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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 BANCORP, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1233716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 LAWRENCE STREET, SUITE 1400
DENVER, COLORADO 80204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 12, 1999, 6,724,911 shares of common stock were outstanding. The
aggregate market value of common stock held by non-affiliates of the registrant,
based on the closing sales price of such stock on the NASDAQ National Market on
March 11, 1999, was $55,441,449. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors and 10% beneficial owners are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive proxy statement for the Annual Meeting of
Shareholders to be held May 14, 1999 are incorporated by reference into Part III
of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 19
Item 3. Legal Proceedings............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........................................... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 20
Item 6. Selected Financial Data....................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................... 44
Item 8. Financial Statements and Supplementary Data................................................... 44
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......... 44
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 44
Item 11. Executive Compensation........................................................................ 44
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 44
Item 13. Certain Relationships and Related Transactions................................................ 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 45
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PART I
ITEM 1. BUSINESS
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GENERAL
Matrix Bancorp, Inc. ("Matrix Bancorp" or the "Company"), formerly Matrix
Capital Corporation, is a unitary thrift holding company that, through its
subsidiaries (the "Subsidiaries"), focuses 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 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, as well
as offering specialized custody and clearing services to investment
professionals. The Company was incorporated in Colorado in June 1993. Its
principal executive offices are located at 1380 Lawrence Street, Suite 1400,
Denver, Colorado 80204, and its telephone number is (303) 595-9898.
In December 1998, the Company changed its name to "Matrix Bancorp, Inc."
The name change was approved by the shareholders at the 1998 Annual Meeting of
Shareholders held on May 1, 1998. The Company's management group believes that
the name change more accurately reflects the true nature of the investment
activities undertaken by the Company. The trading symbol for the Company's
common stock on the NASDAQ National Market will continue to be "MTXC."
THE SUBSIDIARIES
The Company's core business operations are conducted through the following
operating Subsidiaries:
MATRIX BANK. With its main office in Las Cruces, New Mexico, full service
branches in Sun City, Arizona and Las Cruces, New Mexico, and loan offices in
Denver and Evergreen, Colorado (near Denver), Matrix Capital Bank ("Matrix
Bank") serves its local communities by providing a broad range of personal and
business depository services, offering residential loans, and providing consumer
and commercial real estate loans. Matrix Bank also holds the noninterest-bearing
custodial escrow deposits related to the residential mortgage loan portfolio
serviced by Matrix Financial Services Corporation ("Matrix Financial") and the
interest-bearing money market accounts administered by Sterling Trust Company
("Sterling Trust"). See "--Matrix Financial" and "--The Vintage Group." These
custodial escrow deposits and money market accounts under administration, as
well as other traditional deposits, are used to fund bulk purchases of
residential mortgage loan portfolios throughout the United States, a substantial
portion of which are serviced by Matrix Financial following their purchase. As
of December 31, 1998, Matrix Bank was deemed to be "well capitalized" under
applicable regulatory standards. See "--Regulation and Supervision--Matrix
Bank's Capital Ratios."
UNITED FINANCIAL. United Financial, Inc. ("United Financial") provides
brokerage and consulting services to financial institutions and financial
services companies in the mortgage banking industry. These services include the
brokering and analysis of residential mortgage loan servicing rights ("MSRs")
and residential mortgage loans, corporate and mortgage loan servicing portfolio
valuations (which includes the "mark-to-market" valuation and analysis required
under Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("FAS 125")), and to a lesser extent, consultation and brokerage services in
connection with mergers and acquisitions of mortgage banking entities. United
Financial provides brokerage services to mortgage banking entities, such as
Crossland Mortgage Corp., Chase Manhattan Mortgage and AccuBanc Mortgage.
During 1998 and 1997, United Financial brokered the sale of 68 and 91 mortgage
loan servicing portfolios totaling $66.4 billion and $33.4 billion in
outstanding mortgage loan principal balances, respectively. As a result of this
volume of brokerage activity and the expertise of the United Financial analytics
department, the Company has access to a wide array of information relating to
the mortgage banking industry, including emerging market trends, prevailing
market prices, pending regulatory changes and changes in levels of supply and
demand. Consequently, the Company is often able to identify certain types of
mortgage loan servicing portfolios that are well suited to its particular
servicing platform and unique corporate structure.
MATRIX FINANCIAL. Matrix Financial acquires MSRs on a nationwide basis
through purchases in the secondary market, services the loans underlying the
MSRs and originates mortgage loans through its wholesale loan origination
network. As of December 31, 1998, Matrix Financial serviced 78,346 borrower
accounts representing $5.4 billion in principal balances (excluding $9.9 million
in subservicing for non-affiliates of the Company), the majority of which were
seasoned loans having
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lower principal and higher custodial escrow balances than newly originated
mortgage loans. As a servicer of mortgage loans, Matrix Financial is required to
establish custodial escrow accounts for the deposit of borrowers' payments,
which may include principal, interest, taxes and insurance. These payments are
held at Matrix Bank. At December 31, 1998, the custodial escrow accounts related
to the Company's servicing portfolio maintained at Matrix Bank were $89.5
million in the aggregate. For the calendar year 1998, Matrix Financial
originated $575.0 million in residential mortgage loans primarily through its
regional wholesale production offices located in Atlanta, Denver, Las Vegas and
Phoenix. The mortgage loans originated by Matrix Financial are typically sold in
the secondary market.
THE VINTAGE GROUP. In early 1997, the Company acquired The Vintage Group,
Inc. ("Vintage"). Vintage's subsidiaries, Sterling Trust and First Matrix
Investment Services Corporation ("First Matrix") are located in Waco and
Arlington, Texas, respectively. Sterling Trust was incorporated in 1984 as a
Texas independent, non-bank trust company specializing in the administration of
self-directed individual retirement accounts, qualified retirement plans, and
custodial and directed trust accounts. As of December 31, 1998, Sterling Trust
administered in excess of 36,000 accounts with assets under administration of
almost $2.1 billion; approximately $137.0 million of which represented interest-
bearing deposits under administration held at Matrix Bank. First Matrix is a
NASD broker/dealer that provides services to individuals and deferred
contribution plans.
UNITED CAPITAL MARKETS. United Capital Markets, Inc. ("UCM") is a
Registered Investment Advisor that focuses on risk management services for
institutional clients. It provides a professional outsourcing alternative to in-
house risk management departments and Wall Street derivative products. UCM
typically focuses on interest rate and prepayment risk as they relate to
specific objectives articulated to UCM by the client. UCM's risk management
strategy includes modeling of asset risk, setting up and trading individual
hedge accounts and matching accounting practice and management goals. Although
the Company believes that UCM will ultimately be able to implement risk
management strategies for clients with respect to several asset classes, UCM's
initial focus has been on the implementation of risk management strategies for
clients' portfolios of MSRs. UCM is managed by former senior executives from
nationally recognized investment banks and the mortgage banking industry with
many years of experience in risk management and hedging strategies.
UNITED SPECIAL SERVICES. United Special Services, Inc. ("USS") provides
real estate management and disposition services to financial services companies
and financial institutions. In addition to the unaffiliated clients currently
served by USS, Matrix Financial uses USS exclusively in handling the disposition
of its foreclosed real estate. USS also provides limited collateral valuation
opinions to clients that are interested in assessing the value of the collateral
underlying mortgage loans, as well as to clients such as Matrix Bank and other
third party mortgage loan buyers evaluating potential bulk purchases of mortgage
loans.
See Note 19 to the Consolidated Financial Statements included elsewhere
herein for a presentation of financial information by industry segment.
SAVINGS BANK ACTIVITIES
GENERAL. With branches in Las Cruces, New Mexico and Sun City, Arizona, and
loan production offices in Denver and Evergreen, Colorado, Matrix Bank serves
its local communities by providing a broad range of personal and business
depository services, offering residential and consumer loans and providing
commercial real estate loans, including Small Business Administration ("SBA")
loans. For a discussion of the depository services offered by Matrix Bank, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." For a discussion of the historical
loan portfolio of the Company, including that of Matrix Bank, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
and Liability Management--Lending Activities."
PURCHASE AND SALE OF BULK LOAN PORTFOLIOS. In addition to its mortgage loan
origination and servicing-related activities, which are discussed under "--
Mortgage Bank Activities," the Company traditionally makes bulk purchases of
residential mortgage loans in the secondary market through Matrix Bank. The
Company believes that its structure provides advantages over its competitors in
the purchase of bulk mortgage loan packages. United Financial, through its
networking within the mortgage banking industry, is able to refer mortgage
banking companies that are interested in selling mortgage loan portfolios
directly to Matrix Bank. This direct contact reduces the number of portfolios
that must be purchased through competitive bid situations, thereby reducing the
cost associated with the acquisition of bulk residential mortgage loan
portfolios. Additionally, Matrix Bank's affiliation with Matrix Financial also
provides servicing advantages that a typical community bank does not possess.
Matrix Financial, which generally acts as a subservicer for Matrix Bank's
mortgage loan portfolio, services loans throughout the entire United States and
has the ability to service additional borrower accounts without any substantial
changes or improvements. As such, Matrix Bank is not limited in the types of
loans that it can acquire, nor is Matrix Bank restricted to certain geographic
regions as Matrix Financial services loans in all fifty states. During the years
ended December 31, 1998 and 1997, the Company made bulk purchases of mortgage
loans of approximately $678.2 million and $493.7 million, respectively.
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Substantially all of the residential mortgage loans that the Company
acquires are classified as held for sale. This accounting classification
dictates that the Company must carry the loans at the lower of aggregate cost or
market. The purchased loan portfolios typically include both fixed and
adjustable rate mortgage loans. Although the Company reviews many loan
portfolios for prospective acquisition, the focus is on acquiring seasoned first
lien priority loans secured primarily by one-to-four single family residential
properties with unpaid principal balances of less than $350,000. To the extent
that adjustable rate loans are available, the Company generally targets
adjustable over fixed rate portfolios. Due to the accounting treatment required,
the Company's management believes that its focus on seasoned and adjustable rate
products reduces the effect on the portfolio's market value in increasing
interest rate environments. Mortgage loan portfolios are purchased from various
sellers who have either originated the loans or, more typically, acquired the
loan portfolios in bulk purchases.
The Company considers several factors prior to a purchase. Among others,
the Company considers the product type, the current loan balance, the current
interest rate environment, the seasoning of the mortgage loans, payment
histories, geographic location of the underlying collateral, price, the current
liquidity of the Company and the product mix in its existing mortgage loan
portfolio.
In some cases, the mortgage loan portfolios that the Company acquires are
purchased at a discount to par. Some of the loans in these portfolios are
considered performing loans that have had payment problems in the past or have
had document deficiencies. These types of portfolios afford the Company with an
opportunity to resell the loans at a higher price if the purchase discount on
such portfolios accurately reflects the additional risks associated with
purchasing these types of loans. Loan document deficiencies are identified in
the due diligence process and, to the extent practical, are cured by the Company
prior to reselling the loans. The Company also analyzes the payment history on
each mortgage loan portfolio. Many prior problems may be a result of inefficient
servicing or may be attributable to several servicing transfers of the loans
over a short period of time. Because many considerations may impact pricing or
yield, each loan package evaluated is priced based on the specific underlying
loan characteristics.
The Company also buys non-performing Federal Housing Administration ("FHA")
and Veteran's Administration ("VA") loans from third party sellers. The
principal and interest on these non-performing loans are generally guaranteed by
the Department of Housing and Urban Development ("HUD"), and in many cases, the
terms of the purchase require the seller to pass scheduled interest through to
the Company and to ultimately guarantee the collection of principal and
interest. These loans are at fixed rates and are anticipated to mature within a
short period of time. As of December 31, 1998, the Company owned $165.7 million
of such loans.
The Company performs due diligence on each mortgage loan portfolio that it
desires to purchase on a bulk basis. These procedures consist of analyzing a
representative sample of the mortgage loans in the portfolio and are typically
performed by Company employees, but occasionally are outsourced to third party
contractors. The underwriter takes into account many factors in analyzing the
sample of mortgage loans in the subject portfolio, including the general
economic conditions in the geographic area or areas in which the underlying
residential properties are situated, the loan-to-value ratios on the underlying
loans, the payment histories of the borrowers and other pertinent statistics. In
addition, the underwriter attempts to verify that each sample loan conforms to
the standards for loan documentation set by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
and, in cases where a significant portion of the sample loans contain non-
conforming documentation, the Company assesses the additional risk involved in
purchasing such loans. This process helps the Company determine whether the
mortgage loan portfolio meets the Company's investment criteria and, if it does,
the range of pricing that the Company feels is appropriate.
The Company continually monitors the secondary market for purchases and
sales of mortgage loan portfolios and typically undertakes a sale of a
particular loan portfolio held by the Company in an attempt to "match" an
anticipated bulk purchase of a particular mortgage loan portfolio or to generate
current period earnings and cash flow. To the extent that the Company is
unsuccessful in matching its purchases and sales of mortgage loans, the Company
may have excess capital at Matrix Bank, resulting in less leverage and higher
capital ratios. During the years ended December 31, 1998 and 1997, the Company
made bulk sales of approximately $319.4 million and $198.3 million in loans, for
gains on sale of bulk mortgage loans of $3.1 million and $2.4 million,
respectively.
COMMERCIAL AND OTHER LENDING. Matrix Bank, through its commercial real
estate division, has sought to provide limited diversity in its loan portfolio
by originating commercial and consumer loans, as well as offering a full range
of lending products to its customers. The Company offers a variety of commercial
loan products, including single family construction loans, commercial real
estate loans, business loans and SBA loans, as well as providing financing to
charter schools for the purchase of real estate and equipment. Matrix Bank's
loan production office in Evergreen, Colorado principally originates single
family construction and commercial real estate loans; therefore, the Company's
market for these products consists of the Denver, Colorado metro area. The main
office in Las Cruces, New Mexico also originates a portion of these loans as
well.
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The Company originates loans to builders for the construction of single
family properties, and to a lesser extent, for the acquisition and development
of improved residential lots. These loans are generally made on a commitment
term that lasts for a period of nine to eighteen months and typically adjust
with the prime rate of interest. In many cases, the residential properties have
been pre-sold to the homeowner. Construction lending is generally considered to
involve a higher level of risk than secured lending on existing properties
because the properties securing these loans are usually more speculative and
more difficult to evaluate and monitor.
The commercial lending entered into by the Company is generally limited to
income-producing real estate properties which meet strict internal underwriting
guidelines. The repayment of loans collateralized by income-producing properties
is dependent upon the successful operation of the related real estate property
and also on the credit and net worth of the borrower. Thus, repayment is subject
to conditions in the real estate market, interest rate levels and overall
economic conditions. Loans on such properties are generally not permitted to
exceed a loan-to-value ratio of 75%. Also, each borrower is reviewed with regard
to management talent, integrity, experience and available financial resources.
The Company generally requires personal guarantees on all commercial loans.
The Company's SBA division, recently opened during 1998, offers the
following loan products: SBA 7a loans, first trust deed loans under the SBA 504
program, first trust deed companion (piggyback) loans and Business and Industry
Guaranteed Loans offered through the United States Department of Agriculture.
The Company is considering applying for preferred lender status under the SBA
program in the Denver, Colorado and Las Cruces, New Mexico market areas.
Preferred lender status would allow the Company to approve SBA-guaranteed loan
applications without prior review from the SBA, thereby accelerating the
approval process for small business loan applications. Preferred lenders also
receive priority funding and service from the SBA.
During 1998, the Company began to offer direct financing leases to charter
schools located primarily in Colorado, Arizona and Texas for the purchase of
real estate, modular space and equipment. Charter schools are public schools
that serve as an alternative to traditional public schools, thereby providing
additional academic choices for parents and students. The direct financing
leases are generally fully amortizing and are completed on a tax-exempt basis.
During 1998, the Company originated $27.4 million of these leases. The leases
are originated with the intent of reselling them, and as a result, are being
classified as held for sale.
In addition, the Company offers a variety of lending products to meet the
specific needs of its customers. These products include secured installment
loans with fixed repayments, manufactured housing, credit card programs, home
equity loans, business loans and share loans. In addition to the secured
consumer loans, on a very limited basis, the Company extends unsecured loans to
qualified borrowers based on their financial statements and creditworthiness.
The majority of the consumer lending is originated within the Las Cruces, New
Mexico market area.
BROKERAGE AND CONSULTING SERVICES
BROKERAGE SERVICES. United Financial operates as a national, full-service
mortgage servicing and mortgage loan broker. It is capable of analyzing,
packaging, marketing and closing servicing portfolios and selected corporate
merger and acquisition transactions. United Financial markets its services to
all types and sizes of market participants, thereby developing diverse
relationships. United Financial has provided servicing brokerage services to
each of the following clients during the last 12 months:
AccuBanc Mortgage NationBanc Mortgage
Chase Manhattan Mortgage Old Kent Mortgage
Crossland Mortgage Corp. PNC Mortgage Corporation of America
Harbor Financial Mortgage Corp. U.S. Bank
Mellon Mortgage
MSRs are sold either on a bulk basis, in which the seller identifies,
packages and sells a portfolio of MSRs to a buyer in a single transaction, or on
a flow basis, in which the seller agrees to sell to a specified buyer from time
to time the MSRs originated by the seller that meet certain criteria at a
predetermined price. United Financial is capable of helping both buyers and
sellers with respect to bulk sales and flow sales of MSRs.
The Company believes that the client relationships developed by United
Financial through its national network of contacts with commercial banks,
mortgage companies, savings associations and other institutional investors
represent a significant competitive advantage and form the basis for United
Financial's national market presence. These contacts also enable United
Financial to identify prospective clients for other Subsidiaries and make
referrals where appropriate. See "--Consulting and Analytic Services."
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The secondary market for purchasing and selling MSRs has become
increasingly more active since its inception during the early 1980s. While MSRs
are the primary asset of most mortgage companies, other institutions such as
commercial banks and savings associations also build portfolios of MSRs, which
can serve as a significant source of noninterest income. Most institutions that
own MSRs have found that careful management of these assets is necessary due to
their susceptibility to interest rate cycles, changing prepayment patterns of
mortgage loans, and fluctuating earnings rates achieved on custodial escrow
balances. With companies required to capitalize originated MSRs, management of
mortgage servicing assets has become even more critical. These managerial
efforts, combined with interest rate sensitivity of the assets and the growth
strategies of market participants, create constantly changing supply and demand
and, therefore, price levels in the secondary market for MSRs.
The sale and transfer of MSRs occurs in a market that is inefficient and
often requires an intermediary to facilitate matching buyers and sellers. Prices
are unpublished and closely guarded by market participants, unlike most other
major financial secondary markets. This lack of pricing information complicates
an already difficult process of differentiating between servicing product types,
evaluating regional, economic and socioeconomic trends and predicting the impact
of interest rate movements. Due to its significant contacts, United Financial
has access to information on the availability of mortgage servicing portfolios
and helps bring together interested buyers and sellers.
In addition, United Financial provides brokerage services to buyers and
sellers of single family residential mortgage loans. United Financial provides
loan brokerage services to both servicing brokerage clients and non-servicing
brokerage clients.
CONSULTING AND ANALYTIC SERVICES. United Financial has made a significant
commitment to its analytics department, which has developed expertise in helping
companies implement and, on an ongoing basis, track their "mark-to-market"
valuations and analyses. United Financial has enhanced its existing valuation
models and has created a software program that can be customized to fit its
customers' many different needs and unique situations in performing valuations
and analyses. In addition, United Financial has the infrastructure and
management information system capabilities necessary to undertake the complex
analyses required by FAS 125. Many of the companies affected by the
implementation of FAS 125 have outsourced this function to a third party rather
than dedicate the resources necessary to develop systems for and perform their
own FAS 125 valuations.
Because FAS 125 requires that mortgage servicing portfolios be valued at
the lower of cost or market value on a quarterly basis, active management of
servicing assets has become a critical component to holders MSRs. Due to the
risk of impairment on MSRs as a result of constantly changing interest rates and
prepayment speeds on the underlying mortgage portfolio, risk management of
portfolios of MSRs by the holder of the portfolio, which typically takes the
form of hedging the portfolio, has become a more prevalent practice over recent
periods. The FAS 125 "mark-to-market" analyses done by United Financial help
clients assess which of their portfolios of MSRs are most susceptible to
impairment due to interest rate and prepayment risk. Once identified, the
analytics department of United Financial is able to introduce the client to
management at UCM, who in turn is able to offer its risk management services
relating to the identified or other mortgage servicing portfolios owned by the
client in order to meet the client's stated objectives.
UCM's primary strategy employs risk management techniques similar to those
utilized by Wall Street firms to offset risk. The UCM approach includes modeling
of asset risk, establishing and trading individual hedge accounts and matching
accounting practice and management goals. UCM employs this strategy by
calculating the appropriate mix of exchange-traded treasury futures and options
to offset the change in value of the clients' portfolios. These calculations are
completed with real time market pricing. Monthly portfolio evaluations are
calculated to insure correlation and appropriate accounting treatment. The use
of these liquid positions to offset risk is a less expensive strategy and
mirrors strategies used by major investment banks. Additionally, the hedging
instruments have lower transaction costs allowing both ease in rebalancing, if
necessary, and daily reporting. UCM uses a combination of futures and options to
match both the duration and convexity of the hedged asset. As of December 31,
1998, UCM was providing risk management services to eight clients with
approximately $20.0 billion of MSRs hedged.
Management believes that combining the services offered by the analytics
department of United Financial with those of UCM provides the Company with a
competitive advantage in attracting and retaining clients because the Company is
able to offer financial services companies and financial institutions a more
complete package of services than the Company's competitors. In addition, United
Financial is able to refer clients to Matrix Bank for financing opportunities
and to USS for asset disposition services. The full range of services offered by
United Financial and its affiliates further strengthens United Financial's
client relationships.
MORTGAGE BANK ACTIVITIES
RESIDENTIAL MORTGAGE LOAN SERVICING. Matrix Financial and Matrix Bank each
has its own mortgage servicing portfolio, but the Company conducts its
residential servicing activities exclusively through Matrix Financial. Matrix
Bank's MSRs are
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subserviced by Matrix Financial. At December 31, 1998, Matrix Financial serviced
approximately $5.4 billion of mortgage loans, including $352.6 million
subserviced for Matrix Bank but excluding $9.9 million subserviced for non-
affiliates of the Company.
Servicing mortgage loans involves a contractual right to receive a fee for
processing and administering loan payments. This processing involves collecting
monthly mortgage payments on behalf of investors, reporting information to those
investors on a monthly basis and maintaining custodial escrow accounts for the
payment of principal and interest to investors and property taxes and insurance
premiums on behalf of borrowers. These payments are held in custodial escrow
accounts at Matrix Bank, where the money can be invested by the Company in
interest-earning assets at returns that historically have been greater than
could be realized by the Company using the custodial escrow deposits as
compensating balances to reduce the effective borrowing cost on the Company's
warehouse credit facilities.
As compensation for its mortgage servicing activities, the Company receives
servicing fees, plus any late charges collected from delinquent borrowers and
other fees incidental to the services provided. At December 31, 1998, the
Company's weighted-average servicing fee was 0.36%. In the event of default by
the borrower, the Company receives no servicing fees until the default is cured.
Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
The Company's policy is to accept only a limited number of servicing assets on a
recourse basis. As of December 31, 1998 and 1997, on the basis of outstanding
principal balances, less than 1% of the mortgage servicing contracts owned by
the Company involved recourse servicing. To the extent that servicing is done on
a recourse basis, the Company is exposed to credit risk with respect to the
underlying loan in the event of a repurchase. Additionally, many of the
nonrecourse mortgage servicing contracts owned by the Company require the
Company to advance all or part of the scheduled payments to the owner of the
mortgage loan in the event of a default by the borrower. Many owners of mortgage
loans also require the servicer to advance insurance premiums and tax payments
on schedule even though sufficient escrow funds may not be available. The
Company, therefore, must bear the funding costs associated with making such
advances. If the delinquent loan does not become current, these advances are
typically recovered at the time of the foreclosure sale. Foreclosure expenses
are generally not fully reimbursable by FNMA, FHLMC or the Government National
Mortgage Association ("GNMA"), for whom the Company provides significant amounts
of mortgage loan servicing. As of December 31, 1998 and 1997, the Company had
advanced approximately $7.9 million and $5.7 million, respectively, in funds on
behalf of third party investors.
MSRs represent a contractual right to service, and not a beneficial
ownership interest in, underlying mortgage loans. Failure to service the loans
in accordance with contract or other applicable requirements may lead to the
termination of the MSRs and the loss of future servicing fees. To date, there
have been no terminations of MSRs by any mortgage loan owners because of the
Company's failure to service the loans in accordance with its obligations.
In order to track information on its servicing portfolio, the Company
utilizes a data processing system provided by Alltel Information Services, Inc.
("Alltel"), one of the largest mortgage banking service bureaus in the United
States. Management believes that this system gives the Company sufficient
capacity to support anticipated expansion of its residential mortgage loan
servicing portfolio.
The following table sets forth certain information regarding the
composition of the Company's mortgage servicing portfolio (excluding loans
subserviced for others) as of the dates indicated:
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AS OF DECEMBER 31,
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1998 1997 1996
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(IN THOUSANDS)
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FHA insured/VA guaranteed residential.......................... $ 960,053 $ 699,056 $ 318,145
Conventional loans............................................. 4,338,308 2,633,563 2,171,016
Other loans.................................................... 59,368 15,443 15,875
------------ ------------ ------------
Total mortgage servicing portfolio........................ $ 5,357,729 $ 3,348,062 $ 2,505,036
============ ============ ============
Fixed rate loans............................................... $ 4,234,349 $ 2,691,409 $ 1,986,599
Adjustable rate loans.......................................... 1,123,380 656,653 518,437
------------ ------------ ------------
Total mortgage servicing portfolio........................ $ 5,357,729 $ 3,348,062 $ 2,505,036
============ ============ ============
</TABLE>
8
<PAGE>
The following table shows the delinquency statistics for the mortgage loans
serviced by the Company (excluding loans subserviced for others) compared with
national average delinquency rates as of the dates presented:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- --------------------------------------
NATIONAL NATIONAL
COMPANY AVERAGE(1) COMPANY AVERAGE(1)
------------------------- ----------- ----------------------- -----------
NUMBER PERCENTAGE PERCENTAGE NUMBER PERCENTAGE PERCENTAGE
OF OF SERVICING OF OF OF SERVICING OF
LOANS PORTFOLIO(2) LOANS LOANS PORTFOLIO(2) LOANS
-------- ------------- ----------- ------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days............... 3,120 3.98% 2.96% 3,558 5.78% 3.03%
60-89 days............... 612 0.78 0.68 835 1.36 0.71
90 days and over......... 712 0.91 0.60 912 1.48 0.62
-------- --------- --------- --------- --------- --------
Total delinquencies...... 4,444 5.67% 4.24% 5,305 8.62% 4.36%
======== ========= ========= ========= ======== =========
Foreclosures............. 727 0.93% 1.11% 447 0.73% 1.11%
======== ======== ======== ======== ======== =========
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1996
-------------------------------------
NATIONAL
COMPANY AVERAGE(1)
------------------------- ------------
NUMBER PERCENTAGE PERCENTAGE
OF OF SERVICING OF
LOANS PORTFOLIO(2) LOANS
--------- ------------- ------------
<S> <C> <C> <C>
Loans delinquent for:
30-59 days............... 2,607 5.45% 3.04%
60-89 days............... 667 1.40 0.71
90 days and over......... 684 1.43 0.62
--------- ------------ ------------
Total delinquencies...... 3,958 8.28% 4.37%
========= ============ ============
Foreclosures............. 264 0.55% 1.03%
========= ============ ============
</TABLE>
________________
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (Data as of December 31,
1998, 1997 and 1996, respectively).
(2) Delinquencies and foreclosures generally exceed the national average due to
high rates of delinquencies and foreclosures on certain bulk loan and bulk
servicing portfolios acquired by the Company at a discount.
The following table sets forth certain information regarding the number and
aggregate principal balance of the mortgage loans serviced by the Company,
including both fixed and adjustable rate loans (excluding loans subserviced for
others), at various interest rates:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997
----------------------------------------- ---------------------------------------
PERCENTAGE PERCENTAGE
NUMBER AGGREGATE OF AGGREGATE NUMBER AGGREGATE OF AGGREGATE
OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL
RATE LOANS BALANCE BALANCE LOANS BALANCE BALANCE
-------- -------- ------------ ------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Less than 7.00%......... 7,123 $ 662,491 12.36% 2,968 $ 220,582 6.59%
7.00%-- 7.99%........... 22,341 1,799,472 33.59 13,836 915,789 27.35
8.00%-- 8.99%........... 26,702 1,859,471 34.71 19,800 1,121,807 33.51
9.00%-- 9.99%........... 15,557 731,586 13.65 15,780 696,575 20.80
10.00%--10.99%.......... 6,067 284,637 5.31 9,086 390,956 11.68
11.00%--11.99%.......... 251 9,441 0.18 37 2,110 0.06
12.00% and over......... 305 10,631 0.20 10 243 0.01
-------- ----------- --------- --------- ----------- --------
Total.................. 78,346 $ 5,357,729 100.00% 61,517 $ 3,348,062 100.00%
======== =========== ========= ========= =========== ========
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------
1996
-----------------------------------------
PERCENTAGE
NUMBER AGGREGATE OF AGGREGATE
OF PRINCIPAL PRINCIPAL
LOANS BALANCE BALANCE
------------ ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Less than 7.00%......... 3,545 $ 145,720 5.82%
7.00%-- 7.99%........... 12,269 726,800 29.01
8.00%-- 8.99%........... 14,011 838,215 33.46
9.00%-- 9.99%........... 9,567 413,598 16.51
10.00%--10.99%.......... 6,322 301,837 12.05
11.00%--11.99%.......... 1,144 45,111 1.80
12.00% and over......... 924 33,755 1.35
--------- ----------- -----------
47,782 $ 2,505,036 100.00%
========= =========== ===========
</TABLE>
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown. The changes in the
remaining maturities as a percentage of unpaid principal between 1998, 1997 and
1996, as reflected below, are the result of acquisitions of MSRs completed
during 1998 and 1997.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------- -------------------------------------------------
PERCENTAGE PERCENTAGE
NUMBER PERCENTAGE UNPAID UNPAID NUMBER PERCENTAGE UNPAID UNPAID
OF OF NUMBER PRINCIPAL PRINCIPAL OF OF NUMBER PRINCIPAL PRINCIPAL
MATURITY LOANS OF LOANS AMOUNT AMOUNT LOANS OF LOANS AMOUNT AMOUNT
-------- -------- ---------- --------- ---------- ------- ---------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-- 5 years.... 9,478 12.10% $ 216,441 4.04% 7,485 12.17% $ 103,761 3.10%
6--10 years.... 21,320 27.21 943,428 17.61 11,405 18.54 257,208 7.68
11--15 years... 10,231 13.06 534,187 9.97 14,325 23.29 589,747 17.62
16--20 years... 7,870 10.04 545,628 10.18 9,600 15.61 558,605 16.68
21--25 years... 12,524 15.99 1,184,562 22.11 7,427 12.07 687,563 20.54
More than 25
years......... 16,923 21.60 1,933,483 36.09 11,275 18.32 1,151,178 34.38
-------- ------- ----------- ---------- ------- ------- ----------- ----------
Total......... 78,346 100.00 % $ 5,357,729 100.00% 61,517 100.00% $ 3,348,062 100.00%
======== ======= =========== ========== ======= ======= =========== ==========
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1996
-----------------------------------------------------
PERCENTAGE
NUMBER PERCENTAGE UNPAID UNPAID
OF OF NUMBER PRINCIPAL PRINCIPAL
Maturity LOANS OF LOANS AMOUNT AMOUNT
-------- --------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1-- 5 years.... 5,020 10.51% $ 77,136 3.08%
6--10 years.... 8,784 18.39 184,629 7.37
11--15 years... 6,418 13.43 340,282 13.58
16--20 years... 14,066 29.44 566,862 22.63
21--25 years... 7,006 14.66 545,336 21.77
More than 25
years......... 6,488 13.57 790,791 31.57
------- ------- ----------- -------
Total......... 47,782 100.00% $ 2,505,036 100.00%
======= ======= =========== =======
</TABLE>
9
<PAGE>
The Company's servicing activity is diversified throughout all 50 states
with concentrations at December 31, 1998 in California, Florida and Texas of
approximately 19.9%, 9.5% and 8.3%, respectively, based on aggregate outstanding
unpaid principal balances of the mortgage loans serviced.
ACQUISITION OF SERVICING RIGHTS. The Company's strategy with respect to
mortgage servicing focuses on acquiring servicing for which the underlying
mortgage loans tend to be more seasoned and have lower principal and higher
custodial escrow balances than newly originated mortgage loans. Management
believes this strategy allows the Company to mitigate its prepayment risk, while
allowing the Company to capture relatively high custodial escrow balances in
relation to the outstanding principal balance. During periods of declining
interest rates, prepayments of mortgage loans increase as homeowners seek to
refinance at lower interest rates, resulting in a decrease in the value of the
servicing portfolio. Mortgage loans with higher interest rates and/or higher
principal balances are more likely to result in prepayments since the cost
savings from refinancing to the borrower can be significant. However, the
Company remains opportunistic in its acquisition philosophy. If a higher
balance, less seasoned portfolio is available at the Company's desired internal
rate of return, the Company may, from time to time, pursue such acquisitions.
The following table shows quarterly and annual average prepayment rate
experience on the mortgage loans serviced by the Company (excluding loans
subserviced by and for others):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1998(1)(2) 1997(3) 1996
--------- ----------- -------
<S> <C> <C> <C>
Quarter ended:
December 31........................ 28.36% 12.52% 12.19%
September 30....................... 23.60 12.75 11.53
June 30............................ 21.53 10.94 12.00
March 31........................... 17.00 8.97 11.83
----- ----- -----
Annual average...................... 22.62% 11.30% 11.89%
===== ===== =====
</TABLE>
_________________
(1) These prepayment rates exclude prepayment experience for MSRs subserviced
for the Company by others of $930 million, $703 million, $0 and $1.3 billion
for the quarters ended December 31, September 30, June 30, and March 31,
1998, respectively.
(2) These prepayment rates do not include prepayments which resulted from the
Company targeting its own servicing portfolio for refinance opportunities.
(3) These prepayment rates exclude prepayment experience for MSRs subserviced
for the Company by others of $700 million, $1.1 billion, $610 million and
$1.3 billion for the quarters ended December 31, September 30, June 30, and
March 31, 1997, respectively.
The Company acquires substantially all of its MSRs in the secondary market.
The secondary market for purchasing and selling MSRs is inefficient in several
respects, including the lack of a centralized exchange for conducting trading,
the lack of definitive market prices and the lack of conformity in modeling
assumptions. The industry expertise of United Financial and Matrix Financial
allows the Company to capitalize upon these inefficiencies when acquiring MSRs.
Prior to completing any such acquisition, the Company analyzes a wide range of
characteristics of each portfolio considered for purchase. This analysis
includes projecting revenues and expenses and reviewing geographic distribution,
interest rate distribution, loan-to-value ratios, outstanding balances,
delinquency history and other pertinent statistics. Due diligence is performed
either by Matrix Financial employees or a designated independent contractor on a
representative sample of the mortgages involved. The purchase price is based on
the present value of the expected future cash flow, calculated by using a
discount rate and loan prepayment assumptions that management considers to be
appropriate to reflect the risk associated with the investment.
SERVICING SALES. The Company periodically sells its purchased mortgage
servicing portfolios and generally sells all originated MSRs. Such sales
increase revenue (reflected in loan origination income for originated servicing
and gain on sale of servicing for purchased servicing) and generate cash at the
time of sale, but reduce future servicing fee income. Originated MSRs were sold
on both a bulk and flow basis on loans having an aggregate principal amount of
$277.4 million and $186.1 million during the years ended December 31, 1998 and
1997, respectively. Periodically, the Company may also sell purchased MSRs to
restructure its portfolio or generate revenues. Purchased MSRs were sold on
loans having an aggregate principal amount of $175.3 million and $1.3 billion
during the years ended December 31, 1998 and 1997, for net gains of $803,000 and
$3.4 million, respectively.
The Company anticipates that it will continue to adhere to its policy of
selling substantially all originated MSRs. The Company also may sell purchased
MSRs. Management intends to base decisions regarding future mortgage servicing
sales upon the Company's cash requirements, purchasing opportunities, capital
needs, earnings and the market price for MSRs. During a quarter in which a sale
of purchased MSRs occurs, reported income will tend to be greater than if such
sale had not occurred during that quarter. Prices obtained for MSRs vary
depending on servicing fee rates, anticipated prepayment rates, average loan
balances, remaining time to maturity, servicing costs, custodial escrow
balances, delinquency and foreclosure experience and purchasers' required rates
of return.
10
<PAGE>
In the ordinary course of selling MSRs, the Company, in accordance with
industry standards, makes certain representations and warranties to purchasers
of MSRs. If a loan defaults and there has been a breach of representations or
warranties and the Company has no third party recourse, the Company may become
liable for the unpaid principal and interest on defaulted loans. In such a case,
the Company may be required to repurchase the mortgage loan and bear any
subsequent loss on the loan. In connection with any purchases by the Company of
MSRs, the Company also is exposed to liability to the extent that an originator
or seller of the MSRs is unable to honor its representations and warranties.
Historically, the Company has not incurred material losses due to breaches of
representations and warranties, and the Company does not anticipate any future
material losses due to breaches of representations and warranties; however,
there can be no assurance that the Company will not experience such losses.
HEDGING OF SERVICING RIGHTS. Ownership of MSRs exposes the Company to
impairment of its investment in certain interest rate environments. As
previously discussed, the prepayment of a mortgage loan increases during periods
of declining interest rates as the homeowner seeks to refinance the loan to a
lower interest rate. If the level of prepayment on segments of the Company's
mortgage servicing portfolio achieves a level higher than projected by the
Company for an extended period of time, an impairment in the associated basis in
the MSRs may occur. To mitigate this risk of impairment due to declining
interest rates, the Company initiated a hedging strategy during 1997 which is
managed by UCM. The Company analyzed its servicing portfolio for potential
segments more susceptible to interest-rate risk. Based on the Company's
analysis, which focused on higher fixed rate, higher balance, less seasoned
loans in the servicing portfolio, the Company hedged a segment of its portfolio.
As of December 31, 1998 and 1997, the Company had identified and hedged $674
million and $306 million, respectively, of its servicing portfolio using a
program of exchange-traded futures and options. Additionally, as of December 31,
1998 and 1997, the net realized deferred gains and the unrealized deferred gains
(losses) of the open positions was approximately $420,000 and $275,000,
respectively. The unrealized gain (loss) is recorded as an adjustment to the
basis of the corresponding investment in MSRs. The hedging program qualifies for
hedge accounting treatment based on a high degree of statistical correlation and
current accounting regulation. The Company only hedges fixed rate loans in its
servicing portfolio, as correlation cannot be established for adjustable rate
loans.
RESIDENTIAL MORTGAGE LOAN ORIGINATION. The Company originates residential
mortgage loans on both a wholesale and retail basis through Matrix Financial and
Matrix Bank. For the years ended December 31, 1998 and 1997, Matrix Financial
originated a total of $575.0 million and $403.0 million in residential mortgage
loans, respectively.
Wholesale Originations. Matrix Financial's primary source of mortgage loan
originations is its wholesale division, which originates mortgage loans through
approved independent mortgage loan brokers that qualify to participate in Matrix
Financial's program through a formal application process that includes an
analysis of the broker's financial condition and sample loan files, as well as
the broker's reputation, general lending expertise and references. As of
December 31, 1998, Matrix Financial had approved relationships with
approximately 600 mortgage loan brokers. From Matrix Financial's offices in
Atlanta, Denver, Las Vegas and Phoenix, the sales staff solicits mortgage loan
brokers throughout the Southeastern and Rocky Mountain areas of the United
States for mortgage loans that meet Matrix Financial's criteria. Mortgage loans
submitted by brokers are funded after being underwritten by Matrix Financial.
Mortgage loan brokers act as intermediaries between borrowers and Matrix
Financial in arranging mortgage loans. Matrix Financial, as an approved FNMA,
FHLMC and GNMA seller/servicer, provides such brokers access to the secondary
market for the sale of mortgage loans that they otherwise cannot access because
they do not meet the applicable seller/servicer net worth requirements. Matrix
Financial attracts and maintains relationships with mortgage loan brokers by
offering a variety of services and products.
To supplement its product offerings made through its wholesale loan
origination network, the Company offers a program tailored to borrowers who are
unable or unwilling to obtain mortgage financing from conventional mortgage
sources. The borrowers who need this type of loan product often have impaired or
unsubstantiated credit histories and/or unverifiable income and require or seek
a high degree of personalized services and swift response to their loan
applications. As a result, these borrowers generally are not averse to paying
higher interest rates for this loan product type, as compared to the interest
rates charged by conventional lending sources. The Company has established
classifications with respect to the credit profiles of these borrowers. The
classifications range from A- through D depending upon a number of factors,
including the borrower's credit history and employment status. During 1998 and
1997, Matrix Financial originated $45.7 million and $48.3 million, respectively,
of A- through D credit residential mortgage loans, all of which were sold to
unaffiliated third party investors on a nonrecourse basis under standard
industry representations and warranties.
Matrix Financial's management has decided, for strategic purposes, to
increase its emphasis on wholesale originations through hiring additional sales
staff at existing offices. In today's interest rate environment, increased loan
origination volumes can act as a hedge against the decreasing value of mortgage
servicing portfolios caused by increased prepayments.
11
<PAGE>
Retail Originations. Matrix Bank originates residential loans on a retail
basis through its branches in Las Cruces, New Mexico and Sun City, Arizona. In
early 1997, Matrix Bank opened a lending office in Evergreen, Colorado. This
location originates primarily residential construction loans and commercial
loans in the local market place. The Company anticipates that the construction
loans funded through the Evergreen office will be converted to permanent
mortgage loans funded through Matrix Bank. The retail loans originated by Matrix
Bank consist of a broad range of residential loans (at both fixed and adjustable
rates), consumer loans and commercial real estate loans.
In 1998, the Company converted its telemarketing call center, located in
Denver, into a retention center which is focusing on the solicitation of the
Company's servicing portfolio for refinancing opportunities. The goal in
soliciting the portfolio is to identify those mortgagees who are likely to
refinance and have them refinance with Matrix Financial, thereby preserving a
portion of our servicing portfolio, which would have been likely to prepay
anyway.
QUALITY CONTROL. The Company has a loan quality control process designed to
ensure sound lending practices and compliance with FNMA, FHLMC and applicable
private investor guidelines. Prior to funding any wholesale or retail loan, the
Company performs a pre-funding quality control audit that consists of the
verification of employment and utilizes a detailed checklist. Subsequent to
funding, the Company, on a monthly basis, selects 10% of all closed loans for a
detailed audit conducted by its own personnel or a third party service provider.
The quality control process entails performing a complete underwriting review
and independent re-verification of all employment information, tax returns,
source of down payment funds, bank accounts and credit. Furthermore, 10% of the
audited loans are chosen for an independent field review and standard factual
credit report. All discovered deficiencies in these audits are reported to
senior management of the Company to determine trends and additional training
needs. All resolvable issues are addressed and cured by the Company. The Company
also performs a quality control audit on all early payment defaults, first
payment defaults and 60-day delinquent loans; the findings are reported to the
appropriate investor and/or senior management.
SALE OF LOAN ORIGINATIONS. The Company generally sells the residential
mortgage loans that it originates. Under ongoing programs established with FNMA
and FHLMC, conforming conventional loans may be sold on a cash basis or pooled
by the Company and exchanged for securities guaranteed by FNMA or FHLMC. These
securities are then sold by the Company to national or regional broker/dealers.
Mortgage loans sold to FNMA or FHLMC are sold on a nonrecourse basis so that
foreclosure losses are generally borne by FNMA or FHLMC and not by the Company.
The Company also sells nonconforming residential mortgage loans on a
nonrecourse basis to other secondary market investors. These loans are typically
first lien mortgage loans that do not meet all of the agencies' underwriting
guidelines, and are originated instead for other institutional investors with
whom the Company has previously negotiated purchase commitments, and for which
the Company occasionally pays a fee.
The Company sells residential mortgage loans on a servicing-retained or
servicing-released basis. Certain purchasers of mortgage loans require that the
loan be sold to them servicing-released. In all other cases the decision is left
to the Company. Generally, the Company sells conforming loans on a servicing-
retained basis and nonconforming loans on a servicing-released basis. See "--
Residential Mortgage Loan Servicing."
In connection with the Company's residential mortgage loan originations and
sales, the Company makes customary representations and warranties, similar in
nature and scope to those provided in connection with sales of MSRs. The
Company's experience has been that giving such representations and warranties
rarely results in a request for repurchases or repurchases of a significant
amount of residential mortgage loans in a given transaction. However, there can
be no assurance that the Company will not be required to make a significant
repurchase in the future or that losses will not occur in the future due to the
representations and warranties issued.
The sale of mortgage loans may generate a gain or loss for the Company.
Gains or losses result primarily from two factors. First, the Company may make a
loan to a borrower at a price that is higher or lower than it would receive if
it immediately sold the loan in the secondary market. These price differences
occur primarily as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses may result from changes in
interest rates that result in changes in the market value of the mortgage loans
from the time that the price commitment is given to the borrower until the time
that the mortgage loan is sold to the investor.
In order to hedge against the interest rate risk resulting from these
timing differences, the Company historically has committed to sell all closed
originated mortgage loans held for sale and a portion of the mortgage loans that
are not yet closed but for which the interest rate has been established
("pipeline loans"). The Company adjusts its net commitment position daily either
by entering into new commitments to sell or by buying back commitments to sell
depending upon its projection of the portion of the pipeline loans that it
expects to close. These projections are based on numerous factors, including
changes in interest rates and general economic trends. The accuracy of the
underlying assumptions bears directly upon the effectiveness
12
<PAGE>
of the Company's use of forward commitments and subsequent profitability. At
December 31, 1998, the Company had approximately $133.7 million in pipeline and
funded loans offset with mandatory forward commitments of approximately $110.0
million and non-mandatory forward commitments of approximately $10.1 million.
