<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________
Commission file number: 0-21231
MATRIX BANCORP, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1233716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
(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 [ ]
Number of shares of Common Stock ($.0001 par value) outstanding at the
close of business on May 8, 2000 was 6,759,741 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999...................3
Condensed Consolidated Statements of Income
Quarters ended March 31, 2000 and 1999 (unaudited).................4
Condensed Consolidated Statements of Changes in Shareholders'Equity
Quarters ended March 31, 2000 and 1999 (unaudited).................5
Condensed Consolidated Statements of Cash Flows
Quarters ended March 31, 2000 and 1999 (unaudited).................6
Notes to Unaudited Condensed Consolidated Financial Statements.......7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................11
PART II - Other Information
ITEM 1 Legal Proceedings...................................................18
ITEM 6 Exhibits and Reports on Form 8-K....................................19
SIGNATURES....................................................................20
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Assets (unaudited)
Cash...................................................................... $ 13,786 $ 13,437
Interest-earning deposits................................................. 21,472 13,172
Mortgage-backed securities held for sale.................................. 27,235 -
Loans held for sale, net.................................................. 942,246 977,751
Loans held for investment, net............................................ 145,924 125,764
Mortgage servicing rights, net............................................ 58,500 63,479
Other receivables......................................................... 47,706 44,933
Federal Home Loan Bank of Dallas stock.................................... 22,756 22,414
Premises and equipment, net............................................... 9,726 10,817
Other assets.............................................................. 13,242 11,979
------------------- -------------------
Total assets.............................................................. $ 1,302,593 $ 1,283,746
=================== ===================
Liabilities and shareholders' equity
Liabilities:
Deposits............................................................... $ 582,801 $ 562,194
Custodial escrow balances.............................................. 86,733 94,206
Drafts payable......................................................... 7,381 3,070
Payable for purchase of mortgage servicing rights...................... 2,457 3,163
Federal Home Loan Bank of Dallas borrowings............................ 396,684 405,000
Borrowed money......................................................... 122,826 114,601
Guaranteed preferred beneficial interests in company's 10% junior
subordinated debentures............................................. 27,500 27,500
Other liabilities...................................................... 12,637 11,756
Income taxes payable................................................... 1,523 1,759
------------------- -------------------
Total liabilities......................................................... 1,240,542 1,223,249
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.0001; authorized 5,000,000 shares; no
shares outstanding..................................................
Common stock, par value $.0001; authorized 50,000,000 shares; issue and
outstanding 6,759,741 and 6,759,241 at March 31, 2000 and December 1 1
31, 1999, respectively..............................................
Additional paid in capital............................................. 22,785 22,780
Retained earnings...................................................... 39,265 37,716
------------------- -------------------
Total shareholders' equity................................................ 62,051 60,497
------------------- -------------------
Total liabilities and shareholders' equity................................ $ 1,302,593 $ 1,283,746
=================== ===================
</TABLE>
See accompanying notes.
3
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Income
(dollars in thousands except per share information)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Interest income
Loans and mortgage-backed securities......................................................... $ 21,904 $ 17,238
Interest-earning deposits.................................................................... 661 367
----------- -----------
Total interest income........................................................................ 22,565 17,605
Interest expense
Deposits..................................................................................... 6,655 5,195
Borrowed money............................................................................... 9,192 5,182
----------- -----------
Total interest expense....................................................................... 15,847 10,377
----------- -----------
Net interest income before provision for loan and valuation losses........................... 6,718 7,228
Provision for loan and valuation losses...................................................... 685 675
----------- -----------
Net interest income after provision for loan and valuation losses............................ 6,033 6,553
Noninterest income
Loan administration.......................................................................... 6,303 5,293
Brokerage.................................................................................... 866 1,672
Trust services............................................................................... 1,260 1,279
Real estate disposition services............................................................. 1,088 784
Gain on sale of loans........................................................................ 864 532
Loan origination............................................................................. 1,169 1,954
Other........................................................................................ 1,890 2,692
----------- -----------
Total noninterest income..................................................................... 13,440 14,206
Noninterest expense
Compensation and employee benefits........................................................... 7,978 6,869
Amortization of mortgage servicing rights.................................................... 2,444 4,726
Occupancy and equipment...................................................................... 1,078 838
Postage and communication.................................................................... 713 669
Professional fees............................................................................ 1,334 300
Data processing.............................................................................. 552 326
Other general and administrative............................................................. 2,861 3,131
----------- -----------
Total noninterest expense.................................................................... 16,960 16,859
----------- -----------
Income before income taxes................................................................... 2,513 3,900
Provision for income taxes................................................................... 964 1,395
----------- -----------
Net income................................................................................... $ 1,549 $ 2,505
=========== ===========
Net income per share......................................................................... $ .23 $ .37
=========== ===========
Net income per share assuming dilution....................................................... $ .23 $ .37
=========== ===========
Weighted average shares...................................................................... 6,759,516 6,724,693
=========== ===========
Weighted average shares assuming dilution.................................................... 6,818,941 6,848,571
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Shareholders' Equity
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid In Retained
Shares Amount Capital Earnings Total
------------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Quarter ended March 31, 2000
- -----------------------------------
Balance at December 31, 1999....... 6,759,241 $ 1 $ 22,780 $ 37,716 $ 60,497
Exercise of stock options.......... 500 - 5 - 5
Net income......................... - - - 1,549 1,549
------------- -------- ------------ ---------- --------
Balance at March 31, 2000.......... 6,759,741 $ 1 $ 22,785 $ 39,265 $ 62,051
============= ======== ============ ========== ========
Quarter ended March 31, 1999
- -----------------------------------
Balance at December 31, 1998....... 6,723,911 $ 1 $ 22,416 $ 26,937 $ 49,354
Exercise of stock options.......... 1,000 - 10 - 10
Net income......................... - - - 2,505 2,505
------------- -------- ------------ ---------- --------
Balance at March 31, 1999.......... 6,724,911 $ 1 $ 22,426 $ 29,442 $ 51,869
============= ======== ============ ========== ========
</TABLE>
See accompanying notes.
