<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 September 30, 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 November 6, 2000 was 6,656,241 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999................. 3
Condensed Consolidated Statements of Income
Quarters and nine months ended September 30, 2000 and 1999
(unaudited).......................................................... 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
Nine months ended September 30, 2000 and 1999 (unaudited)............ 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 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
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 1. Legal Proceedings...................................................... 22
ITEM 6. Exhibits and Reports on Form 8-K....................................... 23
SIGNATURES.......................................................................... 24
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- --------------
Assets (unaudited)
<S> <C> <C>
Cash............................................................................... $ 15,704 $ 13,437
Interest-earning deposits.......................................................... 43,199 13,172
Mortgage-backed securities held for sale........................................... 72,422 -
Loans held for sale, net........................................................... 906,954 977,751
Loans held for investment, net..................................................... 179,434 125,764
Mortgage servicing rights, net..................................................... 42,099 63,479
Other receivables.................................................................. 58,572 44,933
Federal Home Loan Bank of Dallas stock............................................. 27,365 22,414
Premises and equipment, net........................................................ 8,609 10,817
Other assets....................................................................... 13,289 11,979
-------------- --------------
Total assets....................................................................... $ 1,367,647 $ 1,283,746
============== ==============
Liabilities and shareholders' equity
Liabilities:
Deposits.......................................................................... $ 519,028 $ 562,194
Custodial escrow balances......................................................... 94,573 94,206
Drafts payable.................................................................... 3,278 3,070
Federal Home Loan Bank of Dallas borrowings....................................... 526,450 405,000
Borrowed money.................................................................... 115,850 114,601
Guaranteed preferred beneficial interests in company's 10% junior subordinated
debentures....................................................................... 27,500 27,500
Other liabilities................................................................. 15,249 14,919
Income taxes payable.............................................................. 2,055 1,759
-------------- --------------
Total liabilities.................................................................. 1,303,983 1,223,249
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.0001; authorized 5,000,000 shares; no shares
outstanding......................................................................
Common stock, par value $.0001; authorized 50,000,000 shares; issued and
outstanding 6,656,241 and 6,759,241 at September 30, 2000 and December 31, 1999,
respectively..................................................................... 1 1
Additional paid in capital........................................................ 22,785 22,780
Retained earnings................................................................. 40,666 37,716
Accumulated other comprehensive income............................................ 1,032 -
-------------- --------------
Total paid in capital and retained earnings........................................ 64,484 60,497
Less cost of treasury stock, 103,500 shares at September 30, 2000................. 820 -
-------------- --------------
Total shareholders' equity......................................................... 63,664 60,497
-------------- --------------
Total liabilities and shareholders' equity......................................... $ 1,367,647 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income
Loans and mortgage-backed securities.................... $ 24,027 $ 17,425 $ 68,739 $ 51,533
Interest-earning deposits............................... 796 276 2,566 970
----------- ----------- ----------- -----------
Total interest income................................... 24,823 17,701 71,305 52,503
Interest expense
Deposits................................................ 6,064 5,401 19,529 15,785
Borrowings.............................................. 10,968 5,146 30,040 15,232
----------- ----------- ----------- -----------
Total interest expense.................................. 17,032 10,547 49,569 31,017
----------- ----------- ----------- -----------
Net interest income before provision for loan and
valuation losses..................................... 7,791 7,154 21,736 21,486
Provision for loan and valuation losses................. 1,600 700 3,270 2,050
----------- ----------- ----------- -----------
Net interest income after provision for loan and
valuation losses..................................... 6,191 6,454 18,466 19,436
Noninterest income
Loan administration..................................... 5,506 6,133 17,727 17,026
Brokerage............................................... 1,695 1,731 3,795 5,149
Trust services.......................................... 1,098 1,189 3,547 3,678
Real estate disposition services........................ 791 877 2,840 2,555
Gain on sale of loans................................... 95 973 984 2,663
Gain on sale of mortgage servicing rights............... 2,605 - 2,605 -
Loan origination........................................ 1,416 1,128 4,490 4,834
Other................................................... 2,134 3,054 7,833 9,073
----------- ----------- ----------- -----------
Total noninterest income................................ 15,340 15,085 43,821 44,978
Noninterest expense
Compensation and employee benefits...................... 8,869 7,351 24,952 21,533
Amortization of mortgage servicing rights............... 2,561 3,873 7,526 13,383
Occupancy and equipment................................. 1,183 1,011 3,420 2,767
Postage and communication............................... 625 679 1,988 1,954
Professional fees....................................... 1,109 464 3,692 1,263
Data processing......................................... 655 448 1,784 1,152
Other general and administrative........................ 4,847 3,265 14,245 9,715
----------- ----------- ----------- -----------
Total noninterest expense............................... 19,849 17,091 57,607 51,767
----------- ----------- ----------- -----------
Income before income taxes.............................. 1,682 4,448 4,680 12,647
Provision for income taxes.............................. 615 1,662 1,730 4,566
----------- ----------- ----------- -----------
Net income.............................................. $ 1,067 $ 2,786 $ 2,950 $ 8,081
=========== =========== =========== ===========
Net income per share.................................... $ .16 $ .41 $ .44 $ 1.20
=========== =========== =========== ===========
Net income per share assuming dilution.................. $ .16 $ .41 $ .43 $ 1.18
=========== =========== =========== ===========
Weighted average shares................................. 6,741,013 6,729,911 6,753,380 6,727,517
=========== =========== =========== ===========
Weighted average shares assuming dilution............... 6,774,637 6,835,580 6,795,157 6,840,071
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Shareholders' Equity
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------------ Paid In Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income Equity Income
----------- ---------- ----------- ------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 2000
-----------------------
Balance at December 31,
1999.......................... 6,759,241 $ 1 $ 22,780 $ 37,716 $ - $ 60,497
Comprehensive income:
Net income.................... - - - 2,950 - 2,950 $ 2,950
Net unrealized holding gains.. - - - - 1,032 1,032 1,032
---------
Comprehensive income........... $ 3,982
=========
Purchase of treasury shares.... (103,500) - - - - (820)
Issuance of stock related to
employee stock purchase
plan and options.............. 500 - 5 - - 5
----------- -------- ------------ ---------- ---------- -------------
Balance at September 30, 2000.. 6,656,241 $ 1 $ 22,785 $ 40,666 $ 1,032 $ 63,664
=========== ======== ============ ========== ========== =============
Nine Months Ended
September 30, 1999
-----------------------
Balance at December 31, 1998... 6,723,911 $ 1 $ 22,416 $ 26,937 $ - $ 49,354
Net income..................... - - - 8,081 - 8,081
Issuance of stock related to
employee stock purchase
plan and options.............. 6,000 - 65 - - 65
----------- -------- ------------ ---------- ---------- -------------
Balance at September 30, 1999.. 6,729,911 $ 1 $ 22,481 $ 35,018 $ - $ 57,500
=========== ======== ============ ========== ========== =============
</TABLE>
See accompanying notes.
