-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T+oHLSnS4kx3u1dI7mbPuKBPl1oTZTC1+KxGTCR6T3qXDd89rMNpxcVb1PBBJYW6 jkmxt8JvdmVDsc5BivBgvQ== 0000899078-02-000300.txt : 20020426 0000899078-02-000300.hdr.sgml : 20020426 ACCESSION NUMBER: 0000899078-02-000300 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX BANCORP INC CENTRAL INDEX KEY: 0000944725 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 841233716 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21231 FILM NUMBER: 02622401 BUSINESS ADDRESS: STREET 1: 1380 LAWRENCE ST STREET 2: STE 1410 CITY: DENVER STATE: CO ZIP: 80204 BUSINESS PHONE: 3035959898 MAIL ADDRESS: STREET 1: 1380 LAWRENCE STREET STREET 2: SUITE 1410 CITY: DENVER STATE: CO ZIP: 80204 FORMER COMPANY: FORMER CONFORMED NAME: MATRIX CAPITAL CORP /CO/ DATE OF NAME CHANGE: 19960711 10-Q 1 mar312002-10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 0-21231 MATRIX BANCORP, INC. (Exact name of registrant as specified in its charter) Colorado 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1380 Lawrence Street, Suite 1400 Denver, Colorado 80204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of Common Stock ($.0001 par value) outstanding at the close of business on April 24, 2002 was 6,519,304 shares. TABLE OF CONTENTS
PART I - Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 2002 (unaudited) and December 31, 2001..................................3 Condensed Consolidated Statements of Income Quarters ended March 31, 2002 and 2001 (unaudited)................................4 Condensed Consolidated Statements of Changes in Shareholders' Equity Quarters ended March 31, 2002 and 2001 (unaudited)................................5 Condensed Consolidated Statements of Cash Flows Quarters ended March 31, 2002 and 2001 (unaudited)................................6 Notes to Condensed Consolidated Financial Statements (unaudited)........................7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..............................19 PART II - Other Information ITEM 6. Exhibits and Reports on Form 8-K........................................................19 SIGNATURES............................................................................................20
2 Part I - Financial Information Item 1. Financial Statements Matrix Bancorp, Inc. Condensed Consolidated Balance Sheets (Dollars in thousands)
March 31, December 31, 2002 2001 ------------------- ------------------ (unaudited) Assets Cash and cash equivalents........................................................$ 46,216 $ 52,501 Interest-earning deposits and federal funds sold................................. 93,091 31,959 Securities available for sale.................................................... 11,825 6,963 Loans held for sale, net......................................................... 1,010,755 1,157,989 Loans held for investment, net................................................... 199,703 191,161 Mortgage servicing rights, net................................................... 86,701 78,712 Other receivables ............................................................... 56,902 71,239 Federal Home Loan Bank stock, at cost............................................ 24,484 18,181 Premises and equipment, net...................................................... 13,635 13,631 Other assets, net................................................................ 26,915 24,451 ------------------ ------------------- Total assets.....................................................................$ 1,570,227 $ 1,646,787 =================== ================== Liabilities and shareholders' equity Liabilities: Deposits......................................................................$ 897,553 $ 866,235 Custodial escrow balances..................................................... 116,550 129,665 Drafts payable................................................................ 29,888 28,875 Payable for purchase of mortgage servicing rights............................. 3,937 4,738 Federal Home Loan Bank borrowings............................................. 282,342 303,361 Borrowed money................................................................ 74,356 162,532 Guaranteed preferred beneficial interests..................................... 59,500 59,500 Other liabilities and deferred income taxes payable........................... 31,284 19,434 Income taxes payable.......................................................... 2,192 1,135 ------------------- ------------------ Total liabilities................................................................ 1,497,602 1,575,475 ------------------- ------------------ Commitments and contingencies Shareholders' equity: Preferred stock, par value $0.0001; authorized 5,000,000 shares; no shares outstanding................................................................. - - Common stock, par value $0.0001; authorized 50,000,000 shares; issued 6,519,304 shares and outstanding 6,453,244 at March 31, 2002; and issued and outstanding 6,518,604 shares at December 31, 2001....................... 1 1 Additional paid in capital.................................................... 20,806 20,800 Treasury shares, at cost, 66,060 shares at March 31, 2002..................... (726) - Retained earnings............................................................. 52,524 50,486 Accumulated other comprehensive income........................................ 20 25 ------------------- ------------------ Total shareholders' equity....................................................... 72,625 71,312 ------------------- ------------------ Total liabilities and shareholders' equity.......................................$ 1,570,227 $ 1,646,787 =================== ================== See accompanying notes.
3 Matrix Bancorp, Inc. Condensed Consolidated Statements of Income (Dollars in thousands except share information) (Unaudited)
Quarter Ended March 31, 2002 2001 --------------- ------------- Interest income Loans and securities................................................................... $ 22,571 $ 26,395 Interest-earning deposits............................................................... 243 747 --------------- ------------- Total interest income................................................................... 22,814 27,142 Interest expense Deposits................................................................................ 6,498 8,491 Borrowed money and guaranteed preferred beneficial interests........................... 4,693 9,987 --------------- ------------- Total interest expense.................................................................. 11,191 18,478 --------------- ------------- Net interest income before provision for loan and valuation losses...................... 11,623 8,664 Provision for loan and valuation losses................................................. 1,058 977 --------------- ------------- Net interest income after provision for loan and valuation losses....................... 10,565 7,687 --------------- ------------- Noninterest income Loan administration..................................................................... 8,738 7,480 Brokerage.............................................................................. 584 901 Trust services.......................................................................... 1,393 1,329 Real estate disposition services........................................................ 782 609 Gain on sale of loans and securities.................................................... - 1,257 Loan origination........................................................................ 8,172 5,163 School services......................................................................... 1,441 1,339 Other.................................................................................. 2,316 499 --------------- ------------- Total noninterest income................................................................ 23,426 18,577 --------------- ------------- Noninterest expense Compensation and employee benefits...................................................... 14,661 10,987 Amortization of mortgage servicing rights............................................... 5,873 3,422 Occupancy and equipment................................................................. 1,689 1,548 Postage and communication............................................................... 1,140 916 Professional fees....................................................................... 712 550 Data processing......................................................................... 876 672 Other general and administrative........................................................ 5,942 4,714 --------------- ------------- Total noninterest expense............................................................... 30,893 22,809 --------------- ------------- Income before income taxes.............................................................. 3,098 3,455 Provision for income taxes ............................................................. 1,060 1,147 --------------- ------------- Income before cumulative effect of a change in accounting principle..................... 2,038 2,308 Less cumulative effect of a change in accounting principle, net of tax benefit of $190.. - 360 --------------- ------------- Net income............................................................................. $ 2,038 1,948 =============== ============= Net income per share before accounting change.......................................... $ 0.31 $ 0.35 Less cumulative effect of a change in accounting principle.............................. 0.00 0.05 --------------- ------------- Net income per share .................................................................. $ 0.31 0.30 =============== ============= Net income per share assuming dilution before accounting change........................ $ 0.31 $ 0.35 Less cumulative effect of a change in accounting principle.............................. 0.00 0.05 --------------- ------------- Net income per share assuming dilution ................................................ $ 0.31 0.30 =============== ============= Weighted average shares................................................................. 6,487,099 6,532,810 =============== ============= Weighted average shares assuming dilution.............................................. 6,583,159 6,569,775 =============== =============
See accompanying notes. 4 Matrix Bancorp, Inc. Condensed Consolidated Statements of Shareholders' Equity (Dollars in thousands) (Unaudited)
Accumulated Common Stock Additional Other Total -------------------- Paid In Treasury Retained Comprehensive Shareholders' Comprehensive Shares Amount Capital Shares Earnings Income Equity Income ---------- -------- ----------- ---------- --------- ------------- ------------- ------------- Quarter Ended March 31, 2002 - ------------------------- Balance at December 31, 2001..................... 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312 Comprehensive income: Net income............. - - - - 2,038 - 2,038 $ 2,038 Net unrealized holding losses (1)............. - - - - - (5) (5) (5) ------------ Comprehensive income...... $ 2,033 Issuance of stock related to employee stock purchase plan and options................ 700 - 6 - - - 6 Shares repurchased........ (66,060) - - (726) - - (726) ---------- -------- ----------- ---------- --------- ------------- ------------- Balance at March 31, 2002. 6,453,244 $ 1 $ 20,806 $ (726) $ 52,524 $ 20 $ 72,625 ========== ======== =========== ========== ========= ============= ============= Quarter Ended March 31, 2001 - -------------------------- Balance at December 31, 2000..................... 6,558,904 $ 1 $ 23,004 $ (1,775) $ 41,974 $ 819 $ 64,023 Comprehensive income: Net income............. - - - - 1,948 - 1,948 $ 1,948 Unrealized losses on securities, net of reclassification adjustment............. - - - - - (811) (811) (811) ------------ Comprehensive income...... $ 1,137 ============ Shares repurchased........ (45,500) - - (366) - - (366) ---------- -------- ----------- ---------- --------- ------------- ------------- Balance at March 31, 2001. 6,513,404 $ 1 $ 23,004 $ (2,141) $ 43,922 $ 8 $ 64,794 ========== ======== =========== ========== ========= ============= ============= (1) Disclosure of reclassification amount Unrealized holding loss arising during period ended March 31, 2002.... $ (5) Less: reclassification adjustment of gains included in net income....... - ------------ Net unrealized holding losses........ $ (5) ============