5
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Operating activities
Net income......................................................................... $ 1,549 $ 2,505
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization..................................................... 646 1,351
Provision for loan and valuation losses........................................... 685 675
Amortization of mortgage servicing rights......................................... 2,444 4,726
Gain on sale of loans............................................................. (864) (532)
Gain on sale of equipment......................................................... (336) -
Loans originated for sale, net of loans sold...................................... (18,203) 29,181
Loans purchased for sale.......................................................... (90,493) (25,016)
Proceeds from sale of loans purchased for sale.................................... 77,024 40,041
Originated mortgage servicing rights, net......................................... 2,877 (465)
Increase in other receivables and other assets.................................... (2,486) (21,643)
Increase (decrease) in other liabilities and income taxes payable................. 645 (2,296)
--------------- ---------------
Net cash (used) provided by operating activities................................... (26,512) 28,527
Investing activities
Loans originated and purchased for investment...................................... (37,467) (20,202)
Principal repayments on loans...................................................... 60,084 17,267
Purchase of Federal Home Loan Bank of Dallas stock................................. (342) (212)
Purchases of premises and equipment................................................ (587) (880)
Proceeds from sale of equipment.................................................... 1,473 -
Acquisition of mortgage servicing rights........................................... (939) (16,185)
Proceeds from sale of mortgage servicing rights.................................... - 161
Hedging of servicing portfolio, net................................................ (109) (1,303)
--------------- ---------------
Net cash provided (used) by investing activities................................... 22,113 (21,354)
Financing activities
Net increase in deposits........................................................... 20,607 53,438
Net (decrease) increase in custodial escrow balances............................... (7,473) 1,442
Increase (decrease) in revolving lines and repurchase agreements, net.............. 4,521 (77,550)
Payment of notes payable........................................................... (4,590) (12,965)
Proceeds from notes payable........................................................ - 26,619
Payment of financing arrangements.................................................. (22) (44)
Proceeds from issuance of common stock related to employee stock option plan....... 5 10
--------------- ---------------
Net cash provided (used) by financing activities................................... 13,048 (9,050)
--------------- ---------------
Increase (decrease) in cash and cash equivalents................................... 8,649 (1,877)
Cash and cash equivalents at beginning of period................................... 26,609 26,785
--------------- ---------------
Cash and cash equivalents at end of period......................................... $ 35,258 $ 24,908
=============== ===============
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing rights.................................. $ 2,457 $ 9,469
=============== ===============
Drafts payable..................................................................... $ 7,381 $ 2,080
=============== ===============
Supplemental disclosure of cash flow information
Cash paid for interest expense..................................................... $ 15,973 $ 11,910
=============== ===============
Cash paid for income taxes......................................................... $ 1,199 $ -
=============== ===============
</TABLE>
See accompanying notes.
6
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Matrix
Bancorp, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles 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 footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes hereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and the
accompanying notes. Actual results could differ from these estimates.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133. This Statement defers the effective date of Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Statement No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by recognition of those items as assets or
liabilities in the statement of financial position and measurement at fair
value. On March 3, 2000, the Financial Accounting Standards Board issued an
exposure draft entitled Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133. The
impact of Statement No. 133 and any related amendments on the Company's
financial position and results of operations has not yet been determined.
2. Net Income Per Share
The following table sets forth the computation of net income per share and net
income per share assuming dilution:
<TABLE>
<CAPTION>
Quarter Ended March 31,
2000 1999
------------------- -------------------
(dollars in thousands)
Numerator:
<S> <C> <C>
Net income available to common shareholders................. $ 1,549 $ 2,505
=================== ===================
Denominator:
Weighted average shares outstanding......................... 6,759,516 6,724,693
Effect of dilutive securities:..............................
Common stock options................................... 59,425 109,424
Common stock warrants.................................. - 14,454
------------------- -------------------
Dilutive potential common shares............................ 59,425 123,878
------------------- -------------------
Denominator for net income per share assuming dilution...... 6,818,941 6,848,571
=================== ===================
</TABLE>
7
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(unaudited)
3. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
Balance at beginning of period...................... $ 63,479 $ 57,662
Purchases........................................... 233 19,754
Originated, net..................................... (2,877) 1,514
Hedging loss........................................ 109 3,257
Amortization........................................ (2,444) (16,403)
Sales............................................... - (2,305)
------------------- -------------------
Balance at end of period............................ $ 58,500 $ 63,479
=================== ===================
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$47.1 million and $45.3 million at March 31, 2000 and December 31, 1999,
respectively. The Company's servicing portfolio (excluding subserviced loans)
was comprised of the following:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------------------ -------------------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding of Loans Outstanding
-------------- ----------------- --------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Freddie Mac............................... 17,281 $ 1,065,072 20,028 $ 1,334,058
Fannie Mae................................ 37,383 2,290,154 38,779 2,427,053
GNMA...................................... 10,988 507,302 11,720 558,086
VA, FHA, conventional and other loans..... 20,556 1,604,218 20,032 1,570,518
-------------- ----------------- --------------- -----------------
86,208 $ 5,466,746 90,559 $ 5,889,715
============== ================= =============== =================
</TABLE>
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at March 31, 2000 and December 31, 1999 pertain to
escrowed payments of taxes and insurance and the float on principal and interest
payments on loans serviced by the Company.
8
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(unaudited)
4. Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------------------------- --------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
-------------- --------- -------------- --------- --------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 2,931 0.50% 3.39% $ 2,793 0.50% 3.48%
NOW accounts............ 49,659 8.52 1.08 42,787 7.61 1.33
Money market accounts... 135,167 23.20 2.34 141,641 25.19 3.04
-------------- --------- -------------- --------- --------- --------------
187,757 32.22 2.03 187,221 33.30 2.72
Certificate accounts.... 395,044 67.78 5.86 374,973 66.70 5.27
-------------- --------- -------------- --------- --------- --------------
$ 582,801 100.00% 4.60% $ 562,194 100.00% 4.12%
============== ========= ============== ========= ========= ==============
</TABLE>
At March 31, 2000 and December 31, 1999, brokered deposits accounted for
approximately $221.9 million and $221.5 million, respectively, of the total
certificate accounts shown above.
5. Guaranteed Preferred Beneficial Interests in Company's 10% Junior
Subordinated Debentures
On July 30, 1999, Matrix Bancorp Capital Trust I (the "Trust"), a Delaware
business trust formed by the Company, completed the sale of $27.5 million of 10%
preferred securities. The Trust also issued common securities to the Company
and used the net proceeds from the offering to purchase $28.6 million in
principal amount of 10% junior subordinated debentures of the Company due
September 30, 2029. The junior subordinated debentures are the sole assets of
the Trust and are eliminated, along with the related income statement effects,
in the consolidated financial statements. The preferred securities are
mandatorily redeemable upon the maturity of the junior subordinated debentures
or upon earlier redemption as provided in the indenture. The Company has the
right to redeem the junior subordinated debentures, in whole or in part on or
after September 30, 2004, at a redemption price specified in the indenture plus
any accrued but unpaid interest to the redemption date.
6. Commitments and Contingencies
At March 31, 2000, the Company had $54.8 million in pipeline and funded loans
offset with mandatory forward commitments of $39.1 million and nonmandatory
forward commitments of $6.5 million.
