<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number: 0-21231
MATRIX BANCORP, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1233716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Number of shares of Common Stock ($.0001 par value) outstanding at the close
of business on May 7, 1999 was 6,724,911 shares.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998......... 3
Condensed Consolidated Statements of Income
Quarters ended March 31, 1999 and 1998 (unaudited)....... 4
Condensed Consolidated Statements of Changes in Shareholders'
Equity
Quarters ended March 31, 1999 and 1998 (unaudited)....... 5
Condensed Consolidated Statements of Cash Flows
Quarters ended March 31, 1999 and 1998 (unaudited)....... 6
Notes to Unaudited Condensed Consolidated Financial
Statements............................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 11
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................. 20
SIGNATURES............................................................... 21
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Matrix Bancorp, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- --------------
(unaudited)
<S> <C> <C>
Assets
Cash..................................... $ 19,502 $ 18,665
Interest-earning deposits................ 5,406 8,120
Loans held for sale, net................. 700,526 754,226
Loans held for investment, net........... 102,476 94,222
Mortgage servicing rights, net........... 67,437 58,147
Other receivables........................ 43,947 40,018
Federal Home Loan Bank of Dallas stock... 15,855 15,643
Premises and equipment, net.............. 10,714 10,328
Other assets............................. 30,656 13,271
---------- --------------
Total assets................. $ 996,519 $ 1,012,640
========== ==============
Liabilities and shareholders' equity
Liabilities:
Deposits................................. $ 543,954 $ 490,516
Custodial escrow balances................ 98,266 96,824
Drafts payable........................... 2,080 5,423
Payable for purchase of mortgage......... 9,469 12,103
servicing rights
Federal Home Loan Bank of Dallas......... 113,000 168,000
borrowings
Borrowed money........................... 169,849 178,789
Other liabilities........................ 6,298 11,283
Income taxes payable..................... 1,734 348
---------- --------------
Total liabilities............ 944,650 963,286
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 6,724,911 and
6,723,911 at March 31, 1999 and
December 31, 1998, respectively......... 1 1
Additional paid in capital............... 22,426 22,416
Retained earnings........................ 29,442 26,937
---------- --------------
Total shareholders' equity... 51,869 49,354
---------- --------------
Total liabilities and
shareholders' equity........ $ 996,519 $ 1,012,640
========== ==============
</TABLE>
See accompanying notes.
3
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Income
(Dollars in thousands except per share information)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Interest income
Loans................................. $ 17,238 $ 11,301
Interest-earning deposits............. 367 285
----------- -----------
Total interest income................. 17,605 11,586
Interest expense
Deposits.............................. 5,195 2,864
Borrowings............................ 5,182 4,289
----------- -----------
Total interest expense................ 10,377 7,153
----------- -----------
Net interest income before provision
for loan and valuation losses........ 7,228 4,433
Provision for loan and valuation
losses............................... 675 450
----------- -----------
Net interest income................. 6,553 3,983
Noninterest income
Loan administration................... 5,293 3,743
Brokerage............................. 1,672 1,672
Trust services........................ 1,279 1,001
Gain on sale of loans................. 532 1,062
Gain on sale of mortgage servicing
rights............................... - 837
Loan origination...................... 1,954 1,482
Other................................. 3,476 1,122
----------- -----------
Total noninterest income............ 14,206 10,919
Noninterest expense
Compensation and employee benefits.... 6,869 5,127
Amortization of mortgage servicing
rights............................... 4,726 1,594
Occupancy and equipment............... 838 666
Postage and communication............. 669 542
Professional fees..................... 300 249
Data processing....................... 326 346
Other general and administrative...... 3,131 2,854
----------- -----------
Total noninterest expense........... 16,859 11,378
----------- -----------
Income before income taxes.......... 3,900 3,524
Provision for income taxes............ 1,395 1,339
----------- -----------
Net income.......................... $ 2,505 $ 2,185
=========== ===========
Net income per share.................... $ .37 $ .33
=========== ===========
Net income per share assuming dilution.. $ .37 $ .32
=========== ===========
Weighted average shares................. 6,724,693 6,704,026
=========== ===========
Weighted average shares assuming
dilution............................... 6,848,571 6,841,679
=========== ===========
See accompanying notes.
</TABLE>
4
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid In Retained
Shares Amount Capital Earnings Total
--------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Quarter ended March 31, 1999
- ----------------------------
Balance at December 31, 1998.. 6,723,911 $ 1 $ 22,416 $ 26,937 $ 49,354
Exercise of stock options..... 1,000 - 10 - 10
Net income.................... - - - 2,505 2,505
--------- ------------ ----------- ----------- ---------
Balance at March 31, 1999..... 6,724,911 $ 1 $ 22,426 $ 29,442 $ 51,869
========= ============ =========== =========== =========
Quarter ended March 31, 1998
- ----------------------------
Balance at December 31, 1997.. 6,703,880 $ 1 $ 22,185 $ 18,424 $ 40,610
Exercise of stock options..... 200 - 2 - 2
Net income.................... - - - 2,185 2,185
--------- ------------ ----------- ----------- ---------
Balance at March 31, 1998..... 6,704,080 $ 1 $ 22,187 $ 20,609 $ 42,797
========= ============ =========== =========== =========
</TABLE>
See accompanying notes.