See accompanying notes. 5 Matrix Bancorp, Inc. Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Quarter Ended March 31, 2002 2001 --------------- --------------- Operating activities Net income........................................................................ $ 2,038 $ 1,948 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.................................................. 1,752 730 Provision for loan and valuation losses........................................ 1,058 977 Amortization of mortgage servicing rights...................................... 5,873 3,422 Gain on sale of loans and securities........................................... - (1,257) Loans originated for sale, net of loans sold................................... 129,233 (325,521) Loans purchased for sale....................................................... (62,685) (13,846) Proceeds from sale of loans purchased for sale................................. 28,977 15,973 (Increase) decrease in securities held for sale ............................... (4,870) 63,331 Originated mortgage servicing rights, net...................................... (13,681) (2,964) Increase in other receivables and other assets................................. 11,811 (2,758) Increase (decrease) in other liabilities, deferred income taxes payable and income taxes payable......................................................... 12,910 (3,441) --------------- --------------- Net cash provided by (used in) operating activities............................... 112,416 (263,406) --------------- --------------- Investing activities Loans originated and purchased for investment..................................... (35,582) (59,923) Principal repayments on loans..................................................... 78,703 86,026 Purchase of Federal Home Loan Bank stock.......................................... (6,303) (385) Purchases of premises and equipment............................................... (1,693) (920) Acquisition of mortgage servicing rights.......................................... (801) (4,348) Servicing hedging activity........................................................ (181) - --------------- --------------- Net cash provided by investing activities......................................... 34,143 20,450 --------------- --------------- Financing activities Net increase in deposits.......................................................... 31,318 240,757 Net (decrease) increase in custodial escrow balances.............................. (13,115) 50,729 Decrease in revolving lines and repurchase agreements, net........................ (109,178) (65,910) Proceeds from notes payable....................................................... - 1,786 Proceeds from issuance of guaranteed preferred beneficial interests............... - 11,592 Payment of financing arrangements................................................. (17) (19) Treasury shares repurchased....................................................... (726) (366) Proceeds from issuance of common stock related to employee stock option plan...... 6 - --------------- --------------- Net cash (used in) provided by financing activities............................... (91,712) 238,569 --------------- --------------- Increase (decrease) in cash and cash equivalents.................................. 54,847 (4,387) Cash and cash equivalents at beginning of period.................................. 84,460 53,170 --------------- --------------- Cash and cash equivalents at end of period........................................ $ 139,307 $ 48,783 --------------- --------------- Supplemental disclosure of cash flow information Cash paid for interest............................................................ $ 12,550 $ 15,806 =============== =============== Cash (received) paid for income taxes............................................. $ (2,980) $ 1,708 =============== ===============
See accompanying notes. 6 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2002 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Matrix Bancorp, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the condensed consolidated financial statements, and disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period, and the accompanying notes. Actual results could differ from these estimates. 2. New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, that supersedes Accounting Principles Board (APB) Opinion No. 17. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are to be reviewed at least annually for impairment under impairment guidelines established in the statement. SFAS 142 also changes the amortization methodology in intangible assets that are deemed to have finite lives. Finally, SFAS 142 adds to required disclosures regarding goodwill and intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 142 on January 1, 2002 did not have a material impact on the consolidated financial statements, and is not anticipated to have a material impact in the future. In addition, amortization of goodwill previously reported in net income is not material. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that superseded SFAS No. 121 and APB Opinion No. 30. SFAS 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal other than by sale, and the required valuation of such assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 on January 1, 2002 did not have a material impact on the consolidated financial statements, and is not anticipated to have a material impact in the future. 3. Net Income Per Share The following table sets forth the computation of net income per share and net income per share assuming dilution:
Quarter Ended March 31, 2002 2001 ----------------- ---------------- (Dollars in thousands) Numerator: Net income........................................................ $ 2,038 $ 1,948 ================= ================ Denominator: Weighted average shares outstanding............................... 6,487,099 6,532,810 Effect of dilutive securities:.................................... Common stock options......................................... 96,060 36,965 ----------------- ---------------- Potential dilutive common shares.................................. 96,060 36,965 ----------------- ---------------- Denominator for net income per share assuming dilution............ 6,583,159 6,569,775 ================= ================
7 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2002 (Unaudited) 4. Mortgage Servicing Rights The activity in mortgage servicing rights is summarized as follows:
Quarter Ended Year Ended March 31, December 31, 2002 2001 -------------------- -------------------- (In thousands) Balance at beginning of period, net................... $ 78,712 $ 71,529 Purchases............................................. - 530 Originated, net........................................ 13,681 30,129 Amortization........................................... (5,873) (21,862) Sales.................................................. - (1,433) Impairment............................................. 181 (181) -------------------- -------------------- Balance at end of period, net......................... $ 86,701 $ 78,712 ==================== ====================
The Company's servicing portfolio (excluding subserviced loans) was comprised of the following:
March 31, 2002 December 31, 2001 -------------------------------- -------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding --------------- --------------- --------------- --------------- (Dollars in thousands) Freddie Mac................................. 11,491 $ 559,829 12,422 $ 613,527 Fannie Mae.................................. 33,084 2,272,042 31,069 1,885,197 Ginnie Mae.................................. 26,967 1,889,151 26,718 1,820,691 VA, FHA, conventional and other loans....... 14,321 1,156,063 15,946 1,336,950 --------------- --------------- --------------- --------------- 85,863 $ 5,877,085 86,155 $ 5,656,365 =============== =============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed consolidated balance sheets at March 31, 2002 and December 31, 2001 pertain to escrowed payments of taxes and insurance and principal and interest on loans serviced by the Company. 5. Deposits Deposit account balances are summarized as follows:
March 31, 2002 December 31, 2001 ----------------------------------------- ---------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ----------- ------------ ----------- ----------- ----------- ----------- (Dollars in thousands) Passbook accounts...... $ 5,664 0.63 % 2.33 % $ 4,291 0.50 % 3.12 % NOW accounts........... 150,140 16.73 0.51 107,183 12.37 0.94 Money market accounts............. 272,427 30.35 1.42 249,234 28.77 2.11 ----------- ------------ ----------- ----------- ----------- ----------- 428,231 47.71 1.14 360,708 41.64 1.74 Certificate accounts....... 469,322 52.29 4.21 505,527 58.36 5.98 ----------- ------------ ----------- ----------- ----------- ----------- $897,553 100.00 % 2.88 % $ 866,235 100.00 % 4.36 % =========== ============ =========== =========== =========== =========== 8
Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2002 (Unaudited) 5. Deposits (continued) At March 31, 2002 and December 31, 2001, brokered deposits accounted for approximately $331.5 million and $361.2 million, respectively, of the total certificate accounts shown above. 6. Federal Home Loan Bank Stock and Borrowings During the second quarter of 2001, the Company announced the relocation of Matrix Bank's domicile from Las Cruces, New Mexico to Denver, Colorado. The relocation will be completed in the second quarter of 2002. Matrix Bank intends to offer all of its existing banking services in the Denver market. In connection with the change of domicile, Matrix Bank now obtains Federal Home Loan Bank (FHLB) advances from FHLB of Topeka, which is the FHLB that serves Denver, Colorado. This change was approved March 25, 2002. Long-term advances that existed at March 25, 2002 with FHLB of Dallas are still outstanding under their original terms and Matrix Bank continues to utilize FHLB of Dallas as its primary correspondent bank. The balances of FHLB stock are as follows:
March 31, December 31, 2002 2001 -------------------- -------------------- (In thousands) FHLB of Dallas stock, at cost......................... $ 14,312 $ 18,181 FHLB of Topeka stock, at cost......................... 10,172 - -------------------- -------------------- Total FHLB stock.................................... $ 24,484 $ 18,181 ==================== ==================== The balances of FHLB borrowings are as follows: March 31, December 31, 2002 2001 -------------------- -------------------- (In thousands) FHLB of Dallas borrowings............................. $ 147,342 $ 303,361 FHLB of Topeka borrowings............................. 135,000 - -------------------- -------------------- Total FHLB borrowings............................... $ 282,342 $ 303,361 ==================== ====================
7. Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated Debentures On July 30, 1999, Matrix Bancorp Capital Trust I, a Delaware business trust formed by the Company, completed the sale of $27.5 million of 10% preferred securities due September 30, 2029. The Company has the right to redeem the securities, in whole or in part, on or after September 30, 2004, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On March 28, 2001, Matrix Bancorp Capital Trust II, a Delaware business trust created by the Company, completed the sale of $12.0 million of 10.18% preferred securities due June 8, 2031. The Company has the right to redeem the preferred securities on or after June 8, 2011, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. 9 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2002 (Unaudited) 7. Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated Debentures (continued) On July 16, 2001, Matrix Bancorp Capital Trust III, a Delaware business trust formed by the Company, completed the sale of $15.0 million of 10.25% preferred securities due July 25, 2031. The Company has the right to redeem the securities, in whole or in part, on or after July 25, 2006, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. On November 28, 2001, Matrix Bancorp Capital Trust IV, a Delaware business trust formed by the Company, completed the sale of $5.0 million of floating rate of six month LIBOR plus 3.75% preferred securities, due December 8, 2031. The Company has the right to redeem the securities, in whole or in part, on or after December 8, 2006, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. 8. Commitments and Contingencies At March 31, 2002, the Company had $637.9 million in pipeline and funded loans offset with mandatory forward commitments of $418.6 million and best effort forward commitments of $145.6 million. 9. Segment Information
Servicing Traditional Mortgage Brokerage and School Banking Banking Consulting Services All Others Total ------------- ------------ ---------------- ----------- ----------- ---------- (In thousands) Quarter ended March 31, 2002: Revenues from external customers: Interest income......... $ 12,958 8,211 $ - $ 1,550 $ 95 $ 22,814 Noninterest income...... 1,649 16,268 1,229 2,113 2,167 23,426 Intersegment revenues....... 5,068 716 - - 1,340 7,124 Segment profit (loss)....... 5,869 1,625 150 (1,756) (2,790) 3,098 Quarter ended March 31, 2001: Revenues from external customers: Interest income......... $ 20,657 $ 4,894 $ - $ 1,546 $ 45 $ 27,142 Noninterest income...... 2,132 11,831 932 1,339 2,343 18,577 Intersegment revenues....... 4,704 1,614 133 - 705 7,156 Segment profit (loss)....... 6,120 1,150 (433) (332) (3,050) 3,455
10 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2002 (Unaudited) 9. Segment Information (continued)
Quarter Ended Quarter Ended March 31, 2002 March 31, 2001 ------------------ ------------------ (In thousands) Profit: Total profit for reportable segments..................... $ 5,888 $ 6,505 Other loss............................................... (2,760) (3,033) Adjustment of intersegment loss in consolidation......... (30) (17) ------------------ ----------------- Income before income taxes............................... $ 3,098 $ 3,455 ================== =================
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Matrix Bancorp, Inc. (occasionally referred to in this document, on a consolidated basis, as "us," "we," the "Company" or similar terms) is a unitary thrift holding company that, through our subsidiaries, focuses on traditional banking, mortgage banking, trust and clearing activities, lending activities and other fee-based services. 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 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 and clearing activities focus primarily on offering specialized custody and clearing services to banks, trust companies, broker-dealers, third party administrators and investment professionals, as well as the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. Our other fee-based services and lending activities include providing outsourced business services, such as budgeting, governmental reporting, accounts payable, payroll, facility and safety management and comprehensive insurance programs to charter schools. We also offer financing to charter schools for the purchase of school sites and equipment. Our primary operating subsidiaries are: Matrix Capital Bank; Matrix Financial Services Corporation; Matrix Capital Markets, Inc.; Matrix Asset Management Corporation; ABS School Services, L.L.C.; Matrix Advisory Services, L.L.C.; Sterling Trust Company; First Matrix Investment Services Corp., plus an equity investment in Matrix Settlement and Clearing Services, L.L.C. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank, Matrix Financial and ABS; o loan origination fees generated by Matrix Financial, and to a lesser extent, Matrix Bank; o brokerage and consulting and disposition services fees realized by Matrix Capital Markets, First Matrix and Matrix Asset Management; 11 o gains on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust; and o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates and the effect of these changes on our interest margins, the volume of loan originations, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are affected to a lesser extent by interest rates and to a greater extent by competition and general market conditions. Critical Accounting Policies The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in note 2 of the consolidated financial statements on Form 10-K as of December 31, 2001. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgment and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan and valuation losses is a critical accounting policy that requires the most significant judgments, assumptions and estimates used in preparation of its consolidated financial statements. See discussion at "--Asset and Liability Management, Analysis of Allowance for Loan and Valuation Losses" in the Form 10-K for December 31, 2001 for a detailed description of the Company's process and methodology related to the allowance for loan and valuation losses. The Company also considers the valuation of mortgage servicing rights to be a critical accounting policy that requires judgments, assumptions and estimates concerning impairment of their value in certain interest rate environments. See discussion at "--Business, Mortgage Servicing Activities" in the Form 10-K for December 31, 2001 for a detailed discussion of the nature of servicing rights, and see note 2 of the consolidated financial statements on Form 10-K as of December 31, 2001 for a detailed discussion concerning the valuation of mortgage servicing rights. The Company also considers the judgments and assumptions concerning litigation as a critical accounting policy. The Company has been notified that we are a defendant in a number of legal proceedings. Most of these cases involve ordinary and routine claims incidental to our business. Based on management's analysis, no accrual for loss has been made as of March 31, 2002 for any such cases. See a full description of such proceedings at "--Legal Proceedings" in the Form 10-K for December 31, 2001. With respect to all pending litigation matters, our ultimate legal responsibility, if any, cannot be estimated with certainty. Based on the ultimate outcome of such proceedings, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to such proceedings. Forward-Looking Information Certain statements contained in this annual report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities 12 Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this annual report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to the ongoing or future bankruptcies of the Company's customers; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; possible future litigation; the actions or inactions of third parties, including those that are parties to the existing bankruptcies of the Company's customers or litigation related thereto; unanticipated developments in connection with the bankruptcy actions or litigation described above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in the Company's annual report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2002; and in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on March 14, 2001; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. Comparison of Results of Operations for the Quarters Ended March 31, 2002 and 2001 Net Income; Return on Average Equity. Net income increased $90,000, or 4.6%, to $2.0 million, or $0.31 per diluted share, for the quarter ended March 31, 2002 as compared to $1.9 million, or $0.30 per diluted share considering a cumulative effect of a change in accounting principle, for the quarter ended March 31, 2001. Return on average equity decreased to 11.4% for the quarter ended March 31, 2002 as compared to 12.1% for the quarter ended March 31, 2001. Net Interest Income. The increase in net interest income before provision for loan and valuation losses was primarily due to an increase in average noninterest-bearing deposits, which increased $93.0 million, or 57.9%, to $253.6 million for the quarter ended March 31, 2001 as compared to $160.6 million for the quarter ended March 31, 2001. This increase is attributable to increased deposits directed to Matrix Bank by Company subsidiaries and affiliates of Matrix Bank. Additionally, our average interest-bearing liabilities decreased $69.9 million, or 5.6%, to $1.2 billion for the quarter ended March 31, 2002 as compared to $1.3 billion for the quarter ended March 31, 2001. The majority of the decrease can be attributed to the lower levels of third party warehouse borrowings required to fund loan originations. The Company's net interest margin increased to 3.45% for the quarter ended March 31, 2002 as compared to 2.56% for the quarter ended March 31, 2001. The Company's average interest-earning asset balances were comparable quarter to quarter, however, the average yield on the interest-earning assets decreased 124 basis points to 6.77% for the quarter ended March 31, 2002 from 8.01% for the quarter ended March 31, 2001. The weighted average yield on our average loans and mortgage-backed securities decreased to 6.95% as compared to 8.16% for the prior year's comparable quarter. Much of the decrease can be attributed to our adjustable rate loans, as well as decreases in earnings on overnight funds and FHLB stock that follow the federal funds rate which continues to be at a record low level. The Company also experienced a significant decrease in the cost of our interest-bearing liabilities, which decreased 210 basis points to 3.77% for the quarter ended March 31, 2002 from 5.87% for the quarter ended March 31, 2001. The decrease is due to decreases in market rates offered on deposit accounts reflecting the lower market interest rates prevelant in the first quarter of 2002 as compared to the first quarter of 2001. As certificate deposit accounts mature and are renewed or replaced, this occurs at the lower market interest rates. 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 $81,000 to $1.1 million for the quarter ended March 31, 2002 as compared to $977,000 for the quarter ended March 31, 2001. The increase in the provision for the quarter ended March 31, 2002 was due to an increased loan loss provision recorded at ABS which was the result of a modest increase in the aggregate balance of loans to charter schools. 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, gains on sales of repurchased FHA/VA loans, and other ancillary charges. Loan administration 13 fees increased $1.2 million, or 16.8%, to $8.7 million for the quarter ended March 31, 2002 as compared to $7.5 million for the quarter ended March 31, 2001. The increase is primarily attributable to gains on sales of repurchased FHA/VA loans of $1.8 million for the quarter ended March 31, 2002. Gains on sale of repurchased FHA/VA loans relate to delinquent loans which are purchased out of the Company's servicing portfolio and resold into the secondary market. Loan service 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. Our mortgage loan servicing portfolio had an average balance of $5.8 billion for the quarter ended March 31, 2002 as compared to $5.5 billion for the quarter ended March 31, 2001. The actual service fee rate (including all ancillary income and excluding sub-servicing income in 2002) was 0.55% for the quarter ended March 31, 2002 as compared to 0.49% for the quarter ended March 31, 2001. The slight increase in service fee rate is primarily attributed to a higher percentage of Ginnie Mae servicing in the portfolio which tends to have higher service fees. The increase in the gains on sale of repurchased FHA/VA loans and servicing fees was offset by reductions in subservicing income due to the expiration of one subservicing contract on a portfolio of approximately $1.1 billion, which transferred in the second quarter of 2001. 