As of March 31, 2000, the Company had identified and hedged approximately $510
million of its mortgage servicing portfolio using a program of exchange-traded
futures and options. At March 31, 2000, the net realized deferred losses and
the unrealized deferred losses of the open positions were approximately $2.2
million.
Sterling Trust Company ("Sterling") was named a defendant in a lawsuit in which
Sterling served as custodian for the self-directed IRAs of 35 of 69 plaintiffs.
The jury in this lawsuit returned an adverse verdict against Sterling, which is
not expected to exceed $5.9 million, excluding possible attorney fees that may
be claimed by the plaintiffs. Sterling believes it has meritorious defenses and
intends to vigorously appeal the verdict for which no accrual for loss has been
made. The ultimate resolution of this matter could result in loss of up to the
$5.9 million plus attorney fees as discussed above.
9
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(unaudited)
7. Segment Information
<TABLE>
<CAPTION>
Servicing
Traditional Mortgage Banking Brokerage and
Banking Consulting
-------------------- --------------------- ---------------------
(in thousands)
Quarter ended March 31, 2000:
Revenues from external customers:
<S> <C> <C> <C>
Interest income..................... $ 20,957 $ 702 $ -
Noninterest income.................. 3,225 5,507 1,286
Intersegment revenues................ 5 1,156 80
Segment profit(loss)................. 5,690 (158) 106
Quarter ended March 31, 1999:
Revenues from external customers:
Interest income..................... $ 15,571 $ 1,274 $ -
Noninterest income.................. 2,026 6,696 3,004
Intersegment revenues................ 135 339 250
Segment profit(loss)................. 7,040 (1,833) 1,178
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999
------------------- -------------------
(in thousands)
Profit:
<S> <C> <C>
Total profit for reportable segments...................... $ 5,638 $ 6,385
Other profit(loss)........................................ (3,119) (2,289)
Adjustment of intersegment profit(loss) in consolidation.. (6) (196)
------------------- -------------------
Income before income taxes................................ $ 2,513 $ 3,900
=================== ===================
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Matrix Bancorp, Inc. (occasionally referred to in this document as "we," "Matrix
Bancorp" or the "Company") is a unitary thrift holding company that, through our
subsidiaries, focuses on traditional banking, mortgage banking and trust
activities. Our traditional banking activities include originating and
servicing residential, commercial and consumer loans and providing a broad range
of depository services. Our mortgage banking activities consist of purchasing
and selling residential mortgage loans and residential mortgage servicing
rights; offering brokerage, consulting and analytical services to financial
services companies and financial institutions; servicing residential mortgage
portfolios for investors; originating residential mortgages; and providing real
estate management and disposition services. Our trust activities focus
primarily on the administration of self-directed individual retirement accounts,
qualified business retirement plans and custodial and directed trust accounts,
as well as offering specialized custody and clearing services to banks, trust
companies, broker-dealers, third party administrators and investment
professionals. Our primary operating subsidiaries are: Matrix Capital Bank;
Matrix Financial Services Corporation; Sterling Trust Company; United Financial,
Inc.; United Special Services, Inc.; United Capital Markets, Inc.; ABS School
Management Services, L.L.C.; and First Matrix Investment Services Corporation.
The principal components of our revenues consist of:
. net interest income recorded by Matrix Bank;
. loan administration fees generated by Matrix Financial and Matrix Bank;
. brokerage, consulting and disposition services fees realized by United
Financial, United Capital Markets and United Special Services, respectively;
. loan origination fees and gains on sales of mortgage loans and mortgage
servicing rights generated by Matrix Bank and Matrix Financial;
. trust service fees generated by Sterling Trust; and
. administrative school service fees earned by ABS.
Our results of operations are influenced by changes in interest rates and the
effect of these changes on our interest spreads, the volume of loan
originations, mortgage loan prepayments, the value of mortgage servicing
portfolios and brokerage activities.
Forward-Looking Information
Certain statements contained in this quarterly 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 quarterly report could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are: third party claims or actions in relation to
the ongoing or future bankruptcies filed by persons or entities such as MCA
Mortgage Corp. or Harbor Financial Mortgage Corporation; interest rate
fluctuations; level of delinquencies; defaults and prepayments; general economic
conditions; competition; government regulation; possible future litigation; the
actions or inactions of third parties, including those that are parties to the
litigation described elsewhere in this document; unanticipated developments in
connection with the litigation referenced above, including judicial variation
from existing legal precedent, the decision by one or more parties to appeal
decisions rendered, a change in the calculation of damages incurred by the
plaintiffs and the inclination or ability of the parties to negotiate a
settlement; the risks and uncertainties discussed elsewhere in this quarterly
report and in our current report on Form 8-K, filed with the Securities and
Exchange Commission on March 23, 2000; and the uncertainties set forth from time
to time in our periodic reports, filings and other public statements.
11
<PAGE>
Comparison of Results of Operations for the Quarters Ended March 31, 2000 and
1999
Net Income; Return on Average Equity. Net income decreased $956,000, or 38.2%,
to $1.5 million, or $.23 per diluted share, for the quarter ended March 31, 2000
as compared to $2.5 million, or $.37 per diluted share, for the quarter ended
March 31, 1999. Return on average equity decreased to 10.2% for the quarter
ended March 31, 2000 as compared to 19.8% for the quarter ended March 31, 1999.
We incurred approximately $1.2 million of pre-tax legal expenses for the quarter
ended March 31, 2000 as compared to $188,000 for the quarter ended March 31,
1999. A majority of the legal expenses incurred related to the Adderley matter,
which is discussed in "Legal Proceedings."
Net Interest Income. Net interest income before provision for loan and
valuation losses decreased $510,000, or 7.1%, to $6.7 million for the quarter
ended March 31, 2000 as compared to $7.2 million for the quarter ended March 31,
1999. Our net interest margin decreased over 100 basis points to 2.31% for the
quarter ended March 31, 2000 from 3.34% for the quarter ended March 31, 1999 and
interest rate spread decreased to 1.99% for the quarter ended March 31, 2000
from 3.13% for the quarter ended March 31, 1999. The decreases in net interest
income before provision for loan and valuation losses, net interest margin and
interest rate spread for the first quarter of 2000 were attributable to the
following: a decrease in our yield on interest-earning assets to 7.76% for the
quarter ended March 31, 2000 from 8.13% for the quarter ended March 31, 1999 and
an increase in the cost of interest-bearing liabilities to 5.77% for the quarter
ended March 31, 2000 as compared to 5.00% for the quarter ended March 31, 1999.
