% interest in the new company, as well as our remaining operations in Matrix Asset Management Corporation, now known as MTXC Realty Corp. The gain on sale of $13.5 million is included in gain on sale of assets for the quarter and nine months ended September 30, 2004. See complete discussion of the sale and impact on continuing operations in "Item 1. Business -- Sale of Majority Interest in Matrix Asset Management Corporation," and Note 3 of the consolidated financial statements contained in the Company's Form 10-K for the 19 year ended December 31, 2004. The 25% ownership interest retained is accounted for using the equity method of accounting, and the equity earnings reflected in other income for the quarter and nine months ended September 30, 2005 are approximately $10 thousand and $150 thousand, respectively. SALE OF INTEREST IN MATRIX SETTLEMENT AND CLEARANCE SERVICES, LLC On November 30, 2004, the Company and certain of its subsidiaries entered into definitive agreements to sell our 45% membership interest in Matrix Settlement and Clearance Services, LLC, as well as substantially all of the assets of the trust operations of Matrix Bank. In consideration for the sale of our 45% membership interest, the Company received approximately 5% of the outstanding common stock of the new company. This portion of the transaction closed December 1, 2004. In consideration of the sale of the assets of the trust operations of Matrix Bank, the Company has received an additional 2% of the outstanding common stock of the new company. This portion of the transaction closed April 30, 2005. A gain on sale for this portion of the transaction of approximately $300 thousand is included as a gain on sale of other assets in noninterest income for the nine months ended September 30, 2005. The total ownership interest retained is accounted for using the cost basis of accounting. See complete discussion of the sale and impact on continuing operations in "Item 1. Business -- Sale of Interest in Matrix Settlement and Clearance Services, LLC," and Note 4 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. SALE OF MATRIX CAPITAL BANK BRANCHES The Company, through its wholly owned subsidiary Matrix Bank, closed the sale of its two branches in Las Cruces, New Mexico on May 1, 2004. The sale included deposits of the Las Cruces branches that totaled approximately $78.5 million, and loans of approximately $22.8 million, as well as the real estate, equipment and leases associated with the Las Cruces branches. The gain on sale of $5.1 million is included in gain on sale of assets for the nine months ended September 30, 2004. The Company through its wholly owned subsidiary Matrix Bank, closed the sale of its branch in Sun City, Arizona on November 1, 2004. The sale included deposits of the Sun City branch that totaled approximately $104.0 million, a nominal amount of loans, as well as the real estate, equipment and leases associated with the branch. See complete discussion of the sale and impact on continuing operations in "Item 1. Business -- Sale of Matrix Capital Bank Branches," and Note 5 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004. CRITICAL ACCOUNTING POLICIES The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in "Item 7. Critical Accounting Policies" and Note 2 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004, and along with the disclosures presented in other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company views the determination of the allowance for loan and valuation losses as a critical accounting policy that requires significant judgments, assumptions and estimates used in the preparation of its consolidated financial statements. See discussion as noted above and at "Asset and Liability Management, Analysis of Allowance for Loan and Valuation Losses" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed description of the Company's process and methodology related to the allowance for loan and valuation losses. 20 The Company considers the valuation of mortgage servicing rights and loans held for sale to be a critical accounting policy that requires judgments, assumptions and estimates used in the preparation of its consolidated financial statements. See discussion at "Item 1. Business -- Mortgage Servicing Activities" and "Item 7. -- Asset and Liability Management" in the Company's Form 10-K for the year ended December 31, 2004, and see discussion as noted above and in Note 2 of the consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 2004 for a detail concerning the valuation of mortgage servicing rights and the lower of cost or market valuation of loans held for sale. The Company also considers the judgments and assumptions concerning litigation as a critical accounting policy. The Company is a defendant in various legal proceedings. Most of these cases involve ordinary and routine claims incidental to our business. For a full description of such proceedings, see "Legal Proceedings" in the Company's Form 10-K for the year ended December 31, 2004 and in the Company's Forms 10-Q for the quarters ended March 31, 2005 and June 30, 2005, respectively. With respect to all pending litigation matters, our ultimate legal responsibility, if any, cannot be estimated with certainty. Based on the ultimate outcome of such proceedings, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to such proceedings. FORWARD-LOOKING STATEMENTS Certain statements contained in this interim report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this interim report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to ongoing or future litigation or bankruptcy matters; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; unanticipated developments in connection with the bankruptcy actions or litigation mentioned above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in the Company's Form 10-K for the year ended December 31, 2004 and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on March 14, 2005; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004 INCOME FROM CONTINUING OPERATIONS. For the quarter ended September 30, 2005, there was income of $2.9 million, or $0.44 per basic and diluted share as compared to $7.1 million, or $1.09 per basic and $1.07 per diluted share, for the quarter ended September 30, 2004. Our income from continuing operations for the quarter ended September 30, 2004 includes a $13.5 million pre-tax gain on the sale of substantially all of the assets and operations of Matrix Asset Management Corporation as discussed in Note 3 to the consolidated financial statements. NET INTEREST INCOME. Net interest income before provision for loan and valuation losses increased $940 thousand, or 8.9%, to $11.5 million for the quarter ended September 30, 2005 as compared to $10.6 million for the quarter ended September 30, 2004. Our net interest margin, however, decreased 19 basis points to 2.39% for the quarter ended September 30, 2005 from 2.58% for the quarter ended September 30, 2004. The increase in net