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 $3.0 million to $8.2 million for the quarter ended March 31, 2002 as compared to $5.2 million for the quarter ended March 31, 2001. The increase in loan origination income resulted from an increase in wholesale residential mortgage loan production and net income spread. The wholesale residential mortgage loan production increased to $874.2 million and the net income spread increased to 93.5 basis points for the quarter ended March 31, 2002 as compared to $650.7 million and 79.3 basis points for the quarter ended March 31, 2001. Brokerage Fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights. Brokerage fees decreased $317,000 to $584,000 for the quarter ended March 31, 2002 as compared to $901,000 for the quarter ended March 31, 2001. Brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon, among other things, prevailing market conditions, and a seller's need to recognize a sale or to receive cash flows. Trust Services. Trust service fees were consistent between the comparable quarters with a $64,000 increase for the quarter ended March 31, 2002. Trust accounts under administration at Sterling Trust increased to 41,958 at March 31, 2002 from 39,403 at March 31, 2001, and total assets under administration increased to approximately $6.0 billion at March 31, 2002 from approximately $4.0 billion at March 31, 2001. Most of the growth in accounts and assets under administration occurred in third party administrator accounts, which are generally priced at lower fees based on the level of administration required. Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition services income increased $173,000 or 28.4%, to $782,000 for the quarter ended March 31, 2002 as compared to $609,000 for the quarter ended March 31, 2001. The increase is due to an increase in the number of properties closed during the quarter, which was 428 for the quarter ended March 31, 2002, an increase of 25.1% when compared to the same quarter of 2001. Additionally, the increase is due to new clients obtained as a result of expanded marketing efforts in the last half of 2001. Properties under management at March 31, 2002 were 1,588 as compared to 868 at March 31, 2001. Gain on Sale of Loans and Securities. Gain on sale of loans and securities decreased $1.3 million for the quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001. The gain for the first quarter of 2001 was due to sales of mortgage-backed securities, and we did not have the same activity for the first quarter of 2002. The gain on sale of loans can fluctuate significantly from quarter to quarter and year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan and security portfolios we purchase and the particular loan and security portfolios we elect to sell. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided primarily to charter schools. School services income increased $102,000, or 7.6%, to $1.4 million for the quarter ended March 31, 2002 as compared to $1.3 million for the quarter 14 ended March 31, 2001. The increase was due primarily to servicing additional schools, including an increase in the level of services provided to those schools. As of March 31, 2002, ABS provided core business services to approximately 107 schools. Other Income. Other income increased $1.8 million to $2.3 million for the quarter ended March 31, 2002 as compared to $499,000 for the quarter ended March 31, 2001. The increase in other income was primarily due to increases in brokerage fees related to loan portfolios of $480,000 at Matrix Capital Markets and increases in retail and fixed income trading fees and Small Business Administration trading fees of $370,000 at First Matrix. The increase at Matrix Capital Markets was due to increases in levels of whole loan trading, and the increases at First Matrix were due to activity generated by the Company's focus on the acquisition, pooling and selling of Small Business Administration loans and securities. Noninterest Expense. Noninterest expense increased $8.1 million, or 35.4%, to $30.9 million for the quarter ended March 31, 2002 as compared to $22.8 million for the quarter ended March 31, 2001. This increase was predominantly due to increases in compensation and benefits expense and amortization of mortgage servicing rights, as well as other increase due to overall growth in operations of the Company. The following table details the major components of noninterest expense for the periods indicated:
Quarter Ended March 31, --------------------------------- 2002 2001 --------------- -------------- (In thousands) Compensation and employee benefits...................................... $ 14,661 $ 10,987 Amortization of mortgage servicing rights............................... 5,873 3,422 Occupancy and equipment................................................. 1,689 1,548 Postage and communication............................................... 1,140 916 Professional fees....................................................... 712 550 Data processing......................................................... 876 672 Other general and administrative........................................ 5,942 4,714 --------------- -------------- Total............................................................... $ 30,893 $ 22,809 =============== ==============
Compensation and employee benefits expense increased $3.7 million, or 33.4%, to $14.7 million for the quarter ended March 31, 2002 as compared to $11.0 million for the quarter ended March 31, 2001. The Company experienced an increase of 155 employees, or 19.6%, to 945 employees at March 31, 2002 as compared to 790 employees at March 31, 2001. The majority of the increase was attributable to Matrix Financial loan production personnel and school services personnel added at ABS. Amortization of mortgage servicing rights increased $2.5 million to $5.9 million for the quarter ended March 31, 2002 as compared to $3.4 million for the quarter ended March 31, 2001. 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 on our servicing portfolio increased to an average of 21.6% for the quarter ended March 31, 2002 as compared to 17.1% for the quarter ended March 31, 2001. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other general and administrative expenses, increased $2.0 million, or 23.3%, to $10.4 million for the quarter ended March 31, 2002 as compared to $8.4 million for the quarter ended March 31, 2001. The $1.2 million increase in other general and administrative expenses was primarily related to the increased volume at ABS requiring use of temporary help, increased operations at Matrix Financial and First Matrix and increased expenses related to relocation of Matrix Bank's domicile. Provision for Income Taxes. Provision for income taxes decreased $87,000 to $1.1 million for the quarter ended March 31, 2002 as compared to $1.2 million for the quarter ended March 31, 2001. Our effective tax rate was 34.2% for the quarter ended March 31, 2002 as compared to 33.2% for the quarter ended March 31, 2001. The effective tax rates are effected by the level of tax-exempt loans at ABS. 15 Average Balance Sheet The following table sets forth for the periods indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Average interest rate information for the quarters ended March 31, 2002 and 2001 have been annualized. Ratio, yield and rate information is based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated. 16
Quarter Ended March 31, --------------------------------------------------------------------------- 2002 2001 ---------------------------------- ------------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ----------- -------- ----------- ----------- ---------- (Dollars in thousands) Assets Interest-earning assets: Loans receivable, net.......... $ 1,289,945 $ 22,442 6.96 % $ 1,233,230 $ 25,208 8.18 % Securities..................... 10,035 129 5.14 61,150 1,187 7.76 Interest-earning deposits...... 28,966 99 1.37 33,300 362 4.35 FHLB stock..................... 18,827 144 3.06 27,818 385 5.54 ----------- ----------- -------- ----------- ----------- ---------- Total interest-earning assets 1,347,773 22,814 6.77 1,355,498 27,142 8.01 Noninterest-earning assets: Cash........................... 31,794 18,801 Allowance for loan and valuation (9,455) (8,544) losses........................... Premises and equipment......... 13,672 13,322 Other assets................... 171,297 144,891 ----------- ----------- Total noninterest-earning assets....................... 207,308 168,470 ----------- ----------- Total assets................. $ 1,555,081 $ 1,523,968 =========== =========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts.............. $ 4,638 $ 27 2.33 % $ 2,996 $ 25 3.34 % Money market and NOW accounts.. 260,079 1,086 1.67 176,417 1,078 2.44 Certificates of deposit........ 511,967 5,385 4.21 458,378 7,388 6.45 FHLB borrowings................ 255,449 1,972 3.09 462,860 6,674 5.77 Borrowed money................. 156,719 2,721 6.94 158,083 3,313 8.38 ----------- ----------- -------- ----------- ----------- ---------- Total interest-bearing liabilities.................. 1,188,852 11,191 3.77 1,258,734 18,478 5.87 ----------- ----------- -------- ----------- ----------- ---------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances)... 253,580 160,632 Other liabilities.............. 40,987 40,343 ----------- ----------- Total noninterest-bearing 294,567 200,975 liabilities...................... Shareholders' equity............. 71,662 64,259 ----------- ----------- Total liabilities and shareholders' equity............. $ 1,555,081 $ 1,523,968 =========== =========== Net interest income before provision for loan and valuation losses................ $ 11,623 $ 8,664 =========== =========== Interest rate spread.......................................... 3.00 % 2.14 % ======== ========== Net interest margin........................................... 3.45 % 2.56 % ======== ========== Ratio of average interest-earning assets to average interest-bearing liabilities.................................................. 113.37 % 107.69 % ======== ==========
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: o changes in volume, in other words, changes in volume multiplied by old rate; and o changes in rate, in other words, changes in rate multiplied by old volume. 17 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.
Quarter Ended March 31, 2002 vs. 2001 --------------------------------------------- Increase (Decrease) Due to Change in --------------------------------------------- Volume Rate Total ------------- ------------- --------------- (In thousands) Interest-earning assets: Loans receivable, net.......................................... $ 1,121 $ (3,886) $ (2,765) Securities..................................................... (7,180) 6,122 (1,058) Interest-earning deposits...................................... (52) (211) (263) FHLB stock..................................................... (149) (92) (241) ------------- ------------- --------------- Total interest-earning assets............................... (6,260) 1,933 (4,327) Interest-bearing liabilities: Passbook accounts.............................................. 11 (9) 2 Money market and NOW accounts.................................. 413 (405) 8 Certificates of deposit........................................ 788 (2,791) (2,003) FHLB borrowings................................................ (2,309) (2,393) (4,702) Borrowed money................................................. (29) (562) (591) ------------- ------------- --------------- Total interest-bearing liabilities.......................... (1,126) (6,160) (7,286) ------------- ------------- --------------- Change in net interest income before provision for loan and valuation losses............................ $ (5,134) $ 8,093 $ 2,959 ============= ============= ==============
Asset Quality Nonperforming Assets As part of asset and liability management, we monitor nonperforming assets on a monthly basis. Nonperforming assets consist primarily of nonaccrual loans and foreclosed real estate. Loans are placed on nonaccrual when full payment of principal or interest is in doubt or when they are past due 90 days as to either principal or interest. Foreclosed real estate arises primarily through foreclosure on mortgage loans owned.