The inherent value of the forward commitments is considered in the determination
of the lower of cost or market in valuing the Company's pipeline and funded
loans at any given time. For a discussion of secondary marketing losses incurred
by the Company during 1996, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Results of
Operations for Fiscal Years 1997 and 1996--Loan Origination."
SELF-DIRECTED TRUST ACTIVITIES
Sterling Trust provides administrative services for self-directed
individual retirement accounts ("IRAs"), qualified business retirement plans,
personal custodial accounts and a variety of corporate trust and escrow
arrangements. Sterling Trust actively markets its services on a nationwide basis
to the financial services industry, specifically broker/dealers, registered
representatives, insurance agents, tax professionals, financial planners and
advisors and investment product sponsors. The advantage Sterling Trust offers to
these financial service professionals is the ability to hold a wide-array of
assets, including all types of public offerings as well as non-standard assets
such as real estate, individually-negotiated debt instruments and private
offerings of securities. Sterling Trust retains no discretion with respect to
the investment of trust assets, and executes no investment transaction until so
instructed by the client or the client's designated representative.
Sterling Trust's self-directed IRAs offer the client the freedom of choice
and the convenience of consolidation. Sterling Trust handles all of the
maintenance and administrative duties needed to maintain the tax-deferred status
of IRA accounts. All accounts are 100% self-directed and Sterling Trust offers
no investment advice or investment products.
In the qualified business retirement plan arena, Sterling Trust offers a
combination of investment flexibility along with record keeping services on
401(k) plans, profit sharing plans, money purchase pension plans, and other
types of defined contribution plans, as well as defined benefit plans. In
addition, for employers who desire the handling of investment transactions for
the qualified plan but don't require Sterling Trust's full services, record
keeping only services are available as an option.
Non-qualified custodial services are also available which offer the same
flexibility and reporting services as are available for retirement plans.
Sterling Trust offers the service of monitoring and tracking all investments
within client's portfolios.
Sterling Trust also provides a full range of corporate trust and escrow
services to investment product sponsors. In general, Sterling Trust will
consider serving as administrative trustee on various types of documents, as
long as Sterling Trust has no discretion with regard to the investment of
assets. Typical administrative services include holding of trust assets,
periodic reporting on investment activity, paying agent services, and issuing
and maintaining investor records.
In 1998, the Company began to offer specialized custody and clearing
services to investment professionals. These services are provided via a direct
connection with National Securities Clearing Corp. ("NSCC") using FundSERV to
streamline and secure the trading process. The Company also offers a mutual fund
No Transaction Fee Supermarket that includes over 72 fund families and over
1,300 funds.
At December 31, 1998, Sterling Trust had assets under administration of
almost $2.1 billion. Historically, approximately 6% to 8% of the assets under
administration are maintained in interest-bearing accounts. These accounts,
which approximated $137.0 million at December 31, 1998, are held at Matrix Bank.
See "General--The Subsidiaries--Matrix Bank".
REAL ESTATE MANAGEMENT AND DISPOSITION SERVICES
USS provides real estate management and disposition services to customers
across the United States. In addition to the unaffiliated clients currently
served by USS, many of whom are also clients of United Financial, Matrix
Financial uses USS exclusively in handling the disposition of its foreclosed
real estate. Having USS provide this service, as opposed to Matrix Financial,
transforms the disposition process into a revenue generator for the Company,
since USS typically collects a referral fee based on the value of the foreclosed
real estate from the real estate broker involved in the sale transaction.
Because USS typically collects its fee from the real estate broker, USS is able
to provide this disposition service on an outsourced basis and at no additional
cost to the mortgage loan servicer. USS is able to pass the cost of the
disposition on to the real estate broker because of the volume it generates. In
addition, USS provides limited collateral valuation opinions to clients who are
interested in assessing the value of the underlying collateral on non-performing
mortgage loans, as well as to clients such as Matrix Bank and other third party
mortgage loan originators and buyers interested in evaluating potential bulk
purchases of mortgage loans.
13
<PAGE>
COMPETITION
The industries in which the Company operates are highly competitive. The
Company competes for the acquisition of MSRs and bulk loan portfolios mainly
with mortgage companies, savings associations, commercial banks and other
institutional investors. The Company believes that it has competed successfully
for the acquisition MSRs and bulk loan portfolios by relying on the advantages
provided by its unique corporate structure and the secondary marketing expertise
of the employees in each Subsidiary.
Management believes that Matrix Bank's most direct competition for deposits
comes from local financial institutions. The distinction among market
participants is based primarily on price and, to a lesser extent, the quality of
customer service and name recognition. Matrix Bank's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities, as well as from money market mutual funds.
Matrix Bank competes for conventional deposits by emphasizing quality of
service, extensive product lines and competitive pricing.
Competition in mortgage loan and MSRs brokerage and consulting arises
mainly from other mortgage banking consulting firms, national and regional
investment banking companies and accounting firms. Management believes that the
distinction among market participants is based primarily on customer service.
United Financial competes for its brokerage and consulting activities by
recruiting qualified and experienced sales people, by developing innovative
sales techniques, by offering superior analytical services, including hedging
strategies, by providing financing opportunities to its customers through its
affiliation with Matrix Bank and by seeking to provide a higher level of service
than is furnished by its competitors.
Competition in originating mortgage loans arises mainly from other mortgage
companies, finance companies, savings associations and commercial banks. The
distinction among market participants is based primarily on price and, to a
lesser extent, the quality of customer service and name recognition. Aggressive
pricing policies of the Company's competitors, especially during a declining
period of mortgage loan originations, could in the future result in a decrease
in the Company's mortgage loan origination volume and/or a decrease in the
profitability of the Company's loan originations, thereby reducing the Company's
revenues and net income. The Company competes for loans by offering competitive
interest rates and product types and by seeking to provide a higher level of
personal service to mortgage brokers and borrowers than is furnished by
competitors. However, the Company does not have a significant market share of
the lending markets in which it conducts operations.
Sterling Trust faces considerable competition in all of the services and
products that it offers. The main competition comes from other self-directed
trust companies and broker/dealers. Sterling Trust also faces competition from
other trust companies and trust divisions of financial institutions. Sterling
Trust's niche has been, and will continue to be, providing high quality customer
service and servicing niche retirement products. In an effort to increase market
share, Sterling Trust will endeavor to provide superior service, expand its
marketing efforts, provide competitive pricing and continue to diversify its
product mix.
UCM faces competition from in-house risk management departments and Wall
Street derivative products. UCM believes that distinction among market
participants is based on name recognition, price and customer service and
satisfaction. UCM competes by offering a unique hedging product that tends to be
of lower cost than the products offered by competitors.
USS's main competitors consist of Cendant (formerly PHH, which was
purchased by FHLMC), the Clayton Group (formerly Prudential Asset Recovery) and
FNMA, which offers real estate disposition services on an outsourced basis.
Additionally, clients or potential clients that opt to perform these services
in-house, also diminish USS's market.
EMPLOYEES
At December 31, 1998, the Company had 447 employees. Management believes
that its relations with its employees are good. Neither Matrix Bancorp nor any
of the Subsidiaries is a party to any collective bargaining agreement.
REGULATION AND SUPERVISION
Set forth below is a brief description of various laws and regulations
affecting the operations of the Company. The description of laws and regulations
contained herein does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations. Any change in
applicable laws, regulations or regulatory policies may have a material effect
on the business, operations and prospects of the Company.
14
<PAGE>
MATRIX BANCORP. The Company is a unitary thrift holding company within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"). As such,
Matrix Bancorp has registered with the Office of Thrift Supervision ("OTS") and
is subject to OTS regulation, examination, supervision and reporting
requirements. In addition, the OTS has enforcement authority over Matrix
Bancorp and its non-savings institution Subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to Matrix Bank. In addition, Matrix Bank must notify the
OTS at least 30 days before making any distribution to Matrix Bancorp.
As a unitary thrift holding company, Matrix Bancorp generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that Matrix Bank continues to be a "qualified thrift
lender" ("QTL") under HOLA. Upon any nonsupervisory acquisition by Matrix
Bancorp of another savings association or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, Matrix Bancorp would
become a multiple thrift holding company (if the acquired institution is held as
a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. HOLA limits the
activities of a multiple thrift holding company and its uninsured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), subject to the prior approval of the OTS, and activities authorized
by OTS regulation.
Legislation has been proposed that would (i) permit banking, insurance and
securities industries to merge, (ii) subject unitary thrift holding companies
such as Matrix Bancorp to regulation by the Board of Governors of the Federal
Reserve ("FRB") rather than the OTS, and (iii) eliminate the federal thrift
charter and the OTS. A bill that was passed by the House of Representatives in
1998 would subject unitary savings and loan holding companies to the activity
restrictions generally applicable to multiple savings and loan holding
companies. A grandfathering provision would allow existing unitary savings and
loan holding companies to continue to engage in activities permitted unitary
savings and loan holding companies under existing law and the grandfathering
could be transferred to acquirers. It is too early to tell whether legislation
would result in the imposition on the Company of the capital requirements
applicable to bank holding companies. The Company is also unable to predict
whether legislation will be enacted or, given such uncertainty, determine the
extent to which the legislation, if enacted, would affect its business. The
Company is also unable to predict whether the Savings Association Insurance Fund
("SAIF") and the Bank Insurance Fund ("BIF") will eventually be merged.
FEDERAL SAVINGS BANK OPERATIONS. Matrix Bank is subject to extensive
regulation, examination and supervision by the OTS, as its chartering authority
and primary regulator, and potentially by the Federal Deposit Insurance
Corporation ("FDIC"), which insures its deposits up to applicable limits. Such
regulation and supervision (i) establishes a comprehensive framework of
activities in which Matrix Bank can engage, (ii) limits the ability of Matrix
Bank to extend credit to any given borrower, (iii) imposes specified liquidity
requirements, (iv) specifically restricts the transactions in which Matrix Bank
may engage with its affiliates, (v) requires Matrix Bank to meet a QTL test that
imposes a level of portfolio assets in which Matrix Bank must invest (primarily
residential mortgages and related investments), (vi) places limitations on
capital distributions by savings associations such as Matrix Bank, including
cash dividends, (vii) imposes assessments to the OTS to fund its operations,
(viii) establishes a continuing and affirmative obligation, consistent with
Matrix Bank's safe and sound operation, to help meet the credit needs of the
entire community, including low and moderate income neighborhoods, (ix) requires
Matrix Bank to maintain certain noninterest-bearing reserves against its
transaction accounts, (x) establishes various capital categories resulting in
various levels of regulatory scrutiny applied to the institutions in a
particular category and (xi) establishes standards for safety and soundness. In
addition, insured institutions with total assets of $500 million or more, such
as Matrix Bank, beginning with 1999 fiscal year financial results, must submit
annual audit reports prepared by independent auditors to federal and state
regulators. Auditors must receive examination reports, supervisory agreements
and reports of enforcement actions. In addition, an attestation by the auditor
regarding the statements of management relating to the internal controls must be
submitted to the OTS. The committees of such institutions must include members
with experience in banking or financial management, must have access to outside
counsel and must not include representatives of large customers. During 1998,
Matrix Bank adopted revisions to its audit policy to comply with these
requirements. The regulatory structure is designed primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities. Any change in such regulations, whether by the OTS,
the FDIC or the Congress could have a material impact on Matrix Bank and its
operations.
Know Your Customer Rules. The OTS has proposed "Know Your Customer" rules,
which are intended to detect patterns of large cash deposits and withdrawals
outside the "normal" activity of accountholders at financial institutions. The
proposed regulations would require each institution to develop a program to:
determine the identity of customers, their source of funds and their normal and
expected transactions as well as to monitor account activity for inconsistencies
with normal and expected transactions, and report any suspicious transactions.
The proposed regulations were jointly proposed by the federal banking agencies.
Since then, the FDIC and the Comptroller of the Currency have indicated that
they will withdraw the proposal. Therefore, it is uncertain if or whether such
regulations will be adopted in any form. The proposed regulations, if adopted,
could, at least initially, result in additional personnel costs.
15
<PAGE>
Transactions with Affiliates. Under current federal law, Sections 23A and
23B of the Federal Reserve Act govern transactions between depository
institutions and their affiliates. In a holding company context, at a minimum,
the parent holding company of a savings institution and any companies that are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Section 23A limits the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to 10% of such savings institution's capital stock and surplus,
and contains an aggregate limit on all such transactions with all affiliates to
20% of capital stock and surplus. The term "covered transaction" includes, among
other things, the making of loans or other extensions of credit to an affiliate
and the purchase of assets from an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees or acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings institution or its subsidiary as similar transactions with
nonaffiliates. Matrix Bank engages in transactions with its affiliates, which
are structured with the intent of complying with such regulations.
Insurance of Accounts and Regulation by the FDIC. Matrix Bank is a member
of the SAIF, which is administered by the FDIC. Savings deposits are insured up
to $100,000 per insured member (as defined by law and regulation) by the FDIC.
Such insurance is backed by the full faith and credit of the United States. As
insurer, the FDIC imposes deposit insurance assessments and is authorized to
conduct examinations of and to require reporting by the FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also may initiate enforcement actions against savings
associations and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is in
an unsafe or unsound condition.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a risk-
based assessment system under which all SAIF insured depository associations are
placed into one of nine categories and assessed based upon their level of
capital and supervisory evaluation. Under this system, associations classified
as well capitalized and considered healthy pay the lowest assessment while
associations that are less than adequately capitalized and considered of
substantial supervisory concern pay the highest assessment. In addition, under
FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. The FDIC may increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. Matrix Bank's current assessment is .064% of deposits, which is the lowest
rate.
By contrast, financial institutions that are members of the BIF, which has
higher reserves, experienced lower deposit insurance assessments. The disparity
in deposit insurance assessments between SAIF and BIF members was exacerbated by
the statutory requirement that both the SAIF and the BIF funds be recapitalized
to a 1.25% reserved deposits ratio and that a portion of most thrift's deposit
insurance assessments be used to service bonds issued by the Financial
Corporation ("FICO"). BIF reached the required reserve ratio in 1995. As a
result, financial institutions that have deposits insured by the SAIF were
subject to a potential competitive disadvantage as compared to BIF members.
On September 30, 1996, the President signed legislation that provides for
BIF members to service a growing portion of the FICO bond payments. Until
January 1, 2000, annual assessments of .013% of BIF deposits and .064% of SAIF
deposits will service the annual payments due on the FICO bonds. Accordingly,
Matrix Bank's portion of the payment on the FICO bonds is .064% of the deposits.
The legislation provided for subsequent full pro rata sharing of FICO bond
payments by BIF and SAIF institutions. The legislation called for a merger of
the SAIF and BIF as of January 1, 1999, but only if the thrift charter has been
eliminated.
The financing corporations created by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, as amended ("FIRREA") and the Competitive
Equality Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled associations.
Such premiums cannot, however, exceed the amount of SAIF assessments and are
paid in lieu thereof.
Brokered Deposits. Under the FDIC regulations governing brokered deposits,
well capitalized associations are not subject to brokered deposit limitations,
while adequately capitalized associations are subject to certain brokered
deposit limitations and undercapitalized associations may not accept brokered
deposits. Matrix Bank is considered to be a well capitalized association.
Although Matrix Bank historically had not accepted brokered deposits, it began
to do so in February 1998 to allow for the desired growth of Matrix Bank. At
December 31, 1998, Matrix Bank had $148.7 million of brokered deposits. In the
event Matrix Bank is not permitted to accept brokered deposits in the future, it
would have to find replacement sources of liquidity. It is possible that such
alternatives, if available, would result in a higher cost of funds.
16
<PAGE>
MATRIX BANK'S CAPITAL RATIOS. Federal law requires, among other things,
that federal bank regulatory authorities take "prompt corrective action" with
respect to savings institutions that do not meet minimum capital requirements.
For these purposes, the law establishes five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized.
The OTS has adopted regulations to implement the prompt corrective action
legislation. An institution is deemed to be "well capitalized" if it has a
total risk-based capital ratio of 10% or greater and a leverage ratio of 5% or
greater. An institution is "adequately capitalized" if it has a total risk-
based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or
greater and generally a leverage ratio of 4% or greater. An institution is
"undercapitalized" if it has a total risk-based capital ratio of less than 8%, a
Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio
of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is considered to be "critically undercapitalized" if it
has a ratio of tangible equity (as defined in the regulations) to total assets
that is equal to or less than 2%. As of December 31, 1998, Matrix Bank was a
"well capitalized" institution.
"Undercapitalized" institutions must adhere to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A savings institution's compliance with such plan is required
to be guaranteed by any company that controls the "undercapitalized" institution
in an amount equal to the lesser of 5% of total assets when deemed
"undercapitalized" or the amount necessary to achieve the status of "adequately
capitalized." If an "undercapitalized" savings institution fails to submit an
acceptable plan, it is treated as if it is "significantly undercapitalized."
"Significantly undercapitalized" banks must comply with one or more of a number
of additional restrictions, including, but not limited to, an order by the OTS
to sell sufficient voting stock to become "adequately capitalized," requirements
to reduce total assets and cease receipt of deposits from correspondent banks or
dismiss directors or officers, and restriction on interest rates paid on
deposits, compensation of executive officers and capital distributions by the
parent holding company. "Critically undercapitalized" institutions must comply
with additional sanctions including, subject to a narrow exception, the
appointment of a receiver or conservator within 270 days after it obtains such
status.
The following table indicates Matrix Bank's regulatory capital ratios at
December 31, 1998:
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------------
CORE RISK-BASED
CAPITAL CAPITAL
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholder's equity/GAAP capital............................................. $ 51,163 $ 51,163
Additional capital items:
General valuation allowances................................................ -- 2,985
------------ ------------
Regulatory capital as reported to the OTS..................................... 51,163 54,148
Minimum capital requirement as reported to the OTS............................ 32,828 36,938
------------ ------------
Regulatory capital--excess.................................................... $ 18,335 $ 17,210
============ ============
Capital ratios................................................................ 6.23% 11.73%
Well capitalized requirement.................................................. 5.00% 10.00%
</TABLE>
FEDERAL HOME LOAN BANK SYSTEM. Matrix Bank is a member of the Federal Home
Loan Bank ("FHLB") system, which consists of 12 regional FHLBs. The FHLB
provides a central credit facility primarily for member associations and
administers the home financing credit function of savings associations. FHLB
advances must be secured by specified types of collateral and may only be
obtained for the purpose of providing funds for residential housing finance.
The FHLB funds its operations primarily from proceeds derived from the sale of
consolidated obligations of the FHLB system. Matrix Bank, as a member of the
FHLB system, must acquire and hold shares of capital stock in its regional FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. Matrix Bank was in compliance with this requirement with an investment
in FHLB stock at December 31, 1998 of $15.6 million.
The FRB regulations require depository institutions to maintain
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: for
that portion of transaction accounts aggregating $46.5 million or less (which
may be adjusted by the FRB) the reserve requirement is 3%; and for accounts
greater than $46.5 million, the reserve requirement is $1.4 million plus 10%
(which may be adjusted by the FRB between 8% and 14%) against that portion of
total transaction accounts in excess of $46.5 million. At December 31, 1998,
Matrix Bank had $11.2 million of reserves with the Federal Reserve System.
17
<PAGE>
MORTGAGE BANKING OPERATIONS. The rules and regulations applicable to the
Company's mortgage banking operations establish underwriting guidelines that,
among other things, include anti-discrimination provisions, require provisions
for inspections, appraisals and credit reports on prospective borrowers and fix
maximum loan amounts. Moreover, lenders, such as the Company, are required
annually to submit to the HUD, FNMA and FHLMC audited financial statements, and
each regulatory entity maintains its own financial guidelines for determining
net worth and eligibility requirements. The Company's affairs are also subject
to examination by HUD, FNMA and FHLMC at any time to assure compliance with the
applicable regulations, policies and procedures. Mortgage loan origination
activities are subject to, among others, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of
1974, as amended, and the regulations promulgated thereunder that prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs.
Additionally, there are various state and local laws and regulations
affecting the Company's operations. The Company is licensed in those states in
which it does business requiring such a license where the failure to be licensed
would have a material adverse effect on the Company, its business, or its
assets. Mortgage origination operations also may be subject to state usury
statutes.
REGULATION OF STERLING TRUST COMPANY. Sterling Trust provides custodial
services and directed (nondiscretionary) trustee services. Sterling Trust was
chartered under the laws of the State of Texas, and as a Texas trust company is
subject to supervision, regulation and examination by the Texas Department of
Banking (the "TDB"). Under applicable law, a Texas trust company, such as
Sterling Trust, is subject to virtually all provisions of the Texas Finance Code
(the "TFC") as if the trust company were a state chartered bank. The activities
of a Texas trust company are limited by applicable law generally to acting as a
trustee, executor, administrator, guardian or agent for the performance of any
lawful act, and to lend and accumulate money when authorized under applicable
law. In addition, a Texas trust company with capital of not less than $1
million, such as Sterling Trust, has the power to (i) purchase, sell, discount
and negotiate notes, drafts, checks and other evidences of indebtedness, (ii)
purchase and sell securities, (iii) issue subordinated debentures and capital
notes with the written consent of the Texas Banking Commissioner (the
"Commissioner") and (iv) exercise powers incidental to the enumerated powers
described in the TFC. A Texas trust company, such as Sterling Trust, is
generally prohibited from accepting demand or time deposits if not insured by
the FDIC.
Limitation on Capital Distributions. The TFC prohibits a Texas trust
company from reducing its outstanding capital and restricted surplus through
redemption or other capital distribution without the prior written approval of
the Commissioner. The TFC does not prohibit the declaration and payment of pro
rata share dividends consistent with the Texas Business Corporation Act.
Investments. A Texas trust company is generally obligated to maintain an
amount equal to 40% of its capital and surplus in investments that are readily
marketable and can be converted into cash within four business days. Subject to
the requirements set forth in the preceding sentence, a Texas trust company is
permitted to invest its corporate assets in any investment permitted by law,
provided that without the prior written consent of the Commissioner or otherwise
provided by the TFC, a Texas trust company may not invest an amount in excess of
15% of its capital and certified surplus in the securities of a single issuer.
Branching. The TFC permits a Texas trust company to establish and maintain
branch offices at any location within the state on prior written approval of the
Commissioner.
Transactions with Related Parties. The TFC prohibits the sale or lease of
an asset of a Texas trust company, or the purchase or lease of an asset by a
Texas trust company, where the transaction involves an officer, director,
principal shareholder or affiliate, unless such transaction is approved by a
disinterested majority of the board of directors or the prior written approval
of the Commissioner.
Enforcement. Under applicable provisions of the TFC, the Commissioner has
the power to issue enforcement actions against a Texas trust company or any
officer, employee or director of a Texas trust company. In addition, in certain
circumstances, the Commissioner may remove a present or former officer, director
or employee of a Texas trust company from office or employment, and may prohibit
a shareholder or other persons participating in the affairs of a Texas trust
company from such participation. The Commissioner has the authority to assess
civil penalties of up to $500 per day for violations of a cease and desist,
removal or prohibition order.
Capital Requirements. Applicable law requires a Texas trust company to have
and maintain capital of at least $1 million. The Commissioner may require
additional capital of a Texas trust company if the Commissioner determines it
necessary to protect the safety and soundness of such company. Sterling Trust
is in compliance with all capital requirements under Texas law.
18
<PAGE>
ITEM 2. PROPERTIES
----------
The executive and administrative offices of the Company, United Financial
and UCM are located at 1380 Lawrence Street, Suite 1400, Denver, Colorado 80204.
The lease on these premises extends through December 2002 and the current annual
rent is approximately $185,000. The Company leases an additional 8,100 square
feet in downtown Denver for a monthly rental payment of approximately $8,400,
under terms that extend through June 2001. Most of this additional space is
utilized by USS's operations. The Company also owns a 30,000 square foot
building in Phoenix, which houses the majority of Matrix Financial's operations.
This building was purchased by the Company in 1994 and is subject to third party
mortgage indebtedness. See Note 8 to the Consolidated Financial Statements
included elsewhere herein. The Company also leases four smaller office
facilities in Atlanta, Denver, Las Vegas and Scottsdale, most of which are
currently used by Matrix Financial to conduct its wholesale loan origination
activities.
Matrix Bank owns an approximately 30,000 square foot building in Las
Cruces, New Mexico. Of this 30,000 square feet, approximately 17,800 square feet
serve as the headquarters for Matrix Bank. Substantially all of the remaining
space is rented to unaffiliated third party tenants at market rates. Matrix Bank
also owns an 1,800 square foot detached branch in Las Cruces and an
approximately 3,000 square foot branch in Sun City, Arizona. Additionally,
Matrix Bank's loan origination branch in Evergreen, Colorado leases
approximately 1,650 square feet for a monthly rental payment of approximately
$3,000, under a lease that expires on January 1, 2000.
Sterling Trust occupies approximately 11,300 square feet in Waco, Texas,
under a lease agreement that is in place until June 30, 2001, at a monthly
rental payment of $13,553. The lease agreement provides for renewal options and
allocation of certain expenses the lessee would reimburse over a specified
amount during the life of the lease. Three officers of Sterling Trust and an
officer of First Matrix own, in the aggregate, approximately 33% of the equity
interest in the lessor. Additionally, Sterling Trust leases another 928 square
feet, also in Waco, under a lease that expires on June 30, 1999, for a monthly
rental amount of $1,021. Management of Sterling Trust anticipates the renewal of
this lease at its expiration.
First Matrix is located in Arlington, Texas and operates in a 1,446 square
foot office suite. The current lease requires a monthly payment of $1,506 and
matures on April 30, 1999. Management of First Matrix plans to renew this lease
for an additional year at a rate that slightly exceeds their current monthly
payment.
UCM also leases approximately 1,550 square feet in St. Louis, Missouri for
a monthly rental payment of $2,325. The St. Louis lease extends through October
2000.
The Company believes that all of its present facilities are adequate for
its current needs and that additional space is available for future expansion
upon acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
-----------------
United Financial is a defendant is 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 alleged 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 alleged that it relied on United Financial's
representations in purchasing the servicing rights from the seller. Trial was
conducted in Omaha, Nebraska during the week of July 12, 1998. The jury returned
a verdict in favor of United Financial on four counts and in favor of the
plaintiff on one count, and awarded the plaintiff $75,000. On July 31, 1998, the
plaintiff filed a motion for judgement notwithstanding the verdict, or
alternatively, a new trial. On November 6, 1998, the Court denied the
plaintiff's motion. Plaintiff has appealed the Court's ruling, and no assurances
can be given that an adverse judgment of a material amount will not ultimately
be rendered or that any such judgment would not have a material adverse effect
on the Company's consolidated financial condition, results of operations or cash
flows. United Financial is considering an appeal of the $75,000 award to the
plaintiff.
Matrix Financial was 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 alleged 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. On December 31, 1998, the parties settled this
action. Matrix Financial agreed to pay the plaintiff a nominal amount in
consideration of the plaintiff's full release of all claims against Matrix
Financial and the dismissal of the suit with prejudice by the plaintiff.
19
<PAGE>
Matrix Bank has been named defendant in an action styled Transamerica
Mortgage Company v. Matrix Capital Bank that was commenced on or about February
7, 1999 in the District Court of the J-191st Judicial District, Dallas County,
Texas. The plaintiff has alleged that Matrix Bank, as seller of certain
mortgage loans to plaintiff, breached a representation and warranty given to
plaintiff by Matrix Bank under the purchase agreement relating to such loans.
The action relates to approximately $700,000 in principal amount of mortgage
loans, and plaintiff has requested specific performance of the repurchase
obligations of Matrix Bank under the purchase agreement and/or an unspecified
amount of damages. Matrix Bank believes that its has defenses to this lawsuit.
However, no assurances can be given that an adverse judgment will not ultimately
be rendered or that any such 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 material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock, $.0001 par value ("Common Stock"), is traded on
the NASDAQ National Market under the symbol "MTXC." The initial public offering
of Common Stock occurred on October 18, 1996. The following table sets forth the
high and low sales prices for the Common Stock on the NASDAQ National Market for
the periods indicated.
<TABLE>
<CAPTION>
MARKET PRICE
----------------------------
Quarter Ended: HIGH LOW
----------------------------
<S> <C> <C>
December 31, 1998.......... $ 13.750 $ 6.625
September 30, 1998......... 28.750 8.000
June 30, 1998.............. 29.250 25.000
March 31, 1998............. 28.625 13.500
December 31, 1997.......... 18.250 13.875
September 30, 1997......... 16.875 13.000
June 30, 1997.............. 14.250 10.250
March 31, 1997............. 15.875 11.625
</TABLE>
On March 11, 1999, the closing price of the Common Stock was $14.25 per
share. Also as of that date, the approximate number of holders of record of the
Company's Common Stock was 65. This number does not include beneficial owners
who hold their shares in a depository trust in "street" name.
Since its organization in June 1993, the Company has not paid any dividends
on its equity, except for an aggregate of $92,000 in dividends paid in 1993 and
$201,000 paid in 1996, of which $4,000 for 1993 and $201,000 for 1996 represent
dividends paid by Vintage (i.e., the pooled company) prior to its acquisition by
the Company. The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends in the foreseeable future. Any
future determination as to dividend policy will be made at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors the Board of Directors
may deem relevant. The Company's bank stock loan, which was amended in June
1998, does not permit Matrix Bancorp to declare or pay any dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 8 to the Consolidated
Financial Statements included elsewhere herein. In addition, the ability of
Matrix Financial, Sterling Trust and Matrix Bank to pay dividends to the Company
may be restricted in certain instances, including covenants under Matrix
Financial's existing warehouse facilities and certain other debt covenants of
the Company.
20
<PAGE>
Item 6. Selected Financial Data
-----------------------
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(Dollars in thousands, except per share data)
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," each of which is
included elsewhere herein. In February 1997, the Company completed the
acquisition of Vintage in a transaction accounted for as a pooling of interests.
As a result of the pooling, the historical financial and other information of
the Company has been restated to include the financial and other information of
Vintage.
<TABLE>
<CAPTION>
As of and for the
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data
Net interest income before provision for loan
and valuation losses.................................... $ 24,190 $ 13,888 $ 6,059 $ 3,592 $ 4,004
Provision for loan and valuation losses.................. 4,607 874 143 401 216
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
and valuation losses.................................... 19,583 13,014 5,916 3,191 3,788
---------- ---------- ---------- ---------- ----------
Noninterest income:
Loan administration.................................. 17,411 16,007 8,827 7,749 6,926
Brokerage............................................ 7,054 3,921 4,364 4,787 4,017
Trust services....................................... 4,169 3,561 3,061 2,869 2,488
Gain on sale of loans and mortgage-backed
securities......................................... 3,108 2,441 3,121 3,039 1,590
Gain on sale of mortgage servicing rights........... 803 3,365 3,232 1,164 684
Loan origination(1)................................. 5,677 4,694 1,809 2,302 1,294
Other............................................... 8,523 4,040 2,173 1,744 940
---------- ---------- ---------- ---------- ----------
Total noninterest income........................ 46,745 38,029 26,587 23,654 17,939
Noninterest expense...................................... 52,939 37,746 26,655 20,453 16,593
---------- ---------- ---------- ---------- -----------
Income before income taxes............................... 13,389 13,297 5,848 6,392 5,134
Income taxes............................................. 4,876 5,159 2,278 2,469 2,014
---------- ---------- ---------- ---------- -----------
Net income............................................... $ 8,513 $ 8,138 $ 3,570(2) $ 3,923 $ 3,120
========== ========== ========== ========== ===========
Net income per share assuming dilution(3)................ $ 1.24 $ 1.20 $ 0.68 $ 0.83 $ 0.69
Weighted average common shares assuming dilution......... 6,881,890 6,781,808 5,077,321 4,707,221 4,529,593
Cash dividends(4)........................................ $ -- $ -- $ 201 $ -- $ --
Balance Sheet Data
Total assets............................................. $1,012,640 $ 606,745 $ 274,559 $ 186,313 $ 113,597
Total loans (excluding allowance for loan and
valuation losses)....................................... 852,158 513,128 213,400 147,608 90,068
Allowance for loan and valuation losses.................. 3,710 1,756 1,039 943 728
Nonperforming loans and leases(5)........................ 13,209 4,990 3,903 5,538 3,314
Mortgage servicing rights................................ 58,147 36,440 23,680 13,817 6,183
Foreclosed real estate(5)................................ 916 1,242 788 835 543
Deposits(6)(7)........................................... 490,516 224,982 90,179 48,877 41,910
Custodial escrow balances................................ 96,824 53,760 37,881 27,011 24,687
FHLB borrowings.......................................... 168,000 171,943 51,250 19,000 14,600
Borrowed money........................................... 178,789 89,909 42,431 65,093 18,438
Total shareholders' equity............................... 49,354 40,610 32,270 10,686 6,662
Operating Ratios and Other Selected Data
Return on average assets(8).............................. 1.02% 1.78% 1.69% 2.59% 3.13%
Return on average equity(8).............................. 18.92 22.71 24.30 47.62 57.06
Average equity to average assets(8)...................... 5.41 7.86 6.97 5.44 5.49
Net interest margin(8)(9)................................ 3.37 3.70 3.45 2.84 4.64
Operating efficiency ratio(10)........................... 79.81 73.95 82.01 76.19 76.37
Total amount of loans purchased.......................... $ 678,150 $ 493,693 $ 159,015 $ 91,774 $ 80,048
Balance of owned servicing portfolio (end of period)..... $5,357,729 $3,348,062 $2,505,036 $1,596,385 $ 1,041,785
Trust assets under administration (end of period)........ $2,089,562 $1,437,478 $1,162,231 $ 952,528 $ 750,186
Wholesale loan origination volume........................ $ 574,963 $ 402,984 $ 583,279 $ 388,937 $ 183,130
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loan Performance Ratios
Nonperforming loans and leases/total loans(5)............ 1.55% 0.97% 1.83% 3.75% 3.68%
Nonperforming assets/total assets(5)..................... 1.39 1.03 1.89 3.42 3.40
Net loan charge-offs/average loans(8).................... 0.38 0.04 0.03 0.15 0.03
Allowance for loan and valuation losses/
total loans.......................................... 0.44 0.34 0.49 0.64 0.81
Allowance for loan and valuation losses/
nonperforming loans.................................. 28.09 35.19 26.62 17.03 21.97
</TABLE>
__________
(1) On January 1, 1995, the Company adopted FAS 122, which was superceded by
FAS 125. Since FAS 122 prohibited retroactive application, the historical
accounting results for 1998, 1997, 1996 and 1995 are not directly
comparable to the results for prior periods.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Results of Operations for Fiscal
Years 1997 and 1996--Loan Origination Income" for a discussion of the
impact on net income of a secondary marketing loss incurred in March 1996.
(3) Net income per common share assuming dilution is based on the weighted
average number of common shares outstanding during each period and the
dilutive effect, if any, of stock options and warrants outstanding. There
are no other dilutive securities.
(4) Represents dividends paid by Vintage prior to its acquisition by the
Company.
(5) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Nonperforming
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of nonperforming loans and foreclosed
real estate, and the effect of repurchasing sub-prime automobile loans.
(6) Following the Company's acquisition of Vintage in February 1997, Sterling
Trust moved approximately $80.0 million of fiduciary deposits from a third
party institution to Matrix Bank.
(7) Beginning in February 1998, Matrix Bank began accepting brokered deposits.
At December 31, 1998, the total balance of brokered deposits was $148.7
million.
(8) Calculations are based on average daily balances where available and
monthly averages otherwise.
(9) Net interest margin has been calculated by dividing net interest income
before loan and valuation loss provision by average interest-earning
assets.
(10) The operating efficiency ratio has been calculated by dividing noninterest
expense by operating income (net interest income plus noninterest income).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following management's discussion and analysis of the financial condition
and results of operations of the Company should be read in conjunction with the
preceding "Selected Consolidated Financial and Operating Information."
Additionally, the Company's Consolidated Financial Statements and the Notes
thereto, as well as other data included herein, should be read and analyzed in
combination with the analysis below.
General
The Company was formed in June 1993 when the founding shareholders of Matrix
Financial and United Financial, Subsidiaries of the Company, exchanged all of
the outstanding capital stock of those two entities for shares of the Company in
a series of transactions that were each accounted for as a pooling of interests.
In September 1993, the Company acquired Dona Ana Savings and Loan Association,
FSB (which was subsequently renamed Matrix Capital Bank). The acquisition was
accounted for using the purchase method of accounting. The Company formed USS in
June 1995 and UCM in December 1996. In February 1997, the Company acquired
Vintage in a pooling of interests and, accordingly, no goodwill was recorded and
the consolidated financial statements of the Company for the prior periods have
been restated.
The principal components of the Company's revenues consist primarily of net
interest income recorded by Matrix Bank and Matrix Financial, loan
administration fees generated by Matrix Financial, brokerage, consulting and
disposition services fees realized by United Financial, UCM and USS,
respectively, loan origination fees and gains on sales of mortgage loans and
MSRs generated by Matrix Bank and Matrix Financial and trust service fees
generated by Sterling Trust. 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.
Comparison of Results of Operations for Fiscal Years 1998 and 1997
Net Income; Return on Average Equity. Net income increased $375,000, or 4.6%,
to $8.5 million ($1.24 per share) for fiscal year 1998 as compared to $8.1
million ($1.20 per share) for fiscal year 1997. Return on average equity
decreased to 18.9% for fiscal year 1998 as compared to 22.7% for fiscal year
1997. Excluding non-recurring charges in both years, net income increased $1.1
million, or 12.1%, to $10.1 million for fiscal year 1998 as compared to $9.0
million for fiscal year 1997. The non-recurring charges recorded during 1998, on
a pre-tax basis, include a $2.3 million loss recorded related to MCA (discussed
below), $255,000 related to United Financial's litigation expenses pertaining to
the Douglas County case and $62,000 of costs that were written off due to the
termination of the merger agreement with Fidelity National Financial, Inc. Non-
recurring charges in 1997 consisted of a $1.4 million pre-tax loss relating to
the recourse obligation, subsequent operation
22
<PAGE>
and ultimate disposition of the Company's entire portfolio of sub-prime auto
loans. Excluding non-recurring charges, earnings per share increased 10.4%
($1.47 compared to $1.33 from the prior year) and returns on average equity were
22.5% and 25.2% for fiscal years 1998 and 1997, respectively.
During recent years, Matrix Financial entered into several purchase
transactions with MCA Mortgage Corporation ("MCA"), a Michigan-based mortgage
banking entity. At December 31, 1998, Matrix Financial was carrying
approximately $5.0 million of residential mortgage loans on its balance sheet
that were purchased from MCA on a servicing retained basis. The Company also
had an outstanding receivable relating to brokerage and consulting services
provided to MCA. In January 1999, the Company learned that MCA was closing its
operations. Additionally, in February 1999, the Company learned that MCA had
declared bankruptcy and that some of the loans purchased by
Matrix Financial had been sold multiple times or pledged multiple times as
security for repayment of various credit facilities. The Company also
discovered that there appeared to be servicing issues relating to some of the
purchased loans. The servicing issues consisted of instances in which loans
owned by Matrix Financial and serviced by MCA had previously paid off, but for
which MCA had continued to remit monthly principal and interest, rather than the
payoff proceeds. As a result of the above MCA issues, the Company recorded a
$2.3 million loss as of December 31, 1998.
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $10.3 million, or 74.2%, to $24.2 million for fiscal
year 1998 as compared to $13.9 million for fiscal year 1997. The increase in
net interest income before provision for loan and valuation losses was due to a
94.6% increase in the Company's average loan balance, which was offset by a
decrease in the Company's net interest margin to 3.37% for fiscal year 1998 as
compared to 3.70% for fiscal year 1997. The average yield on loans decreased to
8.59% in 1998 from 8.74% in 1997, primarily due to the overall decrease and
continuance of lower interest rates in the market, as well as the acquisition by
the Company of fewer discounted loans. Average interest-bearing liabilities
increased to $663.6 million for fiscal year 1998 from $322.8 million for the
prior fiscal year. The increase in the average interest-bearing liabilities was
offset by a reduction in the cost of the interest-bearing liabilities to 5.50%
in 1998 from 5.66% in 1997. 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. The provision for loan and valuation
losses increased $3.7 million to $4.6 million for fiscal year 1998 as compared
to $874,000 for fiscal year 1997. This increase was primarily attributable to
the MCA loss, as well as the increase in the balance of loans receivable, which
increased to $852.2 million at December 31, 1998 as compared to $513.1 million
at December 31, 1997. For a discussion of the components of the allowance for
loan losses, see "--Asset and Liability Management--Analysis of Allowance for
Loan and Valuation Losses." For a discussion on the allowance as it relates to
nonperforming assets, see "--Asset and Liability Management--Nonperforming
Assets."
Loan Administration. Loan administration income represents service fees and
other income earned from servicing loans for various investors. Loan
administration income includes service fees that are based on a contractual
percentage of the outstanding principal balance plus late fees and other
ancillary charges. Loan administration fees increased $1.4 million, or 8.8%, to
$17.4 million for fiscal year 1998 as compared to $16.0 million for fiscal year
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. The 1998 increase was primarily attributable to the increase in the
outstanding principal balance underlying the Company's mortgage loan servicing
portfolio. The mortgage loan servicing portfolio increased $556.8 million, or
16.3%, to an average balance of $4.0 billion for fiscal year 1998 as compared to
an average balance of $3.4 billion for fiscal year 1997. This increase was
offset by a reduction in the average service fee rate (including all ancillary
income) to 0.44% for fiscal year 1998 as compared to 0.47% for fiscal year 1997.
Brokerage fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to MSRs. Brokerage fees increased $3.2
million, or 79.9%, to $7.1 million for fiscal year 1998 as compared to $3.9
million for fiscal year 1997. This increase is 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 $33.0 billion to $66.4 billion for fiscal year 1998
as compared to $33.4 billion for fiscal year 1997. Due to current market
conditions for MSRs, the Company is unable to predict whether United Financial
will continue to broker the volume of MSRs that it did during fiscal year 1998.
In addition, brokerage fees vary from quarter to quarter as the timing of
servicing sales is dependent upon the seller's need to recognize a sale or to
receive cash flows.
Trust Services. Trust service fees increased $608,000, or 17.1%, to $4.2
million for fiscal year 1998 as compared to $3.6 million for fiscal year 1997.
This increase is associated with the growth in the number of trust accounts
under administration at Sterling Trust, which increased to 36,374 accounts at
December 31, 1998 from 29,382 accounts at December 31, 1997 and the increase in
total assets under administration to $2.1 billion at December 31, 1998 from $1.4
billion at December 31, 1997.
23
<PAGE>
Over half of the increase in accounts is the result of a service agreement with
a large Registered Investment Advisor ("Advisor"), which was signed in early
1998 and provides custody and clearing services for this Advisor's clients.
While this represents a significant portion of Sterling Trust's growth during
1998, the Advisor's clients have all signed individual agreements for Sterling
Trust's services.
Gain on Sale of Loans. During fiscal years 1998 and 1997, the Company made
bulk loan sales of approximately $319.4 million and $198.3 million, for gains on
sale of bulk mortgage loans of $3.1 million and $2.4 million, respectively.
Gain on sale of loans can fluctuate significantly from year to year based on a
variety of factors, such as the current interest rate environment, the supply
and mix of loan portfolios available in the market, the type of loan portfolios
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 MSRs decreased
$2.6 million, or 76.1%, to $803,000 for fiscal year 1998 as compared to $3.4
million for fiscal year 1997. In terms of aggregate outstanding principal
balances of mortgage loans underlying such MSRs, the Company sold $175.3 million
in purchased MSRs during fiscal year 1998 as compared to $1.3 billion during
fiscal year 1997. Gains from the sale of MSRs can fluctuate significantly 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 pursue opportunistic sales of
MSRs.
Loan Origination. Loan origination income increased $983,000, or 20.9%, to
$5.7 million for fiscal year 1998 as compared to $4.7 million for fiscal year
1997. This increase is attributable to the increase in wholesale residential
mortgage loan production of $172.0 million, or 42.7%, to $575.0 million during
fiscal year 1998 as compared to $403.0 million during fiscal year 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 $4.5 million, or 111.0%, to $8.5 million
for fiscal year 1998 as compared to $4.0 million for fiscal year 1997. The
increase in other income was primarily due to increased consulting income from
UCM which rose to $2.6 million for fiscal year 1998 as compared to $184,000 for
fiscal year 1997, an increase in USS service fee income which totaled $2.0
million for fiscal year 1998 as compared to $1.1 million for fiscal year 1997
and certain financing transactions engaged in by the Company which increased
miscellaneous fee income over the prior fiscal year.
Noninterest Expense. Noninterest expense increased $15.2 million, or 40.3%,
to $52.9 million for fiscal year 1998 as compared to $37.7 million for fiscal
year 1997. This increase was primarily due to the overall growth and expansion
of the Company that began in the fourth quarter of 1997 and has continued
throughout 1998 and the increase in the amortization of MSRs. This growth and
expansion included the continued growth in the origination of loans at Matrix
Financial, the opening of a new lending subsidiary of Matrix Financial and
moderate growth at most of the other Subsidiaries. The following table details
the major components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------
1998 1997
-------------- ------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits................................................... $22,194 $14,724
Amortization of mortgage servicing rights............................................ 10,563 6,521
Occupancy and equipment.............................................................. 3,059 2,132
Postage and communication............................................................ 2,393 1,522
Professional fees.................................................................... 1,439 976
Data processing...................................................................... 1,344 843
Losses related to recourse sales..................................................... - 1,237
Other general and administrative..................................................... 11,947 9,791
------- -------
Total............................................................................. $52,939 $37,746
======= =======
</TABLE>
Compensation and employee benefits increased $7.5 million, or 50.7%, to $22.2
million for fiscal year 1998 as compared to $14.7 million for fiscal year 1997.
This increase was primarily the result of the expansion discussed above, as well
as expansion in the operations of Matrix Bank. Additionally, commission-based
compensation at Matrix Financial and United Financial increased due to the
overall increases in loan origination and brokerage income, respectively. Most
of the Company's other Subsidiaries also added new employees during 1998. The
Company had an overall increase of 68 employees, or 17.9%, to 447 full-time
employees at December 31, 1998 as compared to 379 full-time employees at
December 31, 1997.
