<PAGE>
As filed with the Securities and Exchange Commission on July 22, 1999
Registration Nos. 333-79731 and
333-79731-
01
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 2 to FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------
Matrix Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
6035
(Primary Standard Industrial Classification Code Number)
84-1233716
(I.R.S. Employer Identification No.)
Matrix Bancorp Capital Trust I
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
6712
(Primary Standard Industrial Classification Code Number)
84-1505177
(I.R.S. Employer Identification No.)
1380 Lawrence Street, Suite 1400, Denver, Colorado 80204; (303) 595-9898
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Guy A. Gibson, Chief Executive Officer
Matrix Bancorp, Inc.
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
(303) 595-9898
with copies to:
Steven F. Carman Regina M. Pisa, P.C.
Blackwell Sanders Peper Martin LLP Goodwin Procter & Hoar LLP
Two Pershing Square Exchange Place
2300 Main Street, Suite 1000 Boston, MA 02109-2881
Kansas City, MO 64108 (617) 570-1000
(816) 983-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the public As soon as
practicable after the effective date of this registration statement
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 29, 1999
1,100,000 Preferred Securities
[Logo of
Matrix Bancorp Matrix Bancorp Capital Trust I
Appears Here]
% Trust Preferred Securities guaranteed by
Matrix Bancorp, Inc.
- --------------------------------------------------------------------------------
The Trust: Matrix Bancorp Capital Trust I is a subsidiary of Matrix Bancorp,
Inc. and is a statutory business trust created under Delaware law.
The Offering: In connection with this offering, Capital Trust will:
. sell preferred securities to the public and common securities to Matrix
Bancorp;
. use the proceeds from these sales to buy an equivalent principal amount of
% junior subordinated debentures due , 2029 issued by Matrix
Bancorp; and
. distribute the cash payments it receives on the junior subordinated
debentures to the holders of the preferred and common securities.
The preferred securities represent undivided preferred beneficial interests
in the assets of Capital Trust.
If you purchase preferred securities, you will be entitled to receive
cumulative cash distributions at an annual rate of % of the $25 liquidation
amount of each preferred security. Distributions will begin to accumulate on
, 1999 and will be payable quarterly, in arrears, on March 31, June 30,
September 30, and December 31 of each year, beginning , 1999.
Matrix Bancorp can, on one or more occasions, defer interest payments on the
junior subordinated debentures for up to 20 consecutive quarterly periods. If
Matrix Bancorp defers interest payments, Capital Trust will also defer payment
of distributions on the preferred and common securities. During a deferral
period, distributions will continue to accumulate on the preferred and common
securities. Also, additional cash distributions will accumulate on any deferred
distributions at an annual rate of %, to the extent permitted by law.
Matrix Bancorp will fully and unconditionally guarantee Capital Trust's
payment obligations with respect to the preferred securities only to the extent
described in this prospectus. The preferred securities have been approved for
quotation on the Nasdaq National Market under the symbol "MTXCP".
The preferred securities will be ready for delivery in book-entry form only
through The Depository Trust Company on or about , 1999.
Matrix Bancorp has granted the underwriters a 45-day option to purchase up to
165,000 additional preferred securities to cover over-allotments, if any.
Investing in the preferred securities involves certain risks which are
described in the "Risk Factors" section beginning on page 11 of this
prospectus. You should read this prospectus carefully before you invest in the
preferred securities.
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
Per trust preferred security Total
---------------------------- -----------
<S> <C> <C>
Public Offering Price................. $25.00 $27,500,000
Proceeds to Capital Trust............. $25.00 $27,500,000
</TABLE>
Capital Trust will use all proceeds to purchase the junior subordinated
debentures. Matrix Bancorp will pay all underwriting commissions, equal to
$1.00 per preferred security, or $1,100,000 in total. Matrix Bancorp has also
agreed to pay certain expenses of the underwriters in connection with the
offering.
Tucker Anthony Cleary Gull U. S. Bancorp Piper Jaffray
The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 16
Capitalization............................................................ 17
The Company............................................................... 18
Management................................................................ 44
Matrix Bancorp Capital Trust I............................................ 50
Selected Consolidated Financial and Operating Information................. 52
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 54
Market for the Preferred Securities....................................... 84
Accounting Treatment...................................................... 84
Description of the Preferred Securities................................... 85
Description of the Junior Subordinated Debentures......................... 97
Description of the Guarantee.............................................. 105
Expense Agreement......................................................... 107
Relationship Among the Preferred Securities, the Junior Subordinated
Debentures and the Guarantee............................................. 107
Certain Federal Income Tax Consequences................................... 109
ERISA Considerations...................................................... 113
Underwriting.............................................................. 114
Legal Matters............................................................. 115
Experts................................................................... 115
Available Information..................................................... 116
Financial Statements...................................................... F-1
</TABLE>
----------------
FORWARD-LOOKING STATEMENTS
The discussion contained in this prospectus contains forward-looking
statements that involve risks and uncertainties. You can identify these
forward-looking statements because they may include terms such as "believes,"
"anticipates," "intends," "expects," or similar expressions, and may include
discussions of future strategy. We caution you not to rely unduly on any
forward-looking statements in this prospectus. Our actual results could differ
materially from the forward-looking statements. The risk factors described
above and in our other filings could cause or contribute to these differences
and apply to all forward-looking statements wherever they appear in this
prospectus. However, there could be other factors not listed above or in our
other filings which may affect us and Capital Trust. We and Capital Trust may
not publicly announce revisions to forward-looking statements contained in this
prospectus.
----------------
Certain persons participating in this offering may engage in transactions that
stabilize, maintain, or otherwise affect the price of the preferred securities
being offered, including over-alloting shares of the preferred securities and
bidding for and purchasing such securities at a level above that which
otherwise might prevail in the open market. For a description of these
activities, see "Underwriting." Such stabilizing transactions, if commenced,
may be discontinued at any time. In connection with this offering, certain
underwriters (and selling group members) may engage in passive market making
transactions in the preferred securities on the Nasdaq National Market in
accordance with Rule 103 of Regulation M. See "Underwriting."
----------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with the offering of the preferred securities. If given or made,
such information or representations must not be relied upon as having been
authorized by us or the underwriters. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, the preferred securities
in any jurisdiction where, or to any person to whom, it is unlawful to make
such offer or solicitation. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, imply that there has not
been any change in the facts in this prospectus or our affairs since the date
of this prospectus.
<PAGE>
SUMMARY
This summary highlights information contained in other places in this
prospectus. Because this is a summary, it does not contain all of the
information that may be important to you. You should read this entire
prospectus before you decide whether to invest in the preferred securities.
Matrix Bancorp, Inc.
Financial Services
We are a unitary thrift holding company that, through our subsidiaries,
focuses on traditional banking, mortgage banking and the administration of
self-directed trust accounts. We do so by:
. providing a broad range of personal and business depository, loan and
lending services in the communities served by our subsidiary, Matrix
Capital Bank;
. purchasing and selling single-family residential mortgage loans and
mortgage servicing rights;
. providing brokerage, consulting and analytical services to financial
services companies and financial institutions and providing interest rate
risk management services for clients in the mortgage banking industry;
. servicing residential mortgage loan portfolios for investors;
. originating single-family residential mortgage loans;
. providing trust administration services for self-directed qualified
retirement plans, individual retirement accounts, custodial and directed
trust accounts;
. providing real estate management and disposition services for investors
on foreclosed properties; and
. providing broker-dealer services to community banks, individuals and
deferred contribution plans.
We believe that the combination of our business lines is unique in the
banking industry and enhances our revenues and profitability.
Our principal executive offices are located at 1380 Lawrence Street, Suite
1400, Denver, Colorado 80204, and our telephone number is (303) 595-9898.
Subsidiaries
We conduct our operations through the following six principal subsidiaries:
. Matrix Capital Bank. Matrix Bank provides a full range of banking
services at its main office in Las Cruces, New Mexico, and at its
branches in Las Cruces and Sun City, Arizona. It also has loan offices in
Denver and Evergreen, Colorado. In addition, Matrix Bank holds the non-
interest-bearing custodial escrow deposits related to the operations of
our subsidiary, Matrix Financial, and the interest-bearing money market
accounts related to the operations of our subsidiary, Sterling Trust.
These deposits and accounts provide a significant amount of low-cost
deposits for Matrix Bank. Matrix Bank predominantly invests in single-
family residential mortgages.
. United Financial, Inc. United Financial provides brokerage and consulting
services to financial institutions and financial services companies in
the mortgage banking industry. United Financial also provides us with
valuable market information, including emerging trends in the market,
prevailing market prices and changes in the level of supply and demand
for our two most significant assets, single family residential mortgage
loans and mortgage servicing rights.
3
<PAGE>
. Matrix Financial Services Corporation. Matrix Financial purchases
mortgage loan servicing rights nationally in the secondary market,
services the underlying mortgage loans, and originates mortgage loans
through its wholesale loan origination network. Matrix Financial also
acts as sub-servicer on a majority of the mortgage loan portfolio owned
by Matrix Bank. Because Matrix Financial services loans secured by
property in all fifty states, Matrix Bank does not face the geographic
restrictions on mortgage purchase transactions that do most community
banks.
. Sterling Trust Company. Sterling Trust is a Texas non-bank trust company.
It specializes in administering self-directed individual retirement
accounts, qualified retirement plans, and custodial and directed trust
accounts.
. United Capital Markets, Inc. United Capital Markets is a registered
investment advisor that focuses on interest rate risk management services
for institutional clients. It provides those clients with a professional
outsourcing alternative to in-house interest rate risk management and to
Wall Street derivative products.
. United Special Services, Inc. United Special Services provides real
estate management and disposition services on foreclosed properties owned
by financial services companies and financial institutions.
Business Strategy
Our business strategy is to:
. expand our residential mortgage loan servicing portfolio within
identified niches to increase non-interest income, improve operational
efficiencies, and increase custodial escrow deposits;
. increase the size of Matrix Bank by expanding our residential loan
portfolio;
. cultivate revenue-enhancing relationships by sharing knowledge,
information and business opportunities among our subsidiaries; and
. diversify our revenue sources by developing new business lines and by
acquiring financial services businesses that are within, or that we
believe compliment, our existing lines of business.
Pursuant to this strategy, we:
. established an operational infrastructure that we believe can originate,
purchase and service significantly more residential mortgage loans than
it currently services;
. opened additional branches and loan production offices of Matrix Bank;
. formed United Capital Markets, United Special Services and Matrix
Advisory Services;
. acquired Sterling Trust; and
. expanded our management depth and experience.
Matrix Bancorp Capital Trust I
Capital Trust is a Delaware business trust. We created Capital Trust solely
to:
. issue and sell its common securities to us;
. issue and sell its preferred securities to the public;
. use the proceeds it receives from the sale of its preferred securities
and common securities to purchase the junior subordinated debentures from
us; and
. engage in activities incidental to the activities described above.
The principal executive office and telephone number of Capital Trust are the
same as ours.
4
<PAGE>
The Offering
Preferred Securities.... The preferred securities represent preferred
undivided beneficial interests in the assets of
Capital Trust. Capital Trust is offering 1,100,000
preferred securities in this offering for $25 per
preferred security. In addition, the underwriters may
exercise an option within 45 days after the date of
the offering to purchase up to an additional 165,000
preferred securities at the initial offering price,
solely to cover over-allotments, if any.
If you purchase preferred securities, you will be
entitled to receive cumulative cash distributions on
each preferred security at an annual rate of % of
the liquidation amount of $25 per preferred security.
You will also be entitled to receive the liquidation
amount if Capital Trust is dissolved and its assets
are distributed to the holders of its securities, but
only if Capital Trust has enough assets available for
distribution after it has paid liabilities owed to
its creditors. Accordingly, you may not receive the
full amount if Capital Trust does not have enough
funds.
Distributions will accumulate from , 1999.
Capital Trust will pay the distributions at the end
of each calendar quarter, commencing , 1999.
These distributions may be deferred for up to 20
consecutive quarters as described below under "--
Deferral of Distributions." Capital Trust will only
pay distributions when it has funds available for
payment. Payments of distributions are described more
fully under "Description of the Preferred
Securities--Distributions--Payment of Distributions."
If you purchase preferred securities, you will have
no voting rights except in limited circumstances. The
extent of your limited voting rights are described
under "Description of the Preferred Securities--
Voting Rights; Amendment of the Trust Agreement."
Common Securities....... We will acquire all of the common securities of
Capital Trust. The common securities will represent
an aggregate liquidation amount equal to at least 3%
of the total capital of Capital Trust. Normally, the
common securities will have sole voting power on
matters to be voted on by Capital Trust's security
holders.
Junior Subordinated Capital Trust will purchase the junior subordinated
Debentures.............. debentures from us with the proceeds from the sale of
its preferred securities and its common securities.
We will issue the junior subordinated debentures
under an indenture between us and State Street Bank
and Trust Company, as trustee. Our junior
subordinated debentures will be the only assets of
Capital Trust, and payments under our junior
subordinated debentures will be the only revenue of
Capital Trust.
The junior subordinated debentures will:
. be junior in right of payment to all of our senior
debt and subordinated debt, including debt we incur
after the date you purchase the preferred
securities;
5
<PAGE>
. have an aggregate principal amount equal to the
aggregate liquidation amount of the preferred
securities plus the capital contributed by us for
the common securities;
. bear interest at an annual rate of %; and
. mature on , 2029, although they may be redeemed
earlier.
Guarantee of the
Preferred Securities... We have executed a guarantee that requires us to pay
accrued and unpaid distributions and payments on
liquidation or redemption of the preferred
securities, but only in each case to the extent of
funds held by Capital Trust. The guarantee will not
apply to any distributions until Capital Trust has
sufficient funds to pay the distributions to you. If
we do not pay principal or interest due under the
junior subordinated debentures, Capital Trust will
not have sufficient funds to make distributions on
the preferred securities.
Although the guarantee alone is not a complete
guarantee of the preferred securities, we and Capital
Trust believe that we have fully, irrevocably and
unconditionally guaranteed all of the obligations of
Capital Trust under the preferred securities through
the combination of the guarantee and our additional
obligations under the trust agreement, the indenture
and the expense agreement.
The guarantee is more fully described in this
prospectus under "Description of the Guarantee."
Ranking................. The preferred securities will rank equally with the
common securities, and Capital Trust will pay
distributions on the preferred securities and the
common securities based on a proportionate
allocation, except in either case after an event of
default. For a more detailed explanation, see
"Description of the Preferred Securities--
Subordination of the Common Securities."
The junior subordinated debentures will rank equally
with any other junior subordinated debentures issued
by us to any other trusts similar to Capital Trust.
The junior subordinated debentures will be unsecured
and will rank subordinate in right of payment to all
of our current and future senior debt, subordinated
debt and additional senior obligations. For a more
detailed explanation, see "Description of the Junior
Subordinated Debentures."
The guarantee will rank equally with any other
guarantee issued by us to any other trusts similar to
Capital Trust. The guarantee will be unsecured and
will rank subordinate in right of payment to all of
our current and future senior debt, subordinated debt
and additional senior obligations. For a more
detailed explanation, see "Description of the
Guarantee."
Because we are a holding company, the junior
subordinated debentures and the guarantee will be
effectively subordinated to all existing and future
liabilities of our subsidiaries, including Matrix
Bank's deposit
6
<PAGE>
liabilities. For a more detailed explanation, see
"Description of the Junior Subordinated Debentures--
Subordination."
Deferral of We can defer payments of interest on the junior
Distributions........... subordinated debentures for up to 20 consecutive
quarters, but not beyond their maturity date, unless
we are in default under the junior subordinated
debentures. After we make all interest payments that
may be deferred, including accrued interest on the
deferred payments, we can again defer interest
payments during new periods of up to 20 consecutive
quarters as long as we adhere to the same
requirements.
If we defer interest payments on the junior
subordinated debentures, Capital Trust will defer
quarterly distributions on the preferred securities.
During any deferral period, distributions will
continue to accumulate on the preferred securities
and will accrue interest at an annual rate of %
compounded quarterly.
During any period in which we are deferring interest
payments on the junior subordinated debentures, we
cannot pay any cash distributions with respect to our
capital stock or debt securities that are of equal or
lower rank than the junior subordinated debentures.
If we defer payments of interest on the junior
subordinated debentures, you will be required to
include deferred interest income in your gross income
for United States federal income tax purposes before
you have received deferred interest payments. See
"Certain Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original
Issue Discount" for a more complete discussion.
Redemption of Preferred
Securities............. Capital Trust will redeem preferred securities to the
extent we redeem the junior subordinated debentures.
We may redeem all or some of the junior subordinated
debentures before their maturity on or after ,
2004. In addition, we may redeem all (and not less
than all) of the junior subordinated debentures at
any time within 180 days following the occurrence of
the events described in "Description of the Preferred
Securities--Redemption or Exchange." In each case,
the redemption price will be $25 for each junior
subordinated debenture being redeemed, plus any
accrued but unpaid interest to the date of
redemption.
Distribution of the
Junior Subordinated We have the right to dissolve Capital Trust at any
Debentures............. time. If we dissolve Capital Trust, it will first pay
any liabilities to its creditors and then will
distribute your pro rata share of the junior
subordinated debentures to you. If the junior
subordinated debentures are distributed, we will use
our reasonable best efforts to obtain quotation of
the junior subordinated debentures on the Nasdaq
National Market or any other automated quotations
system or securities exchange on which the preferred
securities are then listed.
7
<PAGE>
Use of Proceeds......... Capital Trust will invest all of the proceeds from
the sale of the preferred securities in the junior
subordinated debentures. We intend to use the net
proceeds from the sale of the junior subordinated
debentures estimated to be $26.1 million to redeem
our outstanding senior subordinated notes due July
15, 2002, to make a contribution to Matrix Bank to
fund its operations, to make a contribution to Matrix
Financial to fund its operations, to redeem other
higher-interest rate indebtedness when appropriate
and for other general corporate purposes. Such uses
may change if we are presented with an opportunity
for a strategic acquisition in an existing or
complementary line of business. We from time to time
have had preliminary discussions relating to the
purchase by us of financial services companies,
although we have no agreements or understandings at
this time for any such purchase, and there can be no
assurance that any such purchase will occur. Until
the proceeds are invested as described above, we may
use a part of the proceeds to pay down a portion of
the outstanding balance under our bank stock loan.
Form of Preferred
Securities.............. The preferred securities will be represented by one
or more global securities that will be deposited with
and registered in the name of the Depository Trust
Company or its nominee. This means that you will not
receive a certificate for your securities. Rather,
your broker will maintain your position in the
preferred securities.
Listing of the
Preferred Securities...
The preferred securities have been approved for
quotation on the Nasdaq National Market under the
symbol "MTXCP".
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following summary 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 in this prospectus. In February 1997, we
completed the acquisition of The Vintage Group, of which Sterling Trust is a
subsidiary, in a transaction accounted for as a pooling of interests. As a
result of the pooling, our historical financial and other information has been
restated to include the financial and other information of The Vintage Group.
<TABLE>
<CAPTION>
As of and for the
As of and for the Quarter Ended
Year Ended December 31, March 31,
------------------------------------ ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Net interest income
before provision for
loan and valuation
losses................. $ 6,059 $ 13,888 $ 24,190 $ 4,433 $ 7,228
Provision for loan and
valuation losses....... 143 874 4,607 450 675
---------- ---------- ---------- ---------- ----------
Net interest income..... 5,916 13,014 19,583 3,983 6,553
---------- ---------- ---------- ---------- ----------
Non-interest income..... 26,587 38,029 46,745 10,919 14,206
Non-interest expense.... 26,655 37,746 52,939 11,378 16,859
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 5,848 13,297 13,389 3,524 3,900
Income taxes............ 2,278 5,159 4,876 1,339 1,395
---------- ---------- ---------- ---------- ----------
Net income.............. $ 3,570(1) $ 8,138 $ 8,513 $ 2,185 $ 2,505
========== ========== ========== ========== ==========
Net income per share
assuming dilution(2)... $ 0.68 $ 1.20 $ 1.24 $ 0.33 $ 0.37
Weighted average common
shares assuming
dilution............... 5,077,321 6,781,808 6,881,890 6,841,679 6,848,571
Cash dividends(3)....... $ 201 $ -- $ -- $ -- $ --
Balance Sheet Data
Total assets............ $ 274,559 $ 606,745 $1,012,640 $ 698,517 $ 996,519
Total loans, net........ 212,361 511,372 848,448 573,586 803,002
Mortgage servicing
rights, net............ 23,680 36,440 58,147 48,845 67,437
Deposits and custodial
escrow balances(4)(5).. 128,060 278,742 587,340 391,990 642,220
Total shareholders'
equity................. 32,270 40,610 49,354 42,797 51,869
Operating Ratios and
Other Selected Data
Return on average
assets(6).............. 1.69% 1.78% 1.02% 1.35% 0.98%
Return on average
equity(6).............. 24.30 22.71 18.92 21.22 19.83
Average equity to
average assets(6)...... 6.97 7.86 5.41 6.35 4.97
Net interest
margin(6)(7)........... 3.45 3.70 3.37 3.14 3.34
Operating efficiency
ratio(8)............... 74.20 60.14 59.74 63.73 56.61
Total amount of loans
purchased.............. $ 159,015 $ 493,693 $ 678,150 $ 110,674 $ 25,016
Balance of owned
servicing portfolio
(end of period)........ 2,505,036 3,348,062 5,357,729 4,325,559 6,196,744
Trust assets under
administration (end of
period)................ 1,162,231 1,437,478 2,089,562 1,555,486 2,228,682
Wholesale loan
origination volume..... 583,279 402,984 574,963 151,330 134,766
Ratio of Earnings to
Fixed Charges(9)
Including interest on
deposits.............. 1.54x 1.71x 1.36x 1.47x 1.37x
Excluding interest on
deposits.............. 1.84x 2.30x 1.64x 1.77x 1.73x
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
As of and for the
As of and for the Quarter Ended
Year Ended December 31, March 31,
------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Loan Performance Ratios
Non-performing loans and
leases/total loans(10)........ 1.83% 0.97% 1.55% 1.13% 1.92%
Non-performing assets/total
assets(10).................... 1.89 1.03 1.39 1.09 1.72
Net loan charge-offs/average
loans(6)...................... 0.03 0.04 0.38 0.03 0.02
Allowance for loan and
valuation losses/total loans.. 0.49 0.34 0.44 0.35 0.52
Allowance for loan and
valuation losses/non-
performing loans.............. 26.62 35.19 28.09 31.13 27.02
</TABLE>
- --------
(1) 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.
(2) 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.
(3) Represents dividends paid by The Vintage Group prior to our acquisition of
The Vintage Group.
(4) Following our acquisition of The Vintage Group in February 1997, Sterling
Trust moved approximately $80.0 million of fiduciary deposits from a third
party institution to Matrix Bank.
(5) Beginning in February 1998, Matrix Bank began accepting brokered deposits.
The total balance of brokered deposits was $129.0 million at March 31,
1999, $148.7 million at December 31, 1998, and $80.1 million at March 31,
1998.
(6) Calculations are based on average daily balances where available and
monthly averages otherwise.
(7) Net interest margin has been calculated by dividing net interest income
before loan and valuation loss provision by average interest-earning
assets.
(8) The operating efficiency ratio has been calculated by dividing non
interest expense excluding amortization of mortgage servicing rights by
operating income. Operating income is equal to net interest income before
provision for loan and valuation losses plus non interest income.
(9) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
(10) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Non-performing
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of non-performing loans and
foreclosed real estate, and the effect of repurchasing sub-prime
automobile loans.
10
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Recent Developments
On July 22, 1999, we announced our results of operations for the second
quarter of fiscal year 1999. For the three months ended June 30, 1999, we
recorded net income of $2.8 million, or $.41 per share, as compared to $2.3
million, or $.34 per share, for the quarter ended June 30, 1998. Net income for
the six months ended June 30, 1999 totaled $5.3 million, or $.77 per share, as
compared to $4.5 million, or $.66 per share, for the six months ended June 30,
1998. For the second quarter of fiscal 1999, our annualized return on average
equity was 21.10%, and for the first six months of fiscal 1999, our annualized
return on average equity was 20.48%. We had total assets of $1.0 billion at
both June 30, 1999 and December 31, 1998.
RISK FACTORS
An investment in the preferred securities involves a number of risks. You
should carefully consider the following information about risks concerning the
preferred securities and us, together with the other information in this
prospectus, before buying any preferred securities.
Because Capital Trust will rely on the payments it receives on the junior
subordinated debentures to fund all payments on the preferred securities, and
because Capital Trust may distribute the junior subordinated debentures in
exchange for the preferred securities, you are making an investment decision
with regard to the junior subordinated debentures as well as the preferred
securities. You should carefully review the information in this prospectus
about both of these securities, us and the guarantee.
Risk Factors Relating to the Preferred Securities
If we do not make payments on the junior subordinated debentures, Capital Trust
will not be able to make payments on the preferred securities and the guarantee
will not apply.
The ability of Capital Trust to timely pay amounts due on the preferred
securities depends solely upon our making the related payments on the junior
subordinated debentures when due. If we default on our obligation to pay
principal of or interest on the junior subordinated debentures, Capital Trust
will not have sufficient funds to pay distributions on, or the $25 liquidation
amount of, the preferred securities.
In that event, you will not be able to rely on the guarantee for payment
because the guarantee applies only when Capital Trust has funds available for
payment. Instead, you or the property trustee will have to sue us to enforce
the property trustee's rights under the indenture relating to the junior
subordinated debentures. See "Description of the Guarantee."
Payments on the junior subordinated debentures by us to Capital Trust, and
payments on the preferred securities by Capital Trust to you, will depend
primarily on any dividends we may receive from our subsidiaries, which may be
limited by regulations and debt covenants.
Capital Trust will depend solely on our payments on the junior subordinated
debentures in paying amounts due on the preferred securities. We are a separate
legal entity from our subsidiaries and do not have significant operations of
our own. Therefore, we will depend primarily on any dividends we receive from
our subsidiaries to pay interest on the junior subordinated debentures to
Capital Trust. The payment of dividends by our subsidiaries may be limited by
regulations and debt covenants. For a more complete discussion, see the
immediately following risk information and information under "Description of
the Preferred Securities" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Liquidity and Capital
Resources."
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Most current and future creditors of us and our subsidiaries will get paid
before Capital Trust will get paid under the junior subordinated debentures and
before you will get paid under the guarantee.
Our obligations under the junior subordinated debentures and the guarantee
are unsecured and are subordinate in right of payment to all of our existing
and future senior debt, subordinated debt and additional senior obligations.
Neither the indenture nor the trust agreement enhances our ability to comply
with our payment obligations under the junior subordinated debentures or the
guarantee.
The junior subordinated debentures and the guarantee also are effectively
subordinated to all existing and future liabilities of our subsidiaries. Our
subsidiaries will pay their creditors before they pay dividends to us, and our
subsidiaries' creditors will generally have priority over us and you in any
distribution of our subsidiaries' assets in a liquidation, reorganization or
other transaction. In the event that distributions from our subsidiaries are
not sufficient to cover our payment obligations under the junior subordinated
debentures or the guarantee, we may be unable to make those payments. See
"Description of the Junior Subordinated Debentures--Subordination" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources."
We may defer interest payments under the junior subordinated debentures, which
could have adverse tax consequences for you.
We may defer the payment of interest on the junior subordinated debentures
at any time for up to 20 consecutive quarters, subject to certain limitations.
During any period in which we are deferring interest payments, Capital Trust
will defer quarterly distributions on the preferred securities. Deferred
distributions will accumulate with interest at the rate of % per annum
compounded quarterly from the normal distribution payment date.
During each period in which we are deferring interest payments, the United
States federal income tax laws will require you to accrue and recognize income
in the form of original issue discount on your pro rata share of the interest
accruing on the junior subordinated debentures held by Capital Trust. As a
result, you will be subject to United States federal income tax on this income
before you have received cash distributions on the preferred securities. In
addition, you will not receive the deferred cash distributions if you sell the
preferred securities before the record date for payment of the deferred
distributions, even if you held the preferred securities on the last day of a
quarter. See "Description of the Preferred Securities--Extension Period" and
"Certain Federal Income Tax Consequences--Potential Extension of Interest
Payment Period and Original Issue Discount."
The preferred securities may be redeemed prior to maturity; you may be taxed on
the proceeds at the time of redemption and you may not be able to reinvest the
proceeds at the same or a higher rate of return.
We may redeem the junior subordinated debentures prior to maturity within
180 days after the occurrence of the events described in "Description of the
Preferred Securities--Redemption or Exchange," at any time during the life of
Capital Trust. In addition, we may redeem the junior subordinated debentures
prior to maturity at any time after , 2004, so long as we have obtained
any approvals from regulatory agencies that are required at that time. If we
redeem the junior subordinated debentures, Capital Trust will redeem the
preferred securities. Under current United States federal income tax law, the
redemption of the preferred securities would be a taxable event to you. In
addition, you may not be able to reinvest the money you receive in an
investment with a similar or higher expected rate of return. See "Description
of the Junior Subordinated Debentures--Redemption or Exchange" and "Description
of the Preferred Securities--Redemption or Exchange."
12
<PAGE>
We may require you to exchange your preferred securities for junior
subordinated debentures; this may have adverse tax consequences for you and the
junior subordinated debentures may trade at a lower price than the price you
paid for the preferred securities.
We may dissolve Capital Trust at any time before its expiration. In such an
event, the trustees will, after paying the creditors of Capital Trust,
distribute your share of the junior subordinated debentures to you.
We cannot predict the market prices for the junior subordinated debentures
that would be distributed upon the dissolution of Capital Trust. Accordingly,
the junior subordinated debentures that you receive in a distribution, or the
preferred securities that you hold pending the distribution, may trade at a
lower price than the price you paid to purchase the preferred securities.
Although we have agreed to use our reasonable best efforts in the event that
we dissolve Capital Trust to list the junior subordinated debentures for
quotation on the Nasdaq National Market or any other automated quotation system
or exchange on which the preferred securities are then listed, we cannot assure
you that the junior subordinated debentures would be approved for listing or
that a trading market would exist for the junior subordinated debentures.
Under current United States federal income tax laws, a distribution of
junior subordinated debentures to you upon the dissolution of Capital Trust
would not be a taxable event for you. If, however, Capital Trust were taxable
as a corporation at the time of its dissolution, then a distribution of junior
subordinated debentures to you may be a taxable event for you.
See "Description of Preferred Securities--Distribution of Junior
Subordinated Debentures" and "Certain Federal Income Tax Consequences--Receipt
of Junior Subordinated Debentures or Cash Upon Liquidation of the Trust."
You generally will not have voting rights, and we can amend the trust agreement
without your consent.
You will not have voting rights except in limited circumstances, and you
will not be able to appoint, remove or replace the property trustee or the
Delaware trustee. These rights generally reside with us as the holder of the
common securities. Even if it would adversely affect your rights, we may, with
the property trustee and the administrative trustees, amend the trust agreement
without your consent to ensure that Capital Trust will be classified as a
grantor trust for United States federal income tax purposes. See "Description
of the Preferred Securities--Voting Rights; Amendment of the Trust Agreement"
and "Description of the Preferred Securities--Removal of the Trust Trustees."
The market price for the preferred securities may decline after you invest.
There is no current public market for the preferred securities. There is no
guarantee that an active public market will develop for the preferred
securities. Even if an active public market does develop, there is no guarantee
that the market price for the preferred securities will equal or exceed the
price you paid in this offering.
The preferred securities may not trade at a price that accurately reflects
the value of accrued but unpaid interest on the underlying junior subordinated
debentures. In addition to other circumstances, our deferral of interest
payments on the junior subordinated debentures may cause the market price for
the preferred securities to decline.
The preferred securities are not insured.
Neither the Bank Insurance Fund of the Federal Deposit Insurance
Corporation, the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation, nor any other governmental agency has insured the
preferred securities.
13
<PAGE>
Risk Factors Relating to the Company
We have a limited operating history upon which you can evaluate our
performance.
We have a limited operating history under our existing corporate structure.
We may encounter significant difficulties in integrating operations acquired or
commenced in the future. The shareholders of Matrix Financial and United
Financial formed Matrix Bancorp in 1993 to combine the operations of the two
predecessor companies. We purchased Matrix Bank in 1993, formed United Special
Services as a start-up operation in 1995, formed United Capital Markets in
1996, formed Matrix Advisory Services in 1997 and completed the acquisition of
Sterling Trust in 1997. This series of combinations, purchases and formations
has involved the integration of the operations of companies that previously
operated independently, or in the case of United Special Services, Matrix
Advisory Services and United Capital Markets, not at all.
We may not be able to effectively manage our growth.
Our business strategy, in part, is to expand our existing lines of business,
particularly in the area of servicing mortgage loans. Rapid expansion may
significantly burden our infrastructure, and our senior management may be
unable to oversee such expansion successfully. Our business strategy also is to
diversify into lines of business that are not now part of our core business.
Our senior management may not be able to effectively manage the development of
new business lines in which we have not previously participated. To the extent
we expand our existing lines of business or diversify into new lines of
business by acquisition, we may not be able to profitably manage and integrate
such acquisitions.
Fluctuating interest rates and other national or regional economic trends may
adversely affect our operating results and therefore our ability to perform our
obligations under the junior subordinated debentures.
Our mortgage loan servicing rights portfolio may be adversely affected
during periods of declining interest rates. The difference between interest
rates on existing mortgage loans and prevailing mortgage rates, as well as
other national and regional economic trends, such as recessions or depressed
real estate markets, influence the rate of prepayment of mortgage loans. The
rate of loan prepayments affects the total amount of servicing fees earned, as
well as the amortization of the investment of the servicing rights. Therefore,
both the market value of, and our income derived from, our portfolio of
mortgage loan servicing rights may decline during periods of declining interest
rates. Fluctuating interest rates can also cause the value of our loan
portfolio to decline. See "The Company--Mortgage Bank Activities--Hedging of
Servicing Rights" and "The Company--Mortgage Bank Activities--Residential
Mortgage Loan Origination."
A decline in markets where our mortgage loans and servicing rights are
geographically concentrated may adversely affect our ability to pay amounts due
under the junior subordinated debentures.
Our portfolio of residential mortgage loans and mortgage servicing rights is
concentrated in certain geographic areas. Consequently, the general trends in
the markets where concentration exists, particularly trends in residential real
estate markets, can significantly affect our ability to pay amounts due under
the junior subordinated debentures. An economic decline in a market in which
our portfolio is concentrated may adversely affect the values of properties
securing our loans, making our ability to recover losses if a borrower defaults
extremely unlikely. In addition, uninsured disasters such as earthquakes and
mudslides may adversely affect borrowers' ability to repay their loans and the
value of collateral supporting those loans, which could materially and
adversely affect our operations and financial condition.
Our ability to make payments on the junior subordinated debentures may vary
from quarter to quarter.
The number and magnitude of our purchases and sales of mortgage loans and
mortgage servicing rights can vary significantly from quarter to quarter. The
timing and receipt of our revenues from brokerage fees are also unpredictable.
These quarterly fluctuations can affect our ability to make payments on the
junior subordinated debentures. See "The Company--Mortgage Bank Activities" and
"--Brokerage and Consulting Services."
14
<PAGE>
We may incur secondary marketing losses when we sell mortgage loans originated
by us.
Changes in interest rates from the time the interest rate on the customer's
loan is established to the time that we sell the loan can result in losses when
we sell loans we originated. See "The Company--Mortgage Bank Activities--
Hedging of Servicing Rights" and "--Residential Mortgage Loan Origination."
Our ability to pay amounts due under the junior subordinated debentures may be
adversely affected if our borrowers are delinquent or default.
Numerous lenders throughout the United States originated the loans in our
loan portfolio under various loan programs and underwriting standards. In order
to earn a higher return, our strategy includes purchasing loans that have had
or are having delinquencies. We assume substantially all of the risk associated
with our loan portfolio in the case of default. This risk includes the cost of
the foreclosure, the loss of interest and the potential loss of principal to
the extent that the value of the underlying collateral is not sufficient to
cover our investment in the loans. See "The Company--Purchase and Sale of Bulk
Loan Portfolios."
Our revenues from mortgage loan servicing can also be adversely affected by
delinquencies and defaults.
We are also affected by mortgage loan delinquencies and defaults on mortgage
loans that we service. Under many types of mortgage servicing contracts, the
servicer must forward to the owner of the loan all or part of the scheduled
payments and mortgage and hazard insurance and tax payments even though
sufficient escrow funds may not have been paid by borrowers. Until we are able
to recover these advances, we must incur the cost of funds on the advance.
Further, we must bear the increased costs of attempting to collect delinquent
or defaulted mortgage loans and may experience losses if we are unable to
recover the advanced funds. See "The Company--Residential Loan Servicing
Activities."
If we sell mortgage loans or mortgage servicing rights and the underlying loan
defaults, we may be liable to the purchaser for unpaid principal and interest
on the loan.
In the ordinary course of selling mortgage loans or mortgage servicing
rights and in accordance with industry standards, we make certain
representations and warranties to purchasers. If a loan defaults and there has
been a breach of representations or warranties and we have no recourse against
a third party, we may become liable for the unpaid principal and interest on
the defaulted loan. In such a case, we may be required to repurchase the
mortgage loan and bear any subsequent loss on the loan. When we purchase
mortgage servicing rights or mortgage loans, we also are exposed to liability
to the extent that an originator or other seller of the servicing rights is
unable to honor its representations and warranties to us.
We are subject to extensive regulation that may adversely affect our ability to
operate and our ability to make the required payments on the junior
subordinated debentures.
We and our subsidiaries are subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision and other federal and state
regulatory agencies. A change in existing regulations of the Office of Thrift
Supervision or other regulatory agencies could adversely affect our operations
and financial condition. Our ability to sell mortgage loans depends on the
continuation of programs administered by Fannie Mae, the Federal Home Loan
Mortgage Corporation and the Government National Mortgage Association, which
facilitate the sale of mortgage loans and the pooling of such loans into
mortgage-backed securities, as well as our continued eligibility to participate
in these programs. The discontinuation of, or a significant reduction in, the
operation of these programs would adversely affect our operations and financial
condition. If our eligibility were significantly impaired, our operations and
financial condition would be adversely affected because seller/servicer status
is vital to our servicing business. See "The Company--Residential Mortgage Loan
Origination--Sale of Loan Originations" and "Supervision and Regulation."
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<PAGE>
Charter schools to which we provide lease financing are subject to governmental
charter and appropriation laws that could adversely affect our operations.
We recently began offering lease financing to charter schools in several
states. If the sponsoring state government does not renew the charter of a
school to which we provide lease financing or fails to appropriate sufficient
funds for the school during the term of the financing, the school may not be
able to satisfy its obligations to us. The failure of one or more charter
schools to satisfy their obligations under lease financing arrangements with us
could have an adverse effect on our operations and financial condition. See
"The Company--Savings Bank Activities--Commercial and Other Lending."
Our operations may be adversely affected if we are unable to maintain and
increase our deposit base and secure adequate financing.
We fund our banking and mortgage banking activities, including the
acquisition of mortgage servicing rights and the acquisition and origination of
mortgage loans, through lines of credit, deposits and sale/repurchase
facilities from various financial institutions and from Federal Home Loan Bank
borrowings. Our business plan, including the profitable use of the proceeds of
this offering, depends in part on our ability to maintain and increase deposits
and our ability to maintain our existing credit facilities and to negotiate
additional credit facilities for the acquisition of mortgage servicing rights
and other purposes. Our inability to obtain funding on favorable terms, or at
all, would adversely affect our operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
If we or certain persons with whom we do business fail to adequately address
the Year 2000 issue, our operations may be adversely affected.
Similar to many companies, we face the risk of computer software failures
because the software may not be able to process calendar dates beginning in the
year 2000. We also face Year 2000 risks from third party sources providing data
and/or services to us and from certain significant customers. If we, our
subsidiaries or third parties fail to adequately address and resolve the Year
2000 problems, our operations and financial condition could be adversely
affected. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Year 2000."
The loss of certain key personnel could adversely affect our operations.
We are dependent upon the continued services of our executive officers. The
loss of the services of any such officer could adversely affect our operations
and financial condition. We do not maintain key-man life insurance on any of
our executive officers. See "Management."
USE OF PROCEEDS
Capital Trust will use the gross proceeds from the sale of the preferred
securities and common securities to purchase junior subordinated debentures
from us. We intend to use the net proceeds from the sale of the junior
subordinated debentures estimated to be $26.1 million to redeem our outstanding
senior subordinated notes due July 15, 2002, to make a contribution to Matrix
Bank to fund its operations, to make a contribution to Matrix Financial to fund
its operations, to redeem other higher-interest rate indebtedness when
appropriate and for other general corporate purposes. Such uses may change if
we are presented with an opportunity for a strategic acquisition in an existing
or complementary line of business. We from time to time have had preliminary
discussions relating to the purchase by us of financial services companies,
although we have no agreements or understandings at this time for any such
purchase, and there can be no assurance that any such purchase will occur.
Until the proceeds are invested as described above, we may use a part of the
proceeds to pay down a portion of the outstanding balance under our bank stock
loan.
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As a unitary thrift holding company, we are not currently subject to the
Federal Reserve capital requirements for bank holding companies, but it is
possible that in the future we could become subject to such or similar
requirements as a result of the acquisition of a bank or a change in
regulations. On October 21, 1996, the Federal Reserve announced that cumulative
preferred securities having the characteristics of the preferred securities
could be included as "Tier 1" Capital for bank holding companies. Such Tier 1
Capital treatment, together with our ability to deduct, for income tax
purposes, interest payable on the junior subordinated debentures, would provide
us with a more cost-effective means of obtaining capital for regulatory
purposes than if we were to issue preferred stock.
CAPITALIZATION
The following table sets forth (a) our consolidated borrowings and
capitalization at March 31, 1999; and (b) our consolidated borrowings and
capitalization after giving effect to the issuance of the preferred securities
and common securities offered by Capital Trust and our receipt of the net
proceeds from the corresponding sale of the junior subordinated debentures to
Capital Trust, as if the sale of the preferred securities, common securities,
and junior subordinated debentures had been consummated on March 31, 1999, and
assuming the underwriters' over-allotment option was not exercised.
<TABLE>
<CAPTION>
As of
March 31, 1999
--------------------
Actual As Adjusted
-------- -----------
(In thousands)
<S> <C> <C>
Borrowings:
Borrowed money (1)...................................... $169,849 $169,849
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures (2)........... -- 27,500
Shareholders' Equity:
Common stock, par value $0.0001 per share; 50,000,000
shares authorized; 6,724,911 shares issued and
outstanding, actual and as adjusted.................... 1 1
Additional paid-in capital.............................. 22,426 22,426
Retained earnings....................................... 29,442 29,442
-------- --------
Total stockholders' equity............................ 51,869 51,869
-------- --------
Total capitalization (1).............................. $221,718 $249,218
======== ========
</TABLE>
- --------
(1) Does not include deposits, custodial escrow deposits or Federal Home Loan
Bank advances.
(2) In connection with the issuance of the guaranteed preferred beneficial
interest in the Company's junior subordinated debentures, we estimate we
will incur expenses of $1.5 million (including underwriters' compensation
of $1.1 million). The junior subordinated debentures will mature on ,
2029, which date may be shortened to a date no earlier than , 2004, if
certain conditions are met.
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THE COMPANY
Matrix Bancorp, Inc.
General
Matrix Bancorp, Inc. (occasionally referred to in this prospectus as "Matrix
Bancorp" or the "Company") is a unitary thrift holding company that, through
our subsidiaries, focuses on traditional banking, mortgage banking and the
administration of self-directed trust accounts. Our traditional banking
activities include originating and servicing residential, commercial and
consumer loans and providing a broad range of depository services. Our mortgage
banking activities consist of purchasing and selling residential mortgage loans
and residential mortgage servicing rights; offering brokerage, consulting and
analytical services to financial services companies and financial institutions;
servicing residential mortgage portfolios for investors; originating
residential mortgages; and providing real estate management and disposition
services. Our trust activities focus primarily on the administration of self-
directed individual retirement accounts, qualified 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 and was formerly
called "Matrix Capital Corporation." In December 1998, we changed our 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. We believe that the
name change more accurately reflects the true nature of our banking and
investment activities. The trading symbol for our common stock on the NASDAQ
National Market is "MTXC."
The Subsidiaries
Our core business operations are conducted through the six operating
subsidiaries described below. See Note 19 to the Consolidated Financial
Statements included elsewhere in this prospectus for a presentation of
financial information by industry segment.
Matrix Capital 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, 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 non-interest-bearing custodial escrow deposits
related to the residential mortgage loan portfolio serviced by our subsidiary,
Matrix Financial, and the interest-bearing money market accounts administered
by our subsidiary, Sterling Trust. See "--Matrix Financial Services
Corporation" and "--The Vintage Group, Inc." 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 for Matrix Bank by Matrix Financial following their purchase. As of
March 31, 1999, Matrix Bank had total assets of $826.0 million.
Matrix Bank and the other subsidiaries have significant experience in
purchasing and originating mortgage loans, have familiarity with real estate
markets throughout the United States, and have traditionally had access to
relatively low cost deposits. The resulting knowledge and activities permit
Matrix Bank to manage its funding and capital position in a way that enhances
its performance.
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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
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; 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 the mortgage banking
entities of several of the nation's largest financial institutions. During
1997, United Financial brokered the sale of 91 mortgage loan servicing
portfolios totaling $33.4 billion in outstanding mortgage loan principal
balances, and during 1998 brokered the sale of 68 mortgage loan servicing
portfolios totaling $66.4 billion in outstanding mortgage loan principal
balances. During the three months ended March 31, 1999, United Financial
brokered the sale of 10 mortgage loan servicing portfolios totaling $13.8
billion in outstanding mortgage loan principal balances.
United Financial's volume of brokerage activity and the expertise of its
analytics department give us 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, we are often able to identify certain types of mortgage
loan servicing portfolios that are well suited to our particular servicing
platform and unique corporate structure.
Matrix Financial Services Corporation
Matrix Financial acquires mortgage servicing rights on a nationwide basis
through purchases in the secondary market, services the loans underlying the
mortgage servicing rights and originates mortgage loans through its wholesale
loan origination network.
As of March 31, 1999, Matrix Financial serviced 93,285 borrower accounts
representing $6.2 billion in principal balances, excluding $23.1 million in
sub-servicing for companies that are unaffiliated with us. The majority of
these accounts were seasoned loans having 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. These custodial escrow accounts are
maintained at Matrix Bank. At March 31, 1999, the custodial escrow accounts
related to our servicing portfolio maintained at Matrix Bank were $98.1
million.
During 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. During the three months
ended March 31, 1999, Matrix Financial originated $134.8 million in residential
mortgage loans. The mortgage loans originated by Matrix Financial are typically
sold in the secondary market.
The Vintage Group, Inc.
In early 1997, we acquired The Vintage Group. The Vintage Group has two
primary subsidiaries, Sterling Trust Company, headquartered in Waco, Texas, and
First Matrix Investment Services Corporation, headquartered in Arlington,
Texas.
Sterling Trust was incorporated in 1984 as a Texas 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 March 31, 1999, Sterling Trust administered 37,360 accounts
with assets under
19
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administration of over $2.2 billion, of which approximately $136.2 million
represented interest-bearing deposits under administration held at Matrix Bank.
First Matrix is a NASD broker/dealer that provides brokerage services to
financial institutions, individuals and deferred contribution plans.
United Capital Markets, Inc.
United Capital Markets is a registered investment advisor that focuses on
interest rate risk management services for institutional clients. It provides a
professional outsourcing alternative to in-house interest rate risk management
departments and to Wall Street derivative products.
United Capital Markets typically focuses on interest rate and prepayment
risk as they relate to specific objectives articulated to it by the client.
United Capital Markets' interest rate risk management strategy includes
modeling of asset risk, setting up and trading individual hedge accounts and
matching accounting practice and management goals. Although we believe that
United Capital Markets will ultimately be able to implement interest rate risk
management strategies for clients with respect to several asset classes, its
initial focus has been on the implementation of interest rate risk management
strategies for clients' portfolios of mortgage servicing rights.
United Capital Markets is managed by former senior executives from
nationally recognized investment banks and the mortgage banking industry with
many years of experience in interest rate risk management and hedging
strategies.
United Special Services, Inc.
United Special Services provides real estate management and disposition
services on foreclosed properties owned by financial services companies and
financial institutions. In addition to the unaffiliated clients currently
served by United Special Services, Matrix Financial uses United Special
Services exclusively in handling the disposition of its foreclosed real estate.
As of March 31, 1999, United Special Services had approximately 1,700
foreclosed properties under its management.
United Special Services 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.
Savings Bank Activities
General
Matrix Bank's main office is in Las Cruces, New Mexico. It also has branches
in Las Cruces and in Sun City, Arizona, and loan production offices in Denver
and Evergreen, Colorado. Through these locations, 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 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," Matrix Bank
traditionally makes bulk purchases of residential mortgage loans
20
<PAGE>
in the secondary market. We believe that our structure provides advantages over
our competitors in the purchase of bulk mortgage loan packages. In particular:
. 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.
. Matrix Bank's affiliation with Matrix Financial also provides servicing
advantages that a typical community bank does not possess. Matrix
Financial acts as a sub-servicer for a majority of Matrix Bank's mortgage
loan portfolio. Because Matrix Financial services loans throughout the
entire United States, Matrix Bank can acquire loans secured by property
located in any of the fifty states.
Substantially all of the residential mortgage loans that Matrix Bank
acquires are classified as held for sale. This accounting classification
requires Matrix Bank to 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 Matrix Bank reviews many loan
portfolios for prospective acquisition, it focuses 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, Matrix Bank generally targets
adjustable over fixed rate portfolios. Due to the accounting treatment
required, we believe that the focus on seasoned and adjustable rate products
reduces the effect of increasing interest rates on the portfolio's market
value.
Matrix Bank purchases mortgage loan portfolios from various sellers who have
either originated the loans or, more typically, acquired the loan portfolios in
bulk purchases. Matrix Bank considers several factors prior to a purchase.
Among other factors, Matrix Bank 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 Matrix Bank and the product mix in its existing
mortgage loan portfolio.
In some cases, the mortgage loan portfolios that Matrix Bank 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 Matrix Bank with an
opportunity to resell the loans at a higher price if the purchase discount on
these 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 Matrix
Bank prior to reselling the loans. Matrix Bank 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, Matrix Bank prices each loan package based on the specific
underlying loan characteristics.
Matrix Bank also buys non-performing Federal Housing Administration and
Veteran's Administration loans from third party sellers. The Department of
Housing and Urban Development generally guarantees the principal and interest
on these non-performing loans, and in many cases, the terms of the purchase
require the seller to pass scheduled interest through to Matrix Bank 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 March 31, 1999, Matrix Bank owned $178.6 million of these loans.
Matrix Bank performs due diligence on each mortgage loan portfolio that it
desires to purchase on a bulk basis. These procedures which consist of
analyzing a representative sample of the mortgage loans in the portfolio, and
are typically performed by Matrix Bank employees, but occasionally are
outsourced to third party contractors. The underwriter takes into account many
factors and statistics in analyzing the sample of mortgage loans in the subject
portfolio, including:
21
<PAGE>
. 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; and
. the payment histories of the borrowers.
In addition, the underwriter attempts to verify that each sample loan conforms
to the standards for loan documentation set by Fannie Mae and the Federal Home
Loan Mortgage Corporation. In cases where a significant portion of the sample
loans contains non-conforming documentation, Matrix Bank assesses the
additional risk involved in purchasing these loans. This process helps Matrix
Bank determine whether the mortgage loan portfolio meets its investment
criteria and, if it does, the range of pricing that Matrix Bank feels is
appropriate.
Matrix Bank continually monitors the secondary market for purchases and
sales of mortgage loan portfolios and typically undertakes a sale of a
particular loan portfolio 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 Matrix Bank is unsuccessful in matching its
purchases and sales of mortgage loans, Matrix Bank may have excess capital,
resulting in less leverage and higher capital ratios.
During the year ended December 31, 1997, Matrix Bank made bulk purchases of
mortgage loans of approximately $493.7 million, and made bulk sales of
approximately $198.0 million, for a gain on sale of bulk mortgage loans of $2.4
million. During the year ended December 31, 1998, Matrix Bank made bulk
purchases of mortgage loans of approximately $678.2 million, and made bulk
sales of approximately $319.4 million, for a gain on sale of bulk mortgage
loans of $3.1 million. During the three months ended March 31, 1999, Matrix
Bank made bulk purchases of mortgage loans of approximately $25.0 million, and
made bulk sales of approximately $40.0 million, for a net gain on sale of bulk
mortgage loans of $532,400.
Commercial and Other Lending
Matrix Bank, through its commercial real estate division, has sought to
diversify and enhance the yield of its loan portfolio by originating commercial
and consumer loans and by 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;
. SBA loans; and
. financing to charter schools for the purchase of real estate and
equipment.
Matrix Bank's loan production office in Evergreen, Colorado, a suburb of
Denver, principally originates single family construction and commercial real
estate loans. Matrix Bank's main office in Las Cruces, New Mexico also
originates a portion of these loans.
Matrix Bank 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. Matrix Bank generally makes these loans on
commitments that last from 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.
Matrix Bank generally limits its commercial lending to income-producing real
estate properties. The repayment of loans collateralized by income-producing
properties depends 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
22
<PAGE>
the profitable operation of the business of the borrower, conditions in the
real estate market, interest rate levels and overall economic conditions. Loans
on income-producing properties meet internal underwriting guidelines that
include:
. a limit on the loan-to-value ratio of 75%;
. a review of the borrower with regard to management talent, integrity,
experience and available financial resources; and
. generally, a personal guarantee of the borrower.
Matrix Bank'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 loans, also known as "piggyback" loans; and
. business and industry guaranteed loans offered through the United States
Department of Agriculture.
Matrix Bank has received preferred lender status under the SBA program in the
Denver, Colorado market area. Preferred lender status allows Matrix Bank 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, we 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 completed on a tax-exempt basis.
During 1998, we originated $27.4 million of these leases. During the three
months ended March 31, 1999, we originated $1.3 million of these leases. We
originate the leases for resale, and as a result, classify the leases as held
for sale.
In addition, Matrix Bank 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 financing, credit card
programs, home equity loans, business loans and share loans. In addition to the
secured consumer loans, Matrix Bank extends unsecured loans on a very limited
basis to qualified borrowers based on their financial statements and
creditworthiness. Matrix Bank originates the majority of its consumer lending
within the Las Cruces, New Mexico market area.
Brokerage and Consulting Services
Brokerage Services
United Financial operates as one of the nation's leading full-service
mortgage servicing and mortgage loan brokers. It is capable of analyzing,
packaging, marketing and closing transactions involving servicing portfolios
and merger and acquisition transactions for mortgage banking entities. United
Financial markets its services to all types and sizes of market participants,
thereby developing diverse relationships. During 1998, United Financial
provided servicing brokerage services to each of the following clients:
AccuBanc Mortgage NationsBanc Mortgage
Chase Manhattan Mortgage Old Kent Mortgage
Crossland Mortgage Corp. PNC Mortgage Corporation of America
Harbor Financial Mortgage Corp. U.S. Bank
Mellon Mortgage
23
<PAGE>
Mortgage servicing rights are sold either on a bulk basis or a flow basis.
In a bulk sale, the seller identifies, packages and sells a portfolio of
mortgage servicing rights to a buyer in a single transaction. In a flow sale,
the seller agrees to sell to a specified buyer from time to time at a
predetermined price the mortgage servicing rights originated by the seller that
meet certain criteria. United Financial is capable of helping both buyers and
sellers with respect to bulk sales and flow sales of mortgage servicing rights.
We believe 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 our other subsidiaries and make referrals when
appropriate. See "--Consulting and Analytic Services."
The secondary market for purchasing and selling mortgage servicing rights
has become increasingly more active since its inception during the early 1980s.
Most institutions that own mortgage servicing rights 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. Since companies must
capitalize originated mortgage servicing rights, management of mortgage
servicing assets has become even more critical. These management efforts,
combined with interest rate sensitivity of the assets and the growth strategies
of market participants, create constantly changing supply and demand, and
therefore constantly changing price levels, in the secondary market for
mortgage servicing rights.
The sale and transfer of mortgage servicing rights occurs in a market that
is inefficient and often requires an intermediary to match 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, reputation and market penetration, United Financial has access to
information on the availability of mortgage servicing portfolios, which helps
it 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
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 of mortgage
servicing rights. Due to the risk of impairment of mortgage servicing rights as
a result of constantly changing interest rates and prepayment speeds on the
underlying mortgage portfolio, risk management of mortgage servicing rights
portfolios by the holder of the portfolio, which typically takes the form of
hedging the portfolio, has become more prevalent. The FAS 125 "mark-to-market"
analyses done by United Financial help clients assess which of their portfolios
of mortgage servicing rights 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 United Capital Markets, which in
turn is able to offer its interest rate risk management
24
<PAGE>
services relating to the identified or other mortgage servicing portfolios
owned by the client in order to meet the client's stated objectives.
United Capital Markets' primary strategy employs interest rate risk
management techniques that are different and more cost-efficient than products
offered by Wall Street firms. The United Capital Markets approach includes
modeling of asset risk, establishing and trading individual hedge accounts and
matching accounting practice and management goals. United Capital Markets
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 hedging instruments used have lower
transaction costs allowing both ease in rebalancing, if necessary, and daily
reporting. United Capital Markets uses a combination of futures and options to
match both the duration and convexity of the hedged asset. As of March 31,
1999, United Capital Markets was providing interest rate risk management
services to eight clients with approximately $15.1 billion of mortgage
servicing rights hedged.
We believe that combining the services offered by the analytics department
of United Financial with those of United Capital Markets provides us with a
competitive advantage in attracting and retaining clients because we are able
to offer financial services companies and financial institutions a more
complete package of services than our competitors. In addition, United
Financial is able to refer clients to Matrix Bank for financing opportunities
and to United Special Services 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 we conduct our residential servicing activities primarily
through Matrix Financial. Matrix Bank's mortgage servicing rights are typically
sub-serviced by Matrix Financial. At March 31, 1999, Matrix Financial serviced
approximately $6.2 billion of mortgage loans, including $2.0 billion sub-
serviced for Matrix Bank.
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. Matrix Bank invests this money in interest-
earning assets with returns that historically have been greater than could be
realized by Matrix Financial using the custodial escrow deposits as
compensating balances to reduce the effective borrowing cost on its warehouse
credit facilities.
As compensation for its mortgage servicing activities, Matrix Financial
receives servicing fees, plus any late charges collected from delinquent
borrowers and other fees incidental to the services provided. In the event of
default by the borrower, Matrix Financial receives no servicing fees until the
default is cured. For the three months ended March 31, 1999, Matrix Financial's
weighted-average servicing fee was 0.43%.
Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
Matrix Financial's policy is to accept only a limited number of servicing
assets on a recourse basis. As of December 31, 1997 and 1998, and March 31,
1999, on the basis of outstanding principal balances, less than 1% of the
mortgage servicing contracts owned by Matrix Financial involved recourse
servicing. To the extent that servicing is done on a recourse basis, Matrix
Financial 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 Matrix Financial require Matrix Financial 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.
25
<PAGE>
Matrix Financial, 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 Fannie Mae, the Federal Home
Loan Mortgage Corporation or the Government National Mortgage Association, for
which Matrix Financial provides significant amounts of mortgage loan servicing.
As of December 31, 1997 and 1998, and March 31, 1999, the Company had advanced
approximately $5.7 million, $7.9 million and $7.8 million, respectively, in
funds on behalf of third party investors.
Mortgage servicing rights 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 mortgage servicing rights and the loss of
future servicing fees. To date, there have been no terminations of mortgage
servicing rights by any mortgage loan owners because of Matrix Financial's
failure to service the loans in accordance with its obligations.
In order to track information on its servicing portfolio, Matrix Financial
utilizes a data processing system provided by Alltel Information Services, Inc.
Because Alltel is one of the largest mortgage banking service bureaus in the
United States, we believe that this system gives Matrix Financial capacity to
support anticipated expansion of its residential mortgage loan servicing
portfolio.
The following table sets forth certain information regarding the composition
of our mortgage servicing portfolio, excluding loans subserviced for others, as
of the dates indicated:
<TABLE>
<CAPTION>
As of December 31, As of March 31,
-------------------------------- ---------------
1996 1997 1998 1999
---------- ---------- ---------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
FHA insured/VA guaranteed
residential................. $ 318,145 $ 699,056 $ 960,053 $ 944,251
Conventional loans........... 2,171,016 2,633,563 4,338,308 5,208,415
Other loans.................. 15,875 15,443 59,368 44,078
---------- ---------- ---------- ----------
Total mortgage servicing
portfolio................. $2,505,036 $3,348,062 $5,357,729 $6,196,744
========== ========== ========== ==========
Fixed rate loans............. $1,986,599 $2,691,409 $4,234,349 $5,223,741
Adjustable rate loans........ 518,437 656,653 1,123,380 973,003
---------- ---------- ---------- ----------
Total mortgage servicing
portfolio................. $2,505,036 $3,348,062 $5,357,729 $6,196,744
========== ========== ========== ==========
</TABLE>
The following table shows the delinquency statistics for the mortgage loans
serviced by us, excluding loans subserviced for others, compared with national
average delinquency rates as of the dates presented. Delinquencies and
foreclosures for the mortgage loans serviced by us generally exceed the
national average due to high rates of delinquencies and foreclosures on certain
bulk loan and bulk servicing portfolios that we acquired at a discount.
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
National National National
Company Average(1) Company Average(1) Company Average(1)
------------------- ---------- ------------------- ---------- ------------------- ----------
Number Percentage Percentage Number Percentage Percentage Number Percentage Percentage
of of Servicing of of of Servicing of of of Servicing of
Loans Portfolio Loans Loans Portfolio Loans Loans Portfolio Loans
------ ------------ ---------- ------ ------------ ---------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent
for:
30-59 days...... 2,607 5.45% 3.04% 3,558 5.78% 3.03% 3,120 3.98% 2.96%
60-89 days...... 667 1.40 0.71 835 1.36 0.71 612 0.78 0.68
90 days and
over........... 684 1.43 0.62 912 1.48 0.62 712 0.91 0.60
----- ---- ---- ----- ---- ---- ----- ---- ----
Total
delinquencies.. 3,958 8.28% 4.37% 5,305 8.62% 4.36% 4,444 5.67% 4.24%
===== ==== ==== ===== ==== ==== ===== ==== ====
Foreclosures.... 264 0.55% 1.03% 447 0.73% 1.11% 727 0.93% 1.11%
===== ==== ==== ===== ==== ==== ===== ==== ====
<CAPTION>
As of March 31,
------------------------------
1999
------------------------------
National
Company Average(2)
------------------- ----------
Number Percentage Percentage
of of Servicing of
Loans Portfolio Loans
------ ------------ ----------
<S> <C> <C> <C>
Loans delinquent
for:
30-59 days...... 3,545 3.80% N/A%
60-89 days...... 749 0.80 N/A
90 days and
over........... 908 0.97 N/A
------ ------------ ----------
Total
delinquencies.. 5,202 5.57% N/A%
====== ============ ==========
Foreclosures.... 575 0.62% N/A%
====== ============ ==========
</TABLE>
- --------
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (Data as of December 31,
1996, 1997 and 1998, respectively).
(2) Data as of March 31, 1999 not yet available.
