<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 JUNE 30, 1998
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 CAPITAL CORPORATION
(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 1410
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 August 10, 1998 was 6,705,230 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997............................. 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997 (unaudited)............... 4
Condensed Consolidated Statements of Changes in Shareholders'
Equity
Six months ended June 30, 1998 and 1997 (unaudited)............................. 5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 (unaudited)......................... 6
Notes to Unaudited Condensed Consolidated Financial Statements.................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................... 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................................... 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................. 21
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 21
ITEM 5. OTHER INFORMATION............................................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................ 21
SIGNATURES................................................................................... 23
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Matrix Capital Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------- -------------------
ASSETS (unaudited)
<S> <C> <C>
Cash $ 12,798 $ 3,296
Interest-earning deposits 10,553 6,337
Loans held for sale, net 623,577 456,978
Loans held for investment, net 72,781 54,394
Mortgage servicing rights, net 46,919 36,440
Other receivables 38,452 22,695
Federal Home Loan Bank of Dallas stock 10,100 8,700
Premises and equipment, net 10,211 9,012
Other assets 9,081 8,893
Income taxes receivable 185 -
------------------- -------------------
Total assets $ 834,657 $ 606,745
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 405,021 $ 224,982
Custodial escrow balances 99,375 53,760
Drafts payable 8,922 7,506
Payable for purchase of mortgage servicing rights 3,633 8,660
Federal Home Loan Bank of Dallas borrowings 124,000 171,943
Borrowed money 137,333 89,909
Other liabilities 11,215 9,192
Income taxes payable - 183
------------------- -------------------
Total liabilities 789,499 566,135
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 6,705,230 and 6,703,880 at June 30, 1998 and December 31,
1997, respectively 1 1
Additional paid in capital 22,202 22,185
Retained earnings 22,955 18,424
--------------------- -------------------
Total shareholders' equity 45,158 40,610
--------------------- -------------------
Total liabilities and shareholders' equity $ 834,657 $ 606,745
===================== ===================
</TABLE>
See accompanying notes.
3
<PAGE>
Matrix Capital Corporation
Condensed Consolidated Statements of Income
(Dollars in thousands except per share information)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Loans $ 13,576 $ 7,479 $ 24,877 $ 12,563
Interest-earning deposits 243 147 528 559
----------- ----------- ----------- -----------
Total interest income 13,819 7,626 25,405 13,122
INTEREST EXPENSE
Deposits 3,854 2,190 6,718 3,837
Borrowings 4,454 2,015 8,887 3,514
----------- ----------- ----------- -----------
Total interest expense 8,308 4,205 15,605 7,351
----------- ----------- ----------- -----------
Net interest income before provision for loan and
valuation losses 5,511 3,421 9,800 5,771
Provision for loan and valuation losses 538 205 988 297
----------- ----------- ----------- -----------
Net interest income 4,973 3,216 8,812 5,474
NONINTEREST INCOME
Loan administration 4,587 4,281 8,329 8,264
Brokerage 1,870 824 3,542 1,961
Trust services 1,090 890 2,091 1,768
Gain on sale of loans 800 846 1,933 964
Gain on sale of mortgage servicing rights - 942 838 2,352
Loan origination 1,329 867 2,740 1,509
Other 1,670 762 2,792 1,537
----------- ----------- ----------- -----------
Total noninterest income 11,346 9,412 22,265 18,355
NONINTEREST EXPENSES
Compensation and employee benefits 5,240 3,442 10,367 6,904
Amortization of mortgage servicing rights 2,262 1,649 3,856 3,175
Occupancy and equipment 757 475 1,423 977
Postage and communication 664 347 1,206 663
Professional fees 376 218 626 418
Data processing 364 202 710 365
Losses related to recourse sales - 900 - 1,125
Other general and administrative 2,967 2,370 5,676 4,303
----------- ----------- ----------- -----------
Total noninterest expense 12,630 9,603 23,864 17,930
----------- ----------- ----------- -----------
Income before income taxes 3,689 3,025 7,213 5,899
Provision for income taxes 1,343 1,155 2,682 2,275
----------- ----------- ----------- -----------
Net income $ 2,346 $ 1,870 $ 4,531 $ 3,624
=========== =========== =========== ===========
Net income per share $ .35 $ .28 $ .68 $ .54
=========== =========== =========== ===========
Net income per share assuming dilution $ .34 $ .28 $ .66 $ .54
=========== =========== =========== ===========
Weighted average shares 6,704,878 6,681,031 6,704,454 6,681,031
=========== =========== =========== ===========
Weighted average shares assuming dilution 6,960,628 6,762,315 6,916,571 6,772,217
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Matrix Capital Corporation
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
ADDITIONAL
----------------------------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1998
- -------------------------------------
Balance at December 31, 1997 6,703,880 $ 1 $ 22,185 $ 18,424 $ 40,610
Exercise of stock options 1,350 17 17
Net income 4,531 4,531
--------------- ---------------- ---------------- ---------------- --------------
Balance at June 30, 1998 6,705,230 $ 1 $ 22,202 $ 22,955 $ 45,158
=============== ================ ================ ================ ==============
Six months ended June 30, 1997
- -------------------------------------
Balance at December 31, 1996 6,681,031 $ 1 $ 21,983 $ 10,286 $ 32,270
Net income 3,624 3,624
--------------- ---------------- ---------------- ---------------- --------------
Balance at June 30, 1997 6,681,031 $ 1 $ 21,983 $ 13,910 $ 35,894
=============== ================ ================ ================ ==============
</TABLE>
See accompanying notes.
5
<PAGE>
Matrix Capital Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
JUNE 30,
1998 1997
--------------- ---------------
Operating activities
<S> <C> <C>
Net income $ 4,531 $ 3,624
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 921 691
Provision for loan and valuation losses 988 297
Amortization of mortgage servicing rights 3,856 3,175
Gain on sale of loans (1,933) (964)
Gain on sale of mortgage servicing rights (838) (2,352)
Losses related to recourse sales -- 1,125
Loans originated for sale, net of loans sold (42,703) (10,973)
Loans purchased for sale (213,840) (208,483)
Proceeds from sale of loans purchased for sale 71,670 38,430
Originated mortgage servicing rights, net (1,204) (42)
Increase in other receivables and other assets (17,601) (10,916)
Increase in other liabilities and income taxes payable 1,654 5,945
--------------- ---------------
Net cash used by operating activities (194,499) (180,443)
INVESTING ACTIVITIES
Loans originated and purchased for investment (48,113) (28,194)
Principal repayments on loans 50,165 27,707
Purchase of Federal Home Loan Bank of Dallas stock (1,400) (1,936)
Purchases of premises and equipment (1,976) (1,273)
Acquisition of mortgage servicing rights (20,694) (29,100)
Proceeds from sale of mortgage servicing rights 5,082 3,128
--------------- ---------------
Net cash used by investing activities (16,936) (29,668)
FINANCING ACTIVITIES
Net increase in deposits 180,039 112,419
Net increase in custodial escrow balances 45,615 43,043
Increase (decrease) in revolving lines and repurchase agreements, net (23,397) 35,326
Repayments of notes payable (18,364) (5,434)
Proceeds from notes payable 41,329 34,558
Repayment of financing arrangements (86) (80)
Proceeds from issuance of common stock related to employee stock option plan 17 -
--------------- ---------------
Net cash provided by financing activities 225,153 219,832
--------------- ---------------
Increase in cash and cash equivalents 13,718 9,721
Cash and cash equivalents at beginning of period 9,633 12,609
--------------- ---------------
Cash and cash equivalents at end of period $ 23,351 $ 22,330
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY
Payable for purchase of mortgage servicing rights $ 3,633 $ 4,652
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ 14,026 $ 7,029
=============== ===============
Cash paid for income taxes $ 3,050 $ 3,256
=============== ===============
</TABLE>
See accompanying notes.
6
<PAGE>
Matrix Capital Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
Three and Six Months Ended June 30, 1998 and 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Matrix
Capital Corporation (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, 1997.
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 those estimates.
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share, and restated all prior period earnings
per share data, as required.
The Company also adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (Statement No. 130), as of January 1, 1998.
Statement No. 130 requires reclassification of financial statements for earlier
periods provided for comparative purposes. The Company's adoption of Statement
No. 130 has not resulted in any change in presentation, as there is no material
effect on the Company's consolidated financial statements as a result of the
adoption.
(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>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------------ ----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Numerator:
Net income available to common
shareholders $ 2,346 $ 1,870 $ 4,531 $ 3,624
================== ================= ================= =================
Denominator:
Weighted average shares outstanding 6,704,878 6,681,031 6,704,454 6,681,031
Effect of dilutive securities:
Common stock options 214,268 77,487 178,713 83,957
Common stock warrants 41,482 3,797 33,404 7,229
------------------ ----------------- ----------------- -----------------
Dilutive potential common shares 255,750 81,284 212,117 91,186
------------------ ----------------- ----------------- -----------------
Denominator for net income per
share assuming dilution 6,960,628 6,762,315 6,916,571 6,772,217
================== ================= ================= =================
</TABLE>
7
<PAGE>
(3) MORTGAGE SERVICING RIGHTS
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------------------ -----------------
(unaudited)
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 36,440 $ 23,680
Purchases 15,667 37,151
Originated, net 1,204 818
Amortization (3,856) (6,521)
Sales (2,536) (18,688)
------------------ -----------------
Balance at end of period $ 46,919 $ 36,440
================== =================
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$20.3 million and $17.2 million at June 30, 1998 and December 31, 1997,
respectively.
The Company's servicing portfolio (excluding subserviced loans) was comprised of
the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------------------------- ----------------------------------------
NUMBER Principal NUMBER Principal
OF LOANS Balance OF LOANS Balance
Outstanding Outstanding
------------- ---------------- --------------- -----------------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLMC 17,332 $ 1,139,220 13,134 $ 715,513
FNMA 27,009 1,740,569 18,000 1,168,199
GNMA 8,084 365,852 15,845 615,234
Other VA, FHA and
conventional loans 13,869 840,077 14,538 849,116
------------- ---------------- --------------- -----------------
66,294 $ 4,085,718 61,517 $ 3,348,062
============= ================ =============== =================
</TABLE>
The Company's custodial escrow balances shown in the accompanying consolidated
balance sheets pertain to escrowed payments of taxes and insurance and the float
on principal and interest payments on loans serviced by the Company, aggregating
approximately $95.2 million and $49.7 million at June 30, 1998 and December 31,
1997, respectively. The Company also had custodial escrow accounts on deposit
for other mortgage companies aggregating approximately $4.2 million and $4.1
million at June 30, 1998 and December 31, 1997, respectively.
8
<PAGE>
(4) DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------------------------------------- ----------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
--------------- ------------ --------------- --------------- -------------- -------------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 2,833 0.70% 3.75 % $ 2,851 1.27% 3.95%
NOW accounts 30,168 7.45 1.74 26,382 11.73 1.62
Money market accounts 122,847 30.33 2.93 99,899 44.40 2.96
--------------- ------------ --------------- --------------- -------------- --------
155,848 38.48 2.71 129,132 57.40 2.70
Certificate accounts 249,173 61.52 5.61 95,850 42.60 5.94
--------------- ------------ --------------- --------------- -------------- --------
Total deposits $ 405,021 100.00% 4.34 % $ 224,982 100.00% 4.09%
=============== ============ =============== =============== ============== ========
</TABLE>
At June 30, 1998 and December 31, 1997, brokered deposits accounted for
approximately $143.3 million and $0, respectively, of the total certificate
accounts shown above.
(5) COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company had $86.8 million in pipeline and funded loans
offset with mandatory forward commitments of $65.5 million and nonmandatory
forward commitments of $12.3 million.
As of June 30, 1998, the Company had identified and hedged approximately $296.1
million of its mortgage servicing portfolio using a program of exchange-traded
futures and options. At June 30, 1998, the net realized deferred gains and the
unrealized deferred gain(loss) of the open positions was approximately $431,000.
