-----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, JirDstrmSvv1FhDy77LawLRSQFeX3bK8AwR3YvCifj90J9v5OY1DQYH2MBh3z65c vXzMJ4OWNwbYhf85JWf0Yw== 0000899078-02-000431.txt : 20020730 0000899078-02-000431.hdr.sgml : 20020730 20020730165914 ACCESSION NUMBER: 0000899078-02-000431 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020730 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: 02715010 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 june302002-10q.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 June 30, 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 1300 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 July 26, 2002 was 6,454,244 shares.
TABLE OF CONTENTS PART I - Financial Information ITEM 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 2002 (unaudited) and December 31, 2001...................................3 Condensed Consolidated Statements of Income Quarters and six months ended June 30, 2002 and 2001 (unaudited)..................4 Condensed Consolidated Statements of Shareholders' Equity Six months ended June 30, 2002 and 2001 (unaudited)...............................5 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001 (unaudited)...............................6 Notes to Unaudited Condensed Consolidated Financial Statements..........................7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................12 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................23 PART II - Other Information ITEM 1. Legal Proceedings.......................................................................24 ITEM 4. Submissions of Matters to a Vote of Security Holders....................................24 ITEM 6. Exhibits and Reports on Form 8-K........................................................24 SIGNATURES............................................................................................26
2 Part I - Financial Information Item 1. Financial Statements
Matrix Bancorp, Inc. Condensed Consolidated Balance Sheets (Dollars in thousands) June 30, December 31, 2002 2001 ------------------ ------------------ (Unaudited) Assets Cash and cash equivalents........................................................ $ 56,758 $ 52,501 Interest-earning deposits and federal funds sold................................. 17,728 31,959 Securities available for sale.................................................... 14,574 6,963 Loans held for sale, net......................................................... 1,104,293 1,157,989 Loans held for investment, net................................................... 199,542 191,161 Mortgage servicing rights, net................................................... 79,950 78,712 Other receivables ............................................................... 62,864 71,239 Federal Home Loan Bank stock, at cost............................................ 31,251 18,181 Premises and equipment, net...................................................... 28,762 13,631 Other assets, net................................................................ 27,501 24,451 ------------------ ------------------ Total assets..................................................................... $ 1,623,223 $ 1,646,787 ================== ================== Liabilities and shareholders' equity Liabilities: Deposits...................................................................... $ 789,342 $ 866,235 Custodial escrow balances..................................................... 117,563 129,665 Drafts payable................................................................ 24,636 28,875 Payable for purchase of mortgage servicing rights............................. 2,850 4,738 Federal Home Loan Bank borrowings............................................. 446,923 303,361 Borrowed money................................................................ 74,075 162,532 Guaranteed preferred beneficial interests..................................... 59,500 59,500 Other liabilities and deferred income taxes payable........................... 32,558 19,434 Income taxes payable.......................................................... 2,236 1,135 ------------------ ------------------ Total liabilities................................................................ 1,549,683 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 and outstanding 6,454,244 and 6,518,604 shares at June 30, 2002 and December 31, 2001, respectively...................................................... 1 1 Additional paid in capital.................................................... 20,080 20,800 Retained earnings............................................................. 53,428 50,486 Accumulated other comprehensive income........................................ 31 25 ------------------ ------------------ Total shareholders' equity....................................................... 73,540 71,312 ------------------ ------------------ Total liabilities and shareholders' equity....................................... $ 1,623,223 $ 1,646,787 ================== ==================
See accompanying notes. 3 Matrix Bancorp, Inc. Condensed Consolidated Statements of Income (Dollars in thousands, except share information) (Unaudited)
Quarter Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Interest income Loans and securities........................................ $ 22,403 $ 29,309 $ 44,974 $ 55,704 Interest-earning deposits................................... 316 517 559 1,263 --------------- --------------- --------------- --------------- Total interest income....................................... 22,719 29,826 45,533 56,967 --------------- --------------- --------------- --------------- Interest expense Deposits.................................................... 5,397 9,764 11,894 18,255 Borrowed money and guaranteed preferred beneficial interests 5,043 8,929 9,737 18,916 --------------- --------------- --------------- --------------- Total interest expense...................................... 10,440 18,693 21,631 37,171 --------------- --------------- --------------- --------------- Net interest income before provision for loan and valuation 12,279 11,133 23,902 19,796 losses.................................................... Provision for loan and valuation losses..................... 642 526 1,700 1,503 --------------- --------------- --------------- --------------- Net interest income after provision for loan and valuation losses.................................................... 11,637 10,607 22,202 18,293 --------------- --------------- --------------- --------------- Noninterest income Loan administration......................................... 8,266 7,979 17,005 15,764 Brokerage................................................... 75 954 659 1,855 Trust services.............................................. 1,348 1,167 2,741 2,496 Real estate disposition services............................ 1,113 645 1,895 1,255 Gain on sale of loans and securities........................ 149 147 149 1,403 Gain on sale of mortgage servicing rights, net.............. 1,066 435 1,066 435 Loan origination............................................ 8,054 7,420 16,226 12,278 School services............................................. 1,379 1,400 2,820 2,488 Other....................................................... 2,047 1,804 4,362 2,554 --------------- --------------- --------------- --------------- Total noninterest income.................................... 23,497 21,951 46,923 40,528 --------------- --------------- --------------- --------------- Noninterest expense Compensation and employee benefits.......................... 14,950 12,784 29,612 23,771 Amortization of mortgage servicing rights................... 5,162 6,167 11,035 9,588 Occupancy and equipment..................................... 1,830 1,634 3,519 3,183 Postage and communication................................... 1,148 1,067 2,287 1,982 Professional fees........................................... 597 837 1,309 1,387 Data processing............................................. 769 668 1,645 1,340 Other general and administrative............................ 9,726 6,849 15,668 11,563 --------------- --------------- --------------- --------------- Total noninterest expense................................... 34,182 30,006 65,075 52,814 --------------- --------------- --------------- --------------- Income before income taxes.................................. 952 2,552 4,050 6,007 Provision for income taxes.................................. 48 924 1,108 2,071 --------------- --------------- --------------- --------------- Income before cumulative effect of a change in accounting principle.................................... 904 1,628 2,942 3,936 Less cumulative effect of a change in accounting principle, net of tax benefit of $190............................... - - - 360 --------------- --------------- --------------- --------------- Net income.................................................. $ 904 $ 1,628 $ 2,942 $ 3,576 =============== =============== =============== =============== Net income per share before accounting change............... $ 0.14 $ 0.25 $ 0.45 $ 0.60 Less cumulative effect of a change in accounting principle.. - - - 0.05 --------------- --------------- --------------- --------------- Net income per share........................................ $ 0.14 $ 0.25 $ 0.45 $ 0.55 =============== =============== =============== =============== Net income per share assuming dilution before accounting $ 0.14 $ 0.25 $ 0.45 $ 0.60 change Less cumulative effect of a change in accounting principle.. - - - 0.05 --------------- --------------- --------------- --------------- Net income per share assuming dilution...................... $ 0.14 $ 0.25 $ 0.45 $ 0.55 =============== =============== =============== =============== Weighted average shares..................................... 6,453,560 6,480,728 6,470,237 6,506,625 =============== =============== =============== =============== Weighted average shares assuming dilution................... 6,601,209 6,551,176 6,591,262 6,558,886 =============== =============== =============== ===============
See accompanying notes. 4 Matrix Bancorp, Inc. Condensed Consolidated Statements of Shareholders' Equity (Dollars in thousands) (Unaudited)
Accumulated Additional Other Total Common Stock Paid In Treasury Retained Comprehensive Shareholders' Comprehensive ------------------- Shares Amount Capital Shares Earnings Income Equity Income --------- -------- ---------- --------- ---------- -------------- ------------ --------------- Six Months Ended June 30, 2002 - -------------------------- Balance at December 31, 2001.................... 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312 Comprehensive income: Net income............. - - - - 2,942 - 2,942 $ 2,942 Net unrealized holding gains (1).............. - - - - - 6 6 6 ------------- Comprehensive income...... $ 2,948 ============= Issuance of stock related to employee stock purchase plan and options................ 1,700 - 6 - - - 6 Shares repurchased........ (66,060) - - (726) - - (726) Shares retired............ - - (726) 726 - - - ------------ ------ --------- -------- --------- ---------- ----------- Balance at June 30, 2002.. 6,454,244 $ 1 $ 20,080 $ - $ 53,428 $ 31 $ 73,540 ============ ====== ========= ======== ========= ========== =========== Six Months Ended June 30, 2001 - -------------------------- Balance at December 31, 2000.................... 6,558,904 $ 1 $ 23,004 $ (1,775) $ 41,974 $ 819 $ 64,023 Comprehensive income: Net income............. - - - - 3,576 - 3,576 $ 3,576 Unrealized losses on securities, net of reclassification adjustment............. - - - - - (818) (818) (818) ------------ Comprehensive income...... $ 2,758 ============ Issuance of stock related to employee stock purchase plan and options................ 500 - 4 - - - 4 Shares repurchased........ (80,500) - - (685) - - (685) ------------ ------ --------- -------- --------- ---------- ----------- Balance at June 30, 2001.. 6,478,904 $ 1 $ 23,008 $ (2,460) $ 45,550 $ 1 $ 66,100 ============ ====== ========= ======== ========= ========== =========== (1) Disclosure of reclassification amount Six Months Ended June 30, 2002 - -------------------------------------- Unrealized holding gain arising during period............................ $ 6 Less: reclassification adjustment of gains included in net income............ - ------------ Net unrealized gain on securities..................... $ 6 ============
See accompanying notes. 5 Matrix Bancorp, Inc. Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Six Months Ended June 30, 2002 2001 ------------- ------------- Operating activities Net income.................................................................. $ 2,942 $ 3,576 Adjustments to reconcile net income to net provided by (cash used) in operating activities: Depreciation and amortization............................................ 1,665 1,526 Provision for loan and valuation losses.................................. 1,700 1,503 Amortization of mortgage servicing rights................................ 11,035 9,588 Gain on sale of loans and securities..................................... (149) (1,403) Gain on sale of mortgage servicing rights................................ (1,066) (435) Loans originated for sale, net of loans sold............................. 220,820 (383,906) Loans purchased for sale................................................. (249,691) (36,660) Proceeds from sale of loans purchased for sale........................... 35,843 68,657 (Increase) decrease in securities held for sale......................... (7,602) 63,331 Originated mortgage servicing rights, net................................ (23,485) (10,697) (Increase) decrease in other receivables and other assets................ 12,015 (27,881) Increase in other liabilities, deferred income taxes payable and income taxes payable.......................................................... 14,222 463 ------------- ------------- Net cash provided by (used in) operating activities......................... 18,249 (312,338) Investing activities Loans originated and purchased for investment............................... (72,389) (100,121) Principal repayments on loans............................................... 104,941 216,803 Redemption (purchase) of Federal Home Loan Bank stock....................... (13,070) 6,480 Purchases of premises and equipment......................................... (16,668) (12,929) Acquisition of mortgage servicing rights.................................... (1,888) (7,553) Servicing hedging activity.................................................. 1,219 - Proceeds from sale of mortgage servicing rights............................. 4,242 451 ------------- ------------- Net cash provided by investing activities................................... 6,387 103,131 Financing activities Net increase (decrease) in deposits......................................... (76,893) 246,106 Net increase (decrease) in custodial escrow balances........................ (12,102) 55,394 Increase (decrease) in revolving lines and repurchase agreements, net....... 55,493 (83,041) Payment of notes payable.................................................... (357) (844) Proceeds from notes payable................................................. - 1,786 Proceeds from issuance of guaranteed preferred beneficial interests......... - 11,592 Payment of financing arrangements........................................... (31) (42) Treasury shares repurchased................................................. (726) (685) Proceeds from issuance of common stock related to employee stock option plan..................................................................... 6 4 ------------- ------------- Net cash (used in) provided by financing activities......................... (34,610) 230,270 ------------- ------------- (Decrease) increase in cash and cash equivalents............................ (9,974) 21,063 Cash and cash equivalents at beginning of period............................ 84,460 53,170 ------------- ------------- Cash and cash equivalents at end of period.................................. $ 74,486 $ 74,233 ============= ============= Supplemental disclosure of cash flow information Cash paid for interest expense.............................................. $ 24,055 $ 33,748 ============= ============= Cash (received) paid for income taxes....................................... $ (2,970) $ 4,030 ============= =============
See accompanying notes. 6 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements June 30, 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 notes 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 income 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 superseded 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. SFAS 142 also changes the amortization methodology in intangible assets that are deemed to have finite lives, and 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. Amortization of goodwill previously reported in net income is not material. Under guidance in SFAS 142, management has performed an analysis concerning potential impairment on the goodwill and, at this time, no impairment is determined necessary. The analysis will be performed annually. The net carrying amount of goodwill at January 1, 2002 was $1.0 million. 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 June 30, Six Months Ended June 30, 2002 2001 2002 2001 ------------- --------------- -------------- --------------- (Dollars in thousands) Numerator: Net income............................ $ 904 $ 1,628 $ 2,942 $ 3,576 ============= =============== ============== =============== Denominator: Weighted average shares outstanding... 6,453,560 6,480,728 6,470,237 6,506,625 Effect of dilutive securities: Common stock options.............. 147,649 70,448 121,025 52,261 ------------- --------------- -------------- --------------- Potential dilutive common shares...... 147,649 70,448 121,025 52,261 ------------- --------------- -------------- --------------- Denominator for net income per share assuming dilution............. 6,601,209 6,551,176 6,591,262 6,558,886 ============= =============== ============== ===============
7 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) 4. Mortgage Servicing Rights The activity in the mortgage servicing rights is summarized as follows:
Six Months Year Ended Ended June 30, December 31, 2002 2001 ------------------ ------------------ (In thousands) Balance at beginning of period, net................... $ 78,712 $ 71,529 Purchases............................................. - 530 Originated, net........................................ 23,485 30,129 Amortization........................................... (11,035) (21,862) Sales.................................................. (9,993) (1,433) Impairment............................................. (1,219) (181) ------------------ ------------------ Balance at end of period, net......................... $ 79,950 $ 78,712 ================== ==================
Amortization of mortgage servicing rights for the quarters ended June 30, 2002 and 2001 were $5.2 million and $6.2 million, respectively. Mortgage servicing rights are amortized in proportion to and over the period of estimated future net servicing income, and the calculation is adjusted quarterly. Amortization of mortgage servicing rights fluctuates based on the size of the mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio, among other factors, which are affected by the current interest rate environment. Based on the nature of the components of the calculation, future levels of amortization are difficult to predict. The Company's servicing portfolio (excluding subserviced loans) was comprised of the following:
June 30, 2002 December 31, 2001 ------------------------------- ---------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding ------------ -------------- --------------- --------------- (Dollars in thousands) Freddie Mac................................. 10,619 $ 510,230 12,422 $ 613,527 Fannie Mae.................................. 29,763 1,914,758 31,069 1,885,197 Ginnie Mae.................................. 27,031 1,926,940 26,718 1,820,691 VA, FHA, conventional and other loans....... 12,599 981,208 15,946 1,336,950 ------------ -------------- --------------- --------------- 80,012 $ 5,333,136 86,155 $ 5,656,365 ============ ============== =============== ===============
The Company's custodial escrow balances shown in the accompanying condensed consolidated balance sheets at June 30, 2002 and December 31, 2001 pertain to escrowed payments of taxes and insurance and principal and interest on loans serviced by the Company. 8 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) 5. Deposits Deposit account balances are summarized as follows:
June 30, 2002 December 31, 2001 --------------------------------------- --------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------- ----------- ----------- ---------- ----------- ----------- (Dollars in thousands) Passbook accounts.......... $ 5,999 0.76 % 2.00 % $ 4,291 0.50 % 3.12 % NOW accounts............... 88,390 11.20 0.53 107,183 12.37 0.94 Money market accounts...... 306,150 38.79 1.36 249,234 28.77 2.11 ---------- ----------- ----------- ---------- ----------- ----------- 400,539 50.74 1.12 360,708 41.64 1.74 Certificate accounts....... 388,803 49.26 4.05 505,527 58.36 5.98 ---------- ----------- ----------- ---------- ----------- ----------- $ 789,342 100.00 % 2.71 % $ 866,235 100.00 % 4.36 % ========== =========== =========== ========== =========== ===========
At June 30, 2002 and December 31, 2001, brokered deposits accounted for approximately $221.9 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 the domicile of its banking subsidiary, Matrix Capital Bank, from Las Cruces, New Mexico to Denver, Colorado. The relocation was completed in the second quarter of 2002. Matrix Bank is offering 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. Matrix Bank now utilizes FHLB of Topeka as its primary correspondent bank. Long-term advances that existed at March 25, 2002 with FHLB of Dallas are still outstanding under their original terms. The balances of FHLB stock are as follows:
June 30, December 31, 2002 2001 -------------------- -------------------- (In thousands) FHLB of Dallas stock, at cost......................... $ 14,419 $ 18,181 FHLB of Topeka stock, at cost......................... 16,832 - -------------------- -------------------- Total FHLB stock.................................... $ 31,251 $ 18,181 ==================== ==================== The balances of FHLB borrowings are as follows: June 30, December 31, 2002 2001 -------------------- -------------------- (In thousands) FHLB of Dallas borrowings............................. $ 147,323 $ 303,361 FHLB of Topeka borrowings............................. 299,600 - -------------------- -------------------- Total FHLB borrowings............................... $ 446,923 $ 303,361 ==================== ====================
9 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) 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. 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 (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 June 30, 2002, the Company had $444.7 million in pipeline and funded loans offset with mandatory forward commitments of $345.5 million and best effort forward commitments of $99.3 million. 9. Relocation of Matrix Capital Bank's Domicile and Move of Office Space for Matrix Bancorp and Certain Subsidiaries During the second quarter of 2001, the Company announced a plan to relocate the domicile of Matrix Bank to Denver, Colorado from Las Cruces, New Mexico. The relocation was generally completed in May 2002 with the opening of Matrix Bank operations in a high-rise building in downtown Denver which is owned by an operating subsidiary of Matrix Bank. The building has been named Matrix Financial Center. The purchase was completed in June 2002. Associated with the purchase of Matrix Financial Center, Matrix Bancorp and certain subsidiaries with various leased office space throughout the Denver metropolitan area have or are planning to move their offices into Matrix Financial Center. Associated with this move, approximately $700,000 pre-tax charge has been recognized in other general and administrative expenses at June 30, 2002. The expenses consist of currently anticipated losses recognized as in connection with amounts to be paid on the previous office space leases above anticipated sub-lease payment amounts to be received. The move of subsidiary offices to Matrix Financial Center is anticipated to be completed in the fourth quarter of 2002. 10 Matrix Bancorp, Inc. Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) 10. Segment Information
Servicing Traditional Mortgage Brokerage and School All Others Banking Banking Consulting Services Total ------------- ------------ ---------------- ----------- ----------- ---------- (In thousands) Quarter ended June 30, 2002: Revenues from external customers: Interest income......... $ 14,231 6,415 - $ 1,942 $ 131 $ 22,719 Noninterest income...... 1,069 17,167 1,088 1,821 2,352 23,497 Intersegment revenues....... 4,562 667 416 - 105 5,750 Segment profit (loss)....... 5,721 688 113 (4,273) 952 (1,297) Quarter ended June 30, 2001: Revenues from external customers: Interest income......... $ 17,556 10,552 - $ 1,697 $ 21 $ 29,826 Noninterest income...... 1,725 13,651 1,230 1,534 3,811 21,951 Intersegment revenues....... 6,762 1,747 198 - 250 8,957 Segment profit (loss)....... 4,623 735 (87) (66) (2,653) 2,552 Six months ended June 30, 2002: Revenues from external customers: Interest income......... $ 27,189 14,626 - $ 3,492 $ 226 $ 45,533 Noninterest income...... 2,718 33,435 2,317 3,934 4,519 46,923 Intersegment revenues....... 9,630 1,383 416 - 1,445 12,874 Segment profit (loss)....... 11,590 2,313 263 (3,053) (7,063) 4,050 Six months ended June 30, 2001: Revenues from external customers: Interest income......... $ 38,213 15,416 - $ 3,243 $ 95 $ 56,967 Noninterest income...... 3,857 25,482 2,162 2,873 6,154 40,528 Intersegment revenues....... 11,466 3,361 331 - 955 16,113 Segment profit (loss)....... 10,743 1,885 (520) (398) (5,703) 6,007 Quarter Ended June 30, Six Months Ended June 30, -------------------------------- -------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- (In thousands) Profit: Total profit for reportable segments.............. $ 5,225 $ 5,205 $ 11,113 $ 11,710 Other loss........................................ (4,033) (2,681) (6,793) (5,714) Adjustment of intersegment loss in consolidation.. (240) 28 (270) 11 -------------- -------------- -------------- -------------- Income before income taxes........................ $ 952 $ 2,552 $ 4,050 $ 6,007 ============== ============== ============== ==============