26
<PAGE>
The following table sets forth certain information regarding the number and
aggregate principal balance of the mortgage loans serviced by us, including
both fixed and adjustable rate loans, excluding loans subserviced for others,
at various interest rates:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- ---------------------------- ----------------------------
Percentage Percentage Percentage
of of of
Number Aggregate Aggregate Number Aggregate Aggregate Number Aggregate Aggregate Number
of Principal Principal of Principal Principal of Principal Principal of
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance Loans
---- ------ ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 7.00%.. 3,545 $ 145,720 5.82% 2,968 $ 220,582 6.59% 7,123 $ 662,491 12.36% 6,972
7.00%-7.99%..... 12,269 726,800 29.01 13,836 915,789 27.35 22,341 1,799,472 33.59 26,062
8.00%-8.99%..... 14,011 838,215 33.46 19,800 1,121,807 33.51 26,702 1,859,471 34.71 34,042
9.00%-9.99%..... 9,567 413,598 16.51 15,780 696,575 20.80 15,557 731,586 13.65 17,820
10.00%-10.99%.... 6,322 301,837 12.05 9,086 390,956 11.68 6,067 284,637 5.31 7,414
11.00%-11.99%.... 1,144 45,111 1.80 37 2,110 0.06 251 9,441 0.18 740
12.00% and over.. 924 33,755 1.35 10 243 0.01 305 10,631 0.20 235
------ ---------- ------ ------ ---------- ------ ------ ---------- ------ ------
Total........... 47,782 $2,505,036 100.00% 61,517 $3,348,062 100.00% 78,346 $5,357,729 100.00% 93,285
====== ========== ====== ====== ========== ====== ====== ========== ====== ======
<CAPTION>
As of March 31,
---------------------
1999
---------------------
Percentage
of
Aggregate Aggregate
Principal Principal
Rate Balance Balance
---- ---------- ----------
<S> <C> <C>
Less than 7.00%.. $ 616,524 9.95%
7.00%-7.99%..... 2,162,641 34.90
8.00%-8.99%..... 2,310,017 37.28
9.00%-9.99%..... 755,209 12.18
10.00%-10.99%.... 324,544 5.24
11.00%-11.99%.... 21,158 0.34
12.00% and over.. 6,651 0.11
---------- ----------
Total........... $6,196,744 100.00%
========== ==========
</TABLE>
27
<PAGE>
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loans
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by us, excluding loans
subserviced for others, as of the dates shown. The changes in the remaining
maturities as a percentage of unpaid principal between 1996, 1997 and 1998, as
reflected below, are the result of acquisitions of mortgage servicing rights
completed during 1997 and 1998.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------------- --------------------------------------- ----------------------------
Percentage Percentage
Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid Number Percentage Unpaid
of of Number Principal Principal of of Number Principal Principal of of Number Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount Loans of Loans Amount
-------- ------ ---------- ---------- ---------- ------ ---------- ---------- ---------- ------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-5 years........ 5,020 10.51% $ 77,136 3.08% 7,485 12.17% $ 103,761 3.10% 9,478 12.10% $ 216,441
6-10 years....... 8,784 18.39 184,629 7.37 11,405 18.54 257,208 7.68 21,320 27.21 943,428
11-15 years....... 6,418 13.43 340,282 13.58 14,325 23.29 589,747 17.62 10,231 13.06 534,187
16-20 years....... 14,066 29.44 566,862 22.63 9,600 15.61 558,605 16.68 7,870 10.04 545,628
21-25 years....... 7,006 14.66 545,336 21.77 7,427 12.07 687,563 20.54 12,524 15.99 1,184,562
More than 25
years............. 6,488 13.57 790,791 31.57 11,275 18.32 1,151,178 34.38 16,923 21.60 1,933,483
------ ------ ---------- ------ ------ ------ ---------- ------ ------ ------ ----------
Total........... 47,782 100.00% $2,505,036 100.00% 61,517 100.00% $3,348,062 100.00% 78,346 100.00% $5,357,729
====== ====== ========== ====== ====== ====== ========== ====== ====== ====== ==========
<CAPTION>
As of March 31,
---------------------------------------
1999
---------------------------------------
Percentage Percentage
Unpaid Number Percentage Unpaid Unpaid
Principal of of Number Principal Principal
Maturity Amount Loans of Loans Amount Amount
-------- ---------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1-5 years........ 4.04% 11,145 11.95% $ 218,259 3.52%
6-10 years....... 17.61 26,040 27.91 1,064,606 17.18
11-15 years....... 9.97 10,166 10.90 549,335 8.86
16-20 years....... 10.18 8,203 8.79 568,617 9.18
21-25 years....... 22.11 20,053 21.50 1,831,205 29.55
More than 25
years............. 36.09 17,678 18.95 1,964,722 31.71
---------- ------ ---------- ---------- ----------
Total........... 100.00% 93,285 100.00% $6,196,744 100.00%
========== ====== ========== ========== ==========
</TABLE>
28
<PAGE>
Our servicing activity is diversified throughout all 50 states with
concentrations at March 31, 1999 of approximately 21.2% in California, 10.7% in
Texas and 9.6% in Florida, based on aggregate outstanding unpaid principal
balances of the mortgage loans serviced.
Acquisition of Servicing Rights
Our strategy with respect to mortgage servicing focuses on acquiring
servicing rights for which the underlying mortgage loans tend to be more
seasoned and to have higher interest rates, lower principal balances and higher
custodial escrow balances than newly originated mortgage loans. We believe this
strategy allows us to reduce our prepayment risk, while allowing us 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 to the borrower
from refinancing can be significant. However, we remain opportunistic in our
acquisition philosophy. If higher balance, less seasoned portfolios are
available at our desired internal rate of return, we 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 us, excluding loans subserviced by
and for others:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1996 1997(1) 1998(2)(3)
---------- ---------- -------------
<S> <C> <C> <C>
Quarter ended:
December 31........................... 12.19% 12.52% 28.36%
September 30.......................... 11.53 12.75 23.60
June 30............................... 12.00 10.94 21.53
March 31(4)........................... 11.83 8.97 17.00
---------- ---------- ----------
Annual average.......................... 11.89% 11.30% 22.62%
========== ========== ==========
</TABLE>
- --------
(1) These prepayment rates exclude prepayment experience for mortgage servicing
rights subserviced for us by others of $1.3 billion for the quarter ended
March 31, 1997, $610 million for the quarter ended June 30, 1997, $1.1
billion for the quarter ended September 30, 1997, and $700 million for the
quarter ended December 31, 1997.
(2) These prepayment rates exclude prepayment experience for mortgage servicing
rights subserviced for us by others of $1.3 billion for the quarter ended
March 31, 1998, $0 for the quarter ended June 30, 1998, $703 million for
the quarter ended September 30, 1998, and $930 million for the quarter
ended December 31, 1998.
(3) These prepayment rates do not include prepayments that resulted from us
targeting our own servicing portfolio for refinance opportunities.
(4) For the quarter ended March 31, 1999, our average prepayment rate
experience on the mortgage loans serviced by us was 27.60%, excluding
prepayment experience for mortgage servicing rights subserviced for us by
others of $380 million.
We acquire substantially all of our mortgage servicing rights in the
secondary market. The industry expertise of United Financial and Matrix
Financial allows us to capitalize upon inefficiencies in this market when
acquiring mortgage servicing rights. Prior to acquiring mortgaging servicing
rights, we analyze 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 we consider to be appropriate to reflect the risk associated
with the investment.
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Sales of Servicing Rights
We periodically sell our purchased mortgage servicing portfolios and
generally sell all mortgage servicing rights on new loans that we originate.
These sales increase current revenue, which is 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. We did not sell any mortgage servicing rights during the three
months ended March 31, 1999. We sold mortgage servicing rights on loans that we
originated having an aggregate principal amount of $186.1 million during the
year ended December 31, 1997 and $277.4 million during the year ended December
31, 1998. Periodically, we may also sell purchased mortgage servicing rights to
restructure our portfolio or generate revenues.
We anticipate that we will continue to sell substantially all mortgage
servicing rights on new loans that we originate. We also may sell purchased
mortgage servicing rights. We intend to base decisions regarding future
mortgage servicing sales upon our cash requirements, purchasing opportunities,
capital needs, earnings and the market price for mortgage servicing rights.
During a quarter in which we sell purchased mortgage servicing rights, reported
income will tend to be greater than if we had not made the sale during that
quarter. Prices obtained for mortgage servicing rights 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.
Hedging of Servicing Rights
Our investment in mortgage servicing rights is exposed to impairment in
certain interest rate environments. As previously discussed, the prepayment of
mortgage loans increases during periods of declining interest rates as
homeowners seek to refinance their loan to lower interest rates. If the level
of prepayment on segments of our mortgage servicing portfolio reaches a level
higher than we projected for an extended period of time, the associated basis
in the mortgage servicing rights may be impaired. To mitigate this risk of
impairment due to declining interest rates, we initiated a hedging strategy
during 1997 that is managed by United Capital Markets. We analyze our servicing
portfolio for potential segments more susceptible to interest-rate risk,
focusing on higher fixed rate, higher balance, less seasoned loans. Based on
our analysis, we have hedged a segment of our portfolio using a program of
exchange-traded futures and options. We had identified and hedged $306 million
of our servicing portfolio as of December 31, 1997, $674 million of our
servicing portfolio as of December 31, 1998, and $548 million of our servicing
portfolio as of March 31, 1999. The hedging program qualifies for hedge
accounting treatment based on a high degree of statistical correlation and
current accounting regulation. We only hedge fixed rate loans in our servicing
portfolio, as correlation cannot be established for adjustable rate loans.
Residential Mortgage Loan Origination
We originate residential mortgage loans on both a wholesale and retail basis
through Matrix Financial and Matrix Bank. Matrix Financial originated a total
of $403.0 million in residential mortgage loans for the year ended December 31,
1997, $575.0 million in residential mortgage loans for the year ended December
31, 1998, and $134.8 million in residential mortgage loans for the three months
ended March 31, 1999.
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. These brokers 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 March 31, 1999, Matrix Financial had approved relationships
with approximately 450 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.
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<PAGE>
Mortgage loan brokers act as intermediaries between borrowers and Matrix
Financial in arranging mortgage loans. Matrix Financial, as an approved
seller/servicer for Fannie Mae, Federal Home Loan Mortgage Corporation and the
Government National Mortgage Association, provides these 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 our product offerings made through our wholesale loan
origination network, we offer 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. We have 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 1997,
1998, and the three months ended March 31, 1999, Matrix Financial originated
$48.3 million, $45.7 million, and $5.4 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.
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. We anticipate 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.
Matrix Financial has also developed a retention center that focuses on the
solicitation of our 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 that would have been likely to prepay
anyway.
Quality Control
We have a loan quality control process designed to ensure sound lending
practices and compliance with Fannie Mae, the Federal Home Loan Mortgage
Corporation and applicable private investor guidelines. Prior to funding any
wholesale or retail loan, we perform a pre-funding quality control audit that
consists of the verification of employment and utilizes a detailed checklist.
In addition, on a monthly basis we select 10% of all closed loans for a
detailed audit conducted by our 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 our senior management to determine trends and
additional training needs. We then address and cure all resolvable issues. We
also perform a quality control audit on all early payment defaults, first
payment defaults and 60-day delinquent loans, the findings of which are
reported to the appropriate investor and/or senior management.
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<PAGE>
Sale of Originated Loans
We generally sell the residential mortgage loans that we originate. Under
ongoing programs established with Fannie Mae and the Federal Home Loan Mortgage
Corporation, conforming conventional loans may be sold on a cash basis or
pooled by us and exchanged for securities guaranteed by Fannie Mae or the
Federal Home Loan Mortgage Corporation. We then sell these securities to
national or regional broker/dealers. Mortgage loans sold to Fannie Mae or the
Federal Home Loan Mortgage Corporation are sold on a nonrecourse basis so that
foreclosure losses are generally borne by Fannie Mae or the Federal Home Loan
Mortgage Corporation and not by us.
We also sell 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 we have
previously negotiated purchase commitments and for which we occasionally pay a
fee.
We sell 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. Generally, we sell conforming loans on a
servicing-retained basis and nonconforming loans on a servicing-released basis.
See "--Residential Mortgage Loan Servicing."
The sale of mortgage loans may generate a gain or loss for us. Gains or
losses result primarily from two factors. First, we may make a loan to a
borrower at a rate resulting in 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, we historically have 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"). We adjust our net commitment position daily either by entering into
new commitments to sell or by buying back commitments to sell depending upon
our projection of the portion of the pipeline loans that we expect 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 of our use of forward commitments and
subsequent profitability. The inherent value of the forward commitments is
considered in the determination of the lower of cost or market in valuing our
pipeline and funded loans at any given time.
Self-Directed Trust Activities
Sterling Trust provides administrative services for self-directed individual
retirement accounts, 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 to broker/dealers, registered representatives,
insurance agents, tax professionals, financial planners and advisors and
investment product sponsors. Sterling Trust believes that these individuals
have significant control over the placement of their customers' assets and can
encourage their customers to open accounts at Sterling Trust. The advantage
Sterling Trust offers to these financial service professionals and their
customers is the ability to hold a wide-array of assets, including non-standard
assets such as real estate, individually-negotiated debt instruments and public
and private offerings of securities.
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.
32
<PAGE>
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 do not require Sterling Trust's full services, Sterling
Trust may provide only record keeping services.
Non-qualified custodial services are also available and 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 clients' 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, we began offering specialized clearing services to investment
professionals. These services are provided via a direct connection with
National Securities Clearing Corporation using FundSERV to streamline and
secure the trading process. We also offer a mutual fund no transaction fee
supermarket that includes over 72 fund families and over 1,300 funds.
At March 31, 1999, Sterling Trust had assets under administration of over
$2.2 billion.
Real Estate Management and Disposition Services
United Special Services provides real estate management and disposition
services on foreclosed properties owned by financial services companies and
financial institutions across the United States. In addition to the
unaffiliated clients currently served by United Special Services, many of which
are also clients of United Financial, Matrix Financial uses United Special
Services exclusively in handling the disposition of its foreclosed real estate.
Having United Special Services, rather than Matrix Financial, provide this
service transforms the disposition process into a revenue generator for us,
since United Special Services 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 United Special Services typically collects its fee
from the real estate broker, United Special Services is able to provide this
disposition service on an outsourced basis and at no additional cost to the
mortgage loan servicer. United Special Services is able to pass the cost of the
disposition on to the real estate broker because of the volume it generates. In
addition, United Special Services 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.
Competition
We compete for the acquisition of mortgage servicing rights and bulk loan
portfolios mainly with mortgage companies, savings associations, commercial
banks and other institutional investors. We believe that we have competed
successfully for the acquisition of mortgage servicing rights and bulk loan
portfolios by relying on the advantages provided by our unique corporate
structure and the secondary market expertise of the employees of each of our
subsidiaries.
We believe that Matrix Bank's most direct competition for deposits comes
from local financial institutions. Customers distinguish between market
participants 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,
we expect additional significant competition for deposits 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.
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<PAGE>
For mortgage loan and mortgage servicing rights brokerage and consulting, we
compete mainly with other mortgage banking consulting firms, national and
regional investment banking companies and accounting firms. We believe that the
customers distinguish between market participants based primarily on customer
service. United Financial competes for its brokerage and consulting activities
by:
. recruiting qualified and experienced sales people;
. developing innovative sales techniques;
. offering superior analytical services, including hedging strategies;
. providing financing opportunities to its customers through its
affiliation with Matrix Bank; and
. seeking to provide a higher level of service than is furnished by its
competitors.
In originating mortgage loans, we compete mainly with other mortgage
companies, finance companies, savings associations and commercial banks.
Customers distinguish among market participants based primarily on price and,
to a lesser extent, the quality of customer service and name recognition.
Aggressive pricing policies of our competitors, especially during a declining
period of mortgage loan originations, could in the future result in a decrease
in our mortgage loan origination volume and/or a decrease in the profitability
of our loan originations, thereby reducing our revenues and net income. We
compete 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 our competitors. However, we do not have a
significant market share of the lending markets in which we conduct operations.
Sterling Trust faces considerable competition in all of the services and
products that it offers, mainly 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.
United Capital Markets competes with in-house interest rate risk management
departments and Wall Street derivative products. United Capital Markets
believes that customers distinguish among market participants based on name
recognition, price and customer service and satisfaction. United Capital
Markets competes by offering a unique hedging product that tends to be of lower
cost than the products offered by competitors.
United Special Services competes against other companies that specialize in
providing real estate management and disposition services on foreclosed
property. Additionally, clients or potential clients that opt to perform these
services in-house diminish United Special Services' market.
Employees
At March 31, 1999, we and our subsidiaries had 518 employees. We believe
that our relations with our employees are good. Neither we nor any of our
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 our operations. The description of laws and regulations contained in
this prospectus is not intended 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 our business, operations and prospects.
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Matrix Bancorp
We are a unitary savings and loan holding company within the meaning of the
Home Owners' Loan Act of 1933. As such, we have registered with the Office of
Thrift Supervision and are subject to Office of Thrift Supervision regulation,
examination, supervision and reporting requirements. In addition, the Office
Thrift Supervision has enforcement authority over us and our savings
association and non-savings association subsidiaries. Among other things, this
authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to us. In addition, Matrix
Bank must notify the Office of Thrift Supervision at least 30 days before
making any capital distribution to us.
As a unitary savings and loan holding company, we generally are not
restricted under existing laws as to the types of business activities in which
we may engage, provided that Matrix Bank continues to be a "qualified thrift
lender" under the Home Owners' Loan Act. To maintain its status as a qualified
thrift lender, Matrix Bank must invest a minimum percentage of its assets in
qualified thrift investments in nine out of every 12 months, unless the Office
of Thrift Supervision grants an exception to this requirement. In general,
qualified thrift investments include certain types of residential mortgage
loans and mortgage backed securities. Upon any nonsupervisory acquisition by us
of another savings association or of a savings bank or a cooperative bank that
is an insured bank that meets the qualified thrift lender test and is deemed to
be a savings association by the Office of Thrift Supervision, we would become a
multiple savings and loan holding company if the acquired institution is held
as a separate subsidiary. Multiple savings and loan holding companies are
subject to extensive limitations on the types of business activities in which
they may engage. The Home Owners' Loan Act limits the activities of a multiple
savings and loan 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, subject to the prior approval
of the Office of Thrift Supervision, and activities authorized by Office of
Thrift Supervision regulation. In addition, if Matrix Bank fails to maintain
its status as a qualified thrift lender, the Home Owners' Loan Act would limit
the types of business activities in which we may engage to those permissible
for a multiple savings and loan holding company, and, except in limited
circumstances, it would impose significant limitations on the types of
activities in which Matrix Bank would be permitted to engage, on the ability of
Matrix Bank to establish additional branch offices, on the availability of
Federal Home Loan Bank advances to Matrix Bank, on the ability of Matrix Bank
to pay dividends, and on the types of investments that Matrix Bank would be
permitted to make and retain.
Federal law imposes limitations on who may control us. Specifically, the
Change in Bank Control Act prohibits a person or group of persons from
acquiring control of a savings association directly, or indirectly by acquiring
control of a savings and loan holding company, unless the Office of Thrift
Supervision has been given 60 days prior written notice of the proposed
acquisition and within that time the Office of Thrift Supervision has not
issued a notice disapproving the proposed acquisition or extending for up to
another 30 days the period during which the Office of Thrift Supervision may
issue such a disapproval. The Office of Thrift Supervision may further extend
the disapproval period under certain circumstances. A proposed acquisition may
be made prior to the expiration of the disapproval period if the Office of
Thrift Supervision issues written notice of its intent not to disapprove the
action.
Notwithstanding the above, except in certain limited circumstances, the Home
Owner's Loan Act also requires that any "company" obtain the prior approval of
the Office of Thrift Supervision prior to acquiring control of a savings
association directly or indirectly by acquiring control of a savings and loan
holding company. In considering whether to approve such an acquisition, the
Office of Thrift Supervision must consider a number of factors, including, the
financial and managerial resources and future prospects of the acquirer and the
savings association involved, the effect of the acquisition on the savings
association, the insurance risk to the Deposit Insurance Funds of the Federal
Deposit Insurance Corporation, and the convenience and needs of the community
to be served. The Office of Thrift Supervision may not approve a proposed
acquisition which would result in a monopoly, or which would be in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
savings and loan business in any part of the United States. The Office of
Thrift Supervision also may not approve any proposed acquisition the effect of
which in any part of the United States
35
<PAGE>
may be substantially to lessen competition, or tend to create a monopoly, or
which in any other manner would be in restraint of trade, unless the Office of
Thrift Supervision finds that the anticompetitive effects of the proposed
acquisition are clearly outweighed in the public interest by the probable
effect of the acquisition in meeting the convenience and needs of the community
to be served.
Among other circumstances, under a conclusive presumption established by the
Office of Thrift Supervision regulations, an acquirer will be deemed to have
acquired control of a savings and loan holding company if the acquirer,
directly or indirectly, through one or more subsidiaries or transaction, or
acting in concert with one or more persons or companies, acquires control of
more than 25 percent of any class of voting stock of the savings and loan
holding company or controls in any manner the election of a majority of the
board of directors of the savings and loan holding company. The Office of
Thrift Supervision regulations also establish other presumptions of control
with respect to acquisitions of interest in savings and loan holding companies.
Legislation has been proposed that would:
. permit affiliations between banking, insurance and securities firms in a
manner not presently permissible;
. subject unitary savings and loan holding companies such as us to
regulation by the Board of Governors of the Federal Reserve rather than
the Office of Thrift Supervision; and
. eliminate the federal savings association charter and the Office of
Thrift Supervision.
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 to unitary savings and
loan holding companies under existing law, and the grandfathering could be
transferred to acquirers under certain circumstances. It is too early to tell
whether legislation would result in the imposition on us of the capital
requirements applicable to bank holding companies. We are also unable to
predict whether legislation will be enacted or, given such uncertainty,
determine the extent to which the legislation, if enacted, would affect our
business. We are also unable to predict whether the Savings Association
Insurance Fund and the Bank Insurance Fund will eventually be merged.
Federal Savings Bank Operations
General. Matrix Bank is subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision, as its chartering authority
and primary regulator, and potentially by the Federal Deposit Insurance
Corporation, which insures its deposits up to applicable limits. Such
regulation and supervision:
. establishes a comprehensive framework of activities in which Matrix Bank
can engage;
. limits the types and amounts of investments permissible for Matrix Bank;
. limits the ability of Matrix Bank to extend credit to any given borrower;
. imposes specified liquidity requirements;
. significantly limits the transactions in which Matrix Bank may engage
with its affiliates;
. requires Matrix Bank to meet a qualified thrift lender test that imposes
a level of portfolio assets in which Matrix Bank must invest in qualified
thrift investments, which include primarily residential mortgage loans
and related investments;
. places limitations on capital distributions by savings associations such
as Matrix Bank, including cash dividends;
. imposes assessments to the Office of Thrift Supervision to fund its
operations;
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<PAGE>
. establishes a continuing and affirmative obligation, consistent with
Matrix Bank's safe and sound operation, to help meet the credit needs of
its community, including low and moderate income neighborhoods;
. requires Matrix Bank to maintain certain noninterest-bearing reserves
against its transaction accounts;
. establishes various capital categories resulting in various levels of
regulatory scrutiny applied to the institutions in a particular category;
and
. 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 Office of Thrift Supervision. 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 these regulations, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or Congress, could have a material impact
on Matrix Bank and its operations.
Transactions with Affiliates. Under current federal law, Sections 23A and
23B of the Federal Reserve Act govern transactions between depository
institutions and their affiliates. These provisions are made applicable to
savings associations such as Matrix Bank by the Home Owners' Loan Act. In a
holding company context, in general, the parent holding company of a savings
association and any companies that are controlled by the parent holding company
are affiliates of the savings association. In addition, any companies that are
sponsored and advised on a controlled basis by a savings association or its
affiliates and any investment companies to which a savings association or its
affiliates act as investment advisors are deemed to be affiliates. Section 23A
limits the extent to which the savings association or its subsidiaries may
engage in certain transactions with its affiliates. These transactions include,
among other things, the making of loans or other extensions of credit to an
affiliate and the purchase of assets from an affiliate. Generally, these
transactions between the savings association and any one affiliate cannot
exceed 10% of the savings association's capital stock and surplus, and these
transactions between the savings institution and all of its affiliates cannot,
in the aggregate, exceed 20% of the savings institution's capital stock and
surplus. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to an affiliate, and for guarantees or
acceptances on letters of credit issued on behalf of an affiliate. Section 23B
requires that transactions covered by Section 23A and a broad list of other
specified transactions be on terms substantially the same, or no less favorable
to the savings association or its subsidiary, as similar transactions with non-
affiliates. In addition to the restrictions on transactions with affiliates
that Sections 23A and 23B of the Federal Reserve Act impose on depository
institutions, the regulations of the Office of Thrift Supervision also
generally prohibit a savings association from purchasing or investing in
securities issued by an affiliate. Matrix Bank engages in transactions with its
affiliates, which are structured with the intent of complying with these
regulations.
Insurance of Accounts and Regulation by the Federal Deposit Insurance
Corporation. Matrix Bank is a member of the Savings Association Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation. The
deposits of Matrix Bank are insured up to $100,000 per depositor by the Federal
Deposit Insurance Corporation. This insurance is backed by the full faith and
credit of the United States. As insurer, the Federal Deposit Insurance
Corporation imposes deposit insurance assessments and is authorized to conduct
examinations of and to require reporting by institutions insured by the Federal
Deposit Insurance Corporation. It also may prohibit any Federal Deposit
Insurance Corporation-insured institution from engaging in any activity the
Federal Deposit Insurance Corporation determines by regulation or order to pose
a serious risk to
37
<PAGE>
the Federal Deposit Insurance Corporation. The Federal Deposit Insurance
Corporation 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 required
the Federal Deposit Insurance Corporation to implement a risk-based deposit
insurance assessment system. Pursuant to this requirement, the Federal Deposit
Insurance Corporation has adopted a risk-based assessment system under which
all depository associations insured by the Savings Association Insurance Fund
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
the Federal Deposit Insurance Corporation Improvement Act, the Federal Deposit
Insurance Corporation may impose special assessments on Savings Association
Insurance Fund members to repay amounts borrowed from the United States
Treasury or for any other reason deemed necessary by the Federal Deposit
Insurance Corporation. The Federal Deposit Insurance Corporation may increase
assessment rates, on a semiannual basis, if it determines that the reserve
ratio of the Savings Association Insurance Fund will be less than the
designated reserve ratio of 1.25% of deposits insured by the Savings
Association Insurance Fund. In setting these increased assessments, the Federal
Deposit Insurance Corporation must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
Federal Deposit Insurance Corporation. Matrix Bank's current assessment is
.064% of deposits, which is the lowest rate.
By contrast, financial institutions that are members of the Bank Insurance
Fund, which has higher reserves, experienced lower deposit insurance
assessments. The disparity in deposit insurance assessments between the Savings
Association Insurance Fund and the Bank Insurance Fund members was exacerbated
by the statutory requirement that both the Savings Association Insurance Fund
and the Bank Insurance Fund funds be re-capitalized 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. The
Bank Insurance Fund reached the required reserve ratio in 1995. As a result,
financial institutions that have deposits insured by the Savings Association
Insurance Fund were subject to a potential competitive disadvantage as compared
to Bank Insurance Fund members.
On September 30, 1996, the President signed legislation that provides for
Bank Insurance Fund members to service a growing portion of the Financial
Corporation bond payments. Until January 1, 2000, annual assessments of .013%
of Bank Insurance Fund deposits and .064% of Savings Association Insurance Fund
deposits will service the annual payments due on the Financial Corporation
bonds. Accordingly, Matrix Bank's portion of the payment on the Financial
Corporation bonds is .064% of the deposits. The legislation provided for
subsequent full pro rata sharing of Financial Corporation bond payments by the
Bank Insurance Fund and the Savings Association Insurance Fund institutions.
The financing corporations created by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 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 Savings Association Insurance Fund assessments
and are paid in lieu thereof.
Brokered Deposits. Under the Federal Deposit Insurance Corporation
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 fund the desired growth of Matrix Bank. At March 31, 1999, Matrix Bank
had $129.0 million of brokered deposits. In
38
<PAGE>
the event Matrix Bank is not permitted to accept brokered deposits in the
future, it would have to find replacement sources of funding. It is possible
that such alternatives, if available, would result in a higher cost of funds.
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 Office of Thrift Supervision 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;
. "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;
. "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%;
. "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%; and
. "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 March 31, 1999, Matrix Bank was a "well capitalized" institution.
"Undercapitalized" institutions must adhere to growth, capital distribution
and dividend and other limitations and are required to submit a capital
restoration plan. A savings institution's compliance with its capital
restoration 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 an
order by the Office of Thrift Supervision 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 this status.
39
<PAGE>
The following table indicates Matrix Bank's regulatory capital ratios at
March 31, 1999:
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------
Core Risk-Based
Capital Capital
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Shareholder's equity/GAAP capital.................. $ 52,020 $ 52,020
Additional capital items:
General valuation allowances..................... -- 3,232
----------- -----------
Regulatory capital as reported to the Office of
Thrift Supervision................................ 52,020 55,252
Minimum capital requirement as reported to the
Office of Thrift Supervision...................... 33,090 38,706
----------- -----------
Regulatory capital--excess......................... $ 18,930 $ 16,546
=========== ===========
Capital ratios..................................... 6.29% 11.42%
Well capitalized requirement....................... 5.00% 10.00%
</TABLE>
Federal Home Loan Bank System and Federal Reserve Board
Matrix Bank is a member of the Federal Home Loan Bank system, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member associations and administers the
home financing credit function of savings associations. The Federal Home Loan
Bank 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 Federal Home Loan Bank funds its operations primarily from proceeds derived
from the sale of consolidated obligations of the Federal Home Loan Bank system.
Matrix Bank, as a member of the Federal Home Loan Bank system, must acquire and
hold shares of capital stock in its regional Federal Home Loan Bank 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 Federal Home Loan Bank,
whichever is greater. Matrix Bank was in compliance with this requirement with
an investment in Federal Home Loan Bank stock at March 31, 1999 of $15.9
million.
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
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 Federal Reserve Board, the reserve
requirement is 3%; and
. for accounts greater than $46.5 million, the reserve requirement is
$1.395 million plus 10% of amounts over $46.5 million, which may be
adjusted by the Federal Reserve Board between 8% and 14%, against that
portion of total transaction accounts in excess of $46.5 million.
At March 31, 1999, Matrix Bank had $7.6 million of reserves with the Federal
Reserve System.
Mortgage Banking Operations
The rules and regulations applicable to our 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,
we are required annually to submit to the Department of Housing and Urban
Development, Fannie Mae and Federal Home Loan Mortgage Corporation audited
financial statements, and each regulatory entity maintains its own financial
guidelines for determining net worth and eligibility requirements. Our
operations are also subject to examination by the Department of Housing and
Urban Development, Fannie Mae and Federal Home Loan
40
<PAGE>
Mortgage Corporation at any time to assure compliance with the applicable
regulations, policies and procedures. Mortgage loan origination activities are
subject to, among other laws, the Equal Credit Opportunity Act, the Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974, and
the regulations promulgated under these laws 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 our operations. We are licensed in those states in which we do
business requiring such a license where the failure to be licensed would have a
material adverse effect on us, our business, or our assets. Mortgage
origination operations also may be subject to state usury statutes.
Regulation of Sterling Trust Company
Sterling Trust provides custodial services and directed, non-discretionary
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. Under applicable law, a Texas
trust company, such as Sterling Trust, is subject to virtually all provisions
of the Texas Finance Code 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 $1
million or more, such as Sterling Trust, has the power to:
. purchase, sell, discount and negotiate notes, drafts, checks and other
evidences of indebtedness;
. purchase and sell securities;
. issue subordinated debentures and capital notes with the written consent
of the Texas Banking Commissioner; and
. exercise powers incidental to the enumerated powers described in the
Texas Finance Code.
A Texas trust company, such as Sterling Trust, is generally prohibited from
accepting demand or time deposits if not insured by the Federal Deposit
Insurance Corporation.
Limitation on Capital Distributions. The Texas Finance Code 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 Texas Banking Commissioner. The Texas Finance Code 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 that can be converted into cash within four business days. So
long as it complies with those requirements, a Texas trust company generally is
permitted to invest its corporate assets in any investment permitted by law.
However, unless otherwise permitted by the Texas Finance Code, a Texas trust
company cannot invest an amount in excess of 15% of its capital and certified
surplus in the securities of a single issuer without the prior written consent
of the Texas Banking Commissioner.
Branching. The Texas Finance Code permits a Texas trust company to establish
and maintain branch offices at any location within the state if it first
obtains written approval of the Texas Banking Commissioner.
Transactions with Related Parties. The Texas Finance Code 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 the transaction is
approved by a disinterested majority of the board of directors or the written
approval of the Texas Banking Commissioner is first obtained.
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<PAGE>
Enforcement. Under applicable provisions of the Texas Finance Code, the
Texas Banking 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 Texas Banking 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 Texas Banking 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 Texas Banking Commissioner may
require additional capital of a Texas trust company if the Texas Banking
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.
Properties
We believe that all of our present facilities are adequate for our current
needs and that additional space is available for future expansion on acceptable
terms. The following table sets forth certain information concerning the real
estate that we own or lease:
<TABLE>
<CAPTION>
Monthly Rent
or Mortgage
Location Square Feet Owned/Leased Occupant Payment
-------- ----------- --------------------------------- ----------------- ------------
<S> <C> <C> <C> <C>
Denver, CO.............. 14,000 Leased through December 31, 2002 Company, United $15,417
Financial, United
Capital Markets
Denver, CO.............. 8,100 Leased through June 30, 2001 United Special $ 8,400
Services
Phoenix, AZ (1)......... 30,000 Owned Matrix Financial $ 7,814
Atlanta, GA............. 4,129 Leased through April 30, 2001 Matrix Financial $ 6,366
Denver, CO.............. 9,549 Leased through June 30, 2002 Matrix Financial $11,402
Las Vegas, NV........... 225 Leased through September 30, 1999 Matrix Financial $ 565
Scottsdale, AZ.......... 1,883 Leased through April 30, 2001 Matrix Financial $ 4,125
Las Cruces, NM.......... 30,000(2) Owned Matrix Bank N/A
Las Cruces, NM.......... 1,800 Owned Matrix Bank N/A
Sun City, AZ............ 3,000 Owned Matrix Bank N/A
Evergreen, CO........... 1,650 Leased through December 31, 1999 Matrix Bank $ 3,000
Waco, TX................ 11,300 Leased through June 30, 2001(3) Sterling Trust $13,553
Waco, TX................ 928 Leased through June 30, 1999(4) Sterling Trust $ 1,021
Arlington, TX........... 1,446 Leased through April 30, 2000 First Matrix $ 1,752
St. Louis, MO........... 1,550 Leased through October 31, 2000 United Capital $ 2,325
Markets
</TABLE>
- --------
(1) The Phoenix, Arizona, building is subject to third-party mortgage
indebtedness. See Note 8 to the consolidated financial statements.
(2) 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 parties at market prices.
(3) 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.
(4) Management of Sterling trust anticipates renewal of this lease at its
expiration.
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<PAGE>
Legal Proceedings
United Financial is a defendant in a lawsuit entitled Douglas County Bank &
Trust Co. v. United Financial, Inc. that was commenced on or about May 23, 1997
in the United States District Court for the District of Nebraska. In this
lawsuit, 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 requesting that the court render a
verdict in place of the jury's verdict, or alternatively, that the court order
a new trial. On November 6, 1998, the court denied the plaintiff's motion. The
plaintiff 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 our
consolidated financial condition, results of operations or cash flows.
Matrix Bank has been named defendant in a lawsuit entitled Transamerica
Mortgage Company v. Matrix Capital Bank that was commenced on or about February
7, 1999, in the District Court of the J-191st Judicial District, Dallas County,
Texas. The plaintiff has alleged that Matrix Bank breached a representation and
warranty given to the plaintiff by Matrix Bank under a purchase agreement by
which Matrix Bank sold certain mortgage loans to the plaintiff. The action
relates to approximately $700,000 in principal amount of mortgage loans, and
the plaintiff has requested that Matrix Bank be required to repurchase the
loans and/or pay an unspecified amount of money damages. Matrix Bank believes
that it has defenses to this lawsuit. However, no assurances can be given that
an adverse judgment will not ultimately be rendered or that any adverse
judgment would not have a material adverse effect on our consolidated financial
conditions, results of operations or cash flows.
We and our subsidiaries are involved from time to time in routine litigation
incidental to our business. However, other than described above, we believe
that neither we nor any of our subsidiaries are parties to any material pending
litigation that in our opinion is likely to have a material adverse effect on
our consolidated financial condition, results of operations or cash flows.
43
<PAGE>
MANAGEMENT
Directors and Advisory Director
The following sets forth the name, age and certain biographical information
of our directors and advisory director:
Guy A. Gibson, age 34, has served as the Chief Executive Officer and a
director of Matrix Bancorp since its formation in June 1993. Mr. Gibson has
served as Chairman of the Board of Matrix Financial since August 1990. Mr.
Gibson was one of the original founders of Matrix Financial and acted as its
Chief Executive Officer during 1990. Prior to his tenure with the Company, Mr.
Gibson held the position of Account Executive with the investment banking firms
of PaineWebber from 1987 to 1989 and Lincoln Financial Group, a Denver-based
servicing brokerage firm, from 1989 to 1990.
Richard V. Schmitz, age 36, has served as a director of Matrix Bancorp since
its formation in June 1993 and was elected Chairman of the Board of Matrix
Bancorp in February 1996. Mr. Schmitz was one of the original founders of
United Financial, held the position of Chief Executive Officer of United
Financial from 1990 until early 1997, and has been Chairman of the Board of
United Financial since that time.
D. Mark Spencer, age 39, served as Chairman of the Board of Matrix Bancorp
from June 1993 until February 1996. Mr. Spencer has also served as an executive
officer of the Company since June 1993. Mr. Spencer has served as Chairman of
the Board of Matrix Bank since October 1993, and has served as director of
Matrix Financial since August 1990. From 1985 through July 1990, Mr. Spencer
served as Vice President of Secondary Marketing for Austin Federal Savings and
Loan, an Austin, Texas savings and loan association.
Thomas M. Piercy, age 34, has served in various managerial capacities at
United Financial since October 1990, and currently serves as Managing Director
of United Financial. Mr. Piercy has served as a director of Matrix Bancorp
since June 1993. From 1986 to 1990, Mr. Piercy served as Managing Director of
Lincoln Financial Group.
David W. Kloos, age 37, has served as a Vice President and Chief Financial
Officer of Matrix Bancorp since June 1993, and he has served as a director of
Matrix Bancorp also since June 1993. Mr. Kloos was appointed as Senior Vice
President of Matrix Bancorp in September 1996. Mr. Kloos has served as
Executive Vice President and Chief Financial Officer of Matrix Bank since
October 1993. From 1989 through 1993, Mr. Kloos served as Senior Vice President
and Chief Financial Officer of Argo Federal Savings Bank, a Summit, Illinois,
federal savings bank. From 1985 to 1989, Mr. Kloos, a certified public
accountant, was employed by KPMG Peat Marwick LLP.
Stephen G. Skiba, age 44, a director of Matrix Bancorp since March 1996, is
Director of Equity Research, focusing on banks and thrifts, for ABN AMRO Inc.,
an investment banking firm in Chicago, Illinois. From November 1990 to June
1996, Mr. Skiba was Senior Vice President, Chief Financial Officer and
Treasurer of N.S. Bancorp, Inc. in Chicago, Illinois. Prior to joining N.S.
Bancorp, Inc., Mr. Skiba was an audit partner with KPMG Peat Marwick LLP.
David A. Frank, age 51, was elected director of Matrix Bancorp in September
1996. Mr. Frank is a private investor and a consultant for financial services
companies. He was President, Chief Executive Officer and founder of America's
Mortgage Source, a mortgage company involved in the origination of residential
mortgage loans and which operated from 1995 into 1998. From 1994 to 1995, Mr.
Frank served as President and Chief Executive Officer of Chemical Residential
Mortgage Corporation in Edison, New Jersey, and as a director of Chemical Bank,
N.A. Chemical Residential Mortgage Corporation was the primary mortgage banking
operation of Chemical Banking Corporation, now known as Chase Manhattan. Prior
to joining Chemical Residential Mortgage Corporation, Mr. Frank served from
1989 to 1994 as President and Chief Operating Officer of Margaretten Financial
Corporation, a publicly traded national mortgage banking company based in Perth
Amboy, New Jersey. From 1977 to 1989, Mr. Frank held various positions with
Primerica Corporation/American Can Company, now known as Citigroup, where he
was primarily involved in mergers, acquisitions, capital market activities and
in restructuring a manufacturing-based concern into a diversified financial
services company.
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<PAGE>
Peter G. Weinstock, age 37, has served as an advisory director to Matrix
Bancorp since September 1996. In his capacity as advisory director, Mr.
Weinstock is invited to attend meetings of the Board of Directors and to
participate in its discussions. However, Mr. Weinstock is not entitled to vote
in matters submitted for approval and is not involved in the administration or
management of the Company. Mr. Weinstock is a member of the law firm of Jenkens
& Gilchrist, a Professional Corporation, where he has been employed for more
than five years. Jenkens & Gilchrist, a Professional Corporation, from time to
time serves as outside counsel to the Company.
Executive Officers
The following sets forth the name, age, current position with the Company,
and the principal occupation during the last five years of each executive
officer of the Company. Information with respect to Messrs. Gibson, Schmitz,
Spencer, Piercy and Kloos is set forth above under the caption "--Directors."
George R. Bender, age 59, has been President and Chief Executive Officer of
Matrix Financial since October 1998. Prior to joining Matrix Financial, from
1990 to 1997, Mr. Bender served as Executive Vice President in charge of
mortgage banking operations for Bank United in Houston, Texas. From 1985 to
1990, Mr. Bender served as President and Chief Executive Officer of Centrust
Mortgage Corporation. Mr. Bender has been in the mortgage banking business for
more than 35 years, primarily serving during such time in various executive
capacities for subsidiaries of financial institutions and Wall Street
investment banking concerns.
Thomas P. Cronin, age 53, joined the Company in March 1997 as Vice Chairman
of Matrix Bancorp and Chief Executive Officer of United Financial. Prior to
joining the Company, Mr. Cronin held various positions with MCA Financial
Corporation, a Michigan-based financial services company, and its wholly owned
subsidiary, MCA Mortgage Corporation. Mr. Cronin's most recent management
position with MCA Financial Corporation was Vice Chairman. Mr. Cronin served as
an outside director of MCA Financial Corporation after joining Matrix Bancorp
and United Financial and until his resignation in January 1999. In February,
1999, MCA Financial Corporation and several of its affiliates, including MCA
Mortgage Corporation, filed for reorganization under Chapter 11 of the
bankruptcy code. The petition for reorganization was filed by a receiver for
such entities, who was appointed in January, 1999. Mr. Cronin has over 30 years
of experience in the mortgage banking industry and currently is the Legislative
Vice Chairman and board member for the Mortgage Bankers Association of America.
Gary Lenzo, age 48, has served as President and Chief Executive Officer and
a director of Matrix Bank since October 1993. From 1987 to 1992, Mr. Lenzo
served as Vice President of Austin Savings Association and Great Western
Savings Bank, both Austin, Texas based savings associations. From 1984 to 1986,
Mr. Lenzo served as Vice President of Unifirst American Mortgage Corporation,
an Austin, Texas, mortgage company.
T. Allen McConnell, age 32, joined the Company in October 1997 as Senior
Vice President, Secretary and General Counsel. From September 1992 to October
1997, Mr. McConnell was an attorney with Jenkens & Gilchrist, a Professional
Corporation, in Dallas, Texas, where his practice focused on corporate finance
and mergers and acquisitions. Jenkens & Gilchrist, a Professional Corporation,
from time to time serves as outside counsel for the Company.
Paul E. Skretny, age 54, has served as Chief Executive Officer of Sterling
Trust since May 1993 and as Chairman of the Board of First Matrix since March
1994. Prior to his association with Sterling Trust, Mr. Skretny was Senior Vice
President of APS Securities Corporation and Masterson, Moreland, Sauer, Whisman
Inc. from June 1988 to February 1993, providing investment services and
assistance to individual and institutional investors. From May 1975 to April
1988, Mr. Skretny was employed by Jefferson Bancshares, Inc. and its
subsidiaries serving as President and Chief Executive Officer from 1984 to
1988. From June 1964 to 1975, he was employed by the Manufacturers & Traders
Trust Company and the Bank of Buffalo in various positions as Assistant
Manager, Operations Officer, Assistant Vice President and Vice President of
Branch Office Administration. Mr. Skretny holds professional certifications and
licenses as a fully registered general securities representative, general
securities principal and uniform securities agent.
45
<PAGE>
Compensation of Executive Officers
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during 1996, 1997, and 1998 by the
Company to or on behalf of the Chief Executive Officer and the four other
highest paid executive officers of the Company whose salary and bonus for 1998
was in excess of $100,000:
<TABLE>
<CAPTION>
Annual Long-Term
Compensation(1) Compensation
----------------------------------- ------------
Other Annual Options/ All Other
Name and Principal Positions Year Salary Bonus Compensation SARs Compensation
- ---------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Guy A. Gibson........... 1998 $250,000 $ 50,000 $ -- -- $33,500(3)(4)(7)
President, Chief 1997 250,000 -- -- -- 8,375(3)(4)
Executive Officer and 1996 250,000 -- 47,514(2) -- 8,375(3)(4)
Director of Matrix
Bancorp; Chairman of
the Board of Matrix
Financial
Richard V. Schmitz...... 1998 $250,000 $ 50,000 $ -- -- $31,820(3)(4)(7)
Chairman of the Board 1997 257,211 -- -- -- 8,525(3)(4)
of Matrix Bancorp; 1996 250,000 -- -- -- 8,375(3)(4)
Chairman of the Board
of United Financial
D. Mark Spencer......... 1998 $250,000 $ 50,000 $ -- -- $34,920(3)(4)(7)
Vice Chairman of Matrix 1997 257,211 -- -- -- 9,025(3)(4)
Bancorp; Chairman of 1996 250,000 -- -- -- 8,375(3)(4)
the Board of Matrix
Bank
Thomas M. Piercy........ 1998 $250,000 $ -- $ -- -- $ --
Director of Matrix 1997 280,631 -- -- -- 373(6)
Bancorp; Managing 1996 293,626 -- -- -- 2,375(4)
Director of United
Financial
Thomas P. Cronin........ 1998 $250,000 $100,000 $ -- -- $ 2,500(4)
Vice Chairman of Matrix 1997 208,333 20,000 -- 25,000(5) --
Bancorp; Chief 1996 -- -- -- -- --
Executive Officer of
United Financial
</TABLE>
- --------
(1) Annual compensation does not include the cost to us of benefits certain
executive officers receive in addition to salary and cash bonuses. The
aggregate amounts of such personal benefits, however, did not exceed the
lesser of either $50,000 or 10% of the total annual compensation of such
executive officer. The bonus amount reflected for each such person for 1998
was actually paid in 1999.
(2) Amount specified represents payments made to Mr. Gibson during the year
shown in respect of Mr. Gibson's accrued tax liability during prior periods
in which we operated as an "s" corporation.
(3) Of this amount, $6,000 represents directors fees paid by Matrix Bank for
such person's service on that entity's board of directors for each of 1995,
1996 and 1997, except that such amount for 1997 is only $5,500 for Mr.
Schmitz.
(4) Of this amount, $2,375, $2,375, and $2,500, respectively, represents our
contribution to such person's account maintained under the 401(k) savings
plan during 1996, 1997 and 1998, respectively.
(5) The exercise price for these options is $13.75. These options become
exercisable ratably over five years, with the first 20% exercisable as of
March 3, 1998.
(6) Represents our contribution to Mr. Piercy's account maintained under the
401(k) savings plan during 1997.
(7) Represents premiums we paid for life insurance policies owned by and
payable to the family of each executive officer. Annual premiums paid in
1998 were $25,000 for Mr. Gibson, $23,320 for Mr. Schmitz, and $26,420 for
Mr. Spencer.
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<PAGE>
Stock Option Plan
In September 1996, our board of directors and shareholders adopted the 1996
Stock Option Plan, which amended and restated our stock option plan adopted in
1995. Our 1996 Stock Option Plan has authorized the grant of options to
substantially all of our full-time employees and directors for up to 525,000
shares of our common stock. All options granted have ten year terms and vest
based on the determination by our compensation committee.
The 1996 Stock Option Plan authorized the granting of incentive stock
options and nonqualified stock options to purchase common stock to eligible
persons. The 1996 Stock Option Plan is currently administered by the
compensation committee 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 a 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
compensation committee. 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
optionee's employment with the Company if and to the extent such option was
exercisable on the date of such termination.
Employee Stock Purchase Plan
In September 1996, our board of directors and shareholders adopted the
Matrix Bancorp, Inc. Employee Stock Purchase Plan and reserved 125,000 shares
of common stock for issuance under the Employee Stock Purchase Plan. The
Employee Stock Purchase Plan became effective upon consummation of our initial
public offering. The price at which the Employee Stock Purchase Plan shares are
sold is 85 percent of the lower of the fair market value per share of common
stock on the enrollment or the purchase date.
Exercises of Options
The following table sets forth information with respect to the executive
officers identified in the prior table concerning the exercise of options
during fiscal 1998, and unexercised options held as of December 31, 1998. No
options were exercised by these executive officers during 1998.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Number of Unexercised in-the-money
Shares options options
Acquired at FY-end: at FY-end:
on Exercisable/ Exercisable/
Name Exercise Value Realized Unexercisable Unexercisable(1)
- ---- --------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Guy A. Gibson........... -- -- --/-- $--/--
Richard V. Schmitz...... -- -- --/-- --/--
D. Mark Spencer......... -- -- --/-- --/--
Thomas M. Piercy........ -- -- --/-- --/--
Thomas P. Cronin........ -- -- 5,000/20,000 --/--
</TABLE>
- --------
(1) Values are stated based upon the closing price of $13.50 per share of the
common stock on the Nasdaq National Market on December 31, 1998, the last
trading day of our fiscal year.
47
<PAGE>
Director Compensation
We pay each of our nonemployee directors a $3,750 quarterly retainer and a
fee of $1,000 for each meeting of our board of directors that he attends, or
$250 if such director's attendance is via teleconference. We also reimburse
each director for ordinary and necessary travel expenses related to such
director's attendance at board of directors and committee meetings. Nonemployee
directors are also eligible for stock option grants under the 1996 Stock Option
Plan.
Each of our advisory directors is paid a $2,500 quarterly retainer and a fee
of $1,000 for each meeting of our board of directors that he attends, or $250
if such advisory director's attendance is via teleconference. We also reimburse
each advisory director for ordinary and necessary travel expenses related to
such advisory director's attendance at board of directors meetings. Advisory
directors are also eligible for stock option grants under the 1996 Stock Option
Plan.
Compensation Committee Interlocks and Insider Participation
There are no reportable compensation committee interlocks or insider
participation matters.
Certain Relationships and Related Transactions
On December 31, 1998, we renewed a loan originally made to Mr. Spencer, a
Vice Chairman and director of Matrix Bancorp, in December 1994 in the amount of
approximately $80,000. The loan to Mr. Spencer accrues interest at the prime
rate, is unsecured, and the entire principal and all accrued interest is due
and payable in one lump sum on December 30, 1999. We have the option of
extending the maturity of such loan to Mr. Spencer in annual increments.
On September 9, 1998, we made a loan to Mr. Piercy, Managing Director of
United Financial and one of our directors, in original principal amount of
$85,000. Subsequent to year end, this loan to Mr. Piercy was cancelled. Prior
to cancellation, the loan to Mr. Piercy accrued interest at the prime rate, was
unsecured, and the entire principal and all accrued interest was due and
payable in one lump sum on September 8, 1999. On January 15, 1999, we made an
additional loan to Mr. Piercy in the original principal amount of $195,000.
This loan accrues interest at 10% per annum, is secured by shares of the
Company held by Mr. Piercy and is due and payable upon demand or December 31,
1999, whichever occurs first.
In 1997, Matrix Financial loaned Mr. McConnell $320,000 to finance the
purchase of his principal residence in Denver, Colorado. During 1998, Matrix
Financial refinanced Mr. McConnell's mortgage loan in the amount of
approximately $320,000. Mr. McConnell is our Senior Vice President, Secretary
and General Counsel. Both mortgage loans were made in the ordinary course of
business of Matrix Financial, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility or present other unfavorable features. We
subsequently sold both mortgage loans to an unaffiliated third-party investor
at a fair market value. In addition, in connection with his relocation to
Denver, we made Mr. McConnell a $40,000 unsecured loan for an approximate one-
week period during December, 1997, which was repaid in full, with interest at
the prime rate, as published in the Wall Street Journal, upon the sale by Mr.
McConnell of his residence in Dallas.
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. Mr. Skretny, President of Sterling Trust
and one of our executive officers, owns approximately 12.5% of the equity
interests of the lessor of such office space.
In October, 1995, we loaned $750,000 to Matrix Diversified, Inc., a company
in which Messrs., Gibson, Schmitz, Piercy, Spencer and Kloos, each of whom is
one of our executive officers, and Mr. Robert Fowles, an officer of United
Financial, own all of the outstanding capital stock, in order to enable Matrix
Diversified to purchase the assets of an unaffiliated business. That business
was sold to an unaffiliated third party after the
48
<PAGE>
end of 1997. The loan was paid in full upon the sale. The loan accrued interest
at 13% per annum and was secured by a secondary lien on the assets of Matrix
Diversified. In addition, until such sale, we leased approximately 7,400 square
feet in our Phoenix office building to such business at a base rental of
approximately $8,500 per month. The office space is now utilized by Matrix
Financial.
Principal Shareholders and Stock Ownership of Management of Matrix Bancorp,
Inc.
The following table shows information regarding the beneficial ownership of
our common stock as of April 9, 1999, by (i) each person whom we know to own
beneficially five percent or more of our common stock; (ii) each of our
directors and advisory directors; (iii) each of our executive officers named in
the summary compensation table; and (iv) all of our directors, advisory
directors and executive officers as a group. Unless otherwise indicated, the
address of each person listed below is 1380 Lawrence Street, Suite 1400,
Denver, Colorado 80204.
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)
-------------------
Name Number Percent of Class
- ---- ------------------- ----------------
<S> <C> <C>
Guy A. Gibson............................. 1,149,875 17.1%
Richard V. Schmitz........................ 1,151,375 17.1
D. Mark Spencer........................... 1,147,876 17.1
Thomas M. Piercy.......................... 236,375 3.5
David W. Kloos............................ 156,498(2) 2.3
Thomas P. Cronin.......................... 13,089(2) *
Stephen G. Skiba.......................... 16,000(2) *
David A. Frank............................ 11,000(2) *
Peter G. Weinstock........................ 8,500(2) *
U.S. Bancorp
601 2nd Ave. South
Minneapolis, MN 55402-4302............... 658,413(3) 9.8
Fleet Financial Group, Inc.
One Federal Street
Boston, MA 02211......................... 366,900(4) 5.5
Financial Stocks, Inc.
507 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202................... 424,300(5) 6.3
All directors, advisory directors and
executive officers as a group
(13 persons)............................. 3,958,628(2) 58.3
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Except as indicated in the footnotes to this table and subject
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
beneficially owned.
(2) Includes options that are currently exercisable, or become exercisable
within 60 days of April 9, 1999, to purchase from us the number of shares
of common stock indicated for the following persons: David W. Kloos,
14,000; Thomas P. Cronin, 10,000; Stephen G. Skiba, 6,000; David A. Frank,
6,000; Peter G. Weinstock, 6,000; and all directors, advisory directors and
executive officers as a group, 68,000. Under the terms of the Employee
Stock Purchase Plan, participants are issued fractional shares to the
extent the money in their account is not evenly divisible into a whole
number of shares on the purchase date. For ease of presentation, the number
of shares of common stock outstanding and the number of shares of common
stock beneficially owned by the persons described in this prospectus have
been rounded to the nearest whole share.
49
<PAGE>
(3) Based on a Schedule 13G filed by U.S. Bancorp on February 11, 1999. The
Schedule 13G discloses that U.S. Bancorp has sole power to vote or direct
the vote of no shares and the sole power to dispose or direct the
disposition of 658,413 shares. These shares are pledged securities.
(4) Based on a Schedule 13G filed by Fleet Financial Group, Inc. on February
12, 1999. The Schedule 13G discloses that Fleet Financial Group, Inc. has
sole power to vote or direct the vote of 279,200 shares and sole power to
dispose or direct the disposition of 366,900 shares.
(5) Based on a Schedule 13D filed by Financial Stocks, Inc. on March 31, 1998.
The Schedule 13D disclosed that Financial Stocks, Inc. has sole voting
power over 401,346 shares of common stock, shared voting power over 22,954
shares of common stock, sole dispositive power over 401,346 shares of
common stock and shared dispositive power over 22,954 shares of common
stock.
MATRIX BANCORP CAPITAL TRUST I
Capital Trust is a statutory business trust formed under Delaware law
pursuant to:
. a trust agreement, dated as of May 26, 1999, executed by us, as
depositor, and the trustees of Capital Trust; and
. a certificate of trust filed with the Secretary of State of the State of
Delaware on May 26, 1999.
The initial trust agreement will be amended and restated in its entirety
substantially in the form filed as an exhibit to the registration statement of
which this prospectus forms a part. The trust agreement will be qualified as an
indenture under the Trust Indenture Act. Capital Trust will issue all of the
preferred securities to purchasers in the offering described in this
Prospectus. We will acquire all of the common securities, which will represent
an aggregate liquidation amount equal to at least 3% of the total capital of
Capital Trust. The common securities will be equal in right to payments with
the preferred securities, except that upon the occurrence and during the
continuance of an event of default under the trust agreement resulting from a
debenture event of default, our rights as holder of the common securities to
payment in respect of distributions and payments upon liquidation, redemption
or otherwise will be subordinated to your right to payments as a holder of the
preferred securities. See "Description of the Preferred Securities--
Subordination of Common Securities."
Capital Trust exists for the exclusive purposes of:
. issuing the preferred securities and common securities representing
undivided beneficial interests in its assets,
. investing the gross proceeds of the preferred securities and the common
securities in the junior subordinated debentures issued by us, and
. engaging activities incidental to the activities described above.
The junior subordinated debentures and payments on the junior subordinated
debentures will be the only assets of Capital Trust and payments under the
junior subordinated debentures will be the only revenue of the Capital Trust.
Capital Trust has a term of 55 years, but may dissolve earlier as provided in
the trust agreement. The principal executive office of Capital Trust is c/o
Matrix Bancorp, Inc., 1380 Lawrence Street, Suite 1400, Denver, Colorado 80204,
and its telephone number is (303) 595-9898.
The number of trustees will, pursuant to the trust agreement, initially be
five. Three of the trustees will be our employees, officers or affiliates. The
fourth trustee, the property trustee, will be a financial institution that is
not our affiliate. This fourth trustee will serve as institutional trustee
under the trust agreement and as indenture trustee for purposes of compliance
with the Trust Indenture Act. State Street Bank and Trust Company, a state
chartered trust company organized under the laws of the Commonwealth of
Massachusetts, will be the property trustee until we decide to remove or
replace it. For purposes of compliance with the provisions of the Trust
Indenture Act, State Street Bank and Trust Company will also act as trustee
under the Guarantee and as debenture trustee under the indenture. The fifth
trustee, the Delaware trustee, will be an entity that maintains its principal
place of business in the State of Delaware. Wilmington Trust Company, a
Delaware banking corporation, will act as Delaware trustee.
50
<PAGE>
The property trustee will hold title to the junior subordinated debentures
for the benefit of the holders of the preferred securities and the common
securities and in such capacity will have the power to exercise all rights,
powers and privileges under the indenture. The property trustee will also
maintain exclusive control of a segregated non interest-bearing bank account,
the property account, to hold all payments made under the junior subordinated
debentures for the benefit of the holders of the preferred securities and the
common securities. The property trustee will make payments of distributions and
payments on liquidation, redemption and otherwise to the holders of the
preferred securities and the common securities out of funds from the property
account. The guarantee trustee will hold the guarantee for the benefit of the
holders of the preferred securities. We, as the holder of all the common
securities, will have the right to appoint, remove or replace any trustee and
to increase or decrease the number of trustees. We will pay all fees and
expenses related to Capital Trust and the offering of the preferred securities
and the common securities.
Your rights as a holder of the preferred securities, including economic
rights, rights to information and voting rights, are set forth in the trust
agreement, the Delaware Business Trust Act and the Trust Indenture Act. See
"Description of the Preferred Securities."
51
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
OF MATRIX BANCORP, INC.
The following selected consolidated financial data and operating information
of Matrix Bancorp, Inc. 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 in this prospectus. In February 1997, we completed our
acquisition of The Vintage Group in a transaction accounted for as a pooling of
interests. As a result of the pooling, our historical financial and other
information has been restated to include the financial and other information of
The Vintage Group.
<TABLE>
<CAPTION>
As of and for the
As of and for the Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data
Net interest income
before provision for
loan and valuation
losses................. $ 4,004 $ 3,592 $ 6,059 $ 13,888 $ 24,190 $ 4,433 $ 7,228
Provision for loan and
valuation losses....... 216 401 143 874 4,607 450 675
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan and valuation
losses................. 3,788 3,191 5,916 13,014 19,583 3,983 6,553
---------- ---------- ---------- ---------- ---------- ---------- ----------
Non interest income:
Loan administration.... 6,926 7,749 8,827 16,007 17,411 3,743 5,293
Brokerage.............. 4,017 4,787 4,364 3,921 7,054 1,672 1,672
Trust services......... 2,488 2,869 3,061 3,561 4,169 1,001 1,279
Gain on sale of loans
and mortgage-backed
securities............ 1,590 3,039 3,121 2,441 3,108 1,062 532
Gain on sale of
mortgage servicing
rights................ 684 1,164 3,232 3,365 803 837 --
Loan origination (1)... 1,294 2,302 1,809 4,694 5,677 1,482 1,954
Other.................. 940 1,744 2,173 4,040 8,523 1,122 3,476
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non interest
income................ 17,939 23,654 26,587 38,029 46,745 10,919 14,206
Non interest expense.... 16,593 20,453 26,655 37,746 52,939 11,378 16,859
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 5,134 6,392 5,848 13,297 13,389 3,524 3,900
Income taxes............ 2,014 2,469 2,278 5,159 4,876 1,339 1,395
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $ 3,120 $ 3,923 $ 3,570(2) $ 8,138 $ 8,513 $ 2,185 $ 2,505
========== ========== ========== ========== ========== ========== ==========
Net income per share
assuming dilution (3).. $ 0.69 $ 0.83 $ 0.68 $ 1.20 1.24 $ 0.33 $ 0.37
Weighted average common
shares assuming
dilution............... 4,529,593 4,707,221 5,077,321 6,781,808 6,881,890 6,841,679 6,848,571
Cash dividends (4)...... $ -- $ -- $ 201 $ -- $ -- $ -- $ --
Balance Sheet Data
Total assets............ $ 113,597 $ 186,313 $ 274,559 $ 606,745 $1,012,640 $ 698,517 $ 996,519
Total loans, net........ 89,340 146,665 212,361 511,372 848,448 573,586 803,002
Mortgage servicing
rights, net............ 6,183 13,817 23,680 36,440 58,147 48,845 67,437
Deposits (5)(6)......... 41,910 48,877 90,179 224,982 490,516 316,303 543,954
Custodial escrow
balances............... 24,687 27,011 37,881 53,760 96,824 75,687 98,266
FHLB borrowings......... 14,600 19,000 51,250 171,943 168,000 104,000 113,000
Borrowed money.......... 18,438 65,093 42,431 89,909 178,789 125,607 169,849
Total shareholders'
equity................. 6,662 10,686 32,270 40,610 49,354 42,797 51,869
Operating Ratios and
Other Selected Data
Return on average assets
(7).................... 3.13% 2.59% 1.69% 1.78% 1.02% 1.35% 0.98%
Return on average equity
(7).................... 57.06 47.62 24.30 22.71 18.92 21.22 19.83
Average equity to
average assets (7)..... 5.49 5.44 6.97 7.86 5.41 6.35 4.97
Net interest margin
(7)(8)................. 4.64 2.84 3.45 3.70 3.37 3.14 3.34
Operating efficiency
ratio (9).............. 70.22 68.40 74.20 60.14 59.74 63.73 56.61
Total amount of loans
purchased.............. $ 80,048 $ 91,774 $ 159,015 $ 493,693 $ 678,150 $ 110,674 $ 25,016
Balance of owned
servicing portfolio
(end of period)........ $1,041,785 $1,596,385 $2,505,036 $3,348,062 $5,357,729 $4,325,559 $6,196,744
Trust assets under
administration (end of
period)................ $ 750,186 $ 952,528 $1,162,231 $1,437,478 $2,089,562 $1,555,486 $2,228,682
Wholesale loan
origination volume..... $ 183,130 $ 388,937 $ 583,279 $ 402,984 $ 574,963 $ 151,330 $ 134,766
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
As of and for the
As of and for the Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges (10)
Including interest on
deposits............... 2.58x 1.86x 1.54x 1.71x 1.36x 1.47x 1.37x
Excluding interest on
deposits............... 3.91x 2.22x 1.84x 2.30x 1.64x 1.77x 1.73x
Loan Performance Ratios
and Data
Allowance for loan and
valuation losses....... $ 728 $ 943 $ 1,039 $ 1,756 $ 3,710 $ 2,021 $ 4,182
Non-performing loans and
leases (11)............ 3,314 5,538 3,903 4,990 13,209 6,492 15,475
Non performing loans and
leases/
total loans (11)....... 3.68% 3.75% 1.83% 0.97% 1.55% 1.13% 1.92%
Non performing
assets/total assets
(11)................... 3.40 3.42 1.89 1.03 1.39 1.09 1.72
Net loan charge-
offs/average loans
(7).................... 0.03 0.15 0.03 0.04 0.38 0.03 0.02
Allowance for loan and
valuation losses/
total loans............ 0.81 0.64 0.49 0.34 0.44 0.35 0.52
Allowance for loan and
valuation losses/
non performing loans... 21.97 17.03 26.62 35.19 28.09 31.13 27.02
</TABLE>
- --------
(1) On January 1, 1995, we adopted FAS 122, which was superceded by FAS 125.