5
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------------- ------------
<S> <C> <C>
Operating activities
Net income......................................................................... $ 2,950 $ 8,081
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization..................................................... 1,825 3,755
Provision for loan and valuation losses........................................... 3,270 2,050
Amortization of mortgage servicing rights......................................... 7,526 13,383
Unrealized gain on securities..................................................... 1,032 -
Gain on sale of loans............................................................. (984) (2,663)
Gain on sale of mortgage servicing rights, net.................................... (2,605) -
Gain on sale of building and equipment............................................ (1,159) -
Loans originated for sale, net of loans sold...................................... (58,252) 66,254
Loans purchased for sale.......................................................... (170,274) (382,741)
Proceeds from sale of loans purchased for sale.................................... 84,710 135,292
Originated mortgage servicing rights, net......................................... 2,237 (1,194)
Deferred income taxes............................................................. 2,582 -
Decrease in other receivables and other assets.................................... 3,040 627
Increase in other liabilities and income taxes payable............................ 700 667
------------ ----------
Net cash used by operating activities.............................................. (123,402) (156,489)
Investing activities
Loans originated and purchased for investment...................................... (160,036) (77,952)
Principal repayments on loans...................................................... 241,543 217,818
(Purchase) redemption of Federal Home Loan Bank of Dallas stock.................... (4,951) 5,009
Purchases of premises and equipment................................................ (1,831) (1,897)
Acquisition of mortgage servicing rights........................................... (4,454) (26,659)
Hedging of servicing portfolio, net................................................ (92) (3,076)
Proceeds from sale of building and equipment....................................... 3,664 -
Proceeds from sale of mortgage servicing rights.................................... 2,768 159
------------ ----------
Net cash provided by investing activities.......................................... 76,611 113,402
Financing activities
Net (decrease) increase in deposits................................................ (43,166) 26,578
Net increase in custodial escrow balances.......................................... 367 11,335
Increase (decrease) in revolving lines and repurchase agreements, net.............. 151,232 (17,982)
Payment of notes payable........................................................... (30,812) (29,766)
Payment of subordinated debt....................................................... - (2,910)
Proceeds from notes payable........................................................ 2,325 33,304
Proceeds from issuance of trust preferred.......................................... - 26,064
Payment of financing arrangements.................................................. (46) (98)
Purchase of treasury stock......................................................... (820) -
Proceeds from issuance of common stock related to employee stock option plan....... 5 65
------------ ----------
Net cash provided by financing activities.......................................... 79,085 46,590
------------ ----------
Increase in cash and cash equivalents.............................................. 32,294 3,503
Cash and cash equivalents at beginning of period................................... 26,609 26,785
------------ ----------
Cash and cash equivalents at end of period......................................... $ 58,903 $ 30,288
============ ==========
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing rights.................................. $ 906 $ 6,766
============ ==========
Receivable from sale of mortgage servicing rights.................................. $ 13,190 $ -
============ ==========
Supplemental disclosure of cash flow information
Cash paid for interest expense..................................................... $ 49,464 $ 30,993
============ ==========
Cash paid for income taxes......................................................... $ 3,341 $ 4,558
============ ==========
</TABLE>
See accompanying notes.
6
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 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 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133. In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, which amends certain provisions of SFAS 133. These
Statements establish accounting and reporting standards requiring that all
derivatives, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at fair value and that changes in fair value be recognized currently in
earnings, unless specific hedge accounting criteria are met. These Statements
become effective for the Company on January 1, 2001, and, generally, will affect
the Company in two principal areas, the hedging activities related to the
Company's investment in mortgage servicing rights and the mandatory commitments
made by the Company in its wholesale mortgage operations, as well as forward
loan sale commitments.
Currently, the Company hedges approximately 12% of its $42.1 million investment
in mortgage servicing rights through an investment in exchange-traded futures
and options. The Company does not believe it will elect hedge accounting for
these instruments under SFAS 133 immediately after adoption on January 1, 2001,
and accordingly, will record its outstanding futures and options, if any, at
their fair values on January 1, 2001 with subsequent changes in value recognized
currently in earnings.
Based on an October 2000 FASB tentative conclusion, loan commitments that relate
to the origination or acquisition of mortgage loans that will be held for resale
("pipeline") will be accounted for as derivatives under SFAS 133. Additionally,
the Company determined its mandatory forward loan sale commitments meet the SFAS
133 derivative definition, and accordingly, are required to be recorded at fair
value as an asset or liability upon adoption of SFAS 133. Pending FASB's
deliberation of the loan commitment issue, the Company has not quantified the
fair value of the outstanding forward loan sale commitments and pipeline as of
September 30, 2000 and is still assessing the potential impact of SFAS 133 in
this area. Since the fair values of the pipeline and the forward loan sale
commitments used to hedge all or a portion of the pipeline are generally
expected to offset each other, the Company does not believe the adoption of SFAS
133, with respect to these instruments, will result in a material impact to the
Company's operations in the first quarter of 2001, however, the effects of
adoption will largely depend on future market conditions at the time of adoption
and cannot be reliably estimated at this time.
7
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
--------------- ----------------- ------------------ -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Numerator:
Net income available to common
shareholders........................ $ 1,067 $ 2,786 $ 2,950 $ 8,081
=============== ================= ================== =================
Denominator:
Weighted average shares outstanding... 6,741,013 6,729,911 6,753,380 6,727,517
Effect of dilutive securities:........
Common stock options.............. 33,624 96,647 41,777 101,528
Common stock warrants............. - 9,022 - 11,026
--------------- ----------------- ------------------ -----------------
Dilutive potential common shares...... 33,624 105,669 41,777 112,554
--------------- ----------------- ------------------ -----------------
Denominator for net income per
share assuming dilution............. 6,774,637 6,835,580 6,795,157 6,840,071
=============== ================= ================== =================
</TABLE>
3. Mortgage Servicing Rights
The activity in the mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
2000 1999
----------------------- ----------------------
(in thousands)
<S> <C> <C>
Balance at beginning of period, net................ $ 63,479 $ 57,662
Purchases.......................................... 2,197 19,754
Originated, net.................................... (2,237) 1,514
Hedging loss....................................... 92 3,257
Amortization....................................... (7,526) (16,403)
Sales.............................................. (13,906) (2,305)
----------------------- ----------------------
Balance at end of period, net...................... $ 42,099 $ 63,479
======================= ======================
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$53.0 million and $45.3 million at September 30, 2000 and December 31, 1999,
respectively. The Company's servicing portfolio (excluding subserviced loans)
was comprised of the following:
<TABLE>
<CAPTION>
September 30, 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............................... 12,189 $ 680,615 20,028 $ 1,334,058
Fannie Mae................................ 26,843 1,398,993 38,779 2,427,053
GNMA...................................... 10,571 478,423 11,720 558,086
Other VA, FHA and conventional loans...... 18,862 1,513,008 20,032 1,570,518
--------------- ----------------- --------------- -----------------
68,465 $ 4,071,039 90,559 $ 5,889,715
=============== ================= =============== =================
</TABLE>
8
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
3. Mortgage Servicing Rights (continued)
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at September 30, 2000 and December 31, 1999 pertain
to escrowed payments of taxes and insurance and principal and interest on loans
serviced by the Company.
4. Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
September 30, 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........ $ 3,168 0.61% 3.41% $ 2,793 0.50% 3.48%
NOW accounts............. 75,012 14.45 1.00 42,787 7.61 1.33
Money market accounts.... 131,939 25.42 2.33 141,641 25.19 3.04
--------------- ----------- -------------- --------------- ------------- -------------
210,119 40.48 1.97 187,221 33.30 2.72
Certificate accounts..... 308,909 59.52 6.09 374,973 66.70 5.27
--------------- ----------- -------------- --------------- ------------- -------------
$ 519,028 100.00% 4.68% $ 562,194 100.00% 4.12%
=============== =========== ============== =============== ============= =============
</TABLE>
At September 30, 2000 and December 31, 1999, brokered deposits accounted for
approximately $123.5 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 September 30, 2000, the Company had $94.5 million in pipeline and funded
loans offset with mandatory forward commitments of $80.2 million and
nonmandatory forward commitments of $4.8 million.