In June 1996, the Company purchased 154 acres of land for $1.3 million in cash
for the purpose of developing residential and multi-family lots in Ft. Lupton,
Colorado. As part of the acquisition, the Company entered into a Residential
Facilities Development Agreement (the "Development Agreement") with the City of
Ft. Lupton. The Development Agreement is a residential and planned unit
development agreement providing for the orderly planning, engineering and
development of a golf course and surrounding residential community. The City of
Ft. Lupton is responsible for the development of the golf course and the Company
is responsible for the development of the surrounding residential lots. The
Development Agreement sets forth a mandatory obligation on the part of the
Company to pay the City of Ft. Lupton pledged enhancement assessments of
$600,000. These pledged enhancement assessments require the Company to pay the
City a $2,000 fee each time the Company sells a developed residential lot. The
Company is obligated to pay a minimum of $60,000 in assessment fees per year
beginning in 1998 and continuing through 2007.
The Company also entered into a development management agreement with a local
developer to complete the development of the land. At June 30, 1998 and
December 31, 1997, the total basis of the land development was $3.8 million and
$2.8 million, respectively, and was classified in other assets in the
accompanying condensed consolidated balance sheets.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company's principal activities focus on traditional banking, mortgage
banking and the administration of self-directed trust accounts. The Company's
traditional banking activities include originating and servicing residential,
commercial and consumer loans and providing a broad range of depository
services. The Company's mortgage banking activities consist primarily 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. The Company's trust
activities focus primarily on the administration of self-directed individual
retirement accounts, qualified retirement plans and custodial and directed trust
accounts. These activities are conducted through the Company's primary
operating subsidiaries, Matrix Capital Bank ("Matrix Bank"), Matrix Financial
Services Corporation ("Matrix Financial"), Sterling Trust Company ("Sterling
Trust"), United Financial, Inc. ("United Financial"), United Special Services,
Inc. ("USS"), United Capital Markets, Inc. ("UCM") and First Matrix Investment
Services Corporation ("First Matrix").
The principal components of the Company's revenues consist of net interest
income recorded by Matrix Bank and Matrix Financial, loan administration fees
generated by Matrix Financial, brokerage fees realized by United Financial, loan
origination fees and gains on sales of mortgage loans and mortgage servicing
rights generated by Matrix Bank and Matrix Financial, trust service fees
generated by Sterling Trust and consulting and service fee income earned by UCM
and USS, respectively. The Company's results of operations are influenced by
changes in interest rates and the effect of these changes on the interest
spreads of the Company, the volume of loan originations, mortgage loan
prepayments and the value of mortgage servicing portfolios.
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," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology, are forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995, and
involve a number of risks and uncertainties. The actual results of the future
events described in such forward-looking statements in this quarterly report
could differ materially from those stated in such forward-looking statements.
Among the factors that could cause actual results to differ materially are:
interest rate fluctuations, level of delinquencies, defaults and prepayments,
general economic conditions, competition, government regulation and possible
future litigation, as well as the risks and uncertainties discussed in the
Company's Current Report on Form 8-K, filed March 25, 1998, including without
limitation, the uncertainties set forth from time to time in the Company's other
public reports and filings and public statements.
RESULTS OF OPERATIONS FOR THE
QUARTER ENDED JUNE 30, 1998 COMPARED TO THE QUARTER ENDED JUNE 30, 1997
NET INCOME; RETURN ON AVERAGE EQUITY. Net income increased $476,000, or 25.5%,
to $2.3 million, or $.34 per share for the quarter ended June 30, 1998 as
compared to $1.9 million, or $.28 per share for the quarter ended June 30, 1997.
Return on average equity for the two quarters was comparable with a return of
21.6% for the quarter ended June 30, 1998 as compared to 21.5% for the quarter
ended June 30, 1997.
NET INTEREST INCOME. Net interest income before provision for loan and
valuation losses increased $2.1 million, or 61.1%, to $5.5 million for the
quarter ended June 30, 1998 as compared to $3.4 million for the quarter ended
June 30, 1997. The Company's net interest margin decreased to 3.34% for the
quarter ended June 30, 1998 as compared to 3.93% for the quarter ended June 30,
1997. Additionally, the interest rate spread decreased to 2.81% for the quarter
ended June 30, 1998 from 3.20% for the quarter ended June 30, 1997. The
increase in net interest income before provision for loan and valuation losses
and the decreases in net interest margin and interest rate spread for the
quarter ended June 30, 1998 were attributable to the following: a 90.2%
increase in the Company's average loan balance to $641.6 million for the quarter
ended June 30, 1998 from $337.3 million for the quarter ended June 30, 1997,
while the cost of interest-bearing liabilities remained constant at 5.56% for
the quarters ended June 30, 1998 and 1997. The increase in the average loan
balance and the comparable cost of interest-bearing liabilities were offset by a
decrease in the yield on the Company's loan portfolio to 8.46% from 8.87% for
the quarters ended June
10
<PAGE>
30, 1998 and 1997, respectively, and a 97.6% increase in the average interest-
bearing liabilities to $598.1 million for the quarter ended June 30, 1998 from
$302.6 million for the quarter ended June 30, 1997. The loan portfolio's yield
decreased due to the overall market decrease in interest rates, the increase in
wholesale originations which are at the lower rates reflected in the market and
the acquisition of fewer discounted loans by the Company. For a tabular
presentation of the changes in net interest income due to changes in the volume
of interest-earning assets and changes in interest rates, see "---Analysis of
Changes in Net Interest Income Due to Changes in Interest Rates and Volumes."
PROVISION FOR LOAN AND VALUATION LOSSES. The provision for loan and valuation
losses increased $333,000 to $538,000 for the quarter ended June 30, 1998 as
compared to $205,000 for the quarter ended June 30, 1997. This increase was
primarily attributable to the increase in the balance of loans receivable, which
increased to $696.4 million at June 30, 1998 as compared to $394.5 million at
June 30, 1997. For a discussion of the Company's allowance for loan losses as it
relates to nonperforming assets, see "---Asset Quality---Nonperforming Assets."
LOAN ADMINISTRATION. Loan administration fees increased $306,000, or 7.1%, to
$4.6 million for the quarter ended June 30, 1998 as compared to $4.3 million for
the quarter ended June 30, 1997. Loan administration fees are affected by
factors that include the size of the Company's residential mortgage loan
servicing portfolio, the servicing spread, the timing of payment collections and
the amount of ancillary fees collected. This increase was primarily attributable
to the increase in the outstanding principal balance underlying the Company's
mortgage loan servicing portfolio at June 30, 1998 as compared to June 30, 1997.
The mortgage servicing portfolio increased $719.6 million, or 20.6%, to an
average balance of $4.2 billion for the quarter ended June 30, 1998 as compared
to an average balance of $3.5 billion for the quarter ended June 30, 1997. The
increase was offset by a reduction in the average service fee rate (including
all ancillary income) to 0.44% for the quarter ended June 30, 1998 as compared
to 0.49% for the quarter ended June 30, 1997.
BROKERAGE FEES. Brokerage fees increased $1.0 million, or 126.9%, to $1.9
million for the quarter ended June 30, 1998 as compared to $824,000 for the
quarter ended June 30, 1997. This increase was the result of an increase in the
balance of residential mortgage servicing portfolios brokered by United
Financial which in terms of aggregate unpaid principal balances on the
underlying loans, increased $13.0 billion to $17.1 billion for the quarter ended
June 30, 1998 as compared to $4.1 billion for the quarter ended June 30, 1997.
TRUST SERVICES. Trust services fees increased $200,000, or 22.5%, to $1.1
million for the quarter ended June 30, 1998 as compared to $890,000 for the
quarter ended June 30, 1997. This increase is associated with the growth in the
number of trust accounts under administration at Sterling Trust, which increased
to 31,695 at June 30, 1998 as compared to 28,396 at June 30, 1997, and the
increase in the total assets under administration, which increased to $1.7
billion at June 30, 1998 as compared to $1.3 billion at June 30, 1997.
GAIN ON SALE OF LOANS. Gain on the sale of loans decreased $46,000, or 5.4%, to
$800,000 for the quarter ending June 30, 1998 as compared to $846,000 for the
quarter ended June 30, 1997. 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 of loan
portfolios in the market, the mix of loan portfolios available in the market,
the type of loan portfolios the Company purchases and the particular loan
portfolios the Company elects to sell.
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on the sale of mortgage
servicing rights decreased $942,000 as the Company did not sell any mortgage
servicing rights during the quarter ended June 30, 1998. Gains from the sale of
mortgage servicing rights can fluctuate significantly from quarter to quarter
and from year to year based on the market value of the Company's servicing
portfolio, the particular servicing portfolios the Company elects to sell and
the availability of similar portfolios in the market. Due to the Company's
position in and knowledge of the market, the Company will at times sell
servicing portfolios if it is determined that the market value is greater than
the economic value which would be achieved from holding the servicing portfolio.
LOAN ORIGINATION. Loan origination income increased $462,000, or 53.3%, to $1.3
million for the quarter ended June 30, 1998 as compared to $867,000 for the
quarter ended June 30, 1997. This increase was primarily attributable to the
increase in wholesale residential mortgage loan production by $35.5 million to
$132.7 million, or 36.6%, for the quarter ended June 30, 1998 as compared to
$97.2 million for the quarter ended June 30, 1997. Loan origination income
includes all mortgage loan fees, secondary marketing activity on new loan
originations and servicing release premiums on new originations sold, net of
origination costs.
11
<PAGE>
In the second quarter of 1997, the Company opened a telemarketing call center
primarily for the purpose of soliciting both the Company's servicing portfolio
and third-party portfolios for non-conforming second mortgages. Due to the
competitive market for second mortgages and the Company's recognition of an
opportunity to enter the more profitable and less competitive refinancing
market, the Company decided to change the direction of the call center. In the
second quarter of 1998, the call center changed its focus toward the
solicitation of refinancings within the Company's servicing portfolio.
OTHER INCOME. Other income increased $908,000, or 119.2%, to $1.7 million for
the quarter ended June 30, 1998 as compared to $762,000 for the quarter ended
June 30, 1997. The increase in other income was primarily due to increased
consulting income earned by UCM and an increase in USS service fee income. In
combination, these subsidiaries' increased revenues accounted for approximately
$681,000, or 75.0%, of the total increase in other income for the second quarter
of 1998.
NONINTEREST EXPENSE. Noninterest expense increased $3.0 million, or 31.5%, to
$12.6 million for the quarter ended June 30, 1998 as compared to $9.6 million
for the quarter ended June 30, 1997. This increase was due to expenses related
to the overall growth and expansion of the Company that occurred during the
third and fourth quarters of 1997 and throughout 1998. This growth and expansion
included the opening of a new lending office of Matrix Bank, the opening of a
telemarketing call center for the origination of loans for Matrix Financial and
the opening of a new lending subsidiary of Matrix Financial. During the second
quarter of 1997, the Company incurred a non-recurring charge when it established
a $900,000 reserve for losses on repurchased sub-prime auto loans. The following
table details the major components of noninterest expense for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
------------------------------
1998 1997
------------------------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits $ 5,240 $ 3,442
Amortization of mortgage servicing rights 2,262 1,649
Occupancy and equipment 757 475
Postage and communication 664 347
Professional fees 376 218
Data processing 364 202
Loss related to recourse sales - 900
Other general and administrative 2,967 2,370
------------ -----------
Total $ 12,630 $ 9,603
============ ===========
</TABLE>
Compensation and employee benefits increased $1.8 million, or 52.2%, to $5.2
million for the quarter ended June 30, 1998 as compared to $3.4 million for the
quarter ended June 30, 1997. This increase was the result of the expansion
discussed above, as well as growth in the Company's other subsidiaries such as
United Financial and UCM. Also, increases in the volume of loan originations
and servicing brokerage resulted in increased commissions for Matrix Financial
and United Financial. The Company experienced a total increase of 92 employees,
or 28.5%, to 415 full-time employees at June 30, 1998 as compared to 323 full-
time employees at June 30, 1997.