24
<PAGE>
Amortization of MSRs increased $4.1 million, or 62.0%, to $10.6 million for
fiscal year 1998 as compared to $6.5 million for fiscal year 1997. Amortization
of MSRs fluctuates based on the size of the Company's mortgage servicing
portfolio and the prepayment rates experienced. The Company's prepayment rates
on its servicing portfolio averaged 22.6% during fiscal year 1998 as compared to
11.3% during fiscal year 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. The Company anticipates the
increased amortization levels to continue for the foreseeable future in response
to the historically low interest rate levels.
The remainder of noninterest expense, after removing the effect of the non-
recurring charges in both years, which includes occupancy and equipment expense,
postage and communication expense, professional fees, data processing costs and
other expenses increased $4.7 million, or 31.8% to $19.8 million for fiscal year
1998 as compared to $15.1 million for fiscal year 1997. The increase was
generally attributable to the growth and expansion of the Company's business
lines, especially with regard to Matrix Financial and Matrix Bank.
Additionally, the Company experienced higher interest curtailment expenses
related to the increased prepayments at Matrix Financial.
Provision for Income Taxes. The Company's provision for income taxes
decreased $283,000 to $4.9 million for fiscal year 1998 as compared to $5.2
million for fiscal year 1997. The increase in pre-tax income was offset by a
reduction in the effective tax rate to 36.4% for fiscal year 1998 from 38.8% for
fiscal year 1997. The decrease in the effective tax rate was the result of the
origination of tax-exempt leases by the Company.
Comparison of Results of Operations for Fiscal Years 1997 and 1996
Net Income; Return on Average Equity. Net income increased $4.5 million, or
128.0%, to $8.1 million ($1.20 per share) for fiscal year 1997 as compared to
$3.6 million ($0.68 per share) for fiscal year 1996. Return on average equity
decreased to 22.7% for fiscal year 1997 as compared to 24.3% for fiscal year
1996. The decrease in return on average equity was due to the increase in
average equity to $35.8 million for fiscal year 1997 as compared to $14.7
million for fiscal year 1996. The increase in average equity is primarily
attributable to the Company's initial public offering during the fourth quarter
of 1996, which increased equity by $18.2 million.
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $7.8 million, or 129.2%, to $13.9 million for fiscal
year 1997 as compared to $6.1 million for fiscal year 1996. The Company's net
interest margin increased to 3.70% for fiscal year 1997 as compared to 3.45% for
fiscal year 1996. These increases were attributable to the following: a 118.8%
increase in the Company's average loan portfolio balance to $355.8 million for
fiscal year 1997 from $162.6 million for fiscal year 1996, and a decrease in the
cost of interest-bearing liabilities to 5.66% for fiscal year 1997 as compared
to 6.59% for fiscal year 1996. The decrease in the cost of interest-bearing
liabilities was the result of fiduciary deposits of approximately $80.0 million
administered by Sterling Trust being transferred from a third party financial
institution to Matrix Bank upon completion of the Vintage acquisition. The
above were offset by a 102.8% increase in average interest-bearing liabilities
to $322.8 million for fiscal year 1997 as compared to $159.2 million for fiscal
year 1996, and a decrease in the Company's yield on interest-earning assets to
8.55% from 9.43% for fiscal years 1997 and 1996, respectively. The decrease in
the Company's yield on interest-earning assets was attributable to the lower
yield earned on the loan portfolio, which decreased to 8.74% as compared to
9.67% for fiscal years 1997 and 1996, respectively. The loan portfolio yield
decrease is attributable to the overall market decrease in interest rates and
the acquisition of loans with less discounts 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. Provision for loan losses increased
$731,000 to $874,000 for fiscal year 1997 as compared to $143,000 for fiscal
year 1996. This increase was primarily attributable to the increase in the
balance of loans receivable, which increased to $513.1 million at December 31,
1997 as compared to $213.4 million at December 31, 1996. 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 $7.2 million, or
81.3%, to $16.0 million for fiscal year 1997 as compared to $8.8 million for
fiscal year 1996. 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. This increase was primarily attributable to the increase in the
outstanding principal balance underlying the Company's mortgage loan servicing
portfolio. The mortgage loan servicing portfolio increased $843.0 million, or
33.7%, to $3.3 billion at December 31, 1997 from $2.5 billion at December 31,
1996.
Brokerage Fees. Brokerage fees decreased $443,000, or 10.2%, to $3.9 million
for fiscal year 1997 as compared to $4.4 million for fiscal year 1996. This
decrease occurred despite the increase in bulk servicing portfolios brokered by
United
25
<PAGE>
Financial. Servicing portfolios brokered by United Financial increased $7.0
billion to $33.4 billion for fiscal year 1997 as compared to $26.4 billion for
fiscal year 1996. The decrease in brokerage fees is attributable to an overall
decrease in the margins earned on servicing brokered.
Trust Services. Trust service fees increased $500,000, or 16.3%, to $3.6
million for fiscal year 1997 as compared to $3.1 million for fiscal year 1996.
This increase is associated with the growth in the number of trust accounts
under administration at Sterling Trust, which increased to 29,382 accounts at
December 31, 1997 from 25,772 accounts at December 31, 1996 and the increase in
the total assets under administration which increased to over $1.4 billion at
December 31, 1997 from under $1.2 billion at December 31, 1996.
Gain on Sale of Loans and Mortgage-Backed Securities. Gain on sale of loans
and mortgage-backed securities decreased $680,000, or 21.8%, to $2.4 million for
fiscal year 1997 as compared to $3.1 million for fiscal year 1996. Gain on sale
of loans can fluctuate significantly 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, 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 sale of MSRs increased
$133,000 to $3.4 million for fiscal year 1997 as compared to $3.2 million for
fiscal year 1996. In terms of aggregate outstanding principal balances of
mortgage loans underlying such servicing rights, the Company sold $1.3 billion
in purchased MSRs during fiscal year 1997 as compared to $646.0 million during
fiscal year 1996. Gains from the sale of MSRs can fluctuate significantly 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. A majority of the gain in 1997 pertains to
MSRs bought by the Company in 1997. 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 that
would be achieved from holding the servicing portfolio.
Loan Origination. Loan origination income increased $2.9 million, or 159.5%,
to $4.7 million for fiscal year 1997 as compared to $1.8 million for fiscal year
1996 despite the $180.3 million, or 30.9%, decrease in wholesale residential
mortgage loan production to $403.0 million for fiscal year 1997 as compared to
$583.3 million for fiscal year 1996. The increase in loan origination income
was related to a $1.9 million secondary marketing loss that occurred in the
first quarter of 1996 and the origination in 1997 of a greater amount of non-
agency eligible loans, which generally result in higher origination fees. The
secondary loss was attributable to the failure of a former officer of Matrix
Financial to adhere to the Company's established hedging policies, and as a
result, certain closed loans were not adequately hedged. The $1.9 million loss
resulted when interest rates increased dramatically in March 1996, thereby
causing the funded loans and pipeline commitments to decline in market value.
Had the Company's policies been followed, a loss still would have been
recognized, albeit significantly smaller, since it is difficult for the Company
to be completely hedged when interest rates rapidly and significantly change.
The Company has implemented several management and reporting changes to help
ensure that the hedging policies established by Matrix Financial's Board of
Directors are followed to mitigate secondary losses in volatile interest rate
markets. Loan origination income includes all mortgage loan fees, secondary
marketing activity on new loan originations and servicing release premiums on
net originations sold, net of origination costs.
Other Income. Other income increased $1.8 million, or 85.9%, to $4.0 million
for fiscal year 1997 as compared to $2.2 million for fiscal year 1996. Other
income mainly consists of fee income, including credit card fees earned by
Matrix Bank, consulting income earned by UCM, brokerage income earned by First
Matrix and USS service fee income. The increase in other income between 1997
and 1996 is predominantly related to the growth in credit card fee income, USS
service fees and consulting income generated by UCM, which was formed in
December 1996. Credit card fee income increased $889,000 to $908,000 for fiscal
year 1997 as compared to $19,000 for fiscal year 1996. Additionally, USS
service fees and UCM consulting income increased $557,000 and $184,000,
respectively, to $1.1 million and $184,000 for fiscal year 1997 as compared to
$564,000 and $0 for fiscal year 1996.
Noninterest Expense. Noninterest expense increased $11.1 million, or 41.6%,
to $37.7 million for fiscal year 1997 as compared to $26.7 million for fiscal
year 1996. This increase was primarily due to expenses related to the interim
subservicing on mortgage servicing portfolios acquired in 1997, the expenses
related to UCM which was formed in December 1996, the opening of a telemarketing
call center for the origination of loans at Matrix Financial, increased
amortization due to the Company's increased investment in MSRs and the overall
growth and expansion of the Company. During 1997, the Company recognized a pre-
tax loss of approximately $1.4 million relating to the recourse obligation,
subsequent operation and ultimate disposition of its entire portfolio of sub-
prime auto loans. This loss was less than the following non-recurring items,
which were recorded during fiscal year 1996: a $600,000 accrual for the
previously disclosed settlement of a class-action lawsuit, a
26
<PAGE>
one-time fee of $450,000 to recapitalize the SAIF, and a $787,000 loss relating
to the repurchase of sub-prime auto loans. The following table details the major
components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits................................................... $14,724 $12,722
Amortization of mortgage servicing rights............................................ 6,521 2,432
Occupancy and equipment.............................................................. 2,132 1,776
Postage and communication............................................................ 1,522 1,214
Professional fees.................................................................... 976 666
Data processing...................................................................... 843 642
Losses related to recourse sales..................................................... 1,237 787
Other................................................................................ 9,791 6,416
------- -------
Total............................................................................. $37,746 $26,655
======= =======
</TABLE>
Compensation and employee benefits increased $2.0 million, or 15.7%, to $14.7
million for fiscal year 1997 as compared to $12.7 million for fiscal year 1996.
This increase was the result of continued expansion of the Company's business
lines in 1997, including the opening of a retail branch of Matrix Bank, a new
lending office of Matrix Bank, the formation of UCM at the end of 1996 and the
opening of Matrix Financial's telemarketing call center. The Company had an
increase of 119 employees, or 45.8%, to 379 full-time employees at December 31,
1997 as compared to 260 full-time employees at December 31, 1996.
Amortization of MSRs increased $4.1 million, or 168.1%, to $6.5 million for
fiscal year 1997 as compared to $2.4 million for fiscal year 1996. Amortization
of MSRs fluctuates based on the size of the Company's mortgage servicing
portfolio and the prepayment rates experienced. The prepayment speed experienced
by the Company on the loans it serviced averaged 11.3% during fiscal year 1997
as compared to 11.9% during fiscal year 1996.
The remainder of noninterest expense, which includes occupancy and equipment
expenses, postage and communication expenses, professional fees, data processing
costs, losses related to recourse sales and other expenses, increased $5.0
million, or 43.5%, to $16.5 million for fiscal year 1997 as compared to $11.5
million for fiscal year 1996. The increase was primarily attributable to $1.2
million of interim subservicing costs on mortgage servicing portfolios acquired
during 1997 and the expansion of both existing and new business lines.
Provision for Income Taxes. The provision for income taxes increased by $2.9
million to $5.2 million for fiscal year 1997 as compared to $2.3 million for
fiscal year 1996. The two periods had comparable effective tax rates of 38.8%
and 39.0%, respectively.
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 or
costs. Ratio, yield and rate information are based on average daily balances
where available; otherwise, average monthly balances have been used. Nonaccrual
loans are included in the calculation of average balances for loans for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ---------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable, net....... $692,443 $59,452 8.59% $355,848 $31,096 8.74% $162,648 $15,733 9.67%
Mortgage-backed securities.. - - - - - - 4,653 351 7.54
Interest-earning deposits... 15,042 627 4.17 15,371 778 5.06 5,556 312 5.62
FHLB stock.................. 10,719 615 5.74 4,606 275 5.97 2,585 153 5.92
-------- ------ ---- -------- ------- ---- -------- ------- -----
Total interest-earning
assets.................... 718,204 60,694 8.45 375,825 32,149 8.55 175,442 16,549 9.43
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1998 1997
----------------------------- ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-earning assets:
Cash............................................... $ 13,241 $ 10,268
Allowance for loan and valuation losses............ (2,223) (1,343)
Premises and equipment............................. 9,913 8,302
Other assets....................................... 93,208 62,922
-------- --------
Total noninterest-earning assets............... 114,139 80,149
-------- --------
Total assets................................... $832,343 $455,974
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts.................................. $ 2,859 $ 102 3.58% $ 2,859 $ 113 3.95%
Money market and NOW accounts...................... 142,382 4,432 3.11 96,982 3,278 3.38
Certificates of deposit............................ 211,592 11,687 5.52 83,993 4,985 5.94
FHLB borrowings.................................... 159,381 8,554 5.37 59,984 3,435 5.73
Borrowed money..................................... 147,368 11,729 7.96 79,011 6,450 8.16
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities............. 663,582 36,504 5.50 322,829 18,261 5.66
-------- ------- ------ -------- ------- ------
Noninterest-bearing liabilities:
Demand deposits (including custodial escrow
balances)...................................... 106,247 80,816
Other liabilities.................................. 17,518 16,501
-------- --------
Total noninterest-bearing liabilities.............. 123,765 97,317
Shareholders' equity............................... 44,996 35,828
-------- --------
Total liabilities and shareholders' equity..... $832,343 $455,974
======== ========
Net interest income before provision for loan and
valuation losses................................... $24,190 $13,888
======= =======
Interest rate spread.................................. 2.95% 2.89%
====== ======
Net interest margin................................... 3.37% 3.70%
====== ======
Ratio of average interest-earning assets to average
interest-bearing liabilities....................... 108.23% 116.42%
====== ======
<CAPTION>
Year Ended December 31,
-----------------------------
1996
-----------------------------
Average Average
Balance Interest Rate
------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Noninterest-earning assets:
Cash............................................... $ 3,085
Allowance for loan and valuation losses............ (964)
Premises and equipment............................. 6,976
Other assets....................................... 26,199
--------
Total noninterest-earning assets.............. 35,296
--------
Total assets.................................. $210,738
========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts.................................. $ 2,389 $ 82 3.43%
Money market and NOW accounts...................... 11,964 468 3.91
Certificates of deposit............................ 54,824 3,210 5.85
FHLB borrowings.................................... 35,838 2,039 5.69
Borrowed money..................................... 54,171 4,691 8.66
-------- -------- ------
Total interest-bearing liabilities............ 159,186 10,490 6.59
-------- -------- ------
Noninterest-bearing liabilities:
Demand deposits (including custodial escrow
balances)..................................... 27,934
Other liabilities.................................. 8,927
--------
Total noninterest-bearing liabilities.............. 36,861
Shareholders' equity............................... 14,691
--------
Total liabilities and shareholders' equity.... $210,738
========
Net interest income before provision for loan and
valuation losses................................... $ 6,059
========
Interest rate spread.................................. 2.84%
=====
Net interest margin................................... 3.45%
=====
Ratio of average interest-earning assets to average
interest-bearing liabilities....................... 110.21%
======
</TABLE>
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (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 the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 Increase (Decrease) 1997 vs. 1996 Increase
Due to Change in (Decrease) Due to Change in
----------------------------------- -------------------------------
Volume Rate Total Volume Rate Total
------- ------- ---------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net............................ $ 28,914 $ (558) $ 28,356 $ 18,688 $ (3,325) $ 15,363
Mortgage-backed securities....................... -- -- -- (351) -- (351)
Interest-earning deposits........................ (14) (137) (151) 551 (85) 466
FHLB stock....................................... 351 (11) 340 120 2 122
--------- ------- --------- --------- --------- ---------
Total interest-earning assets............. 29,251 (706) 28,545 19,008 (3,408) 15,600
--------- ------- --------- --------- --------- ---------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 Increase (Decrease) 1997 vs. 1996 Increase (Decrease)
Due to Change in Due to Change in
---------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
---------- ------- ---------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Passbook accounts................................ $ -- $ (11) $ (11) $ 16 $ 15 $ 31
Money market and NOW accounts.................... 1,412 (258) 1,154 3,322 (512) 2,810
Certificates of deposit.......................... 7,043 (341) 6,702 1,708 67 1,775
FHLB advances.................................... 5,338 (219) 5,199 1,374 22 1,396
Borrowed money................................... 5,441 (162) 5,279 2,151 (392) 1,759
--------- ------- --------- --------- --------- ---------
Total interest-bearing liabilities.............. 19,234 (991) 18,243 8,571 (800) 7,771
--------- ------- --------- --------- --------- ---------
Change in net interest income before provision
for loan and valuation losses.................... $ 10,017 $ 285 $ 10,302 $ 10,437 $ (2,608) $ 7,829
========= ======= ========= ========= ========= =========
</TABLE>
Asset and Liability Management
General. A significant portion of the Company's revenues and net income is
derived from net interest income and, accordingly, the Company strives to manage
its interest-earning assets and interest-bearing liabilities to generate what
management believes to be an appropriate contribution from net interest income.
Asset and liability management seeks to control the volatility of the Company's
performance due to changes in interest rates. The Company constantly attempts
to achieve an appropriate relationship between rate sensitive assets and rate
sensitive liabilities. The Company has responded to interest rate volatility by
developing and implementing asset and liability management strategies designed
to increase its noninterest income and improve the match between interest-
earning assets and interest-bearing liabilities. These strategies include:
. Utilizing MSRs as a source of noninterest income and as a countermeasure
against the decline in the value of mortgage loans during a rising
interest rate environment. Increases in interest rates tend to increase
the value of MSRs because of the resulting decrease in prepayment rates on
the underlying loans;
. Increasing the noninterest-bearing custodial escrow balances related to
the Company's MSRs;
. Increasing focus on lines of business that are less interest rate
sensitive, such as brokerage activities, consulting services, self-
directed trust services and real estate disposition;
. Maintaining a wholesale loan origination operation. Wholesale originations
provide a form of hedge against the balance of MSRS. In a decreasing
interest rate environment, the value of the servicing portfolio tends to
decrease due to increased prepayments of the underlying loans. During this
same period, however, the volume of loan originations generally increases;
. Originating and purchasing adjustable rate mortgages and selling newly
originated fixed rate residential mortgages in the secondary market;
. Increasing emphasis on the origination of construction and commercial real
estate lending, which tend to have higher interest rates with shorter loan
maturities than residential mortgage loans and generally are at adjustable
rates;
. Increasing retail deposits, which are less susceptible to changes in
interest rates than other funding sources;
. Pursuing strategic acquisitions or alliances that provide fee-based income
or generate liabilities that are less expensive or less interest rate
sensitive than retail deposits or borrowings from third party institutions
to fund the Company's investing activities; and
. Hedging segments of the Company's servicing portfolio and selling forward
commitments on our loan pipeline.
Lending Activities. The major interest-earning asset of the Company is the
loan portfolio. Consequently, a significant part of the Company's asset and
liability management involves monitoring the composition of the Company's loan
portfolio, including the corresponding maturities. The following table sets
forth the composition of the Company's loan portfolio by loan type as of the
dates indicated. The amounts in the following table are shown net of discounts
and other deductions.
29
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ---------------- --------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential................ $732,512 86.34% $462,604 90.46% $192,118 90.47% $136,741 93.23% $ 80,010 89.56%
Multi-family, commercial
real estate and
commercial............. 52,689 6.21 29,492 5.77 15,352 7.23 7,544 5.15 7,518 8.41
Direct financing leases.... 24,429 2.88 2,708 0.53 -- -- -- -- -- --
Construction............... 27,648 3.26 7,591 1.48 1,061 0.50 78 0.05 106 0.12
Consumer................... 14,880 1.75 10,733 2.10 4,869 2.29 3,245 2.21 2,434 2.72
-------- ------ -------- ------ -------- ------ -------- ----- --------- ------
Total loans and leases... 852,158 100.44 513,128 100.34 213,400 100.49 147,608 100.64 90,068 100.81
Less allowance for loan and
valuation losses....... 3,710 0.44 1,756 0.34 1,039 0.49 943 0.64 728 0.81
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Loans receivable, net...... $848,448 100.00% $511,372 100.00% $212,361 100.00% $146,665 100.00% $ 89,340 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ========= ======
</TABLE>
The following table presents the aggregate maturities of loans in each major
category of the Company's loan portfolio as of December 31, 1998 (excluding the
allowance for loan and valuation losses). Loans held for sale are classified as
maturing within one year. Actual maturities may differ from the contractual
maturities shown below as a result of renewals and prepayments or the timing of
loan sales.
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------------------------------
Less than One to Over five
one year five years years Total
------------ ------------ --------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Residential........................................... $ 724,827 $ 530 $ 7,155 $ 732,512
Multi-family, commercial real estate and commercial... 14,930 12,478 25,281 52,689
Direct financing leases............................... 24,429 -- -- 24,429
Construction.......................................... 21,481 2,533 3,634 27,648
Consumer.............................................. 10,714 2,743 1,423 14,880
---------- ------------ --------- ----------
Total loans and leases.............................. $ 796,381 $ 18,284 $ 37,493 $ 852,158
========== ============ ========= ==========
</TABLE>
Included in loans held for sale is approximately $49.5 million, at December
31, 1998, of loans which the Company has acquired under purchase/repurchase
facilities and purchase agreements with several parties. The terms of these
agreements 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. In all cases, the seller provides contractual recourse to the Company in
the event of delinquency and/or loss.
Loans held for investment, which are contractually due in one or more years,
are split between fixed and adjustable rates as follows:
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------------------------------------------
One to five Over five
years years Total
------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Fixed........................................... $ 10,226 $ 14,231 $ 24,457
Adjustable...................................... 8,058 23,262 31,320
------------ ------------ ------------
Total loans................................... $ 18,284 $ 37,493 $ 55,777
============ ============ ============
</TABLE>
Nonperforming Assets. As part of asset and liability management, the Company
monitors nonperforming assets ("NPAs") on a monthly basis. 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. The following
table sets forth the Company's NPAs as of the dates indicated:
30
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual mortgage loans...................... $ 8,208 $ 4,796 $ 3,031 $ 5,523 $ 3,275
Nonaccrual commercial loans and direct
financing leases.............................. 4,349 -- -- -- --
Nonaccrual consumer loans...................... 652 194 872 15 39
--------- -------- -------- -------- --------
Total nonperforming loans and leases......... 13,209 4,990 3,903 5,538 3,314
Foreclosed real estate......................... 916 1,242 788 835 543
Repossessed automobiles........................ -- -- 506 -- --
--------- -------- -------- -------- --------
Total nonperforming assets................... $ 14,125 $ 6,232 $ 5,197 $ 6,373 $ 3,857
========= ======== ======== ======== ========
Total nonperforming loans and leases
to total loans................................ 1.55% 0.97% 1.83% 3.75% 3.68%
Total nonperforming assets to total assets..... 1.39% 1.03% 1.89% 3.42% 3.40%
Ratio of allowance for loan and valuation
losses to total non-performing loans and
leases........................................ 28.09% 35.19% 26.62% 17.03% 21.97%
Interest income on nonperforming loans and
leases not included in interest income........ $ 524 $ 89 $ 120 $ 156 $ 140
</TABLE>
As of December 31, 1998, the Company had approximately $90,000 of non-
government accruing loans that were contractually past due 90 days or more.
Beginning in 1996, the Company began to accrue interest 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. The
aggregate unpaid principal balance of government-sponsored accruing loans that
were past due 90 or more days was $165.7 million and $18.7 million as of
December 31, 1998 and 1997, respectively. A significant portion of these loans
are serviced by a third party who is required to remit monthly interest
regardless of whether it is collected. The higher levels of nonaccrual mortgage
loans as a percentage of total loans during 1995 and 1994 were primarily
attributable to purchases by Matrix Bank of bulk residential loan portfolios in
those years. Decreases in the nonaccrual mortgage loans at December 31, 1998,
1997 and 1996 are attributable to the improvement of the loans that had past
delinquency problems and the credit quality of the loan portfolios the Company
acquired in 1998, 1997 and 1996. In the past three years, Matrix Bank acquired
loans with fewer delinquency problems and/or document deficiencies, which also
resulted in a decrease in the nonaccrual loans as a percentage of total loans.
The increase in nonaccrual commercial loans and direct financing leases in
1998 is the result of the Company's origination of tax-exempt lease financing
for charter schools for the purchase of real estate and equipment. Several of
the charter schools for which the Company has provided financing have
encountered enrollment and/or state funding problems which has caused them to
become delinquent on their lease obligations to the Company.
The increase in the nonaccrual consumer loans in 1996 is a result of sub-
prime auto loans that the Company repurchased pursuant to limited
representations and warranties included in loan sale agreements. The Company
had a separate reserve of $600,000 included in other liabilities for anticipated
losses relating to the repurchased sub-prime auto loans at December 31, 1996.
Included in repossessed assets for 1996 is $506,000 of automobiles that the
Company was required to repurchase pursuant to the same limited representations
and warranties. The balance of the loans and automobiles repurchased in 1996
and 1997 were either disposed of or sold to a third party investor in December
1997. The Company does not anticipate that it will originate any additional
sub-prime automobile contracts.
The prior delinquency and anticipated future delinquencies are taken into
consideration in the pricing of the loans acquired. The Company generally
purchases such loans at discounts and, in some instances, receives recourse or
credit enhancement from the seller to further reduce the Company's risk of loss
associated with the loans' nonaccrual status. At December 31, 1998, $8.0
million, or 60.6%, 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 December 31, 1998, were $754.2 million, of
which $12.8 million, or 1.7%, were nonaccrual loans. However, against the
$754.2 million of total loans held for sale, the Company has $3.7 million of
purchase discounts.
The percentage of the allowance for loan and valuation 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 and valuation losses. See "--Comparison of Results of Operations for
Fiscal Years 1998 and 1997."
31
<PAGE>
Analysis of Allowance for Loan and Valuation Losses. The following table
sets forth information regarding changes in the Company's allowance for loan and
valuation losses for the periods indicated. The table includes the allowance for
both loans held for investment and loans held for sale.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period..................... $ 1,756 $ 1,039 $ 943 $ 728 $ 538
Charge-offs:
Real estate-mortgage............................. 1,922 22 64 198 26
Real estate-construction......................... -- -- -- 35 --
Direct financing leases.......................... -- -- -- -- --
Consumer......................................... 789 166 6 7 --
-------- -------- -------- -------- -------
Total charge-offs............................. 2,711 188 70 240 26
Recoveries:
Real estate-mortgage............................. 2 -- 8 5 --
Consumer......................................... 56 31 15 49 --
-------- -------- -------- -------- -------
Total recoveries.............................. 58 31 23 54 --
-------- -------- -------- -------- -------
Net charge-offs.................................... 2,653 157 47 186 26
Provision for loan losses charged to operations.... 4,607 874 143 401 216
-------- -------- -------- -------- -------
Balance at end of period........................... $ 3,710 $ 1,756 $ 1,039 $ 943 $ 728
======== ======== ======== ======== =======
Ratio of net charge-offs to average loans.......... 0.38% 0.04% 0.03% 0.15% 0.03%
======== ======== ======== ======== =======
Average loans outstanding during the period........ $692,443 $355,848 $162,648 $121,206 $79,393
======== ======== ======== ======== =======
</TABLE>
A majority of the increase in real estate-mortgage charge-offs for 1998 as
compared to 1997 is due to the loss recognized related to MCA. See "--
Comparison of Results of Operations for Fiscal Years 1998 and 1997--Net Income;
Return on Average Equity" for additional information. Additionally, the
increase in consumer charge-offs in 1998 pertains to losses experienced on the
Company's credit card portfolio, which accounts for less than 1% of the
Company's total loan portfolio as of December 31, 1998.
The allowance for loan and valuation losses is increased by the provision
for loan and valuation losses (which is charged to operations) for particular
loans where management considers ultimate collection to be questionable; all
other loans are evaluated by the Company as part of their respective categories,
and not on an individual basis. Each category of loans in the loan portfolio is
assigned a loss factor based on the assessed risk inherent in each loan
category, certain qualitative evaluations of individual classified assets,
trends in the portfolio, geographic and portfolio concentrations, new products
or markets, evaluations of the changes in the historical loss experience
component and projections of this component into the current and future periods
based on current knowledge and conditions. These loss factors range from 0.10%
for FHA/VA loans guaranteed by HUD to 8.00% for credit card loans. Additionally
substandard and doubtful loans of homogeneous loan portfolios are assigned loss
factors of 5.00% and 50.00%, respectively. The Company had no impaired loans as
of December 31, 1998, 1997, 1996, 1995 and 1994. The loss factors are applied
to the outstanding principal balance of loans in their respective categories,
and the total for all categories determines the Company's allowance for loan and
valuation losses, except for direct financing leases, for which the allowance is
determined based on specific loans.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------------------------------------------------------------------------------------
Percentage Percentage Percentage Percentage
of Loans to of Loans to of Loans to of Loans to
Amount Total loans Amount Total loans Amount Total loans Amount Total loans
------ ------------ ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential.................... $2,372 85.96% $1,234 90.15% $ 911 90.03% $830 92.64%
Multi-family, commercial real
estate and commercial..... 137 6.18 91 5.75 51 7.19 78 5.11
Direct financing leases........ 275 2.87 -- 0.53 -- -- -- --
Construction................... 72 3.24 23 1.48 6 0.50 1 0.05
Consumer....................... 854 1.75 408 2.09 71 2.28 34 2.20
------ ------ ------ ------ ------ ------ ---- ------
$3,710 100.00% $1,756 100.00% $1,039 100.00% $943 100.00%
====== ====== ====== ====== ====== ====== ==== ======
<CAPTION>
----------------------
1994
-----------------------
Percentage
of Loans to
Amount Total loans
------ ------------
<S> <C> <C>
Residential........................ $635 88.83%
Multi-family, commercial real
estate and commercial......... 69 8.35
Direct financing leases............ -- --
Construction....................... 1 0.12
Consumer........................... 23 2.70
---- ------
$728 100.00%
==== ======
</TABLE>
32
<PAGE>
The ratio of the allowance for loan and valuation losses to total loans was
0.44%, 0.34%, 0.49%, 0.64% and 0.81% at December 31, 1998, 1997, 1996, 1995 and
1994, respectively. The allowance for loan and valuation losses is reduced by
loans charged off, net of recoveries. The allowance for loan and valuation
losses allocated to residential, multi-family, commercial real estate and
commercial and construction loans has increased mainly due to the increased
outstanding loan principal balances in these loan categories and not due to any
increase in the perceived risk or losses experienced in these categories. The
Company did not assign any of the allowance for loan and valuation losses to
direct financing leases in 1997, as the Company originated the $2.7 million of
outstanding direct financing leases in the last month of the year and management
felt that it was not necessary due to the immaterial amount of leases relative
to the total loan portfolio, as well as payments under the direct financing
leases were not due until 1998, and as such, the leases could not have been
delinquent at December 31, 1997. This increase in the allowance for loan and
valuation losses in 1998 reflects the growth of the direct financing leases
during 1998 and the nonaccrual status of a small portion of this portfolio at
December 31, 1998. Additionally, the increase in the allowance for loan and
valuation losses for consumer loans in 1998 primarily reflects the Company's
increase in its loss factor for credit card loans from 4.00% to 8.00% during
1998, due to the increased losses experienced in the portfolio.
Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability
Management -- General" a significant portion of the Company's earnings and
ultimate success is partially dependent upon its ability to manage interest rate
risk. Interest rate risk can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Although the Company
manages other risks, such as credit, operational and liquidity risk, in the
normal course of business, management considers interest rate risk to be a
significant market risk which could potentially have the largest material effect
on the Company's financial condition and results of operations. The majority of
the Company's market risk related to interest rates exists within the operations
of Matrix Bank. However, Matrix Financial also has interest rate risk related
to its primary asset, MSRs, and also related to the net interest income earned
on its originated loans that are funded through warehouse lines of credit. The
susceptibility to movements in interest rates affects the cash flows generated
from the MSRs which are recorded in other income versus interest income. In a
decreasing interest rate environment, the underlying servicing portfolio tends
to prepay faster which reduces future servicing income; while in an increasing
interest rate environment, prepayments tend to decrease, which increases
expected future servicing income. As it relates to Matrix Financial's lending
activities, Matrix Financial originates residential mortgage loans, which are
generally pre-sold. However, between the time that the loan is originated and
sold to the ultimate investor, Matrix Financial earns interest income. The
loans are funded through the use of warehouse credit facilities that are
generally priced based on short-term interest rates. Therefore, the net
interest income that is earned by Matrix Financial is generally dependent on the
spread between long-term mortgage rates and short-term interest rates.
The Company currently does not maintain a trading portfolio. As a result,
the Company is not exposed to market risk as it relates to trading activities.
The majority of the Company's residential loan portfolio is held for sale which
requires the Company to perform quarterly market valuations of the portfolio in
order to properly record the portfolio at the lower of cost or market.
Therefore, the Company continually monitors the interest rates of its loan
portfolio as compared to prevalent interest rates in the market.
Interest rate risk management at Matrix Bank is the responsibility of the
Asset and Liability Committee ("ALCO" or the "Committee"), which reports to the
Board of Directors of Matrix Bank. ALCO establishes policies that monitor and
coordinate the Company's sources, uses and pricing of its funds. The Committee
is also involved in formulating the Company's budget and strategic plan as it
relates to investment objectives. Due to the historical size of Matrix Bank's
loan portfolio and the high degree of purchase and sale activity, ALCO has
relied on the OTS interest rate risk exposure report to assist in the overall
monitoring of Matrix Bank's interest rate sensitivity. Based on the information
and assumptions used in the OTS exposure report as of December 31, 1998,
management believes that a 200 basis point shock over a twelve month period, up
or down would not significantly affect Matrix Bank's annualized net interest
income. As Matrix Bank continues to grow, management anticipates having to use
an asset/liability software package to monitor and manage Matrix Bank's interest
rate risk on a more timely basis.
The Company continues to attempt to reduce the volatility in net interest
income by managing the relationship of interest rate sensitive assets to
interest rate sensitive liabilities. To accomplish this (see "Asset and
Liability Management General" for additional discussion on strategies),
management focuses on acquiring adjustable rate residential mortgages and has
increased its efforts regarding the origination of residential construction
loans, commercial real estate loans and limited consumer lending which reprice
or mature more quickly than fixed rate residential real estate loans. In 1998,
the Company increased its investment in non-performing FHA and VA loans, which
are fixed rate loans that have a significantly shorter life than newly
originated loans. The other significant asset that the Company invests in is
MSRs. The value and cash flows from MSRs respond counter-cyclically to the
value of fixed rate mortgages. When interest rates increase and the value of
fixed rate mortgages decrease (in turn decreasing net interest income) the value
of the MSRs increase. In a decreasing interest rate environment, the inverse
occurs. Another significant strategy that the Company focuses on in managing
interest rate risk is
33
<PAGE>
identifying lines of business that generate noninterest rate sensitive
liabilities. Examples of this strategy are the investment in MSRs, which
generate no cost escrow deposits and Sterling Trust's operations, which
administer deposits with relatively low costs.
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 December 31, 1998, the
Company had $133.7 million in pipeline and funded loans offset with mandatory
forward commitments of $110.0 million and nonmandatory forward commitments of
$10.1 million. The inherent value of the forward commitments is considered in
the determination of the lower of cost or market for such loans.
Ownership of MSRs exposes the Company to impairment of their value in certain
interest rate environments. The incidence of prepayment of a mortgage loan
increases during periods of declining interest rates as the homeowner seeks to
refinance the loan to a lower interest rate. If the level of prepayment on
segments of the Company's mortgage servicing portfolio achieves a level higher
than projected by the Company for an extended period of time, then an impairment
in the associated basis in the MSRs may occur. To mitigate this risk of
impairment due to declining interest rates, the Company hedged a segment of its
portfolio beginning in September 1997. As of December 31, 1998 and 1997, the
Company had identified and hedged $674 million and $306 million, respectively,
of its mortgage servicing portfolio using a program of exchange-traded futures
and options. See Note 13 to the Consolidated Financial Statements included
elsewhere herein.
The following tables represent, in tabular form, contractual balances of the
Company's on balance sheet financial instruments in dollars at the expected
maturity dates, as well as the fair value of those on balance sheet financial
instruments for the periods ended December 31, 1998 and 1997. The expected
maturity categories take into consideration historical and anticipated
prepayment speeds, as well as actual amortization of principal and does not take
into consideration the reinvestment of cash. The Company's assets and
liabilities that do not have a stated maturity date, such as interest-earning
deposits, FHLB stock and certain other deposits, are considered to be long term
in nature by the Company and are reported in the thereafter column. The Company
has made the assumption that the portfolio of loans held for sale will mature in
the first year. The Company is very active in the secondary market as it
relates to the purchase and sale of mortgage loans. The total amount of loans
sold in 1998 and 1997 approximated 70% and 108%, respectively, of the total held
for sale portfolio at December 31, 1997 and 1996. This proves the Company's
intent to sell the loans classified as held for sale and the one-year maturity
assumption is supported. The Company also treats the FHLB and revolving
borrowings as long term in nature, as the continued availability of these
amounts is anticipated indefinitely. Third party servicers service a portion of
the Company's loan portfolio; as a result, a portion of the information
presented is based on the best available information.
For the most part, the carrying amounts of interest-earning deposits, FHLB
stock, FHLB borrowings and borrowed money approximate those assets' and
liabilities' fair values. The fair values of the loan portfolios for held for
sale and held for investment are based on quoted market prices or outstanding
commitments from investors. If quoted market prices are not available, fair
values are based on quoted market prices of similar loans sold in securitization
transactions, adjusted for differences in loan characteristics. The fair values
of forward sale commitments are included in the determination of the fair value
of loans held for sale. The fair values of demand deposits are, by definition,
equal to the amount payable upon demand at the reporting date. The fair value
of time deposits are based upon the discounted value of contractual cash flows,
which is estimated using interest rates currently being offered on certificates
to a schedule of aggregated expected periodic maturities on time deposits.
MSRs are not included in the tabular presentation, as the investment does not
directly affect interest income. As noted, however, earnings from MSRs directly
correlate with market risk as it relates to interest rate fluctuations. The
Company mitigates this risk through both the type of MSRs acquired and hedging
of MSRs. The loans underlying the servicing acquired tend to be more seasoned
and have lower principal balances. Management believes that the more seasoned,
lower balance servicing portfolios carry less prepayment risk than less
seasoned, higher balance mortgage servicing, because the cost savings of
refinancing a lower balance loan tend to be less than for a higher balance loan
with a comparable interest rate. It is also believed that if a loan has been
outstanding for a period of time and has been through several declining interest
rate cycles without refinancing, the risk of prepayment in the future is less
than a newly originated loan. Although significantly increased in 1998, the
prepayment percentages which the Company has experienced over the past three
years have been lower than experienced in the industry, as a whole. The
prepayment speeds for the years ended December 31, 1998, 1997 and 1996 were
22.6%, 11.3% and 11.9%, respectively, during a primarily decreasing interest
rate environment. In the 1998 table below, prepayment speeds of 24% and 12%
were used for residential and non-residential loans, respectively, to project
expected cash flows relating to loans held for investment and in the 1997 table
below, prepayment speeds of 12% were used for all loan types. These assumptions
are based on the Company's historical prepayment speeds, as well as our
knowledge and experience in the market.
34
<PAGE>
The Company's on balance sheet financial instruments for the period ended
December 31, 1998 were:
<TABLE>
<CAPTION>
Expected Maturity Date - Fiscal Year Ended December 31,
-----------------------------------------------------------------------
There- Fair
1999 2000 2001 2002 2003 after Total Value
-------- -------- -------- -------- -------- --------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Held for sale /(1)(2)/:
Fixed-rate residential loans.......... $376,168 $ -- $ -- $ -- $ -- $ -- $376,168 $378,274
Average interest rate................ 8.29% --% --% --% --% --% 8.29%
Adjustable-rate residential loans..... $347,790 $ -- $ -- $ $ -- $ -- $347,790 $349,737
Average interest rate................ 7.90% --% --% --% --% --% 7.90%
Fixed-rate commercial loans
and leases........................... $ 30,268 $ -- $ -- $ -- $ -- $ -- $ 30,268 $ 30,268
Average interest rate................ 12.06% --% --% --% --% --% 12.06%
Held for investment/(2)/:
Fixed-rate residential loans.......... $ 541 $ 399 $ 293 $ 215 $ 156 $ 351 $ 1,955 $ 1,769
Average interest rate/(3)/........... 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%
Adjustable-rate residential
loans/(4)/........................... $ 995 $ 747 $ 559 $ 419 $ 314 $ 887 $ 3,921 $ 3,548
Average interest rate/(3)/........... 7.94% 7.94% 7.94% 7.94% 7.94% 7.94% 7.94%
Fixed-rate consumer loans............. $ 3,272 $ 2,830 $ 2,441 $ -- $ -- $ -- $ 8,543 $ 9,149
Average interest rate/(3)/........... 11.11% 11.11% 11.11% --% --% --% 11.11%
Adjustable-rate consumer loans/(4)/... $ 111 $ 95 $ 82 $ 71 $ 61 $ 164 $ 584 $ 626
Average interest rate/(3)/........... 8.38% 8.38% 8.38% 8.38% 8.38% 8.38% 8.38%
Fixed-rate other loans/(5)/........... $ 8,929 $ 7,674 $ 6,576 $ 5,617 $ 4,778 $ -- $ 33,574 $ 33,644
Average interest rate/(3)/........... 9.37% 9.37% 9.37% 9.37% 9.37% --% 9.37%
Adjustable-rate other loans/(4)(5)/... $ 12,197 $10,456 $ 8,935 $ 7,607 $ 6,450 $ -- $ 45,645 $ 45,740
Average interest rate/(3)/........... 8.94% 8.94% 8.94% 8.94% 8.94% --% 8.94%
Interest-earning deposits.............. $ -- $ -- $ -- $ -- $ -- $ 8,120 $ 8,120 $ 8,120
Average interest rate................ --% --% --% --% --% 4.40% 4.40%
FHLB stock............................ $ -- $ -- $ -- $ -- $ -- $ 15,643 $ 15,643 $ 15,643
Average interest rate................ --% --% --% --% --% 5.75% 5.75%
Total interest-earning assets........ $780,271 $22,201 $18,886 $13,929 $11,759 $ 25,165 $872,211 $876,518
======== ======= ======= ======= ======= ======== ======== ========
Interest-bearing liabilities:
Passbook accounts...................... $ -- $ -- $ -- $ -- $ -- $ 2,830 $ 2,830 $ 2,830
Average interest rate................. --% --% --% --% --% 3.44% 3.44%
NOW accounts/(6)/...................... $ -- $ -- $ -- $ -- $ -- $ 19,506 $ 19,506 $ 19,506
Average interest rate................. --% --% --% --% --% 2.72% 2.72%
Money market accounts.................. $ -- $ -- $ -- $ -- $ -- $170,957 $170,957 $170,957
Average interest rate................. --% --% --% --% --% 3.42% 3.42%
Certificates of deposit over $100,000.. $ 7,999 $ 636 $ 322 $ 646 $ 661 $ -- $ 10,264 $ 10,383
Average interest rate................. 5.57% 6.33% 6.22% 6.44% 5.89% --% 5.71%
Brokered certificates of deposit....... $148,676 $ -- $ -- $ -- $ -- $ -- $148,676 $148,907
Average interest rate................. 4.92% --% --% --% --% --% 4.92%
Other certificates of deposit.......... $ 84,776 $14,037 $ 5,652 $ 6,126 $ 5,020 $ -- $115,611 $116,748
Average interest rate................. 5.54% 5.73% 5.87% 6.35% 5.76% --% 5.63%
FHLB borrowings/(7)/................... $ -- $ -- $ -- $ -- $ -- $168,000 $168,000 $171,544
Average interest rate................. --% --% --% --% --% 4.90% 4.90%
Revolving borrowings................... $ -- $ -- $ -- $ -- $ -- $116,845 $116,845 $116,845
Average interest rate................. --% --% --% --% --% 6.60% 6.60%
Term borrowings........................ $ 9,737 $ 8,625 $12,223 $ 4,997 $ 4,959 $ 21,403 $ 61,944 $ 61,944
Average interest rate................. 7.73% 7.48% 7.62% 7.77% 6.71% 11.17% 8.78%
Total interest-bearing liabilities.... $251,188 $23,298 $18,197 $11,769 $10,640 $499,541 $814,633 $819,664
======== ======= ======= ======= ======= ======== ======== ========
</TABLE>
__________
(1) Loans held for sale are assumed to mature within one year, as the intent
is to sell the loans.
(2) Balances are stated net of discounts and other deductions.
(3) For the fixed-rate loans held for investment, the Company computed a
weighted average interest rate and a weighted average maturity for the
loan portfolio and then applied a prepayment assumption of 24% to
residential loans and 12% to non-residential loans in determining the cash
flows. The same approach was used for the adjustable-rate loans, which are
generally fully indexed loans.
(4) The adjustable-rate loans generally are indexed to the 1-year treasury.
However, included in the balance are loans indexed to 11/th/ district cost
of funds, prime and 3,5 and 7-year treasury.
(5) Other consists of multi-family, commercial real estate, commercial, land
and construction loans.
(6) Excludes noninterest-bearing demand deposits of approximately $22.7
million.
(7) See "--Short-term Borrowings" for additional discussion on the term of the
FHLB borrowings.
