-----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, Oj0hBjsa8beEeil9IMxbYdDFAll0cqFDS/Ox8XzvEPSrnk7tVavIq2QdvxbPjFBi UIZtyskQ97617ja8ersk8w== 0000899078-04-000216.txt : 20040312 0000899078-04-000216.hdr.sgml : 20040312 20040312170211 ACCESSION NUMBER: 0000899078-04-000216 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040312 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21231 FILM NUMBER: 04666809 MAIL ADDRESS: STREET 1: 700 17TH STREET STREET 2: SUITE 2100 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: MATRIX CAPITAL CORP /CO/ DATE OF NAME CHANGE: 19960711 10-K 1 matrixbancorp2003form10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 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.) 700 17th Street, Suite 2100 Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share Preferred Share Purchase Rights (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x] As of March 9, 2004, 6,518,981 shares of common stock were outstanding. The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing sales price of such stock on the NASDAQ National Market on June 30, 2003 was $22,756,700. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held May 14, 2004 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS Page ---- PART I Item 1. Business..............................................................................................1 Item 2. Properties...........................................................................................24 Item 3. Legal Proceedings....................................................................................24 Item 4. Submission of Matters to a Vote of Security Holders..................................................27 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....................................................................................28 Item 6. Selected Financial Data..............................................................................29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................30 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........................................52 Item 8. Financial Statements and Supplementary Data..........................................................52 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................52 Item 9A. Controls and Procedures..............................................................................52 PART III Item 10. Directors and Executive Officers of the Registrant...................................................53 Item 11. Executive Compensation...............................................................................53 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.......53 Item 13. Certain Relationships and Related Transactions.......................................................53 Item 14. Principal Accountant Fees and Services...............................................................53 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................53
PART I Item 1. Business -------- Matrix Bancorp, Inc. 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, trust and clearing activities, lending activities, mortgage banking 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 loans; offering brokerage, consulting and analytical services to financial services companies and financial institutions; servicing residential mortgage portfolios for investors; 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 a limited amount of financing to charter schools for the purchase of school sites and equipment. Other fee-based services also include nationwide real estate management and disposition services provided to financial service companies and financial institutions. Matrix Bancorp was incorporated in Colorado in June 1993 and was formerly called "Matrix Capital Corporation." The trading symbol for our common stock on The NASDAQ National Market is "MTXC." Discontinued Operations On February 28, 2003, Matrix Capital Bank and Matrix Financial Services Corporation entered into a Purchase and Assumption Agreement, as amended (the "Purchase Agreement") to sell substantially all of Matrix Financial's assets associated with its wholesale mortgage origination platform (the "Platform") to AmPro Mortgage Corporation ("AmPro" or the "Buyer"). On September 2, 2003, the Company announced the final closing and substantial completion of the sale by Matrix Bank and Matrix Financial of substantially all of its assets associated with its wholesale mortgage origination platform. The effective sale date for accounting purposes was August 31, 2003. Included in the sale were the wholesale production offices, the back office personnel that processed the loan originations and a significant portion of the corporate operations and personnel. After the sale, our remaining operations at Matrix Financial consist of our mortgage servicing platform, where we service loans for ourselves and third parties. As a result of the sale, the Company recorded an after tax loss on the sale of the Platform of $(2.7) million, or $(0.43) per diluted share, which is included in the income from discontinued operations of $3.3 million, net of tax effect, on the consolidated statements of operations for the year ended December 31, 2003. For comparative purposes, the operating income of the discontinued production platform is reflected in discontinued operations beginning in the first quarter of 2001, and the consolidated financial statements have been restated to reflect the production platform as a discontinued operation. For further discussion and detail of the accounting for, and effects of, the sale of the Platform, see Note 3 to the consolidated financial statements included elsewhere in this document. Prior to and at the time of the signing of the Purchase Agreement, and throughout the period from signing of the Purchase Agreement through the Final Closing Date (the "Transition Period"), Matrix Bank provided a warehouse line of credit for substantially all of the loans originated by the Platform. At the end of the Transition Period, the Buyer was required to utilize third party financings to fund new originations by the buyer and the warehouse line was required to be paid-off. With the warehouse line paid-off, Matrix Bank had a significant amount of liquidity to re-invest, which has been re-invested primarily in bulk loan portfolios of adjustable rate loans, guaranteed portions of Small Business Administration ("SBA") loans and mortgaged-backed securities. For a period of two years from February 28, 2003, Matrix Bank has agreed that neither Matrix Bank nor any of its affiliates will engage in, directly or indirectly, the single-family retail or wholesale mortgage origination business in those states in which the acquired division operated or was located as of such date. However, this non-compete provision does not prohibit Matrix Bank or its affiliates from engaging in such business in order to comply with applicable law, rule, regulation, directive, agreement or order from the Office of Thrift Supervision ("OTS") or another party where it is 3 necessary to resolve regulatory or supervisory concerns. Additionally, the non-compete provision does not apply in the event of a change in control of Matrix Bank or the Company. Sale of Matrix Capital Bank Branches On January 30, 2004, Matrix Bank entered into definitive agreement to sell its two branches in Las Cruces, New Mexico to FirstBank, a subsidiary of Access Anytime BanCorp, Inc. The sale is subject to regulatory approval and other customary conditions, and is expected to be completed in the second quarter of 2004. The sale will include deposits of the Las Cruces branches that totaled approximately $84.1 million at December 31, 2003, and loans of approximately $23.8 million at December 31, 2003. The sale will allow us to reduce costs associated with the operations of the retail branch locations, and will provide us the opportunity to focus our efforts on pursuing additional institutional depository relationships, in line with our strategic plan. The sale of the branches is not anticipated to significantly impact our operations or liquidity, or that of Matrix Bank. The Subsidiaries Our core business operations are conducted through the operating subsidiaries and an investment in a settlement and clearing operation described below. Matrix Capital Bank. With offices in Colorado, New Mexico and Arizona, Matrix Bank serves its local communities by providing a broad range of personal and business depository services, offering residential loans and commercial real estate loans, including Small Business Administration loans, and providing consumer loans. In 2002, Matrix Bank relocated its domicile from Las Cruces, New Mexico to Denver, Colorado where it offers all of its existing banking services in the Denver market. In connection with the relocation, a subsidiary of Matrix Bank, Matrix Tower Holdings, LLC, purchased a high rise building in downtown Denver, Colorado in June 2002, renamed Matrix Financial Center. In addition to Matrix Bank, the Company and several of its subsidiaries relocated their offices to Matrix Financial Center during 2002 and 2003. Matrix Bank holds the noninterest-bearing custodial escrow deposits related to the residential mortgage loan portfolio serviced by Matrix Financial Services Corporation, the interest-bearing money market accounts administered by Sterling Trust Company and the deposits resulting from transactions in which Matrix Bank acts as the clearing bank for clients of Matrix Settlement & Clearance Services, L.L.C., an equity method investment. These deposits, as well as other traditional deposits, are used primarily to fund bulk purchases of residential mortgage loan portfolios throughout the United States, a portion of which are serviced for Matrix Bank by Matrix Financial. As of December 31, 2003, Matrix Bank had total assets of $1.6 billion. Matrix Bank and several of our other subsidiaries have significant experience in purchasing mortgage loans, originating multi-family and other loans secured by real estate, including Small Business Administration loans, have familiarity with real estate markets throughout the United States and have traditionally had access to low-cost deposits. We believe that the resulting knowledge and activities permit Matrix Bank to manage its funding and capital position in a way that enhances its performance. Matrix Financial Services Corporation. Matrix Financial, which is a wholly owned subsidiary of Matrix Bank, historically has acquired mortgage servicing rights on a nationwide basis through purchases in the secondary market, has retained originated mortgage servicing rights, and services the loans underlying the purchased mortgage servicing rights and a portion of our originated mortgage servicing rights. As of December 31, 2003, Matrix Financial serviced over 50,000 borrower accounts representing $3.2 billion in principal balances, excluding $176.9 million in subservicing for companies that are unaffiliated with us. As a servicer of mortgage loans, Matrix Financial generally is required to establish custodial escrow accounts for the deposit of borrowers' payments. These custodial accounts are maintained at Matrix Bank. At December 31, 2003, the custodial escrow accounts related to our servicing portfolio maintained at Matrix Bank were $85.5 million. Prior to the sale of the production platform as discussed in "Item 1. Business--Discontinued Operations", Matrix Financial originated residential mortgage loans through its wholesale loan origination network, with offices located in Atlanta, Dallas, Denver, Houston, Jacksonville, Phoenix, Sacramento, Santa Ana and St. Louis. The mortgage loans originated by Matrix Financial were retained and sold in the secondary market. Prior to the sale of the production platform, 4 for the period January 1, 2003 through February 28, 2003, Matrix Financial originated $758.9 million in residential mortgage loans. Matrix Bancorp Trading, Inc. Matrix Bancorp Trading, formerly known as Matrix Capital Markets, Inc., provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry. These services include: o the brokering, acquisition and analysis of loans; o the brokering, analysis and sales of residential mortgage loan servicing rights; o mortgage loan servicing portfolio valuations, which includes the "mark-to-market" valuation and analysis required under Statements of Financial Accounting Standards No. 133 and No. 140; and o to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Matrix Bancorp Trading's volume of brokerage activity and the expertise of its analytics department gives us access to a wide array of information relating to the mortgage banking industry, including emerging market trends, prevailing market prices, pending regulatory changes and changes in levels of supply and demand. Consequently, we are often able to identify certain types of mortgage loans that are well suited to our particular servicing platform, investment objectives and unique corporate structure. First Matrix Investment Services Corporation. First Matrix, which became a wholly owned subsidiary of Matrix Bancorp Trading in October 2001, is registered with the National Association of Securities Dealers ("NASD") as a fully disclosed broker-dealer, with its headquarters in Denver, Colorado and branch offices in Fort Worth, Texas and Memphis, Tennessee. First Matrix offers brokerage services related to a wide range of investment options for both individual and institutional investors, including stocks, bonds, mutual funds and fixed income and debt securities. The Fort Worth office focuses primarily on long-term investing and retirement planning for individuals. The Denver office works primarily with financial institutions in managing their investment portfolios. The Memphis office focuses on the acquisition, brokering, securitization and sale of SBA loans and loan pools. SBA loans are acquired by Matrix Bank through the brokerage activities of First Matrix. Matrix Asset Management Corporation. Matrix Asset Management provides nationwide real estate management and disposition services on foreclosed properties owned by financial services companies, mortgage companies and financial institutions. In addition to the unaffiliated clients currently served by Matrix Asset Management, Matrix Bank and Matrix Financial utilize Matrix Asset Management to handle the disposition of foreclosed real estate for which it is responsible as servicer. As of December 31, 2003, Matrix Asset Management had approximately 3,200 foreclosed properties under its management. Matrix Asset Management also provides limited collateral valuation opinions to clients that are interested in assessing the value of the collateral underlying mortgage loans, as well as to clients such as Matrix Bank and other third party mortgage loan buyers evaluating potential bulk purchases of mortgage loans. During 2003, Matrix Asset Management began operations of an internet based business, reoSource, that allows buyers and agents to utilize the web to make offers on the foreclosed properties managed by Matrix Asset Management, and posted on the site by clients of Matrix Asset Management. Sterling Trust Company. Sterling Trust, headquartered in Waco, Texas, was incorporated in 1984 as a Texas non-bank trust company specializing in the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts. As of December 31, 2003, Sterling Trust administered approximately 36,000 accounts, with assets under administration of over $2.3 billion. As of December 31, 2003, approximately $179.0 million of the $2.3 billion represented money market deposits held at Matrix Bank. ABS School Services, L.L.C. ABS School Services (sometimes referred to hereafter collectively with its subsidiaries as "ABS") provides outsourced business services to charter schools, and operates under the name The GEO Group. Charter schools are public schools that are an alternative to traditional public schools. The primary services offered include fund accounting, cash management, budgeting, governmental reporting, payroll and accounts payable. The GEO Group also offers administrative and instructional leadership and consults with schools and offers assistance in the following areas: facility and safety management, technology, policy development, grant administration and comprehensive insurance 5 programs. Additionally, The GEO Group has a financing division, which offers a limited amount of financing to charter schools for the purchase of school sites and equipment. Matrix Settlement & Clearance Services, L.L.C. Matrix Settlement & Clearance Services is a joint venture in which we own a 45% equity interest. Matrix Settlement & Clearance Services provides automated clearing of mutual funds utilizing the National Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance & Settlement platform for banks, trust companies, third party administrators and registered investment advisors. Effective January 2, 2002, Matrix Settlement & Clearance Services' wholly owned subsidiary, MSCS Financial Services, LLC, began operations as a NASD registered broker-dealer. For the year ended December 31, 2003, Matrix Settlement & Clearance Services consolidated had $9.1 million of revenues and pre-tax net income of approximately $2.6 million. As of December 31, 2003, Matrix Settlement & Clearance Services had 126 customers under contract. These customers administer and trade through Matrix Settlement & Clearance Services approximately $26.2 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. Matrix Settlement & Clearance Services has developed relationships with several Matrix Bancorp subsidiaries to assist in the performance of services for its customers. For example, Matrix Bank, as the National Securities Clearing Corporation member, serves as the settlement bank for Fund/SERV transactions and provides banking services for certain Matrix Settlement & Clearance Services customers. This relationship helps generate low-cost deposits for Matrix Bank. As of December 31, 2003, Matrix Settlement & Clearance Services' customers had $85.3 million of deposits at Matrix Bank. In addition, many of Matrix Settlement & Clearance Services' customers require trust and custody services. As of December 31, 2003, Matrix Bank held in custody $11.0 billion of assets for customers of Matrix Settlement & Clearance Services. Please see Note 21 to the consolidated financial statements for further financial information about our subsidiaries. Lending Activities Purchase and Sale of Bulk Loan Portfolios. The majority of our assets consist of residential mortgage loans that we generally acquire through bulk acquisitions in the secondary market through Matrix Bank. We believe that our structure provides advantages over our competitors in the purchase of bulk mortgage loan packages. In particular: o Matrix Bancorp Trading, through its networking within the mortgage banking and financial services industries, is able to refer companies that are interested in selling mortgage loan portfolios directly to Matrix Bank. This direct contact reduces the number of portfolios that must be purchased through competitive bid situations, thereby reducing the cost associated with the acquisition of bulk residential mortgage loan portfolios; and o Matrix Bank's subsidiary, Matrix Financial, provides servicing advantages that a typical "stand-alone" community bank does not possess. Matrix Financial acts as a subservicer for a majority of Matrix Bank's mortgage loan portfolio. Because Matrix Financial services loans throughout the entire United States, Matrix Bank can acquire various types of loans secured by property located in any of the fifty states. Over 75% of the residential mortgage loans that Matrix Bank acquires are classified as held for sale. This accounting classification requires Matrix Bank to carry the loans classified as held for sale at the lower of aggregate cost or market value. The purchased loan portfolios typically include both fixed and adjustable rate mortgage loans. Although Matrix Bank reviews many loan portfolios for prospective acquisition, it focuses on acquiring first lien priority loans secured primarily by one-to-four single-family residential properties. To the extent that adjustable rate loans are available, Matrix Bank generally targets adjustable over fixed rate portfolios. Due to the accounting treatment required, we believe that the focus on adjustable rate loans generally reduces the effect of changing interest rates on the portfolio's market value. Matrix Bank purchases mortgage loan portfolios from various sellers who have either originated the loans or acquired the loan portfolios in bulk purchases. Matrix Bank considers several factors prior to a purchase. Among other factors, Matrix Bank considers the product type, the current loan balance, the current interest rate environment, the seasoning of the mortgage loans, payment histories, geographic location of the underlying collateral, price, yield, the current liquidity of Matrix Bank and the product mix in its existing mortgage loan portfolio. In the past, Matrix Bank has purchased nonperforming Federal Housing Administration ("FHA") and Veteran's Administration ("VA") loans from third party sellers, and currently Matrix Financial purchases all of the eligible delinquent FHA and VA loans out of its servicing portfolio. The Department of Housing and Urban Development ("HUD") generally guarantees the majority of principal and interest on these nonperforming loans. These loans are at fixed rates and have a 6 relatively short average life since the loans are typically liquidated through the foreclosure and subsequent claim process with HUD. As of December 31, 2003, we owned $12.2 million of these loans. Matrix Bank performs due diligence on each mortgage loan portfolio that it desires to purchase on a bulk basis. These procedures consist of analyzing a representative sample of the mortgage loans in the portfolio and are typically performed by Matrix Bank employees, but occasionally are outsourced to third party contractors. The underwriter takes into account many factors and statistics in analyzing the sample of mortgage loans in the subject portfolio, including: the general economic conditions in the geographic area or areas in which the underlying residential properties are located; the loan-to-value ratios on the underlying loans; and the payment histories of the borrowers. In addition, the underwriter attempts to verify that each sample loan conforms to the standards for loan documentation set by Fannie Mae and Freddie Mac. In cases where a significant portion of the sample loans contain nonconforming documentation, Matrix Bank assesses the additional risk involved in purchasing the loans. This process helps Matrix Bank determine whether the mortgage loan portfolio meets its investment criteria and, if it does, the range of pricing that is appropriate. Matrix Bank continually monitors the secondary market for purchases and sales of mortgage loan portfolios and typically undertakes a sale of a particular loan portfolio in an attempt to "match" an anticipated bulk purchase of a particular mortgage loan portfolio or to generate current period earnings and cash flow. To the extent that Matrix Bank is unsuccessful in matching its purchases and sales of mortgage loans, Matrix Bank may have excess capital, resulting in less leverage, potentially less interest income and higher capital ratios. During the year ended December 31, 2003, we made bulk purchases of mortgage loans of approximately $637.3 million. We made bulk sales of 1-4 family, multi-family and originated SBA loans of approximately $252.2 million for a net gain on sale of bulk mortgage loans of $12.0 million. Residential Mortgage Loan Origination. We originate residential mortgage loans on a retail basis through Matrix Bank, and prior to the sale of the production platform as discussed in "Item 1. Business--Discontinued Operations", on a wholesale and retail basis through Matrix Financial. Since August 31, 2003, we have not originated mortgage loans on a wholesale basis, with the exception of our participation in the New Mexico Housing Authority program, which was excluded from the sale of the production platform, and as noted in "Item 1. Business--Discontinued Operations", we have agreed with the Buyer not to compete in certain respects. Our participation in the New Mexico Housing Authority program is anticipated to terminate in the second quarter of 2004. Retail Originations. Matrix Bank originates residential loans on a retail basis through its branches in Las Cruces, New Mexico. Matrix Bank's lending office in Denver, Colorado primarily originates multi-family loans on a national basis, and residential construction loans and commercial loans in that local market place. Matrix Bank attempts to convert the construction loans funded through the Denver office into permanent mortgage loans. The retail loans originated by Matrix Bank consist of a broad range of residential loans, at both fixed and adjustable rates, consumer loans and commercial real estate loans. As discussed in "Item 1. Business--Sale of Matrix Capital Bank Branches", an agreement for the sale of the Matrix Bank branches in Las Cruces, New Mexico was entered into January 2004, subject to regulatory approval and other customary conditions. This sale, anticipated to be finalized in the second quarter of 2004, will eliminate our retail originations operations in New Mexico. Quality Control. We have a loan quality control process designed to ensure sound lending practices and compliance with Fannie Mae, Freddie Mac, Ginnie Mae and applicable private investor guidelines. Prior to funding any retail loan, we perform a verbal or written verification of employment as required by investor programs and utilize a detailed checklist to ensure accuracy of documentation. Sale of Originated Loans. We generally sell the residential mortgage loans that we originate. Prior to the sale of the Platform as discussed in "Item 1. Business--Discontinued Operations.", under programs established with Fannie Mae, Freddie Mac and Ginnie Mae, conforming conventional and government loans were sold on a cash basis or pooled by us and exchanged for securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We then sold those securities to national or regional broker-dealers. Mortgage loans sold to Fannie Mae, Freddie Mac or Ginnie Mae were sold on a nonrecourse basis, except for standard representations and warranties, so that foreclosure losses were generally borne by Fannie Mae, Freddie Mac or Ginnie Mae and not by us. Prior to the sale of the Production Platform, we also sold nonconforming and conforming residential mortgage loans on a nonrecourse basis to other secondary market investors. Currently, all of the originated residential loans, absent the 7 loans originated under the New Mexico Housing Authority Program, are sold under this method. Nonconforming loans are typically first lien mortgage loans that do not meet all of the agencies' underwriting guidelines, and are originated instead for other institutional investors with whom we have previously negotiated purchase commitments and for which we occasionally pay a fee. In the past, we sold residential mortgage loans on a servicing-retained or servicing-released basis. Currently, all loans are sold servicing released, with the exception of loans under the New Mexico Housing Authority program. See "Item 1. Mortgage Servicing Activities--Residential Mortgage Loan Servicing." In connection with our residential mortgage loan originations and sales, we make customary representations and warranties. Our past experience has been that giving such representations and warranties have not resulted in material repurchases. However, due to the increased originations activity that occurred in 2001 and 2002, we have experienced an increase in repurchases. The Company has provided a reserve for anticipated losses related to the representations and warranties. There can be no assurance that we will not be required to make a significant repurchase in the future or that losses will not occur in the future due to the representations and warranties made. We remain responsible for all loans originated through the Platform through February 28, 2003, as discussed in "Item 1. Business--Discontinued Operations." The sale of mortgage loans may generate a gain or loss for us. Gains or losses result primarily from two factors. First, we may make a loan to a borrower at a rate resulting in a price that is higher or lower than we would receive if we had immediately sold the loan in the secondary market. These price differences occur primarily as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses may result from changes in interest rates that consequently change the market value of the mortgage loans. The change in the market value of the mortgage loans may occur after the price commitment is given to the borrower and before the time that the mortgage loan is sold to the investor. Net gains and losses on Production Platform originated loans are recorded in net income from discontinued operations, and net gains and losses on all other originated loans are recorded in gain or loss on sale of loans and securities. Commercial and Other Lending. We have sought to diversify and enhance the yield of our loan portfolio by originating multi-family, commercial and, to a lesser extent, consumer loans and by offering a full range of lending products to our customers. The Company offers a variety of commercial loan products, including: single-family construction loans; commercial real estate loans; business and SBA loans; and a limited amount of financing to charter schools for the purchase of real estate and equipment. Matrix Bank's loan production office in Denver, Colorado principally originates single-family construction and commercial real estate loans. Matrix Bank's office in Las Cruces, New Mexico also originates a portion of these loans. Matrix Bank's small business lending division, headquartered in Denver, Colorado, offers the following loan products: SBA 7a loans; first trust deed loans through the SBA 504 program; first trust deed companion loans senior to SBA 7a loans; and Business and Industry Guaranteed Loans offered through the United States Department of Agriculture, as well as certain secondary market qualified conventional lending. Matrix Bank has been a SBA Preferred provider in the Colorado market area since 1999, and was awarded expansion of that designation into New Mexico, Utah, Arizona, Oregon, Washington, Idaho and Texas. Preferred lender status allows Matrix Bank delegated authority to approve SBA guaranteed loan applications without prior review from the SBA, in most cases, thereby accelerating the approval process for small business loan applications. Preferred lenders also are granted unilateral servicing powers over the term of those loans. During 2003, Matrix Bank originated $33.0 million in SBA loans. Matrix Bank generally limits its commercial lending to income-producing real estate properties. The repayment of loans collateralized by income-producing properties depends upon the successful operation of the related real estate property and also on the credit and net worth of the borrower. Thus, repayment is subject to the profitable operation of the borrower's business, conditions in the real estate market, interest rate levels and overall economic conditions. Loans on income-producing properties must generally meet internal underwriting guidelines that include: a limit on the loan-to-value ratio of 75%; a review of the borrower with regard to management talent, integrity, experience and available financial resources; and, in most instances, a personal guarantee from the borrower. Matrix Bank originates loans to builders for the construction of single-family properties, and to a lesser extent, for the acquisition and development of improved residential lots. Matrix Bank generally makes these loans on commitment terms that last from nine to eighteen months and typically adjust with the prime rate of interest. In many cases, the residential properties have been pre-sold to the homeowner. It is generally considered that construction lending involves a higher level 8 of risk than secured lending on existing properties because the properties securing construction loans are usually more speculative and more difficult to evaluate and monitor. Matrix Bank originates loans on multi-family residential properties. The properties are located throughout the United States and are generally on properties of between 5 to 150 units. In 2003, Matrix Bank originated over $41.0 million of multi-family loans and sold $31.0 million of multi-family loans. At December 31, 2003, Matrix Bank had a multi-family loan portfolio of approximately $58.0 million. In addition to origination, Matrix Bank also buys participations in commercial real estate loans primarily from banks located in the Colorado market. The loans that we acquire through participations are underwritten with the same diligence and standards as though we were originating them directly. ABS offers limited financing to charter schools located primarily in Arizona, Colorado, Missouri, Florida and Texas for the purchase of real estate, modular space and equipment. The offered financing is generally fully amortizing and completed on a tax-exempt basis. On occasion, we also provide cash flow loans to charter schools. During 2003, we began limiting to a large degree the financing activities at ABS. We expect this trend to continue for the foreseeable future because our objective is to reduce the overall size of our charter school loan portfolio. As of December 31, 2003, we had a total of $46.8 million loans outstanding to charter schools. Charter school financing involves inherent risks such as: o the loan-to-value ratio for real estate transactions can be as high as 100% and for furniture, fixtures and equipment and modular space it is 100%; o there are generally no personal guarantees; and o cash flow to service the financing is derived from the school's student enrollment. If the school's student enrollment decreases, or is less than projected, the school's ability to make scheduled payments on the financing may be impaired. In addition, Matrix Bank offers a variety of lending products to meet the specific needs of its customers. These products include fully amortizing secured installment loans, manufactured housing financing, credit card programs, home equity loans, business loans and share loans. In addition to the secured consumer loans, Matrix Bank extends unsecured loans, on a limited basis, to qualified borrowers based on their financial statements and creditworthiness. Matrix Bank originates the majority of its consumer lending within the Las Cruces, New Mexico market area. Mortgage Servicing Activities Residential Mortgage Loan Servicing. We conduct our residential mortgage loan servicing activities exclusively through Matrix Financial including the residential mortgage loan servicing that Matrix Financial provides as subservicer for Matrix Bank's servicing portfolio. At December 31, 2003, Matrix Financial serviced approximately $3.2 billion of mortgage loans, excluding $176.9 million subserviced for companies that are not affiliated with us. Servicing mortgage loans involves a contractual right to receive a fee for processing and administering loan payments. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. These payments are held in custodial escrow accounts at Matrix Bank. Matrix Bank invests this money in interest-earning assets with returns that historically have been greater than could be realized by Matrix Financial using the custodial escrow deposits as compensating balances to reduce the effective borrowing cost on its warehouse credit facilities. As compensation for its mortgage servicing activities, Matrix Financial receives servicing fees, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of default by the borrower, Matrix Financial receives no servicing fees until the default is cured. At December 31, 2003, Matrix Financial's annual weighted-average servicing fee, including ancillary fees, was 0.50%. Servicing is provided on mortgage loans on a recourse or nonrecourse basis. Our policy is to accept only a limited number of servicing assets on a recourse basis. As of December 31, 2003, on the basis of outstanding principal balances, approximately 1.16% of our owned mortgage servicing contracts involved recourse servicing. To the extent that servicing is done on a recourse basis, we are exposed to credit risk with respect to the underlying loan in the event of a repurchase. Additionally, many of our nonrecourse mortgage servicing contracts owned require us to advance all or part of the scheduled payments to the owner of the mortgage loan in the event of a default by the borrower. Many owners of 9 mortgage loans also require the servicer to advance insurance premiums and tax payments on schedule even though sufficient escrow funds may not be available. Therefore, we must bear the funding costs associated with making such advances. If the delinquent loan does not become current, these advances are typically recovered at the time of the foreclosure sale. Foreclosure expenses, which may include legal fees or property maintenance, are generally not fully reimbursable by Fannie Mae, Freddie Mac or Ginnie Mae, for which agencies we provide significant amounts of mortgage loan servicing. As of December 31, 2003, we had advanced approximately $12.9 million in funds on behalf of third party investors. For the VA loans sold and serviced for Ginnie Mae, which are sold on a nonrecourse basis, the VA loan guarantees may not cover the entire principal balance and, in that case, we are responsible for the losses which exceed the VA's guarantee. Estimated losses related to foreclosure are estimated and reserved for, and included in the consolidated financial statements. Mortgage servicing rights represent a contractual right to service, and not a beneficial ownership interest in, underlying mortgage loans. Failure to service the loans in accordance with contract or other applicable requirements may lead to the termination of the mortgage servicing rights and the loss of future servicing fees. To date, there have been no terminations of mortgage servicing rights by any mortgage loan owners because of our failure to service the loans in accordance with our obligations. In order to track information on our servicing portfolio, Matrix Financial utilizes a data processing system provided by Fidelity Information Services, formerly known as Alltel Information Services, Inc. Because Fidelity Information Services is one of the largest mortgage banking service bureaus in the United States, we believe that this system gives Matrix Financial capacity to support our residential mortgage loan servicing portfolio. The following table sets forth certain information regarding the composition of our mortgage servicing portfolio, excluding loans subserviced for others, as of the dates indicated:
As of December 31, --------------------------------------------------- 2003 2002 2001 -------------- -------------- ---------------- (In thousands) FHA insured/VA guaranteed residential........................ $ 1,318,485 $ 2,128,363 $ 2,187,686 Conventional loans 1,742,096 3,053,368 3,272,109 Other loans.................................................. 122,955 151,896 196,570 ------------ -------------- --------------- Total mortgage servicing portfolio...................... $ 3,183,536 $ 5,333,627 $ 5,656,365 =============== ============== =============== Fixed rate loans............................................. $ 2,697,892 $ 4,688,672 $ 5,009,501 Adjustable rate loans........................................ 485,644 644,955 646,864 --------------- -------------- --------------- Total mortgage servicing portfolio...................... $ 3,183,536 $ 5,333,627 $ 5,656,365 =============== ============== ===============
The following table shows the delinquency statistics for the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, as of the dates presented. Delinquencies and foreclosures for the mortgage loans serviced by us generally exceed the national average due to high rates of delinquencies and foreclosures on certain bulk loan and bulk servicing portfolios. The higher levels of delinquencies result in a higher cost of servicing, however, a portion of the higher cost is offset by the collection of late fees.
As of December 31, --------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------ -------------------------------- ----------------------------- Number Percentage Number Percentage Number Percentage of of Servicing of of Servicing of of Servicing Loans Portfolio Loans Portfolio Loans Portfolio ------------- ---------------- ------------- ----------------- ------------- -------------- Loans delinquent for: 30-59 days.......... 3,366 6.62 4,276 5.65 4,610 5.35 60-89 days.......... 1,018 2.00 1,021 1.35 932 1.08 90 days and over.... 1,433 2.82 647 0.86 616 0.72 ------------- -------------- ------------- --------------- ------------- -------------- Total delinquencies. 5,817 11.44 5,944 7.86 6,158 7.15 ============= ============== ============= =============== ============= ============== Foreclosures........ 438 0.86 540 0.71 757 0.88 ============= ============== ============= =============== ============= ==============
The following table sets forth certain information regarding the number and aggregate principal balance of the mortgage loans serviced by Matrix Financial, including both fixed and adjustable rate loans, excluding loans subserviced for others, at various interest rates: 10
As of December 31, ----------------------------------------------------------------------------------------------------------- 2003 2002 2001 ----------------------------------- ----------------------------------------------------------------------- Percentage Percentage Percentage Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate Rate of Principal Principal of Principal Principal of Principal Principal Loans Balance Balance Loans Balance Balance Loans Balance Balance -------- --------- ----------- -------- ---------- ---------- ------- ----------- ------------ (Dollars in thousands) Less than 7.00%.... 17,240 1,446,158 45.43% 23,345 $2,196,944 41.19% 16,024 $ 1,443,862 25.53% 7.00%--7.99%...... 10,950 846,330 26.58 19,043 1,634,054 30.64 23,815 1,895,797 33.52 8.00%--8.99%...... 8,492 390,254 12.26 13,424 724,053 13.57 19,002 1,144,290 20.23 9.00%--9.99%...... 6,237 215,188 6.76 8,755 349,308 6.55 12,122 542,621 9.59 10.00% and over.... 7,936 285,606 8.97 11,080 429,268 8.05 15,192 629,795 11.13 -------- --------- ----------- -------- ---------- ---------- -------- ----------- --------- Total............ 50,855 3,183,536 100.00% 75,647 $5,333,627 100.00% 86,155 $ 5,656,365 100.00% ========== ========= =========== ========= ========== ========== ======== =========== =========
Loan administration fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens. The following table sets forth certain information regarding the remaining contractual maturity of the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, as of the dates shown.
As of December 31, ------------------------------------------------------------------------------------------------------------------ 2003 2002 2001 ------------------------------------------------------------------------------------------------------------------ Percentage Percentage Percentage Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid of of Number Principal Principal of of Number Principal Principal of of Number Principal Principal Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount Loans of Loans Amount Amount ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1--5 years...... 11,431 22.48% $ 190,283 5.98% 11,647 15.40% $ 188,463 3.53% 11,539 13.39% 169,794 3.00% 6--10 years...... 4,958 9.75 169,379 5.32 8,954 11.84 271,438 5.09 14,711 17.08 442,458 7.82 11--15 years...... 7,055 13.87 394,119 12.38 10,728 14.18 662,439 12.42 12,101 14.05 729,162 12.89 16--20 years...... 8,080 15.89 620,435 19.49 12,914 17.07 1,042,962 19.56 18,013 20.91 1,428,794 25.26 21--25 years...... 1,274 2.51 87,013 2.73 1,588 2.10 134,967 2.53 2,219 2.57 246,835 4.37 More than 25 years 18,057 35.50 1,722,307 54.10 29,816 39.41 3,033,358 56.87 27,572 32.00 2,639,322 46.66 ------ ------ ---------- ------ ------ ------ ---------- ------ ------ ------ --------- ------- Total.......... 50,855 100.00% $3,183,536 100.00% 75,647 100.00% $5,333,627 100.00% 86,155 100.00% 5,656,365 100.00% ====== ====== ========== ====== ====== ====== ========== ====== ====== ====== ========= =======
Our servicing activity is diversified throughout all 50 states with concentrations in Missouri, Texas, California, Arizona, New Mexico and Florida of approximately 14.50%, 14.28%, 13.87%, 9.03%. 8.16% and 5.01%, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced at December 31, 2003. Acquisition of Servicing Rights. Historically, our strategy with respect to mortgage servicing was to focus on acquiring servicing for which the underlying mortgage loans tended to be more seasoned and to have higher interest rates, lower principal balances and higher custodial escrow balances than newly originated mortgage loans. We believed this strategy allowed us to reduce our prepayment risk, while allowing us to capture relatively high custodial escrow balances in relation to the outstanding principal balance. During periods of declining interest rates, prepayments of mortgage loans usually increase as homeowners seek to refinance at lower interest rates, resulting in a decrease in the value of the servicing portfolio. Mortgage loans with higher interest rates and/or higher principal balances are more likely to result in prepayments because the cost savings to the borrower from refinancing can be significant. During 2003, existing low interest rates continued to decrease throughout the year. We purchased only nominal amounts of servicing in 2003 due to the interest rates prevalent during the year, the lack of the servicing products available and a decision to retain a portion of our originated servicing. The following table shows quarterly and annual average prepayment rate experience on the mortgage loans serviced by Matrix Financial, excluding loans subserviced by and for others:
For the Years Ended December 31, ----------------------------------------------------- 2003(1)(4) 2002(2)(4) 2001(3)(4) ---------------- ---------------- ---------------- Quarter ended: December 31.... 30.27 % 31.03 % 24.67% September 30... 41.23 23.30 25.13 June 30........ 38.90 19.00 24.63 March 31....... 31.30 21.60 17.13 ---------------- ---------------- ---------------- Annual average.... 35.43 % 23.73 % 22.89% ================ ================ ================
11 __________ (1) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $176.9 million, $192.8 million, $17.6 million and $13.1 million for the quarters ended December 31, September 30, June 30, and March 31, 2003, respectively. (2) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $26.6 million, $600 thousand, $5.8 million and $34.6 million for the quarters ended December 31, September 30, June 30, and March 31, 2002, respectively. (3) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $889.0 million, $581.8 million, $306.9 million and $1.1 billion for the quarters ended December 31, September 30, June 30, and March 31, 2001, respectively. (4) These prepayment rates do not include prepayments that resulted from us targeting our own servicing portfolio for refinance opportunities. Prior to 2001, we acquired substantially all of our mortgage servicing rights in the secondary market. The industry expertise of Matrix Bancorp Trading and Matrix Financial allowed us to capitalize upon inefficiencies in this market when acquiring mortgage servicing rights. Prior to acquiring mortgage servicing rights, we analyze a wide range of characteristics of each portfolio considered for purchase. This analysis includes projecting revenues and expenses and reviewing geographic distribution, interest rate distribution, loan-to-value ratios, outstanding balances, delinquency history and other pertinent statistics. Due diligence is performed either by our employees or a designated independent contractor on a representative sample of the mortgages involved. The purchase price is based on the present value of the expected future cash flow, calculated by using a discount rate, loan prepayment, default rate and other assumptions that we consider to be appropriate to reflect the risk associated with the investment. In 2000, we began to retain a portion of the mortgage servicing rights generated from the origination platform. Throughout 2000, and for the majority of 2001, we generally retained the servicing on the loans sold to Ginnie Mae. In the fourth quarter of 2001, we began to retain the servicing on loans sold to Fannie Mae and Freddie Mac and sold our newly originated Ginnie Mae servicing. In April through August of 2002, we retained all of the servicing originated on Fannie Mae and Ginnie Mae loans. Beginning in September of 2002 and for all of 2003, we entered into an assignment of trade contract with a national mortgage banker to sell the majority of our originated servicing. The decision on which servicing to retain or sell is based on factors including interest rate environment, secondary market pricing for the servicing, our capital levels and liquidity. As of December 31, 2003, in terms of unpaid principal amount, approximately $1.4 billion of the underlying mortgage loans in our servicing portfolio were from loans originated and sold by Matrix Financial prior to the sale of the production platform, as discussed in "Item 1. Business--Discontinued Operations". Based on the fact that we have sold our Platform, and the limited amount of seasoned servicing available in the market place, it is unlikely that we will acquire or add significantly to our servicing portfolio. To the extent that any additions to our servicing portfolio are done, the acquisitions are likely to be portfolios with characteristics of more seasoning, lower balances and higher escrows. Any future acquisitions will be based on availability of desired product, our capital levels, our current investment in mortgage servicing assets and the prevalent interest rate environment. Sales of Servicing Rights. Historically, we have sold a portion of our purchased mortgage servicing portfolios and sold a portion of the mortgage servicing rights on loans that we originated prior to the sale of the Platform as discussed in "Item 1. Business--Discontinued Operations", and as mentioned above. Sales generate cash at the time of sale but reduce future cash flow and servicing fee income. We did not have any sales of mortgage servicing rights during 2003 due to the prevailing market conditions. We will pursue strategic sales of segments of our portfolio if market conditions are favorable. Prices obtained for mortgage servicing rights vary depending on servicing fee rates, anticipated prepayment rates, average loan balances, remaining time to maturity, servicing costs, custodial escrow balances, delinquency and foreclosure experience and purchasers' required rates of return. In the ordinary course of selling mortgage servicing rights, consistent with industry standards, we make certain representations and warranties to purchasers of mortgage servicing rights. If a borrower defaults and there has been a breach of representations or warranties and we have no third party recourse, we may become liable for the unpaid principal and interest on defaulted loans. In such a case, we may be required to repurchase the mortgage loan and bear any subsequent loss on the loan. In connection with any purchases of mortgage servicing rights that we make, we also are exposed to liability to the extent that an originator or seller of the mortgage servicing rights is unable to honor its representations and warranties. Historically, we have not incurred material losses due to breaches of representations and warranties and we do not anticipate any future material losses due to breaches of representations and warranties; however, there can be no assurance that we will not experience such losses. Hedging of Servicing Rights. Our investment in mortgage servicing rights is exposed to potential impairment in certain interest rate environments. As previously discussed, the prepayment of mortgage loans increases during periods of declining interest rates as homeowners seek to refinance their loan to lower interest rates. If the level of prepayment or the 12 estimated future prepayment activity on segments of our mortgage servicing portfolio reaches levels higher than we projected for an extended period of time, the associated basis in the mortgage servicing rights may be impaired. To mitigate a portion of this risk of impairment due to declining interest rates, through December 31, 2000, we initiated a hedging strategy that used a program of exchange-traded future and options, and our hedging program qualified for hedge accounting treatment based on a high degree of statistical correlation and then current accounting guidance. With the required adoption of the SFAS 133 on January 1, 2001, we did not attempt to qualify for hedge accounting treatment due to the requirements in the standard that are necessary to do so. Consistent with the program implemented in the fourth quarter of 2002, in 2003 we elected to reinstate our hedging program to mitigate a portion of our investment in mortgage servicing rights from further impairment, identical to the previously used program. The decision was based on the historically low interest rates, the continued weakening economy, the geopolitical environment and the impairment that we incurred to-date. During 2003, we hedged approximately 15% of our portfolio. As of December 31, 2003, we have maintained consistency with the percentage of coverage at approximately 19%. We did not attempt to qualify for hedge accounting treatment due to the requirements in SFAS 133 that were necessary to do so. During 2003, we earned approximately $700 thousand from hedging activities. The decision to increase or decrease our hedging coverage will be based on several factors, including those discussed above, as well as the composition of our current servicing portfolio. Our servicing portfolio is valued at least quarterly in accordance with the guidelines set forth in SFAS 140. Under SFAS 140, we are required to record our investment in mortgage servicing rights at the lower of cost or fair value. The fair value of mortgage servicing rights is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. We stratify our mortgage servicing rights by product type and investor to reflect the predominant risks. To determine the fair value of this investment, we use a valuation model that calculates the present value of discounted future cash flows. In the fiscal years 2003 and 2003, we made no changes to the significant assumptions inherent in the valuation of the servicing portfolio. These significant assumptions are more fully described in Note 2 to the consolidated financial statements included elsewhere in this document. During 2002, based on a valuation model which incorporates among other things, prepayment speeds, we recorded provisions for impairment on our mortgage servicing rights totaling approximately $14.2 million. Prepayment speeds are highly impacted by changes in interest rates, as when interest rates decline there is a greater incentive for the homeowners to refinance their mortgages. In 2002, mortgage rates increased in the first quarter of the year and we recovered $181 thousand of previously recorded impairment. In the quarters ended June 30, 2002, September 30, 2002 and December 31, 2002, we recorded an impairment charge of $1.4 million, $8.0 million and $5.0 million, respectively. These impairments are highly correlated to the decline in mortgage interest rates that occurred during these periods. During 2003, based on our servicing valuation model, we recorded impairment in the amount of $2.4 million in the quarter ended June 30, 2003 as mortgage interest rates reached their lowest level in over 45 years. In the quarter ended September 30, 2003, mortgage interest rates increased and we recorded an impairment recovery of $5.1 million. Also, in the quarter ended September 30, 2003, we determined that it was remote that $5.0 million of previously recorded impairment would be recovered, and thus recorded a direct write-down to the value of the servicing asset for such amount. Based on our valuation model, we recorded an additional impairment recovery of $250 thousand for the quarter ended December 31, 2003. Our impairment reserve as of December 31, 2003 was $6.5 million. Further decreases in interest rates, or other factors that result in an increase in anticipated future prepayment speeds, may cause additional impairment charges in future years. Brokerage, Consulting and Outsourcing Services Brokerage Services. We provide brokerage services through our subsidiaries, Matrix Bancorp Trading and First Matrix Investment Services Corporation. Matrix Bancorp Trading. Matrix Bancorp Trading operates as a full-service mortgage servicing and mortgage loan broker. It is capable of analyzing, packaging, marketing and closing transactions involving mortgage servicing and loan portfolios and selected merger and acquisition transactions for mortgage banking entities. Matrix Bancorp Trading promotes its services to all types and sizes of market participants, thereby developing diverse relationships. Matrix Bancorp Trading brokers and principals all types of loan products with the majority of the loan products centering on residential mortgages. In most cases, Matrix Bancorp Trading acts as the intermediary between the sellers and buyers of the various loan products. Mortgage servicing rights are sold either on a bulk basis or a flow basis. In a bulk sale, the seller identifies, packages and sells a portfolio of mortgage servicing rights to a buyer in a single transaction. In a flow sale, the seller agrees to sell 13 to a specified buyer from time to time, at a predetermined price, the mortgage servicing rights originated by the seller that meet certain criteria. Matrix Bancorp Trading is capable of helping both buyers and sellers with respect to bulk and flow sales of mortgage servicing rights. We believe that the client relationships developed by Matrix Bancorp Trading through its national network of contacts with commercial banks, mortgage companies, savings associations and other institutional investors represent a significant competitive advantage and form the basis for Matrix Bancorp Trading's national market presence. These contacts also enable Matrix Bancorp Trading to identify prospective clients for our other subsidiaries and make referrals when appropriate. See "Item 1. Business--Consulting and Analytic Services" below. Most institutions that own mortgage servicing rights have found that careful management of these assets is necessary due to their susceptibility to interest rate cycles, changing prepayment patterns of mortgage loans and fluctuating earnings rates achieved on custodial escrow balances. Because companies must capitalize originated mortgage servicing rights, management of mortgage servicing assets has become even more critical. These management efforts, combined with interest rate sensitivity of assets and the growth strategies of market participants, create constantly changing supply and demand and, therefore, constantly fluctuating price levels in the secondary market for mortgage servicing rights. The sale and transfer of mortgage servicing rights occurs in a market that is inefficient and often requires an intermediary to match buyers and sellers. Prices are unpublished and closely guarded by market participants, unlike most other major financial secondary markets. This lack of pricing information complicates an already difficult process of differentiating between servicing product types, evaluating regional, economic and socioeconomic trends and predicting the impact of interest rate movements. Due to its significant contacts, reputation and market penetration, Matrix Bancorp Trading has access to information on the availability of mortgage servicing portfolios, which helps it bring interested buyers and sellers together. Due to the consolidation that has taken place in the mortgage banking industry, as well as the low interest rate environment experienced in 2003 that depressed the value of servicing, the overall market, including the number of buyers and sellers of servicing, has decreased. As a result, we have experienced an overall decrease in both the portfolios brokered and the corresponding revenue. As interest rates increase, and the level of mortgage originations decrease, we would expect that the market for bulk servicing trades would increase. If that occurs, we believe we are well positioned to take advantage of the increased brokerage activity. ......... First Matrix Investment Services Corporation. First Matrix is registered with the NASD as a fully disclosed broker-dealer, headquartered in Denver, Colorado. First Matrix conducts a wide range of general securities business, including fixed income brokerage, retail brokerage, investment banking and structured finance services. First Matrix clears all of its securities transactions through First Southwest Company based in Dallas, Texas on a fully disclosed basis. First Matrix provides brokerage services through fixed income trading and SBA pooling, retail brokerage, and structured finance deals. First Matrix has traditionally focused its fixed income business primarily on financial institutions in the Rocky Mountain Region. First Matrix brokers U.S. government treasury obligations, agencies, municipal bonds and corporate debt. The majority of its fixed income business is of an institutional nature, and its clients include banks, savings and loans, insurance companies, mutual funds, money managers and hedge funds. Through the SBA group in Memphis, First Matrix has diversified its client base and its product mix. First Matrix, acting as agent for Matrix Bank, purchases the guaranteed portion of SBA 7A loans from bank and non-bank lenders around the country. These loans are assembled and later pooled into SBA securities which are sold into the secondary market to institutional and sophisticated investors. This trading strategy enables Matrix Bank to earn attractive yields on high credit quality assets with reduced exposure to the traditional risks associated with investing in any fixed income asset. In retail brokerage services, the First Matrix focus is to attract experienced investment professionals with established relationships, looking to provide their clients with the safety and expanded services provided by a broker-dealer connected to a well-capitalized, regional bank holding company. Our brokers have long-standing relationships with a broad range of retail and small business clients. Although First Matrix' product mix will focus on fee-based products, it will continue to offer traditional fixed income and equity investment services to its retail client base. Consulting and Analytic Services. Matrix Bancorp Trading continues to make significant commitments to its analytics department, which has developed expertise in helping companies implement and track their "mark-to-market" valuations and analyses on servicing portfolios. Matrix Bancorp Trading utilizes a nationally recognized valuation model to fit its customers' many different needs and unique situations in performing valuations and analyses. In addition, 14 Matrix Bancorp Trading has the infrastructure and management information system capabilities necessary to undertake the complex analyses required by SFAS 140. Many of the companies affected by the implementation of SFAS 140 have outsourced this function to a third party rather than dedicate the resources necessary to develop systems for and perform their own SFAS 140 valuations. Because SFAS 140 requires that mortgage servicing portfolios be valued at the lower of cost or market value, active management of servicing assets has become a critical component to holders of mortgage servicing rights. Due to the risk of impairment of mortgage servicing rights as a result of constantly changing interest rates and prepayment speeds on the underlying mortgage portfolio, risk management of mortgage servicing rights by holders of mortgage servicing rights portfolios, which typically takes the form of hedging the portfolio, has become more prevalent. The SFAS 140 "mark-to-market" analyses done by Matrix Bancorp Trading helps clients assess which of their portfolios of mortgage servicing rights are most susceptible to impairment due to interest rate and prepayment risk. We believe that the services offered by the analytics department of Matrix Bancorp Trading provide us with a competitive advantage in attracting and retaining clients because we are able to offer financial services companies and financial institutions a more complete package of services than our competitors. Because of our analytics capabilities, we are able to attract brokerage clients that we may not otherwise be able to do. In addition, Matrix Bancorp Trading is able to refer clients to Matrix Bank for bulk loan acquisitions and to Matrix Asset Management for real estate management and disposition services. The full range of services offered by Matrix Bancorp Trading and its affiliates further strengthens Matrix Bancorp Trading's client relationships. Real Estate Management and Disposition Services. Matrix Asset Management provides real estate management and disposition services on foreclosed properties owned by financial services companies, mortgage companies and financial institutions across the United States. In addition to the unaffiliated clients currently served by Matrix Asset Management, many of which are also clients of Matrix Bancorp Trading, Matrix Bank and Matrix Financial use Matrix Asset Management exclusively in handling the disposition of foreclosed real estate for which it is responsible. Having Matrix Asset Management, rather than Matrix Financial, provide this service transforms the disposition process into a revenue generator for us, because Matrix Asset Management typically collects a referral fee based on the value of the foreclosed real estate from the real estate broker involved in the sale transaction. Because Matrix Asset Management typically collects a portion of its fee from the real estate broker, Matrix Asset Management is able to provide this disposition service on an outsourced basis at a reduced cost to the mortgage loan servicer or loan holder. Matrix Asset Management is able to pass a portion of the cost of the disposition on to the real estate broker because of the volume it generates. In addition, Matrix Asset Management provides limited collateral valuation opinions to clients who are interested in assessing the value of the underlying collateral on nonperforming mortgage loans, as well as to clients such as Matrix Bank and other third party mortgage loan originators and buyers interested in evaluating potential bulk purchases of mortgage loans. In the third quarter of 2003, Matrix Asset Management began operations of our internet based business, reoSource, that allows buyers and agents to utilize the web to make offers on the foreclosed properties managed by Matrix Asset Management, and posted on the site by clients of Matrix Asset Management. We believe this will provide Matrix Asset Management significant growth opportunities. School Services. In addition to providing limited financing to charter schools as mentioned in "Lending Activities - Commercial and Other Lending," ABS, operating under the name The GEO Group, also provides a wide variety of outsourced business and consulting services to charter schools. The most basic services offered by ABS include fund accounting, cash management, budgeting, governmental reporting and payroll and accounts payable processing. Additionally, we consult with and offer programs to charter schools in the following areas: o facility and safety management; o technology; o policy development; and o grant administration. ABS also provides administrative and instructional leadership to some charter schools by placing administrators on-site at the charter schools to take a hands-on approach and work with the schools with regard to curriculum development, special education and personnel management. 