As of September 30, 2000, the Company had identified and hedged approximately
12% of its $42.1 million investment in mortgage servicing rights, which equates
to a notional balance of $500.1 million of its mortgage loan servicing portfolio
using a program of exchange-traded futures and options. At September 30, 2000,
the net realized deferred losses and the net unrealized deferred gains of the
open positions netted to approximately $1.6 million.
9
<PAGE>
Matrix Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(unaudited)
7. Segment Information
<TABLE>
<CAPTION>
Servicing
Traditional Mortgage Brokerage and
Banking Banking Consulting
-------------------- --------------------- ----------------------
(in thousands)
<S> <C> <C> <C>
Quarter ended September 30, 2000:
Revenues from external customers:
Interest income........................... $ 21,997 $ 1,567 $ -
Noninterest income........................ 1,434 8,527 1,758
Intersegment revenues...................... 847 1,651 13
Segment profit............................. 3,287 2,405 335
Quarter ended September 30, 1999:
Revenues from external customers:
Interest income........................... $ 15,601 $ 1,024 $ -
Noninterest income........................ 4,139 5,403 2,422
Intersegment revenues...................... 41 852 210
Segment profit (loss)...................... 7,270 (1,068) 1,078
Nine months ended September 30, 2000:
Revenues from external customers:
Interest income........................... $ 64,487 $ 3,494 $ -
Noninterest income........................ 7,926 19,026 5,222
Intersegment revenues...................... 1,015 3,933 144
Segment profit............................. 12,591 1,596 1,191
Nine months ended September 30, 1999:
Revenues from external customers:
Interest income........................... $ 46,555 $ 3,539 $ -
Noninterest income........................ 9,738 18,465 8,057
Intersegment revenues...................... 119 1,552 662
Segment profit (loss)...................... 21,957 (4,716) 3,278
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------- --------------------------------
2000 1999 2000 1999
------------ ----------- -------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Profit:
Total profit for reportable segments............... $ 6,027 $ 7,280 $ 15,378 $ 20,519
Other loss......................................... (4,368) (2,747) (10,799) (7,502)
Adjustment of intersegment loss in consolidation... 23 (85) 101 (370)
------------ ----------- -------------- ------------
Income before income taxes......................... $ 1,682 $ 4,448 $ 4,680 $ 12,647
============ =========== ============== ============
</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, on a
consolidated basis, as "we," "our," "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. In addition to the above
activities, we also provide administrative services and financing to the charter
school industry. Our primary operating subsidiaries are: Matrix Capital Bank;
Matrix Financial Services Corporation; Sterling Trust Company; United Financial,
Inc.; United Special Services, Inc.; ABS School 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;
. brokerage and consulting and real estate disposition services fees realized
by United Financial and United Special Services, respectively;
. loan origination fees and gains on sales of mortgage loans 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.
Effective August 1, 2000, Matrix Bancorp sold the stock of United Capital
Markets, Inc. to one of the officers of United Capital. The stock was sold at
book value and, as a result, there was no gain or loss realized by Matrix
Bancorp from the sale. As part of the sale, United Financial entered into a
perpetual licensing agreement and revenue sharing agreement with United Capital,
which will allow for United Financial to offer hedging strategies for mortgage
servicing assets to its clients and to share in the fees charged to its clients
by United Capital.
In addition, effective August 1, 2000, Matrix Financial, the Company's mortgage
banking operations, became an operating subsidiary of Matrix Bank. See
"Liquidity and Capital Resources" for additional discussion.
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 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 of the Company's customers; interest rate
fluctuations; level of delinquencies; defaults and prepayments; general economic
conditions; competition; government regulation; possible future litigation; the
actions or inactions of third parties, including those that are parties to
existing
11
<PAGE>
bankruptcies of the Company's customers or litigation related thereto;
unanticipated developments in connection with the bankruptcy actions or
litigation described above, including judicial variation from existing legal
precedent and the decision by one or more parties to appeal decisions rendered;
the risks and uncertainties discussed elsewhere in this 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.
Comparison of Results of Operations for the Quarters Ended September 30, 2000
and 1999
Net Income; Return on Average Equity. Net income decreased $1.7 million, or
61.7%, to $1.1 million, or $.16 per diluted share, for the quarter ended
September 30, 2000 as compared to $2.8 million, or $.41 per share, for the
quarter ended September 30, 1999. Return on average equity decreased to 6.7%
for the quarter ended September 30, 2000 as compared to 19.9% for the quarter
ended September 30, 1999.
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $637,000, or 8.9%, to $7.8 million for the quarter
ended September 30, 2000 as compared to $7.2 million for the quarter ended
September 30, 1999. Our net interest margin decreased 70 basis points to 2.66%
for the quarter ended September 30, 2000 from 3.36% for the quarter ended
September 30, 1999 and interest rate spread decreased to 2.09% for the quarter
ended September 30, 2000 from 2.84% for the quarter ended September 30, 1999.
The increase in net interest income before provision for loan and valuation
losses was due to a 37.5% increase in average interest-earning assets between
the two comparable quarters, combined with an increase in the yield on our
interest-earning assets to 8.48% for the quarter ended September 30, 2000 as
compared to 8.31% for the quarter ended September 30, 1999. The increase in the
yield on interest-earning assets was due primarily to an increase in the yield
earned on our loan portfolio to 8.67% for the quarter ended September 30, 2000
as compared to 8.42% for the quarter ended September 30, 1999. These increases
were offset by decreases in net interest margin and interest rate spread for the
third quarter of 2000 that were attributable to an increase in the cost of
interest-bearing liabilities to 6.39% for the quarter ended September 30, 2000
as compared to 5.47% for the quarter ended September 30, 1999, as well as a
38.1% increase in average interest-bearing liabilities. 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 short-term rates, and the rates paid by
Matrix Bancorp on our bank stock loan, which is indexed to the prime rate.
Compared to earlier this year, we are beginning to see an increase in the yield
on our interest-earning assets due to our strategy of acquiring predominantly
adjustable rate loans, as these loans are undergoing periodic interest rate
adjustments. It is anticipated that these periodic rate adjustments will
generally continue to occur over the next 9 to 15 months in order to adjust to
the short-term interest rate increases mentioned above. We continue to target
primarily 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 increased $900,000 to $1.6 million for the quarter ended September 30,
2000 as compared to $700,000 for the quarter ended September 30, 1999. The
increase in the provision for the quarter ended September 30, 2000 was due to
increased loan loss provisions recorded at Matrix Bank and ABS. ABS charged-off
a $450,000 loan during the current quarter due to the closing of one of its
school customers. Matrix Bank's increased provision is primarily due to an
increase in non-residential loans. 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 decreased $627,000, or 10.2%, to
$5.5 million for the quarter ended September 30, 2000 as compared to $6.1
million for the quarter ended September 30, 1999. Loan administration fees are
affected by factors that include the size of our residential mortgage loan
servicing portfolio, the servicing
12
<PAGE>
spread, the timing of payment collections and the amount of ancillary fees
received. Our mortgage loan servicing portfolio had an average balance of $5.2
billion for the quarter ended September 30, 2000 as compared to $5.8 billion for
the quarter ended September 30, 1999 and the actual service fee rate (including
all ancillary income) was 0.42% for both quarters.