The increase in the cost of interest-bearing liabilities was driven by increases
in short-term interest rates, which have significantly affected the rates paid
by Matrix Bank for Federal Home Loan Bank borrowings and certificates of
deposit, including brokered certificates of deposit, the rates paid by Matrix
Financial for its warehouse debt, which fluctuates with the federal funds rate,
and has increased the portion of the holding company debt that is prime rate
based. Additionally, we have had to replace third party title deposits that
were deposited with Matrix Bank in late 1998 and early 1999 with higher rate
liabilities such as Federal Home Loan Bank borrowings and brokered certificates
of deposit. Due to our strategy of acquiring predominantly adjustable rate
loans, which are, in many cases, acquired at net interest margins that are less
than that of our existing portfolio, we have not seen and will not see an
increase in the yield on our interest-earning assets until these loans undergo
their periodic interest rate adjustments. It is anticipated that this will
generally occur over the next 12 months. We continue to acquire adjustable rate
loans in favor of fixed rate loans despite the short-term compression it creates
in our margins, as adjustable rate loans generally have less interest rate risk.
For a tabular presentation of the changes in net interest income due to changes
in the volume of interest-earning assets and interest-bearing liabilities, as
well as changes in interest rates, see "--Analysis of Changes in Net Interest
Income Due to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and valuation
losses was consistent between the two quarters with only a $10,000 increase for
the quarter ended March 31, 2000. We derive our provision for loan and
valuation losses by assigning each category of loans in the loan portfolio a
loss factor based on a variety of information. The loss factors are applied to
the outstanding principal balance of loans in their respective categories, and
the total for all categories determines our allowance for loan and valuation
losses, except for direct financing leases, for which the allowance is
determined based on specific leases. For a discussion of our 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 increased $1.0 million, or 19.1%,
to $6.3 million for the quarter ended March 31, 2000 as compared to $5.3 million
for the quarter March 31, 1999. Loan administration fees are affected by
factors that include the size of our residential mortgage loan servicing
portfolio, the servicing spread, the timing of payment collections and the
amount of ancillary fees received. The mortgage loan servicing portfolio
increased to an average balance of $5.8 billion for the quarter ended March 31,
2000 as compared to $4.9 billion for the quarter ended March 31, 1999. The
average service fee rate (including all ancillary income) was 0.44% for the
first quarter of 2000 as compared to 0.43% for the first quarter of 1999.
Brokerage Fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to mortgage servicing rights.
Brokerage fees decreased $806,000, or 48.2%, to $866,000 for the quarter ended
March 31, 2000 as compared to $1.7 million for the quarter ended March 31, 1999.
The decrease in brokerage fees was the result of a decrease in mortgage
servicing rights brokered which, in terms of aggregate unpaid principal balances
on the underlying loans, decreased to $7.0 billion for the quarter ended March
31, 2000
12
<PAGE>
from $13.8 billion for the quarter ended March 31, 1999. The decrease in
mortgage servicing rights brokered was primarily due to decreased originations
in the industry as a result of the higher interest rates in 2000 as compared to
1999, which resulted in lower amounts of servicing rights being delivered to
purchasers by sellers under flow servicing contracts brokered by United
Financial. Due to current market conditions for mortgage servicing rights, the
Company is unable to predict the volume of mortgage servicing rights that United
Financial will broker in the future. In addition, brokerage fees vary from
quarter to quarter as the timing of servicing sales is dependent upon the
seller's need to recognize a sale or to receive cash flows.
Trust Services. Trust service fees were consistent between the two comparable
quarters with a $19,000 decrease for the quarter ended March 31, 2000. Trust
accounts under administration at Sterling Trust increased slightly to 37,496 at
March 31, 2000 from 37,360 at March 31, 1999 and total assets under
administration increased to over $3.3 billion at March 31, 2000 from
approximately $2.2 billion at March 31, 1999. Most of the growth in accounts
and assets under administration occurred in third party administrator accounts,
which relate to custodial business generated for Sterling Trust by our 50% owned
joint venture, Matrix Settlement & Clearance Services, L.L.C. There was no
corresponding increase in revenues associated with those accounts for the first
quarter of 2000 as Matrix Settlement & Clearance Services was focused on getting
the clients converted over to their system. Revenues from those companies that
were converted during the first quarter will begin to be reflected in the second
quarter.
Real Estate Disposition Services. Real estate disposition services represents
fees earned by United Special Services for real estate management and
disposition services provided on foreclosed properties owned by third party
financial services companies and financial institutions. Real estate disposition
service income increased $304,000, or 38.8%, to $1.1 million for the quarter
ended March 31, 2000 as compared to $784,000 for the quarter ended March 31,
1999.
Gain on Sale of Loans. Gain on sale of loans increased $332,000 to $864,000 for
the quarter ended March 31, 2000 as compared to $532,000 for the quarter ended
March 31, 1999. These loan sales were completed under standard purchase and
sale agreements, with standard representations and warranties and without
recourse. The gains from these sales represent cash gains. Gain on sale of
loans can fluctuate significantly from quarter to quarter and year to year based
on a variety of factors, such as the current interest rate environment, the
supply and mix of loan portfolios available in the market, the type of loan
portfolios we purchase and the particular loan portfolios we elect to sell.
Loan Origination. Loan origination income includes all mortgage loans fees,
secondary marketing activity on new loan originations and servicing release
premiums on new originations sold, net of origination costs. Loan origination
income decreased $785,000, or 40.2%, to $1.2 million for the quarter ended March
31, 2000 as compared to $2.0 million for the quarter ended March 31, 1999. The
decrease in loan origination income was the result of the $60.9 million decrease
in wholesale residential mortgage loan production caused by increasing interest
rates throughout the first quarter of 2000.
Other Income. Other income decreased $802,000, or 29.8%, to $1.9 million for
the quarter ended March 31, 2000 as compared to $2.7 million for the quarter
ended March 31, 1999. The decrease in other income was primarily due to:
. a $614,000 decrease in consulting income earned by United Capital Markets,
which is a direct result of the current interest rate environment;
. a $298,000 decrease in whole loan brokerage income; and
. a decrease of approximately $700,000 in miscellaneous fee income from certain
financing transactions that were in place in 1999, but for which there were
not any similar transactions in 2000.
The above decreases in other income were offset by a $620,000 increase in school
services income earned by ABS, as we did not acquire ABS until March of 1999
and, therefore, did not have a full quarter of income from that business during
the first quarter of 1999.