Amortization of mortgage servicing rights increased $613,000, or 37.2%, to $2.3
million for the quarter ended June 30, 1998 as compared to $1.6 million for the
quarter ended June 30, 1997. Amortization of mortgage servicing rights
fluctuates based on the size of the Company's mortgage servicing portfolio and
the prepayment rates experienced with respect to the underlying mortgage loan
portfolio. The Company's prepayment rates on its servicing portfolio averaged
21.5% for the quarter ended June 30, 1998 as compared to 10.9% for the quarter
ended June 30, 1997. In response to the lower interest rates prevalent in the
market, prepayment speeds have increased due to borrowers refinancing into
lower interest rate mortgages.
Removing the effect of the loss related to recourse sales, the remainder of
noninterest expense, which includes occupancy and equipment expenses, postage
and communication expenses, professional fees, data processing costs and other
expenses increased $1.5 million, or 42.0%, to $5.1 million for the quarter ended
June 30, 1998 as compared to $3.6 million for the quarter ended June 30, 1997.
The increase was primarily attributable to the growth and expansion of the
Company's business lines, especially with regard to Matrix Financial and Matrix
Bank.
12
<PAGE>
PROVISION FOR INCOME TAXES. Provision for income taxes increased by $188,000 to
$1.3 million for the quarter ended June 30, 1998 as compared to $1.2 million for
the quarter ended June 30, 1997. The increase in pretax income was offset by a
reduction in the effective tax rate to 36.4% for the quarter ended June 30, 1998
as compared to 38.2% for the quarter ended June 30, 1997. The decrease in the
effective tax rate was the result of the origination of tax-exempt leases by
the Company.
RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
NET INCOME; RETURN ON AVERAGE EQUITY. Net income increased $907,000, or 25.0%,
to $4.5 million, or $.66 per share for the six months ended June 30, 1998 as
compared to $3.6 million, or $.54 per share for the six months ended June 30,
1997. Return on average equity was a consistent 21.4% for the six months ended
June 30, 1998 and 1997.
NET INTEREST INCOME. Net interest income before provision for loan and
valuation losses increased $4.0 million, or 69.8%, to $9.8 million for the six
months ended June 30, 1998 as compared to $5.8 million for the six months ended
June 30, 1997. The Company's net interest margin decreased to 3.20% for the six
months ended June 30, 1998 as compared to 3.78% for the six months ended June
30, 1997. Additionally, the interest rate spread decreased to 2.72% for the six
months ended June 30, 1998 from 2.93% for the six months ended June 30, 1997.
The increase in net interest income before provision for loan and valuation
losses and the decreases in net interest margin and interest rate spread for the
six months ended June 30, 1998 were attributable to the following: a 108.0%
increase in the Company's average loan balance to $590.7 million for the six
months ended June 30, 1998 from $284.0 million for the six months ended June 30,
1997, and a decrease in the cost of interest-bearing liabilities to 5.57% for
the six months ended June 30, 1998 from 5.66% for the six months ended June 30,
1997. The above were offset by a decrease in the yield on the Company's loan
portfolio to 8.42% for the six months ended June 30, 1998 from 8.85% for the six
months ended June 30, 1997, and a 115.6% increase in the average interest-
bearing liabilities to $559.9 million for the six months ended June 30, 1998 as
compared to $259.7 million for the six months ended June 30, 1997. The loan
portfolio yield decrease is attributable to the overall market decrease in
interest rates, the increase in wholesale originations which are at the lower
rates reflected in the market and the acquisition of fewer discounted loans by
the Company. 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 $691,000 to $988,000 for the six months ended June 30, 1998 as
compared to $297,000 for the six months ended June 30, 1997. This increase was
primarily attributable to the increase in the balance of loans receivable, which
increased to $696.4 million at June 30, 1998 as compared to $394.5 million at
June 30, 1997. For a discussion of the Company's allowance for loan losses as
it relates to nonperforming assets, see "---Asset Quality---Nonperforming
Assets."
LOAN ADMINISTRATION. Loan administration fees were $8.3 million for the six
months ended June 30, 1998 and 1997. Loan administration fees are affected by
factors that include the size of the Company's 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 $206.7 million, or 6.2%, to an average balance of $3.5 billion for the
six months ended June 30, 1998 as compared to an average balance of $3.3 billion
for the six months ended June 30, 1997. This increase was offset by a reduction
in the average service fee rate (including all ancillary income) to 0.47% for
the six months ended June 30, 1998 as compared to 0.50% for the six months ended
June 30, 1997.
BROKERAGE FEES. Brokerage fees increased $1.5 million, or 80.6%, to $3.5
million for the six months ended June 30, 1998 as compared to $2.0 million for
the six months ended June 30, 1997. This increase was the result of an increase
in the balance of residential mortgage servicing portfolios brokered by United
Financial. In terms of aggregate unpaid principal balances on the underlying
loans, servicing portfolios brokered during the six months ended June 30, 1998
increased $19.6 billion, or 163.3%, to $31.6 billion as compared to $12.0
billion for the six months ended June 30, 1997.
TRUST SERVICES. Trust services fees increased $323,000, or 18.3%, to $2.1
million for the six months ended June 30, 1998 as compared to $1.8 million for
the six months ended June 30, 1997. This increase is associated with the growth
in the number of trust accounts under administration at Sterling Trust which
increased to 31,695 at June 30,
13
<PAGE>
1998 as compared to 28,396 at June 30, 1997, and the increase in the total
assets under administration which increased to $1.7 billion at June 30, 1998 as
compared to $1.3 billion at June 30, 1997.
GAIN ON SALE OF LOANS. Gain on the sale of loans increased $969,000, or 100.5%,
to $1.9 million for the six months ended June 30, 1998 as compared to $964,000
for the six months ended June 30, 1997. 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 of loan
portfolios in the market, the mix of loan portfolios available in the market,
the type of loan portfolios the Company purchases and the particular loan
portfolios the Company elects to sell.
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on the sale of mortgage
servicing rights decreased $1.5 million, or 64.4%, to $838,000 for the six
months ended June 30, 1998 as compared to $2.4 million for the six months ended
June 30, 1997. In terms of aggregate outstanding principal balances of mortgage
loans underlying such servicing rights, the Company sold $178.0 million in
purchased mortgage servicing rights for the six months ended June 30, 1998 as
compared to $988.5 million for the six months ended June 30, 1997. Gains from
the sale of mortgage servicing rights can fluctuate significantly from quarter
to quarter and from year to year based on the market value of the Company's
servicing portfolio, the particular servicing portfolios the Company elects to
sell and the availability of similar portfolios in the market. Due to the
Company's position in and knowledge of the market, the Company will at times
sell servicing portfolios if it is determined that the market value is greater
than the economic value which would be achieved from holding the servicing
portfolio.
LOAN ORIGINATION. Loan origination income increased $1.2 million, or 81.6%, to
$2.7 million for the six months ended June 30, 1998 as compared to $1.5 million
for the six months ended June 30, 1997. This increase is primarily attributable
to the increase in wholesale residential mortgage loan production by $91.3
million, or 47.4%, to $284.0 million for the six months ended June 30, 1998 as
compared to $192.7 million for the six months ended June 30, 1997. Loan
origination income includes all mortgage loan fees, secondary marketing activity
on new loan originations and servicing release premiums on new originations
sold, net of origination costs.
OTHER INCOME. Other income increased $1.3 million, or 81.7%, to $2.8 million
for the six months ended June 30, 1998 as compared to $1.5 million for the six
months ended June 30, 1997. The increase in other income for the six months
period ended June 30, 1998 was primarily driven by increased revenues from UCM
and USS, which in combination, accounted for approximately $1.1 million, or
85.0%, of the total increase.
NONINTEREST EXPENSE. Noninterest expense increased $6.0 million, or 33.1%, to
$23.9 million for the six months ended June 30, 1998 as compared to $17.9
million for the six months ended June 30, 1997. This increase was due to
expenses related to the overall growth and expansion of the Company that
occurred during the third and fourth quarters of 1997 and throughout 1998. This
growth and expansion included the opening of a new lending office of Matrix
Bank, the opening of a telemarketing call center for the origination of loans
for Matrix Financial and the opening of a new lending subsidiary of Matrix
Financial. During the first six months of 1997, the Company incurred a non-
recurring charge when it established a $1.1 million reserve for losses on
repurchased sub-prime auto loans. The following table details the major
components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
------------------------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits $ 10,367 $ 6,904
Amortization of mortgage servicing rights 3,856 3,175
Occupancy and equipment 1,423 977
Postage and communication 1,206 663
Professional fees 626 418
Data processing 710 365
Loss related to recourse sales - 1,125
Other general and administrative 5,676 4,303
------------ -----------
Total $ 23,864 $ 17,930
============ ===========
</TABLE>
14
<PAGE>
Compensation and employee benefits increased $3.5 million, or 50.2%, to $10.4
million for the six months ended June 30, 1998 as compared to $6.9 million for
the six months ended June 30, 1997. This increase was the result of the
expansion discussed above at Matrix Bank and Matrix Financial, as well as growth
in other subsidiaries such as United Financial, UCM and Sterling Trust. Also,
increases in the volume of loan originations and servicing brokerage resulted in
increased commissions for Matrix Financial and United Financial.
Amortization of mortgage servicing rights increased $681,000, or 21.4% to $3.9
million for the six months ended June 30, 1998 as compared to $3.2 million for
the six months ended June 30, 1997. Amortization of mortgage servicing rights
fluctuates based on the size of the Company's mortgage servicing portfolio and
the prepayment rates experienced with respect to the underlying mortgage loan
portfolio. The Company's prepayment rates on its servicing portfolio averaged
19.3% for the six months ended June 30, 1998 as compared to 10.6% for the six
months ended June 30, 1997. As previously noted, prepayment speeds have
increased in 1998 due to the increased refinancing activity as compared to 1997.
Removing the effect of the loss related to recourse sales, the remainder of
noninterest expense, which includes occupancy and equipment expenses, postage
and communication expenses, professional fees, data processing costs and other
expenses increased $2.9 million, or 43.3%, to $9.6 million for the six months
ended June 30, 1998 as compared to $6.7 million for the six months ended June
30, 1997. The increase was primarily attributable to the growth and expansion of
the Company's business lines, especially with regard to Matrix Financial, Matrix
Bank, USS and Sterling Trust.
PROVISION FOR INCOME TAXES. Provision for income taxes increased by $407,000
to $2.7 million for the six months ended June 30, 1998 as compared to $2.3
million for the six months ended June 30, 1997. The increase in pretax income
was offset by a reduction in the effective tax rate to 37.2% for the six months
ended June 30, 1998 as compared to 38.6% for the six months ended June 30, 1997.
The decrease in the effective tax rate was the result of the origination of tax-
exempt leases by the Company.
AVERAGE BALANCE SHEET
The following table sets forth for the periods and as of the dates indicated,
information regarding the Company's 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
and costs. Average interest rate information for the quarters and six months
ended June 30, 1998 and 1997 have been annualized. Ratio, yield and rate
information is based on daily averages where available; otherwise, average
monthly balances have been used. Nonaccrual loans have been included in the
calculation of average balances for loans for the periods indicated.