Brokerage Fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to mortgage servicing rights. Brokerage
fees were consistent between the comparable quarters with a $36,000 decrease for
the quarter ended September 30, 2000. In terms of aggregate unpaid principal
balances on the underlying loans, mortgage servicing rights brokered during the
quarter ended September 30, 2000 totaled $9.6 billion as compared to $14.7
billion brokered during the quarter ended September 30, 1999. Brokerage fees
vary from quarter to quarter as the timing of servicing sales is dependent upon,
among other things, prevailing market conditions, and a seller's need to
recognize a sale or to receive cash flows.
Trust Services. Trust service fees decreased $91,000, or 7.7%, to $1.1 million
for the quarter ended September 30, 2000 as compared to $1.2 million for the
quarter ended September 30, 1999. Trust accounts under administration at
Sterling Trust increased to 39,458 at September 30, 2000 from 36,539 at
September 30, 1999 and total assets under administration increased to over $3.9
billion at September 30, 2000 from approximately $2.1 billion at September 30,
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, LLC and generally are priced at lower fees based on the
level of administration required.
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 decreased $86,000, or 9.8%, to $791,000 for the
quarter ended September 30, 2000 as compared to $877,000 for the quarter ended
September 30, 1999.
Gain on Sale of Loans. Gain on sale of loans decreased $878,000 to $95,000 for
the quarter ended September 30, 2000 as compared to $973,000 for the quarter
ended September 30, 1999. 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.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing
rights increased $2.6 million for the quarter ended September 30, 2000. We did
not sell any mortgage servicing rights during the third quarter of 1999. Gains
from the sale of mortgage servicing rights can fluctuate significantly from
quarter to quarter and year to year based on the market value of our servicing
portfolio, the particular servicing portfolios we elect to sell and the
availability of similar portfolios in the market. Due to our position in and
knowledge of the market, we expect to at times pursue opportunistic sales of
mortgage servicing rights. The sale during the current quarter was undertaken
to take advantage of the aggressive pricing in the marketplace.
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 increased $288,000, or 25.5%, to $1.4 million for the quarter ended
September 30, 2000 as compared to $1.1 million for the quarter ended September
30, 1999. The increase in loan origination income resulted from increased
revenues from the sale of the guaranteed portion of Small Business
Administration loans originated by Matrix Bank and a slight increase in
wholesale residential mortgage loan production to $115.3 million for the quarter
ended September 30, 2000 as compared to $106.3 million for the quarter ended
September 30, 1999.
Other Income. Other income decreased $920,000, or 30.1%, to $2.1 million for
the quarter ended September 30, 2000 as compared to $3.1 million for the quarter
ended September 30, 1999. The decrease in other income was primarily due to:
13
<PAGE>
. an $850,000 decrease in miscellaneous fee income from certain financing
transactions that were in place in 1999, but for which there were no
similar transactions in 2000; and
. a $525,000 decrease in consulting income as a result of our sale of
United Capital.
These decreases were offset by a $557,000 increase in school services income
earned by ABS.
Noninterest Expense. Noninterest expense increased $2.7 million, or 16.1%, to
$19.8 million for the quarter ended September 30, 2000 as compared to $17.1
million for the quarter ended September 30, 1999. This increase was
predominantly due to increases in other general and administrative expense,
compensation and benefits expense and the continuation of increased professional
fees. These increases were offset by a decrease in the amortization of mortgage
servicing rights. The following table details the major components of
noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended
September 30,
------------------------------------
2000 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Compensation and employee benefits....................................... $ 8,869 $ 7,351
Amortization of mortgage servicing rights................................ 2,561 3,873
Occupancy and equipment.................................................. 1,183 1,011
Postage and communication................................................ 625 679
Professional fees........................................................ 1,109 464
Data processing.......................................................... 655 448
Other general and administrative......................................... 4,847 3,265
---------------- ----------------
Total................................................................. $ 19,849 $ 17,091
================ ================
</TABLE>
Compensation and employee benefits expense increased $1.5 million, or 20.7%, to
$8.9 million for the quarter ended September 30, 2000 as compared to $7.4
million for the quarter ended September 30, 1999. This increase was primarily
the result of increased loan production personnel at Matrix Financial and growth
and expansion at Matrix Bank and ABS. The Company experienced an increase of 37
employees to 633 employees at September 30, 2000 as compared to 596 employees at
September 30, 1999.
Amortization of mortgage servicing rights decreased $1.3 million, or 33.9%, to
$2.6 million for the quarter ended September 30, 2000 as compared to $3.9
million for the quarter ended September 30, 1999. Amortization of mortgage
servicing rights fluctuates based on the size of our mortgage servicing
portfolio and the prepayment rates experienced with respect to the underlying
mortgage loan portfolio. In response to the higher interest rates prevalent in
the market, prepayment speeds on our servicing portfolio have decreased to an
average of 12.7% for the quarter ended September 30, 2000 as compared to 16.9%
for the quarter ended September 30, 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 $2.5 million, or 43.5%, to $8.4 million for
the quarter ended September 30, 2000 as compared to $5.9 million for the quarter
ended September 30, 1999. The $1.5 million increase in other general and
administrative expense was primarily related to an additional reserve recorded
to increase the reserve established in the second quarter of 2000 for estimated
losses on loans we acquired under a purchase/repurchase facility and also
related to reserves established for potential interest and principal
curtailments against non-performing FHA and VA loans acquired from Harbor
Financial Mortgage Corporation. Prior to Harbor's bankruptcy, Harbor was
required to pass through scheduled interest on the loans and through a purchase
and sale agreement was responsible for all advances required to be made on the
loans and for all principal curtailments. As part of Harbor's bankruptcy, we
took control of the servicing of the loans and now are responsible for all of
the advances and will incur losses on curtailments as they occur. The
curtailments that we are currently experiencing are higher than originally
anticipated and primarily relate to prior servicing deficiencies. Additionally,
professional fees increased $645,000 over the same quarter of the prior year due
to continued high legal expenses related to Harbor and litigation at Sterling
Trust.
Provision for Income Taxes. Our provision for income taxes decreased by $1.0
million to $615,000 for the quarter ended September 30, 2000 as compared to $1.7
million for the quarter ended September 30, 1999. Our effective tax
14
<PAGE>
rate was 36.6% for the quarter ended September 30, 2000 as compared to 37.4% for
the quarter ended September 30, 1999. The decrease relates primarily to the
origination and ownership of tax-exempt leases at ABS.
Comparison of Results of Operations for the Nine Months Ended September 30, 2000
and 1999
Net Income; Return on Average Equity. Net income decreased $5.1 million, or
63.5%, to $3.0 million, or $.43 per diluted share, for the nine months ended
September 30, 2000 as compared to $8.1 million, or $1.18 per diluted share, for
the nine months ended September 30, 1999. Returns on average equity were 6.3%
and 20.3% for the nine months ended September 30, 2000 and 1999, respectively.