Since FAS 122 prohibited retroactive application, the historical
accounting results for 1995, 1996, 1997, 1998 and 1999 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 The Vintage Group prior to its acquisition by
us.
(5) Following our acquisition of The Vintage Group in February 1997, Sterling
Trust moved approximately $80.0 million of fiduciary deposits from a third
party institution to Matrix Bank.
(6) Beginning in February 1998, Matrix Bank began accepting brokered deposits.
At March 31, 1998, the total balance of brokered deposits was $80.1
million. At December 31, 1998, the total balance of brokered deposits was
$148.7 million. At March 31, 1999, the total balance of brokered deposits
was $129.0 million.
(7) Calculations are based on average daily balances where available and
monthly averages otherwise.
(8) Net interest margin has been calculated by dividing net interest income
before loan and valuation loss provision by average interest-earning
assets.
(9) The operating efficiency ratio has been calculated by dividing non-
interest expense excluding amortization of mortgage servicing rights by
operating income. Operating income is equal to net interest income before
provision for loan and valuation losses plus non-interest income.
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
(11) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Non-performing
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of non-performing loans and the
effect of repurchasing sub-prime automobile loans.
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following management's discussion and analysis of
financial condition and results of operations in conjunction with the preceding
"Selected Consolidated Financial and Operating Information of Matrix Bancorp,
Inc." Additionally, our consolidated financial statements and the notes
thereto, as well as other data included in this prospectus, should be read and
analyzed in combination with the analysis below.
General
Matrix Bancorp was formed in June 1993 when the founding shareholders of
Matrix Financial and United Financial, two of our subsidiaries, exchanged all
of their outstanding capital stock for shares of our stock in a series of
transactions that were each accounted for as a pooling of interests. In
September 1993, we 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. We formed United Special Services in
June 1995 and United Capital Markets in December 1996. In February 1997, we
acquired The Vintage Group in a pooling of interests and, accordingly, no
goodwill was recorded and our consolidated financial statements for the prior
periods have been restated.
The principal components of our 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, United Capital Markets and United Special Services,
respectively;
. loan origination fees and gains on sales of mortgage loans and mortgage
servicing rights generated by Matrix Bank and Matrix Financial; and,
. trust service fees generated by Sterling Trust.
Our results of operations are influenced by changes in interest rates and
the effect of these changes on our interest spreads, the volume of loan
originations, mortgage loan prepayments and the value of mortgage servicing
portfolios.
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. Our 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 our 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 quarter of 1999 were attributable to the following:
. a 54.5% increase in our 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
54
<PAGE>
. 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 our 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 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
our allowance for loan losses as it relates to nonperforming assets, see "--
Asset Quality--Nonperforming Assets."
Loan Administration
Loan administration income represents service fees earned from servicing
loans for various investors, which are based on a contractual percentage of the
outstanding principal balance plus late fees and other ancillary charges. Loan
administration fees increased $1.6 million, or 41.4%, to $5.3 million for the
quarter ended March 31, 1999 as compared to $3.7 million for the quarter ended
March 31, 1998. Loan administration fees are affected by factors that include
the size of our residential mortgage loan servicing portfolio, the servicing
spread, the timing of payment collections and the amount of ancillary fees
received. The mortgage loan servicing portfolio increased to an average balance
of $4.9 billion for the quarter ended March 31, 1999 as compared to $3.5
billion 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 mortgage servicing rights. 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. Mortgage servicing rights 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 mortgage servicing rights, we are unable to
predict whether United Financial will continue to broker the volume of mortgage
servicing rights that it did in the first quarter of 1999 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
55
<PAGE>
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 we purchase and the particular loan
portfolios we elect to sell.
Gain on Sale of Mortgage Servicing Rights
Gain on the sale of mortgage servicing rights decreased $837,000 because we
did not sell any mortgage servicing rights during the quarter ended March 31,
1999. Gains from the sale of mortgage servicing rights can fluctuate
significantly from quarter to quarter and year to year based on the market
value of our servicing portfolio, the particular servicing portfolios we elect
to sell and the availability of similar portfolios in the market. Due to our
position in and knowledge of the market, we will at times pursue opportunistic
sales of mortgage servicing rights.
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 United Capital Markets ($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 United Special Services ($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 United Capital Markets and United Special Services 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.
Non interest Expense
Non interest 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 mortgage servicing rights and our growth and expansion
throughout 1998 and into 1999. This growth and expansion includes increased
emphasis on wholesale loan production at Matrix
56
<PAGE>
Financial, expansion occurring at Sterling Trust due to increased assets under
administration, growth at Matrix Bank and additional personnel at several of
our other subsidiaries.
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Compensation and employee benefits............................. $ 5,127 $ 6,869
Amortization of mortgage servicing rights...................... 1,594 4,726
Occupancy and equipment........................................ 666 838
Postage and communication...................................... 542 669
Professional fees.............................................. 249 300
Data processing................................................ 346 326
Other.......................................................... 2,854 3,131
------- -------
Total........................................................ $11,378 $16,859
======= =======
</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 our growth and expansion, as discussed above, and an increase in
commission- based compensation. We 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 mortgage servicing rights 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 mortgage
servicing rights fluctuates based on the size of our mortgage servicing
portfolio and the prepayment rates experienced with respect to the underlying
mortgage loan portfolio. In response to the lower interest rates prevalent in
the market, prepayment speeds have increased due to borrowers refinancing into
lower interest rate mortgages. Our prepayment rates on our 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 non interest 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
our growth and expansion, as discussed above.
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 our origination of tax-exempt leases.
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 for fiscal year 1998
as compared to $8.1 million for fiscal year 1997. On a per share basis, net
income was $1.24 per share for fiscal 1998, and $1.20 for fiscal 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 Mortgage Corporation, as discussed below, $255,000 related to
United Financial's litigation expenses pertaining to the
57
<PAGE>
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 and ultimate disposition of our
entire portfolio of sub- prime auto loans. Excluding non-recurring charges,
earnings per share increased from $1.33 in 1997 to $1.47 in 1998, or 10.4%, and
returns on average equity were 22.5% for fiscal year 1998 and 25.2% for fiscal
year 1997.
During recent years, Matrix Financial entered into several purchase
transactions with MCA Mortgage Corporation, 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 Mortgage on a servicing retained basis. We also had a outstanding
receivable relating to brokerage and consulting services provided to MCA
Mortgage. In January 1999, we learned that MCA Mortgage was closing its
operations. Additionally, in February 1999, we learned that MCA Mortgage 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. We 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 Mortgage had apparently previously paid off, but for which MCA
Mortgage had continued to remit monthly principal and interest, rather than the
payoff proceeds. As a result of the above MCA Mortgage issues, the Company
recorded a pre-tax loss as of December 31, 1998 of approximately $2.3 million.
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 our average
loan balance, which was offset by a decrease in our 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 our acquisition 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 Mortgage 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 our
residential mortgage loan servicing portfolio, the servicing spread, the timing
of payment collections and the amount of ancillary
58
<PAGE>
fees collected. We attribute the 1998 increase primarily to the increase in the
outstanding principal balance underlying our 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 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 mortgage servicing rights, we are unable
to predict whether United Financial will continue to broker the volume of
mortgage servicing rights 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. Over half of the increase in accounts is the result of a
service agreement with a large registered investment 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 $198.0 million, for gains on sale of bulk
mortgage loans of $3.1 million and $2.4 million, respectively. These loan sales
were completed under standard purchase and sale agreements, with standard
representations and warranties and without recourse. The gains from these sales
represent cash gains. Gain on sale of loans can fluctuate significantly from
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 mortgage servicing rights 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 mortgage servicing rights, we sold $175.3 million in
purchased mortgage servicing rights during fiscal year 1998 as compared to $1.3
billion during fiscal year 1997. Gains from the sale of mortgage servicing
rights can fluctuate significantly from year to year based on the market value
of our servicing portfolio, the particular servicing portfolios we elect to
sell and the availability of similar portfolios in the market. Due to our
position in and knowledge of the market, we will at times pursue opportunistic
sales of mortgage servicing rights.
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
59
<PAGE>
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.
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 United Capital Markets which rose to
$2.6 million for fiscal year 1998 as compared to $184,000 for fiscal
year 1997;
. an increase in United Special Services service fee income which totaled
$2.0 million for fiscal year 1998 as compared to $1.1 million for fiscal
year 1997; and
. certain of our financing transactions which increased miscellaneous fee
income over the prior fiscal year.
Non interest Expense
Non interest 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 that has continued throughout 1998
and the increase in the amortization of mortgage servicing rights. 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 non interest expense for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Compensation and employee benefits............................. $14,724 $22,194
Amortization of mortgage servicing rights...................... 6,521 10,563
Occupancy and equipment........................................ 2,132 3,059
Postage and communication...................................... 1,522 2,393
Professional fees.............................................. 976 1,439
Data processing................................................ 843 1,344
Losses related to recourse sales............................... 1,237 --
Other general and administrative............................... 9,791 11,947
------- -------
Total........................................................ $37,746 $52,939
======= =======
</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.
Amortization of mortgage servicing rights 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 mortgage servicing rights fluctuates based on the
size of our mortgage servicing portfolio and the prepayment rates experienced.
Our prepayment rates on our 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
60
<PAGE>
increased due to borrowers refinancing into lower interest rate mortgages. We
anticipate the increased amortization levels to continue for the foreseeable
future in response to the historically low interest rate levels.
The remainder of non interest 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 our business
lines, especially with regard to Matrix Financial and Matrix Bank.
Additionally, we experienced higher interest curtailment expenses related to
the increased prepayments at Matrix Financial.
Provision for Income Taxes
Our 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 our origination of tax-exempt leases.
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 for fiscal
year 1997 as compared to $3.6 million for fiscal year 1996. On a per share
basis, net income was $1.20 per share for fiscal 1997 and $0.68 for fiscal
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 our 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. Our 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 our 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 our acquisition of the Vintage Group.
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 our yield on interest-earning assets to 8.55% from 9.43%
for fiscal years 1997 and 1996, respectively.
The decrease in our 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
our acquisition of loans with less discounts. 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."
61
<PAGE>
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 our allowance for loan losses as it
relates to non performing assets, see "--Asset Quality--Non-performing 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. This
increase was primarily attributable to the increase in the outstanding
principal balance underlying our 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 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 we purchase and the
particular loan portfolios we elect to sell.
Gain on Sale of Mortgage Servicing Rights
Gain on sale of mortgage servicing rights increased $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, we sold $1.3 billion in purchased mortgage servicing rights
during fiscal year 1997 as compared to $646.0 million during fiscal year 1996.
A majority of the gain in 1997 pertains to mortgage servicing rights we bought
in 1997.
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
62
<PAGE>
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 our 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 our policies been followed, a loss still would have been
recognized, albeit significantly smaller, since it is difficult for us to be
completely hedged when interest rates rapidly and significantly change. We have
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.
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. The increase in
other income between 1997 and 1996 is predominantly related to the growth in
credit card fee income, United Special Services service fees and consulting
income generated by United Capital Markets, 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, United Special Services
service fees and United Capital Markets 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.
Non interest Expense
Non interest 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 sub-servicing on mortgage servicing
portfolios acquired in 1997;
. the expenses related to United Capital Markets 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 our increased investment in mortgage
servicing rights; and
. our overall growth and expansion.
During 1997, we recognized a pre-tax loss of approximately $1.4 million
relating to the recourse obligation, subsequent operation and ultimate
disposition of our 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 one-time fee of $450,000 to re-capitalize the Savings Association
Insurance Fund; and
. a $787,000 loss relating to the repurchase of sub-prime auto loans.
The following table details the major components of non interest expense for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1996 1997
------- -------
(In thousands)
<S> <C> <C>
Compensation and employee benefits............................. $12,722 $14,724
Amortization of mortgage servicing rights...................... 2,432 6,521
Occupancy and equipment........................................ 1,776 2,132
Postage and communication...................................... 1,214 1,522
Professional fees.............................................. 666 976
Data processing................................................ 642 843
Losses related to recourse sales............................... 787 1,237
Other.......................................................... 6,416 9,791
------- -------
Total...................................................... $26,655 $37,746
======= =======
</TABLE>
63
<PAGE>
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 United Capital
Markets 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 mortgage servicing rights 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. The prepayment speed we experienced on the loans we serviced
averaged 11.3% during fiscal year 1997 as compared to 11.9% during fiscal year
1996.
The remainder of non interest expense 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 sub-
servicing 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.
64
<PAGE>
Average Balance Sheet
The following table sets forth for the periods and as of the dates indicated,
information regarding our average balances of assets and liabilities as well
as the dollar amounts of interest income from interest-earning assets and
interest expense on interest-bearing liabilities and the resultant yields or
costs. Ratio, yield and rate information are based on average daily balances
where available; otherwise, average monthly balances have been used. Average
interest rate information for the quarters ended March 31, 1999 and 1998 has
been annualized. Non accrual loans are included in the calculation of average
balances for loans for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1997 1998
-------------------------- -------------------------- --------------------------
Average Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance
-------- -------- ------- -------- -------- ------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning
assets:
Loans
receivable,
net............. $162,648 $15,733 9.67% $355,848 $31,096 8.74% $692,443 $59,452 8.59% $539,449
Mortgage-backed
securities...... 4,653 351 7.54 -- -- -- -- -- -- --
Interest-earning
deposits........ 5,556 312 5.62 15,371 778 5.06 15,042 627 4.17 16,400
FHLB stock...... 2,585 153 5.92 4,606 275 5.97 10,719 615 5.74 9,134
-------- ------- ------ -------- ------- ------ -------- ------- ------ --------
Total interest-
earning assets.. 175,442 16,549 9.43 375,825 32,149 8.55 718,204 60,694 8.45 564,983
Non interest-
earning assets:
Cash............ 3,085 10,268 13,241 7,384
Allowance for
loan and
valuation
losses.......... (964) (1,343) (2,223) (1,845)
Premises and
equipment....... 6,976 8,302 9,913 9,060
Other assets.... 26,199 62,922 93,208 68,843
-------- -------- -------- --------
Total non
interest-earning
assets.......... 35,296 80,149 114,139 83,442
-------- -------- -------- --------
Total assets.... $210,738 $455,974 $832,343 $648,425
======== ======== ======== ========
Liabilities and
Shareholders'
Equity
Interest-bearing
liabilities:
Passbook
accounts........ $ 2,389 82 3.43 $ 2,859 113 3.95 $ 2,859 102 3.58 $ 2,881
Money market and
NOW accounts.... 11,964 468 3.91 96,982 3,278 3.38 142,382 4,432 3.11 116,407
Certificates of
deposit......... 54,824 3,210 5.85 83,993 4,985 5.94 211,592 11,687 5.52 140,824
FHLB
borrowings...... 35,838 2,039 5.69 59,984 3,435 5.73 159,381 8,554 5.37 139,634
Borrowed money.. 54,171 4,691 8.66 79,011 6,450 8.16 147,368 11,729 7.96 121,456
-------- ------- ------ -------- ------- ------ -------- ------- ------ --------
Total interest-
bearing
liabilities..... 159,186 10,490 6.59 322,829 18,261 5.66 663,582 36,504 5.50 521,202
-------- ------- ------ -------- ------- ------ -------- ------- ------ --------
Non interest-
bearing
liabilities:
Demand deposits
(including
custodial escrow
balances)....... 27,934 80,816 106,247 71,596
Other
liabilities..... 8,927 16,501 17,518 14,431
-------- -------- -------- --------
Total non
interest-bearing
liabilities..... 36,861 97,317 123,765 86,027
Shareholders'
equity.......... 14,691 35,828 44,996 41,196
-------- -------- -------- --------
Total
liabilities and
shareholders'
equity.......... $210,738 $455,974 $832,343 $648,425
======== ======== ======== ========
Net interest
income before
provision for
loan and
valuation
losses........... $ 6,059 $13,888 $24,190
======= ======= =======
Interest rate
spread........... 2.84% 2.89% 2.95%
====== ====== ======
Net interest
margin........... 3.45% 3.70% 3.37%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities...... 110.21% 116.42% 108.23%
====== ====== ======
<CAPTION>
Quarter Ended March 31,
-----------------------------------------------
1998 1999
----------------- -----------------------------
Average Average Average
Interest Rate Balance Interest Rate
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets
Interest-earning
assets:
Loans
receivable,
net............. $11,301 8.38% $ 833,534 $17,238 8.27%
Mortgage-backed
securities...... -- -- -- -- --
Interest-earning
deposits........ 150 3.66 17,282 155 3.59
FHLB stock...... 135 5.91 15,645 212 5.42
-------- -------- ----------- -------- --------
Total interest-
earning assets.. 11,586 8.20 866,461 17,605 8.13
Non interest-
earning assets:
Cash............ 17,799
Allowance for
loan and
valuation
losses.......... (3,479)
Premises and
equipment....... 10,555
Other assets.... 126,503
-----------
Total non
interest-earning
assets.......... 151,378
-----------
Total assets.... $1,017,839
===========
Liabilities and
Shareholders'
Equity
Interest-bearing
liabilities:
Passbook
accounts........ 28 3.89 $ 2,764 24 3.42
Money market and
NOW accounts.... 837 2.88 268,848 2,162 3.22
Certificates of
deposit......... 1,999 5.68 230,612 3,009 5.22
FHLB
borrowings...... 1,964 5.63 155,461 1,898 4.88
Borrowed money.. 2,325 7.66 172,485 3,284 7.61
-------- -------- ----------- -------- --------
Total interest-
bearing
liabilities..... 7,153 5.49 830,170 10,377 5.00
-------- -------- ----------- -------- --------
Non interest-
bearing
liabilities:
Demand deposits
(including
custodial escrow
balances)....... 113,050
Other
liabilities..... 24,077
-----------
Total non
interest-bearing
liabilities..... 137,127
Shareholders'
equity.......... 50,542
-----------
Total
liabilities and
shareholders'
equity.......... $1,017,839
===========
Net interest
income before
provision for
loan and
valuation
losses........... $ 4,433 $ 7,228
======== ========
Interest rate
spread........... 2.71% 3.13%
======== ========
Net interest
margin........... 3.14% 3.34%
======== ========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities...... 108.40% 104.37%
======== ========
</TABLE>
65
<PAGE>
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates
and Volumes
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:
. changes in volume, in other words, changes in volume multiplied by old
rate; and
. changes in rate, in other words, changes in rate multiplied by old
volume.
For purposes of this table, changes attributable to both rate and volume,
which cannot be segregated, have been allocated proportionately to the change
due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended Quarter Ended
December 31, 1997 vs 1996 December 31, 1998 vs 1997 March 31, 1999 vs 1998
---------------------------- ----------------------------- ------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
Change in Change in Change in
---------------------------- ----------------------------- ------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
--------- -------- -------- --------- ------- --------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 18,688 $ (3,325) $ 15,363 $ 28,914 $ (558) $ 28,356 $ 6,082 $ (145) $ 5,937
Mortgage-backed
securities........... (351) -- (351) -- -- -- -- -- --
Interest-earning
deposits............. 551 (85) 466 (14) (137) (151) 8 (3) 5
FHLB stock............ 120 2 122 351 (11) 340 88 (11) 77
-------- -------- -------- --------- ------- --------- --------- -------- ---------
Total interest-earning
assets............... 19,008 (3,408) 15,600 29,251 (706) 28,545 6,178 (159) 6,019
Interest-bearing
liabilities:
Passbook accounts..... 16 15 31 -- (11) (11) (1) (3) (4)
Money market and NOW
accounts............. 3,322 (512) 2,810 1,412 (258) 1,154 1,226 99 1,325
Certificates of
deposit.............. 1,708 67 1,775 7,043 (341) 6,702 1,172 (162) 1,010
FHLB advances......... 1,374 22 1,396 5,338 (219) 5,119 193 (259) (66)
Borrowed money........ 2,151 (392) 1,759 5,441 (162) 5,279 971 (12) 959
-------- -------- -------- --------- ------- --------- --------- -------- ---------
Total interest-bearing
liabilities.......... 8,571 (800) 7,771 19,234 (991) 18,243 3,561 (337) 3,224
-------- -------- -------- --------- ------- --------- --------- -------- ---------
Change in net interest
income before
provision for loan
and valuation
losses............... $ 10,437 $ (2,608) $ 7,829 $ 10,017 $ 285 $ 10,302 $ 2,617 $ 178 $ 2,795
======== ======== ======== ========= ======= ========= ========= ======== =========
</TABLE>
Asset and Liability Management
General
A significant portion of our revenues and net income is derived from net
interest income and, accordingly, we strive to manage our interest-earning
assets and interest-bearing liabilities to generate what we believe to be an
appropriate contribution from net interest income. Asset and liability
management seeks to control the volatility of our performance due to changes in
interest rates. We constantly attempt to achieve an appropriate relationship
between rate sensitive assets and rate sensitive liabilities. We have responded
to interest rate volatility by developing and implementing asset and liability
management strategies designed to increase non interest income and improve the
match between interest-earning assets and interest-bearing liabilities. These
strategies include:
. Utilizing mortgage servicing rights as a source of non-interest 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 mortgage servicing rights because of
the resulting decrease in prepayment rates on the underlying loans;
. Increasing the non interest-bearing custodial escrow balances related to
our mortgage servicing rights;
. 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;
66
<PAGE>
. Maintaining a wholesale loan origination operation. Wholesale
originations provide a form of hedge against the balance of mortgage
loan servicing rights. 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 our investing activities; and
. Hedging segments of our servicing portfolio and selling forward
commitments on our loan pipeline.
Lending Activities
Our major interest-earning asset is our loan portfolio. Consequently, a
significant part of our asset and liability management involves monitoring the
composition of our loan portfolio, including the corresponding maturities. The
following table sets forth the composition of our loan portfolio by loan type
as of the dates indicated. No information is given for these items as of March
31, 1999, because there had been no material change in these items since
December 31, 1998. The amounts in the following table are shown net of
discounts and other deductions.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------- ---------------- ---------------- ---------------- ----------------
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............. $80,010 89.56% $136,741 93.23% $192,118 90.47% $462,604 90.46% $732,512 86.34%
Multi-family, commercial
real estate and
commercial............. 7,518 8.41 7,544 5.15 15,352 7.23 29,492 5.77 52,689 6.21
Direct financing
leases................. -- -- -- -- -- -- 2,708 0.53 24,429 2.88
Construction............ 106 0.12 78 0.05 1,061 0.50 7,591 1.48 27,648 3.26
Consumer................ 2,434 2.72 3,245 2.21 4,869 2.29 10,733 2.10 14,880 1.75
------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans and
leases................ 90,068 100.81 147,608 100.64 213,400 100.49 513,128 100.34 852,158 100.44
Less allowance for loan
and valuation losses... 728 0.81 943 0.64 1,039 0.49 1,756 0.34 3,710 0.44
------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans receivable, net... $89,340 100.00% $146,665 100.00% $212,361 100.00% $511,372 100.00% $848,448 100.00%
======= ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The following table presents the aggregate maturities of loans in each major
category of our 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>
67
<PAGE>
Included in loans held for sale is approximately $49.5 million, at December
31, 1998, of loans which we have 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 our 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 us contractual recourse 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 Over five
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>
Non performing Assets
As part of asset and liability management, the Company monitors non
performing assets ("NPAs") on a monthly basis. NPAs consist primarily of non
accrual loans and foreclosed real estate. Loans are placed on non accrual 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 our NPAs as of the dates indicated:
<TABLE>
<CAPTION>
As of December 31, As of March 31,
--------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non accrual mortgage
loans.................. $3,275 $5,523 $3,031 $4,796 $ 8,208 $ 6,248 $ 7,970
Non accrual commercial
loans and direct
financing leases....... -- -- -- -- 4,349 -- 7,312
Non accrual consumer
loans.................. 39 15 872 194 652 244 193
------ ------ ------ ------ ------- ------- --------
Total non performing
loans and leases..... 3,314 5,538 3,903 4,990 13,209 6,492 15,475
Foreclosed real estate.. 543 835 788 1,242 916 1,095 1,627
Repossessed
automobiles............ -- -- 506 -- -- -- --
------ ------ ------ ------ ------- ------- --------
Total non performing
assets............... $3,857 $6,373 $5,197 $6,232 $14,125 $ 7,587 $ 17,102
====== ====== ====== ====== ======= ======= ========
Total non performing
loans and leases to
total loans and
leases................. 3.68% 3.75% 1.83% 0.97% 1.55% 1.13% 1.92%
====== ====== ====== ====== ======= ======= ========
Total non performing
assets to total
assets................. 3.40% 3.42% 1.89% 1.03% 1.39% 1.09% 1.72%
====== ====== ====== ====== ======= ======= ========
Ratio of allowance for
loan and valuation
losses to total non
performing loans and
leases................. 21.97% 17.03% 26.62% 35.19% 28.09% 31.13% 27.02%
====== ====== ====== ====== ======= ======= ========
Interest income on non
performing loans not
included in interest
income................. $ 140 $ 156 $ 120 $ 89 $ 524 $ 29 $ 198
====== ====== ====== ====== ======= ======= ========
</TABLE>
As of March 31, 1999, we had approximately $101,000 of non-government
accruing loans that were contractually past due 90 days or more. Beginning in
1996, we began to accrue interest for government-sponsored loans such as
Federal Housing Administration insured and Veterans Administration guaranteed
loans which are past due 90 or more days, as the interest on these loans is
insured by the federal government. The
68
<PAGE>
aggregate unpaid principal balance of government-sponsored accruing loans that
were past due 90 or more days was $178.6 million as of March 31, 1999, $165.7
million as of December 31, 1998, and $18.7 million as of December 31, 1997. 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. Non
accrual mortgage loans as a percentage of total loans were 3.7% at December 31,
1995 and 3.6% at December 31, 1994, and the higher levels were primarily
attributable to purchases by Matrix Bank of bulk residential loan portfolios in
those years. Non accrual mortgage loans as a percentage of total loans
decreased to 1.0% at March 31, 1999, 1.0% at December 31, 1998, 0.9% at
December 31, 1997, and 1.4% at December 31, 1996. These decreases are
attributable to the improvement of the loans that had past delinquency problems
and the credit quality of the loan portfolios we 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 non accrual mortgage loans as a percentage of total loans.
The increase in non accrual commercial loans and direct financing leases in
1998 and the first quarter of 1999 is the result of our origination of tax-
exempt lease financing for charter schools for the purchase of real estate and
equipment. Several of the charter schools for which we have provided financing
have encountered enrollment problems, which has caused them to become
delinquent on their lease obligations to us.
The increase in the non accrual consumer loans in 1996 is a result of sub-
prime auto loans that we repurchased pursuant to limited representations and
warranties included in loan sale agreements. We 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 we were 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. We do not anticipate that we
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. We generally purchase such
loans at discounts and, in some instances, receive recourse or credit
enhancement from the seller to further reduce our risk of loss associated with
the loans' non accrual status. At March 31, 1999, $7.7 million, or 50.0%, of
the non accrual 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 non accrual loans. However, against the $702.9 million of total loans held
for sale, we had $2.5 million of purchase discounts.
The percentage of the allowance for loan and valuation losses to non accrual
loans varies widely due to the nature of our portfolio of mortgage loans, which
are collateralized primarily by residential real estate. We analyze the
collateral for each non performing 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 the Quarter Ended March
31, 1999 and 1998."
69
<PAGE>
Analysis of Allowance for Loan and Valuation Losses
The following table sets forth information regarding changes in our
allowance for loan and valuation losses for the periods indicated. No
information is given for these items as of and for the three months ended March
31, 1999, because there had been no material change in these items since
December 31, 1998. The table includes the allowance for both loans held for
investment and loans held for sale.
<TABLE>
<CAPTION>
As of and for the
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................... $ 538 $ 728 $ 943 $ 1,039 $ 1,756
Charge-offs:
Real estate--mortgage... 26 198 64 22 1,922
Real estate--
construction........... -- 35 -- -- --
Consumer................ -- 7 6 166 789
------- -------- -------- -------- --------
Total charge-offs..... 26 240 70 188 2,711
Recoveries:
Real estate--mortgage... -- 5 8 -- 2
Consumer................ -- 49 15 31 56
------- -------- -------- -------- --------
Total recoveries...... -- 54 23 31 58
------- -------- -------- -------- --------
Net charge-offs........... 26 186 47 157 2,653
Provision for loan losses
charged to operations.... 216 401 143 874 4,607
------- -------- -------- -------- --------
Balance at end of period.. $ 728 $ 943 $ 1,039 $ 1,756 $ 3,710
======= ======== ======== ======== ========
Ratio of net charge-offs
to average loans......... 0.03% 0.15% 0.03% 0.04% 0.38%(1)
======= ======== ======== ======== ========
Average loans outstanding
during the period........ $79,393 $121,206 $162,648 $355,848 $692,443
======= ======== ======== ======== ========
</TABLE>
- --------
(1) Excluding charge-offs related to the MCA Mortgage losses described above
and charge-offs relating to our credit card operations, the ratio of net
charge-offs to average loans for 1998 was 0.03%.
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 Mortgage. 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 our
credit card portfolio, which accounts for less than 1% of our 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. We
evaluate all other loans 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
70
<PAGE>
These loss factors range from 0.10% for Federal Housing Administration/Veterans
Administration loans guaranteed by the Department of Housing and Urban
Development 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. We had no impaired loans as December 31, 1994,
1995, 1996, 1997 and 1998, or as of March 31, 1998 and 1999. The loss factors
are applied to the outstanding principal balance of loans in their respective
categories, and the total for all categories determines our allowance for loan
and valuation losses, except for direct financing leases, for which the
allowance is determined based on specific loans. The following table shows
information regarding the components of our allowance for loan and valuation
losses as of the dates indicated. No information is given for these items as of
March 31, 1999, because there had been no material change in these items since
December 31, 1998.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percentage Percentage Percentage Percentage Percentage
of Loans in of Loans in of Loans in of Loans in of Loans in
each each each each each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............ $635 88.83% $830 92.64% $ 911 90.03% $1,234 90.15% $2,372 85.96%
Multi-family,
commercial real estate
and commercial........ 69 8.35 78 5.11 51 7.19 91 5.75 137 6.18
Direct financing
leases................ -- -- -- -- -- -- -- 0.53 275 2.87
Construction........... 1 0.12 1 0.05 6 0.50 23 1.48 72 3.24
Consumer............... 23 2.70 34 2.20 71 2.28 408 2.09 854 1.75
---- ------ ---- ------ ------ ------ ------ ------ ------ ------
$728 100.00% $943 100.00% $1,039 100.00% $1,756 100.00% $3,710 100.00%
==== ====== ==== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The ratio of the allowance for loan and valuation losses to total loans was
0.81% at December 31, 1994; 0.64% at December 31, 1995; 0.49% at December 31,
1996; 0.34% at December 31, 1997; and 0.44% at December 31, 1998. 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 loans 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. We did not assign any
of the allowance for loan and valuation losses to direct financing leases in
1997, as we originated the $2.7 million of outstanding direct financing leases
in the last month of the year and we felt that it was not necessary due to the
immaterial amount of leases relative to the total loan portfolio. The increase
in the allowance for loan and valuation losses in 1998 and the first three
months of 1999 reflects the growth of the direct financing leases during 1998
and the non accrual status of a small portion of this portfolio at December 31,
1998 and March 31, 1999. Additionally, the increase in the allowance for loan
and valuation losses for consumer loans in 1998 and the first three months of
1999 primarily reflects our increase in its loss factor for credit card loans
from 4.00% to 8.00% during 1998 and the first three months of 1999, 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 our earnings and ultimate success is partially dependent upon our
ability to manage our interest rate risk. Interest rate risk can be defined as
the exposure of our net interest income to adverse movements in interest rates.
Although we manage other risks, such as credit, operational and liquidity risk,
in the normal course of business, we consider interest rate risk to be a
significant market risk which could potentially have the largest material
effect on our financial condition and results of operations. The majority of
our 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, mortgage servicing rights, and also related to the net
interest income earned on its originated loans that are
71
<PAGE>
funded through warehouse lines of credit. The susceptibility to movements in
interest rates affects the cash flows generated from the mortgage servicing
rights 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.
We currently do not maintain a trading portfolio. As a result, we are not
exposed to market risk as it relates to trading activities. The majority of our
residential loan portfolio is held for sale which requires us to perform
quarterly market valuations of the portfolio in order to properly record the
portfolio at the lower of cost or market. Therefore, we continually monitor 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, which reports to the board of directors of
Matrix Bank. The Asset and Liability Committee establishes policies that
monitor and coordinate the our sources, uses and pricing of its funds. The
Asset and Liability Committee is also involved in formulating our 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, the Asset and Liability Committee has relied on the Office of Thrift
Supervision 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 Office of Thrift Supervision exposure report as of
March 31, 1999, we believe 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.
We continue 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, we focus on acquiring adjustable
rate residential mortgages and have increased our efforts regarding the
origination of residential construction loans, commercial real estate loans and
limited consumer lending which re-price or mature more quickly than fixed rate
residential real estate loans. (See "Asset and Liability Management--General"
for additional discussion on strategies). In 1998, we increased our investment
in non performing Federal Housing Administration and Veterans Administration
loans, which are fixed rate loans that have a significantly shorter life than
newly originated loans. The other significant asset that we invest in is
residential mortgage servicing rights. The value and cash flows from mortgage
servicing rights 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 mortgage
servicing rights increase. In a decreasing interest rate environment, the
inverse occurs. Another significant strategy that we focus on in managing
interest rate risk is identifying lines of business that generate non-interest
rate sensitive liabilities. Examples of this strategy are the investment in
mortgage servicing rights, which generate no cost escrow deposits, and Sterling
Trust's operations, which administer deposits with relatively low costs.
In the ordinary course of business, we make commitments to originate
residential mortgage loans and hold originated loans until delivery to an
investor. Inherent in this business are risks associated with changes in
interest rates and the resulting change in the market value of the pipeline
loans. The Company mitigates this risk through the use of mandatory and non-
mandatory forward commitments to sell loans. As of March 31, 1999, we had $98.0
million in pipeline and funded loans offset with mandatory forward commitments
of $79.9 million and non-mandatory 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.
72
<PAGE>
Ownership of mortgage servicing rights exposes us 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 our mortgage servicing portfolio achieves a level
higher than we projected for an extended period of time, then an impairment in
the associated basis in the mortgage servicing rights may occur. To mitigate
this risk of impairment due to declining interest rates, we hedged a segment of
our portfolio beginning in September 1997. We had identified and hedged $306
million at of December 31, 1997, $674 million as of December 31, 1998, and $548
million as of March 31, 1999, of our mortgage servicing portfolio using a
program of exchange-traded futures and options. See Note 13 to the Consolidated
Financial Statements included elsewhere in this prospectus.
The following tables represent, in tabular form, contractual balances of our
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 do not take into consideration the
reinvestment of cash. Our assets and liabilities that do not have a stated
maturity date, such as interest-earning deposits, Federal Home Loan Bank stock
and certain other deposits. We consider these items to be long term in nature
and are reported in the thereafter column. We have made the assumption that the
portfolio of loans held for sale will mature in the first year. We are very
active in the secondary market as it relates to the purchase and sale of
mortgage loans. The total amount of loans sold in 1997 and 1998 approximated
108% and 70%, respectively, of the total held for sale portfolio at December
31, 1996 and 1997. This proves our intent to sell the loans classified as held
for sale and supports the one-year maturity assumption. We also treat the
Federal Home Loan Bank 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 our 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,
Federal Home Loan Bank stock, Federal Home Loan Bank 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 of deposit to a schedule
of aggregated expected periodic maturities on time deposits.
Mortgage servicing rights are not included in the tabular presentation, as
the investment does not directly affect interest income. As noted, however,
earnings from mortgage servicing rights directly correlate with market risk as
it relates to interest rate fluctuations. We mitigate this risk through both
the type of mortgage servicing rights acquired and hedging of mortgage
servicing rights. The loans underlying the servicing rights 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. We also believe 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 we have 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, 1996, 1997 and 1998 were 11.9%, 11.3%
and 22.6%, 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,
73
<PAGE>
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 our historical prepayment
speeds, as well as our knowledge and experience in the market.
Our financial instruments reflected on our balance sheet 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%
Federal Home Loan Bank
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
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%
Federal Home Loan Bank
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.
74
<PAGE>
(3) For the fixed rate loans held for investment, we 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 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 non-interest-bearing demand deposits of approximately $22.7
million.
(7) See "--Short-term Borrowings" for additional discussion on the term of the
Federal Home Loan Bank borrowings.
Our financial instruments reflected on our balance sheet 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%
Federal Home Loan Bank
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%
Federal Home Loan Bank
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>
75
<PAGE>
- --------
(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 non-interest-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, we rely heavily on short-
term borrowing capabilities for liquidity and as a funding vehicle. The primary
sources for short-term borrowings are the Federal Home Loan Bank for Matrix
Bank and unaffiliated financial institutions for Matrix Financial. See
"Liquidity and Capital Resources."
The following table sets forth a summary of our short-term borrowings during
1996, 1997 and 1998 and as of the end of each such period. No information is
given for these items as of and for the three months ended March 31, 1999,
because there had been no material changes in these items since December 31,
1998.
<TABLE>
<CAPTION>
Average Weighted
Amount amount Maximum Weighted average
outstanding outstanding outstanding average 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:
Federal Home Loan Bank
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:
Federal Home Loan Bank
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:
Federal Home Loan Bank
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) A total of $47.0 million of the Federal Home Loan Bank borrowings
outstanding at December 31, 1998 were borrowed under a short option advance
agreement with the Federal Home Loan Bank. These short option advance
borrowings have a term of ten years, but are callable by the Federal Home
Loan Bank beginning after a six month or one year lock-out period depending
on the particular short option advance borrowing. After the expiration of
the lock-out period, the short option advance borrowings are callable at
three month intervals. If the Federal Home Loan Bank exercises its call
option on a short option advance borrowing, the Federal Home Loan Bank is
required to offer replacement funding to us at a market rate of interest
for the remaining term of the short option advance borrowing. The interest
rates on the short option advance 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 short option
advance, we are not permitted to prepay or otherwise retire a callable
short option advance borrowing prior to the final maturity date.
76
<PAGE>
Liquidity and Capital Resources
Liquidity is our ability to generate funds to support asset growth, satisfy
disbursement needs, maintain reserve requirements and otherwise operate on an
ongoing basis. To date, our principal source of funding for our investing
activities has been:
. secured senior debt provided by unaffiliated financial institutions;
. the issuance of 11.5% senior notes in September 1997;
. the issuance of senior subordinated notes in August 1995;
. a bank stock loan; and
. our initial public offering.
As of March 31, 1999, Matrix Bancorp had $42.0 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 30, 1999, we amended our bank stock loan agreement. The amended
bank stock loan agreement has two components, a $10.0 million term loan and a
revolving line of credit of $10.0 million. As of July 1, 1999, the balance of
the term loan was $7.5 million and the balance of the revolving line of credit
was $10.0 million. The amended bank stock loan requires us to maintain:
. 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
. 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 cash dividends.
On September 29, 1997, we 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, commenced on March 31, 1998, with a
balloon payment for the entire principal balance due in September 2004. The
11.5% senior notes require us to:
. maintain consolidated tangible equity capital of not less than $35
million; and
. meet the requirements necessary such that Matrix Bank will not be
classified as other than "well capitalized" as defined by applicable
regulatory guidelines.
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, we may not incur
any additional indebtedness if the consolidated leverage ratio exceeds 2:1 and
we may not declare or pay cash dividends unless, at the time of and after
giving effect to such dividend:
. no default shall have occurred and be continuing or would occur as a
consequence thereof;
. after giving effect to the payment of such dividend, we would be
permitted to incur at least $1.00 of additional indebtedness pursuant to
the 2:1 consolidated leverage ratio described above; and
. such dividend, together with the aggregate amount of all restricted
payments made, is less than 25% of our aggregate consolidated net income
for the period beginning on October 1, 1997 and ending on the date of
our most recent quarter plus 100% of the net cash proceeds we received
from the issuance of equity interests.
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<PAGE>
As of March 31, 1999, under the foregoing test, we would be entitled to declare
and pay dividends of approximately $625,000, although we have no present intent
to do so, as distributions are not permitted under our bank stock loan.
In August 1995, we 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 each of July 15, 1999, 2000 and
2001. We are restricted from paying cash dividends under the senior
subordinated notes. However, we may pay cash dividends in an amount equal to
50% of our consolidated net income 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. We may redeem the senior subordinated
notes, in whole or in part, at any time on or after July 15, 1999 at a
redemption price equal to par, plus all accrued but unpaid interest.
Until February 1997, the senior subordinated notes bore interest at 13% per
annum. In February 1997, the annual rate increased to 14% per annum.
The quarter ended March 31, 1999 resulted in net cash provided by our
operating activities, which differs from our trend of net cash used by
operating activities experienced over previous reported periods. Our typical
net cash used by operating activities results primarily from the growth that
Matrix Bank has experienced in its residential loan purchasing activity. We
anticipate the trend of increased net use of cash from operations to continue
for the foreseeable future. This anticipation results from the expected
continued growth of Matrix Bank, which we believe will consist primarily of
increased activity in the purchasing of loan and mortgage servicing portfolios.
However, due to liquidity and capital availability we do not anticipate growth
to be as significant as in prior periods.
Matrix Bank's 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;
. Federal Home Loan Bank borrowings;
. sales of loan portfolios; and
. proceeds from principal and interest payments on loans.
Contractual loan payments and net deposit inflows are a generally predictable
source of funds, while loan prepayments and loan sales are significantly
influenced by general market interest rates and economic conditions. Borrowings
on a short-term basis are used as a cash management vehicle to compensate for
seasonal or other reductions in normal sources of funds. Matrix Bank utilizes
advances from the Federal Home Loan Bank as its primary source for borrowings.
At March 31, 1999, Matrix Bank had borrowings from the Federal Home Loan Bank
of $113.0 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 our 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
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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 merger termination agreement, Fidelity National Financial, Inc.,
through its subsidiaries, moved approximately $47.1 million of fiduciary
deposits to Matrix Bank during the fourth quarter of 1998. The balance of the
fiduciary deposits at March 31, 1999 was $107.1 million and at June 15, 1999
was $40.2 million. The following two tables 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, Quarter Ended March 31,
---------------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
---------------- ----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 2,389 3.45% $ 2,859 3.95% $ 2,859 3.58% $ 2,881 3.85% $ 2,764 3.42%
NOW accounts............ 2,813 2.24 23,837 3.34 17,586 2.97 13,671 3.06 23,844 2.59
Money market accounts... 9,151 4.43 73,145 3.39 124,796 3.13 102,736 2.85 245,004 3.28
Time deposits
(except brokered)...... 54,824 5.85 83,993 5.94 108,107 5.79 97,484 5.84 127,762 5.54
Brokered deposits....... -- -- -- -- 103,485 5.25 43,340 5.32 102,850 4.82
------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total deposits......... $69,177 5.43% $183,834 4.56% $356,833 4.37% $260,112 4.40% $502,224 4.14%
======= ==== ======== ==== ======== ==== ======== ==== ======== ====
</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
March 31, 1999:
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------
Weighted Average
Amount Rate Paid
------- ----------------
(Dollars in thousands)
<S> <C> <C>
Three months or less................................... $ 3,141 5.40%
Over three months through six months................... 2,701 5.57
Over six months through twelve months.................. 2,808 5.36
Over twelve months..................................... 2,420 6.06
------- ----
Total................................................ $11,070 5.57%
======= ====
</TABLE>
We actively monitor 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 Federal Home Loan Bank and custodial deposits from affiliates. We
anticipate that such growth will require additional capital. The capital
requirements related to the anticipated growth will in part be fulfilled
through retention of earnings, potentially increasing our bank stock loan and
future possible debt or equity offerings.
Our principal source of funding for our servicing acquisition activities
consists of a line of credit facility provided to Matrix Financial by an
unaffiliated financial institution. As of March 31, 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. Borrowings under
the servicing acquisition lines of credit are secured by mortgage
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servicing rights 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
mortgage servicing rights or amortized over five to six years from the date of
borrowing. At March 31, 1999, $40.7 million was outstanding under the servicing
acquisition line and the interest rate on funds outstanding under this facility
at March 31, 1999 was 6.81%.
Our principal source of funding for our 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 lead lender
for the warehouse line has provided us 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 March 31, 1999,
$47.4 million was outstanding under the warehouse line at a weighted average
interest rate of 6.25%. 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 March
31, 1999, Matrix Financial's sale/repurchase facility was $25.0 million, with
$21.2 million outstanding at a weighted average interest rate of 9.10%.
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.
Our principal source of funding for the working capital needs of Matrix
Financial consists of working capital facilities provided to Matrix Financial
by unaffiliated financial institutions. As of March 31, 1999, Matrix
Financial's working capital facilities aggregated $10.0 million, of which $8.2
million was available. Borrowings under the working capital facilities are
secured by mortgage servicing rights, eligible servicing advance receivables
and eligible delinquent mortgage loans and bear interest at the federal funds
rate plus a negotiated margin. At March 31, 1999, $1.8 million was outstanding
under the working capital facilities at an interest rate of 6.31%.
Matrix Bank is restricted from paying dividends to us due to certain
regulatory requirements. Matrix Financial is restricted from paying dividends
to us under its amended and restated loan agreement. Under this loan agreement,
Matrix Financial is limited to:
. dividends payable solely in the form of capital stock;
. cash dividends to us 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
. dividends otherwise approved in writing by the agent.
At March 31, 1999, we were in compliance with all debt covenants. See "The
Company--Regulation and Supervision."
In June 1996, we 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 our operating funds and a loan from a
third party financial institution of $845,000. As part of the acquisition, we
entered into a planned unit development agreement with the City of Ft. Lupton.
The planned unit 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 of
Ft. Lupton is responsible for the development of the golf course and we are
responsible for the development of the surrounding residential lots and certain
offsite infrastructure estimated at $1.3 million. The planned unit development
agreement also provides for the rebate of certain developments fees,
infrastructure fees and storm drainage fees from the City of Ft. Lupton to us,
estimated at $1.6 million.
Under the planned unit development agreement, we are obligated to secure
future payment to the City of Ft. Lupton of pledged golf course enhancement
fees of $600,000. These pledged enhancement fees require
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successor homebuilders to pay the City of Ft. Lupton a $2,000 fee with the
issuance of each building permit. In the event that less than 30 permits are
issued per year, we are obligated to pay the balance of $60,000 in assessment
fees per year beginning in the year 1998 through the year 2007. We have to date
posted a $300,000 letter of credit to secure those referenced enhancement fees.
We 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 we are to earn a preferred rate of return on its investment and, once the
initial amount of our investment plus the preferred rate of return have been
returned, the remaining profits are split equally. Our current investment in
the project is $4.2 million.
It is anticipated that we 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 in this
prospectus 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 our assets and liabilities are
monetary in nature. As a result, interest rates have a more significant impact
on our 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. We disclose 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 in this prospectus.
Recent Accounting Pronouncements
During fiscal year 1998, we adopted the provisions of two accounting
pronouncements: Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income and Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Additionally, in June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. We plan to adopt FAS 133 with our fiscal
year beginning January 1, 2001 assuming the FASB finalizes its vote on
deferring the implementation date for fiscal years beginning after June 15,
2000. It is not currently known what effect the adoption of FAS 133 will have
on our consolidated financial statements.
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.
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. We have established year 2000 project teams, both at the parent and
individual subsidiary levels. The year 2000 project teams and our overall year
2000 effort are being overseen by our year 2000 director to ensure that
consistent procedures and methodologies are being applied across the
subsidiaries in addressing year 2000 issues.
We are subject to year 2000 risks not only from our own internal data
processing systems and software, but also from third party sources providing
data and/or services to us and from certain significant customers.
Additionally, we have a limited amount of other non-information systems
equipment that relies on date-sensitive information. As such, we have
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.
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Our year 2000 plan consists of the following five separate phases:
. Awareness--The process of informing all of our 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, applications,
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, applications,
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, we do not anticipate that our 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 current year 2000 progress of Sterling Trust, Matrix Bank and Matrix
Financial 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% 50% 85%
Estimated completion
date................... -- -- -- 8/15/99 8/15/99
Non-information sys-
tems................... 100% 100% 100% 100% 100%
Estimated completion
date................... -- -- -- -- --
Third parties........... 100% 100% 100% 25% 100%
Estimated completion
date................... -- -- -- 8/15/99 --
</TABLE>
<TABLE>
<CAPTION>
Matrix Bank Year 2000 Progress
---------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems..... 100% 100% 100% 100% 100%
Estimated completion
date................... -- -- -- -- --
Non-information sys-
tems................... 100% 100% 100% 95% 95%
Estimated completion
date................... -- -- -- 9/30/99 9/30/99
Third parties........... 100% 100% 100% 100% 100%
Estimated completion
date................... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Matrix Financial Year 2000 Progress
---------------------------------------------------------
Awareness Assessment Renovation Validation Implementation
--------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Information Systems..... 100% 100% 100% 100% 90%
Estimated completion
date................... -- -- -- -- 8/31/99
Non-information sys-
tems................... 100% 100% 100% 100% 100%
Estimated completion
date................... -- -- -- -- --
Third parties........... 100% 90% 90% 90% 90%
Estimated completion
date................... -- 8/31/99 8/31/99 8/31/99 8/31/99
</TABLE>
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<PAGE>
The remaining subsidiaries 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 subsidiaries
have more limited renovation issues than Sterling Trust, Matrix Bank and Matrix
Financial and their validation process is substantially underway. The current
progress of the remaining subsidiaries 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% 90% 85% 50% 75%
Estimated completion
date................... -- 7/31/99 7/31/99 8/31/99 8/31/99
Non-information sys-
tems................... 100% 100% 100% 100% 90%
Estimated completion
date................... -- -- -- -- 8/31/99
Third parties........... 100% 100% 100% 100% 90%
Estimated completion
date................... -- -- -- -- 8/31/99
</TABLE>
Included in the implementation phase of our year 2000 Plan is the
development of a contingency plan for the failure of our mission critical
systems. Several of our subsidiaries have completed their contingency plans and
it is anticipated that the remainder of the contingency plans will be finished
by July 31, 1999.
Assuming the proper functioning of our telecommunication and utility
providers, the failure of which would have a significant impact on our ability
to conduct our 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 we were to take no further steps to obtain year 2000 compliance.
Sterling Trust's most reasonably likely worst case scenario lies in not being
able to receive electronic information from various external sources. 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 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 Matrix Bank's customers, but do not contribute significantly to
our net income on a consolidated basis.
Alltel, Fannie Mae and Federal Home Loan Mortgage Corporation whom Matrix
Financial and Matrix Bank rely on for servicing and/or purchasing mortgage
loans, are currently running compliant systems; however, we have not yet
validated those systems. We anticipate using phone and fax lines to receive
necessary information if systems for Alltel, Fannie Mae or Federal Home Loan
Mortgage Corporation 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. Since there are approximately 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. The loss of business from any one broker identified as non compliant
will not have a material impact on us, as no broker is individually significant
to our 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, which is 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
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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 represented to us as
compliant by vendors may not work. The database used by United Special Services
for tracking its properties under management is undergoing the renovation
process, after which it will need to be tested. If this process is not
completed, it will be uncertain as to whether United Special Services would be
able to continue to accurately track its properties under management, which
could significantly affect its business.
We anticipate that the total costs associated with year 2000 compliance will
not exceed $300,000; as such, year 2000 compliance is not expected to have a
material effect on our 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 June
30, 1999, we had expensed approximately $186,000 for costs associated with year
2000 compliance. The costs of the year 2000 project and the deadlines by which
we believe we 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.
MARKET FOR THE PREFERRED SECURITIES
The preferred securities have been approved for quotation on the Nasdaq
National Market under the symbol "MTXCP". Although the underwriters have
informed us that they currently intend to make a market in the preferred
securities, there can be no assurance that an active and liquid trading market
will develop, or if developed, that such a market will continue. The offering
price and distribution rate have been determined by negotiations among our
representatives and the underwriters, and the offering price of the preferred
securities may not be indicative of the market price following the offering.
See "Underwriting."
ACCOUNTING TREATMENT
Capital Trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of Capital Trust will be included in
our consolidated financial statements. The preferred securities will be
presented as a separate category in our consolidated financial statements under
the caption "Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures," and appropriate disclosures about the preferred
securities, the guarantee and the junior subordinated debentures will be
included in the notes to our consolidated financial statements. We will record
distributions payable on the preferred securities as an expense in our
consolidated statements of income for financial reporting purposes.
All of our future reports filed under the Securities and Exchange Act will:
. present the preferred securities and the common securities issued by the
Capital Trust on the balance sheet as a separate category item entitled
"Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures";
. include in a footnote to the financial statement disclosure that the
sole assets of Capital Trust are the junior subordinated debentures
including the outstanding principal amount, interest rate and maturity
date of such junior subordinated debentures; and
. be included in an audited footnote to the financial statements
disclosure that we own all of the common securities of Capital Trust,
and that the back- up obligations, in the aggregate, constitute a full
and unconditional guarantee by us of the obligations of Capital Trust
under the preferred securities.
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DESCRIPTION OF PREFERRED SECURITIES
Capital Trust will issue the preferred securities and the common securities
under the trust agreement for Capital Trust. The preferred securities will
represent preferred undivided beneficial interests in the assets of Capital
Trust and you, as a holder of the preferred securities, will be entitled a
preference in certain circumstances with respect to distributions and amounts
payable on redemption or liquidation over the common securities, as well as
other benefits as described in the trust agreement. This summary of certain
provisions of the preferred securities and the trust agreement is not complete.
You should read the form of the trust agreement, which is filed as an exhibit
to the registration statement of which this prospectus is a part. Wherever
particular defined terms of the trust agreement are referred to in this
prospectus, such defined terms are incorporated herein by reference. A copy of
the form of the trust agreement is also available upon request from the
trustees.
General
The preferred securities will be limited to $27,500,000 aggregate
liquidation amount (as defined in the trust agreement) outstanding (which
amount may be increased by up to $4,125,000 aggregate liquidation amount of
preferred securities for exercise of the underwriters' over-allotment option).
See "Underwriting." The preferred securities will rank equally, and payments
will be made pro rata, with the common securities except as described under "--
Subordination of Common Securities." The junior subordinated debentures will be
registered in the name of Capital Trust and held by the property trustee in
trust for your benefit and the benefit of the holders of the common securities.
The guarantee we will execute for your benefit as a holder of the preferred
securities, will be a guarantee on a subordinated basis with respect to the
preferred securities but will not guarantee payment of distributions or amounts
payable on redemption or liquidation of the preferred securities when Capital
Trust does not have funds on hand available to make such payments. See
"Description of Guarantee."
Distributions
You will receive distributions on each preferred security at the annual rate
of % of the stated liquidation amount of $25. Except as discussed below,
distributions will be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, at the close of business on the 15th
day of March, June, September and December (whether or not a business day (as
defined below)) next preceding the relevant distribution date. Each date on
which distributions will be paid is referred to as a distribution date in this
prospectus. Distributions on the preferred securities will be cumulative.
Distributions will accumulate from , 1999. The first distribution date for
the preferred securities will be , 1999. The amount of distributions
payable for any period less than a full distribution period will be computed on
the basis of a 360-day year of twelve 30-day months and the actual days elapsed
in a partial month in such period. Distributions payable for each full
distribution period will be computed by dividing the annual rate by four. If
any date on which distributions are payable is not a business day, then payment
will be made on the next succeeding day that is a business day (without any
additional distributions or other payment because of the delay), except that,
if such business day falls in the next calendar year, the payment will be made
on the immediately preceding business day.
So long as no debenture event of default has occurred and is continuing, we
have the right to defer the payment of interest on the junior subordinate
debentures at any time or from time to time for an "extension period" not
exceeding 20 consecutive quarterly periods with respect to each extension
period, provided that no extension period may extend beyond the maturity date
of the junior subordinated debentures. As a consequence of any such deferral,
quarterly distributions on the preferred securities will be deferred during the
extension period. Distributions to which you are entitled will accumulate
additional distributions thereon at the annual rate of %, compounded quarterly
from the relevant payment date, computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. Additional distributions payable for each full distribution period will
be computed by dividing the annual rate by four.
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During any extension period, we may not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our
capital stock;
. make any payment of principal of or interest or premium, if any, on,
repay, repurchase or redeem, any of our debt securities that rank
equally in all respects with or junior in interest to the junior
subordinate debentures, including our obligations associated with the
outstanding preferred securities.
Before the end of an extension period, we may further defer the payment of
interest. No extension period may exceed 20 consecutive quarterly periods or
extend beyond the maturity date of the junior subordinated debentures. Upon the
termination of an extension period and the payment of all amounts then due, we
may elect to begin a new extension period. No interest shall be due during an
extension period, except at the end thereof. We must give the trustees notice
of our election of an extension period at least one business day prior to the
earlier of (1) the date the distributions on the preferred securities would
have been payable but for the election to begin the extension period and (2)
the date the property trustee is required to give you notice of the record date
or the date the distributions are payable, but in any event not less than one
business day prior to the record date. The property trustee will give you
notice of our election to begin a new extension period. Subject to the
foregoing, there is no limitation on the number of times that we may elect to
begin an extension period. See "Description of Junior Subordinated Debentures--
Option To Extend Interest Payment Period" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
We currently do not intend to exercise our right to defer payments of
interest by extending the interest payment period on the junior subordinated
debentures.
Source of Distributions
The revenue of Capital Trust available for distribution to you will be
limited to payments under the junior subordinated debentures in which Capital
Trust will invest the proceeds from the issuance and sale of the preferred
securities. See "Description of Junior Subordinated Debentures." If we do not
make payments on the junior subordinated debentures, Capital Trust may not have
funds available to pay distributions or other amounts payable on the preferred
securities. The payment of distributions and other amounts payable on the
preferred securities (if and to the extent Capital Trust has funds legally
available for and cash sufficient to make such payments) is guaranteed by us on
a limited basis as set forth herein under "Description of Guarantee."
Redemption or Exchange
If we repay or redeem the junior subordinated debentures, the property
trustee will redeem a proportionate amount of the preferred and common
securities, upon not less than 30 nor more than 60 days' notice. The redemption
price for each preferred security shall equal $25 plus accumulated but unpaid
distributions on the redemption date and the related amount of the premium, if
any, paid by us upon the concurrent redemption of such junior subordinated
debentures. See "Description of Junior Subordinated Debentures--Redemption." If
less than all the junior subordinated debentures are to be repaid or redeemed
on a redemption date, then the proceeds from the repayment or redemption shall
be allocated to the redemption pro rata of the preferred securities and the
common securities.
We may redeem the junior subordinated debentures:
. on or after , 2004, in whole at any time or in part from time to time;
or
. in whole, but not in part, at any time within 180 days following the
occurrence and during the continuation of a Tax Event, Investment
Company Event or Capital Treatment Event (each as defined below), in
each case subject to possible regulatory approval.
See "--Liquidation Distribution Upon Dissolution." A redemption of the junior
subordinated debentures would cause a mandatory redemption of a proportionate
amount of the preferred securities and common securities at the redemption
price.
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"Tax Event" means the receipt by Capital Trust of an opinion of our counsel
experienced in such matters to the effect that, as a result of any amendment
to, or change (including an announced prospective change) in, the laws (or any
regulations thereunder) of the United States or an political subdivision or
taxing authority thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after the date of issuance
of the preferred securities, there is more than an insubstantial risk that:
. Capital Trust is, or will be within 90 days of the delivery of such
opinion, subject to United States federal income tax with respect to
income received or accrued on the junior subordinated debentures;
. interest payable by us on the junior subordinated debentures is not, or
within 90 days of the delivery of such opinion will not be, deductible
by us, in whole or in part, for United States federal income tax
purposes; or
. Capital Trust is, or will be within 90 days of the delivery of such
opinion, subject to more than a de minimis amount of other taxes, duties
or other governmental charges. See "Certain Federal Income Tax
Consequences--Pending Tax Litigation Affecting the Preferred Securities"
for discussion of pending United States Tax Court litigation that, if
decided adversely to the taxpayer, could give rise to a Tax Event, that
may permit us to redeem the junior subordinated debentures prior to
, 2004.
If a Tax Event described in the first or third circumstances above has
occurred and is continuing and Capital Trust holds of all the junior
subordinated debentures, we will pay on the junior subordinated debentures any
additional amounts as may be necessary in order that the amount of
distributions then due and payable by Capital Trust on the outstanding
preferred securities and common securities of Capital Trust will not be reduced
as a result of any additional taxes, duties and other governmental charges to
which Capital Trust has become subject as a result of a Tax Event.
"Investment Company Event" means the receipt by Capital Trust of an opinion
of our counsel experienced in such matters to the effect that, as a result of
the occurrence of a change in law or regulation or a written change (including
any announced prospective change) in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that Capital Trust is or
will be considered an "investment company" that is required to be registered
under the Investment Company Act, which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date
of the issuance of the preferred securities.
"Capital Treatment Event" means the reasonable determination by us that, as
a result of the occurrence of any amendment to, or change (including any
announced prospective change) in, the laws (or any rules or regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such pronouncement, action or
decision, is announced on or after the date of issuance of the preferred
securities, there is more than an insubstantial risk that we will not be
entitled to treat an amount equal to $ , the liquidation amount of the
preferred securities, as Tier 1 Capital (or the then equivalent thereof),
except as otherwise restricted by the Federal Reserve, for purposes of the
risk-based capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to us. The Federal Reserve has determined that the
proceeds of certain qualifying securities like the preferred securities will
qualify as Tier I capital for us only up to an amount not to exceed, when taken
together with all of our cumulative preferred stock, if any, 25% of our Tier 1
capital. A Capital Treatment Event will only occur if we become subject to the
risk-based capital adequacy guidelines of the Federal Reserve. We are not
currently subject to such guidelines.
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Redemption Procedures
Preferred securities redeemed on each redemption date shall be redeemed at a
price equal to $25 plus accumulated but unpaid distributions, with the
applicable proceeds from the contemporaneous redemption of the junior
subordinated debentures. Redemptions of the preferred securities will be made
and the redemption price will be payable on each redemption date only to the
extent that Capital Trust has funds on hand available for the payment of such
redemption price. See also "--Subordination of Common Securities."
If Capital Trust gives you notice of redemption of the preferred securities,
then, by 12:00 noon, Eastern time, on the redemption date, to the extent funds
are available, the property trustee will deposit irrevocably with The
Depository Trust Company ("DTC") funds sufficient to pay the applicable
redemption price and will give DTC irrevocable instructions and authority to
pay the redemption price to you. Notwithstanding the foregoing, distributions
payable on or prior to the redemption date for any preferred securities called
for redemption will be payable to you on the relevant record dates for the
related distribution dates.
If notice of redemption is given and funds are deposited as required, then
upon the date of such deposit all of your rights with respect to your preferred
securities so called for redemption will cease, except your right to receive
the redemption price, but without interest on such redemption price, and
preferred securities that are redeemed will cease to be outstanding. If any
date fixed for redemption of preferred securities is not a business day, then
payment of the redemption price payable on such date will be made on the next
succeeding day which is a business day (without any interest or other payment
in respect of any such delay), except that, if such business day falls in the
next calendar year, such payment will be made on the immediately preceding
business day. In the event that payment of the redemption price for the
preferred securities called for redemption is improperly withheld or refused
and not paid either by Capital Trust or by us pursuant to the guarantee as
described under "Description of Guarantee," distributions on such preferred
securities will continue to accumulate at the then applicable rate, from the
redemption date originally established by Capital Trust for such preferred
securities to the date such redemption price is actually paid, in which case
the actual payment date will be the date fixed for redemption for purposes of
calculating the redemption price.
If less than all the preferred securities and common securities are to be
redeemed on a redemption date, then the aggregate liquidation amount of such
preferred securities and common securities to be redeemed shall be allocated
pro rata to the preferred securities and the common securities based upon the
relative liquidation amounts of such classes. The particular preferred
securities to be redeemed shall be selected on a pro rata basis not more than
60 days prior to the redemption date by the property trustee from the
outstanding preferred securities not previously called for redemption, or in
accordance with DTC's customary procedures if the preferred securities are then
held in the form of a global preferred security in accordance with DTC's
customary practices. The property trustee shall promptly notify the securities
registrar for the preferred securities in writing of the preferred securities
selected for redemption and, in the case of any preferred securities selected
for partial redemption, the liquidation amount of the preferred securities to
be redeemed. For all purposes of the trust agreement, unless the context
otherwise requires, all provisions relating to the redemption of preferred
securities shall relate, in the case of any preferred securities redeemed or to
be redeemed only in part, to the portion of the aggregate liquidation amount of
preferred securities which has been or is to be redeemed.