15
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------- ------------------------------------------------------
1998 1997 1998 1997
--------------------------- -------------------------- -------------------------- --------------------------
Average Average Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS (Dollars in thousands)
Interest-earning
assets:
Loans, net $641,576 $ 13,576 8.46% $337,269 $ 7,479 8.87% $590,730 $ 24,877 8.42% $284,028 $ 12,563 8.85%
Interest-earning
deposits 9,651 109 4.52 7,689 100 5.20 13,007 259 3.98 18,452 471 5.11
FHLB stock 8,968 134 5.98 3,123 47 6.02 9,050 269 5.95 2,982 88 5.90
-------- -------- ------ -------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-
earning assets 660,195 13,819 8.37 348,081 7,626 8.76 612,787 25,405 8.29 305,462 13,122 8.59
Noninterest-earning
assets:
Cash 12,871 10,835 10,134 11,135
Allowance for loan
and valuation
losses (2,047) (1,178) (1,946) (1,201)
Premises and
equipment 9,735 7,966 9,404 7,931
Other assets 84,714 68,960 76,110 63,144
-------- -------- -------- --------
Total noninterest-
earning assets 105,273 86,583 93,702 81,009
-------- -------- -------- --------
Total assets $765,468 $434,664 $706,489 $386,471
======== ======== ======== ========
LIABILITIES &
SHAREHOLDERS'
EQUITY
Interest-bearing
liabilities:
Passbook accounts $ 2,772 $ 25 3.61% $ 2,909 $ 28 3.85% $ 2,826 $ 53 3.75% $ 2,854 $ 56 3.92%
Money market and
NOW accounts 123,974 941 3.04 105,119 930 3.54 120,205 1,778 2.96 82,345 1,456 3.54
Certificates of
deposit 207,460 2,888 5.57 83,685 1,232 5.89 174,325 4,887 5.61 79,020 2,325 5.88
FHLB borrowings 134,967 1,824 5.41 31,097 441 5.67 138,287 3,788 5.48 25,654 718 5.60
Borrowed money 128,919 2,630 8.16 79,837 1,574 7.89 124,267 5,099 8.21 69,867 2,796 8.00
-------- -------- ------ -------- -------- ------ -------- -------- ------ -------- -------- ------
Total interest-
bearing
liabilities 598,092 8,308 5.56 302,647 4,205 5.56 559,910 15,605 5.57 259,740 7,351 5.66
-------- -------- ------ -------- -------- ------ -------- -------- ------ -------- -------- ------
Noninterest-bearing
liabilities:
Demand deposits
(including
custodial escrow
balances) 104,795 83,760 88,278 74,772
Other liabilities 19,039 13,392 15,932 18,101
-------- -------- -------- --------
Total noninterest-
bearing
liabilities 123,834 97,152 104,210 92,873
Shareholders' equity 43,542 34,865 42,369 33,858
-------- -------- -------- --------
Total liabilities
and shareholders'
equity $765,468 $434,664 $706,489 $386,471
======== ======== ======== ========
Net interest income
before provision
for loan and
valuation losses $ 5,511 $ 3,421 $ 9,800 $ 5,771
======== ======== ======== ========
Interest rate spread 2.81% 3.20% 2.72% 2.93%
====== ====== ====== ======
Net interest margin 3.34% 3.93% 3.20% 3.78%
====== ====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 110.38% 115.01% 109.44% 117.60%
====== ====== ====== ======
</TABLE>
16
<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 (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., 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 change due to volume and change due to rate.
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 VS 1997 1998 VS 1997
----------------------------------------- ----------------------------------------
Increase (Decrease)
Due to Change in
------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
-------- ------ ------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net $ 6,440 $ (343) $ 6,097 $ 12,916 $ (602) $12,314
Interest-earning deposits 22 (12) 10 (108) (104) (212)
FHLB stock 87 - 87 180 1 181
-------- ------ ------- -------- ------ -------
Total interest-earning assets 6,549 (355) 6,194 12,988 (705) 12,283
Interest-bearing liabilities:
Passbook accounts (1) (2) (3) (1) (2) (3)
Money market and NOW accounts 143 (132) 11 560 (238) 322
Certificates of deposit 1,723 (66) 1,657 2,672 (110) 2,562
FHLB borrowings 1,404 (21) 1,383 3,085 (15) 3,070
Borrowed money 1,001 55 1,056 2,233 70 2,303
-------- ------ ------- -------- ------ -------
Total interest-bearing liabilities 4,270 (166) 4,104 8,549 (295) 8,254
-------- ------ ------- -------- ------ -------
Change in net interest income before provision
for loan and valuation losses $ 2,279 $ (189) $ 2,090 $ 4,439 $ (410) $ 4,029
======== ====== ======= ======== ====== =======
</TABLE>
ASSET QUALITY
NONPERFORMING ASSETS
The following table sets forth information as to the Company's nonperforming
assets ("NPAs"). NPAs 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>
JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------------ ------------------ -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans $ 7,076 $ 4,796 $ 3,031
Nonaccrual consumer loans 168 194 872
------------------ ------------------ -----------------
Total nonperforming loans 7,244 4,990 3,903
Foreclosed real estate 865 1,242 788
Repossessed automobiles - - 506
------------------ ------------------ -----------------
Total nonperforming assets $ 8,109 $ 6,232 $ 5,197
================== ================== =================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total nonperforming loans to total loans 1.04% 1.03% 1.89%
================= ================= =================
Total nonperforming assets
to total assets 0.97% 0.97% 1.83%
================= ================= =================
Ratio of allowance for loan and
valuation losses to total non-
performing loans 30.98% 35.19% 26.62%
================= ================= =================
</TABLE>
As of June 30, 1998, the Company had no non-government accruing loans that were
contractually past due 90 days or more. Beginning in 1996, the Company began to
accrue for government-sponsored loans such as FHA insured and VA guaranteed
loans which are past due 90 or more days, as the interest on these loans is
insured by the federal government. At June 30, 1998, $7.6 million, or 94.4%, of
the nonaccrual loans were loans that were residential loans purchased in bulk
loan portfolios and remain classified as "held for sale". Total loans held for
sale at June 30, 1998 were $623.6 million, of which $6.8 million, or 1.10%, were
nonaccrual loans. Against the loans held for sale, the Company has $6.2 million
of purchase discounts plus an additional $41.1 million of loans which have some
form of recourse to the seller.
Included in loans held for sale is approximately $179.6 million, at June 30,
1998, of loans which the Company has acquired under purchase/repurchase
facilities with several parties. The terms of the purchase/repurchase facilities
vary with each seller but include provisions which require the seller to
repurchase the loans within a defined period of time, or provide at the
Company's option, the ability, on short notice, to require the seller to
repurchase the loans, or in some cases, allow the seller to repurchase the
loans.
The decreases in nonaccrual consumer loans and repossessed automobiles in 1997
are the result of the Company's sale and/or disposal of all of the sub-prime
autos and auto loans that the Company repurchased pursuant to limited
representations and warranties included in sale agreements. The Company does
not anticipate that it will originate any additional sub-prime automobile
contracts in the future.
The percentage of the allowance for loan losses to nonaccrual loans varies
widely due to the nature of the Company's portfolio of mortgage loans, which are
collateralized primarily by residential real estate. The Company analyzes the
collateral for each nonperforming mortgage loan to determine potential loss
exposure. In conjunction with other factors, this loss exposure contributes to
the overall assessment of the adequacy of the allowance for loan losses. See "-
- -Results of Operations for the Quarter Ended June 30, 1998 Compared to the
Quarter Ended June 30, 1997."
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability of the Company 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 the Company's operating activities experienced
over the reported periods results primarily from the growth that Matrix Bank has
experienced in its residential loan purchasing activity. The Company anticipates
the trend of a net use of cash from operations to continue for the foreseeable
future. This anticipation results from the expected growth at Matrix Bank,
which management believes will consist primarily of increased activity in the
purchasing of loan portfolios. The Company anticipates such growth will be
funded through retail deposits, custodial escrow deposits, trust deposits,
brokered deposits and FHLB borrowings.
Matrix Bank's primary source of funds for use in lending, purchasing bulk loan
portfolios, investing and other general purposes are retail deposits, trust
deposits, custodial escrow balances, brokered deposits, FHLB borrowings, sales
of loan portfolios and proceeds from principal and interest payments on loans.
Contractual loan payments and deposit inflows and outflows 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 FHLB as its primary source for
borrowings. At June 30, 1998, Matrix Bank had overnight borrowings from the
FHLB of $124.0 million. The trust deposits generated from the trust
administration services fluctuate based on the trust assets under administration
and, to a lesser extent, the general economic conditions. The custodial escrow
balances held by Matrix Bank fluctuate based upon the mix and size of the
related servicing rights portfolios and the timing of payments for taxes and
insurance.
18
<PAGE>
Matrix Bank's leverage capital ratio at June 30, 1998 was 5.4%. This exceeded
the leverage capital requirement of 4.0% of adjusted assets by $9.6 million.
Matrix Bank's risk-based capital ratio was 10.3% at June 30, 1998. Matrix Bank
currently exceeds the risk-based capital requirement of 8.0% of risk weighted
assets by $8.6 million.
The Company's principal source of funding for its servicing acquisition
activities consists of line of credit facilities provided to Matrix Financial by
unaffiliated financial institutions. Effective May 27, 1998, the Company
executed an amendment to its servicing acquisition facilities to increase the
credit available by an additional $15.0 million. As of June 30, 1998, Matrix
Financial's servicing acquisition facilities aggregated $45.0 million, of which
$16.3 million was available to be utilized after deducting drawn amounts. It is
anticipated that the Company will increase the line of credit facilities for
servicing acquisitions activities as needed.
The Company's principal source of funding for its loan origination business
consists of warehouse lines of credit and sale/repurchase facilities provided to
Matrix Financial by financial institutions and brokerage firms. As of June 30,
1998, Matrix Financial's warehouse lines of credit and sale/repurchase
facilities aggregated $110.0 million, of which $50.0 million was available to be
utilized. Additionally, the Company has an overline facility available for an
additional $10.0 million. The availability of the overline facility is at the
lender's sole discretion.
The Company's principal source of funding for the working capital needs of
Matrix Financial consists of working capital facilities provided to Matrix
Financial by unaffiliated financial institutions. As of June 30, 1998, Matrix
Financial's working capital facilities aggregated $10.0 million, of which $5.3
million was available.
On June 29, 1998, the Company amended its bank stock loan and increased the
credit available under the loan by an additional $12.0 million. The amended
bank stock loan has two components of the loan, an $8.5 million term loan and a
revolving line of credit of $11.5 million. As of June 30, 1998, the balance of
the revolving line of credit was $0. One year from the date of the amendment,
the balance of the revolving line of credit will be converted to a term loan.
The additional proceeds from the loan will be used as capital at Matrix Bank.
The amended bank stock loan requires the Company to maintain (i) total
stockholders' equity of the greater of $40.0 million or 90% of actual net worth
at the end of the most recent fiscal year, plus 50% of cumulative net income
after the end of the most recent fiscal year, plus 90% of all contributions made
to stockholders' equity after the closing date, and (ii) total adjusted debt to
net worth less than 4 : 1. Additionally, the amended bank stock loan does not
permit the Company to declare or pay any dividends.
In the ordinary course of business, the Company makes commitments to originate
residential mortgage loans and holds originated loans until delivery to an
investor. Inherent in this business are risks associated with changes in
interest rates and the resulting change in the market value of the pipeline
loans. The Company mitigates this risk through the use of mandatory and
nonmandatory forward commitments to sell loans. As of June 30, 1998, the
Company had $86.8 million in pipeline and funded loans offset with mandatory
forward commitments of $65.5 million and nonmandatory forward commitments of
$12.3 million. The inherent value of the forward commitments is considered in
the determination of the lower of cost or market for such loans.
YEAR 2000
In the next eighteen months, most companies will face a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the Year 2000. This problem could force computers to either
shut down or provide incorrect data or information. The Company has begun the
process of identifying the changes required to its computer programs and
hardware, in consultation with software and hardware providers and regulators.
As of March 1, 1998, the Company took a complete inventory of all of its systems
and applications. Based on this inventory, 125 critical systems were identified
within the Company and its subsidiaries. The Company's deadline for full system
hardware and software compliance for the Year 2000 is January 31, 1999. The
Company has established a Year 2000 Plan, which is being implemented in stages
to address critical systems and applications first, and includes replacement of
any systems that cannot be brought into compliance by the stated deadline.