11 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 interest in Matrix Settlement & Clearance Services, LLC. Associated with the purchase of Matrix Financial Center, a subsidiary of Matrix Bank, Matrix Tower Holdings, LLC, was formed during the quarter. The operations of Matrix Financial Center will reside in Matrix Tower Holdings. 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 loan administration fees generated by Matrix Financial; o brokerage and consulting and disposition services fees realized by Matrix Capital Markets, First Matrix and Matrix Asset Management; o trust service fees generated by Sterling Trust; o gain on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; 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 12 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 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 June 30, 2002 for any such cases. For a full description of certain potentially significant proceedings, see the Legal Proceedings section in the Form 10-K for December 31, 2001, and additional discussion at Part II. Item I. "--Legal Proceedings" of this Form 10-Q. 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 interim 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 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 interim 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. 13 Comparison of Results of Operations for the Quarters Ended June 30, 2002 and 2001 Net Income; Return on Average Equity. Net income, including charges for loss on sublease of office space and impairment of mortgage servicing rights discussed below, decreased $700,000 to $900,000, or $0.14 per diluted share, for the quarter ended June 30, 2002 as compared to $1.6 million, or $0.25 per diluted share, for the quarter ended June 30, 2001. Excluding special charges, net income was a consistent $2.2 million for the quarters ended June 30, 2002 and 2001, and net income per share and return on average equity was $0.33 per diluted share and 11.89%, respectively, for the quarter ended June 30, 2002 and was $0.34 per diluted share and 13.7%, respectively, for the quarter ended June 30, 2001. Special charges in 2002 consisted of $1.3 million after tax, or $0.19 per share, for an impairment on mortgage servicing rights of approximately $840,000 after tax, and approximately $420,000 after tax of current quarter charges related to estimated losses on subleasing of office space previously occupied by various subsidiaries and the holding company. The space was subleased to allow these entities to move into Matrix Financial Center. Nonrecurring charges in 2001 of $0.09 per share consisted of expenses related to the relocation of Matrix Bank's domicile from Las Cruces, New Mexico to Denver, Colorado. Net Interest Income. Net interest income before provision for loan and valuation losses increased $1.2 million, or 10.3%, to $12.3 million for the quarter ended June 30, 2002 as compared to $11.1 million for the quarter ended June 30, 2001. Our net interest margin increased 78 basis points to 3.65% for the quarter ended June 30, 2002 from 2.87% for the quarter ended June 30, 2001 and interest rate spread increased to 3.31% for the quarter ended June 30, 2002 from 2.27% for the quarter ended June 30, 2001. The increase in net interest income before provision for loan and valuation losses was primarily due to a $66.2 million increase in our average noninterest-bearing deposits between the two comparable quarters, the effect of which exceeded the $206.4 million decrease in our total interest-earning assets. The majority of the increase in noninterest-bearing liabilities can be attributed to increases in escrow account balances. The 94 basis point decrease in the yield on our interest-earning assets was more than offset by a 198 basis point decrease in the cost of our interest-bearing liabilities. The decrease in yield was driven by a decrease in the yield earned on our average loan portfolio to 6.89% for the quarter ended June 30, 2002 as compared to 7.83% for the quarter ended June 30, 2001. The decrease in the cost of interest-bearing liabilities was driven by decreases in interest rates, which have significantly affected the rates paid by Matrix Bank for Federal Home Loan Bank borrowings that decreased 210 basis points to 2.93% as compared to the prior year. The interest rate on short-term borrowings fluctuates with the federal funds rate which is at a 40-year low. 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 $100,000 to $600,000 for the quarter ended June 30, 2002 as compared to $500,000 for the quarter ended June 30, 2001. The increase in the provision was mainly due to growth in the loan portfolio and specific loan write-offs. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "--Asset Quality--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees, gains on sales of repurchased FHA/VA loans, and other ancillary charges. Loan administration fees increased $300,000, or 3.6%, to $8.3 million for the quarter ended June 30, 2002 as compared to $8.0 million for the quarter ended June 30, 2001. The increase includes gains on sales of repurchased FHA/VA loans of $1.2 million for each of the quarters ended June 30, 2002 and 2001. Gains on sale of repurchased FHA/VA loans relate to delinquent loans which are purchased out of loan pools on which the Company acts as servicer and then resells into the secondary market. Loan service fees are also 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 $5.3 billion for the quarter ended June 30, 2002 as compared to an average balance of $5.6 billion for the quarter ended June 30, 2001. Actual service fee rate (including all ancillary income) of 0.47% for the quarter ended June 30, 2002 remained consistent as compared to 0.48% for the quarter ended June 30, 2001. Loan Origination. Loan origination income includes all mortgage loans fees, secondary marketing activity on new loan originations and servicing released premiums on new originations sold, net of origination costs. Loan origination 14 income increased $600,000 to $8.0 million for the quarter ended June 30, 2002 as compared to $7.4 million for the quarter ended June 30, 2001. The increase in loan origination income resulted primarily from an increase in net income spread to 65.5 basis points for the quarter ended June 30, 2002 as compared to 45.4 basis points for the quarter ended June 30, 2001. This increase was slightly offset by a decrease in wholesale residential mortgage loan production to $786.7 million for the quarter ended June 30, 2002 as compared to $928.2 million for the quarter ended June 30, 2001. Brokerage Fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights. Brokerage fees decreased $900,000, or 92.1%, to $100,000 for the quarter ended June 30, 2002 as compared to $1.0 million for the quarter ended June 30, 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. Due to turbulent market conditions, combined with the loss of personnel, fees during the quarter ended June 30, 2002 were low. Based on the current market condition, the Company has increased its focus on the brokerage of whole loans. We continue to be committed to the servicing market through our analytical strengths and sales force. When the market conditions improve, the Company anticipates the revenues to improve. Trust Services. Trust service fees increased between the comparable quarters with a $100,000, or 15.5% increase for the current quarter to $1.3 million as compared to $1.2 million for the same quarter of the prior year. Trust accounts under administration at Sterling Trust increased to 43,204 at June 30, 2002 from 40,321 at June 30, 2001 and total assets under administration increased to over $6.4 billion at June 30, 2002 from approximately $5.7 billion at June 30, 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 $500,000, or 72.6%, to $1.1 million for the quarter ended June 30, 2002 as compared to $600,000 for the quarter ended June 30, 2001. The increase is due to an increase in the number of properties closed during the quarter ended June 30, 2002, which was 568, an increase of 53.9% when compared to the quarter ended June 30, 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 were 1,865 at June 30, 2002, compared to 1,022 at June 30, 2001. Gain on Sale of Loans and Securities. Gain on sale of loans and securities was consistent quarter to quarter at $150,000. 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 portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights was $1.1 million for the quarter ended June 30, 2002 as compared to $400,000 for the quarter ended June 30, 2001. The sale was completed to both decrease our level of investment in mortgage servicing rights, as well as to recognize profit. Gains from the sale of mortgage servicing rights can fluctuate significantly from quarter to quarter and year-to-year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to at times pursue opportunistic sales of mortgage servicing rights. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided primarily to charter schools. School services income remained consistent at $1.4 million for the quarter ended June 30, 2002 and 2001. As of June 30, 2002, ABS provided core business services to 106 schools. Other Income. Other income increased $200,000, or 13.5%, to $2.0 million for the quarter ended June 30, 2002 as compared to $1.8 million for the quarter ended June 30, 2001. The increase in other income was primarily due to increases in retail and fixed income brokerage fees and Small Business Administration trading fees at First Matrix of $500,000, as compared to the quarter ended June 30, 2001, related to activity generated by the Company's focus on the acquisition, pooling and selling of Small Business Administration loans and securities. The increase was offset slightly by decreases in escrow and other fees earned at Matrix Financial. 15 Noninterest Expense. Noninterest expense increased $4.2 million, or 13.9%, to $34.2 million for the quarter ended June 30, 2002 as compared to $30.0 million for the quarter ended June 30, 2001. This increase was predominantly due to inclusion of a $700,000 loss on sublease and $1.4 million impairment charge which were special charges recorded during the quarter ended June 30, 2002. Other increases were in compensation and employee benefits expense, offset by lower levels of amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated:
Quarter Ended June 30, ------------------------------ 2002 2001 --------------- -------------- (In thousands) Compensation and employee benefits........................................$ 14,950 $ 12,784 Amortization of mortgage servicing 5,162 6,167 rights.................................. Occupancy and equipment.................................................... 1,830 1,634 Postage and communication.................................................. 1,148 1,067 Professional fees.......................................................... 597 837 Data processing............................................................ 769 668 Other general and administrative........................................... 9,726 6,849 ------------ ------------ Total.................................................................$ 34,182 $ 30,006 ============ ============
Compensation and employee benefits expense increased $2.2 million, or 16.9%, to $15.0 million for the quarter ended June 30, 2002 as compared to $12.8 million for the quarter ended June 30, 2001. This increase was primarily the result of growth and expansion at Matrix Financial, First Matrix and increases in school services personnel at ABS. The change at ABS also includes payment of modest severances primarily expensed in the quarter ended June 30, 2002 related to changes made in upper management positions to better guide ABS in its growth initiatives. Overall, the Company experienced an increase of 75 employees for a total of 945 employees at June 30, 2002 as compared to 870 employees at June 30, 2001. Amortization of mortgage servicing rights decreased $1.0 million, or 16.3%, to $5.2 million for the quarter ended June 30, 2002 as compared to $6.2 million for the quarter ended June 30, 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 stabilization of the low interest rates prevalent in the market during the quarter, prepayment speeds on our servicing portfolio decreased to an average of 17.1% for the quarter ended June 30, 2002 as compared to 24.6% for the quarter ended June 30, 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, excluding the special charges discussed above, were basically at levels consistent with the 2001 comparable quarter levels, with the exception of other general and administrative expenses. Other general and administrative expenses, if the 2002 special items are excluded, and the approximate $1.0 million nonrecurring charge recorded in the quarter ended June 30, 2001 is added back, increased approximately $1.8 million. This increase is primarily attributable to expenses for temporary staffing and consulting services, as well as marketing expenses at ABS incurred in connection with the growth initiatives and an effort to engage additional schools for ABS. Provision for Income Taxes. Our provision for income taxes decreased by $900,000 to $50,000 for the quarter ended June 30, 2002 as compared to $900,000 for the quarter ended June 30, 2001. Our effective tax rate was 5.0% for the quarter ended June 30, 2002 as compared to 36.2% for the quarter ended June 30, 2001. The effective tax rates are affected by the level of tax-exempt loans at ABS in proportion to the level of net income. Comparison of Results of Operations for the Six Months Ended June 30, 2002 and 2001 Net Income; Return on Average Equity. Net income decreased $700,000, or 17.7%, to $2.9 million, or $0.45 per diluted share, for the six months ended June 30, 2002 as compared to $3.6 million, or $0.55 per diluted share, for the six months ended June 30, 2001. Returns on average equity were 8.1% and 11.1% for the six 16 months ended June 30, 2002 and 2001, respectively. The results for both periods include the charges identified in "--Comparison of Results of Operations for the Quarters Ended June 30, 2002 and 2001--Net Income; Return on Average Equity." Net Interest Income. Net interest income before provision for loan and valuation losses increased $4.1 million, or 20.7%, to $23.9 million for the six months ended June 30, 2002 as compared to $19.8 million for the six months ended June 30, 2001. Our net interest margin increased to 3.56% for the six months ended June 30, 2002 as compared to 2.72% for the six months ended June 30, 2001. Additionally, our interest rate spread increased to 3.18% for the six months ended June 30, 2002 from 2.20% for the six months ended June 30, 2001. The increases in net interest income before provision for loan and valuation losses, net interest margin and interest rate spread for the six months ended June 30, 2002 were attributable to the following: a 4.8% increase in our average noninterest-bearing liabilities which includes custodial balances, combined with a drop in the cost of our interest-bearing liabilities to 3.60% for the six months ended June 30, 2002 from 5.63% for the six months ended June 30, 2001, or 203 basis points. The above items were offset by a decrease in the yield on our interest-earning assets to 6.78% for the six months ended June 30, 2002 from 7.83% for the six months ended June 30, 2001 and a 4.0% increase in our average noninterest-earning assets. For additional discussion concerning increases in our average interest-earning assets and decreases in our cost of interest-bearing liabilities, see "--Comparison of Results of Operations for the Quarters Ended June 30, 2002 and 2001--Net Interest Income." For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. Provision for loan and valuation losses increased $200,000 to $1.7 million for the six months ended June 30, 2002 as compared to $1.5 million for the six months ended June 30, 2001. This increase was primarily attributable to additional loan loss provision recorded at ABS. Loan Administration. Loan administration fees increased $1.2 million, or 7.9%, to $17.0 million for the six months ended June 30, 2002 as compared to $15.8 million for the six months ended June 30, 2001. Included in loan administration income was approximately $3.0 million for the six months ended June 30, 2002 and $1.2 million for the six months ended June 30, 2001 of gain from the purchase and subsequent resale of FHA and VA loans from our mortgage servicing rights portfolio. Loan administration fees are also 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 servicing portfolio increased slightly to an average balance of $5.9 billion for the six months ended June 30, 2002 as compared to an average balance of $5.6 billion for the six months ended June 30, 2001. The actual service fee rate (including all ancillary income) remained basically consistent at 0.48% for the six months ended June 30, 2002 as compared to 0.50% for the six months ended June 30, 2001. The current year actual service fee rate excludes the gain mentioned above, and prior year excludes a $360,000 transition adjustment recorded by the Company as a cumulative effect of a change in accounting principle and $275,000 of subservicing income from a portfolio sold in 2000 that was not transferred until 2001. Loan Origination. Loan origination income increased $3.9 million to $16.2 million for the six months ended June 30, 2002 as compared to $12.3 million for the six months ended June 30, 2001. The increase resulted as a combination of effects from an increase in wholesale production to $1.7 billion for the six months ended June 30, 2002 as compared to $1.6 billion for the six months ended June 30, 2001, and an increase in the net income spread to 59.7 basis points year-to-date 2002 versus 50.4 basis points year-to-date 2001. Brokerage Fees. Brokerage fees decreased $1.2 million, or 64.5%, to $700,000 for the six months ended June 30, 2002 as compared to $1.9 million for the six months ended June 30, 2001. Brokerage fees vary from quarter to quarter and year to year, 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. Please see additional discussion under "--Comparison of Results of Operations for the Quarters Ended June 30, 2002 and 2001--Brokerage Fees." Trust Services. Trust service fees were basically consistent between the two comparable six-month periods with a $250,000 increase for the six months ended June 30, 2002 to $2.7 million. Real Estate Disposition Services. Real estate disposition services income increased $600,000, or 51.0%, to $1.9 million for the six months ended June 30, 2002 as compared to $1.3 million for the six months ended June 30, 2001. Please 17 see additional discussion under "--Comparison of Results of Operations for the Quarters Ended June 30, 2002 and 2001--Real Estate Disposition Services." Gain on Sale of Loans and Securities. Gain on sale of loans and securities decreased $1.3 million to $100,000 for the six months ended June 30, 2002 as compared to $1.4 million for the six months ended June 30, 2001. Gain on the sale of loans and securities can fluctuate significantly from quarter to quarter and from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights increased $700,000, or 145.1%, to $1.1 million for the six months ended June 30, 2002 as compared to $400,000 for the six months ended June 30, 2001. Gains from the sale of mortgage servicing rights can fluctuate significantly from quarter to quarter and year-to-year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to at times pursue opportunistic sales of mortgage servicing rights. The current year sale was undertaken to both decrease our level of investment in mortgage servicing rights, as well as to recognize profit. School Services. School services income increased $300,000, or 13.3%, to $2.8 million for the six months ended June 30, 2002 as compared to $2.5 million for the six months ended June 30, 2001. Other Income. Other income increased $1.8 million, or 70.8%, to $4.4 million for the six months ended June 30, 2002 as compared to $2.6 million for the six months ended June 30, 2001. The increase in other income for the six-month period ended June 30, 2002 was primarily driven by increases in retail and fixed income brokerage fees and Small Business Administration trading fees at First Matrix. Please see additional discussion regarding Small Business Administration activity under "--Comparison of Results of Operations for the Quarters Ended June 30, 2002 and 2001--Other Income." Noninterest Expense. Noninterest expense increased $12.3 million, or 23.2%, to $65.1 million for the six months ended June 30, 2002 as compared to $52.8 million for the six months ended June 30, 2001. This increase, excluding the previously mentioned special charges that were recorded during the quarters ended June 30, 2002 and 2001, was predominantly due to increases in compensation and employee benefits expense, amortization of mortgage servicing rights and other general and administrative expense. The following table details the major components of noninterest expense for the periods indicated:
Six Months Ended June 30, ------------------------------ 2002 2001 --------------- -------------- (In thousands) Compensation and employee benefits........................................$ 29,612 $ 23,771 Amortization of mortgage servicing 11,035 9,588 rights.................................. Occupancy and equipment.................................................... 3,519 3,183 Postage and communication.................................................. 2,287 1,982 Professional fees.......................................................... 1,309 1,387 Data processing............................................................ 1,645 1,340 Other general and administrative........................................... 15,668 11,563 ------------ ------------ Total.................................................................$ 65,075 $ 52,814 ============ ============
Compensation and employee benefits increased $5.8 million, or 24.6%, to $ 29.6 million for the six months ended June 30, 2002 as compared to $23.8 million for the six months ended June 30, 2001. Additional personnel hired at Matrix Financial, First Matrix and ABS to handle increased volumes, as well as upper management severances at ABS as discussed above, were the primary causes of the increase. The remainder was the result of growth at several of the Company's other subsidiaries, including First Matrix. Amortization of mortgage servicing rights increased $1.4 million, or 15.1%, to $11.0 million for the six months ended June 30, 2002 as compared to $9.6 million for the six months ended June 30, 2001. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the 18 prepayment rates experienced with respect to the underlying mortgage loan portfolio. The increase is due to the increase in the average balance of our mortgage servicing rights to $84.1 million at June 30, 2002 as compared to $71.9 million at June 30, 2001. Prepayment speeds on our servicing portfolio have slightly decreased to an average of 20.3% for the six months ended June 30, 2002 as compared to 20.9% for the six months ended June 30, 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, and excludes special charges, increased $3.0 million, or 28.3%, to $13.6 million for the six months ended June 30, 2002 as compared to $10.6 million for the six months ended June 30, 2001. The increase is primarily related to the increased volumes at ABS and Matrix Financial and various expenses related to the relocation of Matrix Bank's domicile. Provision for Income Taxes. The provision for income taxes decreased by $1.0 million to $1.1 million for the six months ended June 30, 2002 as compared to $2.1 million for the six months ended June 30, 2001. Our effective tax rate was 27.4% for the six months ended June 30, 2002 as compared to 34.5% for the six months ended June 30, 2001. The effective tax rates are affected by the level of tax-exempt loans at ABS in proportion to the level of net income. Average Balance Sheet The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Average interest rate information for the quarters and six months ended June 30, 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. 19
Quarter Ended June 30, ------------------------------------------------------------------------- 2002 2001 ---------------------------------- --------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ---------- -------- ---------- ---------- ------- (Dollars in thousands) Assets Interest-earning assets: Loans, net.................. $1,292,804 $ 22,255 6.89 % $ 1,496,029 $ 29,281 7.83 % Securities.................. 9,951 148 5.94 1,632 28 6.86 Interest-earning deposits... 16,626 70 1.68 30,025 253 3.37 Federal Home Loan Bank stock 26,132 246 3.77 24,181 264 4.37 ------------ ---------- -------- ---------- ---------- ------- Total interest-earning assets.................. 1,345,513 22,719 6.75 1,551,867 29,826 7.69 Noninterest-earning assets: Cash........................ 45,122 24,500 Allowance for loan and valuation losses.......... (9,420) (8,995) Premises and equipment...... 19,505 15,812 Other assets................ 175,163 130,802 ------------ ---------- Total noninterest-earning assets.................. 230,370 162,119 ------------ ---------- Total assets.............. $1,575,883 $ 1,713,986 ============ ========== Liabilities & Shareholders' Equity Interest-bearing liabilities: Passbook accounts........... 5,731 29 2.02 $ 3,259 28 3.44 Money market and NOW accounts 293,658 1,119 1.52 241,283 1,416 2.35 Certificates of deposit..... 439,466 4,249 3.87 545,398 8,320 6.10 Federal Home Loan Bank borrowings................ 335,623 2,457 2.93 360,168 4,529 5.03 Borrowed money and guaranteed preferred beneficial interests....... 138,255 2,586 7.48 229,486 4,400 7.67 ------------ ---------- -------- ---------- ---------- ------- Total interest-bearing liabilities.............. 1,212,763 10,440 3.44 1,379,594 18,693 5.42 ------------ ---------- -------- ---------- ---------- ------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances)................. 252,737 210,974 Other liabilities........... 37,037 58,316 ------------ ---------- Total noninterest-bearing liabilities............... 289,774 269,290 Shareholders' equity.......... 73,346 65,102 ------------ ---------- Total liabilities and shareholders' equity.......... $ 1,575,883 $ 1,713,986 ============ ========== Net interest income before provision for loan and valuation losses............. $ 12,279 $ 11,133 ============ ========== Interest rate spread.........................................3.31 % 2.27 % ======== ======= Net interest margin..........................................3.65 % 2.87 % ======== ======= Ratio of average interest-earning assets to average interest-bearing liabilities...................110.95 % 112.49 % ======== ======= Six Months Ended June 30, ------------------------------------------------------------------------- 2002 2001 ---------------------------------- --------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- ---------- -------- ----------- ---------- ------- (Dollars in thousands) Interest-earning assets: Loans, net.................. $ 1,291,380 $ 44,698 6.92 % 1,365,355 $ 54,489 7.98 % Securities.................. 9,995 277 5.54 31,227 1,215 7.78 Interest-earning deposits... 18,445 169 1.83 31,653 614 3.88 Federal Home Loan Bank stock 22,500 390 3.47 25,990 649 4.99 ------------ ---------- -------- ---------- ---------- ------- Total interest-earning assets.................. 1,342,320 45,534 6.78 1,454,225 56,967 7.83 Noninterest-earning assets: Cash........................ 38,559 21,552 Allowance for loan and valuation losses.......... (9,437) (8,771) Premises and equipment...... 16,604 14,574 Other assets................ 176,434 137,197 ------------ ---------- Total noninterest-earning assets.................. 222,160 164,552 ------------ ---------- Total assets.............. $ 1,564,480 $ 1,618,777 ============ ========== Liabilities & Shareholders' Equity Interest-bearing liabilities: Passbook accounts........... $ 5,506 55 2.00 $ 3,128 53 3.39 Money market and NOW accounts 276,681 2,204 1.59 209,029 2,494 2.39 Certificates of deposit..... 475,550 9,635 4.05 502,129 15,708 6.26 Federal Home Loan Bank borrowings................ 295,758 4,430 3.00 411,230 11,203 5.45 Borrowed money and guaranteed preferred beneficial interests....... 147,411 5,308 7.20 193,983 7,713 7.95 ------------ ---------- -------- ---------- ---------- ------- Total interest-bearing liabilities.............. 1,200,906 21,632 3.60 1,319,499 37,171 5.63 ------------ ---------- -------- ---------- ---------- ------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances)................. 252,025 185,828 Other liabilities........... 39,045 48,794 ------------ ---------- Total noninterest-bearing liabilities............... 291,070 234,622 Shareholders' equity.......... 72,504 64,656 ------------ ---------- Total liabilities and shareholders' equity.......... $1,564,480 $ 1,618,777 ============ ========== Net interest income before provision for loan and valuation losses............. $ 23,902 $ 19,796 ============ ========== Interest rate spread.........................................3.18 % 2.20 % ======== ======= Net interest margin..........................................3.56 % 2.72 % ======== ======= Ratio of average interest-earning assets to average interest-bearing liabilities...................111.78 % 110.21 % ======== =======
