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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 23, 1999
MATRIX BANCORP, INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Colorado 0-21231 84-1233716
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898.
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ITEM 5. OTHER EVENTS.
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Ownership of the Common Stock and other securities of Matrix Bancorp, Inc.
(the "Company") involves certain risks. Holders of the Company's securities and
prospective investors should carefully consider the following risk factors in
evaluating an investment in the Company's securities.
LIMITED OPERATING HISTORY
Matrix Bancorp, as parent holding company ("Matrix Bancorp"), was formed in
1993 to combine the operations of two subsidiaries of the Company, Matrix
Financial Services Corporation ("Matrix Financial"), and United Financial, Inc.
("United Financial"), which were formed in 1990 and 1989, respectively. The
Company purchased Matrix Capital Bank ("Matrix Bank") in 1993, formed United
Special Services, Inc. ("USS") as a start-up operation in 1995, formed United
Capital Markets, Inc. ("UCM") in 1996 and acquired The Vintage Group, Inc.
("Vintage") and started Equi-mor Holdings, Inc. ("Equi-mor") in 1997. This
series of combinations, purchases and formations has involved the integration of
the operations of companies that previously operated independently or, in the
case of USS, Equi-mor and UCM, not at all. Consequently, the Company has a
limited operating history under its existing corporate structure upon which
investors may base an evaluation of its performance. There can be no assurance
that the Company will not encounter significant difficulties in integrating
operations acquired or commenced in the future, including the recently acquired
custodial and directed (non-discretionary) trust services provided by Vintage
and its subsidiaries, Sterling Trust Company ("STC") and First Matrix Investment
Services Corporation ("First Matrix").
POTENTIAL ADVERSE IMPACT OF FLUCTUATING INTEREST RATES
RESIDENTIAL MORTGAGE LOAN SERVICING RIGHTS. Owning residential mortgage
loan servicing rights carries interest rate risk because the total amount of
servicing fees earned, as well as the amortization of the investment in the
servicing rights, fluctuates based on loan prepayments (affecting the expected
average life of a portfolio of residential mortgage servicing rights). The rate
of prepayment of mortgage loans may be influenced by changing national and
regional economic trends, such as recessions or depressed real estate markets,
as well as the difference between interest rates on existing mortgage loans
relative to prevailing mortgage rates. During periods of declining interest
rates, many borrowers refinance their mortgage loans. Accordingly, prepayments
of mortgage loans increase and the loan administration fee income related to the
mortgage loan servicing rights corresponding to a mortgage loan ceases as
underlying loans are prepaid. Consequently, the market value of portfolios of
mortgage loan servicing rights tends to decrease during periods of declining
interest rates, since greater prepayments can be expected. The income derived
from and the market value of the Company's servicing portfolio, therefore, may
be adversely affected during periods of declining interest rates. See "--Risks
Associated with General Economic Conditions."
ASSET AND LIABILITY MANAGEMENT. The Company's earnings depend in part upon
the level of its net interest income. Net interest income is the difference
between the interest income received from interest-earning assets and the
interest expense incurred in connection with interest-bearing liabilities.
Accordingly, the Company is vulnerable to an increase in interest rates to the
extent that its interest-earning assets, such as mortgage loans, have longer
effective maturities than, or do not adjust as quickly as, its interest-bearing
liabilities. In a rising interest rate environment, interest rates paid to
depositors and on borrowings of the Company may rise more quickly than rates
earned on the Company's loan portfolio. Under such circumstances, material and
prolonged increases in interest rates generally would materially and adversely
affect net interest income and the value of interest-earning assets, while
material and prolonged decreases in interest rates generally would have a
favorable effect on net interest income and the value of interest-earning
assets. Fluctuating interest rates also may affect the net interest income
earned by the Company resulting from the difference between the yield to the
Company on mortgage loans held prior to sale and the interest paid by the
Company for funds advanced under the Company's warehouse lines of credit to
purchase such mortgage loans. The process of balancing the maturities of the
Company's assets and liabilities necessarily involves estimates as to how
changes in the general level of interest rates will impact the yields earned on
assets and the rates paid on liabilities. These estimates may prove to be
inaccurate.