35
<PAGE>
The Company's on balance sheet financial instruments for the period ended
December 31, 1997 were:
<TABLE>
<CAPTION>
Expected Maturity Date-Fiscal Year Ended December 31,
------------------------------------------------------------------------
There- Fair
1998 1999 2000 2001 2002 after Total Value
------ ------ ------ ------ ------ ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Held for sale /(1)(2)/:
Fixed-rate residential loans...... $201,081 $ -- $ -- $ -- $ -- $ -- $201,081 $202,073
Average interest rate......... 9.09% --% --% --% --% --% 9.09%
Adjustable-rate residential loans. $255,897 $ -- $ -- $ -- $ -- $ -- $255,897 $257,159
Average interest rate......... 8.03% --% --% --% --% --% 8.03%
Held for investment/(2)/:
Fixed-rate residential loans...... $ 562 $ 490 $ 427 $ 371 $ 323 $ 1,416 $ 3,589 $ 3,685
Average interest rate/(3)/.... 9.66% 9.66% 9.66% 9.66% 9.66% 9.66% 9.66%
Adjustable-rate residential
loans/(4)/.................... $ 505 $ 441 $ 385 $ 336 $ 293 $ 1,679 $ 3,639 $ 3,736
Average interest rate/(3)/.... 8.18% 8.18% 8.18% 8.18% 8.18% 8.18% 8.18%
Fixed-rate consumer loans......... $ 3,815 $ 3,376 $ 2,989 $ -- $ -- $ -- $ 10,180 $ 10,388
Average interest rate/(3)/.... 14.44% 14.44% 14.44% --% --% --% 14.44%
Adjustable-rate consumer
loans/(4)/.................... $ 69 $ 60 $ 52 $ 45 $ 39 $ 169 $ 434 $ 443
Average interest rate/(3)/.... 8.38% 8.38% 8.38% 8.38% 8.38% 8.38% 8.38%
Fixed-rate other loans/(5)/....... $ 9,994 $ 8,532 $ -- $ -- $ -- $ -- $ 18,526 $ 18,613
Average interest rate/(3)/.... 9.79% 9.79% --% --% --% --% 9.79%
Adjustable-rate other
loans/(4)(5)/................. $ 2,843 $ 2,476 $ 2,153 $ 1,871 $ 1,623 $ 7,060 $ 18,026 $ 18,110
Average interest rate/(3)/.... 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%
Interest-earning deposits............ $ -- $ -- $ -- $ -- $ -- $ 6,337 $ 6,337 $ 6,337
Average interest rate......... --% --% --% --% --% 5.91% 5.91%
FHLB stock........................... $ -- $ -- $ -- $ -- $ -- $ 8,700 $ 8,700 $ 8,700
Average interest rate......... --% --% --% --% --% 6.00% 6.00%
Total interest-earning assets. $474,766 $15,375 $ 6,006 $ 2,623 $ 2,278 $ 25,361 $526,409 $529,244
======== ======= ======== ======== ======== ======== ======== =========
Interest-bearing liabilities:
Passbook accounts.................... $ -- $ -- $ -- $ -- $ -- $ 2,851 $ 2,851 $ 2,851
Average interest rate......... --% --% --% --% --% 3.97% 3.97%
NOW accounts/(6)/.................... $ -- $ -- $ -- $ -- $ -- $ 14,669 $ 14,669 $ 14,669
Average interest rate......... --% --% --% --% --% 2.92% 2.92%
Money market accounts................ $ -- $ -- $ -- $ -- $ -- $ 99,899 $ 99,899 $ 99,899
Average interest rate......... --% --% --% --% --% 2.96% 2.96%
Certificates of deposit over
$100,000...................... $ 4,900 $ 1,030 $ 414 $ 207 $ 634 $ -- $ 7,185 $ 7,258
Average interest rate......... 5.91% 6.06% 6.73% 6.15% 6.44% --% 6.03%
Other certificates of deposit........ $ 63,692 $13,442 $ 2,984 $ 2,453 $ 6,094 $ -- $ 88,665 $ 89,389
Average interest rate......... 5.88% 6.01% 6.24% 6.30% 6.34% --% 5.96%
FHLB borrowings...................... $ -- $ -- $ -- $ -- $ -- $171,943 $171,943 $171,943
Average interest rate......... --% --% --% --% --% 6.37% 6.37%
Revolving borrowings................. $ -- $ -- $ -- $ -- $ -- $ 48,338 $ 48,338 $ 48,338
Average interest rate......... --% --% --% --% --% 7.07% 7.07%
Term borrowings...................... $ 4,928 $ 4,438 $ 5,373 $ 3,546 $ 1,699 $ 21,587 $ 41,571 $ 41,571
Average interest rate......... 8.57% 8.97% 8.89% 9.14% 10.34% 11.15% 10.11%
Total interest-bearing
liabilities................... $ 73,520 $18,910 $ 8,771 $ 6,206 $ 8,427 $359,287 $475,121 $475,918
======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
__________
(1) Loans held for sale are assumed to mature within one year, as the intent
is to sell the loans.
(2) Balances are stated net of discounts and other deductions.
(3) For the fixed rate loans held for investment, the Company computed a
weighted average interest rate and a weighted average maturity for the
loan portfolio and then applied a prepayment assumption of 12% in
determining the cash flows. The same approach was used for the adjustable-
rate loans, which are generally fully indexed loans.
(4) The adjustable-rate loans generally are indexed to the 1-year treasury.
However, included in the balance are loans indexed to 11th district cost
of funds, prime and 3,5 and 7-year treasury.
(5) Other consists of multi-family, commercial real estate, commercial, land
and construction loans.
(6) Excludes noninterest-bearing demand deposits of approximately $9.2
million.
Short-term Borrowings. A primary function of asset and liability
management is to ensure adequate liquidity. In addition to cash and cash
equivalents, the Company relies heavily on short-term borrowing capabilities
for liquidity and as a funding vehicle. The primary sources for short-term
borrowings are the FHLB for Matrix Bank and unaffiliated financial
institutions for Matrix Financial. See "Liquidity and Capital Resources."
36
<PAGE>
The following table sets forth a summary of the short-term borrowings of
the Company during 1998, 1997 and 1996 and as of the end of each such period:
<TABLE>
<CAPTION>
Average Weighted Weighted
Amount amount Maximum average average
outstanding outstanding outstanding interest interest
at during the at any rate during rate at
year end year(1) month end the year year end
-------- ------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
At or for the year ended December 31, 1996:
FHLB borrowings.............................. $ 51,250 $ 35,838 $ 53,650 5.69% 5.84%
Revolving lines of credit.................... 31,504 35,489 60,804 7.17 6.50
Repurchase agreements........................ -- 991 4,962 12.58 --
At or for the year ended December 31, 1997:
FHLB borrowings.............................. 171,943 59,984 171,943 5.73 6.37
Revolving lines of credit.................... 48,338 43,762 57,710 6.99 7.07
Repurchase agreements........................ -- 1,564 3,437 11.26 --
At or for the year ended December 31, 1998:
FHLB borrowings(2)........................... 168,000 159,381 271,000 5.37 4.90
Revolving lines of credit.................... 86,936 74,973 92,507 6.55 6.23
Repurchase agreements........................ 7,350 1,445 7,350 9.06 9.02
Lease financing.............................. 22,559 9,304 22,559 7.32 7.27
</TABLE>
_________
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
(2) $47.0 million of the FHLB borrowings outstanding at December 31, 1998, were
borrowed under a Short Option Advance ("SOA") Agreement with the FHLB. These
SOA borrowings have a term of ten years, but are callable by the FHLB
beginning after a six month or one year lock-out period depending on the
particular SOA borrowing. After the expiration of the lock-out period, the
SOA borrowings are callable at three month intervals. If the FHLB exercises
its call option on a SOA borrowing, the FHLB is required to offer
replacement funding to the Company at a market rate of interest for the
remaining term of the SOA borrowing. The interest rates on the SOA
borrowings ranged from 4.85% to 4.94% at December 31, 1998 and their
possible call dates varied from January 15, 1999 to April 14, 1999.
Additionally, under the terms of the SOA Agreement, the Company is not
permitted to prepay or otherwise retire a callable SOA borrowing prior to
the final maturity date.
Liquidity and Capital Resources
Liquidity is 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. To date, Matrix Bancorp's principal source of
funding for its investing activities has been secured senior debt provided by
unaffiliated financial institutions, the issuance of 11.5% Senior Notes (the
"11.5% Senior Notes") in September 1997, the issuance of Senior Subordinated
Notes (the "Senior Subordinated Notes") in August 1995, a bank stock loan and
the Company's initial public offering. As of December 31, 1998, Matrix Bancorp
had $42.3 million in indebtedness outstanding. The borrowed funds have been used
historically as capital injections to Matrix Bank and Matrix Financial, as well
as to acquire the office building in Phoenix where Matrix Financial maintains
its headquarters. See "Properties."
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, an $8.5 million term loan and a revolving line of
credit of $11.5 million. As of December 31, 1998, the balance of the term loan
and the revolving line of credit were $7.9 million and $10.3 million,
respectively. 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 primarily as capital at Matrix Bank. The
amended bank stock loan requires the Company to maintain (i) total shareholders'
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 Matrix
Bancorp to declare or pay any dividends.
On September 29, 1997, the Company completed a registered debt offering of
$20.0 million in Senior Notes due 2004, raising net proceeds of approximately
$19.1 million. Interest on the Senior Notes of 11.5% is payable semi-annually on
March 31 and September 30 of each year, commencing on March 31, 1998, with a
balloon payment for the entire principal balance due in September 2004. The
11.5% Senior Notes require the Company to (i) maintain consolidated tangible
equity capital of not less than $35 million and (ii) meet the requirements
necessary such that Matrix Bank will not be classified as other than "well
capitalized" as defined by 12 C.F.R. Section 565.4. Additionally, the 11.5%
Senior Notes contain other covenants regarding certain restricted payments,
incurrence of indebtedness and issuance of preferred stock, liens, merger,
consolidation or sale of assets and transactions with affiliates. Under the
conditions of the 11.5% Senior Notes, the Company may not incur
37
<PAGE>
any additional indebtedness if the consolidated leverage ratio exceeds 2:1 and
Matrix Bancorp may not declare or pay cash dividends unless, at the time of and
after giving effect to such dividend, (1) no default shall have occurred and be
continuing or would occur as a consequence thereof, (2) Matrix Bancorp would
(after giving effect to the payment of such dividend) be permitted to incur at
least $1.00 of additional indebtedness pursuant to the 2:1 consolidated leverage
ratio described above, and (3) such dividend, together with the aggregate amount
of all restricted payments made, is less than 25% of the aggregate consolidated
net income of the Company for the period beginning on October 1, 1997 and ending
on the date of the Company's most recent quarter plus 100% of the net cash
proceeds received by Matrix Bancorp from the issuance of equity interests. As of
December 31, 1998, under the foregoing test, Matrix Bancorp would be entitled to
declare and pay dividends of approximately $640,000, although it has no present
intent to do so, as distributions are not permitted under the Company's bank
stock loan.
In August 1995, the Company issued $2.9 million in aggregate principal amount
of Senior Subordinated Notes. Interest on the Senior Subordinated Notes is
payable semi-annually on January 15 and July 15, and the Senior Subordinated
Notes mature on July 15, 2002, with earlier mandatory redemptions of $727,500,
or 25% of the Senior Subordinated Notes, scheduled on July 15, 1999, 2000 and
2001, respectively. The Company is restricted from paying cash dividends under
the Senior Subordinated Notes. However, the Company may pay cash dividends in
an amount equal to 50% of the consolidated net income of the Company as long as
there has been no default under the terms of the Senior Subordinated Notes and
as long as the dividend does not exceed 10% of the consolidated net worth of the
Company. The Company may redeem the Senior Subordinated Notes, in whole or in
part, at any time on or after July 15, 1998; at a redemption price equal to (i)
102% of par through July 14, 1999 and, thereafter, at par, plus (ii) all accrued
but unpaid interest. Until February 1997, the Senior Subordinated Notes bore
interest at 13% per annum. In February 1997, the rate increased to 14% per
annum.
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 and mortgage servicing portfolios. The
Company anticipates such growth will be funded through retail deposits, brokered
deposits, custodial escrow deposits, directed trust deposits, FHLB borrowings,
and possibly, new offerings.
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 December 31, 1998, Matrix Bank had overnight borrowings from the
FHLB of $168.0 million. The custodial escrow balances held by Matrix Bank
fluctuate based upon the mix and size of the related mortgage servicing rights
portfolios and the timing of payments for taxes and insurance. For a tabular
presentation of the Company's short-term borrowings, see "Asset and Liability
Management--Short-term Borrowings."
Matrix Bank offers a variety of deposit accounts having a range of interest
rates and terms. Matrix Bank's retail deposits principally consist of demand
deposits and certificates of deposit. The flow of deposits is influenced
significantly by general economic conditions, changes in prevailing interest
rates and competition. Matrix Bank's retail deposits are obtained primarily
from areas in which it is located and, therefore, its retail deposits are
concentrated primarily in Las Cruces and Sun City. Matrix Bank relies
principally on customer service, marketing programs and its relationships with
customers to attract and retain these deposits. Beginning in February 1998,
brokered deposits were accepted and have been utilized to support growth at
Matrix Bank. In pricing deposit rates, management considers profitability, the
matching of term lengths with assets, the attractiveness to customers and rates
offered by competitors. Matrix Bank intends to continue its efforts to attract
deposits as a primary source of funds to support its lending and investing
activities.
In February 1997, Sterling Trust moved approximately $80.0 million of
fiduciary deposits from a third party institution to Matrix Bank. Additionally,
pursuant to a termination agreement, Fidelity National Title moved approximately
38
<PAGE>
$47.1 million of deposits to Matrix Bank during the fourth quarter of 1998. The
following table sets forth the average balances for each major category of
Matrix Bank's deposit accounts and the weighted-average interest rates paid for
interest-bearing deposits for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- -------- ------- -------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts.................. $ 2,859 3.58% $ 2,859 3.95% $ 2,389 3.45%
NOW accounts....................... 17,586 2.97 23,837 3.34 2,813 2.24
Money market accounts.............. 124,796 3.13 73,145 3.39 9,151 4.43
Time deposits (except brokered).... 108,107 5.79 83,993 5.94 54,824 5.85
Brokered deposits.................. 103,485 5.25 -- -- -- --
-------- ---- -------- ---- ------- ----
Total deposits............... $356,833 4.37% $183,834 4.56% $69,177 5.43%
======== ==== ======== ==== ======= ====
</TABLE>
The following table sets forth the amount of Matrix Bank's certificates of
deposit that are greater than $100,000 by time remaining until maturity as of
December 31, 1998:
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------
Weighted
Average
Amount Rate Paid
------ ---------
(Dollars in thousands)
<S> <C> <C>
Three months or less.................................... $ 2,453 5.42%
Over three months through six months.................... 2,205 5.66
Over six months through twelve months................... 3,340 5.61
Over twelve months...................................... 2,266 6.22
------- ----
Total................................................ $10,264 5.71%
======= ====
</TABLE>
The Company actively monitors Matrix Bank's compliance with regulatory
capital requirements. Historically, Matrix Bank has increased its core capital
through the retention of a portion of its earnings. Matrix Bank's future growth
is expected to be achieved through deposit growth, brokered deposits, borrowings
from the FHLB and custodial deposits from affiliates. The Company anticipates
that such growth will require additional capital. The capital requirements
related to the anticipated growth will in part be fulfilled through retention of
earnings, potentially increasing the Company's bank stock loan and future
possible debt or equity offerings.
The Company's principal source of funding for its servicing acquisition
activities consists of a line of credit facility provided to Matrix Financial by
an unaffiliated financial institution. As of December 31, 1998, Matrix
Financial's servicing acquisition facility aggregated $45.0 million, of which
$14.1 million was available to be utilized after deducting drawn amounts.
Borrowings under the servicing acquisition lines of credit are secured by MSRs
owned by Matrix Financial, bear interest at the federal funds rate plus a
negotiated margin and are due at the earlier of the maturity of the MSRs or
amortized over five to six years from the date of borrowing. At December 31,
1998, $27.0 million was outstanding under the servicing acquisition line and the
interest rate on funds outstanding under this facility at December 1998 was
6.68%.
The Company's principal source of funding for its loan origination business
consists of a warehouse line of credit and a sale/repurchase facility provided
to Matrix Financial by unaffiliated financial institutions. As of December 31,
1998, Matrix Financial's warehouse line of credit facility aggregated $90.0
million, of which $17.8 million was available to be utilized. Effective
February 22, 1999, the Company executed an amendment to its warehouse line of
credit facility to increase the credit available by an additional $30.0 million.
Additionally, the lead lender for the warehouse line has provided the Company
with an overline facility, which provides an additional $10.0 million in funding
capacity. The availability of the overline facility is at the lender's sole
discretion. At December 31, 1998, $72.2 million was outstanding under the
warehouse line at a weighted average interest rate of 6.01%. Borrowings under
the warehouse line of credit are secured by all of the mortgage loans funded
with warehouse loan proceeds and bear interest at the federal funds rate plus a
negotiated margin. As of December 31, 1998, Matrix Financial's sale/repurchase
facility was $25.0 million, with $15.1 million outstanding at a weighted average
interest rate of 9.02%. Borrowings under the sale/repurchase facility are
secured by all of the mortgage loans and direct financing leases funded with
sale/repurchase facility proceeds and bear interest at the higher of the prime
rate or the LIBOR rate plus a negotiated margin on the loans and 8.00% on the
direct lease financing.
39
<PAGE>
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 an unaffiliated financial institution. As of December 31, 1998,
Matrix Financial's working capital facilities aggregated $10.0 million, of which
$5.5 million was available. Borrowings under the working capital facilities are
secured by MSRs, eligible servicing advance receivables and eligible delinquent
mortgage loans and bear interest at the federal funds rate plus a negotiated
margin. At December 31, 1998, $4.5 million was outstanding under the working
capital facilities at an interest rate of 6.18%.
Matrix Bank is restricted from paying dividends to Matrix Bancorp due to
certain regulatory requirements. Matrix Financial is restricted from paying
dividends to the Company under its Amended and Restated Loan Agreement. Under
this loan agreement, Matrix Financial is limited to (1) dividends payable solely
in the form of capital stock, (2) cash dividends to Matrix Bancorp in an amount
not to exceed 50% of Matrix Financial's net cash income for the current fiscal
year so long as no default or potential default exists or would be created by
the dividend, or (3) dividends otherwise approved in writing by the agent. At
December 31, 1998, the Company was in compliance with all debt covenants. See
"Regulation and Supervision."
In June 1996, the Company purchased 154 acres of land for $1.3 million in cash
for the purpose of developing 750 residential and multi-family lots in Ft.
Lupton, Colorado. The purchase was completed with operating funds of the
Company and a loan from a third party financial institution of $845,000. As
part of the acquisition, the Company entered into a Planned Unit Development
Agreement (the "Development Agreement") with the City of Ft. Lupton (the
"City"). The Development Agreement is a residential and golf course development
agreement providing for the orderly planning, engineering and development of a
golf course and surrounding residential community. The City is responsible for
the development of the golf course and the Company is responsible for the
development of the surrounding residential lots and certain offsite
infrastructure (estimated at $1.3 million). The Development Agreement also
provides for the rebate of certain developments fees, infrastructure fees and
storm drainage fees from the City to the Company (estimated at $1.6 million).
The Development Agreement sets forth a mandatory obligation on the part of the
Company to secure future payment to the City of pledged golf course enhancement
fees of $600,000. These pledged enhancement fees require successor homebuilders
to pay the City a $2,000 fee with the issuance of each building permit. In the
event that less than 30 permits are issued per year, the Company is obligated to
pay the balance of $60,000 in assessment fees per year beginning in the year
1998 through the year 2007. The Company has to date posted a $300,000 letter of
credit to secure those referenced enhancement fees. The Company also entered
into a development management agreement with a local developer to complete the
development of the land. The terms of the agreement specify that the Company is
to earn a preferred rate of return on its investment and, once the initial
amount of its investment plus the preferred rate of return have been returned,
the remaining profits are split equally. The Company's current investment in
the project is $4.1 million.
It is anticipated that the Company may obtain a loan from an unaffiliated
financial institution for a portion of the future development costs, as needed.
Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
prices of goods and services. The Company discloses the estimated fair market
value of its financial instruments in accordance with Statement of Financial
Accounting Standards No. 107. See Note 15 to the Consolidated Financial
Statements included elsewhere herein.
Recent Accounting Pronouncements
During fiscal year 1998, the Company adopted the provisions of two accounting
pronouncements: Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("FAS 130") and Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("FAS 131"). Additionally, in June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"), which is effective
for fiscal years beginning after June 15, 1999. Management of the Company plans
to adopt FAS 133 with its fiscal year beginning January 1, 2000. It is not
currently known what effect the adoption of FAS 133 will have on the
Consolidated Financial Statements of the Company.
40
<PAGE>
Year 2000
The following disclosure is a Year 2000 Readiness Disclosure and a Year 2000
Statement, as defined in the Year 2000 Information and Readiness Disclosure Act,
which was enacted by Congress and was effective October 19, 1998.
Similar to many other companies, the Company faces the risk of 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 result
in a system failure or miscalculations causing a disruption of operations. The
Company has established Year 2000 project teams, both at the Company and
individual Subsidiary levels. The Year 2000 project teams and the Company's
overall Year 2000 effort are being overseen by the Company's Year 2000 Director
to ensure that consistent procedures and methodologies are being applied across
the Subsidiaries in addressing Year 2000 issues.
The Company is subject to Year 2000 risks not only from its own internal data
processing systems and software, but also from third party sources providing
data and/or services to the Company and from certain significant customers.
Additionally, the Company has a limited amount of other non-information systems
equipment that relies on date-sensitive information. As such, the Company has
established and implemented a Year 2000 Plan that includes the careful
evaluation of internal data processing systems and software and incorporates the
evaluation of third party sources, significant customers and vendors, and non-
information systems equipment for Year 2000 risks.
The Company's Year 2000 Plan consists of the following five separate phases:
. Awareness - The process of informing all of the Company's employees,
vendors, and significant customers about the nature and extent of the
Year 2000 problem.
. Assessment - The process of gathering and analyzing information to
determine the size and impact of the Year 2000 problem, the complexity
of issues and the level of work and resources necessary to address Year
2000 issues.
. Renovation - The process of modifying, reengineering, and retiring non-
compliant information systems, applications, vendors, third party
service providers and non-information systems based on the information
learned during the assessment phase.
. Validation - The process of testing information systems, application,
vendors, third party service providers and non-information systems for
Year 2000 compliance. This testing phase includes both newly renovated
and compliant items.
. Implementation - The process of implementing all Year 2000 compliant
changed, newly acquired or modified information systems, application,
vendors, third party service providers and non-information systems.
This phase also includes the updating of backup, contingency and
disaster recovery plans.
It is anticipated that the above phases of the Year 2000 Plan will progress
concurrently. Additionally, the Company does not anticipate that its
Subsidiaries will progress at the same rate through the five phases of the Year
2000 Plan due to differences in their systems and the varying levels of
complexity associated with those systems.
The Company's computing environment consists largely of personal computers
("PCs") 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. Due to the substantial number of programming changes required,
Sterling Trust's Year 2000 focus to date has mainly been on renovating,
validating and implementing changes to the Trust Accounting System. Unlike
Sterling Trust, processing for many Matrix Bank and Matrix Financial systems are
handled by outside service bureaus. Therefore, these Subsidiaries' Year 2000
efforts are more focused on obtaining information on the compliance status of
these outside service bureaus and on performing testing procedures to verify
their compliance. Matrix Bank's efforts to become Year 2000 compliant are being
monitored by the OTS. Failure to become Year 2000 compliant could subject
Matrix Bank to formal supervisory or enforcement actions. Matrix Financial plans
to participate in the Year 2000 Inter-System Readiness Test sponsored by the
Mortgage Bankers Association, which is
41
<PAGE>
currently scheduled to begin during March of 1999. The Year 2000 progress of
these three Subsidiaries as of February 28, 1999 is seen in the following
tables:
<TABLE>
<CAPTION>
Sterling Trust Year 2000 Progress
--------------------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems......................... 100% 100% 100% 25% 85%
Estimated completion date................. -- -- -- 6/15/99 4/15/99
Non-information systems..................... 100% 100% 0% 0% 0%
Estimated completion date................. -- -- 6/15/99 6/15/99 6/15/99
Third parties............................... 100% 100% 100% 0% 0%
Estimated completion date................. -- -- -- 6/15/99 6/15/99
</TABLE>
<TABLE>
<CAPTION>
Matrix Bank Year 2000 Progress
--------------------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems......................... 100% 100% 95% 47% 47%
Estimated completion date................. -- -- 6/30/99 6/30/99 6/30/99
Non-information systems..................... 100% 100% 98% 66% 66%
Estimated completion date................. -- -- 6/30/99 6/30/99 6/30/99
Third parties............................... 100% 48% N/A 0% 0%
Estimated completion date................. -- 6/30/99 -- 6/30/99 6/30/99
</TABLE>
<TABLE>
<CAPTION>
Matrix Financial Year 2000 Progress
--------------------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems......................... 96% 60% 57% 54% 54%
Estimated completion date................. 3/31/99 4/30/99 5/31/99 5/31/99 5/31/99
Non-information systems..................... 71% 50% 33% 33% 33%
Estimated completion date................. 4/30/99 5/31/99 5/31/99 5/31/99 5/31/99
Third parties............................... 90% 90% 90% 90% 90%
Estimated completion date................. 4/30/99 5/31/99 5/31/99 5/31/99 5/31/99
</TABLE>
The remaining Companies have more limited exposure risk to the Year 2000
issue. For example, they have fewer mission critical systems, vendors, and
customers than the Subsidiaries discussed above. These remaining entities have
more limited renovation issues than Sterling Trust, Matrix Bank and Matrix
Financial and their validation process is substantially underway. The progress
of the remaining Companies is seen in the following table.
<TABLE>
<CAPTION>
Remaining Companies' Year 2000 Progress
--------------------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems......................... 100% 75% 75% 50% 75%
Estimated completion date................. -- 4/30/99 5/31/99 6/30/99 6/30/99
Non-information systems..................... 100% 75% 50% 70% 70%
Estimated completion date................. -- 4/30/99 5/31/99 6/30/99 6/30/99
Third parties............................... 100% 50% 75% 50% 50%
Estimated completion date................. -- 4/30/99 6/30/99 6/30/99 6/30/99
</TABLE>
The implementation process is at varying levels of completion across the
Company. Included in the implementation phase of the Company's Year 2000 Plan
is the development of a contingency plan for the failure of the Company's
mission critical systems. Several of the Company's Subsidiaries have completed
their contingency plans and it is anticipated that the remainder of the
contingency plans will be finished by June 30, 1999. These plans will address
issues such as the failure of the Company's third party service providers, the
failure of the trust Accounting System, the failure of our telecommunications
network, and so on.
Assuming the proper functioning of the Company's telecommunication and
utility providers, the failure of which would have a significant impact on the
Company's ability to conduct its day-to-day operations, management of each
Subsidiary has assessed what is believed to be the most reasonably likely worst
case Year 2000 scenario if the Company were to take no further steps to prevent
Year 2000 non-compliance. Sterling Trust relies on electronic information
received from various external sources such as mutual fund companies, life
insurance companies, broker/dealers, etc., to prepare quarterly statements and
to process the investment directions of clients. Sterling Trust's most
reasonably likely worst case scenario lies in not being
42
<PAGE>
able to obtain this data. Many of Sterling Trust's external service providers
are either regulated by the National Association of Securities Dealers or are
owned by one of the stock exchanges. As such, Sterling Trust anticipates that
most of these companies will be compliant. If for some reason the data from the
outside service providers is available, but cannot be transmitted
electronically, Sterling Trust plans to coordinate the receipt of that
information via phone and fax lines. Once received, Sterling Trust will then
manually input the data into their system in order to perform the necessary
functions described above. In addition, the database for Sterling Trust's
imaging system is not currently compliant. If Sterling Trust did not take the
necessary steps to upgrade this database, there would be no source documents
available, however, the information would be on the VAX. As such, Sterling Trust
could either upgrade its sequel server or replace the imaging system entirely.
Until one of these alternatives was completed, Sterling Trust would maintain and
file source documents in paper form, as it did prior to the time it began using
the imaging system.
Management from Matrix Bank anticipates that its most reasonably likely worst
case Year 2000 scenario would be the failure of one of its credit card service
providers, such as Matrix Bank's credit card processor. In the event that these
service providers are not Year 2000 compliant, Matrix Bank anticipates
discontinuing their credit card programs, which are mainly provided as a service
to the Bank's customers, but do not contribute significantly to the net income
of the Company on a consolidated basis.
Alltel, FNMA and FHLMC, whom Matrix Financial and Matrix Bank rely on for
servicing mortgage loans are currently running compliant systems, however, the
Company has not yet validated those systems. The Company anticipates using
phone and fax lines to receive necessary information if systems for Alltel, FNMA
or FHLMC fail on January 1, 2000.
Under Matrix Financial's most reasonably likely worst case Year 2000
scenario, two other areas may be affected. The first is the production
department where loan documentation is received from outside brokers and
processed by Matrix Financial. These loan documents could contain inaccurate
calculations resulting from a Year 2000 problem with the software/hardware used
by the broker to generate the documents. Matrix Financial risks inputting these
loans into their PC-based in-house loan processing system, resulting in the bad
input information being carried forward in the system. Since there are more
than 500 brokers that send these documents to Matrix Financial, it is unlikely
that Matrix Financial will be able to certify that all of the brokers are Year
2000 compliant. As such, additional legal disclosures are being reviewed to
protect Matrix Financial in the event of such a problem. Additionally, due to
the large number of brokers, Matrix Financial intends to cease the acceptance of
loan documents from those brokers that are identified as non-compliant. The
loss of business from any one broker will not have a material impact on the
Company, as no broker is individually significant to the Company's operations.
In addition, Matrix Financial is currently running a non-compliant version of
MortgageWare, which is the application that allows Matrix Financial to process
new loan applications. Matrix Financial intends to upgrade this application to
a compliant version before June 30, 1999, however, if the upgrade does not
occur, Matrix Financial would manually register and lock loan applications with
the secondary marketing department and would track the new applications in an
Excel or Access spreadsheet. Additionally, up front disclosures and processing
would either be completed through different origination software or outsourced
to a thrid party and closing documents would be generated from ShadowNet, which
is already compliant or would be outsourced to a Year 2000 compliant vendor.
The second area of exposure for Matrix Financial is the secondary marketing
department. Each day, rate information is received and loans are locked in at a
set rate to be sold to investors. If an investor is unable to verify and
process the loan rate lock confirmation (the paper copy of the agreed upon
transaction) due to a Year 2000 issue, then Matrix Financial may be forced to
relock the loans at the current day's rates, unless other evidence of the
transaction exists. Due to the daily fluctuation in these rates, this could
expose Matrix Financial to significant interest rate risk on the affected loans.
This process is being reviewed to provide an alternative method between Matrix
Financial and the investors for confirmation of the loan rate information.
For the remaining Companies, the worst case scenarios involve the following
issues: for Matrix Bancorp, United Financial and United Capital Markets,
validation of compliant Year 2000 systems and applications is not complete.
Therefore, it is possible that systems and applications which have been
represented to the Company as compliant by vendors may not work. If the
validation phase is not completed on these items, the Company will have no
assurance of these systems' and applications' compliance, and as such, may have
inoperable programs, which could significantly affect aspects of the Company's
business. USS's database used for tracking its properties under management has
also not yet been tested to determine whether further renovation issues exist.
If this process is not completed, it will be uncertain as to whether USS would
be able to continue to accurately track its properties under management, which
could significantly affect its business.
The Company anticipates that the total costs associated with implementing its
Year 2000 Plan will not exceed $400,000; as such, Year 2000 compliance is not
expected to have a material effect on the Company's 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. Through February 28, 1999, the Company had expensed approximately
$145,000 for costs
43
<PAGE>
associated with Year 2000 compliance. The costs of the Year 2000 project and the
deadlines by which the Company believes that it will progress through the
various phases of the project 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. 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 issue could have a material
impact on the operations of the Company. Additionally, despite the Company's
efforts to verify the Year 2000 compliance of third parties, 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.
Forward-Looking Statements
Certain statements contained in this annual report that are not
historical facts, including, but not limited to, statements that can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "predict," "plan," "estimate," or "continue" or the
negative thereof or other variations thereon or comparable terminology, are
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, and involve a number of risks and uncertainties.
The actual results of the future events described in such forward-looking
statements in this annual 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; possible future litigation; the actions or
inactions or third parties (particularly of third party sources upon whom the
Company is relying in connection with Year 2000 issues); unanticipated
developments in connection with the design, implementation or completion of the
Company's Year 2000 Plan (including without limitation the resignation or
removal of the Company's Year 2000 Director, or any other key employees
responsible for the Year 2000 Plan, or the misrepresentation by a third party
source upon whom the Company is dependent as to the status of their Year 2000
readiness, progress or compliance); the risks and uncertainties discussed in the
Company's current report on Form 8-K, filed March 23, 1999; and the
uncertainties set forth from time to time in the Company's periodic reports,
filings and other public statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations Asset and Liability Management Risk Sensitive Assets and
Liabilities" and Item 1. "Business Mortgage Bank Activities Hedging of
Servicing Rights."
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
See Index to Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable.
PART III
Items 10 through 13.
The information for these items is incorporated from the definitive proxy
statement to be filed with the Commission.
44
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) (1) and (a) (2) Financial statements and financial statement
schedules
See Index to Financial Statements on page F-1.
(b) Reports on Form 8-K
See Form 8-K filed by the Company, dated November 30, 1998,
reporting on Year 2000 information under Item 5 thereof.
(c) Exhibits
See Exhibit Index, beginning on page II-1.
(d) Financial Statement Schedules
None.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 26th day of March,
1999.
Matrix Bancorp, Inc.
By: /s/
--------------------------
Guy A. Gibson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ President, Chief Executive March 26, 1999
------------------ Officer and a Director
Guy A. Gibson (Principal Executive Officer)
/s/ Chairman of the Board March 26, 1999
------------------
Richard V. Schmitz
/s/ Vice Chairman and Director March 26, 1999
------------------
D. Mark Spencer
/s/ Director March 26, 1999
------------------
Thomas M. Piercy
/s/ Senior Vice President and March 26, 1999
------------------ Chief Financial Officer,
David W. Kloos and a Director
(Principal Accounting and
Financial Officer)
/s/ Director March 26, 1999
------------------
Stephen Skiba
/s/ Director March 26, 1999
------------------
David A. Frank
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Matrix Bancorp, Inc.
<TABLE>
<S> <C>
Report of Independent Auditors.............................................................................. F-2
Consolidated Balance Sheets - December 31, 1998 and 1997.................................................... F-3
Consolidated Statements of Income - for the years ended December 31, 1998, 1997 and 1996.................... F-4
Consolidated Statements of Shareholders' Equity - for the years ended December 31, 1998, 1997 and 1996...... F-5
Consolidated Statements of Cash Flows - for the years ended December 31, 1998, 1997 and 1996................ F-6
Notes to Consolidated Financial Statements - December 31, 1998.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Matrix Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Matrix
Bancorp, Inc. (Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1997
the Company adopted Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.
March 18, 1999 /s/ Ernst & Young LLP
F-2
<PAGE>
MATRIX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- --------
<S> <C> <C>
ASSETS
Cash......................................................................... $ 18,665 $ 3,296
Interest-earning deposits.................................................... 8,120 6,337
Loans held for sale, net..................................................... 754,226 456,978
Loans held for investment, net............................................... 94,222 54,394
Mortgage servicing rights, net............................................... 58,147 36,440
Other receivables............................................................ 40,018 22,695
Federal Home Loan Bank of Dallas stock....................................... 15,643 8,700
Premises and equipment, net.................................................. 10,328 9,012
Other assets................................................................. 13,271 8,893
---------- --------
Total assets................................................................. $1,012,640 $606,745
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................................. $ 490,516 $224,982
Custodial escrow balances................................................. 96,824 53,760
Drafts payable............................................................ 5,423 7,506
Payable for purchase of mortgage servicing rights......................... 12,103 8,660
Federal Home Loan Bank of Dallas borrowings............................... 168,000 171,943
Borrowed money............................................................ 178,789 89,909
Other liabilities......................................................... 11,283 9,192
Income taxes payable...................................................... 348 183
---------- --------
Total liabilities............................................................ 963,286 566,135
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 6,723,911 and 6,703,880 shares at December 31, 1998 and
1997, respectively..................................................... 1 1
Additional paid in capital................................................ 22,416 22,185
Retained earnings......................................................... 26,937 18,424
---------- --------
Total shareholders' equity................................................... 49,354 40,610
---------- --------
Total liabilities and shareholders' equity................................... $1,012,640 $606,745
========== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Matrix Bancorp, Inc.
Consolidated Statements of Income
(Dollars in thousands except per share information)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans and mortgage backed securities.................................... $ 59,452 $ 31,096 $ 16,084
Interest earning deposits............................................... 1,242 1,053 465
--------- ---------- ----------
Total interest income................................................... 60,694 32,149 16,549
INTEREST EXPENSE
Savings and time deposits............................................... 11,789 5,098 3,292
Demand and money market deposits........................................ 4,432 3,278 468
FHLB borrowings......................................................... 8,554 3,435 2,039
Borrowed money.......................................................... 11,729 6,450 4,691
--------- --------- ---------
Total interest expense.................................................. 36,504 18,261 10,490
--------- --------- ---------
Net interest income before provision for loan and valuation losses...... 24,190 13,888 6,059
Provision for loan and valuation losses................................. 4,607 874 143
--------- --------- ---------
Net interest income..................................................... 19,583 13,014 5,916
NONINTEREST INCOME
Loan administration..................................................... 17,411 16,007 8,827
Brokerage............................................................... 7,054 3,921 4,364
Trust services.......................................................... 4,169 3,561 3,061
Gain on sale of loans and mortgage backed securities.................... 3,108 2,441 3,121
Gain on sale of mortgage servicing rights............................... 803 3,365 3,232
Loan origination........................................................ 5,677 4,694 1,809
Other................................................................... 8,523 4,040 2,173
--------- --------- ---------
Total noninterest income................................................ 46,745 38,029 26,587
NONINTEREST EXPENSE
Compensation and employee benefits...................................... 22,194 14,724 12,722
Amortization of mortgage servicing rights............................... 10,563 6,521 2,432
Occupancy and equipment................................................. 3,059 2,132 1,776
Postage and communication............................................... 2,393 1,522 1,214
Professional fees....................................................... 1,439 976 666
Data processing......................................................... 1,344 843 642
Losses related to recourse sales........................................ -- 1,237 787
Federal Deposit Insurance Corporation premiums.......................... 211 107 635
Other general and administrative........................................ 11,736 9,684 5,781
--------- --------- ---------
Total noninterest expense............................................... 52,939 37,746 26,655
--------- --------- ---------
Income before income taxes.............................................. 13,389 13,297 5,848
Provision for income taxes.............................................. 4,876 5,159 2,278
--------- --------- ---------
Net income.............................................................. $ 8,513 $ 8,138 $ 3,570
========= ========== =========
Net income per common share............................................. $ 1.27 $1.22 $.69
========= ========== =========
Net income per common share - assuming dilution......................... $ 1.24 $1.20 $.68
========= ========== =========
Weighted average common shares.......................................... 6,704,991 6,681,269 5,034,788
========= ========== =========
Weighted average common shares - assuming dilution...................... 6,881,890 6,781,808 5,077,321
========= ========== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Matrix Bancorp, Inc.
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................................. 4,668,531 $ -- $ 3,769 $ 6,917 $10,686
Issuance of stock, net of issuance costs of $1,934........... 2,012,500 1 18,190 -- 18,191
Cash dividends paid by pooled company prior to merger........ -- -- -- (201) (201)
Capital contribution into pooled company prior to merger..... -- -- 24 -- 24
Net income................................................... -- -- -- 3,570 3,570
--------- ----- ------ ------ -------
Balance at December 31, 1996................................. 6,681,031 1 21,983 10,286 32,270
Issuance of stock related to employee stock purchase
plan and options........................................... 22,849 -- 202 -- 202
Net income -- -- -- 8,138 8,138
--------- ----- ------ ------ -------
Balance at December 31, 1997................................. 6,703,880 1 22,185 18,424 40,610
Issuance of stock related to employee stock purchase
plan and options........................................... 20,031 -- 231 -- 231
Net income................................................... -- -- -- 8,513 8,513
--------- ----- ------- ------- -------
Balance at December 31, 1998................................. 6,723,911 $ 1 $22,416 $26,937 $49,354
========= ===== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MATRIX BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................................... $ 8,513 $ 8,138 $ 3,570
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization..................................................... 2,519 1,382 1,106
Provision for loan and valuation losses........................................... 4,607 874 143
Amortization of mortgage servicing rights......................................... 10,563 6,521 2,432
Accretion of premium on deposits.................................................. - - (7)
Deferred income taxes............................................................. 48 (2) (54)
Gain on sale of loans and mortgage backed securities.............................. (3,108) (2,441) (3,121)
Gain on sale of mortgage servicing rights......................................... (803) (3,365) (3,232)
Losses related to recourse sales.................................................. - 1,237 787
Loans originated for sale, net of loans sold...................................... (76,544) (18,800) 8,099
Loans purchased for sale.......................................................... (678,150) (493,693) (159,015)
Proceeds from sale of loans purchased for sale.................................... 319,430 198,010 57,147
Gain on sale of premises and equipment............................................ - - (78)
Originated mortgage servicing rights, net......................................... 24 (818) (441)
Increase in other receivables and other assets.................................... (23,743) (13,279) (796)
Increase (decrease) in other liabilities and income taxes payable................. 2,256 2,832 (2,320)
--------- --------- ---------
Net cash used by operating activities............................................... (434,388) (313,404) (95,780)
INVESTING ACTIVITIES
Loans originated and purchased for investment....................................... (82,547) (56,793) (15,048)
Principal repayments on loans....................................................... 176,520 73,908 22,982
Purchase of Federal Home Loan Bank of Dallas stock.................................. (6,943) (5,829) (917)
Purchases of premises and equipment................................................. (3,028) (2,295) (2,695)
Purchase of land under development.................................................. - - (1,431)
Purchase of revenue anticipation warrants........................................... - - (818)
Purchase of residential homes....................................................... - - (1,003)
Acquisition of mortgage servicing rights............................................ (31,388) (36,535) (10,410)
Proceeds from sale of mortgage servicing rights..................................... 5,160 19,817 8,410
Proceeds from sale of available for sale securities................................. - - 21,548
--------- --------- ---------
Net cash provided (used) by investing activities.................................... 57,774 (7,727) 20,618
FINANCING ACTIVITIES
Net increase in deposits............................................................ 265,534 134,803 41,309
Net increase in custodial escrow balances........................................... 43,064 15,879 10,870
Increase in revolving lines and repurchase agreements, net.......................... 64,564 137,527 17,151
Repayments of notes payable......................................................... (64,539) (34,347) (13,923)
Proceeds from notes payable......................................................... 85,078 45,148 6,924
Proceeds from senior notes, net..................................................... - 19,100 -
Repayment of financing arrangements................................................. (166) (157) (564)
Dividends paid by pooled company prior to merger.................................... - - (201)
Capital contribution into pooled company prior to merger............................ - - 24
Proceeds from issuance of common stock related to employee stock
purchase plan and options......................................................... 231 202 18,191
--------- --------- ---------
Net cash provided by financing activities........................................... 393,766 318,155 79,781
--------- --------- ---------
(Decrease) increase in cash and cash equivalents.................................... 17,152 (2,976) 4,619
Cash and cash equivalents at beginning of the year.................................. 9,633 12,609 7,990
--------- --------- ---------
Cash and cash equivalents at end of the year........................................ $ 26,785 $ 9,633 $ 12,609
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY
Payable for purchase of mortgage servicing rights................................... $ 12,103 $ 8,660 $ 8,044
========= ========= =========
Drafts payable...................................................................... $ 5,423 $ 7,506 $ 5,961
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense...................................................... $ 34,547 $ 17,379 $ 10,598
========= ========= =========
Cash paid for income taxes.......................................................... $ 4,664 $ 6,019 $ 2,298
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION
Matrix Bancorp, Inc. (Company) is a unitary thrift holding company that,
through its subsidiaries, is a diversified financial services company. In
December 1998, the Company changed its name to "Matrix Bancorp, Inc." from
Matrix Capital Corporation. The Company's operations are conducted primarily
through Matrix Capital Bank (Matrix Bank), Matrix Financial Services Corporation
(Matrix Financial), United Financial, Inc. (United Financial) and The Vintage
Group, Inc. (Vintage), all of which are wholly owned.
Matrix Bank, a federally chartered savings and loan association, serves its
local communities of Las Cruces, New Mexico and Phoenix, Arizona, by providing
personal and business depository services, offering residential and consumer
loans and providing, on a limited basis, commercial real estate loans.
The Company's mortgage banking business is conducted through Matrix
Financial, and was established with the primary objective of acquiring,
originating and servicing residential mortgage loan servicing rights. Servicing
mortgage loans involves the contractual right to receive a fee for processing
and administering mortgage loan payments. The Company acquires servicing rights
primarily in the secondary market as well as through Matrix Financial's
wholesale loan origination offices in the Atlanta, Denver, Las Vegas and Phoenix
metropolitan areas.
United Financial provides brokerage and consulting services to financial
institutions and financial services companies in the mortgage banking industry,
primarily related to the brokerage and analysis of residential mortgage loan
servicing rights and residential mortgage loans, corporate and mortgage loan
servicing portfolio valuations, and, to a lesser extent, consultation and
brokerage services in connection with mergers and acquisitions of mortgage
banking entities.
Vintage's operations, which are located in Texas, consist of a nonbank
trust company specializing in the administration of self-directed qualified
retirement plans, individual retirement accounts, custodial and directed trust
accounts, and a NASD broker/dealer that provides services to individuals and
deferred contribution plans.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practices
within the financial services industry. The following is a description of the
more significant policies which the Company follows in preparing and presenting
its consolidated financial statements.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from these
estimates.
Pooling of Interests Accounting
On February 5, 1997, the Company completed the merger of Vintage with the
issuance of 779,592 shares of the Company's common stock, which was accounted
for as a pooling of interests. The financial information for all prior periods
presented has been restated to present the combined financial condition and
results of operations of both companies as if the merger of Vintage had been in
effect for all periods presented.