5
<PAGE>
Matrix Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
Operating activities
Net income................................. $ 2,505 $ 2,185
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization............. 1,351 421
Provision for loan and valuation losses... 675 450
Amortization of mortgage servicing
rights................................... 4,726 1,594
Gain on sale of loans..................... (532) (1,062)
Gain on sale of mortgage servicing
rights, net.............................. - (837)
Loans originated for sale, net of
loans sold............................... 29,181 (27,582)
Loans purchased for sale.................. (25,016) (110,674)
Proceeds from sale of loans purchased
for sale................................. 40,041 64,580
Originated mortgage servicing rights,
net...................................... (465) (651)
Increase in other receivables and
other assets............................. (21,643) (86)
Decrease in other liabilities and
income taxes payable..................... (3,599) (689)
------------- -------------
Net cash provided (used) by operating
activities................................ 27,224 (72,351)
Investing activities
Loans originated and purchased for
investment................................ (20,202) (13,806)
Principal repayments on loans.............. 17,267 29,339
Purchase of Federal Home Loan Bank of
Dallas stock.............................. (212) (449)
Purchases of premises and equipment........ (880) (376)
Acquisition of mortgage servicing rights... (16,185) (10,170)
Proceeds from sale of mortgage
servicing rights.......................... 161 2,256
------------- -------------
Net cash provided (used) by investing
activities................................ (20,051) 6,794
Financing activities
Net increase in deposits................... 53,438 91,321
Net increase in custodial escrow
balances.................................. 1,442 21,927
Decrease in revolving lines and
repurchase agreements, net................ (77,550) (44,587)
Repayments of notes payable................ (12,965) (11,436)
Proceeds from notes payable................ 26,619 23,822
Repayment of financing arrangements........ (44) (45)
Proceeds from issuance of common stock
related to employee stock option plan..... 10 2
------------- -------------
Net cash provided (used) by financing
activities................................ (9,050) 81,004
------------- -------------
Increase (decrease) in cash and cash
equivalents............................... (1,877) 15,447
Cash and cash equivalents at beginning
of period................................. 26,785 9,633
------------- -------------
Cash and cash equivalents at end of
period.................................... $ 24,908 $ 25,080
============= =============
Supplemental disclosure of noncash
activity
Payable for purchase of mortgage
servicing rights.......................... $ 9,469 $ 14,374
============= =============
Drafts payable............................. $ 2,080 $ 11,063
============= =============
Supplemental disclosure of cash flow
information
Cash paid for interest expense............. $ 5,014 $ 7,703
============= =============
Cash paid for income taxes................. $ - $ -
============= =============
</TABLE>
See accompanying notes.
6
<PAGE>
Matrix Bancorp, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1999
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Matrix
Bancorp, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes hereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and the
accompanying notes. Actual results could differ from these estimates.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement No. 133"), 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 effective January 1, 2000. This Statement
requires 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.
2. Net Income Per Share
The following table sets forth the computation of net income per share and net
income per share assuming dilution:
<TABLE>
<CAPTION>
Quarter Ended March 31,
1999 1998
----------- -------------
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Numerator:
Net income available to common
shareholders....................... $ 2,505 $ 2,185
=========== =============
Denominator:
Weighted average shares outstanding. 6,724,693 6,704,026
Effect of dilutive securities:
Common stock options........... 109,424 118,034
Common stock warrants.......... 14,454 19,619
----------- -------------
Dilutive potential common shares.... 123,878 137,653
----------- -------------
Denominator for net income per
share assuming dilution............ 6,848,571 6,841,679
=========== =============
</TABLE>
7
<PAGE>
Matrix Bancorp, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1999
3. Mortgage Servicing Rights
The activity in the Mortgage Servicing Rights ("MSRs") is summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
----------------- ------------------
(unaudited)
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period.... $ 58,147 $ 36,440
Purchases......................... 13,551 34,831
Originated, net................... 465 (24)
Amortization...................... (4,726) (10,563)
Sales............................. - (2,537)
----------------- ------------------
Balance at end of period.......... $ 67,437 $ 58,147
================= ==================
</TABLE>
Accumulated amortization of MSRs aggregated approximately $31.6 million and
$26.9 million at March 31, 1999 and December 31, 1998, respectively. The
Company's servicing portfolio (excluding subserviced loans) was comprised of the
following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------------- -------------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding of Loans Outstanding
------ ------------------ ------ -----------------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLMC................................... 19,299 $ 1,227,490 19,227 $ 1,221,074
Fannie Mae.............................. 40,500 2,539,418 23,198 1,419,345
GNMA.................................... 15,970 752,562 17,552 838,081
Other VA, FHA and conventional loans.... 17,516 1,677,274 18,369 1,879,229
------ ------------------ ------ -----------------
93,285 $ 6,196,744 78,346 $ 5,357,729
====== ================== ====== =================
</TABLE>
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheets at March 31, 1999 and December 31, 1998 pertain to
escrowed payments of taxes and insurance and the float on principal and interest
payments on loans serviced by the Company.
4. Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------------------- ------------------------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
------------------- ------- ---- ---------------- ------- ----
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts.......... $ 2,830 0.52% 3.42% $ 2,830 0.58% 3.58%
NOW accounts............... 46,652 8.58 1.41 42,178 8.60 1.63
Money market accounts...... 234,641 43.13 3.28 170,957 34.85 3.13
------------------- ------- ---- ---------------- ------- ----
284,123 52.23 3.00 215,965 44.03 2.84
Certificate accounts....... 259,831 47.77 5.22 274,551 55.97 5.52
------------------- ------- ---- ---------------- ------- ----
$ 543,954 100.00% 3.98% $ 490,516 100.00% 4.37%
=================== ======= ==== ================ ======= ====
</TABLE>
8
<PAGE>
Matrix Bancorp, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1999
4. Deposits (continued)
At March 31, 1999 and December 31, 1998, brokered deposits accounted for
approximately $129.0 million and $148.7 million, respectively, of the total
certificate accounts shown above. Additionally, included in money market
accounts is approximately $107.1 million and $47.1 million at March 31, 1999 and
December 31, 1998, respectively, from a third party title company.
5. Commitments and Contingencies
At March 31, 1999, the Company had $98.0 million in pipeline and funded loans
offset with mandatory forward commitments of $79.9 million and nonmandatory
forward commitments of $5.8 million.
As of March 31, 1999, the Company had identified and hedged approximately $548
million of its mortgage servicing portfolio using a program of exchange-traded
future and options. At March 31, 1999, the net realized deferred losses and the
unrealized deferred losses of the open positions was approximately $1.2 million.
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. 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, which are to be paid in no
more than $60,000 annual increments by the Company through 2007 if not covered
through permit fees paid by successor homebuilders. 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. At March 31, 1999 and
December 31, 1998, the total basis of the land development was $4.2 million and
$4.1 million, respectively, and is classified in other assets in the
accompanying condensed consolidated balance sheets.