Notice of any redemption will be mailed to you at your address as it appears
on the securities register for Capital Trust at least 30 days but not more than
60 days before the redemption date if your preferred securities will be
redeemed. Unless we default in payment of the redemption price on the junior
subordinated debentures, on and after the redemption date interest will cease
to accrue on the junior subordinated debentures or portions thereof called for
redemption. Unless payment of the redemption price in respect of the preferred
securities is withheld or refused and not paid either by Capital Trust or us
pursuant to the guarantee, distributions will cease to accumulate on the
preferred securities or portions thereof called for redemption.
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Subordination of Common Securities
Payment of distributions on, and the redemption price of, and the
liquidation distribution in respect of, the preferred securities and common
securities, as applicable, shall be made pro rata among the preferred
securities and the common securities based on the liquidation amount of such
preferred securities and common securities. However, if on any distribution
date or redemption date a debenture event of default has occurred and is
continuing as a result of any failure by us to pay any amounts in respect of
the junior subordinated debentures when due, no payment of any distribution on,
or redemption price of, or liquidation distribution in respect of, any of the
common securities, and no other payment on account of the redemption,
liquidation or other acquisition of such common securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all the outstanding preferred securities for all distribution periods
terminating on or prior thereto, or in the case of payment of the redemption
price the full amount of such redemption price on all the outstanding preferred
securities then called for redemption, shall have been made or provided for,
and all funds available to the property trustee shall first be applied to the
payment in full in cash of all distributions on, or redemption price of, the
preferred securities then due and payable.
In the case of any event of default with respect to the preferred securities
(as described below under "--Events of Default; Notice") resulting from an
event of default with respect to junior subordinated debentures (as described
below under "Description of Junior Subordinated Debentures--Debenture Events of
Default"), the holders of the common securities will be deemed to have waived
any right to act with respect to any such event of default under the trust
agreement until the effects of all such events of default with respect to such
preferred securities have been cured, waived or otherwise eliminated. See "--
Events of Default; Notice" and "Description of Junior Subordinated Debentures--
Debenture Events of Default." Until all such events of default under the trust
agreement with respect to the preferred securities have been so cured, waived
or otherwise eliminated, the property trustee will act solely on your behalf
and not on behalf of the holders of the common securities, and only you will
have the right to direct the property trustee to act on your behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the preferred securities in the event of any
liquidation of Capital Trust is $25.00 per preferred security plus accumulated
and unpaid distributions, subject to certain exceptions which may be in the
form of a distribution of such amount in junior subordinated debentures.
The holders of all the outstanding common securities have the right at any
time to dissolve Capital Trust and, after satisfaction of liabilities to
creditors of Capital Trust as provided by applicable law, cause the junior
subordinated debentures to be distributed to you and the holders of the common
securities in liquidation of Capital Trust.
The Federal Reserve's risk-based capital guidelines currently provide that
redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption
should consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base. This consultation
may not be necessary if the equity or capital instrument is redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption.
In the event we, while a holder of common securities, dissolve Capital Trust
prior to the maturity date of the preferred securities and the dissolution of
Capital Trust is deemed to constitute the redemption of capital instruments by
the Federal Reserve under its risk-based capital guidelines or policies, our
dissolution of Capital Trust may be subject to the prior approval of the
Federal Reserve. Moreover, any changes in applicable law or changes in the
Federal Reserve's risk-based capital guidelines or policies could impose a
requirement on us to obtain the prior approval of the Federal Reserve to
dissolve Capital Trust.
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Pursuant to the trust agreement, Capital Trust will automatically dissolve
upon expiration of its term or, if earlier, will dissolve on the first to occur
of:
. certain events of bankruptcy, dissolution or liquidation of us or
another holder of the common securities;
. upon the holders of common securities giving written direction to the
property trustee to dissolve Capital Trust (which direction, subject to
the foregoing restrictions, is optional and wholly within the discretion
of the holders of common securities);
. the repayment of all the preferred securities in connection with the
redemption of all the preferred securities and common securities as
described under "--Redemption;"
. the entry of an order for the dissolution of Capital Trust by a court of
competent jurisdiction.
If dissolution of Capital Trust occurs as described in any of the first
three circumstances described above, Capital Trust will be liquidated by the
property trustee as expeditiously as the property trustee determines to be
possible by distributing, after satisfaction of liabilities to creditors of
Capital Trust as provided by applicable law, to you and the holders of the
common securities a proportionate amount of the junior subordinated debentures,
unless such distribution is not practical. If distribution of the junior
subordinated debentures is not practical, you and the holders of preferred
securities and common securities will be entitled to receive out of the assets
of Capital Trust available for distribution to holders, after satisfaction of
liabilities to creditors of Capital Trust as provided by applicable law, an
amount equal to, in the case of your distribution, the aggregate of the
liquidation amount plus accumulated and unpaid distributions thereon to the
date of payment. If such liquidation distribution can be paid only in part
because Capital Trust has insufficient assets available to pay in full the
aggregate liquidation distribution, then the amounts payable directly by
Capital Trust on its preferred securities shall be paid on a pro rata basis.
The holders of the common securities will be entitled to receive distributions
upon any such liquidation pro rata with you, except that if an event of default
under the junior subordinated debentures has occurred and is continuing as a
result of our failure to pay any amounts in respect of the junior subordinated
debentures when due, the preferred securities shall have a priority over the
common securities. See "--Subordination of Common Securities."
After the liquidation date fixed for any distribution of junior subordinated
debentures:
. the preferred securities will no longer be deemed to be outstanding;
. DTC or its nominee, as the registered holder of preferred securities,
will receive a registered global certificate or certificate representing
the junior subordinated debentures to be delivered upon such
distribution with respect to preferred securities held by DTC or its
nominee; and
. any certificates representing the preferred securities not held by DTC
or its nominee will be deemed to represent the junior subordinated
debentures having a principal amount equal to the stated liquidation
amount of the preferred securities and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid distributions
on the preferred securities until such certificates are presented to the
security registrar for the preferred securities and common securities
for transfer or reissuance.
If we do not redeem the junior subordinated debentures prior to maturity,
Capital Trust is not liquidated, and the junior subordinated debentures are not
distributed to you, then the preferred securities will remain outstanding until
the repayment of the junior subordinated debentures and the distribution of the
liquidation distribution to you.
There can be no assurance as to the market prices for the preferred
securities or the junior subordinated debentures that may be distributed in
exchange for preferred securities if a dissolution and liquidation of Capital
Trust were to occur. Accordingly, the preferred securities that you may
purchase, or the junior subordinated debentures that you may receive on
dissolution and liquidation of Capital Trust, may trade at a discount to the
price that you paid to purchase the preferred securities offered hereby.
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Events of Default; Notice
Any one of the following events constitutes an event of default under the
trust agreement with respect to the preferred securities (whatever the reason
for such event of default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to a judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
. the occurrence of an event of default with respect to the junior
subordinated debentures (see "Description of Junior Subordinated
Debentures--Debenture Events of Default");
. default by Capital Trust or the property trustee in the payment of any
distribution when it becomes due and payable, and continuation of such
default for a period of 30 days;
. default by Capital Trust or the property trustee in the payment of any
redemption price of any preferred security and common security when it
becomes due and payable;
. default in the performance, or breach, in any material respect, of any
covenant or warranty of the trustees in the trust agreement (other than
a covenant or warranty a default in the performance of which or the
breach of which is dealt with in either of the second or third
circumstances above), and continuation of such default or breach for a
period of 60 days after there has been given, by registered or certified
mail, to the trustees and us by the holders of at least 25% in aggregate
liquidation amount of the outstanding preferred securities, a written
notice specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" under the trust
agreement; or
. the occurrence of certain events of bankruptcy or insolvency with
respect to the property trustee if a successor property trustee has not
been appointed within 60 days thereof.
Within five business days after the occurrence of any event of default
actually known to the property trustee, the property trustee will transmit
notice of the event of default to you and the holders of the common securities
and the administrative trustees, unless the event of default has been cured or
waived. We, as depositor, and the administrative trustees are required to file
annually with the property trustee a certificate as to whether or not we are in
compliance with all the conditions and covenants applicable to us under the
trust agreement.
If an event of default with respect to the junior subordinated debentures
has occurred and is continuing as a result of any failure by us to pay any
amounts in respect of the junior subordinated debentures when due, the
preferred securities will have a preference over the common securities with
respect to payments of any amounts in respect of the preferred securities as
described above. See "--Subordination of Common Securities," "--Liquidation
Distribution Upon Dissolution" and "Description of Junior Subordinated
Debentures--Debenture Events of Default."
Resignation or Removal of Trustees; Appointment of Successors
The holders of at least a majority in aggregate liquidation amount of the
outstanding preferred securities may remove the property trustee or the
Delaware trustee if an event of default with respect to the junior subordinated
debentures has occurred and is continuing. In no event will you have the right
to appoint, remove or replace the administrative trustees, which voting rights
are vested exclusively with us as the holder of the common securities. No
resignation or removal of a trustee and no appointment of a successor trustee
shall be effective until the acceptance of appointment by the successor trustee
in accordance with the provisions of the trust agreement. If a trustee is
removed by the holders of the outstanding preferred securities, the successor
may be appointed by the holders of at least 25% in aggregate liquidation amount
of preferred securities. If a trustee resigns, such trustee will appoint its
successor. If a trustee fails to appoint a successor, the holders of at least
25% in aggregate liquidation amount of the outstanding preferred securities may
appoint a successor. If a successor has not been appointed by you or the
holders, any holder of preferred securities or common securities
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or the other trustee may petition a court in the State of Delaware to appoint a
successor. Any Delaware trustee must meet the applicable requirements of
Delaware law. Any property trustee must be a national or state-chartered bank,
and at the time of appointment have securities rated in one of the three
highest rating categories by a nationally recognized statistical rating
organization and have capital and surplus of at least $50,000,000.
Merger or Consolidation of Trustees
Any entity into which the property trustee or the Delaware trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such trustee is
a party, or any entity succeeding to all or substantially all the corporate
trust business of such trustee, will be the successor of such trustee under the
trust agreement, provided such entity is otherwise qualified and eligible.
Co-Trustees and Separate Property Trustee
Unless an event of default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the trust property (as defined
in the trust agreement) may at the time be located, we as the holder of the
common securities, will have power to appoint one or more persons approved by
the property trustee either to act as a co-trustee, jointly with the property
trustee, of all or any part of such trust property, or to act as separate
trustee of any such trust property, in either case with such powers as may be
provided in the instrument of appointment, and to vest in such person or
persons in such capacity any property, title, right or power deemed necessary
or desirable, subject to the provisions of the trust agreement. In case a
debenture event of default has occurred and is continuing, the property trustee
alone will have power to make such appointment.
Mergers, Consolidations, Amalgamations or Replacements of Capital Trust
Capital Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, convey, transfer or lease its properties and assets substantially
as an entirety to, any entity, except described below or as otherwise set forth
in the trust agreement. Capital Trust may, at the request of the holders of the
common securities and with the consent of the holders of at least a majority
aggregate liquidation amount of the outstanding preferred securities, merge
with or into, consolidate amalgamate, or be replaced by or convey, transfer or
lease its properties and assets substantially as an entirety to a trust
organized as such under the laws of any state, so long as:
. such successor entity (1) expressly assumes all the obligations of
Capital Trust with respect to the preferred securities or (2)
substitutes for the preferred securities other securities having
substantially the same terms as the preferred securities so long as the
substitute preferred securities have the same priority as the preferred
securities with respect to distributions and payments upon liquidation,
redemption and otherwise and will be listed or traded on the Nasdaq
National Market or any national securities exchange on which the
preferred securities are then listed or traded;
. a trustee of such successor entity, possessing substantially the same
powers and duties as the property trustee, is appointed to hold the
junior subordinated debentures,
. such merger, consolidation, amalgamation, replacement, conveyance
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities (including any
substitute preferred securities) in any material respect;
. prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, Capital Trust has received an opinion
from independent counsel experienced in such matters to the effect that
(1) such merger, consolidation amalgamation, replacement, conveyance,
transfer or lease does not adversely affect your rights, preference and
privileges as a holder of preferred securities (including any substitute
preferred securities) in any material respect and (2) following such
merger, consolidation, amalgamation, replacement, conveyance transfer or
lease, neither Capital Trust nor such successor entity will be required
to register as investment company under the Investment Company Act; and
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. we or any permitted successor or assignee own all the common securities
of such successor entity and guarantee the obligations of such successor
entity under the successor securities at least to the extent provided by
the guarantee.
Notwithstanding the foregoing, Capital Trust may not, except with the
consent of holders of 100% in aggregate liquidation amount of the preferred
securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause
Capital Trust or the successor entity to be classified other than as a grantor
trust for United States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided above and under "--Removal of Trustees; Appointment of
Successors" and "Description of Guarantee--Amendments and Assignment" and as
otherwise required by law and the trust agreement, you will have no voting
rights.
The trust agreement may be amended from time to time by the holders of a
majority of the common securities and the property trustee, without your
consent to:
. accept appointment by a successor trustee;
. cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the trust agreement, provided that any such amendment does not adversely
affect in any material respect your interests; or
. modify, eliminate or add to any provisions of the trust agreement to
such extent as may be necessary to ensure that Capital Trust will not be
taxable as a corporation for United States federal income tax purposes
at any time that any preferred or common securities are outstanding or
to ensure that Capital Trust will not be required to register as an
"investment company" under the Investment Company Act.
Any such amendments of the trust agreement will become effective when notice of
such amendment is given to the holders of preferred securities and common
securities.
The trust agreement may be amended by the holders of a majority of the
common securities and the property trustee with:
. the consent of holders representing not less than a majority in
aggregate liquidation amount of the outstanding preferred securities;
and
. receipt by the trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the trustees in
accordance with such amendment will not affect Capital Trust's not being
taxable as a corporation for United States federal income tax purposes
or Capital Trust's exemption from status as an "investment company"
under the Investment Company Act.
However, without the consent of each holder of preferred securities or common
securities affected thereby, the trust agreement may not be amended to:
. change the amount or timing of any distribution on the preferred
securities and common securities or otherwise adversely affect the
amount of any distribution required to be made in respect of the
preferred securities and common securities as of a specified date; or
. restrict your right and the right of a holder of common securities to
institute suit for the enforcement of any such payment on or after such
date.
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So long as any junior subordinated debentures are held by Capital Trust, the
property trustee will not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the debenture trustee, or execute any trust or power
conferred on the property trustee with respect to the junior
subordinated debentures;
. waive any past default that is waivable under the indenture;
. exercise any right to rescind or annul a declaration that the junior
subordinated debentures shall be due and payable; or
. consent to any amendment, modification or termination of the indenture
or the junior subordinated debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the
holders of at least a majority in aggregate liquidation amount of the
outstanding preferred securities, or, if a consent under the indenture
would require the consent of each holder of junior subordinated
debentures affected thereby, no such consent will be given by the
property trustee without the prior consent of each holder of the
preferred securities.
The property trustee may not revoke any action previously authorized or
approved by a vote of the holders of the preferred securities except by
subsequent vote of the holders of the preferred securities. The property
trustee will notify you of any notice of default with respect to the junior
subordinated debentures. In addition to obtaining your approval as described
above, before taking any of the actions listed above, the property trustee will
obtain an opinion of counsel experienced in such matters to the effect that
Capital Trust will not be taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of preferred securities may be given at a
meeting of holders of preferred securities convened for such purpose or
pursuant to written consent. The property trustee will cause a notice of any
meeting at which you are entitled to vote, or of any matter upon which action
by your written consent is to be taken, to be given to you in the manner set
forth in the trust agreement.
Your vote or consent will not be required to redeem and cancel preferred
securities in accordance with the trust agreement.
Notwithstanding that you are entitled to vote or consent under any of the
circumstances described above, any of the preferred securities that are owned
by us, the trustees or any of our affiliates or any trustees, will, for
purposes of such vote or consent, be treated as if they were not outstanding.
Expenses and Taxes
In the indenture, we have agreed to pay all debts and other obligations
(other than distributions on the preferred securities) and all costs and
expenses of Capital Trust (including costs and expenses relating to the
organization of Capital Trust, the fees and expenses of the trustees and the
costs and expenses relating to the operation of Capital Trust) and to pay any
and all taxes and all costs and expenses with respect thereto (other than
United States withholding taxes) to which Capital Trust might become subject.
These obligations of ours under the indenture are for the benefit of, and shall
be enforceable by, any creditor of Capital Trust to whom any of these debts,
obligations, costs, expenses and taxes are owed whether or not such creditor
has received notice thereof. Any such creditor may enforce these obligations
directly against us, and we have irrevocably waived any right or remedy to
require that any creditor take any action against Capital Trust or any other
person before proceeding against us. We have also agreed in the indenture to
execute such additional agreements as may be necessary or desirable to give
full effect to the foregoing.
Book Entry, Delivery and Form
The preferred securities will be issued in the form of one or more fully
registered global securities, which will be deposited with, or on behalf of,
DTC and registered in the name of DTC nominee. Unless and until it is
exchangeable in whole or in part for the preferred securities in definitive
form, a global security may not be
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transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or to another nominee of DTC or by DTC or any such nominee to a
successor of DTC or to a nominee of such successor.
DTC has advised Capital Trust and us as follows:
. DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act;
. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions
between participants through electronic book entry changes to accounts
of its participants, thereby eliminating the need for physical movement
of certificates;
. participants include securities brokers and dealers (such as the
underwriters), banks, trust companies and clearing corporations and may
include certain other organizations;
. certain of such participants (or their representatives), together with
other entities, own DTC; and
. indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through, or maintain a
custodial relationship with, a participant, either directly or
indirectly.
Ownership of beneficial interests in a global security will be limited to
participants that have accounts with DTC or its nominee or persons that may
hold interests through such participants. We expect that, upon the issuance of
a global security, DTC will credit, on its book-entry registration and transfer
system, the participants' accounts with their respective principal amounts of
preferred securities represented by such global security. Ownership of
beneficial interests in such global security will be shown on, and the transfer
of such ownership interests will be effected only through records maintained by
DTC (with respect to the interests of participants) and on the records of
participants (with respect to your interests). You will not receive written
confirmation from DTC of your purchase, but are expected to receive written
confirmations from participants through which you entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books
of participants acting on your behalf.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the preferred securities represented by such global security
for all purposes under the trust agreement. Except as provided below, you are
the owner of beneficial interests in a global security and will not be entitled
to receive physical delivery of the preferred securities in definitive form.
You will not be considered an owner or holder under the trust agreement.
Accordingly, you must rely on the procedures of DTC and, if you are not a
participant, on the procedures of the participant through which you own your
interest, to exercise any rights as a holder of preferred securities under the
trust agreement. We understand that, under DTC's existing practices, in the
event that we request any action you, or if you desire to take any action which
a holder is entitled to take under the trust agreement, DTC would authorize the
participants holding your interests to take such action, and such participants
would authorize you to take such action or would otherwise act upon your
instructions. Redemption notices will also be sent to DTC. If less than all of
the preferred securities are being redeemed, we understand that it is DTC's
existing practice to determine by lot the amount of the interest of each
participant to be redeemed.
Distributions on the preferred securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such preferred securities.
Neither the trustees, the administrative trustees, any paying agent nor any
other agent of ours or the trustees will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the global security for such preferred
securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests. Disbursements of distributions to
participants shall be the responsibility of DTC. DTC's practice is to credit
participants' accounts on a payable date in accordance with their respective
holdings shown on DTC's records
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unless DTC has reason to believe that it will not receive payment on the
payable date. Payments by participants to you will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participant and not of DTC, us, the
trustees, the paying agent or any other agent of ours, subject to any
statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the preferred securities at any time by giving reasonable notice to
us or the trustees. If DTC notifies us that it is unwilling to continue as
such, or if it is unable to continue or ceases to be a clearing agency
registered under the Securities Exchange Act and a successor depository is not
appointed by us within ninety days after receiving such notice or becoming
aware that DTC is no longer so registered, we will issue the preferred
securities in definitive form upon registration of transfer of, or in exchange
for, such global security. In addition, we may at any time and in our sole
discretion determine not to have the preferred securities represented by one
or more global securities and, in such event, will issue preferred securities
in definitive form in exchange for all of the global securities representing
such preferred securities.
Same-Day Settlement and Payment
Settlement for the preferred securities will be made by the underwriters in
immediately available funds.
Secondary trading in preferred securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the preferred
securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the preferred securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as
to the effect, if any, of settlement in immediately available funds on trading
activity in the preferred securities.
Payment and Paying Agency
Payments in respect of the preferred securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable distribution dates
or, if the preferred securities are not held by DTC, such payments will be
made by check mailed to the address of the holder entitled thereto as such
address appears on the securities register for the preferred securities and
common securities. The paying agent will initially be the property trustee and
any co-paying agent chosen by the property trustee and acceptable to the
administrative trustees. The paying agent will be permitted to resign as
paying agent upon 30 days' written notice to the property trustee and the
administrative trustees. If the property trustee is no longer the paying
agent, the property trustee will appoint a successor (which must be a bank or
trust company reasonably acceptable to the administrative trustee) to act as
paying agent.
Registrar and Transfer Agent
The property trustee will act as registrar and transfer agent for the
preferred securities.
Registration of transfers of preferred securities will be effected without
charge by or on behalf of Capital Trust, but only upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. Capital Trust will not be required to register or cause to be
registered the transfer of the preferred securities after the preferred
securities have been called for redemption.
Obligations and Duties of the Property Trustee
The property trustee, other than during the occurrence and continuance of
an event of default, undertakes to perform only such duties as are
specifically set forth in the trust agreement and, after such event of
default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to
this provision, the property trustee is under no obligation to exercise any of
the powers vested in it by the trust agreement at your request unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
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Miscellaneous
The administrative trustees and the property trustee are authorized and
directed to conduct the affairs of and to operate Capital Trust in such a way
that (1) Capital Trust will not be deemed to be an "investment company"
required to be registered under the Investment Company Act or taxable as a
corporation for United States federal income tax purposes and (2) the junior
subordinated debentures will be treated as our indebtedness for United States
federal income tax purposes. In this connection, the property trustee and we,
as the holders of common securities, are authorized to take any action not
inconsistent with applicable law, the certificate of trust of Capital Trust or
the trust agreement that the property trustee and we determine in our
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect your interests.
You will not have preemptive or similar rights.
Capital Trust may not borrow money, issue debt or mortgage or pledge any of
its assets.
Governing Law
The trust agreement will be governed by and construed in accordance with the
laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures are to be issued under the indenture
between State Street Bank and Trust Company, the debenture trustee, and us.
This summary of certain terms and provisions of the junior subordinated
debentures and the indenture is not complete. You should read the form of the
indenture that is filed as an exhibit to the registration statement of which
this prospectus is a part. Whenever particular defined terms of the indenture
(as amended or supplemented from time to time) are referred to in this
prospectus, such defined terms are incorporated herein by reference. A copy of
the form of indenture is available from the debenture trustee upon request.
General
Concurrently with the issuance of the preferred securities, Capital Trust
will invest the proceeds, together with the consideration paid by us for the
common securities, in the junior subordinated debentures issued by us. The
junior subordinated debentures will bear interest, accruing from , 1999,
at the annual rate of % of the principal amount thereof, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year,
commencing , 1999, to the person in whose name each junior subordinated
debenture is registered at the close of business on the 15th day of March,
June, September or December (whether or not a business day) next preceding such
interest payment date. It is anticipated that, until the liquidation, (if any),
of Capital Trust, each junior subordinated debentures will be registered in the
name of Capital Trust and held by the property trustee in trust for you, as a
holder of preferred securities, and us, as the holders of the common
securities.
The amount of interest payable for any period less than a full interest
period will be computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. The amount of
interest payable for any full interest period will be computed by dividing the
annual rate by four. If any date on which interest is payable to the junior
subordinated debentures is not a business day, then payment of the interest
payable on such date will be made on the next business day (without any
interest or other payment in respect of any such delay), or, if such business
day falls in the next calendar year, such payment will be made on the
immediately preceding business day in each case with the same force and effect
as if made on the date such payment was originally payable.
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Accrued interest that is not paid on the applicable interest payment date
will bear additional interest on the amount thereof (to the extent permitted by
law) at the annual rate of %, compounded quarterly and computed on the basis
of a 360-day year of twelve 30-day months and the actual days elapsed in a
partial month in such period. The amount of additional interest payable for any
full interest period will be computed by dividing the annual rate by four. The
term "interest" as used herein includes quarterly interest payments, interest
on quarterly interest payments not paid on the applicable interest payment date
and, if applicable, any additional sums we pay on the junior subordinated
debentures following a Tax Event (as defined under "Description of Preferred
Securities--Redemption") that may be required so that distributions payable by
Capital Trust will not be reduced by any additional taxes, duties or other
governmental changes resulting from such Tax Event.
The junior subordinated debentures will mature on , 2029, subject to
our right to shorten the maturity date at any time to any date not earlier than
, 2004, if we have received prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal
Reserve. In the event we elect to shorten the maturity of the junior
subordinated debentures, we will give notice to the registered holders of the
junior subordinated debentures, the debenture trustee and Capital Trust of such
shortening no less than 90 days nor more than 180 days prior to the
effectiveness thereof. The property trustee must give you and the holders of
the common securities notice of the shortening of the stated maturity at least
30 but not more than 60 days before such date.
The junior subordinated debentures will be unsecured and will rank junior
and be subordinate in right of payment to all of our senior indebtedness. The
junior subordinated debentures will not be subject to a sinking fund. The
indenture does not limit our ability to incur or issue other secured or
unsecured debt, including senior indebtedness, whether under the junior
subordinated debentures or any existing or other indenture that we may enter
into in the future or otherwise. See "--Subordination."
Option to Extend Interest Payment Period
So long as no event of default under the junior subordinated debentures has
occurred and is continuing, we have the right at any time during the term of
the junior subordinated debentures to defer the payment of interest at any time
or from time to time for a period not exceeding 20 consecutive quarterly
periods with respect to each extension period, provided that no extension
period may extend beyond the stated maturity of the junior subordinated
debentures. During any extension period, we have the right to make partial
payments of interest on any interest payment date. At the end of an extension
period, we must pay all interest then accrued and unpaid (together with
interest thereon at the annual rate of %, compounded quarterly and computed on
the basis of a 360-day year of twelve 30-day months and the actual days elapsed
in a partial month in such period, to the extent permitted by applicable law).
The amount of additional interest payable for any full interest period will be
computed by dividing the annual rate by four. During an extension period,
interest will continue to accrue and holders of junior subordinated debentures
(or holders of preferred securities while outstanding) will be required to
accrue interest income for United States federal income tax purposes. See
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
During any extension period, we may not:
. make any payment of principal of or interest or premium, if any, on, or
repay, repurchase or redeem any of, our debt securities that rank
equally in all respects with or junior in interest to the junior
subordinated debentures;
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our
capital stock; or
. redeem, purchase or acquire less than all of the junior subordinated
debentures or any of the preferred securities.
Prior to the termination of any extension period, we may further defer the
payment of interest, provided that no extension period may exceed 20
consecutive quarterly periods or extend beyond the stated maturity of
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the junior subordinated debentures. Upon the termination of any extension
period and the payment of all amounts then due, we may elect to begin a new
extension period subject to the above conditions. No interest shall be due and
payable during an extension period, except at its end. We must give the
trustees notice of our election of such extension period at least two business
days prior to the earlier of (1) the date the distribution on the preferred
securities would have been payable but for the election to begin an extension
period and (2) the date the property trustee is required to give you notice of
the record date or the date such distributions are payable, but in any event
not less than one business day prior to such record date. The property trustee
will give you notice of our election to begin a new extension period. There is
no limitation on the number of times that we may elect to begin an extension
period.
Redemption
We may redeem the junior subordinated debentures prior to maturity at our
option (1) on or after , 2004, in whole at any time or in part from time
to time, or (2) in whole, but not in part, at any time within 180 days
following the occurrence and during the continuation of a Tax Event, Investment
Company Event or Capital Treatment Event (each as defined under "Description of
Preferred Securities--Redemption"), in each case at a redemption price equal to
the outstanding principal amount of the junior subordinated debentures plus
accrued interest (including any additional interest on any additional sums we
pay following a Tax Event as described below under "--Additional Sums"). The
proceeds of any such redemption will be used by Capital Trust to redeem the
preferred securities.
The Federal Reserve's risk-based capital guidelines, which are subject to
change, currently provide that redemptions of permanent equity or other capital
instruments before stated maturity could have a significant impact on a bank
holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base. Consultation may not be necessary if the equity or capital
instrument was redeemed with the proceeds of, or replaced by, a like amount of
a similar or higher quality capital instrument and the Federal Reserve
considers the organization's capital position to be fully adequate after the
redemption.
If we redeem the junior subordinated debentures prior to their stated
maturity that would constitute the redemption of capital instruments under the
Federal Reserve's current risk-based capital guidelines and may be subject to
the prior approval of the Federal Reserve. The redemption of the junior
subordinated debentures also could be subject to the additional prior approval
of the Federal Reserve under its current risk-based capital guidelines.
Additional Sums
We have covenanted in the indenture that, if and for so long as Capital
Trust is the holder of all junior subordinated debentures and Capital Trust is
required to pay any additional taxes, duties or other governmental charges as a
result of a Tax Event, we will pay as additional sums on the junior
subordinated debentures such amounts as may be required so that the
distributions payable by Capital Trust will not be reduced as a result of any
such additional taxes, duties or other governmental charges. See "Description
of Preferred Securities--Redemption."
Registration, Denomination and Transfer
The junior subordinated debentures will initially be registered in the name
of Capital Trust. If the junior subordinated debentures are distributed to you,
it is anticipated that the depositary arrangements for the junior subordinated
debentures will be substantially identical to those in effect for the preferred
securities. See "Description of Preferred Securities--Book Entry, Delivery and
Form."
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Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and we do not appoint a successor depositary
within 90 days of receipt of notice from DTC to such effect, we will cause the
junior subordinated debentures to be issued in definitive form.
Payments on junior subordinated debentures represented by a global security
will be made to Cede & Co., the nominee for DTC, as the registered holder of
the junior subordinated debentures, described under "Description of Preferred
Securities--Book Entry, Delivery and Form." If junior subordinated debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the junior subordinated debentures will be registerable, and junior
subordinated debentures will be exchangeable for junior subordinated debentures
of other authorized denominations of a like aggregate principal amount, at the
corporate trust office of the debenture trustee in New York, New York, or at
the offices of any paying agent or transfer agent we appoint, provided that
payment of interest may be made at our option by check mailed to the address of
the persons entitled thereto. However, a holder of $1 million or more in
aggregate principal amount of junior subordinated debentures may receive
payments of interest (other than interest payable at the stated maturity) by
wire transfer of immediately available funds upon written request to the
debenture trustee not later than 15 calendar days prior to the date on which
the interest is payable.
Junior subordinated debentures are issuable only in registered form without
coupons in integral multiples of $25. Junior subordinated debentures will be
exchangeable for other junior subordinated debentures of like tenor, of any
authorized denominations, and of a like aggregate principal amount.
Junior subordinated debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
indenture or at the office of any transfer agent we designate for such purpose
without service charge and upon payment of any taxes and other governmental
charges as described in the indenture. We will appoint the debenture trustee as
securities registrar under the indenture. We may at any time designate
additional transfer agents with respect to the junior subordinated debentures.
In the event of any redemption, we will not, nor will the debenture trustee
be required to:
. issue, register the transfer of or exchange junior subordinated
debentures during a period beginning at the opening of business 15 days
before the day of selection for redemption of the junior subordinated
debentures to be redeemed and ending at the close of business on the day
of mailing of the relevant notice of redemption; or
. transfer or exchange any junior subordinated debentures so selected for
redemption, except, in the case of any junior subordinated debentures
being redeemed in part, any portion of the debenture not to be redeemed.
Any monies deposited with the debenture trustee or any paying agent, or then
held by us in trust, for the payment of the principal of (and premium, if any)
or interest on any junior subordinated debenture and remaining unclaimed for
two years after this principal (and premium, if any) or interest has become due
and payable shall, at our request, be repaid to us and the holder of such
junior subordinated debenture shall thereafter look, as a general unsecured
creditor, only to us for payment thereof.
Restrictions on Certain Payments
We have covenanted that if at any time (1) there has occurred any event (a)
of which we have actual knowledge that with the giving of notice or the lapse
of time, or both, would constitute an event of default under the junior
subordinated debentures and (b) that we have not taken reasonable steps to
cure, (2) if the junior subordinated debentures are held by Capital Trust, we
are in default with respect to our payment of any
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obligations under the guarantee, or (3) we have given notice of our election of
an extension period as provided in the indenture and have not rescinded such
notice, or such extension period, or any extension thereof, is continuing, then
we will not:
. make any payment of principal of or interest or premium, if any, on, or
repay, repurchase or redeem any of, our debt securities that rank
equally in all respects with, or junior in interest to, the junior
subordinated debentures, including our obligations associated with the
outstanding preferred securities;
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock; or
. redeem, purchase or acquire less than all of the junior subordinated
debentures or any of the preferred securities.
Modification of Indenture
From time to time, we as well as the debenture trustee may, without the
consent of any of the holders of the outstanding junior subordinated
debentures, amend, waive or supplement the provisions of the indenture to:
. cure ambiguities or correct the junior subordinated debentures in the
case of defects or inconsistencies in the provisions thereof, so long as
any such cure or correction does not adversely affect the interest of
the holders of the junior subordinated debentures in any material
respect; and
. qualify, or maintain the qualification of, the indenture under the Trust
Indenture Act.
The indenture contains provisions permitting the debenture trustee and us,
with the consent of the holders of not less than a majority in principal amount
of the junior subordinated debentures, to modify the indenture in a manner
affecting the rights of the holders of the junior subordinated debentures.
However, none of these modifications may be made, without the consent of the
holder of each outstanding junior subordinated debenture so affected that
would:
. change the stated maturity of the junior subordinated debentures, or
reduce the principal amount thereof, the rate of interest thereon or any
premium payable upon the redemption thereof, or change the place of
payment where, or the currency in which, any such amount is payable or
impair the right to institute suit for the enforcement of any junior
subordinated debenture; or
. reduce the percentage of principal amount of junior subordinated
debentures, the holders of which are required to consent to any
modification of the indenture.
Debenture Events of Default
The indenture provides that any one or more of the following described
events with respect to the junior subordinated debentures that has occurred and
is continuing constitute an "event of default" with respect to the junior
subordinated debentures:
. failure to pay any interest on the junior subordinated debentures when
due and continuance of this default for a period of 30 days (subject to
the deferral of any due date in the case of an extension period); or
. failure to pay any principal of or premium, if any, on the junior
subordinated debentures when due whether at the stated maturity, upon
redemption, by declaration or otherwise; or
. failure to observe or perform certain other covenants contained in the
indenture for 90 days after written notice of such failure to us from
the debenture trustee or the holders of at least 25% in aggregate
outstanding principal amount of the outstanding junior subordinated
debentures; or
. the occurrence of the appointment of a receiver or other similar
official in any liquidation, insolvency or similar proceeding with
respect to us or all or substantially all of our property; or a court or
other
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governmental agency shall enter a decree or order appointing a receiver
or similar official and such decree or order shall remain unstayed and
undischarged for a period of 60 days.
As described in "Description of Preferred Securities--Events of Default;
Notice," the occurrence of an event of default in respect of the junior
subordinated debentures will also constitute an event of default in respect of
the preferred securities and common securities.
The holders of at least a majority in aggregate principal amount of
outstanding junior subordinated debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
debenture trustee. The debenture trustee or the holders of not less than 25% in
aggregate principal amount of outstanding junior subordinated debentures may
declare the principal due and payable immediately upon a event of default, and,
should the debenture trustee or such holders of junior subordinated debentures
fail to make such declaration, the holders of at least 25% in aggregate
liquidation amount of the outstanding preferred securities shall have such
right. The holders of a majority in aggregate principal amount of outstanding
junior subordinated debentures may annul such declaration and waive the default
if all defaults (other than the non-payment of the principal of junior
subordinated debentures which has become due solely by such acceleration) have
been cured or waived and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by acceleration has been deposited
with the debenture trustee. Should the holders of junior subordinated
debentures fail to annul such declaration and waive such default, the holders
of a majority in aggregate liquidation amount of the outstanding preferred
securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding junior subordinated debentures affected thereby may, on behalf of
the holders of all the junior subordinated debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless this default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the debenture trustee) or a default in respect of a
covenant or provision which under the indenture cannot be modified or amended
without the consent of the holder of each outstanding junior subordinated
debenture affected by the default. See "--Modification of Junior Subordinated
Indenture." We are required to certify annually to the debenture trustee as to
whether or not we are in compliance with all the conditions and covenants
applicable to us under the indenture.
If an event of default occurs and is continuing, the property trustee will
have the right to declare the principal of and the interest on the junior
subordinated debentures, and any other amounts payable under the indenture, to
be due and payable and to enforce its other rights as a creditor with respect
to the junior subordinated debentures.
Enforcement of Certain Rights by Holders of Preferred Securities
If an event of default has occurred and is continuing and such event is
attributable to our failure to pay any amounts due and payable in respect of
the junior subordinated debentures, you, as a holder of preferred securities,
may institute a legal action against us for enforcement of payment to you of an
amount equal to the amount payable in respect of junior subordinated debentures
having a principal amount equal to the aggregate liquidation amount of the
preferred securities you hold. We may not amend the indenture to remove the
foregoing right to bring such legal action without your prior written consent.
We will have the right under the indenture to set-off any payment we make to
you in connection with such a legal action.
You are not able to exercise directly any remedies available to the holders
of the junior subordinated debentures except under the circumstances described
in the preceding paragraph. See "Description of Preferred Securities--Events of
Default; Notice."
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Consolidation, Merger, Sale of Assets and Other Transactions
The indenture provides that we may not consolidate with or merge into any
other entity or convey, transfer or lease our properties and assets
substantially as an entirety to any entity, and no entity may consolidate with
or merge into us or convey, transfer or lease its properties and assets
substantially as an entirety to us, unless:
. in the event we consolidate with or merge into another entity or convey
or transfer our properties and assets substantially as an entirety to
any entity, the successor entity is organized under the laws of the
United States or any state or the District of Columbia, and such
successor entity expressly assumes our obligations in respect of the
junior subordinated debentures;
. immediately after giving effect thereto, no event of default with
respect to the junior subordinated debentures, and no event which, after
notice or lapse of time or both, would constitute an event of default
with respect to the junior subordinated debentures, has occurred and is
continuing; and
. certain other conditions as prescribed in the indenture are satisfied.
Satisfaction and Discharge
The indenture will cease to be of further effect (except as to our
obligations to pay all other sums due pursuant to the indenture and provide the
officers' certificates and opinions of counsel described therein), and we will
deemed to have satisfied and discharged the indenture when:
. all junior subordinated debentures not previously delivered to the
debenture trustee for cancellation (1) have become due and payable, or
(2) will become due and payable at the stated maturity within one year;
and
. we deposit or cause to be deposited with the debenture trustee funds, in
trust, for the purpose and in an amount sufficient to pay and discharge
the entire indebtedness on the junior subordinated debentures not
previously delivered to the debenture trustee for cancellation, for the
principal (and premium, if any) and interest to the date of the deposit
or to the stated maturity.
Subordination
The junior subordinated debentures will be subordinate and junior in right
of payment, to the extent set forth in the indenture, to all of our Senior
Debt, Subordinated Debt and Additional Senior Obligations (as defined below).
If we default in the payment of any principal, premium, if any, or interest, if
any, or any other amount payable on any Senior Debt, Subordinated Debt and
Additional Senior Obligations when the same becomes due and payable, whether at
maturity or at a date fixed for redemption or by declaration of acceleration or
otherwise, then unless and until such default has been cured or waived or has
ceased to exist or all Senior Debt, Subordinated Debt and Additional Senior
Obligations have been paid, no direct or indirect payment (in cash, property,
securities, by set-off or otherwise) may be made or agreed to be made on the
junior subordinated debentures, or in respect of any redemption repayment,
retirement, purchase or other acquisition of any of the junior subordinated
debentures.
"Debt" means, with respect to any person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent:
. every obligation of such person for money borrowed;
. every obligation of such person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of such person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of such person;
. every obligation of such person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
. every capital lease obligation of such person; and
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. every obligation of the type referred to the preceding bullet points of
another person and all dividends of another person the payment of which,
in either case, such person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
"Senior Debt" means, with respect to us, the principal of (and premium, if
any) and interest, if any (including interest accruing on or after the filing
of any petition in bankruptcy or for reorganization relating to us whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the junior subordinated debentures or to other
Debt which is pari passu with, or subordinated to, the junior subordinated
debentures; provided, however, that Senior Debt will not be deemed to include:
. any Debt of us which when incurred and without respect to any election
under section 1111(b) of the United States Bankruptcy Code of 1978 was
without recourse to the Company;
. any of our Debt to any of our subsidiaries;
. any Debt to any of our employees;
. any Debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of such Debt by the holders of
the junior subordinated debentures as a result of the subordination
provisions of the indenture would be greater than they otherwise would
have been as a result of any obligation of such holders to pay amounts
over to the obligees on such trade accounts payable or accrued
liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject; and
. Debt which constitutes subordinated debt.
"Subordinated Debt" means, with respect to us, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to us
whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the indenture
or thereafter incurred, which is by its terms expressly provided to be junior
and subordinate to our other Debt (other than the junior subordinated
debentures).
"Additional Senior Obligations" means, with respect to us, all indebtedness,
whether incurred on or prior to the date of the indenture or thereafter
incurred, for claims in respect of derivative products such as interest and
foreign exchange rate contracts, commodity contracts and similar arrangements;
provided, however, that Additional Senior Obligations do not include claims in
respect of Senior Debt or Subordinated Debt or obligations which, by their
terms, are expressly stated to be not superior in right of payment to the
junior subordinated debentures or to rank pari passu in right of payment with
the junior subordinated debentures. "Claim," as used herein, has the meaning
assigned thereto in Section 101(4) of the United States Bankruptcy Code of
1978.
Information Concerning the Debenture Trustee
The debenture trustee, other than during the occurrence and continuance of a
default in the performance of our obligations under the junior subordinated
debentures, is under no obligation to exercise any of the powers vested in it
by the indenture at the request of any holder of junior subordinated
debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities that might be incurred by the exercise of these
powers. The debenture trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its
duties if the debenture trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
Governing Law
The indenture and the junior subordinated debentures will be governed by and
construed in accordance with the laws of the State of Colorado.
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DESCRIPTION OF GUARANTEE
We will execute and deliver the guarantee concurrently with the issuance of
preferred securities by Capital Trust for your benefit. The guarantee trustee
will hold the guarantee for your benefit. This summary of certain provisions of
the guarantee is not complete. You should read the form of the guarantee, which
is filed as an exhibit to the registration statement of which this prospectus
is a part. A copy of the form of guarantee is available upon request from the
guarantee trustee.
General
We will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth in the guarantee and described
herein, the guarantee payments described below to you, as and when due,
regardless of any defense, right of set-off or counterclaim that Capital Trust
may have or assert other than the defense of payment. The following payments
with respect to the preferred securities, to the extent not paid by or on
behalf of Capital Trust, will be subject to the guarantee:
. any accrued and unpaid distributions required to be paid on such
preferred securities, to the extent that Capital Trust has funds on hand
available therefor at such time;
. the redemption price with respect to any preferred securities called for
redemption, to the extent that Capital Trust has funds on hand available
for its payment at such time; and
. upon a voluntary or involuntary dissolution, termination, winding up or
liquidation of Capital Trust, unless the junior subordinated debentures
are distributed to you, the lesser of:
(a) the aggregate of the liquidation amount and all accumulated and
unpaid distributions to the date of payment, to the extent that
Capital Trust has funds on hand available for their payment; and
(b) the amount of assets of Capital Trust remaining available for
distribution to you on liquidation of Capital Trust.
Our obligation to make a guarantee payment may be satisfied by our direct
payment to you or by causing Capital Trust to pay these amounts to you.
The guarantee will be an irrevocable guarantee of payment on a subordinated
basis of Capital Trust's obligations under the preferred securities, but will
apply only to the extent that Capital Trust has funds sufficient to make such
payments, and is not a guarantee of collection.
If we do not make payments on the junior subordinated debentures held by
Capital Trust, Capital Trust will not be able to pay any amounts payable in
respect of the preferred securities and will not have funds legally available
for these payments. The guarantee will rank subordinate and junior in right of
payment to all of our senior indebtedness. See "--Status of the Guarantee." The
guarantee does not limit our ability to incur or issue other secured or
unsecured debt, including senior indebtedness, whether under the indenture or
any other indenture that we may enter into in the future or otherwise.
We have through the guarantee, the trust agreement, the junior subordinated
debentures and the indenture, taken together, fully, irrevocably and
unconditionally guaranteed all Capital Trust's obligations under the preferred
securities on a subordinated basis. No single document standing alone or
operating in conjunction with fewer than all the other documents constitutes
such guarantee. Only the combined operation of these documents has the effect
of providing a full, irrevocable and unconditional guarantee of Capital Trust's
obligations in respect of the preferred securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee."
Status of the Guarantee
The guarantee will constitute our unsecured obligation and will rank
subordinate and junior in right of payment to all of our Senior Debt,
Subordinated Debt and Additional Senior Obligations.
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The guarantee will constitute a guarantee of payment and not of collection.
This means that the guarantee trustee may institute a legal proceeding
directly against us as the guarantor to enforce its rights under the guarantee
without first instituting a legal proceeding against any other person or
entity. The guarantee will be held by the guarantee trustee for your benefit.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by Capital Trust or distribution to
the holders of the preferred securities of the junior subordinated debentures.
Amendments and Assignment
Except with respect to any changes which do not materially adversely affect
your rights (in which case no consent will be required), the guarantee may not
be amended without the prior approval of the holders of not less than a
majority of the aggregate liquidation amount of the outstanding preferred
securities. The manner of obtaining any such approval is set forth under
"Description of Preferred securities--Voting Rights; Amendment of Trust
Agreement." All guarantees and agreements contained in the guarantee shall
bind our successors, assigns, receivers, trustees and representatives and
shall inure to your benefit and the benefit of all of the holders of the
preferred securities then outstanding.
Events of Default
An event of default under the guarantee will occur if we fail to perform
any of our payment or other obligations under the guarantee. The holders of
not less than a majority in aggregate liquidation amount of the outstanding
preferred securities have the right to direct the time method and place of
conducting any proceeding for any remedy available to the guarantee trustee in
respect of the guarantee or to direct the exercise of any trust or power
conferred upon the guarantee trustee under the guarantee.
You may institute a legal proceeding directly against us to enforce your
rights under the guarantee without first instituting a legal proceeding
against Capital Trust, the guarantee trustee or any other person or entity.
We are required, as guarantor, to certify annually to the guarantee trustee
whether or not we are in compliance with all the conditions and covenants
applicable to us under the guarantee.
Information Concerning the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance of
a default by us in performance of the guarantee, undertakes to perform only
such duties as are specifically set forth in the guarantee and, after the
occurrence of an event of default with respect to the guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the
guarantee trustee is under no obligation to exercise any of the powers vested
in it by the guarantee at your request unless it is offered reasonable
indemnity against the costs, expenses and liabilities that it might incur in
the exercise of these powers.
Termination of the Guarantee
The guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the preferred securities, upon full
payment of the amounts payable with respect to the preferred securities upon
liquidation of Capital Trust or upon distribution of junior subordinated
debentures to you and the other holders of the preferred securities in
exchange for all of the preferred securities. The guarantee will continue to
be effective or will be reinstated, as the case may be, if at any time you
must restore payment of any sums paid to you under the preferred securities or
the guarantee.
Governing Law
The guarantee will be governed by and construed in accordance with the laws
of the State of Colorado.
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EXPENSE AGREEMENT
We will, pursuant to the agreement as to expenses and liabilities entered
into by us under the trust agreement, irrevocably and unconditionally guarantee
to each person or entity to whom Capital Trust becomes indebted or liable, the
full payment of any costs, expenses or liabilities of Capital Trust, other than
obligations of Capital Trust to pay to the holders of the preferred securities
or other similar interests in Capital Trust of the amounts due such holders
pursuant to the terms of the preferred securities or such other similar
interests, as the case may be. Third party creditors of Capital Trust may
proceed directly against us under the expense agreement, regardless of whether
such creditors had notice of the expense agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES, AND THE GUARANTEE
Full and Unconditional Guarantee
We have irrevocably guaranteed, on a subordinate basis, payments of
distributions and other amounts due on the preferred securities (to the extent
that Capital Trust has funds available for such payment) and to the extent set
forth under "Description of Guarantee." Taken together, our obligations under
the junior subordinated debentures, the indenture, the trust agreement and the
guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payments of distributions and other amounts due on the preferred
securities. No single document standing alone or operating in conjunction with
fewer than all the other documents constitute such guarantee. It is only the
combined operation of these documents that has the effect of providing full,
irrevocable and unconditional guarantee of Capital Trust's obligations in
respect of the preferred securities.
If and to the extent that we do not make payments on the junior subordinated
debentures, Capital Trust will not have sufficient funds to pay distributions
or other amounts due on the preferred securities. The guarantee does not cover
payment of amounts payable with respect to the preferred securities when
Capital Trust does not have sufficient funds to pay such amounts. In such
event, your remedy is to institute a legal proceeding directly against us for
enforcement of our payment obligations under the junior subordinated debentures
having a principal amount equal to the liquidation amount of the preferred
securities you hold.
Our obligations under the junior subordinated debentures and the guarantee
are subordinate and junior in right of payment to all of our Senior Debt,
Subordinated Debt and Additional Senior Obligations.
Sufficiency of Payments
As long as we make the payments on the junior subordinated debentures when
they are due, such payments will be sufficient to cover distributions and other
payments distributable on the preferred securities, primarily because:
. the aggregate principal amount of the junior subordinated debentures
will be equal to the sum of the aggregate stated liquidation amount of
the preferred securities and common securities;
. the interest rate and interest and other payment dates on the junior
subordinated debentures will match the distribution rate, distribution
dates and other payment dates for the preferred securities;
. we will pay for any and all costs, expenses and liabilities of Capital
Trust except Capital Trust's obligations to you and the holders of the
common securities; and
. the trust agreement further provides that Capital Trust will not engage
in any activity that is not consistent with the limited purposes of
Capital Trust.
Notwithstanding anything to the contrary in the indenture, we have the right
to set-off any payment we are otherwise required to make thereunder against and
to the extent we have previously made, or are concurrently on the date of such
payment making, a payment under the guarantee.
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Enforcement Rights of Holders of Preferred Securities
You may institute a legal proceeding directly against us to enforce your
rights under the guarantee without first instituting a legal proceeding against
the guarantee trustee, Capital Trust or any other person or entity. See
"Description of Guarantee."
A default or event of default under any of our Senior Debt, Subordinated
Debt and Additional Senior Obligations would not constitute a default or event
of default in respect of the preferred securities. However, in the event of
payment defaults under, or acceleration of, our senior indebtedness, the
subordination provisions of the indenture provide that no payments may be made
in respect of the junior subordinated debentures until such senior indebtedness
has been paid in full or any payment default on senior indebtedness has been
cured or waived. See "Description of Junior Subordinated Debentures--
Subordination. "
Limited Purpose of Capital Trust
The preferred securities represent preferred undivided beneficial interests
in the assets of Capital Trust, and Capital Trust exists for the sole purpose
of issuing the preferred securities and common securities and investing the
proceeds from their issuance in the junior subordinated debentures. A principal
difference between your rights as a holder of preferred securities and a holder
of a junior subordinated debenture is that a holder of a junior subordinated
debenture is entitled to receive from us payments on junior subordinated
debentures held, while you are entitled to receive distributions or other
amounts distributable with respect to the preferred securities from Capital
Trust (or from us under the Guarantee) only if and to the extent Capital Trust
has funds available for the payment of such distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of Capital Trust, other than
any such dissolution involving the distribution of the junior subordinated
debentures, after satisfaction of liabilities to creditors of Capital Trust as
required by applicable law, you will be entitled to receive, out of assets held
by Capital Trust, the liquidation distribution in cash. See "Description of
Preferred Securities--Liquidation Distribution Upon Dissolution." If we are
voluntarily or involuntarily liquidated or declare bankruptcy, Capital Trust,
as registered holder of the junior subordinated debentures, will be our
subordinated creditor, subordinated and junior in right of payment to all our
Senior Debt, Subordinated Debt and Additional Senior Obligations as set forth
in the indenture, but entitled to receive payment in full of all amounts
payable with respect to the junior subordinated debentures before any of our
stockholders receive payments or distributions. Since we are the guarantor
under the guarantee and have agreed under the indenture to pay for all costs,
expenses and liabilities of Capital Trust (other than Capital Trust's
obligations to you and the holders of the common securities), your position as
a holder of the preferred securities and the position of a holder of such
junior subordinated debentures relative to other creditors and to our
stockholders in the event of our liquidation or bankruptcy are expected to be
substantially the same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The preferred securities and payments on the preferred securities generally
are subject to taxation. Therefore, you should consider the tax consequences of
owning and receiving payments on the preferred securities before acquiring
them.
We have engaged Blackwell Sanders Peper Martin LLP, Kansas City, Missouri as
special tax counsel ("Tax Counsel") to review the following discussion. They
have given us their written legal opinion that the discussion correctly
describes the principal aspects of the U.S. federal tax treatment of beneficial
owners ("Owners") of preferred securities.
The following discussion is general and may not apply to your particular
circumstances for any of the following (or other) reasons:
. This summary is based on federal tax laws in effect as of the date of
this prospectus. Changes to any of these laws after this date may affect
the tax consequences described below.
. This summary discusses only preferred securities you acquire at original
issuance at the original offering price and hold as capital assets
(within the meaning of federal tax law). It does not discuss all of the
tax consequences that may be relevant to Owners who are subject to
special rules, such as banks, thrift institutions, real estate
investment trusts, regulated investment companies, insurance companies,
brokers and dealers in securities or currencies, certain securities
traders, tax-exempt organizations and certain other financial
institutions. This discussion also does not discuss tax consequences
that may be relevant to an Owner in light of the Owner's particular
circumstances, such as an Owner holding a preferred security as a
position in a straddle, hedge, conversion or other integrated
investment.
. This summary does not address:
(a) The income tax consequences to stockholders in, or partners or
beneficiaries of, a holder of preferred securities;
(b) the United States alternative minimum tax consequences of
purchasing, owning and disposing of preferred securities; or
(c) any state, local or foreign tax consequences of purchasing, owning
and disposing of preferred securities.
The authorities on which this summary is based are subject to various
interpretations, and the opinions of Tax Counsel are not binding on the
Internal Revenue Service (the "IRS") or the courts, either of which could take
a contrary position. Moreover, no rulings have been or will be sought from the
IRS with respect to the transaction described herein. Accordingly, we cannot
assure you that the IRS will not challenge the opinion expressed herein or that
a court would not sustain such a challenge.
We advise you to consult your own tax advisors regarding the tax
consequences of purchasing, owning and disposing of the preferred securities
because the following discussion may not apply to you.
U.S. Holders
In General. For purposes of the following discussion, a "U.S. Holder" means:
. a citizen or individual resident of the United States;
. a corporation or partnership created or organized in or under the laws
of the United States or any political subdivision thereof;
. an estate the income of which is includible in its gross income for U.S.
federal income tax purposes without regard to its source; or
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. a trust if a court within the United States is able to exercise primary
supervision over its administration and at least one United States
person has the authority to control all substantial decisions of the
trust.
Characterization of Capital Trust. Prior to the time that the preferred
securities are issued, Tax Counsel will give its opinion that (1) under then
current law and based on the representations, facts and assumptions set forth
in this prospectus, and (2) assuming full compliance with the terms of the
trust agreement (and other relevant documents), and (3) based on certain
assumption and qualifications referred to in the opinion, Capital Trust will be
characterized for United States federal income tax purposes as a grantor trust.
Accordingly, for United States federal income tax purposes, if you, as a U.S.
Holder, purchase a preferred security you will be considered the owner of an
undivided interest in the junior subordinated debentures owned by Capital
Trust, and you will be required to include all income or gain recognized for
United States federal income tax purposes with respect to your share of the
junior subordinated debentures on your income tax return.
Characterization of the Junior Subordinated Debentures. We intend to take
the position that, under current law, the junior subordinated debentures are
our debt for United States federal income tax purposes. We, along with Capital
Trust and you (by acceptance of a beneficial interest in a preferred security),
agree to treat the junior subordinated debentures as the Company's debt and the
preferred securities as evidence of a beneficial ownership interest in Capital
Trust. We cannot assure you, however, that such position will not be challenged
by the IRS or, if challenged, that a challenge will not be successful. The
remainder of this discussion assumes that the junior subordinated debentures
will be classified as our debt for United States federal income tax purposes.
Interest Income and Original Issue Discount. Under the terms of the junior
subordinated debentures, we have the ability to defer payments of interest from
time to time by extending the interest payment period for a period not
exceeding 20 consecutive quarterly periods, but not beyond the maturity of the
junior subordinated debentures. Treasury regulations provide that debt
instruments like the junior subordinated debentures will not be considered
issued with original issue discount ("OID") even if their issuer can defer
payments of interest if the likelihood of any deferral is "remote."
We have concluded, and this discussion assumes, that, as of the date of this
prospectus, the likelihood of our deferring payments of interest is "remote"
within the meaning of the applicable Treasury regulations. This conclusion is
based in part on the fact that exercising that option would prevent us from
declaring dividends on our common stock and would prevent us from making any
payments with respect to debt securities that rank equally with or junior to
the junior subordinated debentures. Therefore, the junior subordinated
debentures should not be treated as issued with OID by reason of our deferral
option. Rather, you will be taxed on stated interest on the junior subordinated
debentures when it is paid or accrued in accordance with your method of
accounting for income tax purposes. You should note, however, that no published
rulings or any other published authorities of the IRS have addressed this
issue. Accordingly, it is possible that the IRS could take a position contrary
to the interpretation described herein.
If we exercise our option to defer payments of interest, the junior
subordinated debentures would be treated as redeemed and reissued for OID
purposes. The sum of the remaining interest payments (and any de minimis OID)
on the junior subordinated debentures would thereafter be treated as OID. The
OID would accrue, and be includible in your taxable income, on an economic
accrual basis (regardless of your method of accounting for income tax purposes)
over the remaining term of the junior subordinated debentures (including any
period of interest deferral), without regard to the timing of payments under
the junior subordinated debentures. Subsequent distributions of interest on the
junior subordinated debentures generally would not be taxable. The amount of
OID that would accrue in any period would generally equal the amount of
interest that accrued on the junior subordinated debentures in that period at
the stated interest rate. Consequently, during any period of interest deferral,
you will include OID in gross income in advance of the receipt of cash, and if
you dispose of a preferred security prior to the record date for payment of
distributions on the junior
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subordinated debentures following that period, you will be subject to income
tax on OID accrued through the date of disposition (and not previously included
in income), but you will not receive cash from Capital Trust with respect to
the OID.
If the possibility of our exercising our option to defer payments of
interest is not remote, the junior subordinated debentures would be treated as
initially issued with OID in an amount equal to the aggregate stated interest
(plus any de minimis OID) over the term of the junior subordinated debentures.
You would include that OID in your taxable income, over the term of the junior
subordinated debentures, on an economic accrual basis.
Characterization of Income. Because the income underlying the preferred
securities will not be characterized as dividends for income tax purposes, if
you are a corporate holder of the preferred securities you will not be entitled
to a dividends-received deduction for any income you recognize with respect to
the preferred securities.
Market Discount and Bond Premium. Under certain circumstances, you may be
considered to have acquired your undivided interests in the junior subordinated
debentures with market discount or acquisition premium (as each phrase is
defined for United States federal income tax purposes).
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of
Capital Trust. Under certain circumstances described above (see "Description of
the Preferred Securities--Liquidation Distribution Upon Dissolution"), Capital
Trust may distribute the junior subordinated debentures to you in exchange for
your preferred securities and in liquidation of Capital Trust. Except as
discussed below, such a distribution would not be a taxable event for United
States federal income tax purposes, and you would have an aggregate adjusted
basis in the junior subordinated debentures you receive for United States
federal income tax purposes equal to your aggregate adjusted basis in your
preferred securities. For United States federal income tax purposes, your
holding period in the junior subordinated debentures you receive in such a
liquidation of Capital Trust would include the period during which you held the
preferred securities. If, however, the relevant event is a Tax Event, which
results in Capital Trust being treated as an association taxable as a
corporation, the distribution would likely constitute a taxable event to you
for United States federal income tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), we may redeem junior subordinated debentures for cash
and distribute the proceeds of such redemption to you in redemption of your
preferred securities. Such a redemption would be taxable for United States
federal income tax purposes, and you would recognize gain or loss as if you had
sold the preferred securities for cash. See "--Sales of Preferred Securities"
below.
Sales of Preferred Securities. If you sell preferred securities, you will
recognize gain or loss equal to the difference between your adjusted basis in
the preferred securities and the amount realized on the sale of such preferred
securities. Your adjusted basis in the preferred securities generally will be
the initial purchase price, increased by OID previously included (or currently
includible) in your gross income to the date of disposition, and decreased by
payments received on the preferred securities (other than any interest received
with respect to the period prior to the effective date we first exercise our
option to defer payments of interest). Any such gain or loss generally will be
capital gain or loss, and generally will be a long-term capital gain or loss if
you have held the preferred securities for more than one year prior to the date
of disposition.
If you dispose of your preferred securities between record dates for
payments of distributions thereon, you will be required to include accrued but
unpaid interest (or OID) on the junior subordinated debentures through the date
of disposition in your taxable income for United States federal income tax
purposes (notwithstanding that you may receive a separate payment from the
purchaser with respect to accrued interest). You may deduct that amount from
the sales proceeds received (including the separate payment, if any, with
respect to accrued interest) for the preferred securities (or as to OID only,
to add such amount to your adjusted tax basis in the preferred securities). To
the extent the selling price is less than your adjusted tax basis (which will
include
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accrued but unpaid OID if any), you will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
Pending Tax Litigation Affecting the Preferred Securities
Last year, a taxpayer filed a petition in the United States Tax Court
contesting the IRS's disallowance of interest deductions that taxpayer claimed
in respect of securities issued in 1993 and 1994 that are, in some respects,
similar to the preferred securities. (Enron Corp. v. Commissioner, Docket No.
6149-98, filed April 1, 1998). An adverse decision by the Tax Court concerning
the deductibility of such interest may cause a Tax Event. Such a Tax Event
would give us the right to redeem the junior subordinated debentures. See
"Description of Junior Subordinated Debentures--Redemption" and "Description of
Preferred Securities--Liquidation Distribution Upon Dissolution."
Non-U.S. Holders
The following discussion applies to you if you are not a U.S. Holder as
described above.
Payments to you, as a non-U.S. Holder, on a preferred security will
generally not be subject to withholding of income tax, provided that:
. you did not (directly or indirectly, actually or constructively) own 10%
or more of the total combined voting power of all classes of our stock
entitled to vote;
. you are not a controlled foreign corporation that is related to us
through stock ownership; and
. either (a) you certify to Capital Trust or its agent under penalties of
perjury, that you are not a U.S. Holder and provide your name and
address, or (b) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business, and holds the preferred security in
such capacity, certifies to Capital Trust or its agent, under penalties
of perjury, that it requires and has received such a statement from you
or another financial institution between it and you in the chain of
ownership, and furnishes Capital Trust or its agent with a copy thereof.
As discussed above, it is possible that changes in the law affecting the
income tax consequences of the junior subordinated debentures could adversely
affect our ability to deduct interest payable on the junior subordinated
debentures. Such changes could also cause the junior subordinated debentures to
be classified as our equity (rather than our debt) for United States federal
income tax purposes. This might cause the income derived from the junior
subordinated debentures to be characterized as dividends, generally subject to
a 30% (or lower rate under an applicable income tax treaty) income tax (on a
withholding basis) when paid to you if you are not a U.S. Holder, rather than
as interest which, as discussed above, generally is exempt from income tax in
the hands of a person who is not a U.S. Holder.
You, as a non-U.S. Holder, will generally not be subject to withholding of
income tax on any gain realized upon the sale or other disposition of a
preferred security.