interest income before provision for loan and valuation losses was attributable to an overall increase in the Company's average balance of interest-earning assets to $1.93 billion for the quarter ended September 30, 2005 as compared to $1.64 billion for the quarter ended September 30, 2004, and an increase in the yield on those interest-earning assets of 15 basis points to 4.76% for the quarter ended September 30, 2005 as compared to 4.61% for the quarter ended September 30, 2004. The impact of the increase in the average balance of interest-earning assets and the yield on those assets, as discussed above, was offset by a 45 basis point increase in the cost of our interest-bearing liabilities of $1.74 billion to 2.64% for the quarter ended September 30, 2005 as compared to 2.19% for the quarter ended September 30, 2004. The greater increase in our cost of interest-bearing liabilities than the yield on interest-earning assets caused our interest rate spread to decrease to 2.12% for the quarter ended September 30, 2005 from 2.42% for the quarter ended September 30, 2004. The increases in the yields were in response to the changes in the overall interest rate environment. The compression of our interest rate margin is due primarily to the increase in interest 21 rates at the short end of the yield curve. We historically have focused on the acquisition of adjustable rate loans and securities which tend to have lower initial interest rates, which are financed by short term deposits and FHLBank borrowings. As interest rates have increased, the cost of our liabilities has increased, and our assets have repaid more rapidly than anticipated at acquisition. As a result, the Company has been buying more highly rated securities than in the past, acquired at a discount to offset some of the prepayment risk that exists in our single family residential loan portfolio. See further discussion at "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." PROVISION FOR LOAN AND VALUATION LOSSES. The provision for loan and valuation losses decreased $490 thousand to $50 thousand for the quarter ended September 30, 2005 as compared to $540 thousand for the quarter ended September 30, 2004. The decrease in the provision was due primarily to lower levels of required reserves at Matrix Bank as compared to 2004 as nonperforming assets continue to decline coupled with a higher percentage of the Company's assets being invested in mortgage backed securities. During the quarter ended September 30, 2005, the provision for loan losses was lower than in previous quarters of 2005. The decline was caused primarily by repayments received on loans previously measured for impairment. The cash receipts on these loans reduced the required impairment amounts necessary at September 30, 2005. As a result, in the quarter ended September 30, 2005, there was an approximate $250 thousand reduction in specific valuations related to loans measured for impairment, offset by approximately $300 thousand of provision expense for our general valuation allowance. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "Asset Quality--Nonperforming Assets." LOAN ADMINISTRATION. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Loan administration fees decreased $1.2 million, or 33.6%, to $2.4 million for the quarter ended September 30, 2005 as compared to $3.6 million for the quarter ended September 30, 2004. Loan service fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio decreased to an average balance of $1.94 billion for the quarter ended September 30, 2005 as compared to an average balance of $2.49 billion for the quarter ended September 30, 2004. The decrease was also due to a decrease in the actual service fee rate (including all ancillary income) to 0.45% for the quarter ended September 30, 2005, as compared to 0.54% for the quarter ended September 30, 2004. The Company anticipates loan administration fees to continue to decrease as its servicing portfolio decreases through normal prepayments. Effective December 1, 2004, the servicing functions of Matrix Financial were transferred and are performed by a third-party subservicer which allows us to control our overall cost structure but is not expected to impact loan administration fees. BROKERAGE FEES. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage loans and mortgage servicing rights and SBA trading fees. Brokerage fees increased by $1.0 million, or 42.5% to $3.4 million for the quarter ended September 30, 2005 as compared to $2.4 million for the quarter ended September 30, 2004. The increase is primarily the result of higher volume of transactions in our whole loan brokerage at Matrix Bancorp Trading due to improved market conditions. The number of transactions is, from quarter to quarter, based on market conditions and overall effectiveness of sales efforts. TRUST SERVICES. Trust service fees decreased $490 thousand, or 25.2% to $1.4 million for the quarter ended September 30, 2005 as compared to $1.9 million for the quarter ended September 30, 2004. The total of accounts under administration at September 30, 2005 at Sterling Trust is 42,021. At September 30, 2004, accounts under administration included those at Sterling Trust and at Matrix Bank totaling 57,472. Total assets under administration decreased to approximately $3.06 billion at September 30, 2005 from approximately $16.29 billion at September 30, 2004. The decrease is due to the sale of substantially all of the assets of Matrix Bank's trust department in connection with the sale of our interest in Matrix Settlement and Clearance Services, LLC noted in Item 2 above, which sale closed April 30, 2005. Because of this sale, we anticipate that our future trust services revenues will continue to be less when compared to 2004 levels. REAL ESTATE DISPOSITION SERVICES. Real estate disposition services for the quarter ended September 30, 2005 total $330 thousand, and represents fees earned by MTXC Realty Corp. for real estate brokerage services provided on foreclosed properties owned by third party financial services companies and financial institutions in the Denver metro area. Real estate disposition services income for the quarter ended September 30, 2004 of $2.0 million represented fees earned by Matrix Asset Management Corporation for real estate management and disposition services provided to third party financial services companies. As discussed in Item 2, "Sale of Majority Interest in 22 Matrix Asset Management Corporation" above, the decrease in revenue of $1.7 million represents the impact of the sale of our majority interest in Matrix Asset Management Corporation. As noted, the sale is expected to cause real estate disposition services revenues to continue to be less in 2005 when compared to 2004 levels. GAIN ON SALE OF LOANS AND SECURITIES. Gain on sale of loans and securities decreased $1.0 million to $360 thousand for the quarter ended September 30, 2005 as compared to $1.4 million for the quarter ended September 30, 2004. Gains on sale of loans