15 The business services provided by ABS are integral to the financing division, as these services allow us to use our knowledge of the school's financial condition and the capability of the schools' operators to make informed decisions in the underwriting of charter school financing. The services also give us a significant advantage in the servicing and ongoing monitoring of the schools, which we believe is imperative to the collection process and the overall success of our financing efforts. Self-Directed Trust, Custody and Clearing Activities Self-Directed Trust and Custody Services. The Company's trust and custody activities are provided through Sterling Trust and Matrix Bank. Sterling Trust provides administrative services for self-directed individual retirement accounts, qualified business retirement plans and personal custodial accounts, as well as corporate escrow and paying agent services. In addition, Sterling Trust offers specialized custody and clearing services to investment professionals. These services are marketed on a nationwide basis to the financial services industry, specifically broker-dealers, registered representatives, financial planners and advisors, tax professionals, insurance agents and investment product sponsors. The advantage offered by Sterling Trust is the ability to hold a wide array of publicly traded investments, as well as nonstandard assets and private placement offerings. Sterling Trust does not offer financial planning or advising services, nor does it recommend, sell or solicit any investments. Sterling Trust acts only as a directed custodian and is not affiliated with any investment. It has always been Sterling Trust's mission to keep this independence to ensure that high quality services are offered without any conflicting interests. Sterling Trust executes no investment transaction without the direction of the account holder or the account holder's authorized representative. During 2002, Matrix Bank, through its Denver, Colorado location, expanded the variety and depth of its trust services, primarily by partnering with Matrix Settlement & Clearance Services in providing trust and custodial services to over 50 nationally recognized third party administrators, broker-dealers and banks. Trust and custodial services range from accepting qualified retirement plan contributions, facilitating the trading and settlement of plan securities, making distributions to individual plan participants, to withholding state and federal taxes and producing annual tax forms. These services are marketed in conjunction with Matrix Settlement & Clearance Services on a nationwide-basis to the financial services industry, specifically, broker-dealers, registered representatives, financial planners and advisors, tax professionals, insurance agents and investment product sponsors. The advantage offered by Matrix Bank's trust department is the ability to hold and report on a wide array of publicly traded investments. Matrix Bank's trust department acts only as a direct trustee and does not offer financial planning or advising. At December 31, 2003, Sterling Trust had 35,688 accounts with assets under administration of over $2.3 billion, and the trust department of Matrix Bank had 14,563 accounts with assets under administration of approximately $11.0 billion. Clearing Services. Matrix Settlement & Clearance Services, our joint venture, provides automated clearing of mutual funds utilizing the National Securities Clearing Corporation's Fund/SERV and Defined Contribution Clearance & Settlement platform for banks, trust companies, third party administrators and registered investment advisors. In performing services for its customers, Matrix Settlement & Clearance Services generates low-cost deposits and trust and custodial fees for the Company. At December 31, 2003, Matrix Settlement & Clearance Services had 126 customers under contract with those customers administering approximately $26.2 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. MSCS Financial Services, LLC, a wholly owned subsidiary of Matrix Settlement & Clearance Services, began operations on January 2, 2002 as a NASD registered broker-dealer. Through our wholly owned subsidiary, Matrix Advisory Services, LLC, we began to offer in 2003 an Internet-based private wealth management service through the utilization of proprietary asset allocation models as a complementary business to the clearing operation. The model was developed and will be supported by a nationally recognized research and investment firm. The advantage that Matrix Advisory Services' product offers is a turnkey approach with the automation of the mutual fund clearing and custody of plan assets, if needed. 16 Competition We compete nationally for bulk loan portfolios mainly with mortgage companies, savings associations, commercial banks and other institutional investors. We believe that we have competed successfully for the acquisition of bulk loan portfolios by relying on the advantages provided by our unique corporate structure and the secondary market expertise of our employees. We believe that Matrix Bank's most direct competition for deposits comes from other financial institutions. Customers distinguish between market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Matrix Bank's cost of funds fluctuates with general market interest rates. During certain interest rate environments, we expect additional significant competition for deposits from corporate and governmental debt securities, as well as from money market mutual funds. Matrix Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing. For mortgage loan and mortgage servicing rights, brokerage and consulting, we compete mainly with other mortgage banking consulting firms and national and regional investment banking companies. We believe that the customers distinguish between market participants based primarily on customer service. Matrix Bancorp Trading competes for its brokerage and consulting activities by: o recruiting qualified and experienced sales people; o developing innovative sales techniques; o offering superior analytical services; o providing financing opportunities to its customers through its affiliation with Matrix Bank; and o seeking to provide a higher level of service than is furnished by its competitors. In originating mortgage loans, Matrix Financial and Matrix Bank have historically competed mainly with other mortgage companies, finance companies, savings associations and commercial banks. Customers distinguish among market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. After the sale of the Platform, we have agreed with the Buyer not to compete in certain respects. We do not believe, however, that this stipulation will impact substantially the ability of Matrix Bank to effectively serve its local markets or customers. See "Item 1. Business--Discontinued Operations." Sterling Trust faces considerable competition in all of the services and products that it offers, mainly from other self-directed trust companies and broker-dealers. Sterling Trust also faces competition from other trust companies and trust divisions of financial institutions. Sterling Trust's niche has been, and will continue to be, providing high quality customer service and servicing nonstandard retirement products. In an effort to increase market share, Sterling Trust will endeavor to provide superior service, offer technologically advanced solutions, expand its marketing efforts, provide competitive pricing and continue to diversify its product mix. Matrix Asset Management competes against other companies that specialize in providing real estate management and disposition services on foreclosed property. Additionally, clients or potential clients that opt to perform these services in-house diminish Matrix Asset Management's market. ABS competes with other outsourcing companies and Educational Management Organizations, as well as schools that prefer to perform the services offered by ABS in-house. Employees At December 31, 2003, the Company had 509 employees. We believe that our relations with our employees are good. The Company is not party to any collective bargaining agreement. Regulation and Supervision Set forth below is a brief description of various laws, regulatory authorities and associated regulations affecting our operations. The description of laws and regulations contained in this document does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. 17 Aspects of the Company's public disclosure, corporate governance principles and internal control environment are subject to the Sarbanes-Oxley Act of 2002 and related regulations and rules of the SEC and the NASDAQ. Any change in applicable laws, regulations or regulatory policies may have a material effect on our business, operations and prospects. Matrix Bancorp. We are a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act. As such, we are subject to OTS regulation, examination, supervision and reporting requirements. In addition, the OTS has enforcement authority over us and our savings association and non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of our subsidiary savings institution, Matrix Bank. In addition, Matrix Bank must notify the OTS at least 30 days before declaring any capital distribution to us. As a unitary savings and loan holding company that has been in existence prior to May 4, 1999, we generally are not restricted under existing laws as to the types of business activities in which we may engage, provided that Matrix Bank continues to be a "qualified thrift lender" under the Home Owners' Loan Act. To maintain its status as a qualified thrift lender, Matrix Bank must maintain a minimum percentage of its assets in qualified thrift investments unless the OTS grants an exception to this requirement. In general, qualified thrift investments include certain types of residential mortgage loans and mortgage-backed securities. If we acquire control of another savings association as a separate subsidiary, we would become a multiple savings and loan holding company. Multiple savings and loan holding companies may only engage in those activities permissible for a financial holding company under the Bank Holding Company Act of 1956, as amended. Generally, financial holding companies may only engage in activities such as banking, insurance and securities activities, as well as merchant banking activities under certain circumstances. In addition, if Matrix Bank fails to maintain its status as a qualified thrift lender, within one year of Matrix Bank's failure, we would be required to convert Matrix Bank to a commercial bank and to register as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Change in Bank Control Act, as amended, provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings association unless the OTS has been given 60 days prior written notice. The Home Owners' Loan Act provides that no company may acquire control of a savings association without the prior approval of the OTS. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the OTS. Pursuant to federal regulations, control of a savings association (which includes its holding company) is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of the association or the ability to control the election of a majority of the directors of the association. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, but less than 25% of any class of stock of a savings association, where certain enumerated control factors are also present in the acquisition. The OTS may prohibit an acquisition of control if it would result in a monopoly or substantially lessen competition, the financial condition of the acquiring person might jeopardize the financial stability of the association, or the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. The Gramm-Leach-Bliley Act of 1999 (otherwise known as the "Financial Services Modernization Act") eliminated many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The law revised and expanded the Bank Holding Company Act framework to permit a holding company structure to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determined to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Financial Services Modernization Act prohibits unitary savings and loan holding companies formed after May 4, 1999 from engaging in nonfinancial activities. We are a grandfathered unitary savings and loan holding company. The Financial Services Modernization Act has not had a material adverse effect on our operations. However, the Financial Services Modernization Act permits banks, securities firms and insurance companies to affiliate. This has continued a trend in the financial services industry toward further consolidation. The Financial Services Modernization Act could result in an increasing amount of competition from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources. In addition, the Financial Services Modernization Act may have an anti-takeover effect because it may tend to limit our attractiveness as an acquisition candidate to other savings and loan holding companies and financial holding companies. 18 The USA Patriot Act was signed into law on October 26, 2001. The USA Patriot Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA Patriot Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations. The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002. The Sarbanes-Oxley Act of 2002 is a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by Section 302(a) of Sarbanes-Oxley Act of 2002, the Company's Co-Chief Executive Officers and Chief Financial Officer are each required to certify that the Company's quarterly and annual reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. We have existing policies, procedures and systems designed to comply with these regulations, and are further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations. Federal Savings Bank Operations. Matrix Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and potentially by the Federal Deposit Insurance Corporation ("FDIC"), which insures its deposits up to applicable limits. Such regulation and supervision: o establishes a comprehensive framework of activities in which Matrix Bank can engage; o limits the types and amounts of investments permissible for Matrix Bank; o limits the ability of Matrix Bank to extend credit to any given borrower; o significantly limits the transactions in which Matrix Bank may engage with its affiliates; o requires Matrix Bank to meet a qualified thrift lender test that requires Matrix Bank to invest in qualified thrift investments, which include primarily residential mortgage loans and related investments; o places limitations on capital distributions by savings associations, such as Matrix Bank, including cash dividends; o imposes assessments to the OTS to fund their operations; o establishes a continuing and affirmative obligation, consistent with Matrix Bank's safe and sound operation, to help meet the credit needs of its community, including low and moderate income neighborhoods; o requires Matrix Bank to maintain certain noninterest-bearing reserves against its transaction accounts; o establishes various capital categories resulting in various levels of regulatory scrutiny applied to the institutions in a particular category; and o establishes standards for safety and soundness. Matrix Bank must submit annual financial reports audited by independent auditors to federal regulators. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted to the OTS. The audit committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. The regulatory structure is designed primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in these regulations, whether by the OTS, the FDIC or Congress, could have a material impact on Matrix Bank and its operations. Transactions with Affiliates. Sections 23A and 23B of the Federal Reserve Act and its implementing regulations, govern transactions between depository institutions and their affiliates. These provisions are made applicable to savings associations, such as Matrix Bank, by the Home Owners' Loan Act. In a holding company context, in general, the parent holding company of a savings association and any companies that are controlled by the parent holding company are affiliates of the savings association. However, the OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case-by-case basis. Section 23A limits the extent to which the savings association or its subsidiaries may 19 engage in certain transactions with its affiliates. These transactions include, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Generally, these transactions between the savings association and any one affiliate cannot exceed 10% of the savings association's capital stock and surplus, and these transactions between the savings institution and all of its affiliates cannot, in the aggregate, exceed 20% of the savings institution's capital stock and surplus. Section 23A also establishes specific collateral requirements for loans or extensions of credit to an affiliate, and for guarantees or acceptances on letters of credit issued on behalf of an affiliate. Applicable regulations prohibit a savings association from lending to any affiliate engaged in activities not permissible for a bank holding company or for the purpose of acquiring the securities of most affiliates. Section 23B requires that transactions covered by Section 23A and a broad list of other specified transactions be on terms and under circumstances substantially the same, or no less favorable to the savings association or its subsidiary, as similar transactions with non-affiliates. In addition to the restrictions on transactions with affiliates that Sections 23A and 23B of the Federal Reserve Act impose on depository institutions, the regulations of the OTS also generally prohibit a savings association from purchasing or investing in securities issued by an affiliate. Matrix Bank engages in transactions with its affiliates, which are structured with the intent of complying with these rules. Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation. Matrix Bank is a member of the Savings Association Insurance Fund, which is administered by the FDIC. The deposits of Matrix Bank are insured up to $100 thousand per depositor by the FDIC. This insurance is backed by the full faith and credit of the United States. As insurer, the FDIC imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the FDIC. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also may initiate enforcement actions against savings associations and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized, as defined below, and considered healthy pay the lowest premium while institutions that are less than adequately capitalized, as defined below, and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured depository institutions is made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the Savings Association Insurance Fund will be less than the designated reserve ratio of 1.25% of the Savings Association Insurance Fund's insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on Savings Association Insurance Fund members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. Since January 1, 1997, the premium schedule for insured institutions in the Bank Insurance Fund and the Savings Association Insurance Fund has ranged from 0 to 27 basis points. However, Savings Association Insurance Fund and Bank Insurance Fund insured institutions are required to pay a Financing Corporation or "FICO" assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the quarter ended December 31, 2003, the FICO assessment for both Savings Association Insurance Fund and Bank Insurance Fund insured institutions was equal to 1.52 basis points for each $100 in domestic deposits maintained at the institution. These assessment, which will be revised based upon the level of Savings Association Insurance Fund and Bank Insurance Fund deposits, will continue until the bonds mature in the year 2017. Brokered Deposits. Under the FDIC regulations governing brokered deposits, well capitalized associations, such as Matrix Bank, are not subject to brokered deposit limitations, while adequately capitalized associations are subject to certain brokered deposit limitations and undercapitalized associations may not accept brokered deposits. At December 31, 2003, Matrix Bank had $104.6 million of brokered deposits. In the event Matrix Bank is not permitted to accept brokered deposits in the future, it would have to find replacement sources of funding. It is possible that such alternatives, if available, would result in a higher cost of funds. Matrix Bank's Capital Ratios. Federal law requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to savings institutions that do not meet minimum capital requirements. For these 20 purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The OTS has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be: o "well capitalized" if it has a total risk-based capital ratio of 10% or greater and a leverage ratio of 5% or greater; o "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater and generally a leverage ratio of 4% or greater; o "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%; o "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and o "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of December 31, 2003, Matrix Bank was a "well capitalized" institution. "Undercapitalized" institutions must adhere to growth, capital distribution and dividend and other limitations and are required to submit a capital restoration plan with the OTS within 45 days after an association receives notice of such undercapitalization. A savings institution's compliance with its capital restoration plan is required to be guaranteed by any company that controls the "undercapitalized" institution in an amount equal to the lesser of 5% of total assets when deemed "undercapitalized" or the amount necessary to achieve the status of "adequately capitalized." If an "undercapitalized" savings institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" institutions must comply with one or more of a number of additional restrictions, including an order by the OTS to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restriction on interest rates paid on deposits, compensation of executive officers and capital distributions to the parent holding company. "Critically undercapitalized" institutions must comply with additional sanctions, including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains this status. The following table indicates Matrix Bank's regulatory capital ratios:
As of December 31, 2003 ---------------------------------- Core Risk-Based Capital Capital ------------------ ----------------- (Dollars in thousands) Shareholder's equity/GAAP capital............................................. $ 106,194 $ 106,194 Intangible assets............................................................. (877) (877) Disallowed assets............................................................. (3,816) (3,816) Unrealized gain on available for sale securities.............................. (208) (208) Additional capital items: General valuation allowances............................................. - 7,396 Residual interests.................................................... - - ------------------ ----------------- Regulatory capital as reported to the OTS..................................... 101,293 108,689 Minimum capital requirement as reported to the OTS............................ 65,715 72,104 ------------------ ----------------- Regulatory capital--excess.................................................... $ 35,578 $ 36,585 ================== ================= Capital ratios................................................................ 6.17% 12.06% Well capitalized requirement.................................................. 5.00% 10.00%
FHLBank System. Matrix Bank is a member of the FHLBank system, which consists of 12 regional FHLBanks. The FHLBank provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. The FHLBank advances must be secured by specified types of collateral. The FHLBank funds its operations primarily from proceeds derived from the sale of consolidated obligations of the FHLBank system. Matrix Bank, as a member of the FHLBank system, must acquire and hold shares of capital stock in its regional FHLBank in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and 21 similar obligations at the beginning of each year, 0.3% of total assets, or 5% of its advances ("borrowings") from the FHLBank. Prior to relocating its domicile, Matrix Bank was a member of the FHLBank of Dallas. Effective March 25, 2002, Matrix Bank became a member of the FHLBank of Topeka. Matrix Bank was in compliance with the requirement discussed with an investment in FHLBank of Dallas and FHLBank of Topeka stock at December 31, 2003 totaling $30.7 million. Federal Reserve System. The Federal Reserve Board regulations require all depository institutions to maintain noninterest-earning reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At December 31, 2003, Matrix Bank was in compliance with the Federal Reserve Board's reserve requirements. Savings associations, such as Matrix Bank, are authorized to borrow from the Federal Reserve Bank "discount window". Matrix Bank is deemed by the Federal Reserve to be generally sound and thus is eligible to obtain primary credit from its Federal Reserve Bank. Generally, primary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest of 100 basis points above the Federal Open Market Committee's federal funds target rate. Mortgage Banking Operations. Our mortgage banking operations are conducted through Matrix Financial. The rules and regulations applicable to our mortgage banking operations establish underwriting guidelines that, among other things, include anti-discrimination provisions, require provisions for inspections, appraisals and credit reports on prospective borrowers and fix maximum loan amounts. Moreover, we are required annually to submit audited financial statements to the HUD, Fannie Mae, Freddie Mac and Ginnie Mae, and each regulatory entity maintains its own financial guidelines for determining net worth and eligibility requirements. Our operations are also subject to examination by the HUD, Fannie Mae, Freddie Mac and Ginnie Mae at any time to assure compliance with the applicable regulations, policies and procedures. Mortgage loan origination activities are subject to, among other laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974, and the regulations promulgated under these laws that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Moreover, the OTS, as primary regulatory authority over Matrix Bank (the parent of Matrix Financial), examines our mortgage banking operations as well. See discussion of the sale of the production platform, which was the bulk of our mortgage banking operations as discussed in "Item 1. Business--Discontinued Operations." Regulation of Sterling Trust Company. Sterling Trust provides custodial services and directed, non-discretionary trustee services. Sterling Trust is chartered under the laws of the State of Texas, and as a Texas trust company is subject to supervision, regulation and examination by the Texas Department of Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is subject to virtually all provisions of the Texas Banking Act as if the trust company were a state chartered bank. The activities of a Texas trust company are limited by applicable law generally to acting as a trustee, executor, administrator, guardian or agent for the performance of any lawful act, and to lend and accumulate money when authorized under applicable law. In addition, a Texas trust company with capital of $1 million or more, such as Sterling Trust, has the power to: o purchase, sell, discount and negotiate notes, drafts, checks and other evidences of indebtedness; o purchase and sell securities; o issue subordinated debentures and promissory notes; and o exercise powers incidental to the enumerated powers of Texas trust companies as set forth in the Texas Banking Act. A Texas trust company, such as Sterling Trust, is generally prohibited from accepting demand or time deposits if not insured by the FDIC. Limitation on Capital Distributions. The Texas Finance Code prohibits a Texas trust company from reducing its outstanding capital and certified surplus through redemption or other capital distribution without the prior written approval of the Texas Banking Commissioner. Moreover, Sterling Trust did not pay cash dividends in 2003 and anticipates that it will not pay cash dividends during 2004. Investments. A Texas trust company is generally obligated to maintain an amount equal to 40% of its capital and surplus in investments that are readily marketable and that can be converted into cash within four business days. So long as it complies with those requirements, a Texas trust company generally is permitted to invest its corporate assets in any 22 investment otherwise permitted by law. Generally, a Texas trust company cannot invest an amount in excess of 15% of its capital and certified surplus in the securities of a single issuer. Branching. The Texas Finance Code permits a Texas trust company to establish and maintain branch offices at any location within the state if it first obtains written approval of the Texas Banking Commissioner. Transactions with Related Parties. The Texas Finance Code prohibits the sale or lease of an asset of a Texas trust company, or the purchase or lease of an asset by a Texas trust company, where the transaction involves an officer, director, principal shareholder or affiliate, unless the transaction is approved by a disinterested majority of the board of directors or the written approval of the Texas Banking Commissioner is first obtained. In no event, however, may a Texas trust company lease real property in a transaction involving an officer, director, principal shareholder or affiliate without the prior approval of the Texas Banking Commissioner. Enforcement. Under applicable provisions of the Texas Finance Code, the Texas Banking Commissioner has the power to issue enforcement actions against a Texas trust company or any officer, employee or director of a Texas trust company. In addition, in certain circumstances, the Texas Banking Commissioner may remove a present or former officer, director or employee of a Texas trust company from office or employment, and may prohibit a shareholder or other persons participating in the affairs of a Texas trust company from such participation. The Texas Banking Commissioner has the authority to assess civil penalties of up to $500 per day against a Texas trust company (penalties against individuals may be higher) for violations of a cease and desist, removal or prohibition order. The Texas Banking Commissioner may also refer violations of a cease and desist order to the attorney general for enforcement by injunction. The Texas Banking Commissioner may pursue an order of supervision or conservatorship if: o the Texas Banking Commissioner determines that the Texas trust company is in a hazardous condition and that the continuation of business would be hazardous to the public or to the shareholders or creditors of the Texas trust company; o the Texas Banking Commissioner determines that the Texas trust company has exceeded its powers; o the Texas trust company has violated the law; or o the Texas trust company gives written consent to supervision or conservatorship. The Texas Banking Commissioner also has the authority to pursue the appointment of an independent receiver for a Texas trust company. Capital Requirements. Applicable law generally requires a Texas trust company to have and maintain minimum restricted capital of at least $1 million. Sterling Trust was in compliance with the requirement at December 31, 2003. A Texas trust company may not have at anytime outstanding liabilities in an amount that exceeds five times its capital stock and surplus, except that with the approval of the Texas Banking Commissioner, a Texas trust company may have outstanding liabilities in an amount that does not exceed ten times its capital stock and surplus. The Texas Banking Commissioner may require additional capital of a Texas trust company if the Texas Banking Commissioner determines it necessary to protect the safety and soundness of such company. If the Texas Banking Commissioner were to do so, or in the event Sterling Trust fails to maintain capital of at least $1 million, there is no assurance that Sterling Trust would be able to restore its capital or meet such additional requirements. In either case, the Texas Banking Commissioner could pursue various enforcement actions, such as appointing either a conservator or a receiver for Sterling Trust. Currently, however, Sterling Trust is in compliance with all capital requirements under Texas law. Regulation of First Matrix Investment Services Corp. First Matrix Investment Services Corp. is a registered broker-dealer subsidiary that is subject to the Securities and Exchange Commission's net capital rule, Rule 15c3-1, promulgated under the Securities Exchange Act of 1934. The net capital rule is designed to measure the general financial condition and liquidity of a broker-dealer. Net capital generally is the net worth of a broker or dealer (assets minus liabilities), less deductions for certain types of assets. If a firm fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the Securities and Exchange Commission and suspension or expulsion by the NASD, and could ultimately lead to the firm's liquidation. The net capital rule also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. At December 31, 2003, as adjusted, First Matrix had a net capital deficiency of $(211) thousand, which was $281 thousand under its required net capital of $69 thousand. In connection with a routine examination of First Matrix's books and records by the NASD, differences were identified between First Matrix's net capital calculation performed at December 31, 2003 and the calculation prepared by the NASD. 23 The NASD noted two technical exceptions related to excess cash on hand at an affiliated bank, and to deductible limits on fidelity bonds. Upon receipt of the NASD's calculation of net capital deficiency, First Matrix transferred cash from Matrix Bank to its clearing firm, which cured the capital deficiency. The foregoing is an attempt to summarize some of the relevant laws, rules and regulations governing unitary savings and loan holding companies and savings institutions but does not purport to be a complete summary of all applicable laws, rules and regulations governing such financial institutions. Item 2. Properties ---------- We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion on acceptable terms. The following table sets forth certain information concerning the real estate that we own or lease:
Monthly Rent or Mortgage Location Square Feet/Acres Owned/Leased Occupant Payment - ---------------------- ------------------- ---------------------------------- ---------------------------- ---------------- Denver, CO...........(1) 182,623 Owned Matrix Bancorp and various N/A of its subsidiaries (1) Phoenix, AZ..........(4) 62,771 Leased through February 28, 2007 Matrix Financial and ABS $ 62,771 Las Cruces, NM.......(3) 1,800 Owned Matrix Bank N/A Las Cruces, NM.......(2) 30,000 Owned Matrix Bank N/A Sun City, AZ......... 3,000 Owned Matrix Bank N/A Waco, TX............. 11,294 Leased through June 30, 2006 Sterling Trust $ 13,553 Waco, TX............. 928 Leased through January 31, 2005 Sterling Trust $ 1,021 Waco, TX............. 1,204 Leased through December 31, 2006 Sterling Trust $ 1,385 Fort Worth, TX.......(5) 1,148 Leased through November 30, 2004 First Matrix $ 1,710 Fort Worth, TX.......(6) 1,856 Leased through September 30, 2008 First Matrix $ 3,498 Memphis, TN.......... 3,305 Leased through September 7, 2006 First Matrix and Matrix $ 5,731 Bancorp Trading Cottonwood, AZ....... 1,879 Owned ABS N/A Houston, TX.......... 71,437 Owned ABS N/A Phoenix, AZ.......... 11,304 Owned ABS N/A Phoenix, AZ.......... 5 Acres Owned ABS N/A Mesa, AZ............. 6.729 Acres Owned ABS N/A Mesa, AZ............. 7,616 Owned ABS N/A Springerville, AZ.... 12,904 Owned ABS N/A Lakeland, FL......... 8,521 Owned ABS N/A St. Louis, MO........ 6,144 Leased through June 30, 2012 ABS $ 12,500 St. Louis, MO........ 5,500 Owned ABS N/A St. Louis, MO........ 42,000 Owned ABS N/A Snow Flake, AZ....... 2,850 Owned ABS N/A
__________ (1) Of this 182,623 square feet, approximately 58,167 square feet are leased to the Company and certain of its subsidiaries. Substantially all of the remaining space is rented to unaffiliated third parties at market prices. (2) Of this 30,000 square feet, approximately 10,100 square feet serve as the branch for Matrix Bank. Substantially all of the remaining space is rented to unaffiliated third parties at market prices. This space will be included in the sale of the Las Cruces branches as discussed in "Item 1. Business--Sale of Matrix Capital Bank Branches." (3) This space will be included in the sale of the Las Cruces branches as discussed in "Item 1. Business--Sale of Matrix Capital Bank Branches." (4) Of this 62,771 square fee, approximately 29,725 square feet are leased to Matrix Financial and ABS. Substantially all of the remaining space is subleased to the buyer of the production platform, an unaffiliated third party. See "Item 1. Business--Discontinued Operations." (5) This lease had been subleased by First Matrix to an unaffiliated third party at no gain or loss to the Company. (6) The lease is with a limited partnership in which an officer of First Matrix is a limited partner. Item 3. Legal Proceedings ----------------- General. We are from time to time party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. We accrue for contingent liabilities with respect to litigation matters in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies", which generally requires the Company to accrue a loss for a litigation matter involving a contingent liability if the loss is probable and the amount of the loss is reasonably estimable. In order to determine whether the two conditions necessary for accrual are met, management necessarily makes a number of judgments and assumptions. Because the outcome of most litigation matters is inherently uncertain, the Company will generally only accrue a loss for a pending litigation matter if, 24 for example, the parties to the matter have entered into definitive settlement agreements or a final judgment adverse to the Company has been entered. In many cases, these settlements or final judgments are not material to the consolidated financial position, results of operations or cash flows of the Company. Nevertheless, an adverse decision in certain matters, as described below, may have a material, adverse impact on our consolidated financial position, results of operations or cash flows. Matrix Bancorp. In early 1999, the Company and Matrix Bank instituted an arbitration action with the American Arbitration Association in Phoenix, Arizona against Fidelity National Financial, Inc. The arbitration action arose out of an alleged breach by Fidelity of a Merger Termination Agreement entered into between the Company and Fidelity in connection with the termination of their proposed merger. The arbitration panel has ruled that the entire Merger Termination Agreement was unenforceable. The Company and Matrix Bank filed an appeal of the arbitration panel's decision in federal district court in Phoenix, Arizona, which has been denied. In October 2001, Fidelity initiated a second arbitration to determine the validity of a release given in connection with the Merger Termination Agreement. Matrix Bancorp claimed that the releases were valid and, in the alternative, made a counterclaim against Fidelity demanding restitutional damages for the value of the releases if they were determined valid. The arbitration panel has held the releases to be valid and enforceable and has denied the Company's claim for restitutional damages. Fidelity has filed a motion with the arbitration panel requesting that it be awarded its attorney fees, and the panel has awarded Fidelity approximately $500 thousand. The Company has appealed the decision of the arbitration panel, and the ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Matrix Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings, Inc., Matrix Bank, and Guy A. Gibson, currently a director of Matrix Bancorp, Richard V. Schmitz, currently Co-Chief Executive Officer and Chairman of the Board of Matrix Bancorp, and D. Mark Spencer, currently the President, Co-Chief Executive Officer and a director of Matrix Bancorp, have been named defendants in an action filed in November 2000 styled Roderick Adderley, et al. v. Guy A. Gibson, et al. pending in the District Court of Tarrant County, Texas, seeking to impose joint and several liability on these defendants for the judgment against Sterling Trust in Roderick Adderley, et al. v. Advance Financial Services, Inc., et al. ("Adderley I") See "--Sterling Trust" below. The plaintiffs have asserted various theories of liability, including control person theories of liability under the Texas Securities Act and fraudulent transfer theories of liability. The defendants believe they have adequate defenses and intend to vigorously defend this action. The parties have agreed to abate the action pending the outcome of Adderley I. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Matrix Bancorp, Matrix Bank , The Vintage Group, Inc. and Vintage Delaware Holdings, Inc. have also been named as defendants in the Munoz matter described below. See "--Sterling Trust." Matrix Bank. A former customer of Matrix Bank is a debtor in a Chapter 11 proceeding under the Bankruptcy Code styled In re Apponline.com, Inc. and Island Mortgage Network, Inc. pending in the United States Bankruptcy Court for the Eastern District of New York. Prior to the bankruptcy filing, Matrix Bank had provided the customer, Island Mortgage Network, Inc., with a purchase/repurchase facility under which Matrix Bank purchased residential mortgage loans from Island Mortgage, with Island Mortgage having the right or obligation to repurchase such mortgage loans within a specified period of time. Several other financial institutions had provided Island Mortgage with warehouse financing or additional purchase/repurchase facilities. The total value of the loans Matrix Bank purchased from Island Mortgage that are subject to the bankruptcy was approximately $12.4 million in original principal amount (the "Purchased Loans"). The principals of Island Mortgage were indicted for fraud in connection with financial improprieties committed by Island Mortgage. Various third parties instituted lawsuits, adversary proceedings or competing bankruptcy claims against Matrix Bank claiming an equitable interest in approximately eighteen of the Purchased Loans (approximately $2.1 million in original principal amount). These third parties consist primarily of title companies, closing attorneys and other closing agents that provided settlement funds in connection with the funding of a borrower's mortgage loan, in many cases, we believe in violation of various "good funds" laws, which typically require a closing agent to wait for receipt of "good funds" prior to disbursement of settlement funds on the origination of a loan. After providing settlement funds, these closing agents discovered that Island Mortgage had either provided company checks with insufficient funds or had inappropriately placed a stop payment on the checks. To date, Matrix Bank has reached settlements or prevailed on the merits in connection with all of these loans, with the exception of third parties claiming ownership of, or an interest in, seven loans having an original principal balance of approximately $830 thousand. Matrix Bank to date has paid approximately $210 thousand in connection with the claims in this category that it has settled. Matrix Bank intends to continue to vigorously defend the claims of these third parties with respect to the remaining seven loans in this category to which there continues to be a 25 dispute. The ultimate legal and financial liability of the Company, if any, in any of the matters involving these seven loans cannot be estimated with certainty at this time. Additionally, certain parties in the chain of title to property securing approximately $2.7 million of loans (a total of twenty loans), including sellers and prior lien holders, are seeking to void or rescind their transactions on the theory that they never received consideration. Matrix Bank has reached settlements with respect to all of these loans, with the exception of third parties claiming ownership of, or an interest in, seven of these properties. Matrix Bank to date has paid approximately $1.1 million in connection with the claims in this category that it has settled. Matrix Bank intends to continue to vigorously defend the claims of these third parties with respect to the remaining seven loans in this category to which there continues to be a dispute. The ultimate legal and financial liability of the Company, if any, in any of the matters involving these seven loans cannot be estimated with certainty at this time. In connection with his review of the relationship between Matrix Bank and Island Mortgage, the trustee for Island Mortgage claimed an interest in each of the loans that had been purchased by Matrix Bank from Island Mortgage. His claims included theories that, with respect to certain loans, Matrix Bank was a secured creditor (as opposed to a purchaser) and, with respect to certain other loans, Matrix Bank was an unsecured creditor (as opposed to a purchaser). Accordingly, the trustee concluded, depending on which of the above theories a particular loan fit into, that he was either entitled to a surcharge with respect to the loans or that the estate in fact continued to own the loans. During 2003, Matrix Bank and the trustee reached an agreement to settle these claims, under which Matrix Bank paid the trustee approximately $930 thousand for the trustee to relinquish any right the estate might have in any of these loans. This matter has now been closed. The trustee also initiated an adversary action against Matrix Bank seeking to recover as an avoidable preference the $6.1 million Island Mortgage paid to Matrix Bank. Matrix Bank believes that it will successfully demonstrate to the Bankruptcy Court that the $6.1 million the trustee seeks to recover was purchase money belonging to Matrix Bank returned by Island Mortgage for loans that did not close and were not sold to Matrix Bank. Matrix Bank believes it has adequate defenses and intends to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in any of these matters cannot be estimated with certainty at this time. Additionally, Matrix Bank has initiated an adversary claim against the State Bank of Long Island ("State Bank"). State Bank was the depository bank for Island Mortgage, and Matrix Bank believes that State Bank bears liability for any loss sustained by Matrix Bank as a result of the fraud perpetrated by Island Mortgage. Matrix Bank also believes that any loss it may sustain as a result of its dealings with Island Mortgage are insured. Matrix Bank cannot accurately assess at this time whether and to what extent it will receive compensation from any source for any loss it may incur as a result of its relationship with Island Mortgage. Matrix Bancorp, Matrix Bank, The Vintage Group, Inc. and Vintage Delaware Holdings, Inc. have also been named as defendants in the Munoz matter described below. See "--Sterling Trust." Sterling Trust. Sterling Trust has been named a defendant in an action filed July 1999 styled Roderick Adderley, et al. v. Advanced Financial Services, Inc., et al. that was tried in Tarrant County, Texas district court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of 12 theories of liability posed by the plaintiffs, and the court has signed a judgment for certain of the plaintiffs in the amount of approximately $6.4 million, plus post-judgment interest and conditional attorneys' fees for the plaintiffs in connection with any appeals. Sterling Trust appealed the judgment to the Court of Appeals for the Second District of Texas (Fort Worth). On July 31, 2003, the Court of Appeals affirmed and reversed in part the jury verdict. The Court of Appeals affirmed the jury's award for actual damages of approximately $6.2 million, plus post-judgment interest and conditional attorneys' fees for the appeals (currently estimated to be approximately $2.8 million), but denied the punitive award of approximately $250 thousand. Sterling Trust continues to believe it has meritorious points of appeal to the decision. On October 31, 2003, Sterling Trust filed its Petition for Review with the Supreme Court of Texas. On January 29, 2004, the Supreme Court of Texas notified the parties that it was requesting full briefing from the parties on the matter. We consider this request to be a significant step in possibly having the Court grant our petition for review and agree to hear the case. However, we continue to caution that an appeal to the Supreme Court of Texas is discretionary in nature, meaning that the Supreme Court of Texas does not automatically have to hear the case. Notwithstanding the request by the Court for full briefing on the matter, there can be no assurances that the Supreme Court of Texas will agree to hear the case or that, if heard, Sterling Trust's appeal will be successful. Despite the fact that a final judgment from the trial court and the intermediate appellate court has been entered against Sterling in this matter, management has determined that the loss in this matter is not probable within FAS 5; accordingly, no accrual for loss with respect to this matter has been recorded in the consolidated financial statements. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. 26 Sterling Trust was named a defendant in several putative class action lawsuits instituted in November 2000 by one law firm in Pennsylvania. The styles of such lawsuits are as follows: Douglas Wheeler, et al. v. Pacific Air Transport, et al.; Paul C. Jared, et al. v. South Mountain Resort and Spa, Inc., et al.; Lawrence Rehrig, et al. v. Caffe Diva, et al.; Merrill B. Christman, et al. v. Millennium 2100, Inc., et al.; David M. Veneziale, et al. v. Sun Broadcasting Systems, Inc., et al.; and Don Glazer, et al. v. Technical Support Servs., Inc., et al. All of such lawsuits were originally filed in the United States District Court for the Western District of Pennsylvania. On April 26, 2001, the District Court for the Western District of Pennsylvania ordered that all of such cases be transferred to the United States District Court for the Western District of Texas so that Sterling Trust could properly present its motion to compel arbitration. Sterling Trust filed separate motions to compel arbitration in these actions, all of which were granted. Each of the six plaintiffs timely filed arbitration demands with the American Arbitration Association. The demands seek damages and allege Sterling Trust breached fiduciary duties and was negligent in administrating each claimant's self-directed individual retirement account holding a nine-month promissory note. Each of these arbitration actions has been abated pending the outcome of the Munoz matter described below. Sterling Trust believes it has meritorious defenses and is defending the matters vigorously. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Sterling Trust had been named a defendant in an action filed in August 2002 styled Charles W. and Wanda Davis v. Lionel Sanchez, et al. that was filed in the Second Judicial District Court in the County of Bernalillo, State of New Mexico. The plaintiffs claimed they were defrauded in connection with their investment of approximately $200 thousand through their self-directed IRA held by Sterling Trust. In November 2003, the Court dismissed the plaintiffs claims without prejudice. Sterling Trust, Matrix Bancorp, Matrix Bank, The Vintage Group, Inc. and Vintage Delaware Holdings, Inc. have been named a defendant in an action filed in December 2001 styled Heraclio A. Munoz, et al. v. Sterling Trust Company, et. al. that is pending in Superior Court of the State of California. The complaint seeks class action status, requests unspecified damages and alleges negligent misrepresentation, breach of fiduciary duty and breach of written contract on the part of Sterling Trust. The Company believes it has meritorious defenses and is defending the matter vigorously. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. In addition, Sterling Trust has been the subject of numerous lawsuits and arbitration proceedings in which customers and, in some cases, persons who are not customers allege various theories of liability against the Company for losses suffered by these claimants in connection with their failed investments in several enterprises. To the extent that Sterling Trust has had any relationship with any of such claimants, it has been solely as custodian of such claimants self-directed IRAs pursuant to contracts that specify the limited nature of Sterling Trust's obligations. We believe Sterling Trust has in each case acted in accordance with its obligations under the contracts and/or as otherwise imposed by law. We further believe that the ultimate outcome of each of these cases will not be material to the consolidated financial position and results of operations of Company; but, there can be no assurances that there will not be an adverse outcome in any one or more of these cases or that any such adverse outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company. Matrix Financial. Matrix Financial has been named as a defendant in an arbitration action filed on September 17, 2003 with the American Arbitration Association styled Veteran Home Loans, Inc. v. Matrix Financial Services Corporation. The complaint alleges that Matrix Financial underpaid Veteran Home Loans for services provided to Matrix Financial by Veteran Home Loans in connection with its assistance in originating mortgage loans, and seeks general damages for breach of contract and an accounting. Matrix Financial believes it has meritorious defenses and is defending this matter vigorously. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003. 27 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ------------------------------------- Our common stock, $0.0001 par value, is traded on The NASDAQ National Market under the symbol "MTXC." The following table sets forth the high and low sales prices for our common stock on The NASDAQ National Market for the periods indicated.
Market Price --------------------------- Quarter Ended: High Low ------------ ------------ December 31, 2003................................................ $ 9.321 $ 8.010 September 30, 2003............................................... 10.350 8.790 June 30, 2003.................................................... 10.240 8.600 March 31, 2003................................................... 9.590 8.000 December 31, 2002................................................ $ 9.920 $ 7.400 September 30, 2002............................................... 11.690 9.500 June 30, 2002.................................................... 13.500 10.800 March 31, 2002................................................... 11.750 10.100
On March 9, 2004, the closing price of our common stock was $10.65 per share. Also, as of that date, the approximate number of holders of record of our common stock was 36. This number does not include beneficial owners who hold their shares in a depository trust in "street" name. In May 2000, we announced the adoption of a Common Stock Repurchase Program under which we were authorized to repurchase up to $3.0 million of our common stock. In June 2002, the Board of Directors of the Company authorized the repurchase of up to an additional $2.5 million of common stock, bringing the total authorization to-date under the repurchase program to $5.5 million of common stock. Under the program, we have repurchased a total of 389,560 shares through December 31, 2003, for a total purchase price of approximately $3.2 million. No executive officer or director participated in this repurchase. Our ability to repurchase stock is further limited due to various provisions in Matrix Bancorp's debt instruments, the most restrictive of which is our bank stock loan. Under the bank stock loan, Matrix Bancorp is allowed to make certain restricted payments, which includes repurchases of stock and payments of dividends to shareholders, in an amount of up to $3.0 million plus 25% of the Company's cumulative consolidated net income for fiscal quarters beginning with the quarter ending March 31, 2001. Although we have no present plans to do so, we may seek in the future authorization from the Board of Directors of Matrix Bancorp to repurchase additional shares of our Common Stock under the Common Stock Repurchase Program. Any such additional authorization will be consistent with the restrictions and limitations under our debt covenants, including those of the bank stock loan described above. We have not paid any dividends on our equity for the last three fiscal years. Any future determination as to dividend policy will be made at the discretion of the Board of Directors of the Company and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors the Board of Directors may deem relevant. Our ability to pay dividends is restricted by the same provisions that restrict our ability to repurchase our stock, as described in the immediately preceding paragraph. Additionally, Matrix Bancorp is prohibited from paying dividends on its common stock if the scheduled payments on our junior subordinated debentures and trust preferred securities have not been made. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Notes 10 and 11 to the consolidated financial statements included elsewhere in this document. In addition, the ability of Sterling Trust, First Matrix and Matrix Bank to pay dividends to Matrix Bancorp may be restricted due to certain regulatory requirements. See "Item 1. Business--Regulation and Supervision." The following table provides information as of December 31, 2003 regarding compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance. For further information, see Note 15 to the consolidated financial statements. 28
Number of securities remaining available for future issuance under equity Number of securities Weighted average compensation plans to be issued upon exercise price of (excluding exercise of outstanding securities outstanding options, options, warrants reflected in Plan Category warrants and rights and rights column (a)) - --------------------------------------------------------------------------------------------------------------- (a) (b) (c) Equity compensation plans approved by security holders (1) 609,750 10.10 362,741 ======================= =================== ====================
(1) Column (a) includes the options granted under the 1996 Stock Option Plan, which amended and restated the Company's Stock Option Plan adopted in 1995. Column (a) does not include outstanding options under the Company's Amended and Restated Employee Stock Purchase Plan (the "ESPP"), which has a shareholder approved reserve of 250,000 shares that is included in column (c). Under the ESPP, each eligible employee may purchase a limited number of shares of common stock at annual intervals each year at a purchase price per share equal to 85% of the fair market value of the Company's common stock as of either the beginning or ending date of the annual purchase period. Item 6. Selected Financial Data ----------------------- SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION OF MATRIX BANCORP, INC. The following selected consolidated financial data and operating information of Matrix Bancorp, Inc. and subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," each of which is included elsewhere in this document. Information presented in this table is from continuing operations, which excludes the financial results of the wholesale production platform for all of the years presented. The platform was sold in 2003 as discussed in "Item 1. Business - Discontinued Operations." The results from continuing operations as reflected herein are not necessarily reflective of the financial results that might have occurred had the disposition of the platform had actually been completed on the indicated date, and are not indicative of any future results. See further discussion at "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Discontinued Operations - Sale of Wholesale Production Platform."