20 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 prior period rate; and o changes in rate, in other words, changes in rate multiplied by prior period volume. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Quarter Ended Six Months Ended June 30, June 30, 2002 vs. 2001 2002 vs. 2001 ------------------------------------------ ------------------------------------------- Increase (Decrease) Due to Change in ---------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ------------ ------------ ------------ ------------ ------------ ------------- (In thousands) Interest-earning assets: Loans, net....................... $ (3,731) $ (3,295) $ (7,026) $ (2,834) $ (6,957) $ (9,791) Securities....................... 124 (4) 120 (659) (279) (938) Interest-earning deposits........ (86) (97) (183) (196) (249) (445) FHLB stock....................... 20 (38) (18) (80) (179) (259) ------------ ------------ ------------ ------------ ------------ ------------- Total interest-earning assets. (3,673) (3,434) (7,107) (3,769) (7,664) (11,433) Interest-bearing liabilities: Passbook accounts................ 16 (15) 1 30 (28) 2 Money market and NOW accounts.... 267 (564) (297) 677 (967) (290) Certificates of deposit.......... (1,412) (2,659) (4,071) (792) (5,281) (6,073) FHLB borrowings.................. (291) (291) (2,072) (2,605) (4,168) (6,773) ------------ ------------ ------------ ------------ ------------ ------------- Borrowed money and guaranteed preferred beneficial interests .. (1,708) (1,708) (1,814) (1,725) (680) (2,405) ------------ ------------ ------------ ------------ ------------ ------------- Total interest-bearing liabilities................. (3,128) (5,125) (8,253) (4,415) (11,124) (15,539) ------------ ------------ ------------ ------------ ------------ ------------- Change in net interest income before provision for loan and valuation losses.... $ (545) $ 1,691 $ 1,146 $ 646 $ 3,460 $ 4,106 ============ ============ ============ ============ ============ =============
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. 21
June 30, December 31, June 30, 2002 2001 2001 ------------- --------------- ---------------- (Dollars in thousands) Nonaccrual residential mortgage loans................ $ 14,513 $ 19,039 $ 21,113 Nonaccrual commercial real estate, commercial loans and school financing.............................. 19,136 18,172 13,094 Nonaccrual consumer loans............................ 19 40 147 ------------- --------------- ---------------- Total nonperforming loans......................... 33,668 37,251 34,354 Foreclosed real estate............................... 4,641 8,355 3,343 ------------- --------------- ---------------- Total nonperforming assets........................ $ 38,309 $ 45,606 $ 37,697 ============= =============== ================ Total nonperforming loans to total loans............. 2.58 % 2.74 % 2.46 % ============= =============== ================ Total nonperforming assets to total assets........... 2.36 % 2.79 % 2.24 % ============= =============== ================ Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 28.20 % 25.07 % 26.61 % ============= =============== ================
We accrue 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 interest on these loans is generally insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $49.3 million, $55.2 million and $82.3 million at June 30, 2002, December 31, 2001 and June 30, 2001, respectively. Nonaccrual mortgage loans as a percentage of total loans were 1.1% at June 30, 2002, 1.4% at December 31, 2001 and 1.2% at June 30, 2001. The nonaccrual residential mortgage loans have improved at June 30, 2002 as compared to June 30, 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 these loans in nonaccrual at June 30, 2002 totals $3.0 million as compared to $5.8 million at June 30, 2001. Associated with these nonaccrual loans, we have recorded $1.5 million of discounts at June 30, 2002. The increase in nonaccrual commercial loans and school financing in the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 is attributable to the overall increase in commercial lending at Matrix Capital Bank. This is apparent in the increase in our SBA originated and purchased loans and the increased amount of those loans in nonaccrual status, which at June 30, 2002 was $9.0 million, as compared to $8.1 million at December 31, 2001. It should be noted, however, that approximately $5.9 million of the principal of these SBA loans is guaranteed, and as such, our credit risk is reduced despite the increase in the balances. Increases in other types of commercial loans at Matrix Capital Bank are predominately secured by real estate. Also included are school financing delinquencies, which at June 30, 2002 was $4.4 million as compared to $4.7 million at December 31, 2001. The majority of the delinquent school financing loans are secured by real estate. 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 June 30, 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 nominal net cash provided by our operating activities for the six months ended June 30, 2002 is anticipated to continue to be the trend for the remainder of the year. We do not anticipate significant organizational growth, and do not anticipate significant fluctuations in our operating activities. The Company has a bank stock loan agreement, which consists of two components, a term loan and a revolving line of credit. As of June 30, 2002, the balance of the term loan was $8.2 million and the balance of the revolving line of credit was $5.6 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 22 vehicle to compensate for seasonal or other reductions in normal sources of funds. Matrix Bank utilizes advances from the Federal Home Loan Bank as its primary source for borrowings. At June 30, 2002, Matrix Bank had short-term borrowings of $289.6 million and term borrowings of $157.3 million from the Federal Home Loan Bank of Topeka and Dallas. Matrix Bank also utilizes brokered deposits as a source of liquidity. The balance of brokered deposits at June 30, 2002 was $221.9 million. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occur. Matrix Bank, a well capitalized institution, had a leverage capital ratio of 6.73% at June 30, 2002. This exceeded the well capitalized leverage capital requirement of 5.0% of adjusted assets by $26.4 million. Matrix Bank's risk-based capital ratio was 12.53% at June 30, 2002, which currently exceeds the well capitalized risk-based capital requirement of 10.0% of risk-weighted assets by $22.0 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 June 30, 2002, Matrix Financial had a $80.0 million warehouse line of credit facility provided by an unaffiliated financial institution, as amended effective April 1, 2002. As of June 30, 2002, $75.0 million was available to be utilized. Matrix Capital Markets' future growth will be supported by a $40.0 million warehouse line of credit provided to Matrix Capital Markets, guaranteed by Matrix Bancorp, by an unaffiliated financial institution, effective March 29, 2002. As of June 30, 2002, Matrix Capital Markets had $40.0 million available to be utilized. Our principal source of funding for school financing are internal capital, sales of loans to a third party institution and a partnership trust with an unaffiliated financial institution. Amounts available to be sold and amounts to be financed are at the purchaser's and lender's sole discretion. We are pursuing additional third party financing and sales 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 best effort forward commitments to sell loans. As of June 30, 2002, we had $444.7 million in pipeline and funded loans offset with mandatory forward commitments of $345.5 million and best effort forward commitments of $99.3 million. Item 3. Quantitative and Qualitative Disclosures About Market Risk During the quarter ended June 30, 2002 and the six-month period ended June 30, 2002, there were no material changes to the quantitative and qualitative disclosures about market risk presented in the Annual Report on Form 10-K for the year ended December 31, 2001. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Risk Sensitive Assets and Liabilities" and Item 1. "Business Mortgage Servicing Activities --Hedging of Servicing Rights" in the Form 10-K for December 31, 2001 for a detailed discussion. 23 Part II - Other Information Item 1. Legal Proceedings Sterling Trust Company ("Sterling Trust") was named a defendant in an action filed in October 1999 styled John A. Redin, et al. v. Sterling Trust Company, et al. in the Superior Court of the State of California for the County of Los Angeles. The plaintiffs in this action sought to certify a class action on behalf of all persons and entities that invested in promissory notes issued by Personal Choice Opportunities. The plaintiffs alleged, among other things, that Sterling Trust, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. In January 2002, this matter was settled. The settlement, which was approved by the Court in July 2002, requires no payment from Sterling other than the $5,000 retention amount pursuant to the terms of the Company's insurance policy. The remainder of the settlement consideration is to be paid the by Company's insurer. The settlement will become final if no appeals from the Court approval of the settlement are filed prior to the established deadline for appeal (which Sterling Trust estimates to be approximately 60 to 90 days from the date of Court approval). If any appeal to approval by the Court of the settlement is filed, the settlement will become final only if and when any such appeals are resolved in favor of approval of the settlement. There can be no assurances that appeals of Court approval of the settlement will not be filed or, if they are filed, that they will not be successful in reversing the approval of the Court. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on May 17, 2002. At the meeting, the shareholders voted to re-elect two directors of the Company, Richard V. Schmitz and D. Mark Spencer, to hold office until the Annual Meeting to be held in 2005, or until each person's successor is duly elected and qualified ("Proposal 1"). The other directors whose terms continue after the Annual Meeting are Guy A. Gibson, David W. Kloos, David A. Frank, Lester Ravitz and Robert T. Slezak. In addition, the shareholders were asked to consider and act upon a proposal to ratify the appointment of KPMG LLP as independent auditors for the Company for the 2002 fiscal year ("Proposal 2"). No other matters were voted on at the Annual Meeting. A total of 4,771,848 shares were represented at the meeting, in person or by proxy. The number of shares that were voted for and that were withheld from, each of the director nominees in Proposal 1 was as follows: Director Nominee For Withheld - ---------------- --- -------- Richard V. Schmitz 4,702,257 69,591 D. Mark Spencer 4,702,257 69,591 In Proposal 2, KPMG LLP was ratified as the independent auditors for the Company for fiscal year 2002, with 4,756,347 shares voting for, 13,001 shares voting against and 2,500 shares abstaining. Item 6. Exhibits and Reports on Form 8-K a) Exhibits *10.1 Warehousing Credit and Security Agreement, dated as of March 29, 2002, by and between Matrix Capital Markets, Inc., as borrower, and Residential Funding Corporation, as agent. *10.2 First Amendment to Warehousing Credit and Security Agreement, dated as of May 24, 2002, by and between Matrix Capital Markets, Inc., as borrower, and Residential Funding Corporation, as agent. b) Reports on Form 8-K - - The Company filed a Form 8-K with the Securities and Exchange Commission on June 6, 2002 (Item 5), which contained a press release announcing the resignation of Guy A. Gibson as President and Chief Executive Officer of the Company and Mr. Gibson's Consulting Agreement. - ---------------------- * Filed herewith. 24 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: July 30, 2002 /s/ D. Mark Spencer --------------------- --------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) Dated: July 30, 2002 /s/ David W. Kloos --------------------- --------------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 25 INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- *10.1 Warehousing Credit and Security Agreement, dated as of March 29, 2002, by and between Matrix Capital Markets, Inc., as borrower, and Residential Funding Corporation, as agent. *10.2 First Amendment to Warehousing Credit and Security Agreement, dated as of May 24, 2002, by and between Matrix Capital Markets, Inc., as borrower, and Residential Funding Corporation, as agent. - ----------------------- *Filed herewith. EX-10.1 3 warehousingagmt.txt - -------------------------------------------------------------------------------- WAREHOUSING CREDIT AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- BETWEEN MATRIX CAPITAL MARKETS, INC., a Colorado corporation AND RESIDENTIAL FUNDING CORPORATION, a Delaware corporation Dated as of March 29, 2002
TABLE OF CONTENTS 1. THE CREDIT..................................................................................................1-1 1.1. The Warehousing Commitment.......................................................................1-1 1.2. Expiration of Warehousing Commitment ............................................................1-1 1.3. Warehousing Note.................................................................................1-1 2. PROCEDURES FOR OBTAINING ADVANCES...........................................................................2-1 2.1. Warehousing Advances ............................................................................2-1 3. INTEREST, PRINCIPAL AND FEES ...............................................................................3-1 3.1. Interest.........................................................................................3-1 3.2. Interest Limitation..............................................................................3-2 3.3. Principal Payments ..............................................................................3-2 3.4. Non-Usage Fees ..................................................................................3-4 3.5. Loan Package Fees, Wire Fees, Warehousing Fees ..................................................3-4 3.6. Miscellaneous Fees and Charges...................................................................3-4 3.7. Overdraft Advances............................................................................3-4 3.8. Method of Making Payments........................................................................3-5 4. COLLATERAL..................................................................................................4-1 4.1. Grant of Security Interest.......................................................................4-1 4.2. Maintenance of Collateral Records................................................................4-2 4.3. Release of Security Interest in Pledged Loans and Pledged Securities ............................4-2 4.4. Collection and Servicing Rights..................................................................4-3 4.5. Return of Collateral at End of Warehousing Commitment............................................4-4 4.6. Delivery of Collateral Documents ................................................................4-4 5. CONDITIONS PRECEDENT........................................................................................5-1 5.1. Initial Advance..................................................................................5-1 5.2. Each Advance.....................................................................................5-3 5.3. Force Majeure....................................................................................5-3 6. GENERAL REPRESENTATIONS AND WARRANTIES .....................................................................6-1 6.1. Place of Business................................................................................6-1 6.2. Organization; Good Standing; Subsidiaries .......................................................6-1 6.3. Authorization and Enforceability.................................................................6-1 6.4. Authorization and Enforceability of Guaranty.....................................................6-1 6.5. Approvals........................................................................................6-2 6.6. Financial Condition..............................................................................6-2 6.7. Litigation.......................................................................................6-2 6.8. Compliance with Laws ............................................................................6-2 6.9. Regulation U.....................................................................................6-2 6.10. Investment Company Act..........................................................................6-3 6.11. Payment of Taxes................................................................................6-3 6.12. Agreements......................................................................................6-3 6.13. Title to Properties.............................................................................6-3 6.14. ERISA...........................................................................................6-3 6.15. No Retiree Benefits.............................................................................6-4 6.16. Assumed Names...................................................................................6-4 6.17. Servicing.......................................................................................6-4 7. AFFIRMATIVE COVENANTS ......................................................................................7-1 7.1. Payment of Obligations...........................................................................7-1 7.2. Financial Statements...........................................................................7-1 7.3. Other Borrower Reports.......................................................................7-2 7.4. Maintenance of Existence; Conduct of Business ...................................................7-2 7.5. Compliance with Applicable Laws..................................................................7-2 7.6. Inspection of Properties and Books; Operational Reviews..........................................7-3 7.7. Notice...........................................................................................7-3 7.8. Payment of Debt, Taxes and Other Obligations.................................................... 7-3 7.9. Insurance........................................................................................7-3 7.10. Subordination of Certain Indebtedness.......................................................... 7-4 7.11. Other Loan Obligations ........................................................................ 7-4 7.12. ERISA ......................................................................................... 7-4 7.13. Use of Proceeds of Warehousing Advances........................................................ 7-4 8. NEGATIVE COVENANTS ........................................................................................ 8-1 8.1. Contingent Liabilities.......................................................................... 8-1 8.2. Pledge of Servicing Contracts................................................................... 8-1 8.3. Restrictions on Fundamental Changes .............................................................8-1 8.4. Subsidiaries.....................................................................................8-1 8.5. Deferral of Subordinated Debt................................................................... 8-1 8.6. Loss of Eligibility............................................................................. 8-2 8.7. Accounting Changes ............................................................................8-2 8.8. Leverage Ratio.................................................................................. 8-2 8.9. Minimum Tangible Net Worth...................................................................... 8-2 8.10. Liquidity Ratio............................................................................... 8-2 8.11. Loans to Loans Ratio......................................................................... 8-2 8.12. Distributions to Shareholders ..................................................................8-2 8.13. Transactions with Affiliates................................................................8-2 8.14. Recourse Servicing Contracts....................................................................8-2 8.15. Gestation Agreements........................................................................8-3 9. SPECIAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING COLLATERAL........................................................................................... 9-1 9.1. Special Representations and Warranties Concerning Warehousing Collateral.................................................................................. 9-1 9.2. Special Affirmative Covenants Concerning Warehousing Collateral................................. 9-3 9.3. Special Negative Covenants Concerning Warehousing Collateral.................................... 9-3 10. DEFAULTS; REMEDIES .......................................................................................10-1 10.1. Events of Default.............................................................................10-1 10.2. Remedies..................................................................................... 10-2 10.3. Application of Proceeds.......................................................................10-5 10.4. Lender Appointed Attorney-in-Fact..............................................................10-5 10.5. Right of Set-Off...............................................................................10-5 11. MISCELLANEOUS.............................................................................................11-1 11.1. Notices....................................................................................... 11-1 11.2. Reimbursement Of Expenses; Indemnity.......................................................... 11-1 11.3. Financial Information .....................................................................11-2 11.4. Terms Binding Upon Successors; Survival of Representations ................................... 11-2 11.5. Assignment.................................................................................... 11-2 11.6. Amendments.................................................................................... 11-2 11.7. Governing Law................................................................................. 11-2 11.8. Participations................................................................................ 11-2 11.9. Relationship of the Parties....................................................................11-3 11.10. Severability................................................................................. 11-3 11.11. Consent to Credit References .................................................................11-3 11.12. Counterparts................................................................................. 11-3 11.13. Entire Agreement............................................................................11-3 11.14. Consent to Jurisdiction.......................................................................11-4 11.15. Waiver of Jury Trial......................................................................... 11-4 11.16. Waiver of Punitive, Consequential, Special or Indirect Damages................................11-4 12. DEFINITIONS...............................................................................................12-1 12.1. Defined Terms..................................................................................12-1 12.2. Other Definitional Provisions; Terms of Construction...........................................12-10