and securities include gains on the sale of repurchased FHA and VA loans which represent delinquent loans purchased out of loan pools on which Matrix Financial acts as servicer, and then re-sells into the secondary market, gains on sale of originated SBA and multi-family loans primarily from the portfolio at Matrix Bank, and gains on the sale of purchased SBA loans and pooled securities at Matrix Bank. Gains on sale of loans can fluctuate significantly from quarter-to-quarter and year-to-year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan or securities portfolios available in the market, and as marketplace conditions dictate, the particular loan portfolios we elect to sell. GAIN ON SALE OF ASSETS. There is no gain on sale of assets for the quarter ended September 30, 2005. The gain on sale of assets of $13.5 million for the quarter ended September 30, 2004 represents the gain from the sale of substantially all of the assets and operations of Matrix Asset Management Corporation, which sale closed September 1, 2004. See further discussion of these items noted in Item 2. above. SCHOOL SERVICES. School services income represents fees earned by ABS, operating as The GEO Group, for outsourced business and consulting services provided primarily to charter schools. School services income decreased $330 thousand, or 40.5%, to $480 thousand for the quarter ended September 30, 2005 as compared to $810 thousand for the quarter ended September 30, 2004. The decrease is due to a lower number of school clients served. OTHER INCOME. Other income, which includes equity in earnings of unconsolidated subsidiaries, income earned on bank owned life insurance, rental income, mortgage servicing net hedging gains and losses and other miscellaneous income items, increased $800 thousand to $1.5 million for the quarter ended September 30, 2005 as compared to $740 thousand for the quarter ended September 30, 2004. The increase is due to a combination of the following -- first, an increase in proceeds from the sale of SBA loan commitments of $260 thousand from SBA activity at Matrix Bank; second, the increase is impacted by a $650 thousand charge during 2004 for deferred issuance costs related to the redemption of trust preferred securities that was not present in 2005; and third, the increase was partially offset by decreased income generated due to the sale of our equity investment in Matrix Settlement and Clearance Services, LLC discussed above which was approximately $450 thousand in the quarter ended September 30, 2004. Remaining fluctuations are based on the nature of the accounts reflected in other income driven primarily by market conditions. NONINTEREST EXPENSE. Noninterest expense decreased $7.6 million, or 30.4%, to $17.4 million for the quarter ended September 30, 2005 as compared to $25.0 million for the quarter ended September 30, 2004. This decrease was due to certain charges included in 2004, which are not present in the quarter ended September 30, 2005, consisting of approximately $3.0 million of litigation settlement expense at Matrix Bank and $1.3 million reserve for repurchased loans at Matrix Financial. In addition, we experienced decreases in the level of amortization of the mortgage servicing rights asset, an impairment recovery on the mortgage servicing rights asset, and a decrease in the level of compensation and benefits, all offset by an increase in subaccounting fees. The following table details the major components of noninterest expense for the periods indicated: 23
QUARTER ENDED SEPTEMBER 30, 2005 2004 ------------ ------------ (Dollars in thousands) Compensation and employee benefits $ 6,153 $ 8,203 Amortization of mortgage servicing rights 2,004 3,615 Occupancy and equipment 1,231 1,530 Postage and communication 307 511 Professional fees 802 892 Mortgage servicing rights subservicing fees 755 -- Data processing 208 555 Subaccounting fees 3,609 1,933 (Recovery of) impairment on mortgage servicing rights, net (885) 500 Other general and administrative 3,220 7,254 ------------ ------------ Total $ 17,404 $ 24,993 ============ ============
Compensation and employee benefits expense decreased $2.1 million, or 25.0%, to $6.1 million for the quarter ended September 30, 2005 as compared to $8.2 million for the quarter ended September 30, 2004. This decrease was primarily due to decreased salaries and wages associated with reductions in the number of employees, primarily from the sale of our majority interest in Matrix Asset Management Corporation, the sale of Matrix Bank branches and reductions of employees of Matrix Financial whose positions were eliminated with the transfer of servicing to a third party subservicer. Overall, there was a decrease of 197 employees to 306 employees at September 30, 2005, as compared to 503 employees at September 30, 2004. Amortization of mortgage servicing rights decreased $1.6 million, or 44.6%, to $2.0 million for the quarter ended September 30, 2005 as compared to $3.6 million for the quarter ended September 30, 2004. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. The decrease was due to a decrease in the average balance in our mortgage servicing rights portfolio to $1.94 billion for the quarter ended September 30, 2005 as compared to $2.49 billion for the quarter ended September 30, 2004. The prepayment speeds on our servicing portfolio were comparable quarter to quarter, at an average of 26.9% for the quarter ended September 30, 2005 as compared to 26.6% for the quarter ended September 30, 2004. Amortization of mortgage servicing rights is included in expenses of our mortgage banking operating segment, as discussed in Note 14 to the consolidated financial statements in the Company's Form 10-Q for September 30, 2005. Impairment on mortgage servicing rights reflects a recovery of previous impairment charges of $885 thousand for the quarter ended September 30, 2005 as compared to an impairment charge of $500 thousand for the quarter ended September 30, 2004. The Company is required to record its investment in mortgage servicing rights at the lower of cost or fair value. The fair value of mortgage servicing rights is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its mortgage servicing rights by product type and investor, among other things, to reflect the predominant risks. To determine the fair value of its investment, the Company uses a valuation model that calculates the present value of future cash flows. Due to changes in the interest rate environment during the quarter, among other factors, we recorded a recovery of the impairment charge against the valuation of the asset. It is not possible to estimate if future impairments or recoveries of those impairments will occur, and further changes in market interest rates, or increases in anticipated future prepayment speeds, may cause additional impairment charges in future periods. The impairment or recovery on mortgage servicing rights is included in expenses of our mortgage banking operating segment, as discussed in Note 14 to the consolidated financial statements in the Company's Form 10-Q for September 30, 2005. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, mortgage servicing rights subservicing fees, data processing costs, subaccounting fees and other general and administrative expenses, decreased $2.5 million, or 20.1%, to $10.1 million for the quarter ended September 30, 2005 as compared to $12.7 million for the quarter ended September 30, 2004. The decrease was due to primarily to specific items in other general and administrative expenses incurred in 2004 that were not present in 2005 of approximately $4.3 million, including a $3.0 million litigation settlement expense at Matrix Bank and $1.3 million reserve for repurchased loans at Matrix Financial, offset by an increase of 24 $1.7 million in the levels of subaccounting fees at Matrix Bank due to increases in the levels of institutional deposits held on which subaccounting services are incurred and the level of fees, which generally move with changes in the targeted Fed Funds rate, and a charge of approximately $400 thousand in lease termination costs associated with the relocation of the offices of Matrix Financial in Phoenix, Arizona. INCOME TAXES. Provision for income taxes is $1.1 million for the quarter ended September 30, 2005 as compared to $4.3 million for the quarter ended September 30, 2004. Our effective tax rate is 27.3% for the quarter ended September 30, 2005. The effective tax rate is affected by the level of tax-exempt income at ABS and Matrix Bank in proportion to the level of net income from continuing operations, as well as utilization of tax credits generated by a subsidiary of Matrix Bank. The net tax-exempt income was approximately $620 thousand for the quarter ended September 30, 2005. COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 INCOME FROM CONTINUING OPERATIONS. For the nine months ended September 30, 2005, there is income from continuing operations of $7.6 million, or $1.14 per basic share and $1.13 per diluted share, as compared to $12.1 million, or $1.86 per basic share and $1.83 per diluted share for the nine months ended September 30, 2004. During the nine months ended September 30, 2004, we recognized gains on the sales of substantially all of the assets of Matrix Asset Management Corporation and the sale of the Las Cruces, New Mexico branch of Matrix Bank. NET INTEREST INCOME. Net interest income before provision for loan and valuation losses increased $3.2 million, or 10.1% to $34.4 million for the nine months ended September 30, 2005 as compared to $31.2 million for the nine months ended September 30, 2004. The factors which impact net interest income are as follows: our average interest-earning assets were $1.82 billion for the nine months ended September 30, 2005 as compared to $1.55 billion for the nine months ended September 30, 2004. The increase in net interest income was impacted as well by an increase in the average yield on the average net interest-earning assets to 4.79% for the nine months ended September 30, 2005 as compared to 4.67% for nine months ended September 30, 2004. The Company's average interest-bearing liabilities also increased to $1.64 billion for the nine months ended September 30, 2005 as compared to $1.43 billion for the nine months ended September 30, 2004. Additionally, this increase was impacted by an increase in the average cost of interest-bearing liabilities to 2.52% for the nine months ended September 30, 2005, as compared to 2.14% for the nine months ended September 30, 2004. Both the increase in the yield on interest-earning assets and the cost of the interest-bearing liabilities are attributable to the increasing interest rate environment. The impact of these factors caused the Company's net interest margin to decrease to 2.52% for the nine months ended September 30, 2005 as compared to 2.69% for the nine months ended September 30, 2004, and caused the interest rate spread to decrease to 2.27% for the nine months ended September 30, 2005 as compared to 2.52% for the nine months ended September 30, 2004. For additional discussion concerning increases in our average interest-earning assets and decreases in our cost of interest-bearing liabilities, see "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Net Interest Income." For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." PROVISION FOR LOAN AND VALUATION LOSSES. Provision for loan and valuation losses decreased $1.1 million, or 46.1%, to $1.2 million for the nine months ended September 30, 2005 as compared to $2.3 million for the nine months ended September 30, 2004. The decrease was primarily attributable to lower levels of reserves recorded at Matrix Bank and Matrix Financial as a result of improvements in nonperforming assets at each entity, as well as a higher amount of mortgage backed securities. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "Asset Quality -- Nonperforming Assets." LOAN ADMINISTRATION. Loan administration fees decreased $4.0 million, or 33.9%, to $7.9 million for the nine months ended September 30, 2005 as compared to $11.9 million for the nine months ended September 30, 2004. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage servicing portfolio decreased to an average balance of $2.08 billion for the nine months ended September 30, 2005 as compared to an average balance of $2.77 billion for the nine months ended September 30, 2004. The actual service fee rate (including all ancillary income) decreased to 0.47% for the nine months ended September 30, 2005 as compared to 0.55% for the nine months ended September 30, 2004. 25 BROKERAGE FEES. Brokerage fees decreased $120 thousand to $7.8 million for the nine months ended September 30, 2005 as compared to $7.9 million for the nine months ended September 30, 2004. Brokerage fees vary from quarter to quarter and year-to-year, as the timing of loan and servicing sales and SBA pooling activities is dependent upon, among other things, prevailing market conditions. Decreases are primarily the result of lower volume of activity at First Matrix in the acquisition, pooling and selling of SBA loans and securities. Please see the additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Brokerage Fees." TRUST SERVICES. Trust service fees remained consistent at $5.7 million for the nine months ended September 30, 2005 as compared to $5.8 million for the nine months ended September 30, 2004. The consistency is primarily due to increased revenues generated at Sterling Trust, offset by decreases at Matrix Bank due to the sale of substantially all of the assets of the trust department at Matrix Bank in April 2005. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Trust Services." REAL ESTATE DISPOSITION SERVICES. Real estate disposition services income decreased $6.3 million to $1.2 million for the nine months ended September 30, 2005 as compared to $7.5 million for the nine months ended September 30, 2004 due to the sale of our majority interest in Matrix Asset Management Corporation. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Real Estate Disposition Services." GAIN ON SALE OF LOANS AND SECURITIES. Gain on sale of loans and securities decreased $2.7 million to $1.6 million for the nine months ended September 30, 2005 as compared to $4.4 million for the nine months ended September 30, 2004. Gain on the sale of loans and securities can fluctuate significantly from quarter-to-quarter and from year-to-year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan and securities portfolios we purchase and the particular loan and securities portfolios we elect to sell. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Gain on Sale of Loans and Securities." GAIN ON SALE OF ASSETS. The gain on sale of assets of $300 thousand for the nine months ended September 30, 2005 represents the gain on sale of Matrix Bank's trust department assets and operations as part of the sale of our interest in Matrix Settlement and Clearance Services, LLC which closed April 30, 2005. The gain on sale of assets of $18.6 million for the nine months ended September 30, 2004 represents the gain on sale from the Las Cruces branches of Matrix Bank and the sale of substantially all of the assets and operations of Matrix Asset Management Corporation. See further discussion of these items noted in Item 2. above. SCHOOL SERVICES. School services income decreased $940 thousand, or 41.4%, to $1.3 million for the nine months ended September 30, 2005 as compared to $2.3 million for the nine months ended September 30, 2004. Decrease is due to a decrease in the number of school clients served. Please see the additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- School Services." OTHER INCOME. Other income remained consistent at $3.9 million for the nine months ended September 30, 2005 as compared to $3.9 million for the nine months ended September 30, 2004. The consistency is due to a combination of a decrease in the level of income from unconsolidated subsidiaries due to the sale of our interest in Matrix Settlement and Clearance Services, LLC discussed above, offset by increases in fees earned for the sale of SBA loan commitments at Matrix Bank and hedging losses recognized by Matrix Financial during 2004 that were not present in 2005 due to the removal of our hedge on the mortgage servicing rights asset in 2004. Please see the additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Other Income." NONINTEREST EXPENSE. Noninterest expense decreased $20.1 million, or 27.7%, to $52.5 million for the nine months ended September 30, 2005 as compared to $72.6 million for the nine months ended September 30, 2004. This decrease was primarily due to a decrease in compensation and employee benefits expense due to the headcount reductions in 2004 noted above, a decrease in the level of amortization of our mortgage servicing rights, an increase in the level of recoveries on the impairment on mortgage servicing rights, and a decrease in other general and administrative expenses due to both the divestitures and due to specific charges at Matrix Financial for loan repurchase reserves and receivable write-offs, as well as litigation settlement expense at Matrix Bank during 2004 that were not present in the same levels for the year to date 2005, offset by increases in the levels of subaccounting fees and mortgage rights subservicing fees. The following table details the major components of noninterest expense for the periods indicated: 26
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ------------ ------------ (Dollars in thousands) Compensation and employee benefits $ 18,889 $ 25,950 Amortization of mortgage servicing rights 6,130 12,779 Occupancy and equipment 3,789 4,651 Postage and communication 1,053 1,630 Professional fees 2,126 2,535 Mortgage servicing rights subservicing fees 2,351 -- Data processing 744 1,814 Subaccounting fees 9,460 5,479 (Recovery of) impairment on mortgage servicing rights, net (830) (444) Other general and administrative 8,770 18,206 ------------ ------------ Total $ 52,482 $ 72,600 ============ ============
Compensation and employee benefits decreased $7.1 million, or 27.2%, to $18.9 million for the nine months ended September 30, 2005 as compared to $26.0 million for the nine months ended September 30, 2004. Please see the additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004--Noninterest Expense." Amortization of mortgage servicing rights decreased $6.7 million, or 52.0%, to $6.1 million for the nine months ended September 30, 2005 as compared to $12.8 million for the nine months ended September 30, 2004. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. The decrease is due to a decrease in the average balance of our mortgage servicing rights to $2.08 billion for the nine months ended September 30, 2005 as compared to $2.77 billion for the nine months ended September 30, 2004, offset slightly by a decrease in prepayment speeds on our servicing portfolio to an average of 23.6% for the nine months ended September 30, 2005 as compared to 28.8% for the nine months ended September 30, 2004. Please see the additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004--Noninterest Expense." Recoveries of impairment of mortgage servicing rights increased $400 thousand to a recovery of $830 thousand for the nine months ended September 30, 2005, as compared to a recovery of $440 thousand for the nine months ended September 30, 2004. Please see additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 -- Noninterest Expense." The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, mortgage rights subservicing fees, data processing costs, subaccounting fees and other general and administrative expenses, decreased $6.0 million, or 17.5%, to $28.3 million for the nine months ended September 30, 2005 as compared to $34.3 million for the nine months ended September 30, 2004. Please see the additional discussion under "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004--Noninterest Expense." INCOME TAXES. Provision for income taxes is $2.9 million for the nine months ended September 30, 2005 as compared to $6.4 million for the nine months ended September 30, 2004. Our effective tax rate is 27.7% for the nine months ended September 30, 2005. The effective tax rates are affected by the level of tax-exempt income at ABS and Matrix Bank in proportion to the level of net income from continuing operations, and the utilization of tax credits generated by a subsidiary of Matrix Bank. AVERAGE BALANCE SHEET The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Average interest rate information for the quarters and nine months ended September 30, 2005 and 2004 have been annualized. Ratio, yield and rate information is based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated. 27