<TABLE>
<CAPTION>
6. Segment Information
Servicing
Brokerage and
Traditional Banking Mortgage Banking Consulting
---------------------- ------------------- ----------
(In thousands)
(unaudited)
<S> <C> <C> <C>
Quarter ended March 31, 1999:
Revenues from external customers:
Interest income................. $ 15,571 $ 1,274 $ -
Noninterest income.............. 2,026 6,696 3,004
Intersegment revenues............. 135 339 250
Segment profit(loss).............. 7,040 (1,833) 1,178
Quarter ended March 31, 1998:
Revenues from external customers:
Interest income................. $ 9,802 $ 1,778 $ -
Noninterest income.............. 2,693 4,663 2,017
Intersegment revenues............. - 325 159
Segment profit(loss).............. 4,315 71 985
</TABLE>
9
<PAGE>
Matrix Bancorp, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 1999
6. Segment Information (continued)
<TABLE>
<CAPTION>
Quarter Ended March 31, 1999 Quarter Ended March 31, 1998
------------------------------- -------------------------------
(In thousands)
(unaudited)
<S> <C> <C>
Profit:
Total profit for reportable segments..... $ 6,385 $ 5,371
Other profit(loss)....................... (2,289) (1,763)
Adjustment of intersegment profit(loss)
in consolidation........................ (196) (84)
------------------------------- -------------------------------
Income before income taxes............... $ 3,900 $ 3,524
=============================== ===============================
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's principal activities focus on traditional banking, mortgage
banking and the administration of self-directed trust accounts. The Company's
traditional banking activities include originating and servicing residential,
commercial and consumer loans and providing a broad range of depository
services. The Company's mortgage banking activities consist primarily of
purchasing and selling residential mortgage loans and residential mortgage
servicing rights (MSRs); offering brokerage, consulting and analytical services
to financial services companies and financial institutions; servicing
residential mortgage portfolios for investors; originating residential
mortgages; and providing real estate management and disposition services. The
Company's trust activities focus primarily on the administration of self-
directed individual retirement accounts, qualified retirement plans and
custodial and directed trust accounts. These activities are conducted through
the Company's primary operating subsidiaries, Matrix Capital Bank ("Matrix
Bank"), Matrix Financial Services Corporation ("Matrix Financial"), Sterling
Trust Company ("Sterling Trust"), United Financial, Inc. ("United Financial"),
United Special Services, Inc. ("USS"), United Capital Markets, Inc. ("UCM") and
First Matrix Investment Services Corporation ("First Matrix").
The principal components of the Company's revenues consist primarily of net
interest income recorded by Matrix Bank and Matrix Financial, loan
administration fees generated by Matrix Financial and Matrix Bank, brokerage
fees realized by United Financial, loan origination fees and gains on sales of
mortgage loans and MSRs generated by Matrix Bank and Matrix Financial, trust
service fees generated by Sterling Trust and consulting and service fee income
earned by UCM and USS, respectively. The Company's results of operations are
influenced by changes in interest rates and the effect of these changes on the
interest spreads of the Company, the volume of loan originations, mortgage loan
prepayments and the value of mortgage servicing portfolios.
Forward-Looking Information
Certain statements contained in this quarterly report that are not historical
facts, including, but not limited to, statements that can be identified by the
use of forward-looking terminology such as "may", "will", "expect",
"anticipate", "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 quarterly report could differ materially from those stated in such forward-
looking statements. Among the factors that could cause actual results to differ
materially are: interest rate fluctuations; level of delinquencies; defaults and
prepayments; general economic conditions; competition; government regulation;
possible future litigation; the actions or inactions of 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 with the Securities and Exchange Commission on March 23, 1999; and the
uncertainties set forth from time to time in the Company's periodic reports,
filings and other public statements.
Comparison of Results of Operations for the Quarters Ended March 31, 1999 and
1998
Net Income; Return on Average Equity. Net income increased $320,000, or 14.6%,
to $2.5 million, or $.37 per share, for the quarter ended March 31, 1999 as
compared to $2.2 million, or $.32 per share, for the quarter ended March 31,
1998. Return on average equity decreased to 19.8% for the quarter ended March
31, 1999 as compared to 21.2% for the quarter ended March 31, 1998.
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $2.8 million, or 63.1%, to $7.2 million for the
quarter ended March 31, 1999 as compared to $4.4 million for the quarter ended
March 31, 1998. The Company's net interest margin increased 20 basis points to
3.34% for the quarter ended March 31, 1999 from 3.14% for the quarter ended
March 31, 1998 and interest rate spread increased to 3.13% for the quarter ended
March 31, 1999 from 2.71% for the quarter ended March 31, 1998. The increases
in net interest income before provision for loan and valuation losses, net
interest margin and interest rate spread for the first
11
<PAGE>
quarter of 1999 were attributable to the following: a 54.5% increase in the
Company's average loan balance to $833.5 million for the quarter ended March 31,
1999 from $539.4 million for the quarter ended March 31, 1998 and a decrease in
the cost of interest-bearing liabilities to 5.00% for the quarter ended March
31, 1999 as compared to 5.49% for the quarter ended March 31, 1998. The above
were offset by a 59.3% increase in average interest-bearing liabilities to
$830.2 million for the quarter ended March 31, 1999 as compared to $521.2
million for the quarter ended March 31, 1998 and a decrease in the Company's
yield on interest-earning assets to 8.13% from 8.20% for the quarters ended
March 31, 1999 and 1998, respectively. The decrease in the cost of interest-
bearing liabilities was primarily driven by decreases in the rates paid for
Federal Home Loan Bank ("FHLB") borrowings and certificates of deposit,
including brokered certificates of deposit. For a tabular presentation of the
changes in net interest income due to changes in the volume of interest-earning
assets and interest-bearing liabilities, as well as changes in interest rates,
see "--Analysis of Changes in Net Interest Income Due to Changes in Interest
Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and valuation
losses increased $225,000 to $675,000 for the quarter ended March 31, 1999 as
compared to $450,000 for the quarter ended March 31, 1998. This increase was
primarily attributable to the increase in the balance of loans receivable, which
increased to $803.0 million at March 31, 1999 as compared to $573.6 million at
March 31, 1998. 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 income represents service fees earned
from servicing loans for various investors, which are based on a contractual
percentage of the outstanding principal balance plus late fees and other
ancillary charges. Loan administration fees increased $1.6 million, or 41.4%,
to $5.3 million for the quarter ended March 31, 1999 as compared to $3.7 million
for the quarter March 31, 1998. Loan administration fees are affected by
factors that include the size of the Company's residential mortgage loan
servicing portfolio, the servicing spread, the timing of payment collections and
the amount of ancillary fees received. The mortgage loan servicing portfolio
increased to an average balance of $4.9 million for the quarter ended March 31,
1999 as compared to $3.5 million for the quarter ended March 31, 1998. This
increase was offset by a reduction in the average service fee rate (including
all ancillary income) to 0.43% for the first quarter of 1999 as compared to
0.45% for the first quarter of 1998.