March 31, 2002 December 31, March 31, 2001 2001 ---------------- --------------- --------------- (Dollars in thousands) Nonaccrual residential mortgage loans................ $ 17,506 $ 19,039 $ 21,940 Nonaccrual commercial real estate, commercial loans and school financing........................ 23,741 18,172 8,458 Nonaccrual consumer loans............................ 28 40 110 ---------------- --------------- --------------- Total nonperforming loans......................... 41,275 37,251 30,508 Foreclosed real estate............................... 5,401 8,355 3,893 ---------------- --------------- --------------- Total nonperforming assets........................ $ 46,676 $ 45,606 $ 34,401 ================ =============== =============== Total nonperforming loans to total loans............. 3.41 % 2.74 % 2.09 % ================ =============== =============== Total nonperforming assets to total assets........... 2.90 % 2.79 % 2.03 % ================ =============== =============== Ratio of allowance for loan and valuation losses to total nonperforming loans...................... 22.79 % 25.07 % 29.56 % ================ =============== ===============
We accrue for interest on government-sponsored loans such as Federal Housing Administration insured and Veteran's Administration guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $58.1 million, $55.2 million and $71.5 million at March 31, 2002, December 31, 2001 and March 31, 2001, respectively. Nonaccrual mortgage loans as a percentage of total loans were 1.4% at March 31, 2002, 1.4% at December 31, 2001 and 2.1% at March 31, 2001. The nonaccrual residential mortgage loans have improved at March 31, 2002 as compared to March 31, 2001. The improvement is due to maturity and improvement in certain portfolios acquired in 2000 and 1999 on which the recourse option we had was eliminated with the bankruptcy of the seller/servicer. The balance of 18 these loans in nonaccrual at March 31, 2002 totals $4.2 million as compared to $5.3 million at March 31, 2001. Associated with these nonaccrual loans, we have recorded $1.6 million of discounts at March 31, 2002. The increase in nonaccrual commercial loans and school financing in the first quarter 2002 compared to first quarter 2001 is attributable to the increased volume of charter school loans originated at ABS and the increased amount of these loans in nonaccrual status, which at March 31, 2002 was $8.0 million, and our SBA originated and purchased loans and the increased amount of those loans in nonaccrual status, which at March 31, 2002 was $9.8 million. It should be noted, however, that approximately $6.2 million of the interest and principal of these SBA loans is guaranteed, and as such, our credit risk is reduced despite the increase in the balances. With regard to our school financing, a majority of our origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. Many of our charter schools have encountered enrollment and/or state funding delays with their start-up, which has delayed their funding and caused the school's loans to us to become delinquent. We have historically, however, been able to work with many of the schools on their cash flow issues and eventually removed them from the delinquent lists. 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 limited instances, receive recourse from the seller to further reduce our risk of loss associated with the loans' nonaccrual status. At March 31, 2002, $13.1 million, or 31.9%, of the nonaccrual loans were loans that were residential loans purchased in bulk loan portfolios and remain classified as "held for sale." Total loans held for sale at March 31, 2002, were $1.0 billion, of which $8.8 million, or 0.87%, were nonaccrual loans related to commercial loans and school financing held for sale. The percentage of the allowance for loan losses to nonaccrual loans varies due to the nature of our portfolio of loans. We analyze the collateral for each nonperforming loan to determine potential loss exposure. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. See "--Comparison of Results of Operations for the Quarters Ended March 31, 2002 and 2001." Liquidity and Capital Resources Liquidity is our ability to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. The trend of net cash provided by our operating and investing activities, and used in our financing activities for the quarter ended March 31, 2002 results primarily from selling more of our originated loans, and using the funds to pay down outstanding borrowings previously utilized to fund the growth of loan originations at Matrix Financial. The use of cash will continue to be effected by fluctuations in loan originations and in the volume and timing of sales of originated loans. In periods where originations decrease, the Company anticipates acquiring residential loan portfolios in the secondary market. The level of acquisitions will be based on market availability, pricing, liquidity and capital. The Company has a bank stock loan agreement, which consists of two components, a term loan and a revolving line of credit. As of March 31, 2002, the balance of the term loan was $8.6 million and no amount was outstanding on the revolving line of credit. The terms of the bank stock loan agreement were amended effective March 31, 2002 to extend the maturity of the term loan to December 31, 2004 and to increase the limit for the revolving loan portion to $12.0 million. Matrix Bank's future growth is expected to be achieved through retail deposit growth, brokered deposits, borrowings from the Federal Home Loan Bank, custodial deposits from affiliates and deposits directed to Matrix Bank by third party institutions. 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 and liquidity. At March 31, 2002, Matrix Bank had overnight and term borrowings from the Federal Home Loan Banks of Topeka and Dallas of $282.3 million. In addition, Matrix Bank utilizes brokered deposits as a source of liquidity. The balance at March 31, 2002 was $331.5 million. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and 19 size of the related mortgage servicing portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. Matrix Bank, a well capitalized institution, had a leverage capital ratio of 7.16% at March 31, 2002. This exceeded the well capitalized leverage capital requirement of 5.0% of adjusted assets by $31.6 million. Matrix Bank's risk-based capital ratio was 12.81% at March 31, 2002, which currently exceeds the well capitalized risk-based capital requirement of 10.0% of risk weighted assets by $24.5 million. Matrix Financial's principal source of funding for its loan origination business consists of a warehouse line of credit provided to Matrix Financial by Matrix Bank, as well as a warehouse line of credit provided to Matrix Financial by an unaffiliated financial institution. As of March 31, 2002, Matrix Financial had a $120.0 million warehouse line of credit facility provided by an unaffiliated financial institution which was amended to an aggregate line of $80.0 million on April 1, 2002. As of March 31, 2002, $115.0 million was available to be utilized, which was reduced to $75.0 million on April 1, 2002. Additionally, we have a financing line provided to ABS by third party institutions. Our principal sources of funding for school financing are internal capital, a line of credit facility and a partnership trust with an unaffiliated financial institution. Amounts available under the line of credit facility and the partnership trust are at the lender's sole discretion. We are pursuing additional third party financing options for ABS. In the ordinary course of business, we make commitments to originate residential mortgage loans and hold originated loans until delivery to an investor. Inherent in this business are risks associated with changes in interest rates and the resulting change in the market value of the loans being held for delivery. We mitigate this risk through the use of mandatory and nonmandatory forward commitments to sell loans. As of March 31, 2002, we had $637.9 million in pipeline and funded loans offset with mandatory forward commitments of $418.6 million and best effort forward commitments of $145.6 million. Item 3. Quantitative and Qualitative Disclosures About Market Risk See Item 7. "Management's Discussion and Anlaysis of Financial Condition and Results of Operations -- Asset and Liability Management -- Risk Sensitive Assets and Liabilities" and Item 1. "Business Mortgage Servicing Activities -- Hedging of Servicing Rights" in the Form 10-K for December 31, 2001 for a detailed discussion. Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits *10.1 Sixth Amendment to Credit Agreement, dated as of March 31, 2002, between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders. *10.2 Fourth Amendment to Credit Agreement, dated as of March 31, 2002, between Registrant, as borrower, and U.S. Bank National Association. *10.3 Employment Agreement of T. Allen McConnell, dated October 1, 1997. (b) Reports on Form 8-K None. - ---------------------- * Filed herewith. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX BANCORP, INC. Dated: April 26, 2002 /s/ Guy A. Gibson -------------------------- ------------------------------------ Guy A. Gibson President and Chief Executive Officer (Principal Executive Officer) Dated: April 26, 2002 /s/ David W. Kloos --------------------------- ------------------------------------ David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 21 EX-10 3 ex10-1to10q.txt 10.1 EXHIBIT 10.1 SIXTH AMENDMENT TO CREDIT AGREEMENT This SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and entered into as of March 31, 2002, is by and among MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation (the "Company"), the lenders from time to time party to the Credit Agreement referred to below (each a "Lender" and collectively, the "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, together with any successor agents appointed hereunder, the "Agent"). RECITALS A. The Company, the Lenders and U.S. Bank National Association, in its capacities as a Lender and as Agent, entered into a Credit Agreement dated as of September 29, 2000, as amended by a First Amendment to Credit Agreement dated as of March 5, 2001, a Second Amendment to Credit Agreement dated as of April 11, 2001, a Third Amendment to Credit Agreement dated as of June 29, 2001, a Fourth Amendment to Credit Agreement dated as of September 28, 2001 and a Fifth Amendment to Credit Agreement dated as of November 20, 2001 (as amended, the "Credit Agreement"); and B. The Company desires to amend certain provisions of the Credit Agreement, and the Lenders and the Agent have agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require. Section 2. Amendments to Credit Agreement. 2.1 Section 1.01. (a) The Credit Agreement is hereby amended by amending the definitions of "Swingline Facility Amount" and "Termination Date" contained in Section 1.01 of the Credit Agreement to read in their entireties as follows: "Swingline Facility Amount": $60,000,000. "Termination Date": The earliest of (a) November 30, 2002, (b) the date on which the Commitments are terminated or reduced to zero pursuant to Section 2.01(g), or (c) the date on which the Commitments are terminated pursuant to Section 6.02. 2.2 Schedule 1.01(a). Schedule 1.01(a) to the Credit Agreement is hereby amended in its entirety to read as set forth in Schedule 1.01(a) attached to this Amendment, which is made a part of the Credit Agreement as Schedule 1.01(a) thereto. Section 3. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective provided the Agent shall have received at least five (5) counterparts of this Amendment, duly executed by the Company and all of the Lenders, and the Agent shall have received the following, each duly executed or certified: (a) This Amendment, duly executed by the Company. (b) A copy of the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Certificate of Incorporation or Bylaws of the Company since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Company dated September 29, 2000, and (ii) identifying each officer of the Company authorized to execute this Amendment and any other instrument or agreement executed by the Company in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. (c) Certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment. (d) The Consent and Reaffirmation of Guaranty, duly executed by the Guarantor. (e) An Amendment Fee in the amount of (i) $1,200 times (ii) the number of Lenders outstanding as of the date hereof. (f) The Company shall have satisfied such other conditions as specified by the Agent and the Lenders, including payment of all unpaid legal fees and expenses incurred by the Agent through the date of this Amendment in connection with the Credit Agreement and the Amendment Documents. Section 4. Representations, Warranties, Authority, No Adverse Claim. 