Quarter Ended September 30, -------------------------------------------------------------------------------------- 2005 2004 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ----------- ----------- ------------- ----------- -------- ------------- ASSETS Interest-earning assets: Loans receivable $ 1,450,196 $ 17,260 4.76% $ 1,384,532 $16,414 4.74% Securities 425,388 5,177 4.87 222,904 2,250 4.04 Interest-earning deposits 19,658 154 3.13 3,275 7 0.85 FHLBank stock 33,208 380 4.58 30,354 255 3.36 ----------- ----------- ------------- ----------- ------- ------------- Total interest-earning assets 1,928,450 22,971 4.76 1,641,065 18,926 4.61 Noninterest-earning assets: Cash 26,463 48,410 Allowance for loan and valuation losses (11,045) (10,707) Premises and equipment 17,921 21,540 Other assets 101,558 154,280 ----------- ----------- Total noninterest-earning assets 134,897 213,523 Total assets $ 2,063,347 $ 1,854,588 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Passbook accounts $ 305 $ 1 1.31% $ 1,663 6 1.47% Money market and NOW accounts 939,200 3,169 1.35 676,754 1,184 0.70 Certificates of deposit 106,119 993 3.74 176,774 1,491 3.37 FHLBank borrowings 599,102 5,482 3.66 546,561 3,313 2.42 Borrowed money and guaranteed preferred beneficial interests 92,615 1,802 7.78 121,084 2,346 7.75 ----------- ----------- ------------- ----------- ------- ------------- Total interest-bearing liabilities 1,737,341 11,447 2.64 1,522,836 8,340 2.19 ----------- ----------- ------------- ----------- ------- ------------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances) 211,758 231,924 Other liabilities 16,375 23,871 ----------- ----------- Total noninterest-bearing liabilities 228,133 255,795 Shareholders' equity 97,873 75,957 ----------- ----------- Total liabilities and shareholders' Equity $ 2,063,347 $ 1,854,588 =========== =========== Net interest income before provision for loan and valuation losses $ 11,524 $10,586 =========== ======= Interest rate spread 2.12% 2.42% ============= ============= Net interest margin 2.39% 2.58% ============= ============= Ratio of average interest-earning assets to average interest-bearing liabilities 111.0% 107.77% ============= ============= Nine Months Ended September 30, --------------------------------------------------------------------------------- 2005 2004 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ---------- -------- ------------- ---------- ----------- ------------- Assets Interest-earning assets: Loans receivable $1,421,154 $50,952 4.78% $1,351,524 $ 48,315 4.77% Securities 358,323 13,191 4.91 165,337 5,206 4.20 Interest-earning deposits 9,208 188 2.72 3,042 15 0.66 FHLBank stock 33,416 1,102 4.40 30,028 709 3.15 ---------- ------- ------------- ---------- ----------- ------------- Total interest-earning assets 1,822,101 65,433 4.79 1,549,931 54,245 4.67 Noninterest-earning assets: Cash 40,751 53,255 Allowance for loan and valuation losses (11,242) (10,409) Premises and equipment 18,366 23,037 Other assets 104,374 151,934 ---------- ---------- Total noninterest-earning assets 152,249 217,817 Total assets $1,974,350 $1,767,748 ========== ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts $ 414 $ 4 1.29% $ 3,570 35 1.31% Money market and NOW accounts 848,100 7,936 1.25 647,504 3,262 0.67 Certificates of deposit 138,357 3,431 3.31 177,720 4,388 3.29 FHLBank borrowings 562,316 14,262 3.38 481,596 8,489 2.35 Borrowed money and guaranteed preferred beneficial interests 92,221 5,419 7.83 121,462 6,850 7.52 ---------- ------- ------------- ---------- ----------- ------------- Total interest-bearing liabilities 1,641,408 31,052 2.52 1,431,852 23,024 2.14 ---------- ------- ------------- ---------- ----------- ------------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances) 220,791 240,283 Other liabilities 16,526 22,620 ---------- ---------- Total noninterest-bearing liabilities 237,317 262,903 Shareholders' equity 95,625 72,993 ---------- ---------- Total liabilities and shareholders' Equity $1,974,350 $1,767,748 ========== ========== Net interest income before provision for loan and valuation losses $34,381 $ 31,221 ======= =========== Interest rate spread 2.27% 2.52% ============= ============= Net interest margin 2.52% 2.69% ============= ============= Ratio of average interest-earning assets to average interest-bearing liabilities 111.01% 108.25% ============= =============
28 ANALYSIS OF CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN INTEREST RATES AND VOLUMES The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: o changes in volume, in other words, changes in volume multiplied by prior period rate; and o changes in rate, in other words, changes in rate multiplied by prior period volume. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. 2004 2005 VS. 2004 -------------------------------------- -------------------------------------- Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in -------------------------------------- -------------------------------------- Volume Rate Total Volume Rate Total ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) (Dollars in thousands) Interest-earning assets: Loans receivable $ 784 $ 62 $ 846 $ 2,499 $ 138 $ 2,637 Securities 2,385 542 2,927 6,972 1,013 7,985 Interest-earning deposits 95 52 147 67 106 173 FHLBank stock 26 99 125 87 306 393 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 3,290 755 4,045 9,625 1,563 11,188 ---------- ---------- ---------- ---------- ---------- ---------- Interest-bearing liabilities: Passbook accounts (4) (1) (5) (31) -- (31) Money market and NOW accounts 584 1,401 1,985 1,237 3,437 4,674 Certificates of deposit (646) 148 (498) (981) 24 (957) FHLBank borrowings 344 1,825 2,169 1,598 4,175 5,773 Borrowed money and guaranteed preferred beneficial interests (553) 9 (544) (1,704) 273 (1,431) ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities (275) 3,382 3,107 119 7,909 8,028 ---------- ---------- ---------- ---------- ---------- ---------- Change in net interest income before provision for loan and valuation losses $ 3,565 $ (2,627) $ 938 $ 9,506 $ (6,346) $ 3,160 ========== ========== ========== ========== ========== ==========
ASSET QUALITY NONPERFORMING ASSETS As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are generally placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate arises primarily through foreclosure on mortgage loans owned.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 2005 2004 2004 --------------- --------------- --------------- (Dollars in thousands) Nonaccrual residential mortgage loans $ 8,842 $ 12,157 $ 10,651 Nonaccrual commercial real estate, commercial loans and school financing 9,789 19,148 19,607 Nonaccrual consumer loans 10 40 31 --------------- --------------- --------------- Total nonperforming loans 18,641 31,345 30,289 Foreclosed real estate 3,482 2,955 4,810 --------------- --------------- --------------- Total nonperforming assets $ 22,123 $ 34,300 $ 35,099 =============== =============== =============== Total nonperforming loans to total loans 1.35% 2.27% 2.12% =============== =============== =============== Total nonperforming assets to total assets 1.09% 1.82% 1.87% =============== =============== =============== Ratio of allowance for loan and valuation losses to total nonperforming loans 58.23% 35.64% 36.13% =============== =============== ===============