F-7
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth separate company financial information for
the year ended December 31, 1996. The separate company financial information for
Vintage for 1997 was not significant due to the pooling occurring on February 5,
1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(In thousands)
COMPANY VINTAGE
------- -------
<S> <C> <C>
Net interest income.................................... $ 5,859 $ 57
Total noninterest income............................... 22,471 4,116
Total noninterest expense.............................. 22,951 3,704
Net income............................................. 3,273 297
</TABLE>
Loans Held for Sale
Loans originated or purchased with the intent for sale in the secondary
market are carried at the lower of cost, net of discounts or premiums and a
valuation allowance, or estimated market value in the aggregate. Market value is
determined using forward sale commitments to permanent investors or current
market rates for loans of similar quality and type. Net unrealized losses, if
any, would be recognized in a valuation allowance by charges to income.
Discounts or premiums on loans held for sale are not accreted or amortized into
income on an interest method, however discounts and premiums related to payments
of loan principal are recorded in interest income. The loans are primarily
secured by one to four family residential real estate located throughout the
United States.
The Company includes in loans held for sale first mortgage loans which are
acquired under several purchase/repurchase facilities. The Company earns
interest income on all the facilities and on some of the facilities receives a
profit participation when the loans are subsequently sold which is included in
interest income.
Gains and losses on loan sales are determined based on the difference
between the allocated cost basis of the assets sold and the proceeds, which
includes the fair value of any assets or liabilities that are newly created as a
result of the transaction. Losses related to recourse provisions in excess of
the amount originally provided are accrued as a liability at the time such
additional losses are determined, and recorded as part of noninterest expense.
Loans Held for Investment
Loans held for investment are stated at unpaid principal balances, less
unearned discounts and premiums, deferred loan fees, loans in process and
allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is calculated, in part, based on historical
loss experience. In addition, management takes into consideration other factors
such as any qualitative evaluations of individual classified assets, geographic
portfolio concentrations, new products or markets, evaluations of the changes in
the historical loss experience component, and projections of this component into
the current and future periods based on current knowledge and conditions. After
an allowance has been established for the loan portfolio, management establishes
an unallocated portion of the allowance for loan losses, which is attributable
to factors that cannot be associated with a specific loan or loan portfolio.
These factors include general economic conditions, recognition of specific
regional geographic concerns, loan type and trends in portfolio growth. Loan
losses are charged against the allowance when the probability of collection is
considered remote. In the opinion of management, the allowance, when taken as a
whole, is adequate to absorb reasonably foreseeable losses in the current loan
portfolio.
The Company considers a loan impaired when, based on current information
and events, it is probable that it will be unable to collect all amounts due
according to the contractual terms of the loan. The Company evaluates its
residential loans
F-8
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
collectively due to their homogeneous nature. Accordingly, potential impaired
loans of the Company include only commercial, real estate construction and
commercial real estate mortgage loans classified as nonperforming loans.
Impairment allowances are considered by the Company in determining the overall
adequacy of the allowance for loan losses. When a loan is identified as
"impaired," accrual of interest ceases. The Company had no impaired loans as of
or for the years ended December 31, 1998, 1997 and 1996.
Loans are placed on nonaccrual status when full payment of principal or
interest is in doubt, or generally when they are past due ninety days as to
either principal or interest, unless the interest is guaranteed through recourse
provisions. Previously accrued but unpaid interest is reversed and charged
against interest income, if not collectible, and future accruals are
discontinued. Interest payments received on nonaccrual loans are recorded as
interest income unless there is doubt as to the collectibility of the recorded
investment. In those cases, cash received is recorded as a reduction in
principal.
Mortgage Servicing Rights (MSRs)
Effective January 1, 1997, Statement of Financial Accounting Standards
(Statement) No. 122, Accounting for Mortgage Servicing Rights, was superseded by
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. The Company adopted Statement No. 125 in
1997 and recognizes originated mortgage servicing rights (OMSRs) as an asset
separate from the underlying originated mortgage loan by allocating the total
cost of originating a mortgage loan between the loan and the servicing right
based on their respective fair values. MSRs are carried at the lower of cost
(allocated cost for OMSRs), less accumulated amortization, or fair value. MSRs
are amortized in proportion to and over the period of the estimated future net
servicing income.
The fair value of MSRs is determined based on the discounted future
servicing income stratified based on one or more predominant risk
characteristics of the underlying loans. The Company stratifies its MSRs by
product type and investor to reflect the predominant risk characteristics. To
determine the fair value of MSRs, the Company uses a valuation model that
calculates the present value of future cash flows to determine the fair value of
the MSRs. In using this valuation method, the Company incorporates assumptions
that market participants would use in estimating future net servicing income
which includes estimates of the cost of servicing per loan, the discount rate,
float value, an inflation rate, ancillary income per loan, prepayment speeds and
default rates. As of December 31, 1998, no valuation allowance was required and
the fair value of the aggregate MSRs was approximately $61,000,000.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight line method over the estimated lives
of the assets, which range from three to seven years for office furniture,
equipment and software and 30 years for buildings.
Foreclosed Real Estate
Real estate acquired through foreclosure, deed in lieu of foreclosure or in
judgment is carried at the lower of fair value, minus estimated costs to sell,
or the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is established by
a charge to operations if the carrying value of a property exceeds its fair
value, minus estimated costs to sell. The net carrying value of foreclosed real
estate, which is classified in other assets, was $916,000 and $1,242,000 at
December 31, 1998 and 1997, respectively. All of the Company's foreclosed
properties relate to residential real estate as of December 31, 1998.
Acquired Real Estate
Costs directly attributable to the acquisition, development, and
construction of land development are capitalized. Such costs include
preacquisition costs, direct project costs and holding costs. The investment in
land development is carried at the lower of cost, which includes capitalized
costs, or net realizable value. Net unrealized losses, if any, would be
recognized in a valuation allowance. As of December 31, 1998 there was no
valuation allowance necessary for the land development.
F-9
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company and its subsidiaries file consolidated federal and state income
tax returns. The subsidiaries are charged for the taxes applicable to their
profits calculated on the basis of filing separate income tax returns. Matrix
Bank qualifies as a savings and loan association for income tax purposes.
The Company follows Statement No. 109, Accounting for Income Taxes, which
uses the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Drafts Payable
Drafts payable represent the in transit outstanding funding of a new loan
by the Company via a negotiable instrument, however, the instrument has not yet
been presented to the bank for payment. Presentation to the bank generally
occurs within one to three days.
Loan Administration Income
Loan administration income represents service fees and other income earned
from servicing loans for various investors. Loan administration income includes
service fees that are based on a contractual percentage of the outstanding
principal balance plus late fees and other ancillary charges. Income is
recognized when the related payments are received.
Brokerage Income
Brokerage income represents fees earned related to servicing brokerage and
consulting services. Brokerage income is recognized when earned.
Trust Services Income
Trust services income represents fees earned related to services provided
for self-directed IRA, qualified benefit plans and escrow arrangements. Trust
services income is recognized when earned.
Gain on Sale of Servicing Rights
Gain on sale of servicing rights is recognized when substantially all the
risks and rewards inherent in owning the MSRs have been transferred to the
buyer, and any protection provisions retained by the Company are minor and can
be reasonably estimated.
Loan Origination Income
Loan origination income for loans originated for sale, which includes all
mortgage origination fees, secondary marketing activity and servicing-released
premiums on mortgage loans sold, net of outside origination costs, is recognized
as income at the time the loan is sold.
Loan origination income for loans originated for investment, which includes
mortgage origination fees and certain direct costs associated with loan
originations, is deferred and amortized as a yield adjustment over the
contractual life of the related loan using the interest method, adjusted for
estimated prepayments.
F-10
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for stock option grants.
Cash and Cash Equivalents
Cash equivalents, for purposes of the statements of cash flows, consist of
cash and interest-earning deposits with banks with original maturities when
purchased of three months or less.
Hedging of Mortgage Servicing Rights
The Company hedges a segment of its servicing portfolio using exchange
traded futures and options. A change in the market value of the futures contract
is deferred and amortized in proportion to and over the period of the estimated
future net servicing income of the hedged servicing portfolio. The option
premium or cost is amortized ratably over the period of the option. If any of
the hedged servicing portfolio is sold, then the realized and unrealized gain or
loss from the futures and options attributable to the portion sold is included
in the basis of the MSRs sold for purposes of calculating gain or loss on sale.
These realized and unrealized hedging gains and losses are considered in the
determination of the fair value of the MSRs.
Net Income Per Share
As of December 31, 1997, the Company adopted Statement No. 128, Earnings
per Share, and restated all prior period earnings per share (EPS) data, as
required. Statement No. 128 replaced the presentation of primary and fully
diluted EPS pursuant to APB Opinion No. 15, Earnings per Share, with the
presentation of basic and diluted EPS. Basic EPS, or net income per common
share, excludes dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Net income per
common share assuming dilution is computed by dividing net income by the
weighted average number of common shares outstanding for the period and the
dilutive effect, if any, of stock options and warrants outstanding for the
period.
Comprehensive Income
The Company adopted Statement No. 130, Reporting Comprehensive Income, as
of January 1, 1998. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, however, the adoption of
this Statement did not result in any change in presentation and had no impact on
the Company's net income or shareholders' equity. Statement No. 130 requires
reclassification of financial statements for earlier periods provided for
comparative purposes.
Segment Reporting
Effective January 1, 1998, the Company adopted Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
No. 131 superceded FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement No.
131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of Statement No.
131 did not affect results of operations or financial position.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Statement No. 133
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement
F-11
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effective January 1, 2000. Statement No. 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
The Company has not yet determined what effect Statement No. 133 will have
on the earnings and financial position of the Company.
Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
3. 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>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Numerator:
Net income..................................... $ 8,513 $ 8,138 $ 3,570
Less: preferred stock dividends from pooled
company....................................... - - (112)
---------- ---------- ----------
Net income available to common shareholders.... $ 8,513 $ 8,138 $ 3,458
========== ========== ==========
Denominator:
Weighted average shares outstanding............ 6,704,991 6,681,269 5,034,788
Effect of dilutive securities:
Common stock options........................... 150,478 89,333 42,533
Common stock warrants.......................... 26,421 11,206 -
---------- ---------- ----------
Dilutive potential common shares................ 176,899 100,539 42,533
---------- ---------- ----------
Denominator for net income per share,
assuming dilution.............................. 6,881,890 6,781,808 5,077,321
========== ========== ==========
</TABLE>
F-12
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS RECEIVABLE
Loans Held for Investment
Loans held for investment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Residential loans............................................... $ 5,563 $ 7,523
Multi-family, commercial real estate, and commercial............ 56,130 32,189
Construction loans.............................................. 43,672 14,878
Consumer loans and other........................................ 9,997 10,942
-------- -------
115,362 65,532
Less:
Loans in progress............................................... 18,941 9,784
Purchase discounts, net......................................... 212 236
Unearned fees on loans (excluding consumer)..................... 524 220
Unearned fees on consumer loans................................. 327 209
Allowance for loan losses....................................... 1,136 689
-------- -------
21,140 11,138
-------- -------
$ 94,222 $54,394
======== =======
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period................... $ 689 $ 270 $ 227
Provision for loan losses........................ 1,178 554 34
Charge-offs...................................... (789) (166) (6)
Recoveries....................................... 58 31 15
------ ------ ------
Balance at end of period......................... $1,136 $ 689 $ 270
====== ====== ======
</TABLE>
Nonaccrual loans in the loans held for investment portfolio totaled
approximately $376,000 and $381,000 or 0.4 percent and 0.7 percent of the total
loans held for investment portfolio at December 31, 1998 and 1997, respectively.
The Company had commitments to extend credit on consumer, commercial and
construction loans of approximately $40,768,000 at December 31, 1998.
F-13
<PAGE>
MATRIX BANCROP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS RECEIVABLE (CONTINUED)
Loans Held for Sale
Loans held for sale consist of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Residential loans.............................. $ 730,247 $ 456,552
Commercial loans, leases and other............. 30,268 2,728
------------ ------------
760,515 459,280
Less:
Purchase discounts, net................... 3,715 1,235
Valuation allowance....................... 2,574 1,067
------------ ------------
6,289 2,302
------------ ------------
$ 754,226 $ 456,978
============ ============
</TABLE>
Included in loans held for sale are approximately $49,459,000 and
$36,352,000 at December 31, 1998 and 1997, respectively, of first mortgage 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, 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.
Activity in the valuation allowance is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.... $ 1,067 $ 769 $ 716
Provision for valuation allowance. 3,429 320 109
Charge-offs....................... (1,922) (22) (64)
Recoveries........................ - - 8
------------ ----------- ------------
Balance at end of period.......... $ 2,574 $ 1,067 $ 769
============ =========== ============
</TABLE>
Nonaccrual loans related to the loans and direct financing leases held for
sale portfolio aggregated approximately $12,833,000 and $4,609,000 at December
31, 1998 and 1997, respectively. Interest income that would have been recorded
for all nonaccrual loans was approximately $524,000, $89,000 and $120,000 during
the years ended December 31, 1998, 1997 and 1996, respectively.
During 1996, the Company formed two mortgage-backed securities with an
unpaid principal balance of approximately $21,000,000 from its loans held for
sale portfolio. During the year ended December 31, 1996, the Company recognized
a gross gain on the sale of mortgage-backed securities of approximately $171,000
and the taxes related to this sale were approximately $68,000.
During 1996, the Company purchased numerous automobile retail installment
contracts and sold approximately $18,500,000 of such contracts, subject to
certain recourse provisions. During 1997 and 1996, the Company was required to
repurchase approximately $4,000,000 of automobile installment contracts and
repossessed automobiles pursuant to the recourse provisions.
In December 1997, the Company sold the remaining automobile retail
installment contracts including its repossessed assets and the charged-off
accounts for $800,000, to an independent third party. The Company received
$260,000 in cash and financed the remaining balance, with recourse limited to
the assets sold. The Company realized a loss of approximately $54,000 upon the
sale. The Company recorded losses of $-0-, $1,237,000 and $787,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, related to the repurchase
and ultimate disposition of the loans and automobiles.
F-14
<PAGE>
MATRIX BANCROP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................. $ 684 $ 684
Buildings......................................... 4,486 4,348
Leasehold improvements............................ 1,116 460
Office furniture and equipment.................... 7,697 5,485
Other equipment................................... 1,297 1,268
---------- ----------
15,280 12,245
Less: accumulated depreciation and amortization.. 4,952 3,233
---------- ----------
$ 10,328 $ 9,012
========== ==========
</TABLE>
Included in occupancy and equipment expense is depreciation and
amortization expense of premises and equipment of approximately $1,712,000,
$1,170,000 and $828,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
6. MORTGAGE SERVICING RIGHTS
The activity in the MSRs is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............ $ 36,440 $ 23,680 $ 13,817
Purchases............................... 34,831 37,151 17,142
Originated, net of OMSRs sold........... (24) 818 441
Amortization............................ (10,563) (6,521) (2,432)
Transfer of MSRs to FHLMC............... - - (110)
Sales................................... (2,537) (18,688) (5,178)
------------ ------------- ------------
Balance at end of year.................. $ 58,147 $ 36,440 $ 23,680
============ ============= ============
</TABLE>
Accumulated amortization of MSRs aggregated approximately $26,921,000 and
$17,223,000 at December 31, 1998 and 1997, respectively.
The Company's servicing activity is diversified throughout 50 states with
concentrations at December 31, 1998 in California, Florida and Texas of
approximately 19.9 percent, 9.5 percent and 8.3 percent, respectively, based on
aggregate outstanding unpaid principal balances of the mortgage loans serviced.
As of December 31, 1998 and 1997, the Company subserviced loans for others of
approximately $9,900,000 and $239,000,000, respectively.
The Company's servicing portfolio (excluding subserviced loans) comprised
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------------------------- ------------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OUTSTANDING OF LOANS OUTSTANDING
------------ -------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLMC..................................... 19,227 $1,221,074 13,134 $ 715,513
FNMA...................................... 23,198 1,419,345 18,000 1,168,199
GNMA...................................... 17,552 838,081 15,845 615,234
Other VA, FHA, and conventional loans..... 18,369 1,879,229 14,538 849,116
------------ -------------- ---------- -------------
78,346 $5,357,729 61,517 $ 3,348,062
============ ============== ========== =============
</TABLE>
F-15
<PAGE>
MATRIX BANCROP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MORTGAGE SERVICING RIGHTS (CONTINUED)
The Company's custodial escrow balances shown in the accompanying
consolidated balance sheets at December 31, 1998 and 1997 pertain to escrowed
payments of taxes and insurance and the float on principal and interest payments
on loans serviced on behalf of others of approximately $6,111,000 and
$6,801,000, respectively, and owned by the Company of approximately $89,546,000
and $42,878,000, respectively. The Company also has custodial accounts on
deposit from other mortgage companies aggregating approximately $1,167,000 and
$4,081,000 at December 31, 1998 and 1997, respectively. The Companies custodial
accounts are maintained at Matrix Bank in noninterest-bearing accounts. The
balance of the custodial accounts fluctuate from month to month based on the
pass-through of the principal and interest payments to the ultimate investors
and the timing of taxes and insurance payments.
7. DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
---------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts.................. $ 2,830 0.58% 3.58% $ 2,851 1.27% 3.95%
NOW accounts....................... 42,178 8.60 1.63 26,382 11.73 1.62
Money market accounts.............. 170,957 34.85 3.13 99,899 44.40 2.96
---------- --------- ---------- --------- --------- ----------
215,965 44.03 2.84 129,132 57.40 2.70
Certificate accounts............... 274,551 55.97 5.52 95,850 42.60 5.94
---------- --------- ---------- --------- --------- ----------
$ 490,516 100.00% 4.37% $ 224,982 100.00% 4.09%
========== ========= ========== ========= ========= ==========
</TABLE>
Included in NOW accounts are noninterest-bearing DDA accounts of
$22,672,000 and $9,218,000 for the years ended December 31, 1998 and 1997,
respectively.
Contractual maturities of certificate accounts as of December 31, 1998:
<TABLE>
<CAPTION>
UNDER 12 12 TO 36 36 TO 60
MONTHS MONTHS MONTHS
-------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
4.00-4.99%................... $ 127,469 $ 294 $
5.00-5.99%................... 106,772 15,607 5,970
6.00-6.99%................... 7,210 4,620 6,481
7.00-7.99%................... - 126 2
-------------- ------------ ------------
$ 241,451 $ 20,647 $ 12,453
============== ============ ============
</TABLE>
Approximately $137,043,000 and $108,990,000 of assets under administration
by Vintage are included in NOW, DDA and money market accounts as of December 31,
1998 and 1997, respectively. Included in certificate accounts is $148,676,000 of
brokered deposits as of December 31, 1998. Additionally, included in money
market accounts is approximately $47,078,000 from a title company.
F-16
<PAGE>
MATRIX BANCROP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts................ $ 102 $ 113 $ 82
NOW accounts..................... 522 795 63
Money market..................... 3,910 2,483 405
Certificates of deposit.......... 11,687 4,985 3,210
----------- ----------- ------------
$16,221 $ 8,376 $ 3,760
=========== =========== ============
</TABLE>
The aggregate amount of deposit accounts with a balance greater than
$100,000 (excluding brokered deposits) was approximately $17,622,000 and
$7,185,000 at December 31, 1998 and 1997, respectively.
8. BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Revolving Lines
$90,000,000 revolving warehouse loan agreement with banks, secured by
mortgage loans held for sale, interest at federal funds rate plus 0.85-2.00
percent (6.01 percent average rate at December 31, 1998); $17,843,000
available at December 31, 1998....................................................... $ 72,157 $ 45,962
$10,000,000 working capital facility with banks secured by mortgage loans
held for sale, MSRs, eligible servicing advance receivables and eligible
delinquent mortgage receivables; interest at federal funds rate plus 1.5
percent (6.18 percent at December 31, 1998); $5,521,000 available
at December 31, 1998................................................................. 4,479 2,376
$11,500,000 revolving line of credit with a third party financial institution,
secured by common stock of Matrix Bank; interest due monthly at prime;
$1,200,000 available at December 31, 1998............................................ 10,300 -
-------- -------
Total revolving lines.................................................................. 86,936 48,338
Term Notes Payable
Servicing acquisition loan agreement with a bank, secured by
MSRs, due at the earlier of the maturity of the MSRs or amortized over five
to six years from the date of the borrowing through January 31, 2003;
interest at federal funds rate plus 2.00 percent (6.68 percent at December 31,
1998); $14,137,000 available at December 31, 1998.................................... 26,974 12,348
Senior notes, interest at 11.50 percent payable semiannually, unsecured and
maturing September 30, 2004.......................................................... 20,000 20,000
Senior subordinated notes, interest at 14 percent payable semiannually,
unsecured and maturing July 2002, with mandatory redemptions of $727,500 on
each of July 15, 1999, 2000 and 2001................................................. 2,910 2,910
$8,500,000 note payable to a third party financial institution (revised bank
stock loan) due in quarterly installments of $303,591, plus interest, through
June 30, 2001, collateralized by the common stock of Matrix Bank; interest at
prime................................................................................ 7,893 1,786
</TABLE>
F-17
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BORROWED MONEY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to banks, secured by a deeds of trust on real estate, interest at
prime plus 1.0 percent........................................................... $ 1,715 $ 1,740
Other.............................................................................. 1,296 1,465
--------- ---------
Total term notes................................................................... 60,788 40,249
Other
Agreements with a bank to sell mortgage loans and direct financing leases
originated by the Company under agreements to repurchase. The agreement
can be terminated upon 90 days written notice by either party; interest at the
higher of the prime rate or note rate on the loans and 8 percent on direct lease
financing. Total commitment amount of these agreements is $25,000,000, with
$9,933,000 available at December 31, 1998. Increases are at the discretion of
the bank......................................................................... 15,067 -
Financing agreement with a bank, secured by Ft. Lupton Subordinated Series
1996 A1 revenue anticipation warrants, interest is at 5 percent and is due based
on the semi-annual bonds payments, unpaid principal due at bond maturity......... 800 800
MSR financing, collateralized by MSR's with unpaid principal balances of
$42,900,000 at December 31, 1998................................................. 356 522
Agreement with bank to finance direct financing leases to charter schools,
interest is at 7 percent and can be terminated at any time by either party.
Total commitment amount is at the option of the bank............................. 1,125 -
Financing agreement, collateralized by direct financing leases, interest variable.. 13,717 -
--------- ---------
Total other........................................................................ 31,065 1,322
--------- ---------
Total borrowed money............................................................... $ 178,789 $ 89,909
========= =========
</TABLE>
The Company may redeem the senior subordinated notes, in whole or in part,
at any time after July 15, 1998 at a redemption price of 102 percent of par
through July 14, 1999 and, thereafter, at par, plus accrued and unpaid interest.
As of December 31, 1998 the maturities of term notes payable during the
next five years and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $ 9,531
2000........................................................ 8,519
2001........................................................ 12,192
2002........................................................ 4,984
2003........................................................ 4,959
Thereafter.................................................. 20,603
-------
$60,788
=======
</TABLE>
The Company must comply with certain financial and other covenants related
to the foregoing debt agreements including, among other things, the maintenance
of specific ratios, net worth and other amounts as defined in the credit
agreements limiting the Company's ability to declare dividends (and its
subsidiaries) or incur additional debt, and establishes requirements to maintain
certain capital levels in certain subsidiaries. These covenants include
requirements for the Company to maintain consolidated tangible capital of not
less than $44.4 million, maintain adjusted debt to shareholders' equity of less
than 4:1 and
F-18
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. BORROWED MONEY (CONTINUED)
maintain the requirements necessary such that Matrix Bank will not be classified
as other than "well capitalized," as defined. At December 31, 1998, the Company
was in compliance with these covenants.
On February 22, 1999, the Company renegotiated the revolving credit
facilities for its $90,000,000 warehouse loan agreement, the $10,000,000 working
capital loan agreement and its $45,000,000 servicing acquisition loan agreement.
With this renegotiation, the aggregate amount of revolving warehouse lines of
credit facilities was increased to $120,000,000 and the aggregate amount of the
servicing acquisition facility and the aggregate amount of the working capital
facility were unchanged. The new credit facility agreement requires Matrix
Financial to maintain, among other things, (i) total shareholder's equity of at
least $13,000,000 plus 90 percent of capital contributed after January 1, 1999,
plus 90 percent of cumulative quarterly net income, (ii) adjusted net worth, as
defined, of at least $25,000,000, (iii) a servicing portfolio of at least
$4,000,000,000, (iv) principal debt of term line borrowings of no more than the
lesser of 70 percent of the appraised value of the mortgage servicing portfolio
or 1.25 percent of the unpaid principal balance of the mortgage servicing
portfolio, (v) a ratio of total adjusted debt to adjusted tangible net worth of
no more than eight to one, (vi) a ratio of cash flow to current maturities of
long-term debt and any capital leases of at least 1.3 to 1.0, (vii) a ratio of
outstanding term-line borrowings outstanding to adjusted net worth of no more
than 2.5 to 1.0 and (viii) principal debt of working capital borrowings and term
line borrowings of no more than the lesser of 95 percent of the appraised value
of the mortgage servicing portfolio or 1.25 percent of the unpaid principal
balance of the mortgage servicing portfolio.
Direct Financing Leases Financing Agreement
During 1998, the Company placed tax-exempt direct financing leases it
originated to charter schools into a partnership trust, USBI, Trust Series 1998
(Trust). The Trust then issued Class "A" Certificates and Class "B"
Certificates, with the Class "A" Certificates being sold under a private
placement at a price of par.
The "A" Certificates are guaranteed by a letter of credit issued by the
Guarantor, which is a third party investment bank (Investment Bank) and the
underlying leases. The "A" Certificates interest rate may be determined weekly,
monthly or for a term for up to one year. The interest rate and the term of the
interest rate are determined by the Remarking Agent, which is also the
Investment Bank. Generally, the Trust is short-term in nature with an average
life of one year or less.
The "B" Certificates are owned in part by the Company and in part by the
Investment Bank. The interest rate paid on the "A" Certificates and the "B"
Certificates owned by the Investment Bank is considered the Company's financing
cost. The approximate cost of the financing at December 31, 1998 was 6.88
percent. The interest that the Company receives through its part ownership of
the "B" Certificates is tax-exempt.
Although the Investment Bank acts as Guarantor to the "A" Certificates, the
Company provides full recourse to the Investment Bank in all cases of loss or
default. Due to the nature of the recourse and the ability of the "A"
Certificate holders to put the certificates to the Trust, the transaction has
been treated as a financing.
9. FEDERAL HOME LOAN BANK OF DALLAS BORROWINGS
Federal Home Loan Bank of Dallas (FHLB) borrowings aggregated $168,000,000
and $171,943,000 at December 31, 1998 and 1997, respectively. Advances of
$121,000,000 bear interest at rates which adjust daily and are based on the
mortgage repo rate. Advances of $47,000,000 at December 31, 1998, were borrowed
under a Short Option Advance (SOA) Agreement with the FHLB. These SOA borrowings
have a term of ten years, but are callable by the FHLB beginning after a six
month or one year lock-out period depending on the particular SOA borrowing.
After the expiration of the lock-out period, the SOA borrowings are callable at
three month intervals. If the FHLB exercises its call option on a SOA borrowing,
the FHLB is required to offer replacement funding to the Company at a market
rate of interest for the remaining term of the SOA borrowing. The interest rates
on the SOA borrowings ranged from 4.85 percent to 4.94 percent at December 31,
1998 and their possible call dates varied from January 15, 1999 to April 14,
1999. Additionally, under the terms of the SOA Agreement, the Company is not
permitted to prepay or otherwise retire a callable SOA borrowing prior to the
final maturity date. All advances are secured by first mortgage loans of Matrix
Bank and all of its FHLB stock.
F-19
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FEDERAL HOME LOAN BANK OF DALLAS BORROWINGS (CONTINUED)
Matrix Bank has a commitment from the FHLB for advances of approximately
$310,700,000 at December 31, 1998. Matrix Bank adopted a collateral pledge
agreement whereby it has agreed to keep on hand, at all times, first mortgages
free of all other pledges, liens and encumbrances with unpaid principal balances
aggregating no less than 170 percent of the outstanding secured advances from
the FHLB. However, in 1999, Matrix Bank has been notified that it will be
placed on full blanket status, which will be phased-in during 1999 by 25 percent
at each quarter end. Management believes that this decision will not affect
Matrix Bank's borrowing capabilities from the FHLB, but will impact where the
collateral that secures the FHLB borrowings will be held.
10. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------ ---------- -----------
(In thousands)
<S> <C> <C> <C>
Current
Federal............................. $ 3,837 $ 4,108 $ 1,871
State............................... 991 1,053 461
Deferred
Federal............................. 42 (2) (42)
State............................... 6 - (12)
------------ ---------- ----------
$ 4,876 $ 5,159 $ 2,278
============ ========== ==========
</TABLE>
A reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax provision............ $ 4,552 $ 4,521 $ 1,988
Effect of federal tax brackets........... 13 - -
State income taxes....................... 660 694 296
Other.................................... (349) (56) (6)
------------ ----------- -----------
$ 4,876 $ 5,159 $ 2,278
============ =========== ===========
</TABLE>
F-20
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities result from the tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes shown
below.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for losses.................................................. $ 1,383 $ 475
Discounts and premiums................................................ 144 106
Amortization of servicing rights...................................... - 156
Deferred fees......................................................... 718 328
Delinquent interest................................................... 215 52
Other................................................................. 30 6
--------- ---------
Total deferred tax assets............................................... 2,490 1,123
Deferred tax liabilities:
Gain on sale of loans................................................. (931) (732)
Amortization of servicing rights...................................... (1,025) -
Depreciation.......................................................... (526) (335)
--------- ---------
Total deferred tax liabilities.......................................... (2,482) (1,067)
--------- ---------
Net deferred tax asset.................................................. $ 8 $ 56
========= =========
</TABLE>
11. REGULATORY
The Company is a unitary thrift holding company and, as such, is subject to
the regulation, examination and supervision of the Office of Thrift Supervision
(OTS).
Matrix Bank is also subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions,
actions by regulators that, if undertaken, could have a direct material effect
on Matrix Bank"s financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, Matrix Bank must meet
specific capital guidelines that involve quantitative measures of Matrix Bank"s
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Matrix Bank"s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Matrix Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I capital (as
defined) to total assets (as defined). Management believes, as of December 31,
1998 and 1997, that Matrix Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 1998, the most recent notification from the OTS
categorized Matrix Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized Matrix Bank must
maintain
F-21
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REGULATORY (CONTINUED)
minimum total risk-based, Tier I risk based and Tier I leverage ratios
as set forth in the table. There have been no conditions or events since that
notification that management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- ------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital
(to Risk Weighted Assets).............. $54,148 11.7% *$36,938 *8.0% *$46,173 *10.0%
Core Capital
(to Adjusted Tangible Assets).......... 51,163 6.2% * 32,828 *4.0% * 41,035 * 5.0%
Tangible Capital
(to Tangible Assets)................... 51,163 6.2% * 12,310 *1.5% N/A
Tier I Capital
(to Risk Weighted Assets).............. 51,163 11.1% N/A * 27,704 * 6.0%
As of December 31, 1997
Total Capital
(to Risk Weighted Assets).............. 29,714 10.8% * 21,969 *8.0% * 27,462 *10.0%
Core Capital
(to Adjusted Tangible Assets).......... 27,958 5.7% * 19,498 *4.0% * 24,372 * 5.0%
Tangible Capital
(to Tangible Assets)................... 27,958 5.7% * 7,312 *1.5% N/A
Tier I Capital
(to Risk Weighted Assets).............. 27,958 10.2% N/A * 16,477 * 6.0%
</TABLE>
* Denotes greater than or equal to
The various federal banking statutes to which Matrix Bank is subject also
include other limitations regarding the nature of the transactions in which it
can engage or assets it may hold or liabilities it may incur.
Matrix Bank is required to maintain balances with the Federal Reserve Bank
of Dallas in a noninterest-earning account based on a percentage of deposit
liabilities. Such balances averaged $6,860,000 and $6,897,000 in 1998 and 1997,
respectively.
Matrix Bank is required by Federal regulations to maintain a minimum level
of liquid assets of four percent. Matrix Bank exceeded the Federal requirement
at December 31, 1998 and 1997, respectively.
Matrix Financial is subject to examination by various regulatory agencies
involved in the mortgage banking industry. Each regulatory agency requires the
maintenance of a certain amount of net worth, the most restrictive of which
required $3,089,000 at December 31, 1998 and $2,587,000 at December 31, 1997.
12. SHAREHOLDERS' EQUITY
Common Stock
The authorized common stock of the Company consists of 50,000,000 shares
with a par value of $.0001 per share. There were 6,723,911, 6,703,880 and
6,681,031 shares of common stock outstanding at December 31, 1998, 1997 and
1996, respectively. Holders of common stock are entitled to receive dividends
when, and if, declared by the board of directors. Each share of common stock
entitles the holders thereof to one vote, and cumulative voting is not
permitted.
F-22
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
Preferred Stock
The authorized preferred stock of the Company consists of 5,000,000 shares
with a par value of $.0001 per share. The board of directors is authorized,
without further action of the shareholders of the Company, to issue from time to
time shares of preferred stock in one or more series and with such relative
rights, powers, preferences and limitations as the board of directors may
determine at the time of issuance. Such shares may be convertible into common
stock and may be superior to the common stock in the payment of dividends,
liquidation, voting and other rights, preferences and privileges.
Stock Option Plan
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under Statement No. 123, Accounting for Stock-Based Compensation,
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In September 1996, the board of directors and shareholders adopted the 1996
Stock Option Plan, which amended and restated the Company's stock option plan
adopted in 1995. The Company's 1996 Stock Option Plan has authorized the grant
of options to substantially all of the Company's full-time employees and
directors for up to 525,000 shares of the Company's common stock. All options
granted have ten year terms and vest based on the determination by the Company's
compensation committee.
The 1996 Stock Option Plan authorized the granting of incentive stock
options (Incentive Options) and nonqualified stock options (Nonqualified
Options) to purchase common stock to eligible persons. The 1996 Stock Option
Plan is currently administered by the compensation committee (administrator) of
the board of directors. The 1996 Stock Option Plan provides for adjustments to
the number of shares and to the exercise price of outstanding options in the
event of a declaration of stock dividend or any recapitalization resulting in a
stock split-up, combination or exchange of shares of common stock.
No Incentive Option may be granted with an exercise price per share less
than the fair market value of the common stock at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
administrator of the 1996 Stock Option Plan. The expiration date of an option is
determined by the administrator at the time of the grant, but in no event may an
option be exercisable after the expiration of ten years from the date of grant
of the option.
The 1996 Stock Option Plan further provides that in most instances an
option must be exercised by the optionee within 30 days after the termination of
the consulting contract between such consultant and the Company or termination
of the optionee's employment with the Company, as the case may be, if and to the
extent such option was exercisable on the date of such termination.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
5.4 percent, 5.7 percent and 6.0 percent; a dividend yield of zero percent;
volatility factors of the expected market price of the Company's common stock of
.39, .38 and .39; and a weighted-average expected life of the option of four
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-23
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C>
Pro forma net income.................... $8,256 $7,960 $3,534
Pro forma earnings per share:
Basic.................................. 1.23 1.19 0.67
Diluted................................ 1.20 1.17 0.67
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........ 330,150 $10.55 209,100 $ 8.15 79,500 $ 5.13
Granted............................... 63,000 12.96 149,500 14.12 129,600 10.00
Exercised............................. (1,725) 12.25 (2,100) 10.00 - -
Forfeited............................. (3,725) 14.00 (26,350) 11.93 - -
-------- ------- --------
Outstanding, end of year.............. 387,700 $10.90 330,150 $10.55 209,100 $ 8.15
======== ======== ========
Exercisable at end of year............ 167,350 $ 8.49 117,700 $ 6.75 87,000 $ 5.55
Weighted average fair value of options
granted during the year $6.03 $6.67 $ 4.06
</TABLE>
Options outstanding at December 31, 1998 have exercise prices ranging from $5.13
to $26.50 per share, with a weighted average exercise price of $10.90 per share,
as outlined in the following table:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS EXERCISE PRICE REMAINING OPTIONS EXERCISE PRICE
PRICES OUTSTANDING PER SHARE CONTRACTUAL LIFE EXERCISABLE PER SHARE
- ------------ --------------- ---------------- -------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 5.13 79,500 $ 5.13 6.00 79,500 $ 5.13
8.13 25,000 8.13 9.79 - -
10.00 110,700 10.00 7.83 59,850 10.00
10.38-13.88 74,000 13.20 8.22 14,000 13.17
14.25-17.25 95,500 15.20 8.56 12,500 15.17
26.50 3,000 26.50 9.33 1,500 26.50
--------------- ---------------- -------------------- ---------------- ----------------
387,700 $10.90 7.85 167,350 $ 8.49
=============== ================ ==================== ================ ================
</TABLE>
Restricted Net Assets
As a result of the regulatory requirements and debt covenants, substantially all
of the net assets of the Company are restricted at December 31, 1998 and 1997.
F-24
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
Warrants
The Company issued warrants exercisable for an aggregate of 75,000 shares
of its common stock to its primary underwriters upon the closing of the
Company's initial public offering. The warrants are exercisable from time to
time during the four years after the one year anniversary of their date of
grant, and are not transferable during the first year after their grant. The
exercise price for the shares of common stock underlying such warrants is $12
per share. The shares of common stock underlying such warrants are entitled to
certain demand and incidental registration rights.
Employee Stock Purchase Plan
In September 1996, the board of directors and shareholders adopted the
Matrix Bancorp, Inc. Employee Stock Purchase Plan (Purchase Plan) and reserved
125,000 shares of common stock (ESPP Shares) for issuance thereunder. The
Purchase Plan became effective upon consummation of the initial public offering.
The price at which ESPP shares are sold under the Purchase Plan is 85 percent of
the lower of the fair market value per share of common stock on the enrollment
or the purchase date.
13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Leases
The Company leases office space and certain equipment under noncancelable
operating leases. Annual amounts due under the office and equipment leases as
of December 31, 1998 are approximately as follows:
(In thousands)
1999...................... $ 770
2000...................... 692
2001...................... 599
2002...................... 384
2003...................... 22
------
$2,467
======
Total rent expense aggregated approximately $955,000, $631,000 and $541,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Hedging of Pipeline
In the ordinary course of business, the Company makes commitments to
originate residential mortgage loans (Pipeline) and holds originated loans until
delivery to an investor. Inherent in this business is a risk associated with
changes in interest rates and the resulting change in the market value of the
Pipeline and funded loans. The Company mitigates this risk through the use of
mandatory and nonmandatory forward commitments to sell loans. At December 31,
1998, the Company had $133,724,000 in Pipeline and funded loans offset with
mandatory forward commitments of $110,006,000 and nonmandatory forward
commitments of $10,057,000. At December 31, 1997, the Company had $72,803,000 in
Pipeline and funded loans offset with mandatory forward commitments of
$45,622,000 and nonmandatory forward commitments of $9,070,000. The inherent
value of the forward commitments is considered in the determination of the lower
of cost or market for the Pipeline and funded loans.
Hedging of MSRs
Ownership of MSRs exposes the Company to impairment of its value in certain
interest rate environments. The incidence of prepayment of a mortgage loan
increases during periods of declining interest rates as the homeowner seeks to
refinance the loan to a lower interest rate. If the level of prepayment on
segments of the Company's mortgage servicing portfolio achieves a level higher
than projected by the Company for an extended period of time, then an impairment
in the associated basis in the MSRs may occur. To mitigate this risk of
impairment due to declining interest rates, the Company hedged a segment of its
mortgage servicing portfolio beginning in September 1997. As of December 31,
1998, the Company had identified and
F-25
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
hedged approximately $674 million of its mortgage servicing portfolio using a
program of exchange traded futures and options.
At December 31, 1998, the Company had the following open options:
<TABLE>
<CAPTION>
Expiration Open Positions Notional Fair Value
Date (No. of Contracts) Amount by Contract
----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Ten year Treasury Note futures.................. March 1999 205 $20,500,000 $ (42,656)
Ten year Treasury Note put options............. February 1999 188 18,800,000 (185,782)
Ten year Treasury Note call options............ February 1999 157 15,700,000 112,219
</TABLE>
During 1997, the Company closed a portion of its hedge positions which
resulted in a realized gain of approximately $250,000 being recognized in
connection with the sale of a portion of the hedged servicing portfolio. At
December 31, 1998 the net realized deferred gains and the unrealized deferred
losses of the open positions was approximately $420,000.
Land Development Commitment
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 Planned
Unit Development Agreement (Development Agreement) with the City of Ft. Lupton
(City). The Development Agreement is a residential and golf course Development
Agreement providing for the orderly planning, engineering and development of a
golf course and surrounding residential community. The City is responsible for
the development of the golf course and the Company is responsible for the
development of the surrounding residential lots and certain offsite
infrastructure (estimated at $1,300,000 as of December 31, 1998). The
Development Agreement also provides for the rebate of certain Development Fees,
Infrastructure Fees and Storm Drainage Fees from the City to the Company
(estimated at $1,635,000 as of December 31, 1998).
The Development Agreement sets forth a mandatory obligation on the part of
the Company to secure future payment to the City of pledged Golf Course
Enhancement Fees of $600,000. These pledged Enhancement Fees require successor
homebuilders to pay the City a $2,000 fee with the issuance of each building
permit. In the event that less than thirty (30) permits are issued per year, the
Company is obligated to pay the balance of $60,000 in assessment fees per year
beginning in the year 1998 through the year 2007. The Company, has to date,
posted a $300,000 letter of credit to secure those referenced Enhancement Fees.
The Company also entered into a development management agreement with a
local developer to complete the development of the land. The terms of the
agreement specify that the Company is to earn a preferred rate of return on its
investment and, once the initial amount of its investment plus the preferred
rate of return has been paid, the remaining profits are split equally. As of
December 31, 1998 and 1997, the Company has included in its basis in the
development $197,000 and $118,000, respectively, in capitalized interest costs.
At December 31, 1998 and 1997, the total basis of the land development is
$4,055,000 and $2,835,000, respectively, and is classified in other assets in
the accompanying consolidated balance sheets.
Financing Agreement
In 1996, the Company purchased $800,000 of City of Fort Lupton Subordinated
Series 1996 A1 revenue anticipation warrants, with interest at 9.75 percent and
due December 15, 2015. The warrants are classified as other receivables in the
accompanying consolidated balance sheets. The Company entered into an agreement
with a bank to sell the warrants, subject to certain repurchase obligations
resulting from the bank's annual remarketing of the bonds, with interest at five
percent. The Company entered into a letter of credit agreement of $825,000 to
guarantee its repurchase obligation.
Contingencies
The Company is a defendant is a lawsuit that was commenced on or about May
23, 1997 in which the plaintiff-buyer alleges that the Company, as broker for
the seller, made false representations regarding the GNMA certification of
certain
F-26
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13.COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
mortgage pools the servicing rights of which were offered for sale in a written
offering. The plaintiff further alleges that it relied on the Company's
representations in purchasing the servicing rights from the seller. Trial was
conducted during the week of July 12, 1998. The jury returned a verdict in favor
of the Company 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. On
November 6, 1998, the court denied the plaintiff's motion. Plaintiff has
appealed the court's ruling and the Company is considering an appeal of the
$75,000 award to the plaintiff.
The Company has been named defendant in an action which commenced on or
about February 7, 1999. The plaintiff alleges that the Company, as seller of
certain mortgage loans to the plaintiff, breached a representation and warranty
given to the plaintiff by the Company under the purchase agreement relating to
such loans. The action relates to approximately $700,000 in principal amount of
mortgage loans and plaintiff has requested specific performance of the
repurchase obligations of the Company under the purchase agreement and/or an
unspecified amount of damages.
The Company and its subsidiaries are parties to various other litigation
matters, in most cases involving ordinary and routine claims incidental to the
business of the Company. The ultimate legal and financial liability of the
Company, if any, with respect to the foregoing litigation cannot be estimated
with certainty, but the Company believes, based on its examination of such
matters, that such ultimate liability will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
Related Party Transactions
The Company had a note receivable from an affiliate of $750,000 at December
31, 1997, which bore interest at 13 percent and was due October 1, 2000. In
January 1998, the note was paid in full. The Company had leased office space to
the affiliate for approximately $8,500 per month. In January 1998, the space was
leased to a third party.
At December 31, 1998, the Company had unsecured loan receivables from an
executive officer, a director and a shareholder of $57,500, $85,000 and
approximately $80,000, respectively, which all bear interest at the prime rate
and are renewable at the Company's option. Due dates on the loan receivables are
as follows: $50,000 due February 15, 1999, $7,500 due September 29, 1999,
$85,000 due September 8, 1999 and approximately $80,000 due December 31, 1999.
The Company occupies office space under a lease agreement expiring June 30,
2001, at a monthly rental payment of $13,553, in which four officers of
subsidiaries of the Company own an equity interest in the lessor.
14. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) defined contribution plan (Plan) covering all
employees who have elected to participate in the Plan. Each participant may make
pretax contributions to the Plan up to 15 percent of such participant's earnings
with a maximum of $10,000 in 1998. The Company makes a matching contribution of
25 percent of the participant's total contribution. Matching contributions made
by the Company vest over six years. The cost of the plan approximated $162,000,
$116,000 and $110,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
15. FINANCIAL INSTRUMENTS
Off-Balance Sheet Risk and Concentration of Commitments
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of its business. These instruments are commitments to
originate or purchase first mortgage loans and forward loan sale commitments
(see Note 13) and involve credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet.
Commitments to originate or purchase mortgage loans amounted to
approximately $50,254,000 at December 31, 1998. The Company plans to fund the
commitments in its normal commitment period. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
F-27
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FINANCIAL INSTRUMENTS (CONTINUED)
The Company's credit risks comprised the outstanding loans held for sale
and loans held for investment as shown in the consolidated balance sheets. The
loans are located throughout the United States and are collateralized primarily
by a first mortgage on the property.