The decrease in net income relates primarily to the decrease in our interest
rate spread as a result of higher short-term interest rates, as well as reserves
established for principal and interest curtailments during the third quarter
which related to assets acquired from Harbor, reserves established in both the
second and third quarters for estimated losses on loans acquired under a
purchase/repurchase facility, the second quarter loss incurred related to the
settlement of litigation with Harbor's trustee and warehouse lending group and
legal expenses incurred throughout the first nine months of 2000 related to both
the Harbor bankruptcy and Sterling Trust litigation.
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $250,000, or 1.2%, to $21.7 million for the nine
months ended September 30, 2000 as compared to $21.5 million for the nine months
ended September 30, 1999. Our net interest margin decreased to 2.48% for the
nine months ended September 30, 2000 as compared to 3.34% for the nine months
ended September 30, 1999. Additionally, the interest rate spread decreased to
2.07% for the nine months ended September 30, 2000 from 2.99% for the nine
months ended September 30, 1999. The decreases in net interest margin and
interest rate spread for the nine months ended September 30, 2000 were
attributable to the following: an increase in the cost of average interest-
bearing liabilities to 6.08% for the nine months ended September 30, 2000 from
5.18% for the nine months ended September 30, 1999, combined with a 36.0%
increase in average interest-bearing liabilities between the comparable periods.
These increases were generally offset by a 36.1% increase in our average
interest-earning assets. The increase in average interest-earning assets,
mainly the loan portfolio, caused the modest increase in net interest income
before the provision for loan valuation losses. As mentioned in the third
quarter discussion, the yield on our loan portfolio, which consists
predominately of adjustable rate mortgages, has been slower to adjust than the
cost of our liabilities as a result of short-term interest rate increases which
occurred during the first half of 2000. The adjustable rate mortgages acquired
generally should adjust to higher interest rates over the next 9 to 15 months in
the current interest environment. For additional discussion concerning short-
term interest rate increases and our acquisition of adjustable rate loans, see
"Comparison of Results of Operations for the Quarters Ended September 30, 2000
and 1999--Net Interest Income." For a tabular presentation of the changes in
net interest income due to changes in volume of interest-earning assets and
changes in interest rates, see "--Analysis of Changes in Net Interest Income Due
to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. Provision for loan and valuation
losses increased $1.2 million to $3.3 million for the nine months ended
September 30, 2000 as compared to $2.1 million for the nine months ended
September 30, 1999. This increase was primarily attributable to increased loan
loss provisions recorded at Matrix Bank, ABS and Matrix Financial.
Additionally, as previously mentioned, ABS charged off a $450,000 loan during
the third quarter. See additional discussion related to this item under
"Comparison of Results of Operations for the Quarters Ended September 30, 2000
and 1999--Provision for Loan and Valuation Losses."
Loan Administration. Loan administration fees increased $701,000, or 4.1%, to
$17.7 million for the nine months ended September 30, 2000 as compared to $17.0
million for the nine months ended September 30, 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 servicing portfolio
increased to an average balance of $5.5 billion for the nine months ended
September 30, 2000 as compared to an average balance of $5.4 billion for the
nine months ended September 30, 1999. The actual service fee rate (including
all ancillary income) increased to 0.43% for the nine months ended September 30,
2000 as compared to 0.42% for the nine months ended September 30, 1999.
Brokerage Fees. Brokerage fees decreased $1.3 million, or 26.3%, to $3.8
million for the nine months ended September 30, 2000 as compared to $5.1 million
for the nine months ended September 30, 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 $22.1 billion during the nine months ended September 30,
15
<PAGE>
2000 from $45.3 billion for the nine months ended September 30, 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.
Trust Services. Trust service fees decreased $131,000, or 3.6%, to $3.5 million
for the nine months ended September 30, 2000 as compared to $3.7 million for the
nine months ended September 30, 1999.
Real Estate Disposition Services. Real estate disposition service income
increased $285,000, or 11.2%, to $2.8 million for the nine months ended
September 30, 2000 as compared to $2.6 million for the nine months ended
September 30, 1999.
Gain on Sale of Loans. Gain on sale of loans decreased $1.7 million to $984,000
for the nine months ended September 30, 2000 as compared to $2.7 million for
the nine months ended September 30, 1999. Gain on the sale of loans can
fluctuate significantly from quarter to quarter and from year to year based on a
variety of factors, such as the current interest rate environment, the supply
and mix of loan portfolios available in the market, the type of loan portfolios
we purchase and the particular loan portfolios we elect to sell.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing
rights increased $2.6 million for the nine months ended September 30, 2000. We
did not sell any mortgage servicing rights during the nine months ended
September 30, 1999. Gains from the sale of mortgage servicing rights can
fluctuate significantly from quarter to quarter and year to year based on the
market value of our servicing portfolio, the particular servicing portfolios we
elect to sell and the availability of similar portfolios in the market. Due to
our position in and knowledge of the market, we expect to at times pursue
opportunistic sales of mortgage servicing rights. The current sale was
undertaken to take advantage of the aggressive pricing in the marketplace.
Loan Origination. Loan origination income decreased $344,000, or 7.1%, to $4.5
million for the nine months ended September 30, 2000 as compared to $4.8 million
for the nine months ended September 30, 1999. The decrease resulted from a
decrease in wholesale production to $286.1 million for the nine months ended
September 30, 2000 as compared to $366.0 million for the nine months ended
September 30, 1999, but was offset by increased revenues on the sale of the
guaranteed portions of Small Business Administration loans originated by Matrix
Bank.
Other Income. Other income decreased $1.3 million, or 13.7%, to $7.8 million
for the nine months ended September 30, 2000 as compared to $9.1 million for the
nine months ended September 30, 1999. The decrease in other income for the nine
months ended September 30, 2000 was primarily driven by a $1.6 million decrease
in revenues earned by United Capital, which for the first half of 2000 was a
direct result of the current interest rate environment, and later, due to the
sale of United Capital as of August 1, 2000, as well as a decrease of
approximately $1.6 million 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. Offsetting these decreases were the following
items:
. a $1.2 million gain from the sale of some equipment and a Company-owned
building; and
. a $1.2 million increase in school services income earned by ABS.
Noninterest Expense. Noninterest expense increased $5.8 million, or 11.3%, to
$57.6 million for the nine months ended September 30, 2000 as compared to $51.8
million for the nine months ended September 30, 1999. This increase was
primarily due to an increase in other general and administrative expense related
to the previously mentioned reserves and/or losses concerning Harbor and its
bankruptcy and loans acquired under a purchase/repurchase facility. Also
increased compensation and benefits expense and increased professional fees due
to legal expenses incurred during 2000 related mainly to Harbor and litigation
involving Sterling Trust. These increases were offset by a decrease in the
amortization of mortgage servicing rights. The following table details the major
components of noninterest expense for the periods indicated:
16
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
2000 1999
---------------- ----------------
(in thousands)
<S> <C> <C>
Compensation and employee benefits....................................... $ 24,952 $ 21,533
Amortization of mortgage servicing rights................................ 7,526 13,383
Occupancy and equipment.................................................. 3,420 2,767
Postage and communication................................................ 1,988 1,954
Professional fees........................................................ 3,692 1,263
Data processing.......................................................... 1,784 1,152
Other general and administrative......................................... 14,245 9,715
---------------- ----------------
Total................................................................. $ 57,607 $ 51,767
================ ================
</TABLE>
Compensation and employee benefits increased $3.5 million, or 15.9%, to $25.0
million for the nine months ended September 30, 2000 as compared to $21.5
million for the nine months ended September 30, 1999. This increase was
primarily the result of growth at all of our subsidiaries, most predominate,
however, was the growth at ABS, Matrix Bank and Matrix Financial.