29 We accrue interest on government-sponsored loans such as FHA insured and VA guaranteed loans which are past due 90 or more days, as the interest on these loans is generally insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $10.3 million, $18.1 million and $13.5 million at September 30, 2005, December 31, 2004 and September 30, 2004, respectively. Nonaccrual residential mortgage loans as a percentage of total loans were 0.65% at September 30, 2005, 0.89% at December 31, 2004, and 0.75% at September 30, 2004. The nonaccrual residential mortgage loans decreased approximately $3.3 million in the nine months ended September 30, 2005 as compared to December 31, 2004. This decrease is due to higher levels of payoffs, refinancing of borrower debt due to the interest rate environment and the sale of under-performing loans by Matrix Financial in the second quarter of 2005. The nonaccrual commercial loans and school financing at September 30, 2005 decreased as compared to December 31, 2004. Nonaccrual commercial loans and school financing are discussed further below. With regard to our school financing, a majority of our origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. The balance of these loans in nonaccrual status decreased to $270 thousand at September 30, 2005 as compared to $5.6 million at December 31, 2004. Based on current information, we believe that reserves are sufficient for any potential losses. However, no assurances can be made that further reserves will not be necessary. The decrease was due to the disposition of one of the previously held nonaccrual loans and putting another previously held nonaccrual loan back in accrual status based on the loan's performance during the first and third quarters of 2005. See further discussion of the nonaccrual school financing loans in "Item 7. -- Asset and Liability Management-Nonperforming Assets" in the Company's Form 10-K for the year ended December 31, 2004. With regard to the nonaccrual commercial loans, the balance of these loans in nonaccrual status decreased to $9.5 million at September 30, 2005 as compared to $13.6 million at December 31, 2004. Based on current information, we believe that there are sufficient reserves for any potential loss. However, no assurances can be made that further reserves will not be necessary. The decrease is due to repayments, reinstatements and foreclosures primarily in the SBA portfolio during the nine month period ended September 30, 2005 resulting in an overall improvement in our non-performing ratios. See further discussion of the nonaccrual commercial loans in "Item 7. -- Asset and Liability Management-Nonperforming Assets" in the Company's Form 10-K for the year ended December 31, 2004. The percentage of the allowance for loan losses to nonaccrual loans varies due to the nature of our portfolio of loans. We analyze the allowance for loan losses related to the nonaccrual loans by loan type, historical loss experience and loans measured for impairment. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. See "--Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004." LIQUIDITY AND CAPITAL RESOURCES Liquidity is our ability to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. The Company is reliant on dividend and tax payments from its subsidiaries in order to fund operations, meet debt and tax obligations and grow new or developing lines of business. A long-term inability of a subsidiary to make dividend payments could significantly impact the Company's liquidity. Historically, the majority of the dividend payments have been made by Matrix Bank under the dividend policy approved by Matrix Bank of 75% of the consolidated cumulative earnings of Matrix Bank. Due to the divestures that the Company undertook in 2003 and 2004, plus the positive operating results of the non-bank operating subsidiaries, the Company has not required a dividend from Matrix Bank since the second quarter of 2003. Based on current liquidity at the Company, including the unused line of credit of $12.0 million with a third party institution secured by Matrix Bank stock, the Company does not anticipate the need for a dividend from Matrix Bank in the next several quarters. However, if the Company is unable to prudently leverage the capital at Matrix Bank in a safe and sound manner, or if the liquidity needs of the Company change, it is contemplated that a dividend policy of 75% of Matrix Bank's earnings will be reconstituted. Matrix Bank's liquidity needs are expected to be met primarily through borrowings from the FHLBank, as well as institutional deposits and custodial escrow deposits held at Matrix Bank. Contractual loan payments and net deposit 30 inflows are a generally predictable source of funds, while loan prepayments and loan sales are significantly influenced by general market interest rates and economic conditions. At September 30, 2005, Matrix Bank had overnight and term borrowings of $575.0 million from the FHLBank of Topeka and Dallas. Matrix Bank also utilizes brokered deposits as a source of liquidity. The balance of brokered deposits at September 30, 2005 was $68.1 million. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. Matrix Bank, a well-capitalized institution, had a leverage capital ratio of 6.36% at September 30, 2005. This exceeded the well-capitalized leverage capital requirement of 5.0% of adjusted assets by $26.9 million. Matrix Bank's risk-based capital ratio was 13.54% at September 30, 2005, which currently exceeds the well capitalized risk-based capital requirement of 10.0% of risk-weighted assets by $34.5 million. ABS' principal source of funding for school financings are internal capital, sales of loans to third party institutions and a partnership trust with an unaffiliated financial institutions. The original partnership trust expired September 30, 2005 and was replaced with a new partnership trust at that time. Amounts available to be sold and amounts to be financed are at the purchaser's and lender's sole discretion. The trust facility currently outstanding has a balance of approximately $17.0 million and matures in September 2008. We do not anticipate significantly increasing our current loan portfolio. Under a purchase and sale agreement, ABS has sold school financings to an unaffiliated financial institution, with full recourse to ABS. ABS services the school financings on a scheduled/scheduled remittance and in the case of a loss or default, upon the liquidation of the underlying collateral, ABS is required to reimburse the unaffiliated financial institution for any shortfall. Due to the control the unaffiliated financial institution has over the school financing, the transaction was accounted for as a sale. The recourse provisions were considered by us at the time of the sale. No gain or loss was booked at the sale date as the loans were sold at their carrying value. The total balance of the school financings sold with recourse is $5.6 million at September 30, 2005. CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS During the quarter ended September 30, 2005, there were no material changes outside of the normal course of business to the quantitative and qualitative disclosures about contractual obligations, commitments, contingent liabilities and off-balance sheet arrangements previously reported in the Annual Report contained in the Company's Form 10-K for the year ended December 31, 2004. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. See Notes 11 and 12 to the Consolidated Financial Statements herein for detail on the balances of deposit liabilities and FHLBank borrowings as of September 30, 2005. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the quarter and nine months ended September 30, 2005, there were no material changes to the quantitative and qualitative disclosures about market risk presented in the Annual Report contained in the Company's Form 10-K for the year ended December 31, 2004. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset and Liability Management - Risk Sensitive Assets and Liabilities" and Item 1. "Business Mortgage Servicing Activities -- Hedging of Servicing Rights" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. In addition, see Item 2. "Comparison of Results of Operations for the Quarters Ended September 30, 2005 and 2004 - Net Interest Income" herein for additional discussion. ITEM 4. CONTROLS AND PROCEDURES Management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(b) of the Securities Exchange Act of 1934. As of September 30, 2005, an evaluation was performed under the supervision and with the participation of the Company's management, including the Co-Chief Executive Officers and Chief Financial Officer, of the 31 effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Co-Chief Executive Officers and Chief Financial Officer concluded that the Company's disclosure controls and procedures as of September 30, 2005 were effective in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported within the time period required by the SEC's rules and forms. There have been no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the quarter ended September 30, 2005, there were no material changes to the information previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, and updated in the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005, respectively. See Item 3. "Legal Proceedings" in the Company's Form 10-K for the year ended December 31, 2004, as well as Item 1. "Legal Proceedings" in the Company's Form 10-Q for the quarter ended June 30, 2005, for a detailed discussion. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended September 30, 2005, there were no material changes to the information previously reported in the Annual Report contained in the Company's Form 10-K for the year ended December 31, 2004. See Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in the Company's Form 10-K for the year ended December 31, 2004 for a detailed discussion. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended September 30, 2005, no items were submitted to a vote of security holders. ITEM 6. EXHIBITS (a) Exhibits *31.1 Certification by D. Mark Spencer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification by Richard V. Schmitz pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.3 Certification by David W. Kloos pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adoped pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------------- * Filed herewith. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX BANCORP, INC. Dated: November 7, 2005 /s/ D. Mark Spencer ------------------------------ ------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) Dated: November 7, 2005 /s/ Richard V. Schmitz ------------------------------ ------------------------------- Richard V. Schmitz Co-Chief Executive Officer Dated: November 7, 2005 /s/ David W. Kloos ------------------------------ ------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 33 INDEX TO EXHIBITS
Exhibit Number Description - -------- -------------------------------------------------------------------- *31.1 Certification by D. Mark Spencer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification by Richard V. Schmitz pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.3 Certification by David W. Kloos pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adoped pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.3 Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith. 34 EX-31.1 2 d30041exv31w1.txt CERTIFICATION BY D. MARK SPENCER - SECTION 302 EXHIBIT 31.1 CERTIFICATION I, D. Mark Spencer, President and Co-Chief Executive Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 1. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. /s/ D. Mark Spencer ---------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) November 7, 2005 EX-31.2 3 d30041exv31w2.txt CERTIFICATION BY RICHARD V. SCHMITZ - SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Richard V. Schmitz, Co-Chief Executive Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 1. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. /s/ Richard V. Schmitz ------------------------------------- Richard V. Schmitz Co-Chief Executive Officer November 7, 2005 EX-31.3 4 d30041exv31w3.txt CERTIFICATION BY DAVID W. KLOOS - SECTION 302 EXHIBIT 31.3 CERTIFICATION I, David W. Kloos, Senior Vice President and Chief Financial Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-Q of Matrix Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report in being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. /s/ David W. Kloos ------------------------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) November 7, 2005 EX-32.1 5 d30041exv32w1.txt CERTIFICATION BY D. MARK SPENCER - SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Matrix Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, D. Mark Spencer, President and Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2005 /s/ D. Mark Spencer --------------------------- Name: D. Mark Spencer Title: President and Co-Chief Executive Officer EX-32.2 6 d30041exv32w2.txt CERTIFICATION BY RICHARD V. SCHMITZ - SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Matrix Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard V. Schmitz, Co-Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2005 /s/ Richard V. Schmitz ---------------------------------- Name: Richard V. Schmitz Title: Co-Chief Executive Officer EX-32.3 7 d30041exv32w3.txt CERTIFICATION BY DAVID W. KLOOS - SECTION 906 EXHIBIT 32.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Matrix Bancorp, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Kloos, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2005 /s/ David W. Kloos ---------------------------------- Name: David W. Kloos Title: Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----