As of and for the Year Ended December 31, ---------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------- ------------- -------------- ------------ (Dollars in thousands, except per share data) Statement of Operations Data Net interest income before provision for loan $ 41,708 $ 42,710 $ 30,183 $ 28,552 $ 28,397 and valuation losses..................... Provision for loan and valuation losses.... 3,641 2,821 2,980 3,840 3,180 ------------ ------------- ------------ -------------- ------------ Net interest income after provision for loan and valuation losses.................. 38,067 39,889 27,203 24,712 25,217 ------------ ------------- ------------ -------------- ------------ Noninterest income: Loan administration...................... 21,668 27,359 28,273 23,850 23,686 Brokerage................................ 10,873 8,105 4,815 8,119 6,156 Trust services......................... 6,781 5,345 4,036 4,923 4,840 Real estate disposition services....... 6,624 4,153 2,572 3,677 3,659 Gain on sale of loans and securities . 14,267 5,480 4,163 982 3,247 Gain on sale of mortgage servicing rights, net............................ - 675 167 2,634 363 School services.......................... 2,420 4,616 5,427 4,240 2,813 Other.................................... 6,696 6,201 8,934 4,536 9,445 ------------ ------------- ------------ -------------- ------------ Total noninterest income............... 69,329 61,934 58,387 52,961 54,209 Noninterest expense........................ 110,968 118,848 85,585 67,635 61,403 ------------ ------------- ------------ -------------- ------------ (Loss) income from continuing operations before income taxes..................... (3,572) (17,025) 5 10,038 18,023 Income tax (benefit) expense............... (2,575) (7,756) (887) 3,632 6,658 ------------ ------------- ------------ -------------- ------------ (Loss) income from continuing operations... $ (997) $ (9,269) $ 892 $ 6,406 $ 11,365 ============ ============= ============ ============== ============ (Loss) income from continuing operations per share assuming dilution(1) ......... $ (0.15) $ (1.43) $ 0.14 $ 0.95 $ 1.66 Weighted average common shares assuming dilution................................ 6,539,195 6,462,272 6,560,454 6,748,857 6,833,546 Balance Sheet Data Total assets............................... $1,723,924 $ 1,701,405 $ 1,646,940 $ 1,418,773 $ 1,283,746 Securities................................. 152,508 29,073 6,963 66,616 -- Total loans, net........................... 1,344,256 1,393,810 1,340,700 1,095,045 1,103,515 Mortgage servicing rights, net............. 39,744 63,200 78,712 71,529 63,479
29
As of and for the Year Ended December 31, ---------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------- ------------- -------------- ------------ (Dollars in thousands, except per share data) Deposits(2)................................ $ 974,059 $ 933,957 $ 866,235 $ 602,669 $ 562,194 Custodial escrow balances.................. 85,466 151,790 129,665 77,647 94,206 FHLBank borrowings......................... 458,204 385,785 303,361 519,433 405,000 Other borrowings........................... 114,495 125,903 222,032 124,503 142,101 Total shareholders' equity................. 69,684 66,936 71,312 64,023 60,497 Operating Ratios and Other Selected Data Return from continuing operations on average assets(3)....................... (0.06)% (0.57)% 0.56% 0.49% 1.08% Return from continuing operations on average equity(3)....................... (1.45) (13.07) 1.34 10.22 20.87 Average equity to average assets(3)........ 4.16 4.35 4.18 4.75 5.16 Net interest margin(3)(4).................. 2.88 3.06 2.14 2.41 3.13 Operating efficiency ratio(5).............. 73.33 76.88 71.95 70.89 54.48 Total amount of loans purchased for sale... $ 1,636,986 $ 1,127,632 $ 97,486 $ 204,922 $ 701,952 Balance of owned servicing portfolio (end of period).............................. 3,183,536 5,333,627 5,656,365 5,517,963 5,889,715 Trust assets under administration (end of period) ................................ 13,280,435 7,876,329 6,017,085 3,847,038 2,545,060 Ratios of Earnings to Fixed Charges(6) Including interest on deposits............. 0.89x 0.60x 1.00x 1.15x 1.40x Excluding interest on deposits............. 0.82x 0.18x 0.99x 1.23x 1.79x Loan Performance Ratios and Data Allowance for loan and valuation losses.... $ 9,789 $ 9,343 $ 9,338 $ 8,581 $ 6,354 Nonperforming loans(7) .................... 31,450 30,818 37,251 28,516 25,641 Nonperforming loans/total loans(7) ........ 2.32% 2.20% 2.76% 2.54% 2.31% Nonperforming assets/total assets(7) ...... 2.32 2.30 2.77 2.20 2.06 Net loan charge-offs/average loans(3) ..... 0.23 0.21 0.17 0.18 0.06 Allowance for loan and valuation losses/ total loans ............................ 0.72 0.67 0.69 0.76 0.57 Allowance for loan and valuation losses/ nonperforming loans .................... 31.13 30.32 25.07 30.09 24.78
_________ (1) Net (loss) income per common share assuming dilution is based on the weighted average number of common shares outstanding during each period and the dilutive effect, if any, of stock options and warrants outstanding. There are no other dilutive securities. (2) At December 31, 2003, 2002, 2001, 2000 and 1999, the total balance of brokered deposits was $95.5 million, $327.3 million, $303.0 million, $203.6 million and $221.5 million, respectively. (3) Calculations are based on average daily balances where available and monthly averages otherwise. (4) Net interest margin has been calculated by dividing net interest income from continuing operations before loan and valuation loss provision by average interest-earning assets. (5) The operating efficiency ratio has been calculated by dividing noninterest expense from continuing operations, excluding amortization of mortgage servicing rights, by operating income from continuing operations. Operating income from continuing operations is equal to net interest income before provision for loan and valuation losses plus noninterest income. (6) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense. (7) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Nonperforming Assets" for a discussion of the level of nonperforming loans. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------- You should read the following management's discussion and analysis of the financial condition and results of operations in conjunction with the preceding "Selected Consolidated Financial and Operating Information." Additionally, our consolidated financial statements and the notes thereto, as well as other data included in this document, should be read and analyzed in combination with the analysis below. Overview The primary source of the Company's revenue is net interest income, which is the difference between interest income earned on loans and investments, and interest expense paid on deposits and borrowed money. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest earning assets and the mix of interest bearing and non-interest bearing deposits and borrowings. The Company manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest rate risk monitoring and management policies and practices. In addition, the Company generates revenue through fee- based services. Many of these services provide additional low-cost deposits for, or have other synergies with, the core banking operations. 30 During 2003, the Company sold its wholesale loan origination production platform (as discussed in "Item 1. Business - Discontinued Operations.") We sold the Platform because we were concerned that, over an extended period of time, we would find it difficult to compete in the highly competitive, lower margin mortgage origination industry, and believe that the synergies provided to our core operations from this line of business were no longer beneficial from an operational risk standpoint. The Company was able to successfully reinvest the liquidity generated by the sale of the production platform without substantially impacting its net interest income. The historically low interest rates in 2003 were a significant challenge to our Asset/Liability Committee. We have maintained our positive net interest gap, which means that our assets are expected to re-price quicker than our liabilities as interest rates change. See a detailed discussion of our strategies to manage our risk in "Item 7. - Asset and Liability Management" which follows. The low interest rate environment in 2003 caused continued compression of our net interest income and was the cause of a significant amount of amortization expense on our mortgage servicing rights. The mortgage servicing rights are amortized based on the expected pattern and life of related servicing revenues and our investment is also evaluated quarterly for impairment. As interest rates fall, there is a higher probability of prepayment as the borrower can generally refinance the loan. The historically low mortgage interest rate environment in 2003 led to high prepayments and refinancing resulting in continued high levels of servicing rights amortization. If interest rates remain at current levels or increase in 2004, there should be reduced refinance activity and reduced related amortization, and a possibility of additional recovery on the recorded impairment. Conversely, if interest rates decrease to levels of the summer of 2003, levels of amortization and impairments could be significant. Certain of our fee based business, including the acquisition, brokerage and sale of SBA loans and loan pools, fees generated from the management and disposition of foreclosed properties owned by independent financial services companies, and our investment in Matrix Settlement and Clearance Services continue to be a strong point in our operations, and in positively impacting our core banking operations. Growth in core deposits continued in 2003, primarily driven by deposits generated by subsidiaries of the Company for Matrix Bank. We will focus on these businesses and our core banking operations in 2004 and beyond. The following portions of the Management's Discussion and Analysis focus in more detail on the results of operations for 2003, 2002 and 2001 and on information about the Company's balance sheet, credit quality, liquidity and funding resources, capital, critical accounting estimates and other matters. General Matrix Bancorp was formed in June 1993 when the founding shareholders of Matrix Financial and United Financial, now known as Matrix Bancorp Trading, two of our subsidiaries, exchanged all of their outstanding capital stock for shares of our stock in a series of transactions that were each accounted for as a pooling of interests. In September 1993, we acquired Dona Ana Savings and Loan Association, FSB, which was subsequently renamed Matrix Capital Bank. The acquisition was accounted for using the purchase method of accounting. We formed Matrix Asset Management, formerly United Special Services, in June 1995 and United Capital Markets in December 1996. In February 1997, we acquired The Vintage Group (whose primary subsidiary is Sterling Trust) in a pooling of interests and, accordingly, no goodwill was recorded and our consolidated financial statements for the prior periods were restated. Additionally, we acquired ABS in March 1999. The acquisition was accounted for using the purchase method of accounting. We entered into our joint venture, Matrix Settlement & Clearance Services, in September of 1999. On August 1, 2000, we sold the stock of United Capital Markets to one of the officers of that company. On August 1, 2000, Matrix Financial, our mortgage banking operation, became an operating subsidiary of Matrix Bank. On October 31, 2001, First Matrix, our broker-dealer operation, became an operating subsidiary of Matrix Bancorp Trading. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank, Matrix Financial and ABS School Services; o brokerage and consulting fees generated by Matrix Bancorp Trading and First Matrix; o disposition services fees generated by Matrix Asset Management; o gains on sales of mortgage loans generated by Matrix Bank and Matrix Financial; o loan administration fees generated by Matrix Financial; o trust service fees generated by Sterling Trust and Matrix Bank; and o school service fees generated by ABS. 31 Our results of operations are influenced by changes in interest rates and the effect of these changes on our interest margins, mortgage loan prepayments and the value of mortgage servicing portfolios. Our fee-based businesses are effected to a lesser extent by interest rates and more by competition and general market conditions. Discontinued Operations - Sale of Wholesale Production Platform On September 2, 2003, we announced the final closing, and substantial completion of the sale by Matrix Financial of substantially all of its assets associated with its wholesale mortgage origination platform. See "Item 1. Business--Discontinued Operations" for a more detailed discussion. We agreed to sell the Platform because we were concerned that, over an extended period of time, we would find it difficult to compete in the highly competitive mortgage origination industry that generally operates on high volume and low margins. Based on the size of our wholesale production platform, we were required to commit a significant percentage of our capital to a line of business that is fairly cyclical and the earnings were difficult for us to estimate. The sale of platform has allowed us to reduce our operational risks and the costs associated with the platform. We were successful in reinvesting the liquidity created from the sale into predominately adjustable rate loans, SBA loans and high quality mortgage-backed securities, thereby reducing the financial impact of being underinvested due to the sale of the production platform. The operations of the production platform, which reflect income from discontinued operations, net of tax effect, of $3.3 million, $5.3 million and $7.6 million for the years ended December 31, 2003, 2002 and 2001, respectively, are reported as discontinued operations in the consolidated financial statements, and will be presented as such in future releases and filings, and as such are not included in the discussion of results from continuing operations below. It should be noted the discontinued operations are based upon the Company's historical results from operations of the production platform, adjusted to reflect the impact of the sale of the production platform. Because there was an opportunity cost of owning the production platform, the historical results are not necessarily indicative of the results that might have occurred if the disposition had actually been completed on the indicated date, and are not indicative of any future results. Comparison of Results of Operations for Fiscal Years 2003 and 2002 Loss from Continuing Operations. A loss of $(1.0) million for the fiscal year 2003 was recognized, an improvement of $8.3 million to the loss of $(9.3) million for fiscal year 2002. On a basic and diluted per share basis, loss was $(0.15) for the fiscal year 2003 as compared to $(1.43) for fiscal year 2002. Our loss in 2003 was primarily caused by the incurrence of $32.5 million of amortization of our mortgage servicing asset, which increased $8.3 million from 2002 levels. This increase was due to an increase in the prepayment speeds on the loans underlying the mortgage servicing asset caused by the historical low interest rate environment. The impact of the increased amortization was offset by a recovery of $2.9 million of impairment charges recorded against our mortgage servicing rights asset, whereas in 2002 there was a $14.2 million, net pre-tax, impairment charge against the value of the mortgage servicing rights. Net Interest Income. Net interest income before provision for loan and valuation losses decreased $(1.0) million to $41.7 million for fiscal year 2003 as compared to $42.7 million for fiscal year 2002. Our net interest margin decreased 15 basis points to 2.88% for the year ended December 31, 2003 from 3.06% for the year ended December 31, 2002, and interest rate spread decreased to 2.57% for the year ended December 31, 2003 from 2.72% for the year ended December 31, 2002. The decrease in net interest margin and the interest rate spread is due to a combination of a 94 basis point decrease in the average rate earned on average interest-earning assets to 5.08% for the year ended December 31, 2003 as compared to 6.02% for the year ended December 31, 2002. The effects of the decrease in rates on interest-earning assets was offset partially by a decrease in the cost of our interest-bearing liabilities of 79 basis points to 2.51% for the year ended December 31, 2003 as compared to 3.30% for the year ended December 31, 2002. Both the decrease in the rate earned on our average interest-earning assets, and the decrease in the cost of our average interest-bearing liabilities is driven by continued low levels of market interest rates prevalent throughout 2003. The impact of the low interest rate environment is not as direct for the average interest-bearing liabilities as certain of the term borrowings are at fixed rates. For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses increased $800 thousand, or 29.1%, to $3.6 million for fiscal year 2003 as compared to $2.8 million for fiscal year 2002. This increase was attributable to increased levels of reserves as a result of an increase in our homogeneous residential 32 loan portfolio acquired to replace the originated wholesale loans, which liquidity was available due to the sale of the production platform as discussed in "Item 1. Business--Discontinued Operations". The Company's historic experience is that our homogeneous residential loan portfolio has slightly greater losses than mortgage loans that are sold within 45 days of origination. For a discussion of the components of the allowance for loan losses, see "Asset and Liability Management--Analysis of Allowance for Loan and Valuation Losses." For a discussion on the allowance as it relates to nonperforming assets, see "Asset and Liability Management--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Loan administration fees decreased $(5.7) million to $21.7 million for fiscal year 2003 as compared to $27.4 million for fiscal year 2002. Loan service fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio decreased to an average balance of $4.2 billion for fiscal year 2003 as compared to an average balance of $5.7 billion for fiscal year 2002. The impact of the decrease in the average balance of the servicing portfolio was partially offset by an increase in the average service fee (including all ancillary income) to 0.50% for the year ended December 31, 2003 as compared to 0.45% for the year ended December 31, 2002. Matrix Financial anticipates loan administration fees to continue to decrease as its servicing portfolio decreases through normal prepayments. Brokerage Fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights, as well as brokerage income earned from whole loan and retail activities, and SBA trading fees. Brokerage fees increased $2.8 million, or 34.2%, to $10.9 million for fiscal year 2003 as compared to $8.1 million for fiscal year 2002. This increase was primarily the result of strong performance and the revenues generated from the acquisition, pooling and selling of SBA loans and securities, which increased to $3.1 million for the year ended December 31, 2003 as compared to $1.7 million for the year ended December 31, 2002. Trust Services. Trust service fees increased $1.4 million, or 26.9%, to $6.8 million for fiscal year 2003 as compared to $5.4 million for fiscal year 2002. The increase is due to an increase in total trust accounts under administration of 50,251 accounts at December 31, 2003 from 45,097 accounts at December 31, 2002, and total fiduciary assets under administration which increased to $13.3 billion at December 31, 2003 from $7.9 billion at December 31, 2002. The growth was due to increases at Matrix Bank's trust department, driven by the business referred to us by Matrix Settlement & Clearance Services. 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 service revenue increased $2.5 million, or 59.5%, between the fiscal years 2003 and 2002 to $6.6 million for the year ended December 31, 2003 as compared to $4.1 million for the year ended December 31, 2002. The increase was due to the increase in the number of properties closed during the year, which increased 54.2%, to 3,521 from 2,283 in 2002. Additionally, the increase is due to new clients obtained, and increased volumes from existing clients. Properties under management were 3,183 at December 31, 2003 as compared to 2,071 at December 31, 2002. Gain on Sale of Loans and Securities. Gain on sale of loans and securities increased $8.8 million, or 160.3%, to $14.3 million for fiscal year 2003 as compared to $5.5 million for fiscal year 2002. The increase includes gains on sale of repurchased FHA and VA loans previously sold from our mortgage servicing rights portfolio of $10.2 for the year ended December 31, 2003 as compared to $4.9 million for the year ended December 31, 2002. Gains on sale of repurchased FHA and VA loans relate to delinquent loans that are purchased out of loan pools of which Matrix Financial acts as servicer and then re-sells into the secondary market. The gains on sale of loans and securities also includes an increase of $1.7 million in gains on the sale of originated SBA and multi family loans at Matrix Bank, to $1.8 million for the year ended December 31, 2003, as compared to $100 thousand for the year ended December 31, 2002. Gains on sale can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan or securities portfolios available in the market, and as market conditions dictate, the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights decreased to $0 for fiscal year 2003 from $700 thousand for fiscal year 2002. Due to the low interest rate environment prevalent in the second half of 2002 and all of 2003, the market conditions were not favorable for our servicing portfolio. If interest rates increase and prices become more attractive, we may sell a portion of our servicing asset. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. 33 School Services. School services income represents fees earned by ABS, operating as The GEO Group, for outsourced business and consulting services provided primarily to charter schools. School services income decreased $(2.2) million, or 47.6%, to $2.4 million for fiscal year 2003 as compared to $4.6 million for fiscal year 2002. This decrease was primarily due to a decrease in the number of, and rates paid by our core business service clients, as a result of the strategic decision in mid 2002 to downsize the level of capital committed to ABS, and to reduce our operating exposure in this line of business. Other Income. Other income, which includes loan origination income, equity in earnings of unconsolidated subsidiaries, service and ATM fees, rental income, structured finance trading activities, and other miscellaneous items, increased $500 thousand, or 8.0%, to $6.7 million for fiscal year 2003 as compared to $6.2 million for fiscal year 2002. The increase was primarily due to an increase of $900 thousand in income generated from our equity investment in Matrix Settlement and Clearance, to $1.1 million for fiscal 2003 as compared to $200 thousand for fiscal 2002. Noninterest Expense. Noninterest expense decreased $(7.9) million, or 6.6%, to $111.0 million for fiscal year 2003 as compared to $118.9 million for fiscal year 2002. This decrease was primarily due to a $14.2 million non-cash impariment charge on mortgage servicing rights incurred in 2002 as compared to a $3.0 million recovery of such impairment in fiscal 2003. This decrease was also due to a $1.0 million charge to write-off the goodwill balance at ABS incurred in 2002, whereas a similar charge was not incurred in fiscal 2003. The decrease was offset by an increase in the level of amortization on our mortgage servicing rights asset. The following table details the major components of noninterest expense for the periods indicated:
Year Ended December 31, ------------------------------- 2003 2002 --------------- -------------- (In thousands) Compensation and employee benefits $ 34,984 $ 36,350 Amortization of mortgage servicing rights .......................................... 32,497 24,176 Occupancy and equipment............................................................. 6,172 5,600 Postage and communication........................................................ 2,435 2,676 Professional fees................................................................... 3,357 2,770 Data processing..................................................................... 2,860 2,796 (Recovery of) impairment on mortgage servicing rights............................ (2,950) 14,219 Other general and administrative.................................................... 31,613 30,261 --------------- -------------- Total.......................................................................... $ 110,968 $ 118,848 =============== ==============
Compensation and employee benefits decreased $(1.4) million, or 3.8%, to $35.0 million for fiscal year 2003 as compared to $36.4 million for fiscal year 2002. This decrease was primarily the result of decreased salaries and wages associated with reductions in the overall number of employees, primarily at ABS, and by decreases in medical benefits expense associated with the structural rate changes implemented for the 2003 benefit year. The Company had an overall decrease of 47 employees, or 8.5%, to 509 employees at December 31, 2003 as compared to 556 employees at December 31, 2002. Amortization of mortgage servicing rights increased $8.3 million, or 34.4%, to $32.5 million for fiscal year 2003 as compared to $24.2 million for fiscal year 2002. 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 continued historic low interest rates prevalent in the market, prepayment speeds on our servicing portfolio continued to increase to an average of 35.4% during fiscal year 2003 as compared to 23.7% during fiscal year 2002, which increase offset the effects of a decrease in the average balance of our mortgage servicing rights to $48.7 million for the 2003 fiscal year as compared to $81.0 million for the 2002 fiscal year. (Recovery of) impairment on mortgage servicing rights, which is a non-cash item, reflects a recovery for the year ended December 31, 2003 of $2.9 million as compared to an impairment charge of $14.2 million for the year ended December 31, 2002. The Company is required to record its investment in mortgage servicing rights at the lower of cost or fair value. The fair value of mortgage servicing rights is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its mortgage servicing rights by product type and investor to reflect the predominant risks. To determine the fair value of its investment, the Company uses a valuation model that calculates the present value of future cash flows. Due to increases in interest rates in 2003, a portion of the previously recorded impairment was recovered increasing the carrying basis to fair value. It is not possible to estimate if future recoveries will occur, and further decreases in market interest rates, or increases in anticipated future prepayment speeds, may cause additional impairment charges in future periods. 34 The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication, professional fees, data processing costs and other expenses increased $2.3 million, or 5.3%, to $46.4 million for fiscal year 2003 as compared to $44.1 million for fiscal year 2002. The increase is primarily related to increased levels of subaccounting fees paid by Matrix Bank, increased consulting fees, consisting of accounting, auditing, information services, legal and other, incurred at Matrix Bank, Matrix Financial and Matrix Tower Holdings in fiscal year 2003 above those from fiscal year 2002, litigation settlement costs in fiscal year 2003 at Matrix Financial that were not present in fiscal year 2002, writedown of real estate owned at ABS in 2003, and losses realized on loans repurchased at Matrix Financial related to the production platform in 2003 that were not present in 2002. Income Taxes. Income taxes reflect a benefit of $(2.6) million for fiscal year 2003 as compared to a benefit of $(7.8) million for fiscal year 2002. Our effective tax benefit was 72.1% for fiscal year 2003 as compared to an effective tax benefit of 45.6% for fiscal year 2002. The effective tax rates are affected by the level of tax-exempt income at ABS and Matrix Bank in proportion to the level of net loss. The net tax exempt interest income was $3.7 million and $2.9 million for the years ended December 31, 2003 and 2002, respectively. Comparison of Results of Operations for Fiscal Years 2002 and 2001 Net Income (Loss) from Continuing Operations. A net loss from continuing operations of $(9.3) million for the fiscal year 2002 was recognized, a $(10.2) million decrease to the net income of $892 thousand for fiscal year 2001. On a basic and diluted per share basis, net loss from continuing operations was $(1.43) for the fiscal year 2002 as compared to net income of $0.14 per basic and diluted share for fiscal year 2001. The decreases in net income, earnings per share and return on average equity were caused primarily by $14.2 million, net pre-tax, non-cash impairment charges against the value of the mortgage servicing rights and related advances, $1.0 million write-off of goodwill balances at ABS in accordance with SFAS No. 142, and a $700 thousand loss on subleasing of office space. Net Interest Income. Net interest income before provision for loan and valuation losses increased $12.5 million to $42.7 million for fiscal year 2002 as compared to $30.2 million for fiscal year 2001. Our net interest margin increased 92 basis points (equivalent to 0.0092 percentage points) to 3.06% for the year ended December 31, 2002 from 2.14% for the year ended December 31, 2001, and interest rate spread increased to 2.72% for the year ended December 31, 2002 from 1.59% for the year ended December 31, 2001. The increase in net interest income before provision for loan valuation losses was primarily due to a 184 basis point decrease in the cost of our interest-bearing liabilities, driven by decreases in interest rates, which have significantly impacted the rates paid by Matrix Bank for FHLBank borrowings and certificates of deposit. The cost of FHLBank borrowings decreased 173 basis points to 2.89% for the year ended December 31, 2002 as compared to 4.62% for the year ended December 31, 2001. The cost of certificates of deposit decreased 233 basis points to 3.65% for the year ended December 31, 2002 as compared to 5.98% for the year ended December 31, 2001. The interest rate on short-term borrowings fluctuates with the federal funds rate, which remain at historic lows. The decrease in our cost of interest-bearing liabilities was partially offset by a decrease in the yield earned on our average loan portfolio to 6.16% for the year ended December 31, 2002 as compared to 6.85% for the year ended December 31, 2001. The increase was also due to a $64.0 million increase in our average noninterest-bearing deposits between the two comparable years, offset by a slight decrease in our average interest-earning assets to $1.40 billion for the year ended December 31, 2002 as compared to $1.41 billion for the year ended December 31, 2001. For a tabular presentation of the changes in net interest income due to changes in volume of interest-earning assets and changes in interest rates, see "Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." Provision for Loan and Valuation Losses. The provision for loan and valuation losses decreased $(200) thouand, or 5.3%, to $2.8 million for fiscal year 2002 as compared to $3.0 million for fiscal year 2001. This decrease was attributable to lower levels of reserves recorded at Matrix Bank and Matrix Financial due to improvements in nonaccrual loans, offset by higher levels of reserves recorded at ABS due to higher loan losses versus levels in 2001. For a discussion of the components of the allowance for loan losses, see "Asset and Liability Management--Analysis of Allowance for Loan and Valuation Losses." For a discussion on the allowance as it relates to nonperforming assets, see "Asset and Liability Management--Nonperforming Assets." Loan Administration. Loan administration income represents service fees earned from servicing loans for various investors, which are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Loan administration fees decreased $(900) thousand to $27.4 million for fiscal year 2002 as compared to $28.3 million for fiscal year 2001. Loan service fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our 35 mortgage loan servicing portfolio increased slightly to an average balance of $5.7 billion for fiscal year 2002 as compared to an average balance of $5.5 billion for fiscal year 2001. There was a decrease in the average service fee (including all ancillary income) to 0.45% for the year ended December 31, 2002 as compared to 0.50% for the year ended December 31, 2001, excluding for fiscal 2001 a $550 thousand transition adjustment, as well as $275 thousand of subservicing income from a portfolio sold in 2001 not transferred until 2002. The decrease in the service fees was due to Matrix Financial's decision in the third quarter of 2002 to begin to sell the majority of its newly originated servicing under an assignment of trade contract. Brokerage Fees. Brokerage fees increased $3.3 million, or 68.3%, to $8.1 million for fiscal year 2002 as compared to $4.8 million for fiscal year 2001. This increase was the result of strong performance in whole loan brokerage activities, where fees increased to $5.9 million for the year ended December 31, 2002 as compared to $1.9 million for the year ended December 31, 2001, as well as revenues generated as a result of the focus by First Matrix on the acquisition, pooling and selling of SBA loans and securities where revenue increased to $1.7 million for the year ended December 31, 2002 as compared to $100 thousand for the year ended December 31, 2001 when the SBA activity began. Trust Services. Trust service fees increased $1.3 million, or 32.4%, to $5.3 million for fiscal year 2002 as compared to $4.0 million for fiscal year 2001. During 2002, the trust department at Matrix Bank began its operations. The increase is due to an increase in total trust accounts under administration at Sterling Trust and Matrix Bank of 45,097 accounts at December 31, 2002 from 41,329 accounts at December 31, 2001 and total fiduciary assets under administration which increased to $7.9 billion at December 31, 2002 from $6.0 billion at December 31, 2001. Much of the growth was driven by business referred to us by Matrix Settlement & Clearance Services. Real Estate Disposition Services. Real estate disposition service income increased $1.6 million, or 61.5%, between the fiscal years 2002 and 2001 to $4.2 million. The increase was due to the increase in the number of properties closed during the year, which increased 58.1%, to 2,283 from 1,444 in 2001. Additionally, the increase is due to new clients obtained as a result of prior marketing efforts. Properties under management were 2,071 at December 31, 2002 as compared to 1,146 at December 31, 2001. Gain on Sale of Loans and Securities. Gain on sale of loans and securities increased $1.3 million, or 31.7%, to $5.5 million for fiscal year 2002 as compared to $4.2 million for fiscal year 2001. The increase includes gains on sale of previously repurchased FHA and VA loans from our mortgage servicing rights portfolio of $4.9 for the year ended December 31, 2002 as compared to $1.8 million for the year ended December 31, 2001. Gains on sale of previously repurchased FHA and VA loans relate to delinquent loans which are purchased out of loan pools of which Matrix Financial acts as servicer and then re-sells into the secondary market. Gains on sale can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan or securities portfolios available in the market, and as market conditions dictate, the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights increased $500 thousand to approximately $700 thousand for fiscal year 2002 as compared to $200 thousand for fiscal year 2001. The increased gain was despite a decrease in terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights which we sold being $681.0 million in purchased mortgage servicing rights during fiscal year 2002 as compared to $1.7 billion during fiscal year 2001. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, and as market conditions dictate, we anticipate selling additional servicing rights to decrease our overall investment. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided primarily to charter schools. School services income decreased $(800) thousand, or 14.9%, to $4.6 million for fiscal year 2002 as compared to $5.4 million for fiscal year 2001. This decrease was primarily due to a decrease in the rates paid by our core business service clients, which stood at 142 schools at December 31, 2002. During the first six months of 2002, in an effort to increase our client base and fee income on a national basis, ABS incurred significant costs for personnel and marketing efforts. Ultimately, ABS was not able to attract the amount of new contracts that it had targeted for the new school year, which begins in July of each year. As a result of the lower than projected revenue, management has elected to focus on expense reductions and client retention rather than significant expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Comparison of Results of Operations for Fiscal Years 2002 and 2001-Noninterest Expense" for discussion of goodwill write-off. 36 Other Income. Other income decreased $(2.7) million, or 30.6%, to $6.2 million for fiscal year 2002 as compared to $8.9 million for fiscal year 2001. The 2001 fiscal year income included $3.4 million pre-tax gain on sale of assets generated due to the condemnation of real estate held by Matrix Bank in Denver, Colorado, which was going to be used for relocation of Matrix Bank's domicile. The City and County of Denver condenmed the property in October 2001. A similar gain was not present in 2002. Noninterest Expense. Noninterest expense increased $33.3 million, or 38.9%, to $118.9 million for fiscal year 2002 as compared to $85.6 million for fiscal year 2001. This increase was primarily due to inclusion of the $14.2 million non-cash impariment charge on mortgage servicing rights as compared to $181 thousand in 2001, a $1.0 million charge to write-off the goodwill balance at ABS, a $700 thousand loss on subleasing office space associated with the move to Matrix Financial Center and $1.0 million incremental reserves against other assets during the year ended December 31, 2002. In addition, the Company experienced increases in compensation and benefits expense and other general and administrative expense due to increases to support growth and volume at Matrix Bank and First Matrix. The following table details the major components of noninterest expense for the periods indicated:
Year Ended December 31, ------------------------------- 2002 2001 --------------- -------------- (In thousands) Compensation and employee benefits.................................................. $ 36,350 $ 30,603 Amortization of mortgage servicing rights .......................................... 24,176 21,862 Occupancy and equipment............................................................. 5,600 4,545 Postage and communication........................................................... 2,676 2,410 Professional fees................................................................... 2,770 2,590 Data processing..................................................................... 2,796 2,370 Impairment of mortgage servicing rights............................................. 14,219 181 Other general and administrative.................................................... 30,261 21,024 --------------- -------------- Total.......................................................................... $ 118,848 $ 85,585 =============== ==============
Compensation and employee benefits increased $5.7 million, or 18.8%, to $36.3 million for fiscal year 2002 as compared to $30.6 million for fiscal year 2001. This increase was primarily the result of increases in personnel costs at Matrix Bank, First Matrix and ABS. The increased costs are due to a combination of increased personnel and the inclusion of a full year of salary and benefits costs for employees added during 2001. The increase also reflects increased costs of medical benefits for the year ended December 31, 2002 at these and the Company's other subsidiaries. The Company had an overall decrease of 58 employees, or 9.4%, to 556 employees at December 31, 2002 as compared to 614 employees at December 31, 2001, excluding estimated employees attributable to the discontinued operations of the production platform. Much of the decrease occurred in the latter part of 2002. See in "Item 1. Business--Discontinued Operations". Amortization of mortgage servicing rights increased $2.3 million, or 10.6%, to $24.2 million for fiscal year 2002 as compared to $21.9 million for fiscal year 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 continued low interest rates prevalent in the market, prepayment speeds on our servicing portfolio increased to an average of 23.7% during fiscal year 2002 as compared to 22.9% during fiscal year 2001, and the average balance of our mortgage servicing rights increased to $81.0 million for the 2002 fiscal year as compared to $73.4 million for the 2001 fiscal year. However, the fourth quarter of 2002 experienced a much higher prepayment speed of 31.0% than what was experienced in the first three quarters of 2002. Impairment of mortgage servicing rights, which is a non-cash charge, increased to $14.2 million for the year ended December 31, 2002 as compared to $181 thousand for the year ended December 31, 2001. With regard to the impairment charge, the Company is required to record its investment in mortgage servicing rights at the lower of cost or fair value. The fair value of mortgage servicing rights is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its mortgage servicing rights by product type and investor to reflect the predominant risks. To determine the fair value of its investment, the Company uses a valuation model that calculates the present value of future cash flows. Due to the drop in interest rates, both the actual and anticipated prepayment speeds used in the valuation model increased causing the fair value of the servicing to decrease below the carrying basis which resulted in an impairment. The majority of the impairment related to the servicing rights retained by the Company on its originations over the last year. 37 The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $11.2 million, or 33.9%, to $44.1 million for fiscal year 2002 as compared to $32.9 million for fiscal year 2001. The increase is primarily related to the charges and reserves noted above, as well as increases in foreclosure expenses at Matrix Financial, miscellaneous operation expenses associated with additional volume at Matrix Bank, First Matrix and Matrix Asset Management, and incremental reserves and write-offs of receivables primarily at ABS. Income Taxes. Income taxes reflect a benefit of $(7.8) million for fiscal year 2002 as compared to $(887) thousand for fiscal year 2001. Our effective tax benefit was 45.6% for fiscal year 2002. The effective tax rate is affected by the level of tax-exempt income at ABS in proportion to the level of net income (loss). Average Balance Sheet The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Ratio, yield and rate information 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.
Year Ended December 31, ---------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------- --------------------------- ------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- --------------- ------------------ -------- ------------------------------ (Dollars in thousands) Assets Interest-earning assets: Loans receivable .....................$1,376,723 $ 71,202 5.17% $1,333,390 $82,121 6.16% $1,338,613 $91,731 6.85% Securities............................ 28,437 1,465 5.15 11,003 594 5.40 17,667 1,335 7.56 Interest-earning deposits............. 14,227 135 0.95 24,285 337 1.39 33,746 1,008 2.99 FHLBank stock......................... 30,611 905 2.96 26,393 936 3.55 23,281 996 4.28 --------- -------- ------ ---------- ------- ------ ---------- ------- ------ Total interest-earning assets.......$1,449,998 73,707 5.08% $1,395,071 $83,988 6.02% $1,413,307 $95,070 6.73% Noninterest-earning assets: Cash.................................. 46,451 42,393 24,196 Allowance for loan and valuation (9,008) (9,445) (9,038) losses.............................. Premises and equipment................ 25,542 22,454 17,838 Other assets.......................... 153,114 178,450 142,914 ---------- ---------- ---------- Total noninterest-earning assets.... 216,099 233,852 175,910 ---------- ---------- ---------- Total assets........................$1,666,097 $1,628,923 $1,589,217 ========== ========== ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts.....................$ 5,706 74 1.30% $ 5,998 117 1.95% 3,467 108 3.12% Money market and NOW accounts......... ("NOW") accounts.................... 444,468 3,928 0.88 302,479 4,254 1.41 493,354 5,220 2.18 Certificates of deposit............... 336,623 9,336 2.77 469,226 17,125 3.65 493,954 29,544 5.98 FHLBank borrowings.................... 366,627 9,379 2.56 328,057 9,478 2.89 347,807 16,071 4.62 Borrowed money and guaranteed preferred beneficial interests..... 120,471 9,282 7.70 143,843 10,304 7.16 176,980 13,944 7.88 ---------- -------- ------ ---------- ------- ------ ---------- ------- ------ Total interest-bearing liabilities..$1,273,895 31,999 2.51% $1,249,603 41,278 3.30% $1,262,149 64,887 5.14% Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances).................... 317,693 268,957 55,764 Other liabilities..................... 5,510 39,459 55,764 ---------- ---------- ---------- Total noninterest-bearing liabilities.................... 323,203 308,416 260,687 Shareholders' equity.................. 68,999 70,904 66,381 ---------- ---------- ---------- Total liabilities and shareholders' $1,666,097 $1,628,923 $1,589,217 equity...........................========== ========== ========== Net interest income before provision for loan and valuation losses...........$ 41,708 $ 42,710 $ 30,183 ========== ========== ========== Interest rate spread.................... 2.57% 2.72% 1.59% ====== ====== ====== Net interest margin..................... 2.88% 3.06% 2.14% ====== ====== ====== Ratio of average interest-earning assets to average interest bearing liabilities.......................... 113.82% 111.64% 111.98% ====== ======== =======
38 Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase or decrease related to changes in balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: o changes in volume, in other words, changes in volume multiplied by old rate; and o changes in rate, in other words, changes in rate multiplied by old volume. 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.
Year Ended December 31, 2003 vs. 2002 Year Ended December 31, 2002 vs. 2001 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in ---------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ------------ ----------- ------------------------ -------------- ------------ (In thousands) Interest-earning assets: Loans receivable...................... $ 2,604 $ (13,523) $ (10,919) $ (357) $ (9,253) $ (9,610) Securities............................ 900 (29) 871 (422) (319) (741) Interest-earning deposits............. (114) (88) (202) (231) (440) (671) FHLBank stock......................... 138 (169) (31) 123 (183) (60) ---------- ---------- --------- -------- -------- ---------- Total interest-earning assets....... 3,528 (13,809) (10,281) (887) (10,195) (11,082) ----------- ---------- --------- -------- -------- ---------- Interest-bearing liabilities: Passbook accounts..................... (6) (37) (43) 59 (50) 9 Money market and NOW accounts......... 1,599 (1,925) (326) 1,152 (2,118) (966) Certificates of deposit............... (4,203) (3,586) (7,789) (1,414) (11,005) (12,419) FHLBank borrowings.................... 1,049 (1,148) (99) (868) (5,725) (6,593) Borrowed money and guaranteed preferred beneficial interest...... (1,759) 737 (1,022) (2,448) (1,192) (3,640) ---------- ---------- --------- -------- -------- -------- Total interest-bearing liabilities.. (3,320) (5,959) (9,279) (3,519) (20,090) (23,609) ---------- ---------- --------- -------- -------- -------- Change in net interest income before provision for loan and valuation losses................... $ 6,848 $ (7,850) $ (1,002) $ 2,632 $ 9,895 $ 12,527 =========== ========== ========= ======== ======== ==========
Asset and Liability Management General. A significant portion of our revenues and net income is derived from net interest income and, accordingly, we strive to manage our interest-earning assets and interest-bearing liabilities to generate what we believe to be an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of our performance due to changes in interest rates. We constantly attempt to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. We have responded to interest rate volatility by developing and implementing asset and liability management strategies designed to increase noninterest income and improve the match between interest-earning assets and interest-bearing liabilities. These strategies include: o Increasing focus on lines of business that are less interest rate sensitive, such as brokerage activities, consulting services, self-directed trust services, clearing operations and real estate disposition; o Purchasing adjustable rate mortgages; o Increasing emphasis on the origination of construction, multi-family and commercial real estate lending, including SBA loans, which tend to have higher interest rates with shorter loan maturities than residential mortgage loans and generally are at adjustable rates; o Acquisition and sales of guaranteed portions of SBA loans, which are generally at adjustable rates; o Extending the maturity of our interest-bearing liabilities by borrowing longer-term advances from the FHLBank; o Pursuing institutional alliances or depository relationships that provide fee-based income or generate liabilities that are less expensive or less interest rate sensitive than retail deposits or borrowings from third party institutions to fund our investing activities; o Focusing on noninterest-bearing custodial escrow balances related to our mortgage servicing rights; o Hedging segments of our servicing portfolio; o Using Matrix Bank as the settlement bank for settlement and clearing services offered by Sterling Trust and Matrix Settlement & Clearance Services to generate low-cost deposits; and o Expanding our trust activities to provide custodial services to Matrix Settlement & Clearance Services' clients to increase fee income and low cost deposits. The strategies outlined have been adhered to over the past several years. As a result of the strategies, Matrix Bank is positively gapped, which means that its assets will re-price quicker than its liabilities as interest rates fluctuate. As a result, if interest rates increase, the rising interest rates should have a positive impact on the net interest income. However, if 39 interest rates remain static or decrease further, we should experience some compression in our net interest income as certain of our interest-bearing and noninterest-bearing liabilities cannot re-price any lower. Due to the historic low interest rate environment, our investment in mortgage servicing rights was very unprofitable in 2003 and 2002. In the current interest rate environment, the investment in mortgage servicing rights will cause the amortization of the investment to remain at higher levels that initially estimated. Due to the sale of the production platform, as discussed in "Item 1. Business--Discontinued Operations", we do not anticipate increasing our investment in mortgage servicing rights. We also face the challenge of managing the servicing costs of our servicing operation as our investment continues to decrease, as many of the costs are fixed. The increased cost in relation to the level of investment may cause the investment to be even less profitable. We may consider several options related to the servicing operations, including the reduction of expenses, the potential sale of the operations, and strategic sales of the servicing asset. During the first quarter of 2004, as dicussed in "Item 1. Business--Sale of Matrix Capital Bank Branches", we announced the potential sale of our two retail branch locations in Las Cruces, New Mexico. Included in the sale are approximately $80.0 million of retail deposits, representing less than 5% of our interest bearing liabilities, and approximately $20.0 million of loans originated in the Las Cruces market. The decision to sell the locations will allow us to focus our efforts on generating institutional depository alliances which we believe is a less expensive funding strategy. Lending Activities. Our major interest-earning asset is our loan portfolio. Consequently, a significant part of our asset and liability management involves monitoring the composition of our loan portfolio, including the corresponding maturities. The following table sets forth the composition of our loan portfolio by loan type as of the dates indicated. The amounts in the table below are shown net of discounts and other deductions.
As of December 31, ---------------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------- -------------------- -------------------- --------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------- ------- ------ ------- (Dollars in thousands) Residential $ 903,186 67.19% $1,001,885 71.88% $1,055,284 78.71% $ 903,955 81.00% $ 954,424 86.49% Multi-family, commercial real estate and 379,931 28.26 313,237 22.47 192,225 14.34 123,491 11.07 78,046 7.07 commercial School Financing 46,765 3.48 49,560 3.56 61,969 4.62 51,909 4.65 31,748 2.88 Construction 21,201 1.58 34,160 2.45 35,158 2.62 36,768 3.29 36,056 3.26 Consumer 2,962 0.22 4,311 0.31 5,403 0.40 8,479 0.76 9,595 0.87 --------- ------ --------- ------ ---------- ------ --------- ------ ---------- ------- Total loans 1,354,045 100.73 1,403,153 100.67 1,350,038 100.70 1,124,602 100.77 1,109,869 100.57 Less allowance for loan and valuation losses 9,789 0.73 9,343 0.67 9,338 0.70 8,581 0.77 6,354 0.57 --------- ------ --------- ------ ---------- ------ --------- ------ ---------- ------- Loans receivable, net . $1,344,256 100.00% $1,393,810 100.00% $1,340,700 100.00% $1,116,021 100.00% $1,103,515 100.00% ========= ====== ========= ====== ========== ====== ========= ====== ========== =======
The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2003, excluding the allowance for loan losses. Loans held for sale are classified as maturing over five years. Actual maturities may differ from the maturities shown below as a result of renewals and prepayments or the timing of loan sales.
As of December 31, 2003 ------------------------------------------------------ Less than One to Over Five One Year Five Years Years Total ------------- ------------ ------------ ------------- (In thousands) Residential.............................................. $ 219,689 $ 658,153 $ 25,344 $ 903,186 Multi-family, commercial real estate and commercial...... 284,445 85,411 10,075 379,931 School financing......................................... 9,353 37,412 - 46,765 Construction............................................. 7,713 12,051 1,437 21,201 Consumer................................................. 1,360 1,544 58 2,962 ------------- ------------ ------------ ------------- Total loans ........................................ $ 522,560 $ 794,571 $ 36,914 $ 1,354,045 ============= ============ ============ =============
Loans held for sale, excluding the allowance for loan losses, which are primarily contractually due in less than one to five years, are split between fixed and adjustable rates as follows:
As of December 31, 2003 ----------------------------------------------------- Less than One to Over Five One Year Five Years Years Total ------------- ------------ ------------ ------------ (In thousands) Fixed ................................................... $ 37,076 $ 50,131 - 87,207 Adjustable............................................... 365,604 551,446 - 917,050 ------------- ------------ ------------ ------------ Total loans ........................................ $ 402,680 $ 601,577 - 1,004,257 ============= ============ ============ ============
40 Loans held for investment, excluding the allowance for loan losses, which are contractually due in one or more years, are split between fixed and adjustable rates as follows:
As of December 31, 2003 ----------------------------------------------------- Less than One to Over Five One Year Five Years Years Total ------------- ------------ ------------ ------------ (In thousands) Fixed ................................................... $ 57,869 $ 95,797 19,588 173,254 Adjustable............................................... 60,331 98,613 17,590 176,534 ------------- ------------ ------------ ------------ Total loans ........................................ $ 118,200 $ 194,410 37,178 349,788 ============= ============ ============ ============
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. The following table sets forth our nonperforming assets as of the dates indicated:
As of December 31, -------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Nonaccrual residential mortgage loans............ 19,599 15,123 19,039 22,592 20,185 Nonaccrual commercial real estate, commercial loans 11,851 15,649 18,172 5,792 5,301 and school financing ........................ Nonaccrual consumer loans........................ - 46 40 132 155 ----------- ----------- ----------- ----------- ----------- Total nonperforming loans................... 31,450 30,818 37,251 28,516 25,641 Foreclosed real estate........................... 8,538 8,343 8,355 2,646 800 ----------- ----------- ----------- ----------- ----------- Total nonperforming assets.................. 39,988 39,161 45,606 31,162 26,441 =========== =========== =========== =========== =========== Total nonperforming loans to total loans......... 2.32 % 2.20 2.76 2.54 2.31% Total nonperforming assets to total assets....... 2.32 % 2.30 2.77 2.20 2.06% Ratio of allowance for loan and valuation losses to total nonperforming loans................. 31.13 % 30.32 25.07 30.09 24.78% Interest on nonperforming loans not included in interest income.............................. 1,084 916 1,773 1,016 979
We accrue for interest on government-sponsored loans such as FHA insured and VA guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $12.2 million, $34.8 million and $55.2 million at December 31, 2003, 2002 and 2001, respectively. Nonaccrual residential mortgage loans as a percentage of total loans were 1.4% at December 31, 2003, 1.1% at December 31, 2002, 1.4% at December 31, 2001, 2.1% at December 31, 2000 and 1.8% at December 1999. The nonaccrual residential mortgage loans have increased at December 31, 2003 as compared to December 31, 2002. The increase is due to residential portfolios added at Matrix Financial in the latter part of 2003. The increase at Matrix Financial is related to our origination activity prior to the sale of the production platform in February 2003, as discussed in "Item 1. Business--Discontinued Operations." The nonaccrual loans relate to loans that have been repurchased from investors for a breach of a representation or warranty primarily consisting of not obtaining mortgage insurance from the FHA. We do not anticipate an increase in 2004 because we have ceased our origination activities. The decrease in nonaccrual commercial loans and school financing in 2003 is primarily attributable to the decreased amount of commercial real estate and construction loans in nonaccrual status, which decreased $1.3 million to $900 thousand at December 31, 2003. In addition, there were decreases in the balance of SBA originated and purchased loans in nonaccrual status, which decreased $1.3 million to $7.9 million at December 31, 2003. It should be noted that approximately $5.7 million of the interest and principal of these loans is guaranteed, and as such, our credit risk is minimized by those guarantees. With regard to our school financing, a majority of our past origination of tax-exempt financing for charter schools is for the purchase of real estate and equipment. The balance of these loans in nonaccrual status decreased $1.2 million to $3.0 million at December 31, 2003. The decrease is due to our success at working with the schools to either become current on their loans or to have their loans refinanced with unaffiliated institutions, which results in the pay-off of the balances outstanding with us. Not included in the 2003 balance is $600 thousand 41 of delinquent school financing that was sold to a third party with recourse. The losses related to the delinquencies and foreclosures would be recorded as part of noninterest expense. The prior delinquency and anticipated future delinquencies are taken into consideration in the pricing of the loans acquired. At December 31, 2003, $10.4 million, or 33.2%, of the nonaccrual loans were loans that were residential loans purchased in bulk loan portfolios and remain classified as "held for sale." Total loans held for sale at December 31, 2003, were $1.3 billion, of which $21.0 million, or 2.15%, were in nonaccrual status. Analysis of Allowance for Loan and Valuation Losses. The following table sets forth information regarding changes in our allowance for loan and valuation losses for the periods indicated. The table includes the allowance for both loans held for investment and loans held for sale.
As of and for the Year Ended December 31, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------------- -------------- ------------- ------------ ------------ (Dollars in thousands) Allowance for Loan and valuation losses, beginning of year............................. 9,343 9,338 8,581 6,354 3,710 Charge-offs: Real estate - mortgage................... 1,998 1,239 872 434 98 Real estate - construction .............. 74 -- 31 320 -- Commercial loans and school financing.... 1,319 1,482 746 819 -- Consumer................................. 139 276 659 476 509 ------------ ------------ ------------ ------------ ----------- Total charge-offs................... 3,530 2,997 2,308 2,049 607 Recoveries: Real estate - mortgage................... 101 97 4 1 2 Commercial loans and school financing.... 110 17 - - - Consumer................................. 124 67 81 40 69 ------------ ------------ ------------ ------------ ----------- Total recoveries.................... 335 181 85 41 71 ------------ ------------ ------------ ------------ ----------- Net charge-offs............................... 3,195 2,816 2,223 2,008 536 Provision for loan and valuation losses charged to operations......................... 3,641 2,821 2,980 4,235 3,180 ------------ ------------ ------------ ------------ ----------- Balance at end of year........................ 9,789 9,343 9,338 8,581 6,354 ============ ============ ============ ============ =========== Ratio of net charge-offs to average loans..... 0.23 % 0.2% 0.17 0.18 % 0.06% ============ ============ ============ ============ =========== Average loans outstanding during the year..... 1,376,723 1,333,390 1,338,613 1,086,041 877,117
The allowance for loan and valuation losses is analyzed by management as discussed below and is increased by the provision for loan and valuation losses, which is charged to operations, as necessary. The allowance for loan and valuation losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors, such as: o qualitative evaluations of individual classified assets; o geographic and other portfolio concentrations; o new products or markets; o evaluations of the changes in the historical loss experience component; and o projections of this component into the current and future periods based on current knowledge and conditions. These loss factors range from 0.10% for FHA/VA loans guaranteed by the HUD, to 8.0% for unsecured credit card loans. The loss factors are applied to the outstanding principal balance of loans in their respective categories. Loans in the commercial and school finance portfolios are assigned loss factors based on items similar to those listed, plus additional individual loan review on all significant loans, including SBA loans, which result in loans being classified as watch, substandard or doubtful. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. Accordingly, potential impaired loans of the Company include only commercial loans, real estate construction loans, commercial real estate mortgage loans and school financing. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. 42 After an allowance has been established for the loan portfolio, management establishes a portion of the allowance for loan losses, which is attributed to factors that cannot be associated with a specific loan or loan portfolio. The Company evaluates its residential loans collectively due to their homogeneous nature. These factors include: o general economic conditions; o recognition of specific regional geographic concerns; o loan type and the assessed risk inherent in each loan category; and o trends in the portfolio and portfolio growth trends. Substandard and doubtful loans of homogeneous loan portfolios are assigned loss factors of 5.00% to 50.00%. The loss factors are applied to the outstanding principal balances of loans in their respective categories. The total for all categories as described above determines our allowance for loan and valuation losses. Loan losses are charged against the allowance when the probability of collection is considered remote. The following table shows information regarding the components of our allowance for loan and valuation losses as of the dates indicated:
As of December 31, --------------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------- --------------------- --------------------- -------------------- ------------------- Percentage Percentage Percentage Percentage Percentage of Loans of Loans of Loans of Loans of Loans in each in each in each in each in each Category Category Category Category Category Amount to Amount to Amount to Amount to Amount to Total Total Total Total Total Loans Loans Loans Loans Loans -------- -------- --------- ---------- -------- ----------- -------- ---------- -------- ---------- (Dollars in thousands) Residential.............. $4,018 66.70% $3,199 71.40% $3,918 78.30% $4,133 80.39% $3,591 86.00% Multi-family, commercial real estate and commercial 3,653 28.06 2,768 22.32 2,400 14.15 1,684 11.28 835 7.02 School financing......... 1,766 3.45 2,810 3.53 2,527 4.56 2,329 4.31 1,320 2.86 Construction............. 326 1.57 542 2.44 445 2.59 302 3.27 286 3.25 Consumer................. 26 0.22 24 0.31 48 0.40 133 0.75 322 0.87 ------- --------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- $9,789 100.00% $9,343 100.00% $9,338 100.00% $8,581 100.00% $6,354 100.00% ======= ========= ======= =========== ======= =========== ======= =========== ======= ===========
The ratio of the allowance for loan and valuation losses to total loans was 0.73% at December 31, 2003, 0.67% at December 31, 2002, 0.70% at December 31. 2001, 0.77% at December 31, 2000 and 0.57% at December 31, 1999. The allowance for loan and valuation losses is reduced by loans charged off, net of recoveries. The balance of the allowance for loan and valuation losses allocated to residential has increased, due to the increase in these loans in nonaccrual status, while the balance of loan and valuation losses allocated to multi-family, commercial real estate, commercial, school financing and construction loans has decreased mainly due to the decreased outstanding loan principal balances in these loan categories. As of December 31, 2003, we believe that the allowance, when taken as a whole, is adequate to absorb losses in the current loan portfolio. Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability Management--General" a significant portion of our operations and ultimate success is partially dependent upon our ability to manage our interest rate risk. Interest rate risk can be defined as the exposure of our net interest income to adverse movements in interest rates. Although we manage other risks, such as credit, operational and liquidity risk in the normal course of business, we consider interest rate risk to be a significant market risk which could potentially have the largest material effect on our financial condition and results of operations. The majority of our market risk related to interest rates exists within the operations of Matrix Bank. However, Matrix Financial also has interest rate risk related to its primary asset, mortgage servicing rights. The susceptibility to movements in interest rates affects the cash flows generated from the mortgage servicing rights, which are recorded in other income versus interest income. In a decreasing interest rate environment, the underlying servicing portfolio tends to prepay faster, which reduces future servicing income; in an increasing interest rate environment, prepayments tend to decrease, which increases expected future servicing income. We currently do not maintain a trading portfolio. As a result, we are not exposed to market risk as it relates to trading activities. The majority of our residential loan portfolio is held for sale, which requires us to perform quarterly market valuations of the portfolio in order to properly record the portfolio at the lower of aggregate cost or market. Therefore, we continually monitor the interest rates of our loan portfolio as compared to prevalent interest rates in the market. 43 Interest rate risk management at Matrix Bank is the responsibility of the Asset and Liability Committee, which reports to the board of directors of Matrix Bank. The Asset and Liability Committee establishes policies that monitor and coordinate our sources, uses and pricing of funds. The Asset and Liability Committee is also involved in formulating our budget and strategic plan as it relates to investment objectives. We have engaged a third party to provide consulting services to assist us with our asset/liability management. We meet with this consulting firm quarterly to monitor the interest rate risk position and to analyze and discuss strategies related to asset/liability management. In 2002, we purchased the software from our third party consultant to be able to internally model asset/liability and interest rate risk positions and alternatives as requested by the Asset and Liability Committee. We anticipate that we will continue to engage this consulting firm on a quarterly basis to perform quarter end models of interest rate risk and asset/liability positions and will use our internal modeling to support asset/liability decisions between quarter end. Part of the modeling is done to comply with the requirements of the OTS. We continue to attempt to reduce the volatility in net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate residential mortgages and have increased our efforts regarding the origination of residential construction loans, multi-family loans, commercial real estate loans, SBA loans and limited consumer lending, which re-price or mature more quickly than fixed rate residential real estate loans. In the fourth quarter of 2001, we began a strategy of purchasing with the intent to sell the guaranteed portion of SBA loans. Again, the loans generally adjust with prime and present very little interest rate risk. The risk associated with the guaranteed SBA loans acquired resides with the significant premium paid for the loans. The other significant asset that in the past we have invested in is residential mortgage servicing rights. The value and cash flows from residential mortgage servicing rights respond counter-cyclically to the value of fixed rate mortgages. When interest rates increase and the value of fixed rate mortgages decrease, in turn decreasing net interest income, the value of the mortgage servicing rights increase. In a decreasing interest rate environment, the inverse occurs. It is important to note, however, that an equal increase or decrease in interest rates will not affect the value of our mortgage servicing rights portfolio equally. A decrease in interest rates causes a greater reduction in the value of the portfolio as compared to the increase in value in the portfolio from an equal increase in interest rates. The scenario discussed of decreasing interest rates is exactly what happened in 2003 and 2002. The interest rate environment in 2003 remained at historically low levels. In response to the low interest rates, we experienced significant runoff in our servicing portfolio. Due to the volatility of the value of mortgage servicing, we do not anticipate increasing our investment in 2004. To the contrary, we expect our overall investment in 2004 to again decrease through normal runoff. Ownership of mortgage servicing rights exposes us to impairment of their value in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of our mortgage servicing portfolio achieves a level higher than we projected for an extended period of time, then an impairment in the associated basis in the mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, we initiated a hedging program on a portion of our investment. During 2003 prior to the sale of the production platform as discussed in "Item 1. Business--Discontinued Operations", we sold substantially all of our newly originated servicing rights with the intent of reducing our overall investment in mortgage servicing rights. We expect in 2004 to attempt to sell portions of our mortgage servicing portfolio as the opportunity presents itself, and continue to reduce our overall investment in this asset. Another significant strategy that we focus on in managing interest rate risk is identifying lines of business that generate noninterest rate sensitive liabilities. Examples of this strategy are the investment in mortgage servicing rights, which generate no cost escrow deposits; Sterling Trust's operations, which administer deposits with relatively low costs; and our investment in Matrix Settlement & Clearance Services that uses, or its clients use, Matrix Bank as the clearing bank and custodian, which creates low-cost deposits. With regards to our interest-sensitive liabilities, in order to take advantage of the declining and low interest rate environment present in 2002 and 2001, and to extend the average lives of our interest-bearing liabilities, Matrix Bank entered into short option agreements and other longer term advances (2 to 10 years) totaling $266.0 million, which have interest rates ranging from 1.27% to 5.63%. It is anticipated that our interest margin will benefit in the long term as interest rates increase. Short-term Borrowings. A primary function of asset and liability management is to ensure adequate liquidity. In addition to cash and cash equivalents, we rely heavily on short-term borrowing capabilities for liquidity and as a funding vehicle. The primary sources for short-term borrowings are the FHLBank for Matrix Bank, third party credit facility for ABS, and the revolving portion of the bank stock loan for Matrix Bancorp. See "Liquidity and Capital Resources." 44 The following table sets forth a summary of our short-term borrowings during 2003, 2002 and 2001 and as of the end of each such period:
Average Amount Amount Maximum Weighted Weighted Outstanding Outstanding Outstanding Average Average at During the at any Interest Interest Year-End Year(1) Month-End Rate During Rate at the Year Year-End ------------------------------------------------------------- --------------- (Dollars in thousands) At or for the year ended December 31, 2003: FHLBank borrowings(2).................... $ 458,204 $ 366,627 $ 592,211 2.56% 2.17% Revolving lines of credit................ - 5,883 18,362 4.88 - School financing......................... 30,439 31,586 32,367 4.03 3.96 At or for the year ended December 31, 2002: FHLBank borrowings(3).................... 385,785 328,057 446,923 2.89 2.64 Revolving lines of credit................ 10,000 15,820 30,850 3.45 2.79 School financing......................... 32,328 41,293 50,252 4.77 4.37 At or for the year ended December 31, 2001: FHLBank borrowings(4).................... 303,361 347,807 478,921 4.62 2.94 Revolving lines of credit................ 95,450 58,673 95,450 4.54 2.51 School financing......................... 44,965 46,160 60,100 6.02 4.65 __________ (1) Calculations are based on daily averages where available and monthly averages otherwise. (2) A total of $266.0 million of the FHLBank borrowings outstanding at December 31, 2003 were borrowed under short option advance agreements with the FHLBank. The interest rates on the short option advance borrowings ranged from 1.27% to 5.63% at December 31, 2003 and their possible call dates varied from January 2004 to November 2006. Additionally, $1.2 million of the FHLBank borrowings outstanding at December 31, 2003 are fixed-term/rate advances, which were borrowed from the FHLBank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014. (3) A total of $266.0 million of the FHLBank borrowings outstanding at December 31, 2002 were borrowed under short option advance agreement with the FHLBank. The interest rates on the short option advance borrowings ranged from 1.27% to 5.63% at December 31, 2002 and their possible call dates varied from December 2002 to November 2006. Additionally, $1.3 million of the FHLBank borrowings outstanding at December 31, 2002 are fixed-term/rate advances, which were borrowed from the FHLBank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014. (4) A total of $136.0 million of the FHLBank borrowings outstanding at December 31, 2001 were borrowed under short option advance agreements with the FHLBank. The interest rates on the short option advance borrowings ranged from 2.69% to 5.63% at December 31, 2001 and their possible call dates varied from February 2002 to November 2006. Additionally, $1.4 million of the FHLBank borrowings outstanding at December 31, 2001 are fixed-term/rate advances, which were borrowed from the FHLBank to offset specific loans originated by Matrix Bank. The principal amount of these fixed-term/rate advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014.