Additionally, the Company and all of its subsidiaries have formed Year 2000
project teams, all of which are overseen by the Company's Chief Information
Officer to ensure that consistent methodologies are being used by the
subsidiaries to address the various Year 2000 issues.
19
<PAGE>
The Company's computing environment consists largely of personal computers
connected to Local Area Network ("LAN") based systems. The exception to this is
an in-house Digital VAX mini-computer system used by Sterling Trust. This VAX
system houses the Trust Accounting System which is written in the COBOL
language. Based on the Company's Year 2000 Plan, this system is scheduled to be
in compliance by the January 31, 1999 deadline. The Company's Plan involves
modification and/or replacement of systems as necessary to allow them to
function properly with respect to date in the Year 2000 and thereafter.
Management presently believes that the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if the required
modifications or replacements are not made, or are not completed in a timely
manner, the Year 2000 could have material impact on the operations of the
Company.
The Company has identified approximately 300 different vendors and suppliers
currently utilized by the Company and its subsidiaries. Letters requesting the
status of the identified vendors' Year 2000 compliance have been sent to
approximately 50% of these vendors. The remaining vendors will be contacted by
the end of September 1998. The Company and its subsidiaries receive information
from many outside sources. As such, the Company will be working closely with
those vendors to minimize its exposure to non-compliant sources of data. Vendors
that cannot meet the January 31, 1999 deadline for compliance will be reviewed
by the appropriate project team to evaluate the Company's need to replace the
affected system and/or the vendor in exchange for an alternative provider.
Processing for many of Matrix Bank and Matrix Financial systems are handled by
outside service bureaus. These service bureaus have already been contacted by
the Company and are either already in compliance, or are expected to be in
compliance by the Company's deadline. However, there can be no guarantee that
the systems of other companies on which the Company relies will be converted
timely and will not have an adverse effect on the Company or its systems.
The costs for compliance or replacement have been determined for approximately
60% of the Company's critical systems. The total impact for the remaining
systems will be determined during the next quarter. The current costs identified
approximate $365,000. The Company anticipates that total costs associated with
Year 2000 compliance will not exceed $450,000; as such, Year 2000 compliance is
not expected to have a material effect on the results of operations. Most of the
costs associated with the Year 2000 issue will be expensed as incurred; however,
any costs attributable to the purchase of new software will be capitalized.
The costs of the project and the deadline by which the Company believes that it
will be Year 2000 compliant are based on management's best estimates, which were
derived utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
United Financial is a defendant in a lawsuit entitled Douglas County Bank &
Trust Co. v. United Financial, Inc., that was commenced on or about May 23, 1997
in the United States District Court for the District of Nebraska. In the
action, the plaintiff-buyer alleges that United Financial, as broker for the
seller, made false representations regarding the GNMA certification of certain
mortgage pools the servicing rights of which were offered for sale in a written
offering. The plaintiff further alleges that it relied on United Financial's
representations in purchasing the servicing rights from the seller. The
plaintiff seeks recovery of (i) the deposit paid to the seller in connection
with the purchase thereof in the amount of $147,000; (ii) $1.4 million that the
plaintiff claims it paid GNMA to settle a dispute regarding the certification of
the mortgage pools; and (iii) approximately $1.4 million in lost profits. Trial
was conducted in Omaha, Nebraska during the week of July 12, 1998. The jury
returned a verdict in favor of United Financial on four counts and in favor of
the plaintiff on one count, and awarded the plaintiff $75,000. On July 31, 1998,
the plaintiff filed a motion for judgment notwithstanding the verdict, or,
alternatively, a new trial. United Financial expects to file a motion in
opposition to such motion by the plaintiff, and is considering an appeal of the
$75,000 award to the plaintiff. No assurances can be given that an adverse
judgment of a material amount will not ultimately be rendered or that any such a
judgment would not have a material adverse effect on the Company's consolidated
financial condition, results of operations, or cash flows.
20
<PAGE>
Matrix Financial has been named defendant in an action styled Leslie M. Ronzitti
v. Matrix Financial Services Corp and Wendover Funding. Plaintiff commenced
this action on or about August 8, 1997. The plaintiff alleges that Matrix
Financial, as subservicer for Matrix Bank, breached the terms of the underlying
note and deed of trust with plaintiff and otherwise committed negligence, fraud
and violations of RESPA in connection with their servicing of plaintiff's
mortgage loan. Matrix Bank purchased this mortgage loan and the servicing
rights from a third-party in December 1996. Plaintiff claims $126,000 in actual
damages and $2,000,000 in punitive damages, in addition to interest, attorneys'
fees and other costs and expenses. The Company believes that it has defenses to
this lawsuit; however, no assurances can be given that an adverse judgment will
not be rendered or that such a judgment would not have a material adverse effect
on the Company's consolidated financial condition, results of operations, or
cash flows.
The Company is involved from time to time in routine litigation incidental to
its business. However, other than described above, the Company believes that it
is not a party to any material pending litigation that, if decided adversely to
the Company, would have a significant adverse effect on the Company's
consolidated financial condition, results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 1, 1998, the Company held its Annual Meeting of Shareholders ( the
"Annual Meeting"). At the Annual Meeting, the shareholders voted on the election
of directors and three other motions. The first motion the shareholders voted on
was a proposal to amend the Company's Amended and Restated Articles of
Incorporation to change the Company's name to Matrix Bancorp. On this motion,
6,386,529 of the shares entitled to vote were in favor of approving the proposed
amendment, with 3,004 against, and 100 abstentions.
The second motion was to ratify the appointment of Ernst & Young, LLP as
independent auditors for the Company for the 1998 fiscal year. With regard to
this motion, 6,387,890 of the shares entitled to vote were in favor of this
motion, with 1,243 against, and 100 abstentions.
The third motion was to consider and vote upon a proposal to add ", Inc." to the
proposed name change of Matrix Bancorp, due to notification by the Department of
Banking of Colorado that the name change would be approved only if Inc., Corp.,
or some similar title were added to the proposed name change. With regard to
this motion, 6,004,896 of the shares entitled to vote were in favor of this
motion, with 210,227 against, and 174,510 abstentions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1 Fourth Amendment to Credit Agreement, dated as of June 29, 1998, between
Matrix Capital Corporation, as borrower, and Bank One, Texas, N.A., as
agent, and certain lenders, as lenders
*10.2 Term Note, dated as of June 29, 1998, from Matrix Capital Corporation, as
borrower, to U.S. Bank National Association, as lender
*10.3 Term Note, dated as of June 29, 1998, from Matrix Capital Corporation, as
borrower, to Bank One, Texas, N.A., as lender
21
<PAGE>
*10.4 Revolving Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to U.S. Bank National Association, as lender
*10.5 Revolving Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to Bank One, Texas, N.A., as lender
*10.6 Fourth Amendment to Amended and Restated Loan Agreement, dated as of
May 27, 1998, between Matrix Financial Services Corporation, as borrower,
Bank One, Texas, N.A., as agent, and certain lenders, as lenders
*10.7 Fifth Amendment to Amended and Restated Loan Agreement, dated as of
June 26, 1998, between Matrix Financial Services Corporation, as
borrower, Bank One, Texas, N.A., as agent, and certain lenders, as
lenders
*27 Financial Data Schedule
(b) Reports on Form 8-K
None
______________________
* Filed herewith.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX CAPITAL CORPORATION
Dated: August 13, 1998 /s/ Guy A. Gibson
----------------------------- --------------------------------
Guy A. Gibson
President and
Chief Executive Officer
(Principal Executive
Officer)
Dated: August 13, 1998 /s/ David W. Kloos
----------------------------- --------------------------------
David W. Kloos
Senior Vice President
and Chief Financial Officer
(Principal Accounting
and Financial Officer)
23
<PAGE>
EXHIBIT 10.1
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS AMENDMENT is entered into as of June 29, 1998, between MATRIX CAPITAL
CORPORATION, a Colorado corporation ("BORROWER"), the Lenders described below,
and BANK ONE, TEXAS, N.A., as Agent for Lenders.
Borrower, Lenders, and Agent are party to the Credit Agreement (as renewed,
extended, and amended, the "CREDIT AGREEMENT") dated as of March 12, 1997,
providing for a $2,000,000 Term Loan and a Revolving Facility of up to
$6,000,000. Borrower, Lenders, and Agent have agreed, upon the following terms
and conditions, to amend certain provisions of the Credit Agreement as described
in PARAGRAPH 2 below.
1. TERMS AND REFERENCES. Unless otherwise stated in this amendment (A) terms
--------------------
defined in the Credit Agreement have the same meanings when used in this
amendment and (B) references to "SECTIONS," "SCHEDULES," and "EXHIBITS" are to
the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENT. The Credit Agreement is amended as follows:
---------
(A) The recital paragraph in the Credit Agreement is entirely amended as
follows:
Borrower has requested that Lenders extend credit to Borrower not to
exceed a total outstanding principal amount of $20,000,000 (as that amount
may be reduced or canceled pursuant to this agreement) to be used by
Borrower as provided in SECTION 6.1 and allocated as (A) a term loan of
$8,500,000 (the "TERM LOAN"), and (B) a revolving-credit facility of
$11,500,000 (the "REVOLVING FACILITY") to be funded by Lenders from time to
time on and after the Closing Date but before the Actual-Termination Date.
Lenders are willing to extend the requested credit on the terms and
conditions of this agreement.
(B) SECTION 1.1 is amended by entirely amending or adding the following
definitions in alphabetical order with the other definitions in that section:
"BORROWING BASE" means, at any time, 40% of the book value of
Matrix Bank's issued and outstanding common stock subject to Lender
Liens.
"COMMERCIAL LOAN" means a loan that is not a one- to four-family
residential loan, nor an installment loan to an individual, nor the
portion of a loan guaranteed by the Small Business Administration, but
is a loan for commercial purposes, or a loan secured by chattel or a
mortgage note on non one- to four-family residential real property.
"MATURITY DATE" means June 30, 2001.
"STATED-TERMINATION DATE" means the earlier of EITHER (a) June
30, 1999, OR (b) 30 days after the date on which at least 90% of the
total Commitments for the Revolving Facility have been funded under
SECTION 2.2.
(C) The third bullet point in SECTION 2.2 is entirely amended as follows:
. The total of the Principal Debt of the Revolving Facility and
of the Term Loan may never exceed the lesser of EITHER (i) the
total of (a) the Principal Debt of the Term Loan plus (b) the
total Commitments for the Revolving Facility OR (ii) the
Borrowing Base.
FOURTH AGREEMENT TO CREDIT AGREEMENT
------------------------------------
<PAGE>
(D) The first bullet point in SECTION 3.2(A) is entirely amended as
follows:
. The Principal Debt of the Term Loan is payable in 12
consecutive quarterly installments of $303,571 each on the
last day of each March, June, September, and December
(commencing September 30, 1998), with a final installment in
the amount of the unpaid Principal Debt of the Term Loan due
on the Maturity Date.
(E) New SECTION 3.15 is added as follows:
3.15 NON-USE FEE. From and after October 1, 1998, Borrower
-----------
shall pay to Agent a non-use fee for Lenders according to each
Lender's Commitment Percentage. The fee is payable as it accrues on
the last day of each March, June, September, and December (commencing
on December 31, 1998) and on the Actual-Termination Date. Each
payment of the fee is equal to the following, determined for the
calendar quarter (or portion of a calendar quarter commencing on the
date of this agreement or ending on the Actual-Termination Date)
preceding and including the date it is due: From October 1, 1998,
until the Actual-Termination Date, the product of (i) 0.25% times (ii)
the amount by which the average-daily total Commitments for only the
Revolving Facility exceed the sum of the average-daily Principal Debt
under only the Revolving Notes, times (iii) a fraction with the number
of days in the applicable quarter or portion of it as the numerator
and 365 or 366, as the case may be, as the denominator.