Fair Value of Financial Instruments
The carrying amounts and estimated fair value of financial instruments are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ---------- ----------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash.......................................... $ 18,665 $ 18,665 $ 3,296 $ 3,296
Interest-earning deposits..................... 8,120 8,120 6,337 6,337
Loans held for sale, net...................... 754,226 758,279 456,978 459,231
Loans held for investment, net................ 94,222 94,476 54,394 54,975
Federal Home Loan Bank of Dallas stock........ 15,643 15,643 8,700 8,700
Financial liabilities:
Deposits...................................... 490,516 492,003 224,982 225,780
Custodial escrow balances..................... 96,824 96,824 53,760 53,760
Drafts payable................................ 5,423 5,423 7,506 7,506
Payable for purchase of MSRs.................. 12,103 12,103 8,660 8,660
Federal Home Loan Bank of Dallas
borrowings................................... 168,000 171,544 171,943 171,943
Borrowed money................................. 178,789 178,789 89,909 89,909
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair value of the financial instruments:
The carrying amounts reported in the balance sheet for cash, interest-
earnings deposits, FHLB stock, drafts payable, payable for purchase of MSRs,
FHLB borrowings and borrowed money approximate those assets' and liabilities'
fair values.
The fair values of loans are based on quoted market prices where available
or outstanding commitments from investors. If quoted market prices are not
available, fair values are based on quoted market prices of similar loans sold
in securitization transactions, adjusted for differences in loan
characteristics. The fair value of forward sale commitments are included in the
determination of the fair value of loans held for sale.
The fair value disclosed for demand deposits (e.g., interest and
noninterest checking, savings, and money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
periodic maturities on time deposits. The component commonly referred to as
deposit base intangible, was not estimated at December 31, 1998 and 1997 and is
not considered in the fair value amount. The fair value disclosed for custodial
escrow balances liabilities (noninterest checking) is, by definition, equal to
the amount payable on demand at the reporting date (i.e., their carrying
amounts).
F-28
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Matrix Bancorp, Inc. (Parent Company) is
as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
--------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash.............................................. $ 158 $ 1,459 $ 45
Other receivables................................. 105 1,040 872
Premises and equipment, net....................... 2,393 1,481 1,405
Other assets...................................... 1,601 1,840 507
Investment in and advances to subsidiaries........ 88,791 62,042 36,199
---------- ------------ ------------
Total assets....................................... $93,048 $67,862 $39,028
========== ============ ============
Liabilities and shareholders' equity:
Borrowed money (a)................................ $42,275 $26,002 $ 6,372
Other liabilities................................. 1,419 1,250 386
---------- ------------ ------------
Total liabilities.................................. 43,694 27,252 6,758
Shareholders' equity:
Common stock...................................... 1 1 1
Additional paid in capital........................ 22,416 22,185 21,983
Retained earnings................................. 26,937 18,424 10,286
---------- ------------ ------------
Total shareholders' equity......................... 49,354 40,610 32,270
---------- ------------ -----------
Total liabilities and shareholders' equity......... $93,048 $67,862 $39,028
========== ============ ===========
</TABLE>
______________
(a) The Parent's debt is set forth below. The Parent also guarantees the
revolving warehouse and servicing acquisition loan agreements and the
financing related to the direct financing leases to charter schools. See
Note 8 for additional information regarding the debt.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
---------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Revolving line of credit........................... $10,300 $ - $ -
Senior subordinated notes.......................... 2,910 2,910 2,910
Bank stock loan.................................... 7,893 1,786 2,003
Note payable to a bank secured by real estate...... 870 895 938
Notes payable secured by MSRs...................... 302 411 521
Senior notes....................................... 20,000 20,000 -
---------- ------------ ------------
$42,275 $26,002 $6,372
========== ============ ============
</TABLE>
As of December 31, 1998, the maturities of term notes payable during the next
five years and thereafter are as follows:
(In thousands)
1999.................................... $ 2,922
2000.................................... 2,052
2001.................................... 6,275
2002.................................... 726
2003.................................... -
Thereafter.............................. 20,000
-------
$31,975
=======
F-29
<PAGE>
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Income:
Interest income on loans..................................... $ 17 $ 118 $ 142
Other........................................................ 463 352 130
--------- --------- ---------
Total income.................................................. 480 470 272
Expenses:
Compensation and employee benefits........................... 2,412 1,700 1,344
Occupancy and equipment...................................... 600 333 299
Interest on borrowed money................................... 3,601 1,593 805
Professional fees............................................ 295 279 138
Other general and administrative (b)......................... 1,416 1,353 328
--------- --------- ---------
Total expenses................................................ 8,324 5,258 2,914
--------- --------- ---------
Loss before income taxes and equity income of
subsidiaries.................................................. (7,844) (4,788) (2,642)
Income taxes (a).............................................. -- -- --
--------- --------- ---------
Loss before equity income of subsidiaries..................... (7,844) (4,788) (2,642)
Equity income of subsidiaries................................. 16,357 12,926 6,212
--------- --------- ---------
Net income.................................................... $ 8,513 $ 8,138 $ 3,570
========= ========= =========
</TABLE>
________
(a) The Company's tax sharing agreement with its subsidiaries provides that the
subsidiaries will pay the Parent an amount equal to its individual current
income tax provision calculated on the basis of the subsidiary filing a
separate return. In the event a subsidiary incurs a net operating loss in
future periods, the subsidiary will be paid an amount equal to the current
income tax refund the subsidiary would be due as a result of carryback of
such loss, calculated on the basis of the subsidiary filing a separate
return. Accordingly, the Parent's condensed statements of income do not
include any income tax benefit for the current losses.
(b) The Parent Company has entered into a subaccounting agreement with third
parties which require the Parent Company to pay a fee to the third party
company for record keeping services performed related to custodial escrow
deposits directed by that company and maintained at Matrix Bank. The total
amount of the subaccounting fees paid by the Parent Company are
approximately $199,000, $544,000 and $-0- for the years ended 1998, 1997 and
1996, respectively.
F-30
<PAGE>
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income............................................................. $ 8,513 $ 8,138 $ 3,570
Adjustments to reconcile net income to net cash used by
operating activities:
Equity income of subsidiaries........................................ (16,357) (12,926) (6,212)
Dividend from subsidiaries........................................... 4,534 2,916 1,843
Depreciation and amortization........................................ 281 192 127
Increase (decrease) in other liabilities............................. 169 864 (78)
Decrease (increase) in other receivables and other
assets.............................................................. 945 (701) (133)
--------- --------- ---------
Net cash used by operating activities................................... (1,915) (1,517) (883)
Investing activities:
Purchases of premises and equipment.................................... (964) (168) (88)
Investment in and advances to subsidiaries............................. (14,926) (15,833) (16,630)
--------- --------- ---------
Net cash used by investing activities................................... (15,890) (16,001) (16,718)
Financing activities:
Repayments of notes payable and revolving line of credit............... (14,774) (7,870) (438)
Proceeds from notes payable and revolving line of credit............... 31,047 7,500 59
Dividends paid by pooled company prior to merger....................... -- -- (201)
Capital contribution by pooled company prior to merger................. -- -- 24
Proceeds from senior notes, net........................................ -- 19,100 --
Proceeds from issuance of common stock................................. 231 202 --
Proceeds from the sale of common stock................................. -- -- 18,191
--------- -------- --------
Net cash provided by financing activities............................... 16,504 18,932 17,635
--------- -------- --------
Increase (decrease) in cash............................................. (1,301) 1,414 34
Cash at beginning of year............................................... 1,459 45 11
--------- -------- --------
Cash at end of year..................................................... $ 158 $ 1,459 $ 45
========= ======== ========
</TABLE>
F-31
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -----------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- -------- --------- --------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations
Net interest income after
provision for loan and
valuation losses....... $ 4,326 $ 6,445 $ 4,973 $ 3,839 $ 3,863 $ 3,677 $ 3,216 $ 2,258
Noninterest income....... 13,154 11,326 11,346 10,919 10,605 9,069 9,412 8,943
Noninterest expense...... 15,273 13,802 12,630 11,234 10,760 9,057 9,603 8,326
--------- -------- -------- -------- --------- --------- -------- --------
Income before income
taxes.................. 2,207 3,969 3,689 3,524 3,708 3,689 3,025 2,875
Income taxes............. 762 1,432 1,343 1,339 1,424 1,459 1,155 1,121
--------- -------- -------- -------- --------- --------- -------- --------
Net income............... $ 1,445 $ 2,537 $ 2,346 $ 2,185 $ 2,284 $ 2,230 $ 1,870 $ 1,754
========= ======== ======== ======== ========= ========= ======== ========
Net Income per Share Data
Basic.................... $ .22 $ .38 $ .35 $ .33 $ .34 $ .33 $ .28 $ .26
========= ======== ======== ======== ========= ========= ======== ========
Diluted.................. $ .21 $ .37 $ .34 $ .32 $ .34 $ .33 $ .28 $ .26
========= ======== ======== ======== ========= ========= ======== ========
Balance Sheet
Total assets............. $1,012,640 $ 929,607 $ 834,657 $ 698,517 $ 606,745 $ 525,511 $502,563 $422,476
Total loans, net......... 848,448 753,464 696,358 573,586 511,372 426,007 394,537 319,489
Shareholders' equity..... 49,354 47,699 45,158 42,797 40,610 38,124 35,894 34,024
</TABLE>
The net income per share for the first three quarters of 1997 have been
restated to comply with the requirements of Statement No. 128.
18. TRANSACTIONS WITH MCA MORTGAGE CORPORATION
During recent years, the Company entered into several purchase transactions
with MCA Mortgage Corporation (MCA), a Michigan-based mortgage banking entity.
At December 31, 1998, the Company was carrying approximately $5,000,000 of
residential mortgage loans on its balance sheet that were purchased from MCA on
a servicing retained basis. The Company also had an outstanding receivable
relating to brokerage and consulting services provided to MCA. In January 1999,
the Company learned that MCA was closing its operations. Additionally, in
February 1999, the Company learned that MCA had declared bankruptcy and it
appeared likely that some of the loans purchased by the Company had been sold
multiple times or pledged multiple times as security for repayment of various
credit facilities. The Company also discovered that there appeared to be
servicing issues relating to some of the purchased loans. The servicing issues
consisted of instances in which loans owned by the Company and serviced by MCA
had previously paid off, but for which MCA had continued to remit monthly
principal and interest, rather than the payoff proceeds. As a result of the
above MCA issues, the Company recorded a provision for valuation losses of
approximately $2,200,000 as of December 31, 1998. Additionally, the Company
wrote off approximately $100,000 of accounts receivable and accrued interest
relating to MCA as of December 31, 1998.
19. SEGMENTS OF THE COMPANY AND RELATED INFORMATION
The Company has three reportable segments under Statement No. 131: the
Company's traditional banking subsidiary, the Company's mortgage banking
subsidiary and the Company's servicing brokerage and consulting subsidiaries.
The Company's traditional banking subsidiary provides deposit and lending
services to its customers and also makes investments in residential mortgage
loans and residential MSRs. The Company's mortgage banking subsidiary acquires
residential MSRs and services the mortgage loans underlying those MSRs, and in
addition, originates residential mortgage loans through its wholesale loan
origination offices. The Company's servicing brokerage subsidiary offers
brokerage, consulting and risk management services for residential MSRs. The
remaining subsidiaries of the Company are included in the "all other" category
for purposes of the Statement No. 131 disclosures and consist of the Company's
trust operations, real estate disposition services, a broker/dealer and the
Parent Company operations.
F-32
<PAGE>
MATRIX BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENTS OF THE COMPANY AND RELATED INFORMATION (CONTINUED)
The Company evaluates performance and allocates resources based on
operating profit or loss before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Transactions between affiliates, the resulting
revenues of which are shown in the intersegment revenue category, are conducted
at market prices (i.e., prices that would be paid if the companies were not
affiliates).
For the years ended December 31:
<TABLE>
<CAPTION>
SERVICING
TRADITIONAL MORTGAGE BROKERAGE AND
BANKING BANKING CONSULTING ALL OTHERS TOTAL
----------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(In thousands)
1998
Revenues from external customers:
Interest income........................ $ 52,445 $ 8,227 $ - $ 22 $ 60,694
Noninterest income..................... 7,603 22,017 9,993 7,132 46,745
Intersegment revenues...................... (133) 991 501 1,665 3,024
Interest expense........................... 24,972 7,895 1 3,636 36,504
Depreciation/amortization.................. 1,516 10,334 227 1,005 13,082
Segment profit (loss)...................... 21,470 (4,725) 4,119 (7,475) 13,389
Segment assets (a)......................... 821,448 181,883 3,143 28,304 1,034,778
1997
Revenues from external customers:
Interest income......................... 27,313 4,664 - 172 32,149
Noninterest income...................... 6,410 21,623 4,283 5,713 38,029
Intersegment revenues...................... 33 1,213 230 1,141 2,617
Interest expense........................... 11,812 4,781 1 1,667 18,261
Depreciation/amortization.................. 1,344 5,835 214 510 7,903
Segment profit (loss)...................... 10,290 6,269 1,393 (4,655) 13,297
Segment assets (a)......................... 486,857 111,228 1,225 24,759 624,069
1996
Revenues from external customers:
Interest income......................... 12,697 3,653 - 199 16,549
Noninterest income...................... 5,107 12,372 4,462 4,646 26,587
Intersegment revenues...................... - 448 169 365 982
Interest expense........................... 5,811 3,811 - 868 10,490
Depreciation/amortization.................. 428 2,622 72 416 3,538
Segment profit (loss)...................... 4,635 2,166 1,420 (2,373) 5,848
Segment assets (a)......................... 196,874 70,880 2,107 16,606 286,467
</TABLE>
________________
(a) See reconciliation to total consolidated assets in the following table.
F-33
<PAGE>
MATRIX BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SEGMENTS OF THE COMPANY AND RELATED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
(In thousands)
REVENUES FOR YEAR ENDED DECEMBER 31,
Interest income for reportable segments............................ $ 60,672 $ 31,977 $ 16,350
Noninterest income for reportable segments......................... 39,613 32,316 21,941
Intersegment revenues for reportable segments...................... 1,359 1,476 617
Other revenues..................................................... 8,819 7,026 5,210
Elimination of intersegment revenues............................... (3,024) (2,617) (982)
------------- -------------- --------------
Total consolidated revenues........................................ 107,439 70,178 43,136
PROFIT OR LOSS FOR YEAR ENDED DECEMBER 31,
Total profit or loss for reportable segments....................... 20,864 17,952 8,221
Other profit or loss............................................... (7,367) (4,531) (2,373)
Adjustment to intersegment profit (loss) in consolidation.......... (108) (124) -
------------- -------------- --------------
Income before income tax........................................... 13,389 13,297 5,848
ASSETS AS OF DECEMBER 31,
Total assets for reportable segments............................... 1,006,474 599,310 269,861
Other assets....................................................... 28,304 24,759 16,606
Elimination of intercompany receivables............................ (21,905) (17,200) (11,908)
Other eliminations................................................. (233) (124) -
------------- -------------- --------------
Total consolidated assets.......................................... 1,012,640 606,745 274,559
OTHER SIGNIFICANT ITEMS FOR THE YEAR ENDED DECEMBER 31,
Depreciation/amortization expense:
Segment totals................................................. 12,077 7,393 3,122
Adjustments.................................................... 1,005 510 416
------------- -------------- --------------
Consolidated totals................................................ 13,082 7,903 3,538
Interest expense:
Segment totals................................................ 32,868 16,594 9,622
Adjustments................................................... 3,636 1,667 868
------------- -------------- --------------
Consolidated totals 36,504 18,261 10,490
</TABLE>
F-34
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
3.1 * Amended and Restated Articles of Incorporation of the
Registrant
3.2 + Bylaws, as amended, of the Registrant (3.2)
4.1 @ Indenture by and among the Registrant and First Trust
National Association, as trustee, relating to 11.50% Senior
Notes due 2004 (4.1)
4.2 + Specimen certificate for Common Stock of the Registrant (4.1)
4.3 +. Amended and Restated 1996 Stock Option Plan (4.2)
4.4 ***. Employee Stock Purchase Plan, as amended (4.4)
4.5 + Form of Common Stock Purchase Warrant by and between the
Registrant and Piper Jaffray, Inc. (4.4)
4.6 + Form of Common Stock Purchase Warrant by and between the
Registrant and Keefe, Bruyette & Woods, Inc. (4.5)
10.1 + Note and Agency Agreement, dated as of August 1, 1995, by and
between the Registrant and PHS Mortgage, Inc. as agent (10.1)
10.2 + First Amendment to Note and Agency Agreement, dated as of
August 2, 1995, by and between the Registrant and PHS
Mortgage, Inc., as agent (10.2)
10.3 + Form of 13% Senior Subordinated Note (10.3)
10.4 +. Executive Employment Agreement, dated as of January 1, 1996,
by and between the Registrant and David Kloos (10.4)
10.5 +. Employment Agreement, dated as of January 1, 1995, between
Matrix Capital Bank and Gary Lenzo and as amended January 1,
1996 (10.5)
10.6 + Multiple Advance Term Loan Agreement, dated as of June 27,
1994, by and between Matrix Capital Corporation and CorTrust
Bank (10.8)
10.7 + Multiple Advance Fixed Rate Term Loan Promissory Note, dated
as of June 30, 1994, from Matrix Capital Corporation, as
maker, to CorTrust Bank, as payee (10.9)
10.8 + Mortgage Loan Purchase and Servicing Agreement, dated as of
August 1, 1993, by and between Argo Federal Savings Bank,
FSB, and Matrix Financial Services Corporation (10.11)
10.9 + Multiple Advance Fixed Rate Term Loan Promissory Note, dated
as of October 19, 1994, from Matrix Capital Corporation, as
maker, to CorTrust, as payee (10.29)
10.10 + Assignment and Assumption Agreement, dated as of June 28,
1996, by and among Mariano C. DeCola, William M. Howdon, R.
James Nicholson and Matrix Funding Corp. (10.30)
10.11 + Development Management Agreement, dated as of June 28, 1996,
by and among Fort Lupton, L.L.C. and Matrix Funding Corp.
(10.31)
10.12 * Coyote Creek Planned Unit Development Agreement, dated as of
July 1, 1998, by and among Fort Lupton, L.L.C. and Matrix
Funding Corp.
10.13 *. Employment Agreement Addendum of Gary Lenzo, dated December
16, 1998
10.14 * Promissory Note, dated as of December 31, 1998, from D. Mark
Spencer, as maker, to the Registrant, as payee
10.15 + Fort Lupton Golf Course Residential and Planned Unit
Development Agreement, dated as of November 28, 1995 (10.36)
10.16 + Loan Agreement, dated as of June 21, 1996, by and between
Matrix Funding Corporation and The First Security Bank
(10.41)
10.17 + Loan Agreement, dated as of June 29, 1995, by and between the
Registrant and Bank One, Arizona, N.A. (10.42)
10.18 + Promissory Note, dated as of June 29, 1995, from the
Registrant to Bank One, Arizona, N.A. (10.43)
10.19 + Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing, dated as of June 29, 1995, from the
Registrant to Arizona Trust Deed Corporation, as trustee
(10.44)
10.20 * Fourth Modification Agreement to the Loan Agreement, dated
February 28, 1999, by and between The Registrant and Bank
One, Arizona, N.A.
10.21 + Loan Agreement, dated July 10, 1992, by and between American
Strategic Income Portfolio Inc. and Matrix Financial Services
Corporation (10.45)
10.22 + Promissory Note, dated as of July 10, 1992, by Matrix
Financial Services Corporation, as maker, to American
Strategic Income Portfolio, Inc., as payee (10.46)
10.23 ** Revolving Subordinated Loan Agreement, dated as of October
18, 1996, by and between Matrix Financial Services
Corporation and the Registrant (10.31)
10.24 ** Amended and Restated Loan Agreement, dated as of January 31,
1997, by and between Matrix Financial Services Corporation,
as borrower, and Bank One, Texas, N.A., as agent, and certain
lenders, as lenders (10.32)
10.25 ** Amended and Restated Swing Note, dated as of January 31,
1997, from Matrix Financial Services Corporation, as borrower
to the lenders under the Amended and Restated Loan Agreement
(10.34)
</TABLE>
II-1
<PAGE>
10.26 ** Amended and Restated Guaranty, dated as of January 31, 1997,
from the Registrant to Bank One, Texas, N.A., as agent
(10.37)
10.27 *** Third Amendment to Amended and Restated Loan Agreement, dated
as of March 1, 1998, between Matrix Financial Services
Corporation, as borrower, Bank One, Texas, N.A., as agent,
and certain lenders, as lenders (10.39)
10.28 *** Overline Note, dated as of March 1, 1998, from Matrix
Financial Services Corporation, as borrower, to Bank One,
Texas, N.A., as lender (10.40)
10.29 ## 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 (10.6)
10.30 ## 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 (10.7)
10.31 * Sixth Amendment to Amended and Restated Loan Agreement, dated
as of October 31, 1998, between Matrix Financial Services
Corporation, as borrower, Bank One, Texas, N.A., as agent,
and certain lenders, as lenders
10.32 * Seventh Amendment to Amended and Restated Loan Agreement,
dated as of January 28, 1999, between Matrix Financial
Services Corporation, as borrower, Bank One, Texas, N.A., as
agent, and certain lenders, as lenders
10.33 * Eighth Amendment to Amended and Restated Loan Agreement,
dated as of February 12, 1999, between Matrix Financial
Services Corporation, as borrower, Bank One, Texas, N.A., as
agent, and certain lenders, as lenders
10.34 * Ninth Amendment to Amended and Restated Loan Agreement, dated
as of February 22, 1999, between Matrix Financial Services
Corporation, as borrower, Bank One, Texas, N.A., as agent,
and certain lenders, as lenders
10.35 * Warehouse Note, dated as of February 22, 1999, from Matrix
Financial Services Corporation, as borrower, to Bank One,
Texas, N.A., as lender
10.36 * Warehouse Note, dated as of February 22, 1999, from Matrix
Financial Services Corporation, as borrower, to U.S. Bank
National Association, as lender
10.37 * Warehouse Note, dated as of February 22, 1999, from Matrix
Financial Services Corporation, as borrower, to Residential
Funding Corporation, as lender
10.38 * Amended and Restated Term-Line Note, dated as of February 22,
1999, from Matrix Financial Services Corporation, as
borrower, to Bank One, Texas, N.A., as lender
10.39 * Amended and Restated Term-Line Note, dated as of February 22,
1999, from Matrix Financial Services Corporation, as
borrower, to U.S. Bank National Association, as lender
10.40 * Amended and Restated Term-Line Note, dated as of February 22,
1999, from Matrix Financial Services Corporation, as
borrower, to Residential Funding Corporation, as lender
10.41 * Amended and Restated Working-Capital Note, dated as of
February 22, 1999, from Matrix Financial Services
Corporation, as borrower, to Bank One, Texas, N.A., as lender
10.42 * Amended and Restated Working-Capital Note, dated as of
February 22, 1999, from Matrix Financial Services
Corporation, as borrower, to U.S. Bank National Association,
as lender
10.43 * Amended and Restated Working-Capital Note, dated as of
February 22, 1999, from Matrix Financial Services
Corporation, as borrower, to Residential Funding Corporation,
as lender
10.44 **. Employment Agreement, dated as of February 4, 1997, by and
between the Registrant and Paul Skretny (10.38)
10.45 ** Credit Agreement, dated as of March 12, 1997, by and between
Matrix Capital Corporation, as borrower, and Bank One, Texas,
N.A., as agent, and certain lenders, as lenders (10.39)
10.46 ** Guaranty Form, dated as of March 12, 1997, from each of the
Registrant's significant subsidiaries to Bank One, Texas,
N.A., as agent (10.42)
10.47 # Second Amendment to Credit Agreement, dated as of September
23, 1997, between Matrix Capital Corporation, as borrower,
and Bank One, Texas, N.A., as agent, and certain lenders, as
lenders (10.1)
10.48 # Third Amendment to Credit Agreement, dated as of March 12,
1998, between Matrix Capital Corporation, as borrower, and
Bank One, Texas, N.A., as agent, and certain lenders, as
lenders (10.2)
10.49 ## 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 (10.1)
10.50 ## Term Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to U.S. Bank National Association,
as lender (10.2)
10.51 ## Term Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to Bank One, Texas, N.A., as lender
(10.3)
10.52 ## Revolving Note, dated as of June 29, 1998, from Matrix
Capital Corporation, as borrower, to U.S. Bank
II-2
<PAGE>
National Association, as lender (10.4)
10.53 ## Revolving Note, dated as of June 29, 1998, from Matrix
Capital Corporation, as borrower, to Bank One, Texas, N.A.,
as lender (10.5)
10.54 * Fifth Amendment to Credit Agreement, dated as of November 12,
1998, between Matrix Capital Corporation, as borrower, and
Bank One, Texas, N.A., as agent, and certain lenders, as
lenders
10.55 * Sixth Amendment to Credit Agreement, dated as of January 29,
1999, between Matrix Capital Corporation, as borrower, and
Bank One, Texas, N.A., as agent, and certain lenders, as
lenders
10.56 ***. Agreement, dated October 1, 1997, with T. Allen McConnell
(10.37)
10.57 +++ Agreement and Plan of Merger, dated as of March 25, 1998,
among Fidelity National Financial, Inc., MCC Merger, Inc. and
Matrix Capital Corporation (99.2)
10.58 * Promissory Note, dated as of February 15, 1999, from Thomas
P. Cronin, as maker, to the Registrant, as payee
10.59 ### Merger Termination Agreement between Matrix Capital
Corporation, Fidelity National Financial, Inc., and MCC
Merger Sub, Inc., dated August 28, 1998 (10.1)
10.60 * Promissory Note, dated as of September 30, 1998, from Thomas
P. Cronin, as maker, to the Registrant, as payee
21 * Subsidiaries of the Registrant
23 * Consent of Ernst & Young LLP
27 * Financial Data Schedule
__________________________
* Filed herewith
+ Incorporated by reference from the exhibit number shown in parenthesis
from the Registrant's registration statement on Form S-1 (No. 333-
10223), filed by the Registrant with the Commission.
++ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 1997, filed by the Registrant with the Commission.
+++ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's report on Form 8-K, filed by the Registrant with the
Commission on April 8, 1998.
@ Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's registration statement on Form S-1 (No. 333-34977), filed
by the Registrant with the Commission.
** Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1996, filed by the Registrant with the Commission.
*** Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1997, filed by the Registrant with the Commission.
# Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended March
31, 1998, filed by the Registrant with the Commission.
## Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended June
30, 1998, filed by the Registrant with the Commission.
### Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 1998, filed by the Registrant with the Commission.
. Management contract or compensatory plan or arrangement
II-3
<PAGE>
EXHIBIT 3.1
Secretary of State FOR OFFICE USE ONLY
Corporations Section
MUST BE TYPED
FILING FEE: $25.00
MUST SUBMIT TWO COPIES
---
Please include a typed
self-addressed envelope
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is Matrix Capital Corporation
--------------------------
SECOND: The following amendment to the Articles of Incorporation was adopted
on May 1, 1998, as prescribed by the Colorado Business Corporation
Act, in the manner marked with an "X" below:
______ No shares have been issued or Directors Elected - Action by
Incorporators
______ No shares have been issued but Directors Elected - Action by Directors
______ Such amendment was adopted by the board of directors where shares have
been issued and shareholder action was not required.
X Such amendment was adopted by a vote of the shareholders. The number
- ------
of shares voted for the amendment was sufficient for approval.
THIRD: If changing corporate name, the new name of the corporation is Matrix
Bancorp, Inc.
FOURTH: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
amendment shall be effected, is as follows:
If these amendments are to have a delayed effective date, please list that date:
________
(Not exceed ninety (90) days from the date of filing)
Signature /s/ Allen McConnell
--------------------------------
Title Senior Vice President
---------------------------------
<PAGE>
[LETTERHEAD OF STATE OF COLORADO]
April 27, 1998
Peter G. Weinstock
Jenkens & Gilchrist
1445 Ross Avenue, Suite 3200
Dallas, TX 75202
RE: Matrix Bancorp, Inc.
Request to Use the Word "Bancorp"
Dear Mr. Weinstock:
The Colorado Division of Banking (Division) has considered the request by Matrix
Capital Corporation to file corporate documents with the Colorado Secretary of
State using the name Matrix Bancorp, Inc. for an organization that is not a
Colorado chartered commercial bank. The name is to be used initially as an
assumed name and then as a change to the corporate name. Acting under the
authority delegated by the Colorado State Banking Board, the Division has no
objection to the request to use the word "BANCORP" in this manner in the filing.
The Division's determination is based on the representations(s) that Matrix
Capital Corporation is a unitary holding company that operates various financial
entities in several states including Colorado.
This determination does not constitute Division approval for any activities
other than the filing described above. Specifically, the Division has not
approved this organization to engage in the banking business, other than as a
unitary holding company, or to hold itself out to the public as a bank.. Nor has
the Division approved use of the word "BANCORP" in any other manner.
In taking this action, the Division relied on representations and information
supplied by you and your client. Should there be a substantive change in any of
the information provided, the Division staff should be notified at once. All
information submitted with the request will be retained in the Division's file.
Sincerely,
FOR: COLORADO STATE BANKING BOARD
/s/
- ----------------------------------
Richard J. Fulkerson
State Bank Commissioner
<PAGE>
FILING FEE: $10.00
MUST SUBMIT TWO COPIES
---
Please include a typed
self-addressed envelope
Mail to: Secretary of State
Corporations Section
1560 Broadway, Suite 200
Denver, CO 80202
(303) 894-2251
Fax (303) 894-2242
CERTIFICATE OF
ASSUMED OR TRADE NAME
For office use only
Matrix Bancorp, Inc., a corporation formed under the laws of the State of
Colorado, being desirous of transacting a portion of its business under an
assumed or trade name as permitted by 7-71-101, Colorado Revised Statutes,
hereby certifies:
1. The location of its principal office is: 1380 Lawrence Street, Suite 1410,
Denver, Colorado 80204.
2. The name, other than its own, under which business is carried on is: Matrix
Bancorp.
3. A brief description of the kind of business transacted under such assumed
or trade name is: a specialized financial service company.
MATRIX BANCORP, INC.
By /s/
-----------------------------------
T. Allen McConnell,
Senior Vice President
<PAGE>
[LETTERHEAD OF STATE OF COLORADO]
April 27, 1998
Peter G. Weinstock
Jenkens & Gilchrist
1445 Ross Avenue, Suite 3200
Dallas, TX 75202
RE: Matrix Bancorp, Inc.
Request to Use the Word "Bancorp"
Dear Mr. Weinstock:
The Colorado Division of Banking (Division) has considered the request by Matrix
Capital Corporation to file corporate documents with the Colorado Secretary of
State using the name Matrix Bancorp, Inc. for an organization that is not a
Colorado chartered commercial bank. The name is to be used initially as an
assumed name and then as a change to the corporate name. Acting under the
authority delegated by the Colorado State Banking Board, the Division has no
objection to the request to use the word "BANCORP" in this manner in the filing.
The Division's determination is based on the representations(s) that Matrix
Capital Corporation is a unitary holding company that operates various financial
entities in several states including Colorado.
This determination does not constitute Division approval for any activities
other than the filing described above. Specifically, the Division has not
approved this organization to engage in the banking business, other than as a
unitary holding company, or to hold itself out to the public as a bank.. Nor has
the Division approved use of the word "BANCORP" in any other manner.
In taking this action, the Division relied on representations and information
supplied by you and your client. Should there be a substantive change in any of
the information provided, the Division staff should be notified at once. All
information submitted with the request will be retained in the Division's file.
Sincerely,
FOR: COLORADO STATE BANKING BOARD
/s/
- ------------------------------------
Richard J. Fulkerson
State Bank Commissioner
<PAGE>
FOR OFFICE USE ONLY
SECRETARY OF STATE
CORPORATION SECTION
Please include a typed
self-addressed envelope
MUST BE TYPED
FILING FEE: $60.00
MUST SUBMIT TWO COPIES
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RESTATED ARTICLES OF
INCORPORATION WITH AMENDMENTS
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following amended and restated Articles of
Incorporation. These articles correctly set forth the provisions of the
Articles of Incorporation, as amended, and supersede the original Articles of
Incorporation and all amendments thereto.
FIRST: The name of the corporation is Matrix Capital Corporation
--------------------------
SECOND: The following amended and restated Articles of Incorporation were
adopted in the manner marked with an "X" below:
______ The amended and restated Articles of Incorporation were adopted by the
board of directors where no shares have been issued, or no shareholder
action required.
X The amended and restated Articles of Incorporation were adopted by a
- ------
vote of the shareholders. The number of shares voted for the amended
and restated Articles of Incorporation was sufficient for approval.
______ The amended and restated Articles of Incorporation were adopted by the
incorporators where no shares have been issued or directors elected,
or no shareholder action required.
THIRD: The name of the corporation as amended is Not applicable - name did
-------------------------
not change
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ATTACH A COPY OF YOUR AMENDED AND RESTATED ARTICLES OF
INCORPORATION
MATRIX CAPITAL CORPORATION
Signature /s/ Guy A. Gibson
--------------------------------
Title President
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MATRIX CAPITAL CORPORATION
Pursuant to the Colorado Business Corporation Act, the undersigned
corporation adopts the following Amended and Restated Articles of Incorporation:
FIRST: The name of the corporation is Matrix Capital Corporation (the
"Corporation").
SECOND: The Corporation is organized for any legal and lawful purpose
pursuant to the Colorado Business Corporation Act (the "CBCA").
THIRD: The aggregate number of shares which the Corporation shall have
the authority to issue is 50,000,000 shares of common stock, par value $.0001
per share, and 5,000,000 shares of preferred stock, par value $.0001 per share.
The Board of Directors is authorized by resolution to divide said preferred
stock into series, to fix the number of shares of any series of preferred stock
and to determine or alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of preferred stock and,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares constituting a
series of preferred stock, to decrease the authorized number of shares within
such series (but not below the number of shares in any such series then
outstanding).
FOURTH: No shareholder shall have the right to cumulate his or her votes
in an election of directors or for any other matter(s) to be voted upon by the
shareholders of the Corporation.
FIFTH: No shareholder shall have a preemptive right to acquire any
shares or securities of any kind, whether now or hereafter authorized, which may
at any time be issued, sold or offered for sale by the Corporation.
SIXTH: The address of the registered office of the Corporation is 1675
Broadway, Denver, Colorado 80202; and the name of its registered agent at such
address is THE CORPORATION COMPANY.
SEVENTH: The address of the initial principal place of business of the
Corporation is 1380 Lawrence Street, Suite 1410, Denver, Colorado 80204.
EIGHTH: The number of directors constituting the initial board of
directors of the Corporation at the time of its incorporation was four (4) and
the name and address of the persons who, after incorporation, served as
directors until the first annual meeting of shareholders were:
D. Mark Spencer
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
Thomas M. Piercy
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
Richard V. Schmitz
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
Guy A. Gibson
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
<PAGE>
The number of persons to serve on the Board of Directors shall be hereafter
fixed by the Bylaws of the Corporation.
The Board of Directors, other than those who may be elected by the holders
of any class or series of stock having preference over the Common Stock as to
dividends or upon liquidation, shall be divided, with respect to the time during
which they shall hold office, into three classes as nearly equal in number as
possible, with the initial term of office of the Class I directors expiring at
the annual meeting of shareholders to be held in 1997, of the Class II directors
expiring at the next succeeding annual meeting of shareholders, and of the Class
III directors expiring at the second succeeding annual meeting, with all such
directors to hold office until their successors are elected and qualified. Any
increase or decrease in the number of directors shall be apportioned by the
Board of Directors so that all classes of directors shall be as nearly equal in
number as possible. At each annual meeting of shareholders, directors chosen to
succeed those whose terms then expire shall be elected to hold office for a term
expiring at the annual meeting of shareholders held in the third year following
the year of their election and until their successors are duly elected and
qualified.
NINTH: The name and address of the incorporator is:
Norman C. Storey
40 North Central, Suite 2700
Phoenix, Arizona 85004
TENTH: The officers, directors and employees of the Corporation shall
be indemnified to the maximum extent permitted by Article 109 of the CBCA, as
the same may be amended from time to time. Any repeal or modification of this
Article Tenth by the shareholders of the Corporation shall be prospective only,
and shall not adversely affect any indemnification obligation of the Corporation
existing at the time of such repeal or modification.
ELEVENTH: Nominations for the election of directors may be made by the
Board of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote in the election of directors generally. However, a
shareholder entitled to vote in the election of directors generally may nominate
one or more persons for election as directors at a meeting only if written
notice of such shareholder's intent to make such nomination or nominations has
been delivered to or mailed and received by the Secretary of the Corporation at
the principal executive offices of the Corporation not later than (A) with
respect to an election to be held at an annual meeting of shareholders, ninety
(90) days prior to the date one year after the immediately preceding annual
meeting of shareholders, and (B) with respect to an election to he held at a
special meeting of shareholders, the close of business on the tenth (10th) day
following the date on which notice of such meeting is first given to
shareholders. Each such notice shall set forth: (i) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated; (ii) a representation that the shareholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (iii) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (iv) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (v) the consent of each nominee
to serve as a director of the Corporation if so elected. The presiding officer
at the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the foregoing procedure.
TWELFTH: At an annual meeting of the shareholders, only such business
shall be conducted as shall have been brought before the meeting (A) by or at
the direction of the Board of Directors or (B) by any shareholder of the
Corporation who complies with the notice procedures set forth in this Article
Twelfth. For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than twenty (20) days nor more than fifty
<PAGE>
(50) days prior to the meeting; provided, however, that in the event that less
than thirty (30) days' notice or prior public disclosure of the date of the
meeting is given or made to the shareholders, notice by the shareholder to be
timely must be received not later than the close of business on the tenth (10th)
day following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A shareholder's notice to the
Secretary shall set forth as to each matter the shareholder proposes to bring
before the annual meeting the following information: (i) a brief description of
the business proposed to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting; (ii) the name and address,
as they appear on the Corporation's books, of the shareholder proposing such
business; (iii) the number of shares of the Corporation which are beneficially
owned by the shareholder; and (iv) any material interest of the shareholder in
such business. The presiding officer at an annual meeting shall, if he
determines the facts so warrant, determine and declare to the meeting that the
business was not properly brought before the meeting and in accordance with the
provisions of this Article Twelfth. Upon such determination and declaration, the
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Article Twelfth, a shareholder
seeking to have a proposal included in the Corporation's proxy statement shall
comply with the requirements of Regulation 14A under the Securities Exchange Act
of 1934, as amended.
THIRTEENTH: No director of the Corporation shall be personally liable to
the Corporation or any of its shareholders for damages for breach of fiduciary
duty as a director involving any act or omission of any of such director except,
that the foregoing provision shall not eliminate the liability of a director to
the Corporation or to its shareholders for monetary damages for any breach of
the director's duty of loyalty to the Corporation or to its shareholders, acts
or omissions not in good faith or which invoke intentional misconduct or a
knowing violation of law, acts specified in Section 7-108-403 of the CBCA, or
any transaction from which the director directly or indirectly derived an
improper personal benefit. Neither the amendment nor repeal of this Article
Thirteenth, nor the adoption of any provision of the Articles of Incorporation
inconsistent with this Article Thirteenth shall eliminate or reduce the effect
of this Article Thirteenth with respect to any matter occurring, or any cause of
action, suit or claim that, but for this Article Thirteenth would accrue or
arise, prior to such amendment, repeal or adoption of any inconsistent
provision.
FOURTEENTH: A vote of the majority of shares entitled to be cast with
respect to the following matters shall be required before the matter shall have
been approved by the shareholders of the Corporation:
(i) amendment of the Corporation's Articles of Incorporation, as
contemplated in Section 7-110-103 of the CBCA;
(ii) approval of a plan of merger or share exchange, as contemplated in
Section 7-111-103 of the CBCA;
(iii) approval of the sale, lease, exchange, or other disposition, of
all, or substantially all, of the Corporation's property, with or without
goodwill, otherwise than in the usual and regular course of business of the
Corporation, as contemplated in Section 7-112-102(I) of the CBCA;
(iv) approval of a proposal to dissolve the Corporation, as contemplated
in Section 7-114-102 of the CBCA; and
(v) approval of a proposal to revoke the dissolution of the
Corporation, as contemplated in Section 7-114-104 of the CBCA.
IN WITNESS WHEREOF, the undersigned has duly executed these Amended and
Restated Articles of Incorporation as of the 20th day of September, 1996.
MATRIX CAPITAL CORPORATION
Signature /s/
---------------------------------
Title Guy A. Gibson , President
<PAGE>
EXHIBIT 10.12
COYOTE CREEK PLANNED UNIT DEVELOPMENT AGREEMENT
The Parties: Matrix Funding Corp., ("the Developer").
City of Fort Lupton, Colorado, a statutory Municipal Corporation,
("the City").
The Project: A public golf course ("the course") being built and to be operated
by the Golf Course Enterprise of the City, geographically integrated with a
residential community (the "PUD") owned by the Developer, sharing the name
"Coyote Creek".
The prior agreement: The FORT LUPTON GOLF COURSE RESIDENTIAL AND PLANNED UNIT
DEVELOPMENT AGREEMENT, between these parties and others, dated November 28, 1995
including subsequent amendments.
COME NOW the parties, for valuable consideration, and with full authority in
the signatories hereto, agree as follows:
1. This agreement is a renegotiation of the prior agreement, and is intended
to set forth the entire understanding of the parties. It is, however,
based on the prior agreement, and it may be referred to for historical
perspective. Any breach related to timing or performance of the prior
agreement by either party is waived and released so that the parties may
embark on this new agreement without any past delay issues, however,
responsibility for yet undiscovered latent construction defects on the PUD
improvements is not waived. This new agreement represents the parties
desire to successfully complete the project.
2. The Developer is the successor in interest to FORT LUPTON L.L.C.. HI-VIEW
FARMS and AIMS FARM no longer have any ownership interest in the PUD and
therefore are not parties to this agreement.
3. At this time, the parties have exchanged the parcels of land identified in
the original agreement and the parties have cooperated to complete the
design of the course and construction is underway.
General. Consistent with the Parties' commitment to parcelize the Course
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and the PUD Property, the Golf Course Enterprise is building an 18-hole
regulation play golf course, including clubhouse, driving range,
maintenance facilities, irrigation systems and all related amenities and
appurtenances. Said course shall be a public golf course, to be funded and
operated by the City Golf Course Enterprise. The Developer shall make a
good faith effort to continue to cooperate and coordinate its necessary and
required efforts to effect the development of the Golf Course by the Golf
Course Enterprise. The City intends to complete and open the golf course on
or before May 1, 1999.
Project Management. The Golf Course Enterprise shall use its best efforts
------------------
to assure full cooperation and coordination on all earthwork, utility and
drainage issues affecting the Golf Course and the PUD.
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<PAGE>
In accordance with the intentions for the Golf Course Drainage Master Plan
and the overall PUD Drainage Master Plan, storage ponds for irrigation,
and/or aquifer recharge shall be located wholly on the Golf Course Parcels.
The Parties agree the ponds shall be designed to reasonably prevent and
minimize any potential damage to the residential subdivision. The Parties
agree neither the City nor the Golf Course Enterprise is an assurer or
insurer for damage to the Developer's land, but the Golf Course Enterprise
and Developer will use its best efforts to minimize foreseeable events and
to design adequately sized drainage facilities.
Golf Course crossings of local or collector streets shall be "at-grade."
Such crossings shall be maintained by the Golf Course Enterprise and
Developer shall be indemnified against future accidents or claims by the
Golf Course Enterprise.
The Golf Course Enterprise and Developer will cooperate in the promotion
and marketing of the proposed Golf Course and surrounding residential
community.
Golf Course Financing. The Golf Course Enterprise issued Revenue
---------------------
Anticipation Warrants, totaling approximately $5,900,000. Developer will
use his best efforts to assist the Golf Course Enterprise in expediting all
warrant ordinances, disclosure statements and other documents necessary,
proper and critical to the ongoing efforts.
To help secure the financial viability of the Golf Course warrant issuance,
to reinforce the Trust Indenture, and to eliminate individual plat sureties
otherwise required, if any, Developer agrees to a commitment letter for an
Irrevocable Letter of Credit ("LOC") in the amount of $600,000 from a
financial institution. The LOC secures the Developer's payment of certain
Enhancement Fees, more particularly described in Section 18A.
4. The mountain water project (Colorado Big Thompson) has been successfully
completed and the City has sufficient water and sewer capacity to serve 500
SFE's in the project within four years (with no more than 200 units per
year) and an additional 250 after that initial four year period. The sewer
lift station and the high zone pump station have been successfully
completed by the City and are ready to serve the project.
5. The project has been surveyed and a topography map has been prepared, with
the overall PUD being approved based on those final plans. A Subdivision
Improvement Agreement (SIA) has been approved by the City for the first
filing and such improvements to that parcel of the PUD are underway.
SIA's shall be required for each final plat hereafter.
6. All the studies included in the prior agreement, Section 1.3, either have
been done or will be accomplished in due course.
7. The Developer's water rights associated with the PUD shall be conveyed to
the City by Quit Claim Deed, if that has not already been accomplished.
These water rights are not substitute for the City water rights
requirements for fees for Colorado Big Thompson (CBT) and related water
rights purchases described in the Section 13-122(e) of the Fort Lupton
Municipal Code (FLMC). The developer shall not be required to dedicate
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<PAGE>
additional water rights in the future, unless the number of residential
units on the property is increased beyond the maximum now approved of 750.
8. The preliminary and final plats for the first individual PUD parcel has
been approved, and will remain enforceable by both parties. Each
subsequent PUD parcel, pursuant to Section 2.2.d of the prior agreement,
shall be subject to the review process set forth in the FLMC, including
public hearings before the Planning Commission and City Council, within the
specifications already approved for the overall PUD. However, Final
Construction Plans (FCP) for individual site plans and/or plats will not be
a prerequisite for Final Plat Approval. Instead, the Engineer for the City
will review and approve the FCP and said public improvements shall be
constructed within two years from the date of the construction plan
approval, or the plans will be subject to resubmittal and reapproval.
9. The Parties agree the Developer shall have the ability and flexibility to
introduce a variety of subdivision themes and innovations, including
reduced street sections (local and collector), off-street parking, urban or
rural drainage features, special street lighting and signage, alternating
or no sidewalks or other design features which will provide unique and
marketable themes for the project. The said PUD themes and innovations are
to be filed with the Planning Commission and City Council on a plat-by-plat
basis, and shall be permitted so long as they are consistent with the
intent of this Agreement and the approved PUD Plan.