Liquidity and Capital Resources Liquidity is our ability to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. To date, our principal source of funding for our investing activities has been: o secured senior debt provided by unaffiliated financial institutions; o the issuance of junior subordinated debentures through Matrix Bancorp Capital Trust I in 1999, Matrix Bancorp Capital Trust II, III and IV in 2001 and Matrix Bancorp Capital Trust V in 2002; o the issuance of subordinated debt offering in February 2004; o the issuance of 11.5% senior notes in September 1997; o a bank stock loan; and o our initial public offering. As of December 31, 2003, Matrix Bancorp had $82.1 million in indebtedness outstanding. The borrowed funds have been used historically as capital injections to Matrix Bank, Matrix Financial, Matrix Bancorp Trading and ABS. 45 On March 29, 2003, Matrix Bancorp amended its bank stock loan agreement. The amended bank stock loan agreement has two components, an $8.2 million term loan and a revolving line of credit of $12.0 million. As of December 31, 2003, the balance of the term loan was $6.1 million and the balance of the revolving line of credit was $0. The amended bank stock loan requires Matrix Bancorp to maintain total shareholders' equity of $60.0 million. Matrix Bank is required to maintain classified assets of less than 4% of total assets from January 1, 2003 to and including March 31, 2004, and 3% of total assets thereafter, and must also earn in excess of $7.5 million over the previous four quarters as of the end of each fiscal quarter from June 30, 2003 forward. The covenants must be met quarterly. As of December 31, 2003, we were in compliance with all covenants. The term loan has a maturity date of December 31, 2004. The revolving line of credit is annually renewed and currently has a maturity date of March 31, 2004. We are in the process of renewing the revolving line of credit and are in negotiations regarding extending the maturity date of the term loan. However, there can be no assurances that the bank stock loan will be renewed or any terms modified. The Company has sponsored five trusts, Matrix Bancorp Capital Trusts I through V, of which 100% of the common equity is owned by the Company. The trusts were formed for the purposes of issuing corporation-obligated mandatorily redeemable capital securities (the "capital securities") to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company. The debentures held by each trust are the sole assets of that trust. Distributions on the capital securities issued by each trust are payable either quarterly or semiannually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment o the debentures. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the term of each of the guarantees. See details and further discussion of these trusts included in Note 11 to the consolidated financial statements. In February 2004, the Company issued $10.0 million of subordinated debt with a ten-year maturity. The interest rate adjusts quarterly based on the 90-day LIBOR at a margin of 2.75%. Interest payments are to be made quarterly. Generally, the debt covenants are no less restrictive than the Capital Trusts discussed below. The net proceeds will be used to satisfy the full repayment of the 11.5% senior notes (discussed in the following paragraph) in September 2004. On September 29, 1997, we completed a registered debt offering of $20.0 million in senior notes due in September 2004, raising net proceeds of approximately $19.1 million. Interest on the senior notes of 11.5% is payable semi-annually on March 31 and September 30 of each year. The 11.5% senior notes require us to: o maintain consolidated tangible equity capital of not less than $35 million; and o meet the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized" as defined by applicable regulatory guidelines. Additionally, the 11.5% senior notes contain other covenants regarding certain restricted payments, incurrence of indebtedness and issuance of preferred stock, liens, merger, consolidation or sale of assets and transactions with affiliates. As of December 31, 2003, due to repurchases made by the Company of the senior notes, there remained $9.5 million of the debt issue outstanding. Through issuances of the subordinated debt in February 2004, we should have adequate liquidity and intend to payoff the balance of the senior notes in 2004. Matrix Bancorp has guaranteed the indebtedness of Matrix Settlement & Clearance Services to U.S. Bank, N.A., in an amount not greater than $6.0 million. The guaranty relates to a $6.0 million line of credit with a third party that is utilized by Matrix Settlement & Clearance Services in situations where its clients do not wire funds to settle trades. If the guaranty is utilized, our joint venture partner guarantees half of any such obligation. The line is used very infrequently and Matrix Settlement & Clearance Services is adequately secured in the case that the utilization of the line is required. There was $0 outstanding at Matrix Settlement & Clearance Services on such indebtedness at December 31, 2003. The trend of net cash used by our operating activities experienced over the reported periods results primarily from the growth at Matrix Bank, Matrix Asset Management and First Matrix. We anticipate that in 2004, this trend should in part reverse as any further growth at Matrix Bank and First Matrix will be funded through additional revenues at those companies, however, as the growth initiatives at Matrix Asset Management are still in the early stages for certain of their new initiatives, cash will be required to fund this growth. The Company is reliant on dividend and tax payments from its subsidiaries in order to fund operations, meet debt obligations and grow new or developing lines of business. A long-term inability of a subsidiary to make dividend payments could significantly impact the Company's liquidity. Historically, the majority of the dividend payments have been made by Matrix Bank and its 46 consolidated subsidiaries, which include Matrix Financial. Due to the success experienced by Matrix Bancorp Trading and Matrix Asset Management in 2003, dividends were also paid by these subsidiaries to the Company. The current dividend policy approved by Matrix Bank is 75% of the consolidated cumulative earnings of Matrix Bank. Matrix Bank made dividend payments in 2003, for earnings through April, 2003, and is anticipating payment of the remaining calculated dividends for 2003 in 2004. The current dividend policy approved by Matrix Bancorp Trading and Matrix Asset Management is 90% of the earnings of those subsidiaries. Absent these dividend payments, the Company intends to utilize the line of credit on its bank stock loan, as needed, to meet its own and the other subsidiaries financial obligations. Additionally, it is anticipated that during 2004, a portion of the capital that was committed to ABS will be returned through dividends to Matrix Bancorp as the loans receivable at ABS are liquidated under a strategy adopted in 2003. The timing and amounts of this liquidation are fluid, but are anticipated to provide liquidity to the Company during 2004. Matrix Bank's primary source of funds for use in lending, purchasing bulk loan portfolios, investing and other general purposes are: o trust deposits; o custodial escrow balances; o brokered deposits; o FHLBank borrowings; o retail and wholesale deposits; o sales of loan portfolios; and o proceeds from principal and interest payments on loans. Contractual loan payments and net deposit inflows are a generally predictable source of funds, while loan prepayments and loan sales are significantly influenced by general market interest rates and economic conditions. Borrowings on a short-term basis are used as a cash management vehicle to compensate for seasonal or other reductions in normal sources of funds. Matrix Bank utilizes advances from the FHLBank as its primary source for borrowings. At December 31, 2003, Matrix Bank had overnight and term borrowings from the FHLBank of $458.2 million. The availability of FHLBank borrowings is based on the level of collateral pledged. Generally, the availability will be limited based on eligible collateral pledged or 50% of total assets. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing rights portfolios and the timing of payments for taxes and insurance, as well as the level of prepayments which occurs. For a tabular presentation of the our short-term borrowings, see "Asset and Liability Management--Short-Term Borrowings." Matrix Bank offers a variety of deposit accounts having a range of interest rates and terms. Matrix Bank's retail deposits principally consist of demand deposits and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. Matrix Bank's retail deposits are obtained from areas in which it is located, currently concentrated primarily in Las Cruces and Sun City, with lesser amounts in Denver. Matrix Bank relies principally on customer service, marketing programs and its relationships with customers to attract and retain in-market deposits. As discussed in "in "Item 1. Business--Sale of Matrix Bank Branches", in February 2004, Matrix Bank announced the potential sale of its two retail branch locations in Las Cruces. Included in the sale is approximately $80.0 million of retail deposits, less than 5% of our interest-bearing liabilities. The sale of the branches is not expected to have a significant impact on the liquidity at Matrix Bank. Other funding sources discussed will be utilized to replace the deposits. Brokered deposits are accepted and have been utilized to support growth at Matrix Bank. In pricing deposit rates, management considers profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by competitors. Matrix Bank intends to continue its efforts to attract deposits as a primary source of funds to support its lending and investing activities. The following table sets forth the average balances for each major category of Matrix Bank's deposit accounts and the weighted-average interest rates paid for interest-bearing deposits for the periods indicated: 47
Year Ended December 31, ------------------------------------------------------------------------------------------- 2003 2002 2001 ----------------------------- ----------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------------- -------------- -------------- -------------- -------------- -------------- (Dollars in thousands) Passbook accounts........... $ 5,706 1.30 % $ 5,998 1.95 % $ 3,467 3.12 % NOW accounts................ 159,140 0.21 119,585 0.48 98,872 0.94 Money market accounts....... 444,468 0.81 302,479 1.22 203,757 2.11 Time deposits .............. 114,175 1.92 130,544 4.55 181,535 5.60 Brokered deposits........... 222,448 2.28 338,682 3.30 312,419 6.20 ----------- ------------ ----------- ----------- ------------ ----------- Total deposits......... $ 945,937 1.41 % $ 897,288 2.40 % $ 800,050 4.36 % ----------- ------------ ----------- ----------- ------------ -----------
The following table sets forth the amount of Matrix Bank's certificates of deposit that are greater than $100 thousand by time remaining until maturity as of December 31, 2003:
Weighted Amount Average Rate Paid --------------- ------------------ (Dollars in thousands) Three months or less............................ $ 2,025 2.38 % Over three months through six months............ 857 3.02 Over six months through twelve months........... 4,869 3.21 Over twelve months.............................. 10,203 4.37 --------------- ------------------ Total...................................... $ 17,954 3.77 % --------------- ------------------
We actively monitor Matrix Bank's compliance with regulatory capital requirements. Historically, Matrix Bank has increased its core capital through the retention of a portion of its earnings. Matrix Bank's future growth is dependent upon retention of a portion of its earnings and will be funded through wholesale deposit growth, brokered deposits, borrowings from the FHLBank and custodial deposits directed by affiliates. ABS School Services' principal source of funding for school financing consists of its internal capital, sales of loans to a third party institution and partnership trusts with unaffiliated financial institutions. Amounts available to be sold and amounts to be financed are at the purchaser's and lender's sole discretion. We continue to pursue additional third party financing and sale options for ABS. We do not anticipate significantly increasing our current loan portfolio. The Company has placed tax-exempt financing of approximately $29.1 million at December 31, 2003 it originated to charter schools into two grantor trusts. The trusts then issued Class "A" Certificates and Class "B" Certificates, with the Class "A" Certificates being sold to various third party investors under a private placement at a price of par. The "A" Certificates under the two grantor trusts are guaranteed by a letter of credit issued by a unaffiliated financial institution for one, and the second one is guaranteed equally by two unaffiliated financial institutions. The first trust's letter of credit arrangement, which currently holds approximately $13.0 million of tax-exempt financing, is scheduled to mature September 2004. The second trust's letter of credit arrangement, which currently holds approximately $17.0 million of tax-exempt financing, is scheduled to mature September 2005. Without the letters of credit, ABS will be required to fund the tax-exempt financings. We are in the process of attempting to refinance several of the financings with third party lenders. To the extent that we are unsuccessful, we will attempt to extend the letter of credit arrangements or seek other borrowing options. The "A" Certificates' interest rate may be determined weekly, monthly or for a term of up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the investment bank. Generally, the trusts are short-term in nature with an average life of one year or less. The "B" Certificates are owned by the Company. The interest rate paid on the "A" Certificates is considered the Company's financing cost. The approximate cost of the financing at December 31, 2003 and 2002 was 1.65% and 1.55%, respectively. The interest that the Company receives through its part ownership of the "B" Certificates is tax-exempt. Although "A" Certificates are guaranteed by unaffiliated entities, the Company is obligated on a full recourse basis to the unaffiliated entities in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the trusts, the transactions have been accounted for as a secured financing. In addition, under a purchase and sale agreement, ABS has sold school financings to an unaffiliated financial institution. The school financings were sold with full recourse to 48 ABS. ABS services the school financings on a scheduled/scheduled remittance and in the case of a loss or default, upon the liquidation of the underlying collateral, ABS is required to reimburse for any shortfall. Due to the control that the unaffiliated financial institution has over the school financing, the transaction was accounted for as a sale. The recourse provisions were considered by us at the time of the sale. No gain or loss was booked at the sale date. The total balance of the school financings sold with recourse was $10.5 million at December 31, 2003. Matrix Bank and Sterling Trust are restricted in certain instances from paying dividends to Matrix Bancorp due to certain regulatory requirements. See "Item 1. Business--Regulation and Supervision." As discussed in "Item 3. Legal Proceedings," we are from time to time party to various litigation matters, in most cases, involving ordinary routine claims incidental to our business. We accrue for contingent liabilities with respect to litigation matters in accordance with the requirements of SFAS 5, which generally requires the Company to accrue a loss for a litigation matter involving a contingent liability if the loss is probable and the amount of the loss is reasonably estimable. With respect to all pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. As such, the impact on our liquidity and capital cannot be estimated with certainty, and, an adverse decision in certain matters, as described in "Item 3. Legal Proceedings," may have a material, adverse impact on our consolidated liquidity or capital. With regard to the Adderley case at Sterling Trust discussed in "Item 3. Legal Proceedings," it was noted that the Court of Appeals for the Second District of Texas (Fort Worth) affirmed a portion of the jury's award for the plaintiffs and against Sterling Trust for actual damages of $6.2 million, plus post-judgment interest and conditional attorneys fees for the appeals. We also noted that we are appealing this decision to the Supreme Court of Texas, but noted that there are no assurances that the Supreme Court of Texas will agree to hear the case, or that, if heard, Sterling Trust's appeal will be successful. If we are unsuccessful in this appeal, and if we elect to contribute the capital to Sterling Trust to pay the judgment, there would be a significant impact on the liquidity of the Company. During the fourth quarter of 2002, the Company executed a Shareholder Rights Plan at which time the Board of Directors of the Company declared a dividend of one preferred stock purchase right for each outstanding share of the Company's common stock. Each of these Rights, which are not immediately exercisable, entitles the holder to purchase one one-thousandth of a share of the Company's newly designated Series A Junior Participating Preferred Stock at an exercise price of $40.00. The Rights are not exercisable until certain events occur, are not detachable from the Company's common stock and do not have any immediate value to stockholders. The Rights distribution was made on November 15, 2002, payable to shareholders of record on that date. The Rights will expire on November 5, 2012. Inflation and Changing Prices The consolidated financial statements and related data presented in this document have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as prices of goods and services. Critical Accounting Policies The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in Note 2 of the consolidated financial statements, and along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are value in the financial statements and how those values are determined. 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 49 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 judgments 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 currently views the determination of the allowance for loan and valuation losses as a critical accounting policy that requires the most significant judgments, assumptions and estimates used in preparation of its consolidated financial statements. The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolios, which represent the largest asset type on the consolidated balance sheet. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. The allowance for loan losses consists of an allocated component and an unallocated component. The components of the allowance for loan losses represent an estimation done pursuant to either SFAS 5, "Accounting for Contingencies", or SFAS 114, "Accounting by Creditors for Impairment of a Loan", as appropriate. The unallocated portion of the allowance reflects management's estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. The Company has expanded the geographic footprint in which it operates, and changed its portfolio mix in recent years. As a result, historical loss experience data used to establish allocation estimates may not precisely correspond to the current portfolio. Uncertainty surrounding the strength and timing of economic cycles also affects estimates of loss. The historical losses used may not be representative of actual unrealized losses inherent in the portfolio. The allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on regular analyses of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The historical loan loss element is generally based on historical loss experience, loss factors are updated as needed based on actual experience. The allocated component of the allowance for loan losses also includes consideration of concentrations and changes in portfolio mix and volume. There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect earnings or financial position in future periods. 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. Our mortgage servicing portfolio does not trade in an active open market with readily observable market prices. Although sales of mortgage servicing rights do occur, the exact terms and conditions may not be readily available. As such, mortgage servicing rights are established and valued in accordance with SFAS 140 using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of mortgage servicing rights asset. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the mortgage servicing rights, mortgage interest rates, which are used to determine prepayment rates, and discount rates are held constant over the estimated life of the portfolio. Expected mortgage loan prepayment rates are derived from a third-party model and may be adjusted to reflect the specific characteristics of the Company's portfolio. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or fair value. Management compares its fair value estimates and assumptions to observable market data where available and to recent market activity and believes that the fair values and related assumptions are comparable to those used by other market participants. The Company has recorded impairment reserves and recoveries of 50 such reserves based on the market conditions and the valuation analysis. Although management believes its process for determining the impairment reserve required adequately considers all of the potential factors that could potentially result in declines in value of the mortgage servicing rights, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for impairment could be required that could adversely affect earnings or financial position in future periods. The Company mitigates risk associated with declines in the estimated fair value of mortgage servicing rights due to increases in mortgage loan prepayments through the use of derivative instruments that are expected to increase in value when interest rates decline. 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. We accrue for contingent liabilities with respect to litigation matters in accordance with the requirements of SFAS 5, which generally requires the Company to accrue a loss for a litigation matter involving a contingent liability if the loss is probable and the amount of the loss is reasonably estimable. See a full description of such proceedings at "Item 3. Legal Proceedings." 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. Any material effect on the consolidated financial statements related to these critical accounting areas is also discussed in this financial review. Recent Accounting Pronouncements Note 2 to the consolidated financial statements discusses new accounting policies adopted by the Company during 2003 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section(s) of this discussion and the notes to the consolidated financial statements. Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements The following table presents, as of December 31, 2003, the Company's significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced Note to the consolidated financial statements.
As of December 31, 2003 ------------------------------------------------------------------------------------ Note 1 Year 1 to 3 Years 3 to 5 Over 5 Years Reference or Less Years Total -------------- -------------------------- ------------------------------------------ (In thousands) Contractual Obligations Deposits (passbook, NOW and money market).................................. 9 $ - $ - $ - $762,496 $762,496 Certificate accounts........................ 9 121,003 70,162 20,398 - 211,563 FHLBank borrowings.......................... 12 - - - 458,204 458,204 Borrowed money.............................. 10 31,097 16,873 - - 47,970 Junior subordinated debentures owed to unconsolidated subsidiary trusts...... 11 - - - 66,525 66,525 Operating leases............................ 16 1,158 2,007 548 525 4,238
A schedule of significant commitments at December 31, 2003 follows: Commitments (In thousands) Loans secured by mortgages.................. $ 50,155 Construction loans.......................... 12,833 Commercial lines of credit.................. 1,583 Commercial loans............................ 747 Consumer loans.............................. 848 51 Further discussion of these commitments is included in Note 16 of the consolidated financial statements. In addition, the Company has contingencies due to various litigation matters which are also discussed in Note 16 of the consolidated financial statements. The Company may also have liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of the significant contractual arrangements under which the Company may be held contingently liable, including guarantee arrangements, is included in Note 16 of the consolidated financial statements. The Company's significant off-balance sheet arrangements include the use of school financing sale agreements which are discussed further in Note 10 of the consolidated financial statements. Forward Looking Statements Certain statements contained in this annual report that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "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 annual report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: third party claims or actions in relation to the ongoing or future bankruptcies of the Company's customers; interest rate fluctuations; level of delinquencies; defaults and prepayments; general economic conditions; competition; government regulation; possible future litigation; the actions or inactions of third parties, including failure of the Buyer to perform its obligations under the Purchase Agreement (See "Item 1. Business--Sale of Wholesale Production Platform"), and actions or inactions of those that are parties to the existing or future 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 this annual report 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk See Item 7."Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Risk Sensitive Assets and Liabilities" and Item 1."Business--Mortgage Servicing Activities--Hedging of Servicing Rights." Item 8. Financial Statements and Supplementary Data See Index to Financial Statements on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(b) of the Securities Exchange Act of 1934. As of December 31, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management concluded that the Company's disclosure controls and procedures as of December 31, 2003 were effective in ensuring that information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported within the time period required by the SEC's rules and forms. There have been no significant changes in the Company's internal controls over financial reporting that occurred during the quarter ended December 31, 2003 that have significantly affected, or are likely to materially affect, the Company's internal controls over financial reporting. 52 PART III Items 10 through 14. The information for these items is incorporated from the definitive proxy statement to be filed with the Commission within 120 days of December 31, 2003. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (a) (2) Financial statements and financial statement schedules See Index to Financial Statements on page F-1. (b) Reports on Form 8-K The Company filed a Form 8-K with the Securities and Exchange Commission on November 4, 2003 (Item 7) which contained a press release announcing the third quarter 2003 earnings of the Company. (c) Exhibits See Exhibit Index, beginning on page II-1. (d) Financial Statement Schedules None. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12th day of March, 2004. MATRIX BANCORP, INC. Dated: March 12, 2004 /s/ D. Mark Spencer ----------------------- --------------------------------------- D. Mark Spencer President and Co-Chief Executive Officer (Principal Executive Officer) Dated: March 12, 2004 /s/ Richard V. Schmitz ----------------------- --------------------------------------- Richard V. Schmitz Co-Chief Executive Officer Dated: March 12, 2004 /s/ David W. Kloos ----------------------- --------------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- /s/ D. Mark Spencer President, Co-Chief Executive March 12, 2004 - ---------------------------- Officer and a Director D. Mark Spencer (Principal Executive Officer) /s/ Richard V. Schmitz Co-Chief Executive Officer and March 12, 2004 - ---------------------------- Chairman of the Board Richard V. Schmitz /s/ Guy A. Gibson Director March 12, 2004 - ---------------------------- Guy A. Gibson /s/ David A. Frank Director March 12, 2004 - ---------------------------- David A. Frank /s/ Robert T. Slezak Director March 12, 2004 - ---------------------------- Robert T. Slezak /s/ Lester Ravitz Director March 12, 2004 - ---------------------------- Lester Ravitz /s/ Dr. James Bullock Director March 12, 2004 - ---------------------------- Dr. James Bullock
54 INDEX TO EXHIBITS 3.1 ////// Articles of Amendment to the Articles of Incorporation (3.1) 3.2 + Bylaws, as amended, of the Registrant (3.2) 4.1 ++ Indenture by and among the Registrant and First Trust National Association, as trustee, relating to 11.50% Senior Notes due 2004 (4.1) 4.2 ///// First Amendment to the Indenture, dated as of December 5, 2001, by and between the Registrant and U.S. Bank National Association (the successor to First Trust National Association), as trustee, relating to 11.50% Senior Notes due 2004 (4.2) 4.3 + Specimen Certificate for Common Stock of the Registrant (4.1) 4.4 + o Amended and Restated 1996 Stock Option Plan (4.2) 4.5 ***o Amendment No. 1 to the 1996 Amended and Restated Employee Stock Option Plan of the Registrant (4.1) 4.6 ***o Amendment No. 2 to the 1996 Amended and Restated Employee Stock Option Plan of the Registrant (4.2) 4.7 // o Employee Stock Purchase Plan, as amended (4.4) 4.8 ^ Indenture by and among the Registrant and State Street Bank and Trust Company, as trustee, relating to the 10% Junior Subordinated Debentures due 2029 (4.7) 4.9 ^ Form of Junior Subordinated Debentures (4.8) 4.10 ^ Certificate of Trust of Matrix Bancorp Capital Trust I (4.9) 4.11 ^ Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust I (4.10) 4.12 ^ Preferred Security Certificate for Matrix Bancorp Capital Trust I (4.11) 4.13 ^ Preferred Securities Guarantee Agreement of the Company relating to the Preferred Securities (4.12) 4.14 ^ Agreement as to the Expenses and Liabilities (4.13) 4.15 ^^ Amended and Restated Trust Agreement, dated May 11, 2001, between Matrix Bancorp, Inc. and Matrix Bancorp, Inc., as Trustee (4.2) 4.16 * Indenture between the Registrant and Wilmington Trust Company, as debenture trustee, dated as of March 28, 2001, relating to the 10.18% junior subordinated deferrable interest debentures due June 8, 2031 (10.5) 4.17 * Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust II, dated as of March 28, 2001 (10.6) 4.18 * Common Securities Guarantee Agreement of the Registrant, dated as of March 28, 2001 (10.7) 4.19 * Capital Securities Guarantee Agreement of the Registrant, dated as of March 28, 2001 (10.8) 4.20 ** Indenture between the Registrant and The Bank of New York, as debenture trustee, dated as of July 16, 2001, relating to the 10.25% junior subordinated deferrable interest debentures due July 25, 2031 (10.3) 4.21 ** Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust III, dated as of July 16, 2001 (10.4) 4.22 ** Common Securities Subscription Agreement of the Registrant, dated as of July 16, 2001 (10.5) 4.23 ** Capital Securities Agreement of the Registrant, dated as of June 28, 2001 (10.6) 4.24 ///// Indenture between the Registrant and Wilmington Trust Company, as trustee, dated as of November 28, 2001, relating to Floating Rate Junior Subordinated Debt Securities due 2031 (4.26) 4.25 ///// Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust IV, dated as of November 28, 2001 (4.27) 4.26 ///// Guarantee Agreement of the Registrant, dated as of November 28, 2001 (4.28) 4.27 ****** Junior Indenture between the Registrant and The Bank of New York, as trustee, dated as of July 25, 2002, relating to Floating Rate Junior Subordinated Debt Securities, due July 25, 2032 (4.1) 4.28 ****** Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust V, dated as of July 25, 2002 (4.2) 4.29 ****** Guarantee Agreement of Matrix Bancorp Capital Trust V, dated as of July 25, 2002 (4.3) 4.30 ++++ Rights Agreement dated as of November 4, 2002, between Matrix Bancorp, Inc. and Computershare Trust Company, which includes the form of Articles of Amendment to State Terms of Series A Junior Participating Preferred Stock, $0.01 par value, the form of Right Certificate and the Summary of Rights (4.1) II-1 4.31 ++++ Form of Articles of Amendment to State Terms of Series A Junior Participating Preferred Stock (4.2) 4.32 FH Indenture, dated February 13, 2004, between Registrant and Wells Fargo Bank, as Trustee, relating to Floating Rate Subordinated Debt Security due 2014. 10.1 + Assignment and Assumption Agreement, dated as of June 28, 1996, by and among Mariano C. DeCola, William M. Howdon, R. James Nicholson and Matrix Funding Corp. (10.30) 10.2 ? Amendment to Assignment and Assumption Agreement, dated as of August 13, 2002, by and among Mariano C. DeCola, William M. Howdon, R. James Nicholson and Matrix Funding Corp. 10.3 + Development Management Agreement, dated as of June 28, 1996, by and among Matrix Funding Corp. and Nicholson Enterprises, Inc. (10.31) 10.4 /// Coyote Creek Planned Unit Development Agreement, dated as of July 1, 1998, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.12) 10.5 + Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as of November 28, 1995 (10.36) 10.6 ??? Credit Agreement, dated as of September 29, 2000, between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.7 * First Amendment to Credit Agreement, dated as of March 5, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.8 * Second Amendment to Credit Agreement, dated as of April 11, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.9 ** Third Amendment to Credit Agreement, dated as of June 29, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.10 *** Fourth Amendment to Credit Agreement, dated as of September 28, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.11 ///// Fifth Amendment to Credit Agreement, dated as of November 20, 2001, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.11) 10.12 **** Sixth Amendment to Credit Agreement, dated as of March 31, 2002, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.13 ? Seventh Amendment to Credit Agreement, dated as of December 2, 2002, by and between Matrix Financial Services Corporation, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders 10.14 ??? Guaranty, dated as of September 29, 2000, from the Registrant to U.S. Bank National Association, as agent (10.3) 10.15 //// Credit Agreement, dated as of December 27, 2000, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.15) 10.16 * First Amendment to Credit Agreement, dated as of March 5, 2001, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.3) 10.17 ** Second Amendment to Credit Agreement, dated as of July 27, 2001, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) 10.18 ///// Third Amendment to Credit Agreement, dated as of December 26, 2001, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.19) 10.19 **** Fourth Amendment to Credit Agreement, dated as of March 31, 2002, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.2) II-2 10.20 ******* Fifth Amendment to Credit Agreement, dated as of March 29, 2003, by and between Registrant, as borrower, and U.S. Bank National Association, as agent, and certain lenders, as lenders (10.1) 10.21 //// Lease dated as of September 1, 1999, by and between Matrix Financial Services Corporation and Suncor Development Company (10.22) 10.22 //// Lease with a reference date of 1999, by and between the Registrant and the Regents of the University of Colorado (10.23) 10.23 ///// Lease dated as of December 21, 2001 by and between Matrix Bancorp, Inc. and WXI/SEV Realty, LLC (10.1) 10.24 //// First Amendment to Lease, dated as of July, 2000, by and between the Registrant and the Regents of the University of Colorado, amending the Lease with a reference date of 1999 between the parties (10.24) 10.25 //// Second Amendment to Lease, dated as of October, 2000, by and between the Registrant and the Regents of the University of Colorado, amending the Lease with a reference date of 1999 between the parties (10.25) 10.26 ////o Matrix Bancorp, Inc. Executive Incentive Plan (10.27) 10.27 /////o Matrix Bancorp, Inc. (f/k/a Matrix Capital Corporation) 401(k) Profit Sharing Plan (10.29) 10.28 /////o Amendment No. 1, effective as of January 1, 1994, to the Registrant's 401(k) Profit Sharing Plan (10.30) 10.29 /////o Amendment No. 2, effective as of May 20, 1996, to the Registrant's 401(k) Profit Sharing Plan (10.31) 10.30 /////o Amendment No. 3, effective as of April 1, 1997, to the Registrant's 401(k) Profit Sharing Plan (10.32) 10.31 /////o Amendment No. 4, effective as of December 30, 2001, to the Registrant's 401(k) Profit Sharing Plan (10.33) 10.32 ***** Warehousing Credit and Security Agreement, dated as of March 29, 2002, by and between Matrix Bancorp Trading, Inc., as borrower, and Residential Funding Corporation, as agent (10.1) 10.33 ***** First Amendment to Warehousing Credit and Security Agreement, dated as of May 24, 2002, by and between Matrix Bancorp Trading, Inc., as borrower, and Residential Funding Corporation, as agent (10.2) 10.34 +++o Consulting Agreement, dated as of June 5, 2002, by and between Guy A. Gibson and Matrix Bancorp, Inc. (10.1) 10.35 +++++ Purchase and Assumption Agreement, dated as of February 28, 2003, by Matrix Financial Services Corporation, as seller, and AmPro Mortgage Corporation, as purchaser (10.1) 10.36 ******* First Amendment to Purchase and Assumption Agreement, dated as of April 18, 2003, by and between Matrix Financial Services Corporation, as seller, Matrix Capital Bank, as parent, and AmPro Mortgage Corporation, as purchaser (10.2) 10.37 ******** Second Amendment to Purchase and Assumption Agreement, dated as of July 22, 2003, by and between Matrix Financial Services Corporation, as seller, Matrix Capital Bank, as parent, and AmPro Mortgage Corporation, as purchaser (10.1) 10.38 +++++ Third Amendment to Purchase and Assumption Agreement, dated as of August 31, 2003, by and between Matrix Financial Services Corporation, as seller, Matrix Capital Bank, as parent, and AmPro Mortgage Corporation, as purchaser (10.4) 10.39 FHo Change of Control Agreement, dated as of October 28, 2003 by and between Matrix Bancorp, Inc. and David W. Kloos 10.40 FHo Change of Control Agreement, dated as of October 28, 2003 by and between Matrix Bancorp, Inc. and T. Allen McConnell 10.41 FH Branch Purchase and Deposit Assumption Agreement, dated as of January 30, 2004 by and between Matrix Capital Bank and FirstBank 12 FH Statement Re: Computations of Ratios 21 FH Subsidiaries of the Registrant 23.1 FH Consent of KPMG LLP 31.1 FH Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 FH Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. II-3 31.3 FH Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 FH Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 FH Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.3 FH Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. __________ FH Filed herewith + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-10223), filed by the Registrant with the Commission on August 15, 1996. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-34977), filed by the Registrant with the Commission on September 4, 1997. / Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1996, filed by the Registrant with the Commission. // Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1997, filed by the Registrant with the Commission. /// Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1998, filed by the Registrant with the Commission. //// Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000, filed by the Registrant with the Commission. /////Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 2001, filed by the Registrant with the Commission. ////// Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 2002, filed by the Registrant with the Commission. + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K, filed by the Registrant with the Commission on April 8, 1998. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K filed by the Registrant with the Commission on June 30, 2000. +++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K filed by the Registrant with the Commission on June 6, 2002. ++++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K filed by the Registrant with the Commission on November 6, 2002. +++++Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K filed by the Registrant with the Commission on March 4, 2003. ++++++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's report on Form 8-K filed by the Registrant with the Commission on September 15, 2003. II-4 ? Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1998, filed by the Registrant with the Commission. ?? Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000, filed by the Registrant with the Commission. ??? Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2000, filed by the Registrant with the Commission. * Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2001, filed by the Registrant with the Commission. ** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2001, filed by the Registrant with the Commission. *** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed by the Registrant with the Commission. **** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2002, filed by the Registrant with the Commission. *****Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2002, filed by the Registrant with the Commission. ****** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2002, filed by the Registrant with the Commission. ******* Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2003, filed by the Registrant with the Commission. ******** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2003, filed by the Registrant with the Commission. ^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-79731), filed by the Registrant with the Commission on June 1, 1999. ^^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-8 (No. 333-75000), filed by the Registrant with the Commission on December 12, 2001. o Management contract or compensatory plan or arrangement. II-5 INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Matrix Bancorp, Inc. and Subsidiaries Independent Auditors' Report..........................................................................F-2 Consolidated Balance Sheets--December 31, 2003 and 2002...............................................F-3 Consolidated Statements of Operations--for the years ended December 31, 2003, 2002 and 2001......................................................................F-4 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001..................................................F-6 Consolidated Statements of Cash Flows--for the years ended December 31, 2003, 2002 and 2001......................................................................F-7 Notes to Consolidated Financial Statements............................................................F-9
F-1 Independent Auditors' Report The Board of Directors and Shareholders Matrix Bancorp, Inc.: We have audited accompanying consolidated balance sheets of Matrix Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2 to the consolidated financial statements, the Company changed its method of accounting for variable interest entities in 2003 and changed its method of accounting for goodwill and other intangible assets in 2002. KPMG LLP Denver, Colorado March 5, 2004 F-2
Matrix Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands) December 31, 2003 2002 ------------------------------------ Assets Cash and cash equivalents $ 32,538 $ 58,705 Interest-earning deposits and federal funds sold 1,972 3,707 Investment securities 152,508 29,073 Loans held for sale, net 999,454 1,136,159 Loans held for investment, net 344,802 257,651 Mortgage servicing rights, net 39,744 63,200 Other receivables 43,884 54,818 FHLBank stock, at cost 30,682 30,379 Foreclosed real estate 8,538 8,343 Premises and equipment, net 24,981 27,705 Bank owned life insurance 20,613 - Other assets, net 24,208 31,665 ------------------------------------ Total assets $ 1,723,924 $ 1,701,405 ==================================== Liabilities and shareholders' equity Liabilities: Deposits $ 974,059 $ 933,957 Custodial escrow balances 85,466 151,790 Draft Payable - 7,097 FHLBank borrowings 458,204 385,785 Borrowed money 47,970 61,403 Junior subordinated debentures owed to unconsolidated subsidiary trusts 66,525 - Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely debentures of the Company - 64,500 Other liabilities 18,508 23,165 Income taxes payable and deferred income tax liability 3,508 6,772 ------------------------------------ Total liabilities 1,654,240 1,634,469 ------------------------------------ Commitments and contingencies (Note 16) 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 6,518,981 and 6,489,543 shares at December 31, 2003 and 2002, respectively 1 1 Additional paid-in capital 20,615 20,375 Retained earnings 48,859 46,534 Accumulated other comprehensive income 209 26 ------------------------------------ Total shareholders' equity 69,684 66,936 ------------------------------------ Total liabilities and shareholders' equity $ 1,723,924 $ 1,701,405 ====================================
See accompanying notes to consolidated financial statements. F-3 Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except share information)
Years Ended December 31, 2003 2002 2001 ---------------------------------------------- Interest and dividend income: Loans and securities $ 72,667 $ 82,715 $ 93,066 Interest-earning deposits 1,040 1,273 2,004 ---------------------------------------------- Total interest and dividend income 73,707 83,988 95,070 Interest expense: Savings and time deposits 9,410 17,242 29,652 Demand and money market deposits 3,928 4,254 5,220 FHLBank borrowings 9,379 9,478 16,071 Borrowed money and junior subordinated debentures 9,282 10,304 13,944 ---------------------------------------------- Total interest expense 31,999 41,278 64,887 ---------------------------------------------- Net interest income before provision for loan and valuation losses 41,708 42,710 30,183 Provision for loan and valuation losses 3,641 2,821 2,980 ---------------------------------------------- Net interest income after provision for loan and valuation losses 38,067 39,889 27,203 Noninterest income: Loan administration 21,668 27,359 28,273 Brokerage 10,873 8,105 4,815 Trust services 6,781 5,345 4,036 Real estate disposition services 6,624 4,153 2,572 Gain on sale of loans and securities 14,267 5,480 4,163 Gain on sale of mortgage servicing rights, net - 675 167 School services 2,420 4,616 5,427 Other 6,696 6,201 8,934 ---------------------------------------------- Total noninterest income 69,329 61,934 58,387 Noninterest expense: Compensation and employee benefits 34,984 36,350 30,603 Amortization of mortgage servicing rights 32,497 24,176 21,862 Occupancy and equipment 6,172 5,600 4,545 Postage and communication 2,435 2,676 2,410 Professional fees 3,357 2,770 2,590 Data processing 2,860 2,796 2,370 (Recovery of) impairment on mortgage servicing rights (2,950) 14,219 181 Other general and administrative 31,613 30,261 21,024 ---------------------------------------------- Total noninterest expense 110,968 118,848 85,585 (Loss) income from continuing operations before income taxes (3,572) (17,025) 5 Income tax benefit (2,575) (7,756) (887) ---------------------------------------------- (Loss) income from continuing operations (997) (9,269) 892 ---------------------------------------------- Discontinued operations: Income from discontinued operations, net of income tax provision of $2,149, $3,439 and $5,162, respectively 3,322 5,317 7,620 ---------------------------------------------- Net income (loss) $ 2,325 $ (3,952) $ 8,512 ==============================================
F-4 Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations (Dollars in thousands, except share information)
Years Ended December 31, 2003 2002 2001 ---------------------------------------------- ---------------------------------------------- (Loss) income from continuing operations per share - basic $ (0.15) $ (1.43) $ 0.14 ---------------------------------------------- (Loss) income from continuing operations per share - assuming dilution $ (0.15) $ (1.43) $ 0.14 ---------------------------------------------- Income from discontinued operations per share - basic $ 0.51 $ 0.82 $ 1.17 ---------------------------------------------- Income from discontinued operations per share - assuming dilution $ 0.51 $ 0.82 $ 1.16 ---------------------------------------------- Net income (loss) per share - basic $ 0.36 $ (0.61) $ 1.31 ============================================== Net income (loss) per share - assuming dilution $ 0.36 $ (0.61) $ 1.30 ============================================== Weighted average shares - basic 6,494,803 6,462,272 6,495,583 ============================================== Weighted average shares - assuming dilution 6,539,195 6,462,272 6,560,454 ==============================================
See accompanying notes to consolidated financial statements. F-5
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) (Dollars in thousands) Accumulated Common Stock Additional Other Comprehensive ------------------ Paid-In Treasury Retained Comprehensive Income Shares Amount Capital Shares Earnings Income Total (loss) ---------------------------------------------------------------------------------------------- Balance at December 31, 2000 6,558,904 $ 1 $ 23,004 $ (1,775) $ 41,974 $ 819 $ 64,023 Shares repurchased (86,500) - (746) - - - (746) Shares retired (323,500 shares) - - (1,775) 1,775 - - - Issuance of stock related to employee stock purchase plan and options 46,200 - 317 - - - 317 Comprehensive income: Net income - - - - 8,512 - 8,512 $ 8,512 Net unrealized holding losses - - - - - (794) (794) (794) ----------- Comprehensive income $7,718 -----------------------------------------------------------------------------------=========== Balance at December 31, 2001 6,518,604 $ 1 $ 20,800 $ - $ 50,486 $ 25 $ 71,312 ----------------------------------------------------------------------------------- Shares repurchased (66.060) - - (726) - - (726) Shares retired (389,560 shares) - - (726) 726 - - - Issuance of stock related to employee stock purchase plan and options 36,999 - 301 - - - 301 Comprehensive (loss): Net loss - - - - (3,952) - (3,952) $ (3,952) Net unrealized holding gains(1) - - - - - 1 1 1 --------- Comprehensive (loss) $ (3,951) -------------------------------------------------------------------------------------========= Balance at December 31, 2002 6,489,543 $ 1 $ 20,375 $ - $ 46,534 $ 26 $ 66,936 ------------------------------------------------------------------------------------- Issuance of stock related to employee stock purchase 29,438 - 240 - - - 240 plan and options Comprehensive income: Net income - - - - 2,325 - 2,325 $ 2,325 Net unrealized holding gains(1) - - - - - 183 183 183 --------- Comprehensive income $ 2,508 -------------------------------------------------------------------------------------========= Balance at December 31, 2003 6,518,981 $ 1 $ 20,615 $ - $ 48,859 $ 209 $ 69,684 ------------------------------------------------------------------------------------- (1) Disclosure of reclassification amount Unrealized holding gain arising during the year ended December 31, 2003 $ 183 Less: reclassification adjustment of gains included in net income (loss) - --------- Net unrealized holding gain on securities $ 183 =========
See accompanying notes to consolidated financial statements. F-6
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) Years Ended December 31, 2003 2002 2001 --------------------------------------------- Operating activities Net (loss) income from continuing operations $ (997) $ (9,269) $ 892 Adjustments to reconcile net (loss) income from continuing operations to net cash used in operating activities: Depreciation and amortization 3,652 3,978 2,473 Provision for loan and valuation losses 3,641 2,821 2,980 Amortization of mortgage servicing rights 32,497 24,176 21,862 (Recovery) impairment on mortgage servicing rights (2,950) 14,219 181 Gain on sale of loans and securities (14,267) (5,480) (4,163) Gain on sale of mortgage servicing rights - (675) (167) Loss (gain) on sale of building and equipment - 17 (3,425) Gain on sale of foreclosed real estate (925) (284) (16) Changes in assets and liabilities: Loans originated for sale, net of loans sold (16,216) (109,014) (753,783) Loans purchased for sale (1,636,986) (1,127,632) (97,486) Principal payments on, and proceeds from sale of loans held 743,713 684,364 261,802 for sale Originated mortgage servicing rights, net (5,717) (34,511) (30,266) (Increase) decrease in other receivables and other assets 18,508 10,608 (19,844) Decrease in payable for purchase of mortgage servicing rights (581) (3,956) (7,791) (Decrease) increase in other liabilities, income taxes payable and deferred income tax liability (5,191) 26,964 (29,519) --------------------------------------------- Net cash used in operating activities from continuing operations (881,819) (523,674) (656,270) Net cash provided by discontinued operations 353,903 139,964 417,609 --------------------------------------------- Net cash used in operating activities (527,916) (383,710) (238,661) --------------------------------------------- Investing activities Loans originated and purchased for investment (236,055) (253,672) (159,619) Principal repayments on loans held for investment 130,302 137,972 144,002 Purchase of available for sale securities (29,397) (10,994) (1,042) Proceeds from sale of available for sale securities 653,744 422,685 72,705 Proceeds from maturity and prepayment of available for sale 1,348 1,728 5,912 securities Purchase of held to maturity securities (40,440) - - (Purchase) redemption of FHLBank stock, net (303) (12,198) 9,633 Purchase of bank owned life insurance (20,000) - - Purchases of premises and equipment (4,121) (17,614) (14,415) Acquisition of mortgage servicing rights (374) - (530) Proceeds from the sale of building and equipment - 45 14,601 Proceeds from sale of foreclosed real estate 12,306 8,306 1,521 Proceeds from sale of mortgage servicing rights - 9,682 1,600 --------------------------------------------- Net cash provided by investing activities 467,010 285,940 74,368 ---------------------------------------------
F-7
Matrix Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in thousands) Years Ended December 31, 2003 2002 2001 --------------------------------------------- Financing activities Net increase in deposits $ 40,102 $ 67,722 $ 263,566 Net (decrease) increase in custodial escrow balances (66,324) 22,125 52,018 Increase (decrease) in revolving lines, net 60,530 (18,663) (138,946) Payments of notes payable (1,515) (1,981) (13,298) Proceeds from notes payable - 2,000 1,786 Payment of financing arrangements (29) (61) (86) Proceeds from issuance of capital securities of subsidiary trusts - 5,000 30,977 Treasury shares repurchased - (726) (746) Proceeds from issuance of common stock related to employee stock purchase plan and options 240 301 317 --------------------------------------------- Net cash provided by financing activities 33,004 75,717 195,588 --------------------------------------------- (Decrease) increase in cash and cash equivalents (27,902) (22,053) 31,295 Cash and cash equivalents at beginning of the year 62,412 84,465 53,170 --------------------------------------------- Cash and cash equivalents at end of the year $ 34,510 $ 62,412 $ 84,465 ============================================= Supplemental disclosure of non-cash activity Loans transferred to foreclosed real estate $ 12,572 $ 8,010 $ 7,214 ============================================= Loans transferred to securities available for sale $ 708,507 $ 435,528 $ 19,196 ============================================= Supplemental disclosure of cash flow information Cash paid for interest $ 32,592 $ 45,050 $ 62,520 ============================================= Cash paid (received) for income taxes $ 2,879 $ (4,074) $ 4,557 =============================================