13
<PAGE>
Noninterest Expense. Noninterest expense increased less than 1.0% to $17.0
million for the quarter ended March 31, 2000 as compared to $16.9 million for
the quarter ended March 31, 1999. However, there were some significant
fluctuations within the individual components, as can be seen in the following
table:
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------------------------
2000 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Compensation and employee benefits....................................... $ 7,978 $ 6,869
Amortization of mortgage servicing rights................................ 2,444 4,726
Occupancy and equipment.................................................. 1,078 838
Postage and communication................................................ 713 669
Professional fees........................................................ 1,334 300
Data processing.......................................................... 552 326
Other.................................................................... 2,861 3,131
---------------- ----------------
Total................................................................. $ 16,960 $ 16,859
================ ================
</TABLE>
Compensation and employee benefits expense increased $1.1 million, or 16.1%, to
$8.0 million for the quarter ended March 31, 2000 as compared to $6.9 million
for the quarter ended March 31, 1999. This increase was primarily the result of
the acquisition of ABS late in the first quarter of 1999, as well as growth
within the operations of Matrix Bank and Matrix Financial. We experienced an
increase of 95 employees to 613 employees at March 31, 2000 as compared to 518
employees at March 31, 1999.
Amortization of mortgage servicing rights decreased $2.3 million, or 48.3%, to
$2.4 million for the quarter ended March 31, 2000 as compared to $4.7 million
for the quarter ended March 31, 1999. Amortization of MSRs fluctuates based on
the size of the Company's mortgage servicing portfolio and the prepayment rates
experienced with respect to the underlying mortgage loan portfolio. In response
to the higher interest rates prevalent in the market, prepayment speeds on our
servicing portfolio have decreased to an average of 10.5% for the quarter ended
March 31, 2000 as compared to 26.5% for the quarter ended March 31, 1999.
The remainder of noninterest expense, which includes occupancy and equipment
expense, postage and communication expense, professional fees, data processing
costs and other expenses, increased $1.2 million, or 24.2%, to $6.5 million for
the quarter ended March 31, 2000 as compared to $5.3 million for the quarter
ended March 31, 1999. This increase was primarily attributable to increased
legal fees related to all of our current outstanding litigation, with a majority
of the 2000 legal fees incurred being related to the Adderley matter. See
"Legal Proceedings."
Provision for Income Taxes. Our provision for income taxes decreased $431,000
to $964,000 for the quarter ended March 31, 2000 from $1.4 million for the
quarter ended March 31, 1999.
14
<PAGE>
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding our average balances of assets and liabilities, as well as
the dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities and the resultant yields or costs.
Average interest rate information for the quarters ended March 31, 2000 and 1999
has 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.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------------------------------------------------------------------------
2000 1999
-------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- ---------- --------- ----------- ---------- ------------
Assets (dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net.............................. $ 1,104,575 $ 21,741 7.87% $ 833,534 $ 17,238 8.27%
Mortgage-backed securities.............. 9,186 163 7.10 - - -
Interest-earning deposits............... 26,571 319 4.80 17,282 155 3.59
Federal Home Loan Bank stock............ 22,417 342 6.10 15,645 212 5.42
----------- ---------- --------- ----------- ---------- ------------
Total interest-earning assets......... 1,162,749 22,565 7.76 866,461 17,605 8.13
Noninterest-earning assets:
Cash.................................... 13,750 17,799
Allowance for loan and valuation losses. (6,448) (3,479)
Premises and equipment.................. 10,928 10,555
Other assets............................ 119,125 126,503
----------- -----------
Total noninterest-earning assets...... 137,355 151,378
----------- -----------
Total assets.......................... $ 1,300,104 $ 1,017,839
=========== ===========
Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts....................... $ 2,843 $ 24 3.38% $ 2,764 $ 24 3.42%
Money market and NOW accounts........... 161,285 941 2.33 268,848 2,162 3.22
Certificates of deposit................. 388,602 5,690 5.86 230,612 3,009 5.22
Federal Home Loan Bank borrowings....... 403,388 5,865 5.82 155,461 1,898 4.88
Borrowed money.......................... 142,705 3,327 9.33 172,485 3,284 7.61
----------- ---------- --------- ----------- ---------- ------------
Total interest-bearing liabilities.... 1,098,823 15,847 5.77 830,170 10,377 5.00
----------- ---------- --------- ----------- ---------- ------------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances)............ 123,560 113,050
Other liabilities....................... 16,772 24,077
----------- -----------
Total noninterest-bearing liabilities. 140,332 137,127
Shareholders' equity...................... 60,949 50,542
----------- -----------
Total liabilities and shareholders' equity $ 1,300,104 $ 1,017,839
=========== ===========
Net interest income before provision
for loan and valuation losses........... $ 6,718 $ 7,228
========== ==========
Interest rate spread...................... 1.99% 3.13%
========= ============
Net interest margin....................... 2.31% 3.34%
========= ============
Ratio of average interest-earning assets to
average interest-bearing liabilities.... 105.82% 104.37%
========= ============
</TABLE>
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:
15
<PAGE>
. changes in volume, in other words, changes in volume multiplied by old rate;
and
. changes in rate, in other words, changes in rate multiplied by old volume.
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Quarter Ended March 31
2000 vs. 1999
----------------------------------------
Increase (Decrease) Due to Change in
----------------------------------------
Volume Rate Total
---------- ---------- ---------
(in thousands)
Interest-earning assets:
<S> <C> <C> <C>
Loans, net............................................................... $ 9,751 $ (5,248) $ 4,503
Mortgage-backed securities............................................... 163 - 163
Interest-earning deposits................................................ 101 63 164
FHLB stock............................................................... 101 29 130
---------- ---------- ---------
Total interest-earning assets......................................... 10,116 (5,156) 4,960
Interest-bearing liabilities:
Passbook accounts........................................................ 2 (2) -
Money market and NOW accounts............................................ (723) (498) (1,221)
Certificates of deposit.................................................. 2,274 407 2,681
FHLB borrowings.......................................................... 3,541 426 3,967
Borrowed money........................................................... (2,553) 2,596 43
---------- ---------- ---------
Total interest-bearing liabilities.................................... 2,541 2,929 5,470
---------- ---------- ---------
Change in net interest income before provision for loan
and valuation losses.......................................... $ 7,575 $ (8,085) $ (510)
========== ========== =========
</TABLE>
Asset Quality
Nonperforming Assets
As part of asset and liability management, we monitor nonperforming assets on a
monthly basis. Nonperforming assets consist primarily of nonaccrual loans and
foreclosed real estate. Loans are placed on nonaccrual when full payment of
principal or interest is in doubt or when they are past due 90 days as to either
principal or interest. Foreclosed real estate arises primarily through
foreclosure on mortgage loans owned.