The Parties agree the total units developed in a given parcel shall not
exceed the designated limits by more than twenty percent (20%). The
allocation adjustment shall be permitted by density transfers from one or
more development parcels identified in the PUD. The PUD shall provide that
such transfers are regularly accounted for by City planning staff and
Developer. Density transfers may accompany a given final plat submittal.
The Parties agree the Developer or Developer's successor/builders may
obtain building permits in a specific filing prior to completion and City
acceptance of the adjacent Public Improvements. Construction must, however,
proceed in compliance with the Subdivision Improvements Agreement and
Certificates of Occupancy shall be issued only if all adjacent public
improvements are substantially complete and constructed in accordance with
the City's citywide construction standards of the City in effect at the
time of construction.
10. Developer at its sole cost shall engineer and construct all on-site
improvements within individually approved parcels and utilities and street
connections between parcels in the PUD. All such improvements shall comply
with the City construction standards in effect at the time of actual
completion, including:
A. Overlot grading and earthwork within the platted property (may include
road shoulders, if so permitted);
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<PAGE>
B. Appropriate curb, gutter, valley pans, sidewalks, pathways or other
site concrete work within the platted property (innovations to which
shall be permitted through the PUD);
C. Street paving (concrete or asphaltic, as approved by the City) on all
local and collector streets within the platted property;
D. Storm drainage systems including inlets, pipelines, manholes channels,
detention ponds, dams, outfall structures and all other facilities
conveying developed storm flows from within the platted property;
E. Water distribution mainlines, valves, air vacs, blow-off's, water
services, fire hydrants and meter pits required to serve new home
sites within the platted property. Any pressure reducing (or
backpressure sustaining) valves and associated vaults required for the
City's pressure zone "breaks" shall be constructed by Developer, at
the Developer's sole cost;
F. Sanitary Sewer trunk lines, mainlines, underdrain systems, manholes
and sewer services required to serve new homesite within the platted
property. Lift stations and force mains are discussed in subsequent
sub-sections.
Any facility over-sizing required by City is detailed in other sections.
11. The Parties agree to construct off-site infrastructure as follows, and as
set forth on Attachment "B";
A. That the Developer engineer and construct the necessary improvements
to the Short-Line Ditch - Phase I, from Colorado Highway 52 north to
Fourteenth Street, including channels, box culverts and the regional
detention pond, estimated to cost $530,000, with no future requests by
the City for participation in Phases II or III. The City shall
exercise its authority to acquire any additional easements or right-
of-ways, if necessary, which may be required to construct the
improvements. Cost of acquisition shall be borne by the Developer.
Also, subsequent to the completion of the project, the City shall
accept and maintain the ditch in perpetuity and shall indemnify the
developer against any future claims or action which may result from
stormwater flooding "downstream" of the Fourteenth Street Detention
Pond (prior to the City's completion of Phase II outfall to the Platte
River). Notwithstanding that the Developer shall retain the right to
"defer" the construction of Phase I provided that interim stormwater
detention ponds are constructed on the Multi-Family Site ("A") and on
the westerly limits of Parcel "D", supported by engineered drainage
studies and satisfactory to the City Engineer with the caveat that the
Developer "must" complete Phase I prior to the issuance of the 125/th/
Certificate of Occupancy "east" of the Fulton Ditch.
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B. That the Developer complete the improvements to the intersection at
the primary, Golf Course entry road on Colorado Highway 52, with full
build-out, accel/decel lanes and necessary appurtenances (north side
only), and the Golf Course entry road previously required to be
completed by the City, both projects estimated to cost $340,000. The
City shall also contribute $125,000 in cash currently appropriated in
the 1998 Financial Plan in conjunction with a Notice to Proceed or by
September 1, 1998 whichever comes first. Also, the City shall assist
the Developer's efforts to apply for and obtain a Temporary
Construction Permit and a Permanent Access Permit from the Colorado
Department of Transportation (CDOT) at the subject intersection on
Colorado Highway 52. The Developer shall retain the right to
construct additional sidewalks, landscaping, signage, monumentation,
street lighting or other amenities adjacent to the Golf Course entry
road at the Developer's sole cost.
C. That the Developer construct curb and gutter, detached sidewalks and
incremental paving (approximately 3 feet) along the south side of
Ninth Street and overlay Ninth Street from Twombly Elementary east
through the intersection (25 ft.) of Northrup Avenue, estimated to
cost $100,000. The City shall be responsible to make any pavement
repairs or remedial subgrade work prior to the overlay project. Also,
the City shall indemnify the Developer against future pavement failure
which may be the result of subsurface failures or subsidence on Ninth
Street.
D. That the Developer construct the westerly one-half (1/2) of the
future collector street improvements on College Avenue to include
earthwork, curb and gutter, and detached sidewalks, estimated to cost
$120,000. Per approved Final Plans and Pavement Design, Developer
shall pave a 26 foot width (two lane) street from the Aims College
entrance to the northerly-most entrance of the development. This
project may be done in two phases, dependent upon the adjacent
development or filing.
E. The Developer shall fund and construct three segments of natural gas
main lines into the development as follows:
(1) Segment No. 1 - Prior to March 1, 1999 (east of Aims College
along Colorado Highway 52, west to intersection with the primary
Golf Course entry road).
(2) Segment No. 2 - Prior to March 1, 1999 (Primary Entrance
Intersection north through Entry Road to Filing 2 and the Golf
Course Clubhouse).
(3) Segment No. 3 - As dictated by adjacent development (from Highway
52 north on College Avenue to individual Coyote Creek filings).
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<PAGE>
F. The City will be 100% responsible for extending Ninth Street from
Northrup Avenue to College Avenue and extending and widening College
Avenue from the North entrance of the development to Ninth Street as
necessitated by future development. The City may seek contribution
from others (not PUD developer) for such improvements.
G. The City will have the responsibility to improve the intersections of
Rollie Street/Colorado Highway 52, and College Avenue/Colorado Highway
52 when necessitated by future growth or if required by the Colorado
Department of Transportation, at which time the City may seek
contribution from others (not PUD developer) for such improvements.
12. The City and the Developer shall fund the expenses for their respective
legal counsels to obtain three Oil and Gas Siting Agreements for the Golf
Course and the residential development, two of which have already been
obtained. The Developer will be responsible for the incremental and
additional costs of any required "slant" drilling by the respective oil and
gas companies if so required in the Siting Agreements. In addition, the
City will be required to work with the Developer to correct the percent of
royalties that are shared equally between the parties. The parties agree
with respect to this provision that they will mutually cooperate to
reasonably mitigate the costs involved with "slant" drilling and visual
impacts of well sites adjacent to the Course and the PUD.
13. All building and development fees, taxes and charges (as enumerated in
Section 18 of this agreement) for all lots constructed east of the Fulton
Ditch, and the multi-family Parcel "A", will be collected pursuant to then
existing City regulations.
Also, all fees enumerated in Section 18 of this agreement are locked in
until December 31, 2003 at which time any remaining units will be subject
to the then prevailing rates (see Attachment "A").
The Developer may increase the 3 fees that the City will rebate by up to
25% over the then existing regulations, at their discretion, providing only
for notification to the City. This would include the Development Fee, the
Infrastructure Assessment Fee and the Storm Drainage Fee. The Developer
shall be required to notify the City, through the City Administrator, of
any fee increases at least 30 days prior to the Developer's disclosure of
fee increases to its home builders.
14. In order to address the 10 acre shortfall which stems from the prior
agreement's requirement that the Developer was not to net less than 119
acres and netted only 109, even with the initial 35 acres donated by the
developer from its land to the course, the City will agree to the
parcelization and conveyance of Lot 2 (approximately 1.62 acres adjacent to
Colorado Highway 52) as discussed in Section 14.B. below, to the Developer
with the following conditions:
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A. The Developer shall donate/convey any park sites, recreation tracts or
other usable open space to the City on a plat-by-plat basis, with the
City being responsible for converting it to a park site or other
recreational amenities at a later date, provided however, that the
Developer shall be allowed to construct said improvements, at their
expense, if so dictated to meet their needs. Also, the Developer
shall be responsible to extend water and sewer service lines to those
sites which may require turf or landscape irrigation and/or restroom
facilities. Remnant parcels, not suitable or acceptable to the City,
will be retained by the Developer and conveyed to and maintained by a
Master Association to be formed by the Developer; and
B. The City will process a Final Plat (through the Planning Commission
and City Council) for the Clubhouse Entry Road Filing No. 1., as
currently engineered and submitted by the Developer. The Developer
shall submit a zoning request, Preliminary Site Plan and proposed land
uses for Lot 2 within sixty (60) days following the execution of this
agreement. The City will favorably entertain said zoning proposal for
Lot 2 for appropriate retail or commercial zoning which must
compliment or support the adjacent residential community and will not
compete with retail businesses at the Golf Course Clubhouse. Once the
property is appropriately zoned, agreed to by the City and Developer,
the City shall convey, by Special Warranty Deed, Lot 2 to the
Developer and the City shall bear the cost of a Title Commitment and
any necessary closing costs.
C. In recognition of the net loss differential between the 10 acres and
the 1.62 acre parcel, the City shall waive the requirement for the
Developer to participate in the High-Zone Water Pump Station
referenced in Section 4.2.d of the prior agreement totaling $100,000,
as "FULL SETTLEMENT" for the loss of the 10 acres.
---------------
In the event that the Developer and the City cannot reach a reasonable
accord regarding the zoning for Lot 2, the shortfall of 10 acres will be
administered as follows:
A. The City will retain the 1.62 acre parcel; and
B. The City will waive the requirement to participate in the High-Zone
Water Pump Station referenced in Section 4.2.d of the prior agreement
totaling $100,000; and
C. The City will pay cash for the remainder of the "shortfall" based upon
the fair market value of the 10 acres by an appraiser mutually agreed
upon by both parties by June 1, 1999.
15. The Developer shall contribute $75,000 by September 1, 1998 to the City to
assist in the financing necessary to build the course clubhouse and fund
marketing efforts related to the course.
16. The Developer shall contribute $150,000 by June 1, 1999 to the City to
assist in the financing necessary for the acquisition of or construction of
a Community Center.
7
<PAGE>
17. In response to the comprehensive nature of this amendment and in light of
the mutual cooperation thereof, the City and the Developer will agree not
to request reimbursement for costs already incurred by each other.
18. The Parties agree to establish the level of certain development fees and
charges to be paid by homebuilders over the residential build-out of the
PUD. Certain fees are restricted or pledged and are summarized as follows:
A. Enhancement Fee. Developer or assigns shall pay an Enhancement Fee of
---------------
$2,000 per SFE to be pledged into a shortfall reserve account,
securing the Golf Course Revenue Anticipation Warrants. If annual
fees collected fall below $60,000 per year for the years 1998 through
2007 the Developer's aforementioned letter of Credit ($600,000) shall
be used to secure the Developer's minimum pledge of $60,000 per year.
Any excess over the amounts required to fund the shortfall reserve
account shall be used by the City for the off-site phased
infrastructure detailed in Section 11 of this agreement. As long as
the City is meeting its phased commitments, the City may use any
excess enhancement fees for community enhancements, such as a
community center, recreation center, aquatic facilities, parks,
playing fields and open space.
Any year during the years 1998 through 2007 in which the Developer or
Developer's assigns/homebuilders pay more than $60,000 ($2,000 per
single family equivalent) in enhancement fees, the amount paid in the
excess of $60,000 shall be credited against the subsequent years
$60,000 payment requirement, and the resulting LOC amount shall be the
difference between the $60,000 annual payment requirement and the
amount paid in any given year. The LOC may be reduced annually in
accordance with payments made hereunder, insuring only that an LOC
remains in place in an amount equal to $600,000 minus the total of
enhancement fees paid to that point in time. For example, if at the
anniversary date of the LOC, the Developer or Developer's
assigns/homebuilders have paid $120,000 in Enhancement Fees, the LOC
can be renewed in the amount of $480,000, etc.
B. Infrastructure Assessment Fee. Developer or Developer's assigns agree
-----------------------------
to pay an Infrastructure Assessment Fee pursuant to attachment "A".
50% of these fees are to be rebated to the Developer for the off-site
infrastructure required to serve the Golf Course and Residential
Development projects as enumerated in Section 11. After said time, the
City may use its 50% share of this fee, at its sole discretion, for
any other appropriate city infrastructure projects.
C. Water Tap and Sewer Tap Fees. Developer or Developer's assigns shall
----------------------------
pay the water tap and sewer tap fees pursuant to attachment "A" which
are locked in until December 31, 2003 at which time any remaining
units will be subject to the then prevailing water and sewer tap fees.
8
<PAGE>
D. Other Fees and Use Taxes. Developer or Developer's assigns shall pay
------------------------
the following other fees and use taxes pursuant to Attachment "A":
(1) Development Fees.
(2) Construction Building Permit Fees.
(3) Storm Drainage Assessment Fee.
(4) Water Resources Fee.
(5) Lien Recording Fees.
(6) Water meters and transponders purchased from the City at cost.
(7) Use Taxes.
19. The parties agree to mutually cooperate to address the means necessary to
engineer and construct a secondary ingress/egress site into the multi-
family parcel "A" and to the Sewer Liftstation.
20. Assignability. This agreement is freely assignable to an assignee known in
-------------
the business community to be financially responsible, reliable and of good
reputation, by the Developer and Land Owners, and all the benefits and
obligations hereunder shall inure to their successors and assigns.
21. The official representative of and contact person for the City is the City
Administrator at City Hall, and the developer's representative, presently
O. Karl Kasch of Cimarron Consultants, Inc. at his office in Englewood.
The parties shall notify any change in the contact person in writing from
the Mayor of Fort Lupton to Matrix, or from Matrix to the Mayor at City
Hall.
CITY OF FORT LUPTON MATRIX FUNDING CORP.
("CITY"): ("DEVELOPER"):
_______________________________ ___________________________________
CITY (Signature) DEVELOPER (Signature)
Ron Jones, Mayor Guy Gibson, President
- ------------------------------- -----------------------------------
(Printed name and title) (Printed name and title)
ATTEST: ATTEST:
_______________________________ ___________________________________
Barbara Rodgers, City Clerk O. Karl Kasch, Development Manager
9
<PAGE>
COYOTE CREEK PUD AGREEMENT
SCHEDULE OF FEES
<TABLE>
<CAPTION>
Total
SF SF SF SF SF MF Potential
Fee West West West East East West Revenues
Type Fund 1-100 101-200 201-300 1-100 101-250 1-200 (750 units)
---- ---- ----- ------- ------- ----- ------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CITY OF FORT LUPTON RECEIVES AND RETAINS
----------------------------------------
Water Resources Fee (CBT) 1 WF Per City Regulations at time Building Permit is issued.
Water Tap Fees 2 WF $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 937,500
Sewer Tap Fees 2 SF $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 937,500
Enhancement Fees (Golf) GOLF $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 1,500,000
Enhancement Fees (CPR) CPR Per City Regulations at time Building Permit is issued.
Construction Permit Fees GF Per City Regulations at time Building Permit is issued.
Use Taxes Multi-Funds Per City Regulations at time Building Permit is issued.
CITY REBATES TO DEVELOPER
-------------------------
Development Fee 3 n/a $ 800 $ 900 $ 1,000 $ 1,200 $ 1,400 $ 700 $ 740,000
Storm Drainage Assessment Fee 3 n/a $ 250 $ 250 $ 350 $ 550 $ 650 $ 250 $ 287,500
CITY AND DEVELOPER SHARES EQUALLY
---------------------------------
Infrastructure Assessment Fee 3/4 GF 600 1,300 2,000 2,500 3,000 600 $ 1,210,000
</TABLE>
1. The stated Water Resource Fee
2. Fixed until 12-31-2003 at which time this fee will convert to the City's
prevailing rate.
3. The Developer shall have the right to adjust these fees up to 125% of the
City's then prevailing rate with a thirty day notice sent to the City.
4. The Developer and the City shall share this fee equally.
Note: Total Potential Revenues is an estimate based on the construction of 750
units. The actual number of units may be lower.
<PAGE>
ATTACHMENT "B"
--------------
COYOTE CREEK PUD AGREEMENT
OFFSITE INFRASTRUCTURE REQUIREMENTS BETWEEN DEVELOPER AND CITY
ESTIMATED FUNDING REQUIREMENTS
<TABLE>
<CAPTION>
ESTIMATED SCHEDULE/
PROJECT DESCRIPTION FUND COSTS DEADLINES
------------------- ---- ----- ---------
CITY OF FORT LUPTON:
-------------------
EXPENDITURES:
------------
<S> <C> <C> <C>
East Sewer Lift Station (100% towards project) Sewer $ 462,238 Done.
Entry Road Participation Street 125,000 Due to Developer 9-1-98 or Notice
to Proceed.
Water Pump Station (30% towards project) Water 497,126 Done.
Finish 9th from Northrup to College Street 170,000 As necessitated by future growth.
Finish College from North ent. to 9th Street 210,000 As necessitated by future growth.
Intersection - Hwy. 52/Rollie St. Street 145,000 As necessitated by future growth.
Intersection - Hwy. 52/College Ave. Street 163,000 As necessitated by future growth.
-----------
Total Expenditures $ 1,772,364
===========
Remaining as of 6-15-98 $ 813,000
===========
DEVELOPER:
---------
EXPENDITURES:
------------
Preliminary Engineering $ 125,000 Ongoing
Entry Road Participation 90,000 Must be completed before 5-1-99.
Hwy. 52/Golf Course Intersection 125,000 Phase I - prior to 5-1-99.
Phase II - by CDOT permit.
Shortline Imp. - Phase I 530,000 On or before the 125th C.O. (east of
Fulton Ditch) or as required by Engineer.
Overlay 9th from Twombly to Northrup 100,000 Prior to the 50th C.O. in Filing No. 2.
Construct 26' road on College from Aims entrance 120,000 Prior to the 1st C.O. in any filing east
to North entrance into Development. of Fulton Ditch.
Community Center Contribution (due 6-1-99) 150,000 On or before 6-1-99.
Clubhouse Contribution (due 11-1-98) 75,000 On or before 11-1-98.
Natural Gas Extensions (3 segments) 40,000 Segments 1&2 by 3-1-99.
Segment 3 with filings east of Fulton.
-----------
Total Expenditures $ 1,355,000
===========
</TABLE>
*Note: Funds received from the Developer for the Clubhouse and Community Center
will be deposited into the Golf Fund and CPR Fund respectively.
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT ADDENDUM
THIS EMPLOYMENT AGREEMENT ADDENDUM, is a supplement to the original EMPLOYMENT
AGREEMENT dated January 1, 1995, by and between MATRIX CAPITAL BANK,
(hereinafter referred to as the "Bank") and GARY LENZO (hereinafter referred to
as the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as President and
Chief Executive Officer, and
WHEREAS, the Bank wishes to assure itself of the services of the Employee as
outlined in Section 5. Term of the original Employment Agreement, and
----
WHEREAS, the parties desire by this writing to set forth the continued
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is agreed to amend Section 2. Base Compensation and Section
-----------------
5. Term as follows:
----
2. Base Compensation. The Bank agrees to pay the Employee during the term of
-----------------
this Addendum, a salary at the rate of $150,000.00 per annum payable in cash
not less frequently than twice monthly and shall be increased annually in
such an amount as the Board of Directors may determine.
5. Term. This Addendum extends the period of employment an additional twelve
----
(12) months, per performance evaluation by the Board of Directors, as
outlined in the original Employment Contract, thereby extending the term of
said Employment Agreement to January 1, 2000.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
Addendum, on the 16th day of December 1998.
<TABLE>
<CAPTION>
MATRIX CAPITAL BANK
<S> <C>
By: /s/
--------------------------
Name: D. Mark Spencer
Its: Chairman
By: /s/
--------------------------
Name: Gary Lenzo
</TABLE>
<PAGE>
EXHIBIT 10.14
PROMISSORY NOTE
Dated: December 31, 1998
Principal Amount: $79,340.45 State of Colorado
FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to
pay to the order of Matrix Capital Corporation.
The sum of Seventy-nine Thousand Three Hundred and Forty and 45/100, Dollars
($79,340.45), together with interest thereon at the rate of Prime per annum on
the unpaid balance. Said sum shall be paid in the manner following:
All principal and interest shall be due on December 30, 1999.
All payment shall be first applied to interest and the balance to
principal. This note may be prepaid, at any time, in whole or in part, without
penalty. All prepayments shall be applied in reverse order of maturity.
This note shall at the option of any holder hereof be immediately due and
payable upon the failure to make any payment due hereunder within N/A days
of its due date.
This note at the option of any holder hereof may be extended on an annual
basis for increments of one (1) year. The terms and interest rate will remain
constant.
In the event this note shall be in default, and placed with an attorney for
collection, then the undersigned agree to pay all reasonable attorney's fees and
costs of collection. Payments not made within five (5) days of due date shall be
subject to a late charge of 2% of said payment. All payments hereunder shall be
made to such address as may from time to time be designed by any holder hereof.
The undersigned and all other parties to this note, whether as endorsers,
guarantors or sureties, agree to remain fully bound hereunder until this note
shall be fully paid and waive demand, presentment and protest and all notices
thereto and further agree to remain bound, notwithstanding any extension,
renewal, modification, waiver, or other indulgence by any holder or upon the
discharge or release of any obligor hereunder to this note, or upon the
exchange, substitution, or release of any collateral granted as security for
this note. No modification or indulgence by any holder hereof shall be binding
unless in writing: and any indulgence on any one occasion shall not be an
indulgence for any other or future occasion. Any modification or change of
terms, hereunder granted by any holder hereof, shall be valid and binding upon
each of the undersigned, notwithstanding the acknowledgment of any of the
undersigned, and each of the undersigned does hereby irrevocably grant to each
of the others a power of attorney to enter into any such modification on their
behalf. The rights of any holder hereof shall be cumulative and not necessarily
successive. This note shall take effect as sealed instrument and shall be
construed, governed and enforced in accordance with the laws of the State first
appearing at the head of this note. The undersigned hereby execute this note as
principals and not as sureties.
Maker:
/s/
- -----------------------------------
D. Mark Spencer
<PAGE>
EXHIBIT 10.20
FOURTH MODIFICATION AGREEMENT
-----------------------------
DATE: February 28, 1999
- ----
PARTIES: Borrower: MATRIX CAPITAL CORPORATION,
- -------
a Colorado corporation
Bank: BANK ONE, ARIZONA, NA,
a national banking association
RECITALS:
- --------
A. Bank has extended to Borrower credit ("Loan") in the principal amount
----
of $980,000.00 pursuant to the Loan Agreement, dated June 29, 1995 ("Loan
----
Agreement"), and evidenced by the Promissory Note, dated June 29, 1995 ("Note").
- --------- ----
The unpaid principal of the Loan as of the date hereof is $870,477.00.
B. The Loan is secured by, among other things, the Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing, dated June 29, 1995
("Deed of Trust"), by Borrower, as trustor, for the benefit of Bank, as
-------------
beneficiary, recorded on July 3, 1995, Instrument No. 95-0387291, records of
Maricopa County, Arizona (the agreements, documents, and securing the Loan and
the Note are referred to individually and collectively as the "Security
--------
Documents").
- ---------
C. Bank and Borrower have executed and delivered previously the following
agreements ("Modifications") modifying the terms of the Loan, the Note, the Loan
-------------
Agreement, and/or the Security Documents: (i) the First Modification Agreement
dated June 26, 1998, (ii) the Second Modification Agreement dated September 29,
1998, (iii) the Third Modification Agreement dated November 29, 1998. (The
Note, the Loan Agreement, the Security Documents, any arbitration resolution,
any environmental certification and indemnity agreement, and all other
agreements, documents, and instruments evidencing, securing, or otherwise
relating to the Loan, as modified in the Modifications, are sometimes referred
to individually and collectively as the "Loan Documents". Hereinafter, "Note",
-------------- ----
"Loan Agreement", "Deed of Trust", and "Security Documents" shall mean such
-------------- ------------- ------------------
documents as modified in the Modifications.)
<PAGE>
D. Borrower has requested that Bank modify the Loan and the Loan Documents
as provided herein. Bank is willing to so modify the Loan and the Loan
Documents, subject to the terms and conditions herein.
AGREEMENT:
- ---------
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Bank agree as follows:
1. ACCURACY OF RECITALS.
--------------------
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
------------------------------
2.1 The Loan Documents are modified as follows:
2.1.1 The maturity date of the Loan and the Note is changed from February
28, 1999, to June 30, 1999. On the maturity date Borrower shall pay to Bank the
unpaid principal, accrued and unpaid interest, and all other amounts payable by
Borrower under the Loan Documents as modified herein.
2.2 Each of the Loan Documents is modified to provide that it shall be a
default or an event of default thereunder if Borrower shall fail to comply with
any of the covenants of Borrower herein or if any representation or warranty by
Borrower herein or by any guarantor in any related Consent and Agreement of
Guarantor(s) is materially incomplete, incorrect, or misleading as of the date
hereof.
2.3 Each reference in the Loan Documents to any of the Loan Documents
shall be a reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
---------------------------------------------
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or
interests in property granted as security in the Loan Documents shall remain as
security for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
---------------------------------------
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of
<PAGE>
time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial condition
of Borrower or any other person whose financial statement has been delivered to
Bank in connection with the Loan from the most recent financial statement
received by Bank.
4.3 Each and all representations and warranties of Borrower in the Loan
Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified herein.
The execution and delivery of this Agreement and the performance of the Loan
Documents as modified herein have been duly authorized by all requisite action
by or on behalf of Borrower. This Agreement has been duly executed and
delivered on behalf of Borrower.
5. BORROWER COVENANTS.
------------------
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such additional
agreements, documents, and instruments as reasonably required by Bank to
effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank and
its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in law
or equity of Borrower, whether now known or unknown to Borrower, (i) in respect
of the Loan, the Loan Documents, or the actions or omissions of Bank in respect
of the Loan or the Loan Documents and (ii) arising from events occurring prior
to the date of this Agreement.
5.3 Contemporaneously with the execution and delivery of this Agreement,
Borrower has paid to Bank:
<PAGE>
5.3.1 All accrued and unpaid interest under the Note and all amounts,
other than interest and principal, due and payable by Borrower under the Loan
Documents as of the date hereof.
5.3.2 A modification fee of $1,000.00.
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
-------------------------------------------
Bank shall not be bound by this Agreement until (i) Bank has executed and
delivered this Agreement, (ii) Borrower has performed all of the obligations of
Borrower under this Agreement to be performed contemporaneously with the
execution and delivery of this Agreement, (iii) each guarantor(s) of the Loan,
if any, has executed and delivered to Bank a Consent and Agreement of
Guarantor(s), and (iv) if required by Bank, Borrower and any guarantor(s) have
executed and delivered to Bank an arbitration resolution, an environmental
questionnaire, and an environmental certification and indemnity agreement.
7. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
-----------------------------------------------------------
The Loan Documents as modified herein contain the entire understanding and
agreement of Borrower and Bank in respect of the Loan and supersede all prior
representations, warranties, agreements, arrangements, and understandings. No
provision of the Loan Documents as modified herein may be changed, discharged,
supplemented, terminated, or waived except in a writing signed by Bank and
Borrower.
8. BINDING EFFECT.
--------------
The Loan Documents as modified herein shall be binding upon, and inure to the
benefit of, Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Arizona, without giving effect to conflicts of law principles.
10. COUNTERPART EXECUTION.
---------------------
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED March 19, 1999, but effective as of the date first above stated.
<PAGE>
MATRIX CAPITAL CORPORATION, a
Colorado corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
BANK ONE, ARIZONA, NA, a national banking
association
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE>
EXHIBIT 10.31
SIXTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
(AND WAIVER)
THIS DOCUMENT is entered into as of October 31, 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 to
amend or waive the Loan Agreement, as applicable, in order, among other things,
to (a) waive Lenders' right to declare a Default under Section 10.1 resulting
from certain transactions described below (the "Subject Transactions") involving
Borrower's wholly-owned subsidiary Equi-Mor Holdings, Inc. ("Equi-Mor") and,
consequently, Borrower's failure to observe the requirements of Sections 8.1,
8.2, and 8.3 of the Loan Agreement, (b) amend Sections 8.1, 8.2, and 8.3 of the
Loan Agreement to permit future Subject Transactions, (c) increase the total
Warehouse Commitment to $120,000,000, and (d) make the additional changes
described 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 hereby amended as follows:
----------
(A) Section 1.1 is amended by adding the following new definition in
alphabetical order with the definitions in that section:
"Equi-Mor" means Equi-Mor Holdings, Inc., a Nevada corporation
and wholly-owned Subsidiary of Borrower.
(B) Sections 8.1(x) and 8.1(xi) are entirely amended as follows:
(x) 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.
(xi) Debt of Equi-Mor owed to Investment Services, Inc., an
affiliate of U.S. Bancorp, on a short-term basis for financing charter-
school leases or loans until they can be sold in the secondary market,
which Debt is guaranteed by Guarantor until, but not after, those
leases are sold in the secondary market.
(xii) Debt (other than the above) incurred after the date of
this agreement, never to exceed $250,000 unless approved by Agent in
writing.
(C) Section 8.2(ix) is added as follows:
(ix) Liens that secure only the Debt described in Section
8.1(xi), that do not cover any Collateral, and that cover only the
charter-school leases or loans of Equi-Mor financed with that Debt and
related assets such as proceeds.
(D) Sections 8.3(xiii) and the final paragraph of Section 8.3 are entirely
amended as follows:
Sixth Amendment
---------------
<PAGE>
(xiii) Charter-school leases or loans originated or acquired by
Equi-Mor in the ordinary course of business.
(xiv) Other loans, advances, or investments, so long as the
aggregate amount outstanding (defined as the amount of any such loans
or advances plus the cost of any such investments) is never more than
$100,000 at any one time.
At no time may the aggregate market value of all Permitted
Loans/Investments (other than Mortgage Loans and Mortgage Securities
described in Section 8.3(iii) and assets described in Section
8.3(xiii) above) exceed an aggregate value of more than $6,000,000.
(E) Schedule 2, Schedule 6.2, and Schedule 6.9 are entirely amended in the
forms of, and all references in the Loan Agreement to Schedule 2, Schedule 6.2,
and Schedule 6.9 are changed to, the attached Fourth Amended Schedule 2, Amended
Schedule 6.2, and Amended Schedule 6.9, respectively.
3. WAIVERS. Lenders waive any past or present Default existing solely as
-------
a result of Borrower's failure to observe the requirements of Sections 8.1, 8.2,
and 8.3 in connection with the Subject Transactions. Except as expressly
stated, this paragraph is not a waiver of existing or future Potential Defaults
or Defaults or a waiver of Agent's or any Lender's rights to insist upon
compliance by all other relevant parties with each Loan Document.
4. 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 and substance acceptable to
Agent and its special counsel.
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.
Sixth Amendment
2 ---------------
<PAGE>
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 PAGE FOLLOWS.]
Sixth Amendment
3 ---------------
<PAGE>
EXECUTED as of the date first stated in this Sixth Amendment to Amended and
Restated Loan Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES CORPORATION, as Borrower BANK ONE, TEXAS, N.A., as Agent, as a Lender,
and as Bank One
By /s/ By /s/
--------------------------------------------- ---------------------------------------------
George R. Bender, President Mark L. Freeman, Vice President
U.S. BANK NATIONAL ASSOCIATION, formerly Colorado RESIDENTIAL FUNDING CORPORATION, as a Lender
National Bank, as a Lender
By /s/ By /s/
--------------------------------------------- ---------------------------------------------
Jerry A. Davis, Senior Vice President Mitchell K. Nomura, 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, Chief Executive
Officer and President
Signature Page to Sixth Amendment
<PAGE>
EXHIBIT 10.32
SEVENTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS DOCUMENT is entered into as of January 28, 1999, 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, Agent, and Lenders have agreed, upon
the following terms and conditions, to amend the Credit Agreement as described
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. Section 1.1 of the Loan Agreement is amended to entirely
----------
amend the following definitions in that section:
"Tranche B-Stated-Termination Date" means the earlier of either
(a) February 15, 1999, or (b) the 30th calendar day after the calendar
day that at least $31,500,000 of Tranche B is outstanding at any one
time.
"Warehouse-Stated-Termination Date" means February 15, 1999.
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
Seventh Amendment
-----------------
<PAGE>
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 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.
Seventh Amendment
2 -----------------
<PAGE>
EXECUTED as of the date first stated in this Seventh Amendment to Amended
and Restated Loan Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES CORPORATION, BANK ONE, TEXAS, N.A., as Agent, as a Lender,
as Borrower and as Bank One
By /s/ By /s/
---------------------------------------------- ------------------------------------------------
George R. Bender, President Mark L. Freeman, Vice President
U.S. BANK NATIONAL ASSOCIATION, formerly RESIDENTIAL FUNDING CORPORATION, as a
Colorado National Bank, as a Lender Lender
By /s/ By /s/
---------------------------------------------- ------------------------------------------------
Jerry A. Davis, Senior Vice President Mitchell K. Nomura, 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.
Signature Page to Seventh Amendment
<PAGE>
MATRIX CAPITAL CORPORATION, as
Guarantor
By /s/
--------------------------------------
Guy A. Gibson, Chief Executive
Officer and President
Signature Page to Seventh Amendment
<PAGE>
EXHIBIT 10.33
EIGHTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS DOCUMENT is entered into as of February 12, 1999, 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, Agent, and Lenders have agreed, upon
the following terms and conditions, to amend the Credit Agreement as described
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. Section 1.1 of the Loan Agreement is amended to entirely
----------
amend the following definitions in that section:
"Tranche B-Stated-Termination Date" means the earlier of either
(a) February 22, 1999, or (b) the 30th calendar day after the calendar
day that at least $31,500,000 of Tranche B is outstanding at any one
time.
"Warehouse-Stated-Termination Date" means February 22, 1999.
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
Eighth Amendment
----------------
<PAGE>
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 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 Eighth Amendment
----------------
<PAGE>
EXECUTED as of the date first stated in this Eighth Amendment to Amended
and Restated Loan Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES CORPORATION, BANK ONE, TEXAS, N.A., as Agent, as a Lender,
as Borrower and as Bank One
By /s/ By /s/
------------------------------------------- ---------------------------------------------
George R. Bender, President Mark L. Freeman, Vice President
U.S. BANK NATIONAL ASSOCIATION, formerly RESIDENTIAL FUNDING CORPORATION, as a
Colorado National Bank, as a Lender Lender
By /s/ By /s/
------------------------------------------- ---------------------------------------------
Susan Derber, Senior Vice President Mitchell K. Nomura, 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.
Signature Page to Eighth Amendment
<PAGE>
MATRIX BANCORP, INC., as Guarantor
By /s/
------------------------------
Guy A. Gibson, Chief Executive
Officer and President
Signature Page to Eighth Amendment
<PAGE>
EXHIBIT 10.34
NINTH AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS DOCUMENT is entered into as of February 22, 1999, 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, Agent, and Lenders have agreed, upon
the following terms and conditions, to amend the Credit Agreement as described
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 hereby amended as follows:
----------
(A) Section 1.1 is amended to entirely amend or add the following
definitions in alphabetical order with the other definitions in that section:
"Applicable-Covered Rate" means -- for each Borrowing-Purpose
Category in the table below -- the annual interest rate stated beside
that category:
<TABLE>
<CAPTION>
Borrowing-Purpose Category Applicable-Covered Rate
<S> <C>
Gestation Borrowings 0.850%
Repurchase Borrowings 1.375%
Nonconforming-Bulk Borrowings 2.000%
Other Warehouse Borrowings 1.250%
Indirect-Warehouse Borrowings 1.500%
Working-Capital Borrowings 1.500%
Term-Line Borrowings 2.000%
Overline Borrowings As agreed by Borrower and
Bank One from time to time
</TABLE>
"Applicable Margin" means -- for each Borrowing-Purpose Category
and relevant Borrowing-Price Category in the table below -- the
positive or negative interest margin beside those categories:
<TABLE>
<CAPTION>
Borrowing-Purpose Category Borrowing-Price Category Applicable Margin
<S> <C> <C>
Gestation Borrowings Base Rate 0.000%
Fed-Funds Rate or LIBOR 0.850%
Swing Borrowings Base Rate 0.000%
</TABLE>
Ninth Amendment
---------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Borrowing-Purpose Category Borrowing-Price Category Applicable Margin
Fed-Funds Rate 1.250%
Nonconforming-Bulk Borrowings Base Rate 1.000%
Fed-Funds Rate or LIBOR 2.000%
Repurchase Borrowings Base Rate 0.000%
Fed-Funds Rate or LIBOR 1.375%
Other Warehouse Borrowings Base Rate 0.000%
Fed-Funds Rate or LIBOR 1.250%
Indirect-Warehouse Borrowings Base Rate 0.000%
Fed-Funds Rate or LIBOR 1.500%
Working-Capital Borrowings Base Rate 0.500%
Fed-Funds Rate or LIBOR 1.500%
Term-Line Borrowings Base Rate 1.000%
Fed-Funds Rate or LIBOR 2.000%
Overline Borrowings Base Rate As agreed by Borrower
and Bank One from time
to time.
Fed-Funds Rate or As agreed by Borrower
LIBOR and Bank One from time
to time.
</TABLE>
"Approved Originator" means any Originator who (a) has entered into a
Three-Party Agreement with Borrower and Agent, (b) has a minimum net worth of
$250,000, (c) has been in business for a minimum of three years, (d) has
submitted its Current Financial statements to Agent, and (e) is from time to
time named on a list agreed to by Agent and Borrower (which list Agent shall
furnish to any Lender upon request) as that list may be amended from time to
time (i) by Borrower and Agent to remove or add other names as Agent and
Borrower may agree, (ii) by either Agent or Determining Lenders to remove any
such other Person after Agent has or Determining Lenders have given to Borrower
notice of (and an opportunity to discuss) the proposed removal of that Person,
or (iii) automatically (without signing by any party) to remove any such Person
who then (A) is not Solvent, (B) fails to pay its debts generally as they become
due, (C) voluntarily seeks, consents to, or acquiesces in the benefit of any
Debtor Law, (D) becomes a party to or is made the subject of any proceeding
provided for by any Debtor Law (other than as a creditor or claimant) that could
suspend or otherwise adversely affect the Rights of any Company, Agent, or any
Lender in connection with the transactions contemplated in the Originator
Documents or Loan Documents, (E) is in default under its Indirect-Warehouse Loan
Agreement, or (F) fails to be agency qualified in any respect.
"Bailee Letter" means, as applicable under the circumstances, one of the
letters executed and delivered by Agent in substantially the form of Exhibit C-
4.
"Borrowing-Purpose Category" means any category of Borrowing determined
with respect to its purpose, e.g., a (a) Warehouse Borrowing, which may be a Dry
Borrowing, Wet Borrowing, Gestation Borrowing, Swing Borrowing, Second-Lien
Borrowing, Nonconforming
Ninth Amendment
---------------
<PAGE>
Borrowing, Nonconforming-Bulk Borrowing, or Repurchase Borrowing, (b) Working-
Capital Borrowing, which may be a P&I Borrowing, T&I Borrowing, or Foreclosure
Borrowing, or (c) Term-Line Borrowing.
"Eligible-Nonconforming Loan" is defined in Schedule 4.1.
"Eligible-Nonconforming-Bulk Loan" is defined in Schedule 4.1.
"Eligible-Indirect-Warehouse Loan" is defined in Schedule 4.1.
"Guarantor" means Matrix Bancorp, Inc., a Colorado corporation.
"Indirect-Warehouse Borrowings" means a Warehouse Borrowing which is (a)
a Ratable Borrowing or Swing Borrowing, (b) subject to the Indirect-Warehouse
Sublimit, and (c) supported by the Borrowing Base for Eligible-Indirect-
Warehouse Loans.
"Indirect-Warehouse Sublimit" means $10,000,000.
"Indirect-Warehouse Collateral" means all Indirect-Warehouse Documents
offered as Collateral under the Loan Documents.
"Indirect-Warehouse Documents" means, for any Approved Originator, its
Indirect-Warehouse Loan Agreement and the documents and items described on
Schedule 4.3 and required to be delivered to Agent under Section 4.3.
"Indirect-Warehouse Loan Agreement" means a loan agreement between
Borrower and an Approved Originator under which, among other things (a) Borrower
provides financing to that Approved Originator for its Mortgage Loan origination
and acquisition until those Mortgage Loans are sold in the secondary market, and
(b) that Approved Originator grants to Borrower first-priority Liens upon, among
other things, the Mortgage Collateral delivered to or for Borrower by or for
that Approved Originator.
"Jumbo Sublimit", at any time, means, unless otherwise approved by Agent
in writing, (a) for all Jumbo Loans (except Eligible-Nonconforming Loans,
Eligible-Nonconforming-Bulk Loans, Eligible-Repurchased Loans, or Eligible-
Second-Lien Loans), 35% of the total Warehouse Commitments, and (b) for any
Jumbo Loan (except Eligible-Nonconforming Loans, Eligible-Nonconforming-Bulk
Loans, Eligible-Repurchase Loans, or Eligible-Second-Lien Loans) in excess of
$750,000, only the first $750,000.
"Nonconforming Borrowing" means a Warehouse Borrowing which is (a) a
Ratable Borrowing or Swing Borrowing, (b) subject to the Nonconforming Sublimit,
and (c) supported by the Borrowing Base for Eligible-Nonconforming Loans.
"Nonconforming Bulk-Borrowing" means a Warehouse Borrowing which is (a)
a Ratable Borrowing or Swing Borrowing, (b) subject to the Nonconforming
Sublimit, and (c) supported by the Borrowing Base for Eligible-Nonconforming-
Bulk Loans.
"Nonconforming Loans" means, collectively, Eligible-Nonconforming Loans
and Eligible-Nonconforming-Bulk Loans.
"Nonconforming Sublimit" means (a) for all Nonconforming Loans,
$45,000,000 and (b) for Eligible-Nonconforming-Bulk Loans, $35,000,000.
"Originator" means any Person who originates and acquires Mortgage Loans
and markets and sells then in the secondary market.
Ninth Amendment
3 ---------------
<PAGE>
"Overline Borrowing" means a Borrowing under the Overline
Facility, which may not be a Nonconforming Borrowing, a Nonconforming
Bulk Borrowing, a Repurchase Borrowing, or a Second-Lien Borrowing.
"Repurchase Sublimit" means $20,000,000.
"Revolving Subordinated Loan Agreement" means the Revolving Loan
Agreement dated August 1, 1995, between Borrower and Guarantor.
"Servicing Portfolio" means, at any time, the total unpaid
principal amount of Mortgage Loans serviced by Borrower for a fee, the
servicing rights to which are owned by Borrower, other than any Mortgage
Loans serviced by Borrower under a subservicing agreement or a master
servicing agreement.
"Three-Party Agreement" means a Three-Party Agreement entered
into between Agent, Borrower, and an Approved Originator substantially
in the form of Exhibit G.
"Tranche A" means that portion of Term-Line Borrowings that (a)
is advanced for the purpose of leveraging certain portions of Borrower's
existing Servicing Portfolio, (b) may not be reborrowed under this
agreement on or after the Tranche A-Actual-Termination Date, and (c) may
not exceed an amount equal at any time to the lesser of either (i) the
total Term-Line Commitments minus Tranche B or (ii) $15,000,000.
"Tranche A-Actual-Termination Date" means the earlier of either
(a) the Tranche A-Stated-Termination Date or (b) the date on which all
of the Term-Line Commitments have otherwise terminated or been canceled.
"Tranche A-Stated-Termination Date" means February 22, 1999.
"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
equal at any time to the lesser of either (i) the total Term-Line
Commitments minus Tranche A or (ii) $30,000,000.
"Tranche B-Actual-Termination Date" means the earlier of either
(a) the Tranche B-Stated-Termination Date or (b) the date on which all
of the Term-Line Commitments have otherwise terminated or been canceled.
"Tranche B-Stated-Termination Date" means June 30, 1999.
"Warehouse-Stated-Termination Date" means June 30, 1999.
"Warehouse Borrowing" means a Ratable Borrowing or Swing
Borrowing that is (a) advanced to Borrower under the Warehouse
Commitment, (b) either a Dry Borrowing, Wet Borrowing, Gestation
Borrowing (which may not be a Swing Borrowing), Nonconforming Borrowing,
Nonconforming-Bulk Borrowing, Second-Lien Borrowing, Indirect-Warehouse
Borrowing, or Repurchase Borrowing, and (c) supported by the Borrowing
Base for Mortgage Collateral.
"Wet Sublimit" means, at any time, a percentage of the total
Warehouse Commitments, which percentage is (a) 35% for the first five
and last five Business Days of each Calendar Month, and (b) 25% at all
other times
(B) Clause (h) of the definition of "Adjusted-Tangible-Net Worth" in
Section 1.1 is entirely amended as follows:
Ninth Amendment
4 ---------------
<PAGE>
"(h) Borrower's direct and indirect guaranties of Debt of any
other Person (other than Matrix Bancorp, Inc.), minus"
(C) The parenthetical in the definition of "Approved Investor" in
Section 1.1 is entirely amended as follows:
"(separate lists will be maintained for Nonconforming
Borrowings, Second-Lien Borrowings, and for all other Warehouse
Borrowings)"
(D) Clause (b) of the definition of "Total-Adjusted Debt" in Section 1.1
is entirely amended as follows:
"(b) obligations under repurchase agreements used to finance
Mortgage Securities, minus"
(E) The definition of "B/C-Paper Sublimit," "Committed B/C-Paper
Borrowing," "Eligible-Committed-B/C-Paper Loan," "Eligible-Uncommitted-B/C-Paper
Loan," "Equi-Mor," and "Uncommitted-B/C-Paper Sublimit" is entirely deleted from
Section 1.1.
(F) Section 2.1(a) is entirely amended as follows:
(a) Warehouse Commitments. Subject to the limitations below and
other provisions of the Loan Documents, on a revolving basis, and on
Business Days before the Warehouse-Actual-Termination Date, each
Lender severally agrees to provide its Commitment Percentage (except
for Agent in respect of Swing Borrowings) of Warehouse Borrowings so
long as, in each case, no Warehouse Borrowing may be disbursed that
would cause any of the following applicable limitations to be
exceeded, which limitations must be read together and are not
mutually exclusive:
. The sum (without duplication) of the total Principal Debt plus
the total LC Exposure may never exceed the lesser of either
(a) the total Combined Commitments and the Overline Facility,
or (b) the total Borrowing Base.