Brokerage Fees. Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to MSRs. Brokerage fees were identical
for the quarters ended March 31, 1999 and 1998, which was the result of
comparable balances of residential mortgage servicing portfolios brokered by
United Financial. MSRs brokered, in terms of aggregate unpaid principal
balances on the underlying loans, were $13.8 billion and $14.5 billion for the
quarters ended March 31, 1999 and 1998, respectively. 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 in this and other recent
quarters.
Trust Services. Trust service fees increased $278,000, or 27.8%, to $1.3
million for the quarter ended March 31, 1999 as compared to $1.0 million for the
quarter ended March 31, 1998. This increase is associated with the growth in
the number of trust accounts under administration at Sterling Trust, which
increased to 37,360 at March 31, 1999 from 30,193 at March 31, 1998 and the
increase in the total assets under administration, which increased to over $2.2
billion at March 31, 1999 from approximately $1.5 billion at March 31, 1998.
Gain on Sale of Loans. Gain on the sale of loans decreased $530,000 to $532,000
for the quarter ended March 31, 1999 as compared to $1.1 million for the quarter
ended March 31, 1998. This decrease resulted from the sale of only $39.5
million loans during the quarter ended March 31, 1999 as compared to the sale of
$63.5 million loans during the quarter ended March 31, 1998. Gain on the sale
of loans can fluctuate significantly from quarter to quarter and year to year
based on a variety of factors, such as the current interest rate environment,
the supply 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 the sale of MSRs decreased
$837,000 as the Company did not sell any MSRs during the quarter ended March 31,
1999. Gains from the sale of MSRs can fluctuate significantly from quarter to
quarter and 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.
12
<PAGE>
Loan Origination. Loan origination income includes all mortgage loans fees,
secondary marketing activity on new loan originations and servicing release
premiums on new originations sold, net of origination costs. Loan origination
income increased $472,000, or 31.8%, to $2.0 million for the quarter ended March
31, 1999 as compared to $1.5 million for the quarter ended March 31, 1998. The
increase in loan origination income resulted from differences in the pricing and
mix of loans originated, which offset the $16.6 million decrease in wholesale
residential mortgage loan production.
Other Income. Other income increased $2.4 million, or 209.8%, to $3.5 million
for the quarter ended March 31, 1999 as compared to $1.1 million for the quarter
ended March 31, 1998. The increase in other income was primarily due to
increased consulting income earned by UCM ($960,000 for the quarter ended March
31, 1999 as compared to $307,000 for the quarter ended March 31, 1998),
increased service fee income earned by USS ($784,000 for the quarter ended March
31, 1999 as compared to $321,000 for the quarter ended March 31, 1998) and a
$335,000 increase in whole loan brokerage income from the first quarter of 1998
to the first quarter of 1999. Increases in income for UCM and USS relate to an
increase in customers between the first quarters of 1999 and 1998. The remainder
of the increase in other income pertains to various financing transactions and
service fees earned by Matrix Financial and Matrix Bank.
Noninterest Expense. Noninterest expense increased $5.5 million, or 48.2%, to
$16.9 million for the quarter ended March 31, 1999 as compared to $11.4 million
for the quarter ended March 31, 1998. This increase was predominantly due to
increases in the amortization of MSRs and growth and expansion of the Company
throughout 1998 and into 1999. This growth and expansion includes increased
emphasis on wholesale loan production at Matrix Financial, expansion occurring
at Sterling Trust due to increased assets under administration, growth at Matrix
Bank and additional personnel at several other subsidiaries of the Company.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Compensation and employee benefits...... $ 6,869 $ 5,127
Amortization of mortgage servicing
rights................................. 4,726 1,594
Occupancy and equipment................. 838 666
Postage and communication............... 669 542
Professional fees....................... 300 249
Data processing......................... 326 346
Other................................... 3,131 2,854
------- -------
Total................................. $16,859 $11,378
======= =======
</TABLE>
Compensation and employee benefits expense increased $1.8 million, or 34.0%, to
$6.9 million for the quarter ended March 31, 1999 as compared to $5.1 million
for the quarter ended March 31, 1998. This increase was primarily the result of
the growth and expansion of the Company (as discussed above) and an increase in
commission-based compensation. The Company experienced an increase of 133
employees to 518 full-time employees at March 31, 1999 as compared to 385
employees at March 31, 1998.
Amortization of MSRs increased $3.1 million, or 196.5%, to $4.7 million for the
quarter ended March 31, 1999 as compared to $1.6 million for the quarter ended
March 31, 1998. Amortization of MSRs fluctuates based on the size of the
Company's mortgage servicing portfolio and the prepayment rates experienced with
respect to the underlying mortgage loan portfolio. In response to the lower
interest rates prevalent in the market, prepayment speeds have increased due to
borrowers refinancing into lower interest rate mortgages. The Company's
prepayment rates on its servicing portfolio averaged 27.6% for the quarter ended
March 31, 1999 as compared to 17.0% for the quarter ended March 31, 1998.
The remainder of noninterest expense, which includes occupancy and equipment
expense, postage and communication expense, professional fees, data processing
costs and other expenses, increased $607,000, or 13.0%, to $5.3 million for the
quarter ended March 31, 1999 as compared to $4.7 million for the quarter ended
March 31, 1998. This increase was primarily attributable to the growth and
expansion of the Company (as discussed above).
13
<PAGE>
Provision for Income Taxes. The provisions for income taxes for the quarters
ended March 31, 1999 and 1998 were comparable, as the increase in pretax income
was offset by a reduction in the effective tax rate to 35.8% for the quarter
ended March 31, 1999 as compared to 38.0% for the quarter ended March 31, 1998.
The decrease in the effective tax rate is the result of the origination of tax-
exempt leases by the Company.