- -------------------------------------------------------------------------------- EXHIBITS - -------------------------------------------------------------------------------- Exhibit A Request for Advance Exhibit B Procedures and Documentation for Warehousing Mortgage Loans Exhibit C Schedule of Servicing Portfolio Exhibit D Subsidiaries Exhibit E Compliance Certificate Exhibit F Lines of Credit Exhibit G Assumed Names Exhibit H Eligible Loans and Other Assets - -------------------------------------------------------------------------------- WAREHOUSING CREDIT AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- WAREHOUSING CREDIT AND SECURITY AGREEMENT, dated as of March 29, 2002 between MATRIX CAPITAL MARKETS, INC., a Colorado corporation ("Borrower"), and RESIDENTIAL FUNDING CORPORATION, a Delaware corporation ("Lender"). A. Borrower has requested certain financing from Lender. B. Lender has agreed to provide that financing to Borrower subject to the terms and conditions of this Agreement. C. The "Closing Date" for the transactions contemplated by this Agreement is ____________. NOW, THEREFORE, the parties to this Agreement agree as follows: 1. THE CREDIT 1.1. The Warehousing Commitment On the terms and subject to the conditions and limitations of this Agreement, including Exhibit H, Lender agrees to make Warehousing Advances to Borrower from the Closing Date to the Business Day immediately preceding the Warehousing Maturity Date, during which period Borrower may borrow, repay and reborrow in accordance with the provisions of this Agreement. The total aggregate principal amount of all Warehousing Advances outstanding at any one time may not exceed the Warehousing Commitment Amount. While a Default or Event of Default exists, Lender may refuse to make any additional Warehousing Advances to Borrower. If the initial Warehousing Advance has not been made within 90 days after the Closing Date, the Warehousing Commitment and Lender's obligation to make Warehousing Advances to Borrower under this Agreement will automatically terminate, and all Obligations (including any Obligations arising under Section 11.2) will automatically become due and payable, without presentment, demand or other Notice or requirements of any kind, all of which Borrower expressly waives. 1.2. Expiration of Warehousing Commitment The Warehousing Commitment expires on the earlier of ("Warehousing Maturity Date"): (a) the earlier of (i) July 31, 2003, as such date may be extended in writing by Lender, in its sole discretion, or (ii) the first Business Day that is 90 days or more after Lender gives Notice to Borrower of termination of the Commitment, in each case on which date the Warehousing Commitment will expire of its own term and the Warehousing Advances will become due and payable and without the necessity of Notice or action by Lender, and (b) the date the Warehousing Commitment is terminated and the Warehousing Advances become due and payable under Section 10.2. 1.3. Warehousing Note Warehousing Advances under the Warehousing Commitment are evidenced by Borrower's promissory note, payable to Lender on the form prescribed by Lender ("Warehousing Note"). The term "Warehousing Note" as used in this Agreement includes all amendments, restatements, renewals or replacements of the original Warehousing Note and all substitutions for it. All terms and provisions of the Warehousing Note are incorporated into this Agreement. End of Article 1 2. PROCEDURES FOR OBTAINING ADVANCES 2.1. Warehousing Advances To obtain a Warehousing Advance under this Agreement, Borrower must deliver to Lender either a completed and signed request for a Warehousing Advance on the then current form approved by Lender, or an Electronic Advance Request, together with a list of the Mortgage Loans for which the request is being made and a signed RFConnects Pledge Agreement sent by facsimile ("Warehousing Advance Request"), not later than 1 Business Day before the Business Day on which Borrower desires the Warehousing Advance. Subject to the delivery of a Warehousing Advance Request and the satisfaction of the conditions set forth in Sections 5.1 and 5.2, Borrower may obtain a Warehousing Advance under this Agreement upon compliance with the procedures set forth in this Section and in the applicable Exhibit B, including delivery to Lender of all required Collateral Documents. Lender's current form of Warehousing Advance Request is set forth in Exhibit A. Upon not less than 3 Business Days' prior Notice to Borrower, Lender may modify its form of Warehousing Advance Request, RFConnects Pledge Agreement and any other Exhibit or document referred to in this Section to conform to current legal requirements or Lender practices and, as so modified, those Exhibits and documents will become part of this Agreement. End of Article 2 3. INTEREST, PRINCIPAL AND FEES 3.1. Interest 3.1 (a) Except as provided in Sections 3.1(d) and 3.1(e), Borrower must pay interest on the unpaid amount of each Warehousing Advance from the date the Warehousing Advance is made until it is paid in full at the Interest Rate specified in Exhibit H. 3.1 (b) As long as no Default or Event of Default exists, Borrower is entitled to receive a benefit in the form of an "Earnings Credit" on the portion of the Eligible Balances maintained in time deposit accounts with a Designated Bank, and Borrower is entitled to receive a benefit in the form of an "Earnings Allowance" on the portion of the Eligible Balances maintained in demand deposit accounts with a Designated Bank. Any Earnings Allowance will be used first and any Earnings Credit will be used second as a credit against Miscellaneous Fees and Charges (including Designated Bank Charges), and against other fees payable to Lender under this Agreement, including Warehousing Fees, Wire Fees, Non-Usage Fees, and Loan Package Fees, and may be used, at Lender's option, to reduce accrued interest. Any Earnings Allowance not used during the month in which the benefit was received will be accumulated and must be used within 6 months of the month in which the benefit was received. As long as no Default or Event of Default exists, any Earnings Credit not used during the month in which the benefit was received will be used to provide a cash benefit to Borrower. Any Earnings Credit retained by Lender as a result of a Default or Event of Default will be applied to the payment of Borrower's Obligations in the order Lender determines in its sole discretion. The Earnings Credit and the Earnings Allowance for any month will be determined by Lender in its sole discretion and Lender's determination of those amounts is conclusive and binding absent manifest error. In no event will the benefit received by Borrower exceed the Depository Benefit. Either party to this Agreement may terminate the benefits provided for in this Section effective immediately upon Notice to the other party, if the terminating party determines (which determination is conclusive and binding on the other party, absent manifest error) at any time that any applicable law, rule, regulation, order or decree or any interpretation or administration of such law, rule, regulation, order or decree by any governmental authority charged with its interpretation or administration, or compliance by such party with any request or directive (whether or not having the force of law) of any such authority, makes it unlawful or impossible for the party sending the Notice to continue to offer or receive the benefits provided for in this Section. No Notice is required for a termination of benefits as a result of a Default or Event of Default. 3.1 (c) Lender computes interest on the basis of the actual number of days elapsed in a year of 360 days. Borrower must pay interest monthly in arrears, not later than 9 days after the date of Lender's invoice or, if applicable, 2 days after the date of Lender's account analysis statement, commencing with the first month following the Closing Date and on the Warehousing Maturity Date. 3.1 (d) If, for any reason Borrower repays a Warehousing Advance on the same day that it was made by Lender, Borrower agrees to pay to Lender an administrative fee equal to 1 day of interest on that Advance at the Interest Rate that would otherwise be applicable under Exhibit H. Borrower must pay all administrative fees within 9 days the date of Lender's invoice or, if applicable, within 2 days of the date of Lender's account analysis statement. 3.1 (e) After an Event of Default occurs and upon Notice to Borrower by Lender, the unpaid amount of each Warehousing Advance will bear interest at the Default Rate until paid in full. 3.1 (f) Lender will adjust the rates of interest provided for in this Agreement as of the effective date of each change in the applicable index. Lender's determination of such rates of interest as of any date of determination are conclusive and binding, absent manifest error. 3.2. Interest Limitation Lender does not intend, by reason of this Agreement, the Warehousing Note or any other Loan Document, to receive interest in excess of the amount permitted by applicable law. If Lender receives any interest in excess of the amount permitted by applicable law, whether by reason of acceleration of the maturity of this Agreement, the Warehousing Note or otherwise, Lender will apply the excess to the unpaid principal balance of the Warehousing Advances and not to the payment of interest. If all Warehousing Advances have been paid in full and the Warehousing Commitment has expired or has been terminated, Lender will remit any excess to Borrower. This Section controls every other provision of all agreements between Borrower and Lender and is binding upon and available to any subsequent holder of the Warehousing Note 3.3. Principal Payments 3.3 (a) Borrower must pay Lender the outstanding principal amount of all Warehousing Advances on the Warehousing Maturity Date. 3.3 (b) Except as provide in Section 3.1(e), Borrower may prepay any portion of the Warehousing Advances without premium or penalty at any time. 3.3 (c) Borrower must pay to Lender, without the necessity of prior demand or Notice from Lender, and Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account for, the amount of any outstanding Warehousing Advance against a specific Pledged Asset upon the earliest occurrence of any of the following events: (1) One (1) Business Day elapses from the date a Warehousing Advance was made if the Pledged Loan to be funded by that Warehousing Advance is not acquired. (2) Ten (10) Business Days elapse without the return of a Collateral Document delivered by Lender to Borrower under a Trust Receipt for correction or completion. (3) On the date on which a Pledged Loan is determined to have been originated based on untrue, incomplete or inaccurate information or otherwise to be subject to fraud, whether or not Borrower had knowledge of the misrepresentation, incomplete or incorrect information or fraud, on the date on which Borrower knows, has reason to know, or receives Notice from Lender, that (A) one or more of the representations and warranties set forth in Article 9 were inaccurate or incomplete in any material respect on any date when made or deemed made, or (B) Borrower has failed to perform or comply with any covenant, term or condition set forth in Article 9. (4) On the date the Pledged Loan or a Lien prior to the Mortgage securing repayment of the Pledged Loan is defaulted and remains in default for a period of 60 days or more. (5) Upon the sale, other disposition or payment of any Pledged Asset or, with respect to a Pledged Loan included in an Eligible Mortgage Pool, upon the sale or other disposition of the related Agency Security. (6) One (1) Business Day immediately following the date foreclosure proceedings are commenced with respect to a Pledged Loan 3.3 (d) Upon telephonic or written Notice to Borrower by Lender, Borrower must pay to Lender, and Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account for, the amount of any outstanding Warehousing Advance against a specific Pledged Asset upon the earliest occurrence of any of the following events: (1) For any Pledged Loan, the Warehouse Period elapses. (2) Forty-five (45) days elapse from the date a Pledged Loan was delivered to an Investor or Approved Custodian for examination and purchase or for inclusion in a Mortgage Pool, without the purchase being made or an Eligible Mortgage Pool being initially certified, or upon rejection of a Pledged Loan as unsatisfactory by an Investor or Approved Custodian. (3) With respect to any Pledged Loan, any of the Collateral Documents, upon examination by Lender, are found not to be in compliance with the requirements of this Agreement or the related Purchase Commitment. 3.3 (e) In addition to the payments required pursuant to Sections 3.3 (c) and 3.3(d), if the principal amount of any Pledged Loan is prepaid in whole or in part while a Warehousing Advance is outstanding against the Pledged Loan, Borrower must pay to Lender, without the necessity of prior demand or Notice from Lender, and Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account for, the amount of the prepayment, to be applied against the Warehousing Advance. 3.3 (f) The proceeds of the sale or other disposition of Pledged Assets must be paid directly to the Cash Collateral Account. Borrower must give Notice to Lender in writing or by telephone or by RFConnects Delivery to Lender (and if by telephone, followed promptly by written Notice) of the Pledged Assets for which proceeds have been received. Upon receipt of Borrower's Notice, Lender will apply any proceeds deposited into the Cash Collateral Account to the payment of the Warehousing Advance related to the Pledged Assets identified by Borrower in its Notice, and those Pledged Assets will be considered to have been redeemed from pledge. Lender is entitled to rely upon Borrower's affirmation that deposits in the Cash Collateral Account represent payments from Investors for the purchase of the Pledged Assets specified by Borrower in its Notice. If the payment from an Investor for the purchase of Pledged Assets is less than the outstanding Warehousing Advance against the Pledged Assets identified by Borrower in its Notice, Borrower must pay to Lender, and Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account in an amount equal to that deficiency. As long as no Default or Event of Default exists, Lender will return to Borrower any excess payment from an Investor for Pledged Assets. 3.3 (g) Lender reserves the right to revalue any Pledged Loan. Borrower must pay to Lender, without the necessity of prior demand or Notice from Lender, and Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account for, any amount required after any such revaluation to reduce the principal amount of the Warehousing Advance outstanding against the revalued Pledged Loan to an amount equal to the Advance Rate for the applicable type of Eligible Loan multiplied by the Fair Market Value of the Mortgage Loan. 3.4. Non-Usage Fees At the end of each Calendar Quarter during the term of this Agreement, commencing with the Calendar Quarter beginning on July 1, 2002, Lender will determine the average usage of the Warehousing Commitment by calculating the arithmetic daily average of the Warehousing Advances outstanding during such Calendar Quarter ("Used Portion"). Lender will then subtract the Used Portion from the arithmetic daily average of the Warehousing Commitment Amount outstanding during such Calendar Quarter, and the result, if positive, will be known as the "Unused Portion." Borrower must pay to Lender a fee ("Non-Usage Fee") in the amount of 0.125% per annum of the Unused Portion during such Calendar Quarter. The Non-Usage Fee is payable quarterly, in arrears. Lender computes the Non-Usage Fee on the basis of the actual number of days in each Calendar Quarter and a year of 360 days. Borrower must pay the Non-Usage Fee within 9 days after the date of Lender's invoice or, if applicable, within 2 days after the date of Lender's account analysis statement. If the date set forth in clause (a) of the definition of Warehousing Maturity Date occurs on a day other than the last day of a Calendar Quarter, Borrower must pay the prorated portion of the Non-Usage Fee due from the beginning of the then current Calendar Quarter to and including that date. Borrower is not entitled to a reduction in the amount of the Non-Usage Fee if (a) the Warehousing Commitment Amount is reduced or (b) the Warehousing Commitment is terminated at the request of Borrower or as a result of an Event of Default. If the Warehousing Commitment terminates at the request of Borrower or as a result of an Event of Default, Borrower must pay, on the date of termination, a Non-Usage Fee in the amount of 0.125% per annum of the Warehousing Commitment Amount in effect immediately prior to the date of termination, for the period from the date of termination to and including the date set forth in clause (a) of the definition of Warehousing Maturity Date. Lender's determination of the Non-Usage Fee for any period is conclusive and binding, absent manifest error. 3.5. Loan Package Fees, Wire Fees, Warehousing Fees At the time of each Warehousing Advance against an Eligible Loan, Borrower will incur a loan package fee ("Loan Package Fee") and a wire fee ("Wire Fee"). Loan Package Fees and Wire Fees may, at Lender's discretion, be billed separately or combined into a single warehousing fee ("Warehousing Fee"). Borrower must pay all Loan Package Fees, Wire Fees or Warehousing Fees in the amount set forth in Exhibit H within 9 days after the date of Lender's invoice or, if applicable, within 2 days after the date of Lender's account analysis statement. 3.6. Miscellaneous Fees and Charges Borrower must reimburse Lender for all Miscellaneous Fees and Charges. Borrower must pay all Miscellaneous Fees and Charges within 9 days after the date of Lender's invoice or, if applicable, within 2 days after the date of Lender's account analysis statement. 3.7. Overdraft Advances If, under the authorization given by Borrower in the Funding Bank Agreement or pursuant to this Agreement, Lender debits Borrower's Operating Account or directs the Funding Bank to honor an item presented against the Operating Account, and that debit or direction results in an overdraft, Lender may make an additional Warehousing Advance to fund that overdraft ("Overdraft Advance"). Borrower must pay (a) the outstanding amount of any Overdraft Advance within 1 Business Day after the date of the Overdraft Advance and (b) interest on the amount of the Overdraft Advance at a rate per annum equal to the Bank One Prime Rate plus 2% within 9 days after the date of Lender's invoice or, if applicable, within 2 days after the date of Lender's account analysis statement. 3.8. Method of Making Payments 3.8 (a) Unless otherwise specified in this Agreement, Borrower must make all payments under this Agreement to Lender by the close of business on the date when due unless the date is not a Business Day. If the due date is not a Business Day, payment is due on, and interest will accrue to, the next Business Day. Borrower must make all payments in United States dollars in immediately available funds transferred by wire to accounts designated by Lender. 3.8 (b) Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account for any interest or fees due and payable to Lender on the 9th day after the date of Lender's invoice or, if applicable, on the 2nd day after the date of Lender's account analysis statement, without the necessity of prior demand or Notice from Lender. 3.8 (c) While a Default or Event of Default exists, Borrower authorizes Lender to cause the Funding Bank to charge Borrower's Operating Account for any Obligations due and payable to Lender, without the necessity of prior demand or Notice from Lender. End of Article 3 4. COLLATERAL 4.1. Grant of Security Interest As security for the payment of the Warehousing Note and for the performance of all of Borrower's Obligations, Borrower grants a security interest to Lender in all of Borrower's right, title and interest in and to the following described property ("Collateral"): 4.1 (a) All amounts advanced by Lender to or for the account of Borrower under this Agreement to fund a Mortgage Loan until that Mortgage Loan is closed and those funds disbursed. 4.1 (b) All Mortgage Loans, including all Mortgage Notes, Mortgages and Security Agreements evidencing or securing those Mortgage Loans, that are delivered or caused to be delivered to Lender (including delivery to a third party on behalf of Lender), or that otherwise come into the possession, custody or control of Lender (including the possession, custody or control of a third party on behalf of Lender) for the purpose of pledge or in respect of which Lender has made a Warehousing Advance under this Agreement (collectively, "Pledged Loans"). 4.1 (c) All Mortgage-backed Securities that are created in whole or in part on the basis of Pledged Loans or that are delivered or caused to be delivered to Lender (including delivery to a third party on behalf of Lender), or that otherwise come into the possession, custody or control of Lender (including the possession, custody or control of a third party on behalf of Lender) or that are registered by book-entry in the name of Lender (including registration in the name of a third party on behalf of Lender), in each case for the purpose of pledge, or in respect of which an Advance has been made by Lender under this Agreement (collectively, "Pledged Securities"). 4.1 (d) All private mortgage insurance and all commitments issued by the VA or FHA to insure or guarantee any Mortgage Loans included in the Pledged Loans; all Purchase Commitments held by Borrower covering Pledged Loans or Pledged Securities, and all proceeds from the sale of Pledged Loans or Pledged Securities, all agreements under which any Pledged Loans were acquired or are sold by Borrower; and all personal property, contract rights, servicing rights or contracts and servicing fees and income or other proceeds, amounts and payments payable to Borrower as compensation or reimbursement, accounts, payments, intangibles and general intangibles of every kind relating to Pledged Loans, Pledged Securities, Purchase Commitments, VA commitments or guaranties, FHA commitments, private mortgage insurance and commitments, and all other documents or instruments relating to Pledged Loans and Pledged Securities, including any interest of Borrower in any fire, casualty or hazard insurance policies and any awards made by any public body or decreed by any court of competent jurisdiction for a taking or for degradation of value in any eminent domain proceeding as the same relate to Pledged Loans. 4.1 (e) All escrow accounts, documents, instruments, files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records (including all information, records, tapes, data, programs, discs and cards necessary or helpful in the administration or servicing of the Collateral) and other information and data of Borrower relating to the Collateral. 4.1 (f) All cash, whether now existing or acquired after the date of this Agreement, delivered to or otherwise in the possession of Lender, the Funding Bank or Lender's agent, bailee or custodian or designated on the books and records of Borrower as assigned and pledged to Lender, including all cash deposited in the Cash Collateral Account and the Wire Disbursement Account. 4.1 (g) All Hedging Arrangements related to the Collateral ("Pledged Hedging Arrangements") and Borrower's accounts in which those Hedging Arrangements are held ("Pledged Hedging Accounts"), including all rights to payment arising under the Pledged Hedging Arrangements and the Pledged Hedging Accounts, except that Lender's security interest in the Pledged Hedging Arrangements and Pledged Hedging Accounts applies only to benefits, including rights to payment, related to the Collateral. 4.1 (h) All cash and non-cash proceeds of the Collateral, including all dividends, distributions and other rights in connection with, and all additions to, modifications of and replacements for, the Collateral, and all products and proceeds of the Collateral, together with whatever is receivable or received when the Collateral or proceeds of Collateral are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including all rights to payment with respect to any cause of action affecting or relating to the Collateral or proceeds of Collateral. 4.2. Maintenance of Collateral Records As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, Borrower must preserve and maintain, at its chief executive office and principal place of business or in a regional office approved by Lender, or in the office of a computer service bureau engaged by Borrower and approved by Lender and, upon request, make available to Lender the originals, or copies in any case where the originals have been delivered to Lender or to an Investor, of the Mortgage Notes, Mortgages and Security Agreements included in Pledged Loans, Mortgage-backed Securities delivered to Lender as Pledged Securities, Purchase Commitments, and all related Mortgage Loan documents and instruments, and all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other information and data relating to the Collateral. 4.3. Release of Security Interest in Pledged Loans and Pledged Securities 4.3 (a) Except as provided in Section 4.3 (b), Lender will release its security interest in the Pledged Loans only against payment to Lender of the Release Amount in connection with those Pledged Loans. If Pledged Loans are transferred to a pool custodian or an Investor for inclusion in a Mortgage Pool and Lender's security interest in the Pledged Loans included in the Mortgage Pool is not released before the issuance of the related Mortgage-backed Security, then that Mortgage-backed Security, when issued, is a Pledged Security, Lender's security interest continues in the Pledged Loans backing that Pledged Security and Lender is entitled to possession of the Pledged Security in the manner provided in this Agreement. 4.3 (b) If Pledged Loans are transferred to an Approved Custodian and included in an Eligible Mortgage Pool, Lender's security interest in the Pledged Loans included in the Eligible Mortgage Pool will be released upon the delivery of the Agency Security to Lender (including delivery to or registration in the name of a third party on behalf of Lender) and that Agency Security is a Pledged Security. Lender's security interest in that Pledged Security will be released only against payment to Lender of the Release Amount in connection with the Mortgage Loans backing that Pledged Security. 4.3 (c) Lender has the exclusive right to possession of all Pledged Securities or, if Pledged Securities are issued in book-entry form or issued in certificated form and delivered to a clearing corporation (as that term is defined in the Uniform Commercial Code of Minnesota) or its nominee, Lender has the right to have the Pledged Securities registered in the name of a securities intermediary (as that term is defined in the Uniform Commercial Code of Minnesota) in an account containing only customer securities and credited to an account of Lender. Lender has no duty or obligation to deliver Pledged Securities to an Investor or to credit Pledged Securities to the account of an Investor or an Investor's designee except against payment for those Pledged Securities. Borrower acknowledges that Lender may enter into one or more standing arrangements with securities intermediaries with respect to Pledged Securities issued in book entry form or issued in certificated form and delivered to a clearing corporation or its designee, under which the Pledged Securities are registered in the name of the securities intermediary, and Borrower agrees, upon request of Lender, to execute and deliver to those securities intermediaries Borrower's written concurrence in any such standing arrangements. 4.3 (d) If no Default or Event of Default occurs, Borrower may redeem a Pledged Loan or Pledged Security from Lender's security interest by notifying Lender of its intention to redeem the Pledged Loan or Pledged Security from pledge and either (1) paying, or causing an Investor to pay, to Lender, for application as a prepayment on the principal balance of the Warehousing Note, the Release Amount in connection with the Pledged Loan or the Pledged Loans backing that Pledged Security, or (2) delivering substitute Collateral that, in addition to being acceptable to Lender in its sole discretion, will, when included with the remaining Collateral, result in a Warehousing Collateral Value of all Collateral held by Lender that is at least equal to the aggregate outstanding Warehousing Advances. 4.3 (e) After a Default or Event of Default occurs, Lender may, with no liability to Borrower or any Person, continue to release its security interest in any Pledged Loan or Pledged Security against payment of the Release Amount for that Pledged Loan or for the Pledged Loans backing that Pledged Security. 4.3 (f) The amount to be paid by Borrower to obtain the release of Lender's security interest in a Pledged Loan ("Release Amount") will be (1) in connection with the sale of a Pledged Loan by Borrower, the payment required in any bailee letter pursuant to which Lender ships that Pledged Loan to an Investor, Approved Custodian, pool custodian or other party, (2) in connection with the sale of a Pledged Loan by Lender while an Event of Default exists, the amount paid to Lender in a commercially reasonable disposition of that Pledged Loan and (3) otherwise, until an Event of Default occurs, the principal amount of the Advance outstanding against the Pledged Loan. 4.4. Collection and Servicing Rights 4.4 (a) If no Event of Default exists, Borrower may service and receive and collect directly all sums payable to Borrower in respect of the Collateral other than proceeds of any sale of Collateral. All proceeds of any sale of Collateral must be paid directly to the Cash Collateral Account for application as provided in this Agreement. 4.4 (b) After an Event of Default, Lender or its designee is entitled to service and receive and collect all sums payable to Borrower in respect of the Collateral, and in such case (1) Lender or its designee in its discretion may, in its own name, in the name of Borrower or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but Lender has no obligation to do so, (2) Borrower must, if Lender requests it to do so, hold in trust for the benefit of Lender and immediately pay to Lender at its office designated by Notice, all amounts received by Borrower upon or in respect of any of the Collateral, advising Lender as to the source of those funds and (3) all amounts so received and collected by Lender will be held by it as part of the Collateral. 4.5. Return of Collateral at End of Warehousing Commitment If (a) the Warehousing Commitment has expired or been terminated, and (b) no Warehousing Advances, interest or other Obligations are outstanding and unpaid, Lender will release its security interest and will deliver all Collateral in its possession to Borrower at Borrower's expense. Borrower's acknowledgement or receipt for any Collateral released or delivered to Borrower under any provision of this Agreement is a complete and full acquittance for the Collateral so returned, and Lender is discharged from any liability or responsibility for that Collateral. 4.6. Delivery of Collateral Documents 4.6 (a) Lender may deliver documents relating to the Collateral to Borrower for correction or completion under a Trust Receipt. 