Amortization of mortgage servicing rights decreased $5.9 million, or 43.8%, to
$7.5 million for the nine months ended September 30, 2000 as compared to $13.4
million for the nine months ended September 30, 1999. Amortization of mortgage
servicing rights fluctuates based on the size of our mortgage servicing
portfolio and the prepayment rates experienced with respect to the underlying
mortgage loan portfolio. Our prepayment rates on our servicing portfolio
averaged 12.0% for the nine months ended September 30, 2000 as compared to 22.7%
for the nine months ended September 30, 1999.
The remainder of noninterest expense, which includes occupancy and equipment
expense, postage and communication expense, professional fees, data processing
costs and other general and administrative expenses increased $8.2 million, or
49.1%, to $25.1 million for the nine months ended September 30, 2000 as compared
to $16.9 million for the nine months ended September, 1999. This increase was
primarily attributable to the reserves and losses mentioned above, which were
recorded predominantly in other general and administrative expense, but was also
due to the increased legal fees incurred in 2000 related to the Harbor
bankruptcy and the litigation involving Sterling Trust.
Provision for Income Taxes. The provision for income taxes decreased by $2.9
million to $1.7 million for the nine months ended September 30, 2000 as compared
to $4.6 million for the nine months ended September 30, 1999. Our effective tax
rate was 37.0% for the nine months ended September 30, 2000 as compared to 36.1%
for the nine months ended September 30, 1999. The fluctuation related to the
varying levels of origination and ownership of tax-exempt leases by ABS during
the comparable periods.
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding our average balances of assets and liabilities, as well as
the dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities and the resultant yields or costs.
Average interest rate information for the quarters and nine months ended
September 30, 2000 and 1999 have been annualized. Ratio, yield and rate
information is based on average daily balances where available; otherwise,
average monthly balances have been used. Nonaccrual loans are included in the
calculation of average balances for loans for the periods indicated.
17
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
September 30,
--------------------------------------------------------------------------------------------
2000 1999
-------------------------------------- -------------------------------------- ------------
Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance
------------ ---------- ----------- ---------- ------------ ----------- ------------
Assets (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net........................ $ 1,043,332 $ 22,610 8.67% $ 827,437 $ 17,425 8.42% $ 1,078,414
Mortgage-backed securities........ 74,082 1,417 7.65 - - - 36,832
Interest-earning deposits......... 29,624 404 5.46 16,468 168 4.08 28,146
Federal Home Loan Bank stock...... 23,967 392 6.54 7,717 108 5.60 23,135
------------ ---------- -------- ---------- ----------- --------- ------------
Total interest-earning assets... 1,171,005 24,823 8.48 851,622 17,701 8.31 1,166,527
Noninterest-earning assets:
Cash.............................. 16,166 16,505 15,021
Allowance for loan and valuation
losses.......................... (7,653) (4,713) (6,997)
Premises and equipment............ 8,435 10,978 10,049
Other assets...................... 112,493 121,031 116,855
------------ ---------- ------------
Total noninterest-earning
assets......................... 129,441 143,801 134,928
------------ ---------- ------------
Total assets.................... $ 1,300,446 $ 995,423 $ 1,301,455
============ ========== ============
Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts................. $ 3,140 27 3.44 $ 2,784 24 3.45 $ 2,970
Money market and NOW accounts..... 152,426 904 2.37 189,560 1,377 2.91 155,129
Certificates of deposit........... 322,850 5,133 6.36 306,922 4,000 5.21 366,309
Federal Home Loan Bank
borrowings...................... 433,478 7,324 6.76 119,088 1,553 5.22 408,740
Borrowed money.................... 153,920 3,644 9.47 153,331 3,593 9.37 153,036
------------ ---------- -------- ---------- ----------- --------- ------------
Total interest-bearing
liabilities.................. 1,065,814 17,032 6.39 771,685 10,547 5.47 1,086,184
------------ ---------- -------- ---------- ----------- --------- ------------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances)...... 150,369 144,643 133,994
Other liabilities................. 20,897 23,189 18,874
------------ ---------- ------------
Total noninterest-bearing
liabilities.................... 171,266 167,832 152,868
Shareholders' equity................ 63,366 55,906 62,403
------------ ---------- ------------
Total liabilities and
shareholders' equity............... $ 1,300,446 $ 995,423 $ 1,301,455
============ ========== ============
Net interest income before provision
for loan and valuation losses..... $ 7,791 $ 7,154
========== ===========
Interest rate spread................ 2.09% 2.84%
======== =========
Net interest margin................. 2.66% 3.36%
======== =========
Ratio of average interest-earning
assets to average interest-bearing
liabilities...................... 109.87% 110.36%
======== =========
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------------------------------------------
2000 1999
------------------------------- ----------------------------------------
Average Average Average
Interest Rate Balance Interest Rate
---------- -------------- ------------ ------------ -----------
Assets
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net................................ 66,660 8.24% $ 828,339 $ 51,533 8.30%
Mortgage-backed securities................ 2,079 7.53 - - -
Interest-earning deposits................. 1,103 5.23 15,898 443 3.72
Federal Home Loan Bank stock.............. 1,463 8.43 13,044 527 5.39
-------- --------- ----------- ---------- -------
Total interest-earning assets........... 71,305 8.15 857,281 52,503 8.17
Noninterest-earning assets:
Cash...................................... 18,907
Allowance for loan and valuation
losses.................................. (4,135)
Premises and equipment.................... 10,771
Other assets.............................. 127,088
-----------
Total noninterest-earning assets........ 152,631
-----------
Total assets............................ $ 1,009,912
===========
Liabilities & Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts......................... 76 3.41 $ 2,768 72 3.47
Money market and NOW accounts............. 2,727 2.34 231,203 5,320 3.07
Certificates of deposit................... 16,726 6.09 267,862 10,393 5.17
Federal Home Loan Bank
borrowings.............................. 19,189 6.26 131,717 4,942 5.00
Borrowed money............................ 10,851 9.45 165,041 10,290 8.31
-------- --------- ----------- ---------- -------
Total interest-bearing liabilities....... 49,569 6.08 798,591 31,017 5.18
-------- --------- ----------- ---------- -------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances).............. 136,385
Other liabilities......................... 21,822
-----------
Total noninterest-bearing liabilities... 158,207
Shareholders' equity........................ 53,114
-----------
Total liabilities and
shareholders' equity....................... $ 1,009,912
===========
Net interest income before provision
for loan and valuation losses............. $ 21,736 $ 21,486
======== ==========
Interest rate spread........................ 2.07% 2.99%
========= =======
Net interest margin......................... 2.48% 3.34%
========== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities...... 107.40% 107.35%
========== =======
</TABLE>
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<PAGE>
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:
. 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 Nine Months Ended
September 30, September 30,
2000 vs 1999 2000 vs 1999
-------------------------------- ------------------------------
Increase (Decrease) Due to Change in
---------------------------------------------------------------------
Volume Rate Total Volume Rate Total
---------- -------- --------- ---------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net..................................... $ 4,662 $ 523 $ 5,185 $ 15,471 $ (344) $ 15,127
Mortgage-backed securities..................... 1,417 - 1,417 2,079 - 2,079
Interest-earning deposits...................... 166 70 236 431 229 660
FHLB stock..................................... 263 21 284 541 395 936
---------- -------- --------- ---------- -------- ---------
Total interest-earning assets................ 6,508 614 7,122 18,522 280 18,802
Interest-bearing liabilities:
Passbook accounts.............................. 3 - 3 5 (1) 4
Money market and NOW accounts.................. (244) (229) (473) (1,507) (1,086) (2,593)
Certificates of deposit........................ 217 916 1,133 4,273 2,060 6,333
FHLB borrowings................................ 5,189 582 5,771 12,726 1,521 14,247
Borrowed money................................. 14 37 51 (782) 1,343 561
---------- -------- --------- ---------- -------- ---------
Total interest-bearing liabilities........... 5,179 1,306 6,485 14,715 3,837 18,552
---------- -------- --------- ---------- -------- ---------
Change in net interest income before provision
for loan and valuation losses.................. $ 1,329 $ (692) $ 637 $ 3,807 $ (3,557) $ 250
========== ======== ========= ========== ======== =========
</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>
September 30, December 31, September 30,
2000 1999 1999
------------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans......................... $ 21,373 $ 20,185 $ 11,282
Nonaccrual commercial loans and direct financing
leases........................................... 1,477 5,301 6,208
Nonaccrual consumer loans......................... 118 155 164
------------- ------------ --------------
Total nonperforming loans........................ 22,968 25,641 17,654
Foreclosed real estate............................ 2,687 800 334
------------- ------------ --------------
Total nonperforming assets....................... $ 25,655 $ 26,441 $ 17,988
============= ============ ==============
Total nonperforming loans to total loans.......... 1.97% 2.31% 2.02%
============= ============ ==============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
Total nonperforming assets to total assets........ 1.88% 2.06% 1.70%
============= ============ ==============
Ratio of allowance for loan and valuation losses
to total nonperforming loans..................... 35.78% 24.78% 28.74%
============= ============ ==============
</TABLE>
As of September 30, 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 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 $100.3 million, $147.9 million and $151.8
million at September 30, 2000, December 31, 1999 and September 30, 1999,
respectively. Nonaccrual mortgage loans as a percentage of total loans were 1.8%
at September 30, 2000, 1.8% at December 31, 1999 and 1.3% at September 30, 1999.