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding the Company's average balances of assets and liabilities,
as well as the dollar amounts of interest income from interest-earning assets
and interest expense on interest-bearing liabilities and the resultant yields or
costs. Average interest rate information for the quarters ended March 31, 1999
and 1998 has been annualized. Ratio, yield and rate information is based on
average daily balances where available; otherwise, average monthly balances have
been used. Nonaccrual loans are included in the calculation of average balances
for loans for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net.......................... $ 833,534 $ 17,238 8.27 % $ 539,449 $ 11,301 8.38 %
Interest-earning deposits........... 17,282 155 3.59 16,400 150 3.66
FHLB stock.......................... 15,645 212 5.42 9,134 135 5.91
------------ ---------------- -------- ---------- ---------- ---------
Total interest-earning assets..... 866,461 17,605 8.13 564,983 11,586 8.20
Noninterest-earning assets:
Cash................................ 17,799 7,384
Allowance for loan and valuation.... (3,479) (1,845)
losses
Premises and equipment.............. 10,555 9,060
Other assets........................ 126,503 68,843
------------ ----------
Total noninterest-earning assets.. 151,378 83,442
------------ ----------
Total assets...................... $ 1,017,839 $ 648,425
============ ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Passbook accounts................... $ 2,764 $ 24 3.42 % $ 2,881 $ 28 3.89 %
Money market and NOW accounts....... 268,848 2,162 3.22 116,407 837 2.88
Certificates of deposit............. 230,612 3,009 5.22 140,824 1,999 5.68
FHLB borrowings..................... 155,461 1,898 4.88 139,634 1,964 5.63
Borrowed money...................... 172,485 3,284 7.61 121,456 2,325 7.66
------------ ---------------- -------- ---------- ---------- ---------
Total interest-bearing
liabilities...................... 830,170 10,377 5.00 521,202 7,153 5.49
------------ ---------------- -------- ---------- ---------- ---------
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances)........ 113,050 71,596
Other liabilities................... 24,077 14,431
------------ ----------
Total noninterest-bearing
liabilities...................... 137,127 86,027
Shareholders' equity.................. 50,542 41,196
------------ ----------
Total liabilities and shareholders'
equity............................... $ 1,017,839 $ 648,425
============ ==========
Net interest income before provision
for loan and valuation losses..................... $ 7,228 $ 4,433
================ ==========
Interest rate spread...................................................... 3.13 % 2.71 %
======== ========
Net interest margin....................................................... 3.34 % 3.14 %
======== ========
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................................................. 104.37 % 108.40 %
======== ========
</TABLE>
14
<PAGE>
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. It distinguishes between the increase or decrease related
to changes in balances and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Quarter Ended March 31,
1999 vs 1998
---------------------------------------
Increase (Decrease) Due
to Change in
---------------------------------------
Volume Rate Total
----------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans, net............................ $ 6,082 $ (145) $ 5,937
Interest-earning deposits............. 8 (3) 5
FHLB stock............................ 88 (11) 77
----------- ---------- -------
Total interest-earning assets...... 6,178 (159) 6,019
Interest-bearing liabilities:
Passbook accounts..................... (1) (3) (4)
Money market and NOW accounts........ 1,226 99 1,325
Certificates of deposit............... 1,172 (162) 1,010
FHLB borrowings....................... 193 (259) (66)
Borrowed money........................ 971 (12) 959
----------- ---------- -------
Total interest-bearing
liabilities....................... 3,561 (337) 3,224
----------- ---------- -------
Change in net interest income
before provision for
loan and valuation losses.... $ 2,617 $ 178 $ 2,795
=========== ========== =======
</TABLE>
Asset Quality
Nonperforming Assets
The following table sets forth information on the Company's nonperforming assets
("NPAs"). NPAs consist primarily of nonaccrual loans and foreclosed real
estate. Loans are placed on nonaccrual when full payment of principal or
interest is in doubt or when they are past due 90 days as to either principal or
interest. Foreclosed real estate arises primarily through foreclosure on
mortgage loans owned.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 March 31, 1998
---------------- ------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans................ $ 7,970 $ 8,208 $ 6,248
Nonaccrual commercial loans and direct
financing leases........................ 7,312 4,349 -
Nonaccrual consumer loans................ 193 652 244
---------------- ------------------- ----------------
Total nonperforming loans 15,475 13,209 6,492
Foreclosed real estate 1,627 916 1,095
---------------- ------------------- ----------------
Total nonperforming assets $ 17,102 $ 14,125 $ 7,587
================ =================== ================
Total nonperforming loans to total loans 1.92% 1.55% 1.13%
================ =================== ================
Total nonperforming assets to total
assets 1.73% 1.39% 1.09%
================ =================== ================
Ratio of allowance for loan and
valuation losses to total
nonperforming loans..................... 27.02% 28.09% 31.12%
================ =================== ================
</TABLE>
As of March 31, 1999, the Company had approximately $101,000 of non-government
accruing loans that were contractually past due 90 days or more. The Company
accrues for government-sponsored loans such as FHA
15
<PAGE>
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 $178.6 million at March 31, 1999. 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. At March 31, 1999, $7.7 million,
or 50.0%, of the nonaccrual loans were loans that were residential loans
purchased in bulk loan portfolios and remain classified as "held for sale".
Total loans held for sale at March 31, 1999 were $702.9 million, of which $15.1
million, or 2.1%, were nonaccrual loans. Against the loans held for sale, the
Company has $2.5 million of purchase discounts.
The increases in nonaccrual commercial loans and direct financing leases at
December 31, 1998 and March 31, 1999 were caused by tax-exempt lease financing
originated by the Company for charter schools for the purchase of real estate
and equipment. These leases are classified by the Company as held for sale. Due
to enrollment issues and the timing of receipt state funding, some of the leases
originated have advanced to nonaccrual status.
The percentage of the allowance for loan losses to nonaccrual loans varies
widely due to the nature of the Company's portfolio of loans. The Company
analyzes the collateral for each nonperforming loan to determine potential loss
exposure. In conjunction with other factors, this loss exposure contributes to
the overall assessment of the adequacy of the allowance for loan and valuation
losses. See "--Comparison of Results of Operations for the Quarters Ended March
31, 1999 and 1998."
Liquidity and Capital Resources
Liquidity represents the ability of the Company to generate funds to support
asset growth, satisfy disbursement needs, maintain reserve requirements and
otherwise operate on an ongoing basis.
The quarter ended March 31, 1999 resulted in net cash provided by the Company's
operating activities, which differs from the Company's trend of net cash used by
operating activities experienced over previous reported periods. The Company's
typical net use of cash for operating activities results primarily from growth
at Matrix Bank 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. However,
due to liquidity and capital, the Company does not anticipate growth to be as
significant as in prior periods.