PIPELINE LOANS. Secondary marketing losses on sales of originated mortgage
loans may result from changes in interest rates from the time the interest rate
on the customer's mortgage loan application is established to
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the time the Company sells the loan. Such a change in interest rates could
result in a loss upon the sale of such loans. In order to hedge this risk and to
minimize the effect of interest rate changes on the sale of originated loans,
the Company commits to sell mortgage loans to investors for delivery at a future
time for a stated price. At any given time, the Company's policy is to sell
substantially all of its mortgage loans that are closed and a percentage of the
mortgage loans that are not yet closed but for which the interest rate has been
established ("pipeline loans").
To manage the interest rate risk of the Company's pipeline loans, the
Company continuously projects the percentage of the pipeline loans it expects to
close and, on the basis of such projections, enters into forward commitments to
sell such loans. If an unanticipated change in interest rates occurs, the actual
percentage of mortgage loans that close may differ from the projected
percentage. The resulting mismatch of commitments to originate loans and
commitments to sell loans may have an adverse effect on the results of
operations of the Company. A sudden increase in interest rates can cause a
higher percentage of mortgage loans to close than projected. To the degree this
may not have been anticipated, the Company may not have made commitments to sell
these additional loans and consequently may incur significant losses upon their
sale, adversely affecting results of operations. On the other hand, if a lower
percentage of mortgage loans close than was projected, due to a sudden decrease
in interest rates or otherwise, the Company may have committed to sell more
loans than actually close and as a result may incur significant losses in
fulfilling these commitments, adversely affecting results of operations. This
risk is greatest during times of high interest rate volatility.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's financial results are subject to significant quarterly
fluctuations as a result of, among other things, the variance in the number and
magnitude of purchases and sales of mortgage loans and/or mortgage servicing
rights consummated by the Company from time to time. In addition, a portion of
the Company's revenues are derived from brokerage fees, the timing and receipt
of which are unpredictable. Accordingly, the Company's results of operations for
any particular quarter are not necessarily indicative of the results that may be
achieved for any succeeding quarter or for the full fiscal year.
DIVERSIFICATION IN BUSINESS LINES; MANAGEMENT OF GROWTH
As part of the Company's business strategy, the Company has in the past
diversified, and may in the future diversify, its lines of business into areas
that are not now part of its core business. As a result, the Company must manage
the development of new business lines in which the Company has not previously
participated. Although the Company's strategy is to acquire on-going businesses
and to retain senior management of the entities that the Company acquires, such
as Vintage, each new business line, including start-up operations like USS,
Equi-mor and UCM, requires the investment of additional capital and the
significant involvement of senior management of the Company to acquire or
develop a new line of business and integrate it with the Company's operations.
There can be no assurance that the Company will successfully achieve these
objectives.
In addition to entering into new lines of business, the Company's business
strategy also envisions the expansion of its existing lines of business,
particularly in the area of servicing and purchasing of mortgage loans. The
Company believes that it currently has in place the infrastructure necessary to
undertake this expansion, including management information systems, senior
management and other personnel. However, there can be no assurance that any
rapid expansion, similar to that encountered by the Company over the past
several years, would not unduly burden the Company's infrastructure or that
senior management of the Company could successfully oversee such expansion.
RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS
General economic conditions, whether regional or industry-related or due to
a recession throughout the United States, affect consumers' decisions to buy or
sell residences as well as the number of residential mortgage loan delinquencies
and foreclosures, the value of collateral supporting loan portfolios,
administrative costs in evaluating and processing mortgage loan applications and
the costs and availability of funds that mortgage banking companies rely upon in
order to make or purchase loans. Changes in the level of consumer confidence,
real estate values, prevailing interest rates and investment returns expected by
the financial community could make mortgage loans of the types purchased,
serviced and sold by the Company less attractive to borrowers or investors.
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DEPENDENCE UPON MORTGAGE SERVICING RIGHTS
The Company has relied and expects to continue to rely on the purchase and
sale of mortgage servicing rights for a significant portion of its revenues.