If you hold the preferred securities in connection with the active conduct
of a United States trade or business, you will be subject to income tax on all
income and gains recognized with respect to your proportionate share of the
junior subordinated debentures.
Information Reporting
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the preferred securities held by a
noncorporate U.S. Holder within the United States. In addition, payments made
on, and payments of the proceeds from the sale of, the preferred securities to
or through the United States office of a broker are subject to information
reporting unless you certify as to your non-U.S.
112
<PAGE>
Holder status or otherwise establish an exemption from information reporting
and backup withholding. See "--Backup Withholding." Taxable income on the
preferred securities for a calendar year should be reported to U.S. Holders on
the appropriate forms by the following January 31st.
Backup Withholding
Payments made on, and proceeds from the sale of, the preferred securities
may be subject to a "backup" withholding tax of 31% unless you comply with
certain identification or exemption requirements. Any amounts so withheld will
be allowed as a credit against your income tax liability, or refunded, provided
the required information is provided to the IRS.
The preceding discussion is only a summary and does not address the
consequences to particular persons of the purchase, ownership and disposition
of the preferred securities. Potential purchasers of the preferred securities
are urged to contact their own tax advisors to determine their particular tax
consequences.
CERTAIN ERISA CONSIDERATIONS
We and certain of our affiliates may each be considered a "party in
interest" within the meaning of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or a "disqualified person" within the meaning of
Section 4975 of the Code with respect to many employee benefit plans that are
subject to ERISA. The purchase of the preferred securities by an employee
benefit plan that is subject to the fiduciary responsibility provisions of
ERISA or the prohibited transaction provisions of Section 4975(e)(1) of the
Code and with respect to which we, or any affiliate of ours, is a service
provider (or otherwise is a party in interest or a disqualified person), may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless the preferred securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan proposing to acquire any preferred securities should consult with its
counsel.
113
<PAGE>
UNDERWRITING
Under the terms and conditions of an underwriting agreement, the form of
which is filed as an exhibit to the registration statement containing this
prospectus, the underwriters named below, represented by Tucker Anthony Cleary
Gull and U.S. Bancorp Piper Jaffray Inc., have severally agreed to purchase
from Capital Trust the number of preferred securities set forth opposite their
respective names below:
<TABLE>
<CAPTION>
Number of
Underwriter Preferred Securities
- ----------- --------------------
<S> <C>
Tucker Anthony Cleary Gull.................................
U.S. Bancorp Piper Jaffray Inc.............................
---------
Total.................................................... 1,100,000
=========
</TABLE>
The underwriters are offering the preferred securities subject to their
acceptance of the securities from the Trust and subject to prior sale. The
underwriters are obligated to purchase all the preferred securities if any are
purchased. If an underwriter fails to purchase its share of preferred
securities, the purchase commitments of the other underwriters may be increased
or the underwriting agreement may be terminated.
The representatives propose initially to offer the preferred securities to
the public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers at such price less a concession not in
excess of $ per preferred security. The underwriters may allow, and such
dealers may re-allow, a discount not in excess of $ per preferred security
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
Because Capital Trust will use proceeds of the sale of the preferred
securities to purchase the junior subordinated debentures from us, the
underwriting agreement provides that we will pay the underwriters as
compensation for their services $ per preferred security (or $ in the
aggregate if the over-allotment option is exercised).
Capital Trust has granted the Underwriters an option to purchase up to an
additional 165,000 preferred securities at the public offering price. This
option, which expires 45 days from the date of this prospectus, may be
exercised solely to cover over-allotments. If the underwriters exercise this
option, each of the underwriters will generally be obligated to purchase its
proportionate share of the additional preferred securities.
If the underwriters exercise their option to purchase additional preferred
securities, Capital Trust will issue and sell to us the amount of common
securities necessary for us to continue to hold common securities in an
aggregate liquidation amount equal to at least 3% of the total capital of
Capital Trust and we will issue and sell to Capital Trust junior subordinated
debentures in an aggregate principal amount equal to the total aggregate
liquidation amount of the additional preferred securities and common securities
being purchased.
In connection with the offering of the preferred securities, the
underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the SEC's
Regulation M that are intended to stabilize, maintain or otherwise affect the
market price of the preferred securities. These transactions may include over-
allotment transactions in which the underwriters create a short position for
their own account by selling more preferred securities than they are committed
to purchase from Capital Trust. In such case, to cover all or part of the short
position, the underwriters may exercise the over-allotment option described
above or may purchase preferred securities in the open market following the
initial offering of the preferred securities. The underwriters also may engage
in stabilizing transactions in which they bid for and purchase preferred
securities at a level above that which might otherwise prevail in the open
market for the purpose of preventing or retarding a decline in the market price
of the preferred securities. The underwriters may also reclaim any selling
concessions allowed to an underwriter or dealer if the underwriters repurchase
preferred securities distributed by that underwriter or dealer.
114
<PAGE>
Any of the foregoing transactions may result in the maintenance of a price
for the preferred securities at a level above that which might otherwise
prevail in the open market. Neither we nor any of the underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the preferred
securities. The underwriters are not required to engage in any of the foregoing
activities and, if they do, they may end these activities at any time without
notice.
During a period of 180 days from the date of this prospectus, neither
Capital Trust nor we will, subject to certain exceptions, without the prior
written consent of the representatives, directly or indirectly sell, offer to
sell, grant any option for sale of, or otherwise dispose of, any preferred
securities, any security convertible into or exchangeable into or exchangeable
for preferred securities or junior subordinated debentures or any debt
securities substantially similar to the junior subordinated debentures or
equity securities substantially similar to the preferred securities, except in
this offering.
Because we expect the National Association of Securities Dealers, Inc. to
view the preferred securities as interests in a direct participation program,
we are making the offering of the preferred securities in compliance with the
applicable provisions of Rule 2810 of the NASD's Conduct Rules.
Before this offering there was no public market for the preferred
securities. The preferred securities have been approved for quotation on the
Nasdaq National Market under the trading symbol "MTXCP". The representatives
have advised Capital Trust that they currently intend to make a market in the
preferred securities after the commencement of trading on the Nasdaq National
Market. The representatives are not obligated to make a market in the preferred
securities, however, and may cease market making activities at any time. We
cannot give any assurance that an active or liquid trading market for the
preferred securities will develop or, if it does, that it will continue.
Capital Trust, the underwriters and we have agreed to indemnify one another
against, or contribute to payments that may be required to make in respect of,
certain liabilities, including liabilities under the Securities Act.
The parent company of U.S. Bancorp Piper Jaffray Inc. is U.S. Bancorp. U.S.
Bancorp provides financing to Matrix Financial under a warehouse line of credit
and to Matrix Bank under a bank stock loan.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the preferred
securities, the enforceability of the trust agreement and the formation of
Capital Trust, will be passed upon by Morris, Nichols, Arsht & Tunnell, special
Delaware counsel to us and Capital Trust. Certain legal matters for us and
Capital Trust, including matters relating to United States federal income tax
considerations and the validity of the guarantee and the junior subordinated
debentures, will be passed upon for us and Capital Trust by Blackwell Sanders
Peper Martin LLP, Kansas City, Missouri, counsel to us and Capital Trust.
Certain legal matters will be passed upon for the Underwriters by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
115
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act and file reports, proxy statements and other information with the SEC.
These reports, proxy statements and other information may be inspected and
copied at the public reference facilities maintained by the SEC at: Room 1024,
450 Fifth Street, N.W., Washington, DC 20549 and at the SEC's regional offices
at: 7 World Trade Center, 13th Floor, Suite 1300, New York, NY 10048 and Suite
1400, Citicorp Center, 500 West Madison Street, Chicago, IL 60661.
Copies of these material may also be obtained by mail from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates. If available, this information may also be accessed through
the SEC EDGAR system on the SEC home page on the Internet (http://www.sec.gov).
Our common stock is traded on the Nasdaq National Market. Our reports, proxy
statements and other information also may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, DC 20006.
We have filed with the SEC a registration statement on Form S-1 pursuant to
the Securities Act with respect to the securities offered by this prospectus.
This prospectus does not contain all of the information in the registration
statement and the exhibits and schedules relating thereto as permitted by the
rules and regulations of the SEC. For further information pertaining to us and
the securities offered by this prospectus, we refer you to the registration
statement and the exhibits thereto. Items of information omitted from this
prospectus, but contained in the registration statement, may be obtained at the
prescribed rates or inspected without charge at the offices of the SEC set
forth above. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance, reference is made
to the copy of such document filed as an exhibit to the registration statement
or otherwise filed with the SEC. Each such statement is qualified in its
entirety by such reference.
No separate financial statements of Capital Trust have been included in this
prospectus. We do not consider that these financial statements would be
material to you because:
. all of the voting securities of Capital Trust will be owned by us, a
reporting company under the Securities Exchange Act;
. Capital Trust has no independent operations but exists for the sole
purpose of issuing securities representing undivided beneficial interest
in its assets and investing the proceeds in the junior subordinated
debentures issued by us; and
. our obligations described in this prospectus to provide certain
indemnities in respect of, and be responsible for certain costs,
expenses, debts and liabilities of, the Capital Trust under the
indenture and pursuant to the trust agreement, the guarantee, and the
junior subordinated debentures, taken together, constitute, in our
belief, a full and unconditional guarantee of payments due on the
preferred securities. See "Description of the Junior Subordinated
Debentures" and "Description of the Guarantee."
Capital Trust is not currently subject to the information reporting
requirements of the Securities Exchange Act. Capital Trust will become subject
to such requirements upon the effectiveness of the registration statement,
although it intends to seek and expects to receive an exemption therefrom.
116
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Matrix Bancorp, Inc.
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheet--March 31, 1999 (unaudited).......... F-2
Condensed Consolidated Statements of Income--for the quarters ended March
31, 1999,
and 1998 (unaudited)..................................................... F-3
Condensed Consolidated Statements of Changes in Shareholders' Equity--for
the quarters ended March 31, 1999 and 1998 (unaudited)................... F-4
Condensed Consolidated Statements of Cash Flows--for the quarters ended
March 31, 1999 and 1998 (unaudited)...................................... F-5
Notes to Unaudited Condensed Consolidated Financial Statements............ F-6
Report of Independent Auditors............................................ F-10
Consolidated Balance Sheets--December 31, 1998 and 1997................... F-11
Consolidated Statements of Income--for the years ended December 31, 1998,
1997
and 1996................................................................. F-12
Consolidated Statements of Shareholders' Equity--for the years ended
December 31, 1998, 1997 and 1996......................................... F-13
Consolidated Statements of Cash Flows--for the years ended December 31,
1998, 1997
and 1996................................................................. F-14
Notes to Consolidated Financial Statements--December 31, 1998............. F-15
</TABLE>
F-1
<PAGE>
MATRIX BANCORP, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Assets
Cash................................................................. $ 19,502
Interest-earning deposits............................................ 5,406
Loans held for sale, net............................................. 700,526
Loans held for investment, net....................................... 102,476
Mortgage servicing rights, net....................................... 67,437
Other receivables.................................................... 43,947
Federal Home Loan Bank of Dallas stock............................... 15,855
Premises and equipment, net.......................................... 10,714
Other assets......................................................... 30,656
--------
Total assets....................................................... $996,519
========
Liabilities and shareholders' equity
Liabilities:
Deposits........................................................... $543,954
Custodial escrow balances.......................................... 98,266
Drafts payable..................................................... 2,080
Payable for purchase of mortgage servicing rights.................. 9,469
Federal Home Loan Bank of Dallas borrowings........................ 113,000
Borrowed money..................................................... 169,849
Other liabilities.................................................. 6,298
Income taxes payable............................................... 1,734
--------
Total liabilities................................................ 944,650
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.................................. 1
Additional paid in capital......................................... 22,426
Retained earnings.................................................. 29,442
--------
Total shareholders' equity....................................... 51,869
--------
Total liabilities and shareholders' equity....................... $996,519
========
</TABLE>
See accompanying notes.
F-2
<PAGE>
MATRIX BANCORP, INC.
Condensed Consolidated Statements of Income
(Dollars in thousands except per share information)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Interest income
Loans.................................................... $ 11,301 $ 17,238
Interest-earning deposits................................ 285 367
--------- ---------
Total interest income.................................... 11,586 17,605
Interest expense
Deposits................................................. 2,864 5,195
Borrowings............................................... 4,289 5,182
--------- ---------
Total interest expense................................... 7,153 10,377
--------- ---------
Net interest income before provision for loan and
valuation losses........................................ 4,433 7,228
Provision for loan and valuation losses.................. 450 675
--------- ---------
Net interest income.................................... 3,983 6,553
Noninterest income
Loan administration...................................... 3,743 5,293
Brokerage................................................ 1,672 1,672
Trust services........................................... 1,001 1,279
Gain on sale of loans.................................... 1,062 532
Gain on sale of mortgage servicing rights................ 837 --
Loan origination......................................... 1,482 1,954
Other.................................................... 1,122 3,476
--------- ---------
Total noninterest income............................... 10,919 14,206
Noninterest expense
Compensation and employee benefits....................... 5,127 6,869
Amortization of mortgage servicing rights................ 1,594 4,726
Occupancy and equipment.................................. 666 838
Postage and communication................................ 542 669
Professional fees........................................ 249 300
Data processing.......................................... 346 326
Other general and administrative......................... 2,854 3,131
--------- ---------
Total noninterest expense.............................. 11,378 16,859
--------- ---------
Income before income taxes............................. 3,524 3,900
Provision for income taxes............................... 1,339 1,395
--------- ---------
Net income............................................. $ 2,185 $ 2,505
========= =========
Net income per share....................................... $ .33 $ .37
========= =========
Net income per share assuming dilution..................... $ .32 $ .37
========= =========
Weighted average shares.................................... 6,704,026 6,724,693
========= =========
Weighted average shares assuming dilution.................. 6,841,679 6,848,571
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MATRIX BANCORP, INC.
Condensed Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
----------------
Additional
Paid In Retained
Shares Amount Capital Earnings Total
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Quarter ended March 31, 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
========= === ======= ======= =======
Quarter ended March 31, 1999
Balance at December 31, 1998...... 6,723,911 $ 1 $22,416 $26,937 $49,354
Exercise of stock options......... 1,000 -- 10 -- 10
Net income........................ -- -- -- 2,505 2,505
--------- --- ------- ------- -------
Balance at March 31, 1999......... 6,724,911 $ 1 $22,426 $29,442 $51,869
========= === ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
MATRIX BANCORP, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------
1998 1999
--------- --------
<S> <C> <C>
Operating activities
Net income............................................... $ 2,185 $ 2,505
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization.......................... 421 1,351
Provision for loan and valuation losses................ 450 675
Amortization of mortgage servicing rights.............. 1,594 4,726
Gain on sale of loans.................................. (1,062) (532)
Gain on sale of mortgage servicing rights, net......... (837) --
Loans originated for sale, net of loans sold........... (27,582) 29,181
Loans purchased for sale............................... (110,674) (25,016)
Proceeds from sale of loans purchased for sale......... 64,580 40,041
Originated mortgage servicing rights, net.............. (651) (465)
Increase in other receivables and other assets......... (86) (21,643)
Decrease in other liabilities and income taxes
payable............................................... (689) (3,599)
--------- --------
Net cash provided (used) by operating activities......... (72,351) 27,224
Investing activities
Loans originated and purchased for investment............ (13,806) (20,202)
Principal repayments on loans............................ 29,339 17,267
Purchase of Federal Home Loan Bank of Dallas stock....... (449) (212)
Purchases of premises and equipment...................... (376) (880)
Acquisition of mortgage servicing rights................. (10,170) (16,185)
Proceeds from sale of mortgage servicing rights.......... 2,256 161
--------- --------
Net cash provided (used) by investing activities......... 6,794 (20,051)
Financing activities
Net increase in deposits................................. 91,321 53,438
Net increase in custodial escrow balances................ 21,927 1,442
Decrease in revolving lines and repurchase agreements,
net..................................................... (44,587) (77,550)
Repayments of notes payable.............................. (11,436) (12,965)
Proceeds from notes payable.............................. 23,822 26,619
Repayment of financing arrangements...................... (45) (44)
Proceeds from issuance of common stock related to
employee stock option plan.............................. 2 10
--------- --------
Net cash provided (used) by financing activities......... 81,004 (9,050)
--------- --------
Increase (decrease) in cash and cash equivalents......... 15,447 (1,877)
Cash and cash equivalents at beginning of period......... 9,633 26,785
--------- --------
Cash and cash equivalents at end of period............... $ 25,080 $ 24,908
========= ========
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing rights........ $ 14,374 $ 9,469
========= ========
Drafts payable........................................... $ 11,063 $ 2,080
========= ========
Supplemental disclosure of cash flow information
Cash paid for interest expense........................... $ 7,703 $ 5,014
========= ========
Cash paid for income taxes............................... $ -- $ --
========= ========
</TABLE>
See accompanying notes.
F-5
<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 for the
year ended December 31, 1998 and footnotes thereto included elsewhere in this
prospectus.
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, 2001. 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,
-----------------------
1998 1999
----------- -----------
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Numerator:
Net income available to common shareholders...... $ 2,185 $ 2,505
=========== ===========
Denominator:
Weighted average shares outstanding.............. 6,704,026 6,724,693
Effect of dilutive securities:
Common stock options........................... 118,034 109,424
Common stock warrants.......................... 19,619 14,454
----------- -----------
Dilutive potential common shares................. 137,653 123,878
----------- -----------
Denominator for net income per share assuming
dilution........................................ 6,841,679 6,848,571
=========== ===========
</TABLE>
F-6
<PAGE>
MATRIX BANCORP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
March 31, 1999
3. Mortgage Servicing Rights
The activity in the Mortgage Servicing Rights ("MSRs") is summarized as
follows:
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1999
--------------
(unaudited)
(In thousands)
<S> <C>
Balance at beginning of period................................ $58,147
Purchases..................................................... 13,551
Originated, net............................................... 465
Amortization.................................................. (4,726)
Sales......................................................... --
-------
Balance at end of period...................................... $67,437
=======
</TABLE>
Accumulated amortization of MSRs aggregated approximately $31.6 million at
March 31, 1999. The Company's servicing portfolio (excluding subserviced loans)
was comprised of the following:
<TABLE>
<CAPTION>
March 31, 1999
------------------------
Principal
Number Balance
of Loans Outstanding
--------- -------------
(unaudited)
(Dollars in thousands)
<S> <C> <C>
FHLMC.............................................. 19,299 $ 1,227,490
Fannie Mae......................................... 40,500 2,539,418
GNMA............................................... 15,970 752,562
Other VA, FHA and conventional loans............... 17,516 1,677,274
--------- -------------
93,285 $ 6,196,744
========= =============
</TABLE>
The Company's custodial escrow balances shown in the accompanying condensed
consolidated balance sheet at March 31, 1999 pertain to escrowed payments of
taxes and insurance and the float on principal and interest payments on loans
serviced by the Company.
F-7
<PAGE>
MATRIX BANCORP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
March 31, 1999
4. Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------
Weighted
Average
Amount Percent Rate
-------- ------- --------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Passbook accounts.................................. $ 2,830 0.52% 3.42%
NOW accounts....................................... 46,652 8.58 1.41
Money market accounts.............................. 234,641 43.13 3.28
-------- ------ ----
284,123 52.23 3.00
Certificate accounts............................... 259,831 47.77 5.22
-------- ------ ----
$543,954 100.00% 3.98%
======== ====== ====
</TABLE>
At March 31, 1999 brokered deposits accounted for approximately $129.0
million of the total certificate accounts shown above. Additionally, included
in money market accounts is approximately $107.1 million at March 31, 1999,
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 the total
basis of the land development was $4.2 million, and is classified in other
assets in the accompanying condensed consolidated balance sheets.
F-8
<PAGE>
MATRIX BANCORP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
March 31, 1999
6. Segment Information
<TABLE>
<CAPTION>
Servicing
Traditional Mortgage Brokerage and
Banking Banking Consulting
----------- -------- -------------
(In thousands)
(unaudited)
<S> <C> <C> <C>
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
Quarter ended March 31, 1999:
Revenues from external customers:
Interest income........................... $15,571 $ 1,274 $ --
Noninterest income........................ 2,026 6,696 3,004
Intersegment revenues....................... 135 339 250
Segment profit (loss)....................... 7,040 (1,833) 1,178
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1999
-------------- --------------
(In thousands)
(unaudited)
<S> <C> <C>
Profit:
Total profit for reportable segments............ $5,371 $ 6,385
Other profit (loss)............................. (1,763) (2,289)
Adjustment of intersegment profit (loss) in
consolidation.................................. (84) (196)
------ -------
Income before income taxes...................... $3,524 $ 3,900
====== =======
</TABLE>
F-9
<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, 1997 and 1998, 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, 1997 and 1998, 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.
Phoenix, Arizona
March 18, 1999
/s/ Ernst & Young LLP
F-10
<PAGE>
MATRIX BANCORP, INC.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ----------
<S> <C> <C>
ASSETS
Cash....................................................... $ 3,296 $ 18,665
Interest-earning deposits.................................. 6,337 8,120
Loans held for sale, net................................... 456,978 754,226
Loans held for investment, net............................. 54,394 94,222
Mortgage servicing rights, net............................. 36,440 58,147
Other receivables.......................................... 22,695 40,018
Federal Home Loan Bank of Dallas stock..................... 8,700 15,643
Premises and equipment, net................................ 9,012 10,328
Other assets............................................... 8,893 13,271
-------- ----------
Total assets............................................. $606,745 $1,012,640
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $224,982 $ 490,516
Custodial escrow balances................................. 53,760 96,824
Drafts payable............................................ 7,506 5,423
Payable for purchase of mortgage servicing rights......... 8,660 12,103
Federal Home Loan Bank of Dallas borrowings............... 171,943 168,000
Borrowed money............................................ 89,909 178,789
Other liabilities......................................... 9,192 11,283
Income taxes payable...................................... 183 348
-------- ----------
Total liabilities........................................ 566,135 963,286
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 6,723,911 and 6,703,880
shares at December 31, 1998 and 1997, respectively....... 1 1
Additional paid in capital................................ 22,185 22,416
Retained earnings......................................... 18,424 26,937
-------- ----------
Total shareholders' equity............................... 40,610 49,354
-------- ----------
Total liabilities and shareholders' equity............... $606,745 $1,012,640
======== ==========
</TABLE>
See accompanying notes.
F-11
<PAGE>
MATRIX BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share information)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Interest income
Loans and mortgage-backed securities............ $ 16,084 $ 31,096 $ 59,452
Interest-earning deposits....................... 465 1,053 1,242
--------- --------- ---------
Total interest income........................... 16,549 32,149 60,694
Interest expense
Savings and time deposits....................... 3,292 5,098 11,789
Demand and money market deposits................ 468 3,278 4,432
FHLB borrowings................................. 2,039 3,435 8,554
Borrowed money.................................. 4,691 6,450 11,729
--------- --------- ---------
Total interest expense.......................... 10,490 18,261 36,504
--------- --------- ---------
Net interest income before provision for loan
and valuation losses........................... 6,059 13,888 24,190
Provision for loan and valuation losses......... 143 874 4,607
--------- --------- ---------
Net interest income............................. 5,916 13,014 19,583
Noninterest income
Loan administration............................. 8,827 16,007 17,411
Brokerage....................................... 4,364 3,921 7,054
Trust services.................................. 3,061 3,561 4,169
Gain on sale of loans and mortgage-backed
securities..................................... 3,121 2,441 3,108
Gain on sale of mortgage servicing rights....... 3,232 3,365 803
Loan origination................................ 1,809 4,694 5,677
Other........................................... 2,173 4,040 8,523
--------- --------- ---------
Total noninterest income........................ 26,587 38,029 46,745
Noninterest expense
Compensation and employee benefits.............. 12,722 14,724 22,194
Amortization of mortgage servicing rights....... 2,432 6,521 10,563
Occupancy and equipment......................... 1,776 2,132 3,059
Postage and communication....................... 1,214 1,522 2,393
Professional fees............................... 666 976 1,439
Data processing................................. 642 843 1,344
Losses related to recourse sales................ 787 1,237 --
Federal Deposit Insurance Corporation premiums.. 635 107 211
Other general and administrative................ 5,781 9,684 11,736
--------- --------- ---------
Total noninterest expense....................... 26,655 37,746 52,939
--------- --------- ---------
Income before income taxes...................... 5,848 13,297 13,389
Provision for income taxes...................... 2,278 5,159 4,876
--------- --------- ---------
Net income...................................... $ 3,570 $ 8,138 $ 8,513
========= ========= =========
Net income per common share..................... $ .69 $ 1.22 $ 1.27
========= ========= =========
Net income per common share--assuming dilution.. $ .68 $ 1.20 $ 1.24
========= ========= =========
Weighted average common shares.................. 5,034,788 6,681,269 6,704,991
========= ========= =========
Weighted average common shares--assuming
dilution....................................... 5,077,321 6,781,808 6,881,890
========= ========= =========
</TABLE>
See accompanying notes.
F-12
<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-13
<PAGE>
MATRIX BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income...................................... $ 3,570 $ 8,138 $ 8,513
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization.................. 1,106 1,382 2,519
Provision for loan and valuation losses........ 143 874 4,607
Amortization of mortgage servicing rights...... 2,432 6,521 10,563
Accretion of premium on deposits............... (7) -- --
Deferred income taxes.......................... (54) (2) 48
Gain on sale of loans and mortgage-backed
securities.................................... (3,121) (2,441) (3,108)
Gain on sale of mortgage servicing rights...... (3,232) (3,365) (803)
Losses related to recourse sales............... 787 1,237 --
Loans originated for sale, net of loans sold... 8,099 (18,800) (76,544)
Loans purchased for sale....................... (159,015) (493,693) (678,150)
Proceeds from sale of loans purchased for
sale.......................................... 57,147 198,010 319,430
Gain on sale of premises and equipment......... (78) -- --
Originated mortgage servicing rights, net...... (441) (818) 24
Increase in other receivables and other
assets........................................ (796) (13,279) (23,743)
Increase (decrease) in other liabilities and
income taxes payable.......................... (2,320) 2,832 2,256
-------- -------- --------
Net cash used by operating activities........... (95,780) (313,404) (434,388)
Investing activities
Loans originated and purchased for investment... (15,048) (56,793) (82,547)
Principal repayments on loans................... 22,982 73,908 176,520
Purchase of Federal Home Loan Bank of Dallas
stock.......................................... (917) (5,829) (6,943)
Purchases of premises and equipment............. (2,695) (2,295) (3,028)
Purchase of land under development.............. (1,431) -- --
Purchase of revenue anticipation warrants....... (818) -- --
Purchase of residential homes................... (1,003) -- --
Acquisition of mortgage servicing rights........ (10,410) (36,535) (31,388)
Proceeds from sale of mortgage servicing
rights......................................... 8,410 19,817 5,160
Proceeds from sale of available for sale
securities..................................... 21,548 -- --
-------- -------- --------
Net cash provided (used) by investing
activities..................................... 20,618 (7,727) 57,774
Financing activities
Net increase in deposits........................ 41,309 134,803 265,534
Net increase in custodial escrow balances....... 10,870 15,879 43,064
Increase in revolving lines and repurchase
agreements, net................................ 17,151 137,527 64,564
Repayments of notes payable..................... (13,923) (34,347) (64,539)
Proceeds from notes payable..................... 6,924 45,148 85,078
Proceeds from senior notes, net................. -- 19,100 --
Repayment of financing arrangements............. (564) (157) (166)
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.... 18,191 202 231
-------- -------- --------
Net cash provided by financing activities....... 79,781 318,155 393,766
-------- -------- --------
(Decrease) increase in cash and cash
equivalents.................................... 4,619 (2,976) 17,152
Cash and cash equivalents at beginning of the
year........................................... 7,990 12,609 9,633
-------- -------- --------
Cash and cash equivalents at end of the year.... $ 12,609 $ 9,633 $ 26,785
======== ======== ========
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing
rights......................................... $ 8,044 $ 8,660 $ 12,103
======== ======== ========
Drafts payable.................................. $ 5,961 $ 7,506 $ 5,423
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest expense.................. $ 10,598 $ 17,379 $ 34,547
======== ======== ========
Cash paid for income taxes...................... $ 2,298 $ 6,019 $ 4,664
======== ======== ========
</TABLE>
See accompanying notes.
F-14
<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
F-15
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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
------------------
Company Vintage
--------- --------
(In thousands)
<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
F-16
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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 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.
F-17
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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.
F-18
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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
F-19
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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 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.
F-20
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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
------------------------------
1996 1997 1998
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Numerator:
Net income................................ $ 3,570 $ 8,138 $ 8,513
Less: preferred stock dividends from
pooled company........................... (112) -- --
--------- --------- ---------
Net income available to common
shareholders............................. $ 3,458 $ 8,138 $ 8,513
========= ========= =========
Denominator:
Weighted average shares outstanding....... 5,034,788 6,681,269 6,704,991
Effect of dilutive securities:
Common stock options...................... 42,533 89,333 150,478
Common stock warrants..................... -- 11,206 26,421
--------- --------- ---------
Dilutive potential common shares............ 42,533 100,539 176,899
--------- --------- ---------
Denominator for net income per share,
assuming dilution.......................... 5,077,321 6,781,808 6,881,890
========= ========= =========
</TABLE>
4. Loans Receivable
Loans Held for Investment
Loans held for investment consist of the following:
<TABLE>
<CAPTION>
December 31
----------------
1997 1998
------- --------
(In thousands)
<S> <C> <C>
Residential loans.......................................... $ 7,523 $ 5,563
Multi-family, commercial real estate, and commercial....... 32,189 56,130
Construction loans......................................... 14,878 43,672
Consumer loans and other................................... 10,942 9,997
------- --------
65,532 115,362
Less:
Loans in process......................................... 9,784 18,941
Purchase discounts, net.................................. 236 212
Unearned fees on loans (excluding consumer).............. 220 524
Unearned fees on consumer loans.......................... 209 327
Allowance for loan losses................................ 689 1,136
------- --------
11,138 21,140
------- --------
$54,394 $ 94,222
======= ========
</TABLE>
F-21
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1996 1997 1998
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 227 $ 270 $ 689
Provision for loan losses.......................... 34 554 1,178
Charge-offs........................................ (6) (166) (789)
Recoveries......................................... 15 31 58
------ ------ --------
Balance at end of period........................... $ 270 $ 689 $ 1,136
====== ====== ========
</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.
Loans Held for Sale
Loans held for sale consist of the following as of:
<TABLE>
<CAPTION>
December 31
-----------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Residential loans......................................... $456,552 $730,247
Commercial loans, leases and other........................ 2,728 30,268
-------- --------
459,280 760,515
Less:
Purchase discounts, net................................. 1,235 3,715
Valuation allowance..................................... 1,067 2,574
-------- --------
2,302 6,289
-------- --------
$456,978 $754,226
======== ========
</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.
F-22
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
Activity in the valuation allowance is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1996 1997 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period.................. $ 716 $ 769 $ 1,067
Provision for valuation allowance............... 109 320 3,429
Charge-offs..................................... (64) (22) (1,922)
Recoveries...................................... 8 -- --
------ -------- --------
Balance at end of period........................ $ 769 $ 1,067 $ 2,574
====== ======== ========
</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.
5. Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
---------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Land....................................................... $ 684 $ 684
Buildings.................................................. 4,348 4,486
Leasehold improvements..................................... 460 1,116
Office furniture and equipment............................. 5,485 7,697
Other equipment............................................ 1,268 1,297
------- -------
12,245 15,280
Less: accumulated depreciation and amortization............ 3,233 4,952
------- -------
$ 9,012 $10,328
======= =======
</TABLE>
F-23
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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
-------------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year..................... $13,817 $23,680 $36,440
Purchases........................................ 17,142 37,151 34,831
Originated, net of OMSRs sold.................... 441 818 (24)
Amortization..................................... (2,432) (6,521) (10,563)
Transfer of MSRs to FHLMC........................ (110) -- --
Sales............................................ (5,178) (18,688) (2,537)
------- ------- -------
Balance at end of year........................... $23,680 $36,440 $58,147
======= ======= =======
</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
-----------------------------------------
1997 1998
-------------------- --------------------
Principal Principal
Number Balance Number Balance
of Loans Outstanding of Loans Outstanding
-------- ----------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLMC............................... 13,134 $ 715,513 19,227 $1,221,074
FNMA................................ 18,000 1,168,199 23,198 1,419,345
GNMA................................ 15,845 615,234 17,552 838,081
Other VA, FHA, and conventional
loans.............................. 14,538 849,116 18,369 1,879,229
------ ---------- ------ ----------
61,517 $3,348,062 78,346 $5,357,729
====== ========== ====== ==========
</TABLE>
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
F-24
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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
-----------------------------------------------------
1997 1998
-------------------------- --------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
-------- ------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts........... $ 2,851 1.27% 3.95% $ 2,830 0.58% 3.58%
NOW accounts................ 26,382 11.73 1.62 42,178 8.60 1.63
Money market accounts....... 99,899 44.40 2.96 170,957 34.85 3.13
-------- ------ ---- -------- ------ ----
129,132 57.40 2.70 215,965 44.03 2.84
Certificate accounts........ 95,850 42.60 5.94 274,551 55.97 5.52
-------- ------ ---- -------- ------ ----
$224,982 100.00% 4.09% $490,516 100.00% 4.37%
======== ====== ==== ======== ====== ====
</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.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1996 1997 1998
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Passbook accounts..................................... $ 82 $ 113 $ 102
NOW accounts.......................................... 63 795 522
Money market.......................................... 405 2,483 3,910
Certificates of deposit............................... 3,210 4,985 11,687
------- ------- --------
$ 3,760 $ 8,376 $ 16,221
======= ======= ========
</TABLE>
F-25
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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
---------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
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......................................................... $45,962 $72,157
$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............................................ 2,376 4,479
$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......................................... 48,338 86,936
Term Notes Payable
$45,000,000 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................... 12,348 26,974
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..................................................... 1,786 7,893
Notes payable to banks, secured by a deeds of trust on real
estate, interest at prime plus 1.0 percent................... 1,740 1,715
Other......................................................... 1,465 1,296
------- -------
Total term notes.............................................. 40,249 60,788
</TABLE>
F-26
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
December 31
----------------
1997 1998
------- --------
(In thousands)
<S> <C> <C>
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................ 522 356
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.................................................. 1,322 31,065
------- --------
Total borrowed money......................................... $89,909 $178,789
======= ========
</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 maintain the
F-27
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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 million 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
F-28
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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
-------------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current
Federal.......................................... $ 1,871 $ 4,108 $ 3,837
State............................................ 461 1,053 991
Deferred
Federal.......................................... (42) (2) 42
State............................................ (12) -- 6
------- ------- -------
$ 2,278 $ 5,159 $ 4,876
======= ======= =======
</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
-------------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Expected income tax provision..................... $ 1,988 $ 4,521 $ 4,552
Effect of federal tax brackets.................... -- -- 13
State income taxes................................ 296 694 660
Other............................................. (6) (56) (349)
------- ------- -------
$ 2,278 $ 5,159 $ 4,876
======= ======= =======
</TABLE>
F-29
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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
----------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for losses..................................... $ 475 $ 1,383
Discounts and premiums................................... 106 144
Amortization of servicing rights......................... 156 --
Deferred fees............................................ 328 718
Delinquent interest...................................... 52 215
Other.................................................... 6 30
------- -------
Total deferred tax assets.................................. 1,123 2,490
Deferred tax liabilities:
Gain on sale of loans.................................... (732) (931)
Amortization of servicing rights......................... -- (1,025)
Depreciation............................................. (335) (526)
------- -------
Total deferred tax liabilities............................. (1,067) (2,482)
------- -------
Net deferred tax asset..................................... $ 56 $ 8
======= =======
</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 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.
F-30
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------------- ----------------------------------------------------
Amount Ratio Amount Ratio
------- ----- --------------------------- ------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
As of December
31, 1998
Total Capital
(to Risk
Weighted
Assets)........ $54,148 11.7% (greater than or =) $36,938 (greater than or =) 8.0%
Core Capital
(to Adjusted
Tangible
Assets)........ 51,163 6.2% (greater than or =) $32,828 (greater than or =) 4.0%
Tangible Capital
(to Tangible
Assets)........ 51,163 6.2% (greater than or =) $12,310 (greater than or =) 1.5%
Tier I Capital
(to Risk
Weighted
Assets)........ 51,163 11.1% N/A
As of December
31, 1997
Total Capital
(to Risk
Weighted
Assets)........ 29,714 10.8% (greater than or =) $21,969 (greater than or =) 8.0%
Core Capital
(to Adjusted
Tangible
Assets)........ 27,958 5.7% (greater than or =) $19,498 (greater than or =) 4.0%
Tangible Capital
(to Tangible
Assets)........ 27,958 5.7% (greater than or =) $ 7,312 (greater than or =) 1.5%
Tier I Capital
(to Risk
Weighted
Assets)........ 27,958 10.2% N/A
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------------------------------------------
Amount Ratio
--------------------------- -------------------------
<S> <C> <C>
As of December
31, 1998
Total Capital
(to Risk
Weighted
Assets)........ (greater than or =) $46,173 (greater than or =) 10.0%
Core Capital
(to Adjusted
Tangible
Assets)........ (greater than or =) $41,035 (greater than or =) 5.0%
Tangible Capital
(to Tangible
Assets)........ N/A
Tier I Capital
(to Risk
Weighted
Assets)........ (greater than or =) $27,704 (greater than or =) 6.0%
As of December
31, 1997
Total Capital
(to Risk
Weighted
Assets)........ (greater than or =) $27,462 (greater than or =) 10.0%
Core Capital
(to Adjusted
Tangible
Assets)........ (greater than or =) $24,372 (greater than or =) 5.0%
Tangible Capital
(to Tangible
Assets)........ N/A
Tier I Capital
(to Risk
Weighted
Assets)........ (greater than or =) $16,477 (greater than or =) 6.0%
</TABLE>
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-31
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
F-32
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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
-----------------------------
1996 1997 1998
--------- --------- ---------
(Dollars in thousands except
per share data)
<S> <C> <C> <C>
Pro forma net income............................. $ 3,534 $ 7,960 $ 8,256
Pro forma earnings per share:
Basic.......................................... 0.67 1.19 1.23
Diluted........................................ 0.67 1.17 1.20
</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
----------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- -----------------------
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................ 79,500 $5.13 209,100 $ 8.15 330,150 $10.55
Granted................. 129,600 10.00 149,500 14.12 63,000 12.96
Exercised............... -- -- (2,100) 10.00 (1,725) 12.25
Forfeited............... -- -- (26,350) 11.93 (3,725) 14.00
------- ------- -------
Outstanding, end of
year................... 209,100 8.15 330,150 10.55 387,700 10.90
======= ======= =======
Exercisable at end of
year................... 87,000 5.55 117,700 6.75 167,350 8.49
Weighted average fair
value of options
granted during the
year................... $ 4.06 $ 6.67 $ 6.03
</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 Average Weighted Average Weighted Average
Range of Exercise Number of Options Exercise Price Remaining Number of 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>
F-33
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999.......................................................... $ 770
2000.......................................................... 692
2001.......................................................... 599
2002.......................................................... 384
2003.......................................................... 22
------
$2,467
======
</TABLE>
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.
F-34
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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 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 positions:
<TABLE>
<CAPTION>
Open Positions
Expiration (No. of Notional Fair Value by
Date Contracts) Amount 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.
F-35
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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 in 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 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.
F-36
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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
-----------------------------------
1997 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash................................. $ 3,296 $ 3,296 $ 18,665 $ 18,665
Interest-earning deposits............ 6,337 6,337 8,120 8,120
Loans held for sale, net............. 456,978 459,231 754,226 758,279
Loans held for investment, net....... 54,394 54,394 94,222 94,476
Federal Home Loan Bank of Dallas
stock............................... 8,700 8,700 15,643 15,643
Financial liabilities:
Deposits............................. 224,982 225,780 490,516 492,003
Custodial escrow balances............ 53,760 53,760 96,824 96,824
Drafts payable....................... 7,506 7,506 5,423 5,423
Payable for purchase of MSRs......... 8,660 8,660 12,103 12,103
Federal Home Loan Bank of Dallas
borrowings.......................... 171,943 171,943 168,000 171,544
Borrowed money....................... 89,909 89,909 178,789 178,789
</TABLE>
F-37
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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).
16. Parent Company Condensed Financial Information
Condensed financial information of Matrix Bancorp, Inc. (Parent Company) is
as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Condensed Balance Sheets
Assets:
Cash.............................................. $ 45 $ 1,459 $ 158
Other receivables................................. 872 1,040 105
Premises and equipment, net....................... 1,405 1,481 2,393
Other assets...................................... 507 1,840 1,601
Investment in and advances to subsidiaries........ 36,199 62,042 88,791
------- ------- -------
Total assets........................................ $39,028 $67,862 $93,048
======= ======= =======
Liabilities and shareholders' equity:
Borrowed money (a)................................ $ 6,372 $26,002 $42,275
Other liabilities................................. 386 1,250 1,419
------- ------- -------
Total liabilities................................... 6,758 27,252 43,694
Shareholders' equity:
Common stock...................................... 1 1 1
Additional paid in capital........................ 21,983 22,185 22,416
Retained earnings................................. 10,286 18,424 26,937
------- ------- -------
Total shareholders' equity.......................... 32,270 40,610 49,354
------- ------- -------
Total liabilities and shareholders' equity.......... $39,028 $67,862 $93,048
======= ======= =======
</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.
F-38
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
December 31
----------------------
1996 1997 1998
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Revolving line of credit............................. $ -- $ -- $10,300
Senior subordinated notes............................ 2,910 2,910 2,910
Bank stock loan...................................... 2,003 1,786 7,893
Note payable to a bank secured by real estate........ 938 895 870
Notes payable secured by MSRs........................ 521 411 302
Senior notes......................................... -- 20,000 20,000
------ ------- -------
$6,372 $26,002 $42,275
====== ======= =======
</TABLE>
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.......................................................... $ 2,922
2000.......................................................... 2,052
2001.......................................................... 6,275
2002.......................................................... 726
2003.......................................................... --
Thereafter.................................................... 20,000
-------
$31,975
=======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Condensed Statements of Income
Income:
Interest income on loans...................... $ 142 $ 118 $ 17
Other......................................... 130 352 463
------- ------- -------
Total income.................................... 272 470 480
Expenses:
Compensation and employee benefits............ 1,344 1,700 2,412
Occupancy and equipment....................... 299 333 600
Interest on borrowed money.................... 805 1,593 3,601
Professional fees............................. 138 279 295
Other general and administrative (b).......... 329 1,353 1,416
------- ------- -------
Total expenses.................................. 2,914 5,258 8,324
------- ------- -------
Loss before income taxes and equity income of
subsidiaries................................... (2,642) (4,788) (7,844)
Income taxes (a)................................ -- -- --
------- ------- -------
Loss before equity income of subsidiaries....... (2,642) (4,788) (7,844)
Equity income of subsidiaries................... 6,212 12,926 16,357
------- ------- -------
Net income...................................... $ 3,570 $ 8,138 $ 8,513
======= ======= =======
</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
F-39
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income...................................... $ 3,570 $ 8,138 $ 8,513
Adjustments to reconcile net income to net cash
used by operating activities:
Equity income of subsidiaries.................. (6,212) (12,926) (16,357)
Dividend from subsidiaries..................... 1,843 2,916 4,534
Depreciation and amortization.................. 127 192 281
Increase (decrease) in other liabilities....... (78) 864 169
Decrease (increase) in other receivables and
other assets.................................. (133) (701) 945
-------- -------- --------
Net cash used by operating activities............ (883) (1,517) (1,915)
Investing activities:
Purchases of premises and equipment............. (88) (168) (964)
Investment in and advances to subsidiaries...... (16,630) (15,833) (14,926)
-------- -------- --------
Net cash used by investing activities............ (16,718) (16,001) (15,890)
Financing activities:
Repayments of notes payable and revolving line
of credit...................................... (438) (7,870) (14,774)
Proceeds from notes payable and revolving line
of credit...................................... 59 7,500 31,047
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.......... -- 202 231
Proceeds from the sale of common stock.......... 18,191 -- --
-------- -------- --------
Net cash provided by financing activities........ 17,635 18,932 16,504
-------- -------- --------
Increase (decrease) in cash...................... 34 1,414 (1,301)
Cash at beginning of year........................ 11 45 1,459
-------- -------- --------
Cash at end of year.............................. $ 45 $ 1,459 $ 158
======== ======== ========
</TABLE>
F-40
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
17. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997 1998
----------------------------------- -------------------------------------
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................ $ 3,863 $ 3,677 $ 3,216 $ 2,258 $ 4,326 $ 6,445 $ 4,973 $ 3,839
Noninterest income..... 10,605 9,069 9,412 8,943 13,154 11,326 11,346 10,919
Noninterest expense.... 10,760 9,057 9,603 8,326 15,273 13,802 12,630 11,234
-------- -------- -------- -------- ---------- -------- -------- --------
Income before income
taxes.................. 3,708 3,689 3,025 2,875 2,207 3,969 3,689 3,524
Income taxes............ 1,424 1,459 1,155 1,121 762 1,432 1,343 1,339
-------- -------- -------- -------- ---------- -------- -------- --------
Net income............. $ 2,284 $ 2,230 $ 1,870 $ 1,754 $ 1,445 $ 2,537 $ 2,346 $ 2,185
======== ======== ======== ======== ========== ======== ======== ========
Net Income per Share
Data
Basic.................. $ .34 $ .33 $ .28 $ .26 $ .22 $ .38 $ .35 $ .33
======== ======== ======== ======== ========== ======== ======== ========
Diluted................ $ .34 $ .33 $ .28 $ .26 $ .21 $ .37 $ .34 $ .32
======== ======== ======== ======== ========== ======== ======== ========
Balance Sheet
Total assets........... $606,745 $525,511 $502,563 $422,476 $1,012,640 $929,607 $834,657 $698,517
Total loans, net....... 511,372 426,007 394,537 319,489 848,448 753,464 696,358 573,586
Shareholders' equity... 40,610 38,124 35,894 34,024 49,354 47,699 45,158 42,797
</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
F-41
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
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.
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
----------- -------- ------------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
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-42
<PAGE>
MATRIX BANCORP, INC.
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Revenues for year ended December 31
Interest income for reportable segments....... $ 16,350 $ 31,977 $ 60,672
Noninterest income for reportable segments.... 21,941 32,316 39,613
Intersegment revenues for reportable
segments..................................... 617 1,476 1,359
Other revenues................................ 5,210 7,026 8,819
Elimination of intersegment revenues.......... (982) (2,617) (3,024)
-------- -------- ----------
Total consolidated revenues................. $ 43,136 $ 70,178 $ 107,439
======== ======== ==========
Profit or loss for year ended December 31
Total profit or loss for reportable segments.. $ 8,221 $ 17,952 $ 20,864
Other profit or loss.......................... (2,373) (4,531) (7,367)
Adjustment to intersegment profit (loss) in
consolidation................................ -- (124) (108)
-------- -------- ----------
Income before income tax.................... $ 5,848 $ 13,297 $ 13,389
======== ======== ==========
Assets as of December 31
Total assets for reportable segments.......... $269,861 $599,310 $1,006,474
Other assets.................................. 16,606 24,759 28,304
Elimination of intercompany receivables....... (11,908) (17,200) (21,905)
Other eliminations............................ -- (124) (233)
-------- -------- ----------
Total consolidated assets................... $274,559 $606,745 $1,012,640
======== ======== ==========
Other Significant Items for the year ended
December 31
Depreciation/amortization expense:
Segment totals................................ $ 3,122 $ 7,393 $ 12,077
Adjustments................................... 416 510 1,005
-------- -------- ----------
Consolidated totals......................... $ 3,538 $ 7,903 $ 13,082
======== ======== ==========
Interest expense:
Segment totals................................ $ 9,622 $ 16,594 $ 32,868
Adjustments................................... 868 1,667 3,636
-------- -------- ----------
Consolidated totals......................... $ 10,490 $ 18,261 $ 36,504
======== ======== ==========
</TABLE>
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[MATRIX BANCORP LOGO APPEARS HERE]
Tucker Anthony Cleary Gull
U.S. Bancorp Piper Jaffray
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1)
<TABLE>
<CAPTION>
Nature of Expense Amount
----------------- --------
<S> <C>
SEC filing fee(2)..................................................... $ 8,792
Nasdaq listing fee.................................................... 39,230
NASD filing fee....................................................... 3,663
Printing, postage and mailing......................................... 100,000
Legal fees and expenses............................................... 75,000
Accounting fees and expenses.......................................... 60,000
Trustees' fees and expenses........................................... 15,000
Transfer agent and Registrar fees..................................... 10,000
Blue Sky fees and expenses............................................ 10,000
Miscellaneous......................................................... 28,315
--------
Total............................................................... $350,000
========
</TABLE>
- --------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
(2) Based upon the sale of 1,265,000 Preferred Securities at $25.00 per
Preferred Security.
Item 14. Indemnification of Directors and Officers
The Amended and Restated Articles of Incorporation of the Company, together
with its Bylaws, provide that the Company shall indemnify officers and
directors, and may indemnify its other officers and agents, to the fullest
extent permitted by law. The laws of the State of Colorado permit, and in some
cases require, corporations to indemnify officers, directors, agents and
employees who are or who have been a party to or are threatened to be made a
party to litigation against judgments, fines, settlements and reasonable
expenses under certain circumstances.
The Company has also adopted provisions in its Amended and Restated Articles
of Incorporation that limit the liability of its directors to the fullest
extent permitted by the laws of the State of Colorado. Under the Company's
Articles of Incorporation, as permitted by the laws of the State of Colorado, a
director is not liable to the Company or its shareholders for damages for a
breach of fiduciary duty. Such limitation of liability does not affect
liability for (i) breach of the director's duty of loyalty, (ii) knowing
violation of the law, (iii) any transaction from which the director directly or
indirectly derived an improper personal benefit, or (iv) the payment of any
unlawful distribution. The Company has agreed to indemnify the Underwriters,
and the Underwriters have agreed to indemnify the Company against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Item 15. Recent Sales of Unregistered Securities
The following sets forth information as of June 25, 1999, regarding all
sales of unregistered securities of the Company during the past three years. In
connection with each of these transactions, the shares were sold to a limited
number of persons, such persons were provided access to all relevant
information concerning the issuer and/or represented to the issuer that they
were "sophisticated investors", and such persons represented to the issuer that
the shares were purchased for investment purposes only and not with a view
toward distribution. Each such issuance was made in reliance on Section 4(2) of
the Securities Act of 1933, as amended.
In October, 1996, the Company granted options exercisable for a total of
10,000 shares of Common Stock to the two non-employee directors of the Company,
5,000 shares of Common Stock to an advisory director of
II-1
<PAGE>
the Company and 114,600 shares of Common Stock to various employees of the
Company. All such options are exercisable at $10.00 per share, which was the
fair market value of the Common Stock on the date of grant of such options.
In October, 1996, the Company also 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 date of grant. The exercise price of the shares of Common
Stock underlying such warrants is $12.00 per share.
In February, 1997, the Company issued an aggregate of 779,592 shares of
Common Stock to the 43 former shareholders of The Vintage Group, Inc.
("Vintage"), in connection with the Company's acquisition of all of the
outstanding capital stock of Vintage.
During 1997, prior to the filing of a Registration Statement on Form S-8,
the Company issued options exercisable for an aggregate of (A) 55,000 shares of
Common Stock to three executive officers of the Company, with exercise prices
ranging from $10.375 to $14.25 per share; and (B) 69,500 shares of Common Stock
to non-executive employees of the Company, with exercise prices ranging from
$12.00 to $17.25 per share.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following is a complete list of exhibits filed as a part of this
Registration Statement:
<TABLE>
<C> <C> <S>
1.1 * Draft form of Underwriting Agreement by and between the Registrant
as issuer and Tucker Anthony Cleary Gull and U.S. Bancorp Piper
Jaffray, Inc. as Representatives of the several Underwriters
3.1 Y Amended and Restated Articles of Incorporation of the Registrant
(3.1)
3.2 + Bylaws, as amended, of the Registrant (3.2)
4.1 x 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)
4.7 * Draft form of Indenture of the Registrant relating to the Junior
Subordinated Debentures
4.8 * Draft form of Junior Subordinated Debentures
4.9 * Certificate of Trust of Matrix Bancorp Capital Trust I
4.10 * Draft form of Amended and Restated Trust Agreement of Matrix Bancorp
Capital Trust I
4.11 * Draft form of Preferred Security Certificate for Matrix Bancorp
Capital Trust I
4.12 * Draft form of Preferred Securities Guarantee Agreement of the
Company relating to the Preferred Securities
4.13 * Draft form of Agreement as to Expenses and Liabilities
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
5.1 * Opinion of Blackwell Sanders Peper Martin LLP as to legality of the
Junior Subordinated Debentures and the Guarantee to be issued by the
Company
5.2 * Opinion of Morris, Nichols, Arsht & Tunnell (Special Delaware
Counsel) as to legality of the Preferred Securities to be issued by
Matrix Bancorp Capital Trust I
8.1 * Opinion of Blackwell Sanders Peper Martin LLP as to certain federal
income tax matters
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
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 Y Coyote Creek Planned Unit Development Agreement, dated as of July 1,
1998, by and among Fort Lupton, L.L.C. and Matrix Funding Corp.
(10.12)
10.13 Y. Employment Agreement Addendum of Gary Lenzo, dated December 16, 1998
(10.13)
10.14 Y Promissory Note, dated as of December 31, 1998, from D. Mark
Spencer, as maker, to the Registrant, as payee (10.14)
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 Y Fourth Modification Agreement to the Loan Agreement, dated February
28, 1999, by and between the Registrant and Bank One, Arizona, N.A.
(10.20)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <C> <S>
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)
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 Y 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 (10.31)
10.32 Y 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 (10.32)
10.33 Y 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(10.33)
10.34 Y 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 (10.34)
10.35 Y Warehouse Note, dated as of February 22, 1999, from Matrix Financial
Services Corporation, as borrower, to Bank One, Texas, N.A., as
lender (10.35)
10.36 Y Warehouse Note, dated as of February 22, 1999, from Matrix Financial
Services Corporation, as borrower, to U.S. Bank National
Association, as lender (10.36)
10.37 Y Warehouse Note, dated as of February 22, 1999, from Matrix Financial
Services Corporation, as borrower, to Residential Funding
Corporation, as lender (10.37)
10.38 Y 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 (10.38)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <C> <S>
10.39 Y 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 (10.39)
10.40 Y 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 (10.40)
10.41 I 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 (10.41)
10.42 I 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 (10.42)
10.43 I 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 (10.43)
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 Conformed and Amended Credit Agreement, dated as of March 12, 1997
as amended through June 30, 1999, between Matrix Bancorp, Inc., as
borrower, and U.S. Bank National Association, as successor agent,
and certain lenders, as lenders.
10.51 // Term Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to U.S. Bank National Association, as
lender (10.2)
10.52 // Term Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to Bank One, Texas, N.A., as lender
(10.3)
10.53 // Revolving Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to U.S. Bank National Association, as
lender (10.4)
10.54 // Revolving Note, dated as of June 29, 1998, from Matrix Capital
Corporation, as borrower, to Bank One, Texas, N.A., as lender
(10.5)
10.55 I 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 (10.54)
10.56 I 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 (10.55)
10.57 ***. Agreement, dated October 1, 1997, with T. Allen McConnell (10.37)
10.58 +++ 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)
10.59 I Promissory Note, dated as of February 15, 1999, from Thomas P.
Cronin, as maker, to the Registrant, as payee (10.58)
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <C> <S>
10.60 /// Merger Termination Agreement between Matrix Capital Corporation,
Fidelity National Financial, Inc., and MCC Merger Sub, Inc., dated
August 28, 1998 (10.1)
10.61 I Promissory Note, dated as of September 30, 1998, from Thomas P.
Cronin, as maker, to the Registrant, as payee (10.60)
10.62 YY. Promissory Note, dated as of January 15, 1999, from Thomas M.
Piercy, as maker, to the Registrant, as payee (10.1)
12 * Statements re: Computations of Ratios
21 I Subsidiaries of the Registrant (21)
23.1 * Consent of Blackwell Sanders Peper Martin LLP (see Exhibits 5.1 and
8.1)
23.2 * Consent of Morris, Nichols, Arsht & Tunnell (Special Delaware
Counsel)(see Exhibit 5.2)
23.3 Consent of Ernst & Young LLP
24.1 Power of Attorney (set forth on the signature page to this
Registration Statement)
25.1 * Form T-1 Statement of Eligibility of State Street Bank and Trust
Company to act as Trustee under the Indenture
25.2 * Form T-1 Statement of Eligibility of State Street Bank and Trust
Company to act as Trustee under the Amended and Restated Trust
Agreement
25.3 * Form T-1 Statement of Eligibility of State Street Bank and Trust
Company to act as Trustee under the Preferred Securities Guaranty
Agreement
</TABLE>
- --------
* Previously filed.
+ 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.
x 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
I 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, 1998, filed by the Registrant with the Commission.
YY Incorporated by reference from the exhibit number shown in parenthesis from
the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1999, filed by the Registrant with the Commission.
II-6
<PAGE>
(b) Financial Statement Schedules
No financial statement schedules are applicable.
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on July 22, 1999.
Matrix Bancorp Capital Trust I
By s/ T. Allen McConnell
------------------------------------
T. Allen McConnell, Administrative
Trustee
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on July 22, 1999.
Matrix Bancorp, Inc
By: /s/ David W. Kloos
-----------------------------------
David W. Kloos, Senior Vice
President and
Chief Financial Officer
II- 9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief July 22, 1999
___________________________________________ Executive Officer and
Guy A. Gibson Director (Principal
executive officer)
* Chairman of the Board July 22, 1999
___________________________________________
Richard V. Schmitz
* Vice Chairman and July 22, 1999
___________________________________________ Director
D. Mark Spencer
* Director July 22, 1999
___________________________________________
Thomas M. Piercy
* Senior Vice President July 22, 1999
___________________________________________ and Chief Financial
David W. Kloos Officer and Director
(Principal financial
officer)
* Director July 22, 1999
___________________________________________
Stephen Skiba
* Director July 22, 1999
___________________________________________
David A. Frank
</TABLE>
* By: s/ T. Allen McConnell
T. Allen McConnell,
Attorney-in-Fact
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Administrative
* Trustee July 22, 1999
- ------------------------------------
Guy A. Gibson
Administrative
* Trustee July 22, 1999
- ------------------------------------
David W. Kloos
Administrative
* Trustee July 22, 1999
- ------------------------------------
T. Allen McConnell
* By: s/ T. Allen McConnell
T. Allen McConnell,
Attorney-in-Fact
II-11
<PAGE>
CONFORMED AND AMENDED
CREDIT AGREEMENT
between
MATRIX BANCORP, INC.
(formerly Matrix Capital Corporation),
as Borrower,
U.S. BANK NATIONAL ASSOCIATION,
as successor Agent,
and
CERTAIN LENDERS,
as Lenders
$8,000,000
As Increased to $20,000,000
March 12, 1997
As Amended Through June 30, 1999
Conformed to reflect changes effected by waiver, amendment, and assignment
dated August 18, 1997, and amendments dated September 23, 1997, March 12, 1998,
June 29, 1998, November 12, 1998, January 29, 1999, and June 30, 1999, with
changed provisions noted in bold italics. The date of the change is noted in
the margin.
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION 1 DEFINITIONS AND REFERENCES................................. 1
1.1 Definitions................................................ 1
1.2 Time References............................................ 8
1.3 Other References........................................... 9
1.4 Accounting Principles...................................... 9
SECTION 2 BORROWINGS................................................. 9
2.1 Term Loan.................................................. 9
2.2 Revolving Facility......................................... 9
2.3 Borrowing Procedure........................................ 9
2.4 Termination................................................10
SECTION 3 PAYMENT TERMS..............................................10
3.1 Notes and Payments.........................................10
3.2 Principal and Interest Payments............................11
3.3 Voluntary Prepayments......................................11
3.4 Mandatory Prepayments......................................12
3.5 Interest Rates.............................................12
3.6 Interest Recapture.........................................12
3.7 Interest Calculations......................................12
3.8 Maximum Rate...............................................12
3.9 Order of Application.......................................13
3.10 Distributions to Lenders...................................13
3.11 Sharing of Payments, Etc...................................13
3.12 Offset.....................................................13
3.13 Capital Adequacy...........................................13
3.14 Foreign Lenders, Participants, and Purchasers..............14
3.15 Non-Use Fee................................................14
SECTION 4 SECURITY...................................................14
4.1 Guaranty...................................................14
4.2 Collateral.................................................14
4.3 Further Assurances.........................................14
4.4 Release of Collateral......................................14
SECTION 5 CONDITIONS PRECEDENT.......................................15
SECTION 6 REPRESENTATIONS AND WARRANTIES.............................15
6.1 Purpose and Regulation U...................................15
6.2 Companies..................................................15
6.3 Authorization and Contravention............................15
6.4 Binding Effect.............................................16
6.5 Fiscal Year................................................16
6.6 Current Financials.........................................16
6.7 Debt.......................................................16
6.8 Solvency and Capital Requirements..........................16
6.9 Litigation.................................................16
6.10 Transactions with Affiliates...............................16
6.11 Taxes......................................................16
6.12 Employee Plans.............................................16
6.13 Property and Liens.........................................17
6.14 Intellectual Property......................................17
6.15 Environmental Matters......................................17
6.16 Regulations................................................17
6.17 Insurance..................................................17
6.18 Full Disclosure............................................17
<PAGE>
SECTION 7 AFFIRMATIVE COVENANTS..................................... 18
7.1 Reporting Requirements.................................... 18
7.2 Use of Proceeds........................................... 18
7.3 Books and Records......................................... 19
7.4 Inspections............................................... 19
7.5 Taxes..................................................... 19
7.6 Expenses.................................................. 19
7.7 Maintenance of Existence, Assets, and Business............ 19
7.8 Insurance................................................. 19
7.9 Subsidiaries.............................................. 19
7.10 Indemnification........................................... 19
SECTION 8 NEGATIVE COVENANTS........................................ 20
8.1 Debt...................................................... 20
8.2 Liens..................................................... 21
8.3 Investments............................................... 23
8.4 Distributions............................................. 24
8.5 Merger or Consolidation................................... 24
8.6 Dispositions of Assets.................................... 24
8.7 Use of Proceeds........................................... 24
8.8 Transactions with Affiliates.............................. 24
8.9 Employee Plans............................................ 24
8.10 Compliance with Laws and Documents........................ 24
8.11 Government Regulations.................................... 24
8.12 Fiscal Year Accounting.................................... 25
8.13 New Businesses............................................ 25
8.14 Assignment................................................ 25
SECTION 9 FINANCIAL COVENANTS....................................... 25
9.1 Net Worth................................................. 25
9.2 Adjusted Debt/Net Worth................................... 25
9.3 Cash Coverage............................................. 25
9.4 Net Income................................................ 25
9.5 Capital Ratio............................................. 25
9.6 Leverage Ratio............................................ 25
9.7 Classified Assets/Total Capital........................... 25
9.8 Net Charge Offs/Total Loans............................... 25
9.9 Adjusted Assets/Total Assets.............................. 25
9.10 Interest Rate Sensitivity................................. 25
9.11 Commercial Loans/Total Capital............................ 26
SECTION 10 DEFAULTS AND REMEDIES..................................... 26
10.1 Default................................................... 26
10.2 Remedies.................................................. 27
10.3 Right of Offset........................................... 27
10.4 Waivers................................................... 28
10.5 Performance by Agent...................................... 28
10.6 No Responsibility......................................... 28
10.7 No Waiver................................................. 28
10.8 Cumulative Rights......................................... 28
10.9 Rights of Individual Lenders.............................. 28
10.10 Notice to Agent........................................... 29
10.11 Costs..................................................... 29
SECTION 11 AGENT..................................................... 29
11.1 Authorization and Action.................................. 29
11.2 Agent's Reliance, Etc..................................... 29
11.3 Agent and Affiliates...................................... 29
11.4 Credit Decision........................................... 30
11.5 Indemnification........................................... 30
(ii)
<PAGE>
11.6 Successor Agent.............................................. 30
SECTION 12 MISCELLANEOUS................................................ 30
12.1 Nonbusiness Days............................................. 30
12.2 Communications............................................... 31
12.3 Form and Number of Documents................................. 31
12.4 Exceptions to Covenants...................................... 31
12.5 Survival..................................................... 31
12.6 Governing Law................................................ 31
12.7 Invalid Provisions........................................... 31
12.8 Conflicts Between Loan Documents............................. 31
12.9 Discharge and Certain Reinstatement.......................... 31
12.10 Amendments, Consents, Conflicts, and Waivers................. 31
12.11 Multiple Counterparts........................................ 32
12.12 Parties...................................................... 32
12.13 Participations............................................... 33
12.14 Transfers.................................................... 33
12.15 Jurisdiction; Venue; Service of Process; and Jury Trial...... 33
12.16 Limitation of Liability...................................... 34
12.17 Entire Agreement............................................. 34
(iii)
<PAGE>
SCHEDULES AND EXHIBITS
----------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Third Amended Schedule 2 - Lenders and Commitments 06/30/99
Schedule 5 - Closing Conditions
Schedule 6.2 - Companies
Schedule 6.7 - Existing Debt
Schedule 6.9 - Litigation and Judgments
Schedule 6.10 - Affiliate Transactions
Schedule 6.13 - Existing Liens
Second Amended Exhibit A-1 - Term Note 06/30/99
Second Amended Exhibit A-2 - Revolving Note 06/30/99
Exhibit B - Guaranty
Exhibit C - Pledge Agreement
Second Amended Exhibit D-1 - Borrowing Request 06/30/99
Third Amended Exhibit D-2 - Compliance Certificate 06/30/99
Exhibit E - Opinion of Counsel
Amended Exhibit F - Assignment and Assumption Agreement 06/30/99
</TABLE>
(iv)
<PAGE>
CREDIT AGREEMENT
----------------
06/30/99
THIS AGREEMENT is entered into as of March 12, 1997, between MATRIX
BANCORP, INC. a Colorado corporation formerly named Matrix Capital Corporation
("Borrower"), the Lenders described below, and U.S. BANK NATIONAL ASSOCIATION
(as the successor to Bank One, Texas, N.A.). as Agent for Lenders.