The Company anticipates that the growth at Matrix Bank (discussed above) and its
lending, investing and other general activities will be funded through retail
deposits, custodial escrow deposits, directed trust deposits, brokered deposits,
FHLB borrowings and possibly, new holding company offerings; many of which are
already a primary source of funds for Matrix Bank. 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 March 31, 1999, Matrix Bank had overnight
borrowings from the FHLB of $113.0 million. The directed trust deposits
generated from the Company's trust administration services fluctuate based on
the trust assets under administration, and to a lesser extent, the general
economic conditions. The custodial escrow balances held by Matrix Bank fluctuate
based upon the mix and size of the related mortgage servicing portfolios and the
timing of payments for taxes and insurance.
Matrix Bank, a well capitalized institution, had a leverage capital ratio of
6.3% at March 31, 1999. This exceeded the well capitalized leverage capital
requirement of 5.0% of adjusted assets by $10.7 million. Matrix Bank's risk-
based capital ratio was 11.5% at March 31, 1999, which currently exceeds the
well capitalized risk-based capital requirement of 10.0% of risk weighted assets
by $6.9 million.
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 March 31, 1999, Matrix Financial's
servicing acquisition facility aggregated $45.0 million, of which $4.2 million
was available to be utilized after deducting drawn amounts. It is anticipated
that the Company will increase the line of credit facility for servicing
acquisition activities as needed.
16
<PAGE>
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 March 31,
1999, Matrix Financial's warehouse line of credit facility aggregated $120.0
million, of which $72.6 million was available to be utilized. Additionally, the
agent bank for the warehouse line has provided the Company with an overline
facility, which provides an additional $10.0 million in funding capacity at the
lender's sole discretion. Matrix Financial also has a $25.0 million
sale/repurchase facility with a third party financial institution.
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 March 31, 1999,
Matrix Financial's working capital facilities aggregated $10.0 million, of which
$8.2 million was available.
The Company's principal source of funding for direct financing leases is a line
of credit facility and a partnership trust with an unaffiliated financial
institution. Amounts available under the line of credit facility and the
partnership trust are at the lender's sole discretion.
In the ordinary course of business, 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 loans being
held for delivery. The Company mitigates this risk through the use of mandatory
and nonmandatory forward commitments to sell loans. As of March 31, 1999, the
Company had $98.0 million in pipeline and funded loans offset with mandatory
forward commitments of $79.9 million and nonmandatory forward commitments of
$5.8 million. The inherent value of the forward commitments is considered in
the determination of the lower of cost or market for such loans.
Year 2000
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.
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.
The Year 2000 progress of several of the Company's Subsidiaries as of March 31,
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 6/15/99
Non-information systems 100% 100% 100% 50% 50%
Estimated completion date -- -- -- 6/15/99 6/15/99
Third parties 100% 100% 100% 0% 100%
Estimated completion date -- -- -- 6/15/99 --
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Matrix Bank Year 2000 Progress
-----------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems 100% 100% 100% 70% 70%
Estimated completion date -- -- -- 6/30/99 6/30/99
Non-information systems 100% 100% 98% 90% 90%
Estimated completion date -- -- 6/30/99 6/30/99 6/30/99
Third parties 100% 100% 75% 0% 0%
Estimated completion date -- -- 9/30/99 9/30/99 9/30/99
<CAPTION>
Matrix Financial Year 2000 Progress
-----------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems 100% 85% 80% 68% 65%
Estimated completion date -- 4/30/99 5/31/99 6/15/99 6/15/99
Non-information systems 90% 70% 40% 37% 33%
Estimated completion date 4/30/99 5/31/99 6/30/99 6/30/99 6/30/99
Third parties 90% 90% 90% 90% 90%
Estimated completion date 4/30/99 6/15/99 6/30/99 6/30/99 6/30/99
The progress of the remaining companies as of March 31, 1999 is seen in the following table.
<CAPTION>
Remaining Companies' Year 2000 Progress
-----------------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems 100% 75% 75% 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>
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 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.
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 their 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, Fannie Mae and FHLMC whom Matrix Financial and Matrix Bank rely on for
servicing and/or purchasing 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, Fannie Mae or FHLMC fail on January 1, 2000.
18
<PAGE>
Under Matrix Financial's most reasonably likely worst case Year 2000 scenario,
two 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.
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 that 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 Year 2000
compliance 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 March 31, 1999, the Company had expensed approximately
$172,000 for costs 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 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.
19
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 10.1 Promissory Note, dated as of January 15, 1999, from Thomas M.
Piercy, as maker, to the Registrant, as payee
* 27 Financial Data Schedule
(b) Reports on Form 8-K
See Form 8-K filed by the Company, dated March 23, 1999, reporting various
information under Item 5 thereof.
______________________
* Filed herewith.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX BANCORP, INC.
Dated: May 11, 1999 /s/ Guy A. Gibson
-------------------- -----------------------------
Guy A. Gibson
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: May 11, 1999 /s/ David W. Kloos
-------------------- -----------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
21
<PAGE>
EXHIBIT 10.1
PROMISSORY NOTE
MATRIX BANCORP, INC.
- --------------------------------------------------------------------------------
1. DATE AND PARTIES. The date of this Promissory Note (Note) is January 15,
1999. This Note evidences a loan which includes all extensions, renewals,
modifications and substitutions (Loan). The parties to this Note and Loan
are:
BORROWER:
THOMAS M. PIERCY
450 SOUTH FRANKLIN
DENVER, COLORADO 80209
Social Security ####-##-####
BANK:
MATRIX BANCORP, INC.
a COLORADO corporation
1380 LAWRENCE STREET, SUITE 1400
DENVER, COLORADO 80204
Tax I.D. #84-1233716
2. NAMES. The term "Bank" shall include any person or firm that holds this Note.
The pronouns "you, your" refer to Borrower, individually and together, and
"we, us, our" refer to Bank.
3. PROMISE TO PAY. For value received, you promise to pay to our order at our
office at the above address, or such other place as we may designate, the sum
of $195,000.00 (Principal) plus interest from January 15, 1999, on the unpaid
principal balance at the rate of 10% per annum (Contract Rate) until this
Note matures or the obligation is accelerated. After maturity or
acceleration, the unpaid balance shall continue to bear interest at the
Contract Rate until this Note is paid in full. The Loan and this Note are
limited to the maximum lawful amount of interest (Maximum Lawful Interest)
permitted under federal and state laws. If the interest accrued and collected
exceeds the Maximum Lawful Interest as of the time of collection, such excess
shall be applied to reduce the principal amount outstanding, unless otherwise
required by law. If or when no principal amount is outstanding, any excess
interest shall be refunded to you according to the actuarial method. Unless
otherwise required by law, all fees and charges, accrued, assessed or
collected shall be amortized and prorated over the full term of the Loan for
purposes of determining the Maximum Lawful Interest. Interest shall be
computed on the basis of the actual calendar year and the actual number of
days elapsed.