. The total Principal Debt of all Warehouse Borrowings may never
exceed the lesser of either (i) the total Warehouse
Commitments or (ii) the sum of the Borrowing Base for Mortgage
Collateral plus the Borrowing Base for Gestation Collateral
minus the Principal Debt of all Overline Borrowings.
. The total Principal Debt of all Swing Borrowings may never
exceed the Swing Sublimit.
. The total Principal Debt of all Wet Borrowings may never
exceed the Wet Sublimit.
. The total Principal Debt of all Gestation Borrowings may never
exceed the lesser of either (i) the Gestation Sublimit or (ii)
the Borrowing Base for Gestation Collateral.
. The total Principal Debt of all Nonconforming Borrowings may
never exceed the lesser of either (i) the Nonconforming
Sublimit or (ii) the Borrowing Base for Eligible-Nonconforming
Loans.
. The total Principal Debt of all Nonconforming-Bulk Borrowings
may never exceed the lesser of either (i) the Nonconforming
Sublimit or (ii) the Borrowing Base for Eligible-Nonconforming
Bulk Loans.
Ninth Amendment
5 ---------------
<PAGE>
. The total Principal Debt of all Second-Lien Borrowings may
never exceed the lesser of either (i) the Second-Lien Sublimit
or (ii) the Borrowing Base for Eligible-Second-Lien Loans.
. The total Principal Debt of all Indirect-Warehouse Borrowings
may never exceed the lesser of either (i) the Indirect-
Warehouse Sublimit or (ii) the Borrowing Base for Eligible-
Indirect-Warehouse Loans.
. The total Principal Debt of all Repurchase Borrowings may
never exceed the lesser of either (i) the Repurchase Sublimit
or (ii) the Borrowing Base for Eligible-Repurchased Loans.
. Except for Agent in respect of Swing Borrowings, no Lender's
direct or indirect portion of the Principal Debt under this
clause (a) may ever exceed either its Warehouse Commitment or
its Commitment Percentage for Warehouse Borrowings.
. No Warehouse Borrowing may be made on a day that is not a
Business Day, or on or after the Warehouse-Actual-Termination
Date.
. Each disbursement of a Warehouse Borrowing must be at least
$25,000.
(G) The fourth bullet point in Section 2.1(c) is entirely deleted.
(H) Section 3.3 is entirely amended as follows:
3.3 Scheduled Payments. Unless otherwise provided in this
agreement, Borrower shall pay the Obligation in accordance
with the following table:
<TABLE>
<CAPTION>
Obligation Payable
<S> <C>
Interest on each LIBOR Borrowing except at As it accrues on (a) the last day of that
the Default Rate Borrowing's Interest Period and -- if that
Interest Period is longer than three months
-- 90 days after its first day and each 90
days after that and (b) on the
Warehouse-Actual-Termination Date (for
Warehouse and Working-Capital Borrowings) or
the final maturity date of the applicable
tranche for Term-Line Borrowings, as the case
may be
Interest on each other Borrowing except at On (a) the 15th day of each Calendar Month as
the Default Rate it accrued on the last day of the preceding
Calendar Month and (b) on the
Warehouse-Actual-Termination Date or the
final maturity date of the applicable tranche
for Term-Line Borrowings, as the case may be
Interest at the Default Rate regardless of On demand as it accrues
Borrowing-Price Category
Principal Debt of Swing Borrowings and On demand
Overline Borrowings
Other Principal Debt of, and other Obligation On the Warehouse-Actual-Termination Date
related to, Warehouse Borrowings and
Working-Capital Borrowings
Principal Debt of Tranche A outstanding on In consecutive, equal, monthly installments
the Tranche A-Actual-Termination Date commencing on the Tranche
A-Actual-Termination Date and continuing on
the same day of each ensuing Calendar Month,
with the last installment being made on
February 22, 2004, accompanied by the balance
of all related Obligation then remaining
unpaid
Principal Debt of Tranche B outstanding on In consecutive, equal, monthly installments
commencing on
</TABLE>
Ninth Amendment
6 ---------------
<PAGE>
<TABLE>
<CAPTION>
Obligation Payable
<S> <C>
the Tranche B-Actual-Termination Date June 30, 1999, and continuing
on the same day of each ensuing Calendar
Month, with the last installment being made
on June 30, 2004, accompanied by the balance
of all Obligation then remaining unpaid
</TABLE>
(I) Section 3.5(a)(ii) is entirely amended as follows:
(ii) Principal Debt of all non-Swing Borrowings in the order
below -- payable ratably to each Lender in accordance with its
Commitment Percentage -- except as the order may be rearranged by
Agent to the extent possible to avoid the application of any Funding
Loss for LIBOR Borrowings. Principal Debt shall be applied (A) to the
Borrowing-Purpose Category to the extent the collections or proceeds
are from or arose in respect of the Collateral in its Borrowing Base
and (B) then in the following order:
. Term-Line Borrowings
. Foreclosure Borrowings
. P&I Borrowings
. T&I Borrowings
. Nonconforming-Bulk Borrowings (Wet Borrowings first)
. Nonconforming Borrowings (Wet Borrowings first)
. Repurchase Borrowings (Wet Borrowings first)
. Second-Lien Borrowings (Wet Borrowings first)
. Indirect-Warehouse Borrowings (Wet Borrowings first)
. Other Wet Borrowings
. Other Dry Borrowings (other than Gestation Borrowings)
. Gestation Borrowings
(J) Section 3.5(b)(vi) is entirely amended as follows:
(vi) Principal Debt in the order below -- payable ratably to
each Lender in accordance with its Termination Percentage -- except as
the order may be rearranged by Agent to the extent possible to avoid
the application of any Funding Loss for LIBOR Borrowings. For
purposes of this section, no distinction shall be made whether the
Borrowings arose under the Warehouse Commitments or the Overline
Facility. Principal Debt shall be applied (A) to the Borrowing-
Purpose Category to the extent the collections or proceeds are from or
arose in respect of the Collateral in its Borrowing Base and (B) then
in the following order:
. Term-Line Borrowings
. Foreclosure Borrowings
. P&I Borrowings
. T&I Borrowings
. Nonconforming-Bulk Borrowings (Wet Borrowings first)
. Nonconforming Borrowings (Wet Borrowings first)
. Repurchase Borrowings (Wet Borrowings first)
. Second-Lien Borrowings (Wet Borrowings first)
. Indirect-Warehouse Borrowings (Wet Borrowings first)
. Other Wet Borrowings
. Other Dry Borrowings (other than Gestation Borrowings)
. Gestation Borrowings
(K) Section 3.14 is entirely amended as follows:
3.14 Fees. The following are not compensation for the use,
detention, or forbearance of money, are in addition to and not in lieu
of interest and expenses otherwise described in the Loan Documents,
are non-refundable, bear interest if not paid when due at
Ninth Amendment
7 ---------------
<PAGE>
the Default Rate, and are calculated on the basis of actual days (including
the first but excluding the last) elapsed over a year of 360 days (or
actual days during that year, if the calculation would otherwise result in
exceeding the Maximum Amount and the payment were deemed to be interest
notwithstanding the above provisions to the contrary):
(a) Agent's Fees. Borrower shall pay to Agent -- for its
sole account -- administrative, syndication, and custodial fees
in amounts and upon such payment terms as may be separately
agreed upon by Borrower and Agent in writing.
(b) Warehouse Unused Facility Fee. Borrower shall pay to
Agent an unused facility fee for Lenders payable in arrears on
the 15th day of each Calendar Month for the preceding Calendar
Month and on the Warehouse-Actual-Termination Date. Each payment
of the unused facility fee is a percentage per annum calculated
for the period in which it accrued as the product of 0.125%
multiplied by the amount by which (i) the average-daily total
Warehouse Commitment exceeds (ii) the average daily Principal
Debt relating to Warehouse Borrowings.
(c) Working-Capital Commitment Fee. Borrower shall pay
to Agent a commitment fee for Lenders payable in arrears on the
15th day of the Calendar Quarter for the preceding Calendar
Quarter and on the Warehouse-Actual-Termination Date. Each
payment of the commitment fee is a percentage per annum
calculated for the period in which it accrued as the product of
0.150% multiplied by the total Working-Capital Commitment.
(d) Term-Line Commitment Fee. Borrower shall pay to
Agent a commitment fee for Lenders payable in arrears on the 15th
day of the Calendar Quarter for the preceding Calendar Quarter
and on the Tranche B-Stated-Termination Date. Each payment of the
commitment fee is a percentage per annum calculated for the
period in which it accrued as the product of 0.250% multiplied by
the amount by the total Term-Line Commitment.
(e) LC Issuance Fees. On the date that any LC is issued
under this agreement, Borrower shall pay to Agent -- for its sole
account --an LC issuance fee of 1.25% multiplied by the face
amount of the LC being issued.
(L) The phrase "or pooling" is entirely deleted from Section 4.5(a).
(M) Section 8.1 is entirely amended as follows:
8.1 Debt. No Company may directly or indirectly create, incur,
----
permit to exist, or commit to create or incur (a) any Wet Borrowings except
in connection with this agreement or in connection with any Permitted Debt
whose description specifically allows for Wet Borrowings, (b) any mortgage
loan repurchase agreements (except in connection with any Permitted Debt
whose description specifically allows for mortgage loan repurchase
agreements or as otherwise permitted by Agent in writing), or (c) any other
Debt except the following (collectively, the "Permitted Debt"):
(i) Obligations to pay Taxes.
(ii) Liabilities for accounts payable, non-capitalized equipment
or operating leases, and similar liabilities if in each
case incurred in the ordinary course of business.
(iii) Accrued expenses, deferred credits, and loss contingencies
that are properly classified as liabilities under GAAP.
(iv) The Obligation.
Ninth Amendment
8 ---------------
<PAGE>
(v) Up to $825,000 in Debt (including related letters of
credit and reimbursement agreements) under a municipal
bond financing facility with U.S. Bank National
Association (formerly known as Colorado National Bank).
(vi) Up to $1,235,000 in Debt under a land acquisition loan
from First Security Bank, which can be replaced by up to
$5,000,000 in Debt under a land acquisition/development
loan from Bank One, Colorado.
(vii) Up to $15,000,000 in warehouse Debt with Argo Federal
Savings Bank that involves financings of a Company's
origination or acquisition of mortgage loans until they
are sold in the secondary market.
(viii) Up to $400,000 in Debt (but not warehouse-type Debt) under
a facility with Piper-Jaffray (American Strategic Income
Portfolio, Inc.) as that amount may be reduced but not
increased at any time on or after the Closing Date.
(ix) Debt under a Revolving Subordinated Loan Agreement between
Borrower and Guarantor, providing (in terms acceptable to
Agent) that any liabilities arising under the Revolving
Subordinated Loan Agreement are expressly subordinated to
the Obligation.
(x) Guaranty by the Companies of up to $20,000,000 principal
and all other indebtedness of Matrix Bancorp, Inc. 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.
(xi) Debt (other than the above) incurred after the date of
this agreement, never to exceed $250,000 unless approved
by Agent in writing.
(N) Section 8.2(ix) is entirely deleted.
(O) Sections 8.3(xi) through (xiv), and the last paragraph of Section 8.3,
are entirely amended as follows:
(xi) An investment in real property in Ft. Lupton, Colorado,
valued up to $5,000,000.
(xii) Investments in Pulte Corporation model homes, valued at no
more than $500,000.
(xiii) Loans to Approved Originators under Indirect-Warehouse
Loans Agreements with a maximum commitment of $5,000,000 to each
individual Approved Originator.
(xiv) Other loans, advances, or investments, so long as the
aggregate amount outstanding (defined as the amount of any such loans
or advances plus the cost of any such investments) is never more than
$100,000 at any one time.
At no time may the aggregate market value of all Permitted
Loans/Investments (other than Mortgage Loans and Mortgage Securities
described in Section 8.3(iii) and loans described in Section 8.3(xiii)
above) exceed an aggregate value of more than $6,000,000.
(P) A new Section 8.16 is added as follows:
Ninth Amendment
9 ---------------
<PAGE>
8.16 Underwriting Guidelines. No Company may make any material
change to its underwriting guidelines.
(Q) Section 9 is entirely amended as follows:
SECTION 9. FINANCIAL COVENANTS. Until all commitments by
-------------------
Lenders to extend credit under this agreement have been canceled or
terminated and the Obligation is fully paid and performed, Borrower
covenants and agrees with Agent and Lenders as follows:
9.1 Net Worth.
(a) The Companies' Net Worth may never be less than
the greater of: (i) $13,000,000, or (ii) 90% of actual Net
Worth as of the preceding fiscal year end, plus 90% of
positive Net Income for each Calender Month following such
date, plus 90% of all contributions to any Company's
stockholders' equity made on or after such date.
(b) The Companies' Adjusted-Net Worth may never be
less than the greater of: (i) $25,000,000, or (ii) 90% of
actual Adjusted-Net Worth as of the preceding fiscal year
end, plus 90% of positive Net Income for each Calender Month
following such date, plus 90% of all contributions to any
Company's stockholders' equity made on or after such date.
(c) The Companies' Adjusted-Tangible-Net Worth may
never be less than the greater of: (i) $25,000,000, or (ii)
90% of actual Adjusted-Tangible-Net Worth as of the
preceding fiscal year end, plus 90% of positive Net Income
for each Calender Month following such date, plus 90% of all
contributions to any Company's stockholders' equity made on
or after such date.
9.2 Leverage. The ratio of the Companies' Total-Adjusted
Debt to Adjusted-Tangible-Net Worth may never exceed 8.0 to 1.0.
9.3 Servicing Leverage. The ratio of outstanding Term-Line
Borrowings outstanding to the Companies' Adjusted-Net Worth may
never exceed 2.5 to 1.0.
9.4 Subordinated Debt Leverage. The ratio of any Permitted
Debt outstanding under the Revolving Subordinated Loan Agreement
to the Companies' Net Worth may never exceed 2.0 to 1.0.
9.5 Cash Flow. The ratio of the Companies' historical Cash
Flow to historical CMLTD may never be less than 1.3 to 1.0 at the
end of any 12-month period, calculated as of the last day of each
Calendar Month.
9.6 Servicing Portfolio. The Servicing Portfolio may never
be less than $4,000,000,000. Agency servicing must represent a
minimum of 65% of the total Servicing Portfolio.
9.7 Servicing Delinquencies. The ratio of mortgage loans
in the Servicing Portfolio that are 30 days or more delinquent,
or in foreclosure or bankruptcy, to the Servicing Portfolio, may
not exceed 8.0%. The ratio of mortgage loans in the Servicing
Portfolio that are 90 days or more delinquent, or in foreclosure
or bankruptcy, to the Servicing Portfolio, may not exceed 3.0%.
9.8 Debt to Servicing Portfolio.
Ninth Amendment
10 ---------------
<PAGE>
(a) The Principal Debt of Term-Line Borrowings may
never exceed the lesser of either (i) 1.25% of the unpaid
principal balance of the Servicing Portfolio, or (ii) 70% of
the Appraised Value of the Servicing Portfolio.
(b) The Principal Debt of Working-Capital Borrowings
and Term-Line Borrowings may never exceed the lesser of
either (i) 1.25% of the unpaid principal balance of the
Servicing Portfolio, or (ii) 95% of the Appraised Value of
the Servicing Portfolio.
(R) Exhibit C-5 is entirely deleted.
(S) A new Exhibit G is added in the form of the attached Exhibit G.
(T) Schedules 2, 4.1, 4.2, 4.3, 6.9, and 6.10 and Exhibits C-3, C-4, C-6,
D-1, D-2, D-3, and D-6 are entirely amended in the forms of, and all references
in the Credit Agreement to those schedules and exhibits are changed to, the
attached Fifth Amended Schedule 2, Amended Schedule 4.1, Amended Schedule 4.2,
Amended Schedule 4.3, Second Amended Schedule 6.9, Amended Schedule 6.10,
Amended Exhibit C-3, Amended Exhibit C-4, Amended Exhibit C-5, Second Amended
Exhibit D-1, Amended Exhibit D-2, Second Amended Exhibit D-3, and Amended
Exhibit D-6 respectively.
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 and substance acceptable to
Agent and its special counsel.
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 counsel in connection with the
negotiation, preparation, delivery, and execution of this document and any
related documents.
Ninth Amendment
11 ---------------
<PAGE>
7. MISCELLANEOUS. All references in the Loan Documents to the "Loan
-------------
Agreement" 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.
Ninth Amendment
12 ---------------
<PAGE>
EXECUTED as of the date first stated in this Ninth Amendment to Amended and
Restated Loan Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES CORPORATION, as Borrower BANK ONE, TEXAS, N.A., as Agent, as a Lender, and as
Bank One
By /s/ By /s/
---------------------------------------------- ------------------------------------------------
George R. Bender, President Mark L. Freeman, Vice President
U.S. BANK NATIONAL ASSOCIATION, formerly RESIDENTIAL FUNDING CORPORATION, as a Lender
Colorado National Bank, as a Lender
By /s/ By /s/
---------------------------------------------- ------------------------------------------------
Susan Derber, Vice President Mitchell K. Nomura, 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 BANCORP, INC., as Guarantor
By /s/
-------------------------------
Guy A. Gibson, Chief Executive
Officer and President
Signature Page to Ninth Amendment
<PAGE>
EXHIBIT 10.35
WAREHOUSE NOTE
--------------
$45,000,000 February 22,1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order BANK ONE, TEXAS, N.A.
("Lender") that portion of the principal amount of $45,000,000 that may from
time to time be disbursed and outstanding under this note together with
interest.
This note is a "Warehouse Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity, which is the Warehouse-Actual-Termination 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Warehouse Notes (as the
same may have been amended and replaced to the date hereof, the "Former Notes")
which Former Notes were executed and delivered pursuant to the Loan Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as
Borrower
By /s/
----------------------------------------------
George R. Bender, President
Exhibit A-2
-----------
<PAGE>
EXHIBIT 10.36
WAREHOUSE NOTE
--------------
$37,500,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order U.S. BANK NATIONAL
ASSOCIATION ("Lender") that portion of the principal amount of $37,500,000 that
may from time to time be disbursed and outstanding under this note together with
interest.
This note is a "Warehouse Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity, which is the Warehouse-Actual-Termination 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Warehouse Notes (as the
same may have been amended and replaced to the date hereof, the "Former Notes")
which Former Notes were executed and delivered pursuant to the Loan Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as Borrower
By /s/
-----------------------------------------------
George R. Bender, President
Exhibit A-2
-----------
<PAGE>
EXHIBIT 10.37
WAREHOUSE NOTE
--------------
$37,500,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order RESIDENTIAL FUNDING
CORPORATION ("Lender") that portion of the principal amount of $37,500,000 that
may from time to time be disbursed and outstanding under this note together with
interest.
This note is a "Warehouse Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity, which is the Warehouse-Actual-Termination 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Warehouse Notes (as the
same may have been amended and replaced to the date hereof, the "Former Notes")
which Former Notes were executed and delivered pursuant to the Loan Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as Borrower
By /s/
-----------------------------------------------
George R. Bender, President
Exhibit A-2
-----------
<PAGE>
EXHIBIT 10.38
AMENDED AND RESTATED TERM-LINE NOTE
-----------------------------------
$15,000,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order of BANK ONE, TEXAS, N.A.
("Lender"), that portion of the principal amount of $15,000,000 that may from
time to time be disbursed and outstanding under this note together with
interest.
This note is a "Term-Line Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity. 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Term-Line Notes (as the
same may have been amended and replaced to the date hereof, the "Former Notes"),
which Former Notes were executed and delivered pursuant to the Loan Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as
Borrower
By /s/
----------------------------------------------
George R. Bender, President
Amended Exhibit A-5
-------------------
<PAGE>
EXHIBIT 10.39
AMENDED AND RESTATED TERM-LINE NOTE
-----------------------------------
$15,000,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION ("Lender"), that portion of the principal amount of $15,000,000 that
may from time to time be disbursed and outstanding under this note together with
interest.
This note is a "Term-Line Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity. 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Term-Line Notes (as the
same may have been amended and replaced to the date hereof, the "Former Notes"),
which Former Notes were executed and delivered pursuant to the Loan Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as
Borrower
By /s/
-----------------------------------------------
George R. Bender, President
<PAGE>
EXHIBIT 10.40
AMENDED AND RESTATED TERM-LINE NOTE
-----------------------------------
$15,000,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order of RESIDENTIAL FUNDING
CORPORATION ("Lender"), that portion of the principal amount of $15,000,000 that
may from time to time be disbursed and outstanding under this note together with
interest.
This note is a "Term-Line Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity. 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Term-Line Notes (as the
same may have been amended and replaced to the date hereof, the "Former Notes"),
which Former Notes were executed and delivered pursuant to the Loan Agreement.
MATRIX FINANCIAL SERVICES
CORPORATION, as Borrower
By /s/
----------------------------------------------
George R. Bender, President
<PAGE>
EXHIBIT 10.41
AMENDED AND RESTATED WORKING-CAPITAL NOTE
-----------------------------------------
$5,000,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order of BANK ONE, TEXAS, N.A.
("Lender") that portion of the principal amount of $5,000,000 that may from time
to time be disbursed and outstanding under this note together with interest.
This note is a "Working-Capital Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity, which is the Warehouse-Actual-Termination 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Receivables Notes (as
the same may have been amended and replaced to the date hereof, the "Former
Notes"), which Former Notes were executed and delivered pursuant to the Loan
Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as
Borrower
By /s/
-----------------------------------------------
George R. Bender, President
<PAGE>
EXHIBIT 10.42
AMENDED AND RESTATED WORKING-CAPITAL NOTE
-----------------------------------------
$2,500,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION ("Lender") that portion of the principal amount of $2,500,000 that
may from time to time be disbursed and outstanding under this note together with
interest.
This note is a "Working-Capital Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity, which is the Warehouse-Actual-Termination 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Receivables Notes (as
the same may have been amended and replaced to the date hereof, the "Former
Notes"), which Former Notes were executed and delivered pursuant to the Loan
Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as
Borrower
By /s/
-----------------------------------------------
George R. Bender, President
<PAGE>
EXHIBIT 10.43
AMENDED AND RESTATED WORKING-CAPITAL NOTE
-----------------------------------------
$2,500,000 February 22, 1999
FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona
corporation ("Borrower"), promises to pay to the order of RESIDENTIAL FUNDING
CORPORATION ("Lender") that portion of the principal amount of $2,500,000 that
may from time to time be disbursed and outstanding under this note together with
interest.
This note is a "Working-Capital Note" under the Amended and Restated Loan
Agreement (as renewed, extended, amended, or restated, the "Loan Agreement")
dated as of January 31, 1997, between Borrower, Lender, certain other Lenders,
and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in
the Loan 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 Loan Agreement for this note, including, without limitation, the
final maturity, which is the Warehouse-Actual-Termination 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 Loan
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 Loan Agreement.
This note is an amendment, restatement, renewal, extension, modification
of, consolidation of, and substitution for, the existing Receivables Notes (as
the same may have been amended and replaced to the date hereof, the "Former
Notes"), which Former Notes were executed and delivered pursuant to the Loan
Agreement.
MATRIX FINANCIAL SERVICES CORPORATION, as
Borrower
By /s/
-----------------------------------------------
George R. Bender, President
<PAGE>
EXHIBIT 10.54
FIFTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
(AND WAIVER)
THIS DOCUMENT is entered into as of November 12, 1998, between MATRIX
CAPITAL CORPORATION, a Colorado corporation ("Borrower"), the Determining
Lenders described below, and BANK ONE, TEXAS, N.A., as Agent for Determining
Lenders.
Borrower, Determining 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 $8,500,000 Term Loan and a Revolving Facility of up to
$11,500,000. Borrower, Determining Lenders, and Agent have agreed, upon the
following terms and conditions, to (a) waive Determining Lenders' right to
declare a Default under Section 10.1 of the Credit Agreement resulting from
certain transactions described below (the "Subject Transactions") involving
Borrower and Equi-Mor Holdings, Inc. ("Equi-Mor") and, consequently, Borrower's
failure to observe the requirements of Sections 8.1, 8.2, and 8.3 of the Loan
Agreement, (b) to amend Sections 8.1, 8.2, and 8.3 of the Loan Agreement to
permit future Subject Transactions, and (c) to make certain related changes as
described in Paragraph 2 below.
1. TERMS AND REFERENCES. Unless otherwise stated in this document (A) terms
--------------------
defined in the Credit Agreement have the same meanings when used in this
document and (B) references to "Sections," "Schedules," and "Exhibits" are to
the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENTS. The Credit Agreement is amended as follows:
----------
(A) Section 1.1 is amended by adding the following new definition in
alphabetical order with the definitions in that section:
"Equi-Mor" means Equi-Mor Holdings, Inc., a Nevada corporation
and wholly-owned Subsidiary of Matrix Financial.
(B) Section 8.1(g) is entirely amended as follows:
(g) Charter-School Debt. Debt of Equi-Mor owed to U.S. Bancorp
-------------------
Investments, Inc., on a short-term basis for financing charter-school
leases or loans until they can be sold in the secondary market, for
which Borrower has no direct or contingent liability; provided,
however, that if Borrower is either directly or contingently liable,
the amount of such Debt may not exceed $18,500,000 at any time on or
before January 31, 1999.
(C) A new Section 8.2(l) is added as follows:
(l) Charter-School Liens. Liens incurred on or before January
--------------------
31, 1999, that secure only the Debt described in Section 8.1(g), that
do not cover any Collateral, and that cover only the charter-school
leases or loans of Equi-Mor financed with that Debt and related assets
such as proceeds.
(D) Section 8.3(m) is added as follows:
(m) Charter-School Assets. Investments made on or before January
---------------------
31, 1999, in charter-school leases or loans originated or acquired by
Equi-Mor in the ordinary course of business.
3. WAIVERS. Determining Lenders waive any past or present Default existing
-------
solely as a result of Borrower's failure to observe the requirements of Sections
8.1, 8.2, and 8.3 in connection with the Subject Transactions. Except as
expressly stated, this paragraph is not a waiver of existing or future Potential
Defaults or Defaults or a waiver of Agent's or any Lender's rights to insist
upon compliance by all other relevant parties with each Loan Document.
<PAGE>
4. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the foregoing
--------------------
paragraphs in this document are not effective unless and until (A) the
representations and warranties in this document are true and correct, and (B)
Agent receives counterparts of this document executed by Agent, Determining
Lenders, Borrower, and each other Company named on the signature pages of this
document.
5. RATIFICATIONS. To induce Agent and Determining Lenders to enter into this
-------------
document, Borrower (A) ratifies and confirms all provisions of the Loan
Documents as amended by this document, (B) ratifies and confirms that all
guaranties, assurances, and Liens granted, conveyed, or assigned to Agent and
Lenders under the Loan Documents (as they may have been renewed, extended, and
amended) are not released, reduced, or otherwise adversely affected by this
document and continue to guarantee, assure, and secure full payment and
performance of the present and future Obligation, and (C) agrees to perform
those acts and duly authorize, execute, acknowledge, deliver, file, and record
those additional agreements, and certificates as Agent or any Lender may request
in order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens.
6. REPRESENTATIONS. To induce Agent and Determining Lenders to enter into this
---------------
document, Borrower represents and warrants to Agent and Determining Lenders that
as of the date of this document (A) each Company has all requisite authority and
power to execute, deliver, and perform its obligations under this document,
which execution, delivery, and performance have been duly authorized by all
necessary corporate action, require no action by or filing with any Tribunal, do
not violate corporate charter or bylaws or (except where not a Material-Adverse
Event) violate any Law applicable to it or any material agreement to which it or
its assets are bound, (B) upon execution and delivery by all parties to it, this
document will constitute each Company's legal and binding obligation,
enforceable against it in accordance with this document's terms except as that
enforceability may be limited by Debtor Laws and general principles of equity,
(C) all other representations and warranties in the Loan Documents are true and
correct in all material respects except to the extent that (1) any of them speak
to a different specific date or (2) the facts on which any of them were based
have been changed by transactions contemplated or permitted by the Credit
Agreement, and (D) no Material-Adverse Event, Default, or Potential Default
exists.
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 document, including, without limitation, the reasonable fees
and expenses of Agent's counsel in connection with the negotiation, preparation,
delivery, and execution of this document and any related agreements.
8. MISCELLANEOUS. All references in the Loan Documents to the "Credit
-------------
Agreement" refer to the Credit Agreement as amended by this document. This
document is a "Loan Document" referred to in the Credit Agreement; therefore,
the provisions relating to Loan Documents in Sections 1 and 12 are incorporated
in this document by reference. Except as specifically amended and modified in
this document, the Credit Agreement is unchanged and continues in full force and
effect. This document may be executed in any number of counterparts with the
same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one and the same
instrument. THIS DOCUMENT BINDS AND INURES TO EACH OF THE UNDERSIGNED AND THEIR
RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, SUBJECT TO SECTION 12.12. THIS
DOCUMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES IN RESPECT OF THE MATTERS COVERED BY THE LOAN DOCUMENTS AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
<PAGE>
EXECUTED as of the date first stated in this Fifth Amendment to Credit
Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX CAPITAL CORPORATION, as BANK ONE, TEXAS, N.A., as Agent and a
Borrower Lender
By /s/ By /s/
------------------------------------- ---------------------------------------
David W. Kloos, Chief Financial Officer Mark L. Freeman, Vice President
</TABLE>
U.S. BANK NATIONAL ASSOCIATION,
formerly Colorado National Bank,
as a Lender
By /s/
----------------------------
Andrea C. Koeneke,
Vice President
1 of 2 Signature Pages to
Fifth Amendment to Credit Agreement
<PAGE>
CONSENT AND AGREEMENT
---------------------
To induce Agent and Determining Lenders to enter into this document, the
undersigned jointly and severally (a) consent and agree to this document's
execution and delivery, (b) ratify and confirm that all guaranties, assurances,
Liens, and subordinations granted, conveyed, or assigned to Agent or any Lender
under the Loan Documents (as they may have been renewed, extended, and amended)
are not released, diminished, impaired, reduced, or otherwise adversely affected
by this document and continue to guarantee, assure, secure, and subordinate
other debt to the full payment and performance of all present and future
Obligation, (c) agree to perform those acts and duly authorize, execute,
acknowledge, deliver, file, and record those additional guaranties, assignments,
security agreements, deeds of trust, mortgages, and other agreements,
agreements, instruments, and certificates as Agent or any Lender may reasonably
deem necessary or appropriate in order to create, perfect, preserve, and protect
those guaranties, assurances, Liens, and subordinations, (d) represent and
warrant to Agent and Determining 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 Determining Lenders and their respective
successors and permitted assigns.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES CORPORATION UNITED CAPITAL MARKETS, INC.
and MATRIX FUNDING CORPORATION
By /s/ By /s/
--------------------------------- ------------------------------------
George R. Bender, President of Austin Tilghman, President
each above Company
UNITED FINANCIAL, INC. UNITED SPECIAL SERVICES, INC.
By /s/ By /s/
---------------------------------- -----------------------------------
Richard Schmitz, Chairman Linda Preston, President
VINTAGE DELAWARE HOLDINGS, INC. FIRST MATRIX INVESTMENT SERVICES CORP.
and THE VINTAGE GROUP, INC.
By /s/ By /s/
---------------------------------- -----------------------------------
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
Fifth Amendment to Credit Agreement
<PAGE>
EXHIBIT 10.55
SIXTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS DOCUMENT is entered into as of January 29, 1999, 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 $8,500,000 Term Loan and a Revolving Facility of up to
$11,500,000. Borrower, Lenders, and Agent have agreed, upon the following terms
and conditions, to extend the Stated-Termination Date for the Commitments and
modify the amount of Charter-School Debt allowable as Permitted Debt under the
Credit Agreement.
1. TERMS AND REFERENCES. Unless otherwise stated in this document (A) terms
--------------------
defined in the Credit Agreement have the same meanings when used in this
document and (B) references to "Sections," "Schedules," and "Exhibits" are to
the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENT. Section 8.1(g) of the Credit Agreement is entirely amended as
---------
follows:
(g) Charter-School Debt. Debt of Equi-Mor owed to U.S. Bancorp
-------------------
Investments, Inc. (or its successor or assignee), on a short-term
basis for financing charter-school leases or loans until they can be
sold in the secondary market, for which Borrower has no direct or
contingent liability; provided, however, that if Borrower is either
directly or contingently liable, the amount of such Debt may not
exceed the lesser of either (i) 10% of Borrower's Net Worth or (ii)
$5,000,000.
3. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the foregoing
--------------------
paragraphs in this document are not effective unless and until (A) the
representations and warranties in this document are true and correct, and (B)
Agent receives counterparts of this document executed by Agent, Lenders,
Borrower, and each other Company named on the signature pages of this document.
4. RATIFICATIONS. To induce Agent and Lenders to enter into this document,
-------------
Borrower (A) ratifies and confirms all provisions of the Loan Documents as
amended by this document, (B) ratifies and confirms that all guaranties,
assurances, and Liens granted, conveyed, or assigned to Agent and Lenders under
the Loan Documents (as they may have been renewed, extended, and amended) are
not released, reduced, or otherwise adversely affected by this document and
continue to guarantee, assure, and secure full payment and performance of the
present and future Obligation, and (C) agrees to perform those acts and duly
authorize, execute, acknowledge, deliver, file, and record those additional
agreements, and certificates as Agent or any Lender may request in order to
create, perfect, preserve, and protect those guaranties, assurances, and Liens.
5. REPRESENTATIONS. To induce Agent and Lenders to enter into this document,
---------------
Borrower represents and warrants to Agent and Lenders that as of the date of
this document (A) each Company has all requisite authority and power to execute,
deliver, and perform its obligations under this document, which execution,
delivery, and performance have been duly authorized by all necessary corporate
action, require no action by or filing with any Tribunal, do not violate
corporate charter or bylaws or (except where not a Material-Adverse Event)
violate any Law applicable to it or any material agreement to which it or its
assets are bound, (B) upon execution and delivery by all parties to it, this
document will constitute each Company's legal and binding obligation,
enforceable against it in accordance with this document's terms except as that
enforceability may be limited by Debtor Laws and general principles of equity,
(C) all other representations
Sixth Amendment to Credit Agreement
-----------------------------------
<PAGE>
and warranties in the Loan Documents are true and correct in all material
respects except to the extent that (1) any of them speak to a different specific
date or (2) the facts on which any of them were based have been changed by
transactions contemplated or permitted by the Credit Agreement, and (D) no
Material-Adverse Event, Default, or Potential Default exists.
6. EXPENSES. Borrower shall, subject to a contrary written agreement between
--------
Agent and Borrower, pay all costs, fees, and expenses paid or incurred by Agent
incident to this document, including, without limitation, the reasonable fees
and expenses of Agent's counsel in connection with the negotiation, preparation,
delivery, and execution of this document and any related agreements.
7. MISCELLANEOUS. All references in the Loan Documents to the "Credit
-------------
Agreement" refer to the Credit Agreement as amended by this document. This
document is a "Loan Document" referred to in the Credit Agreement; therefore,
the provisions relating to Loan Documents in Sections 1 and 12 are incorporated
in this document by reference. Except as specifically amended and modified in
this document, the Credit Agreement is unchanged and continues in full force and
effect. This document may be executed in any number of counterparts with the
same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one and the same
instrument. This document binds and inures to each of the undersigned and their
respective successors and permitted assigns, subject to Section 12.12. THIS
DOCUMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES IN RESPECT OF THE MATTERS COVERED BY THE LOAN DOCUMENTS AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGES FOLLOW.
Sixth Amendment to Credit Agreement
-----------------------------------
<PAGE>
EXECUTED as of the date first stated in this Sixth Amendment to Credit
Agreement.
<TABLE>
<CAPTION>
<S> <C>
MATRIX CAPITAL CORPORATION, as ONE, TEXAS, N.A., as Agent and a
Borrower Lender
By /s/ By /s/
------------------------------- --------------------------------
David W. Kloos, Chief Financial Officer Mark L. Freeman, Vice President
</TABLE>
U.S. BANK NATIONAL ASSOCIATION,
formerly Colorado National Bank,
as a Lender
By /s/
---------------------------
Andrea C. Koeneke,
Vice President
1 of 2 Signature Pages to
Sixth Amendment to Credit Agreement
<PAGE>
CONSENT AND AGREEMENT
---------------------
To induce Agent and Lenders to enter into this document, the undersigned
jointly and severally (a) consent and agree to this document's execution and
delivery, (b) ratify and confirm that all guaranties, assurances, Liens, and
subordinations granted, conveyed, or assigned to Agent or any Lender under the
Loan Documents (as they may have been renewed, extended, and amended) are not
released, diminished, impaired, reduced, or otherwise adversely affected by this
document and continue to guarantee, assure, secure, and subordinate other debt
to the full payment and performance of all present and future Obligation, (c)
agree to perform those acts and duly authorize, execute, acknowledge, deliver,
file, and record those additional guaranties, assignments, security agreements,
deeds of trust, mortgages, and other agreements, agreements, instruments, and
certificates as Agent or any Lender may reasonably deem necessary or appropriate
in order to create, perfect, preserve, and protect those guaranties, assurances,
Liens, and subordinations, (d) represent and warrant to Agent and Lenders that
(i) the value of the consideration received and to be received by the
undersigned in respect of those guaranties, assurances, Liens, and
subordinations are reasonably worth at least as much as the related liability
and obligation, (ii) that liability and obligation may reasonably be expected to
directly or indirectly benefit the undersigned, and (iii) each undersigned is --
and after giving effect to those guaranties, assurances, Liens, subordinations,
and the Loan Documents, in light of all existing facts and circumstances
(including, without limitation, collateral for and other obligors in respect of
the Obligation and various components of it and various rights of subrogation
and contribution), each undersigned will be -- Solvent, and (e) waive notice of
acceptance of this consent and agreement, which consent and agreement binds the
undersigned and their successors and permitted assigns and inures to Agent and
Lenders and their respective successors and permitted assigns.
<TABLE>
<CAPTION>
<S> <C>
MATRIX FINANCIAL SERVICES UNITED CAPITAL MARKETS, INC.
CORPORATION and MATRIX FUNDING
CORPORATION
By /s/ By /s/
------------------------------ ---------------------------
George R. Bender, President of Austin Tilghman, President
each above Company
UNITED FINANCIAL, INC. UNITED SPECIAL SERVICES, INC.
By /s/ By /s/
------------------------------ ---------------------------
Richard Schmitz, Chairman Linda Preston, President
VINTAGE DELAWARE HOLDINGS, INC. FIRST MATRIX INVESTMENT SERVICES
CORP. and THE VINTAGE GROUP, INC.
By /s/ By /s/
------------------------------ ---------------------------
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
Sixth Amendment to Credit Agreement
<PAGE>
EXHIBIT 10.58
PROMISSORY NOTE
Dated: February 15, 1999
Principal Amount: $53,362.32 State of Colorado
FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to
pay to the order of Matrix Capital Corporation.
The sum of Fifty-three Thousand, Three Hundred and Sixty-two and 32/100, Dollars
($53,362.32), together with interest thereon at the rate of Prime per annum on
the unpaid balance. Said sum shall be paid in the manner following:
All principal and interest shall be due on February 15, 2000.
All payment shall be first applied to interest and the balance to
principal. This note may be prepaid, at any time, in whole or in part, without
penalty. All prepayments shall be applied in reverse order of maturity.
This note shall at the option of any holder hereof be immediately due and
payable upon the failure to make any payment due hereunder within N/A days
of its due date.
This note at the option of any holder hereof may be extended on an annual
basis for increments of one (1) year. The terms and interest rate will remain
constant.
In the event this note shall be in default, and placed with an attorney for
collection, then the undersigned agree to pay all reasonable attorney's fees and
costs of collection. Payments not made within five (5) days of due date shall be
subject to a late charge of 2% of said payment. All payments hereunder shall be
made to such address as may from time to time be designed by any holder hereof.
The undersigned and all other parties to this note, whether as endorsers,
guarantors or sureties, agree to remain fully bound hereunder until this note
shall be fully paid and waive demand, presentment and protest and all notices
thereto and further agree to remain bound, notwithstanding any extension,
renewal, modification, waiver, or other indulgence by any holder or upon the
discharge or release of any obligor hereunder to this note, or upon the
exchange, substitution, or release of any collateral granted as security for
this note. No modification or indulgence by any holder hereof shall be binding
unless in writing: and any indulgence on any one occasion shall not be an
indulgence for any other or future occasion. Any modification or change of
terms, hereunder granted by any holder hereof, shall be valid and binding upon
each of the undersigned, notwithstanding the acknowledgment of any of the
undersigned, and each of the undersigned does hereby irrevocably grant to each
of the others a power of attorney to enter into any such modification on their
behalf. The rights of any holder hereof shall be cumulative and not necessarily
successive. This note shall take effect as sealed instrument and shall be
construed, governed and enforced in accordance with the laws of the State first
appearing at the head of this note. The undersigned hereby execute this note as
principals and not as sureties.
Maker:
/s/
- -----------------------------------
Thomas P. Cronin
<PAGE>
EXHIBIT 10.60
PROMISSORY NOTE
Dated: September 30, 1998
Principal Amount: $7,500 State of Colorado
FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to
pay to the order of Matrix Capital Corporation.
The sum of Seven Thousand Five Hundred and 00/100, Dollars ($7,500.00), together
with interest thereon at the rate of Prime per annum on the unpaid balance. Said
sum shall be paid in the manner following:
All principal and interest shall be due on September 29, 1999.
All payment shall be first applied to interest and the balance to
principal. This note may be prepaid, at any time, in whole or in part, without
penalty. All prepayments shall be applied in reverse order of maturity.
This note shall at the option of any holder hereof be immediately due and
payable upon the failure to make any payment due hereunder within N/A days
of its due date.
This note at the option of any holder hereof may be extended on an annual
basis for increments of one (1) year. The terms and interest rate will remain
constant.
In the event this note shall be in default, and placed with an attorney for
collection, then the undersigned agree to pay all reasonable attorney's fees and
costs of collection. Payments not made within five (5) days of due date shall be
subject to a late charge of 2% of said payment. All payments hereunder shall be
made to such address as may from time to time be designed by any holder hereof.
The undersigned and all other parties to this note, whether as endorsers,
guarantors or sureties, agree to remain fully bound hereunder until this note
shall be fully paid and waive demand, presentment and protest and all notices
thereto and further agree to remain bound, notwithstanding any extension,
renewal, modification, waiver, or other indulgence by any holder or upon the
discharge or release of any obligor hereunder to this note, or upon the
exchange, substitution, or release of any collateral granted as security for
this note. No modification or indulgence by any holder hereof shall be binding
unless in writing: and any indulgence on any one occasion shall not be an
indulgence for any other or future occasion. Any modification or change of
terms, hereunder granted by any holder hereof, shall be valid and binding upon
each of the undersigned, notwithstanding the acknowledgment of any of the
undersigned, and each of the undersigned does hereby irrevocably grant to each
of the others a power of attorney to enter into any such modification on their
behalf. The rights of any holder hereof shall be cumulative and not necessarily
successive. This note shall take effect as sealed instrument and shall be
construed, governed and enforced in accordance with the laws of the State first
appearing at the head of this note. The undersigned hereby execute this note as
principals and not as sureties.
Maker:
/s/
- -----------------------------------
Thomas P. Cronin
<PAGE>
EXHIBIT 21
Matrix Capital Corporation
Subsidiaries of the Registrant
1. Matrix Financial Services Corporation - Incorporated in Arizona
2. United Financial, Inc. - Incorporated in Colorado
3. Matrix Capital Bank - Organized pursuant to a Federal savings and loan
charter
4. United Special Services, Inc. - Incorporated in Colorado
5. United Capital Markets, Inc. - Incorporated in Colorado
6. The Vintage Group Inc. - Incorporated in Texas
7. Vintage Delaware Holdings, Inc. - Incorporated in Delaware
8. Sterling Trust Company - Incorporated in Texas
9. First Matrix Investment Services Corp. - Incorporated in Texas
10. Matrix Funding Corp. - Incorporated in Colorado
11. Matrix Advisory Services Corporation - Incorporated in Colorado
12. Equi-Mor Holdings, Inc. - Incorporated in Nevada
13. Matrix Aviation Corporation - Incorporated in Colorado
14. MCNP-1 Corp. - Incorporated in New Mexico
15. Leader Acquisition Corp. - Incorporated in Delaware
II-3
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8
No. 333-36671) pertaining to the 1996 Amended and Restated Employee Stock Option
Plan and the 1996 Employee Stock Purchase Plan of Matrix Capital Corporation of
our report dated
March 18, 1999, with respect to the consolidated financial statements of Matrix
Bancorp, Inc. (formerly known as Matrix Capital Corporation) as of December 31,
1997 and 1998 and for each of the three years in the period ended December 31,
1998 included in the Form 10-K for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,665
<INT-BEARING-DEPOSITS> 8,120
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 852,158
<ALLOWANCE> 3,710
<TOTAL-ASSETS> 1,012,640
<DEPOSITS> 587,340
<SHORT-TERM> 284,845
<LIABILITIES-OTHER> 29,157
<LONG-TERM> 61,944
0
0
<COMMON> 1
<OTHER-SE> 49,353
<TOTAL-LIABILITIES-AND-EQUITY> 1,012,640
<INTEREST-LOAN> 59,452
<INTEREST-INVEST> 1,242
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 60,694
<INTEREST-DEPOSIT> 16,222
<INTEREST-EXPENSE> 36,504
<INTEREST-INCOME-NET> 24,190
<LOAN-LOSSES> 4,607
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 52,939
<INCOME-PRETAX> 13,389
<INCOME-PRE-EXTRAORDINARY> 8,513
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,513
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 3.37
<LOANS-NON> 13,209
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,756
<CHARGE-OFFS> 2,711
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 3,710
<ALLOWANCE-DOMESTIC> 3,710
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