<TABLE>
<CAPTION>
March 31, 2000 December 31, March 31, 1999
1999
-------------- ----------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans......................... $ 18,989 $ 20,185 $ 7,970
Nonaccrual commercial loans and direct financing
leases........................................... 8,809 5,301 7,312
Nonaccrual consumer loans......................... 116 155 193
--------------- ----------------- ---------------
Total nonperforming loans and leases............. 27,914 25,641 15,475
Foreclosed real estate............................ 2,000 800 1,627
--------------- ----------------- ---------------
Total nonperforming assets....................... $ 29,914 $ 26,441 $ 17,102
=============== ================= ===============
Total nonperforming loans and leases to total
loans and leases................................. 2.55% 2.31% 1.92%
=============== ================= ===============
Total nonperforming assets to total assets........ 2.30% 2.06% 1.73%
=============== ================= ===============
Ratio of allowance for loan and valuation losses
to total nonperforming loans and leases.......... 24.29% 24.78% 27.02%
=============== ================= ===============
</TABLE>
As of March 31, 2000, we had approximately $80,000 of non-government accruing
loans that were contractually past due 90 days or more. We accrue interest on
government-sponsored loans such as Federal Housing
16
<PAGE>
Administration insured and Veteran's Administration guaranteed loans which are
past due 90 or more days, as the interest on these loans is insured by the
federal government. The aggregate unpaid principal balance of government-
sponsored accruing loans that were past due 90 or more days was $139.2 million
and $147.9 million at March 31, 2000 and December 31, 1999, respectively.
Nonaccrual mortgage loans percentage of total loans were 1.7% at March 31, 2000,
1.8% at December 31, 1999 and 1.0% at March 31, 1999. The increases in late 1999
and 2000 can be primarily attributed to a sub-prime residential portfolio that
we acquired on a scheduled interest and scheduled principal remittance with full
recourse to the seller/servicer. In October 1999, however, the seller/servicer
declared bankruptcy and the servicing was transferred to us. The total principal
balance of the portfolio was $15.3 million at March 31, 2000, and approximately
$2.2 million was 90 or more days delinquent at that time. We believe that a
portion of these delinquencies are a result of the servicing transfer.
Associated with these loans, we have a $485,000 reserve, which is not reflected
in the general valuation reserve.
The increase in nonaccrual commercial loans and direct financing leases in 2000
is the result of our origination of tax-exempt lease financing for charter
schools for the purchase of real estate and equipment. Several of the charter
schools for which we have provided financing have encountered enrollment and/or
state funding delays, which has caused them to become delinquent on their lease
obligations to us. In April 2000, $1.7 million of these leases were removed
from nonaccrual after we received payments from the school, which brought the
status of the leases to under 90 days. It is anticipated that some of these
leases may continue to experience delinquency issues until the next school year,
which begins in September 2000, at which time, several of the schools anticipate
enrollment increases.
At March 31, 2000, $15.8 million, or 56.7%, of the nonaccrual loans were loans
that were residential loans purchased in bulk loan portfolios and remain
classified as "held for sale". Total loans held for sale at March 31, 2000 were
$942.2 million, of which $18.6 million, or 2.0%, were nonaccrual loans.
The percentage of the allowance for loan losses to nonaccrual loans varies
widely due to the nature of our portfolio of loans, which are collateralized
primarily by residential real estate. We analyze the collateral for each
nonperforming loan to determine potential loss exposure. In conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and valuation losses. See "--Comparison of
Results of Operations for the Quarters Ended March 31, 2000 and 1999."
Liquidity and Capital Resources
Liquidity is our ability to generate funds to support asset growth, satisfy
disbursement needs, maintain reserve requirements and otherwise operate on an
ongoing basis.
The trend of net cash used by our operating activities for the quarter ended
March 31, 2000 results primarily from growth at Matrix Bank. Cash provided by
our operating activities for the quarter ended March 31, 1999 was an
uncharacteristic result considering the growth we have experienced over the last
several years. We anticipate the trend of a net use of cash from operations to
continue for the foreseeable future. This anticipation results from the
expected growth, albeit less than our historical growth, at Matrix Bank, which
we believe will consist primarily of increased activity in the purchasing of
loan and mortgage servicing portfolios. However, due to liquidity and capital
availability, we do not anticipate growth to be as significant as in prior
periods.
Matrix Bank's future growth is expected to be achieved through deposit growth,
brokered deposits, borrowings from the Federal Home Loan Bank and custodial
deposits from affiliates. We anticipate that such growth will require
additional capital. The capital requirements related to the anticipated growth
will in part be fulfilled through retention of earnings, potentially increasing
our bank stock loan and future possible debt or equity offerings. Contractual
loan payments and net deposit inflows are a generally predictable source of
funds, while loan prepayments and loan sales are significantly influenced by
general market interest rates and economic conditions. Borrowings on a short-
term basis are used as a cash management vehicle to compensate for seasonal or
other reductions in normal sources of funds. Matrix Bank utilizes advances from
the Federal Home Loan Bank as its primary source for borrowings. At March 31,
2000, Matrix Bank had overnight and term borrowings from the Federal Home Loan
Bank of $396.7 million. To increase its available liquidity. Matrix Bank
securitized approximately $27.2 million of residential loans during the first
quarter of 2000. Matrix Bank is able to pledge these securities with the
Federal Home Loan Bank with less of a haircut. Additionally, the market for
securities is more liquid than the market for whole loans. The custodial escrow
balances held by Matrix Bank fluctuate based
17
<PAGE>
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
6.0% at March 31, 2000. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $11.4 million. Matrix Bank's risk-
based capital ratio was 10.9% at March 31, 2000, which currently exceeds the
well capitalized risk-based capital requirement of 10.0% of risk weighted assets
by $6.1 million.
Our principal source of funding for our servicing acquisition activities
consists of a line of credit facility provided to Matrix Financial by an
unaffiliated financial institution. As of March 31, 2000, Matrix Financial's
servicing acquisition facility aggregated $45.0 million, of which $17.5 million
was available to be utilized after deducting drawn amounts.
Our principal source of funding for our loan origination business consists of a
warehouse line of credit provided to Matrix Financial and a sale/repurchase
facility provided to Matrix Financial and ABS by unaffiliated financial
institutions. As of March 31, 2000, Matrix Financial's warehouse line of credit
facility aggregated $120.0 million, of which $93.0 million was available to be
utilized. As of March 31, 2000, the sale/repurchase facility was $25.0 million
of which $8.7 million was available to be utilized.
Our principal source of funding for the working capital needs of Matrix
Financial consists of working capital facilities provided to Matrix Financial by
an unaffiliated financial institution. As of March 31, 2000, Matrix Financial's
working capital facilities aggregated $10.0 million, of which $9.7 million was
available.
Our principal source of funding for direct financing leases is a line of credit
facility and a partnership trust with an unaffiliated financial institution.
Amounts available under the line of credit facility and the partnership trust
are at the lender's sole discretion.
In the ordinary course of business, we make commitments to originate residential
mortgage loans and hold originated loans until delivery to an investor.