All unpaid principal, accrued interest, other costs and expenses are due and
payable upon demand. Unless demand is made, all unpaid principal, accrued
interest, other costs and expenses are due and payable in one payment on
December 31, 1999, which payment is estimated to be $213,698.63. This payment
amount is based upon timely payment. The amount shall be paid in legal U.S.
currency. Any payment made with a check will constitute payment only when
collected.
4. EFFECT OF PREPAYMENT. You may prepay this Loan in full, subject to any
prepayment penalty or minimum charge as agreed to below. Interest will cease
to accrue on the amounts prepaid on the day actually credited by us.
5. MINIMUM INTEREST CHARGE. If you pay this Note in full before the maturity
date or otherwise, you agree to pay us a minimum interest charge of $35.00 or
the earned interest charge, whichever amount is greater.
6. LATE CHARGE. You agree to pay us a late charge equal to 5% of the unpaid
installment or $5.00, whichever is greater, but in no event more than
$150.00, if payment is not made in full on or before 15 days after the
scheduled due date.
7. SET-OFF. You agree that we may exercise our right of set-off to pay any or
all of the outstanding Principal and accrued interest, costs and expenses,
attorneys' fees, and advances due and owing on this Note against any
obligation we may have, now or hereafter, to pay money, securities or other
property to you. This includes, without limitation:
A. any deposit account balance, securities account balance or certificate
of deposit balance you have with us whether general, special, time,
savings or checking;
B. any money owing to you on an item presented to us or in our possession
for collection or exchange; and
C. any repurchase agreement or any other non-deposit obligation or credit
in your favor.
If any such money, securities or other property is also owned by some other
person who has not agreed to pay this Note (such as another depositor on a
joint account) our right of set-off will extend to the amount which could be
withdrawn or paid directly to you on your request, endorsement or instruction
alone. In addition, where you may obtain payment from us only with the
endorsement or consent of someone who has not agreed to pay this Note, our
right of set-off will extend to your interest in the obligation. Our right of
set-off will not apply to an account or other obligation if it clearly
appears that your rights in the obligation are solely as a fiduciary for
another, or to an account, which by its nature and applicable law (for
example an IRA or other tax-deferred retirement account), must be exempt from
the claims of creditors. You hereby appoint us as your attorney-in-fact and
authorize us to redeem or obtain payment on any certificate of deposit in
which you have an interest in order to exercise our right of set-off. Such
authorization applies to any certificate of deposit even if not matured. You
further authorize us to withhold any early withdrawal penalty without
liability in the event such penalty is applicable as a result of our set-off
against a certificate of deposit prior to its maturity.
Our right of set-off may be exercised;
A. without prior demand or notice;
B. without regard to the existence or value of any Collateral securing this
Note; and
C. without regard to the number or creditworthiness of any other persons
who have agreed to pay this Note.
We will not be liable for dishonor of a check or other request for payment
where there are insufficient funds in the account (or other obligation) to
pay such request because of our exercise of our right of set-off. You agree
to indemnify and hold us harmless from any person's claims and the costs and
expenses, including without limitation, attorneys' fees and paralegal fees,
incurred as a result of such claims or arising as the result of our exercise
of our right of set-off.
8. EVENTS OF DEFAULT. You shall be in default upon the occurrence of any of the
following events, circumstances or conditions (Events of Default):
A. Failure by any party obligated on this Note or any other obligations you
have with us to make payment when due; or
B. A default or breach by you or any co-signer, endorser, surety, or
guarantor under any of the terms of this Note, any construction loan
agreement or other loan agreement, any security agreement, mortgage,
deed to secure debt, deed of trust, trust deed, or any other document or
instrument evidencing, guarantying, securing or otherwise relating to
this Note or any other obligations you have with us; or
C. The making or furnishing of any verbal or written representation,
statement or warranty to us which is or becomes false or incorrect in
any material respect by or on behalf of you, or any co-signer, endorser,
surety or guarantor of this Note or any other obligations you have with
us; or
D. Failure to obtain or maintain the insurance coverages required by us, or
insurance as is customary and proper for any collateral (as herein
defined); or
E. The death, dissolution or insolvency of, the appointment of a receiver
by or on behalf of, the assignment for the benefit of creditors by or on
behalf of, the voluntary or involuntary termination of existence by, or
the commencement of any proceeding under any present or future federal
or state insolvency, bankruptcy, reorganization, composition or debtor
relief law by or against you, or any co-signer, endorser, surety or
guarantor of this Note or any other obligations you have with us; or
F. A good faith belief by us at any time that we are insecure with respect
to you, or any co-signer, endorser, surety or guarantor, that the
prospect of any payment is impaired or that any collateral (as herein
defined) is impaired; or
<PAGE>
G. Failure to pay or provide proof of payment of any tax, assessment,
rent, insurance premium, escrow or escrow deficiency on or before its
due date; or
H. A transfer of a substantial part of your money or property.
9. REMEDIES ON DEFAULT. On or after the occurrence of an Event of Default, at
our option, all or any part of this Note shall be immediately due and
payable without notice or demand. We may exercise all rights and remedies
provided by law, equity, this Note, any mortgage, deed of trust or similar
instrument and any other security, loan, guaranty or surety agreements,
pertaining to this Note and all other obligations which you owe us. Bank is
entitled to all rights and remedies provided at law or equity whether or not
expressly stated in this Note. By choosing any remedy, Bank does not waive
its right to an immediate use of any other remedy if the event of default
continues or occurs again.
10. COLLECTION EXPENSES. On or after an Event of Default, we may recover from
you all expenses of collection, reasonable expenses in realizing on any
security interest, and other related fees, charges, and expenses, to the
extent not prohibited by law. Any such fees and expenses shall be added to
the Principal of this Note and shall accrue interest at the same rate as
provided for in this Note.
11. ATTORNEYS' FEES. Upon default of this Note and to the extent not prohibited
by law, we may recover from you reasonable attorneys' fees incurred by us.
Any such fees and expenses shall be added to the principal amount of this
Note, shall accrue interest at the same rate as this Note and shall be
secured by the Collateral you have granted us.