4.6 (b) If no Default or Event of Default exists, upon delivery by Borrower to Lender of shipping instructions pursuant to the applicable Exhibit B, Lender will deliver the Mortgage Notes evidencing Pledged Loans or Pledged Securities, together with all related loan documents and pool documents previously received by Lender under the requirements of the applicable Exhibit Q to the designated Investor or Approved Custodian or to another party designated by Borrower and acceptable to Lender in its sole discretion. 4.6 (c) If a Default or Event of Default exists, Lender may, without liability to Borrower or any other Person, continue to deliver Pledged Loans or Pledged Securities, together with all related loan documents and pool documents in Lender's possession, to the applicable Investor, or Approved Custodian or to another party acceptable to Lender in its sole discretion. End of Article 4 5. CONDITIONS PRECEDENT 5.1. Initial Advance The effectiveness of this Agreement is subject to the satisfaction, in the sole discretion of Lender, of the following conditions precedent: 5.1 (a) Lender must receive the following, all of which must be satisfactory in form and content to Lender, in its sole discretion: (1) The Warehousing Note and this Agreement duly executed by Borrower. (2) Borrower's articles or certificate of incorporation, together with all amendments, as certified by the Secretary of State of Colorado, Borrower's bylaws, together with all amendments, certified by the corporate secretary or assistant secretary of Borrower, and certificates of good standing dated within 30 days of the date of this Agreement. (3) A resolution of the board of directors of Borrower authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, each Warehousing Advance Request and all other agreements, instruments or documents to be delivered by Borrower under this Agreement. (4) A certificate as to the incumbency and authenticity of the signatures of the officers of Borrower executing this Agreement and the other Loan Documents, and of the officers and employees of Borrower delivering each Warehousing Advance Request and all other agreements, instruments or documents to be delivered under this Agreement (Lender being entitled to rely on that certificate until a new incumbency certificate has been furnished to Lender). (5) Assumed Name Certificates dated within 30 days of the date of this Agreement for any assumed name used by Borrower in the conduct of its business. (6) Fiscal year-end financial statements of Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) containing a balance sheet as of December 31, 2001 and related statements of income for the period ended on that date, all in reasonable detail and prepared in accordance with GAAP applied on a basis consistent with prior periods. (7) Interim financial statements of Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) containing a balance sheet as of January 31, 2002, and a related statement of income, for the period ended on that date prepared in accordance with GAAP applied on a basis consistent with Borrower's most recent financial statements. (8) The Guaranty, on the form prescribed by Lender, duly executed by the Guarantor. (9) The Guarantor's articles or certificate of incorporation, together with all amendments, as certified by the Secretary of State of Colorado, bylaws certified by the corporate secretary of the Guarantor and certificates of good standing dated within 30 days of the date of this Agreement. (10) A resolution of the board of directors of the Guarantor, certified as of the date of the Agreement by its corporate secretary, authorizing the execution, delivery and performance of the Guaranty, and all other agreements, instruments or documents to be delivered by the Guarantor under this Agreement. (11) A certificate as to the incumbency and authenticity of the signatures of the officers of the Guarantor executing the Guaranty and all other agreements, instruments or documents to be delivered under this Agreement (Lender being entitled to rely on that certificate until a new incumbency certificate has been furnished to Lender). (12) Fiscal year-end financial statements of Parent (and, if applicable, Parent's Subsidiaries, on a consolidated basis) containing a balance sheet as of December 31, 2001 and related statements of income, changes in stockholders' equity and cash flows for the period ended on that date, all in reasonable detail and prepared in accordance with GAAP applied on a basis consistent with prior periods and accompanied by (A) an opinion as to those financial statements in form and substance satisfactory to Lender and prepared by independent certified public accountants of recognized standing acceptable to Lender and (B) any management letters, management reports or other supplementary comments or reports delivered by those accountants to Parent or its Board of directors. (13) A favorable written opinion of counsel to Borrower and the Guarantor (or of separate counsel at the option of Borrower and the Guarantor), addressed to Lender and dated as of the date of this Agreement, covering such matters as Lender may reasonably request. (14) Uniform Commercial Code, tax lien and judgment searches of the appropriate public records for Borrower that do not disclose the existence of any prior Lien on the Collateral other than in favor of Lender or as permitted under this Agreement. (15) Copies of Borrower's errors and omissions insurance policy or mortgage impairment insurance policy, and blanket bond coverage policy, or certificates in lieu of policies, showing compliance by Borrower as of the date of this Agreement with the provisions of Section 7.9. (16) A fully-executed Funding Bank Agreement and evidence that all accounts into which Warehousing Advances will be funded have been established at the Funding Bank. (17) Receipt by Lender of any fees due on the date of this Agreement. (18) Receipt by Lender of the December 31, 2001 consolidating statement of Guarantor. 5.1 (b) If Borrower is indebted to any of its directors, officers, shareholders or Affiliates, or to the Guarantor, as of the date of this Agreement, which indebtedness has a term of more than 1 year or is in excess of $250,000, the Person to whom Borrower is indebted must have executed a Subordination of Debt Agreement, on the form prescribed by Lender; and Lender must have received an executed copy of that Subordination of Debt Agreement, certified by the corporate secretary or assistant secretary of Borrower to be true and complete and in full force and effect as of the date of the Warehousing Advance. 5.1 (c) Borrower must not have incurred any material liabilities, direct or contingent, other than in the ordinary course of its business, since the Audited Statement Date. 5.2. Each Advance The obligation of Lender to make the initial and each subsequent Warehousing Advance is subject to the satisfaction, in the sole discretion of Lender, as of the date of each Warehousing Advance, of the following additional conditions precedent: 5.2 (a) Borrower must have delivered to Lender the Warehousing Advance Request and Collateral Documents required by, called for under, and must have satisfied the procedures set forth in, Article 2 and the Exhibits described in that Article. All items delivered to Lender must be satisfactory to Lender in form and content, and Lender may reject any item that does not satisfy the requirements of this Agreement or of the related Purchase Commitment. 5.2 (b) Lender must have received evidence satisfactory to it as to the making or continuation of any book entry or the due filing and recording in all appropriate offices of all financing statements and other instruments necessary to perfect the security interest of Lender in the Collateral under the Uniform Commercial Code or other applicable law. 5.2 (c) The representations and warranties of Borrower contained in Article 6 and Article 9 must be accurate and complete in all material respects as if made on and as of the date of each Warehousing Advance. 5.2 (d) Borrower must have performed all agreements to be performed by it under this Agreement, and after giving effect to the requested Warehousing Advance, no Default or Event of Default may exist under this Agreement. 5.2 (e) The Guarantor must have performed all agreements to be performed by the Guarantor under the Guaranty. Delivery of a Warehousing Advance Request by Borrower will be deemed a representation by Borrower that all conditions set forth in this Section have been satisfied as of the date of the Warehousing Advance. 5.3. Force Majeure Notwithstanding Borrower's satisfaction of the conditions set forth in this Agreement, Lender has no obligation to make a Warehousing Advance if Lender is prevented from obtaining the funds necessary to make a Warehousing Advance, or is otherwise prevented from making a Warehousing Advance as a result of any fire or other casualty, failure of power, strike, lockout or other labor trouble, banking moratorium, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, insurrection, act of terrorism, war or other activity of armed forces, act of God or other similar reason beyond the control of Lender. Lender will make the requested Warehousing Advance as soon as reasonably possible following the occurrence of such an event. End of Article 5 6. GENERAL REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender, as of the date of this Agreement and as of the date of each Warehousing Advance Request and the making of each Warehousing Advance, that: 6.1. Place of Business Borrower's chief executive office and principal place of business is 1380 Lawrence Street, Suite 1400, Denver, CO, 80204. 6.2. Organization; Good Standing; Subsidiaries Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, and has the full legal power and authority to own its property and to carry on its business as currently conducted. Borrower is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction in which the transaction of its business makes qualification necessary, except in jurisdictions, if any, where a failure to be in good standing has no material adverse effect on Borrower's business, operations, assets or financial condition as a whole. For the purposes of this Agreement, good standing includes qualification for all licenses and payment of all taxes required in the jurisdiction of its incorporation and in each jurisdiction in which Borrower transacts business. Borrower has no Subsidiaries except as set forth on Exhibit D, which sets forth with respect to each Subsidiary, its name, address, jurisdiction of organization, each state in which it is qualified to do business, and the percentage ownership of its capital stock by Borrower. Each of Borrower's Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has the full legal power and authority to own its property and to carry on its business as currently conducted. 6.3. Authorization and Enforceability Borrower has the power and authority to execute, deliver and perform this Agreement, the Warehousing Note and other Loan Documents to which Borrower is party and to make the borrowings under this Agreement. The execution, delivery and performance by Borrower of this Agreement, the Warehousing Note and the other Loan Documents to which Borrower is party and the making of the borrowings under this Agreement, and the Warehousing Note, have been duly and validly authorized by all necessary corporate action on the part of Borrower (none of which actions has been modified or rescinded, and all of which actions are in full force and effect) and do not and will not (a) conflict with or violate any provision of law, of any judgments binding upon Borrower, or of the articles of incorporation or by-laws of Borrower, or (b) conflict with or result in a breach of, constitute a default or require any consent under, or result in or require the acceleration of any indebtedness of Borrower under any agreement, instrument or indenture to which Borrower is a party or by which Borrower or its property may be bound or affected, or result in the creation of any Lien upon any property or assets of Borrower (other than the Lien on the Collateral granted under this Agreement). This Agreement, the Warehousing Note and the other Loan Documents constitute the legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other such laws affecting the enforcement of creditors' rights. 6.4. Authorization and Enforceability of Guaranty Each non-individual Guarantor has the power and authority, and each individual Guarantor has the legal capacity to execute, deliver and perform the Guaranty. The Guaranty constitutes the legal, valid, and binding obligation of each Guarantor, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other such laws affecting the enforcement of creditors' rights. 6.5. Approvals The execution and delivery of this Agreement, the Warehousing Note and the other Loan Documents and the performance of Borrower's obligations under this Agreement, the Warehousing Note and the other Loan Documents and the validity and enforceability of this Agreement, the Warehousing Note and the other Loan Documents do not require any license, consent, approval or other action of any state or federal agency or governmental or regulatory authority other than those that have been obtained and remain in full force and effect. 6.6. Financial Condition The balance sheet of Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) as of each Statement Date, and the related statements of income, cash flows and changes in stockholders' equity for the fiscal period ended on each Statement Date, furnished to Lender, fairly present the financial condition of Borrower (and, if applicable, Borrower's Subsidiaries) as at that Statement Date and the results of its operations for the fiscal period ended on that Statement Date. Borrower had, on each Statement Date, no known material liabilities, direct or indirect, fixed or contingent, matured or unmatured, or liabilities for taxes, long-term leases or unusual forward or long-term commitments not disclosed by, or reserved against in, those financial statements, and at the present time there are no material unrealized or anticipated losses from any loans, advances or other commitments of Borrower except as previously disclosed to Lender in writing. Those financial statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods involved. Since the date of the financial statements described in Section 5.1(6) or, from and after the delivery of the first financial statement required under Section 7.2(b), there has been no material adverse change in the business, operations, assets or financial condition of Borrower (and, if applicable, Borrower's Subsidiaries), nor is Borrower aware of any state of facts that (with or without notice or lapse of time or both) would or could result in any such material adverse change. 6.7. Litigation There are no actions, claims, suits or proceedings pending or, to Borrower's knowledge, threatened or reasonably anticipated against or affecting Borrower or any Subsidiary of Borrower in any court or before any arbitrator or before any government commission, board, bureau or other administrative agency that, if adversely determined, may reasonably be expected to result in a material adverse change in Borrower's business, operations, assets or financial condition as a whole, or that would affect the validity or enforceability of this Agreement, the Warehousing Note or any other Loan Document. 6.8. Compliance with Laws Neither Borrower nor any Subsidiary of Borrower is in violation of any provision of any law, or of any judgment, award, rule, regulation, order, decree, writ or injunction of any court or public regulatory body or authority that could result in a material adverse change in Borrower's business, operations, assets or financial condition as a whole or that would affect the validity or enforceability of this Agreement, the Warehousing Note or any other Loan Document. 6.9. Regulation U Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no part of the proceeds of any Warehousing Advance made under this Agreement will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. 6.10. Investment Company Act Borrower is not an "investment company" or controlled by an "investment company" within the meaning of the Investment Company Act. 6.11. Payment of Taxes Borrower and each of its Subsidiaries has filed or caused to be filed all federal, state and local income, excise, property and other tax returns that are required to be filed with respect to the operations of Borrower and its Subsidiaries, all such returns are true and correct and Borrower and each of its Subsidiaries has paid or caused to be paid all taxes shown on those returns or on any assessment, to the extent that those taxes have become due, including all FICA payments and withholding taxes, if appropriate. The amounts reserved as a liability for income and other taxes payable in the financial statements described in Section 6.6 are sufficient for payment of all unpaid federal, state and local income, excise, property and other taxes, whether or not disputed, of Borrower and its Subsidiaries accrued for or applicable to the period and on the dates of those financial statements and all years and periods prior to those financial statements and for which Borrower and its Subsidiaries may be liable in their own right or as transferee of the assets of, or as successor to, any other Person. No tax Liens have been filed and no material claims are being asserted against Borrower, any Subsidiary of Borrower or any property of Borrower or any Subsidiary of Borrower with respect to any taxes, fees or charges. 6.12. Agreements Neither Borrower nor any Subsidiary of Borrower is a party to any agreement, instrument or indenture or subject to any restriction materially and adversely affecting its business, operations, assets or financial condition, except as disclosed in the financial statements described in Section 6.6. Neither Borrower nor any Subsidiary of Borrower is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, instrument, or indenture which default could result in a material adverse change in Borrower's business, operations, properties or financial condition as a whole. No holder of any indebtedness of Borrower or of any of its Subsidiaries has given notice of any asserted default under that indebtedness, and no liquidation or dissolution of Borrower or of any of its Subsidiaries and no receivership, insolvency, bankruptcy, reorganization or other similar proceedings relative to Borrower or of any of its Subsidiaries or any of its or their properties is pending, or to the knowledge of Borrower, threatened. 6.13. Title to Properties Borrower and each Subsidiary of Borrower has good, valid, insurable and (in the case of real property) marketable title to all of its properties and assets (whether real or personal, tangible or intangible) reflected on the financial statements described in Section 6.6, except for those properties and assets that Borrower has disposed of since the date of those financial statements either in the ordinary course of business or because they were no longer used or useful in the conduct of Borrower's or the Subsidiary's business. All of Borrower's properties and assets are free and clear of all Liens except as disclosed in Borrower's financial statements. 6.14. ERISA Each Plan is in compliance with all applicable requirements of ERISA and the Internal Revenue Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Internal Revenue Code setting forth those requirements, except where any failure to comply would not result in a material loss to Borrower or any ERISA Affiliate. All of the minimum funding standards or other contribution obligations applicable to each Plan have been satisfied. No Plan is a defined-benefit pension plan subject to Title IV of ERISA, and there is no Multiemployer Plan. 6.15. No Retiree Benefits Except as required under Section 4980B of the Internal Revenue Code, Section 601 of ERISA or applicable state law, neither Borrower nor, if applicable, any Subsidiary is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees. 6.16. Assumed Names Borrower does not originate Mortgage Loans or otherwise conduct business under any names other than its legal name and the assumed names set forth on Exhibit G. Borrower has made all filings and taken all other action as may be required under the laws of any jurisdiction in which it originates Mortgage Loans or otherwise conducts business under any assumed name. Borrower's use of the assumed names set forth on Exhibit G does not conflict with any other Person's legal rights to any such name, nor otherwise give rise to any liability by Borrower to any other Person. Borrower may amend Exhibit G to add or delete any assumed names used by Borrower to conduct business. An amendment to Exhibit G to add an assumed name is not effective until Borrower has delivered to Lender an assumed name certificate in the jurisdictions in which the assumed name is to be used, which must be satisfactory in form and content to Lender, in its sole discretion. In connection with any amendment to delete a name from Exhibit G, Borrower represents and warrants that it has ceased using that assumed name in all jurisdictions. 6.17. Servicing Exhibit C is a true and complete list of Borrower's Servicing Portfolio. All of Borrower's Servicing Contracts are in full force and effect, and are unencumbered by Liens other than Liens disclosed in Exhibit C. No default or event that, with notice or lapse of time or both, would become a default, exists under any of Borrower's Servicing Contracts. End of Article 6 7. AFFIRMATIVE COVENANTS As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, Borrower must: 7.1. Payment of Obligations Punctually pay or cause to be paid all Obligations, including the Obligations payable under this Agreement and under the Warehousing Note, in accordance with their terms. 7.2. Financial Statements Deliver to Lender: 7.2 (a) As soon as available and in any event within 30 days after the end of each month, including the last month of Borrower's fiscal year, an interim statement of income of Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) for the immediately preceding month and for the period from the beginning of the fiscal year to the end of that month, and the related balance sheet as at the end of the immediately preceding month, all in reasonable detail, subject, however, to year-end audit adjustments. 7.2 (b) As soon as available and in any event within 90 days after the end of each fiscal year of Borrower, fiscal year-end statements of income, changes in stockholders' equity and cash flow of Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) for that year, and the related balance sheet as of the end of that year (setting forth in comparative form the corresponding figures for the preceding fiscal year), all in reasonable detail and accompanied by (1) an opinion as to those financial statements in form and prepared by independent certified public accountants of recognized standing acceptable to Lender and (2) any management letters, management reports or other supplementary comments or reports delivered by those accountants to Borrower or its board of directors. 7.2 (c) Together with each delivery of financial statements required by this Section, a Compliance Certificate substantially in the form of Exhibit E. 7.2 (d) As soon as available and in any event within 90 days after the end of each fiscal year of the Guarantor, fiscal year-end statements of income, changes in stockholders' equity and cash flows of the Guarantor (and, if applicable, the Guarantor's Subsidiaries, on a consolidated basis) for the most recent fiscal year, the related balance sheet as at the end of that year (setting forth in comparative form the corresponding figures for the preceding fiscal year), all in reasonable detail and accompanied by (1) an opinion as to those financial statements in form and substance satisfactory to Lender and prepared by independent certified public accountants of recognized standing acceptable to Lender and (2) any management letters, management reports or other supplementary comments or reports delivered by those accountants to the Guarantor. 7.2 (e) As soon as available and in any event within 45 days after the end of each fiscal quarter of Guarantor, including the last fiscal quarter of Guarantor's fiscal year, an interim statement of income of Guarantor (and, if applicable, Guarantor's Subsidiaries, on a consolidated basis) for that fiscal quarter and the period from the beginning of the fiscal year to the end of that fiscal quarter, and the related balance sheet as at the end of that fiscal quarter, all in reasonable detail, subject, however, to year-end audit adjustments. 7.2 (f) Copies of all regular or periodic financial and other reports that Borrower or Guarantor files with the Securities and Exchange Commission or any successor governmental agency or other entity. 7.3. Other Borrower Reports Deliver to Lender: 7.3 (a) If Borrower has a Servicing Portfolio, then as soon as available and in any event within 30 days after the end of each month, a consolidated report ("Servicing Portfolio Report") as of the end of the month, as to all Mortgage Loans the servicing rights to which are owned by Borrower (specified by investor type, recourse and non-recourse) regardless of whether the Mortgage Loans are Pledged Loans. The Servicing Portfolio Report must indicate which Mortgage Loans (1) are current and in good standing, (2) are more than 30, 60 or 90 days past due, (3) are the subject of pending bankruptcy or foreclosure proceedings, or (4) have been converted (through foreclosure or other proceedings in lieu of foreclosure) into real estate owned by Borrower. 7.3 (b) Other reports in respect of Pledged Assets, including copies of purchase confirmations issued by Investors purchasing Pledged Loans from Borrower, in such detail and at such times as Lender in its discretion may reasonably request. 7.3 (c) With reasonable promptness, all further information regarding the business, operations, properties or financial condition of Borrower as Lender may reasonably request, including copies of any audits completed by HUD, Ginnie Mae, Fannie Mae or Freddie Mac. 7.3 (d) As soon as available and in any event within 30 days after the end of each month, a report, in such detail as Lender in its discretion may reasonably request, with respect to all Mortgage Loans (including the Pledged Loans) purchased, held or sold by Borrower during such month, separately identifying Non-performing Mortgage Loans, Sub-performing Mortgage Loans, and Mortgage Loans purchased under the Ginnie Mae Early Buyout Loan, and a summary of Mortgage Loan documentation or Investor problems for each Pledged Loan that is a Sub-performing Mortgage Loan or a Non-performing Mortgage Loan. 7.4. Maintenance of Existence; Conduct of Business Preserve and maintain its corporate existence in good standing and all of its rights, privileges, licenses and franchises necessary or desirable in the normal conduct of its business, conduct its business in an orderly and efficient manner; maintain a net worth of acceptable assets as required for maintaining Borrower's eligibility as lender, seller/servicer and issuer; and make no material change in the nature or character of its business or engage in any business in which it was not engaged on the date of this Agreement. 7.5. Compliance with Applicable Laws Comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, a breach of which could result in a material adverse change in Borrower's business, operations, assets, or financial condition as a whole or on the enforceability of this Agreement, the Warehousing Note, any other Loan Document or any Collateral, except where contested in good faith and by appropriate proceedings. 