(See Section 1.1 for defined terms.)
06/30/99
Borrower has requested that Lenders extend credit to Borrower not to exceed
a total outstanding principal amount of $20,000,000 (as that amount may be
reduced or canceled pursuant to this agreement) to be used by Borrower as
provided in Section 6.1 and allocated as (A) a term loan of $10,000,000 (the
"Term Loan"), and (B) a revolving-credit facility of $10,000,000 (the "Revolving
Facility") to be funded by Lenders from time to time on and after the Closing
Date but before the Actual-Termination Date. Lenders are willing to extend the
requested credit on the terms and conditions of this agreement.
ACCORDINGLY, for adequate and sufficient consideration, Borrower, Lenders,
and Agent agree as follows:
SECTION 1 DEFINITIONS AND REFERENCES. Unless stated otherwise, the following
- --------- --------------------------
provisions apply to each Loan Document, and annexes, exhibits, and schedules to
- -- and certificates, reports, and other writings delivered under -- the Loan
Documents.
1.1 Definitions.
-----------
"Actual-Termination Date" means the earlier of either (a) the Stated-
Termination Date or (b) the effective date that Lenders' commitments to lend
under this agreement are fully canceled or terminated in accordance with the
terms of this agreement.
"Adjusted Assets" means, for Matrix Bank and at any time, the sum of (a)
its cash, (b) its Cash Equivalents, (c) its loans that are not non-residential
commercial loans, are evidenced by valid promissory notes, and are secured by
mortgages, deeds of trust, or trust deeds that grant perfected first-priority
Liens on residential-real property, plus (d) its securities that, in respect of
an underlying pool of related mortgage loans, provide for payment by the issuer
to the holder of specified principal installments and a fixed-interest rate on
the unpaid balance, with all prepayments being passed through to the holder,
whether issued in certificate or book-entry form.
"Adjusted Debt" means, for the Companies and at any time, the sum of (a)
their consolidated Debt, minus (b) obligations under bank repurchase agreements,
obligations under escrow-arbitrage-type facilities, deposits at Matrix Bank, and
obligations of Matrix Bank for advances to it by the Federal Home Loan Bank.
"Affiliate" of a Person means any other individual or entity who directly
or indirectly controls, is controlled by, or is under common control with that
Person. For purposes of this definition (a) "control," "controlled by," and
"under common control with" mean possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of voting securities or other interests, by contract, or otherwise),
and (b) the Companies are "Affiliates" of each other.
06/30/99
"Agent" means, at any time, U.S. Bank National Association (or its
successor appointed under Section 11.6), acting as administrative, collateral,
managing, and syndication agent for Lenders under the Loan Documents.
"Assignment" means an Assignment and Assumption Agreement executed by a
selling Lender and a Purchaser under Sections 12.12 and 12.14 and delivered to
Agent in substantially the form of Exhibit F.
CREDIT AGREEMENT
----------------
<PAGE>
"Bankers Blanket Bond" means the bond or bonds, and any renewals,
extensions, or modifications of them, issued with respect to losses incurred by
Matrix Bank, including, without limitation, all bonds represented by Bankers
Blanket Bond, Standard Form No. 24, with attached riders, as revised, and Bank
Employee Dishonesty Blanket Bond, Standard Form No. 28, Surety Association of
America.
"Base Rate" means an annual interest rate equal from day to day to the
floating annual interest rate established by Agent from time to time as its
base-rate of interest, which may not be the lowest interest rate charged by
Agent on loans similar to Borrowings.
"Borrower" is defined in the preamble to this agreement.
"Borrowing" means any amount disbursed (a) by any Lender to Borrower under
the Loan Documents as an original disbursement of funds, a renewal, extension,
or continuation of an amount outstanding, or (b) by Agent or any Lender in
accordance with, and to satisfy a Company's obligations under, any Loan
Document.
06/29/98
"Borrowing Base" means, at any time, 40% of the book value of Matrix Bank's
issued and outstanding common stock subject to Lender Liens.
"Borrowing Date" means, for any Borrowing, the date it is disbursed.
"Borrowing Excess" means, at any time, the amount by which any of the
limitations of Section 2.2 are exceeded.
"Borrowing Request" means a request executed by a Responsible Officer of
Borrower requesting a Borrowing and delivered to Agent in substantially the form
of Exhibit D-1.
"Business Day" means any day other than Saturday, Sunday, and any other day
that commercial banks are authorized by applicable Laws to be closed in Texas.
"Capital Lease" means any capital lease or sublease that is required by
GAAP to be capitalized on a balance sheet.
"Cash Equivalents" means Investments described in Sections 8.3(a) through
(e).
08/18/97
["Cash Flow" deleted as defined term.]
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. (S)(S)9601 et seq.
"Classified Assets" means, for Matrix Bank and at any time, all (a) assets
of Matrix Bank that are classified as "substandard," "doubtful," or "loss" by
FDIC, OTS, or any other Tribunal with regulatory authority over Matrix Bank, (b)
assets that are otherwise subject to special credit quality supervision by
Matrix Bank or the financial institution through which Matrix Bank claims an
interest in the particular asset, (c) Other Real Estate Owned, and (d) Other
Impaired Assets.
"Closing Date" means the date agreed to by Borrower and Agent for the
initial Borrowings under this agreement, which date may not be (a) before the
conditions precedent for those initial Borrowings have been satisfied or (b), if
at all, later than March 31, 1997.
08/18/97
"CMLTD" means, for Borrower alone and at any time, the current maturities
of long-term Debt except that for purposes of this definition (a) Debt of Matrix
Financial and guaranties of that Debt by Borrower are excluded and (b) through
June 30, 1998, the current maturities of the Debt described in
2
CREDIT AGREEMENT
----------------
<PAGE>
Item 3 on Schedule 6.7 (as it may be renewed) shall be limited to the greater of
either (i) $42,000 or (ii) the actual amount of annual amortization required by
the terms of that Debt as it may be renewed.
"Collateral" is defined in Section 4.2.
06/29/98
"Commercial Loan" means a loan that is not a one- to four-family
residential loan, nor an installment loan to an individual, nor the portion of a
loan guaranteed by the Small Business Administration, but is a loan for
commercial purposes, or a loan secured by chattel or a mortgage note on non one-
to four-family residential real property.
"Commitment" means, at any time and for any Lender, the amounts stated
beside that Lender's name on the most-recently amended Schedule 2 for the
Revolving Facility (which amount is subject to reduction and cancellation
pursuant to this agreement) and for the Term Loan.
"Commitment Percentage" means, for any Lender, the proportion (stated as a
percentage) that its Commitment bears to the total Commitments of all Lenders.
"Companies" means, at any time, Borrower and each of its Subsidiaries.
"Compliance Certificate" means a certificate executed by a Responsible
Officer of Borrower and delivered to Agent in substantially the form of Exhibit
D-2.
"Current Financials" means either (a) the Companies' Financials for the
year ended December 31, 1995, and for the 11 months ended November 30, 1996, or
(b) at any time after the Companies' annual Financials are first delivered under
Section 7.1, the Companies' annual Financials then most recently delivered to
Agent and subsequent quarterly Financials then most recently delivered to Agent.
"Debt" means, for any Person and without duplication (a) all obligations
required by GAAP to be classified upon that Person's balance sheet as
liabilities, (b) liabilities secured (or for which the holder of the liabilities
has an existing Right, contingent or otherwise, to be so secured) by any Lien
existing on property owned or acquired by that Person, (c) obligations under
Capital Leases, and (d) all guaranties, endorsements, and other contingent
obligations with respect to Debt of others or in respect of any Employee Plan.
"Debtor Laws" means the Bankruptcy Code of the United States of America and
all other applicable liquidation, conservatorship, bankruptcy, moratorium,
rearrangement, receivership, insolvency, reorganization, suspension of payments,
or similar Laws affecting creditors' Rights.
"Default" is defined in Section 10.1.
"Default Rate" means, for any day, an annual interest rate equal to the
lesser of either (a) the Fed-Funds Rate plus 5% or (b) the Maximum Rate.
"Determining Lenders" means, at any time, any combination of Lenders whose
(a) Termination Percentages total at least 66 2/3% at any time on or after the
Actual-Termination Date, or (b) Commitment Percentages total at least 66 2/3% at
all other times.
"Distribution" means, at any time and with respect to any shares of any
capital stock or other equity securities issued by a Person, (a) the retirement,
redemption, purchase, or other acquisition for value of those securities, (b)
the declaration or payment of any dividend with respect to those securities, (c)
any loan or advance by that Person to, or other investment by that Person in,
the holder of any of those securities, and (d) any other payment by that Person
with respect to those securities.
"Employee Plan" means any employee-pension-benefit plan (a) covered by
Title IV of ERISA and established or maintained by Borrower or any ERISA
Affiliate (other than a Multiemployer Plan) or
3
CREDIT AGREEMENT
----------------
<PAGE>
(b) established or maintained by Borrower or any ERISA Affiliate, or to which
Borrower or any ERISA Affiliate contributes, under the Laws of any foreign
country.
"Environmental Law" means any applicable Law that relates to protection of
the environment or to the regulation of any Hazardous Substances, including,
without limitation, CERCLA, the Hazardous Materials Transportation Act (49
U.S.C. (S) 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
(S) 6901 et seq.), the Clean Water Act (33 U.S.C. (S) 1251 et seq.), the Clean
Air Act (42 U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. (S) 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide
Act (7 U.S.C. (S) 136 et seq.), the Emergency Planning and Community Right-to-
Know Act (42 U.S.C. (S) 11001 et seq.), the Safe Drinking Water Act (42 U.S.C.
(S) 201 and (S) 300f et seq.), the Rivers and Harbors Act (33 U.S.C. (S) 401 et
seq.), the Oil Pollution Act (33 U.S.C. (S) 2701 et seq.), analogous state and
local Laws, and any analogous future enacted or adopted Laws.
11/12/98
"Equi-Mor" means Equi-Mor Holdings, Inc., a Nevada corporation and wholly-
owned Subsidiary of Matrix Financial.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA Affiliate" means any Person that, for purposes of Title IV of ERISA,
is a member of Borrower's controlled group or is under common control with
Borrower within the meaning of Section 414 of the IRC.
08/18/97
["Excess Distributions" deleted as a definition.]
"FDIC" means the Federal Deposit Insurance Corporation.
"Fed-Funds Rate" means, for any day, the annual interest rate (rounded
upwards, if necessary, to the nearest 0.01%) determined by Agent to be either
(a) the weighted average of the rates on overnight-federal-funds transactions
with member banks of the Federal Reserve System arranged by federal-funds
brokers for that day (or, if not a Business Day on the preceding Business Day)
as published by the Federal Reserve Bank of New York (as published by Knight-
Ridder, page 73, utilizing the Fed-Effective Rate), or (b) if not so published
for any day, the average of the quotations for that day on those transactions
received by Agent from three federal-funds brokers of recognized standing it may
select.
"Financials" of a Person means balance sheets, profit and loss statements,
reconciliations of capital and surplus, and statements of cash flow prepared (a)
according to GAAP (subject to year end audit adjustments with respect to interim
Financials) and (b) except as stated in Section 1.4, in comparative form to
prior year-end figures or corresponding periods of the preceding fiscal year or
other relevant period, as applicable.
"GAAP" means generally accepted accounting principles of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the Financial Accounting Standards Board that are applicable from time to time,
as from time to time superseded by regulatory accounting principles applicable
to Matrix Bank and Sterling Trust Company, consistently applied.
"Government Securities" means (to the extent they mature within one year
from the date in question) readily marketable (a) direct full faith and credit
obligations of the United States of America or obligations guaranteed by the
full faith and credit of the United States of America, and (b) obligations of an
agency or instrumentality of, or corporation owned, controlled, or sponsored by,
the United States of America that are generally considered in the securities
industry to be implicit obligations of the United States of America.
"Guaranty" means a Guaranty in substantially the form of Exhibit B.
4
CREDIT AGREEMENT
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<PAGE>
"Hazardous Substance" means any substance that is designated, defined,
classified, or regulated as a hazardous waste, hazardous material, pollutant,
contaminant, explosive, corrosive, flammable, infectious, carcinogenic,
mutagenic, radioactive, or toxic or hazardous substance under any Environmental
Law, including, without limitation, any hazardous substance within the meaning
of (S) 101(14) of CERCLA.
"Hedge Contract" means, for any Person, any present or future, whether
master or single, agreement, document or instrument providing for (or
constituting an agreement to enter into) (a) commodity hedges in the normal
course of business in accordance with prior practices of that Person before the
date of this agreement for purposes of hedging material purchases, (b) foreign-
currency purchases and swaps, (c) interest-rate swaps, and (d) interest-rate-
hedging products.
"Interest Expense" means -- for any Person, for any period, and without
duplication -- all interest on Debt, whether paid in cash or accrued as a
liability and payable in cash during any subsequent period (including the
interest component of Capital Leases), as determined by GAAP, and premium or
penalty for repayment, redemption, or repurchase of Debt.
"Investment" means, in respect of any Person, any loan, advance, extension
of credit, or capital contribution to that Person, any investment in that
Person, or any purchase or commitment to purchase any equity securities or Debt
issued by that Person or substantially all of the assets or a division or other
business unit of that Person.
"IRC" means the Internal Revenue Code of 1986.
"Laws" means all applicable statutes, laws, treaties, ordinances, rules,
regulations, orders, writs, injunctions, decrees, judgments, opinions, and
interpretations of any Tribunal.
"Lender Lien" means any present or future first-priority Lien securing the
Obligation and assigned, conveyed, and granted to or created in favor of Agent
for the benefit of Lenders under the Loan Documents.
"Lenders" means the financial institutions (including, without limitation,
Agent in respect of its share of Borrowings) named on Schedule 2 or on the most-
recently-amended Schedule 2, if any, delivered by Agent under this agreement,
and, subject to this agreement, their respective successors and permitted
assigns (but not any Participant who is not otherwise a party to this
agreement).
"Lien" means any lien, mortgage, security interest, pledge, assignment,
charge, title retention agreement, or encumbrance of any kind and any other
arrangement for a creditor's claim to be satisfied from assets or proceeds prior
to the claims of other creditors or the owners.
"Litigation" means any action by or before any Tribunal.
"Loan Documents" means (a) this agreement, certificates and reports
delivered under this agreement, and exhibits and schedules to this agreement,
(b) all agreements, documents, and instruments in favor of Agent or Lenders (or
Agent on behalf of Lenders) ever delivered under this agreement or otherwise
delivered in connection with any of the Obligation, and (c) all renewals,
extensions, and restatements of, and amendments and supplements to, any of the
foregoing.
"Material-Adverse Event" means any circumstance or event that, individually
or collectively, is reasonably expected to result (at any time before the
Commitments under this agreement are fully canceled or terminated and the
Obligation is fully paid and performed) in any (a) impairment of any Company's
ability to perform any of its payment or other material obligations under any
Loan Document or (ii) the ability of Agent or any Lender to enforce any of those
obligations or any of their respective Rights under the Loan Documents, (b)
material and adverse effect on Borrower's individual financial condition or the
Companies' consolidated financial condition as represented to Lenders in the
Current Financials most recently delivered before the date of this agreement,
(c) material and adverse effect on any Collateral, or (d) Default or Potential
Default.
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CREDIT AGREEMENT
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<PAGE>
"Material Agreement" means, for any Person, any agreement to which that
Person is a party, by which that Person is bound, or to which any assets of that
Person may be subject, and that is not cancelable by that Person upon less than
30-days notice without liability for further payment other than nominal penalty,
and the default under which or cancellation or forfeiture of which would be a
Material-Adverse Event.
"Matrix Bank" means Matrix Capital Bank, a federal savings bank formerly
named Dona Ana Savings Bank and a wholly owned Subsidiary of Borrower.
"Matrix Financial" means Matrix Financial Services Corporation, an Arizona
corporation and wholly owned Subsidiary of Borrower.
"Matrix Financial Loan Agreement" means the Amended and Restated Loan
Agreement dated as of January 31, 1997, between Matrix Financial, certain
lenders, and Bank One, Texas, N.A., as Agent for Lenders.
06/29/98
"Maturity Date" means June 30, 2001.
"Maximum Amount" and "Maximum Rate" respectively mean, for any day and for
any Lender, the maximum non-usurious amount and the maximum non-usurious rate of
interest that, under applicable Law, the Lender is permitted to contract for,
charge, take, reserve, or receive on its portion of the Obligation.
"Multiemployer Plan" means a multiemployer plan as defined in Sections
3(37) or 4001(a)(3) of ERISA or Section 414(f) of the IRC (or any similar type
of plan established or regulated under the Laws of any foreign country) to which
Borrower or any ERISA Affiliate is making, or has made, or is accruing, or has
accrued, an obligation to make contributions.
"Net Charge Offs" means, for Matrix Bank and at any time, the sum of its
"Gross Charge Offs" minus its "Recoveries," as those items are reflected in its
quarterly call reports.
"Net Income" means, for any period and any Person, the amount that should
in accordance with GAAP be reflected on that Person's income statement as net
income for that period after deduction of any minority interests.
"Net Worth" means, for any period and any Person, that Person's
stockholder's equity as determined under GAAP.
"Notes" means the Revolving Notes and the Term Notes.
"Obligation" means all (a) present and future indebtedness, obligations,
and liabilities of Borrower to Agent or any Lender and related to any Loan
Document, whether principal, interest, fees, costs, attorneys' fees, or
otherwise, (b) all present and future indebtedness, obligations, and liabilities
of Borrower to Agent or any Lender in respect of any Hedge Contract, (c) amounts
that would become due but for operation of 11 U.S.C. (S)(S) 502 and 503 or any
other provision of Title 11 of the United States Code, and all renewals,
extensions, and modifications of any of the foregoing, and (d) pre- and post-
maturity interest on any of the foregoing, including, without limitation, all
post-petition interest if any Company voluntarily or involuntarily files for
protection under any Debtor Law.
"Other Impaired Assets" means, for Matrix Bank and at any time, assets
(excluding Other Real Estate Owned) acquired by Matrix Bank through foreclosure
or other realization upon collateral or rearrangement, settlement, or
satisfaction of debt.
"Other Real Estate Owned" means, for Matrix Bank and at any time, each of
its ownership interests (including any option in its favor and any put or
similar agreement requiring it to purchase but excluding any Lien constituting a
bona fide encumbrance to secure obligations owed to it) in any real property not
currently
6
CREDIT AGREEMENT
----------------
<PAGE>
used solely as either a principal banking house, an office, branch, parking
facility, remote manned or unmanned teller facility, or real estate acquired for
development in the ordinary course of business and that was not acquired through
foreclosure or other realization upon collateral or rearrangement, settlement,
or satisfaction of debt.
"OTS" means the Office of Thrift Supervision.
"Participant" is defined in Section 12.13.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Debt" is defined in Section 8.1.
"Permitted Liens" is defined in Section 8.2.
"Permitted Investments" is defined in Section 8.3.
"Person" means any individual, entity, or Tribunal.
"Potential Default" means any event's occurrence or any circumstance's
existence that would (upon any required notice, time lapse, or both) become a
Default.
"Principal Debt" means, at any time, the outstanding principal balance of
all Borrowings.
"Purchaser" is defined in Section 12.14.
"Refinanced Debt" means the Debt described on Schedule 6.7 owed to Banker's
Bank of the West, which Debt must be paid in full (and all commitments to extend
further Debt canceled) as a condition precedent to, or concurrent with, the
initial Borrowing under this agreement.
"Representatives" means representatives, officers, directors, employees,
attorneys, and agents.
"Responsible Officer" means (a) the chairman, president, chief executive
officer, any vice president, or chief financial officer of Borrower to the
extent that such officer's name, title, and signature have been certified to
Agent by the secretary or an assistant secretary of Borrower or (b) any other
officer designated as a "Responsible Officer" in writing to Administrative Agent
by any officer in clause (a) preceding.
"Revolving Facility" is defined in the recitals to this agreement.
"Revolving Note" means one of the promissory notes substantially in the
form of Exhibit A-2.
"Rights" means rights, remedies, powers, privileges, and benefits.
"Solvent" means, for any Person, that (a) the aggregate fair market value
of its assets exceeds its liabilities, (b) it has sufficient cash flow to enable
it to pay its Debts as they mature, and (c) it does not have unreasonably small
capital to conduct its businesses.
06/30/99
"Stated-Termination Date" means the earlier of either (a) June 30, 2000, or
(b) 30 days after the date on which at least 90% of the total Commitments for
the Revolving Facility have been funded under Section 2.2.
06/30/99
"Subordinated Debentures" means the Junior Subordinated Debentures proposed
to be issued by Borrower in the total principal amount of not more than
$31,625,000 under the Indenture proposed to be entered into by Borrower and
State Street Bank and Trust Company as Trustee, as described in the Form S-1
filed by Borrower with the Securities and Exchange Commission via EDGAR on June
1, 1999.
06/30/99
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CREDIT AGREEMENT
----------------
<PAGE>
"Subordinated Debt" means, at any time (a) Debt existing on June 30, 1999,
that is by its terms subordinated to the payment of the Obligation, (b) the
Debt evidenced by the Subordinated Debentures, and (c) Debt of Borrower that (i)
is subject to subordination, payment blockage, and standstill provisions at
least as favorable to Lenders as are applicable to the Subordinated Debentures,
(ii) does not subject Borrower to representations, covenants, events of default,
and other provisions significantly more onerous to Borrower than those contained
in the Subordinated Debentures, (iii) does not have any scheduled or mandatory
principal or sinking fund payment due before 180 days after the Maturity Date,
and (iv) is upon terms and conditions otherwise reasonably acceptable to
Determining Lenders.
"Subsidiary" of any Person means any entity of which at least 50% (in
number of votes) of the stock (or equivalent interests) is owned of record or
beneficially, directly or indirectly, by that Person.
"Taxes" means, for any Person, taxes, assessments, or other governmental
charges or levies imposed upon it, its income, or any of its properties,
franchises, or assets.
"Term Loan" is defined in the recitals to this agreement.
"Term Note" means one of the promissory notes substantially in the form of
Exhibit A-1.
"Termination Percentage" means, at any time for any Lender, the proportion
(stated as a percentage) that its Principal Debt bears to the total Principal
Debt.
"Total Capital" means, for Matrix Bank and at any time, the sum of (a)
stated par value of its common stock, (b) stated par value of its perpetual
preferred stock, if any, (c) its undivided profits, surplus, and retained
earnings, (d) its account denominated "loan loss reserve" or "reserve for loan
and lease losses," plus (e) its reserve for contingencies.
"Total Loans" means, for Matrix Bank and at any time, the sum of all of its
outstanding loans, leases, and advances, net of unearned income.
"Tribunal" means any (a) local, state, or federal judicial, executive, or
legislative instrumentality, (b) private arbitration board or panel, or (c)
central bank.
"UCC" means the Uniform Commercial Code as enacted in Texas or other
applicable jurisdictions.
1.2 Time References. Unless otherwise specified, in the Loan Documents
---------------
(a) time references (e.g., 10:00 a.m.) are to time in Dallas, Texas, and (b) in
calculating a period from one date to another, the word "from" means "from and
including" and the word "to" or "until" means "to but excluding."
1.3 Other References. Unless otherwise specified, in the Loan Documents
----------------
(a) where appropriate, the singular includes the plural and vice versa, and
words of any gender include each other gender, (b) heading and caption
references may not be construed in interpreting provisions, (c) monetary
references are to currency of the United States of America, (d) section,
paragraph, annex, schedule, exhibit, and similar references are to the
particular Loan Document in which they are used, (e) references to "telefax,"
"telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy
transmissions, (f) references to "including" mean including without limiting the
generality of any description preceding that word, (g) the rule of construction
that references to general items that follow references to specific items as
being limited to the same type or character of those specific items is not
applicable in the Loan Documents, (h) references to any Person include that
Person's heirs, personal representatives, successors, trustees, receivers, and
permitted assigns, (i) references to any Law include every amendment or
supplement to it, rule and regulation adopted under it, and successor or
replacement for it, and (j) references to any Loan Document or other document
include every renewal and extension of it, amendment and supplement to it, and
replacement or substitution for it.
8
CREDIT AGREEMENT
----------------
<PAGE>
1.4 Accounting Principles. Unless otherwise specified, in the Loan
---------------------
Documents (a) GAAP in effect on the date of this agreement determines all
accounting and financial terms and compliance with all financial covenants, (b)
otherwise, all accounting principles applied in a current period must be
comparable in all material respects to those applied during the preceding
comparable period, and (c) while Borrower has any consolidated Subsidiaries (i)
all accounting and financial terms and compliance with reporting covenants must
be on a consolidating and consolidated basis, as applicable, and (ii) compliance
with financial covenants must be on a consolidated basis.
SECTION 2 BORROWINGS. Subject to the provisions in the Loan Documents, each
- --------- ----------
Lender severally and not jointly agrees to extend credit to Borrower under the
Term Loan and the Revolving Facility in accordance with the following
provisions.
2.1 Term Loan. Each Lender severally but not jointly agrees to lend to
---------
Borrower that Lender's Commitment Percentage of the Term Loan in a single
Borrowing on the Closing Date.
2.2 Revolving Facility. Each Lender severally but not jointly agrees to
------------------
lend to Borrower that Lender's Commitment Percentage of requested Borrowings
under the Revolving Facility, which Borrower may borrow, repay, and reborrow
under this agreement subject to the following conditions:
. Each Borrowing may only occur on a Business Day on or after the
Closing Date and before the Actual-Termination Date.
. Each Borrowing may only be $500,000 or a greater integral multiple of
$100,000.
06/29/98
. The total of the Principal Debt of the Revolving Facility and of the
Term Loan may never exceed the lesser of either (i) the total of (a)
the Principal Debt of the Term Loan plus (b) the total Commitments for
the Revolving Facility or (ii) the Borrowing Base.
. The total Principal Debt owed to any Lender may never exceed that
Lender's total Commitments.
2.3 Borrowing Procedure. The following procedures apply to Borrowings:
-------------------
(a) Borrowing Request. Borrower may request a Borrowing by making or
-----------------
delivering a Borrowing Request to Agent, which is irrevocable and binding
on Borrower and must be received by Agent no later than 11:00 a.m. on the
Business Day before the requested Borrowing Date. Agent shall promptly on
the day received notify each Lender of any Borrowing Request.
(b) Funding. Each Lender shall remit its Commitment Percentage of
-------
each requested Borrowing to Agent's principal office in Dallas, Texas, in
funds that are available for immediate use by Agent by 2:00 p.m. on the
applicable Borrowing Date. Subject to receipt of those funds, Agent shall
(unless to its actual knowledge any of the applicable conditions precedent
have not been satisfied by Borrower or waived by the requisite Lenders
under Section 12.10) make those funds available to Borrower by depositing
the funds in Borrower's account with Agent.
(c) Funding Assumed. Absent contrary written notice from a Lender,
---------------
Agent may assume that each Lender has made its Commitment Percentage of the
requested Borrowing available to Agent on the applicable Borrowing Date,
and Agent may, in reliance upon such assumption (but shall not be required
to), make available to Borrower a corresponding amount. If a Lender fails
to make its Commitment Percentage of any requested Borrowing available to
Agent on the applicable Borrowing Date, Agent may recover the applicable
amount on demand (i) from that Lender together with interest, commencing on
the Borrowing Date and ending on (but excluding) the date Agent recovers
the amount from that Lender, at an annual interest rate equal to the Fed-
Funds Rate, or (ii) if that Lender fails to pay its amount upon demand,
then from Borrower, together with interest,
9
CREDIT AGREEMENT
----------------
<PAGE>
commencing on the Borrowing Date and ending on (but excluding) the date
Agent recovers the amount from Borrower, at an annual interest rate equal
to the Base Rate No Lender is responsible for the failure of any other
Lender to make its Commitment Percentage of any Borrowing available as
required by Section 2.3(b). However, failure of any Lender to make its
Commitment Percentage of any Borrowing so available does not excuse any
other Lender from making its Commitment Percentage of any Borrowing so
available.
2.4 Termination. Borrower may (upon giving at least ten Business Days
-----------
prior written and irrevocable notice to Agent) terminate all or part of the
Revolving Facility. Each partial termination must be in an amount of not less
than $500,000 or a greater integral multiple of $100,000 and must be ratable in
accordance with each Lender's Commitment Percentage. At the time of any
termination, Borrower shall pay to Agent, for the account of each Lender, as
applicable, any amounts that may then be due under Section 3.4, all accrued and
unpaid fees under this agreement, and the interest attributable to the amount of
that reduction. Any part of the Commitments for the Revolving Facility that are
terminated may not be reinstated.
SECTION 3 PAYMENT TERMS.
- --------- -------------
3.1 Notes and Payments.
------------------
(a) Notes. The Principal Debt under the Term Loan is evidenced by
-----
the Term Notes, one payable to each Lender in the stated amount of its
Commitment for the Term Loan. Principal Debt under the Revolving Facility
is evidenced by the Revolving Notes, one payable to each Lender in the
stated amount of its Commitment for the Revolving Facility.
(b) Payment. Borrower must make each payment and prepayment on the
-------
Obligation to Agent's principal office in Dallas, Texas in funds that are
(i) immediately available by 1:00 p.m. on the day due (otherwise, but
subject to Section 3.8, those funds continue to accrue interest as if they
were received on the next Business Day and (ii) not (in Agent's or any
Lender's good faith judgment) subject to any reasonable grounds for the
payment or prepayment lawfully to be required to be rescinded, restored, or
returned for any reason (unless Agent or Required Lenders agree to
otherwise accept such payment or prepayment).
(c) Payment Assumed. Unless Agent has received notice from Borrower
---------------
prior to the date on which any payment is due under this agreement that
Borrower will not make that payment in full, Agent may assume that Borrower
has made the full payment due and Agent may, in reliance upon that
assumption, cause to be distributed to each Lender on that date the amount
then due to each Lender. If and to the extent Borrower does not make the
full payment due to Agent, each Lender shall repay to Agent on demand the
amount distributed to that Lender by Agent together with interest for each
day from the date that Lender received payment from Agent until the date
that Lender repays Agent (unless such repayment is made on the same day as
such distribution), at an annual interest rate equal to the Fed-Funds Rate.
3.2 Principal and Interest Payments.
-------------------------------
(a) Term Loan.
---------
06/30/99
. The Principal Debt of the Term Loan is payable in seven
consecutive quarterly installments equal to 1/28th of the amount
of that Principal Debt on July 1, 1999, payable on the last day
of each March, June, September, and December (commencing
September 30, 1999), with a final installment in the amount of
the unpaid Principal Debt of the Term Loan due on the Maturity
Date.
10
CREDIT AGREEMENT
----------------
<PAGE>
. Interest on the Principal Debt of the Term Loan is due and
payable as it accrues on each principal payment date described in
the preceding sentence.
(b) Revolving Facility.
------------------
. Until the Actual-Termination Date, interest on the Principal Debt
of the Revolving Facility is due and payable as it accrues on the
15th day of each calendar month (commencing on the first such
date that follows the Closing Date).
. Before the Actual-Termination Date, Borrower may prepay and,
subject to the terms of the Loan Documents, reborrow the
Principal Debt of the Revolving Facility.
. If the effective date that Lenders' commitments to lend under
this agreement are fully canceled or terminated occurs before the
Stated-Termination Date, then the Principal Debt of the Revolving
Facility, together with all accrued and unpaid interest on it, is
due and payable on the Actual-Termination Date.
. If the Stated-Termination Date occurs before the effective date
that Lenders' commitments to lend under this agreement are fully
canceled or terminated, then (i) the Principal Debt of the
Revolving Facility is payable in consecutive quarterly
installments, each equal to 1/28th of the Principal Debt of the
Revolving Facility on the Stated-Termination Date, on the last
day of each February, May, August, and November (commencing on
the first of those dates that follows the Stated-Termination
Date), with a final installment in the amount of the unpaid
Principal Debt of the Revolving Facility due on the Maturity
Date, and (ii) interest on the Principal Debt of the Revolving
Facility is due and payable as it accrues on each principal
payment date described in clause (i) preceding.
3.3 Voluntary Prepayments. In addition to voluntary prepayments that
---------------------
Borrower may make under the Revolving Facility before the Actual-Termination
Date, Borrower may prepay, without penalty and in whole or part, the Principal
Debt of the Term Loan or the Principal Debt of the Revolving Facility during its
term period so long as (a) Borrower gives notice of the prepayment to Agent ten
Business Days before the date on which the prepayment is to be made (and Agent
will promptly notify Lenders of any such notice), (b) the notice by Borrower
specifies the amount to be prepaid, and (c) each voluntary partial prepayment
must be equal to the lesser of either the applicable Principal Debt or a
principal amount of not less than $500,000 or a greater integral multiple of
$100,000, plus accrued interest on the amount prepaid to the date of the
prepayment. Those voluntary prepayments shall be applied to installments of
Principal Debt of the Term Loan or the term portion of the Revolving Facility,
as the case may be, in inverse order of maturity.
08/18/97
3.4 Mandatory Prepayments. Within five days after any Borrowing Excess
---------------------
occurs, Borrower shall make a mandatory prepayment of Principal Debt necessary
to eliminate that Borrowing Excess, which shall, if applicable, be applied to
installments of Principal Debt of the Term Loan or the term portion of the
Revolving Facility, as the case may be, in inverse order of maturity.
3.5 Interest Rates. The Principal Debt, except as provided in the next
--------------
sentence, bears interest at the Base Rate. If lawful, all past-due Principal
Debt and past-due interest accruing on any of the foregoing bears interest from
the date due (stated or by acceleration) at the Default Rate until paid,
regardless whether payment is made before or after entry of a judgment.
3.6 Interest Recapture. If the designated interest rate applicable to any
------------------
Borrowing exceeds the Maximum Rate, the interest rate on that Borrowing is
limited to the Maximum Rate, but any subsequent reductions in the designated
rate shall not reduce the interest rate thereon below the Maximum Rate until the
total amount of accrued interest the amount of interest that would have accrued
if that designated rate had always been in effect. If at maturity (stated or by
acceleration), or at final payment of the Notes, the total
11
CREDIT AGREEMENT
----------------
<PAGE>
interest paid or accrued is less than the interest that would have accrued if
the designated rates had always been in effect, then, at that time and to the
extent permitted by Law, Borrower shall pay an amount equal to the difference
between (a) the lesser of the amount of interest that would have accrued if the
designated rates had always been in effect and the amount of interest that would
have accrued if the Maximum Rate had always been in effect, and (b) the amount
of interest actually paid or accrued on the Notes.
3.7 Interest Calculations. Interest will be calculated on the basis of
---------------------
actual number of days (including the first day but excluding the last day)
elapsed but computed as if each calendar year consisted of 360 days (unless the
calculation would result in an interest rate greater than the Maximum Rate, in
which event interest shall be calculated on the basis of a year of 365 or 366
days, as the case may be). All interest rate determinations and calculations by
Agent are conclusive and binding absent manifest error.
3.8 Maximum Rate. Regardless of any provision contained in any Loan
------------
Document, no Lender is entitled to contract for, charge, take, reserve, receive,
or apply, as interest on all or any part of the Obligation, any amount in excess
of the Maximum Rate, and, if Lenders ever do so, then any excess shall be
treated as a partial prepayment of principal and any remaining excess shall be
refunded to Borrower. In determining if the interest paid or payable exceeds
the Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted
under applicable Law, (a) treat all Borrowings as but a single extension of
credit (and Lenders and Borrower agree that is the case and that provision in
this agreement for multiple Borrowings is for convenience only), (b)
characterize any nonprincipal payment as an expense, fee, or premium rather than
as interest, (c) exclude voluntary prepayments and their effects, and (d)
amortize, prorate, allocate, and spread the total amount of interest throughout
the entire contemplated term of the Obligation. However, if the Obligation is
paid in full before the end of its full contemplated term, and if the interest
received for its actual period of existence exceeds the Maximum Amount, Lenders
shall refund any excess (and Lenders may not, to the extent lawful, be subject
to any penalties provided by any Laws for contracting for, charging, taking,
reserving, or receiving interest in excess of the Maximum Amount). If the Laws
of the State of Texas are applicable for purposes of determining the "Maximum
Rate" or the "Maximum Amount," then those terms mean the "indicated rate
ceiling" from time to time in effect under Article 5069-1.04, Title 79, Revised
Civil Statutes of Texas, as amended. Borrower agrees that Chapter 15, Subtitle
79, Revised Civil Statutes of Texas, 1925, as amended (which regulates certain
revolving credit loan accounts and revolving triparty accounts), does not apply
to the Obligation.
3.9 Order of Application.
--------------------
(a) No Default. If no Default or Potential Default exists, then any
----------
payment shall be applied to the Obligation (except as otherwise
specifically provided in the Loan Documents) in the order and manner as
Borrower directs.
(b) Default. If a Default or Potential Default exists or if Borrower
-------
fails to give direction, any payment (including proceeds from the exercise
of any Rights) shall be applied in the following order: (i) To all fees
and expenses for which Agent or Lenders have not been paid or reimbursed in
accordance with the Loan Documents (and if such payment is less than all
unpaid or unreimbursed fees and expenses, then the payment shall be paid
against unpaid and unreimbursed fees and expenses in the order of
incurrence or due date); (ii) to accrued interest on the Principal Debt;
(iii) to the remaining Principal Debt in the order as Determining Lenders
may elect; and (iv) to the remaining Obligation in the order and manner
Determining Lenders deem appropriate.
3.10 Distributions to Lenders. Unless otherwise specified above, each
------------------------
payment and prepayment shall be distributed to Lenders ratably in accordance
with their respective Commitment Percentages or Termination Percentages, as
applicable.
3.11 Sharing of Payments, Etc. If any Lender obtains any payment or
------------------------
prepayment with respect to the Obligation (whether voluntary, involuntary, or
otherwise, including, without limitation, as a result of exercising its Rights
under Section 3.12) that exceeds the part of that payment or prepayment that it
is then
12
CREDIT AGREEMENT
----------------
<PAGE>
entitled to receive under the Loan Documents, then that Lender shall purchase
from the other Lenders participations that will cause the purchasing Lender to
share the excess payment or prepayment ratably with each other Lender. If all or
any portion of any excess payment or prepayment is subsequently recovered from
the purchasing Lender, then the purchase shall be rescinded and the purchase
price restored to the extent of the recovery. Borrower agrees that any Lender
purchasing a participation from another Lender under this section may, to the
fullest extent permitted by Law, exercise all of its Rights of payment
(including the Right of offset) with respect to that participation as fully as
if that Lender were the direct creditor of Borrower in the amount of that
participation.
3.12 Offset. If a Default exists, each Lender is entitled to exercise (for
------
the benefit of all Lenders in accordance with Section 3.11) the Rights of offset
and banker's Lien against each and every account and other property, or any
interest therein, that any Company may now or hereafter have with, or which is
now or hereafter in the possession of, that Lender to the extent of the full
amount of the Obligation owed (directly or participated) to it.
3.13 Capital Adequacy. If any change in any present Laws, any change in
----------------
the interpretation or application of any present Law, or any future Law
regarding capital adequacy, or if compliance by any Lender with any request,
directive, or requirement imposed in the future by any Tribunal regarding
capital adequacy, or if any change in its written policies or in the risk
category of this transaction, in any of the foregoing events or circumstances,
reduces the rate of return on its capital as a consequence of its obligations
under this agreement to a level below that which it otherwise could have
achieved (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by it to be material (and it may, in determining
the amount, utilize reasonable assumptions and allocations of costs and expenses
and use any reasonable averaging or attribution method), then (unless the effect
is already reflected in the rate of interest then applicable under this
agreement) Agent or that Lender (through Agent) shall notify Borrower and
deliver to Borrower a certificate setting forth in reasonable detail the
calculation of the amount necessary to compensate it (which certificate is
conclusive and binding absent manifest error), and Borrower shall pay that
amount to Agent or that Lender within five Business Days after demand. The
provisions of and undertakings and indemnification in this Section 3.13 shall
survive the satisfaction and payment of the Obligation and termination of this
agreement.
3.14 Foreign Lenders, Participants, and Purchasers. Each Lender,
---------------------------------------------
Participant (by accepting a participation interest under this agreement), and
Purchaser (by executing an Assignment) that is not organized under the Laws of
the United States of America or one of its states (a) represents to Agent and
Borrower that (i) no Taxes are required to be withheld by Agent or Borrower with
respect to any payments to be made to it in respect of the Obligation and (ii)
it has furnished to Agent and Borrower two duly completed copies of either U.S.
Internal Revenue Service Form 4224, Form 1001, Form W-8, or any other form
acceptable to Agent that entitles it to exemption from U.S. federal withholding
Tax on all interest payments under the Loan Documents, and (b) covenants to (i)
provide Agent and Borrower a new Form 4224, Form 1001, Form W-8, or other form
acceptable to Agent upon the expiration or obsolescence of any previously
delivered form according to Law, duly executed and completed by it, and (ii)
comply from time to time with all Laws with regard to the withholding Tax
exemption. If any of the foregoing is not true or the applicable forms are not
provided, then Borrower and Agent (without duplication) may deduct and withhold
from interest payments under the Loan Documents United States federal income Tax
at the full rate applicable under the IRC.
06/29/98
3.15 Non-Use Fee. From and after October 1, 1998, Borrower shall pay to
-----------
Agent a non-use fee for Lenders according to each Lender's Commitment
Percentage. The fee is payable as it accrues on the last day of each March,
June, September, and December (commencing on December 31, 1998) and on the
Actual-Termination Date. Each payment of the fee is equal to the following,
determined for the calendar quarter (or portion of a calendar quarter commencing
on the date of this agreement or ending on the Actual-Termination Date)
preceding and including the date it is due: From October 1, 1998, until the
Actual-Termination Date, the product of (a) 0.25% times (b) the amount by which
the average-daily total Commitments for only the Revolving Facility exceed the
sum of the
<PAGE>
average-daily Principal Debt under only the Revolving Notes, times (c) a
fraction with the number of days in the applicable quarter or portion of it as
the numerator and 365 or 366, as the case may be, as the denominator.
SECTION 4 SECURITY.
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4.1 Guaranty. Solely as an inducement to Lenders to extend credit under
--------
this agreement to Borrower and not in any way as a condition to or inducement to
any other extensions of credit by any Lender to any other Company, Borrower
shall cause each of its present and future Subsidiaries (other than Matrix Bank
and Sterling Trust Company) to unconditionally guarantee the full payment of the
Obligation by execution and delivery of a Guaranty.
4.2 Collateral. Borrower shall cause full payment and performance of the
----------
Obligation to be secured by Lender Liens on 100% of the present and future,
issued and outstanding common stock of Matrix Bank now or in the future owned by
Borrower. The foregoing collateral, together with the additional collateral
ever assigned, conveyed, granted, or delivered for any of the Obligation under
any Loan Document, if any, and the cash and non-cash proceeds of all of the
foregoing, is referred to as the "Collateral."
4.3 Further Assurances. Borrower shall (and shall cause each other
------------------
appropriate Company to) perform the acts, duly authorize, execute, acknowledge,
deliver, file, and record any additional writings, and pay all filings fees and
costs as Agent or Determining Lenders may reasonably deem appropriate or
necessary to perfect and maintain the Lender Liens and preserve and protect the
Rights of Agent and Lenders under any Loan Document so long as those additional
acts and writings do not increase Borrower's obligations or diminish its Rights
provided for in the Loan Documents.
4.4 Release of Collateral. Upon Borrower's written request and at
---------------------
Borrower's cost and expense, Agent shall cause the Lender Liens to be released
if (a) no Lender has any commitment to extend credit under any Loan Document,
(b) the Obligation has been fully paid and performed, and (c) neither Agent nor
any Lender in good faith believes that there are reasonable grounds for any
payment or prepayment under any Loan Document lawfully to be required to be
rescinded, restored, or returned for any reason.
SECTION 5 CONDITIONS PRECEDENT. No Lender is obligated to fund its part of
- --------- --------------------
any Borrowing unless Agent has received all of the documents and items described
on Schedule 5. In addition, no Lender is obligated to fund its part of any
Borrowing unless on the applicable Borrowing Date (and after giving effect to
the requested Borrowing): (a) Agent has timely received a Borrowing Request; (b)
all of the representations and warranties of Borrower in the Loan Documents are
true and correct in all material respects (unless they speak to a specific date
or are based on facts which have changed by transactions contemplated or
permitted by this agreement); (c) no Default or Potential Default exists; (d)
the funding of the Borrowing is permitted by Law and does not cause a Borrowing
Excess; (e) if reasonably requested by Agent, it has received evidence
substantiating any of the matters in the Loan Documents that are necessary to
enable Borrower to qualify for the Borrowing; and (f) a due diligence
examination of Borrower for the preceding year has been completed and reviewed
to the satisfaction of Agent. Each condition precedent in this agreement
(including, without limitation, those on Schedule 5) is material to the
transactions contemplated by this agreement, and time is of the essence with
respect to each. Subject to first obtaining the approval of all Lenders, Agent
or any Lender may fund any Borrowing without all conditions being satisfied.
However, to the extent lawful, that funding is not a waiver of the requirement
that each condition precedent be satisfied as a prerequisite for any subsequent
funding or issuance, unless all Lenders specifically waive an item in writing.
SECTION 6 REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
- --------- ------------------------------
Agent and Lenders as follows:
6.1 Purpose and Regulation U.
------------------------
14 Credit Agreement
----------------
<PAGE>
(a) Purpose. Borrower will use the proceeds of the (i) Term Loan to
-------
refinance the Refinanced Debt and to make contributions to capital of
Matrix Bank and (ii) Revolving Facility to either make or refinance
contributions to capital of Matrix Bank for Matrix Bank's use as working
capital for its general corporate purposes.
(b) Regulation U. No Company is engaged principally, or as one of
------------
its important activities, in the business of extending credit for the
purpose of purchasing or carrying any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, as
amended. No part of the proceeds of any Borrowing will be used, directly
or indirectly, for a purpose that violates Regulation U or any other Law.
6.2 Companies. Except as described on Schedule 6.2, Borrower has no
---------
Subsidiaries and no Company has used or transacted business under any other
corporate or trade name in the six-month period preceding the date of this
agreement. Each Company is duly organized, validly existing, and in good
standing under the Laws of the jurisdiction in which it is incorporated as
stated on Schedule 6.2. Except where failure is not a Material-Adverse Event,
each Company (i) is duly qualified to transact business and is in good standing
as a foreign corporation or other entity in each jurisdiction where the nature
and extent of its business and properties require due qualification and good
standing (as described on Schedule 6.2), (ii) possesses all requisite authority,
permits, and power to conduct its business as is now being (or is contemplated
by this agreement to be) conducted, and (iii) is in compliance with all
applicable Laws. Matrix Bank's authorized capital consists of 60,000 shares of
common stock, par value $2.50 per share. Borrower owns 100% (45,000 shares) of
Matrix Bank's issued and outstanding shares of common stock, all of which are
duly authorized, validly issued, fully paid, and nonassessable and not subject
to any warrant, option, or other acquisition Right of any Person, subject to any
transfer restriction (except restrictions imposed by securities and general
corporate Laws), or subject to any Liens (except Lender Liens).
6.3 Authorization and Contravention. The execution and delivery by each
-------------------------------
Company of each Loan Document to which it is a party and the performance by it
of its related obligations (a) are within its corporate power, (b) have been
duly authorized by all necessary corporate action, (c) except for any action or
filing that has been taken or made on or before the date of this agreement,
require no action by or filing with any Tribunal, (d) do not violate any
provision of its charter or bylaws, (e) except where not a Material-Adverse
Event, do not violate any provision of Law applicable to it or any material
agreements to which it is a party, and (f) except for Lender Liens, do not
result in the creation or imposition of any Lien on any asset of any Company.
6.4 Binding Effect. Upon execution and delivery by all parties to it,
--------------
each Loan Document will constitute a legal and binding obligation of each
Company party to it, enforceable against it in accordance with its terms, except
as enforceability may be limited by applicable Debtor Laws and general
principles of equity.
6.5 Fiscal Year. The Companies' fiscal year ends each December 31.
-----------
6.6 Current Financials. The Current Financials were prepared in
------------------
accordance with GAAP and present fairly, in all material respects, the financial
condition, results of operations, and cash flows of the Companies as of, and for
the portion of the fiscal year ending on their date or dates (subject only to
normal year-end adjustments). All material liabilities of the Companies as of
the date or dates of the Current Financials are reflected in them or notes to
them. Except for transactions directly related to, or specifically contemplated
by, the Loan Documents, no subsequent material adverse changes have occurred in
the financial condition of the Companies from that shown in the Current
Financials, nor has any Company incurred any subsequent material liability.
6.7 Debt. No Company has any Debt except as described on Schedule 6.7.
----
6.8 Solvency and Capital Requirements. On the date of each Borrowing,
---------------------------------
each Company is, and after giving effect to the requested Borrowing will be,
Solvent. Matrix Bank has (and has not received any
15 Credit Agreement
----------------
<PAGE>
notice or directive from OTS that it does not have) an amount of capital to
satisfy its minimum capital requirements.
6.9 Litigation. Except as disclosed on Schedule 6.9 (a) no Company is
----------
subject to, or aware of the threat of, any Litigation that is reasonably likely
to be determined adversely to it or, if so adversely determined, would be a
Material-Adverse Event, and (b) no outstanding or unpaid judgments against any
Company exists.
6.10 Transactions with Affiliates. No Company is a party to a material
----------------------------
transaction with any of its Affiliates except (a) transactions in the ordinary
course of business and upon fair and reasonable terms not materially less
favorable than it could obtain or could become entitled to in an arm's-length
transaction with a Person that was not its Affiliate, and (b) transactions
described on Schedule 6.10.
6.11 Taxes. All Tax returns of each Company required to be filed have been
-----
filed (or extensions have been granted) before delinquency, except for returns
for which the failure to file is not a Material-Adverse Event, and all Taxes
imposed upon each Company that are due and payable have been paid before
delinquency.
6.12 Employee Plans. Except where occurrence or existence is not a
--------------
Material-Adverse Event, (a) no Employee Plan has incurred an "accumulated
funding deficiency" (as defined in (S) 302 of ERISA or (S) 412 of the IRC), (b)
no Company has incurred liability under ERISA to the PBGC in connection with any
Employee Plan, (c) no Company has withdrawn in whole or in part from
participation in a Multiemployer Plan, (d) no Company has engaged in any
"prohibited transaction" (as defined in (S) 406 of ERISA or (S) 4975 of the
IRC), and (e) no "reportable event" (as defined in (S) 4043 of ERISA) has
occurred in respect of any Employee Plan, excluding events for which the notice
requirement is waived under applicable PBGC regulations.
6.13 Property and Liens. Each Company has good and indefeasible title to
------------------
its real property and marketable title to all its other property reflected on
the Current Financials except for property that is obsolete or that has been
disposed of in the ordinary course of business or, after the date of this
agreement, as otherwise permitted by this agreement. All Collateral is free and
clear of any Liens and adverse claims of any nature except as described on
Schedule 6.13.
6.14 Intellectual Property. Subject to the qualification below (a) each
---------------------
Company owns all material licenses, patents, patent applications, copyrights,
service marks, trademarks, trademark applications, and trade names necessary to
continue to conduct its businesses as presently conducted by it and proposed to
be conducted by it immediately after the date of this agreement, (b) each
Company is conducting its business without infringement or claim of infringement
of any license, patent, copyright, service mark, trademark, trade name, trade
secret, or other intellectual property right of others, other than any
infringements or claims that, if successfully asserted against or determined
adversely to that Company, are not a Material-Adverse Event, and (c) no
infringement or claim of infringement by others of any material license, patent,
copyright, service mark, trademark, trade name, trade secret, or other
intellectual property of any Company exists. The Companies have advised Agent
and Lenders that the representations and warranties in this Section 6.14 are
based on information available to them at the time the representations and
warranties are made or are reaffirmed in each Borrowing Request based upon the
due diligence that is reasonably prudent under the circumstances. Therefore,
there may be facts about which no Company is at that time aware that may cause
one or more of the representations and warranties in this Section 6.14 to be
untrue. If so, then (i) that untruth shall constitute a Default under Section
10.1(c) to the same extent that it would have otherwise constituted a Default,
but (ii) solely for purposes of determining whether any Company has made a false
representation to Agent or any Lender for purposes of any alleged criminal
violation, then the untrue representation and warranty in this Section 6.14
shall be deemed qualified by the existence of those facts so long as the
Companies (A) notify Agent and Lenders about those facts promptly after any
Company becomes aware of them, and (B) diligently attempt to cause the
circumstances to be corrected or remedied so that each affected representation
and warranty in this Section 6.14 shall thereafter be true and correct in all
material respects.
Credit Agreement
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16
<PAGE>
6.15 Environmental Matters. Except where not a Material-Adverse Event, no
---------------------
Company (a) knows of any environmental condition or circumstance adversely
affecting any Company's properties or operations, (b) has received any report of
any Company's violation of any Environmental Law, or (c) knows that any Company
is under any obligation to remedy any violation of any Environmental Law. Each
Company has taken prudent steps to determine that its properties and operations
do not violate any Environmental Law except violations that are not a Material-
Adverse Event.
6.16 Regulations. Borrower is duly registered under the Savings and Loan
-----------
Holding Company Act. No Company is subject to regulation under the Investment
Company Act of 1940, or the Public Utility Holding Company Act of 1935.
6.17 Insurance. Each Company maintains with financially sound,
---------
responsible, and reputable insurance companies or associations (or, as to
workers' compensation or similar insurance, with an insurance fund or by self-
insurance authorized by the jurisdictions in which it operates) insurance
concerning its properties and businesses against casualties and contingencies
and of types and in amounts (and with co-insurance and deductibles) as is
customary in the case of similar businesses.
6.18 Full Disclosure. Each material fact or condition relating to the
---------------
Loan Documents or the financial condition, business, or property of the
Companies that is a Material-Adverse Event has been disclosed in writing to
Agent and Lenders. All information previously furnished by any Company to Agent
or any Lender in connection with the Loan Documents was (and all information
furnished in the future by any Company to Agent or any Lender will be) true and
accurate in all material respects or based on reasonable estimates on the date
the information is stated or certified.
SECTION 7 AFFIRMATIVE COVENANTS. For so long as any Lender is committed to lend
- --------- ---------------------
under this agreement and until the Obligation has been fully paid and performed,
Borrower covenants and agrees with Agent and Lenders that, without first
obtaining Determining Lenders' consent to the contrary:
7.1 Reporting Requirements. Borrower shall cause to be furnished to Agent
----------------------
the following, all in form and detail reasonably satisfactory to Agent:
(a) Annually. Promptly after preparation but no later than 90 days
--------
after the last day of each fiscal year of Borrower (i) Financials showing
Borrower's consolidated and consolidating financial condition and results
of operations as of, and for the year ended on, that last day, (ii)
Financials showing Matrix Bank's consolidated and consolidating financial
condition and results of operations as of, and for the year ended on, that
last day, (iii) solely with respect to the consolidated portion of those
Financials, the opinions, without material qualification, of Ernst & Young
or of another firm of nationally-recognized independent certified public
accountants reasonably acceptable to Determining Lenders, based on audits
using generally accepted auditing standards, that the consolidated portion
of those Financials were prepared in accordance with GAAP and present
fairly, in all material respects, Holdings' and Borrower's respective
consolidated financial conditions and results of operations, and (iv) a
Compliance Certificate.
(b) Quarterly. Promptly after preparation but no later than 45 days
---------
after the last day of the first three fiscal quarters of Borrower each year
(i) Financials showing Borrower's consolidating financial condition and
results of operations for that fiscal quarter and for the period from the
beginning of the current fiscal year to the last day of that fiscal
quarter, (ii) a Compliance Certificate, (iii) Matrix Bank's most recent
call reports or other quarterly and annual reports of condition or income
furnished to the FDIC or the OTS, and (iv) reports sent to and all consents
and resolutions adopted by Matrix Bank's Board of Directors during the
preceding fiscal quarter.
17 Credit Agreement
----------------
<PAGE>
(c) Examinations. Promptly but not later than 45 days after receipt
------------
by Matrix Bank and to the extent lawful, copies of all federal regulatory
examinations of Matrix Bank, including all calculations of its Risk Based
Capital (as described in Section 9.5).
(d) Notices. Notice, promptly after any Company knows or has reason
-------
to know, of (i) any notice of intention to cancel or of cancellation of
Matrix Bank's Bankers Blanket Bond, (ii) any notice or capital directive
from OTS to Matrix Bank indicating that it does not have an amount of
capital satisfying its minimum capital requirements or imposing any
restrictions on Matrix Bank's ability to declare and pay cash Distributions
to Borrower, (iii) the existence and status of any Litigation that, if
determined adversely to any Company, would be a Material-Adverse Event,
(iv) any change in any material fact or circumstance represented or
warranted by any Company in any Loan Document that constitutes a Material-
Adverse Event, (v) the receipt by any Company of notice of any violation or
alleged violation of ERISA or any Environmental Law or other Law if that
violation is a Material-Adverse Event, or (vi) a Default or Potential
Default specifying the nature thereof and what action Borrower has taken,
is taking, or proposes to take with respect to it.
(e) Other Information. Promptly upon reasonable request by Agent or
-----------------
Determining Lenders (through Agent), information (not otherwise required to
be furnished under the Loan Documents) respecting the business affairs,
assets, and liabilities of any Company and opinions, certifications, and
documents in addition to those mentioned in this agreement.
7.2 Use of Proceeds. Each Company shall use the proceeds of Borrowings
---------------
only for the purposes represented in this agreement.
7.3 Books and Records. Each Company shall maintain books, records, and
-----------------
accounts necessary to prepare Financials in accordance with GAAP.
7.4 Inspections. Upon reasonable request and to the extent lawful, each
-----------
Company shall allow Agent, any Lender, or their respective Representatives to
inspect any of its properties, to review reports, files, and other records and
to make and take away copies, to conduct tests or investigations, and to discuss
any of its affairs, conditions, and finances with its directors, officers,
employees, or representatives from time to time during reasonable business
hours.
7.5 Taxes. Each Company shall promptly pay before delinquency any and all
-----
Taxes other than Taxes of which the failure to pay is not a Material-Adverse
Event or which are being contested in good faith by lawful proceedings
diligently conducted, against which reserve or other provision required by GAAP
has been made, and in respect of which levy and execution of any Lien have been
and continue to be stayed.
7.6 Expenses. Borrower shall pay (a) all reasonable legal fees and
--------
expenses incurred by Agent in connection with the preparation, negotiation, and
execution of the Loan Documents, (b) all reasonable legal fees and expenses
incurred by Agent in connection with each separate future amendment, consent,
waiver, or approval requested or agreed to by Borrower and executed in
connection with any Loan Document, (c) all fees, charges, or Taxes for the
recording or filing of any Loan Document to create or perfect Lender Liens, (d)
all other reasonable out-of-pocket expenses of Agent or any Lender in connection
with the preparation, negotiation, execution, or administration of the Loan
Documents, including courier expenses, (e) all amounts expended, advanced, or
incurred by Agent or any Lender to satisfy any obligation of any Company under
any Loan Document, to collect the Obligation, or to enforce the Rights of Agent
or any Lender under any Loan Document, including all court costs, attorneys'
fees (whether for trial, appeal, other proceedings, or otherwise), fees of
auditors and accountants, and investigation expenses reasonably incurred by
Agent or any Lender in connection with any such matters, and (f) interest at an
annual interest rate equal to the Default Rate on each item specified in clauses
(a) through (e) above from 30 days after the date of written demand or request
for reimbursement.
Credit Agreement
----------------
18
<PAGE>
7.7 Maintenance of Existence, Assets, and Business. Each Company shall
----------------------------------------------
(a) except as permitted by Section 8.5, maintain its corporate existence and
good standing in its jurisdiction of incorporation and its authority to transact
business in all other states where failure to maintain its authority to transact
business is a Material-Adverse Event, and (b) maintain all licenses, permits,
and franchises necessary for its business where failure to do so is a Material-
Adverse Event.
7.8 Insurance. Each Company shall (a) maintain with financially sound and
---------
reputable insurers, insurance with respect to its assets and business against
such liabilities, casualties, risks, and contingencies and in such types and
amounts (including a fidelity bond or bonds in form and with coverage, with a
company, and with respect to such individuals or groups of individuals) as is
customary in the case of Persons engaged in the same or similar businesses and
similarly situated and, if applicable, as satisfy prevailing FDIC and OTS
applicable requirements, and (b) upon Agent's request, furnish to Agent from
time to time a summary of their insurance coverage, in form and substance
satisfactory to Agent, and originals or copies of the applicable policies.
7.9 Subsidiaries. Borrower shall give Agent 20 days written notice in
------------
advance of the formation or acquisition of any new direct or indirect Subsidiary
of Borrower. Within 20 days after any such new Subsidiary's acquisition or
formation, Borrower shall, and shall cause the Companies to, fully comply with
the applicable provisions of Section 4.1.
7.1 Indemnification. In consideration of the commitments by Agent and
---------------
Lenders under the Loan Documents, Borrower shall indemnify and defend Agent,
each Lender, and their respective affiliates and representatives (collectively,
the "Indemnified Parties") -- and defend them and hold each of them harmless --
against any and all out-of-pocket losses, liabilities, claims, damages,
deficiencies, interest, judgments, costs, or expenses (including reasonable
attorneys' fees) incurred by any of them arising from or because of (a) any
investigation, litigation, or other proceeding brought or threatened in
connection with any loan document or the transactions contemplated by the Loan
Documents, including, without limitation, any use by any Company of the proceeds
of Borrowings, and (b) any representation made by any Company under any Loan
Document. Although each Indemnified Party is entitled to Indemnification for
any Indemnified Party's ordinary negligence, no Indemnified Party is entitled to
Indemnification for its own gross negligence, willful misconduct, or fraud.
This indemnity survives the payment and performance of the Obligation and
termination of the Loan Documents.
SECTION 8 NEGATIVE COVENANTS. For so long as any Lender is committed to lend
- --------- ------------------
under this agreement and until the Obligation has been fully paid and performed,
Borrower covenants and agrees with Agent and Lenders that, without first
obtaining Determining Lenders' consent to the contrary, the Companies designated
in the following sections of this Section 8 may not directly or indirectly do
any of the following or commit (other than a commitment that is not binding on
any Company until any prior written consent of Determining Lenders is first
obtained) to do any of the following:
8.1 Debt. Neither Borrower nor Matrix Bank may create, incur, or permit
----
to exist any Debt except the following (collectively, the "Permitted Debt"):
(a) Existing Debt. The existing Debt that is described on Schedule
-------------
6.7 (other than Refinanced Debt) and all renewals, extensions, amendments,
modifications, and refinancings of (but not any principal increases after
the date of this agreement to) any of that Debt.
(b) This Transaction. The Obligation and Guaranties delivered under
----------------
this agreement.
(c) To Borrower. Debt of Matrix Bank to Borrower to the extent that
-----------
the creation of it constitutes a Permitted Investment.