(F) The second sentence of SECTION 5 is entirely amended as follows:
"In addition, no Lender is obligated to fund its part of any
Borrowing unless on the applicable Borrowing Date (and after giving
effect to the requested Borrowing): (a) Agent has timely received a
Borrowing Request; (b) all of the representations and warranties of
Borrower in the Loan Documents are true and correct in all material
respects (unless they speak to a specific date or are based on facts
which have changed by transactions contemplated or permitted by this
agreement); (c) no Default or Potential Default exists; (d) the
funding of the Borrowing is permitted by Law and does not cause a
Borrowing Excess; (e) if reasonably requested by Agent, it has
received evidence substantiating any of the matters in the Loan
Documents that are necessary to enable Borrower to qualify for the
Borrowing; and (f) a due diligence examination of Borrower for the
preceding year has been completed and reviewed to the satisfaction of
Agent."
(G) SECTION 6.1(A) is entirely amended as follows:
(A) PURPOSE. Borrower will use the proceeds of the (i) Term Loan
-------
to refinance the Refinanced Debt and to make contributions to capital
of Matrix Bank and (ii) Revolving Facility to either make or refinance
contributions to capital of Matrix Bank for Matrix Bank's use as
working capital for its general corporate purposes.
(H) SECTION 7.1(B) is entirely amended as follows:
(B) QUARTERLY. Promptly after preparation but no later than 45
---------
days after the last day of the first three fiscal quarters of Borrower
each year (i) Financials showing Borrower's consolidating financial
condition and results of operations for that fiscal quarter and for
the period from the beginning of the current fiscal year to the last
day of that fiscal quarter, (ii) a Compliance Certificate, (iii)
Matrix Bank's most recent call reports or other quarterly and annual
reports of condition or income furnished to the FDIC or the OTS, and
(iv) reports sent to and all consents and resolutions adopted by
Matrix Bank's Board of Directors during the preceding fiscal quarter.
2
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
<PAGE>
(I) SECTION 8.1(D) is entirely amended as follows:
(D) OTHER DEBT. Other Debt incurred by either Borrower or Matrix
----------
Bank with the approval of all Lenders that never exceeds $1,000,000 in
total-principal amount outstanding for both Borrower and Matrix Bank,
together with renewals, extensions, amendments, modifications, and
refinancings of that Debt and those obligations subject to the
foregoing limitations of this CLAUSE (D).
(J) SECTION 8.4 is entirely amended as follows:
8.4 DISTRIBUTIONS. Borrower may not pay or declare any
-------------
Distribution.
(K) SECTION 9.1 is entirely amended as follows:
9.1 NET WORTH . The Companies' Net Worth to be less than the
---------
greater of EITHER (a) the SUM of (i) 90% of actual Net Worth at the
most recent fiscal year end, PLUS (ii) 50% of cumulative Net Income
(without deduction for losses) after the most recent fiscal year end,
PLUS (iii) 90% of all contributions to Borrower's stockholders' equity
made after the Closing Date, OR (b) $40,000,000.
(L) SECTION 9.3 is entirely amended as follows:
9.3 CASH COVERAGE. The ratio (calculated only in respect of
-------------
Borrower) of cash dividends and tax sharing payments available to be
received by the Borrower from its Subsidiaries divided by cash
expenses and CMLTD paid by the Borrower, may not be less than 1.5 to
1.0 for any four-fiscal-quarter period.
(M) SECTION 9.4 is entirely amended as follows:
9.4 NET INCOME. Matrix Bank's Net Income to be less than
----------
$7,500,000 for any four-fiscal-quarter period.
(N) SECTION 9.7 is amended to change the percentage value set forth
therein to 50%.
(O) New SECTION 9.11 is added as follows:
9.11 COMMERCIAL LOANS/TOTAL CAPITAL. The ratio of the
------------------------------
outstanding principal balance of Commercial Loans owned by Matrix Bank
to Total Capital of Matrix Bank to exceed 200%.
(P) SECTION 10.1(J) is entirely amended as follows:
(J) CHANGE OF CONTROL. Any (i) material change in the ownership
-----------------
or management of Borrower or any Guarantor from that ownership and
senior management as it exists on the date of this agreement without
the written approval of all Lenders, (ii) failure to provide advance
notice of any change in ownership or management, or (iii) common
stock, preferred stock, or ownership interest in Matrix Bank ceases to
be owned by Borrower.
(Q) SCHEDULE 2 AND EXHIBITS A-1, A-2, D-1 and D-2 are entirely amended in
the forms of, and all references in the Credit Agreement to SCHEDULE 2
AND EXHIBITS A-1, A-2, D-1 and D-2 are changed to, the attached SECOND
AMENDED SCHEDULE 2, AMENDED EXHIBIT A-1, AMENDED EXHIBIT A-2, AMENDED
EXHIBIT D-1, and SECOND AMENDED EXHIBIT D-2, respectively.
3
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
<PAGE>
3. TERM LOAN. Subject to the terms and conditions of this amendment and the
---------
terms and conditions of the Credit Agreement that are not inconsistent with the
terms and conditions of this amendment, each Lender severally but not jointly
agrees to lend to Borrower that Lender's Commitment Percentage of $6,857,150 as
a single Borrowing on the date of this amendment that, when loaned, will cause
the Principal Debt of the Term Loan to be $8,500,000.
4. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the foregoing
--------------------
paragraphs in this amendment are not effective unless and until (a) the
representations and warranties in this amendment are true and correct, and (b)
Agent receives (i) counterparts of this amendment executed by Agent, Lenders,
Borrower, and each other Company named on the signature pages of this amendment,
and (ii) each amendment and other item listed on the attached ANNEX A.
5. RATIFICATIONS. To induce Agent and Lenders to enter into this amendment,
-------------
Borrower (A) ratifies and confirms all provisions of the Loan Documents as
amended by this amendment, (B) ratifies and confirms that all guaranties,
assurances, and Liens granted, conveyed, or assigned to Agent and Lenders under
the Loan Documents (as they may have been renewed, extended, and amended) are
not released, reduced, or otherwise adversely affected by this amendment and
continue to guarantee, assure, and secure full payment and performance of the
present and future Obligation, and (C) agrees to perform those acts and duly
authorize, execute, acknowledge, deliver, file, and record those additional
agreements, and certificates as Agent or any Lender may request in order to
create, perfect, preserve, and protect those guaranties, assurances, and Liens.
6. REPRESENTATIONS. To induce Agent and Lenders to enter into this amendment,
---------------
Borrower represents and warrants to Agent and Lenders that as of the date of
this amendment (A) each Company has all requisite authority and power to
execute, deliver, and perform its obligations under this amendment, which
execution, delivery, and performance have been duly authorized by all necessary
corporate action, require no action by or filing with any Tribunal, do not
violate corporate charter or bylaws or (except where not a Material-Adverse
Event) violate any Law applicable to it or any material agreement to which it or
its assets are bound, (B) upon execution and delivery by all parties to it, this
amendment will constitute each Company's legal and binding obligation,
enforceable against it in accordance with this amendment's terms except as that
enforceability may be limited by Debtor Laws and general principles of equity,
(C) all other representations and warranties in the Loan Documents are true and
correct in all material respects except to the extent that (1) any of them speak
to a different specific date or (2) the facts on which any of them were based
have been changed by transactions contemplated or permitted by the Credit
Agreement, and (D) no Material-Adverse Event, Default, or Potential Default
exists.
7. EXPENSES. Borrower shall, subject to a contrary written agreement between
--------
Agent and Borrower, pay all costs, fees, and expenses paid or incurred by Agent
incident to this amendment, including, without limitation, the reasonable fees
and expenses of Agent's counsel in connection with the negotiation, preparation,
delivery, and execution of this amendment and any related agreements.
8. MISCELLANEOUS. All references in the Loan Documents to the "Credit
-------------
Agreement" refer to the Credit Agreement as amended by this amendment. This
amendment is a "Loan Document" referred to in the Credit Agreement; therefore,
the provisions relating to Loan Documents in SECTIONS 1 and 12 are incorporated
in this amendment by reference. Except as specifically amended and modified in
this amendment, the Credit Agreement is unchanged and continues in full force
and effect. This amendment may be executed in any number of counterparts with
the same effect as if all signatories had signed the same amendment. All
counterparts must be construed together to constitute one and the same
instrument. This amendment binds and inures to each of the undersigned and their
respective successors and permitted assigns, subject to SECTION 12.12. THIS
AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES IN RESPECT OF THE MATTERS COVERED BY THE LOAN DOCUMENTS AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
4
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
<PAGE>
EXECUTED as of the date first stated in this Fourth Amendment to Credit
Agreement.
MATRIX CAPITAL CORPORATION, BANK ONE, TEXAS, N.A.,
as Borrower as Agent and a Lender
By /s/ David W. Kloos By /s/ Mark L. Freeman
--------------------------------------- -------------------------------
David W. Kloos, Chief Financial Officer Mark L. Freeman, Vice President
U.S. BANK NATIONAL ASSOCIATION,
formerly Colorado National Bank,
as a Lender
By /s/ Andrea C. Koeneke
--------------------------
Andrea C. Koeneke,
Vice President
1 OF 2 SIGNATURE PAGES TO
FOURTH AMENDMENT TO CREDIT AGREEMENT
5
<PAGE>
CONSENT AND AGREEMENT
---------------------
To induce Agent and Lenders to enter into this amendment, the undersigned
jointly and severally (a) consent and agree to this amendment's execution and
delivery, (b) ratify and confirm that all guaranties, assurances, Liens, and
subordinations granted, conveyed, or assigned to Agent or any Lender under the
Loan Documents (as they may have been renewed, extended, and amended) are not
released, diminished, impaired, reduced, or otherwise adversely affected by this
amendment and continue to guarantee, assure, secure, and subordinate other debt
to the full payment and performance of all present and future Obligation, (c)
agree to perform those acts and duly authorize, execute, acknowledge, deliver,
file, and record those additional guaranties, assignments, security agreements,
deeds of trust, mortgages, and other agreements, agreements, instruments, and
certificates as Agent or any Lender may reasonably deem necessary or appropriate
in order to create, perfect, preserve, and protect those guaranties, assurances,
Liens, and subordinations, (d) represent and warrant to Agent and Lenders that
(i) the value of the consideration received and to be received by the
undersigned in respect of those guaranties, assurances, Liens, and
subordinations are reasonably worth at least as much as the related liability
and obligation, (ii) that liability and obligation may reasonably be expected to
directly or indirectly benefit the undersigned, and (iii) each undersigned is --
and after giving effect to those guaranties, assurances, Liens, subordinations,
and the Loan Documents, in light of all existing facts and circumstances
(including, without limitation, collateral for and other obligors in respect of
the Obligation and various components of it and various rights of subrogation
and contribution), each undersigned will be -- Solvent, and (e) waive notice of
acceptance of this consent and agreement, which consent and agreement binds the
undersigned and their successors and permitted assigns and inures to Agent and
Lenders and their respective successors and permitted assigns.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES CORPORATION and MATRIX
FUNDING CORPORATION UNITED CAPITAL MARKETS, INC.
By /s/ Thomas J. Osselaer By /s/ Austin Tilghman
------------------------------------------------- -------------------------------------------------
Thomas J. Osselaer, Chief Executive Officer and Austin Tilghman, President
President of each above Company
UNITED FINANCIAL, INC. UNITED SPECIAL SERVICES, INC.
By /s/ Richard Schmitz By /s/ Linda Preston
------------------------------------------------- -------------------------------------------------
Richard Schmitz, Chairman Linda Preston, President
FIRST MATRIX INVESTMENT SERVICES
VINTAGE DELAWARE HOLDINGS, INC. CORP. and THE VINTAGE GROUP, INC.
By /s/ David W. Kloos By /s/ Paul E. Skretny
------------------------------------------------- -------------------------------------------------
David W. Kloos, Chairman Paul E. Skretny, Chairman of the Board and Chief
Executive Officer of each above Company
</TABLE>
2 OF 2 SIGNATURE PAGES TO
FOURTH AMENDMENT TO CREDIT AGREEMENT
6
<PAGE>
EXHIBIT 10.2
AMENDED EXHIBIT A-1
-------------------
TERM NOTE
---------
$ 4,250,000 June 29, 1998
FOR VALUE RECEIVED, MATRIX CAPITAL CORPORATION, a Colorado corporation
("BORROWER"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION
("LENDER") $4,250,000, together with interest.