12. NO DUTY BY US. We are under no duty to preserve or protect any Collateral
until we are in actual, or constructive, possession of the Collateral. For
purposes of this paragraph, we shall only be considered to be in "actual"
possession of the Collateral when we have physical, immediate and exclusive
control over the Collateral and have affirmatively accepted such control. We
shall only be considered to be in "constructive" possession of the
Collateral when we have both the power and the intent to exercise control
over the Collateral.
13. WAIVER AND CONSENT BY YOU AND OTHER SIGNERS. Regarding this Note, to the
extent not prohibited by law, you any other signers;
A. waive protest, presentment for payment, demand, notice of acceleration,
notice of intent to accelerate and notice of dishonor.
B. consent to any renewals and extensions for payment on this Note,
regardless of the number of such renewals or extensions.
C. consent to our release of any borrower, endorser, guarantor, surety,
accommodation maker or any other co-signer.
D. consent to the release, substitution or impairment of any collateral.
E. consent that you are, or any one of you is, authorized to modify the
terms of this Note or any instrument securing, guarantying or relating
to this Note.
F. consent to our right of set-off as well as any right of set-off of any
bank participating in the Loan.
G. consent to any and all sales, repurchases and participations of this
Note to any person in any amounts and waive notice of such sales,
repurchases or participations of this Note.
14. SECURITY. This Note is secured by the following type(s) (or items) of
property (Collateral):
Securities
which Collateral is wholly or partially described as follows:
18,000 SHARES OF STOCK IN MATRIX BANCORP, INC. IN ADDITION ALL ACCRUED
BUT UNPAID COMMISSIONS OWED AS OF JANUARY 15, 1999, PLUS ANY ADDITIONAL
COMMISSIONS EARNED AND ACCRUED FROM JANUARY 15, 1999 UNTIL THIS
OBLIGATION IS PAID IN FULL
The term "Collateral" further includes, but is not limited to, the following
property, whether now owned or hereafter acquired, and whether or not held
by a bailee for your benefit, all: accessions, accessories, additions,
fittings, increases, insurance benefits and proceeds, parts, products,
profits, renewals, rents, replacements, special tools and substitutions,
together with all books and records pertaining to the Collateral and access
to the equipment containing such books and records including computer stored
information and all software relating thereto, plus all cash and non-cash
proceeds and all proceeds of proceeds arising from the type(s) (items) of
property listed above.
15. PAYMENTS APPLIED. All payments, including but not limited to regular
payments or prepayments, received by us shall be applied first to costs,
then to accrued interest and the balance, if any, to Principal unless
otherwise required by law.
16. LOAN PURPOSE. You represent and warrant that you shall only use the proceeds
of this Note for personal, family or household purposes.
17. NO CREDIT INSURANCE. You do not desire, or you understand that you are not
eligible for, any credit insurance.
18. FINANCIAL STATEMENTS. Until this Note is paid in full, you shall furnish us,
upon our request, your current financial statement, which you certify to be
true and accurate.
19. JOINT AND SEVERAL. You and all other makers, co-signers, sureties and
guarantors shall be jointly and severally liable under this Note.
20. GENERAL PROVISIONS.
A. TIME IS OF THE ESSENCE. Time is of the essence in your performance of
all duties and obligations imposed by this Note.
B. NO WAIVER BY US. Our course of dealing, or our forbearance from, or
delay in, the exercise of any of our rights, remedies, privileges or
right to insist upon your strict performance of any provisions
contained in this Note, or other loan documents, shall not be construed
as a waiver by us, unless any such waiver is in writing and is signed
by us.
C. AMENDMENT. The provisions contained in this Note may not be amended,
except through a written amendment which is signed by you and us.
D. INTEGRATION CLAUSE. This written Note and all documents executed
concurrently herewith, represent the entire understanding between the
parties as to the Obligations and may not be contradicted by evidence
of prior, contemporaneous, or subsequent oral agreements of the
parties.
E. FURTHER ASSURANCES. You agree, upon our request and within the time we
specify, to provide any information, and to execute, acknowledge,
deliver and record or file such further instruments or documents as we
may require to secure this Note or confirm any lien.
F. GOVERNING LAW. This Note shall be governed by the laws of the State of
COLORADO, provided that such laws are not otherwise preempted by
federal laws and regulations.
G. FORUM AND VENUE. In the event of litigation pertaining to this Note,
the exclusive forum, venue and place of jurisdiction shall be in the
State of COLORADO, unless otherwise designated in writing by us or
otherwise required by law.
H. SUCCESSORS. This Note shall inure to the benefit of and bind the heirs,
personal representatives, successors and assigns of the parties;
provided however, that you may not assign, transfer or delegate any of
the rights or obligations under this Note.
I. NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
J. DEFINITIONS. The terms used in this Note, if not defined herein, shall
have their meanings as defined in the other documents executed
contemporaneously, or in conjunction, with this Note.
K. PARAGRAPH HEADINGS. The headings at the beginning of any paragraph, or
any subparagraph, in this Note are for convenience only and shall not
be dispositive in interpreting or construing this Note.
L. IF HELD UNENFORCEABLE. If any provision of this Note shall be held
unenforceable or void, then such provision to the extent not otherwise
limited by law shall be severable from the remaining provisions and
shall in no way affect the enforceability of the remaining provisions
nor the validity of this Note.
M. CHANGE IN APPLICATION. You will notify us in writing prior to any
change in your name, address, or other application information.
N. NOTICE. All notices under this Note must be in writing. Any notice
given by us to you will be effective upon personal delivery or 24 hours
after mailing by first class United States mail, postage prepaid,
addressed to you at the address indicated below your name on page one
of this Note. Any notice given by you to us will be effective upon
receipt by us at the address indicated below our name on page one of
this Note. Such addresses may be changed by written notice to the other
party.
<PAGE>
21. RECEIPT OF COPY. You acknowledge that you have read and received a copy of
this Note by your signature below.
BORROWER:
----------------------------------------------------------
THOMAS M. PIERCY
Individually
BANK:
MATRIX BANCORP, INC.
a COLORADO corporation [Corporate Seal*]
By:
----------------------------------------------------------
RICHARD V. SCHMITZ, CHAIRMAN OF THE BOARD
(*Corporate seal may be affixed, but failure to affix shall not affect validity
or reliance.)
THIS IS THE LAST PAGE OF A 3 PAGE DOCUMENT. EXHIBITS AND/OR ADDENDA MAY FOLLOW.
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