Credit Agreement
----------------
19
<PAGE>
(d) Other Debt. Other Debt incurred by either Borrower or Matrix Bank
----------
with the approval of all Lenders that never exceeds $1,000,000 in total-
principal amount outstanding for both Borrower and Matrix Bank, together
with renewals, extensions, amendments, modifications, and refinancings of
that Debt and those obligations subject to the foregoing limitations of
this clause (d).
(e) Miscellaneous. Hedging Contracts; trade payables, accrued Taxes,
-------------
and other liabilities that do not constitute Debt for borrowed money or
Capital Leases; and endorsements of negotiable instruments in the ordinary
course of business.
09/27/97
(f) Senior Notes. Up to $20,000,000 principal amount of Debt with
------------
respect to the senior debt offering consisting of the "Notes" as
described in the Form S-1 filed by Borrower on September 4, 1997, with the
Securities and Exchange Commission, which "Notes" are so described as
unsecured general obligations of Borrower with pari passu right of payment
with all current and future unsecured Debt of Borrower.
01/29/99
(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.
06/30/99
(h) Matrix Bancorp Capital Trust I Guaranty. Guaranty by Borrower of
---------------------------------------
the payment obligations of Matrix Bancorp Capital Trust I under the
1,100,000 Trust Preferred Securities proposed to be issued under the
Amended and Restated Trust Agreement proposed to be entered into by
Borrower, State Street Bank and Trust Company as Property Trustee,
Wilmington Trust Company as Delaware Trustee, and certain administrative
trustees, as described in the Form S-1 filed by Borrower with the
Securities and Exchange Commission via EDGAR on June 1, 1999.
06/30/99
(i) Matrix Financial Services Guaranty. Guaranty by Borrower of the
----------------------------------
obligations of Matrix Financial Services Corporation under the SS&TG
Customer Agreement and the Agreement for Early Funding, both dated May 4,
1994, and both between Matrix Financial Services Corporation and the
Federal Home Loan Mortgage Corporation related to the purchase and sale of
mortgage-related and debt securities issued or guaranteed by the Federal
Home Loan Mortgage Corporation and related options or forwards.
06/30/99
(j) PaineWebber Guaranty. Guaranty by Borrower of the obligations of
--------------------
Matrix Financial Services Corporation to PaineWebber Incorporated in
connection with transactions for the purchase, sale, lending, borrowing,
and delivery of securities and related transactions.
06/30/99
(k) Subordinated Debt. Subordinated Debt, so long as Borrower does
-----------------
not (A) prepay or cause to be prepaid any principal of, or any interest on,
any of the Subordinated Debt except (i) conversions of Subordinated Debt to
equity of Borrower that is not mandatorily redeemable, (ii) exchanges of
Subordinated Debt for other Subordinated Debt, and (ii) prepayment of
Subordinated Debt with the proceeds of the issuance of additional
Subordinated Debt or capital stock issued by Borrower, or (B) amend or
modify the terms of any Subordinated Debt to the extent that (i) any of the
applicable subordination, payment blockage, or standstill provisions are
less favorable to Lenders than exists for the Subordinated Debentures, as
described in the Form S-1 filed by Borrower with the Securities and
Exchange Commission via EDGAR on June 1, 1999, (ii) the applicable
representations, covenants, events of default, and other provisions are
materially more onerous to the obligor than exists for the Subordinated
Debentures, as described in the Form S-1 filed by Borrower with the
Securities and Exchange Commission via EDGAR on June 1, 1999, or (iii)
scheduled
Credit Agreement
----------------
20
<PAGE>
or mandatory principal or sinking fund payment obligations before 180 days
after the Maturity Date are made applicable to any Subordinated Debt.
8.2 Liens. Neither Borrower nor Matrix Bank may create, incur, permit to
-----
exist, or enter into any arrangement or agreement (except the Loan Documents)
that directly or indirectly prohibits any Company from creating or incurring any
Lien on any of its assets, or create, incur, permit to exist, or commit to
create or incur any Lien on any of its assets except the following
(collectively, the "Permitted Liens"):
(a) Existing Liens. The existing Liens that are described on Schedule
--------------
6.13 (to the extent that such schedule does not indicate they are to be
extinguished as a condition precedent to, or concurrent with, the initial
Borrowing under this agreement) and all renewals, extensions, amendments,
and modifications of any of them to the extent that the total-principal
amount each individually secures never exceeds the total-principal amount
secured by it on the date of this agreement.
(b) This Transaction. Lender Liens.
----------------
(c) Operating Leases. Any interest or title of a lessor in assets
----------------
being leased under an operating lease that does not constitute Debt.
(d) Hedging Contracts. Liens arising under Hedging Contracts that do
-----------------
not cover any Collateral.
(e) Purchase Money. Liens that secure any of the Permitted Debt
--------------
described in Section 8.1(d) (together with any renewal, extension,
amendment, or modification of any such Lien) so long as each such Lien
never cover any assets except the assets acquired, constructed, or improved
with the directly related Permitted Debt.
(f) Setoffs. Subject to any limitations imposed upon them in the Loan
-------
Documents, rights of set off or recoupment and banker's Liens.
(g) Insurance. Pledges or deposits (to the extent that they do that
---------
may not cover any Collateral except cash proceeds of Collateral arising in
the ordinary course of business) made to secure payment of workers'
compensation, unemployment insurance, or other forms of governmental
insurance or benefits or to participate in any fund in connection with
workers' compensation, unemployment insurance, pensions, or other social
security programs.
(h) Bids and Bonds. Good-faith pledges or deposits (to the extent
--------------
that they do not cover any Collateral except cash proceeds of Collateral
arising in the ordinary course of business) (i) for 10% or less of the
amounts due under (and made to secure) any Company's performance of bids,
tenders, contracts (except for the repayment of borrowed money), (ii) in
respect of any operating lease, that are for up to but not more than the
greater of either 10% of the total rental obligations for the term of the
lease or 50% of the total rental obligations payable during the first year
of the lease, or (iii) made to secure statutory obligations, surety or
appeal bonds, or indemnity, performance, or other similar bonds benefitting
any Company in the ordinary course of its business.
(i) Property Restrictions. Zoning and similar restrictions on the use
---------------------
of, and easements, restrictions, covenants, title defects, and similar
encumbrances on, real property that do not materially impair the use of the
real property and that are not violated by existing or proposed structures
or land use.
(j) Inchoate Liens. If no Lien has been filed in any jurisdiction or
--------------
agreed to (i) claims and Liens for Taxes not yet due and payable, (ii)
mechanic's Liens and materialman's Liens for services or materials and
similar Liens incident to construction and maintenance of real property, in
21 Credit Agreement
----------------
<PAGE>
each case for which payment is not yet due and payable, (iii) landlord's
Liens for rental not yet due and payable, and (iv) Liens of warehousemen
and carriers and similar Liens securing obligations that are not yet due
and payable.
(k) Miscellaneous. Any of the following to the extent that the
-------------
validity or amount is being contested in good faith and by appropriate and
lawful proceedings diligently conducted, reserve or other appropriate
provision (if any) required by GAAP has been made, levy and execution has
not issued or continues to be stayed, they do not individually or
collectively detract materially from the value of the property of the
Person in question or materially impair the use of that property in the
operation of its business, and (other than any such Liens given statutory
priority) they are subordinate to the Lender Liens to the extent that they
cover any Collateral: (i) Claims and Liens for Taxes; (ii) claims and
Liens upon, and defects of title to, real or personal property, including
any attachment of personal or real property or other legal process before
adjudication of a dispute on the merits; (iii) claims and Liens of
mechanics, materialmen, warehousemen, carriers, landlords, or other like
Liens; (iv) Liens incident to construction and maintenance of real
property; and (v) adverse judgments, attachments, or orders on appeal for
the payment of money.
11/12/98
(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.
8.3 Investments. Borrower may not make any Investments except the
-----------
following (collectively, "Permitted Investments"):
(a) Government Securities. Government Securities.
---------------------
(b) State Obligations. Readily marketable direct obligations of any
-----------------
state of the United States of America given on the date of such investment
a credit rating of at least Aa by Moody's Investors Service, Inc., or AA by
Standard & Poor's Corporation, in each case due within one year from the
making of the investment.
(c) Certificates of Deposit, Etc. Certificates of deposit issued by,
-----------------------------
bank deposits in, eurocurrency deposits through, bankers' acceptances of,
and repurchase agreements covering Government Securities executed by (i)
any Lender or (ii) any domestic bank or any domestic branch or office of a
foreign bank, in either case having on the date of the investment a short-
term certificate of deposit credit rating of at least P-2 by Moody's
Investors Service, Inc., or A-2 by Standard & Poor's Corporation, in each
case due within one year after the date of the making of the investment.
(d) Government Repos. Repurchase agreements covering Government
----------------
Securities executed by a broker or dealer registered under Section 15(b) of
the Securities Exchange Act of 1934 having on the date of the investment
capital of at least $100,000,000, due within 30 days after the date of the
making of the investment, so long as the maker of the investment receives
written confirmation of the transfer to it of record ownership of the
Government Securities on the books of a "primary dealer" in the Government
Securities as soon as practicable after the making of the investment.
(e) Commercial Paper. Readily marketable commercial paper of domestic
----------------
corporations doing business in the United States of America or any of its
states or of any corporation that is the holding company for a bank
described in clause (c) above and having on the date of the investment a
credit rating of at least P-1 by Moody's Investors Service, Inc., or A-1 by
Standard & Poor's Corporation, in each case due within 90 days after the
date of the making of the investment.
22 Credit Agreement
----------------
<PAGE>
(f) Preferred Stock. "Money market preferred stock" issued by a
---------------
domestic corporation given on the date of the investment a credit rating of
at least Aa by Moody's Investors Services, Inc., and AA by Standard &
Poor's Corporation, in each case having an investment period not exceeding
50 days, so long as (i) the amount of all of those investments issued by
the same issuer does not exceed $5,000,000 and (ii) the total amount of all
of those investments does not exceed $10,000,000.
(g) Mutual Funds. A readily redeemable "money market mutual fund"
------------
sponsored by a bank described in clause (c) above, or a registered broker
or dealer described in clause (d) above, that has and maintains an
investment policy limiting its investments primarily to instruments of the
types described in clauses (a) through (f) above and has on the date of
those investment total assets of at least $1,000,000,000.
(h) Other Companies. Investments by Borrower in any other Company in
---------------
compliance with Section 4.1.
(i) Directors, Etc.. Loans or advances to directors, officers, and
---------------
employees of the Borrower that never exceed a total of $1,000,000 in
principal-amount outstanding.
(j) Customers. Indebtedness of its customers created in its ordinary
---------
course of business in a manner consistent with its present practices.
(k) Hedge Contracts. Hedge Contracts.
---------------
08/18/97
(l) Miscellaneous. Other Investments made in the ordinary course of
-------------
business for a financial services firm.
11/12/98
(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.
For purposes of this Section 8.3, the total amount outstanding of any Investment
by any Person in any other Person is to be determined net of repayments and
dividends to, and sales of securities of the second Person by, the first Person.
06/29/98
8.4 Distributions. Borrower may not pay or declare any Distribution.
-------------
8.5 Merger or Consolidation. No Company may merge or consolidate with or
-----------------------
into any other Person except that any Company may merge into or be consolidated
with any other Company so long as Borrower is the surviving corporation if it is
involved.
8.6 Dispositions of Assets. Neither Borrower nor Matrix Bank may sell,
----------------------
assign, lease, transfer, or otherwise dispose of any of its assets (including,
without limitation, equity interests in any other Company) except (a) sales and
dispositions in the ordinary course of business for a fair and adequate
consideration and (b) sales of assets which are obsolete or are no longer in use
and which are not significant to the continuation of that Company's business.
8.7 Use of Proceeds. Borrower may not use the proceeds of Borrowings (a)
---------------
for any purpose other than as represented in this agreement, (b) for wages of
employees, unless a timely payment to or deposit with the United States of
America of all amounts of Tax required to be deducted and withheld with respect
to such wages is also made, or (c) in violation of the representation in Section
6.1.
23 Credit Agreement
----------------
<PAGE>
8.8 Transactions with Affiliates. No Company may directly or indirectly
----------------------------
enter into any transaction with any of its Affiliates other than (a)
transactions between Companies that are in compliance with Section 4.1 and (b)
other transactions in the ordinary course of business or upon fair and
reasonable terms not materially less favorable than it could obtain or could
become entitled to in an arm's-length transaction with a Person that was not its
Affiliate.
8.9 Employee Plans. Except where a Material-Adverse Event would not
--------------
result, no Company may directly or indirectly permit any of the events or
circumstances described in Section 6.12 to exist or occur.
8.10 Compliance with Laws and Documents. No Company may directly or
----------------------------------
indirectly (a) violate the provisions of any Laws applicable to it or of any
Material Agreement to which it is a party if that violation alone or with all
other violations is a Material-Adverse Event or (b) violate the provisions of
its charter or bylaws or repeal, replace or amend any provision of its charter
or bylaws if any such action is a Material-Adverse Event.
8.11 Government Regulations. No Company (other than United Capital
----------------------
Markets, Inc.) may directly or indirectly conduct its business in a way that it
becomes regulated under the Investment Company Act of 1940.
8.12 Fiscal Year Accounting. No Company may directly or indirectly change
----------------------
its fiscal year nor use any accounting method other than GAAP.
8.13 New Businesses. No Company may directly or indirectly engage in any
--------------
business except the businesses in which it or any of its Affiliates is presently
engaged and any other reasonably-related business.
8.14 Assignment. No Company may directly or indirectly assign or transfer
----------
any of its Rights, duties, or obligations under any of the Loan Documents.
SECTION 9 FINANCIAL COVENANTS. For so long as any Lender is committed to lend
- --------- -------------------
under this agreement and until the Obligation has been fully paid and performed,
Borrower covenants and agrees with Agent and Lenders that, without first
obtaining Determining Lenders' consent to the contrary, it may not directly or
indirectly permit any of the following to occur or exist, as measured (unless
otherwise stated) at the end of each of the Companies' fiscal quarters included
below:
06/29/98
9.1 Net Worth. The Companies' Net Worth to be less than the greater of
---------
either (a) the sum of (i) 90% of actual Net Worth at the most recent fiscal year
end, plus (ii) 50% of cumulative Net Income (without deduction for losses) after
the most recent fiscal year end, plus (iii) 90% of all contributions to
Borrower's stockholders' equity made after the Closing Date, or (b) $40,000,000.
9.2 Adjusted Debt/Net Worth. The ratio of the Companies' Adjusted Debt to
-----------------------
Net Worth to exceed 4.0 to 1.0.
06/29/98
9.3 Cash Coverage. The ratio (calculated only in respect of Borrower) of
-------------
cash dividends and tax sharing payments available to be received by the Borrower
from its Subsidiaries divided by cash expenses and CMLTD paid by the Borrower,
may not be less than 1.5 to 1.0 for any four-fiscal-quarter period.
06/29/98
9.4 Net Income. Matrix Bank's Net Income to be less than $7,500,000 for
----------
any four-fiscal-quarter period.
9.5 Capital Ratio. Matrix Bank fails to maintain either (a) a "well
-------------
capitalized" designation from OTS with respect to its minimum "Risk Based
Capital," as defined in 12 C.F.R. (S) 565.4(b)(1), or (b) a "Risk Based Capital
Ratio," in 12 C.F.R. (S) 567.2(a)(1) of not less than 10%.
24 Credit Agreement
----------------
<PAGE>
9.6 Leverage Ratio. Matrix Bank fails to maintain either (a) a "well
--------------
capitalized" designation from OTS with respect to its "Leverage," as defined in
12 C.F.R. (S) 565.4(b)(1), or (b) a "Leverage Ratio," in 12 C.F.R. (S)
567.2(a)(2)(ii) of not less than 5.0%.
9.7 Classified Assets/Total Capital. The ratio of Matrix Bank's
-------------------------------
Classified Assets to Total Capital (stated as a percentage) to exceed 50%.
06/29/98
9.8 Net Charge Offs/Total Loans. The ratio of Matrix Bank's Net Charge
---------------------------
Offs to Total Loans (stated as a percentage) to exceed 0.50%.
9.9 Adjusted Assets/Total Assets. The ratio of Matrix Bank's Adjusted
----------------------------
Assets to total assets (stated as a percentage) to be less than the greater of
either (a) the minimum percentage required by (S) 10(m) of the Home Owners' Loan
Act for "QTL" or (b) 60%.
08/18/97
9.10 Interest Rate Sensitivity. Deterioration in the base case
-------------------------
sensitivity, as measured by the "No Change" category of the "Present Value
Estimates by Interest Rate Scenario" in the quarterly OTS's "Interest Rate Risk
Exposure Report" for Matrix Bank may never exceed $10,000,000.
06/29/98
9.11 Commercial Loans/Total Capital. The ratio of the outstanding
------------------------------
principal balance of Commercial Loans owned by Matrix Bank to Total Capital of
Matrix Bank to exceed 200%.
SECTION 10 DEFAULTS AND REMEDIES.
- ---------- ---------------------
10. Default. The term "Default" means the existence or occurrence of any
-------
one or more of the following:
(a) Obligation. Borrower fails to pay (i) any interest on the
----------
Obligation when due under the Loan Documents and that failure continues for
five days or (ii) any other part of the Obligation when due under the Loan
Documents.
(b) Covenants. Any Company fails to punctually and properly perform,
---------
observe, and comply with any (i) any covenant, agreement, or condition
under Sections 8 or 9 or (ii) any covenant, agreement, or condition
contained in any of the Loan Documents -- other than covenants to pay the
Obligation and the covenants listed in clause (i) above -- and that failure
continues for a period of 30 calendar days after any Company has, or, with
the exercise of reasonable investigation, should have, notice of it.
(c) Misrepresentation. Any material statement, warranty, or
-----------------
representation by or on behalf of any Company or Guarantor in any Loan
Document or other writing authored by any Company or Guarantor and
furnished in connection with the Loan Documents, proves to have been
incorrect or misleading in any material respect as of the date made or
deemed made.
(d) Debtor Law. Any Company or Guarantor (i) is not Solvent, (ii)
----------
fails to pay its Debts generally as they become due, (iii) voluntarily
seeks, consents to, or acquiesces in the benefit of any Debtor Law, or (iv)
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 Agent or any Lender granted in the
Loan Documents unless, if the proceeding is involuntary, the applicable
petition is dismissed within 60 days after its filing.
08/18/97
(e) Matrix Financial Loan Agreement. Either (i) the occurrence of a
-------------------------------
"Default," as defined in the Matrix Financial Loan Agreement or (ii) 90-
days elapse after the commitments to lend under the Matrix Financial Loan
Agreement are canceled or terminated by Matrix Financial under that
agreement in accordance with its terms or are not extended beyond their
current expiration by Matrix Financial.
25 Credit Agreement
----------------
<PAGE>
(f) Other Debt. Any Company or Guarantor fails to make any payment
----------
due on any Debt or security (with respect to which any Company or Guarantor
has redemption, sinking fund, or other purchase obligations) or any event
occurs or any condition exists in respect of any Debt or security of any
Company or Guarantor, the effect of which is (i) to cause or to permit any
holder of that Debt or security or a trustee to cause (whether or not it
elects to cause) any of that Debt or security to become due before its
stated maturity or its regularly scheduled payment dates, or (ii) to permit
a trustee or the holder of any security (other than common stock of any
Company or Guarantor) to elect (whether or not it does elect) a majority of
the directors on the board of directors of that Company or Guarantor.
(g) Judgments. Any Company or Guarantor fails to pay any money
---------
judgment of $50,000 or more against it at least ten days prior to the date
on which any of the assets of that Company or Guarantor may be lawfully
sold to satisfy that judgment.
(h) Attachments. The failure to have discharged within a period of 30
-----------
days after the commencement of any attachment, sequestration, or similar
proceeding against any of the assets of any Company or Guarantor.
(i) Unenforceability. Any material provision of any Loan Document for
----------------
any reason ceases to be in full force and effect or is fully or partially
declared null and void or unenforceable or the validity or enforceability
of any Loan Document is challenged or denied by any Company.
06/29/98
(j) Change of Control. Any (i) material change in the ownership or
-----------------
management of Borrower or any Guarantor from that ownership and senior
management as it exists on the date of this agreement without the written
approval of all Lenders, (ii) failure to provide advance notice of any
change in ownership or management, or (iii) common stock, preferred stock,
or ownership interest in Matrix Bank ceases to be owned by Borrower.
(k) Capital Requirements or Restrictions/Bankers Bond. Matrix Bank
-------------------------------------------------
(i) has (or receives notice or a directive from OTS that it has) inadequate
capital to satisfy its minimum capital requirements, (ii) receives any
notice or capital directive from OTS restricting its ability to pay cash
Distributions to Borrower, or (iii) receives notice of intention to cancel
or of cancellation of its Bankers Blanket Bond.
10. Remedies.
--------
(a) Debtor Law. Upon the occurrence of a Default under Section
----------
10.1(d), the commitments of Lenders to extend credit under this agreement
automatically terminate and the full Obligation is automatically due and
payable, without presentment, demand, notice of default, notice of the
intent to accelerate, notice of acceleration, or other requirements of any
kind, all of which are expressly waived by Borrower.
(b) Other Defaults. While a Default exists -- other than those
--------------
described in clause (a) above -- Agent may and, upon the direction of
Determining Lenders, shall declare the Obligation to be immediately due and
payable, whereupon it shall be due and payable, whereupon the commitments
of Lenders to extend credit under this agreement are then automatically
terminated.
(c) Other Remedies. Following the termination of the commitments of
--------------
Lenders to extend credit under this agreement and the acceleration of the
Obligation, Agent may (and, at the direction of Determining Lenders, shall)
do any one or more of the following: (i) Reduce any claim to judgment;
(ii) foreclose upon or otherwise enforce any Lender Liens; and (iii)
exercise any other Rights in the Loan Documents, at Law, in equity, or
otherwise that Determining Lenders may direct. Should any Default continue
that, in Agent's opinion, materially and adversely affects the Collateral
or the interests of the Lenders under this agreement, Agent may, in a
notice to the Lenders of that
26 Credit Agreement
----------------
<PAGE>
Default set forth one or more actions that Agent, in its opinion, believes
should be taken. Unless otherwise directed by Determining Lenders
(excluding the Lender serving as Agent) within ten days following the date
of the notice setting forth the proposed action or actions, Agent may, but
shall not be obligated to, take the action or actions set forth in that
notice.
10.3 Right of Offset. Borrower hereby grants to Agent and to each Lender a
---------------
right of offset, to secure the repayment of the Obligation, upon any and all
monies, securities, or other property of Borrower, and the proceeds therefrom
now or hereafter held or received by or in transit to Agent or such Lender from
or for the account of Borrower, whether for safekeeping, custody, pledge,
transmission, collection, or otherwise, and also upon any and all deposits
(general or special, time or demand, provisional or final) and credits of
Borrower, and any and all claims of Borrower against Agent or such Lender, at
any time existing. While a Default exists, Agent and each Lender are authorized
at any time and from time to time, without notice to either Company, to offset,
appropriate, and apply any and all of those items against the Obligation,
subject to Section 3.9.
10.4 Waivers. Borrower waives any right to require Agent to (a) proceed
-------
against any Person, (b) proceed against or exhaust any of the Collateral or
pursue its Rights and remedies as against the Collateral in any particular
order, or (c) pursue any other remedy in its power. Borrower and each surety,
endorser, guarantor, pledgor, and other party ever liable or whose property is
ever liable for payment of any of the Obligation jointly and severally waive
presentment and demand for payment, protest, notice of intention to accelerate,
notice of acceleration, and notice of protest and nonpayment, and agree that
their or their property's liability with respect to the Obligation, or any part
thereof, shall not be affected by any renewal or extension in the time of
payment of the Obligation, by any indulgence, or by any release or change in any
security for the payment of the Obligation, and hereby consent to any and all
renewals, extensions, indulgences, releases, or changes, regardless of the
number thereof.
10.5 Performance by Agent. Should any covenant, duty, or agreement of any
--------------------
Company fail to be performed in accordance with the terms of this agreement or
of any document delivered under this agreement, Agent may, at its option, after
notice to Borrower, as the case may be, perform, or attempt to perform, such
covenant, duty, or agreement on behalf of that Company and shall notify each
Lender that it has done so. In such event, Borrower shall jointly and
severally, at the request of Agent, promptly pay any amount expended by Agent in
such performance or attempted performance to Agent at its principal place of
business, together with interest thereon at the Maximum Rate from the date of
such expenditure by Agent until paid. Notwithstanding the foregoing, it is
expressly understood that Agent does not assume and shall never have, except by
express written consent of Agent, any liability or responsibility for the
performance of any duties of any Company under this agreement or under any other
document delivered under this agreement.
10.6 No Responsibility. Except in the case of fraud, gross negligence, or
-----------------
willful misconduct, neither Agent nor any of its officers, directors, employees,
or attorneys shall assume -- or ever have any liability or responsibility for --
any diminution in the value of the Collateral or any part of the Collateral.
10.7 No Waiver. The acceptance by Agent or any Lender at any time and from
---------
time to time of partial payment or performance by any Company of any of their
respective obligations under this agreement or under any Loan Document shall not
be deemed to be a waiver of any Default then existing. No waiver by Agent or any
Lender shall be deemed to be a waiver of any other then existing or subsequent
Default. No delay or omission by Agent or any Lender in exercising any right
under this agreement or under any other document required to be executed under
or in connection with this agreement shall impair such right or be construed as
a waiver thereof or any acquiescence therein, nor shall any single or partial
exercise of any such right preclude other or further exercise thereof, or the
exercise of any other right under this agreement or otherwise.
10.8 Cumulative Rights. All Rights available to Agent and the Lenders
-----------------
under this agreement or under any other document delivered under this agreement
shall be cumulative of and in addition to all other Rights granted to Agent and
the Lenders at Law or in equity, whether or not the Notes be due and payable
27 Credit Agreement
----------------
<PAGE>
and whether or not Agent shall have instituted any suit for collection,
foreclosure, or other action in connection with this agreement or any other
document delivered under this agreement.
10.9 Rights of Individual Lenders. No Lender shall have any right by
----------------------------
virtue of, or by availing itself of, any provision of this agreement to
institute any actions or proceedings at Law, in equity, or otherwise (excluding
any actions in bankruptcy), upon or under or with respect to this agreement, or
for the appointment of a receiver, or for any other remedy under this agreement,
unless (a) the Determining Lenders previously shall have given to Agent written
notice of a Default and the continuance thereof, including a written request
upon Agent to institute such action or proceedings in its own name and offering
to indemnify Agent against the costs, expenses and liabilities to be incurred
therein or thereby, (b) Agent, for ten Business Days after its receipt of such
notice, shall have failed to institute any such action or proceeding, and (c) no
direction inconsistent with such written request shall have been given to Agent
by Determining Lenders. It is understood and intended, and expressly covenanted
by the taker and holder of every Note with every other taker and holder and
Agent, that no one or more holders of Notes shall have any right in any manner
whatever by virtue, or by availing itself, of any provision of this agreement to
affect, disturb or prejudice the Rights of any other Lenders, or to obtain or
seek to obtain priority over or preference to any other such Lender, or to
enforce any right under this agreement, except in the manner herein provided and
for the equal, ratable and common benefit of all Lenders. For the protection
and enforcement of the provisions of this Section 10.9, each and every Lender
and Agent shall be entitled to such relief as can be given either at law or in
equity.
10.10 Notice to Agent. Should any Default or Potential Default occur and be
---------------
continuing, any Lender having actual knowledge thereof shall notify Agent and
Borrower of the existence thereof, but the failure of any Lender to provide that
notice shall not prejudice that Lender's Rights under this agreement.
10.11 Costs. All court costs, reasonable attorneys' fees, other costs of
-----
collection, and other sums spent by Agent or any Lender in the exercise of any
Right provided in any Loan Document is payable to Agent or that Lender, as the
case may be, on demand, is part of the Obligation, and bears interest at the
Default Rate from the date paid by Agent or any Lender to the date repaid by
Borrower.
SECTION 11 AGENT.
- ---------- -----
11.1 Authorization and Action. Each Lender hereby appoints Agent as Agent
------------------------
under the Loan Documents and authorizes Agent to take such action on its behalf
and to exercise such powers and perform such duties as are expressly delegated
to Agent by the terms of the Loan Documents, together with such powers as are
reasonably incidental thereto. As to any matter not expressly provided for by
this agreement (including, without limitation, enforcement or collection of the
Notes), Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
Lenders, and those instructions shall be binding upon all Lenders and all
holders of the Notes. However, that Agent shall not be required to take any
action that exposes Agent to personal liability or that is contrary to this
agreement or applicable Laws. Agent agrees to give to each Lender prompt notice
of each notice given to it by Borrower pursuant to the terms of the Loan
Documents.
11.2 Agent's Reliance, Etc. Notwithstanding anything to the contrary in
----------------------
any Loan Document, neither Agent nor any of its Representatives shall be liable
for any action taken or omitted to be taken by it or them under or in connection
with the Loan Documents, except for its or their own gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, Agent: (a)
May treat the payee of any Note as the holder thereof; (b) may consult with
legal counsel (including counsel for Borrower), independent public accountants
and other experts selected by it or Borrower and shall not be liable for any
action taken or omitted to be taken in good faith by it in accordance with the
advice of such counsel, accountants or experts; (c) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties, or representations made in or in connection with the
Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of this
agreement on the part of Borrower or to inspect the property (including the
books and
28 Credit Agreement
----------------
<PAGE>
records) of Borrower; (e) shall not be responsible to any Lender for the due
execution, legality, validity, enforceability, genuineness, sufficiency or value
of this agreement or any other instrument or document furnished pursuant hereto;
and (f) shall incur no liability under or in respect of this agreement by acting
upon any notice, consent, certificate or other instrument or writing (which may
be by telecopy) believed by it to be genuine and signed or sent by the proper
party or parties.
11.3 Agent and Affiliates. With respect to Borrowings made by it, and the
--------------------
one or more Notes issued to it, Agent shall have the same rights and powers
under this agreement and the other Loan Documents as any other Lender and may
exercise the same as though it were not the Agent; and the term "Lender" or
"Lenders" shall, unless otherwise expressly indicated, include Agent in its
individual capacity. Agent and the Affiliates of Agent may accept deposits from,
lend money to, act as trustee under indentures of, and generally engage in any
kind of business with, Borrower, any of its Affiliates and any Person who may do
business with or own securities of Borrower or any of its Affiliates, all as if
Agent was not Agent and without any duty to account therefor to Lenders.
11.4 Credit Decision. Each Lender acknowledges that it has, independently
---------------
and without reliance upon Agent or any other Lender, and based on the financial
statements referred to in Sections 6.6 and 7.1 of this agreement and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter this agreement. Each Lender also acknowledges
that it will, independently and without reliance upon Agent or any Lender, and
based on such documents and information as it shall deem appropriate at the
time, make its own credit decisions in taking or not taking action under this
agreement.
11.5 Indemnification. Lenders shall indemnify Agent (to the extent not
---------------
reimbursed by Borrower), ratably according to their respective Commitment
Percentages, from and against any and all liabilities, obligations, losses,
damages, penalties, judgments, suits, costs, expenses, or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against Agent in any way relating to or arising out of this agreement or any
action taken or omitted by Agent under this agreement (including any of same
which may result from the negligence, but not gross negligence, of Agent).
However, no Lender shall be liable for any portion of those liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, or disbursements resulting from Agent's gross negligence or willful
misconduct. Without limitation of the foregoing, each Lender shall reimburse
Agent promptly upon demand for its ratable share of any out-of-pocket expenses
(including counsel fees) incurred by Agent in connection with the preparation,
execution, delivery, administration, modification, amendment, or enforcement
(whether through negotiations, legal proceedings, or otherwise) of, or legal
advice in respect of rights or responsibilities under, this agreement, to the
extent that Agent is not reimbursed for such expenses by Borrower.
11.6 Successor Agent. Agent may resign at any time by giving written
---------------
notice thereof to Lenders and Borrower and may be removed at any time with or
without cause by 100% of Lenders. Upon any such resignation or removal, 100% of
Lenders shall have the right to appoint a successor Agent in the capacity of
Agent. If no successor Agent shall have been so appointed by 100% of Lenders,
and shall have accepted such appointment, within 30 days after the retiring
Agent's giving of notice of resignation or the Lenders' removal of the retiring
Agent, then the retiring Agent may, on behalf of Lenders, appoint a successor
Agent, which shall be a commercial bank or savings bank organized under the laws
of the United States of America or of any state thereof which has a combined
capital and surplus of at least $200,000,000. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges,
and duties of the retiring Agent, and the retiring Agent shall be discharged
from any further duties, and obligations under this agreement. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this article shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under this agreement. The appointment of a
successor Agent shall not release the retiring Agent from any liability it may
have for any actions taken or omitted to be taken by it while it was Agent under
this agreement.
29 Credit Agreement
----------------
<PAGE>
SECTION 12 MISCELLANEOUS.
- ---------- -------------
12.1 Nonbusiness Days. Any action that is due under any Loan Document on
----------------
a non-Business Day may be delayed until the next Business Day. However, interest
accrues on any payment until it is made.
12.2 Communications. Unless otherwise stated, a communication under any
--------------
Loan Document to a party to this agreement must be written to be effective and
is deemed given:
. For Borrowing Requests, only when actually received by Agent.
. Otherwise, if by fax, when transmitted to the appropriate fax number
(but, without affecting the date deemed given, the fax must be
promptly confirmed by telephone).
. Otherwise, if by mail, on the third Business Day after enclosed in a
properly addressed, stamped, and sealed envelope deposited in the
appropriate official postal service.
. Otherwise, when actually delivered.
Until changed by written notice to each other party to this agreement, the
address and fax number are stated for (a) Borrower and Agent, beside their names
on the signature pages below, and (b) each Lender, beside its name on Schedule
2.
12.3 Form and Number of Documents. The form, substance, and number of
----------------------------
counterparts of each writing to be furnished under the Loan Documents must be
satisfactory to Agent and its counsel.
12.4 Exceptions to Covenants. An exception to any Loan Document covenant
-----------------------
does not permit violation of any other Loan Document covenant.
12.5 Survival. All Loan Document provisions survive all closings and are
--------
not affected by any investigation made by any party.
12.6 Governing Law. Unless otherwise stated, each Loan Document must be
-------------
construed and its performance enforced under the Laws of the State of Texas and
the United States of America.
12.7 Invalid Provisions. If any provision of a Loan Document is
------------------
judicially determined to be unenforceable, all other provisions of it remain
enforceable. If the provision determined to be unenforceable is a material part
of that Loan Document, then, to the extent lawful, it shall be replaced by a
judicially-construed provision that is enforceable but otherwise as similar in
substance and content to the original provision as the context of it reasonably
allows.
12.8 Conflicts Between Loan Documents. The provisions of this agreement
--------------------------------
control if in conflict (i.e., the provisions contradict each other as opposed to
a Loan Document containing additional provisions not in conflict) with the
provisions of any other Loan Document.
12.9 Discharge and Certain Reinstatement. Borrower's obligations under
-----------------------------------
the Loan Documents remain in full force and effect until no Lender has any
commitment to extend credit under the Loan Documents and the Obligation is fully
paid (except for provisions under the Loan Documents which by their terms
expressly survive payment of the Obligation and termination of the Loan
Documents). If any payment under any Loan Document is ever rescinded or must be
restored or returned for any reason, then all Rights and obligations under the
Loan Documents in respect of that payment are automatically reinstated as though
the payment had not been made when due.
30 Credit Agreement
----------------
<PAGE>
12.10 Amendments, Consents, Conflicts, and Waivers. An amendment of --
--------------------------------------------
or an approval, consent, or waiver by Agent or by one or more Lenders under --
any Loan Document must be in writing and must be:
(a) Borrower, Agent, and All Lenders. Executed by Borrower and
--------------------------------
Agent and executed or approved in writing by all Lenders if action of all
Lenders is specifically provided in any Loan Document or if it purports to
(i) except as otherwise stated in this Section 12.10, extend the due date
or decrease the scheduled amount of any payment under -- or reduce the
rate or amount of interest, fees, or other amounts payable to Agent or any
Lender under -- any Loan Document, (ii) change the definition of Borrowing
Base (or any component of it), Commitment Percentage, Determining Lenders,
Maturity Date, Termination Percentage, or Stated-Termination Date, or
(iii) partially or fully release any Guaranty or any Collateral except
releases of Collateral contemplated in this agreement.
(b) Borrower, Agent, and Determining Lenders. Otherwise (i) for
----------------------------------------
this agreement, executed by Borrower, Agent, and Determining Lenders, or
(ii) for other Loan Documents, approved in writing by Determining Lenders
and executed by Borrower, Agent, and any other party to that Loan
Document.
No course of dealing or any failure or delay by Agent, any Lender, or any of
their respective Representatives with respect to exercising any Right of Agent
or any Lender under the Loan Documents operates as a waiver of that Right. An
approval, consent, or waiver is only effective for the specific instance and
purpose for which it is given. The Loan Documents may only be supplemented by
agreements, documents, and instruments delivered according to their respective
express terms.
12.11 Multiple Counterparts. Any Loan Document may be executed in any
---------------------
number of counterparts with the same effect as if all signatories had signed the
same document, and all of those counterparts must be construed together to
constitute the same document. This agreement is effective when counterparts of
it have been executed and delivered to Agent by each Lender, Agent, and
Borrower, or, in the case only of those Lenders, when Agent has received faxed
or other evidence satisfactory to it that each Lender has executed and is
delivering to Agent a counterpart of it.
12.12 Parties. This agreement binds and inures to Borrower, each Lender,
-------
Agent, and their respective successors and permitted assigns. Only those
Persons may rely upon or raise any defense about this agreement.
(a) Assignment by Companies. No Company may assign any Rights or
-----------------------
obligations under any Loan Document without first obtaining the written
consent of Agent and all Lenders.
(b) Assignment by Lender. Any Lender may assign, pledge, and
--------------------
otherwise transfer all or any of its Rights and obligations under the Loan
Documents either (i) to a Federal Reserve Bank without the consent of any
party to this agreement so long as that Lender is not released from its
obligations under the Loan Documents, or (ii) otherwise in the ordinary
course of its lending business and in accordance with all Laws, and with
Section 12.13 or 12.14 so long as (A) except for assignments, pledges, and
other transfers by a Lender to its Affiliates, the written consent of
Borrower and Agent, which may not be unreasonably withheld, must be first
obtained, (B) the assignment or transfer (other than a pledge) does not
involve a purchase price that directly or indirectly reflects a discount
from face value unless that Lender first offered that assignment or
transfer to the other Lenders on ratable basis according to their
Commitment Percentages, (C) neither Borrower nor Agent are required to
incur any cost or expense incident to any assignment, pledge, or other
transfer by any Lender, all of which are for the account of the assigning,
pledging, or transferring Lender and its assignee, pledgee, or transferee
as they may agree, and (D) if the Participant or Purchaser is organized
under the Laws of any jurisdiction other than the United States of America
or any of its states, it complies with Section 3.14.
31 Credit Agreement
----------------
<PAGE>
(c) Otherwise Void. Any purported assignment, pledge, or other
--------------
transfer in violation of this section is void from beginning and not
effective.
12.13 Participations. Subject to Section 12.12(b) and this section and
--------------
only if no Default exists, a Lender may at any time sell to one or more Persons
(each a "Participant") participating interests in its Commitment and its share
of the Obligation.
(a) Additional Conditions. For each participation (i) the selling
---------------------
Lender must remain --and the Participant may not become -- a "Lender"
under this agreement, (ii) the selling Lender's obligations under the Loan
Documents must remain unchanged, (iii) the selling Lender must remain
solely responsible for the performance of those obligations, (iv) the
selling Lender must remain the holder of its one or more Notes and its
share of the Obligation for all purposes under the Loan Documents, and (v)
Borrower and Agent may continue to deal solely and directly with the
selling Lender in connection with those Rights and obligations.
(b) Participant Rights. The selling Lender may obtain for each of
------------------
its Participants the benefits of the Loan Documents related to
participations in its share of the Obligation, but Borrower is never
obligated to pay any greater amount that would be due to the selling
Lender under the Loan Documents calculated as though no participation had
been made. Otherwise, Participants have no Rights under the Loan Documents
except certain permitted voting Rights described below.
(c) Participation Agreements. An agreement for a participating
------------------------
interest (i) may only provide to a Participant voting Rights in respect of
any amendment of or approval, consent, or waiver under any Loan Document
related to the matters in Section 12.10(b) if it also provides for a
voting mechanism that a majority of that selling Lender's Commitment
Percentage or Termination Percentage, as the case may be (whether directly
held by that selling Lender or participated) controls the vote for that
selling Lender, and (ii) may not permit a Participant to assign, pledge,
or otherwise transfer its participating interest in the Obligation to any
Person except any Lender or its Affiliates.
12.14 Transfers. Subject to Section 12.12(b) and this section and only if
---------
no Default exists, a Lender may at any time sell to one or more financial
institutions (each a "Purchaser") all or part of its Rights and obligations
under the Loan Documents.
(a) Additional Conditions. The sale (i) must be accomplished by the
---------------------
selling Lender and Purchaser executing and delivering to Agent and
Borrower an Assignment and (ii) may not occur until the selling Lender
pays to Agent an administrative-transfer fee of $2,500 (unless waived by
Agent).
(b) Procedures. Upon satisfaction of the foregoing conditions and
----------
as of the Effective Date in the assignment and assumption agreement, which
may not be before delivery of that document to Agent and Borrower, then
(i) a Purchaser is for all purposes a Lender party to -- with all the
Rights and obligations of a Lender under -- this agreement, with a
Commitment as stated in the assumption agreement, (ii) the selling Lender
is released from its obligations under the Loan Documents to a
corresponding extent, (iii) Schedule 2 is automatically deemed to reflect
the name, address, and Commitment of the Purchaser and the reduced
Commitment of the selling Lender, and Agent shall deliver to Borrower and
Lenders an amended Schedule 2 reflecting those changes, (iv) Borrower
shall execute and deliver to each of the selling Lender and the Purchaser
a Note, each based upon their respective Commitments following the
transfer, (v) upon delivery of the one or more Notes under clause (iv)
above, the selling Lender shall return to the appropriate Company all
Notes previously delivered to it under this agreement, and (vi) the
Purchaser is subject to all the provisions in the Loan Documents, the same
as if it were a Lender that executed this agreement on its original date.
32 Credit Agreement
----------------
<PAGE>
12.15 Jurisdiction; Venue; Service of Process; and Jury Trial. EACH
-------------------------------------------------------
PARTY, IN EACH CASE FOR ITSELF, ITS SUCCESSORS AND ASSIGNS (AND IN THE CASE OF
BORROWER, FOR EACH OF ITS SUBSIDIARIES), (A) IRREVOCABLY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN TEXAS, AND
AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL
PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS AND THE
OBLIGATION BY SERVICE OF PROCESS AS PROVIDED BY TEXAS LAW, (B) IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN
CONNECTION WITH THE LOAN DOCUMENTS AND THE OBLIGATION BROUGHT IN ANY SUCH COURT,
(C) IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY SUCH COURT
HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) AGREES TO DESIGNATE AND MAINTAIN
AN AGENT FOR SERVICE OF PROCESS IN DALLAS, TEXAS, IN CONNECTION WITH ANY SUCH
LITIGATION AND TO DELIVER TO AGENT EVIDENCE THEREOF, IF REQUESTED, (E)
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH LITIGATION BY THE MAILING OF COPIES THEREOF BY CERTIFIED
MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, AT ITS ADDRESS SET FORTH
HEREIN, (F) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING AGAINST ANY PARTY
ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE OBLIGATION SHALL
BE BROUGHT IN ONE OF THE AFOREMENTIONED COURTS, AND (G) IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT OR
THE TRANSACTIONS CONTEMPLATED THEREBY. The scope of each of the foregoing
waivers is intended to be all-encompassing of any and all disputes that may be
filed in any court and that relate to the subject matter of this transaction,
including, without limitation, contract claims, tort claims, breach of duty
claims, and all other common law and statutory claims. Borrower (for itself and
on behalf of each of its Subsidiaries) and each other party to this agreement
acknowledge that this waiver is a material inducement to the agreement of each
party hereto to enter into a business relationship, that each has already relied
on this waiver in entering into this agreement, and each will continue to rely
on each of such waivers in related future dealings. Borrower (for itself and on
behalf of each of its Subsidiaries) and each other party to this agreement
warrant and represent that they have reviewed these waivers with their legal
counsel, and that they knowingly and voluntarily agree to each such waiver
following consultation with legal Counsel. THE WAIVERS IN THIS SECTION 12.15
ARE IRREVOCABLE, MEANING THAT THEY MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND THESE WAIVERS SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
SUPPLEMENTS, AND REPLACEMENTS TO OR OF THIS OR ANY OTHER LOAN DOCUMENT. In the
event of Litigation, this agreement may be filed as a written consent to a trial
by the court.
12.16 Limitation of Liability. Neither Agent nor any Lender shall be
-----------------------
liable to any Company for any amounts representing indirect, special, or
consequential damages suffered by any Company, except where such amounts are
based substantially on willful misconduct by Agent or any Lender, but then only
to the extent any damages resulting from such wilful misconduct are covered by
Agent's and the other Lenders' fidelity bond or other insurance.
12.17 Entire Agreement. The Loan Documents represent the final agreement
----------------
between the parties with respect to the subject matter thereof and may not be
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties. There are no unwritten oral agreements between the
parties.
Remainder of page intentionally blank.
Signature page follows.
33 Credit Agreement
----------------
<PAGE>
EXECUTED as of the date first stated in this agreement.
<TABLE>
<S> <C>
(address) MATRIX CAPITAL CORPORATION, as
Borrower
Matrix Capital Corporation
1380 Lawrence Street, Suite 1410
Denver, CO 80204 By /s/ Guy A. Gibson
Attn: Guy A. Gibson, Chief Executive Officer --------------------------------------------
and President Guy A. Gibson, Chief Executive Officer
Tel (303) 595-9898 and President
Fax (303) 595-9906
</TABLE>
<TABLE>
<S> <C>
(address) U.S. BANK NATIONAL ASSOCIATION, as 06/30/99
successor Agent
U.S. Bank National Association, Agent
950 17th Street, Suite 300
Denver, CO 80202 By /s/ Andrea C. Koeneke
Attn: Andrea C. Koeneke, Vice President --------------------------------------------
Tel (303) 585-4234 Andrea C. Koeneke, Vice President
Fax (303) 585-6273
</TABLE>
Signature Page to Credit Agreement
<PAGE>
6/30/99
THIRD AMENDED SCHEDULE 2
------------------------
LENDERS AND COMMITMENTS
-----------------------
Name of Lender Term Loan Revolving Combined
Commitment Facility Commitment
Commitment
===============================================================================
U.S. Bank National Association $ 5,000,000 $ 5,000,000 $10,000,000
950 17th Street, Suite 300
Denver, CO 80202
Attn: Andrea C. Koeneke
Vice President
Tel (303) 585-4234
Fax (303) 585-6273
- -------------------------------------------------------------------------------
Bank One, Texas, N.A. $ 2,500,000 $ 2,500,000 $ 5,000,000
1717 Main Street, 4th Floor
Dallas, TX 75201
Attn: Carol L. Whitley
Vice President
Tel (214) 290-2495
Fax (214) 290-2054
- -------------------------------------------------------------------------------
Residential Funding Corporation $ 2,500,000 $ 2,500,000 $ 5,000,000
1646 North California Boulevard
Suite 400
Walnut Creek, CA 94596
Attn: Mitchell Nomura
Director
Tel (925) 935-0614
Fax (925) 935-6424
===============================================================================
Total Commitments $10,000,000 $10,000,000 $20,000,000
===============================================================================
Third Amended Schedule 2
------------------------
<PAGE>
SCHEDULE 5
----------
CLOSING CONDITIONS
------------------
Unless otherwise specified, all dated as of March 12, 1997
(the "Closing Date") or a date (a "Current Date")
within 30 days before the Closing Date.
1. CREDIT AGREEMENT (the "Credit Agreement") between MATRIX CAPITAL
CORPORATION, a Colorado corporation ("Borrower"), certain lenders
("Lenders"), and BANK ONE, TEXAS, N.A., as Agent for Lenders ("Agent")--
all the terms in which have the same meanings when used in this
schedule -- accompanied by:
Schedule 2 - Lenders and Commitments
Schedule 5 - Closing Conditions
Schedule 6.2 - Companies
Schedule 6.7 - Existing Debt
Schedule 6.9 - Litigation and Judgments
Schedule 6.10 - Affiliate Transactions
Schedule 6.13 - Existing Liens
Exhibit A-1 - Term Note
Exhibit A-2 - Revolving Note
Exhibit B - Guaranty
Exhibit C - Pledge Agreement
Exhibit D-1 - Borrowing Request
Exhibit D-2 - Compliance Certificate
Exhibit E - Opinion of Counsel
Exhibit F - Assignment and Assumption Agreement
2. TERM NOTE in the stated principal amount of $2,000,000, executed by
Borrower, payable to the order of Bank One, Texas, N.A., as the sole
initial Lender, and in substantially the form of Exhibit A-1 to the
Credit Agreement.
3. REVOLVING NOTE in the stated principal amount of $6,000,000, executed by
Borrower, payable to the order of Bank One, Texas, N.A., as the sole
initial Lender, and in substantially the form of Exhibit A-2 to the
Credit Agreement.
4. GUARANTY executed by all of Borrower's Subsidiaries named below as
Guarantors ("Guarantors"), accepted by Agent, and in substantially the
form of Exhibit B to the Credit Agreement.
Matrix Financial Services Corporation
Matrix Funding Corporation
United Capital Markets, Inc.
United Financial, Inc.
United Special Services, Inc.
Vintage Delaware Holdings, Inc.
Vintage Financial Services Corporation
(now named First Matrix Investment Services Corp.)
The Vintage Group, Inc.
H&B [5.]GUARANTY re-executed by First Matrix Investment Services Corp., as
Guarantor, accepted by Agent, and in substantially the form of Exhibit
B to the Credit Agreement.
6. PLEDGE AGREEMENT executed by Borrower as Debtor and Agent as Secured
Party, and in substantially the form of Exhibit C to the Credit
Agreement.
Schedule 5
----------
<PAGE>
J&G [7.] STOCK CERTIFICATE(S) evidencing all of the issued and outstanding
common stock of Matrix Capital Bank accompanied by an ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE for each such stock certificate, duly
executed in blank by Borrower, and in substantially the form of Annex
A to the Pledge Agreement referred to above.
8. UCC SEARCH REPORTS for financing statements filed against Borrower as
Debtor with the following UCC filing offices:
Jurisdiction Search File Number File Description
Date Date
- --------------------------------------------------------------------------------
Sec. of State CO 02/11/97 952051252 07/10/95 Accounts, fixtures,
(Bank One, equipment, contract
Arizona, N.A.) rights, inventory,
proceeds, products,
etc.
- --------------------------------------------------------------------------------
Sec. of State TX 02/26/97 None None None
- --------------------------------------------------------------------------------
9. TERMINATIONS OR AMENDMENTS OF FINANCING STATEMENTS reflected in the
UCC Search Reports described above that, in the judgment of Agent and
its special counsel, conflict with the priority of the Lender Liens
contemplated by the Loan Documents, each executed by the appropriate
secured party and (if necessary) debtor, and in form acceptable to
Agent for filing with the applicable UCC filing offices:
NONE
10. CORPORATE CHARTER for Borrower, certified as of January 17, 1997 by
the Colorado Secretary of State.
Kloos[11.]OFFICERS' CERTIFICATE for Borrower, executed by its President and
Secretary as to (a) the due incumbency of its officers authorized to
execute or attest to the Loan Documents, (b) resolutions duly adopted
by its directors approving and authorizing the execution of the Loan
Documents, (c) its corporate charter, (d) bylaws, to which must be
attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
12. CORPORATE CHARTER for Matrix Capital Bank, certified as of March 7,
1997, by the Office of Thrift Supervision.
13. CORPORATE CHARTER for Matrix Financial Services Corporation, certified
as of January 24, 1997, by the Arizona Secretary of State.
Kloos[14.]OFFICERS' CERTIFICATE for Matrix Financial Services Corporation,
executed by its President and Secretary as to (a) the due incumbency
of its officers authorized to execute or attest to the Loan Documents,
(b) resolutions duly adopted by its directors approving and
authorizing the execution of the Loan Documents, (c) its corporate
charter, (d) bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
Schedule 5
----------
2
<PAGE>
H&B [15.] CORPORATE CHARTER for Matrix Funding Corporation, certified as of a
Current Date by the Colorado Secretary of State.
Kloos [16.] OFFICERS' CERTIFICATE for Matrix Funding Corporation, executed by
its President and Secretary as to (a) the due incumbency of its
officers authorized to execute or attest to the Loan Documents, (b)
resolutions duly adopted by its directors approving and authorizing
the execution of the Loan Documents, (c) its corporate charter, (d)
bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
17. CORPORATE CHARTER for Sterling Trust Company, certified as of
February 26, 1997, by the Texas Secretary of State.
18. CORPORATE CHARTER for United Capital Markets, Inc., certified as of
February 21, 1997, by the Colorado Secretary of State.
Kloos [19.] OFFICERS' CERTIFICATE for United Capital Markets, Inc., executed
by its President and Secretary as to (a) the due incumbency of its
officers authorized to execute or attest to the Loan Documents, (b)
resolutions duly adopted by its directors approving and authorizing
the execution of the Loan Documents, (c) its corporate charter, (d)
bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
20. CORPORATE CHARTER for United Financial, Inc., certified as of
February 21, 1997, by the Colorado Secretary of State.
Kloos [21.] OFFICERS' CERTIFICATE for United Financial, Inc., executed by its
President and Secretary of Borrower as to (a) the due incumbency of
its officers authorized to execute or attest to the Loan Documents,
(b) resolutions duly adopted by its directors approving and
authorizing the execution of the Loan Documents, (c) its corporate
charter, (d) bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
22. CORPORATE CHARTER for United Special Services, Inc., certified as
of February 21, 1997, by the Colorado Secretary of State.
Kloos [23.] OFFICERS' CERTIFICATE for United Special Services, Inc., executed
by its President and Secretary of Borrower as to (a) the due
incumbency of its officers authorized to execute or attest to the
Loan Documents, (b) resolutions duly adopted by its directors
approving and authorizing the execution of the Loan Documents, (c)
its corporate charter, (d) bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
24. CORPORATE CHARTER for Vintage Delaware Holdings, Inc., certified
as of February 28, 1997, by the Delaware Secretary of State.
3 Schedule 5
----------
<PAGE>
Kloos [25.] OFFICERS' CERTIFICATE for Vintage Delaware Holdings, Inc.,
executed by its President and Secretary of Borrower as to (a) the
due incumbency of its officers authorized to execute or attest to
the Loan Documents, (b) resolutions duly adopted by its directors
approving and authorizing the execution of the Loan Documents, (c)
its corporate charter, (d) bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
26. CORPORATE CHARTER for First Matrix Investment Services Corp.,
certified as of February 28, 1997, by the Texas Secretary of State.
Kloos [27.] OFFICERS' CERTIFICATE for First Matrix Investment Services Corp.,
executed by its President and Secretary of Borrower as to (a) the
due incumbency of its officers authorized to execute or attest to
the Loan Documents, (b) resolutions duly adopted by its directors
approving and authorizing the execution of the Loan Documents, (c)
its corporate charter, (d) bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
28. CORPORATE CHARTER for The Vintage Group, Inc., certified as of
February 28, 1997, by the Texas Secretary of State.
Kloos [29.] OFFICERS' CERTIFICATE for The Vintage Group, Inc., executed by its
President and Secretary of Borrower as to (a) the due incumbency of
its officers authorized to execute or attest to the Loan Documents,
(b) resolutions duly adopted by its directors approving and
authorizing the execution of the Loan Documents, (c) its corporate
charter, (d) bylaws, to which must be attached
Exhibit A - Resolutions
Exhibit B - Bylaws
Exhibit C - Charter
H&B [30.] CERTIFICATES OF QUALIFICATION, GOOD STANDING, AND AUTHORITY for the
following Companies, issued as of Current Dates by the appropriate
Tribunals for the following jurisdictions:
<TABLE>
<CAPTION>
Company Jurisdiction Certificate Date
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Matrix Capital Colorado Existence/ Good Standing 01/17/97
Corporation
- --------------------------------------------------------------------------------------------------
Matrix Capital Bank OTS Existence/Good Standing 03/03/97
- --------------------------------------------------------------------------------------------------
Matrix Financial Arizona Good Standing 01/24/97
Services Corporation
- --------------------------------------------------------------------------------------------------
California Certificate of Foreign Status 01/24/97
- --------------------------------------------------------------------------------------------------
Colorado Authorization/Good Standing 01/17/97
- --------------------------------------------------------------------------------------------------
Florida Existence/Good Standing 01/24/97
- --------------------------------------------------------------------------------------------------
Georgia Existence 01/24/97
- --------------------------------------------------------------------------------------------------
</TABLE>
Schedule 5
----------
4
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================
Company Jurisdiction Certificate Date
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Iowa Authorization 01/27/97
- --------------------------------------------------------------------------------------------------
Michigan Existence/Good Standing 01/24/97
- --------------------------------------------------------------------------------------------------
Missouri Existence/Good Standing 01/24/97
- --------------------------------------------------------------------------------------------------
North Carolina Authorization 01/24/97
- --------------------------------------------------------------------------------------------------
Ohio Qualification 01/24/97
(Surrendered 07/18/96)
- --------------------------------------------------------------------------------------------------
Texas Existence Forfeited 08/27/96
- --------------------------------------------------------------------------------------------------
Utah Qualification 01/30/97
(Not Registered in State)
- --------------------------------------------------------------------------------------------------
Matrix Funding Colorado Existence/Good Standing ordered
Corporation
- --------------------------------------------------------------------------------------------------
Sterling Trust Texas Existence/Good Standing 02/25/97 and 02/28/97
Company
- --------------------------------------------------------------------------------------------------
United Capital Colorado Existence/Good Standing 02/21/97
Markets, Inc.
- --------------------------------------------------------------------------------------------------
United Financial, Inc. Colorado Existence/Good Standing 02/21/97
- --------------------------------------------------------------------------------------------------
United Special Colorado Existence/Good Standing 02/21/97
Services, Inc.
- --------------------------------------------------------------------------------------------------
Vintage Delaware Delaware Existence/Good Standing 02/28/97
Holdings, Inc.
- --------------------------------------------------------------------------------------------------
First Matrix Texas Existence/Good Standing 02/28/97
Investment Services
Corp.
- --------------------------------------------------------------------------------------------------
The Vintage Group, Texas Existence/Good Standing 02/28/97
Inc.
- --------------------------------------------------------------------------------------------------
</TABLE>
31. OPINION of Jenkens & Gilchrist, P.C., Dallas, Texas, as counsel to
Borrower and Guarantors, addressed to Lender, and addressing the
matters described on Exhibit E to the Credit Agreement.
32. Any other documents and items as Agent or any Lender may reasonably
request.
Schedule 5
----------
5
<PAGE>
SCHEDULE 6.2
------------
<TABLE>
<CAPTION>
===================================================================================================================================
COMPANIES
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
Name Jurisdiction Jurisdictions Trade Names Used Still Using Chief Ownership
Organized Qualified to in Last Four Trade Executive
Business Months Name(s)? Y/N Office
- -----------------------------------------------------------------------------------------------------------------------------------
Matrix Capital Corporation Colorado None None NA 1380 Lawrence Publicly
("Borrower") Street Traded
Suite 1410
Denver, CO
80204
- -----------------------------------------------------------------------------------------------------------------------------------
Matrix Capital Bank Federal None None N 277 E. Amador 100% -
Savings Bank Las Cruces, NM Borrower
88004
- -----------------------------------------------------------------------------------------------------------------------------------
Matrix Financial Services Arizona California, Matrix Capital Y 201 West 100% -
Corporation ("Matrix Colorado, Florida, Mortgage Corp Coolidge St. Borrower
Financial") Georgia, Maryland, Phoenix, AZ
Michigan, 85013
Missouri, North
Carolina, Ohio,
Pennsylvania,
Texas, and Utah
- -----------------------------------------------------------------------------------------------------------------------------------
Matrix Funding Corp. Colorado None None NA 201 West 100% - Matrix
Coolidge St. Financial
Phoenix, AZ
85013
- -----------------------------------------------------------------------------------------------------------------------------------
Sterling Trust Company Texas None None NA 7901 Fish Pond 100% -
Rd. Vintage
Waco, TX 76702 Delaware
- -----------------------------------------------------------------------------------------------------------------------------------
United Capital Markets, Colorado Missouri None 1380 Lawrence 100% -
Inc. Street Borrower
Suite 1420
Denver, CO
80204
- -----------------------------------------------------------------------------------------------------------------------------------
United Financial, Inc. Colorado None None NA 1380 Lawrence 100% -
Street Borrower
Suite 1420
Denver, CO
80204
- -----------------------------------------------------------------------------------------------------------------------------------
United Special Services, Colorado None None NA 1380 Lawrence 100% -
Inc. Street Borrower
Suite 1450
Denver, CO
80204
- -----------------------------------------------------------------------------------------------------------------------------------
Vintage Delaware Holdings, Delaware None None NA 7901 Fish Pond 100% -
Inc. Rd. Vintage Group
Waco, TX 76702
===================================================================================================================================
</TABLE>
Schedule 6.2
------------
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
COMPANIES
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
Name Jurisdiction Jurisdictions Trade Names Used Still Using Chief Ownership
Organized Qualified to in Last Four Trade Executive
Business Months Name(s)? Y/N Office
- -----------------------------------------------------------------------------------------------------------------------------------
First Matrix Investment Texas None Vintage NA 6001 W. I20 100% -
Services Corp. Financial Suite 208 Vintage Group
Services Arlington, TX
Corporation 76017
- -----------------------------------------------------------------------------------------------------------------------------------
The Vintage Group, Inc. Texas None None NA 7901 Fish Pond 100% -
Rd. Borrower
Waco, TX 76702
====================================================================================================================================
</TABLE>
2 Schedule 6.2
------------
<PAGE>
SCHEDULE 6.7
------------
EXISTING DEBT
-------------
1. Balance @ 2/28/97 - $2,002,778 - Debt owed to Banker's Bank of the West due
in annual principal installments of $286,101, plus interest through 2003,
collateralized by common stock of Matrix Capital Bank, interest at prime
plus 1.0%. (the "Refinanced Debt").
2. Balance @ 2/28/97 - $2,910,000 - Senior subordinated notes, interest at
14.0% payable semiannually, unsecured and maturing July 2002, with
mandatory redemptions of $727,500 on each of July, 1999, 2000, and 2001.
3. Balance @ 2/28/97 - $930,538 - Debt owed to Bank One, Arizona, secured by a
first lien deed of trust on real estate, unpaid principal balance plus
interest due June 1998, interest at prime plus 1.0%.
4. Balance @ 2/28/97 - $520,866 - Debt owed to Cortrust Bank due in 28
consecutive installments, secured by mortgage servicing rights, interest
ranging from prime plus 2.5% to fixed at 10.0%.
5. Guaranty by Borrower of Debt arising under the Amended and Restated Loan
Agreement dated as of January 31, 1997, between Matrix Financial Services
Corporation, certain lenders, and Bank One, Texas, N.A., as Agent for those
lenders, providing for a secured revolving credit facility of up to
$100,000,000.
Schedule 6.7
------------
<PAGE>
SCHEDULE 6.9
------------
LITIGATION AND JUDGMENTS
------------------------
1. Matrix Financial is a defendant in two lawsuits, Limper v. Matrix Financial
Services Corporation (Court of Common Pleas, Ottawa County, Ohio, January
29, 1996), and Mogavero v. Matrix Financial Services Corporation (United
States District Court for the District of Massachusetts, June 17, 1996),
which purport to cover a nationwide class of plaintiffs and involve similar
facts and legal claims. In both cases, the plaintiffs allege that Matrix
Financial breached the terms of plaintiffs' promissory notes and mortgages
by imposing certain fax and payoff statement fees at the time the
plaintiffs prepaid their loans. The plaintiffs claim that such fees
constitute unauthorized charges in violation of the terms of the notes, and
demand restitution and attorneys' fees. In addition, the plaintiffs in the
Mogavero action seek treble damages for Matrix Financial's alleged
violation of 18 U.S.C. (S) 1964.
Matrix Financial has entered into an agreement, which is subject to court
approval, to settle the Limper action and the Mogavero action. The
settlement agreement provides for the administration of the settlement of
both actions in the Limper action and the dismissal of the Mogavero action.
Accordingly, a settlement order of dismissal was entered in the Mogavero
action on November 13, 1996.