This note is a "Term Note" under the Credit Agreement (as renewed,
extended, amended, or restated, the "CREDIT AGREEMENT") dated as of March 12,
1997, between Borrower, Lender, certain other Lenders, and Bank One, Texas,
N.A., as Agent for Lenders. All of the defined terms in the Credit Agreement
have the same meanings when used, unless otherwise defined, in this note.
This note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this note, including, without limitation, the
final maturity, which is the Maturity Date. Principal and interest are payable
to the holder of this note through Agent at either (a) its offices at 1717 Main
Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent
in written notice to Borrower.
This note incorporates by reference all other provisions in the Credit
Agreement applicable to this note, such as provisions for disbursements of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
attorneys' fees, court costs, and other costs of collection, certain waivers by
Borrower and other obligors, assurances and security, choice of Texas and United
States federal Law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
This note is a renewal, extension, increase of, and substitution for (but
not novation of), the existing Term Note dated as of March 12, 1997, executed by
Borrower, payable to Payee, and in the stated principal amount of $1,000,000.
MATRIX CAPITAL CORPORATION, as Borrower
By /s/ Guy A. Gibson
--------------------------------------------
Guy A. Gibson, Chief Executive Officer and
President
AMENDED EXHIBIT A-1
-------------------
<PAGE>
EXHIBIT 10.3
AMENDED EXHIBIT A-1
-------------------
TERM NOTE
---------
$ 4,250,000 June 29, 1998
FOR VALUE RECEIVED, MATRIX CAPITAL CORPORATION, a Colorado corporation
("BORROWER"), promises to pay to the order of BANK ONE, TEXAS, N.A. ("LENDER")
$4,250,000 together with interest.
This note is a "Term Note" under the Credit Agreement (as renewed,
extended, amended, or restated, the "CREDIT AGREEMENT") dated as of March 12,
1997, between Borrower, Lender, certain other Lenders, and Bank One, Texas,
N.A., as Agent for Lenders. All of the defined terms in the Credit Agreement
have the same meanings when used, unless otherwise defined, in this note.
This note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this note, including, without limitation, the
final maturity, which is the Maturity Date. Principal and interest are payable
to the holder of this note through Agent at either (a) its offices at 1717 Main
Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent
in written notice to Borrower.
This note incorporates by reference all other provisions in the Credit
Agreement applicable to this note, such as provisions for disbursements of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
attorneys' fees, court costs, and other costs of collection, certain waivers by
Borrower and other obligors, assurances and security, choice of Texas and United
States federal Law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
This note is a renewal, extension, increase of, and substitution for (but
not novation of), the existing Term Note dated as of March 12, 1997, executed by
Borrower, payable to Payee, and in the stated principal amount of $1,000,000.
MATRIX CAPITAL CORPORATION, as Borrower
By /s/ Guy A. Gibson
--------------------------------------------
Guy A. Gibson, Chief Executive Officer and
President
AMENDED EXHIBIT A-1
-------------------
<PAGE>
EXHIBIT 10.4
AMENDED EXHIBIT A-2
-------------------
REVOLVING NOTE
--------------
$ 5,750,000 June 29, 1998
FOR VALUE RECEIVED, MATRIX CAPITAL CORPORATION, a Colorado corporation
("BORROWER"), promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION
("LENDER") that portion of the principal amount of $5,750,000 that may from time
to time be disbursed and outstanding under this note together with interest.
This note is a "Revolving Note" under the Credit Agreement (as renewed,
extended, amended, or restated, the "CREDIT AGREEMENT") dated as of March 12,
1997, between Borrower, Lender, certain other Lenders, and Bank One, Texas,
N.A., as Agent for Lenders. All of the defined terms in the Credit Agreement
have the same meanings when used, unless otherwise defined, in this note.
This note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this note, including, without limitation, the
final maturity, which is the Maturity Date. Principal and interest are payable
to the holder of this note through Agent at either (a) its offices at 1717 Main
Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent
in written notice to Borrower.
This note incorporates by reference all other provisions in the Credit
Agreement applicable to this note, such as provisions for disbursements of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
attorneys' fees, court costs, and other costs of collection, certain waivers by
Borrower and other obligors, assurances and security, choice of Texas and United
States federal Law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
This note is a renewal, extension, increase of, and substitution for (but
not novation of), the existing Revolving Note dated as of March 12, 1997,
executed by Borrower, payable to Payee, and in the stated principal amount of
$3,000,000.
MATRIX CAPITAL CORPORATION, as Borrower
By /s/ Guy A. Gibson
----------------------------------------------
Guy A. Gibson, Chief Executive Officer and
President
AMENDED EXHIBIT A-2
-------------------
<PAGE>
EXHIBIT 10.5
AMENDED EXHIBIT A-2
-------------------
REVOLVING NOTE
--------------
$ 5,750,000 June 29, 1998
FOR VALUE RECEIVED, MATRIX CAPITAL CORPORATION, a Colorado corporation
("BORROWER"), promises to pay to the order of BANK ONE, TEXAS, N.A. ("LENDER")
that portion of the principal amount of $5,750,000 that may from time to time be
disbursed and outstanding under this note together with interest.
This note is a "Revolving Note" under the Credit Agreement (as renewed,
extended, amended, or restated, the "CREDIT AGREEMENT") dated as of March 12,
1997, between Borrower, Lender, certain other Lenders, and Bank One, Texas,
N.A., as Agent for Lenders. All of the defined terms in the Credit Agreement
have the same meanings when used, unless otherwise defined, in this note.
This note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this note, including, without limitation, the
final maturity, which is the Maturity Date. Principal and interest are payable
to the holder of this note through Agent at either (a) its offices at 1717 Main
Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent
in written notice to Borrower.
This note incorporates by reference all other provisions in the Credit
Agreement applicable to this note, such as provisions for disbursements of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
attorneys' fees, court costs, and other costs of collection, certain waivers by
Borrower and other obligors, assurances and security, choice of Texas and United
States federal Law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
This note is a renewal, extension, increase of, and substitution for (but
not novation of), the existing Revolving Note dated as of March 12, 1997,
executed by Borrower, payable to Payee, and in the stated principal amount of
$3,000,000.
MATRIX CAPITAL CORPORATION, as Borrower
By /s/ Guy A. Gibson
----------------------------------------------
Guy A. Gibson, Chief Executive Officer and
President
AMENDED EXHIBIT A-2
-------------------
<PAGE>
EXHIBIT 10.6
FOURTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS DOCUMENT is entered into effective as of May 27, 1998, between MATRIX
FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), the Lenders
listed on the signature page below, and BANK ONE, TEXAS, N.A., as Agent (in that
capacity "AGENT").
Borrower, Lenders, and Agent have entered into the Amended and Restated
Loan Agreement (as renewed, extended, amended, or restated, the "LOAN
AGREEMENT") dated as of January 31, 1997, providing for loans to Borrower both
on a revolving and a term basis. Borrower, Lenders, and Agent have agreed, upon
the following terms and conditions, to amend the Loan Agreement as provided in
PARAGRAPH 2 below. Accordingly, for adequate and sufficient consideration,
Borrower, Lenders, and Agent agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this document (A)
--------------------
terms defined in the Loan Agreement have the same meanings when used in this
document and (B) all references to "Sections," "Schedules," and "Exhibits" are
to the Loan Agreement's sections, schedules, and exhibits.
2. AMENDMENTS. The Loan Agreement is amended as follows:
----------
(A) The following definitions are entirely amended or added to SECTION 1.1
in alphabetical order with the other definitions in that section:
"TRANCHE B" means that portion of Term-Line Borrowings that (a)
is advanced for the purpose of financing certain Servicing Portfolio
acquisitions, (b) may not be reborrowed under this agreement on or
after the Tranche B-Actual-Termination Date, and (c) may not exceed an
amount (as that amount is permanently reduced by payments or
prepayments on Tranche B under SECTION 3 on and after the Tranche B-
Actual-Termination Date) equal at any time to the lesser of either (i)
the total Term-Line Commitments minus Tranche A or (ii) $35,000,000.
"TRANCHE B-STATED-TERMINATION DATE" means the earlier of either
(a) January 31, 1999, or (b) the 30th calendar day after the calendar
day that at least $31,500,000 of Tranche B has been disbursed (whether
or not prepaid) under this agreement.
(B) SCHEDULE 2 is entirely amended in the form of, and all references in
the Loan Agreement to SCHEDULE 2 are changed to, the attached THIRD AMENDED
SCHEDULE 2.
3. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the
--------------------
foregoing paragraphs in this document are not effective unless and until (A) the
representations and warranties in this document are true and correct and (B)
Agent receives (1) counterparts of this document executed by each party on the
signature pages of this document and (2) each document and other item listed on
the attached ANNEX A, each of which must be in form, substance, and number of
counterparts as may be acceptable to Agent and its special counsel.
4. SETTLEMENT AMONG LENDERS. Agent and Lenders agree among themselves
------------------------
(and Borrower consents) that, concurrently with the effectiveness of this
document, there shall be deemed to have occurred assignments and assumptions
with respect to the Obligation, Liens, Rights, and obligations under the Loan
Documents in respect of the Term-Line Commitment such that, after giving effect
to those assignments and assumptions, the Obligation, Liens, Rights, and
obligations under the Loan Documents in respect of the Term-Line Commitment are
owned by each Lender in accordance with its Commitment Percentage for Term-Line
Commitments after giving effect to this document. Lenders hereby make those
assignments and assumptions and shall make all appropriate payments and
adjustments among themselves through Agent in order to effectuate the
appropriate purchase price for and other amounts payable with respect to those
assignments and assumptions.
<PAGE>
5. RATIFICATIONS. To induce Agent and Lenders to enter into this
-------------
document, Borrower (A) ratifies and confirms all provisions of the Loan
Documents as amended by this document, (B) ratifies and confirms that all
guaranties, assurances, and Liens granted, conveyed, or assigned to Agent and
Lenders under the Loan Documents (as they may have been renewed, extended, and
amended) are not released, reduced, or otherwise adversely affected by this
document and continue to guarantee, assure, and secure full payment and
performance of the present and future Obligation, and (C) agrees to perform
those acts and duly authorize, execute, acknowledge, deliver, file, and record
those additional documents, and certificates as Agent or any Lender may request
in order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens.
6. REPRESENTATIONS. To induce Agent and Lenders to enter into this
---------------
document, Borrower represents and warrants to Agent and Lenders that as of the
date of this document (A) Borrower has all requisite authority and power to
execute, deliver, and perform its obligations under this document, which
execution, delivery, and performance have been duly authorized by all necessary
corporate action, require no action by or filing with any Tribunal, do not
violate its corporate charter or bylaws, or (except where not a Material-Adverse
Event) violate any Law applicable to it or any material agreement to which it or
its assets are bound, (B) upon execution and delivery by all parties to it, this
document will constitute Borrower's legal and binding obligation, enforceable
against it in accordance with their respective terms except as that
enforceability may be limited by Debtor Laws and general principles of equity,
(C) all other representations and warranties in the Loan Documents are true and
correct in all material respects except to the extent that (1) any of them speak
to a different specific date or (2) the facts on which any of them were based
have been changed by transactions contemplated or permitted by the Loan
Agreement, and (D) no Material-Adverse Event, Default, or Potential Default
exists.
7. EXPENSES. Borrower shall pay all costs, fees, and expenses paid or
--------
incurred by Agent incident to this document, including, without limitation, the
reasonable fees and expenses of Agent's special counsel in connection with the
negotiation, preparation, delivery, and execution of this document and any
related documents.