See accompanying notes to consolidated financial statements. F-8 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Organization Matrix Bancorp, Inc. (the "Company") is a unitary thrift holding company that, through its subsidiaries, is a diversified financial services company headquartered in Denver, Colorado. The Company's operations are conducted primarily through Matrix Capital Bank ("Matrix Bank"), Matrix Financial Services Corporation ("Matrix Financial"), Matrix Bancorp Trading, Inc. ("Matrix Bancorp Trading"), Matrix Asset Management Corporation ("Matrix Asset Management"), ABS School Services, L.L.C. ("ABS"), Sterling Trust Company ("Sterling") and First Matrix Investment Services Corp. ("First Matrix"), all of which are wholly owned subsidiaries of the Company. Matrix Bank, a federally chartered savings and loan association, serves its local communities of Denver, Colorado, Las Cruces, New Mexico, and Phoenix, Arizona, by providing personal and business depository services, trust services, offering residential loans and providing commercial real estate, Small Business Administration, multi-family and consumer loans. During 2002, Matrix Bank completed the relocation of its domicile from Las Cruces to Denver. On January 30, 2004, Matrix Bank entered into a definitive agreement to sell its two branches in Las Cruces to Access Anytime BanCorp, Inc.'s subsidiary, FirstBank. The sale is subject to regulatory approval and other customary conditions, and is expected to be completed in the second quarter of 2004. The sale would include deposits and loans of the Las Cruces branches (approximately $84.1 million and $23.8 million as of December 31, 2003, respectively). The sale of the branches is not expected to significantly impact the operations or liquidity of Matrix Bank or the Company. The Company's mortgage banking business is primarily conducted through Matrix Financial, and was established with the primary objective of originating, acquiring and servicing residential mortgage loans. On September 2, 2003, the Company announced the final closing, and substantial completion of the sale by Matrix Financial of substantially all of its assets associated with its wholesale mortgage origination platform, as discussed more fully in Note 3 below. The servicing platform was retained. Servicing mortgage loans involves the contractual right to receive a fee for processing and administering mortgage loan payments. Matrix Bancorp Trading, formerly known as Matrix Capital Markets, Inc., provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry, primarily related to the brokerage and analysis of residential mortgage loan servicing rights and residential mortgage loans, corporate and mortgage loan servicing portfolio valuations and, to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Matrix Asset Management provides real estate management and disposition services on foreclosed properties owned by financial service companies and financial institutions. Sterling is a non-bank trust company specializing in the administration of self-directed individual retirement accounts, qualified business retirement plans and personal custodial accounts, as well as corporate escrow and paying agent services. F-9 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Organization (continued) First Matrix is registered with the National Association of Securities Dealers as a fully disclosed broker-dealer. First Matrix is headquartered in Denver, Colorado and has branch offices in Fort Worth, Texas and Memphis, Tennessee. First Matrix offers a wide range of investment options for both individual and institutional investors, long term investing and retirement planning, and the acquisition, brokering and sale of Small Business Administration ("SBA") loan pools. ABS, operating under the trade name The GEO Group, provides outsourced business services and financing primarily to charter schools. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America. The following is a description of the more significant policies that the Company follows in preparing and presenting its consolidated financial statements. 2. Significant Accounting Policies Basis of Presentation Accounting Research Bulletin No. 51 ("ARB 51"), Consolidated Financial Statements, requires a company's consolidated financial statements to include subsidiaries in which the company has a controlling financial interest. This requirement has been applied to subsidiaries in which a company has a majority voting interest. Investments in companies in which the Company controls operating and financing decisions (principally defined as owning a voting or economic interest greater than 50%) are consolidated, and intercompany accounts and transactions have been eliminated in consolidation. The Company's investment in Matrix Settlement & Clearance Services, LLC ("MSCS") in which the Company has significant influence over operating and financing decisions (principally defined as owning a voting or economic interest of 20% to 50%) is accounted for by the equity method of accounting. This investment is included in other assets and the Company's proportionate share of income or loss is included in other noninterest income. The voting interest approach defined in ARB 51 is not applicable in identifying controlling financial interests in entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. In such instances, Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", and the reissued FIN 46, indicate when a company should include in its financial statements the assets, liabilities and activities of another entity. In general, a variable interest entity ("VIE") is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors F-10 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 provides guidance on how to identify a VIE and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity's consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or 2. Significant Accounting Policies (continued) the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Company has 5 VIE's in the form of its wholly-owned subsidiary trusts that issued capital securities to third-party investors and to certain direct and indirect interests in investment partnerships, commonly referred to as Trust Preferred securities. Such VIE's have been deconsolidated in the financial statements as of December 31, 2003. Further discussion regarding these securitization trusts is included below and in Note 11. Critical Accounting Policies and Estimates The Company and its subsidiaries have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of the Company's consolidated financial statements. 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 judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan and valuation losses is a critical accounting policy that requires the most significant judgments, assumptions and estimates used in preparation of its consolidated financial statements. See further detail in this Note 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 further detail in this Note for a detailed discussion concerning the use of estimates in 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, as discussed in detail in Note 16. Most of these cases involve ordinary and routine claims incidental to our business. We accrue for contingent liabilities with respect to litigation matters in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies," which generally requires the Company to accrue a loss for a litigation matter involving a contingent liability if the loss is probable and the amount of the loss is reasonably estimable. In order to determine whether the two conditions F-11 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) necessary for accrual are met, management makes a number of judgments and assumptions. Because the outcome of most litigation matters is inherently uncertain, the Company will generally only a accrue a loss for a pending litigation matter if, for example, the parties to the matter have entered into definitive settlement agreements or a final judgment adverse to the Company has been entered. 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. The preparation of the consolidated 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 consolidated financial statements, and disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. See discussion above regarding estimates used in critical accounting policy areas. Certain reclassifications have been made to prior years' consolidated financial statements and related notes to conform with current year presentation. Derivative Instruments and Hedging Activities The Company, through its subsidiary Matrix Financial, enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities. The Company is also required to recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative. Under the guidelines of SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities", as amended, all derivative instruments are required to be carried at fair value on the balance sheet. SFAS 133 provides special hedge accounting provisions, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in fair value of the derivative. F-12 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) At December 31, 2003, the Company has no hedge that meets the hedge accounting provisions provided under SFAS 133. However, the Company does have contracts and commitments that meet the definition of a derivative as well as economic hedges outstanding. SFAS 133 requires the Company to record its best effort commitments associated with its mortgage loan origination activities on the consolidated balance sheets. 2. Significant Accounting Policies (continued) The Company also utilizes derivative instruments to hedge a portion of its investment in mortgage servicing rights. The Company's hedge is an economic hedge to offset changes in fair value of mortgage servicing rights caused by changes in interest rates with changes in hedge instruments that consist of futures contracts and options on futures. The change in the fair value of the derivative instruments is recorded with a corresponding charge or credit to earnings. Investment Securities Securities available for sale include mortgage-backed securities and SBA securities available for sale. Securities available for sale are carried at estimated fair value with the change in unrealized gains and losses reported in other comprehensive income, net of tax, which is included as a separate component in shareholders' equity. Realized gains and losses on the sale of, and other-than-temporary impairment charges on, available for sale securities are recorded in gains on sale of loans and securities using the specific-identification method. Securities held to maturity include mortgage-backed securities. Securities are classified as held to maturity when management has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Loans Held for Sale Loans purchased or originated with the intent for sale in the secondary market are carried at the lower of aggregate cost, net of discounts or premiums and a valuation allowance, or estimated fair market value. Estimated fair market value is determined using forward commitments to sell loans or mortgage-backed securities to permanent investors, or current market rates for loans of similar quality and type. Net unrealized losses, if any, are recognized in a valuation allowance by charges to operations. SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," requires discounts or premiums on loans held for sale be deferred until the related loan is sold. However, the Company accretes discounts and amortizes premiums related to repayment of loan principal, which is included in interest income. The loans are primarily secured by 1-to-4 family residential real estate located throughout the United States. F-13 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Loans are considered sold when the Company surrenders control over the transferred assets to the purchaser, with standard representations and warranties. At such time, the loan is removed from the loan portfolio and a gain or loss is recorded on the sale. Gains and losses on loan sales are determined based on the difference between the allocated cost basis of the assets sold and the proceeds, which includes the estimated fair value of any assets or liabilities that are newly created as a result of the transaction. Losses related to recourse provisions are accrued as a liability at the time such additional losses are determined, and recorded as part of noninterest expense. Losses related to asset quality are recorded against the allowance for loan and valuation losses at the time the loss is probable and quantifiable. 2. Significant Accounting Policies (continued) Loans Held for Investment Loans held for investment are stated at unpaid principal balances, net of unearned discounts and premiums, deferred loan fees, and allowance for loan losses. The loans include residential mortgage loans, commercial loans, multi-family, and SBA loans, and are primarily secured by real estate. Loan origination fees, net of certain direct origination costs, are deferred and amortized into interest income as an adjustment to the yield over the term of the loan. Allowance for Loan and Valuation Losses The allowance for loan and valuation losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors such as the size and current risk characteristics of the loan portfolio, any qualitative evaluations of individual classified assets, geographic portfolio concentrations, new products or markets, regulatory guidance, evaluations of the changes in the historical loss experience component, and projections of this component into the current and future periods based on current knowledge and conditions. The loss factors are applied to the outstanding principal balance of loans in their respective categories, plus additional loan review is performed on all significant commercial and school finance loans. After an allowance has been established for the loan portfolio, from the factors described above, management evaluates other factors such as trends in delinquency such as loans in foreclosure, loans in bankruptcy and other relevant factors, and establishes a valuation allowance that cannot be associated with a specific loan or loan portfolio. The Company evaluates its residential loans collectively due to their homogeneous nature. These factors include general economic conditions, recognition of specific regional geographic concerns, loan type, trends in portfolio growth and historical loss experience. Loan losses are charged against the allowance when the probability of collection is considered remote. In the opinion of management, the allowance is adequate to absorb the inherent losses in the current loan portfolio. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Estimated fair value is measured using either the present value of expected future cash flows discounted using loan rate, market price of the loan or fair value of the collateral, if collateral dependent. All loans considered impaired are included in nonperforming loans. The Company evaluates its residential loans collectively due to their homogeneous nature. Accordingly, potential impaired loans of the Company include only commercial loans, real estate construction loans, commercial real estate mortgage loans, larger multi-family loans and school financing loans classified as nonperforming loans. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. F-14 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Loans are placed on nonaccrual status when full payment of principal or interest is in doubt, or generally when they are past due 90 days as to either principal or interest, unless the interest is guaranteed by a creditworthy entity through recourse provisions. Previously accrued but unpaid interest is reversed and charged against interest income, if not collectible, and future accruals are discontinued. Interest payments received on nonaccrual loans are recorded as interest income unless there is doubt as to the collectibility of the recorded investment. In those cases, cash received is recorded as a reduction in principal. Mortgage Servicing Rights The Company recognizes mortgage servicing rights ("MSRs") as an asset separate from the underlying originated mortgage loan at the time of sale. Upon sale of a loan, the Company measures retained MSRs by allocating the previous carrying amount of the originated mortgage loan between the loan and the servicing right based on their relative estimated fair values. Purchased MSRs are initially measured at cost. MSRs are carried at the lower of cost (allocated cost for originated MSRs), less accumulated amortization, or estimated fair value. MSRs are amortized in proportion to and over the period of the estimated future net servicing income. The estimated fair value of MSRs is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its MSRs by product type, interest rate and investor to reflect the predominant risk characteristics. To determine the estimated fair value of MSRs, the Company uses a valuation model that calculates the present value of future cash flows. In using this valuation model, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing per loan, including incremental interest cost of servicer advances, foreclosure expenses and losses, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds and default rates. For purposes of performing an impairment analysis on MSRs, the Company estimates fair value using the following primary assumptions: prepayment speeds ranging from 91 PSA (Public Securities Association prepayment speed measurement) to 1,316 PSA; discount rates ranging from 9.00% to 22.00%; and default rates ranging from 0% to 100%. The Company records a valuation allowance where the estimated fair value is below the carrying amount of individual stratifications, even though the overall fair value of the servicing assets may exceed amortized cost. As of December 31, 2003 and 2002, a valuation allowance of $6,450,000 and $14,400,000, respectively, was required, and the fair value of the aggregate MSRs was approximately $39,744,000 and $63,200,000, respectively. F-15 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Gain on sale of MSRs is recorded when title to MSRs and the risks and rewards inherent in owning the MSRs have been transferred to the buyer. 2. Significant Accounting Policies (continued) Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated lives of the assets, which range from 2 to 7 years for software, office furniture and equipment and 40 years for buildings. Foreclosed Real Estate Residential or commercial real estate acquired through foreclosure, deed in lieu of foreclosure or in judgment is carried at the lower of estimated fair value, less estimated costs to sell, or the related loan balance at the date of foreclosure. Valuations are periodically performed by management and an allowance for loss is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated costs to sell. Bank Owned Life Insurance Bank owned life insurance represents the cash surrender value of life insurance policies purchased to insure the lives of certain officers and directors of Matrix Bank. Earnings are credited to the balance and recorded as part of other income in the consolidated statements of operations. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. The subsidiaries are charged for the taxes applicable to their profits calculated on the basis of filing separate income tax returns. Matrix Bank qualifies as a savings and loan association for income tax purposes. The Company uses the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Loan Administration Income Loan administration income represents service fees and other income earned from servicing loans for various investors. Loan administration income includes service fees that are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Service fees on loans and all other income is recognized when the related payments are received. F-16 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Brokerage Income Brokerage income represents fees earned related to consulting services performed pertaining to mortgage servicing rights, as well as brokerage income from whole loan activities, retail and fixed income activities, SBA trading fees and fees earned related to third party servicing brokerage. Brokerage income is recognized when services are performed. Trust Services Income Trust services income represents fees earned related to services provided for self-directed individual retirement accounts, qualified benefit plans and escrow arrangements. Trust services income is recognized over the contract period in proportion to when the services are performed. Real Estate Disposition Services Income Real estate disposition services income represents fees earned related to real estate management and disposition services provided to others. Real estate disposition services income is recognized when services are performed. School Services Income School services income represents fees earned related to outsourced business and consulting services provided to schools. School services income is recognized when services are performed. Stock-Based Compensation At December 31, 2003, the Company has one stock-based employee compensation plan, which is described more fully in Note 15. We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS 123, "Accounting for Stock-Based Compensation" established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plan. As allowed by SFAS 123 and SFAS 148 "Accounting for Stock Based Compensation - Transition and Disclosure, an Amendment to FASB Statement No. 123," we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS 123. Accordingly, we do not recognize compensation expense for our stock-based plan, as we do not issue options at exercise prices below the market value at the date of the grant. Had compensation cost for our stock-based plans been determined consistent with SFAS No. 123, our net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below: F-17 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued)
Year ended December 31, 2003 2002 2001 ------------------------------------------------------ (Dollars in thousands except per share data) Net income (loss): Net income (loss) as reported $ 2,325 $ (3,952) $ 8,512 Deduct: Total stock-based employee compensation expense determined under fair value based method for awards, net of related tax effects (262) (358) (307) ------------------------------------------------------ Pro forma $ 2,063 $ (4,310) $ 8,205 ====================================================== Income (loss) per share: Basic, as reported $ 0.36 $ (0.61) $ 1.31 ====================================================== Basic, pro forma $ 0.32 $ (0.67) $ 1.26 ====================================================== Diluted, as reported $ 0.36 $ (0.61) $ 1.30 ====================================================== Diluted, pro forma $ 0.32 $ (0.67) $ 1.25 ======================================================
Cash and Cash Equivalents Cash equivalents, for purposes of the consolidated statements of cash flows, consist of nonrestricted cash, federal funds sold and interest-earning deposits with banks with original maturities, when purchased, of three months or less. Income (Loss) Per Common Share Basic income (loss) per common share from continuing operations is computed by dividing (loss) income from continuing operations by the weighted average number of common shares outstanding for the period. Basic and diluted income per common share from discontinued operations is computed by dividing net income from discontinued operations by the weighted average number of common shares for the period, and the effect of potentially dilutive securities, such as stock options and warrants outstanding for the year ("dilutive securities"). Net income per common share assuming dilution is computed by dividing net income by the weighted average number of common shares outstanding for the year and the effect of potentially dilutive securities. Due to the net loss in 2002, the potentially dilutive securities were not used in the calculation of diluted loss per share for the year ended December 31, 2002. F-18 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Restructuring Charges Associated with the purchase of Matrix Financial Center by Matrix Bank in 2002, Matrix Bancorp and certain subsidiaries with various leased office space throughout the Denver metropolitan area have moved their offices into Matrix Financial Center. Associated with this move, the Company recorded a pre-tax charge of $700,000 in other general and administrative expenses for the year ended December 31, 2002. The charge represents the excess of costs to be 2. Significant Accounting Policies (continued) incurred on original leased space in excess of expected revenues on subleasing of the space or terminating original lease commitments. Moving expenses associated with the final relocation are included in other general and administrative expenses for the years ended December 31, 2003 and 2002. Investment in Joint Venture The Company has a 45%-owned investment in MSCS, and in MSCS' wholly owned subsidiary, MSCS Financial Services, L.L.C., which is accounted for using the equity method. This investment was classified in other assets, and had a carrying value of $1,737,000 and $802,000 as of December 31, 2003 and 2002, respectively. For the years ended December 31, 2003, 2002 and 2001, the Company recorded income (losses) of $1,158,000, $213,000, and $(175,000), respectively, in other income related to MSCS consolidated operations. As of December 31, 2003 and 2002, MSCS had total assets of $5,192,000 and $3,362,000; total liabilities of $1,949,000 and $1,709,000; and equity of $3,243,000 and $1,653,000, respectively. For the years ended December 31, 2003, 2002 and 2001, MSCS had revenues of $9,061,000, $7,714,000, and $3,517,000; and pre-tax income (loss) of $2,573,000, $475,000, and $(388,000), respectively. Fair Value of Financial Instruments The Company determines the fair value of financial instruments as required by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The amounts disclosed represent the Company's best estimate of fair value of financial instruments required to be disclosed under the Statement. The Company also has disclosed the methods and significant assumptions used to estimate the fair value of its financial instruments. Impact of Recently Issued Accounting Standards On December 11, 2003, the SEC staff announced its intention to release a Staff Accounting Bulletin that would require all registrants to account for mortgage loan interest rate lock commitments related to loans held for sale as written options, effective no later than for commitments entered into after March 31, 2004. The Company enters into such commitments with customers in connection with residential mortgage loan applications, however, the amount of these commitments is not material to the Company's consolidated financial statements. This guidance, if issued, would require the Company to recognize a liability on its consolidated balance sheet equal to the fair value of the commitment at the time the loan commitment is issued. As a result, this guidance would delay the recognition of any revenue related to these commitments until such time as the loan is sold, however, it would have no effect on the ultimate amount of revenue or cash flows recognized over time. The Company is currently assessing the impact of this pending guidance on its consolidated results of operations and financial position, F-19 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) but does not expect the implementation to have a significant impact on the consolidated financial statements. In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for classifying and measuring certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The provisions of SFAS 150 became effective June 1, 2003, for all financial instruments created or modified after May 31, 2003, and otherwise became effective as of July 1, 2003. The adoption of this standard did not have a material impact on consolidated financial statements. In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments and hedging activities under SFAS 133, as well as amends certain other existing FASB pronouncements. In general, SFAS 149 is effective for derivative transactions entered into or modified and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material impact on consolidated financial statements. In January 2003, the FASB issued FIN 46, which provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity's consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, or the right to receive the expected residual returns of the entity if they occur. In December 2003, the FASB revised FIN 46 with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIEs commonly referred to as special-purpose entities (SPEs) as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied. During the fourth quarter of 2003, the Company applied the provisions of FIN 46 and the revised FIN 46 to its wholly-owned subsidiary trusts that issued capital securities to third-party investors and to certain direct and indirect interests in investment partnerships. The application of FIN 46, and early adoption of the reissued FIN 46, resulted in the deconsolidation of the 5 wholly-owned subsidiary trusts. The assets and liabilities of the subsidiary trusts that were deconsolidated totaled $64,500,000 and $66,525,000, respectively. See Note 11 for further discussion of these trusts and the Company's related obligations. F-20 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) In June 2001, the FASB issued SFAS No 142, "Goodwill and Other Intangible Assets," that supersedes APB Opinion No. 17. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are to be reviewed at least annually for impairment, under impairment guidelines established in the statement. SFAS 142 also changes the amortization methodology in intangible assets that are deemed to have finite lives and adds to required disclosures regarding goodwill and intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 on January 1, 2002 and its unamortized balance of goodwill as of that date was $1,004,000. Beginning in 2002, the Company ceased its amortization of goodwill. During the fourth quarter of 2002, under guidelines contained in the statement, management performed an analysis concerning potential impairment of the goodwill carried at ABS School Services, and determined an impairment of goodwill was present, and the entire goodwill balance of $1,004,000 was written off. The consolidated balance of goodwill is $0 at both December 31, 2003 and 2002. 3. Discontinued Operations On September 2, 2003, the Company announced the final closing, and substantial completion of the sale by Matrix Financial Services Corporation of substantially all of its assets associated with its wholesale mortgage origination platform. On February 23, 2003, the Company announced that its subsidiaries, Matrix Financial and Matrix Bank, entered into a Purchase and Assumption Agreement, as amended ("Purchase Agreement"), to sell substantially all of Matrix Financial's assets associated with its wholesale mortgage origination platform ("Platform") to AmPro Mortgage Corporation ("AmPro" or the "Buyer"). After the sale, our remaining operations at Matrix Financial consist of our mortgage servicing platform, where we service loans for third parties and ourselves. Included in the sale were the wholesale production offices, the back office personnel that process the loan originations and a significant portion of the corporate operations and personnel. After the sale, our remaining operations at Matrix Financial consist primarily of the mortgage servicing platform and a limited amount of corporate personnel and operations. Upon signing of the Purchase Agreement, the Buyer was not yet licensed to engage in any mortgage banking activities under state or federal law. It was anticipated that it would take approximately six months from execution of the Purchase Agreement for the Buyer to obtain the necessary licensing. Accordingly, Matrix Financial, Matrix Bank and the Buyer desired to structure the transaction in a manner that transferred substantially all the economic risks and benefits of the operation of the Platform during the Transition Period (defined below) to the Buyer, while at the same time having Matrix Financial and Matrix Bank maintain continuous effective control over the operations of the Platform for regulatory purposes. The Purchase Agreement, therefore, contemplated a two-staged closing. The first closing ("Initial Closing Date") occurred on the date the Purchase Agreement was signed and was the effective date for F-21 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations (continued) the sale of the fixed assets, and the final or second closing ("Final Closing Date") occurred six months following the Initial Closing Date, or August 31, 2003. The effective sale date for accounting purposes was considered to be the Final Closing Date. The period of operation of the Platform in between the Initial Closing Date and the Final Closing Date is referred to as the "Transition Period." On the Initial Closing Date, the Buyer purchased substantially all of the tangible personal property and intangible property associated with the Platform. There was no gain or loss on the sale of the assets. The Buyer additionally has taken the transfer and assignment of certain contract rights, real property leases and equipment leases from Matrix Financial at or about the Final Closing Date. At the Final Closing Date, the Buyer purchased any tangible and intangible personal property of the Platform that was acquired during the Transition Period in the ordinary course of business or otherwise inadvertently not purchased on the Initial Closing Date (the "Subsequently Acquired Assets"), as well as Matrix Financial's loan files, pipeline applications and sales commitments. The purchase price was determined as follows: o The asset payment amount, which was $3,342,000 in payment for the tangible and intangible assets of the Platform as of the Initial Closing Date; plus o The Subsequently Acquired Assets payment amount, which was $577,000 in payment for the book value of the Subsequently Acquired Assets as of the Final Closing Date; plus o The production premium, which is generally 20 basis points times the original principal balance of all loans originated during the 12 months following the Initial Closing Date at Matrix Financial loan production offices purchased by Buyer. The production premium is "capped" at $9,100,000. Through December 31, 2003, the production premium earned and reflected in discontinued operations loss on sale is $6,836,000 before tax; plus o The aggregate locked loan profitability amount, which pays Matrix Financial one-half of the profit over a specified threshold amount (the threshold being generally 30 basis points) on loans that funded during the first two months after the Initial Closing Date which resulted from its locked pipeline as of the Initial Closing Date and which was $160,000 before tax; plus or minus o The transition period gain or loss, which is a mechanism that provides for an approximation of the accounting for the transaction as if the entire sale and transfer occurs on the Initial Closing Date. Because the Platform generated a profit during the transition period of $11,594,000 before tax, Matrix Financial was required to pay such profit into an escrow account, and has reflected the amount as a component of the loss on sale of discontinued operations. F-22 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Discontinued Operations (continued) As a result of the sale, the Company recorded an after tax loss on the sale of the platform of $2,792,000, or $(0.43) per diluted share, which is included in income from discontinued operations in the consolidated statements of operations. The operating income of the discontinued production platform is reflected in discontinued operations beginning in the first quarter of 2001, and the consolidated statements of operations have been restated to reflect the production platform as a discontinued operation. Operating results of the discontinued operations, previously included in our mortgage banking segment, were as follows:
Years Ended December 31, 2003 2002 2001 ------------------------------------------------------------ (Dollars in thousands, except share information) Net interest income after provision for loan and valuation losses $ 3,477 $ 6,490 $ 10,327 Noninterest income 38,309 35,476 33,130 Noninterest expense 31,717 33,210 30,865 ------------- --------------- --------------- Operating income before taxes from discontinued operations 10,069 8,756 12,592 Income tax provision 3,955 3,439 4,972 ------------- --------------- --------------- Operating income from discontinued operations 6,114 5,317 7,620 Loss on sale of production platform, net of income tax benefit of $1,806 (2,792) - - ------------- --------------- --------------- Income from discontinued operations, net of income taxes $ 3,322 $ 5,317 $ 7,620 ============= =============== =============== Income from discontinued operations per share - basic $ 0.51 $ 0.82 $ 1.17 ============= =============== =============== Income from discontinued operations per share - diluted $ 0.51 $ 0.82 $ 1.16 ============= =============== ===============
For a period of two years from the Initial Closing Date, Matrix Bank has agreed that neither Matrix Bank nor any of its affiliates will engage in, directly or indirectly, the single-family retail or wholesale mortgage origination business in those states in which the acquired division operates or is located as of the Initial Closing Date. However, this non-compete provision does not prohibit Matrix Bank or its affiliates from engaging in such business in order to comply with applicable law, rules, regulations, directives, agreements or orders from the Office of Thrift Supervision ("OTS") or other parties where it is necessary to resolve regulatory or supervisory concerns. Additionally, the non-compete provision does not apply in the event of a change in control of the Matrix Bank or the Company. F-23 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) The Purchase Agreement requires Matrix Bank to guarantee Matrix Financial's obligations under the Purchase Agreement if certain events occur, such as Matrix Financial's bankruptcy, failure to maintain a minimum net worth, or loss of voting control of Matrix Financial. 4. Net Income (Loss) Per Share The following table sets forth the computation of basic net (loss) income per share and net (loss) income per share, assuming dilution:
Years Ended December 31, 2003 2002 2001 ------------------------------------------------------- (Dollars in thousands) Numerator: (Loss) income from continuing operations, net of tax effects $ (997) $ (9,269) $ 892 ======================================================= Income from discontinued operations, net of tax effects $ 3,322 $ 5,317 $ 7,620 ======================================================= Net income (loss) $ 2,325 $ (3,952) $ 8,512 ======================================================= Denominator: Weighted average shares outstanding 6,494,803 6,462,272 6,495,583 Effect of dilutive securities: Common stock options 44,392 - 64,871 ------------------------------------------------------- Denominator for net (loss) income per share, assuming dilution 6,539,195 6,462,272 6,560,454 =======================================================
For the year ended December 31, 2002, there were 90,702 stock options and warrants outstanding which were potentially convertible to common stock. Assuming conversion at the beginning of the year, the aggregate weighted average shares would have been 6,552,974 at December 31, 2002. These securities are anti-dilutive due to the net loss in 2002; therefore, these potentially dilutive securities have not been used in the calculation of diluted loss per share for the year ended December 31, 2002. 5. Investment Securities Investment securities available for sale were as follows:
December 31, 2003 December 31, 2002 -------------------------------------------------- ------------------------------------ Gross Gross Gross Amortized Unrealized Unrealized Carrying Amortized Unrealized Carrying Cost Gains Losses Value Cost Gains Value ------------ ------------ ------------ ----------- ----------- ------------- ---------- (In thousands) Mortgage-backed securities, available for sale $ 29,562 $ 223 $ - $ 29,785 $ 1,046 $ 40 $ 1,086 SBA Securities, available for sale 82,515 124 (22) 82,617 27,987 - 27,987 ------------ ------------ ------------ ----------- ----------- ------------- ---------- Total $ 112,077 $ 347 $ (22) $ 112,402 $ 29,033 $ 40 $ 29,073 ============ ============ ============ =========== =========== ============= ==========
F-24 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Investment Securities (continued) The Company expects to receive payments on investment securities available for sale over periods that are considerably shorter than the contractual maturities of the securities, which range from 6 to 30 years, due to prepayments. Realized gains on the sale of securities available for sale as determined by specific identification, were approximately $0, $78,000, and $1,198,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Carrying value of held for sale securities equals the estimated fair value. Investment securities held to maturity were as follows:
December 31, 2003 December 31, 2002 --------------------------------------- ------------------------------------------ Amortized Amortized Cost and Gross Cost and Gross Carrying Unrealized Estimated Carrying Unrealized Estimated Value Gains Fair Value Value Gains Fair Value ------------- ------------ ------------ ------------- ------------ --------------- (In thousands) Mortgage-backed securities, held to maturity $ 40,106 $ 66 $ 40,172 $ - $ - $ - ------------- ------------ ------------ ------------- ------------ --------------- Total $ 40,106 $ 66 $ 40,172 $ - $ - $ - ============= ============ ============ ============= ============ ===============
The amortized cost and estimated fair value of investment securities by contractual maturity at December 31, 2003 is as follows:
Available for Sale Held to Maturity Amortized Cost Estimated Fair Amortized Cost Estimated Fair Value Value (In thousands) Within 1 year $ $ $ $ - - - - Over 1 year through 5 years 193 193 - - After 5 years through 10 years 5,364 5,381 - - Over 10 years 76,958 77,043 - - ----------------- ------------------- ------------------- ----------------- 82,515 82,617 - - Mortgage-backed securities 29,562 29,785 40,106 40,172 ----------------- ------------------- ------------------- ----------------- Total $ 112,077 $ 112,402 $ 40,106 $ 40,172 ================= =================== =================== =================
At December 31, 2003 and 2002, mortgage backed securities and SBA securities with a carrying value of $1,166,000 and $926,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. F-25 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Loans Held for Sale and Investment Loans Held for Investment Loans held for investment consist of the following:
December 31, 2003 2002 ---------------------------------- (In thousands) Residential loans $ 178,463 $ 54,420 Multi-family, commercial real estate, SBA commercial 148,842 168,316 Construction loans 21,304 34,175 Consumer loans and other 2,977 4,313 (Discounts) premium, net (1,000) 570 Unearned fees (798) (699) ---------------------------------- 349,788 261,095 Less: Allowance for loan and valuation losses 4,986 3,444 ---------------------------------- Loans held for investment, net $ 344,802 $ 257,651 ================================== Activity in the allowance for loan and valuation losses on loans held for investment is summarized as follows: Years Ended December 31, 2003 2002 2001 ----------------------------------------------------- (In thousands) Balance at beginning of year $ $ 2,776 $ 2,107 3,444 Provision for loan and valuation losses 2,248 1,700 1,821 Charge-offs (1,035) (1,127) (1,235) Recoveries 329 95 83 ----------------------------------------------------- Balance at end of year $ 4,986 $ 3,444 $ 2,776 ===================================================== Loans Held for Sale Loans held for sale consist of the following: December 31, 2003 2002 ----------------------------------- (In thousands) Residential loans $ 722,192 $ 941,249 SBA guaranteed commercial loans, school financing and other 267,705 191,400 Purchase premiums, net 14,360 9,409 ----------------------------------- 1,004,257 1,142,058 Less: Allowance for loan and valuation losses 4,803 5,899 ----------------------------------- Loans held for sale, net $ 999,454 $ 1,136,159 ===================================
F-26 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Loans Held for Sale and Investment (continued) Activity in the allowance for loan and valuation losses on loans held for sale is summarized as follows:
Years Ended December 31, 2003 2002 2001 ------------------------------------------------------ (In thousands) Balance at beginning of year $ 5,899 $ 6,562 $ 6,474 Provision for loan losses 1,393 1,121 1,159 Charge-offs (2,515) (1,871) (1,075) Recoveries 26 87 4 ------------------------------------------------------ Balance at end of year $ 4,803 $ 5,899 $ 6,562 ====================================================== The following lists information related to nonperforming loans held for investment and held for sale: December 31, 2003 2002 --------------------------------- (In thousands) Loans on nonaccrual status in the held for investment portfolio $ 21,006 $ 11,604 Loans on nonaccrual status in the held for sale portfolio 10,444 19,214 --------------------------------- Total nonperforming loans $ 31,450 $ 30,818 ================================= Interest income that would have been recognized at original contract terms $ 1,084 $ 916 =================================
The Company continues to accrue interest on government-sponsored loans such as Federal Housing Administration (FHA) insured and Department of Veterans' Affairs (VA) guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured or guaranteed by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $12,164,000 and $34,791,000 as of December 31, 2003 and 2002, respectively. F-27 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Premises and Equipment Premises and equipment consist of the following:
December 31, 2003 2002 ------------------------------------ (In thousands) Land $ 3,450 $ 3,520 Buildings 14,069 13,987 Leasehold improvements 4,377 2,992 Office furniture and equipment 15,152 20,513 ------------------------------------ 37,048 41,012 Less accumulated depreciation 12,067 13,307 ------------------------------------ Premises and equipment, net $ 24,981 $ 27,705 ====================================
7. Premises and Equipment Included in premises and equipment, net at December 31, 2002 was $3,492,000 of assets sold under the Purchase Agreement with the sale of the production platform as discussed in Note 3 above. There was no gain or loss on the sale. Included in occupancy and equipment expense is depreciation expense of premises and equipment of approximately $3,552,000, $3,478,000 and $2,797,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 8. Mortgage Servicing Rights The activity in the MSRs is summarized as follows:
Years Ended December 31, 2003 2002 2001 ------------------------------------------------------ (In thousands) Mortgage servicing rights Balance at beginning of year $ 79,234 $ 78,893 $ 71,529 Purchases 375 - 530 Originations 5,082 34,511 30,129 Amortization (32,497) (24,176) (21,862) Sales - (9,994) (1,433) Application of valuation allowance to write down impaired MSRs (5,000) - - ------------------------------------------------------ Balance before valuation allowance at end of year 47,194 79,234 78,893 ------------------------------------------------------ Valuation allowance for impairment of mortgage servicing rights Balance at beginning of year (14,400) (181) - Additions (2,400) (14,219) (181) Application of valuation allowance to write down impaired MSRs 5,000 - - Recovery 5,350 - - ------------------------------------------------------ Balance at end of year (6,450) (14,400) (181) ------------------------------------------------------ Valuation allowance for foreclosure costs (1,000) (1,634) - ------------------------------------------------------ Mortgage servicing rights, net $ 39,744 $ 63,200 $ 78,712 ======================================================
The Company's servicing activity is diversified throughout 50 states with concentrations at December 31, 2003, in Missouri, Texas, California, Arizona, New Mexico and Florida of approximately 14.5%, 14.3%, 13.9%, 9.0%, 8.2% and 5.0%, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. As of December 31, 2003, 2002 and 2001, the Company subserviced loans for others of approximately $176,921,000, $26,613,000 and $889,000,000, respectively. F-28 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Mortgage Servicing Rights (continued) The Company's servicing portfolio (excluding subserviced loans) is comprised of the following:
December 31, 2003 2002 -------------------------------------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding -------------------------------------------------------------- (Dollars in thousands) Freddie Mac 6,194 $ 253,245 9,027 $ 417,583 Fannie Mae 19,257 1,164,589 27,678 1,832,276 Ginnie Mae 16,370 1,068,975 24,453 1,823,706 VA, FHA, conventional and other loans 9,034 696,727 13,489 1,260,062 -------------------------------------------------------------- Total servicing portfolio 50,855 $ 3,183,536 75,647 $ 5,333,627 ==============================================================
The Company's custodial escrow balances shown in the accompanying consolidated balance sheets at December 31, 2003 and 2002, pertain to payments held in escrow in respect of taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company. The custodial accounts are maintained at Matrix Bank in noninterest-bearing accounts. The balance of the custodial accounts fluctuates from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of taxes and insurance payments. The estimated aggregate amortization of our MSR's for each of the next five years ending December 31, 2004, 2005, 2006, 2007 and 2008 is $9,158,000, $6,929,000, $5,249,000, $4,032,000, $3,118,000, respectively. The estimated amortization is based on several assumptions as of December 31, 2003 with the most significant being the anticipated prepayment speeds of the underlying mortgages. It is reasonably possible the actual repayment speeds of the underlying mortgage loans may differ materially from the estimate repayment speed, and thus, the actual amortization may be significantly different than the amounts estimated. F-29 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Deposits Deposit account balances are summarized as follows:
December 31, 2003 2002 --------------------------------------------------------------------------- Percent of Weighted Percent of Weighted Total Average Rate Total Average Rate Amount Deposits Amount Deposits --------------------------------------------------------------------------- (Dollars in thousands) Passbook accounts $ 5,675 0.58% 1.28% $ 5,514 0.59% 1.31% NOW accounts 180,733 18.55 0.15 145,465 15.57 0.20 Money market accounts 576,088 59.14 0.71 334,508 35.82 0.91 --------------------------------------------------------------------------- 762,496 78.28 0.58 485,487 51.98 0.69 Certificate accounts 211,563 21.72 2.89 448,470 48.02 2.63 --------------------------------------------------------------------------- Deposits $ 974,059 100.00% 1.07% $ 933,957 100.00% 1.62% ===========================================================================
Included in NOW accounts are noninterest-bearing DDA accounts of $136,146,000 and $96,289,000 at December 31, 2003 and 2002, respectively. Contractual maturities of certificate accounts as of December 31, 2003 are as follows:
Under 12 12 to 36 36 to 60 months months months Total ------------------------------------------------------------------ (In thousands) 0.00-0.99% $ 7,468 $ $ $ - - 7,468 1.00-1.99% 86,254 3,171 - 89,425 2.00-2.99% 6,925 10,372 596 17,893 3.00-3.99% 5,958 3,989 5,623 15,570 4.00-4.99% 9,257 39,940 9,553 58,750 5.00-5.99% 3,750 3,659 4,626 12,035 6.00-6.99% 616 9,031 - 9,647 7.00-7.99% 775 - - 775 ------------------------------------------------------------------ $ 121,003 $ 70,162 $ 20,398 $ 211,563 ==================================================================
Approximately $178,991,000 and $141,278,000 of fiduciary assets under administration by Sterling are included in NOW and money market accounts as of December 31, 2003 and 2002, respectively. Approximately $85,338,000 and $60,870,000 of MSCS customer assets under administration by MSCS are included in NOW and money market accounts as of December 31, 2003 and 2002, respectively. Included in certificate accounts are $104,608,000 and $327,335,000 of brokered deposits as of December 31, 2003 and 2002, respectively. F-30 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Deposits (continued) Interest expense on deposits is summarized as follows:
Years Ended December 31, 2003 2002 2001 ------------------------------------------------------ (In thousands) Passbook accounts $ 74 $ 117 $ 108 NOW accounts 327 570 929 Money market 3,602 3,684 4,291 Certificates of deposit 9,335 17,125 29,544 ------------------------------------------------------ Interest expense on deposits $ 13,338 $ 21,496 $ 34,872 ======================================================
The aggregate amount of deposit accounts with a balance greater than $100,000 (excluding brokered deposits) was approximately $17,954,000 and $17,769,000 at December 31, 2003 and 2002, respectively. 10. Borrowed Money Borrowed money is summarized as follows:
December 31, 2003 2002 --------------------------------- (In thousands) Borrowed Money Senior notes, interest at 11.50% payable semiannually, unsecured and maturing September 30, 2004 $ 9,545 $ 9,545 $8,215,000 note payable to a third party financial institution due in quarterly principal installments of $357,000 plus interest, through December 31, 2004, collateralized by the common stock of Matrix Bank; interest at LIBOR plus 2.65% (3.87% at December 31, 2003) 6,073 7,501 $12,000,000 revolving line of credit to a third party financial institution, through March 31, 2004, renewable annually, collateralized by the common stock of Matrix Bank; interest at LIBOR plus 2.65% (3.87% at December 31, 2003); $12,000,000 available at December 31, 2003 - - Note payable with a bank, secured by real estate, interest only at 7% at December 31, 2002, maturing September 30, 2004 1,913 2,000 School financing agreements, maturing September 2004 and September 2005, collateralized by school financing; interest rates are variable based on the BMA mini-swap index. Future financing commitment is at the discretion of the third-party lenders 30,439 32,328 $50,000,000 at December 31, 2002, through August 30, 2003, secured by mortgage loans held for sale, interest at LIBOR plus 1.20% at December 31, 2002 - 10,000 Other financing agreements - 29 ---------------------------------- Total $ 47,970 $ 61,403 ==================================
F-31 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Borrowed Money (continued) As of December 31, 2003, the maturities of borrowed money are as follows: (In thousands) 2004 $ 31,097 2005 16,873 ------------------ $ 47,970 ================== The Company must comply with certain financial and other covenants related to the foregoing debt agreements including, among other things, the maintenance of specific ratios, net income, net worth and other amounts as defined in the credit agreements, limiting the Company's and its subsidiaries' ability to declare dividends or incur additional debt, and requirements to maintain certain capital levels in certain subsidiaries. These covenants include requirements for the Company to maintain "consolidated tangible capital" of not less than $60,000,000, Matrix Bank to maintain "classified assets" of less than 4% of total assets from January 1, 2003 to and including March 31, 2004, and 3% of total assets thereafter, Matrix Bank to earn not less than $7,500,000 over the prior four quarters as of and for the end of each fiscal quarter, and maintain the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized," all as defined in the regulations. At December 31, 2003, the Company was in compliance with the covenants described above. We are in the process of renewing the revolving line of credit, and anticipate it will be renewed with similar terms and conditions as those currently in effect. However, there can be no assurances that the bank stock loan will be renewed. School Financing Agreement The Company had approximately $29,119,000 and $31,100,000 at December 31, 2003 and 2002, respectively, in tax-exempt financing it originated to charter schools into two grantor trusts (Trusts). The Trusts then issued Class "A" Certificates and Class "B" Certificates, with the Class "A" Certificates being sold to various third party investors under a private placement at a price of par. The "A" Certificates, under the two grantor trusts, are guaranteed by a letter of credit issued by a an unaffiliated financial institutions. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is an investment bank for one trust and First Matrix, LLC (a wholly owned subsidiary of First Matrix) for the second trust. Generally, the Trusts are short-term in nature with an average life of three years or less. The "B" Certificates are owned in part by the Company. The interest rate paid on the "A" Certificates is considered the Company's financing cost. The approximate cost of the financing at December 31, 2003 and 2002 was 1.54% and 1.55%, respectively. The interest that the Company receives through its ownership of the "B" Certificates is tax-exempt. F-32 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Borrowed Money (continued) Although the investment bank and the unaffiliated financial institutions act as guarantors to the "A" Certificates, the Company provides full recourse to the letter of credit providers in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the Trusts, the transactions have been accounted for as a secured financing. Through a Purchase and Sale Agreement, the Company has sold school financing loans to a third party financial institution. The Company provides scheduled interest and principal plus full recourse in the case of loss or default. The transaction was treated as a sale due to the transfer of control over the school financing loans. No gain or loss was recorded at the time of sale. The balance of the school financing loans sold with recourse was approximately $10,534,000 at December 31, 2003. 11. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Company The Company has sponsored five trusts, Matrix Bancorp Capital Trust I, Matrix Bancorp Capital Trust II, Matrix Bancorp Capital Trust III, Matrix Bancorp Capital Trust IV and Matrix Bancorp Capital Trust V, of which 100% of the common equity is owned by the Company. The trusts were formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the "capital securities") to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company (the "debentures"). The debentures held by each trust are the sole assets of that trust. Distributions on the capital securities issued by each trust are payable at either quarterly or semiannually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by the trusts are redeemable as noted below. In the fourth quarter of 2003, as a result of applying the provisions of FIN 46 and early application of revised FIN 46, governing when an equity interest should be consolidated, the Company was required to deconsolidate these subsidiary trusts from its consolidated financial statements. The deconsolidation of the net assets and results of operations of the trusts had virtually no impact on the Company's consolidated financial statements or liquidity position because the Company continues to be obligated to repay the debentures held by the trusts and guarantees repayment of the capital securities issued by the trusts. The consolidated debt obligation related to the trusts increased from $64,500,000 to $66,525,000 upon deconsolidation with the difference representing the Company's common ownership interests in the trusts. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Company are summarized as follows: F-33 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Company (continued)
December 31, 2003 2002 ---------------------------------- (In thousands) Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts Junior subordinated debentures owed to Matrix Bancorp Capital Trust I, 10% junior subordinated debentures payable quarterly, unsecured and maturing September 30, 2029 $ 28,351 $ - Junior subordinated debentures owed to Matrix Bancorp Capital Trust II, 10.18% junior subordinated debentures payable semi-annually, unsecured and maturing June 8, 2031 12,400 - Junior subordinated debentures owed to Matrix Bancorp Capital Trust III, 10.25% junior subordinated debentures payable semi-annually, unsecured and maturing July 25, 2031 15,464 - Junior subordinated debentures owed to Matrix Bancorp Capital Trust IV, LIBOR plus 3.75% (4.97% at December 31, 2003) junior subordinated debentures payable semi-annually, unsecured and maturing December 8, - 2031 5,155 Junior subordinated debentures owed to Matrix Bancorp Capital Trust V, LIBOR plus 3.625% (4.845% at December 31, 2003) junior subordinated debentures payable semi-annually, unsecured and maturing January 25, - 2032 5,155 Capital Securities of Matrix Bancorp Capital Trust I, 10% junior subordinated debentures payable quarterly, unsecured and maturing September 30, 2029 - 27,500 Capital Securities of Matrix Bancorp Capital Trust II, 10.18% junior subordinated debentures payable semi-annually, unsecured and maturing June 8, 2031 - 12,000 Capital Securities of Matrix Bancorp Capital Trust III, 10.25% junior subordinated debentures payable semi-annually, unsecured and maturing July 25, 2031 - 15,000 Capital Securities of Matrix Bancorp Capital Trust IV, LIBOR plus 3.75% (5.140% at December 31, 2002) junior subordinated debentures payable semi-annually, unsecured and maturing December 8, 2031 - 5,000 Capital Securities of Matrix Bancorp Capital Trust V, LIBOR plus 3.625% (5.015% at December 31, 2002) junior subordinated debentures payable semi-annually, unsecured and maturing January 25, 2032 - 5,000 ---------------------------------- Total $ 66,525 $64,500 ==================================
F-34 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Company (continued) Following is a description of each of the trusts: On July 30, 1999, Matrix Bancorp Capital Trust I (Trust I), a Delaware business trust formed by the Company, completed the sale of $27,500,000 of 10% preferred securities. Trust I also issued common securities to the Company and used the net proceeds from the offering to purchase $28,351,000 in principal amount of 10% junior subordinated debentures of the Company due September 30, 2029. The preferred securities accrue and pay distributions quarterly at an annual rate of 10% of the stated liquidation amount of $25 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust I under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust I. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, 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 (Trust II), a Delaware business trust formed by the Company, completed the sale of $12,000,000 of 10.18% preferred securities. Trust II also issued common securities to the Company and used the net proceeds from the offering to purchase $12,400,000 in principal amount of 10.18% junior subordinated debentures of the Company due June 8, 2031. The preferred securities accrue and pay distributions semi-annually at an annual rate of 10.18% of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust II under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust II. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part, 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 (Trust III), a Delaware business trust formed by the Company, completed the sale of $15,000,000 of 10.25% preferred securities. Trust III also issued common securities to the Company and used the net proceeds from the offering to purchase $15,464,000 in principal amount of 10.25% junior subordinated debentures of the Company due July 25, 2031. The preferred securities accrue and pay distributions semi-annually at an annual rate of 10.25% of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust III under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust III. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, 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. F-35 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Company (continued) On November 28, 2001, Matrix Bancorp Capital Trust IV (Trust IV), a Delaware business trust formed by the Company, completed the sale of $5,000,000 of floating rate of six-month LIBOR plus 3.75% preferred securities. Trust IV also issued common securities to the Company and used the net proceeds from the offering to purchase $5,155,000 in principal amount of floating rate of six-month LIBOR plus 3.75% junior subordinated debentures of the Company due December 8, 2031. The preferred securities accrue and pay distributions semi-annually at the floating rate as described above percent of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust IV under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust IV. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, 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. On July 25, 2002, Matrix Bancorp Capital Trust V (Trust V), a Delaware business trust formed by the Company, completed the sale of $5,000,000 of floating rate of six-month LIBOR plus 3.625% preferred securities. Trust V also issued common securities to the Company and used the net proceeds from the offering to purchase $5,155,000 in principal amount of floating rate of six-month LIBOR plus 3.625% junior subordinated debentures of the Company due July 25, 2032. The preferred securities accrue and pay distributions semi-annually at the floating rate as described above of the stated liquidation amount of $1,000 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of Trust V under the preferred securities. The guarantee covers the quarterly distributions and payments on liquidation or redemption of the preferred securities, but only to the extent of funds held by Trust V. The preferred securities are mandatorily redeemable upon the maturity of the junior subordinated debentures or upon earlier redemption as provided in the indenture. The Company has the right to redeem the junior subordinated debentures, in whole or in part, on or after July 25, 2007, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. Capitalized expenses associated with the offerings of approximately $2,348,000 were included in other assets at December 31, 2002. These costs have also been deconsolidated as of December 31, 2003. 12. FHLBank Borrowings In connection with Matrix Bank's change in domicile in 2002, Matrix Bank obtains FHLBank advances from FHLBank of Topeka, which is the FHLBank that serves Denver, Colorado, and utilizes FHLBank of Topeka as its primary correspondent bank. This change was approved March 25, 2002. Long-term advances that existed at March 25, 2002 with FHLBank of Dallas are still outstanding under their original terms. F-36 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FHLBank Borrowings (continued) The balances of FHLBank borrowings are as follows: December 31, 2003 2002 ------------------------------------ (In thousands) FHLBank of Topeka borrowings $ 311,000 $ 238,500 FHLBank of Dallas borrowings 147,204 147,285 ------------------------------------ $ 458,204 $ 385,785 ==================================== Advances of $266,000,000 at both December 31, 2003 and 2002, were borrowed under Convertible Advance and Short Option Advance (SOA) Agreements with the FHLBank. These SOA borrowings have a term of up to ten years, but are callable by the FHLBank beginning after a six-month to five-year lockout period, depending on the particular SOA borrowing. After the expiration of the lockout period, the SOA borrowings are callable at various intervals. If the FHLBank exercises its call option on a SOA borrowing, the FHLBank is required to offer replacement funding to the Company at a market rate of interest for the remaining term of the SOA borrowing. Additionally, under the terms of the SOA Agreement, the Company is not permitted to prepay or otherwise retire a callable SOA borrowing prior to the final maturity date. At December 31, 2003, the interest rates on the SOA borrowings ranged from 1.27% to 5.63%, and their possible call dates varied from January 2004 to November 2006. Community investment advances of $1,204,000 and $1,285,000 at December 31, 2003 and 2002, respectively, were borrowed under a fixed term and rate. At December 31, 2003, the advances are at a rate of 5.84% and mature June 2014. All advances are secured by first lien mortgage loans of Matrix Bank and all of its FHLBank stock. Matrix Bank is on full custody status at FHLBank of Dallas, which requires Matrix Bank to place loan collateral at the FHLBank of Dallas. At December 31, 2003, loans collateralized by first lien mortgages of $251,107,000 and securities held for sale of $36,295,000 were pledged for FHLBank of Dallas advances. Matrix Bank is on blanket collateral status at FHLBank of Topeka, which requires Matrix Bank to identify, yet maintain in its possession, loan collateral pledged at FHLBank of Topeka. At December 31, 2003, loans collateralized by first lien mortgages of $483,000,000 and guaranteed SBA loans of $159,834,000 were pledged for the FHLBank of Topeka advances. As of December 31, 2003, Matrix Bank had available unused borrowings from the FHLBank of Topeka for advances of approximately $208,000,000. F-37 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. Income Taxes The income tax (benefit) provision consists of the following:
Years ended December 31, 2003 2002 2001 ------------------------------------------------------ (In thousands) Current: Federal $ 2,586 $ 832 $ (7,713) State 366 - (15) Deferred: Federal (2,941) (4,306) 11,162 State (437) (843) 841 ------------------------------------------------------ (Benefit) provision $ (426) $ (4,317) $ 4,275 ======================================================
A reconciliation of the (benefit) provision for income taxes with the expected income taxes based on the statutory federal income tax rate follows:
Years ended December 31, 2003 2002 2001 ------------------------------------------------------ (In thousands) Expected income tax (benefit) provision $ 646 $ (2,811) $ 4,348 State income tax (benefit) provision, net of federal benefit 100 (556) 545 Other (1,172) (950) (618) ------------------------------------------------------ (Benefit) provision for income taxes $ (426) $ (4,317) $ 4,275 ======================================================
The actual tax (benefit) provision differs from the expected tax expense (computed by applying the applicable United States Federal corporate tax rate of 34% and the composite state tax rates, which range from 4.5% to 8.0% to the (loss) income before taxes for the years ended 2003, 2002 and 2001). This is principally due to state income tax expense and various income and expense items which are not deductible for tax purposes, including certain meal and entertainment deductions and nontaxable interest income. Deferred tax assets and liabilities result from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes shown below. F-38 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. Income Taxes (continued)
December 31, 2003 2002 ------------------------------------ (In thousands) Deferred tax assets: Allowance for loan and valuation losses $ 5,401 $ 6,481 Deferred fees 1,367 1,270 Delinquent interest - 552 Net operating loss carry-forwards - 1,082 Other 201 393 ------------------------------------ Total deferred tax assets 6,969 9,778 Deferred tax liabilities: Mortgage servicing rights $ (6,435) $ (12,992) Gain on sale of building (1,318) (1,368) Other (1,775) (1,355) ------------------------------------ Total deferred tax liabilities (9,528) (15,715) ------------------------------------ Net deferred tax liability $ (2,559) $ (5,937) ====================================
The net deferred tax liability is recorded in the accompanying consolidated balance sheets in income taxes payable and deferred income tax liability. The current and other income tax payable of $949,000 and $835,000 as of December 31, 2003 and 2002, respectively, is recorded in income taxes payable and deferred income tax liability. There is no valuation allowance for gross deferred tax assets as of December 31, 2003 or 2002. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, and does not believe that a valuation allowance is necessary. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced. 14. Regulatory The Company is a unitary thrift holding company and, as such, is subject to the regulation, examination and supervision of the OTS. F-39 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Regulatory (continued) Matrix Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Matrix Bank's and the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Matrix Bank must meet specific capital guidelines that involve quantitative measures of Matrix Bank's assets, liabilities and certain off-balance sheet commitments as calculated under regulatory accounting practices. Matrix Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Matrix Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier I capital (as defined in the regulations) to total assets (as defined in the regulations). Management believes, as of December 31, 2003 and 2002, that Matrix Bank met all applicable capital adequacy requirements. As of December 31, 2003, the most recent notification from the OTS categorized Matrix Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Matrix Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the institution's category.