7.6. Inspection of Properties and Books; Operational Reviews Permit Lender or any Participant (and their authorized representatives) to discuss the business, operations, assets and financial condition of Borrower and its Subsidiaries with Borrower's officers, agents and employees, and to examine and make copies or extracts of Borrower's and its Subsidiaries' books of account, all at such reasonable times as Lender or any Participant may request. Provide its accountants with a copy of this Agreement promptly after its execution and authorize and instruct them to answer candidly all questions that the officers of Lender or any Participant or any authorized representatives of Lender or any Participant may address to them in reference to the financial condition or affairs of Borrower and its Subsidiaries. Borrower may have its representatives in attendance at any meetings held between the officers or other representatives of Lender or any Participant and Borrower's accountants under this authorization. Permit Lender or any Participant (and their authorized representatives) access to Borrower's premises and records for the purpose of conducting a review of Borrower's general mortgage business methods, policies and procedures, auditing its loan files and reviewing the financial and operational aspects of Borrower's business. 7.7. Notice Give prompt Notice to Lender of (a) any action, suit or proceeding instituted against Borrower or any of its Subsidiaries in any federal or state court or before any commission or other regulatory body (federal, state or local, domestic or foreign), which action, suit or proceeding has at issue in excess of $100,000, or any such proceedings threatened against Borrower or any of its Subsidiaries in a writing containing the details of that action, suit or proceeding; (b) the filing, recording or assessment of any federal, state or local tax Lien against Borrower, or any of its assets or any of its Subsidiaries; (c) an Event of Default; (d) a Default that continues for more than 4 days; (e) the suspension, revocation or termination of Borrower's eligibility, in any respect, as lender, seller/servicer or issuer, (f) the transfer, loss, nonrenewal or termination of any Servicing Contracts to which Borrower is a party, or which is held for the benefit of Borrower, and the reason for that transfer, loss, nonrenewal or termination; (g) any Prohibited Transaction with respect to any Plan, specifying the nature of the Prohibited Transaction and what action Borrower proposes to take with respect to it; and (h) any other action, event or condition of any nature that could lead to or result in a material adverse change in the business, operations, assets or financial condition of Borrower or any of its Subsidiaries. 7.8. Payment of Debt, Taxes and Other Obligations Pay, perform and discharge, or cause to be paid, performed and discharged, all of the obligations and indebtedness of Borrower and its Subsidiaries, all taxes, assessments and governmental charges or levies imposed upon Borrower or its Subsidiaries or upon their respective income, receipts or properties before those taxes, assessments and governmental charges or levies become past due, and all lawful claims for labor, materials and supplies or otherwise that, if unpaid, could become a Lien or charge upon any of their respective properties or assets. Borrower and its Subsidiaries are not required to pay, however, any taxes, assessments and governmental charges or levies or claims for labor, materials or supplies for which Borrower or its Subsidiaries have obtained an adequate bond or insurance or that are being contested in good faith and by proper proceedings that are being reasonably and diligently pursued and for which proper reserves have been created. 7.9. Insurance Maintain blanket bond coverage and errors and omissions insurance or mortgage impairment insurance, with such companies and in such amounts as satisfy prevailing requirements applicable to a lender, seller/servicer and issuer, and liability insurance and fire and other hazard insurance on its properties, in each case with responsible insurance companies acceptable to Lender, in such amounts and against such risks as is customarily carried by similar businesses operating in the same location. Within 30 days after Notice from Lender, obtain such additional insurance as Lender may reasonably require, all at the sole expense of Borrower. Copies of such policies must be furnished to Lender without charge upon request of Lender. 7.10. Subordination of Certain Indebtedness Cause any indebtedness of Borrower to any shareholder, director, officer or Affiliate of Borrower, or to any Guarantor, which indebtedness has a term of more than 1 year or is in excess of $250,000, to be subordinated to the Obligations by the execution and delivery to Lender of a Subordination of Debt Agreement, on the form prescribed by Lender, certified by the corporate secretary of Borrower to be true and complete and in full force and effect. 7.11. Other Loan Obligations Perform all material obligations under the terms of each loan agreement, note, mortgage, security agreement or debt instrument by which Borrower is bound or to which any of its property is subject, and promptly notify Lender in writing of a declared default under or the termination, cancellation, reduction or nonrenewal of any of its other lines of credit or agreements with any other lender. Exhibit F is a true and complete list of all such lines of credit or agreements as of the date of this Agreement. Borrower must give Lender at least 30 days Notice before entering into any additional lines of credit or agreements. 7.12. ERISA Maintain (and, if applicable, cause each ERISA Affiliate to maintain) each Plan in compliance with all material applicable requirements of ERISA and of the Internal Revenue Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Internal Revenue Code, and not (and, if applicable, not permit any ERISA Affiliate to), (a) engage in any transaction in connection with which Borrower or any ERISA Affiliate would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code, in either case in an amount exceeding $25,000 or (b) fail to make full payment when due of all amounts that, under the provisions of any Plan, Borrower or any ERISA Affiliate is required to pay as contributions to that Plan, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $25,000. 7.13. Use of Proceeds of Warehousing Advances Use the proceeds of each Warehousing Advance solely for the purpose of purchasing Eligible Loans and against the pledge of those Eligible Loans as Collateral. End of Article 7 8. NEGATIVE COVENANTS As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed, Borrower must not, either directly or indirectly, without the prior written consent of Lender: 8.1. Contingent Liabilities Assume, guarantee, endorse or otherwise become contingently liable for the obligation of any Person except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, and except for obligations arising in connection with the sale of Mortgage Loans with recourse in the ordinary course of Borrower's business. 8.2. Pledge of Servicing Contracts Pledge or grant a security interest in any existing or future Servicing Contracts of Borrower other than to Lender, or omit to take any action required to keep all of Borrower's Servicing Contracts in full force and effect. 8.3. Restrictions on Fundamental Changes 8.3 (a) Consolidate, merge or enter into any analogous reorganization or transaction with any Person. 8.3 (b) Amend or otherwise modify Borrower's articles of incorporation or by-laws. 8.3 (c) Liquidate, wind up or dissolve (or suffer any liquidation or dissolution). 8.3 (d) Cease actively to engage in the business of originating or acquiring Mortgage Loans or make any other material change in the nature or scope of the business in which Borrower engages as of the date of this Agreement. 8.3 (e) Sell, assign, lease, convey, transfer or otherwise dispose of (whether in one transaction or a series of transactions) all or any substantial part of Borrower's business or assets, whether now owned or acquired after the Closing Date, other than, in the ordinary course of business and to the extent not otherwise prohibited by this Agreement, sales of (1) Mortgage Loans, (2) Mortgage-backed Securities and (3) Servicing Contracts. 8.3 (f) Acquire by purchase or in any other transaction all or substantially all of the business or property of, or stock or other ownership interests of, any Person. 8.3 (g) Permit any Subsidiary of Borrower to do or take any of the foregoing actions. 8.4. Subsidiaries Form or acquire, or permit any Subsidiary of Borrower to form or acquire, any Person that would thereby become a Subsidiary. 8.5. Deferral of Subordinated Debt Pay any Subordinated Debt of Borrower in advance of its stated maturity or, after a Default or Event of Default under this Agreement has occurred, make any payment of any kind on any Subordinated Debt of Borrower until all of the Obligations have been paid and performed in full and any applicable preference period has expired. 8.6. Loss of Eligibility Take any action that would cause Borrower to lose all or any part of its status as an eligible lender, seller/servicer or issuer. 8.7. Accounting Changes Make, or permit any Subsidiary of Borrower to make, any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year or the fiscal year of any Subsidiary of Borrower. 8.8. Leverage Ratio Permit Borrower's Leverage Ratio at any time to exceed 10 to 1. 8.9. Minimum Tangible Net Worth Permit Borrower's Tangible Net Worth at any time to be less than $2,500,000. 8.10. Liquidity Ratio Permit Borrower's Liquidity Ratio at any time to be less than 35%. 8.11. Loans to Loans Ratio Permit the ratio (expressed as a percentage) of the aggregate amount of Advances outstanding against Non-performing Mortgage Loans and Sub-performing Mortgage Loans to the aggregate amount of Advances outstanding at any time to be greater than 10%. For the purpose of this calculation, any Pledged Loans that are Ginnie Mae Early Buyout Loans shall be excluded. 8.12. Distributions to Shareholders For any fiscal year, declare or pay any dividends or otherwise declare or make any distribution to Borrower's shareholders (including any purchase or redemption of stock) if a Default or Event of Default exists or would occur as a result of the dividend or distribution. 8.13. Transactions with Affiliates Directly or indirectly (a) make any loan, advance, extension of credit or capital contribution to any of Borrower's Affiliates, except for (i) loans, advances, extensions of credit or capital contributions in an aggregate amount not to exceed $500,000 to First Matrix Investment Services, and (ii) loans made to Matrix Bancorp as part of its consolidated cash management system; (b) sell, transfer, pledge or assign any of its assets to or on behalf of those Affiliates, other than sales of Mortgage Loans to Affiliates in the ordinary course of business; (c) merge or consolidate with or purchase or acquire assets from those Affiliates, or (d) pay management fees in excess of $250,000 to or on behalf of those Affiliates. 8.14. Recourse Servicing Contracts Acquire or enter into Servicing Contracts under which Borrower must repurchase or indemnify the holder of the Mortgage Loans as a result of defaults on the Mortgage Loans at any time during the term of those Mortgage Loans. End of Article 8 9. SPECIAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING COLLATERAL 9.1. Special Representations and Warranties Concerning Warehousing Collateral Borrower represents and warrants to Lender, as of the date of this Agreement and as of the date of each Warehousing Advance Request and the making of each Warehousing Advance, that: 9.1 (a) Borrower has not selected the Collateral in a manner so as to affect adversely Lender's interests. 9.1 (b) Borrower is the legal and equitable owner and holder, free and clear of all Liens (other than Liens granted under this Agreement), of the Pledged Loans and the Pledged Securities. All Pledged Loans, Pledged Securities and related Purchase Commitments have been duly authorized and validly issued to Borrower, and all of the foregoing items of Collateral comply with all of the requirements of this Agreement, and have been and will continue to be validly pledged or assigned to Lender, subject to no other Liens. 9.1 (c) Borrower has, and will continue to have, the full right, power and authority to pledge the Collateral pledged and to be pledged by it under this Agreement. 9.1 (d) Each Mortgage Loan and each related document included in the Pledged Loans (1) has been duly executed and delivered by the parties to that Mortgage Loan and that related document, (2) has been made in compliance with all applicable laws, rules and regulations (including all laws, rules and regulations relating to usury), (3) is and will continue to be a legal, valid and binding obligation, enforceable in accordance with its terms, without setoff, counterclaim or defense in favor of the mortgagor under the Mortgage Loan or any other obligor on the Mortgage Note and (4) has not been modified, amended or any requirements of which waived, except in a writing that is part of the Collateral Documents. No party to any Mortgage Loan or related document is in violation of any applicable law, rule or regulation if the violation would impair the collectibility of the Mortgage Loan or the performance by the mortgagor or any other obligor of its obligations under the Mortgage Note or any related document. 9.1 (e) Each Pledged Loan is denominated in dollars and secured by a Mortgage on real property located in one of the states of the United States or the District of Columbia. 9.1 (f) Except for open-ended Second Mortgage Loans, each Mortgage Loan has been fully advanced in the face amount of its Mortgage Note. 9.1 (g) Each First Mortgage is a first Lien on the premises described in that Mortgage. 9.1 (h) Each Second Mortgage Loan is secured by a second Lien on the premises described in that Mortgage. 9.1 (i) To the extent required by the related Purchase Commitment or by Investors generally for similar Mortgage Loans, each Second Mortgage Loan has or will have a title insurance policy, in ALTA form or equivalent, from a recognized title insurance company, insuring the priority of the Lien of the Mortgage and meeting the usual requirements of Investors purchasing those Mortgage Loans. 9.1(j) Each First Mortgage Loan has or will have a title insurance policy, in ALTA form or equivalent, from a recognized title insurance company, insuring the priority of the Lien of the Mortgage and meeting the usual requirements of Investors purchasing those Mortgage Loans. 9.1 (k) Each Mortgage Loan has been evaluated or appraised in accordance with Title XI of FIRREA. 9.1 (l) The Mortgage Note for each Pledged Loan is (1) payable or endorsed to the order of Borrower, (2) an "instrument" within the meaning of Article 9 of the Uniform Commercial Code of all applicable jurisdictions and (3) is denominated and payable in United States dollars. 9.1 (m) Except in the case of Non-performing Mortgage Loans, no default has existed for 60 days or more under any Mortgage Loan included in the Pledged Loans, except Non-performing Mortgage Loans and Sub-performing Mortgage Loans. 9.1 (n) No party to a Mortgage Loan or any related document is in violation of any applicable law, rule or regulation that would impair the collectibility of the Mortgage Loan or the performance by the mortgagor or any other obligor of its obligations under the Mortgage Note or any related document. 9.1 (o) All fire and casualty policies covering the premises encumbered by each Mortgage included in the Pledged Loans (1) name and will continue to name Borrower and its successors and assigns as the insured under a standard mortgagee clause, (2) are and will continue to be in full force and effect and (3) afford and will continue to afford insurance against fire and such other risks as are usually insured against in the broad form of extended coverage insurance generally available. 9.1 (p) Pledged Loans secured by premises located in a special flood hazard area designated as such by the Director of the Federal Emergency Management Agency are and will continue to be covered by special flood insurance under the National Flood Insurance Program. 9.1 (q) Each Pledged Loan against which a Warehousing Advance is made on the basis of a Purchase Commitment meets all of the requirements of that Purchase Commitment, and each Pledged Security against which a Warehousing Advance is outstanding meets all of the requirements of the related Purchase Commitment. 9.1 (r) Pledged Loans that are intended to be used in the formation of Mortgage-backed Securities comply with the requirements of the issuer of the Mortgage-backed Securities (or its sponsor) and of the Rating Agencies. 9.1 (s) None of the Pledged Loans is a graduated payment Mortgage Loan or has a shared appreciation or other contingent interest feature, and each Pledged Loan provides for periodic payments of all accrued interest on the Mortgage Loan on at least a monthly basis. 9.1 (t) The original assignments of Mortgage delivered to Lender for each Pledged Loan are in recordable form and comply with all applicable laws and regulations governing the filing and recording of such documents. 9.1 (u) Each Pledged Loan secured by real property to which a Manufactured Home is affixed will create a valid Lien on that Manufactured Home that will have priority over any other Lien on the Manufactured Home, whether or not arising under applicable real property law. 9.2. Special Affirmative Covenants Concerning Warehousing Collateral As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, Borrower must: 9.2 (a) Warrant and defend the right, title and interest of Lender in and to the Collateral against the claims and demands of all Persons. 9.2 (b) Service or cause to be serviced all Pledged Loans in accordance with the standard requirements of the issuers of Purchase Commitments covering them and all applicable HUD, Fannie Mae and Freddie Mac requirements, including taking all actions necessary to enforce the obligations of the obligors under such Mortgage Loans. Service or cause to be serviced all Mortgage Loans backing Pledged Securities in accordance with applicable governmental requirements and requirements of issuers of Purchase Commitments covering them. Hold all escrow funds collected in respect of Pledged Loans and Mortgage Loans backing Pledged Securities in trust, without commingling the same with non-custodial funds, and apply them for the purposes for which those funds were collected. 9.2 (c) Execute and deliver to Lender with respect to the Collateral those further instruments of sale, pledge, assignment or transfer, and those powers of attorney, as required by Lender, and do and perform all matters and things necessary or desirable to be done or observed, for the purpose of effectively creating, maintaining and preserving the security and benefits intended to be afforded Lender under this Agreement. 9.2 (d) Prior to the origination by Borrower of any Mortgage Loan to be registered on the MERS system, obtain the approval of Lender and enter into an Electronic Tracking Agreement. 9.2 (e) No Pledged Loan is a Discontinued Loan. 9.3. Special Negative Covenants Concerning Warehousing Collateral As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed, Borrower must not, either directly or indirectly, without the prior written consent of Lender: 9.3 (a) Amend or modify, or waive any of the terms and conditions of, or settle or compromise any claim in respect of, any Pledged Loans or Pledged Securities. 9.3 (b) Sell, transfer or assign, or grant any option with respect to, or pledge (except under this Agreement and, with respect to each Pledged Loan or Pledged Security, the related Purchase Commitment) any of the Collateral or any interest in any of the Collateral. 9.3 (c) Make any compromise, adjustment or settlement in respect of any of the Collateral or accept other than cash in payment or liquidation of the Collateral. End of Article 9 10. DEFAULTS; REMEDIES 10.1. Events of Default The occurrence of any of the following is an event of default ("Event of Default"): 10.1 (a) Borrower fails to pay the principal of any Warehousing Advance when due, whether at stated maturity, by acceleration, or otherwise; or fails to pay any installment of interest on any Warehousing Advance within 9 days after the date of Lender's invoice or, if applicable, within 2 days after the date of Lender's account analysis statement; or fails to pay, within any applicable grace period, any other amount due under this Agreement or any other Obligation of Borrower to Lender. 10.1 (b) Borrower, any of its Subsidiaries or Guarantor fails to pay, or defaults in the payment of any principal or interest on, any other indebtedness or any contingent obligation within any applicable grace period; breaches or defaults with respect to any other material term of any other indebtedness or of any loan agreement, mortgage, indenture or other agreement relating to that indebtedness, if the effect of that breach or default is to cause, or to permit the holder or holders of that indebtedness (or a trustee on behalf of such holder or holders) to cause, indebtedness of Borrower, any of its Subsidiaries or Guarantor in the aggregate amount of $50,000 or more to become or be declared due before its stated maturity (upon the giving or receiving of notice, lapse of time, both, or otherwise). 10.1 (c) Borrower fails to perform or comply with any term or condition applicable to it contained in Sections 7.4 or 7.13 or in any Section of Article 8. 10.1 (d) Any representation or warranty made or deemed made by Borrower under this Agreement, in any other Loan Document or in any written statement or certificate at any time given by Borrower is inaccurate or incomplete in any material respect on the date as of which it is made or deemed made. 10.1 (e) Borrower defaults in the performance of or compliance with any term contained in this Agreement or any other Loan Document other than those referred to in Sections 10.1 (a), 10.1 (c) or 10.1 (d) and such default has not been remedied or waived within 30 days after the earliest of (1) receipt by Borrower of Notice from Lender of that default, (2) receipt by Lender of Notice from Borrower of that default or (3) the date Borrower should have notified Lender of that default under Section 7.7(c) or 7.7(d). 10.1 (f) An "event of default" (however defined) occurs under any agreement between Borrower and Lender other than this Agreement and the other Loan Documents. 10.1 (g) A case (whether voluntary or involuntary) is filed by or against Borrower or any Subsidiary of Borrower or any Guarantor under any applicable bankruptcy, insolvency or other similar federal or state law; or a court of competent jurisdiction appoints a receiver (interim or permanent), liquidator, sequestrator, trustee, custodian or other officer having similar powers over Borrower or any Subsidiary of Borrower or any Guarantor, or over all or a substantial part of their respective properties or assets; or Borrower or any Subsidiary of Borrower or any Guarantor (1) consents to the appointment of or possession by a receiver (interim or permanent), liquidator, sequestrator, trustee, custodian or other officer having similar powers over Borrower or any Subsidiary of Borrower or any Guarantor, or over all or a substantial part of their respective properties or assets, (2) makes an assignment for the benefit of creditors, or (3) fails, or admits in writing its inability, to pay its debts as those debts become due. 10.1 (h) Borrower fails to perform any contractual obligation to repurchase Mortgage Loans, if such obligations in the aggregate exceed $500,000. 10.1 (i) Any money judgment, writ or warrant of attachment or similar process involving in an amount in excess of $100,000 is entered or filed against Borrower or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of 30 days or 5 days before the date of any proposed sale under that money judgment, writ or warrant of attachment or similar process. 10.1 (j) Any order, judgment or decree decreeing the dissolution of Borrower or any nonindividual Guarantor is entered and remains undischarged or unstayed for a period of 20 days. 10.1 (k) Borrower purports to disavow the Obligations or contests the validity or enforceability of any Loan Document. 10.1 (l) Any Guarantor purports to disavow its obligations under its Guaranty or contests the validity or enforceability of the Guaranty. 10.1 (m) Lender's security interest on any portion of the Collateral becomes unenforceable or otherwise impaired. 10.1 (n) A material adverse change occurs in Borrower's financial condition, business, properties, operations or prospects, or in Borrower's ability to repay the Obligations. 10.1 (o) Any Lien for any taxes, assessments or other governmental charges (1) is filed against Borrower or any of its property, or is otherwise enforced against Borrower or any of its property, or (2) obtains priority that is equal to greater than the priority of Lender's security interest in any of the Collateral. 10.1 (p) Guarantor ceases to own, directly or indirectly, all of the capital stock of Borrower. 10.2. Remedies 10.2 (a) If an Event of Default described in Section 10.1 (g) occurs with respect to Borrower, the Warehousing Commitment will automatically terminate and the unpaid principal amount of and accrued interest on the Warehousing Note and all other Obligations will automatically become due and payable, without presentment, demand or other Notice or requirements of any kind, all of which Borrower expressly waives. 10.2 (b) If any other Event of Default occurs, Lender may, by Notice to Borrower, terminate the Warehousing Commitment and declare the Obligations to be immediately due and payable. 10.2 (c) If any Event of Default occurs, Lender may also take any of the following actions: (1) Foreclose upon or otherwise enforce its security interest in any Lien on the Collateral to secure all payments and performance of the Obligations in any manner permitted by law or provided for in the Loan Documents. (2) Notify all obligors under any of the Collateral that the Collateral has been assigned to Lender (or to another Person designated by Lender) and that allpayments on that Collateral are to be made directly to Lender (or such other Person); settle, compromise or release, in whole or in part, any amounts any obligor or Investor owes on any of the Collateral on terms acceptable to Lender; enforce payment and prosecute any action or proceeding involving any of the Collateral; and where any Collateral is in default, foreclose on and enforce any Liens securing that Collateral in any manner permitted by law and sell any property acquired as a result of those enforcement actions. (3) Prepare and submit for filing UCC amendment statements evidencing the assignment to Lender or its designee of any financing statement filed in connection with any item of Collateral. (4) Act, or contract with a third party to act, at Borrower's expense, as servicer or subservicer of Collateral requiring servicing, and perform all obligations required under any Collateral, including Servicing Contracts and Purchase Commitments. (5) Require Borrower to assemble and make available to Lender the Collateral and all related books and records at a place designated by Lender. (6) Enter onto property where any Collateral or related books and records are located and take possession of those items with or without judicial process; and obtain access to Borrower's data processing equipment, computer hardware and software relating to the Collateral and use all of the foregoing and the information contained in the foregoing in any manner Lender deems necessary for the purpose of effectuating its rights under this Agreement and any other Loan Document. (7) Before the disposition of the Collateral, prepare it for disposition in any manner and to the extent Lender deems appropriate. (8) Exercise all rights and remedies of a secured creditor under the Uniform Commercial Code of Minnesota or other applicable law, including selling or otherwise disposing of all or any portion of the Collateral at one or more public or private sales, whether or not the Collateral is present at the place of sale, for cash or credit or future delivery, on terms and conditions and in the manner as Lender may determine, including sale under any applicable Purchase Commitment. Borrower waives any right it may have to prior notice of the sale of all or any portion of the Collateral to the extent allowed by applicable law. If notice is required under applicable law, Lender will give Borrower not less than 10 days' notice of any public sale or of the date after which any private sale may be held. Borrower agrees that 10 days' notice is reasonable notice. Lender may, without notice or publication, adjourn any public or private sale one or more times by announcement at the time and place fixed for the sale, and the sale may be held at any time or place announced at the adjournment. In the case of a sale of all or any portion of the Collateral on credit or for future delivery, the Collateral sold on those terms may be retained by Lender until the purchaser pays the selling price or takes possession of the Collateral. Lender has no liability to Borrower if a purchaser fails to pay for or take possession of the Collateral sold on those terms, and in the case of any such failure, Lender may sell the Collateral again upon notice complying with this Section. (9) Instead of or in conjunction with exercising the power of sale authorized by Section (8), Lender may proceed by suit at law or in equity to collect all amounts due on the Collateral, or to foreclose Lender's Lien on and sell all or any portion of the Collateral pursuant to a judgment or decree of a court of competent jurisdiction. (10) Proceed against Borrower on the Warehousing Note or against any Guarantor under the Guaranty. (11) Retain all excess proceeds from the sale or other disposition of the Collateral, and apply them to the payment of the Obligations under Section 10.3. 