The Court in the Limper action granted preliminary approval of the
settlement in January 1997. Accordingly, as provided by the settlement
agreement, Matrix established a settlement fund of $640,000. The costs of
notice and class administration, attorneys' fees, and recovery to class
members are all to come from the settlement fund. Notice to class members
was mailed in January 1997, and published in February 1997. The final
approval hearing for the settlement is scheduled for April 10, 1997.
2. The Companies are involved from time to time in routine Litigation
incidental to their businesses. However, other than described above, the
Companies believe that they are not party to any pending Litigation that,
if decided adversely to any of them, would be a Material-Adverse Event.
SCHEDULE 6.9
------------
<PAGE>
SCHEDULE 6.10
-------------
AFFILIATE TRANSACTIONS
----------------------
1. In October, 1995, Borrower loaned Matrix Diversified, an affiliate of
Borrower, $750,000. The loan accrues at an interest rate of 13% and is
secured by a second lien on the assets of Matrix Diversified. Principal and
interest is due and payable in one lump sum on October 31, 2000.
2. Borrower leases approximately 7,400 square feet of office space to a
subsidiary of Matrix Diversified at a base rental rate of approximately
$8,500 per month. The lease expires September 1997, but Borrower
anticipates that the lease will be renewed for successive one-year terms at
a market rate.
3. Borrower has a loan to Mr. Spencer, Vice Chairman of its Board, in the
amount of approximately $80,000. The loan accrues at an interest rate of
prime and is unsecured. The entire principal and interest is due in one
lump sum and is payable December 31, 1997. Borrower, at its option, may
extend the note in annual increments.
SCHEDULE 6.10
-------------
<PAGE>
SCHEDULE 6.13
-------------
EXISTING LIENS
--------------
1. Pledge of the Capital Stock of Matrix Capital Bank to secure the Refinanced
Debt, which pledge will be released upon payment of the Refinanced Debt
pursuant to the Credit Agreement.
2. Mortgage Lien upon the commercial office building at 201 W. Coolidge, Suite
100, Phoenix, Arizona 85013, and related Financing Statement No. 952051252
filed on July 10, 1995, with the Colorado Secretary of State in respect of
the Debt described as Item 3 on Schedule 6.7.
3. Lien on servicing rights of Matrix Financial Services Corporation securing
the Debt described as Item 4 on Schedule 6.7.
SCHEDULE 6.13
-------------
<PAGE>
06/30/99
SECOND AMENDED EXHIBIT A-1
--------------------------
TERM NOTE
---------
$___________________ June 30, 1999
FOR VALUE RECEIVED, MATRIX BANCORP, INC., a Colorado corporation formerly
named Matrix Capital Corporation ("Borrower"), promises to pay to the order of
___________________________________________ ("Lender") $____________, together
with interest.
This note is a "Term Note" under the Credit Agreement (as renewed,
extended, amended, or restated, the "Credit Agreement") dated as of March 12,
1997, between Borrower, Lender, certain other Lenders, and U.S. Bank National
Association, as Agent for Lenders. All of the defined terms in the Credit
Agreement have the same meanings when used, unless otherwise defined, in this
note.
This note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this note, including, without limitation, the
final maturity, which is the Maturity Date. Principal and interest are payable
to the holder of this note through Agent at either (a) its offices at 950 17/th/
Street, Denver, Colorado 80202, or (b) at any other address so designated by
Agent in written notice to Borrower.
This note incorporates by reference all other provisions in the Credit
Agreement applicable to this note, such as provisions for disbursements of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
attorneys' fees, court costs, and other costs of collection, certain waivers by
Borrower and other obligors, assurances and security, choice of Texas and United
States federal Law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
This note is a renewal, extension, increase of, and substitution for (but
not novation of), the existing Term Note dated as of June 29, 1998, executed by
Borrower, payable to Payee, and in the stated principal amount of $____________.
MATRIX BANCORP, INC., as Borrower
By ____________________________________________________
Guy A. Gibson, Chief Executive Officer and President
SECOND AMENDED EXHIBIT A-1
--------------------------
<PAGE>
06/30/99
SECOND AMENDED EXHIBIT A-2
--------------------------
REVOLVING NOTE
--------------
$___________________ June 30, 1999
FOR VALUE RECEIVED, MATRIX BANCORP, INC., a Colorado corporation formerly
named Matrix Capital Corporation ("Borrower"), promises to pay to the order of
___________________________________________ ("Lender") that portion of the
principal amount of $___________________________________________ that may from
time to time be disbursed and outstanding under this note together with
interest.
This note is a "Revolving Note" under the Credit Agreement (as renewed,
extended, amended, or restated, the "Credit Agreement") dated as of March 12,
1997, between Borrower, Lender, certain other Lenders, and U.S. Bank National
Association, as Agent for Lenders. All of the defined terms in the Credit
Agreement have the same meanings when used, unless otherwise defined, in this
note.
This note incorporates by reference the principal and interest payment
terms in the Credit Agreement for this note, including, without limitation, the
final maturity, which is the Maturity Date. Principal and interest are payable
to the holder of this note through Agent at either (a) its offices at 950 17/th/
Street, Denver, Colorado 80202, or (b) at any other address so designated by
Agent in written notice to Borrower.
This note incorporates by reference all other provisions in the Credit
Agreement applicable to this note, such as provisions for disbursements of
principal, applicable-interest rates before and after Default, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
attorneys' fees, court costs, and other costs of collection, certain waivers by
Borrower and other obligors, assurances and security, choice of Texas and United
States federal Law, usury savings, and other matters applicable to Loan
Documents under the Credit Agreement.
This note is a renewal, extension, increase of, and substitution for (but
not novation of), the existing Revolving Note dated as of June 29, 1998,
executed by Borrower, payable to Payee, and in the stated principal amount of
$____________.
MATRIX BANCORP, INC., as Borrower
By ____________________________________________________
Guy A. Gibson, Chief Executive Officer and President
SECOND AMENDED EXHIBIT A-2
--------------------------
<PAGE>
EXHIBIT B
---------
GUARANTY
--------
06/30/99
THIS GUARANTY is executed as of March 12, 1997, by the undersigned (each a
"Guarantor") for the benefit of U.S. BANK NATIONAL ASSOCIATION (as successor to
Bank One, Texas, N.A., in its capacity as Agent for the Lenders now or in the
future party to the Credit Agreement described below, "Agent").
06/30/99
MATRIX BANCORP, INC., a Colorado corporation formerly named Matrix Capital
Corporation ("Borrower"), Agent, and Lenders have executed the Credit Agreement
(as renewed, extended, amended, or restated, the "Credit Agreement") dated as of
March 12, 1997. The execution and delivery of this guaranty are requirements to
Agent's and Lenders' execution of the Credit Agreement, are integral to the
transactions contemplated by the Loan Documents, and are conditions precedent to
Lenders' obligations to extend credit under the Credit Agreement. The execution
and delivery of this guaranty in no way constitute a condition to or inducement
to any Lender to extend any other credit to any Guarantor.
ACCORDINGLY, for adequate and sufficient consideration, each Guarantor
agrees with Agent and Lenders as follows:
1. Definitions. Terms defined in the Credit Agreement have the same
-----------
meanings when used, unless otherwise defined, in this guaranty. As used in this
guaranty:
"Agent" is defined in the preamble to this guaranty and includes its
successor appointed under the Loan Documents and acting as Agent for Lenders
under the Loan Documents.
"Borrower" is defined in the recitals to this guaranty and includes,
without limitation, Borrower, Borrower as a debtor-in-possession, and any
receiver, trustee, liquidator, conservator, custodian, or similar party
appointed for Borrower or for all or substantially all of Borrower's assets
under any Debtor Law.
"Credit Agreement" is defined in the recitals to this guaranty.
"Guaranteed Debt" means the Obligation, as defined in the Credit Agreement,
and all present and future costs, attorneys' fees, and expenses incurred by
Agent or any Lender to enforce Borrower's, Guarantor's, or any other obligor's
payment of any of the Obligation, including, without limitation, all present and
future amounts that would become due but for the operation of (S)(S) 502 or 506
or any other provision of Title 11 of the United States Code and all present and
future accrued and unpaid interest (including, without limitation, all post-
petition interest if Borrower voluntarily or involuntarily becomes subject to
any Debtor Law).
"Guarantor" is defined in the preamble to this guaranty.
"Subordinated Debt" means all present and future obligations of Borrower to
any Guarantor, whether those obligations are (a) direct, indirect, fixed,
contingent, liquidated, unliquidated, joint, several, or joint and several, (b)
due or to become due to any Guarantor, (c) held by or are to be held by any
Guarantor, (d) created directly or acquired by assignment or otherwise, or (e)
evidenced in writing.
2. Guaranty. Any Guarantor jointly and severally guarantees to Agent and
--------
Lenders the prompt payment of the Guaranteed Debt at (and at all times after)
maturity (by acceleration or otherwise). This is an absolute, irrevocable, and
continuing guaranty, and the circumstance that at any time or from time to time
the Guaranteed Debt may be paid in full does not affect the obligation of any
Guarantor with respect to the Guaranteed Debt incurred after that time. This
guaranty remains in effect until the Guaranteed Debt is fully
Exhibit B
---------
<PAGE>
paid and performed and all commitments to extend any credit under the Credit
Agreement have terminated. No Guarantor may rescind or revoke its obligations
with respect to the Guaranteed Debt.
3. Representations and Warranties. Each Guarantor jointly and severally
------------------------------
represents and warrants to Agent that (a) each Guarantor has the power and
authority to execute, deliver, and perform this guaranty, which any execution,
delivery, and performance does not violate any Law or agreement by which any
Guarantor or any of any Guarantor's assets is bound, (b) the value of the
consideration received and to be received by each Guarantor is reasonably worth
at least as much as that Guarantor's liability under this guaranty, and that
liability may reasonably be expected to directly or indirectly benefit that
Guarantor, (c) this guaranty constitutes a legal and binding obligation of each
Guarantor, enforceable against that Guarantor in accordance with its terms,
except as enforceability may be limited by applicable Debtor Laws and general
principles of equity, (d) all financial statements and other information about
each Guarantor's financial condition and cash flow are true and correct in all
material respects and fairly present that Guarantor's financial condition, cash
flows, material liabilities, and (e) each Guarantor is Solvent.
4. Cumulative Rights. If any Guarantor becomes liable for any
-----------------
indebtedness owing by Borrower to Agent or any Lender, other than under this
guaranty, that liability may not be in any manner impaired or affected by this
guaranty. The Rights of Agent or Lenders under this guaranty are cumulative of
any and all other Rights that Agent or Lenders may ever have against each
Guarantor. The exercise by Agent or Lenders of any Right under this guaranty or
otherwise does not preclude the concurrent or subsequent exercise of any other
Right.
5. Payment Upon Demand. If a Default exists, each Guarantor shall (on
-------------------
demand and without further notice of dishonor and without any notice having been
given to any Guarantor previous to that demand of either the acceptance by Agent
or Lenders of this guaranty or the creation or incurrence of any Guaranteed
Debt) pay the amount of the Guaranteed Debt then due and payable to Agent and
Lenders. It is not necessary for Agent or Lenders, in order to enforce that
payment by any Guarantor, first or contempo raneously to institute suit or
exhaust remedies against Borrower or others liable on that indebtedness or to
enforce Rights against any collateral securing that indebtedness.
6. Subordination. The Subordinated Debt is expressly subordinated to the
-------------
full and final payment of the Guaranteed Debt. Each Guarantor agrees not to
accept any payment of any Subordinated Debt from Borrower if a Default exists.
If any Guarantor receives any payment of any Subordinated Debt in violation of
the foregoing, that Guarantor shall hold that payment in trust for Agent and
Lenders and promptly turn it over to Agent, in the form received (with any
necessary endorsements), to be applied to the Guaranteed Debt.
7. Subrogation and Contribution. Until the Guaranteed Debt has been paid
----------------------------
and performed in full (a) no Guarantor may assert, enforce, or otherwise
exercise any Right of subrogation to any of the Rights or Liens of Agent or
Lenders or any other beneficiary against Borrower or any other obligor on the
Guaranteed Debt or any collateral or other security or any Right of recourse,
reimbursement, subrogation, contribution, indemnification, or similar Right
against Borrower or any other obligor on any Guaranteed Debt or any guarantor of
it, and (b) each Guarantor irrevocably waives the benefit of, and any Right to
participate in, any collateral or other security given to Agent or Lenders or
any other beneficiary to secure payment of any Guaranteed Debt.
8. No Release. No Guarantor's obligations under this guaranty may be
----------
released, diminished, or affected by the occurrence of any one or more of the
following events: (a) any taking or accepting of any other security or assurance
for any Guaranteed Debt; (b) any release, surrender, exchange, subordination,
impairment, or loss of any collateral securing any Guaranteed Debt; (c) any full
or partial release of the liability of any other obligor on the Obligation; (d)
the modification of, or waiver of compliance with, any terms of any other Loan
Document; (e) the insolvency, bankruptcy, or lack of corporate or partnership
power of any party at any time liable for any Guaranteed Debt, whether now
existing or occurring in the future; (f) any renewal, extension, or
rearrangement of any Guaranteed Debt or any adjustment, indulgence, forbearance,
or com-
2 Exhibit B
---------
<PAGE>
promise that may be granted or given by Agent or any Lender to any other obligor
on the Obligation; (g) any neglect, delay, omission, failure, or refusal of
Agent or any Lender to take or prosecute any action in connection with the
Guaranteed Debt; (h) any failure of Agent or any Lender to notify any Guarantor
of any renewal, extension, or assignment of any Guaranteed Debt, or the release
of any security or of any other action taken or refrained from being taken by
Agent or any Lender against Borrower or any new agreement between Agent, any
Lender, and Borrower, it being understood that neither Agent nor any Lender is
required to give any Guarantor any notice of any kind under any circumstances
whatsoever with respect to or in connection with any Guaranteed Debt, other than
any notice required to be given to any Guarantor elsewhere in this guaranty; (i)
the unenforceability of any Guaranteed Debt against any party because it exceeds
the amount permitted by Law, the act of creating it is ultra vires, the officers
creating it exceeded their authority or violated their fiduciary duties in
connection with it, or otherwise; or (j) any payment of the Obligation to Agent
or Lenders is held to constitute a preference under any Debtor Law or for any
other reason Agent or any Lender is required to refund that payment or make
payment to someone else (and in each such instance this guaranty will be
reinstated in an amount equal to that payment).
9. Waivers. Each Guarantor waives all Rights by which it might be
-------
entitled to require suit on an accrued Right of action in respect of any
Guaranteed Debt or require suit against Borrower or others, whether arising
under (S) 34.02 of the Texas Business and Commerce Code, as amended (regarding
its Right to require Agent or Lenders to sue Borrower on accrued Right of action
following its written notice to Agent or Lenders), (S) 17.001 of the Texas Civil
Practice and Remedies Code, as amended (allowing suit against it without suit
against Borrower, but precluding entry of judgment against it before entry of
judgment against Borrower), Rule 31 of the Texas Rules of Civil Procedure, as
amended (requiring Agent or Lenders to join Borrower in any suit against it
unless judgment has been previously entered against Borrower), or otherwise.
10. Credit Agreement Provisions. Each Guarantor acknowledges that certain
---------------------------
(a) representations and warranties in the Credit Agreement are applicable to it
and confirms that each such representation and warranty is true and correct, and
(b) covenants and other provisions in the Credit Agreement are applicable to it
or are imposed upon it and agrees to promptly and properly comply with or be
bound by each of them.
11. Reliance and Duty to Remain Informed. Each Guarantor confirms that it
------------------------------------
has executed and delivered this guaranty after reviewing the terms and
conditions of the Loan Documents and such other information as it has deemed
appropriate in order to make its own credit analysis and decision to execute and
deliver this guaranty. Each Guarantor confirms that it has made its own
independent investigation with respect to Borrower's creditworthiness and is not
executing and delivering this guaranty in reliance on any representation or
warranty by Agent or any Lender as to that creditworthiness. Each Guarantor
expressly assumes all responsibilities to remain informed of the financial
condition of Borrower and any circumstances affecting Borrower's ability to
perform under the Loan Documents to which it is a party or any collateral
securing any Guaranteed Debt.
12. No Reduction. The Guaranteed Debt may not be reduced, discharged, or
------------
released because or by reason of any existing or future offset, claim, or
defense (other than credits toward outstanding amounts in respect of payments
under this guaranty and except for the defense of complete and final payment of
the Guaranteed Debt) of Borrower or any other party against Agent or Lenders or
against payment of the Guaranteed Debt, whether that offset, claim, or defense
arises in connection with the Guaranteed Debt or otherwise. Those claims and
defenses include, without limitation, failure of consideration, breach of
warranty, fraud, bankruptcy, incapacity/infancy, statute of limitations, lender
liability, accord and satisfaction, usury, forged signatures, mistake,
impossibility, frustration of purpose, and unconscionability.
13. Bankruptcy. If any Guarantor becomes insolvent, fails to pay
----------
Guarantor's debts generally as they become due, voluntarily seeks (or consents
to or acquiesces in) any benefits of any Debtor Law, or becomes a party to (or
is made the subject of) any proceeding under any Debtor Law (other than as a
creditor or claimant) that could suspend or otherwise adversely affect the
Rights of Agent or any Lender under this guaranty, then, in any such event, the
Guaranteed Debt is automatically (as between that Guarantor, Agent,
Exhibit B
---------
3
<PAGE>
and Lenders), a fully matured, due, and payable obligation of that Guarantor to
Agent and Lenders (without regard to whether Borrower is then in default under
the Credit Agreement or whether any of the Obligation is then due and owing by
Borrower), payable in full (i.e., the estimated amount owing in respect of the
contingent claim created under this guaranty) by Guarantor to Agent and Lenders
upon demand.
14. Loan Document. This guaranty is a Loan Document and is subject to the
-------------
applicable provisions of Sections 1 and 12 of the Credit Agreement, all of which
are incorporated into this guaranty by reference the same as if set forth in
this guaranty verbatim.
15. Communications. For purposes of Section 12.2 of the Credit Agreement,
--------------
each Guarantor's address and telecopy number are set forth on the signature page
to this guaranty.
16. Amendments, Etc. No amendment, waiver, or discharge to or under this
----------------
guaranty is valid unless it is in writing and is signed by the party against
whom it is sought to be enforced and is otherwise in conformity with the
requirements of Section 12.10 of the Credit Agreement.
17. Entirety. This guaranty represents the final agreement between the
--------
parties about the subject matter of this guaranty and may not be contradicted by
evidence of prior, contemporaneous, or subsequent oral agreements of the
parties. There are no unwritten oral agreements between the parties.
18. Agent and Lenders. Agent is the agent for each Lender under the
-----------------
Credit Agreement. All Rights granted to Agent under or in connection with this
guaranty are for each Lender's ratable benefit. Agent may, without the joinder
of any Lender, exercise any Rights in Agent's or Lenders' favor under or in
connection with this guaranty. Agent's and each Lender's Rights and obligations
vis-a-vis each other may be subject to one or more separate agreements between
those parties. However, no Guarantor is required to inquire about any such
agreement and is not subject to any terms of it unless that Guarantor
specifically joins it. Therefore, neither any Guarantor nor its successors or
assigns is entitled to any benefits or provisions of any such separate agreement
or is entitled to rely upon or raise as a defense any party's failure or refusal
to comply with the provisions of it.
19. Parties. This guaranty benefits Agent, Lenders, and their respective
-------
successors and assigns and binds each Guarantor and each Guarantor's successors
and assigns. Upon appointment of any successor Agent under the Credit
Agreement, all of the Rights of Agent under this guaranty automatically vest in
that new Agent as successor Agent on behalf of Lenders without any further act,
deed, conveyance, or other formality other than that appointment. The Rights of
Agent and Lenders under this guaranty may be transferred with any assignment of
the Guaranteed Debt. The Credit Agreement contains provisions governing
assignments of the Guaranteed Debt and of Rights and obligations under this
guaranty.
Remainder of page intentionally blank.
Signature page follows.
4 Exhibit B
---------
<PAGE>
EXECUTED as of the date first stated in this guaranty.
-----------------------------------
as Guarantor
(address)
- -------------------------------
- -------------------------------
By
- ------------------------------- -------------------------------
Tel Name:
--------------------------- ------------------------
Fax Title:
--------------------------- ------------------------
Agent executes this guaranty in acknowledgment of Paragraph 17 above.
BANK ONE, TEXAS, N.A., as Agent
By
--------------------------------
Mark L. Freeman, Vice President
Signature Page to Guaranty Exhibit B
---------
<PAGE>
EXHIBIT C
---------
PLEDGE AGREEMENT
----------------
06/30/99
THIS AGREEMENT is entered into as of March 12, 1997, between MATRIX
BANCORP, INC., a Colorado corporation formerly named Matrix Capital Corporation
("Debtor"), certain Lenders, and U.S. BANK NATIONAL ASSOCIATION as successor to
Bank One, Texas, N.A., as Agent for Lenders (in that capacity, "Secured Party").
Debtor, Lenders, and Agent have entered into the Credit Agreement (as
renewed, extended, amended, or restated, the "Credit Agreement") dated as of
March 12, 1997. As a continuing inducement to the Lenders to extend credit to
Debtor under the Credit Agreement, and as a condition precedent to that credit,
Debtor is executing and delivering this agreement for the benefit of Lenders and
Secured Party.
ACCORDINGLY, for adequate and sufficient consideration, Debtor and Secured
Party agree as follows:
SECTION 1. DEFINITIONS AND REFERENCES. Unless stated otherwise, (a) terms
- --------- --------------------------
defined in the Credit Agreement or the UCC have the same meanings when used in
this agreement, and (b) to the extent permitted by Law, if in conflict (i) the
definition of a term in the Credit Agreement controls over the definition of
that term in the UCC, and (ii) the definition of a term in Article 9 of the UCC
controls over the definition of that term elsewhere in the UCC.
"Collateral" is defined in Section 2.2 of this agreement.
"Debtor" is defined in the preamble to this agreement and includes, without
limitation, Debtor, Debtor as a debtor-in-possession, and any receiver, trustee,
liquidator, conservator, custodian, or similar party appointed for Debtor or for
substantially all of Debtor's assets under any Debtor Law.
"Obligor" means any Person obligated with respect to any Collateral
(whether as an account debtor, obligor on an instrument, issuer of securities,
or otherwise).
"Pledged Securities" is defined in Section 2.2 of this agreement.
"Secured Party" is defined in the preamble to this agreement and includes
its successor appointed and acting as Agent for Lenders under the Loan
Documents.
"Security Interest" means the security interest granted and the pledge and
assignment made under Section 2.1 of this agreement, which is a Lender Lien
under the Credit Agreement.
SECTION 2. SECURITY INTEREST AND COLLATERAL.
- --------- --------------------------------
2.1 Security Interest. To secure the full payment and performance of the
-----------------
Obligation, Debtor grants to Secured Party for Lenders a security interest in
the Collateral and pledges and assigns the Collateral to the Secured Party, all
upon and subject to the terms and conditions of this agreement. The grant of
the Security Interest does not subject the Secured Party or any Lender to the
terms of any Collateral or in any way transfer, modify, or otherwise affect any
of Debtor's obligations with respect to any Collateral or the Lender Liens under
the Credit Agreement.
2.2 Collateral. As used in this agreement, the term "Collateral" means
----------
the present and future items and types of property described below, whether now
owned or acquired in the future by Debtor. This description of Collateral does
not permit any action prohibited by any Loan Document.
Exhibit C
---------
C
<PAGE>
All present and future shares of capital stock or other ownership
interest issued by Matrix Capital Bank, a federal savings bank (the
"Pledged Securities"), together with all present and future increases,
profits, combinations, reclassifications, dividends, and substitutes
and replacements for any of the foregoing and all present and future
cash and noncash proceeds of any of the foregoing, including, without
limitation, all cash, accounts, general intangibles, documents,
instruments, chattel paper, goods, and any other property received
upon the sale or disposition of any of the foregoing.
SECTION 3.REPRESENTATIONS AND WARRANTIES. By entering into this agreement,
- --------- ------------------------------
and by each subsequent delivery of additional Collateral under this agreement,
Debtor reaffirms the representations and warranties contained in the Credit
Agreement. Debtor further represents and warrants to Secured Party for Lenders
as follows:
3.1 Binding Obligation. This agreement creates a legal, valid, and
------------------
binding Lender Lien in and to the Collateral in favor of Secured Party and is
enforceable against Debtor, except as enforcement may be limited by applicable
Debtor Laws and general principles of equity. The taking by Secured Party of
physical possession in Texas of the stock certificates or other instruments
representing the Pledged Securities will perfect the Security Interest in that
Collateral. Once perfected, the Security Interest will constitute a first-
priority Lender Lien on the Collateral, subject only to Permitted Liens. The
creation of the Security Interest does not require the consent of any Person
that has not been obtained.
3.2 Securities. All Pledged Securities are duly authorized, validly
----------
issued, fully paid, and non-assessable, and the transfer of them is not subject
to any restrictions other than restrictions imposed by applicable corporate and
securities Laws.
3.3 Additional Collateral. The foregoing representations and warranties
---------------------
will be true and correct in all respects with respect to any additional
Collateral or additional specific descriptions of certain Collateral delivered
to Secured Party in the future by Debtor.
The failure of any of these representations or warranties to be accurate and
complete does not impair the Security Interest in any Collateral.
SECTION 4.COVENANTS. Until all commitments by Secured Party and Lenders to
- --------- ---------
extend credit under the Credit Agreement have been canceled or terminated and
the Obligation is fully paid and performed, Debtor covenants and agrees with
Secured Party for Lenders as follows:
4.1 Other Notices and Actions. Debtor shall promptly notify Secured Party
-------------------------
of (a) any change in any material fact or circumstance represented or warranted
by Debtor with respect to any of the Collateral, and (b) any claim, action, or
proceeding challenging the Security Interest or affecting title to all or any
material portion of the Collateral or the Security Interest (and, at Secured
Party's request, Debtor shall appear in and defend any such action or proceeding
at Debtor's expense).
4.2 Collateral In Trust. While a Default or Potential Default exists,
-------------------
Debtor shall upon request of Secured Party (unless prevented by operation of
applicable Law from making that request, in which event Debtor shall) (a) hold
in trust (and not commingle with its other assets) for Secured Party all of its
Collateral that is chattel paper, instruments, or documents of title at any time
received by it, (b) promptly deliver that Collateral to Secured Party unless
Secured Party at its option gives Debtor written permission to retain any of it,
and (c) cause each chattel paper, instrument, or document of title so retained
to be marked to state that it is assigned to Secured Party and each instrument
to be endorsed to the order of Secured Party (but failure to be so marked or
endorsed may not impair the Security Interest in any such Collateral).
2 Exhibit C
---------
<PAGE>
4.3 Impairment of Collateral. Debtor may not do or permit any act that is
------------------------
reasonably likely to adversely impair the value of any Collateral.
SECTION 5. DEFAULT AND REMEDIES. If a Default exists, then Secured Party may,
- --------- --------------------
at its election (but subject to the terms and conditions of the Credit
Agreement), exercise any and all Rights available to a secured party under the
UCC, in addition to any and all other Rights afforded by the Loan Documents, at
Law, in equity, or otherwise, including, without limitation (a) requiring Debtor
to assemble all or part of the Collateral and make it available to Secured Party
at a place to be designated by Secured Party which is reasonably convenient to
Debtor and Secured Party, (b) surrendering any policies of insurance on all or
part of the Collateral and receiving and applying the unearned premiums as a
credit on the Obligation, (c) applying by appropriate judicial proceedings for
appointment of a receiver for all or part of the Collateral (and Debtor hereby
consents to any such appointment), and (d) applying to the Obligation any cash
held by Secured Party or any Lender under the Loan Documents.
5.1 Notice. Reasonable notification of the time and place of any public
------
sale of the Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be made,
shall be sent to Debtor and to any other Person entitled to notice under the
UCC. If any Collateral threatens to decline speedily in value or is of the type
customarily sold on a recognized market, Secured Party may sell or otherwise
dispose of the Collateral without notification, advertisement, or other notice
of any kind. Notice sent or given not less than five calendar days before the
taking of the action to which the notice relates is reasonable notification and
notice for the purposes of this section.
5.2 Sales of Securities. In connection with the sale of any Collateral
-------------------
that is securities, Secured Party is authorized, but not obligated, to limit
prospective purchasers to the extent deemed necessary or desirable by Secured
Party to render that sale exempt from the registration and similar requirements
under applicable corporate and securities Laws, and no sale so made in good
faith by Secured Party may be deemed not to be "commercially reasonable" because
so made.
5.3 Other Sales. Secured Party's sale of less than all Collateral does
-----------
not exhaust Secured Party's Rights under this agreement and Secured Party is
specifically empowered to make successive sales until all Collateral is sold.
If the proceeds of a sale of less than all Collateral is less than the Secured
Obligation, then this agreement and the Security Interest remain in full force
and effect as to the unsold portion of the Collateral just as though no sale had
been made. In the event any sale under this agreement is not completed or is,
in Secured Party's opinion, defective, that sale does not exhaust Secured
Party's Rights under this agreement, and Secured Party is entitled to cause a
subsequent sale or sales to be made. All statements of fact or other recitals
made in any bill of sale or assignment or other instrument evidencing any
foreclosure sale under this agreement -- whether about nonpayment of the Secured
Obligation, the occurrence of any Default, Secured Party's having declared all
of the Obligation to be due and payable, notice of time, place, and terms of
sale and the properties to be sold having been duly given, or any other act or
thing having been duly done by Secured Party -- shall be taken as prima facie
evidence of the truth of the facts so stated and recited. Secured Party may
appoint or delegate any one or more Persons as agent to perform any act or acts
necessary or incident to any sale held by Secured Party, including the sending
of notices and the conduct of sale, but such acts must be done in the name and
on behalf of Secured Party.
5.4 Obligors. While a Default exists, Secured Party may notify or require
--------
each Obligor to make payment directly to Secured Party, and Secured Party may
take control of the proceeds paid to Secured Party. Until Secured Party elects
to exercise these Rights, Debtor is authorized to collect and enforce the
Collateral and to retain and expend all payments made on Collateral. While
Secured Party is entitled to and elects to exercise these Rights, Secured Party
has the Right in its own name or in the name of Debtor to (a) compromise or
extend time of payment with respect to Collateral for such amounts and upon such
terms as Secured Party may reasonably determine, (b) demand, collect, receive,
receipt for, sue for, compound, and give acquittance for any and all amounts due
or to become due with respect to Collateral, (c) take control of cash and other
proceeds of any Collateral, (d) endorse the applicable Pledgor's name on any
notes, acceptances, checks, drafts, money orders, or other evidences of payment
on Collateral that may come into
3 Exhibit C
---------
<PAGE>
Secured Party's possession, (e) sign Debtor's name on any invoice or bill of
lading relating to any Collateral, on any drafts against Obligors or other
Persons making payment with respect to Collateral, on assignments and
verifications of accounts or other Collateral, and on notices to Obligors making
payment with respect to Collateral, (f) send requests for verification of
obligations to any Obligor, and (gi) do all other acts and things reasonably
necessary to carry out the intent of this agreement. If any Obligor fails to
make payment on any Collateral when due while a Default exists, Secured Party is
authorized, in its sole discretion, either in its own name or in Debtor's name,
to take such action as Secured Party reasonably shall deem appropriate for the
collection of any amounts owed with respect to Collateral or upon which a
delinquency exists. However, Secured Party is neither (A) liable for its failure
to collect, or for its failure to exercise diligence in the collection of, any
amounts owed with respect to Collateral (except for its own fraud, gross
negligence, willful misconduct, or violation of any applicable law), nor (B)
under any duty whatsoever to anyone except Debtor and Lenders to account for
funds that it shall actually receive under this agreement. A receipt given by
Secured Party to any Obligor is a full and complete release, discharge, and
acquittance to that Obligor, to the extent of any amount so paid to Secured
Party. While a Default exists, Secured Party may apply or set off amounts paid
and the deposits against any liability of Debtor to Secured Party. Regarding the
existence of Default for purposes of this agreement, Debtor agrees that the
Obligors on any Collateral may rely upon written certification from Secured
Party that a Default exists.
5.5 Power-of-Attorney. Secured Party is deemed to be irrevocably
-----------------
appointed as Debtor's agent and attorney-in-fact with the Right to enforce all
of Debtor's Rights under or in connection with the Collateral effective and
operable at all times while a Default exists. All reasonable costs, expenses,
and liabilities incurred and all payments made by Secured Party as Debtor's
agent and attorney-in-fact (including, without limitation, reasonable attorney's
fees and expenses) are considered a loan by Secured Party to Debtor that is
repayable on demand, accrues interest at the Default Rate until paid, and is
part of the Obligation.
5.6 Application of Proceeds. Secured Party shall apply the proceeds of
-----------------------
any sale or other disposition of the Collateral under this Section 5 in the
order and manner specified in Section 3.9 of the Credit Agreement. Any surplus
remaining shall be delivered to Debtor or as a court of competent jurisdiction
may direct. If the proceeds are insufficient to pay the Obligation in full,
Debtor remains liable for any deficiency.
SECTION 6. OTHER RIGHTS.
- --------- -----------
6.1 Performance. If Debtor fails to preserve the priority of the Security
-----------
Interest in any of the Collateral or otherwise fail to perform any of its
obligations under any Loan Documents with respect to the Collateral, then
Secured Party may, at its option, but without being required to do so, prosecute
or defend any suits in relation to the Collateral or take all other action which
Debtor is required, but has failed or refused, to take under the Loan Documents.
Any sum which may be expended or paid by Secured Party under this section
(including, without limitation, court costs and attorneys' fees) shall bear
interest from the dates of expenditure or payment at the Default Rate until paid
and, together with such interest, shall be payable by Debtor to Secured Party
upon demand and is part of the Obligation.
6.2 Record Ownership of Securities. While a Default exists, Secured Party
------------------------------
may have any Collateral that is securities and that is in the possession of
Secured Party, or its nominee or nominees, registered in its name or in the name
of its nominee or nominees as pledgee.
6.3 Voting of Securities. As long as no Default exists, Debtor may
--------------------
exercise all voting Rights pertaining to any Collateral that is securities.
While a Default exists, the Right to vote any Collateral that is securities is
vested exclusively in Secured Party. Accordingly, Debtor irrevocably
constitutes and appoints Secured Party as Debtor's proxy and attorney-in-fact --
effective only after notice to Debtor and while a Default exists but with full
power of substitution -- to vote and to act with respect to any Collateral that
is securities standing in the name of Debtor or with respect to which Debtor is
entitled to vote and act. That proxy is coupled with an interest, is
irrevocable, and continues until the Obligation are fully paid and performed.
4 Exhibit C
---------
<PAGE>
6.4 Certain Proceeds. The provisions of this Section 6.4 are applicable
----------------
only while a Default exists. Notwithstanding any contrary provision, all
dividends or distributions of property in respect of, and all proceeds of, any
Collateral that is securities -- whether those dividends, distributions, or
proceeds result from a subdivision, combination, or reclassification of the
outstanding capital stock of any issuer or as a result of any merger,
consolidation, acquisition, or other exchange of assets to which any issuer may
be a party, or otherwise -- are part of the Collateral, shall, if received by
Debtor, be held in trust for Secured Party's benefit, and shall immediately be
delivered to Secured Party (accompanied by proper instruments of assignment or
stock or bond powers executed by Debtor in accordance with Secured Party's
instructions) to be held subject to the terms of this agreement. Any cash
proceeds of any Collateral that come into Secured Party's possession (including,
without limitation, insurance proceeds) may, at Secured Party's option, be
applied in whole or in part to the Obligation (to the extent then due), be fully
or partially released to or under the written instructions of Debtor for any
general or specific purpose, or be fully or partially retained by Secured Party
as additional Collateral. Any cash Collateral in Secured Party's possession may
be invested by Secured Party in certificates of deposit issued by Secured Party,
any Lender, or any other state or national bank having combined capital and
surplus greater than $100,000,000 or in securities issued or guaranteed by the
United States of America or any of its agencies. Secured Party is never
obligated to make any investment and never has any liability to Debtor or any
Lender for any loss that may result from any investment or non-investment. All
interest and other amounts earned from any investment may be dealt with by
Secured Party in the same manner as other cash Collateral.
SECTION 7. MISCELLANEOUS.
- --------- -------------
7.1 Miscellaneous. Because this agreement is a "Loan Document" referred
-------------
to in the Credit Agreement, the provisions relating to Loan Documents in
Sections 1 and 12 of the Credit Agreement are incorporated into this agreement
by reference the same as if included in this agreement verbatim.
7.2 Term. This agreement terminates upon full payment and performance of
----
the Obligation. No Obligor is ever obligated to make inquiry of the termination
of this agreement but is fully protected in making any payments on the
Collateral directly to Secured Party.
7.3 Matters Not Relevant. The Security Interest, Debtor's obligations,
--------------------
and Secured Party's and Lenders' Rights under this agreement are not released,
diminished, impaired, or adversely affected by any one or more of the following:
(a) Secured Party's or any Lender taking or accepting any additional -- or any
release, surrender, exchange, subordination, or loss of any other -- guaranty,
assurance, or security for any of the Obligation; (b) any full or partial
release of any other Person obligated on any of the Obligation; (c) the
modification or assignment of -- or waiver of compliance with -- any other Loan
Document; (d) any present or future insolvency, bankruptcy, or lack of
corporate, partnership, or trust power of any other Person obligated on any of
the Obligation; (e) any renewal, extension, or rearrangement of any of the
Obligation, or any adjustment, indulgence, forbearance, or compromise granted to
any Person obligated on any of the Obligation; (f) any Person's neglect, delay,
omission, failure, or refusal to take or prosecute any action in connection with
any of the Obligation; (g) any existing or future affect, claim, or defense
(other than credits toward outstanding amounts in respect of application of
proceeds of Collateral under this agreement and except for the defense of full
and final payment of the Obligation) of Debtor or any other Person against
Secured Party or any Lender; (h) the unenforceability of any of the Obligation
against any Person obligated or any of the Obligation because it exceeds the
amount permitted by Law, the act of creating it is ultra vires, or the officers,
partners, or trustees creating it exceeded their authority or violated their
fiduciary duties, or otherwise; (i) any payment of the Obligation is held to
constitute a preference under any Debtor Law or for any other reason Secured
Party or any Lender is required to refund any payment or make payment to another
Person; or (j) any Person's failure to notify Debtor, Secured Party, or any
Lender of their acceptance of this agreement or any Person's failure to notify
Debtor about the foregoing events or occurrences, and Debtor waives any notice
of any kind under any circumstances whatsoever with respect to this agreement or
any of the Obligation other than as specifically provided in this agreement.
5 Exhibit C
---------
<PAGE>
7.4 Waivers. Except to the extent expressly otherwise provided in the
-------
Loan Documents, Debtor waives (a) any Right to require Secured Party or any
Lender to proceed against any other Person, to exhaust its Rights in the
Collateral, or to pursue any other Right which Secured Party or any Lender may
have, and (b) all Rights of marshaling in respect of the Collateral.
7.5 Financing Statement. Secured Party may, at any time, file this
-------------------
agreement or a carbon, photographic, or other reproduction of this agreement as
a financing statement, but Secured Party's failure to do so does not impair the
validity or enforceability of this agreement.
7.6 Parties. This agreement binds and inures to Debtor, Secured Party,
-------
and each Lender, and their respective successors and permitted assigns. Only
those Persons may rely or raise any defense about this agreement.
(a) Assignments. Debtor may not assign any Rights or obligations
-----------
under this agreement without first obtaining the written consent of Secured
Party and all Lenders. Secured Party's Rights under this agreement may be
assigned to any successor agent appointed under the Credit Agreement. Any
Lender may assign, pledge, and otherwise transfer all or any of its Rights
under this agreement to any participant or transferee permitted by the
Credit Agreement.
(b) Secured Party. Secured Party is the agent for each Lender.
-------------
Secured Party may, without the joinder of any Lender, exercise any Rights
in favor of any of them under this agreement. The Rights of Secured Party
and Lenders vis-a-vis each other may be subject to other agreements between
them. Neither Debtor nor its successors or permitted assigns need to
inquire about any such agreement or be subject to the terms of it unless
they join in it and, therefore, are not entitled to the benefits of any
such agreement or entitled to rely upon or raise as a defense the failure
of any party to comply with it.
7.7 Entire Agreement. This agreement and the other loan documents
----------------
represent the final agreement between the parties with respect to the subject
matter thereof and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
Remainder of page intentionally blank.
Signature page follows.
6 Exhibit C
---------
<PAGE>
EXECUTED as of the date first stated above.
MATRIX CAPITAL SERVICES CORPORATION, BANK ONE, TEXAS, N.A., AGENT, as
as Debtor Secured Party
By By
------------------------------------- ---------------------------------
Guy A. Gibson, Chief Executive Office Mark L. Freeman, Vice President
and President
The undersigned agrees that to the extent that any of the stock certificates
evidencing any of the capital stock that is included in the Collateral bear any
restrictive legend in respect of the transfer of those certificates, then, in
each case, the undersigned waives the requirements of those restrictive legends
in respect of the pledge of those shares of capital stock to Secured Party.
MATRIX CAPITAL BANK
By
-------------------------------------
Name:
-------------------------------
Title:
-------------------------------
Signature Page to Pledge Agreement Exhibit C
---------
<PAGE>
ANNEX A
-------
ASSIGNMENT SEPARATE FROM STOCK CERTIFICATE
------------------------------------------
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto___
________________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
---------------------------------
| INSERT SOCIAL SECURITY |
| OR OTHER IDENTIFICATION |
| NUMBER OF ASSIGNEE |
---------------------------------
__________________________________________________(_____________________) shares
of the ______________________________________________________ Capital Stock of
MATRIX CAPITAL BANK standing in ________________________ name on the books of
that bank as represented by Certificate
No.(s)_________________________________________________________________________
that accompany(ies) this assignment, and hereby irrevocably constitutes and
appoints _________________attorney to transfer that stock on the books of that
bank with full power of substitution in the premises.
EXECUTED as of March 12, 1997.
MATRIX CAPITAL CORPORATION
By ___________________________________
Guy A. Gibson, Chief Executive
Officer and President
Exhibit C
---------
<PAGE>
SECOND AMENDED EXHIBIT D-1 06/30/99
--------------------------
BORROWING REQUEST
-----------------
AGENT: U.S. Bank National Association DATE: _______________, 199___
BORROWER: Matrix Bancorp, Inc.
- --------------------------------------------------------------------------------
This request is delivered under the Credit Agreement (as renewed, extended,
and amended, the "Credit Agreement") dated as of March 12, 1997, between
Borrower, Agent, and certain Lenders. Terms defined in the Credit Agreement
have the same meanings when used, unless otherwise defined, in this request.
Borrower requests a $____________________________/1/ Borrowing (the
"Requested Borrowing") under the Revolving Facility to be funded on
________________________________, 199_____ /2/ (the "Requested Borrowing Date").
Borrower certifies to Agent and Lenders that (a) the proceeds of the
Requested Borrowing shall be promptly paid to Matrix Bank as a contribution to
its capital or are to refinance contributions to the capital of Matrix Bank
already made by Borrower and for none of which Borrower has requested any other
Borrowing, and (b) after giving effect to the Requested Borrowing, the Principal
Debt of the Revolving Facility will not exceed the least of (i) the Commitments
for the Revolving Facility, (which are $10,000,000), and (ii) 40% of the book
value of Matrix Bank's issued and outstanding capital stock subject to Lender
Liens (which is 40% x $________________________ = $__________________________).
Borrower certifies that on the date of this request and on the Requested
Borrowing Date (after giving effect to the Requested Borrowing) (a) the
representations and warranties of Borrower in the Loan Documents are true and
correct in all material respects except to the extent that (i) a representation
or warranty speaks to a specific date or (ii) the facts on which a
representation or warranty is based have changed by transactions or conditions
contemplated or permitted by the Loan Documents, (b) no Default or Potential
Default exists, and (c) the extension of the Requested Borrowing does not cause
any Borrowing Excess to exist.
MATRIX BANCORP, INC., as Borrower
By ____________________________________________
Name: ___________________________________
/3/Title: _______________________________
- ------------------------
/1/ Must be a Responsible Officer of Borrower.
/2/ Must be $500,000 or a greater integral multiple of $100,000.
/3/ Must be at least the Business Day after date of request.
Second Amended Exhibit D-1
--------------------------
<PAGE>
06/30/99
THIRD AMENDED EXHIBIT D-2
-------------------------
COMPLIANCE CERTIFICATE
----------------------
AGENT: U.S. Bank National Association DATE:______________, 19___
BORROWER: Matrix Bancorp, Inc.
SUBJECT PERIOD: ________________ ended ________________, 199____
================================================================================
This certificate is delivered under the Credit Agreement (as renewed,
extended, and amended, the "Credit Agreement") dated as of March 12, 1997,
between Borrower, Agent, and certain Lenders. Terms defined in the Credit
Agreement have the same meanings when used, unless otherwise defined, in this
certificate.
The undersigned officer certifies to Agent and Lenders, that on the date of
this certificate:
1. The undersigned officer is the officer of Borrower designated below.
2. ___________________________________________ (Borrower's or Matrix
Bank's) Financial Statements that are attached to this certificate were prepared
in accordance with GAAP and present fairly _____________________________________
(Borrower's or Matrix Bank's) __________________________________ (consolidated,
consolidating, or both) financial condition and results of operations as of (and
for the fiscal year or portion of the fiscal year ending on) the last day of the
Subject Period.
3. The proceeds of all Borrowings have been promptly paid to Matrix Bank
as a contribution to its capital or have refinanced contributions to the capital
of Matrix Bank already made by Borrower and for none of which Borrower has
requested any other Borrowing. The Principal Debt of the Revolving Facility
does not exceed the least of (a) the Commitments for the Revolving Facility
(which are $10,000,000), and (b) 40% of the book value of Matrix Bank's issued
and outstanding capital stock subject to Lender Liens (which is 40% x
$___________________________________ = $______________________________________).
4. The undersigned officer supervised a review of the Companies'
activities during the Subject Period in respect of the following matters and has
determined the following: (a) The representations and warranties in the Credit
Agreement are true and correct in all material respects, except (i) to the
extent that a representation or warranty speaks to a specific date or the facts
on which it is based have changed by transactions or conditions contemplated or
permitted by the Loan Documents and (ii) for the changes, if any, described on
the attached Schedule 1; (b) each Company has complied with all of its
obligations under the Loan Documents, other than for the deviations, if any,
described on the attached Schedule 1; (c) no Default or Potential Default exists
or is imminent, other than those, if any, described on the attached Schedule 1;
and (d) the Companies' compliance with certain financial covenants in Sections 8
and 9 of the Credit Agreement is accurately calculated on the attached Schedule
1.
By ______________________________________________
Name: ________________________________________
/1/Title: ____________________________________
______________________
/1/ Must be a Responsible Officer of Borrower.
Third Amended Exhibit D-2
-------------------------
<PAGE>
SCHEDULE 1
----------
A. Describe deviations from compliance with obligations, if any -- clause
4(a) and 4(b) of attached Compliance Certificate -- if none, so state:
B. Describe Potential Defaults or Defaults, if any -- clause 4(c) of the
attached Compliance Certificate -- if none, so state:
C. Calculate compliance with certain covenants in Sections 8 and 9 at end
of Subject Period (on a consolidated basis, if applicable) -- clause 4(d) of the
attached Compliance Certificate. The following table is a short-hand reflection
of that compliance and must be completed fully in accordance with the express
language of the Credit Agreement:
<TABLE>
<CAPTION>
===================================================================================================================================
Covenant At End of Subject Period
===================================================================================================================================
1. Net Worth -- Sec. 9.1
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
(a) First minimum $40,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
(b) 90% of actual Net Worth at the end of the most recent fiscal year $
- -----------------------------------------------------------------------------------------------------------------------------------
(c) 50% of the Companies' cumulative Net Income (without deduction for losses) after
the end of the most recent fiscal year
- -----------------------------------------------------------------------------------------------------------------------------------
(d) 90% of all contributions made to stockholders' equity after the Closing Date $
- -----------------------------------------------------------------------------------------------------------------------------------
(e) Second Minimum sum of Lines 1(b) through 1(d) $
- -----------------------------------------------------------------------------------------------------------------------------------
(f) Actual Net Worth -- may not be less than the greater of Lines 1(a) and 1(e) $
===================================================================================================================================
2. Adjusted Debt/Net Worth -- Sec. 9.2
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Debt of Companies $
- -----------------------------------------------------------------------------------------------------------------------------------
(b) Bank repurchase obligations $
- -----------------------------------------------------------------------------------------------------------------------------------
(c) Escrow-arbitrage-type-facility obligations $
- -----------------------------------------------------------------------------------------------------------------------------------
(d) Deposits at Matrix Bank $
- -----------------------------------------------------------------------------------------------------------------------------------
(f) Adjusted Debt -- sum of Line 2(a) minus Lines 2(b) through 2(e) $
- -----------------------------------------------------------------------------------------------------------------------------------
(g) Ratio of Line 2(f) to Line 1(f) -- may not exceed 4.0 to 1.0 ____ to 1.0
===================================================================================================================================
2 Third Amended Exhibit D-2
-------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
3. Cash Dividends/Expenses and CMLTD - Sec. 9.3 (calculated for quarter each four quarters)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a) Cash dividends available to Borrower $
- ----------------------------------------------------------------------------------------------------------------------------------
(b) Tax sharing payments received by Borrower $
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Cash expenses paid by Borrower $
- ----------------------------------------------------------------------------------------------------------------------------------
(d) Current maturities of long-term Debt of Borrower $
- ----------------------------------------------------------------------------------------------------------------------------------
(e) Total of Lines 3(a) and (b) $
- ----------------------------------------------------------------------------------------------------------------------------------
(f) Total of Lines 3(c) and (d) $
- ----------------------------------------------------------------------------------------------------------------------------------
(g) Ratio of Line 3(e) to Line 3(f) -- may not be less than 1.5 to 1.0 ______ to 1.0
==================================================================================================================================
4. Net Income -- Sec. 9.4 (calculated only for Matrix Bank for each four-fiscal-quarter-period: $
Actual net income (less deduction for minority interests) -- may not be less than $7,500,000
==================================================================================================================================
5. Capital Ratio -- Sec. 9.5 (only for Matrix Bank)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Maintains "well capitalized" designation by OTS for its "Risk Base Capital" -- insert Yes or No
- ----------------------------------------------------------------------------------------------------------------------------------
(b) "Risk Base Capital Ratio" -- may not be less than 10% %
==================================================================================================================================
6. Leverage Ratio -- Sec. 9.6 (Matrix Bank only)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Maintains "well capitalized" designation by OTS for its "Leverage" -- insert Yes or No
- ----------------------------------------------------------------------------------------------------------------------------------
(b) "Leverage Ratio" -- may not be less than 5.0% %
==================================================================================================================================
7. Classified Assets/Total Capital -- Sec. 9.7 (Matrix Bank only)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Classified Assets
- ----------------------------------------------------------------------------------------------------------------------------------
(i) Assets classified as "substantial," "doubtful," or "loss" by regulators $
- ----------------------------------------------------------------------------------------------------------------------------------
(ii) Assets subject to other credit quality supervision $
- ----------------------------------------------------------------------------------------------------------------------------------
(iii)Other Real Estate owned $
- ----------------------------------------------------------------------------------------------------------------------------------
(iv) Other Impaired Assets $
- ----------------------------------------------------------------------------------------------------------------------------------
(v) Sum of Lines 7(a)(i) through 7(a)(iv) $
- ----------------------------------------------------------------------------------------------------------------------------------
(b) Total Capital
- ----------------------------------------------------------------------------------------------------------------------------------
(i) Stated par value of common stock $
- ----------------------------------------------------------------------------------------------------------------------------------
(ii) Stated par value of perpetual preferred stock $
- ----------------------------------------------------------------------------------------------------------------------------------
(iii)Undivided profits, surplus, or retained earnings $
- ----------------------------------------------------------------------------------------------------------------------------------
(iv) "Loan Loss reserve" account $
- ----------------------------------------------------------------------------------------------------------------------------------
(v) Continuous reserve $
- ----------------------------------------------------------------------------------------------------------------------------------
(vi) Sum of Lines 7(b)(i) through 7(b)(v) $
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Ratio of Line 7(a)(v) to Line 7(b)(vi) (stated as percentage) -- may not exceed 50% $
==================================================================================================================================
8. Net Charge Offs/Total Loans -- Sec. 9.8 (Matrix Bank only)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Net Charge Offs $
- ----------------------------------------------------------------------------------------------------------------------------------
(b) Total loans $
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Ratio of Line 8(a) to Line 8(b) -- (stated as a percentage) -- may not exceed 0.50% %
==================================================================================================================================
9. Adjusted Assets/Total Assets -- Sec. 9.9 (Matrix Bank only)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Adjusted Assets
==================================================================================================================================
</TABLE>
3 Third Amended Exhibit D-2
-------------------------
<PAGE>
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
(i) Cash $
- ----------------------------------------------------------------------------------------------------------------------------------
(ii) Cash Equivalents $
- ----------------------------------------------------------------------------------------------------------------------------------
(iii) Loans that are not non-residential commercial loans $
- ----------------------------------------------------------------------------------------------------------------------------------
(iv) Mortgage-backed Securities $
- ----------------------------------------------------------------------------------------------------------------------------------
(v) Sum of Lines 9(a)(i) through 9(a)(iv) $
- ----------------------------------------------------------------------------------------------------------------------------------
(b) Total Assets $
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Ratio of Line 9(a)(v) to Line 9(b) (stated as a percentage) -- must not be less than %
greater of (1) minimum required under HOLA for "QTL" or (2) 60%
==================================================================================================================================
10. Interest Rate Sensitivity -- Sec. 9.10. May not exceed $10,000,000 (Matrix Bank only) $
==================================================================================================================================
11. Commercial Loans/Total Capital -- Sec. 9.11 (Matrix Bank only)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Commercial Loans $
- ----------------------------------------------------------------------------------------------------------------------------------
(b) Total Capital $
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Ratio of Line 11(a) to Line 11(b) (stated as a percentage) -- must not be greater than 200% %
==================================================================================================================================
4 Third Amended Exhibit D-2
-------------------------
</TABLE>
<PAGE>
EXHIBIT E
---------
OPINION OF COUNSEL
------------------
Matters to which Jenkens & Gilchrist, P.C., of Dallas, Texas, counsel to the
Companies, are to opine as of the Closing Date:
1. Each Company is a corporation or bank duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
organization and is duly qualified and in good standing as a foreign corporation
in each jurisdiction where qualification or licensing is required by the nature
of its business or the character and location of its property, business, or
customers and in which the failure to have such license, authorization, consent,
approval, or qualification, as the case may be, in the aggregate, could have a
material adverse effect on the ability of any Company to perform its obligations
under the Loan Documents.
2. Each Company possesses all requisite corporate power and authority to
conduct its business as is now being conducted and as proposed under the Loan
Documents to be conducted and to own and operate its assets as now owned and
operated and as proposed to be owned and operated under the Loan Documents.
3. The execution and delivery by each Company of each Loan Document to
which it is a party and the performance by it of its obligations under those
Loan Documents (a) are within its corporate power, (b) have been duly authorized
by all necessary corporate action, (c) require no action by or filing with any
governmental authority (except any action or filing that has been taken or made
on or before the date of this opinion), (d) do not violate any provision of its
charter or bylaws, and (e) do not violate any provision of law applicable to it
or any material agreement to which it is a party.
4. Each Loan Document constitutes a legal and binding obligation of each
Company party to it, enforceable against that Company in accordance with that
Loan Document's terms.
5. To the best of our knowledge, no Company is subject to, nor under the
threat of, any Litigation that is reasonably likely to be determined adversely
to any Company. There exist no outstanding and unpaid judgments against any
Company.
6. Borrower is duly registered under the Savings and Loan Holding Company
Act, as amended. No Company is subject to regulation under the Investment
Company Act of 1940 or the Public Utility Holding Company Act of 1935, as they
may be amended.
7. The Pledge Agreement creates valid security interests (the "Security
Interests") in the pledged securities described in it that have been issued by
Matrix Bank (the "Collateral"). The Security Interests in the Collateral will
be properly perfected by Agent's possession of the Collateral.
Exhibit E
---------
<PAGE>
06/30/99
AMENDED EXHIBIT F
-----------------
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into effective as of
__________________, 199____, between ________________________ ("Assignor"), and
________________________________ ("Assignee").
MATRIX BANCORP, INC., a Colorado corporation formerly named Matrix Capital
Corporation ("Borrower"), certain lenders ("Lenders"), and U.S. BANK NATIONAL
ASSOCIATION (in its capacity as Agent for Lenders, "Agent"), are party to the
Credit Agreement (as renewed, extended, amended, or restated, the "Credit
Agreement") dated as of March 12, 1997, all of the defined terms in which have
the same meanings when used -- unless otherwise defined -- in this agreement.
This agreement is entered into as required by Section 12.14 of the Credit
Agreement and is not effective until consented to by Borrower and Agent, which
consents may not under the Credit Agreement be unreasonably withheld.
ACCORDINGLY, for adequate and sufficient consideration, Assignor and
Assignee agree as follows:
1. Assignment and Assumption. By this agreement, and effective as of
-------------------------
_____________________, 199____, (the "Effective Date"), Assignor sells and
assigns to Assignee (without recourse to Assignor) and Assignee purchases and
assumes from Assignor an interest in and to all of Assignor's Rights and
obligations under the Credit Agreement (except any Rights and obligations
pertaining to Assignor's role as Agent if applicable) as of the Effective Date,
including, without limitation, a __________% interest in Assignor's total
Commitment, a corresponding amount of the Principal Debt outstanding under
Assignor's existing Notes, all interest accruing in respect of the interests
assigned above (collectively, the "Assigned Interests") after the Effective
Date, and all commitment fees accruing in respect of the Assigned Interest after
the Effective Date.
2. Assignor Provisions. Assignor (a) represents and warrants to Assignee that
-------------------
as of the Effective Date (i) $_____________________________ and
$______________________________ are outstanding (without reduction for any
assignments that have not yet become effective) respectively under the
Assignor's Term Note and Revolving Note, (ii) Assignor is the legal and
beneficial owner of the Assigned Interest, which is free and clear of any
adverse claim, and (iii) Assignor has not been notified of an existing Default
or Potential Default, and (b) makes no representation or warranty to Assignee
and assumes no responsibility to Assignee with respect to (i) any statements,
warranties, or representations made in or in connection with any Loan Document,
(ii) the execution, legality, validity, enforceability, genuineness,
sufficiency, or value of any Loan Document, or (iii) the financial condition of
any Company or the performance or observance by any Company of any of its
obligations under any Loan Document.
3. Assignee Provisions. Assignee (a) represents and warrants to Assignor,
-------------------
Borrower, and Agent that Assignee is legally authorized to enter into this
agreement and each other Loan Document to which it will become a party, (b)
confirms that it has received a copy of the Credit Agreement, copies of the
Current Financials, and such other documents and information as it deems
appropriate to make its own credit analysis and decision to enter into this
agreement, (c) agrees with Assignor, Borrower, and Agent that Assignee shall --
independently and without reliance upon Agent, Assignor, or any other Lender and
based on such documents and information as Assignee deems appropriate at the
time -- continue to make its own credit decisions in taking or not taking action
under the Loan Documents, (d) appoints and authorizes Agent to take such action
as agent on its behalf and to exercise such powers under the Loan Documents as
are delegated to Agent by the terms of the Loan Documents and all other
reasonably-incidental powers, (e) agrees with Assignor, Borrower, and Agent that
Assignee shall perform and comply with all provisions of the Loan Documents
applicable to Lenders in accordance with their respective terms, and (f) if
Assignee is not organized under the Laws of the United States of America or one
of its states, it (i) represents and warrants to Assignor, Agent, and Borrower
that no Taxes are required to be withheld by Assignor, Agent, or Borrower with
respect to any payments to be made to it in respect of the Obligation, and it
has furnished to Agent and Borrower two duly
Amended Exhibit F
-----------------
<PAGE>
completed copies of either U.S. Internal Revenue Service Form 4224, Form 1001,
Form W-8, or any other form acceptable to Agent that entitles Assignee to
exemption from U.S. federal withholding Tax on all interest payments under the
Loan Documents, (ii) covenants to provide Agent and Borrower a new Form 4224,
Form 1001, Form W-8, or other form acceptable to Agent upon the expiration or
obsolescence of any previously delivered form according to Law, duly executed
and completed by it, and to comply from time to time with all Laws with regard
to the withholding Tax exemption, and (iii) agrees with Agent and Borrower that,
if any of the foregoing is not true or the applicable forms are not provided,
then Agent and Borrower (without duplication) may deduct and withhold from
interest payments under the Loan Documents any United States federal-income Tax
at the full rate applicable under the IRC.
4. Credit Agreement and Commitments. From and after the Effective Date (a)
--------------------------------
Assignee shall be a party to the Credit Agreement and (to the extent provided in
this agreement) have the Rights and obligations of a Lender under the Loan
Documents and (b) Assignor shall (to the extent provided in this agreement)
relinquish its Rights and be released from its obligations under the Loan
Documents. On the Effective Date, after giving effect to this and certain other
assignment and assumption agreements that become effective on the Effective
Date, but without giving effect to any other assignments that have not yet
become effective, Assignor's and Assignee's Commitments will be as follows:
==============================================================
Lender Term Loan Revolving Facility Combined
Commitments
==============================================================
Assignor $ $ $
- --------------------------------------------------------------
Assignee $ $ $
==============================================================
5. Notes. Assignor and Assignee request Borrower to issue new Notes to
-----
Assignor and Assignee in the amounts of their respective commitments under
Paragraph 4 above and otherwise issue these Notes in accordance with the Credit
Agreement. Upon delivery of those Notes, Assignor shall return to Borrower all
Notes previously delivered to Assignor under the Credit Agreement.
6. Payments and Adjustments. From and after the Effective Date, Agent shall
------------------------
make all payments in respect of the Assigned Interest (including payments of
principal, interest, fees, and other amounts) to Assignee. Assignor and
Assignee shall make all appropriate adjustments in payments for periods before
the Effective Date by Agent or with respect to the making of this assignment
directly between themselves. Assignor agrees to apply any payments and proceeds
with respect to the Obligation ratably with Assignee.
7. Conditions Precedent. Paragraphs 1 through 6 above are not effective until
--------------------
(a) counterparts of this agreement are executed by Assignor, Assignee, Agent,
and Borrower, and are delivered to Agent and Borrower and (b) pursuant to
Section 12.14(a)(ii), Assignor pays to Agent an administrative transfer fee of
$2,500. If Agent is the Assignor, the requirement of Section 12.14(a)(ii) is
waived with regard to this agreement.
8. Incorporated Provisions. Although this agreement is not a Loan Document,
-----------------------
the provisions of the Credit Agreement applicable to Loan Documents are
incorporated into this instrument by reference the same as if this agreement
were a Loan Document and those provisions were set forth in this agreement
verbatim.
9. Communications. For purposes of Section 12.2 of the Credit Agreement,
--------------
Assignee's address and telecopy number -- until changed under that section --
are beside its signature below.
10. Amendments, Etc. No amendment, waiver, or discharge to or under this
---------------
agreement is valid unless in writing that is signed by the party against whom it
is sought to be enforced and is otherwise in conformity with the requirements of
the Credit Agreement.
Amended Exhibit F
-----------------
2
<PAGE>
11. ENTIRETY. THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN ASSIGNOR
--------
AND ASSIGNEE ABOUT ITS SUBJECT MATTER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF ASSIGNOR AND ASSIGNEE.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN ASSIGNOR AND ASSIGNEE.
12. Parties. This agreement binds and benefits Assignor, Assignee, and their
-------
respective successors and assigns as permitted under the documents.
EXECUTED as of the date first stated above.
_________________________, as Assignor _________________________, as Assignee
By _________________________________ By _______________________________
Name: ___________________________ Name _______________________________
Title: __________________________ Title _______________________________
(Address) __________________________
__________________________
__________________________
Attn: ____________________
(Tel. No.)(___)___-____
(Fax No.) (___)___-____
As of the Effective Date, Agent and Borrower consent to this agreement and
the transactions contem plated in it.
U.S. BANK NATIONAL ASSOCIATION, as Agent MATRIX BANCORP, INC., as Borrower
By _________________________________ By _______________________________
Name: ___________________________ Name _________________________
Title: __________________________ Title _________________________
Amended Exhibit F
-----------------
3
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 18, 1999, with respect to the consolidated
financial statements of Matrix Bancorp, Inc. as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998, in the
Registration Statement (Form S-1 No. 333-79731) and related Prospectus of Matrix
Bancorp, Inc. for the registration of 1,265,000 preferred securities of Matrix
Bancorp Capital Trust I.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
July 19, 1999