There is no established exchange or trading market for mortgage servicing rights
and no assurance can be given that an active trading market will develop in the
future. The Company believes that it has been able to benefit from opportunities
resulting from inefficiencies in the existing market for mortgage servicing
rights; however, no assurance can be given that such inefficiencies will
continue in the future, and even if continued, that the Company will be able to
benefit from such inefficiencies to the extent it has in the past, or that if an
active trading market for mortgage servicing rights develops in the future, the
Company will be able to benefit from such developments. The supply of and demand
for mortgage servicing rights are affected by a number of factors beyond the
Company's control, including, among others, interest rates, regional and
national economic conditions, industry consolidation, other factors affecting
the housing industry, regulations affecting the financial services industry and
accounting rules and interpretations related to the accounting treatment of
mortgage servicing rights. Some or all of these factors may adversely affect the
Company's ability to originate, purchase and sell mortgage servicing rights
profitably in the future.
CONCENTRATION OF LOANS AND SERVICING RIGHTS
The Company's portfolios of residential mortgage loans and mortgage
servicing rights are concentrated in certain geographic areas. The geographic
areas in which concentrations exist varies from time to time. Consequently, the
Company's results of operations and financial condition are dependent upon
general trends in the markets in which concentrations exist and, more
specifically, their respective residential real estate markets. An economic
decline in a particular geographic area may adversely affect the values of
properties securing the Company's loans, such that the principal balances of
such loans, together with any primary financing on the mortgaged properties, may
equal or exceed the value of the mortgaged properties, making the Company's
ability to recover losses in the event of a borrower's default extremely
unlikely. In addition, certain geographic areas, including California, may be
more vulnerable to risks of natural disasters, such as earthquakes and
mudslides, which are not typically covered by standard hazard insurance policies
maintained by borrowers. Uninsured disasters may adversely impact borrowers'
ability to repay loans made by the Company and the value of collateral
underlying such loans, which could have a material adverse effect on the
Company's results of operations and financial condition.
DELINQUENCY, FORECLOSURE AND CREDIT RISKS
Mortgage Loan Portfolio. The Company's loan portfolios include loans that
were originated by numerous lenders throughout the United States under various
loan programs and underwriting standards. Many of the loan portfolios include
loans that have had payment delinquencies in the past or, to a lesser extent,
are delinquent at the time of the purchase. As a part of the Company's business
strategy, portfolios of mortgage loans with varying degrees of current and past
delinquencies are purchased at discounts. Although the Company performs due
diligence at the time loans are purchased, the risk of continuing or recurrent
delinquency remains. The Company assumes substantially all risk of loss
associated with its loan portfolio in the case of foreclosure. This risk
includes the cost of the foreclosure, the loss of interest, and the potential
loss of principal to the extent that the value of the underlying collateral is
not sufficient to cover the Company's investment in the loan.
SERVICING PORTFOLIO. The Company also is affected by mortgage loan
delinquencies and defaults on mortgage loans that it services. Under many types
of mortgage servicing contracts, even when mortgage loan payments are
delinquent, the servicer must forward all or part of the scheduled payments to
the owner of the mortgage loan. Also, to protect their liens on mortgaged
properties, owners of mortgage loans usually require the servicer to advance
mortgage and hazard insurance and tax payments on schedule even though
sufficient escrow funds may not be available. Typically, the servicer will
ultimately be reimbursed by the mortgage loan owner or from foreclosure proceeds
for payments advanced that the servicer is unable to recover from the borrower.
However, in the interim, the servicer must absorb the cost of funds advanced
during the time such advance is outstanding. Further, the servicer must bear the
increased costs of attempting to collect on delinquent and defaulted mortgage
loans. Although these increased costs are somewhat reduced through the receipt
of late fees and the reimbursement of certain direct expenses out of foreclosure
proceeds, the Company believes that increased delinquencies and defaults
generally increase the costs of the servicing function. In addition, the Company
is
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required to forego servicing income from the time a loan becomes delinquent to
the time the mortgage loan is foreclosed.
POSSIBLE INADEQUACY OF ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future losses
is susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond the Company's control, and such
losses may exceed current estimates. Although management believes that the
Company's allowance for loan losses is adequate to absorb any losses on existing
loans that may become uncollectible, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses on existing loans in
the future.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of contract and fiduciary obligations, misrepresentations, errors and
omissions of employees, officers and agents of the Company, incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business, including federal and state banking and
consumer lending laws. There can be no assurance that any liability with respect
to current legal actions, or ones that might be instituted in the future, would
not be material to the Company's consolidated results of operations, financial
condition or cash flows. See "--Liabilities Under Representations and
Warranties."