Inherent in this business are risks associated with changes in interest rates
and the resulting change in the market value of the loans being held for
delivery. We mitigate this risk through the use of mandatory and nonmandatory
forward commitments to sell loans. As of March 31, 2000, we had $54.8 million
in pipeline and funded loans offset with mandatory forward commitments of $39.1
million and nonmandatory forward commitments of $6.5 million. The inherent
value of the forward commitments is considered in the determination of the lower
of cost or market for such loans.
Part II - Other Information
Item 1. Legal Proceedings
United Financial was a defendant in a lawsuit entitled Douglas County Bank &
Trust Co. v. United Financial, Inc. that was commenced on or about May 23, 1997
in the United States District Court for the District of Nebraska. In this
lawsuit, the plaintiff-buyer sought damages of approximately $3 million,
alleging that United Financial, as broker for the seller, made false
representations regarding the Government National Mortgage Association
certification of certain mortgage pools, the servicing rights of which were
offered for sale in a written offering. The plaintiff further alleged that it
relied on United Financial's representations in purchasing the servicing rights
from the seller. Trial was conducted in Omaha, Nebraska during the week of July
12, 1998. The jury returned a verdict in favor of United Financial on four
counts and in favor of the plaintiff on one count, and awarded the plaintiff
$75,000. On July 31, 1998, the plaintiff filed a motion requesting that the
court render a verdict in place of the jury's verdict, or alternatively, that
the court order a new trial. On November 6, 1998, the court denied the
plaintiff's motion. The plaintiff appealed the court's ruling, and on March 22,
2000, the appeals court affirmed the trial court's decision. United Financial
has satisfied the judgment by payment of approximately $85,000 to plaintiff.
Sterling Trust has been named as a defendant in a lawsuit entitled Roderick
Adderley, et al. v. Advanced Financial Services, Inc., et al. in the District
Court for the 263rd Judicial District, Tarrant County, Texas. In this matter,
Sterling Trust served as custodian for the self-directed IRAs of thirty-five of
sixty-nine plaintiffs. The plaintiffs
18
<PAGE>
claim to have lost a total of approximately $12 million as a result of the
various defendants' activity, including the broker and brokerage firm which
allegedly recommended to the plaintiffs how to invest their IRA funds. We
believe that Sterling Trust processed each customer's investment directions
accurately and appropriately disclosed to each plaintiff who was a Sterling
Trust customer that Sterling Trust, acting in its capacity as custodian of a
self-directed IRA, has no responsibility for a customer's investment decision.
The jury returned an adverse verdict against Sterling Trust with respect to 2 of
approximately 12 theories of liability proposed by the plaintiffs in the matter.
Because, among other things, the plaintiffs must choose one of the two theories
under which to seek recovery, the final amount of damages is not certain at this
time. The damages are not expected to exceed approximately $5.9 million,
excluding possible attorney fees that may be claimed by the plaintiffs in
connection with one of the theories. Sterling Trust believes it has meritorious
defenses and intends to vigorously appeal the jury's verdict against which no
accrual for loss has been made. The ultimate resolution of the matter, which is
expected to occur in 18 to 24 months, could result in loss up to the $5.9
million plus attorney fees as discussed above. The ultimate legal and financial
liability, if any, of Sterling Trust in connection with this matter cannot be
estimated with certainty at this time.
Sterling Trust and Matrix Bancorp, Inc. have been named as defendants in an
action styled Victor Doroski v. David M. Mobley, et al., that was commenced in
March of 2000 in the United States District Court for the Southern District of
California. The complaint seeks to certify a class action on behalf of
approximately 170 investors who purportedly invested $140 million in funds with
David M. Mobley and several entities related to Mr. Mobley (the "Mobley Funds"),
and alleges that Sterling Trust and Matrix Bancorp violated various provisions
of the Commodity Exchange Act. Of the purported approximate 170 investors,
Sterling Trust acted as self-directed custodian or self-directed trustee with
respect to only approximately 10 account holders in relation to the Mobley
Funds, representing a total of approximately $1.5 million in funds invested in
the Mobley Funds. Matrix Bancorp never had any dealings with Mobley, the Mobley
Funds or the purported class of plaintiffs. Matrix Bancorp and Sterling Trust
believe they each have adequate defenses to this action and intend to defend
this action vigorously, but no assurances can be given that an adverse judgment
will not ultimately be rendered or that any adverse judgment would not have a
material adverse effect on our consolidated financial condition, results of
operations or cash flows. Matrix Bancorp and Sterling Trust have filed a motion
to compel arbitration and to dismiss or to stay proceedings based upon the
specific provisions in the contracts Sterling Trust executed with each account
holder, including Mr. Doroski.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 10.1 Eighth Amendment to Credit Agreement, dated as of May 2, 2000, between
Matrix Bancorp, Inc., as borrower, U.S. Bank National Association, as
agent, and certain lenders, as lenders
* 27 Financial Data Schedule
(b) Reports on Form 8-K
See Form 8-K filed by the Company, dated March 23, 2000, reporting various
information under Item 5 thereof.
______________________
* Filed herewith.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX BANCORP, INC.
Dated: May 12, 2000 /s/ Guy A. Gibson
----------------- -----------------------------
Guy A. Gibson
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: May 12, 2000 /s/ David W. Kloos
----------------- -----------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
20
<PAGE>
EIGHTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS DOCUMENT is entered into as of May 2, 2000, between MATRIX BANCORP,
INC., a Colorado corporation ("Borrower"), the Lenders described below, and U.S.
Bank National Association, as Agent for Lenders.
Borrower, Lenders, and Agent are party to the Credit Agreement (as renewed,
extended, and amended, the "Credit Agreement") dated as of March 12, 1997,
providing for a $10,000,000 Term Loan and a Revolving Facility of up to
$10,000,000. Borrower, Lenders, and Agent have agreed, upon the following terms
and conditions, to amend the Credit Agreement as further described herein.
1. TERMS AND REFERENCES. Unless otherwise stated in this document (A) terms
defined in the Credit Agreement have the same meanings when used in this
document and (B) references to "Sections," "Schedules," and "Exhibits" are to
the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENT. Section 8.4 of the Credit Agreement is entirely amended as
follows:
"8.4 Distributions. Borrower may not pay or declare any
Distributions except for Distributions consisting of redemption or
repurchases of the stock of the Borrower after the date of the Eighth
Amendment hereof provided that: (a) no Default or Potential Default
exists or would be created by such Distributions; and (b) total
consideration paid by the Borrower in respect of such Distributions
does not exceed the lesser of (i) $3,000,000, or (ii) the amount of
any lesser restriction of such redemptions provided in any indenture,
loan, note issuance, reimbursement or other credit agreement is to
which the Borrower is a party."
3. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the foregoing
paragraphs in this document are not effective unless and until (A) the
representations and warranties in this document are true and correct, and (B)
Agent receives counterparts of this document executed by Agent, Lenders,
Borrower, and each other Company named on the signature pages of this document.
4. RATIFICATIONS. To induce Agent and Lenders to enter into this document,
Borrower (A) ratifies and confirms all provisions of the Loan Documents as
amended by this document, (B) ratifies and confirms that all guaranties,
assurances, and Liens granted, conveyed, or assigned to Agent and Lenders under
the Loan Documents (as they may have been renewed, extended, and amended) are
not released, reduced, or otherwise adversely affected by this document and
continue to guarantee, assure, and secure full payment and performance of the
present and future Obligation, and (C) agrees to perform those acts and duly
authorize, execute, acknowledge, deliver, file, and record those additional
agreements, and certificates as Agent or any Lender may request in order to
create, perfect, preserve, and protect those guaranties, assurances, and Liens.
5. REPRESENTATIONS. To induce Agent and Lenders to enter into this document,
Borrower represents and warrants to Agent and Lenders that as of the date of
this document (A) each Company has all requisite authority and power to execute,
deliver, and perform its obligations under this document, which execution,
delivery, and performance have been duly authorized by all necessary corporate
action, require no action by or filing with any Tribunal, do not violate
corporate charter or bylaws or (except where not a Material-Adverse Event)
violate any Law applicable to it or any material agreement to which it or its
assets are bound, (B) upon execution
<PAGE>
and delivery by all parties to it, this document will constitute each Company's
legal and binding obligation, enforceable against it in accordance with this
document's terms except as that enforceability may be limited by Debtor Laws and
general principles of equity, (C) all other representations and warranties in
the Loan Documents are true and correct in all material respects except to the
extent that (1) any of them speak to a different specific date or (2) the facts
on which any of them were based have been changed by transactions contemplated
or permitted by the Credit Agreement, and (D) no Material-Adverse Event,
Default, or Potential Default exists.
6. EXPENSES. Borrower shall, subject to a contrary written agreement between
Agent and Borrower, pay all costs, fees, and expenses paid or incurred by Agent
incident to this document, including, without limitation, the reasonable fees
and expenses of Agent's counsel in connection with the negotiation, preparation,
delivery, and execution of this document and any related agreements.
7. MISCELLANEOUS. All references in the Loan Documents to the "Credit
Agreement" refer to the Credit Agreement as amended by this document. This
document is a "Loan Document" referred to in the Credit Agreement; therefore,
the provisions relating to Loan Documents in Sections 1 and 12 are incorporated
in this document by reference. Except as specifically amended and modified in
this document, the Credit Agreement is unchanged and continues in full force and
effect. This document may be executed in any number of counterparts with the
same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one and the same
instrument. This document binds and inures to each of the undersigned and their
respective successors and permitted assigns, subject to Section 12.12. This
document and the other Loan Documents represent the final agreement between the
parties in respect of the matters covered by the Loan Documents and may not be
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements by the parties. There are no unwritten oral agreements between the
parties.
EXECUTED as of the date first stated in this Eighth Amendment to Credit
Agreement.
MATRIX BANCORP, INC. (formerly Matrix BANK ONE, TEXAS, N.A., as a Lender
Capital Corporation) as Borrower
By: /s/ Guy A. Gibson By: /s/ Carol L. Whitley
---------------------------------- -------------------------------
Title: CEO and President Title: Vice President
------------------------------- ----------------------------
U.S. BANK NATIONAL ASSOCIATION, RESIDENTIAL FUNDING
CORPORATION,
as Agent and as a Lender as a Lender
By: /s/ Mark Bagley By: /s/ Mitchell Nomura
---------------------------------- -------------------------------
Title: Vice President Title: Director
------------------------------- ----------------------------
2
<PAGE>
CONSENT AND AGREEMENT
---------------------
To induce Agent and Lenders to enter into this document, the undersigned
jointly and severally (a) consent and agree to this document's execution and
delivery, (b) ratify and confirm that all guaranties, assurances, Liens, and
subordinations granted, conveyed, or assigned to Agent or any Lender under the
Loan Documents (as they may have been renewed, extended, and amended) are not
released, diminished, impaired, reduced, or otherwise adversely affected by this
document and continue to guarantee, assure, secure, and subordinate other debt
to the full payment and performance of all present and future Obligation, (c)
agree to perform those acts and duly authorize, execute, acknowledge, deliver,
file, and record those additional guaranties, assignments, security agreements,
deeds of trust, mortgages, and other agreements, agreements, instruments, and
certificates as Agent or any Lender may reasonably deem necessary or appropriate
in order to create, perfect, preserve, and protect those guaranties, assurances,
Liens, and subordinations, (d) represent and warrant to Agent and Lenders that
(i) the value of the consideration received and to be received by the
undersigned in respect of those guaranties, assurances, Liens, and
subordinations are reasonably worth at least as much as the related liability
and obligation, (ii) that liability and obligation may reasonably be expected to
directly or indirectly benefit the undersigned, and (iii) each undersigned is --
and after giving effect to those guaranties, assurances, Liens, subordinations,
and the Loan Documents, in light of all existing facts and circumstances
(including, without limitation, collateral for and other obligors in respect of
the Obligation and various components of it and various rights of subrogation
and contribution), each undersigned will be -- Solvent, and (e) waive notice of
acceptance of this consent and agreement, which consent and agreement binds the
undersigned and their successors and permitted assigns and inures to Agent and
Lenders and their respective successors and permitted assigns.
MATRIX FINANCIAL SERVICES UNITED CAPITAL MARKETS, INC.
CORPORATION
By: /s/ George R. Bender By: /s/ Robert Fredericksen
----------------------------------- ---------------------------------
Title: President Title: President
-------------------------------- ------------------------------
MATRIX FUNDING CORPORATION UNITED FINANCIAL, INC.
By: /s/ Guy A. Gibson By: /s/ Carl de Rozario
----------------------------------- ---------------------------------
Title: President Title: President
-------------------------------- ------------------------------
UNITED SPECIAL SERVICES, INC. VINTAGE DELAWARE HOLDINGS,
INC.
By: /s/ James Panero By: /s/ Paul E. Skretny
----------------------------------- ---------------------------------
Title: President Title: President
-------------------------------- ------------------------------
FIRST MATRIX INVESTMENT SERVICES CORP. THE VINTAGE GROUP, INC.
By: /s/ Kent R. Snodgrass By: /s/ Paul E. Skretny
----------------------------------- ---------------------------------
Title: CEO and President Title: President
-------------------------------- ------------------------------
3
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0
0
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