A significant portion of the increases in late 1999 and 2000 can be primarily
attributed to several portfolios. The first is a sub-prime residential portfolio
that we acquired on a scheduled interest and scheduled principal remittance with
full recourse to the seller/servicer. In October 1999, however, the
seller/servicer declared bankruptcy and the servicing was transferred to us. The
total principal balance of the sub-prime portfolio was $13.8 million at
September 30, 2000, and approximately $2.3 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
$320,000 specific reserve. The second portfolio was principally associated with
the Harbor settlement and consists of $11.9 million loans at September 30, 2000,
of which $5.8 million loans were 90 days or more delinquent at that time.
Recorded against the $11.9 million of loans we have $2.9 million of discounts.
The decrease in nonaccrual commercial loans and direct financing leases at
September 30, 2000 is primarily related to 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 encountered
enrollment and/or state funding delays, which caused them to become delinquent
on their lease obligations to us. However, due to the start of a new fiscal
year for the schools, which began on July 1, and through the efforts of ABS
employees who have worked with several of the schools on their cash flow issues,
we were able to remove several schools from nonaccrual status during the second
and third quarters of 2000.
At September 30, 2000, $17.5 million, or 76.2%, of the nonaccrual loans were
loans that were residential loans purchased in bulk loan portfolios and remain
classified as "held for sale." Total loans and mortgage-backed securities held
for sale at September 30, 2000 were $979.4 million, of which $22.5 million, or
2.3%, 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. 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 September 30, 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 nine months ended
September 30, 2000 results primarily from growth at Matrix Bank. We anticipate
the trend of a net use of cash from operations to continue for the foreseeable
future. This anticipation results from the expected growth, albeit less than
our historical growth, at Matrix Bank, which we believe, will consist primarily
of increased activity in the purchasing of loan and mortgage servicing
portfolios. However, due to liquidity and capital availability, we do not
anticipate growth to be as significant as in prior periods.
20
<PAGE>
The Company has a bank stock loan agreement, which consists of two components, a
$10.0 million term loan and a revolving line of credit of $10.0 million. As of
September 30, 2000, the balance of the term loan was $8.6 million and the
balance of the revolving line of credit was $5.8 million.
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 September 30,
2000, Matrix Bank had overnight and term borrowings from the Federal Home Loan
Bank of $526.5 million. To increase its available liquidity, Matrix Bank swapped
approximately $27.2 million of residential loans during the first quarter of
2000 and $48.8 million of residential loans during the third quarter of 2000
with the agencies in exchange for agency securities. In combination, these
securities have a current balance of $72.4 million at September 30, 2000. Matrix
Bank is able to pledge these securities with the Federal Home Loan Bank at a
higher advance rate. Additionally, the market for securities is more liquid than
the market for whole loans. The custodial escrow balances held by Matrix Bank
fluctuate based upon the mix and size of the related mortgage servicing
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
7.5% at September 30, 2000. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $32.2 million. Matrix Bank's risk-
based capital ratio was 13.5% at September 30, 2000, which currently exceeds the
well capitalized risk-based capital requirement of 10.0% of risk weighted assets
by $26.8 million.
Prior to Matrix Financial being moved underneath Matrix Bank, our principal
source of funding for our servicing acquisition activities and working capital
needs of Matrix Financial consisted of a line of credit facility and a working
capital facility provided to Matrix Financial by an unaffiliated financial
institution. As noted earlier, effective August 1, 2000, Matrix Financial has
moved underneath Matrix Bank as a wholly owned subsidiary. The contribution of
Matrix Financial increased the capital of Matrix Bank by approximately $25
million, which will provide capital for future growth at Matrix Bank. In
addition, effective August 1, through financing provided by Matrix Bank, Matrix
Financial paid off its line of credit for the financing on its servicing
acquisitions. In addition, Matrix Financial paid off approximately $4 million
of higher costing borrowings under its purchase/repurchase facilities and paid
off its working capital facility.
Matrix Financial's principal source of funding for its loan origination business
consists of a warehouse line of credit provided to Matrix Financial by Matrix
Bank. Additionally, we have a warehouse line of credit provided to Matrix
Financial and a sale/repurchase facility provided to Matrix Financial and ABS by
unaffiliated financial institutions. As of September 29, 2000, Matrix
Financial's warehouse line of credit facility provided by an unaffiliated
financial institution was amended. It aggregates $60.0 million, of which $21.4
million was available to be utilized as of September 30, 2000. The September 29,
2000 warehouse agreement provides financing for Matrix Financial's wholesale
lending without sub-limits for such items as servicing acquisitions or working
lines of credit. As of September 30, 2000, $11.4 million of loans were
outstanding under the sale/repurchase facility for Matrix Financial and ABS.
Our principal sources of funding for direct financing leases are internal
capital, a line of credit facility and a partnership trust with an unaffiliated
financial institution. Amounts available under the line of credit facility and
the partnership trust are at the lender's sole discretion.
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 September 30, 2000, we had $94.5
million in pipeline and funded loans offset with mandatory forward commitments
of $80.2 million and nonmandatory
21
<PAGE>
forward commitments of $4.8 million.