10.2 (d) Lender will incur no liability as a result of the commercially reasonable sale or other disposition of all or any portion of the Collateral at any public or private sale or other disposition. Borrower waives (to the extent permitted by law) any claims it may have against Lender arising by reason of the fact that the price at which the Collateral may have been sold at a private sale was less than the price that Lender might have obtained at a public sale, or was less than the aggregate amount of the outstanding Warehousing Advances, accrued and unpaid interest on those Warehousing Advances, and unpaid fees, even if Lender accepts the first offer received and does not offer the Collateral to more than one offeree. Borrower agrees that any sale of Collateral under the terms of a Purchase Commitment, or any other disposition of Collateral arranged by Borrower, whether before or after the occurrence of an Event of Default, will be deemed to have been made in a commercially reasonable manner. 10.2 (e) Borrower acknowledges that Mortgage Loans are collateral of a type that is the subject of widely distributed standard price quotations and that Mortgage-backed Securities are collateral of a type that is customarily sold on a recognized market. Borrower waives any right it may have to prior notice of the sale of Pledged Securities, and agrees that Lender may purchase Pledged Loans and Pledged Securities at a private sale of such Collateral. 10.2 (f) Borrower specifically waives and releases (to the extent permitted by law) any equity or right of redemption, stay or appraisal that Borrower has or may have under any rule of law or statute now existing or adopted after the date of this Agreement, and any right to require Lender to (1) proceed against any Person, (2) proceed against or exhaust any of the Collateral or pursue its rights and remedies against the Collateral in any particular order, or (3) pursue any other remedy within its power. Lender is not required to take any action to preserve any rights of Borrower against holders of mortgages having priority to the Lien of any Mortgage or Security Agreement included in the Collateral or to preserve Borrower's rights against other prior parties. 10.2 (g) Lender may, but is not obligated to, advance any sums or do any act or thing necessary to uphold or enforce the Lien and priority of, or the security intended to be afforded by, any Mortgage or Security Agreement included in the Collateral, including payment of delinquent taxes or assessments and insurance premiums. All advances, charges, costs and expenses, including reasonable attorneys' fees and disbursements, incurred or paid by Lender in exercising any right, power or remedy conferred by this Agreement, or in the enforcement of this Agreement, together with interest on those amounts at the Default Rate, from the time paid by Lender until repaid by Borrower, are deemed to be principal outstanding under this Agreement and the Warehousing Note. 10.2 (h) No failure or delay on the part of Lender to exercise any right, power or remedy provided in this Agreement or under any other Loan Document, at law or in equity, will operate as a waiver of that right, power or remedy. No single or partial exercise by Lender of any right, power or remedy provided under this Agreement or any other Loan Document, at law or in equity, precludes any other or further exercise of that right, power, or remedy by Lender, or Lender's exercise of any other right, power or remedy. Without limiting the foregoing, Borrower waives all defenses based on the statute of limitations to the extent permitted by law. The remedies provided in this Agreement and the other Loan Documents are cumulative and are not exclusive of any remedies provided at law or in equity. 10.2 (i) Borrower grants Lender a license or other right to use, without charge, Borrower's computer programs, other programs, labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any of the Collateral and Borrower's rights under all licenses and all other agreements related to the foregoing inure to Lender's benefit until the Obligations are paid in full. 10.3. Application of Proceeds Lender may apply the proceeds of any sale, disposition or other enforcement of Lender's Lien on all or any portion of the Collateral to the payment of the Obligations in the order Lender determines in its sole discretion. From and after the indefeasible payment to Lender of all of the Obligations, any remaining proceeds of the Collateral will be paid to Borrower, or to its successors or assigns, or as a court of competent jurisdiction may direct. If the proceeds of any sale, disposition or other enforcement of the Collateral are insufficient to cover the costs and expenses of that sale, disposition or other enforcement and payment in full of all Obligations, Borrower is liable for the deficiency. 10.4. Lender Appointed Attorney-in-Fact Borrower appoints Lender its attorney-in-fact, with full power of substitution, for the purpose of carrying out the provisions of this Agreement, the Warehousing Note and the other Loan Documents and taking any action and executing any instruments that Lender deems necessary or advisable to accomplish that purpose. Borrower's appointment of Lender as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Lender may give notice of its Lien on the Collateral to any Person, either in Borrower's name or in its own name, endorse all Pledged Loans or Pledged Securities payable to the order of Borrower, change or cause to be changed the book-entry registration or name of subscriber or Investor on any Pledged Security, prepare and submit for filing Uniform Commercial Code amendment statements with respect to any Uniform Commercial Code financing statements filed in connection with any item of Collateral or receive, endorse and collect all checks made payable to the order of Borrower representing payment on account of the principal of or interest on, or the proceeds of sale of, any of the Pledged Loans or Pledged Securities and give full discharge for those transactions. 10.5. Right of Set-Off If Borrower defaults in the payment of any Obligation or in the performance of any of its duties under the Loan Documents, Lender may, without Notice to or demand on Borrower (which Notice or demand Borrower expressly waives), set-off, appropriate or apply any property of Borrower held at any time by Lender, or any indebtedness at any time owed by Lender to or for the account of Borrower, against the Obligations, whether or not those Obligations have matured. End of Article 10 11. MISCELLANEOUS 11.1. Notices Except where telephonic or facsimile notice is expressly authorized by this Agreement, all communications required or permitted to be given or made under this Agreement ("Notices") must be in writing and must be sent by manual delivery, overnight courier or United States mail (postage prepaid), addressed as follows (or at such other address as may be designated by it in a Notice to the other): If to Borrower: Matrix Capital Markets, Inc. 1380 Lawrence Street, Suite 1400 Denver, CO 80204 Attention: Carl G. de Rozario, President/CEO Facsimile: (303) 825-8202 If to Lender: Residential Funding Corporation 1646 North California Boulevard, Suite 400 Walnut Creek, CA 94596 Attention: Mitchell Nomura, Director Facsimile: (925) 935-6424 All periods of Notice will be measured from the date of delivery if manually delivered, from the first Business Day after the date of sending if sent by overnight courier or from 4 days after the date of mailing if sent by United States mail, except that Notices to Lender under Article 2 and Section 3.3 (f) shall be deemed to have been given only when actually received by Lender. Borrower authorizes Lender to accept Borrower's bailee pledge agreements, Warehousing Advance Requests, shipping requests, wire transfer instructions and security delivery instructions transmitted to Lender by facsimile or RFConnects Delivery, and those documents, when transmitted to Lender by facsimile or by RFConnects Delivery, have the same force and effect as the originals. 11.2. Reimbursement Of Expenses; Indemnity Borrower must: (a) pay Lender a document production fee in connection with the preparation and negotiation of this Agreement; (b) pay such additional documentation production fees as Lender may require and all out-of-pocket costs and expenses of Lender, including reasonable fees, service charges and disbursements of counsel to Lender (including allocated costs of internal counsel), in connection with the amendment, enforcement and administration of this Agreement, the Warehousing Note, and other Loan Documents and the making, repayment and payment of interest on the Warehousing Advances; (c) indemnify, pay, and hold harmless Lender and any other holder of the Warehousing Note from and against, all present and future stamp, documentary and other similar taxes with respect to the foregoing matters and save Lender and any other holder of the Warehousing Note harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes; and (d) indemnify, pay and hold harmless Lender and all of its Affiliates, officers, directors, employees or agents and any subsequent holder of the Warehousing Note (collectively called the "Indemnitees") from and against all liabilities, obligations, losses, damages, penalties, judgments, suits, costs, expenses and disbursements of every kind or nature whatsoever (including the reasonable fees and disbursements of counsel to the Indemnitees (including allocated costs of internal counsel) in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnitees have been designated as parties to such proceeding) that may be imposed upon, incurred by or asserted against such Indemnitees in any manner relating to or arising out of this Agreement, the Warehousing Note, or any other Loan Document or any of the transactions contemplated by this Agreement, the Warehousing Note and the other Loan Documents ("Indemnified Liabilities"), except that Borrower has no obligation under this Agreement with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of any such Indemnitees. To the extent that the undertaking to indemnify, pay and hold harmless as set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Borrower must contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. The agreement of Borrower contained in this Article survives the expiration or termination of this Agreement and the payment in full of the Warehousing Note. Attorneys' fees and disbursements incurred in enforcing, or on appeal from, a judgment under this Agreement are recoverable separately from and in addition to any other amount included in such judgment, and this clause is intended to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. 11.3. Financial Information All financial statements and reports furnished to Lender under this Agreement must be prepared in accordance with GAAP, applied on a basis consistent with that applied in preparing the financial statements as at the end of and for Borrower's most recent fiscal year (except to the extent otherwise required to conform to good accounting practice). 11.4. Terms Binding Upon Successors; Survival of Representations The terms and provisions of this Agreement are binding upon and inure to the benefit of Borrower, Lender and their respective successors and assigns. All of Borrower's representations, warranties, covenants and agreements survive the making of any Warehousing Advance, and except where a longer period is set forth in this Agreement, remain effective for as long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed. 11.5. Assignment Borrower cannot assign this Agreement. Lender may at any time, without Notice to or the consent of Borrower, transfer or assign, in whole or in part, its interest in this Agreement and the Warehousing Note along with Lender's security interest in any of the Collateral, and any assignee of Lender may enforce this Agreement, the Warehousing Note and its security interest in the Collateral assigned. 11.6. Amendments Except as otherwise provided in this Agreement, this Agreement may not be amended, modified or supplemented unless the amendment, modification or supplement is set forth in a writing signed by both Borrower and Lender. 11.7. Governing Law This Agreement and the other Loan Documents are governed by the laws of the State of Minnesota, without reference to its principles of conflicts of laws. 11.8. Participations Lender may at any time sell, assign or grant participations in, or otherwise transfer to any other Person ('Participant"), all or part of the Obligations. Without limiting Lender's exclusive right to collect and enforce the Obligations, Borrower agrees that each participation will give rise to a debtor-creditor relationship between Borrower and the Participant, and Borrower authorizes each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any assets of Borrower that may be held by that Participant. Borrower authorizes Lender to disclose to prospective and actual Participants all information in Lender's possession concerning Borrower, this Agreement and the Collateral. 11.9. Relationship of the Parties This Agreement provides for the making and repayment of Warehousing Advances by Lender (in its capacity as a lender) and Borrower (in its capacity as a borrower), for the payment of interest on those Warehousing Advances and for the payment of certain fees by Borrower to Lender. The relationship between Lender and Borrower is limited to that of creditor and secured party on the part of Lender and of debtor on the part of Borrower. The provisions of this Agreement and the other Loan Documents for compliance with financial covenants and the delivery of financial statements and other operating reports are intended solely for the benefit of Lender to protect its interest as a creditor and secured party. Nothing in this Agreement creates or may be construed as permitting or obligating Lender to act as a financial or business advisor or consultant to Borrower, as permitting or obligating Lender to control Borrower or to conduct Borrower's operations, as creating any fiduciary obligation on the part of Lender to Borrower, or as creating any joint venture, agency, partnership or other relationship between Lender and Borrower other than as explicitly and specifically stated in the Loan Documents. Borrower acknowledges that it has had the opportunity to obtain the advice of experienced counsel of its own choice in connection with the negotiation and execution of the Loan Documents and to obtain the advice of that counsel with respect to all matters contained in the Loan Documents, including the waivers of jury trial and of punitive, consequential, special or indirect damages contained in Sections 11.15 and 11.6, respectively. Borrower further acknowledges that it is experienced with respect to financial and credit matters and has made its own independent decisions to apply to Lender for credit and to execute and deliver this Agreement. 11.10. SeverabiIity If any provision of this Agreement is declared to be illegal or unenforceable in any respect, that provision is null and void and of no force and effect to the extent of the illegality or unenforceability, and does not affect the validity or enforceability of any other provision of the Agreement. 11.11. Consent to Credit References Borrower consents to the disclosure of information regarding Borrower and its Subsidiaries and their relationships with Lender to Persons making credit inquiries to Lender. This consent is revocable by Borrower at any time upon Notice to Lender as provided in Section 11.1. 11.12. Counterparts This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together constitute but one and the same instrument. 11.13. Entire Agreement This Agreement, the Warehousing Note and the other Loan Documents represent the final agreement among the parties with respect to their subject matter, and may not be contradicted by evidence of prior or contemporaneous oral agreements among the parties. There are no oral agreements among the parties with respect to the subject matter of this Agreement, the Warehousing Note and the other Loan Documents. 11.14. Consent to Jurisdiction AT THE OPTION OF LENDER, THIS AGREEMENT, THE WAREHOUSING NOTE AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY STATE OR FEDERAL COURT WITHIN THE STATE OF MINNESOTA. BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF THOSE COURTS, AND WAIVES ANY OBJECTION TO THE JURISDICTION OR VENUE OF THOSE COURTS, INCLUDING THE OBJECTION THAT VENUE IN THOSE COURTS IS NOT CONVENIENT. ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE COMMENCED AND INSTITUTED BY SERVICE OF PROCESS UPON BORROWER BY FIRST CLASS REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO BORROWER AT ITS ADDRESS LAST KNOWN TO LENDER. BORROWER'S CONSENT AND AGREEMENT UNDER THIS SECTION DOES NOT AFFECT LENDER'S RIGHT TO ACCOMPLISH SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN ANY OTHER JURISDICTION OR COURT. IN THE EVENT BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, LENDER AT ITS OPTION MAY HAVE THE CASE TRANSFERRED TO A STATE OR FEDERAL COURT WITHIN THE STATE OF MINNESOTA OR, IF A TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, MAY HAVE BORROWER'S ACTION DISMISSED WITHOUT PREJUDICE. 11.15. Waiver of Jury Trial BORROWER AND LENDER EACH PROMISES AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND FULLY WAIVES ANY RIGHT TO TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT NOW EXISTS OR ARISES AFTER THE DATE OF THIS AGREEMENT. THIS WAIVER OF THE RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER AND LENDER, AND IS INTENDED TO ENCOMPASS EACH INSTANCE AND EACH ISSUE FOR WHICH THE RIGHT TO TRIAL BY JURY WOULD OTHERWISE APPLY. LENDER AND BORROWER ARE EACH AUTHORIZED AND DIRECTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT AS CONCLUSIVE EVIDENCE OF THIS WAIVER OF THE RIGHT TO TRIAL BY JURY. FURTHER, BORROWER AND LENDER EACH CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE OTHER PARTY, INCLUDING THE OTHER PARTY'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY OF ITS REPRESENTATIVES OR AGENTS THAT THE OTHER PARTY WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO TRIAL BY JURY. 11.16. Waiver of Punitive, Consequential, Special or Indirect Damages BORROWER WAIVES ANY RIGHT IT MAY HAVE TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES FROM LENDER OR ANY OF LENDER'S AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS WITH RESPECT TO ANY AND ALL ISSUES PRESENTED IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY BORROWER AGAINST LENDER OR ANY OF LENDER'S AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS WITH RESPECT TO ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. THIS WAIVER OF THE RIGHT TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES IS KNOWINGLY AND VOLUNTARILY GIVEN BY BORROWER, AND IS INTENDED TO ENCOMPASS EACH INSTANCE AND EACH ISSUE FOR WHICH THE RIGHT TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES WOULD OTHERWISE APPLY. LENDER IS AUTHORIZED AND DIRECTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT AS CONCLUSIVE EVIDENCE OF THIS WAIVER OF THE RIGHT TO SEEK PUNITIVE, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES. End of Article 11 12. DEFINITIONS 12.1. Defined Terms Capitalized terms defined below or elsewhere in this Agreement have the following meanings or, as applicable, the meanings given to those terms in Exhibits to this Agreement: "Acquisition Cost" means with respect to any Eligible Loan, the cash purchase price paid by the Borrowers to acquire such Eligible Loan minus any portion thereof attributable to amounts other than principal payable with respect to such Eligible Loan. "Advance Rate" means, with respect to any Eligible Loan, the Advance Rate set forth in Exhibit H for that type of Eligible Loan. "Affiliate" means, when used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by or is under common control with, the Person referred to, (b) each Person that beneficially owns or holds, directly or indirectly, 5% or more of any class of voting Equity Interests of the Person referred to, (c) each Person, 5% or more of the voting Equity Interests of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person's officers, directors, joint venturers and partners, the meaning set forth in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Aged Mortgage Loans" means Mortgage Loans against which a Warehousing Advance has been outstanding for longer than the Standard Warehouse Period, provided that Aged Mortgage Loans are permitted for such type of Mortgage Loan. "Aged Warehouse Period" means the maximum number of days a Warehouse Advance against Aged Mortgage Loans of a particular type may remaining outstanding. "Agency Security" means a Mortgage-backed Security issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. "Agreement" means this Warehousing Credit and Security Agreement, either as originally executed or as it may be amended, restated, renewed or replaced. "Appraised Property Value" means with respect to an interest in real property, the then current fair market value of the real property and any improvements on it as of recent date determined in accordance with Title XI of FIRREA by a qualified appraiser who is a member of the American Institute of Real Estate Appraisers or other group of professional appraisers. "Approved Custodian" means a pool custodian or other Person that Lender deems acceptable, in its sole discretion, to hold Mortgage Loans for inclusion in a Mortgage Pool or to hold Mortgage Loans as agent for an Investor that has issued a Purchase Commitment for those Mortgage Loans. "Audited Statement Date" means the date of Borrower's most recent audited financial statements (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) delivered to Lender under this Agreement. "Bank One" means Bank One, National Association, or any successor bank. "Bank One Prime Rate" means, as of any date of determination, the highest prime rate quoted by Bank One and most recently published by Bloomberg L.P. If the prime rate for Bank One is not quoted or published for any period, then during that period the term 'Bank One Prime Rate" means the highest prime rate published in the most recent edition of The Wall Street Journal in its regular column entitled "Money Rates." "Borrower" has the meaning set forth in the first paragraph of this Agreement. "Business Day" means any day other than Saturday, Sunday or any other day on which national banking associations are closed for business. "Calendar Quarter" means the 3 month period beginning on each January 1, April 1, July 1 or October 1. "Cash Collateral Account" means a demand deposit account maintained at the Funding Bank in Lender's name and designated for receipt of the proceeds of the sale or other disposition of Collateral. "Closing Date" has the meaning set forth in the Recitals to this Agreement. "Collateral" has the meaning set forth in Section 4.1. "Collateral Documents" means, with respect to each Mortgage Loan, (a) the Mortgage Note, the Mortgage and all other documents including, if applicable, any Security Agreement, executed in connection with or relating to the Mortgage Loan; (b) as applicable, the original lender's ALTA Policy of Title Insurance or its equivalent, documents evidencing the FHA Commitment to Insure, the VA Guaranty or private mortgage insurance, the appraisal, the Regulation Z statement, the environmental assessment, the engineering report, certificates of casualty or hazard insurance, credit information on the maker of the Mortgage Note, the HUD-1 or corresponding purchase advice, (c) any other document listed in Exhibit B; and (d) any other document that is customarily desired for inspection or transfer incidental to the purchase of any Mortgage Note by an Investor or that is customarily executed by the seller of a Mortgage Note to an Investor. "Committed Purchase Price" means for an Eligible Loan (a) the dollar price as set forth in the Purchase Commitment or, if the price is not expressed in dollars, the product of the Mortgage Note Amount multiplied by the price (expressed as a percentage) as set forth in the Purchase Commitment for the Eligible Loan, or (b) if the Eligible Loan is to be used to back an Agency Security, the dollar price as set forth in a Purchase Commitment or, if the price is not expressed in dollars the product of the Mortgage Note Amount multiplied by the price (expressed as a percentage) as set forth in the Purchase Commitment for the Agency Security. "Compliance Certificate" means a certificate executed on behalf of Borrower by its chief financial officer or its treasurer or by another officer approved by Lender, substantially in the form of Exhibit E. "Credit Score" means a mortgagor's overall consumer credit rating, represented by a single numeric credit score using the Fair, Isaac consumer credit scoring system, provided by a credit repository acceptable to Lender and the Investor that issued the Purchase Commitment covering the related Mortgage Loan (if a Purchase Commitment is required by Exhibit H). "Debt" means (a) all indebtedness or other obligations of a Person that, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of the Person on the date of determination, plus (b) all indebtedness or other obligations of the Person for borrowed money or for the deferred purchase price of property or services. For purposes of calculating a Person's Debt, Subordinated Debt not due within 1 year of that date and deferred taxes arising from capitalized excess servicing fees and capitalized servicing rights may be excluded from a Person's indebtedness. "Default" means the occurrence of any event or existence of any condition that, but for the giving of Notice or the lapse of time, would constitute an Event of Default. "Default Rate" means, for any Warehousing Advance, the Interest Rate applicable to that Warehousing Advance plus 4% per annum. If no Interest Rate is applicable to a Warehousing Advance, "Default Rate" means, for that Warehousing Advance, the highest Interest Rate then applicable to any outstanding Warehousing Advance plus 4% per annum. "Depository Benefit" means the compensation received by Lender, directly or indirectly, as a result of Borrower's maintenance of Eligible Balances with a Designated Bank. "Designated Bank" means any bank designated by Lender as a Designated Bank, but only for as long as Lender has an agreement under which Lender receives Depository