8. MISCELLANEOUS. All references in the Loan Documents to the "Loan
-------------
Agreement" refer to the Loan Agreement as amended by this document. This
document is a "Loan Document" referred to in the Loan Agreement; therefore, the
provisions relating to Loan Documents in SECTIONS 1 and 12 are incorporated in
this document by reference. Except as specifically amended and modified in this
document, the Loan Agreement is unchanged and continues in full force and
effect. This document may be executed in any number of counterparts with the
same effect as if all signatories had signed the same document. All counterparts
must be construed together to constitute one and the same instrument. This
document binds and inures to each of the undersigned and their respective
successors and permitted assigns, subject to SECTION 12.12. THIS DOCUMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
{REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGES FOLLOW.]
2
<PAGE>
EXECUTED as of the date first stated in this Fourth Amendment to Restated
and Amended Loan Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES BANK ONE, TEXAS, N.A., as Agent, as a
CORPORATION, as Borrower Lender, and as Bank One
By /s/ Thomas J. Osselaer By /s/ Mark L. Freeman
____________________________________ ________________________________________
Thomas J. Osselaer, Mark L. Freeman, Vice President
Executive Vice President
U.S. BANK NATIONAL ASSOCIATION, RESIDENTIAL FUNDING CORPORATION, as
formerly Colorado National Bank as a Lender a Lender
By /s/ Jannette Scarpino By /s/ L.L. Schellenberg
____________________________________ ________________________________________
Jannette Scarpino, Vice President L.L. Schellenberg, Director
</TABLE>
CONSENT AND AGREEMENT
---------------------
To induce Agent and Lenders to enter into this document, the undersigned
(a) consents and agrees to this document's execution and delivery, (b) ratifies
and confirms that all guaranties, assurances, Liens, and subordinations granted,
conveyed, or assigned to Agent and Lenders under the Loan Documents (as they may
have been renewed, extended, and amended) are not released, diminished,
impaired, reduced, or otherwise adversely affected by this document and continue
to guarantee, assure, secure, and subordinate other debt to the full payment and
performance of all present and future Obligation, (c) agrees to perform those
acts and duly authorize, execute, acknowledge, deliver, file, and record those
additional guaranties, assignments, security agreements, deeds of trust,
mortgages, and other agreements, documents, instruments, and certificates as
Agent or any Lender may reasonably deem necessary or appropriate in order to
create, perfect, preserve, and protect those guaranties, assurances, Liens, and
subordinations, (d) represents and warrants to Agent and Lenders that (i) the
value of the consideration received and to be received by the undersigned in
respect of those guaranties, assurances, Liens, and subordinations are
reasonably worth at least as much as the related liability and obligation, (ii)
that liability and obligation may reasonably be expected to directly or
indirectly benefit the undersigned, and (iii) the undersigned is -- and after
giving effect to those guaranties, assurances, Liens, subordinations, and the
Loan Documents, in light of all existing facts and circumstances (including,
without limitation, collateral for and other obligors in respect of the
Obligation and various components of it and various rights of subrogation and
contribution), the undersigned will be -- Solvent, and (e) waives notice of
acceptance of this consent and agreement, which consent and agreement binds the
undersigned and its successors and permitted assigns and inures to Agent, each
Lender, and their successors and permitted assigns.
MATRIX CAPITAL CORPORATION, as Guarantor
By /s/ Guy A. Gibson
_____________________________________
Guy A. Gibson, Chief Executive
Officer and President
<PAGE>
EXHIBIT 10.7
FIFTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS DOCUMENT is entered into effective as of June 26, 1998, between MATRIX
FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), the Lenders
listed on the signature page below, and BANK ONE, TEXAS, N.A., as Agent (in that
capacity "AGENT").
Borrower, Lenders, and Agent have entered into the Amended and Restated
Loan Agreement (as renewed, extended, amended, or restated, the "LOAN
AGREEMENT") dated as of January 31, 1997, providing for loans to Borrower both
on a revolving and a term basis. Borrower, Lenders, and Agent have agreed, upon
the following terms and conditions, to amend the Loan Agreement as provided in
PARAGRAPH 2 below.
Accordingly, for adequate and sufficient consideration, Borrower, Lenders, and
Agent agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this document (A)
--------------------
terms defined in the Loan Agreement have the same meanings when used in this
document and (B) all references to "SECTIONS," "SCHEDULES," and "EXHIBITS" are
to the Loan Agreement's sections, schedules, and exhibits.
2. AMENDMENT. SECTION 8.1(XI) is entirely amended as follows:
---------
(xi) Guaranty by the Companies of up to $20,000,000 principal and all
other indebtedness of Matrix Capital Corporation under a combination
revolving and term credit facility provided by Bank One, Texas, N.A., and
other lenders, as that facility may be renewed, extended, amended, or
restated from time to time.
3. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the
--------------------
foregoing paragraphs in this document are not effective unless and until (A) the
representations and warranties in this document are true and correct and (B)
Agent receives counterparts of this document executed by each party on the
signature pages of this document.
4. RATIFICATIONS. To induce Agent and Lenders to enter into this
-------------
document, Borrower (A) ratifies and confirms all provisions of the Loan
Documents as amended by this document, (B) ratifies and confirms that all
guaranties, assurances, and Liens granted, conveyed, or assigned to Agent and
Lenders under the Loan Documents (as they may have been renewed, extended, and
amended) are not released, reduced, or otherwise adversely affected by this
document and continue to guarantee, assure, and secure full payment and
performance of the present and future Obligation, and (C) agrees to perform
those acts and duly authorize, execute, acknowledge, deliver, file, and record
those additional documents, and certificates as Agent or any Lender may request
in order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens.
5. REPRESENTATIONS. To induce Agent and Lenders to enter into this
---------------
document, Borrower represents and warrants to Agent and Lenders that as of the
date of this document (A) Borrower has all requisite authority and power to
execute, deliver, and perform its obligations under this document, which
execution, delivery, and performance have been duly authorized by all necessary
corporate action, require no action by or filing with any Tribunal, do not
violate its corporate charter or bylaws, or (except where not a Material-Adverse
Event) violate any Law applicable to it or any material agreement to which it or
its assets are bound, (B) upon execution and delivery by all parties to it, this
document will constitute Borrower's legal and binding obligation, enforceable
against it in accordance with their respective terms except as that
enforceability may be limited by Debtor Laws and general principles of equity,
(C) all other representations and warranties in the Loan Documents are true and
correct in all material respects except to the extent that (1) any of them speak
to a different specific date or (2) the facts on which any of them were based
have been changed by transactions contemplated or permitted by the Loan
Agreement, and (D) no Material-Adverse Event, Default, or Potential Default
exists.
6. EXPENSES. Borrower shall pay all costs, fees, and expenses paid or
--------
incurred by Agent incident to this document, including, without limitation, the
reasonable fees and expenses of Agent's special
<PAGE>
counsel in connection with the negotiation, preparation, delivery, and execution
of this document and any related documents.
7. MISCELLANEOUS. All references in the Loan Documents to the "Loan
-------------
Agreement" refer to the Loan Agreement as amended by this document. This
document is a "Loan Document" referred to in the Loan Agreement; therefore, the
provisions relating to Loan Documents in SECTIONS 1 and 12 are incorporated in
this document by reference. Except as specifically amended and modified in this
document, the Loan Agreement is unchanged and continues in full force and
effect. This document may be executed in any number of counterparts with the
same effect as if all signatories had signed the same document. All counterparts
must be construed together to constitute one and the same instrument. This
document binds and inures to each of the undersigned and their respective
successors and permitted assigns, subject to SECTION 12.12. THIS DOCUMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.]
2
<PAGE>
EXECUTED as of the date first stated in this Fifth Amendment to Restated
and Amended Loan Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES BANK ONE, TEXAS, N.A., as Agent, as a
CORPORATION, as Borrower Lender, and as Bank One
By /s/ Thomas J. Osseslaer By /s/ Mark L. Freeman
____________________________________ __________________________________________
Thomas J. Osselaer, Mark L. Freeman, Vice President
Executive Vice President
U.S. BANK NATIONAL ASSOCIATION, RESIDENTIAL FUNDING CORPORATION, as
formerly Colorado National Bank as a Lender a Lender
By /s/ Jannette Scarpino By /s/ L.L. Schellenberg
_____________________________________ ___________________________________________
Jannette Scarpino, Vice President L.L. Schellenberg, Director
</TABLE>
CONSENT AND AGREEMENT
---------------------
To induce Agent and Lenders to enter into this document, the undersigned
(a) consents and agrees to this document's execution and delivery, (b) ratifies
and confirms that all guaranties, assurances, Liens, and subordinations granted,
conveyed, or assigned to Agent and Lenders under the Loan Documents (as they may
have been renewed, extended, and amended) are not released, diminished,
impaired, reduced, or otherwise adversely affected by this document and continue
to guarantee, assure, secure, and subordinate other debt to the full payment and
performance of all present and future Obligation, (c) agrees to perform those
acts and duly authorize, execute, acknowledge, deliver, file, and record those
additional guaranties, assignments, security agreements, deeds of trust,
mortgages, and other agreements, documents, instruments, and certificates as
Agent or any Lender may reasonably deem necessary or appropriate in order to
create, perfect, preserve, and protect those guaranties, assurances, Liens, and
subordinations, (d) represents and warrants to Agent and Lenders that (i) the
value of the consideration received and to be received by the undersigned in
respect of those guaranties, assurances, Liens, and subordinations are
reasonably worth at least as much as the related liability and obligation, (ii)
that liability and obligation may reasonably be expected to directly or
indirectly benefit the undersigned, and (iii) the undersigned is -- and after
giving effect to those guaranties, assurances, Liens, subordinations, and the
Loan Documents, in light of all existing facts and circumstances (including,
without limitation, collateral for and other obligors in respect of the
Obligation and various components of it and various rights of subrogation and
contribution), the undersigned will be -- Solvent, and (e) waives notice of
acceptance of this consent and agreement, which consent and agreement binds the
undersigned and its successors and permitted assigns and inures to Agent, each
Lender, and their successors and permitted assigns.
MATRIX CAPITAL CORPORATION, as Guarantor
By /s/ Guy A. Gibson
_____________________________________
Guy A. Gibson, Chief Executive
Officer and President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 12,797,723 12,797,723
<INT-BEARING-DEPOSITS> 10,553,326 10,553,326
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 698,601,904 698,601,904
<ALLOWANCE> 2,244,123 2,244,123
<TOTAL-ASSETS> 834,657,089 834,657,089
<DEPOSITS> 504,396,317 504,396,317
<SHORT-TERM> 199,805,974 199,805,974
<LIABILITIES-OTHER> 23,769,869 23,769,869
<LONG-TERM> 61,527,002 61,527,002
0 0
0 0
<COMMON> 672 672
<OTHER-SE> 45,157,255 45,157,255
<TOTAL-LIABILITIES-AND-EQUITY> 834,657,089 834,657,089
<INTEREST-LOAN> 13,576,007 24,876,665
<INTEREST-INVEST> 242,737 527,853
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 13,818,744 25,404,518
<INTEREST-DEPOSIT> 3,854,160 6,718,124
<INTEREST-EXPENSE> 8,451,849 15,604,833
<INTEREST-INCOME-NET> 5,366,895 9,799,685
<LOAN-LOSSES> 538,000 988,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 12,486,157 23,863,881
<INCOME-PRETAX> 3,688,499 7,212,454
<INCOME-PRE-EXTRAORDINARY> 2,345,853 4,530,757
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,345,853 4,530,757
<EPS-PRIMARY> .35 .68
<EPS-DILUTED> .34 .66
<YIELD-ACTUAL> 3.34 3.20
<LOANS-NON> 8,037,351 8,037,351
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,021,931 1,756,426
<CHARGE-OFFS> 328,620 526,495
<RECOVERIES> 12,770 26,192
<ALLOWANCE-CLOSE> 2,244,123 2,244,123
<ALLOWANCE-DOMESTIC> 2,244,123 2,244,123
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