Part II - Other Information
Item 1. Legal Proceedings
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 236th Judicial District, Tarrant County, Texas ("Adderley I"). In
this matter, Sterling Trust served as custodian for the self-directed IRAs of
thirty-five of sixty-nine plaintiffs. The plaintiffs 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, and the court
has signed a judgment for certain of the plaintiffs in the amount of
approximately $6.4 million. Sterling Trust believes it has meritorious defenses
and has filed a notice of appeal of 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 12 to 18 months, could result in a loss up to the $6.4 million plus
post-judgment interest. The ultimate legal and financial liability, if any, of
Sterling Trust in connection with this matter cannot be estimated with certainty
at this time.
Before the verdict in Adderley I, the plaintiffs instituted a lawsuit styled
Roderick Adderley, et al. v. Guy A. Gibson, et al. pending in the District Court
of Tarrant County, Texas, seeking to impose joint and several liability on
Matrix Bancorp, Inc., The Vintage Group, Inc., Vintage Delaware Holdings, Inc.,
Guy A. Gibson, D. Mark Spencer and Richard V. Schmitz for the potential
liability of Sterling Trust in Adderley I. The defendants believe they have
adequate defenses and intend to vigorously defend this action, 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.
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 filed a motion to
compel arbitration based upon the specific provisions in the contracts Sterling
Trust executed with each account holder, including Mr. Doroski. In July 2000,
the court granted Sterling Trust's motion to stay the proceedings and granted
Sterling Trust's motion to compel Mr. Doroski to arbitrate his claim. An
arbitration action has been filed by Mr. Doroski.
In connection with the termination of the proposed merger with Fidelity National
Financial, Inc. ("Fidelity") in August 1998, we entered into a Merger
Termination Agreement ("MTA") with Fidelity that provided for certain agreements
between the parties including the requirement that Fidelity maintain, subject to
certain conditions, specific levels of deposits with Matrix Bank. In early
1999, the Company filed an arbitration action against Fidelity alleging failure
to maintain the specified deposits. An arbitration hearing was held in August
2000, and in October 2000, the arbitration panel rendered a decision that there
was no "meeting of the minds" between the parties. Because the panel was
unclear as to whether their findings related to the entire MTA or just the
deposit provisions, we have filed a motion asking the panel for clarification.
Upon receipt of a response from the panel, we will evaluate all of our possible
avenues of recourse.
Matrix Capital Bank has been named defendant in a lawsuit entitled Transamerica
Mortgage Company v. Matrix Capital Bank that was commenced on or about February
7, 1999 in the District Court of the J-191st Judicial District, Dallas County,
Texas. The plaintiff alleged that Matrix Capital Bank breached a representation
and warranty given to the plaintiff by Matrix Capital Bank under a purchase
agreement by which Matrix Capital Bank sold certain mortgage loans to the
plaintiff. The action relates to approximately $600,000 in principal amount of
mortgage loans, and the plaintiff has requested that Matrix Capital Bank be
required to repurchase the loans and/or pay an unspecified amount of money
damages. Matrix Capital Bank and the plaintiff have reached an agreement in
principal to settle this matter. Under the agreement reached, subject to
verification of certain facts relating to the loans, Matrix Capital Bank will
purchase, for approximately $225,000, a 50% participation in the loans in
question and will service the loans in question on behalf of itself and the
plaintiff. The parties will also exchange mutual releases at the closing of the
settlement.
A customer of Matrix Bank is a debtor in a Chapter 11 proceeding under the
Bankruptcy Code styled In re Apponline.com, Inc. and Island Mortgage Network,
Inc. that has been filed in the United States Bankruptcy Court for the Eastern
District of New York. Prior to the bankruptcy filing, Matrix Bank had provided
the customer, Island Mortgage Network, Inc. ("Island"), with a
purchase/repurchase facility under which Matrix Bank purchased mortgage loans
originated by Island, with Island having the right and/or obligation to
repurchase such mortgage loans within a specified period of time. Several other
financial institutions had also provided Island with purchase/repurchase
facilities or warehouse lines for the purpose of assisting Island in funding its
loan origination programs (the "Origination Facilities"). Although, at this
time, it appears that no other financial institution that provided an
Origination Facility to Island has a conflicting interest with Matrix Bank in
respect of the loans purchased by Matrix Bank (the "Purchased Loans"), several
third parties have instituted lawsuits against Matrix Bank claiming an equitable
interest in a portion of the Purchased Loans (approximately $2.5 million in
original principal amount). These third parties primarily consist of title
companies, closing attorneys and other closing agents that provided settlement
funds in connection with the funding of a loan when they had been provided with
only a corporate check from Island. After providing settlement funds, these
closing agents discovered that Island had either provided checks with
insufficient funds or had inappropriately placed a stop payment on the checks.
In many cases, we believe these actions of the closing agents were in direct
violation of various "good funds" laws, which typically require a closing agent
to wait until that agent has received "good funds" prior to providing settlement
funds on the origination of a loan. In all these cases, Matrix Bank provided
Island with appropriate settlement funds in order to purchase the loan from
Island. We intend to vigorously defend these lawsuits, and believe we have
adequate defenses thereto. Nevertheless, there can be no assurance that an
adverse judgment will not be rendered against Matrix Bank, or that the ultimate
outcome of these lawsuits will not have a material adverse effect on our
consolidated financial condition or results of our operations.
In addition to the items described above, the trustee for Island has filed a
motion for authorization of the bankruptcy court to sell certain mortgage loans
originated by Island, including (A) the approximate $2.5 million in original
principal amount claimed by the closing agents described above and (B) an
additional approximate $9.5 million in original
22
<PAGE>
principal amount of mortgage loans that Matrix Bank believes it owns. Underlying
the motion of the trustee is an attempt by the trustee to re-characterize the
purchase/repurchase facility between Matrix Bank and Island as a credit
arrangement as opposed to a purchase and sale. We intend to vigorously oppose
the motion of the trustee, in that we believe that Matrix Bank purchased all of
these mortgage loans. In the event the trustee is successful in his motion, we
believe that in the alternative Matrix Bank would have a valid and perfected
security interest in these mortgage loans and in any proceeds derived from a
sale by the trustee. Nevertheless, there can be no assurance that the outcome of
this motion will not have a material adverse effect on our consolidated
financial condition or our results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Tenth Amendment to Credit Agreement, dated as of September 27, 2000,
between Matrix Bancorp, Inc., as borrower, and U.S. Bank National
Association, as agent, and certain lenders, as lenders
*10.2 Credit Agreement, dated as of September 29, 2000, between Matrix
Financial Services Corporation, as borrower, and U.S. Bank National
Association, as agent, and certain lenders, as lenders
*10.3 Guaranty, dated as of September 29, 2000, from the Registrant to U.S.
Bank National Association, as agent
*10.4 Promissory Note, dated as of October 16, 2000, from Thomas P. Cronin,
as maker, to the Registrant, as payee
* 27 Financial Data Schedule
(b) Reports on Form 8-K
. See Form 8-K filed by the Company with the Securities and Exchange
Commission on July 26, 2000, reporting various information under Items 5 and
7 thereof
. See Form 8-K filed by the Company with the Securities and Exchange
Commission on August 11, 2000, reporting various information under Item 5
thereof
______________________
* Filed herewith.
23
<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: November 13, 2000 /s/ Guy A. Gibson
---------------------------- ---------------------------------
Guy A. Gibson
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 2000 /s/ David W. Kloos
---------------------------- ---------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
24