4.1 Reassertion of Representations and Warranties, No Default. The Company hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit 2 Agreement, and (b) there will exist no Unmatured Event of Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Agent and the Lenders. 4.2 Authority, No Conflict, No Consent Required. The Company represents and warrants that the Company has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Company in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Company is a party or a signatory or a provision of the Company's Certificate of Incorporation, Bylaws or any other agreement or requirement of law in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Company or any of its property except, if any, in favor of the Agent on behalf of the Lenders. The Company represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Company of the Amendment Documents or other agreements and documents executed and delivered by the Company in connection therewith or the performance of obligations of the Company therein described, except for those which the Company has obtained or provided and as to which the Company has delivered certified copies of documents evidencing each such action to the Agent. 4.3 No Adverse Claim. The Company warrants, acknowledges and agrees that no events have taken place and no circumstances exist at the date hereof which would give the Company a basis to assert a defense, offset or counterclaim to any claim of the Agent or the Lenders with respect to the Obligations or the Company's obligations under the Credit Agreement as amended by this Amendment. Section 5. Affirmation of Credit Agreement and Pledge Agreement, Further References. The Agent, the Lenders, and the Company each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. The Company confirms to the Agent and the Lenders that the Company's obligations under the Credit Agreement, as amended by this Amendment, are and continue to be secured by the security interest granted by the Company in favor of the Agent and the Lenders under the Pledge Agreement and all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Company under such document and any and all other documents and agreements entered into with respect to the obligations under the Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respect by the Company. All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. 3 All of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Company under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Company. Section 6. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. Section 7. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 8. Successors. The Amendment Documents shall be binding upon the Company, the Lenders, and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders, and the Agent and the successors and assigns of the Lenders and the Agent. Section 9. Legal Expenses. As provided in Section 8.03 of the Credit Agreement, the Company agrees to reimburse the Agent, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Company under the Amendment Documents, and to pay and save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Company shall survive any termination of the Credit Agreement. Section 10. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. 4 Section 11. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. Section 12. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MATRIX FINANCIAL SERVICES CORPORATION By /s/ Larry G. Sousa ---------------------------------- Its Chief Financial Officer ---------------------------------- Address for Notices: ------------------- 2133 West Peoria Phoenix, Arizona 85029-4928 Attention: James K. Munford, President Telecopier Number: (602) 749-2200 U.S. BANK NATIONAL ASSOCIATION By /s/ Randy S. Baker ----------------------------------- Its Vice President ----------------------------------- Address for Notices: ------------------- 601 South Second Street Minneapolis, Minnesota 55402 Attention: Randall Baker Telecopier Number: (612) 973-0826 RESIDENTIAL FUNDING CORPORATION By /s/ Mitchell K. Nomura ------------------------------------- Its Director ------------------------------------- Address for Notices: ------------------- 1646 North California Boulevard Suite 400 Walnut Creek, California 94596 Phone: (925) 988-2350 ATTN: Mitchell Nomura [Signature Page to Sixth Amendment to Credit Agreement] S - 1 EX-10 4 ex10-2to10q.txt 10.2 EXHIBIT 10.2 FOURTH AMENDMENT TO CREDIT AGREEMENT This FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), made and entered into as of March 31, 2002, is by and between MATRIX BANCORP, INC., a Colorado corporation (the "Borrower"), the lenders from time to time party hereto (each a "Lender" and collectively, the "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, together with any successor agents appointed hereunder, the "Agent"). RECITALS A. The Borrower and U.S. Bank National Association, in its capacities as a Lender and as Agent, entered into a Credit Agreement dated as of December 27, 2000, as amended by a First Amendment to Credit Agreement dated as of March 5, 2001, a Second Amendment to Credit Agreement dated as of July 27, 2001 and a Third Amendment to Credit Agreement dated as of December 26, 2001 (as amended, the "Credit Agreement"); and B. The Borrower desires to amend certain provisions of the Credit Agreement, and the Lenders and Agent have agreed to make such amendments, subject to the terms and conditions set forth in this Amendment. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement, unless the context shall otherwise require. Section 2. Amendments. 2.1 The definition of "Termination Date" contained in Section 1.1 of the Credit Agreement is hereby amended in its entirety to read as follows: "Termination Date": The earliest of (a) March 31, 2003, (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amounts are reduced to zero pursuant to Section 2.8 hereof. 2.2 Section 2.6(b) of the Credit Agreement is hereby amended by deleting the date "December 31, 2003" contained in the fifth line thereof and replacing such date with "December 31, 2004." 2.3 Section 6.10 of the Credit Agreement is hereby amended to add the following Section 6.10(p): (p) Indebtedness in the form of a guaranty by the Borrower of not more than $40,000,000 of Indebtedness owing from Matrix Capital Markets, a subsidiary of the Borrower, to Residential Funding Corporation. 2.4 Schedule 1.1-1. Schedule 1.1-1 to the Credit Agreement is hereby amended in its entirety to read as set forth in Schedule 1.1-1 attached to this Amendment, which is made a part of the Credit Agreement as Schedule 1.1-1 thereto. Section 3. Removal of Residential Funding Corporation. From and after the effective date of this Amendment, Residential Funding Corporation is removed as a Lender from the Credit Agreement and each other Loan Document for all purposes under each Loan Document. Section 4. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective provided the Agent shall have received at least five (5) counterparts of this Amendment, duly executed by the Company and all of the Lenders, and the Agent shall have received the following, each duly executed or certified: 4.1 This Amendment duly executed by the Borrower. 4.2 A copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Certificate of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Borrower dated December 27, 2000, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment (collectively, the "Amendment Documents"), and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. 4.3 Certified copies of all documents evidencing any necessary corporate action, consent or governmental or regulatory approval (if any) with respect to this Amendment. 4.4 The Consent and Reaffirmation of Guarantors, in the form attached hereto as Exhibit A, duly executed by each Guarantor. 4.5 An Amendment Fee in the amount of (i) $1,200 times (ii) the number of Lenders outstanding as of the date hereof. 4.6 The Borrower shall have satisfied such other conditions as specified by the Agent and the Lenders, including payment of all unpaid legal fees and expenses incurred by the Agent through the date of this 2 Amendment in connection with the Credit Agreement and the Amendment Documents. Section 5. Representations, Warranties, Authority, No Adverse Claim. 5.1 Reassertion of Representations and Warranties, No Default. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Credit Agreement are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Credit Agreement, and (b) there will exist no Default or Event of Default under the Credit Agreement as amended by this Amendment on such date which has not been waived by the Agent and the Lenders. 5.2 Authority, No Conflict, No Consent Required. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into the Amendment Documents and has duly authorized as appropriate the execution and delivery of the Amendment Documents and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action, and none of the Amendment Documents nor the agreements contained herein or therein contravenes or constitutes a default under any agreement, instrument or indenture to which the Borrower is a party or a signatory or a provision of the Borrower's Certificate of Incorporation, Bylaws or any other agreement or requirement of law in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, or result in the imposition of any Lien on any of its property under any agreement binding on or applicable to the Borrower or any of its property except, if any, in favor of the Agent on behalf of the Lenders. The Borrower represents and warrants that no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Borrower of the Amendment Documents or other agreements and documents executed and delivered by the Borrower in connection therewith or the performance of obligations of the Borrower therein described, except for those which the Borrower has obtained or provided and as to which the Borrower has delivered certified copies of documents evidencing each such action to the Agent. 5.3 No Adverse Claim. The Borrower warrants, acknowledges and agrees that no events have taken place and no circumstances exist at the date hereof which would give the Borrower a basis to assert a defense, offset or counterclaim to any claim of the Agent or the Lenders with respect to the Obligations or the Borrower's obligations under the Credit Agreement as amended by this Amendment. Section 6. Affirmation of Credit Agreement, Further References. The Agent, the Lenders, and the Borrower each acknowledge and affirm that the Credit Agreement, as hereby amended, is hereby ratified and confirmed in all respects and all terms, conditions and provisions of the Credit Agreement, except as amended by this Amendment, shall remain unmodified and in full force and effect. 3 All references in any document or instrument to the Credit Agreement are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. All of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under such documents and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower. Section 7. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into this Amendment all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. Section 8. Severability. Whenever possible, each provision of this Amendment and the other Amendment Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment, the other Amendment Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 9. Successors. The Amendment Documents shall be binding upon the Borrower, the Lenders, and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Lenders, and the Agent and the successors and assigns of the Lenders and the Agent. Section 10. Legal Expenses. As provided in Section 9.2 of the Credit Agreement, the Borrower agrees to reimburse the Agent, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorney' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the Credit Agreement, including in connection with the negotiation, preparation and execution of the Amendment Documents and all other documents negotiated, prepared and executed in connection with the Amendment Documents, and in enforcing the obligations of the Borrower under the Amendment Documents, and to pay and save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Amendment Documents, which obligations of the Borrower shall survive any termination of the Credit Agreement. Section 11. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. 4 Section 12. Counterparts. The Amendment Documents may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to the Amendment Documents may execute any such agreement by executing a counterpart of such agreement. Section 13. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. MATRIX BANCORP, INC. By /s/ David W. Kloos ------------------------------------- Its Senior Vice President ------------------------------------- U.S. BANK NATIONAL ASSOCIATION By /s/ Randy S. Baker ------------------------------------- Its Vice President ------------------------------------- RESIDENTIAL FUNDING CORPORATION By /s/ Mitchell K. Nomura ------------------------------------- Its Director ------------------------------------- [Signature Page to Fourth Amendment to Credit Agreement] S - 1 EX-10 5 ex10-3to10q.txt 10.3 EXHIBIT 10.3 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is effective as of October 1, 1997, and is made and entered into by and between Matrix Capital Corporation, a Colorado corporation ("Employer"), and T. Allen McConnell, an executive employee of Employer ("Executive"). Recitals A. Employer has proposed that Executive become employed by Employer, effective October 1, 1998, in an executive capacity and Executive has agreed to such emplyment pursuant to the terms of this Agreement. B. Employer desires that the Executive enter into an employment relationship with Employer in order to provide the necessary leadership and senior management skills that are important to the success of Employer. Employer believes that obtaining the Executive's services as an employee of Employer and the benefits of his business experience are of material importance to Employer and Employer's shareholders. Agreement NOW, THEREFORE, in consideration of Executive's continued employment by Employer and the mutual promises and covenants contained herein the receipt and sufficiency of which is hereby acknowledged, Employer and Executive intend by this Agreement to specify the terms and conditions of Executive's employment relationship with Employer. Section 1. General Duties of Employer and Executive. 1.1. Employer agrees to employ Executive and Executive agrees to accept employment by Employer and to serve Employer in an executive capacity upon the terms and conditions set forth herein. The duties and responsibilities of Executive shall include those described for the particular position held by Executive while employed hereunder in the Bylaws of Employer or other documents of Employer, and shall also include such other or additional duties, for Employer, as may from time-to-time be assigned to Executive in good faith by the Board of Directors of Employer or any duly authorized committee thereof. The executive capacity that Executive shall hold while this Agreement is in effect shall be that position as determined by the Board of Directors, or any duly authorized committee thereof, from time to time in its good faith discretion. While employed hereunder, the initial position that Executive shall hold (until such time as such position may be changed as aforesaid) shall be the position of Senior Vice President, Secretary and General Counsel. 1.2. While employed hereunder, Executive shall obey the lawful directions of the Board of Directors of Employer, or any duly authorized committee thereof, and shall use his best efforts to promote the interests of Employer and to maintain and to promote the reputation thereof. While employed hereunder, Executive shall devote his time, efforts, skills and attention to the 1 affairs of Employer and its subsidiaries in order that he shall faithfully perform his duties and obligations hereunder and such as may be assigned to or vested in him by the Board of Directors of Employer, or any duly authorized committee thereof. 1.3. While this Agreement is in effect, Executive may from time to time engage in any businesses or activities that do not compete directly and materially with Employer, provided that such businesses or activities do not materially interfere with his performance of the duties assigned to him in compliance with this Agreement by the Board of Directors of Employer or any duly authorized committee thereof. In any event, Executive is permitted to (i) invest his personal assets as a passive investor in such form or manner as Executive may choose in his discretion, (ii) participate in various charitable efforts, and (iii) serve as a director or officer of any other entity or organization that does not compete with Employer. Section 2. Compensation and Benefits. 2.1. As compensation for services to Employer, Employer shall pay to Executive an initial salary at a yearly rate of $155,000. Such salary may be adjusted (up or down) upon a good faith determination of the Board of Directors that such salary should be adjusted; provided that the Board of Directors shall not adjust such salary downward prior to January 1, 1999. The salary shall be payable in equal semi-monthly installments, subject only to such payroll and withholding deductions as may be required by law and other deductions applied generally to employees of Employer for insurance and other employee benefit plans. 2.2. Upon Executive's furnishing to Employer customary and reasonable documentary support (such as receipts or paid bills) evidencing costs and expenses incurred by him in the performance of his services and duties hereunder (including, without limitation, travel and entertainment expenses) and containing sufficient information to establish the amount, date, place and essential character of the expenditure, Executive shall be reimbursed for such costs and expenses in accordance with Employer's normal expense reimbursement policy. 2.3. Executive shall have the right to participate in any additional compensation, benefit, life insurance or other plan or arrangement of Employer now or hereafter existing for the benefit of executive officers of Employer. 2.4. Executive shall be entitled to such vacation (in no event less than three (3) weeks per year), holiday and other paid or unpaid leave of absence as consistent with Employer's normal policies or as otherwise approved by the Board of Directors. Section 3. Preservation of Business; Fiduciary Responsibility. 3.1. Executive shall use his best efforts to preserve the business and organization of Employer, to keep available to Employer the services of present employees and to preserve the business relations of Employer. So long as the Executive is employed by Employer, Executive shall observe and fulfill proper standards of fiduciary responsibility attendant upon his service and office. 2 Section 4. Initial Term; Extensions of the Term. 4.1. The term of this Agreement shall commence on the effective date hereof and shall end on December 31, 1998. 4.2. The term of this Agreement shall automatically be extended for additional one-year periods commencing on January 1, 1999, 2000, 2001 and 2002, respectively, unless Executive gives written notice to Employer on or before December 1, 1998, 1999, 2000 or 2001, respectively, of his intention not to extend this Agreement. Section 5. Termination other than by Expiration of the Term. Employer or Executive may terminate Executive's employment under this Agreement at any time, but only on the following terms: 5.1. Executive may terminate his employment under this Agreement at any time upon at least 60 days' prior written notice to Employer. 5.2. Employer may terminate Executive's employment under this Agreement at any time, without prior notice, for "due cause." As used herein, the term "due cause" shall mean any of the following events: (i) any intentional misapplication by Executive of Employer's funds, or any other act of dishonesty injurious to Employer committed by Executive; or (ii) Executive's conviction of a felony involving moral turpitude; or (iii) Executive's breach, non-performance or non-observance of any of the material terms of this Agreement if such breach, non-performance or non-observance shall continue beyond a period of 30 business days immediately after notice thereof by Employer to Executive; or (iv) any other action by the Executive involving willful and deliberate malfeasance or gross negligence in the performance of Executive's duties. 5.3. In the event Executive is incapacitated by accident, sickness or otherwise so as to render Executive mentally or physically incapable of performing the services required under Section 1 of this Agreement for a period of one hundred eighty (180) consecutive days, and such incapacity is confirmed by the written opinion of two (2) practicing medical doctors licensed by and in good standing in the state in which they maintain offices for the practice of medicine, upon the expiration of such period or at any time reasonably thereafter, or in the event of Executive's death, Employer may terminate Executive's employment under this Agreement upon giving Executive or his legal representative written notice at least thirty (30) days' prior to the termination date. Executive agrees, after written notice by the Board of Directors of Employer or a duly authorized committee or officer of Employer, to submit to examinations by such practicing medical doctors selected by the Board of Directors of Employer or a duly authorized committee or officer of Employer. 3 5.4. Employer may terminate Executive's employment under this Agreement at any time for any reason whatsoever, even without "due cause," by giving a written notice of termination to Executive, in which case the employment relationship shall terminate immediately upon the giving of such notice. Section 6. Effect of Termination. 6.1. In the event the employment relationship is terminated (a) by Executive upon 60 days' written notice pursuant to Subsection 5.1 hereof, or (b) by Employer for "due cause" pursuant to Subsection 5.2 hereof, all compensation and benefits shall cease as of the date of termination, other than: (i) those benefits that are provided by retirement and benefit plans and programs specifically adopted and approved by Employer for Executive that are earned and vested by the date of termination, and (ii) Executive's pro rata annual salary through the date of termination. 6.2. If Executive's employment relationship is terminated pursuant to Subsection 5.3 hereof due to Executive's incapacity or death, Executive (or, in the event of Executive's death, Executive's legal representative) will be entitled to those benefits that are provided by retirement and benefits plans and programs specifically adopted and approved by Employer for Executive that are earned and vested at the date of termination and, even though no longer employed by Employer, shall continue to receive the salary compensation (payable at the then current rate at the time of incapacity or death and in the manner as prescribed in the second sentence of Subsection 2.1) for one (1) year following the date of termination. 