LIABILITIES UNDER REPRESENTATIONS AND WARRANTIES
In the ordinary course of business, the Company makes representations and
warranties to the purchasers and insurers of mortgage loans and consumer loans
and the purchasers of mortgage servicing rights regarding compliance with laws,
regulations and program standards, and as to the accuracy of certain
information. To a lesser extent, the Company contractually provides recourse
relating to the performance of the loans that it sells. Under certain
circumstances, the Company may become liable for damages or may be required to
repurchase a loan if there has been a breach of these representations or
warranties or in a case where contractual recourse is permitted. The Company
generally receives similar representations and warranties from the originators
and sellers from whom it purchases mortgage loans and servicing rights. However,
in the event of breaches of such representations and warranties, the Company is
subject to the risk that an originator may not have the financial capacity to
repurchase loans when called upon to do so by the Company or otherwise respond
to demands made by the Company.
IMPACT OF REGULATION
GENERAL. The operations of the Company are subject to extensive regulation
by federal and state governmental authorities and are subject to various laws
and regulations and judicial and administrative decisions that, among other
things, establish licensing requirements, regulate credit extension, establish
maximum interest rates and insurance coverages, require specific disclosures to
customers, prohibit discrimination in mortgage lending activities, govern
secured transactions, establish collection, repossession and claims handling
procedures and other trade practices and, in certain states, require payment of
interest on servicing-related custodial escrow deposits. In particular, Matrix
Bank is subject to extensive regulation, examination and supervision by the
Office of Thrift Supervision (the "OTS"), as its chartering agency, and the
Federal Deposit Insurance Corporation (the "FDIC"), as insurer of deposits held
at Matrix Bank. Matrix Bank is a member of the Federal Home Loan Bank (the
"FHLB") system and its deposits are insured by the FDIC up to the applicable
limits of the Savings Association Insurance Fund (the "SAIF"). In addition, in
certain instances the ability of Matrix Financial and Matrix Bank to pay
dividends to Matrix Bancorp could be restricted due to regulatory requirements.
STC is regulated by the Texas Department of Banking as a Texas chartered trust
company. There can be no assurance that more restrictive laws, rules or
regulations will not be adopted in the future, or that existing or proposed laws
will not be changed to the detriment of the Company. Any change in such laws and
regulations or the adoption of more restrictive laws and regulations, whether by
the OTS, the FDIC or the Congress of the United States, could have a material
adverse effect on the Company and its financial condition or results of
operations.
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FEDERAL PROGRAMS. The Company's ability to sell mortgage loans is largely
dependent upon the continuation of programs administered by the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and the Government National Mortgage Association ("GNMA"), which
facilitate the sale of mortgage loans and the pooling of such loans into
mortgage-backed securities, as well as the Company's continued eligibility to
participate in such programs. The discontinuation of, or a significant reduction
in, the operation of such programs would have an adverse effect on the Company's
operations. The Company expects that it will continue to remain eligible to
participate in such programs, but any significant impairment of such eligibility
would adversely affect its operations, because seller/servicer status is vital
to its servicing business. In addition, the products offered under such programs
may be changed from time to time. The profitability of specific products may
vary depending on a number of factors, including the administrative costs to the
Company of originating or acquiring such products.
POTENTIAL LIMITATIONS ON AVAILABILITY OF FUNDING SOURCES
Funding for the Company's mortgage banking activities, including the
acquisition of mortgage servicing rights and the acquisition and origination of
mortgage loans, is provided primarily through lines of credit and
sale/repurchase facilities from various financial institutions and from FHLB
borrowings. The Company's business plan entails, in part, on the Company's
ability to maintain existing credit facilities and negotiate additional credit
facilities for the acquisition of mortgage servicing rights and other purposes.
There can be no assurance that existing credit facilities will be renewed, or if
renewed, that the terms will be favorable to the Company. Furthermore, there can
be no assurance that additional credit lines will be available, or if available,
that the terms will be favorable to the Company. Unavailability of funding on
terms favorable to the Company, or at all, would have an adverse effect on the
Company's business and financial condition.
RISKS ASSOCIATED WITH FINANCING CHARTER SCHOOLS
The Company recently began offering lease financing to charter schools in
several states. In addition to the risks associated with commercial lending
generally, which are discussed elsewhere in these "Risk Factors", financing of
charter schools carries some additional, unique, risks. Charter schools are
typically organized under charters granted by sponsoring governmental entities.