Benefits from that bank. "Designated Bank Charges" means any fees, interest or other charges that would otherwise be payable to a Designated Bank in connection with Eligible Balances maintained at the Designated Bank, including deposit insurance premiums, service charges and any other charges that may be imposed by governmental authorities from time to time. "Discontinued Loan" has the meaning set forth in the GMAC-RFC Client Guide. "Earnings Allowance " has the meaning set forth in Section 3.1(b). "Earnings Credit " has the meaning set forth in Section 3.1(b). "Electronic Advance Request" means an electronic transmission through RFConnects Delivery containing the same information as Exhibit A to this Agreement. "Electronic Tracking Agreement" means an Electronic Tracking Agreement, on the form prescribed by Lender, among Borrower, Lender, MERS and MERCORP, Inc., pursuant to which Lender will have the authority to, among other things, withdraw a Mortgage from the MERS system, if either the Mortgage Loan has been registered on the MERS system naming Borrower as servicer or subservicer, or the Mortgage Loan has not yet been registered on the MERS system. "Eligible Balances" means all funds of or maintained by Borrower (and, if applicable, Borrower's Subsidiaries) in demand deposit or time deposit accounts at a Designated Bank, minus balances to support float, reserve requirements and any other reductions that may be imposed by governmental authorities from time to time. "Eligible Loan" means a Mortgage Loan that satisfies the conditions and requirements set forth in Exhibit H. "Eligible Mortgage Pool" means a Mortgage Pool for which (a) an Approved Custodian has issued its initial certification, (b) there exists a Purchase Commitment covering the Agency Security to be issued on the basis of that certification and (c) the Agency Security will be delivered to Lender. "Equity Interests" means all shares, interests, participations or other equivalents, however, designated, of or in a Person (other than a natural person), whether or not voting, including common stock, membership interests, warrants, preferred stock, convertible debentures and all agreements, instruments and documents convertible, in whole or in part, into any one or more of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is a member of a group of which Borrower is a member and that is treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" means any of the conditions or events set forth in Section 10.1. "Exchange Act" means the Securities Exchange Act of 1934 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "Exhibit B" means Exhibit B-SF or B-NP/SP/SML, as applicable to the type of Eligible Loan against which a Warehousing Advance is to be made. "Fair Market Value" means, at any time for an Eligible Loan or a related Agency Security (if the Eligible Loan is to be used to back an Agency Security) as of any date of determination, (a) the Committed Purchase Price if the Eligible Loan is covered by a Purchase Commitment from Fannie Mae or Freddie Mac or the Eligible Loan is to be exchanged for an Agency Security and that Agency Security is covered by a Purchase Commitment from an Investor, or (b) otherwise, the market price for such Eligible Loan or Agency Security, determined by Lender based on market data for similar Mortgage Loans or Agency Securities and such other criteria as Lender deems appropriate in its sole discretion. "Fannie Mae" means Fannie Mae, a corporation created under the laws of the United States, and any successor corporation or other entity. "FHA" means the Federal Housing Administration and any successor agency or other entity. "FICA" means the Federal Insurance Contributions Act and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules and regulations. "FIRREA" means the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "First Mortgage" means a Mortgage that constitutes a first Lien on the real property covered by the Mortgage. "First Mortgage Loan" means a Mortgage Loan secured by a First Mortgage. "Freddie Mac" means Freddie Mac, a corporation created under the laws of the United States, and any successor corporation or other entity. "Funding Bank" means Bank One or any other bank designated by Lender as a Funding Bank. "Funding Bank Agreement" means a letter agreement on the form prescribed by Lender between the Funding Bank and Borrower authorizing Lender's access to the Operating Account . "GAAP" means generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and in statements and pronouncements of the Financial Accounting Standards Board, or in opinions, statements or pronouncements of any other entity approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Gestation Agreement" means an agreement under which Borrower agrees to sell or finance (a) a Mortgage Loan prior to the date of purchase by an Investor or (b) a Mortgage Pool prior to the date a Mortgage-backed Security backed by the Mortgage Pool is issued. "Ginnie Mae" means the Government National Mortgage Association, an agency of the United States government, and any successor agency or other entity. "Ginnie Mae Early Buyout Loan" means a delinquent Mortgage Loan purchased by Borrower out of a Ginnie Mae mortgage pool. "GMAC-RFC Client Guide" means the applicable loan purchase guide issued by Lender, as the same may be amended or replaced. "Guarantor" means, individually and collectively, Matrix Bancorp, Inc., a Colorado corporation, and any other Person that after the date of this Agreement guarantees all or any portion of Borrower's Obligations. "Guaranty" means a guaranty of all or any portion of Borrower's Obligations. If more than one Guaranty is executed and delivered to Lender, the term "Guaranty" means each of the Guaranties and all of them. "Hedging Arrangements" means, with respect to any Person, any agreements or other arrangements (including interest rate swap agreements, interest rate cap agreements and forward sale agreements) entered into to protect that Person against changes in interest rates or the market value of assets. "HUD" means the Department of Housing and Urban Development, and any successor agency or other entity. "Indemnified Liabilities" has the meaning set forth in Section 11.2. "Indemnitees" has the meaning set forth in Section 11.2. "Interest Rate" means, for any Warehousing Advance, the floating rate of interest specified for that Warehousing Advance in Exhibit H. "Interim Statement Date" means the date of the most recent unaudited financial statements of Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) delivered to Lender under this Agreement. "Internal Revenue Code" means the Internal Revenue Code of 1986, Title 26 of the United States Code, and all rules, regulations and interpretations issued under those statutory provisions, as amended, and any subsequent or successor federal income tax law or laws, rules, regulations and interpretations. "Investment Company Act" means the Investment Company Act of 1940 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "Investor" means Fannie Mae, Freddie Mac or a financially responsible private institution that Lender deems acceptable, in its sole discretion, to issue Purchase Commitments with respect to a particular category of Eligible Loans. "Lender" has the meaning set forth in the first paragraph of this Agreement. "Leverage Ratio" means the ratio of a Person's (and, if applicable, the Person's Subsidiaries, on a consolidated basis) Debt to Tangible Net Worth. For purposes of calculating a Person's Leverage Ratio, Debt arising under Hedging Arrangements, to the extent of assets arising under those Hedging Arrangements, may be excluded from a Person's Debt. "LIBOR" means, for each week, the rate of interest per annum that is equal to the arithmetic mean of the U.S. Dollar London Interbank Offered Rates for 1 month periods of certain U.S. banks as of 11:00 a.m. (London time) on the first Business Day of each week on which the London Interbank market is open, as published by Bloomberg L.P. If those interest rates are not offered or published for any period, then during that period LIBOR means the London Interbank Offered Rate for 1 month periods as published in The Wall Street Journal in its regular column entitled "Money Rates" on the first Business Day of each week on which the London Interbank market is open. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature of such an agreement and any agreement to give any security interest). "Liquid Assets" means the following assets owned by a Person as of any date of determination: (a) unrestricted and unencumbered cash, funds on deposit in any bank located in the United States, investment grade commercial paper, money market funds, or marketable securities; and (b) the excess, if any, of Mortgage Loans and Mortgage-backed Securities held for sale (valued in accordance with GAAP) over the outstanding aggregate principal amount of any Debt against which those Mortgage Loans or Mortgage-backed Securities are pledged as collateral. "Liquidity Ratio" means the ratio of a Person's (and, if applicable, the Person's Subsidiaries, on a consolidated basis) Liquid Assets to Tangible Net Worth. "Loan Documents" means this Agreement, the Warehousing Note, the Guaranty, any agreement of Borrower relating to Subordinated Debt, any Security Agreement, if applicable, and each other document, instrument or agreement executed by Borrower in connection with any of those documents, instruments and agreements, as originally executed or as any of the same may be amended, restated, renewed or replaced. "Loan Package Fee " has the meaning set forth in Section 3.5. "Loan-to-Value Ratio" means, for any Mortgage Loan, the ratio of (a) the maximum amount that may be borrowed under the Mortgage Loan (whether or not borrowed) at the time of origination, II? us the Mortgage Note Amounts of all other Mortgage Loans secured by the related Property, to (b) the Appraised Property Value of the related Property. "Manufactured Home" means a structure that is built on a permanent chassis (steel frame) with the wheel assembly necessary for transportation in one or more sections to a permanent site or semi-permanent site. "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System, as amended. "MERS" means Mortgage Electronic Registrations Systems, Inc. and any successor entity. "Miscellaneous Fees and Charges" means the miscellaneous fees set forth on Lender's collateral operations fees schedule (either as originally delivered to Borrower or as it may be amended, restated, renewed or replaced after the date of this Agreement) and all miscellaneous disbursements, charges and expenses incurred by or on behalf of Lender for the handling and administration of Warehousing Advances and Collateral, including costs for Uniform Commercial Code, tax lien and judgment searches conducted by Lender, filing fees, charges for wire transfers and check processing charges, charges for security delivery fees, charges for overnight delivery of Collateral to Investors, Funding Bank service fees and overdraft charges and Designated Bank Charges. "Mortgage" means a mortgage or deed of trust on real property that is improved and substantially completed (including real property to which a Manufactured Home has been affixed in a manner such that the Lien of a mortgage or deed of trust would attach to the Manufactured Home under applicable real property law). "Mortgage-backed Securities" means securities that are secured or otherwise backed by Mortgage Loans. "Mortgage Loan" means any loan evidenced by a Mortgage Note and secured by a Mortgage and, if applicable, a Security Agreement. "Mortgage Note" means a promissory note secured by one or more Mortgages and, if applicable, one or more Security Agreements. "Mortgage Note Amount" means, as of any date of determination, the then outstanding and unpaid principal amount of a Mortgage Note (whether or not an additional amount is available to be drawn under that Mortgage Note). "Mortgage Pool" means a pool of one or more Pledged Loans on the basis of which a Mortgage-backed Security is to be issued. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, to which either Borrower or any ERISA Affiliate of Borrower has any obligation with respect to its employees. "Non-performing Mortgage Loan" means a Mortgage Loan with respect to which any payment of principal or interest is more than 60 days delinquent, but which is not in the process of foreclosure. "Non-Usage Fee" has the meaning set forth in Section 3.4. "Notices" has the meaning set forth in Section 11.1. "Obligations" means all indebtedness, obligations and liabilities of Borrower to Lender and Lender's Subsidiaries (whether now existing or arising after the date of this Agreement, voluntary or involuntary, joint or several, direct or indirect, absolute or contingent, liquidated or unliquidated, or decreased or extinguished and later increased and however created or incurred), including Borrower's obligations and liabilities to Lender under the Loan Documents and disbursements made by Lender for Borrower's account. "Operating Account" means a demand deposit account maintained at the Funding Bank in Borrower's name and designated for funding that portion of each Eligible Loan not funded by a Warehousing Advance made against that Eligible Loan and for returning any excess payment from an Investor for a Pledged Loan or Pledged Security. "Overdraft Advance" has the meaning set forth in Section 3.9. "Participant" has the meaning set forth in Section 11.8. "Performing Mortgage Loan" means a Mortgage Loan that is current as to all payments of principal and interest and which is not a Sub-performing Mortgage Loan. "Person" means and includes natural persons, corporations, limited liability companies, limited liability partnerships, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions of those governments. "Plan" means each employee benefit plan (whether in existence on the date of this Agreement or established after that date), as that term is defined in Section 3 of ERISA, maintained for the benefit of directors, officers or employees of Borrower or any ERISA Affiliate. "Pledged Assets" means, collectively, Pledged Loans, and Pledged Securities. "Pledged Hedging Accounts" has the meaning set forth in Section 4.1 (g). "Pledged Hedging Arrangements" has the meaning set forth in Section 4.1 (g). "Pledged Loans" has the meaning set forth in Section 4.1 (b). "Pledged Securities" has the meaning set forth in Section 4.1 (c). "Prime Mortgage Loan" has the meaning set forth in Exhibit H. "Prohibited Transaction" has the meanings set forth for such term in Section 4975 of the Internal Revenue Code and Section 406 of ERISA. "Purchase Commitment" means a written commitment, in form and substance satisfactory to Lender, issued in favor of Borrower by an Investor under which that Investor commits to purchase Mortgage Loans or Mortgage-backed Securities. "Release Amount" has the meaning set forth in Section 4.3 (f). "RFC Base Rate" means the greater of LIBOR or 2.25% per annum. "RFConnects Delivery" means Lender's proprietary service to support the electronic exchange of information between Lender and Borrower, including Advance Requests, shipping requests, payoff requests, activity reports and exception reports. \ "RFConnects Pledge Agreement" means an agreement (on the then current form prescribed by Lender) granting Lender a security interest in Mortgage Loans for which Borrower has requested Warehousing Advances using RFConnects Delivery. "Second Mortgage" means a Mortgage that constitutes a second Lien on the property covered by the Mortgage. "Second Mortgage Loan" means a Mortgage Loan secured by a Second Mortgage. "Security Agreement" means a security agreement or other agreement that creates a Lien on personal property, including furniture, fixtures and equipment, to secure repayment of a Mortgage Loan. "Servicing Contract" means, with respect to any Person, the arrangement, whether or not in writing, under which that Person has the right to service Mortgage Loans. "Servicing Portfolio" means, as to any Person, the unpaid principal balance of Mortgage Loans serviced by that Person under Servicing Contracts, minus the principal balance of all Mortgage Loans that are serviced by that Person for others under subservicing arrangements. "Standard Warehouse Period" means, for any Mortgage Loan, the maximum number of days a Warehousing Advance against that type of Mortgage Loan, other than against an Aged Mortgage Loan, may remain outstanding, as set forth in Exhibit H. "Statement Date" means the Audited Statement Date or the Interim Statement Date, as applicable. "Sublimit" means the aggregate amount of Warehousing Advances (expressed as a dollar amount or as a percentage of the Warehousing Commitment Amount) that is permitted to be outstanding at any one time against a specific type of Eligible Loan. "Subordinated Debt" means (a) all indebtedness of Borrower for borrowed money that is effectively subordinated in right of payment to all present and future Obligations either (1) under a Subordination of Debt Agreement on the form prescribed by Lender or (2) otherwise on terms acceptable to Lender, and (b) solely for purposes of Section 8.5, all indebtedness of Borrower that is required to be subordinated by Sections 5.1 (b) and 7.10. "Sub-performing Mortgage Loan" means a Mortgage Loan that is current as to principal and interest for the most recently required payment under the Mortgage Note, past due with respect to previous payments of principal and/or interest, which may be subject to a forbearance agreement for missed payments, or the documentation for the Mortgage Loan has been modified. "Subsidiary" means any corporation, partnership, association or other business entity in which more than 50% of the shares of stock or other ownership interests having voting power for the election of directors, managers, trustees or other Persons performing similar functions is at the time owned or controlled by any Person either directly or indirectly through one or more Subsidiaries of that Person. "Tangible Net Worth" means the excess of a Person's (and, if applicable, the Person's Subsidiaries, on a consolidated basis) total assets over total liabilities as of the date of determination, each determined in accordance with GAAP applied in a manner consistent with the financial statements referred to in Section 5.1 (a)(6), plus that portion of Subordinated Debt not due within 1 year of that date. For purposes of calculating a Person's Tangible Net Worth, advances or loans to shareholders, directors, officers, employees or Affiliates investments in Affiliates, assets pledged to secure any liabilities not included in the Debt of the Person, intangible assets, those other assets that would be deemed by HUD to be non-acceptable in calculating adjusted net worth in accordance with its requirements in effect as of that date, as those requirements appear "Consolidated Audit Guide for Audits of HUD Programs," and other assets Lender deems unacceptable, in its sole discretion, must be excluded from a Person's total assets. "Third Party Originated Loan" means a Mortgage Loan originated and funded by a third party (other than with funds provided by Borrower at closing to purchase the Mortgage Loan) and subsequently purchased by Borrower. "Trust Receipt" means a trust receipt in a form approved by and under which Lender may deliver any document relating to the Collateral to Borrower for correction or completion. "Unused Portion" has the meaning set forth in Section 3.4. "Used Portion" has the meaning set forth in Section 3.4. "Warehousing Advance" means a disbursement by Lender under the Warehousing Commitment. "Warehousing Advance Request" has the meaning set forth in Section 2.1. "Warehousing Collateral Value" means, as of any date of determination, (a) with respect to any Eligible Loan, the lesser of (1) the amount of any Warehousing Advance made, or that could be made, against such Eligible Loan under Exhibit H or (2) an amount equal to the Advance Rate for the applicable type of Eligible Loan multiplied by the Fair Market Value of such Eligible Loan; (b) if Eligible Loans have been exchanged for Agency Securities, the lesser of (1) the amount of any Warehousing Advances outstanding against the Eligible Loans backing the Agency Securities or (2) the Fair Market Value of the Agency Securities; and (c) with respect to cash, the amount of the cash. "Warehousing Commitment" means the obligation of Lender to make Warehousing Advances to Borrower under Section 1.1. "Warehousing Commitment Amount" means $40,000,000. "Warehousing Fee" has the meaning set forth in Section 3.7. "Warehousing Maturity Date" has the meaning set forth in Section 1.2. "Warehousing Note" has the meaning set forth in Section 1.3. "Wire Disbursement Account" means a demand deposit account maintained at the Funding Bank in Lender's name for clearing wire transfers requested by Borrower to fund Warehousing Advances. "Wire Fee" has the meaning set forth in Section 3.7. 12.2. Other Definitional Provisions; Terms of Construction 12.2 (a) Accounting terms not otherwise defined in this Agreement have the meanings given to those terms under GAAP. 12.2 (b) Defined terms may be used in the singular or the plural, as the context requires. 12.2 (c) All references to time of day mean the then applicable time in Chicago, Illinois, unless otherwise expressly provided. 12.2 (d) References to Sections, Exhibits, Schedules and like references are to Sections, Exhibits, Schedules and the like of this Agreement unless otherwise expressly provided. 12.2 (e) The words "include," "includes" and "including" are deemed to be followed by the phrase "without limitation." 12.2 (f) Unless the context in which it is used otherwise clearly requires, the word "or" has the inclusive meaning represented by the phrase "and/or." 12.2 (g) All incorporations by reference of provisions from other agreements are incorporated as if such provisions were fully set forth into this Agreement, and include all necessary definitions and related provisions from those other agreements. All provisions from other agreements incorporated into this Agreement by reference survive any termination of those other agreements until the Obligations of Borrower under this Agreement and the Warehousing Note are irrevocably paid in full and the Warehousing Commitment is terminated. 12.2 (h) All references to the Uniform Commercial Code shall be deemed to be references to the Uniform Commercial Code in effect on the date of this Agreement in the applicable jurisdiction. 12.2 (i) Unless the context in which it is used otherwise clearly requires, all references to days, weeks and months mean calendar days, weeks and months. End of Article 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. MATRIX CAPITAL MARKETS, INC., a Colorado corporation By: --------------------------------------- Its: -------------------------------------- RESIDENTIAL FUNDING CORPORATION, a Delaware Corporation By: --------------------------------------- Its: Director EX-10.2 4 firstamdwarehouse.txt - -------------------------------------------------------------------------------- FIRST AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- FIRST AMENDMENT TO WAREHOUSING CREDIT AND SECURITY AGREEMENT (this "Amendment") dated as of May ___, 2002, between Matrix Capital Markets, Inc., a Colorado corporation ("Borrower") and RESIDENTIAL FUNDING CORPORATION, a Delaware corporation ("Lender"). A. Borrower and Lender have entered into a revolving mortgage warehousing facility with a present Warehousing Commitment Amount of $40,000,000, which is evidenced by a Promissory Note dated March 29, 2002 (the "Note"), and by a Warehousing Credit and Security Agreement dated as of March 29, 2002 (as the same may have been and may be amended or supplemented, the "Agreement"). B. Borrower has requested that Lender amend certain terms of the Agreement, and Lender has agreed to such amendments, subject to the terms and conditions of this Amendment. NOW, THEREFORE, the parties to this Amendment agree as follows: 1. Subject to Borrower's satisfaction of the conditions set forth in Section 17, the effective date of this Amendment is ______________ ("Effective Date"). 2. Unless otherwise defined in this Amendment, all capitalized terms have the meanings given to those terms in the Agreement. Defined terms may be used in the singular or the plural, as the context requires. The words "include," "includes" and "including" are deemed to be followed by the phrase "without limitation." Unless the context in which it is used otherwise clearly requires, the word "or" has the inclusive meaning represented by the phrase "and/or." References to Sections and Exhibits are to Sections and Exhibits of this Amendment unless otherwise expressly provided. 3. Exhibit A to the Agreement is amended and restated in its entirety as set forth in Exhibit A to this Amendment. All references in the Agreement and the other Loan Documents to Exhibit A are deemed to refer to the new Exhibit A. 4. Borrower must deliver to Lender (a) two executed copies of this Amendment, (b) a Certificate of Secretary with corporate resolutions, and (c) a $350 document production fee. 5. Borrower represents, warrants and agrees that (a) there exists no Default or Event of Default under the Loan Documents, (b) the Loan Documents continue to be the legal, valid and binding agreements and obligations of Borrower, enforceable in accordance with their terms, as modified this Amendment, (c) Lender is not in default under any of the Loan Documents and Borrower has no offset or defense to its performance or obligations under any of the Loan Documents, (d) except for changes permitted by the terms of the Agreement, Borrower's representations and warranties contained in the Loan Documents are true, accurate and complete in all respects as of the Effective Date and (e) there has been no material adverse change in Borrower's financial condition from the date of the Agreement to the Effective Date. 6. Except as expressly modified, the Agreement is unchanged and remains in full force and effect, and Borrower ratifies and reaffirms all of its obligations under the Agreement and the other Loan Documents. 1 7. This Amendment may be executed in any number of counterparts, each of which will be deemed an original, but all of which shall together constitute but one and the same instrument. IN WITNESS WHEREOF, Borrower and Lender have caused this Amendment to be duly executed on their behalf by their duly authorized officers as of the day and year above written. Matrix Capital Markets, Inc., a Colorado corporation By: -------------------------------------------- Its: ------------------------------------------- RESIDENTIAL FUNDING CORPORATION, a Delaware corporation By: -------------------------------------------- Its: ------------------------------------------- 2 CONSENT OF GUARANTOR - -------------------------------------------------------------------------------- The undersigned, being the Guarantor under a Guaranty dated March 29, 2002 (the "Guaranty"), consents to the foregoing Amendment and the transactions contemplated by it, and ratifies and reaffirms its obligations under the Guaranty include within the term "Guaranteed Debt" the indebtedness, obligations and liabilities of Borrower under this Amendment, the Agreement as modified by this Amendment, the Note and the other Loan Documents. The Guarantor hereby reaffirms that its obligations under the Guaranty are separate and distinct from Borrower's obligations to Lender, and that its obligations under the Guaranty are in full force and effect. Finally, the Guarantor waives and agrees not to assert any anti-deficiency protections or other rights as a defense to its obligations under the Guaranty, all as set forth in the Guaranty, the terms of which are incorporated into this Consent as if fully set forth in it. Dated: ______________ Matrix Bancorp, Inc., a Colorado corporation By: ----------------------------------- Its: ---------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----