6.3. If Employer (i) terminates the employment of Executive other than pursuant to Subsection 5.2 hereof for "due cause" or other than for a disability or death pursuant to Subsection 5.3 hereof, (ii) demotes Executive to a position below his present position or substantially decreases the scope of the duties or responsibilities of Employee, (iii) decreases Executive's salary below the initial level described in Section 2 hereof (unless it is determined that executive compensation is to be reduced across the board) or reduces the employee benefits and perquisites below the level provided for by the terms of Section 2 hereof, other than as a result of any amendment or termination of any employee and/or executive benefit plan or arrangement, which amendment or termination is applicable to all qualifying executives of Employer, or (iv) requires or requests that Executive locate to a place other than Denver, then such action by Employer, unless consented to in writing by Executive, shall be deemed to be a constructive termination by Employer of Executive's employment (a "Constructive Termination"). In the event of a Constructive Termination, the Executive shall be entitled to receive, in a lump sum within thirty (30) days after the date of the Constructive Termination, an amount equal to the remainder of Executive's current year's (i.e., prior to the Constructive Termination) salary (undiscounted), based on Employer's then fiscal year, plus two additional years' salary (undiscounted) at the rate in effect immediately prior to the event giving rise to the Constructive Termination. 6.4. For purposes of this Section 6, the term "salary" shall mean the sum of (i) the annual rate of compensation provided to Executive by Employer under Subsection 2.1 immediately prior to the Constructive Termination plus 4 (ii) the average annual cash bonuses or other cash incentive compensation paid to Executive by Employer for the three calendar year period immediately preceding the year in which there shall occur a Constructive Termination. 6.5. In the event of a Constructive Termination, all other rights and benefits Executive may have under the employee and/or executive benefit plans and arrangements of Employer generally shall be determined in accordance with the terms and conditions of such plans and arrangements. Section 7. Change in Control. 7.1. Notwithstanding anything to the contrary in this Agreement, if a "Change in Control" (as defined below) of the Employer occurs and, within thirty-six months from the date of the Change in Control, the Executive voluntarily terminates his employment under Subsection 5.1 or there occurs a Constructive Termination of Employee, then the Executive, even though no longer employed by the Employer, shall be entitled to all payments provided in Subsection 6.3, payable in a lump sum within thirty (30) days after the date of termination. 7.2. For the purposes of this Agreement, the term "Change in Control" of the Employer shall be deemed to have occurred if (i) after October 1, 1997, any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than any Employer employee stock ownership plan or the Employer, becomes the beneficial owner (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Employer representing 20% or more of the combined voting power of the Employer's then outstanding securities, (ii) the Board ceases to consist of a majority of Continuing Directors (as defined below) or (iii) a person (as defined in clause (i) above) acquires (or, during the 12-month period ending on the date for the most recent acquisition by such person or group of persons, has acquired) gross assets of Employer that have an aggregate market value greater than or equal to over 50% of the fair market value of all of the gross assets of Executive immediately prior to such acquisition or acquisitions. 7.3. For purposes of this Agreement, a "Continuing Director" shall mean a member of the Board of Directors who either (i) is a member of the Board of Directors at the date of this Agreement or (ii) is nominated or appointed to serve as a director by a majority of the then Continuing Directors. 7.4. Notwithstanding any other provision of this Agreement, if (a) there is a change in the ownership or effective control of the Employer or (b) in the ownership of a substantial portion of the assets of the Employer within the meaning of Section 280G of the Internal Revenue Code ("Section 280G"), the payments to be paid to the Executive in the nature of compensation to be received by or for the benefit of the Executive and contingent upon such event (the "Termination Payments") would create an "excess parachute payment" within the meaning of Section 280G, then the Employer shall make the Termination Payments in substantially equal installments, the first installment being due within thirty days after the date of termination and each subsequent installment being due on January 31 of each year, such that the aggregate present value of 5 all Termination Payments, whether pursuant to this Agreement or otherwise, will be as close as possible to, but not exceed 299% of, the Executive's base salary, within the meaning of Section 280G. It is the intention of this Subsection 8.3 to avoid excise taxes on the Executive under Section 4999 of the Code and the disallowance of a deduction to the Employer pursuant to Section 280G. Section 8. Confidential and Proprietary Information. 8.1. Executive acknowledges and agrees that he will not, without the prior written consent of the Employer, at any time during the term of this Agreement or any time thereafter, except as may be required by law, regulatory process or other competent legal authority or as required by the Employer to be disclosed in the course of performing Executive's duties under this Agreement for the Employer, use or disclose to any person, firm or other legal entity, any confidential records, secrets or information related to the Employer or any parent, subsidiary or affiliated person or entity (collectively, "Confidential Information"). Executive acknowledges and agrees that all Confidential Information of Employer and/or its affiliates that he has acquired, or may acquire, were received, or will be received in confidence and as a fiduciary of the Employer. Executive will exercise utmost diligence to protect and guard such Confidential Information. 8.2. Executive agrees that he will not take with him upon the termination of this Agreement, any document or paper, or any photocopy or reproduction or duplication thereof, relating to any Confidential Information (that is disclosed in writing to Executive prior to his departure to be Confidential Information). Section 9. Return of Employer's Property. Upon the termination of this Agreement or whenever requested by Employer, Executive shall immediately deliver to Employer all property in his possession or under his control belonging to Employer, in good condition, ordinary wear and tear excepted. Section 10. Injunctive Relief. Executive acknowledges that the breach by the Executive of the provisions of this Agreement shall cause irreparable harm to the Employer, which harm cannot be fully redressed by the payment of damages to the Employer. Accordingly, the Employer shall be entitled, in addition to any other right or remedy it may have at law or in equity, to an inunction enjoining or restraining Executive from any violation or threatened violation of this Agreement. Section 11. Arbitration. 11.1. As concluded by the parties and as evidenced by the signatures of the parties, any dispute between the parties arising out of any section of this Agreement will, on the written notice of one party served on the other, be submitted to arbitration complying with and governed by the provisions and rules of the American Arbitration Association, provided that such arbitration shall be held in Denver, Colorado. 6 11.2. Each of the parties will appoint one person as an arbitrator to hear and determine the dispute and if they are unable to agree, then the two arbitrators so chosen will select a third impartial arbitrator whose decision will be final and conclusive upon the parties. 11.3. The expenses of such arbitration will be borne by the losing party or in such proportion as the arbitrators decide. 11.4. A material or anticipatory breach of any section of this Agreement shall not release either party from the obligations of this Section 14. Section 12. Miscellaneous. 12.1. If any provision contained in this Agreement is for any reason held to be totally invalid or unenforceable, such provision will be fully severable, and in lieu of such invalid or unenforceable provision there will be added automatically as part of this Agreement a provision as similar in terms as may be valid and enforceable. 12.2. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when faxed (with confirmation of receipt), sent via overnight courier, or mailed by registered mail or certified mail, return receipt requested, as follows (provided that notice of change of address shall be deemed given only when received): if to Employer: Matrix Capital Corporation 1380 Lawrence Street, Suite 1410 Denver, Colorado 80204 Fax: 303-595-9906 Attn: President if to Executive: T. Allen McConnell 1443 Belford Court Evergreen, Colorado 80439 Fax: 303-674-0576 or to such other names or addresses as Employer or Executive, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Subsection 12.2. 7 12.3. This Agreement shall be binding upon and inure to the benefit of Employer, its successors, legal representatives and assigns, and upon Executive, his heirs, executors, administrators, representatives, legatees and assigns. Executive agrees that his rights and obligations hereunder are personal to him and may not be assigned without the express written consent of Employer. 12.4. This Agreement replaces and merges all previous agreements and discussions relating to the same or similar subject matters between Executive and Employer with respect to the subject matter of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any employee, officer, or representative of Employer or by any written agreement unless signed by an officer of Employer who is expressly authorized by Employer to execute such document. 12.5. The laws of the State of Colorado will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof, and Employer and Executive agree that the state and federal courts situated in Denver County, Colorado shall have personal jurisdiction over Employer and Executive to hear all disputes arising under this Agreement. This agreement is to be at least partially performed in Denver County, Colorado, and, as such, Employer and Executive agree that venue shall be proper with the state or federal courts in Denver County, Colorado to hear such disputes. In the event either Employer or Executive is not able to effect service of process upon the other with respect to such disputes, Employer and Executive expressly agree that the Secretary of State for the State of Colorado shall be an agent of Employer and/or the Executive to receive service of process on behalf of Employer and/or the Executive with respect to such disputes. 12.6. Executive and Employer shall execute and deliver any and all additional instruments and agreements that may be necessary or proper to carry out the purposes of this Agreement. 12.7. The descriptive headings of the several sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 12.8. If either party should file a lawsuit against the other to enforce any right such party has hereunder, the prevailing party shall also be entitled to recover reasonable attorneys' fees and costs of suit in addition to any other relief awarded such prevailing party. 12.9. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 12.10. Executive acknowledges that Executive has had the opportunity to read this Agreement and discuss it with advisors and legal counsel, if Executive has so chosen. Executive also acknowledges the importance of this Agreement and that Employer is relying on this Agreement in entering into an employment relationship with Executive. 8 12.11. Notwithstanding anything else herein to the contrary, this Agreement shall not supercede or govern the terms of the stock options granted to Executive as of October 1, 1997, which are governed by an option agreement dated as of October 1, 1997. 12.12. The provisions of Sections 6, 7, 8, 9, 10, and 11 shall survive a termination of this Agreement. The undersigned, intending to be legally bound, have executed this Agreement as of October 1, 1997. EMPLOYER: MATRIX CAPITAL CORPORATION By: /s/ David W. Kloos ---------------------------------- SVP , Authorized Signatory --------- EXECUTIVE: /s/ T. Allen McConnell ------------------------------------- T. Allen McConnell 9 -----END PRIVACY-ENHANCED MESSAGE-----