The parameters of individual charters are generally dictated by the state law
authorizing the organization of charter schools, as well as the sponsoring
governmental entity of the particular charter school. The law under which each
charter school is organized provides that the charter of a particular school
will be reviewed periodically, sometimes annually and sometimes on a less
frequent basis. In addition, at the expiration of a charter, the sponsoring
governmental entity generally has sole discretion over whether to renew a
school's charter. The Company runs the risk that the charter of a school or
schools that it is financing will not be renewed or will be revoked. If such an
occurrence happens, the principal source of re-payment on the Company's lease
financing of such school or schools will effectively disappear. In such an
event, it is likely that the Company would realize a significant loss with
respect to such lease financing of the school in question because it would
effectively have no recourse to the charter school or, since the sponsoring
governmental entity does not guarantee or otherwise become liable for the
obligations of a charter school, the sponsoring governmental entity.
The obligations of the charter schools to make payments to the Company in
respect its obligations under the lease financing arrangement are subject to and
conditioned upon the appropriation of legally available funds, on an annual
basis, by the sponsoring governmental entity for the charter school itself. If
no such appropriation is made, the lease purchase agreement under which the
charter school is obligated to the Company terminates and neither the charter
school nor any sponsoring governmental entity has any further obligation to the
Company other than to return the equipment or vacate the real property leased by
the charter school.
Appropriations for charter schools are generally made based upon the number
of students enrolled in a particular charter school. In the event a particular
charter school is unable to attract and keep enrolled a minimum number of
students, such school would not be appropriated enough money to meet its
obligations, including its obligations under the lease financing arrangements
with the Company.
The Company is also subject to the risk that the states in which charter
schools are authorized to operate will determine to repeal or otherwise
significantly alter the laws under which charter schools operate. If the
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authorizing laws were repealed in states where the Company has outstanding
financing, the result would be much the same as if the charter of a particular
school were not renewed or were revoked; however, the impact on the Company
would tend to be much more significant because the repeal would affect all
schools financed by the Company in that state as opposed to one particular
school in the case of non-renewal or revocation of a charter. If the laws were
significantly changed or altered in a particular state, the impact on the
Company would depend on the nature of the change.
COMPETITION
The industries in which the Company competes are highly competitive. The
Company competes with other mortgage banking companies, servicing brokers,
commercial banks, savings associations, credit unions, other financial
institutions, trust companies, broker/dealers and various other lenders. A
number of these competitors have substantially greater financial resources,
greater operating efficiencies and longer operating histories than the Company.
Customers distinguish between product and service providers in the industries in
which the Company operates for various reasons, including convenience in
obtaining the product or service, overall customer service, marketing and
distribution channels and pricing for the various products and services. Because
of its emphasis on mortgage banking activities, competition for the Company is
affected particularly by fluctuations in interest rates. During periods of
rising rates, competitors of the Company who have locked in lower borrowing
costs may have a competitive advantage. During periods of declining rates,
competitors may solicit the Company's customers to refinance their loans. During
economic slowdowns or recessions, credit-impaired borrowers may have new
financial difficulties and may be receptive to offers by the Company's
competitors.
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RELIANCE ON SYSTEMS AND CONTROLS
The Company depends heavily upon its systems and controls, many of which
are designed specifically for its business. These systems and controls support
the evaluation, acquisition, monitoring, collection and administration of the
Company's mortgage loan and servicing portfolios, as well as support the
consulting and brokerage functions performed by the Company and the depository,
general accounting and other management functions of the Company. For example,
in order to track information on its mortgage servicing portfolio, the Company
utilizes a data processing system provided by Alltel Information Services Inc.
("Alltel"), formerly known as Computer Power Incorporated or CPI. There can be
no assurance that Alltel or the Company's other providers can continue to
provide the systems and controls on which the Company relies or that the
Company's systems and controls, including those specially designed and built for
the Company, are adequate or will continue to be adequate to support the
Company's growth. A failure of the automated systems, including a failure of
data integrity or accuracy, could have a material adverse effect on the
Company's business and financial condition.
SIGNATURE
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.
Dated: March 23, 1999
MATRIX BANCORP, INC.
By: /s/ DAVID W. KLOOS
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Name: David W. Kloos
Title: Chief Financial Officer