To Be Well Capitalized Under Prompt Corrective For Capital Action Provisions Actual Adequacy Purposes -------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------- (Dollars in thousands) As of December 31, 2003 Total Capital (to Risk Weighted Assets) $ 108,689 12.1% $ 72,104 8.0% $ 90,129 10.0% Core Capital (to Adjusted Tangible Assets) 101,293 6.2 65,715 4.0 82,143 5.0 Tier I Capital (to Risk Weighted Assets) 101,293 11.2 N/A N/A 54,078 6.0 As of December 31, 2002 Total Capital (to Risk Weighted Assets) $ 100,367 11.5% $ 70,179 8.0% $ 87,724 10.0% Core Capital (to Adjusted Tangible Assets) 94,349 5.8 64,852 4.0 81,605 5.0 Tier I Capital (to Risk Weighted Assets) 94,349 10.8 N/A N/A 52,634 6.0
F-40 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Regulatory (continued) The various federal banking statutes to which Matrix Bank is subject also include other limitations regarding the nature of the transactions in which it can engage or assets it may hold or liabilities it may incur. Matrix Bank is required to maintain vault cash or balances with the Federal Reserve Bank of Kansas City in a noninterest-earning account based on a percentage of deposit liabilities. The required reserve balance was $35,301,000 and $6,989,000 at December 31, 2003 and 2002, respectively. As a wholly owned subsidiary of Matrix Bank, Matrix Financial is subject to OTS regulation. In addition, Matrix Financial is also subject to examination by various regulatory agencies involved in the mortgage banking industry. Each regulatory agency requires the maintenance of a certain amount of net worth, the most restrictive of which required $2,492,000 at December 31, 2003 and $5,561,000 at December 31, 2002. At December 31, 2003 and 2002, Matrix Financial was in compliance with these regulatory requirements. First Matrix, headquartered in Denver, Colorado, a wholly owned subsidiary of Matrix Bancorp Trading, is a broker-dealer registered with the Securities and Exchange Commission (SEC) under rule 15c3-3(k)(2)(ii). First Matrix is subject to the SEC's Net Capital Rule that requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined by the regulations, shall not exceed 15 to 1. At December 31, 2003, First Matrix had a net capital deficiency of $(211,000), which was $281,000 under its required net capital of $69,000. The deficiency was calculated after two technical exceptions noted in connection with a routine examination of First Matrix's books and records by the NASD. The exceptions related to cash on hand at an affiliate bank, and deductible limits on fiduciary bond coverage. Upon receipt of the NASD's calculation of net capital deficiency, cash was transferred from First Matrix's account at Matrix Bank to First Matrix's clearing firm, which cured the capital deficiency. Sterling, a Texas trust company, is generally required to maintain minimum restricted capital of at least $1,000,000, and may be required to maintain additional capital if the Texas Banking Commissioner determines that it is necessary to protect the safety and soundness of Sterling. At December 31, 2003, Sterling was in compliance with capital requirements under Texas law. F-41 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Shareholders' Equity Stock Option Plan The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its employee stock options. Under Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In 1996, the board of directors and shareholders adopted the 1996 Stock Option Plan, which amended and restated the Company's stock option plan adopted in 1995. The Company's 1996 Stock Option Plan, as amended, allows for the grant of options to substantially all of the Company's full-time employees and directors for up to 950,000 shares of the Company's common stock. Options granted generally have ten-year terms and vest based on the determination by the Company's compensation committee. The 1996 Stock Option Plan authorized the granting of incentive stock options (Incentive Options) and nonqualified stock options (Nonqualified Options) to purchase common stock to eligible persons. The 1996 Stock Option Plan is currently administered by the compensation committee (administrator) of the board of directors. The 1996 Stock Option Plan provides for adjustments to the number of shares and to the exercise price of outstanding options in the event of a declaration of stock dividend or any recapitalization resulting in a stock split, combination or exchange of shares of common stock. No Incentive Option may be granted with an exercise price per share less than the fair market value of the common stock at the date of grant. The Nonqualified Options may be granted with any exercise price determined by the administrator of the 1996 Stock Option Plan. To date, all grant prices have equaled the market price of the underlying stock on the date of the grant. The expiration date of an option is determined by the administrator at the time of the grant, but in no event may an option be exercisable after the expiration of ten years from the date of grant of the option. All options granted to-date have been non-qualified. The 1996 Stock Option Plan further provides that, in most instances, an option must be exercised by the optionee within 30 days after the termination of the consulting contract between such consultant and the Company or termination of the optionee's employment with the Company, as the case may be, if and to the extent such option was exercisable on the date of such termination. To date, no options have been granted to consultants. Pro forma information regarding net (loss) income and (loss) income per share is required by SFAS 148 and is included in Note 2. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002 and 2001, respectively: risk-free interest rates of 4.2%, 4.5% and 5.0%; a dividend yield of zero percent; volatility factors of the expected market price of the Company's common stock of 0.49, 0.52 and 0.57; and a weighted-average expected life of the option of four years. The Black-Scholes option valuation model for used in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially F-42 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Shareholders' Equity (continued) affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the Company's stock option activity and related information is as follows:
Years ended December 31, 2003 2002 2001 ------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------------ Outstanding, beginning of year 678,125 $ 10.11 611,825 $ 9.99 496,700 $ 10.54 Granted 35,000 9.29 86,500 11.12 250,000 9.32 Exercised (9,000) 9.00 (1,700) 9.11 (16,250) 8.55 Forfeited (94,375) 10.07 (18,500) 10.44 (118,625) 11.09 ------------- ------------- ------------- Outstanding, end of year 609,750 10.10 678,125 10.11 611,825 9.99 ============= ============= ============= Exercisable end of year 436,900 $ 10.24 397,655 $ 10.31 306,683 $ 10.34 Weighted average fair value of options granted during the year $ 2.72 $ 6.20 $ 5.79 ============= ============= =============
Options outstanding at December 31, 2003, have exercise prices ranging from $5.13 to $26.50 per share as outlined in the following table:
Weighted Average Weighted Average Remaining Weighted Average Number of Options Exercise Price Contractual Life Number of Exercise Price Range of Exercise Outstanding Per Share Options Per Share Prices Exercisable - ----------------------------------------------------------------------------------------------------------- $ 5.13 79,500 $ 5.13 1.00 79,500 $ 5.13 7.00 - 7.88 7,500 7.29 7.50 3,000 7.29 8.00 - 8.69 88,750 8.55 6.77 49,950 8.52 9.15 - 9.86 134,000 9.71 8.20 46,250 9.80 10.00 - 10.37 155,000 10.34 5.03 120,600 10.18 11.50 - 13.88 69,500 12.47 5.02 62,100 12.46 14.25 - 17.25 73,500 15.13 3.51 73,500 15.13 26.50 2,000 26.50 5.33 2,000 26.50 ----------------------------------------------------------------------------------------- 609,750 $10.10 6.27 436,900 $10.31 =========================================================================================
F-43 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Shareholders' Equity (continued) Employee Stock Purchase Plan In 1996, the board of directors and shareholders adopted an Employee Stock Purchase Plan (Purchase Plan) and authorized, as amended, 250,000 shares of common stock (ESPP Shares) for issuance there under. The Purchase Plan became effective upon consummation of the initial public offering. The price at which ESPP Shares are sold under the Purchase Plan is 85% of the lower of the fair market value per share of common stock on the enrollment or the purchase date. As of December 31, 2003, there were 59,866 ESPP Shares available for future issuance. 16. Commitments, Contingencies and Related Party Transactions Leases The Company leases office space and certain equipment under noncancelable operating leases. Annual amounts due under the office and equipment leases as of December 31, 2003 are approximately as follows: (In thousands) 2004 $ 1,158 2005 1,065 2006 942 2007 363 2008 185 Thereafter 525 ------------------- $ 4,238 =================== Total rent expense aggregated approximately $1,050,000, $1,534,000 and $1,674,000 for the years ended December 31, 2003, 2002 and 2001, respectively, and is recorded in occupancy and equipment expense. The Company, through Matrix Tower Holdings, LLC, an operating subsidiary of Matrix Bank, is a lessor of office space under various operating leases for Matrix Financial Center. Annual amounts expected for future minimum rental income as of December 31, 2003 are approximately: (In thousands) 2004 $ 1,927 2005 1,888 2006 1,533 2007 1,083 2008 316 Thereafter 20 ------------------- ------------------- $ 6,767 =================== F-44 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) Total rental income for the years ended December 31, 2003, 2002 and 2001 aggregated approximately $2,050,000, $1,172,000 and $0, respectively. Included in the expected future office rents are the following amounts under an operating lease with MSCS: $129,000, $135,000, $136,000, $113,000 and $0 for 2004, 2005, 2006, 2007 and 2008, respectively. Off-Balance Sheet Risk and Concentration of Commitments A summary of the contractual amount of significant commitments follows: December 31, 2003 2002 ---------------------------------- (In thousands) Loans secured by mortgages $ 50,155 $ 31,154 Construction loans 12,833 10,991 Commercial lines of credit 1,583 8,338 Commercial loans 747 4,858 Consumer loans 848 581 The Company is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include undisbursed commercial mortgage construction loans, commercial lines of credit and letters of credit. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The Company's exposure to credit loss, in the event of nonperformance by the other party, to off-balance sheet financial instruments with credit risk is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk. Commercial credit off-balance sheet instruments are agreements to lend to, or provide a credit guarantee for, a customer as long as there is no violation of any condition established in the contract. Such instruments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Because many of these instruments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management's credit evaluation of the customer. F-45 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) Matrix Bancorp, Inc. has guaranteed, with 50% recourse to the joint venture partner, the indebtedness of MSCS to a third party financial institution, in an amount of no greater than $6,000,000 at December 31, 2003. There was no balance outstanding at MSCS on such indebtedness at December 31, 2003. Risk Management Activities for MSRs Ownership of MSRs exposes the Company to impairment of the value of MSRs in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of the Company's mortgage servicing portfolio achieves a level higher than projected by the Company for an extended period of time, then impairment in the associated basis in the MSRs may occur. In 2001 through mid-2002, the Company implemented a strategy to mitigate this risk of retaining a portion of originated servicing as management believed that retaining servicing that was generated in the lower interest rate environment will incur less prepayment risk. During 2002, interest rates continued to decrease, which resulted in the Company incurring a significant provision against the value of its investment in mortgage servicing rights, as well as an increased level of repayment activity. Due to the interest rate environment and capital constraints, in late 2002 the Company began to sell the majority of its newly originated servicing, and continued in that strategy during 2003. The strategy is to reduce the Company's overall investment in mortgage servicing rights. In the fourth quarter 2002, the Company elected to reinstate its hedging program to reduce the risk of loss in fair value of the mortgage servicing rights due to declining interest rates. The decision was based on the historically low interest rates, the continued weakening economy, the geopolitical environment and the impairment that the Company incurred to-date. At December 31, 2003, the Company hedged approximately $530,000,000 notional balance of its servicing portfolio, or 18.8%. During 2003, the Company recorded gains on sale of the derivatives of $708,000, which is recorded in other income. During the fourth quarter 2002, the Company hedged approximately $400,000,000 notional balance of its servicing portfolio, or 7.5%. As of December 31, 2002, the Company removed the hedge and recorded a gain on sale of the derivatives of $800,000, which is recorded in other income. The hedge was reinstated on January 2, 2003, at approximately $600,000,000 notional balance. Although the Company believes its hedging program could qualify for hedge accounting under SFAS 133, the Company did not attempt to qualify for hedge accounting treatment due to the requirements in SFAS 133 that were necessary to do so. The decision to increase or decrease hedging coverage will be based on several factors, including those discussed above, as well as the composition of the current servicing portfolio. F-46 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) Contingencies The Company and its subsidiaries are parties to various litigation matters, in most cases, involving ordinary and routine claims incidental to the business of the Company. The Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based upon developments to date, the Company's estimates of the outcome of these matters and its experience in contesting, litigating and settling other matters. Because the outcome of most litigation matters is inherently uncertain, the Company will generally only accrue a loss for a pending litigation matter if, for example, the parties to the matter have entered into definitive settlement agreements or a final judgment adverse to the Company has been entered. Based on evaluation of the Company's litigation matters and discussions with internal and external legal counsel, management believes that an adverse outcome on one or more of the matters set forth below, against which no accrual for loss has been made as of December 31, 2003 unless otherwise noted, is reasonably possible but not probable, and that the outcome with respect to one or more of these matters, if adverse, is reasonably likely to have a material adverse impact on the consolidated financial position, results of operations or cash flows of the Company. In early 1999, Matrix Bancorp and Matrix Bank instituted an arbitration action with the American Arbitration Association in Phoenix, Arizona against Fidelity National Financial, Inc. The arbitration action arose out of an alleged breach by Fidelity of a Merger Termination Agreement entered into between the Company and Fidelity in connection with the termination of their proposed merger. The arbitration panel has ruled that the entire Merger Termination Agreement was unenforceable. The Company and Matrix Bank filed an appeal of the arbitration panel's decision in federal district court in Phoenix, Arizona, which has been denied. In October 2001, Fidelity initiated a second arbitration to determine the validity of a release given in connection with the Merger Termination Agreement. Matrix Bancorp contested that the releases were valid and, in the alternative, made a counterclaim against Fidelity demanding restitutional damages for the value of the releases if they were determined valid. The arbitration panel has held the releases to be valid and enforceable and has denied the Company's claim for restitutional damages. Fidelity has filed a motion requesting that it be awarded its attorney fees, and the panel has awarded Fidelity approximately $500,000. The Company has appealed the decision of the arbitration panel, and the ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Sterling Trust Company has been named a defendant in an action filed in July 1999 styled Roderick Adderley, et. al. v. Advanced Financial Services, Inc., et. al. that was tried in Tarrant County, Texas District Court in the spring of 2000. The jury returned a verdict adverse to Sterling Trust with respect to two of 12 theories of liability posed by the plaintiffs, and a judgment was entered against Sterling Trust in the amount of approximately $6,400,000, plus post-judgment interest and conditional attorneys' fees for the plaintiffs in connection with any appeals. Sterling Trust appealed the judgment to the Court of Appeals for the Second District of F-47 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) Texas (Fort Worth). On July 31, 2003, the Court of Appeals affirmed and reversed in part the jury's verdict. The Court of Appeals affirmed the jury's award for actual damages of approximately $6,200,000 (plus post-judgment interest and attorneys' fees currently estimated to be approximately $2,800,000) but denied the punitive damage award of approximately $250,000. Sterling Trust continues to believe that it has meritorious points of appeal to the decision. On October 31, 2003, Sterling Trust filed its Petition for Review with the Supreme Court of Texas. On January 29, 2004, the Supreme Court of Texas notified the parties that it was requesting full briefing from the parties on the matter. However, an appeal to the Supreme Court of Texas is discretionary in nature, meaning that the Supreme Court of Texas does not automatically have to hear the case. Notwithstanding the request by the Supreme Court of Texas for full briefing on the matter, there can be no assurances that the Supreme Court of Texas will agree to hear the case or that, if heard, Sterling Trust's appeal will be successful. Because management has determined that the loss in this matter is not probable, no accrual for loss has been recorded in these financial statements. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty at this time. Related to the matter described in the previous paragraph, Sterling Trust and several officers have been named defendants in an action in which the plaintiffs have asserted various theories of liability, including control person theories of liability under the Texas Securities Act and fraudulent transfer theories of liability, to seek to impose liability on the defendants for the judgment described above. The parties have agreed to abate this action pending the outcome of the appeal mentioned in the previous paragraph. The defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty at this time. Sterling Trust was named a defendant in several putative class action lawsuits instituted in November 2000 by one law firm in Pennsylvania. All of such lawsuits were originally filed in the United States District Court for the Western District of Pennsylvania. On April 26, 2001, the District Court for the Western District of Pennsylvania ordered that all of such cases be transferred to the United States District Court for the Western District of Texas so that Sterling Trust could properly present its motion to compel arbitration. Sterling Trust filed separate motions to compel arbitration in these actions, all of which were granted. Each of the six plaintiffs timely filed arbitration demands with the American Arbitration Association. The demands seek damages and allege Sterling Trust breached fiduciary duties and was negligent in administrating each claimant's self-directed individual retirement account holding a nine-month promissory note. Each of these arbitration actions has been abated pending the outcome of the matter pending in the Superior Court of the State of California discussed in the following paragraph. Sterling Trust believes it has meritorious defenses and is defending the matters vigorously. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty at this time. F-48 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) Sterling Trust has been named a defendant in an action pending in Superior Court of the State of California. The complaint seeks class action status, requests unspecified damages and alleges negligent misrepresentation, breach of fiduciary duty and breach of written contract on the part of Sterling Trust. Sterling Trust believes it has meritorious defenses and is defending the matter vigorously. The ultimate legal and financial liability, if any, of the Company cannot be estimated with certainty at this time. In addition to the other litigation matters described above, Sterling Trust has been the subject of numerous lawsuits and arbitration proceedings in which customers and, in some cases, persons who are not customers allege various theories of liability against the Company for losses suffered by these claimants in connection with their failed investments in several enterprises. To the extent that Sterling Trust has had any relationship with any of such claimants, it has been solely as custodian of such claimants self-directed IRAs pursuant to contracts that specify the limited nature of Sterling Trust's obligations. We believe Sterling Trust has in each case acted in accordance with its obligations under the contracts and/or as otherwise imposed by law. We further believe that the ultimate outcome of each of these cases will not be material to the consolidated financial position and results of operations of Company; but, there can be no assurances that there will not be an adverse outcome in any one or more of these cases or that any such adverse outcome will not have a material adverse effect on the consolidated financial position and results of operations of the Company. A former customer of the Company is a debtor in a Chapter 11 proceeding under the Bankruptcy Code pending in the United States Bankruptcy Court for the Eastern District of New York. Prior to the bankruptcy filing, the Company had provided the customer with a purchase/repurchase facility under which the Company purchased residential mortgage loans from the customers, with the customer having the right or obligation to repurchase such mortgage loans within a specified period of time. The Company purchased approximately $12,400,000 in original principal amount (the Purchased Loans) at the time of the Chapter 11 filing. The principals of the customer were indicted for fraud in connection with financial improprieties committed. Various third parties have instituted lawsuits, adversary proceedings or competing bankruptcy claims against the Company claiming an equitable interest in approximately eighteen of the Purchased Loans (approximately $2,100,000 in original principal amount). These third parties consist primarily of title companies, closing attorneys and other closing agents that provided settlement funds in connection with the funding of a borrower's mortgage loan, in many cases, we believe in violation of various "good funds" laws, which typically require a closing agent to wait for receipt of "good funds" prior to disbursement of settlement funds on the origination of a loan. After providing settlement funds, these closing agents discovered that the customer had either provided company checks with insufficient funds or had inappropriately placed a stop payment on the checks. To date, the Company has reached settlements or prevailed on the merits in connection with all of these loans, with the exception of third parties claiming ownership of, or an interest in seven loans having an original principal balance of approximately $830,000. The Company intends to continue to vigorously defend the claims of these third parties with respect to the F-49 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) remaining seven loans in this category to which there continues to be a dispute. The ultimate legal and financial liability of the Company, if any, in any of the matters involving these seven loans cannot be estimated with certainty at this time. Additionally, certain parties in the chain of title to property securing approximately $2,700,000 of loans (approximately 20 loans), including sellers and prior lien holders, are seeking to void or rescind their transactions on the theory that they never received consideration. The Company has reached settlements with respect to all of these loans, with the exception of third parties claiming ownership of, or an interest in seven of these properties. The Company intends to continue to vigorously defend the claims of these third parties with respect to the remaining seven loans in this category. The ultimate legal and financial liability of the Company, if any, in any of the matters involving these seven loans cannot be estimated with certainty at this time. In connection with the review of the relationship between the Company and the debtor, the trustee for the debtor claimed an interest in each of the loans that had been purchased by the Company from the debtor. The trustee's claims included theories that, with respect to certain other loans, the Company was a secured creditor (as opposed to a purchaser), and with respect to certain other loans, that the Company was and unsecured creditor (as opposed to a purchaser). Accordingly, the trustee concluded, depending on which of the above theories a particular loan fit into, that the trustee was either entitled to a surcharge with respect to the loans or that the estate in fact continued to own the loans. During 2003, the Company and the trustee reached an agreement to settle these claims, and this matter has now been closed. The trustee has also initiated an adversarial action against the Company seeking to recover as an avoidable preference approximately $6,100,000 payments by the debtor to the Company during the 90 days proceeding the filing of bankruptcy. The Company believes that it will successfully demonstrate to the Bankruptcy Court that the amount claimed was purchase money belonging to the Company returned by the debtor for loans that did not close and were not sold to the Company. The Company believes it has adequate defenses and intends to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in any of these matters cannot be estimated with certainty at this time. Additionally, the Company has initiated an adversary claim against the depository bank for the customer discussed above. The Company believes that the depository bank bears liability for any loss sustained by the Company as a result of the fraud perpetrated by the customer. The Company also believes that any loss it may sustain as a result of its dealings with the customer are insured. The Company cannot accurately assess at this time whether and to what extent it will receive compensation from any source for any loss it may incur as a result of its relationship with the customer. F-50 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Commitments, Contingencies and Related Party Transactions (continued) Related Party Transactions In June of 2002, the Company accepted the resignation of Guy A. Gibson as the President and Chief Executive Officer of the Company. Mr. Gibson is still serving on the Board of Directors of the Company and is providing ongoing consulting services to the Company. Under the terms of a Consulting Agreement entered into with Mr. Gibson, the Company paid Mr. Gibson $500,000 in 2003 for his consulting services. The expense is recorded in compensation and employee benefits expense in the consolidated statements of operations. 17. Defined Contribution Plan The Company has a 401(k) defined contribution plan (Plan) covering all employees who have elected to participate in the Plan. Each participant may make pre-tax contributions to the Plan up to 25% of such participant's earnings with a maximum of $12,000 in 2003. The Company makes a matching contribution of 50% of the first 6% of the participant's compensation deferred of the participant's total contribution. Matching contributions made by the Company vest over five years. The Company contributed approximately $643,000, $716,000 and $298,000 during the years ended December 31, 2003, 2002 and 2001, respectively, which and was recorded in compensation and employee benefits expense in the consolidated statements of operations. 18. Fair Value of Financial Instruments The carrying amounts and estimated fair value of financial instruments are as follows:
December 31, 2003 2002 ------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------ (In thousands) Financial assets: Cash and cash equivalents $ 34,510 $ 34,510 $ 62,412 $ 62,412 Investment securities - available for sale 112,402 112,402 29,073 29,073 Investment securities - held to maturity 40,106 40,172 - - Loans held for sale, net 999,454 1,003,092 1,107,919 1,112,841 Loans held for investment, net 344,802 341,937 285,891 290,084 FHLBank stock 30,682 30,682 30,379 30,379
F-51 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 18. Fair Value of Financial Instruments (continued)
December 31, 2003 2002 ------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------ (In thousands) Financial liabilities: Deposits $ 974,059 $ 977,280 $ 933,957 $ 936,809 Custodial escrow balances 85,466 85,466 151,790 151,790 Payable for purchase of MSRs 201 201 782 782 FHLBank borrowings 458,204 469,415 385,785 400,418 Borrowed money and junior subordinated debentures 114,495 115,018 125,903 126,849
The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, securities, FHLBank stock, payable for purchase of MSRs and certain components of borrowed money approximate those assets' and liabilities' fair values based on the nature of the asset or liability. The fair values of loans are based on quoted market prices where available or outstanding commitments from reputable investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The value of derivative financial instruments used to hedge the loan portfolio is included in the carrying amount and fair value of the loans. The fair value disclosed for FHLBank borrowings is estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLBank borrowings. The fair value for the remainder of borrowed money, which includes the Company's 11.50% senior notes and guaranteed preferred beneficial interests, is based on over the counter market prices, if available. The fair value disclosed for demand deposits (e.g., interest and noninterest checking, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. The component commonly referred to as deposit base intangible, was not estimated at December 31, 2003 and 2002, and is not considered in the fair value amount. The fair value disclosed for custodial escrow balances liabilities (noninterest checking) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). F-52 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Parent Company Condensed Financial Information Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows:
December 31, 2003 2002 ------------------------------------ (In thousands) Condensed Balance Sheets Assets: Cash $ 3,192 $ 854 Loans receivable - 2,430 Other receivables - 491 Premises and equipment, net 696 915 Other assets 5,311 3,046 Investment in and advances to subsidiaries 157,146 157,480 ------------------------------------ Total assets $ 166,345 $ 165,216 ==================================== Liabilities and shareholders' equity: Borrowed money and junior subordinated debentures owed to unconsolidated subsidiary trusts and corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely debentures of the Company (a) $ 82,143 $ 86,046 Other liabilities 14,518 12,234 ------------------------------------ Total liabilities 96,661 98,280 Shareholders' equity: Common stock 1 1 Treasury shares - - Additional paid-in capital 20,615 20,375 Retained earnings 48,859 46,534 Accumulated other comprehensive income 209 26 ------------------------------------ Total shareholders' equity 69,684 66,936 ------------------------------------ Total liabilities and shareholders' equity $ 166,345 $ 165,216 ==================================== (a) The Parent's debt is set forth in a table following the condensed statements of cash flows. The Parent also guarantees a portion the financing related to charter schools. See Note 10 and Note 11 for additional information regarding the debt.
F-53 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Parent Company Condensed Financial Information (continued)
Years ended December 31, 2003 2002 2001 ---------------------------------------------------- (In thousands) Condensed Statements of Operations Income: Interest income on inter-company advances $ 52 $ 1,232 $ 2,395 Other 46 57 1,230 ---------------------------------------------------- Total income 98 1,289 3,625 Expenses: Compensation and employee benefits 4,468 4,584 3,529 Occupancy and equipment 745 817 748 Interest on borrowed money 7,628 7,766 8,511 Professional fees 947 299 437 Other general and administrative 731 943 2,553 ---------------------------------------------------- Total expenses 14,519 14,409 15,778 ---------------------------------------------------- Loss before income taxes and equity income of subsidiaries (14,421) (13,120) (12,153) Income taxes (b) - - - ---------------------------------------------------- Loss before equity income of subsidiaries (14,421) (13,120) (12,153) Equity income of subsidiaries 16,746 9,168 20,665 ---------------------------------------------------- Net income (loss) $ 2,325 $ (3,952) $ 8,512 ==================================================== (b) The Company's tax sharing agreement with its subsidiaries provides that the subsidiaries will pay the Parent an amount equal to its individual current income tax (benefit) provision calculated on the basis of the subsidiary filing a separate return. In the event a subsidiary incurs a net operating loss in future periods, the subsidiary will be paid an amount equal to the current income tax refund the subsidiary would be due as a result of carry-back of such loss, calculated on the basis of the subsidiary filing a separate return. Accordingly, the Parent's condensed statements of operations do not include any income tax benefit for the current losses.
F-54 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Parent Company Condensed Financial Information (continued)
Years ended December 31, 2003 2002 2001 ------------------------------------------------------ (In thousands) Condensed Statements of Cash Flows Operating activities: Net income (loss) $ 2,325 $ (3,952) $ 8,512 Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: Equity income of subsidiaries (16,746) (9,168) (20,665) Dividends from subsidiaries 6,593 8,485 11,996 Depreciation and amortization 566 757 703 Unrealized gain (loss) on securities available for sale 183 1 (794) Loss on sublease - 700 - Increase (decrease) in other liabilities 2,284 4,647 (888) Decrease (increase) in other receivables and other assets 2,527 534 (3,133) ------------------------------------------------------ Net cash (used in) provided by operating activities (2,268) 2,004 (4,269) Investing activities: Purchases of premises and equipment (193) (274) (606) Investment in and advances to subsidiaries 5,987 (5,042) (19,331) ------------------------------------------------------ Net cash provided by (used in) investing activities 5,794 (5,316) (19,937) Financing activities: Repayments of notes payable and revolving line of credit (11,778) (34,877) (49,437) Proceeds from notes payable and revolving line of credit 10,350 34,396 43,250 Shares repurchased - (726) (746) Proceeds from capital securities of subsidiary trusts - 4,917 30,977 Proceeds from issuance of common stock 240 301 317 ------------------------------------------------------ Net cash (used in) provided by financing activities (1,188) 4,011 24,361 ------------------------------------------------------ Increase in cash 2,338 699 155 Cash at beginning of year 854 155 - ------------------------------------------------------ Cash at end of year $ 3,192 $ 854 $ 155 ======================================================
F-55 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Parent Company Condensed Financial Information (continued) Parent Company Debt is set forth below:
December 2003 2002 ------------------------------------ (In thousands) Senior notes $ 9,545 $ 9,545 Bank stock loan 6,073 7,501 ------------------------------------ Total term notes 15,618 17,046 Bank stock revolving line of credit - - Junior subordinated debentures owed to unconsolidated subsidiary trusts 66,445 - Capital securities of subsidiary trusts - 64,500 Other - 4,500 ------------------------------------ Total debt $ 82,063 $ 86,046 ==================================== As of December 31, 2003, the maturities of debt are as follows: (In thousands) 2004 $ 15,618 Thereafter 66,445 ---------------------- $ 82,063 ====================== 20. Selected Quarterly Financial Data (Unaudited) 2003 ----------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------------------------------------------------------------- (In thousands except share data) Operations: Net interest income before provision for loan and valuation losses $ 9,966 $ 10,295 $ 10,710 $ 10,737 Provision for loan and valuation losses 990 1,114 842 695 Noninterest income 15,675 14,782 21,047 17,825 Noninterest expense 24,185 23,932 34,101 28,750 ----------------------------------------------------------------- Income (loss) from continuing operations before income taxes 466 31 (3,186) (883) Income tax benefit (185) (289) (1,558) (543) Income (loss) from continuing operations 651 320 (1,628) (340) Discontinued operations: Income (loss) from discontinued operations, net of income taxes 373 (2,360) 3,057 2,252 ----------------------------------------------------------------- Net income (loss) $ 1,024 $ (2,040) $ 1,429 $ 1,912 =================================================================
F-56 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 20. Selected Quarterly Financial Data (Unaudited) (continued)
2003 ----------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------------------------------------------------------------- (In thousands except share data) Net income (loss) per share data ----------------------------------------------------------------- Basic $ 0.16 $ (0.31) $ 0.22 $ 0.30 ================================================================= Diluted $ 0.16 $ (0.31) $ 0.22 $ 0.29 ================================================================= Balance Sheet: Total assets $ 1,723,924 $ 1,601,340 $ 1,744,670 $ 1,697,475 Total loans, net 1,344,256 1,282,838 1,384,642 1,376,386 Shareholders' equity 69,684 68,299 70,324 68,856 2002 ----------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------------------------------------------------------------- (In thousands except share data) Operations: Net interest income before provision for loan and valuation losses $ 11,472 $ 11,337 $ 11,028 $ 8,873 Provision for loan and valuation losses 357 895 532 1,037 Noninterest income 14,530 16,034 15,859 15,511 Noninterest expense 32,167 37,342 26,312 23,027 ----------------------------------------------------------------- (Loss) income from continuing operations before income taxes (6,522) (10,866) 43 320 Income tax benefit (2,741) (4,675) (309) (31) Income (loss) from continuing operations (3,781) (6,191) 352 351 Discontinued operations: Income from discontinued operations, net of income taxes 2,088 990 552 1,687 ----------------------------------------------------------------- Net (loss) income $ (1,693) $ (5,201) $ 904 $ 2,038 ================================================================= Net (loss) income per share data ----------------------------------------------------------------- Basic $ (0.26) $ (0.81) $ 0.14 $ 0.31 ================================================================= Diluted $ (0.26) $ (0.81) $ 0.14 $ 0.31 ================================================================= Balance Sheet: Total assets $ 1,701,405 $ 1,778,046 $ 1,623,223 $ 1,570,227 Total loans, net 1,393,810 1,449,773 1,303,835 1,210,458 Shareholders' equity 66,936 68,337 73,540 72,625
21. Segments of the Company and Related Information The Company has four reportable segments under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information": a traditional banking subsidiary, a mortgage banking F-57 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 21. Segments of the Company and Related Information (continued) subsidiary, two brokerage and consulting subsidiaries and a school services subsidiary. The traditional banking subsidiary provides deposit and lending services to its customers and also makes investments in residential mortgage loans. The mortgage banking subsidiary owns residential MSRs and services the mortgage loans underlying those MSRs, and has some minimal mortgage origination activity. The brokerage subsidiaries offer brokerage and consulting services for residential MSRs and brokerage services for whole loan activities, retail and fixed income activities, and SBA loans and securities. The school services subsidiary provides outsourced business and consulting services, as well as financing to charter schools. The remaining subsidiaries are included in the "all other" category for purposes of Statement No. 131 disclosures and consist primarily of the Company's trust operations, real estate disposition services and the Parent company operations. The Company evaluates performance and allocates resources based on operating profit or loss before income taxes. Accordingly, the information presented in this table is from continuing operations, which excludes the financial results of the wholesale production platform for all of the years presented. The platform was sold in 2003 as discussed in Note 3. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices (i.e., prices that would be paid if the companies were not affiliates). For the years ended December 31:
Servicing Traditional Mortgage Brokerage and School Banking Banking Consulting Services All Others Total ---------------------------------------------------------------------------------- (In thousands) 2003 Revenues from external customers: Interest income $ 62,286 $ 5,132 $ 285 $ 5,607 $ 397 $ 73,707 Noninterest income 8,345 32,538 10,707 2,240 15,499 69,329 Intersegment revenues 3,059 3,236 2,028 11 1,814 10,148 Interest expense 22,773 3,082 47 5 6,092 31,999 Depreciation/amortization 702 32,758 123 778 1,622 35,983 Segment income (loss) from continuing operations before income taxes 23,355 (12,608) 4,028 (4,616) (13,731) (3,572) Segment assets (a) 1,647,833 114,743 9,244 62,768 182,925 2,017,573
F-58 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 21. Segments of the Company and Related Information (continued)
Servicing Traditional Mortgage Brokerage and School Banking Banking Consulting Services All Others Total ---------------------------------------------------------------------------------- (In thousands) 2002 Revenues from external customers: Interest income $ 71,320 $ 5,220 $ 123 $ 6,823 $ 501 $ 83,988 Noninterest income 4,677 31,499 9,273 6,445 10,040 61,934 Intersegment revenues 3,019 3,694 1,192 11 2,260 10,176 Interest expense 31,037 3,019 154 2,771 4,297 41,278 Depreciation/amortization 602 25,433 109 1,405 1,383 28,932 Segment income (loss) from continuing operations before income taxes 20,081 (19,377) 2,311 (6,736) (13,304) (17,025) Segment assets (a) 1,556,268 527,328 7,209 70,237 50,842 2,211,884 2001 Revenues from external customers: Interest income $ 87,188 $ 839 $ 14 $ 6,854 $ 175 $ 95,070 Noninterest income 9,652 30,889 3,658 7,252 6,936 58,387 Intersegment revenues 1,385 4,418 2,345 - 3,346 11,494 Interest expense 51,008 4,113 85 4,931 4,750 64,887 Depreciation/amortization 489 23,013 124 360 992 24,978 Segment income (loss) from continuing operations before income taxes 21,529 (5,529) (1,406) (1,177) (13,412) 5 Segment assets (a) 1,410,072 669,317 6,506 78,131 57,367 2,221,393 (a) See reconciliation to total consolidated assets in the following table. 2003 2002 2001 ------------------------------------------------------- (In thousands) Revenues for year ended December 31: Interest income for reportable segments $ 73,310 $ 83,486 $ 94,895 Noninterest income for reportable segments 53,830 51,894 51,451 Intersegment revenues for reportable segments 8,334 7,916 8,148 Other revenues 17,710 12,802 10,457 Elimination of intersegment revenues (10,148) (10,176) (11,494) ------------------------------------------------------- Total consolidated revenues $ 143,036 $ 145,922 $ 153,457 =======================================================
F-59 Matrix Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 21. Segments of the Company and Related Information (continued)
2003 2002 2001 ------------------------------------------------------- (In thousands) (Loss) income for year ended December 31: Total profit for reportable segments $ 10,159 $ (3,721) $ 13,417 Other loss (13,117) (12,664) (13,339) Elimination of intersegment profit (loss) (614) (640) (73) ------------------------------------------------------- (Loss) income before income taxes $ (3,572) $ (17,025) $ 5 ======================================================= Assets as of December 31: Total assets for reportable segments $ 1,834,588 $ 2,161,042 $ 2,164,026 Other assets 182,925 50,842 57,367 Elimination of intersegment receivables (282,574) (497,514) (563,304) Other intersegment eliminations (11,015) (12,965) (11,149) ------------------------------------------------------- Total consolidated assets $ 1,723,924 $ 1,701,405 $ 1,646,940 ======================================================= Other Significant Items for the year ended December 31: Depreciation/amortization expense: Segment totals $ 34,361 $ 27,549 $ 23,986 Intersegment adjustments 1,622 1,383 992 ------------------------------------------------------- Consolidated totals $ 35,983 $ 28,932 $ 24,978 ======================================================= Interest expense: Segment totals $ 25,907 $ 36,981 $ 60,137 Intersegment adjustments 6,092 4,297 4,750 ------------------------------------------------------- Consolidated totals $ 31,999 $ 41,278 $ 64,887 =======================================================
F-60 EX-4.32 3 indenture.txt Exhibit 4.32 Matrix Bancorp, Inc., as Issuer and Wells Fargo Bank, National Association, as Trustee, Paying Agent, Calculation Agent and Securities Registrar ----------------------------- INDENTURE Dated as of February 13, 2004 ----------------------------- FLOATING RATE SUBORDINATED DEBT SECURITIES DUE 2014
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions..........................................................................1 Section 1.02. Compliance Certificates and Opinions.................................................7 Section 1.03. Form of Documents Delivered to Trustee...............................................7 Section 1.04. Notices, etc. to Trustee and Issuer..................................................8 Section 1.05. Notice to Holders; Waiver............................................................8 Section 1.06. Effect of Headings and Table of Contents.............................................9 Section 1.07. Successors and Assigns...............................................................9 Section 1.08. Separability Clause..................................................................9 Section 1.09. Benefits of Indenture................................................................9 Section 1.10. Governing Law........................................................................9 Section 1.11. Legal Holidays.......................................................................9 ARTICLE II DEBT SECURITY FORMS Section 2.01. Forms Generally......................................................................9 Section 2.02. Form of Trustee's Certificate of Authentication.....................................10 ARTICLE III THE DEBT SECURITIES Section 3.01. Authentication, Delivery and Dating.................................................10 Section 3.02. Denominations.......................................................................11 Section 3.03. Execution...........................................................................11 Section 3.04. Registration, Transfer and Exchange.................................................11 Section 3.05. Mutilated, Destroyed, Lost and Stolen Debt Securities...............................14 Section 3.06. Redemption at Maturity..............................................................15 Section 3.07. Payment of Interest; Interest Rights Preserved......................................15 Section 3.08. Additional Amounts..................................................................16 Section 3.09. Cancellation........................................................................18 Section 3.10. Computation of Interest.............................................................18 Section 3.11. CUSIP Numbers.......................................................................20 Section 3.12. Persons Deemed Owners...............................................................20 Section 3.13. Federal Regulatory Approval Required................................................20 ARTICLE IV SATISFACTION AND DISCHARGE Section 4.01. Satisfaction and Discharge of Indenture.............................................20 Section 4.02. Application of Trust Money..........................................................22 Section 4.03. Paying Agent to Repay Moneys Held...................................................22 Section 4.04. Return of Unclaimed Moneys..........................................................22 i TABLE OF CONTENTS (continued) Page ARTICLE V REMEDIES Section 5.01. Events of Default...................................................................22 Section 5.02. Acceleration of Maturity: Rescission and Annulment.................................23 Section 5.03. Defaults; Collection of Indebtedness and Suits for Enforcement by Trustee...........24 Section 5.04. Trustee May File Proofs of Claim....................................................25 Section 5.05. Trustee May Enforce Claims Without Possession of Debt Securities....................25 Section 5.06. Application of Money Collected......................................................25 Section 5.07. Limitation on Suits.................................................................26 Section 5.08. Unconditional Right of Holders to Receive Principal and Interest....................27 Section 5.09. Restoration of Rights and Remedies..................................................27 Section 5.10. Right and Remedies Cumulative.......................................................27 Section 5.11. Delay or Omission Not Waiver........................................................27 Section 5.12. Control by Holders..................................................................27 Section 5.13. Waiver of Past Event of Default.....................................................28 Section 5.14. Undertaking for Costs...............................................................28 ARTICLE VI THE TRUSTEE Section 6.01. Certain Duties and Responsibilities.................................................28 Section 6.02. Notice of Defaults..................................................................29 Section 6.03. Certain Rights of Trustee...........................................................30 Section 6.04. Not Responsible for Recitals or Issuance of Debt Securities.........................31 Section 6.05. May Hold Debt Securities............................................................31 Section 6.06. Money Held in Trust.................................................................31 Section 6.07. Compensation and Reimbursement......................................................32 Section 6.08. Disqualification, Conflicting Interests.............................................33 Section 6.09. Corporate Trustee Required, Eligibility.............................................33 Section 6.10. Resignation and Removal, Appointment of Successor...................................33 Section 6.11. Acceptance of Appointment by Successor..............................................35 Section 6.12. Merger, Conversion, Consolidation or Succession to Business.........................35 Section 6.13. Preferential Collection of Claims Against Issuer....................................35 Section 6.14. Appointment of Authenticating Agent.................................................35 ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER Section 7.01. Issuer to Furnish Trustee Names and Addresses of Holders............................36 Section 7.02. Preservation of Information; Communication to Holders...............................37 ii TABLE OF CONTENTS (continued) Page ARTICLE VIII CONCERNING THE HOLDERS Section 8.01. Acts of Holders.....................................................................38 Section 8.02. Proof of Ownership; Proof of Execution of Instruments by Holders....................38 Section 8.03. Revocation of Consents; Future Holders Bound........................................39 ARTICLE IX HOLDERS' MEETINGS Section 9.01. Purposes of Meetings................................................................39 Section 9.02. Call of Meetings by Trustee.........................................................40 Section 9.03. Call of Meetings by Issuer or Holders...............................................40 Section 9.04. Regulations.........................................................................40 Section 9.05. Voting..............................................................................41 Section 9.06. No Delay of Rights by Meeting.......................................................41 Section 9.07. Quorum; Actions.....................................................................41 ARTICLE X CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 10.01. Issuer May Consolidate, etc., Only on Certain Terms.................................42 Section 10.02. Successor Corporation Substituted...................................................43 Section 10.03. Opinion of Counsel..................................................................43 ARTICLE XI SUPPLEMENTAL INDENTURES Section 11.01. Supplemental Indentures Without Consent of Holders..................................43 Section 11.02. Supplemental Indentures With Consent of Holders.....................................44 Section 11.03. Execution of Supplemental Indentures................................................45 Section 11.04. Effect of Supplemental Indentures...................................................45 Section 11.05. Reference in Debt Securities to Supplemental Indentures.............................45 Section 11.06. Subordination Unimpaired............................................................45 Section 11.07. Notice of Supplemental Indenture....................................................45 ARTICLE XII COVENANTS Section 12.01. Payment of Principal and Interest...................................................45 Section 12.02. Tax Treatment of the Debt Securities................................................46 Section 12.03. Maintenance of Office or Agency.....................................................46 Section 12.04. Money for Debt Securities; Payments To Be Held in Trust.............................46 Section 12.05. Officers' Certificate as to Default.................................................47 Section 12.06. Regulatory Reports..................................................................48 iii TABLE OF CONTENTS (continued) Page ARTICLE XIII TAX EVENT REDEMPTION Section 13.01. Tax Redemption......................................................................48 Section 13.02. Notice of Redemption................................................................48 Section 13.03. Payment of Debt Securities Called for Redemption....................................48 ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 14.01. Indenture and Debt Securities Solely Corporate Obligations..........................49 ARTICLE XV SUBORDINATION OF DEBT SECURITIES Section 15.01. Agreement to Subordinate............................................................49 Section 15.02. Obligation of the Issuer Unconditional and Payment Permitted if No Default..........................................................................51 Section 15.03. Limitations on Duties to Holders of Senior Indebtedness.............................51 Section 15.04. Notice to Trustee of Facts Prohibiting Payments.....................................52 Section 15.05. Application by Trustee of Moneys Deposited With It..................................52 Section 15.06. Subrogation.........................................................................52 Section 15.07. Subordination Rights Not Impaired by Acts or Omissions of Bank or Holders of Senior Indebtedness...................................................52 Section 15.08. Authorization of Trustee to Effectuate Subordination of Debt Securities..........................................................................53 Section 15.09. Right of Trustee to Hold Senior Indebtedness........................................53 Section 15.10. Article XV Not to Prevent Defaults (Including Events of Default)....................53 Section 15.11. Article Applicable to Paying Agents.................................................54 EXHIBITS EXHIBIT A FORM OF DEBT SECURITY
iv THIS INDENTURE is dated as of February 13, 2004, between Matrix Bancorp, Inc. (the "Issuer"), having its principal office at 700 17th Street, Suite 2400 Denver, CO 80202 and Wells Fargo Bank, National Association, a national banking association, as Trustee (in such capacity, the "Trustee"), Paying Agent, Calculation Agent and Securities Registrar hereunder, having its Corporate Trust Office at 919 North Market Street, Suite 700, Wilmington, DE 19801. RECITALS OF THE ISSUER WHEREAS, for its lawful purposes, the Issuer has duly authorized the issuance of its floating rate subordinated debt securities due 2014 (the "Debt Securities") under this Indenture for inclusion in the Regional Diversified Funding 2004-1 Ltd. transaction and, to provide for, among other things, the execution, authentication, delivery and administration thereof, the Issuer has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement of the Issuer, in accordance with its terms have been done and performed. NOW, THEREFORE, in consideration of the premises and the purchase of the Debt Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Debt Securities as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article I have the meanings assigned to them in this Article I, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States at the date of such computation; (c) the words "herein," "hereof and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (d) unless the context otherwise requires; any reference to an "Article" or a "Section" is to an Article or Section of this Indenture. Certain terms, used principally in Article III and Article VI, are defined in those respective Articles. "Act" when used with respect to any Holder has the meaning specified in Section "Additional Amounts" shall have the meaning set forth in Section 3.08. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" has the meaning specified in Section 6.14. "Board of Directors" means either the board of directors of the Issuer, or the executive or any other committee of that board duly authorized to act in respect hereof. "Board Resolution" means a copy of a resolution certified by a Secretary or an Assistant Secretary of the Issuer to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" when used with respect to any Place of Payment means any day that is not a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies in Wilmington, Delaware, Denver, Colorado or such Place of Payment are authorized or obligated by law to close and, unless otherwise specified in a given definition, if the date of payment hereunder falls on a day that is not a Business Day, the first following Business Day will become the relevant date. "Calculation Agent" means the Person identified as "Trustee in the first paragraph hereof. "Code" means the Internal Revenue Code of 1986 as in effect on the date hereof. "Company Account" has the meaning set forth in Section 6.01(e). "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this instrument is located at 919 North Market Street, Suite 700, Wilmington, DE 19801. The term "corporation" includes corporations, associations, companies and business trusts. "Debt Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Debt Securities authenticated and delivered under this Indenture. "Default" has the meaning specified in Section 5.03. "Defaulted Interest" has the meaning specified in Section 3.07. 2 "Dollar" or "$" means such currency of the United States as at the time of payment is legal tender for the payment of public and private debts. "Event of Default" has the meaning specified in Section 5.01 "FDIC" means the Federal Deposit Insurance Corporation. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Holder" of a Debt Security means the Person in whose name the Debt Security is registered in the Security Register. "Indenture" means this instrument as originally executed, or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Interest Payment Date" means February 8, May 8, August 8 and November 8 of each year, commencing on May 8, 2004, during the term of this Indenture. "Interest Rate" means, subject to the occurrence of a Reset Event, a per annum rate of interest, reset quarterly, equal to LIBOR, as determined on the LIBOR Determination Date immediately preceding each Interest Payment Date, plus 2.75%. A Reset Event will occur if on any day specified by the Initial Purchaser (as defined in the Purchase Agreement), Regional Diversified Funding 2004-1 Ltd. or another pooled trust preferred vehicle becomes the registered owner of the Debt Securities (such day, the "Reset Date"). Upon the occurrence of a Reset Event, the applicable LIBOR will be reset on the Reset Date to be equal to the LIBOR applicable on the newly issued securities with the same LIBOR Determination Dates issued by other national banks, federal savings banks, banking organizations, bank holding companies or thrift holding companies who issue LIBOR based on 10 year floating rate securities to Regional Diversified Funding 2004-1 Ltd. or another pooled trust preferred vehicle designated by the Initial Purchaser. "Issuer" means the Person named as the "Issuer" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Issuer" shall mean such successor corporation. "Issuer Authorized Officer" means any executive officer of the Issuer who is authorized to sign an Issuer Request or Issuer Order on behalf of the Issuer. "Issuer Request" and "Issuer Order" mean, respectively, a written request or order signed in the name of the Issuer by two Issuer Authorized Officers and delivered to the Trustee. "LIBOR" means the London Interbank Offered Rate for U.S. Dollar deposits in Europe as determined by the Calculation Agent according to Section 3.10(b). "LIBOR Banking Day" has the meaning set forth in Section 3.10(b)(1). 3 "LIBOR Business Day" has the meaning set forth in Section 3.10(b)(1). "LIBOR Determination Date" has the meaning set forth in Section 3.10(b). "Maturity Date" means May 8, 2014. "OTS" means the Office of Thrift Supervision. "Officers' Certificate" means a certificate signed by two Issuer Authorized Officers and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel to the Issuer and who shall be reasonably satisfactory to the Trustee, that is delivered to the Trustee. "Outstanding" when used with respect to Debt Securities means, as of the date of determination, all Debt Securities theretofore authenticated and delivered under this Indenture, except: (i) Debt Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Debt Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Issuer) in trust or set aside and segregated in trust by the Issuer (if the Issuer shall act as its own Paying Agent) for the Holders of such Debt Securities; provided, however, that if such Debt Securities or portions thereof are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Debt Securities that have been paid pursuant to Section 3.05 or in exchange for, or in lieu of, other Debt Securities shall have been authenticated and delivered pursuant to this Indenture, other than any such Debt Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Debt Securities are held by a bona fide purchaser in whose hands such Debt Securities are valid obligations of the Issuer; provided, however, that in determining whether the Holders of the requisite principal amount of Debt Securities Outstanding have performed any Act hereunder, Debt Securities owned by the Issuer or any other obligor upon the Debt Securities or any Affiliate of the Issuer or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such Act, only Debt Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Debt Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right to act with respect to such Debt Securities and that the pledgee is not the Issuer or any other obligor upon the Debt Securities or any Affiliate of the Issuer or of such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. 4 "Paying Agent" means the Trustee or any Person authorized by the Issuer to pay the principal of or interest on any Debt Securities on behalf of the Issuer. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint stock company, trust, estate, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment" means the place or places where the principal of and interest on the Debt Securities are payable. "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt as that evidenced by such particular Debt Security, and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 3.05 in lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security. "Purchase Agreement" means the Purchase Agreement relating to the offering and sale of the Debt Securities. "Redemption Date" when used with respect to any Debt Security means the date on which the principal of such Debt Security becomes due and payable as therein or herein provided, whether at the Maturity Date or Tax Redemption Date or by declaration of acceleration. "Redemption Price" of any Debt Security means the principal amount thereof and accrued and unpaid interest, if any, to the Redemption Date. "Regular Record Date" for the interest payable on the Debt Securities on any Interest Payment Date means the fifteenth day prior to an Interest Payment Date, whether or not such date is a Business Day. "Reset Date" means "Reset Date" as used in the definition of Interest Rate. "Reset Event" means "Reset Event" as used in the definition of Interest Rate. "Responsible Officer" when used with respect to the Trustee means any officer within the Corporate Trust Office with direct responsibility for the administration of the Indenture, including any vice president, assistant vice president, secretary or assistant secretary, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred at the Trustee's Corporate Trust Office because of his or her knowledge of and familiarity with the particular subject. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.04(a). 5 "Senior Indebtedness" means the principal of and any premium on the following, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred: (a) any obligation of, or any obligation guaranteed by, the Issuer for the repayment of borrowed money (including general unsecured creditors), whether or not evidenced by bonds, debentures, notes or other written instruments, and similar obligations arising from off-balance sheet guarantees and direct credit substitutes including its obligations to the Federal Reserve Bank or the FDIC, if any, and any rights acquired by the FDIC as a result, of loans made by the FDIC to the Issuer or the purchase or guarantee of any of its assets by the FDIC pursuant to the provisions of 12 USC 1823(c), (d) or (e), if applicable, (b) deposits, (c) obligations under bankers' acceptances and letters of credit, (d) obligations associated with derivative products such as interest rate and foreign exchange rate contracts, commodity and currency contracts and similar arrangements, (e) any deferred obligations of, or any such obligation guarantees by, the Issuer for the payment of the purchase price of property or assets, (f) obligations of the Issuer as lessee under any lease of real or personal property required to be capitalized under generally accepted accounting principles at the time and (g) any amendments, deferrals, renewals, extensions or refundings of any such indebtedness or obligations referred to in clauses (a) or (c) - (f) above; provided, that Senior Indebtedness will not include (i) obligations, renewals, extensions or refundings referred to in clauses (a) or (c) - (g) that specifically by their terms rank junior to, or equally with, the Debt Securities in right of payment upon the happening of any event of the kind specified in the first sentence of the second paragraph of Section 15.01 and (ii) the Debt Securities. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. "Subsidiary" means a corporation, limited liability company, partnership or other entity, at least a majority of the outstanding voting stock, membership interests or partnership interests, as the case may be, of which is owned, directly or indirectly, by the Issuer or by one or more other Subsidiaries, or by the Issuer and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock having voting power for the election of directors, whether at all times or only for so long as no senior class of stock has such voting power by reason of any contingency. "Tax Event" means the receipt by the Issuer of an Opinion of Counsel experienced in such matters to the effect that, as a result of any change (including any prospective change) in, or amendment to, the laws (or any regulations or rulings promulgated thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or any change in the application or official interpretation of such laws, regulations or rulings, which change or amendment becomes effective on or after the original issuance of the Debt Securities, there is more than an insubstantial risk that the Issuer has or will become obligated to pay Additional Amounts on the Debt Securities as provided in Section 3.08. "Tax Redemption Date" has the meaning set forth in Section 13.01. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. 6 "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "United States" means the United States of America (including the States and the District of Columbia), its territories and its possessions. "United States Alien" has the meaning set forth in Section 3.08. Section 1.02. Compliance Certificates and Opinions. Upon any application or request by the Issuer to the Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and, if requested by the Trustee, an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 1.03. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, or a certificate or representations by counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or representations or Opinion of Counsel with respect to the matters upon which his or her 7 certificate or opinion is based are erroneous. Any such certificate or representation or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Issuer stating that the information with respect to such factual matters is in the possession of the Issuer, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 1.04. Notices, etc. to Trustee and Issuer. Any Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder or by the Issuer shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Administration; or (b) the Issuer by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid or, transmitted via facsimile, to the Issuer addressedto it at the address of its principal office specified in the first paragraph of this Indenture or at any other address previously furnished in writing to the Trustee by the Issuer. Any such Act or other document shall be in the English language. Section 1.05. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event by the Issuer or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first class postage prepaid, or transmitted via facsimile to such Holders as their names and addresses appear in the Security Register, within the time prescribed. In any case where notice is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Holder shall affect the sufficiency of such notice with respect to other Holders, and any notice that is mailed in the manner herein provided shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. In the event of suspension of regular mail service or by reason of any other cause it shall be impracticable to give notice by mail, then such notification as shall be given with the approval of the Trustee shall constitute sufficient notice for every purpose hereunder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance on such waiver. 8 Section 1.06. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 1.07. Successors and Assigns. All covenants and agreements in this Indenture by the parties hereto shall bind their respective successors and assigns and inure to the benefit of their permitted successors and assigns, whether so expressed or not. Section 1.08. Separability Clause. In case any provision in this Indenture or in the Debt Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 1.09. Benefits of Indenture. Nothing in this Indenture or in the Debt Securities, express or implied, shall give to any Person, other than the parties hereto, any Security Registrar, any Paying Agent, any Authenticating Agent and their respective successors hereunder, the Holders and the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.10. Governing Law. This Indenture and the Debt Securities shall be governed by and construed in accordance with applicable federal laws and the law of the State of New York without regard to the conflicts of law rules of such State. Section 1.11. Legal Holidays. In any case where any Interest Payment Date, the Redemption Date, the Tax Redemption Date or the Maturity Date shall not be a Business Day in Wilmington, Delaware, Denver, Colorado or at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Debt Securities) payment of principal or interest need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on such Interest Payment Date, the Redemption Date, the Tax Redemption Date or the Maturity Date. ARTICLE II DEBT SECURITY FORMS Section 2.01. Forms Generally. Subject to Section 3.04, the Debt Securities shall be substantially in the form of Exhibit A hereto. The Debt Securities shall be issued in registered, certificated form without coupons, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements placed thereon as the Issuer may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange on which the Debt Securities may be listed or of any automated quotation system on which the Debt Securities may be quoted, or to conform to usage, all as determined by the officers executing the Debt Securities as conclusively evidenced by their execution of such Debt Securities. The definitive Debt Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner, all as determined by the 9 officers executing such Debt Securities, as conclusively evidenced by their execution of such Debt Securities. Section 2.02. Form of Trustee's Certificate of Authentication. The form of the Trustee's certificate of authentication to be borne by the Debt Securities shall be substantially as follows: CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities referred to in the within-mentioned Indenture. Wells Fargo Bank, National Association, not in its individual capacity but solely as Trustee By: ------------------------------------- Authorized Officer ARTICLE III THE DEBT SECURITIES Section 3.01. Authentication, Delivery and Dating. (a) Upon the execution and delivery of this Indenture, the Issuer will execute and deliver Debt Securities in an aggregate principal amount not in excess of $10,000,000 to the Trustee for authentication, together with an Issuer Order for the authentication and delivery of the Debt Securities, and the Trustee in accordance with the Issuer Order shall authenticate and deliver the Debt Securities. The Trustee shall be entitled to receive, prior to the authentication and delivery of the Debt Securities, an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the issuance of the Debt Securities have been complied with and as to the absence of any event that is, or after notice or lapse of time or both would become, a Default. (b) The Trustee shall not be required to authenticate any Debt Securities if the issuance of such Debt Securities pursuant to this Indenture will adversely affect the Trustee's own rights, duties or immunities under the Debt Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. (c) Each Debt Security shall be dated the date of its authentication. (d) No Debt Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Debt Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee or by an Authenticating Agent by manual signature of one of its authorized officers, and such certificate upon any Debt Security shall be conclusive evidence, and the only evidence, that such Debt Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. 10 Section 3.02. Denominations. The Debt Securities shall be issuable only in registered form in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof and shall be payable only in Dollars. Section 3.03. Execution. The Debt Securities shall be executed on behalf of the Issuer by an Issuer Authorized Officer. The signature of any Issuer Authorized Officer may be manual or facsimile. Debt Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Debt Securities or did not hold such offices at the date of such Debt Securities. Section 3.04. Registration, Transfer and Exchange. (a) The Issuer shall cause to be kept at the Corporate Trust Office of the Trustee a register for the Debt Securities (the register maintained in such office and in any other office or agency of the Issuer in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of the Debt Securities and of transfers and exchanges of the Debt Securities and the address at which notice and demand to or upon the Issuer in respect of this Indenture and the Debt Securities may be served by the Holders of Debt Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Debt Securities and registering transfers and exchanges of Debt Securities as herein provided; provided, however, that the Issuer may appoint co-Security Registrars. Such Security Register shall be in written form or in any other form capable of being converted into written form within a reasonable period of time. At all reasonable times the Security Register shall be open for inspection by the Issuer. Upon surrender for registration of transfer of any Debt Security at the office or agency of the Issuer maintained for such purpose, the Issuer shall execute, and the Trustee or any Authenticating Agent, upon receipt of and in accordance with an Issuer Order, shall authenticate and deliver, in the name of the designated transferee, one or more new Debt Securities of any authorized denomination or denominations of like tenor and aggregate principal amount, bearing a number not contemporaneously Outstanding and containing identical terms and provisions. At the option of the Holder, Debt Securities may be exchanged for other Debt Securities of any authorized denomination or denominations of like tenor and aggregate principal amount containing identical terms and conditions, upon surrender of the Debt Securities to be exchanged at the office or agency of the Issuer maintained for such purpose. Whenever any Debt Securities are so surrendered for exchange, the Issuer shall execute, and the Trustee or any Authenticating Agent, upon receipt of and in accordance with an Issuer Order, shall authenticate and deliver, the Debt Securities that the Holder making the exchange is entitled to receive. (b) All Debt Securities issued upon any transfer or exchange of Debt Securities shall be valid obligations of the Issuer, evidencing 11 the same debt, and entitled to the same benefits under this Indenture, as the Debt Securities surrendered for such transfer or exchange. Every Debt Security presented or surrendered for transfer or exchange shall (if so required by the Issuer, the Trustee or the Security Registrar) be duly endorsed, and be accompanied by a written instrument of transfer in form satisfactory to the Issuer, the Trustee and the Security Registrar, duly executed by the Holder thereof or such Holder's attorney duly authorized in writing. No service charge will be made for any transfer or exchange of Debt Securities except as provided in Section 3.05. The Issuer or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration, transfer or exchange of Debt Securities, other than, in, the case of the Issuer, those expressly provided in this Indenture to be made at the Issuer's own expense or without expense or without charge to the Holders. The Issuer or the Trustee, as applicable, shall not be required to register, transfer or exchange Debt Securities during a period beginning at the opening of business 15 days before the Redemption Date and ending at the close of business on the Redemption Date. Upon the request of the Initial Purchaser (as defined in the Purchase Agreement) the Issuer shall provide for the Debt Securities to be transferred and held through the facilities of The Depository Trust Company, the Euroclear system, Clearstream Banking or similar book-entry systems for holders and transferees who are qualified institutional buyers for purposes of Rule 144A under the Securities Act or Regulation S Transferees or, consistent with an opinion of counsel, other holders or transferees. The Issuer shall cause appropriate revisions to the form of Debt Securities necessary to facilitate book-entry transfers and holding. (c) Notwithstanding the foregoing, Debt Securities may not be transferred except in compliance with the restricted securities legend set forth below (subject to the preceding paragraph), unless otherwise determined by the Issuer in accordance with applicable law which legend shall be placed on each Debt Security: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE ISSUER, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO A "NON-U.S. PERSON" IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, (D) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR 12 OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE OCC, SUBJECT TO THE ISSUER'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO ANY APPLICABLE REGISTRATION REQUIREMENTS UNDER FEDERAL LAW OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS OR UNLESS SUCH TRANSACTION IS NOT SUBJECT TO ANY SUCH REGISTRATION REQUIREMENTS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE ISSUER, (B) PURSUANT TO AN AVAILABLE EXEMPTION FROM ANY APPLICABLE REGISTRATION REQUIREMENTS OR (C) IF SUCH OFFER, SALE OR OTHER TRANSFER IS NOT SUBJECT TO REGISTRATION UNDER APPLICABLE FEDERAL LAW, SUBJECT TO THE ISSUER'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (B) OR (C) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING 13 THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE SECURITY REGISTRAR AND THE ISSUER SUCH CERTIFICATE AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION. THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS OF THE ISSUER AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE ISSUER, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE ISSUER AND IS NOT SECURED. Section 3.05. Mutilated, Destroyed, Lost and Stolen Debt Securities. If (i) any mutilated Debt Security is surrendered to the Trustee at its Corporate Trust Office or (ii) the Issuer and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Debt Security, and there is delivered to the Issuer and the Trustee such security or indemnity as may be required by them to save each of them and any Paying Agent harmless, and neither the Issuer nor the Trustee receives notice that such Debt Security has been acquired by a bona fide purchaser, then the Issuer shall execute and upon Issuer Request the Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Debt Security, a new Debt Security of like tenor, form, terms and principal amount, bearing a number not contemporaneously Outstanding. In case any such mutilated, destroyed, lost or stolen Debt Security has become or is about to become due and payable, the Issuer in its discretion may, instead of issuing a new Debt Security, pay the amount due on such Debt Security in accordance with its terms. Upon the issuance of any new Debt Security under this Section, the Issuer or the Trustee may require the payment of a sum sufficient to cover any 14 tax or other governmental charge that may be imposed in respect thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Debt Security issued pursuant to this Section shall constitute an original additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Debt Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities. Section 3.06. Redemption at Maturity. (a) The Debt Securities shall, on the Maturity Date, subject to prior written approval from the OTS in accordance with Section 3.13, become due and payable at the Redemption Price and from and after such date (unless the Issuer shall default in the payment of the Redemption Price) the Debt Securities shall cease to bear interest. Upon surrender of any Debt Security for redemption on or after the Maturity Date, such Debt Security shall be paid by the Issuer at the Redemption Price. If any Debt Security shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Maturity Date at the Interest Rate. (b) On or prior to the Maturity Date, the Issuer shall deposit with the Trustee or with a Paying Agent (or, if the Issuer is acting as its own Paying Agent, segregate and hold in trust), in immediately available funds, an amount in Dollars sufficient to pay the Redemption Price on the Maturity Date. Section 3.07. Payment of Interest; Interest Rights Preserved. (a) Each Debt Security will bear interest at the then applicable Interest Rate from and including each Interest Payment Date or, in the case of the first interest period, the original date of issuance of such Debt Security to, but excluding, the next succeeding Interest Payment Date or, in the case of the last interest period, the Redemption Date, and on any overdue principal and any overdue installment of interest (including Defaulted Interest), payable on each Interest Payment Date, commencing on May 8, 2004. Interest on any Debt Security that is payable and is punctually paid or duly provided for on any Interest Payment Date shall be paid to the Person in whose name such Debt Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest notwithstanding the cancellation of such Debt Security upon any transfer or exchange subsequent to the Regular Record Date. Payment of interest shall be made at the Corporate Trust Office or, at the option of the Issuer, by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register or, in accordance with arrangements satisfactory to the Trustee, at the option of the Holder, by wire transfer to an account designated by the Holder. (b) Any interest on any Debt Security that is payable but is not punctually paid or duly provided for on any Interest Payment Date ("Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been 15 such a Holder, and such Defaulted Interest may be paid by the Issuer, at its election in each case, as provided in clause (1) or (2) below: (1) The Issuer may elect to make payment of any Defaulted Interest to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Issuer shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Issuer shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment The Trustee shall promptly notify the Issuer of such Special Record Date and, in the name and at the expense of the Issuer, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to the Holders of such Debt Securities at their addresses as they appear in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debt Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Issuer may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debt Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Issuer to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. (c) Subject to the foregoing provisions of this Section, each Debt Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Debt Security shall carry the rights to interest accrued and unpaid, that were carried by such other Debt Security. Section 3.08. Additional Amounts. The Issuer will, subject to the exceptions and limitations set forth below, pay as additional interest to each Holder that is a United States Alien (as defined below) such amounts (the "Additional Amounts") as may be necessary so that every net payment received by such Holder, after deduction or withholding for or on account of any present or future tax, assessment or other governmental charge imposed upon or as a result 16 of such payment by the United States (or any political subdivision or taxing authority thereof or therein), will not be less than the amount the Holder would have received in respect of such Debt Security had no such deduction or withholding been imposed. However, the Issuer will not be required to make any such payment of additional interest for or on account of: (a) any tax, assessment or other governmental charge that would not have been imposed but for (i) the existence of any present or former connection between such Holder (or between a fiduciary, settlor or beneficiary of, or a person holding a power over, such Holder, if such Holder is an estate or a trust, or a member or shareholder of such Holder, if such Holder is a partnership or a corporation) and the United States, including, without limitation, such Holder (or such fiduciary, settlor, beneficiary, person holding a power, member or shareholder) being or having been a citizen or resident thereof or being or having been engaged in trade or business or present therein or having or having had a permanent establishment therein or (ii) such Holder's past or present status as a personal holding company, foreign personal holding company or private foundation or other tax-exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax; (b) any estate, inheritance, gift, sales, transfer or personal property tax or any similar tax, assessment or other governmental charge; (c) any tax, assessment or other governmental charge that is payable otherwise than by deduction or withholding from a payment on a Debt Security; (d) any tax, assessment or other governmental charge that would not have been imposed but for a failure to comply with any applicable certification, documentation, information or other reporting requirement concerning the nationality, residence, identity or connection with the United States of the Holder or the beneficial owner of such Debt Security if, without regard to any tax treaty, such compliance is required by statute or regulation of the United States as a precondition to relief or exemption from such tax, assessment or other governmental charge; or (e) any tax, assessment or other governmental charge imposed on a Holder that actually or constructively owns 10 percent or more of the combined voting power of all classes of stock of the Issuer or that is a controlled foreign corporation related to the Issuer through stock ownership; nor shall such additional interest be paid with respect to a payment on a Debt Security to a Holder that is a fiduciary or partnership or other than the sole beneficial owner of such payment to the extent a beneficiary or settlor with respect to such fiduciary or a member of such partnership or a beneficial owner would not have been entitled to the additional interest had such beneficiary, settlor, member or beneficial owner held the Debt Security directly. The term "United States Alien" means any person who, for United States federal income tax purposes, is a foreign corporation, a nonresident alien individual, a nonresident alien fiduciary of a foreign estate or trust, or a foreign partnership one or more of the members of which is, for United States 17 federal income tax purposes, a foreign corporation, a nonresident alien individual or a nonresident alien fiduciary of a foreign estate or trust. Whenever in this Indenture or the Debt Securities there is a reference in any context to the payment of principal of or interest on the Debt Securities, such mention shall be deemed to include mention of payments of the Additional Amounts provided for in this paragraph to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made. Section 3.09. Cancellation. All Debt Securities surrendered for payment, redemption, transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debt Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debt Securities canceled by any Authenticating Agent shall be delivered to the Trustee. The Issuer may at any time deliver to the Trustee for cancellation any Debt Securities previously authenticated and delivered hereunder that the Issuer may have acquired in any manner whatsoever, and all Debt Securities so delivered shall be promptly canceled by the Trustee. No Debt Securities shall be authenticated in lieu of or in exchange for any Debt Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Debt Securities held by the Trustee shall be returned to the Issuer. The acquisition of any Debt Securities by the Issuer shall not operate as a redemption or satisfaction of the indebtedness represented thereby unless and until such Debt Securities are surrendered to the Trustee for cancellation. Section 3.10. Computation of Interest. (a) The amount of interest payable for any interest period will be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. (b) LIBOR for a given interest payment period shall be determined by the Calculation Agent in accordance with the following provisions: (1) Subject to the occurrence of a Reset Event, on the second LIBOR Business Day (provided, that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to February 1, May 1, August 1 and November 1, as the case may be, immediately prior to the commencement of such interest payment period (except, with respect to the first interest payment period, LIBOR for such interest payment period shall be determined on February 11, 2004) (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent, for three-month U.S. Dollar deposits in Europe, which appears 18 on Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions) or such other page as may replace such Telerate Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Markets Commodities News. "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in New York, New York or Wilmington, Delaware are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on the same LIBOR Determination Date, the corrected rate as so substituted will be the applicable LIBOR for that LIBOR Determination Date. (2) If, on any LIBOR Determination Date, such rate does not appear on Telerate Page 3750 as reported by Bloomberg Financial Markets Commodities News or such other page as may replace such Page 3750, the Calculation Agent shall determine the, arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for three-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (London time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in the City of New York (as selected by the Calculation Agent) are quoting on the relevant LIBOR Determination Date for three-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (London time) (in an amount determined by the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent. (3) If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR for such interest payment period shall be LIBOR in effect for the immediately preceding interest payment period. (c) All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (d) On each LIBOR Determination Date and the Reset Date, the Calculation Agent shall notify, in writing, the Issuer and the Paying 19 Agent of the applicable Interest Rate in effect for the related Interest Payment Date. The Calculation Agent shall, upon the request of the holder of any Debt Securities, provide the Interest Rate then in effect. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Issuer and the Holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Issuer as to the Interest Rate. The Issuer shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for taxable income calculation purposes. Section 3.11. CUSIP Numbers. The Issuer in issuing the Debt Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debt Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debt Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. Section 3.12. Persons Deemed Owners. The Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Person in whose name any Debt Security is registered as the owner of such Debt Security for the purpose of receiving payment of principal of and (subject to Section 3.07) interest, if any, on, such Debt Security and for all other purposes whatsoever, whether or not such Debt Security be overdue, and neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee shall be affected by notice to the contrary. All payments made to any Holder, or upon such Holder's order, shall be valid, and, to the extent of the sum or sums paid, effectual to satisfy and discharge the liability for moneys payable upon such Debt Security. Section 3.13. Federal Regulatory Approval Required. The Issuer may not retire any part of its obligation under the Debt Securities, whether pursuant to an acceleration in the case of an Event of Default or otherwise, without the prior written approval of the OTS. Not more than 60 days and not less than 30 days prior to the Redemption Date, or within 30 days after receipt of any declaration of acceleration pursuant to Section 5.02, the Issuer will apply to the OTS for written approval of repayment prior to or at maturity. In the event that the Issuer obtains such prior written approval, the Issuer shall notify the Holders and the Trustee, and will arrange for prompt payment on the Debt Securities. ARTICLE IV SATISFACTION AND DISCHARGE Section 4.01. Satisfaction and Discharge of Indenture. This Indenture, shall, upon Issuer Order, cease to be of further effect (except as to any surviving rights of registration of transfer or exchange herein expressly provided for and rights to receive payments of principal of and interest and as 20 otherwise expressly provided herein) and the Trustee, upon receipt of an Issuer Order and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either (1) all Debt Securities theretofore authenticated and delivered (other than (A) Debt Securities that have been destroyed, lost or stolen and that have been replaced or paid as provided in Section 3.05 and (B) Debt Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 12.04), have been delivered to the Trustee for cancellation; or (2) all Debt Securities not theretofore delivered to the Trustee for cancellation, (A) have become due and payable, or (B) will become due and payable within one year, and the Issuer has irrevocably deposited or caused to be deposited with the Trustee funds in trust in an amount sufficient to pay and discharge the entire indebtedness on such Debt Securities, for principal and interest to the date of such deposit (in the case of Debt Securities that have become due and payable) or to the date of redemption; provided, however, in the event a petition for relief under the Federal bankruptcy, insolvency or other similar laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law, is filed with respect to the Issuer within 91 days after the deposit, or the FDIC or any other Person is appointed to act as a receiver or conservator or liquidator or trustee or assignee in bankruptcy or insolvency of the Issuer within 91 days after the deposit, and the Trustee is required to return the moneys then on deposit with the Trustee to the Issuer, the obligations of the Issuer under this Indenture with respect to such Debt Securities shall not be deemed terminated or discharged; (b) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; (c) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with; and (d) the Issuer shall have received prior written approval for such discharge from the OTS pursuant to Section 3.13. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Issuer to the Trustee under Section 6.07, the obligations of the Issuer to any Authenticating Agent under Section 6.14, and, if money shall 21 have been deposited with the Trustee pursuant to subclause (2) of clause (a) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 12.04 shall survive. Section 4.02. Application of Trust Money. Subject to Section 6.07 and the provisions of the last paragraph of Section 12.04, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Debt Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest, except that such money need not be segregated from other funds except to the extent required by applicable law. Section 4.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent of the Debt Securities (other than the Trustee) shall, upon demand of the Issuer, be repaid to it or paid to the Trustee, and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. Section 4.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any Paying Agent for payment of the principal of or interest on Debt Securities and not applied but remaining unclaimed by the Holders for two years after the date upon which the principal of or interest on such Debt Securities, as the case may be, shall have become due and payable, shall be repaid to the Issuer by the Trustee or such Paying Agent on written demand; and the Holders shall thereafter look only to the Issuer for any payment which such Holders may be entitled to collect and all liability of the Trustee or such Paying Agent with respect to such moneys shall thereupon cease. ARTICLE V REMEDIES Section 5.01. Events of Default. "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law, pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Issuer bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, readjustment, arrangement, composition or similar relief for the Issuer under the Federal bankruptcy laws, or any other similar applicable law of any governmental unit, domestic or foreign, and such decree or order shall have continued undischarged or unstayed for a period of 90 days; or a decree or order or other decision of a court or agency or supervisory authority having jurisdiction in the premises for the appointment of the FDIC or any other Person to act as a receiver or conservator or liquidator or trustee or assignee in bankruptcy or insolvency of the Issuer or of a substantial part of its property, or for the involuntary winding up or liquidation of its 22 affairs, shall have been entered and such decree or order shall have remained in force undischarged and unstayed for a period of 90 days; or, under the provisions of any insolvency, bankruptcy, or other law for the relief or aid of creditors or depositors, any court, or agency or supervisory authority having jurisdiction in the premises shall assume custody or control of the Issuer or of a substantial part of its property, and such custody and control shall not be terminated or stayed within 90 days from the date of assumption of such custody or control; or any substantial part of the property of the Issuer shall be sequestered or attached and shall not be returned to the possession of the Issuer or released from such attachment within 90 days thereafter; or (b) the Issuer shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization, readjustment, arrangement, composition or similar relief under the Federal bankruptcy laws, or any other similar applicable law of any governmental unit, domestic or foreign, or shall consent to the filing of any such petition or shall consent to the appointment of a receiver or conservator or liquidator or trustee or assignee in bankruptcy or insolvency of it or of a substantial part of its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or if corporate action shall be taken by the Issuer in furtherance of any of the aforesaid purposes. Section 5.02. Acceleration of Maturity: Rescission and Annulment. If an Event of Default occurs and is continuing, then the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Debt Securities may declare the principal amount of and all accrued but unpaid interest on the Debt Securities to be due and payable immediately, by a notice in writing to the Issuer (and to the Trustee if given by Holders), and upon any such declaration such principal amount and interest shall become immediately due and payable, subject to regulatory approval pursuant to Section 3.13. Upon payment of such amounts, all obligations of the Issuer in respect of the payment of principal of and interest on the Debt Securities shall terminate. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained as hereinafter in this Article V provided, the Holders of a majority in principal amount of the Outstanding Debt Securities, by written notice to the Issuer and the Trustee, may rescind and annul such declaration and its consequences if: (a) the Issuer has paid or deposited with the Trustee a sum sufficient to pay (1) all overdue installments of interest on all Debt Securities, (2) the principal of any Debt Securities that have become due and payable otherwise than by such declaration of acceleration and interest thereon at the Interest Rate, (3) to the extent that payment of such interest is lawful, interest upon overdue installments of interest on each Debt Security at the Interest Rate, and 23 (4) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (b) all Defaults have been cured, waived or otherwise remedied. No such rescission and waiver shall affect any subsequent default or impair any right consequent thereon. Section 5.03. Defaults; Collection of Indebtedness and Suits for Enforcement by Trustee. "Default," wherever used herein, means any one of the following events (whatever the reason for such Default and whether it shall be voluntary or involuntary or be effected by operation of law pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) an Event of Default has occurred; (b) the Issuer fails to pay the principal of any Debt Security at the Redemption Date and such failure is continued for seven days, whether or not such payment is prohibited by Article XV hereof; or (c) the Issuer fails to pay any installment of interest on an Interest Payment Date and such failure is continued for 30 days, whether or not such payment is prohibited by Article XV hereof. The Issuer covenants that, if a Default shall occur, it will, upon demand of the Trustee and subject to Section 3.13 hereof, pay to the Trustee, for the benefit of the Holders, the entire amount then due and payable on the Debt Securities (x) in the case of a Default specified in clause (a) or (b) above, for the principal and interest, if any, and interest upon the overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the Interest Rate, and (y) in the case of a Default specified in clause (c) above, for the interest and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the Interest Rate; and in each case, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Issuer fails to pay such amount forthwith upon such demand and if the necessary approvals under Section 3.13 have been obtained, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Issuer or any other obligor upon the Debt Securities, and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Issuer or any other obligor upon the Debt Securities wherever situated. If a Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific 24 enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 5.04. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceedings, or any voluntary or involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law relative to the Issuer or any other obligor upon the Debt Securities, or the property of the Issuer or of such other obligor or their creditors, the Trustee (irrespective of whether theprincipal of the Debt Securities shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand on the Issuer for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Debt Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, custodian, liquidator, sequestrator (or other similar official) in any such proceeding is hereby authorized by each such Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to such Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07. Nothing herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Debt Securities or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 5.05. Trustee May Enforce Claims Without Possession of Debt Securities. All rights of action and claims under this Indenture or the Debt Securities may be prosecuted and enforced by the Trustee without the possession of any Debt Security or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name, as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders in respect of which such judgment has been recovered. Section 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such 25 money on account of principal or interest, upon presentation of the Debt Securities in respect of which money has been collected and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.07; SECOND: To the payment of all Senior Indebtedness of the Issuer if and to the extent required by Article XV; THIRD: To the payment of the amounts then due and unpaid for principal of and interest on the Debt Securities, in respect of which or for the benefit of which such money has been collected ratably, without preference or priority of any kind, according to the amounts due and payable on such Debt Securities for principal and interest, respectively; and FOURTH: The balance, if any, to the Issuer. Section 5.07. Limitation on Suits. No Holder shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (a) such Holder has previously given written notice to the Trustee of a continuing Default; (b) the Holders of not less than 25% o in principal amount of the Outstanding Debt Securities shall have made written request to the Trustee to institute proceedings in respect of such Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee indemnity satisfactory to the Trustee, in its reasonable discretion, against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Debt Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all Holders. For the protection and enforcement of the provisions of this Section, each and every Holder and the Trustee shall be entitled to such relief as can be given at law or in equity. 26 Section 5.08. Unconditional Right of Holders to Receive Principal and Interest. Subject only to the provisions of Article XV, the Holder of any Debt Security shall have the right, which is absolute and unconditional, to receive payment of the principal on the Redemption Date and (subject to Section 3.07) interest (including any Additional Amounts) on the Interest Payment Dates, and to institutesuit for the enforcement of any such payment and interest thereon, and such right shall not be impaired without the consent of such Holder. Section 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Issuer, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10. Right and Remedies Cumulative. Except as otherwise expressly provided elsewhere in this Indenture, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Indenture or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 5.12. Control by Holders. The Holders of not less than a majority in principal amount of the Outstanding Debt Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Debt Securities; provided, that: (a) such direction shall not be in conflict with any rule of law or with this Indenture; (b) subject to the provisions of Section 6.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith being advised by counsel shall, by a Responsible Officer or Responsible Officers of the Trustee, determine that the proceeding so directed might result in personal liability for the Trustee or would be unjustly prejudicial to the Holders not joining in any such direction; and (c) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. 27 Section 5.13. Waiver of Past Event of Default. The Holders of not less than a majority in principal amount of the Outstanding Debt Securities may on behalf of all Holders waive any past Event of Default hereunder and its consequences. Upon any such waiver, such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of the Debt Securities under this Indenture, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. Section 5.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Debt Security by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant, but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder or group of Holders holding in the aggregate more than 10% o in principal amount of the Outstanding Debt Securities, or to any suit instituted by any Holder of a Debt Security for the enforcement of the payment of the principal of or interest on such Debt Security on or after the Redemption Date or the relevant Interest Payment Date. ARTICLE VI THE TRUSTEE Section 6.01. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default or Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon an Officers' Certificate or Opinion of Counsel or any other certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any Officers' Certificate or Opinion of Counsel or any other such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture. (b) In case a Default has occurred and is continuing, the Trustee shall, with respect to the Debt Securities, exercise such of the rights and powers vested in it by this Indenture, and use the same 28 degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) this clause shall not be construed to limit the effect of clause (a) above; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it, with respect to the Debt Securities, in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Debt Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture with respect to the Debt Securities; and (4) the Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and Section 6.02. (e) The Trustee shall establish and maintain a segregated non-interest bearing trust account (the "Company Account") in the United States in the name of and under the exclusive control of the Trustee, and maintained in the Trustee's trust department, on behalf of the Holders of the Debt Securities and, upon the receipt of payments of funds made in respect of the Debt Securities by the Issuer, deposit such funds into the Company Account and make payments to the Holders of the Debt Securities from the Company Account in accordance with the applicable terms of the relevant Holder's Debt Securities. Funds in the Company Account shall be held uninvested until disbursed in accordance with this Indenture. Section 6.02. Notice of Defaults. Within 90 days after the occurrence of any default hereunder, the Trustee shall by the pertinent methods provided in Section 1.05 give notice to all Holders of each default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of default in the payment of the principal of or interest on any Debt Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders; provided further, that in the case of any default of the character specified in Section 5.01(a)(i) no such notice to Holders shall be given until at least 60 days after the occurrence thereof; and provided further, that the 29 Trustee shall not be charged with knowledge of default unless either (a) a Responsible Officer of the Trustee shall have actual knowledge of such default or (b) the Trustee shall have received written notice thereof from the Issuer or any other obligor on the Debt Security or any Holder, except with respect to a default pursuant to Sections 5.03(b) or 5.03(c) hereof (other than a default resulting from the default in the payment of Additional Amounts, if any, if the Trustee does not have actual knowledge or written notice that such payment is due and payable) of which the Trustee shall be deemed to have knowledge. For the purpose of this Section, the term "default" means any event that is, or after notice or lapse of time or both would become, a Default. Section 6.03. Certain Rights of Trustee. Except as otherwise provided in Section 6.01: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Issuer mentioned herein shall be sufficiently evidenced by an Issuer Request or Issuer Order and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Issuer, personally or by agent or attorney; 30 (g) the Trusteemay execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debt Securities (that has not been cured or waived) to exercise with respect to Debt Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; and (i) Whenever the Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Indenture, is unsure of the course of action to be taken by it hereunder, or otherwise determines that instruction is necessary, appropriate or advisable, the Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Issuer or the Holders requesting instruction as to the course of action to be adopted, and to the extent the Trustee acts in good faith in accordance with any written instruction received from the Issuer or the Holders (exercised by the Act of the Holders of not less than a majority in principal amount of the Outstanding Debt Securities), as the case may be, the Trustee shall not be liable on account of such action or inaction to the Issuer, any Holder or any other Person. If the Trustee shall not have received appropriate instruction within ten days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Indenture, as it shall in good faith deem to be in the best interests of the Holders, and shall have no liability to the Issuer, any Holder or any other Person for such action or inaction. Section 6.04. Not Responsible for Recitals or Issuance of Debt Securities. The recitals contained herein and in the Debt Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or the Debt Securities. The Trustee shall not be accountable for the use or application by the Issuer of any Debt Securities or the proceeds thereof. Section 6.05. May Hold Debt Securities. The Trustee, any Paying Agent, the Security Registrar or any other agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Debt Securities, and may otherwise deal with the Issuer with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. Section 6.06. Money Held in Trust. Money held by the Trustee or any Paying Agent (except the Issuer) in trust hereunder need not be segregated from other funds except to the extent required by law. Neither the Trustee nor any Paying Agent shall be under any liability for interest on any money received by 31 it hereunder except as otherwise agreed in writing with the Issuer. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys, if any, shall be paid from time to time to the Issuer upon the written order of the Issuer, signed by the Chairman of the Board of Directors, the Vice Chairman, the President, the Chief Financial Officer, the Chief Operating Officer, a Vice President, the Treasurer or an Assistant Treasurer of the Issuer. Section 6.07. Compensation and Reimbursement. The Issuer agrees (a) to pay to the Trustee from time to time such compensation in Dollars for all services rendered by it hereunder as may be mutually agreed upon in writing by the Issuer and the Trustee (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee in Dollars upon its written request for all documented reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the reasonable expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance attributable to its negligence or bad faith; and (c) to indemnify in Dollars the Trustee (including in its individual capacity) and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense except to the extent such loss, damage, claim, liability or expense results from the negligence or bad faith of such indemnitee, arising out of or in connection with the acceptance or administration of this trust or performance of its duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Sections 5.01 (a) or 5.01(b), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar laws. As security for the performance of the obligations of the Issuer under this Section, the Trustee shall have a lien prior to the Debt Securities, upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of amounts due on the Debt Securities. The obligations of the Issuer under this Section to compensate, reimburse and indemnify the Trustee for expenses, disbursements and advances shall constitute additional indebtedness under this Indenture and shall survive the satisfaction and discharge or other termination of this indenture and shall survive the resignation or removal of the Trustee. 32 Section 6.08. Disqualification, Conflicting Interests. If the Trustee has or shall acquire any "conflicting interest" within the meaning of ss. 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Indenture. Section 6.09. Corporate Trustee Required, Eligibility. There shall at all times be a Trustee hereunder that shall be an entity organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority. If such entity publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such entity shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Issuer may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Issuer, serve as Trustee. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 6.10. Resignation and Removal, Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Issuer. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time and (subject to Section 6.10(e) below) a successor Trustee appointed by Act of the Holders of a majority in principal amount of the Outstanding Debt Securities, delivered to the Trustee and to the Issuer. (d) If at any time: (1) the Trustee shall fail to comply with Section 6.08 after written request therefor by the Issuer or by any Holder who has been a bona fide Holder of a Debt Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Issuer or by any Holder who has been a bona fide Holder of a Debt Security for at least six months, or 33 (3) the Trustee shall become incapable of acting or a decree or order for relief by a court having jurisdiction in the premises shall have been entered in respect of the Trustee in an involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or State bankruptcy, insolvency or similar law; or a decree or order by a court having jurisdiction in the premises shall have been entered for the appointment of a receiver, custodian, liquidator, assignee, trustee, sequestrator (or other similar official) of the Trustee or of its property or affairs, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation, winding up or liquidation, or (4) the Trustee shall commence a voluntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or State bankruptcy, insolvency or similar law or shall consent to the appointment of or taking possession by a receiver, custodian, liquidator, assignee, trustee, sequestrator (or other similar official) of the Trustee or its property or affairs, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall take corporate action in furtherance of any such action, then, in any such case, (i) the Issuer by a Board Resolution may remove the Trustee or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Debt Security for at least six months may, on behalf of himself or herself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Issuer, by a Board Resolution, shall promptly appoint a successor Trustee and shall comply with the applicable requirements of Section 6.11. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Debt Securities delivered to the Issuer and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and to that extent supersede the successor Trustee appointed by the Issuer. If no successor Trustee shall have been so appointed by the Issuer or the Holders and accepted appointment in the manner hereinafter provided within 30 days after the notice of resignation, or the removal, incapacity or other vacancy, of the Trustee, the Trustee or any Holder who has been a bona fide Holder of a Debt Security for at least six months, subject to Section 5.14, on behalf of himself or herself and all others similarly situated, may petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Issuer shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee in the manner and to the extent provided in Section 1.05 to the Holders. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. 34 Section 6.11. Acceptance of Appointment by Successor. (a) In the case of an appointment hereunder of a successor Trustee, each such successor Trustee so appointed shall execute, acknowledge and deliver to the Issuer and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Issuer or the successor Trustee, such retiring Trustee shall, upon payment of the amounts then due to it pursuant to the provisions of Section 6.07, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its claim, if any, provided for in Section 6.07. (b) Upon request of any successor Trustee, the Issuer shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) of this Section. (c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. Section 6.12. Merger, Conversion, Consolidation or Succession to Business. Any entity into which the Trustee may be merged or converted or with which it may be consolidated, or any entity resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any entity succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided, that such entity shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Debt Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debt Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Debt Securities. In case any Debt Securities shall not have been authenticated by such predecessor Trustee, any such successor Trustee may authenticate and deliver such Debt Securities, in either its own name or that of its predecessor Trustee, with the full force and effect which this Indenture provides for the certificate of authentication of the Trustee. Section 6.13. Preferential Collection of Claims Against Issuer. If and when the Trustee shall be or become a creditor of the Issuer (or any other obligor upon the Debt Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Issuer (or any such other obligor). Section 6.14. Appointment of Authenticating Agent. As long as any Debt Securities remain Outstanding, the Trustee may upon the request of the Issuer, by an instrument in writing, appoint an authenticating agent (the "Authenticating Agent") which shall be authorized to act on behalf of the Trustee to authenticate Debt Securities issued upon exchange, registration of transfer, partial redemption or pursuant to Section 3.05. Debt Securities authenticated by such Authenticating Agent shall be entitled to the benefits of 35 this Indenture and shall be valid and obligatory for all purposes as if authenticated by such Trustee. Wherever reference is made in this Indenture to the authentication and delivery of Debt Securities by the Trustee or to the Trustee's Certificate of Authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a Certificate of Authentication executed on behalf of such Trustee by such Authenticating Agent. Such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 (determined as provided in Section 6.09 with respect to the Trustee) and subject to supervision or examination by Federal or State authority. Any corporation into which any Authenticating Agent may be merged or converted, or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall continue to be the Authenticating Agent without the execution or filing of any paper or any further act on the part of the Trustee or such Authenticating Agent. Any Authenticating Agent may at any time, and if it shall cease to be eligible shall, resign by giving written notice of resignation to the applicable Trustee and to the Issuer. Upon receiving such a notice of resignation, or in case at any time any Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall upon Issuer Request appoint a successor Authenticating Agent, and the Issuer shall provide notice of such appointment to the Holders in the manner and to the extent provided in Section 1.05. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent. The Issuer agrees to pay to the Authenticating Agent from time to time reasonable compensation including reimbursement of its reasonable expenses for its services. The Authenticating Agent shall have no responsibility or liability for any action taken by it as such at the direction of the Trustee. ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER Section 7.01 Issuer to Furnish Trustee Names and Addresses of Holders. The Issuer will furnish or cause to be furnished to the Trustee: (a) on each Regular Record Date for an Interest Payment Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; 36 except that no such lists need be furnished under this Section 7.01 so long as the Trustee is in possession thereof by reason of its acting as Security Registrar. Section 7.02. Preservation of Information; Communication to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 or received by it in the capacity of Paying Agent or Security Registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished, destroy any information received by it as Paying Agent or Security Registrar (if so acting) hereunder upon delivering to itself as Trustee, not earlier than 45 days after an Interest Payment Date, a list containing the names and addresses of the Holders obtained from such information since the delivery of the next previous list, if any, and destroy any list delivered to itself as Trustee which was compiled from information received by it as Paying Agent or Security Registrar (if so acting) hereunder upon the receipt of a new list so delivered. (b) If a Holder applies in writing to the Trustee, and furnishes to the Trustee reasonable proof that it has owned a Debt Security for a period of at least six months preceding the date of such application, and such application states that the Holder desires to communicate with other Holders with respect to their rights under this Indenture or under the Debt Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election either: (1) afford such Holder access to the information preserved at the time by the Trustee in accordance with Section 7.02(a), or (2) inform such Holder as to the approximate number of Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 7.02(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, specified in such application. If the Trustee shall elect not to afford the Holder access to such information, the Trustee shall, upon written request of such applicant, mail to the Holders whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 7.02(a), a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicant a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the Holders or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. In the event that the applicants decide to proceed despite the Trustee's opinion and obtain an order of a court of competent jurisdiction directing the 37 Trustee to mail the applicable material, after entry of such order and renewal of such tender, the Trustee shall mail copies of such material to all such Holders; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Debt Securities, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor the Security Registrar nor any Paying Agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 7.02(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 7.02(b). ARTICLE VIII CONCERNING THE HOLDERS Section 8.01. Acts of Holders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent or proxy duly appointed in writing, and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Whenever in this Indenture it is providedthat the Holders of a specified percentage in aggregate principal amount of the Outstanding Debt Securities may take any Act, the fact that the Holders of such specified percentage have joined therein may be evidenced by (a) the instrument or instruments executed by Holders in person or by agent or proxy appointed in writing, or by (b) the record of Holders voting in favor thereof at any meeting of such Holders duly called and held in accordance with the provisions of Article IX, or by (c) a combination of such instrument or instruments and any such record of such a meeting of Holders. Section 8.02. Proof of Ownership; Proof of Execution of Instruments by Holders. The ownership of the Debt Securitiesshall be proved by the Security Register or by a certificate of the Security Registrar. Subject to the provisions of Sections 6.01, 6.03 and 9.05, proof of the execution of a writing appointing an agent or proxy and of the execution of any instrument by a Holder or such Holder's agent or proxy shall be sufficient and conclusive in favor of the Trustee and the Issuer if made in the following manner: The fact and date of the execution by any such person of any instrument may be proved by the certificate of any notary public or other officer authorized to take acknowledgment of deeds, that the person executing such instrument acknowledged to him or her the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by an officer of a corporation or association or a member of a partnership on behalf of such corporation, association or 38 partnership, as the case may be, or by any other person acting in a representative capacity, such certificate or affidavit shall also constitute sufficient proof of such person's authority. The record of any Holders' meeting shall be proved in the manner provided in Section 9.06. The Trustee may in any instance require further proof with respect to any of the matters referred to in this Section so, long as the request is a reasonable one. If the Issuer shall solicit an Act from the Holders, the Issuer may, at its option, by Board Resolution, fix in advance a record date for the determination of Holders entitled to take such Act, but the Issuer shall have no obligation to do so. Such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Debt Security shall bind every future Holder of the same Debt Security and any Debt Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, suffered or omitted by the Trustee or any agent of the Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Debt Security. Section 8.03. Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any Act by the Holders of the percentage in aggregate principal amount of the Outstanding Debt Securities specified in this Indenture in connection with such Act, any Holder of a Debt Security the number, letter or other distinguishing symbol of which is shown by the evidence to be included in the Debt Securities the Holders of which have consented to such Act may, by filing written notice with the Trustee at the Corporate Trust Office and upon proof of ownership as provided in Section 8.02, revoke such Act so far as it concerns such Debt Security. Except as aforesaid, any such Act taken by the Holder of any Debt Security shall be conclusive and binding upon such Holder and upon all future Holders of such Debt Security and of any Debt Securities issued on transfer or in lieu thereof or in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Debt Security or such other Debt Securities. ARTICLE IX HOLDERS' MEETINGS Section 9.01. Purposes of Meetings. A meeting of Holders may be called at any time and from time to time pursuant to the provisions of this Article IX for any of the following purposes: (a) to give any notice to the Issuer or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action 39 authorized to be taken by Holders pursuant to any of the provisions of Article V; (b) to remove the Trustee and appoint a successor Trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.02; or (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Outstanding Debt Securities under any other provision of this Indenture or under applicable law. Section 9.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Holders to take any action specified in Section 9.01, to be held at such time or times and at such place in New York or Wilmington, Delaware as the Trustee shall determine. Notice of every meeting of the Holders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given to Holders in the manner and to the extent provided in Section 1.05. Such notice shall be given not less than 20 days or more than 180 days prior to the date fixed for the meeting. Section 9.03. Call of Meetings by Issuer or Holders. In case at any time the Issuer, pursuant to a Board Resolution, or the Holders of not less than 10% in aggregate principal amount of the Outstanding Debt Securities shall have requested the Trustee to call a meeting of the Holders by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have given the notice of such meeting within 20 days after the receipt of such request, then the Issuer or such Holders may determine the time or times and the place or places for such meetings and may call such meetings to take any action authorized in Section 9.01, by giving notice thereof as provided in Section 9.02. (a) Qualifications for Voting. To be entitled to vote at any meeting of Holders a Person shall be a Holder or a Person appointed by an instrument in writing as agent or proxy by such Holder. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee with respect to which such meeting is being held and its counsel and any representatives of the Issuer and its counsel. Section 9.04. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders, in regard to proof of the holding of Debt Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Issuer or by Holders as provided in Section 9.03, in which case the Issuer or the Holders calling the meeting, as the case may be, shall in like manner appoint a 40 temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by a majority vote at the meeting. Subject to the provisos in the definition of "Outstanding," at any meeting each Holder or proxy therefor shall be entitled to, one vote for each $1,000 principal amount of Debt Securities held or represented by such Holder; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debt Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Outstanding Debt Securities held by such chairman or instruments in writing duly designating such chairman as the person to vote on behalf of Holders. Any meeting of Holders with respect to which a meeting was duly called pursuant to the provisions of Section 9.02 or 9.03 may be adjourned from time to time by a majority of such Holders present and the meeting may be held as so adjourned without further notice. Section 9.05. Voting. The vote upon any resolution submitted to any meeting of Holders with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such Holders or of their representatives by proxy and the serial number or numbers of the Debt Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was transmitted as provided in Section 9.02. The record shall show the serial numbers of the Debt Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Issuer and the other to the Trustee to be preserved by the Trustee. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 9.06. No Delay of Rights by Meeting. Nothing in this Article IX contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to any Holder under any of the provisions of the Indenture or of the Debt Securities. Section 9.07. Quorum; Actions. The Persons entitled to vote a majority in principal amount of the Debt Securities shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the Debt Securities, the Persons holding or representing such specified percentage in principal amount of the Debt Securities will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting 41 shall, if convened at the request of Securityholders, be dissolved. In any othercase the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 9.02, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debt Securities which shall constitute a quorum. Except as limited by the proviso in the first paragraph of Section 11.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of not less than a majority in principal amount of the Debt Securities; provided, however, that, except as limited by the proviso in the first paragraph of Section 11.02, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the Debt Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debt Securities. Any resolution passed or decision taken at any meeting of holders of Debt Securities duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. ARTICLE X. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 10.01. Issuer May Consolidate, etc., Only on Certain Terms. The Issuer shall not consolidate with or merge into any other entity or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (a) the entity formed by such consolidation or into which the Issuer is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Issuer substantially as an entirety (the "successor corporation") shall be a corporation or other banking organization organized and existing under the laws of the United States or any state or territory thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and interest on all the Debt Securities, the payment of all amounts owed hereunder by the Issuer to the Trustee and the performance of every covenant of this Indenture on the part of the Issuer to be performed or observed; 42 (b) immediately after giving effect to such transaction and treating any indebtedness that becomes an obligation of the Issuer as a result of such transaction as having been incurred by the Issuer at the time of such transaction, no Default, and no event that, after notice or lapse of time, or both, would become a Default, shall have happened and be continuing; and (c) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease, and the assumption by any successor entity, and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. Section 10.02. Successor Corporation Substituted. Upon any consolidation with or merger into any other corporation, or any conveyance, transfer or lease of the properties and assets of the Issuer substantially as an entirety in accordance with Section 10.01, the successor corporation formed by such consolidation or into which the Issuer is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under this Indenture with the same effect as if such successor corporation had been named as the Issuer herein, and thereafter, the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Debt Securities. Section 10.03. Opinion of Counsel. The Trustee shall be entitled to receive and, subject to Sections 6.01 and 6.03, shall be protected in relying upon an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance or lease and any such assumption complies with the provisions of this Article. ARTICLE XI. SUPPLEMENTAL INDENTURES Section 11.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Issuer, when authorized by a Board Resolution, and the Trustee, at the direction of the Issuer, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another corporation to the Issuer and the assumption by such successor of the covenants of the Issuer herein and in the Debt Securities contained; or (b) to add to the covenants of the Issuer, for the benefit of the Holders, or to surrender any right or power herein conferred upon the Issuer; or (c) to add any additional Defaults or Events of Default; or (d) to change or eliminate any of the provisions of this Indenture, provided, that any such change or elimination shall become effective only when there is no Outstanding Debt Security created prior 43 to the execution of such supplemental indenture that is entitled to the benefit of such provision and as to which such supplemental indenture would apply or (e) to establish the form or terms of Debt Securities; or (f) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 6.11; or (g) to evidence any changes to Section 6.08 or 6.09 permitted by the terms thereof; or (h) to cure any ambiguity, to correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture that shall not be inconsistent with any provision of this Indenture; provided, that such other provisions shall not adversely affect the interests of the Holders of Outstanding Debt Securities created prior to the execution of such supplemental indenture in any material respect. Section 11.02. Supplemental Indentures With Consent of Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Debt Securities affected by such supplemental indenture voting separately, by Act of said Holders delivered to the Issuer and the Trustee, the Issuer, when authorized by a Board Resolution, and the Trustee, at the directionof the Issuer, may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture or such Debt Securities; provided, however, that no such supplemental indenture shall, without such consent of the Holder of each Outstanding Debt Security affected thereby, (a) change the Maturity Date or Interest Payment Date of any Debt Security, or reduce the principal amount thereof or the Interest Rate payable upon redemption thereof, or reduce the amount provable in bankruptcy or insolvency pursuant to Section 5.04, or change any Place of Payment where, or the currency in which, any Debt Security or the interest thereon is payable, or impair the right to institute suit for the enforcement of any payment on or after the Redemption Date thereof; or (b) reduce the percentage in principal amount of the Outstanding Debt Securities, the consent of whose Holders is required for any supplemental indenture, or the consent of whose Holders is required forr any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; or (c) modify any of the provisions of this Section or Section 5.13, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Debt Security affected thereby; provided, however, that this clause shall not be deemed to 44 require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section, or the deletion of this proviso, in accordance with the requirements of Sections 6.11 and 11.01(f). It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Section 11.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. Notwithstanding any other provision of this Indenture to the contrary, the Trustee may, but shall not be obligated to, enter into any supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 11.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Debt Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 11.05. Reference in Debt Securities to Supplemental Indentures. Debt Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Issuer, bear a notation in form approved by the Trustee and the Issuer as to any matter provided for in such supplemental indenture. If the Issuer or the Trustee shall so determine, new Debt Securities so modified as to conform, in the opinion of the Board of Directors of the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and, upon receipt by the Trustee of an Issuer Order, authenticated and delivered by the Trustee in exchange for Outstanding Debt Securities. Section 11.06. Subordination Unimpaired. No supplemental indenture entered into under this Article shall modify, directly or indirectly, the provisions of Article XV or the definition of Senior Indebtedness in Section 1.01 in any manner that might alter or impair the subordination of the Debt Securities with respect to Senior Indebtedness then outstanding unless each holder of such Senior Indebtedness has consented thereto in writing. Section 11.07. Notice of Supplemental Indenture. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to Section 11.02, the Issuer shall transmit to the Holders a notice setting forth the substance of such supplemental indenture. ARTICLE XII. COVENANTS Section 12.01. Payment of Principal and Interest. The Issuer covenants and agrees for the benefit of the Debt Securities, that it will duly and punctually pay the principal of and interest on the Debt Securities in 45 accordance with the terms of the Debt Securities and this Indenture. At the option of the Issuer, each installment of interest on the Debt Securities may be paid (i) by mailing checks for such interest payable to the order of the holders of Debt Securities entitled thereto as they appear on the Securities Registrar or (ii) by wire transfer to any account with a banking institution located in the United States designated by such Person to the Paying Agent no later than the related record date. Section 12.02. Tax Treatment of the Debt Securities. The Issuer will treat the Debt Securities as indebtedness, and the interest payable in respect of such Debt Securities (including any Additional Amounts) as interest, for all U.S. federal income tax purposes. All payments in respect of such Debt Securities will be made free and clear of U.S. withholding tax provided, that any beneficial owner thereof has provided an Internal Revenue Service Form W-8 BEN (or any substitute or successor form) establishing its non-U.S. status for U.S. federal income tax purposes. Section 12.03. Maintenance of Office or Agency. The Issuer will maintain in Wilmington, Delaware, in Denver, Colorado or in each Place of Payment an office or agency where Debt Securities may be presented or surrendered for payment, where Debt Securities may be surrendered for transfer or exchange and where notices and demands to or upon the Issuer in respect of the Debt Securities and this Indenture may be served. The Issuer will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Issuer hereby appoints the Trustee as its agent to receive all presentations, surrenders, notices and demands. The Issuer may also from time to time designate different or additional offices or agencies to be maintained for such purposes (in or outside of such Place of Payment), and may from time to time rescind any such designations; provided, however, that no such designation or rescission shall in any manner relieve the Issuer of its obligations described in the preceding paragraph. The Issuer will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. Section 12.04. Money for Debt Securities; Payments To Be Held in Trust. If the Issuer shall at any time act as its own Paying Agent with respect of Debt Securities, it will, on or before each Interest Payment Date and the Redemption Date, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the interest and principal so becoming due, respectively, until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. 46 Whenever the Issuer shall have one or more Paying Agents it will, prior to each Interest Payment Date and the Redemption Date, deposit with any such Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto, and (unless any such Paying Agent is the Trustee) the Issuer will promptly notify the Trustee of its action or failure so to act. The Issuer will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of or interest in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Issuer (or any other obligor upon the Debt Securities) in the making of any payment of principal of or interest on the Debt Securities; and (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Issuer Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Issuer or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Issuer or such Paying Agent, and, upon such payment by the Issuer or any Paying Agent to the Trustee, the Issuer or such Paying Agent, as applicable, shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Issuer, in trust for the payment of the principal of or interest on any Debt Security and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Issuer upon Issuer Request, or (if then held by the Issuer) shall be discharged from such trust, and the Holder of such Debt Security shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Issuer as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent before being required to make any such repayment, may at the expense of the Issuer cause to be transmitted in the manner and to the extent provided by Section 1.05, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification, any unclaimed balance of such money then remaining will be repaid to the Issuer. Section 12.05. Officers' Certificate as to Default. The Issuer will deliver to the Trustee, on or before a date not more than four months afterthe end of each fiscal year of the Issuer, so long as Debt Securities are Outstanding hereunder, an Officers' Certificate (one of the signers of which shall be the principal executive, principal financial or principal accounting officer of the Issuer), stating whether or not to the best knowledge of the signers thereof the Issuer is in default in the performance and observation of any of the terms, provisions and conditions of this Indenture, and, if the Issuer shall be in default, specifying all such defaults and the nature thereof of which they may have knowledge. Such compliance shall be determined without regard to periods of grace or notice requirements. 47 Section 12.06. Regulatory Reports. So long as the only Holder of the Debt Securities is Regional Diversified Funding 2004-1 Ltd., the Issuer will deliver to the Holder a copy of the Issuer's quarterly regulatory financial reports promptly following its filing with the Issuer's federal regulatory authority (including each "Consolidated Reports of Condition and Income" on reporting form FFIEC 031 or 041, or the Federal Reserve Board's Forms FRY-6 and FRY-9, or the Office of Thrift Supervision's "Thrift Financial Report" form, as applicable, or such other similar quarterly regulatory reporting form as may be amended and in affect from time to time). ARTICLE XIII. TAX EVENT REDEMPTION Section 13.01. Tax Redemption. If a Tax Event shall occur and be continuing, the Issuer shall have the right, subject to the receipt by the Issuer of prior approval from the Issuer's appropriate federal regulatory authority (if then required under the applicable regulations or guidelines of such regulatory authority) to redeem the Debt Securities, in whole but not in part, at any time within 90 days following the occurrence of such Tax Event (the "Tax Redemption Date"), at the Redemption Price. Section 13.02. Notice of Redemption. In case the Issuer shall desire to exercise the right to redeem the Debt Securities, it shall fix a Tax Redemption Date and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the Tax Redemption Date to the holders of the Debt Securities at their last addresses as the same appear on the Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debt Security shall not affect the validity of the proceedings for the redemption of any other Debt Security. Each such notice of redemption shall specify the CUSIP number, if any, of the Debt Securities to be redeemed, the date fixed for redemption, the Redemption Price at which Debt Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. The Issuer will give the Trustee notice not less than 45 nor more than 60 days prior to the Redemption Date as to the Redemption Price at which the Debt Securities are to be redeemed and the aggregate principal amount of Debt Securities to be redeemed. Section 13.03. Payment of Debt Securities Called for Redemption. If notice of redemption has been given as provided in Section 13.02, the Debt Securities with respect to which such notice has been given shall become due and payable on the Tax Redemption Date and at the place or places stated in such notice at the applicable Redemption Price, together with any Additional Amounts, and on and after said Tax Redemption Date (unless the Issuer shall default in the payment of such Debt Securities at the Redemption Price) interest on the 48 Debt Securities shall cease to accrue. Prior to 10:00 a.m. New York City time on the Tax Redemption Date specified in such notice of redemption, the Issuer will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem the Debt Securities on the Tax Redemption Date at the Redemption Price. On presentation and surrender of such Debt Securities at a place of payment specified in said notice, such Debt Securities shall be paid and redeemed by the Issuer at the Redemption Price. ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 14.01. Indenture and Debt Securities Solely Corporate Obligations. No recourse for the payment of the principal of or interest on any Debt Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer in this Indenture or in any supplemental indenture, or in any such Debt Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Issuer or of any successor corporation of the Issuer, either directly or through the Issuer or any successor corporation of the Issuer, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debt Securities. ARTICLE XV. SUBORDINATION OF DEBT SECURITIES Section 15.01. Agreement to Subordinate. The Issuer, for itself, its successors and assigns, covenants and agrees, and each Holder of a Debt Security likewise covenants and agrees by such Holder's acceptance thereof, that the obligation of the Issuer to make any payment on account of the principal of and interest on each and all of the Debt Securities shall, to the extent and in the manner provided herein, be subordinate and junior in right of payment to the Issuer's obligations to the holders of Senior Indebtedness. In the event of any insolvency, bankruptcy, receivership, conservatorship, reorganization, readjustment of debt, marshalling of assets and liabilities or similar proceedings or any liquidation, dissolution or winding-up of or relating to the Issuer as a whole, whether voluntary or involuntary, all obligations of the Issuer to holders of Senior Indebtedness shall be entitled to be paid in full before any payment, whether in cash, property or otherwise, shall be made on any account of the principal of or interest on any of the Debt Securities. In the event of any such proceeding, after payment in full of all sums owing with respect to Senior Indebtedness, the Holders shall be entitled ratably to be paid from the remaining assets of the Issuer the amounts at the time due and owing on account of unpaid principal of and interest, if any, on the Debt Securities. In addition, in the event of any such proceeding, if any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities (other than securities of the Issuer or 49 any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Debt Securities, to the payment of all Senior Indebtedness at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), including any such payment or distribution that may be payable or deliverable by reason of the payment of any other indebtedness of the Issuer being subordinated to the payment of the Debt Securities, shall be received by the Trustee or the Holders before all Senior Indebtedness is paid in full, such payment or distribution shall be held (in trust if received by such Holders) for the benefit of and shall be paid over to the holders of such Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably, for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. The subordination provisions of the foregoing paragraph shall not be applicable to amounts at the time due and owing on the Debt Securities on account of the unpaid principal of or interest, if any, on the Debt Securities for the payment of which funds have been deposited in trust with the Trustee or any Paying Agent or have been set aside by the Issuer in trust in accordance with the provisions of this Indenture; nor shall such provisions impair any rights, interests, remedies or powers of any secured creditor of the Issuer in respect of any security the creation of which is not prohibited by the provisions of this Indenture. The Holders of Debt Securities and the Trustee, in respect of any claims of the Holders to payment of any principal or interest in respect of any Debt Securities, by their acceptance thereof will be deemed to have waived any right of set-off or counterclaim that such Holders or (subject to Section 6.07) the Trustee, respectively, in such respect, might otherwise have. The Issuer shall give prompt written notice to the Trustee of any insolvency, bankruptcy, receivership, conservatorship, reorganization, readjustment of debt, marshalling of assets and liabilities or similar proceedings or any liquidation, dissolution or winding-up or relating to the Issuer as a whole, whether voluntary or involuntary, or of any default with respect to any Senior Indebtedness that would prevent the Trustee from making any payment in respect of the Debt Securities under this Section. The Trustee, subject to the provisions of Section 6.01, shall be entitled to assume that, and may act as if, no such event has occurred unless a Responsible Officer of the Trustee assigned to the Corporate Trust Office has received at the Corporate Trust Office of the Trustee from the Issuer or any one or more holders of Senior Indebtedness or any receiver or conservator of the Issuer (who shall have been certified or otherwise established to the satisfaction of the Trustee to be such a holder or trustee) written notice thereof. Upon any distribution of assets of the Issuer referred to in this Article, the Trustee and Holders shall be entitled to rely conclusively upon a certificate of the receiver or conservator, or any order or decree entered by a court of competent jurisdiction, or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent 50 thereto or to this Article. In the absence of a certificate from any such liquidating trustee, receiver, conservator, agent or other Person, the Trustee, subject to Section 6.01, shall be entitled to rely conclusively upon a written notice by a Person representing himself or herself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder) as evidence that such Person is a holder of such Senior Indebtedness (or is such a trustee or representative). In the event that the Trustee determines, in its discretion, that further evidence is required with respect to the right of any Person, as a holder of Senior Indebtedness, to participate in any payment or distribution pursuant to this Section, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, as to the extent to which such Person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such Person under this Section, and if such evidence is not furnished, the Trustee may, defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 15.02. Obligation of the Issuer Unconditional and Payment Permitted if No Default. Subject to the provisions of, this Article and the terms of the Debt Securities, nothing contained in this Article or elsewhere in this Indenture is intended to or shall impair, as between the Issuer and the Holders, the obligation of the Issuer, which is absolute and unconditional, to pay to such Holders the principal of and interest on the Debt Securities when, where and as the same shall become due and payable, all in accordance with the terms of the Debt Securities, or is intended to or shall affect the relative rights of such Holders and creditors of the Issuer other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Debt Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness in respect of cash, property or securities of the Issuer received upon the exercise of any such remedy. Section 15.03. Limitations on Duties to Holders of Senior Indebtedness. In the event and during the continuation of any default in the payment of principal of or interest on any Senior Indebtedness beyond any applicable period of grace, or in the event that the maturity of any Senior Indebtedness has been accelerated because of a default, then, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, no payment of principal of or interest, if any, on the Debt Securities, or in respect of any redemption, exchange, retirement, purchase or other acquisition of any of the Debt Securities, shall be made by the Issuer. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.03, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness 51 Section 15.04. Notice to Trustee of Facts Prohibiting Payments. The Issuer shall give prompt written notice to a Responsible Officer of the Trustee at the Corporate Trust Office of any fact known to the Issuer that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV. Notwithstanding any of the provisions of this Article or any other provision of this Indenture, the Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment of funds to or by the Trustee unless and until a Responsible Officer of the Trustee assigned to its Corporate Trust Office shall have received at the Corporate Trust Office writtennotice thereof from the Issuer or from one or more holders of Senior Indebtedness or from any trustee therefor who shall have been certified by the Issuer or otherwise established to the reasonable satisfaction of the Trustee to be such a holder or trustee; and, prior to the receipt of such written notice, the Trustee, subject to the provisions of Section 6.01, shall be entitled in all respects to assume that no such facts exist; provided, however, that if prior to the fifth Business Day preceding the date upon which by the terms hereof any such funds may become payable, or if prior to the third Business Day preceding the date of the execution of instruments pursuant to Section 4.01 acknowledging satisfaction and discharge of this Indenture, the Trustee shall not have received with respect to such funds the notice provided for in this Section, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and/or apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary that may be received by it on or after such date; provided, however, no such application shall affect the obligations under this Article of the Persons receiving such moneys from the Trustee. Section 15.05. Application by Trustee of Moneys Deposited With It. Anything in this Indenture to the contrary notwithstanding, any deposit of a sum by the Issuer with the Trustee or any agent (whether or not in trust) for any payment of the principal of or interest on any Debt Securities shall, except as provided in Section 15.04, be subject to the provisions of Section 15.01. Section 15.06. Subrogation. Subject to the payment in full of all Senior Indebtedness, the Holders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of assets of the Issuer applicable to such Senior Indebtedness until the Debt Securities shall be paid in full, and none of the payments or distributions to the holders of such Senior Indebtedness to which the Holders or the Trustee would be entitled except for the provisions of this Article or of payments over, pursuant to the provisions of this Article, to the holders of such Senior Indebtedness by the Holders or the Trustee shall, as among the Issuer, its creditors other than the holders of such Senior Indebtedness, and the Holders, be deemed to be a payment by the Issuer to or on account of such Senior Indebtedness; it being understood that the provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders, on one hand, and the holders of the Senior Indebtedness, on the other hand. Section 15.07. Subordination Rights Not Impaired by Acts or Omissions of Bank or Holders of Senior Indebtedness. No right of any present or future holders of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to 52 act on the part of the Issuer or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Issuer with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof with which any such holder may have or be otherwise charged. The holders of Senior Indebtedness may, at any time or from time to time and in their absolute discretion, change the manner, place or terms of payment, change or extend the time of payment of, or renew or alter, any such Senior Indebtedness, or amend or supplement any instrument pursuant to which any such Senior Indebtedness is issued or by which it may be secured, or release any security therefor, or exercise or refrain from exercising any other of their rights under the Senior Indebtedness including, without limitation, the waiver of default thereunder, all without notice to or assent from the Holders or the Trustee and without affecting the obligations of the Issuer, the Trustee or the Holders under this Article. Section 15.08. Authorization of Trustee to Effectuate Subordination of Debt Securities. Each Holder of a Debt Security, by his or her acceptance thereof, authorizes and expressly directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to effectuate, as between the Holders and the holders of Senior Indebtedness, the subordination provided in this Article. If, in the event of any proceeding or other action relating to the Issuer referred to in the second paragraph of Section 15.01, a proper claim or proof of debt in the form required in such proceeding or action is not filed by or on behalf of the Holders prior to 15 days before the expiration of the time to file such claim or claims, then the holder or holders of Senior Indebtedness shall have the right to file and are hereby authorized to file an appropriate claim for and on behalf of the Holders. Section 15.09. Right of Trustee to Hold Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article in respect of any Senior Indebtedness at any time held by it in its individual capacity to the same extent as any other holder of such Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Issuer, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not owe or be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Holders, the Issuer or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.07. Section 15.10. Article XV Not to Prevent Defaults (Including Events of Default). The failure to make a payment pursuant to the terms of the Debt Securities by reason of any provision in this Article shall not be construed as preventing the occurrence of a Default (including an Event of Default, if any). 53 Section 15.11. Article Applicable to Paying Agents. The term "Trustee" as used in this Article shall (unless the context shall otherwise require) be construed as extending to and including each Paying Agent appointed by the Issuer and acting hereunder within its meaning as fully for all intents and purposes as if the Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Sections 15.04 and 15.09 shall not apply to the Issuer or any Affiliate of the Issuer if the Issuer or such Affiliate acts as Paying Agent. * * * * * This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 54 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. Matrix Bancorp, Inc. By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- Wells Fargo Bank, National Association, as Trustee, Paying Agent and Securities Registrar By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- 55 EXHIBIT A FORM OF FLOATING RATE SUBORDINATED DEBT SECURITY DUE 2014 [FACE OF SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE ISSUER, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO A "NON-U.S. PERSON" IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, (D) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS REQUIREMENTS OF THE OCC, SUBJECT TO THE ISSUER'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO ANY APPLICABLE REGISTRATION REQUIREMENTS UNDER FEDERAL LAW OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS OR UNLESS SUCH TRANSACTION IS NOT SUBJECT TO ANY SUCH REGISTRATION REQUIREMENTS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE ISSUER, (B) PURSUANT TO AN AVAILABLE EXEMPTION FROM ANY APPLICABLE REGISTRATION REQUIREMENTS OR (C) IF SUCH OFFER, SALE OR OTHER TRANSFER IS NOT SUBJECT TO REGISTRATION UNDER APPLICABLE FEDERAL LAW, SUBJECT TO THE ISSUER'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (B) OR (C) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER. A-1 THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH- SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE SECURITY REGISTRAR AND THE ISSUER SUCH CERTIFICATE AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION. THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE ISSUER, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE ISSUER AND IS NOT SECURED. A-2 Floating Rate Subordinated Debt Security Due 2014 of Matrix Bancorp, Inc. Matrix Bancorp, Inc. (the "Issuer"), for value received, hereby promises to pay to Citigroup Global Markets Inc., (the "Holder"), or registered assigns, the principal sum of Ten Million Dollars ($10,000,000) on May 8, 2014, and to pay interest thereon from February 13, 2004, or the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly in arrears on February 8, May 8, August 8 and November 8 of each year commencing May 8, 2004, at -a variable per annum rate equal to LIBOR (as defined in the Indenture) plus 2.75% (the "Interest Rate") until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at an annual rate equal to the Interest Rate in effect for each such period compounded quarterly subject to the occurrence of a Reset Event. Upon the occurrence of a Reset Event, the applicable LIBOR will be reset on the Reset Date to be equal to the LIBOR applicable on the newly issued securities with the same LIBOR Determination Dates issued by other national banks, federal savings banks, banking organizations, bank holding companies or thrift holding companies who issue LIBOR based 10 year floating rate securities to Regional Diversified Funding 2004-1 Ltd. or another pooled trust preferred vehicle designated by the Initial Purchaser (as defined in the Purchase Agreement). The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. In the event that any date on which the principal or interest is payable on this Debt Security is not a Business Day, then the payment of principal or interest on such date will be made on the next succeeding day that is a Business Day, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debt Security (or one or more Predecessor Securities, as defined in the Indenture) is registered at the close of business on the Regular Record Date for such interest installment, which shall be the fifteenth day prior to an Interest Payment Date whether or not such date is a Business Day. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such Regular Record Date and may be paid to the Person in whose name this Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debt Securities not more than 15 days and not less than 10 days prior to such special record date, all as more fully provided in the Indenture, or in any other lawful manner consistent with the provisions of the Indenture. The principal of and interest on this Debt Security shall be payable at the office or agency of the Trustee (or other Paying Agent appointed by the Issuer) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may, be made at the option of the Issuer by check mailed to the registered holder at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the holder hereof. A-4 This Debt Security is not subject to redemption, repayment, repurchase or retirement prior to maturity unless certain events occur involving U.S. taxation as set forth in the Indenture, and is not subject to any sinking fund. The indebtedness evidenced by this Debt Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, as defined in the Indenture, and this Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debt Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on its, his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. The Issuer waives demand, presentment for payment, notice of nonpayment, notice of protest, and all other notices. This Debt Security shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debt Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. A-5 IN WITNESS WHEREOF, the Issuer has duly executed this certificate. Matrix Bancorp, Inc. By: -------------------------------- Name: ------------------------------- Title: ------------------------------ Dated: February 13, 2004 CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities referred to in the within-mentioned Indenture. Wells Fargo Bank, National Association, not in its individual capacity but solely as Trustee By: ------------------------------------- Authorized Officer Dated: February 13, 2004 A-6 [REVERSE OF SECURITY] This Debt Security is one of a duly authorized series of Debt Securities of the Issuer, all issued or to be issued pursuant to an Indenture (the "Indenture") dated as of February 13, 2004, duly executed and delivered between the Issuer and Wells Fargo Bank, National Association, as Trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the holders of the Debt Securities of which this Debt Security is a part. The summary of the terms of this Debt Security contained herein does not purport to be complete and is qualified by reference to the Indenture. In the event of any conflict between the terms of this Debt Security and the Indenture, the terms of this Debt Security shall be controlling. Upon the occurrence and continuation of a Tax Event, this Debt Security may become due and payable, in whole but not in part, at any time, within 90 days following the occurrence of such Tax Event (the "Tax Redemption Date"), at the Redemption Price. Any redemption pursuant to the preceding paragraph will be made, subject to the receipt by the Issuer of prior approval from the OTS, if then required under applicable capital guidelines or policies of the OTS upon not less than 30 days' nor more than 60 days' notice. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debt Securities may be declared due and payable, and upon such declaration of acceleration shall become due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. Any such redemption will be made, subject to the receipt by the Issuer of prior approval from the OTS. Redemption at maturity is subject to the receipt by the Issuer of prior written approval from the OTS. The Indenture contains provisions permitting the Issuer and the Trustee, (with certain exceptions as provided in the Indenture) with the consent of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby, as specified in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) change the fixed maturity of the Debt Securities or any Interest Payment Date, or reduce the principal amount of any Debt Security or the Interest Rate thereon, or reduce the amount provable in bankruptcy or insolvency pursuant to Section 5.04 of the Indenture, or change the place of payment for any Debt Security, or the currency in which any Debt Security or any interest thereon is payable, or impair or affect the right of any holder of Debt Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Debt Securities, the holders of which are required to consent to any such supplemental indenture or any waiver of compliance with certain provisions of the Indenture or any Event of Defaults thereunder and their consequences. The Indenture contains provisions permitting the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby A-1-1 as provided in the Indenture, on behalf of all of the holders of the Debt Securities, to waive any past Event of Default. Any such waiver by the registered holder of this Debt Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debt Security and of any Debt Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such waiver is made upon this Debt Security. No reference herein to the Indenture and no provision of this Debt Security or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Debt Security at the time and place and at the rate and in the money herein prescribed. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debt Security is transferable by the registered holder hereof on the Security Register of the Issuer, upon surrender of this Debt Security for registration of transfer at the office or agency of the Trustee in Wilmington, Delaware accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer or the Trustee duly executed by the registered holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Debt Securities of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such registration of transfer, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debt Security, the Issuer, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and the Security Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Issuer nor the Trustee nor any Authenticating Agent nor any Paying Agent nor any transfer agent nor any Security Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debt Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Issuer or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Debt Securities are issuable only in registered certificated form without coupons. As provided in the Indenture and subject to certain limitations herein and therein set forth, the Debt Securities are exchangeable for a like aggregate principal amount of Debt Securities of a different authorized denomination, as requested by the holder surrendering the same. All terms used in this Debt Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. A-1-2 THE INDENTURE AND THE DEBT SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH APPLICABLE FEDERAL LAWS AND THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OF SUCH STATE. A-1-3 EX-10.39 4 changeincontrol-kloos.txt Exhibit 10.39 MATRIX BANCORP, INC. CHANGE OF CONTROL AGREEMENT This Change of Control Agreement (the "Agreement") is made and entered into effective as of the 28th day of October, 2003 by and between MATRIX BANCORP, INC. (the "Company"), a Colorado corporation with its principal offices in Denver, Colorado, and David W. Kloos (the "Executive"). W I T N E S S E T H: WHEREAS, the Company wishes to provide certain protections upon a Change of Control (as defined in Section 1.4) to the Executive under the terms and conditions provided in this Agreement; and WHEREAS, the Executive and the Company (collectively referred to as "both parties") understand and agree to the terms and provisions of this Agreement and desire and intend to be bound by such terms and provisions. NOW, THEREFORE, both parties mutually covenant and agree as follows: ARTICLE 1. DEFINITIONS 1.1. "Average Annual Compensation" shall mean the average annual compensation reported in Box 1 on Internal Revenue Service Form W-2 (or its equivalent) for the two preceding calendar years, but excluding amounts realized from the transfer or exercise of non-qualified stock options and amounts realized from any disqualifying dispositions of incentive stock options. 1.2 "Board" shall mean the Board of Directors of the Company. 1.3. "Cause" when used herein concerning the termination of Executive's employment by the Company, shall mean: (a) conviction of, or a plea of nolo contendere by, Executive to a felony or to fraud, embezzlement or misappropriation of funds; (b) the commission of a fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the Company or the Company's subsidiary bank Matrix Capital Bank ("Bank"), that has had a material adverse effect on the Bank or the Company; (c) substantial and direct responsibility for the insolvency of, the appointment of a conservator or receiver for, or the troubled condition, as defined by applicable regulations of the appropriate federal banking agency, of the Company, the Bank, or any insured depository institution subsidiary of the Company; (d) material violation by Executive of any applicable federal banking law or regulation that has had a material adverse effect on the Bank or the Company; (e) violation or conspiracy to violate section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United States Code, or section 1341 or 1343 of such title affecting a federally insured financial institution as defined in title 18 of the United States Code; (f) the willful failure by Executive to adhere to the Company's written policies, which causes a material monetary injury or other material harm to the Company (but only after receiving written notice thereof and being given a reasonable period, not less than thirty (30) days, to cure said performance by taking such reasonable corrective action as shall be reasonably within his power at the time of reference); (g) the willful failure by Executive to substantially perform material stated duties of his position with the Company (but only after receiving written notice thereof and being given a reasonable period, not less than thirty (30) days, to cure said performance by taking such reasonable corrective action as shall be reasonably within his power at the time of reference); (h) the removal or suspension of Executive from the performance of his duties by any bank regulatory authority; (i) appointment of a conservator or receiver for the Company's subsidiary bank, Matrix Capital Bank (the "Bank") by applicable bank regulatory authorities as a result of fraud committed by the Executive; or (j) the declaration by federal bank regulators that the Bank is in a "troubled condition" as a result of fraud committed by the Executive, and while the Bank is in such a "troubled condition" as a result of fraud committed by Executive, the Bank or the Company engages in a Change in Control transaction; provided, however, as a condition precedent to the termination of Executive's employment under subparagraph (b) - (d) of this Section, there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive to be heard before the Board), finding 2 that, in the good faith opinion of the Board, Executive committed such conduct as set forth in the referenced subparagraphs above. 1.4. "Change of Control" shall mean: (a) a change in the ownership of the capital stock of the Company where a corporation, person, or group acting in concert (a "Person"), as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), holds or acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Company which constitutes fifty percent (50%) or more of the combined voting power of the Company's then outstanding capital stock then entitled to vote generally in the election of directors; (b) the persons who were members of the Board of Directors of the Company immediately prior to a tender offer, exchange offer, contested election, or any combination of the foregoing, cease to constitute a majority of the Board of Directors of the Company; (c) the adoption by the Board of Directors of the Company of a merger, consolidation, or reorganization plan involving the Company in which the Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company. For purposes of this Agreement, a sale of all or substantially all of the assets of the Company shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Company that have an aggregate fair market value equal to fifty percent (50%) of the fair market value of all of the gross assets of the Company immediately prior to such acquisition or acquisitions. The sale of the Bank shall be deemed to be a sale of substantially all the assets of the Company; (d) a tender offer or exchange offer is made by any Person which is successfully completed and which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Company's outstanding shares of capital stock or shares of capital stock having fifty percent (50%) or more of the combined voting power of the Company's then outstanding capital stock (other than an offer made by the Company), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; (e) the existence of a Distribution Date, as defined in Section 3(a) of the Rights Agreement dated as of November 4, 2002, between Matrix Bancorp, Inc. and Computershare Trust Company ("Rights Agreement"), and/or any other transaction or 3 series of related transactions occurring which have or would have substantially the same effect as a transaction that would cause a Distribution Date pursuant to Section 3(a) of the Rights Agreement as in effect on the effective date of this Agreement, regardless of whether any provision of the Rights Agreement is subsequently waived or amended to prevent the issuance of Right Certificates (as defined in Section 3 of the Rights Agreement) or whether the Right Certificates are redeemed in connection with the transaction or series; or (f) any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 1.04; provided, however, that a shareholder may make any of the following transfers and such transfer shall be deemed not to be a Change of Control unless such transfer causes a Distribution Date as described in Section 1.04(e) above: (i) to any trust described section 1361(c)(2) of the Internal Revenue Code of 1986, as amended, ("Code") that is created solely for the benefit of any shareholder or any spouse of or any lineal descendant of any shareholder; (ii) to any individual by bona fide gift; (iii) to any spouse or former spouse pursuant to the terms of a decree of divorce; (iv) to any officer or employee of the Company pursuant to any incentive stock option plan established by the shareholders; or (v) to any family member. ARTICLE 2. CHANGE OF CONTROL BENEFITS 2.1. Immediately prior to the effective time of a Change of Control, the Company shall pay Executive, in cash, a lump sum payment equal to two hundred percent (200%) of his Average Annual Compensation, less withholding required to be paid or withheld in accordance with federal, state, or local law or regulation. 2.2. If Executive, prior to a Change of Control, voluntarily resigns or voluntarily severs his employment with the Company for any reason, including death or permanent disability, or is discharged or terminated by the Company for Cause, then the Executive will not be entitled to any benefits under this Agreement. 2.3 Notwithstanding any provision of this Agreement to the contrary, amounts payable under this Agreement shall be made without regard to 4 whether such payment would cause the aggregate of all compensation paid to Executive by the Company to be a parachute payment under Section 280G of the Code. ARTICLE 3. CONFIDENTIALITY The Executive and the Company agree that the terms of this Agreement as well as the discussions preliminary to, or relating to, this Agreement will be kept strictly confidential, except as disclosure is required by law or deemed appropriate by the Company's securities counsel. ARTICLE 4. COMPLETE AND VOLUNTARY AGREEMENT 4.1. The promises of the Company contained in this Agreement are the whole consideration for this Agreement. 4.2. Executive intends to be legally bound by this Agreement and has signed and delivered it voluntarily, without coercion, and with knowledge as to the nature and consequences thereof. 4.3. The Company intends to be legally bound by this Agreement and has signed and delivered it voluntarily, without coercion, and with knowledge as to the nature and consequences thereof. 4.4. It is understood and agreed that this Agreement contains the entire agreement between the parties and supersedes any and all prior agreements, arrangements, or undertakings between the parties relating to the subject matter. No oral understandings, statements, promises or inducements contrary to the terms of this Agreement exist. This Agreement cannot be changed orally and any changes or amendments to this Agreement must be signed by all parties affected by the changes or amendment. ARTICLE 5. TERMINATION OF AGREEMENT This Agreement will terminate upon the earlier of the following: (i) the occurrence of a Change of Control and the payment of the special termination benefit described in Section 2.1, or (ii) the Executive's voluntary resignation or voluntary severance of employment with the Company for any reason, including death or permanent disability, or discharge or termination by the Company for Cause. ARTICLE 6. GENERAL 6.1. Severability. The Executive and the Company agree that each provision of this Agreement shall be enforceable independent of every other provision and in the event any provision of this Agreement is determined to be unenforceable for any reason, the remaining provisions will remain effective, binding, and enforceable. 5 6.2. Successors And Assigns of Company. The Executive and the Company agree that this Agreement shall be fully assignable by the Company to any successor-in-interest resulting from a transaction described in Section 1.4(c), without the consent of the Executive, and this Agreement shall be fully enforceable by any successor or assignee. 6.3. Not Assignable by the Executive. The Executive and the Company agree that this Agreement is personal to the Executive and shall not be assignable, in whole or in part, by the Executive for any reason. The Company covenants and agrees that, in the event of the Executive's death after a Change of Control, the Company will continue to make all payments required by this Agreement to the Executive's estate. In the event of the Executive's death, this Agreement shall be enforceable by the Executive's estate, executors, or legal representatives only to the extent provided in this Agreement. 6.4. Choice of Law. The Executive and the Company agree that the law of the State of Colorado will govern the validity and interpretation of this Agreement. 6.5. Article and Section Headings. The titles or headings of the respective Article or Sections in this Agreement are inserted merely for convenience and shall be given no legal effect. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement this ________day of _______________, 2003. EXECUTIVE: ___________________________________ David W. Kloos THE COMPANY: MATRIX BANCORP, INC. By:________________________________ Name: _____________________________ Title: ____________________________ 6 EX-10.40 5 changeincontrol-mcconnell.txt Exhibit 10.40 MATRIX BANCORP, INC. CHANGE OF CONTROL AGREEMENT This Change of Control Agreement (the "Agreement") is made and entered into effective as of the 28th day of October, 2003 by and between MATRIX BANCORP, INC. (the "Company"), a Colorado corporation with its principal offices in Denver, Colorado, and T. Allen McConnell (the "Executive"). W I T N E S S E T H: WHEREAS, the Company wishes to provide certain protections upon a Change of Control (as defined in Section 1.4) to the Executive under the terms and conditions provided in this Agreement; and WHEREAS, the Executive and the Company (collectively referred to as "both parties") understand and agree to the terms and provisions of this Agreement and desire and intend to be bound by such terms and provisions. NOW, THEREFORE, both parties mutually covenant and agree as follows: ARTICLE 1. DEFINITIONS 1.1. "Average Annual Compensation" shall mean the average annual compensation reported in Box 1 on Internal Revenue Service Form W-2 (or its equivalent) for the two preceding calendar years, but excluding amounts realized from the transfer or exercise of non-qualified stock options and amounts realized from any disqualifying dispositions of incentive stock options. 1.2. "Board" shall mean the Board of Directors of the Company. 1.3. "Cause" when used herein concerning the termination of Executive's employment by the Company, shall mean: (a) conviction of, or a plea of nolo contendere by, Executive to a felony or to fraud, embezzlement or misappropriation of funds; (b) the commission of a fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the Company or the Company's subsidiary bank, Matrix Capital Bank ("Bank"), that has had a material adverse effect on the Bank or the Company; (c) substantial and direct responsibility for the insolvency of, the appointment of a conservator or receiver for, or the troubled condition, as defined by applicable regulations of the appropriate federal banking agency, of the Company, the Bank, or any insured depository institution subsidiary of the Company; (d) material violation by Executive of any applicable federal banking law or regulation that has had a material adverse effect on the Bank or the Company; (e) violation or conspiracy to violate section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United States Code, or section 1341 or 1343 of such title affecting a federally insured financial institution as defined in title 18 of the United States Code; (f) the willful failure by Executive to adhere to the Company's written policies, which causes a material monetary injury or other material harm to the Company (but only after receiving written notice thereof and being given a reasonable period, not less than thirty (30) days, to cure said performance by taking such reasonable corrective action as shall be reasonably within his power at the time of reference); (g) the willful failure by Executive to substantially perform material stated duties of his position with the Company (but only after receiving written notice thereof and being given a reasonable period, not less than thirty (30) days, to cure said performance by taking such reasonable corrective action as shall be reasonably within his power at the time of reference); (h) the removal or suspension of Executive from the performance of his duties by any bank regulatory authority; (i) appointment of a conservator or receiver for the Company's subsidiary bank, Matrix Capital Bank (the "Bank") by applicable bank regulatory authorities as a result of fraud committed by the Executive; or (j) the declaration by federal bank regulators that the Bank is in a "troubled condition" as a result of fraud committed by the Executive, and while the Bank is in such a "troubled condition" as a result of fraud committed by Executive, the Bank or the Company engages in a Change in Control transaction; provided, however, as a condition precedent to the termination of Executive's employment under subparagraph (b) - (d) of this Section, there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive to be heard before the Board), finding 2 that, in the good faith opinion of the Board, Executive committed such conduct as set forth in the referenced subparagraphs above. 1.4. "Change of Control" shall mean: (a) a change in the ownership of the capital stock of the Company where a corporation, person, or group acting in concert (a "Person"), as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), holds or acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Company which constitutes fifty percent (50%) or more of the combined voting power of the Company's then outstanding capital stock then entitled to vote generally in the election of directors; (b) the persons who were members of the Board of Directors of the Company immediately prior to a tender offer, exchange offer, contested election, or any combination of the foregoing, cease to constitute a majority of the Board of Directors of the Company; (c) the adoption by the Board of Directors of the Company of a merger, consolidation, or reorganization plan involving the Company in which the Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company. For purposes of this Agreement, a sale of all or substantially all of the assets of the Company shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Company that have an aggregate fair market value equal to fifty percent (50%) of the fair market value of all of the gross assets of the Company immediately prior to such acquisition or acquisitions. The sale of the Bank shall be deemed to be a sale of substantially all the assets of the Company; (d) a tender offer or exchange offer is made by any Person which is successfully completed and which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Company's outstanding shares of capital stock or shares of capital stock having fifty percent (50%) or more of the combined voting power of the Company's then outstanding capital stock (other than an offer made by the Company), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or (e) a Distribution Date, as defined in Section 3(a) of the Rights Agreement dated as of November 4, 2002, between Matrix Bancorp, Inc. and Computershare Trust Company ("Rights Agreement"), and/or any other transaction or series of related 3 transactions occurring which have or would have substantially the same effect as a transaction that would cause a Distribution Date pursuant to Section 3(a) of the Rights Agreement as in effect on the effective date of this Agreement, regardless of whether any provision of the Rights Agreement is subsequently waived or amended to prevent the issuance of Right Certificates (as defined in Section 3 of the Rights Agreement) or whether the Right Certificates are redeemed in connection with the transaction or series; or (f) any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 1.04; provided, however, that a shareholder may make any of the following transfers and such transfer shall be deemed not to be a Change of Control unless such transfer causes a Distribution Date as described in Section 1.04(e) above: (i) to any trust described section 1361(c)(2) of the Code that is created solely for the benefit of any shareholder or any spouse of or any lineal descendant of any shareholder; (ii) to any individual by bona fide gift; (iii) to any spouse or former spouse pursuant to the terms of a decree of divorce; (iv) to any officer or employee of the Company pursuant to any incentive stock option plan established by the shareholders; or (v) to any family member. ARTICLE 2. CHANGE OF CONTROL BENEFITS 2.1. Immediately prior to the effective time of a Change of Control, the Company shall pay Executive, in cash, a lump sum payment equal to one hundred and fifty percent (150%) of his Average Annual Compensation, less withholding required to be paid or withheld in accordance with federal, state, or local law or regulation. 2.2. If Executive, prior to a Change of Control, voluntarily resigns or voluntarily severs his employment with the Company for any reason, including death or permanent disability, or is discharged or terminated by the Company for Cause, then the Executive will not be entitled to any benefits under this Agreement. 2.3 Notwithstanding any provision of this Agreement to the contrary, amounts payable under this Agreement shall be made without regard to 4 whether such payment would cause the aggregate of all compensation paid to Executive by the Company to be a parachute payment under Section 280G of the Code. ARTICLE 3. CONFIDENTIALITY The Executive and the Company agree that the terms of this Agreement as well as the discussions preliminary to, or relating to, this Agreement will be kept strictly confidential, except as disclosure is required by law or deemed appropriate by the Company's securities counsel. ARTICLE 4. COMPLETE AND VOLUNTARY AGREEMENT 4.1. The promises of the Company contained in this Agreement are the whole consideration for this Agreement. 4.2. Executive intends to be legally bound by this Agreement and has signed and delivered it voluntarily, without coercion, and with knowledge as to the nature and consequences thereof. 4.3. The Company intends to be legally bound by this Agreement and has signed and delivered it voluntarily, without coercion, and with knowledge as to the nature and consequences thereof. 4.4. It is understood and agreed that this Agreement contains the entire agreement between the parties and supersedes any and all prior agreements, arrangements, or undertakings between the parties relating to the subject matter. No oral understandings, statements, promises or inducements contrary to the terms of this Agreement exist. This Agreement cannot be changed orally and any changes or amendments to this Agreement must be signed by all parties affected by the changes or amendment. ARTICLE 5. TERMINATION OF AGREEMENT This Agreement will terminate upon the earlier of the following: (i) the occurrence of a Change of Control and the payment of the special termination benefit described in Section 2.1, or (ii) the Executive's voluntary resignation or voluntary severance of employment with the Company for any reason, including death or permanent disability, or discharge or termination by the Company for Cause. ARTICLE 6. GENERAL 6.1. Severability. The Executive and the Company agree that each provision of this Agreement shall be enforceable independent of every other provision and in the event any provision of this Agreement is determined to be unenforceable for any reason, the remaining provisions will remain effective, binding, and enforceable. 5 6.2. Successors And Assigns of Company. The Executive and the Company agree that this Agreement shall be fully assignable by the Company to any successor-in-interest resulting from a transaction described in Section 1.4(c), without the consent of the Executive, and this Agreement shall be fully enforceable by any successor or assignee. 6.3. Not Assignable by the Executive. The Executive and the Company agree that this Agreement is personal to the Executive and shall not be assignable, in whole or in part, by the Executive for any reason. The Company covenants and agrees that, in the event of the Executive's death after a Change of Control, the Company will continue to make all payments required by this Agreement to the Executive's estate. In the event of the Executive's death, this Agreement shall be enforceable by the Executive's estate, executors, or legal representatives only to the extent provided in this Agreement. 6.4. Choice of Law. The Executive and the Company agree that the law of the State of Colorado will govern the validity and interpretation of this Agreement. 6.5. Article and Section Headings. The titles or headings of the respective Article or Sections in this Agreement are inserted merely for convenience and shall be given no legal effect. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement this ________day of _______________, 2003. EXECUTIVE: ___________________________________ T. Allen McConnell THE COMPANY: MATRIX BANCORP, INC. By:_________________________________ Name: ______________________________ Title: _____________________________ 6 EX-10.41 6 branchpurchase.txt Exhibit 10.41 BRANCH PURCHASE AND DEPOSIT ASSUMPTION AGREEMENT THIS BRANCH PURCHASE AND DEPOSIT ASSUMPTION AGREEMENT (the "Agreement") is made and entered into as of this 30th day of January, 2004 (the "Agreement Date"), among the following parties (the "Parties"): 1) Matrix Capital Bank, a federal savings bank organized under the laws of the United States of America (the "Seller"); and 2) FIRSTBANK, a federal savings bank organized under the laws of the United States of America ("FIRSTBANK" or "Purchaser"). W I T N E S S E T H WHEREAS, Purchaser desires to purchase certain of the assets and to assume certain of the deposit and other liabilities of Seller's branch office facilities located in Las Cruces, New Mexico and Seller desires to sell such assets and to have such liabilities assumed; NOW THEREFORE, in consideration of the mutual promises and conditions herein set forth, the parties hereto agree as follows: Section 1. Definitions: For the purpose of this Agreement, the terms defined in this Section 1 shall have the meanings assigned to them herein: "Adjustment Date" means the fifth Business Day after the end of the first full calendar month following the Closing Date. "Branch or Branches" means (as the context requires) 1) the Branch Premises, 2) Seller's core banking activities and the assets specifically described in this Agreement arising from, accounted for on the books of, or relating most directly to, the Branch Premises as distinguished from the operation of Seller's other locations (whether or not related documents are maintained or accounting entries are made at the Branch Premises), or 3) both of the foregoing. "Branch Premises" means (collectively or individually, as the context requires) 1) Seller's full-service banking facilities located at 277 E. Amador and Annex and 3090 Roadrunner Parkway, Las Cruces, Dona Ana County, New Mexico and the lessor's interest in the Leases at the facilities more particularly described in Schedule 6.06, and 2) Seller's Automated Teller Machine located in leased facilities at Picacho Hills Country Club, 6861 Via Campestra, Las Cruces, Dona Ana County, New Mexico. "Business Day" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New Mexico, or is a day on which banking institutions located in New Mexico are authorized or required by law or other governmental action to close. "Deposit" or "Deposits" shall have the meaning set forth in Section 3(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(1), including, without limitation, and as further defined in Section 3.01, all uncollected items included in the depositors' balances and credited on the books of the Seller at the Determination Date. 1 "Determination Date" means the Seller's close of business on the last Business Day preceding the Closing Date. (The daily statement of Seller's Branches reflecting the amounts of various assets and liabilities as of the close of business on the Determination Date on a full accrual basis shall determine with respect to certain items the exact balance being transferred to Purchaser, as more specifically set out below). "Equipment" means those improvements, additions, alterations and installations constituting all or a part of the Branch Premises, on and after the Agreement Date, including, without limitation, the automated teller machines presently in use at or in connection with the Branches, artwork, carpeting, furniture, shelving, and office supplies (other than office supplies with Seller's name or trademark), all as more specifically described on Schedule 6.06. As specified in Section 6.06, Schedule 6.06 hereto shall be delivered by Seller to Purchaser on or before the 10th calendar day following the Agreement Date. "Fixtures" means those improvements, additions, alterations and installations constituting all or a part of the Branch Premises on and after the Agreement Date, all as more specifically described on Schedule 6.06. "Furniture" means those improvements, additions, alterations and installations constituting all or a part of the Branch Premises on and after the Agreement Date, all as more specifically described on Schedule 6.06. "Leases" means the real property leases entered into between Seller and the tenants at the Branch Premises specifically described on Schedule 4.06. "Loans" means all of the loans included in the books and records of Seller which were originated by the Branches. `Transferred Loan" is defined in Section 2.03. "Loan Discount" shall have the meaning set forth in Section 2.03. "Real Estate Properties" means the real estate and improvements located in Las Cruces, New Mexico at 277 E. Amador and Annex and 3090 Roadrunner Parkway, all as more specifically described in Exhibit A hereto. "Contracts" have the meaning given them in Section 4.04. 2 Section 2. Purchase and Sale of Assets. 2.01 Assets to be Purchased - Purchase Price. Subject to the terms and conditions provided here, Seller agrees to sell to Purchaser, and Purchaser agrees to purchase the Real Estate Properties, the Leases, the Furniture, the Fixtures, the Equipment, the Contracts, Cash on Hand at the Branches, and the Transferred Loans (collectively, the "Assets") as they exist on the Closing Date. The total purchase price for the Assets, subject to adjustment on the Determination Date in accordance with Section 5.03, shall be as follows ("Purchase Price"): Assets Purchase Price Leases and Furniture, $ 227,000 Fixtures and Equipment Transferred Loans As set forth in Section 2.03. Cash on Hand Face amount Real Estate As set forth in Section 2.07 Purchase Premium Determined pursuant to section 2.02 Contracts Assumption of the Contracts as specified in Section 3.05 2.02 Calculation of Purchase Premium. The "Purchase Premium" shall be determined by multiplying (A) the average of the daily total Deposits at the Branches (but, for purposes of determining the Purchase Premium only, excluding specifically from the definition of Deposits any brokered deposits, municipal, state or public school deposits) during the twenty (20) calendar day period immediately preceding the Determination Date times (B) 6.5% (as stated in the letter of intent). 2.03 Purchase Price for Transferred Loan and Loan Discount. The purchase price for each Transferred Loan (including, for purposes of this Agreement, the Loan Discount described below, the "Transferred Loan Purchase Price") shall be (A) 100% of the unpaid principal balance of each such Transferred Loan on the Determination Date plus (B) accrued and unpaid interest on such Transferred Loan through the Determination Date.; provided that, with respect to each Transferred Loan, Seller shall provide Purchaser a discount (the "Loan Discount") equal to (A) .75% multiplied by (B) the unpaid principal balance of each such Transferred Loan as of the Determination Date. In no event shall the Loan Discount with respect to all of the Transferred Loans be greater than $170,000. The Loan Discount is to cover prior General Valuation Allowance (GVA) for future losses established on the total of the Transferred Loans on the books of the Seller to meet the requirements of Generally Accepted Accounting Principles, and general and specific allowance requirements. 3 2.04 Allocation of Purchase Price. The Purchase Price shall be allocated to the Assets based upon the schedule set forth above. Purchaser and Seller shall jointly participate in preparing Internal Revenue Service Form 8594 ("Asset Acquisition Statement under Section 1060") to be filed by Purchaser to reflect this allocation. 2.05 Acquisition of Loans. Purchaser has had the opportunity to make an extensive examination of the credit files containing documentation with respect to all of the Loans. At least ten (10) Business Days prior to the Determination Date, Seller shall provide Purchaser with a list of all Loans and Purchaser shall mark on such list all Loans which Purchaser desires to exclude from the purchase on the Closing Date. All Loans so included in the purchase are referred to herein as the "Transferred Loans" and each is referred to herein as a "Transferred Loan." Thirty days after the Closing Date Purchaser may request Seller to repurchase any Transferred Loan. Seller agrees to make such repurchase, by wire transfer within two (2) business days following receipt of Seller's request. The repurchase price for each such repurchased Transferred Loan shall be equal to the Transferred Loan Purchase Price for the Transferred Loan in question. 2.06 Acquisition of Real Estate. At Closing, Purchaser shall purchase from Seller and Seller shall sell to Purchaser the Real Estate Properties. The terms upon which such purchase and sale shall occur are set forth in Exhibit A hereto. 2.07. Real Estate Purchase Price. The purchase price for the Real Estate Properties shall be equal to the assessed value of the properties as determined by the Dona Ana County Assessor for year 2002, plus a premium of three and one half percent (3.5%) of such assessed value, which equals an acquisition price of: (1) $ 2,215,521 ------------------ (2) 353,763 ------------------ Total $ 2,569,284 ================== Section 3. Assumption of Liabilities; No Assumption of Other Liabilities. 3.01 Deposit Liabilities. Seller agrees to assign to Purchaser, and Purchaser agrees to assume on the Determination Date all obligations and liabilities of Seller to be performed, satisfied, and discharged on and after the Determination Date with respect to Deposits carried on the books of the Branches and existing at the Determination Date and owed to the person, corporations and other entities (including Deposits held by Individual Retirement Accounts) named as the respective depositors in the books of the Branches at the Determination Date, including, without limitation, (a) all demand deposits, but excluding outstanding cashier's checks, other official checks of Seller, and (b) all time and savings deposits, including accrued and unpaid interest thereon computed through the Determination Date, but excluding any brokered certificates of deposits of Seller (the items included in (a) and (b) above being collectively, the "Deposits"). The term "Deposits" shall not include deposit accounts, if any, that, by law or contract, cannot either be transferred by Seller or assumed by Purchaser. Seller also agrees to transfer to Purchaser all signature cards, deposit contracts, canceled checks and other records required to be retained related to the Deposits in the possession of Seller. 3.02 Payment of Checks, Drafts and Orders. Purchaser agrees to pay all properly payable checks, drafts and withdrawal orders presented to it by mail, over its counters, or through clearing houses by depositors whose accounts are carried on the books of the Branches, whether drawn on the check or draft forms provided by Seller or by Purchaser, to the extent that the assumed 4 balances of Deposits to the credit of the respective makers or drawers shall be sufficient to permit the payment thereof, and in all other respects to discharge, in the usual course of the banking business, the duties and obligations of Seller with respect to the balances due and owing with respect to the Deposits. 3.03 Interest on Accounts Assumed. Purchaser agrees to pay interest on all interest bearing Deposits assumed by it in accordance with the terms thereof at the declared rate established by Seller, subject to the individual contracts relating to such Deposits and Purchaser's right to change applicable interest rates as permitted or required by law. 3.04 Assumption of Leases. Purchaser shall assume and fully discharge as they become due all liabilities and obligations arising after the Determination Date under the Leases. 3.05 Assumption of Contracts. Purchaser shall assume and fully discharge as they become due all liabilities and obligations arising after the Determination Date under the Contracts. 3.06 No Other Liabilities Assumed. Purchaser shall not assume any liabilities of Seller, or any kind or description, known or unknown, disclosed or undisclosed, except for the liabilities described in this Agreement. Those liabilities and obligations of Seller assumed by Purchaser under this Agreement are referred to herein as the "Assumed Obligations" or "Assumed Liabilities". Section 4. Taxes; Pro-Rations and Reimbursements. 4.01 Sales Taxes. Purchaser shall pay and remit all sales taxes or use taxes which, by law, become due and payable by reason of the consummation of the transaction contemplated hereby. 4.02 Ad Valorem Taxes. Ad valorem taxes and personal property taxes accruing or assessed with respect to the Assets for the calendar year which includes the Closing Date shall be pro-rated between Purchaser and Seller as of the Closing Date. If the amount of such taxes cannot be ascertained at Closing, such pro-ration shall be done on the basis of taxes assessed for calendar year 2003. 4.03 Utilities. The net actual payment necessary to pro-rate utility bills (including without limitation monthly statements for electricity, natural gas, water, sewer, trash collection and telephone) shall be made by Purchaser or Seller, as applicable, on the Adjustment Date, but with the pro-ration calculated as of the Closing Date. 4.04 Contracts. All equipment, maintenance, supplies and material, and service agreements relating to the Branches ("Contracts") are listed on Schedule 6.07. Seller shall assign to Purchaser, as of the Closing Date, any of Seller's rights under the Contracts. 4.05 Leases. All payments under Leases shall be prorated as of Closing Date. 4.06 Rental Income. Seller will assign all building leases relating to the Real Estate Properties to Purchaser. All tenant deposits covering such items as first and last months rentals plus any damage deposits held in escrow will be assigned to the Purchaser. Schedule of tenant leases are detailed in Schedule 4.06. 5 4.07 Safe Deposit Boxes. Box income will be prorated to Purchaser based on the Determination Date. 4.08 Employees. (a) On the Closing Date, Purchaser shall offer employment at the Branches to all employees of Seller employed at the Branches at base wages and salaries no less favorable than the wages and salaries currently being paid by Seller to such employees. To the extent consistent with Purchaser's existing structure for comparable positions and comparable officer titles and its current policies regarding officer titles, such employees shall be offered positions with responsibilities and officer titles comparable to those they currently have with Seller. All such employees accepting employment with Purchaser are hereafter called the "Continuing Employees". Purchaser shall cause all Continuing Employees to have the same benefits provided by Purchaser generally to employees of Purchaser. Continuing Employees will be provided with credit for time served with respect to Purchaser's employee Profit Sharing and Employee Stock Ownership Plan. In addition, Purchaser shall permit each Continuing Employee the option to obtain past service credit for accrued vacation as of the Determination Date or to accept payment from the Seller for such accrued vacation leave as of the Determination Date (in which case, no past service credit shall be provided by Purchaser to the Continuing Employee). In the event that a Continuing Employee chooses to accept from Purchaser past service credit for his or her accrued vacation as of the Determination Date, then Seller shall pay to Purchaser the amount, plus applicable payroll taxes, that otherwise would have been payable to such Continuing Employee had he or she chose to be paid for such accrued vacation. (b) Seller agrees that it shall render to Purchaser commercially reasonable assistance in soliciting employees of the Branches to accept employment with Purchaser, including but not limited to permitting Purchaser to immediately contact and solicit such employees. Purchaser acknowledges that Seller has made no assurances to Purchaser with respect to such employees' accepting positions with Purchaser and incurs no liability to Purchaser in rendering the assistance referred to herein. (c) Purchaser shall have no liability to any of Seller's current employees for any accrued wages, sick leave, vacation time, pension obligations or any other employee benefits. Purchaser will have no liability and will not assume obligations under any "employee benefit plan", through the Closing Date (as such term is defined in the Employee Retirement Security Act of 1974, as amended) of Seller or any other obligations (including, without limitation, severance obligations) of Seller to the employees of the Branches. Seller will be responsible for fulfilling, and resolving any disputes concerning its liabilities or obligations (including, without limitation, severance obligations) to the employees at the Branches under any such employee benefit plan or otherwise. All wages and salaries, workers' compensation payments, vacation pay and social security and unemployment taxes of employees of the Branches shall be paid by Seller for the period to and including the Determination Date. Seller affirms that there are no employment contracts with any Continuing Employees in effect at Closing Date. 6 Section 5. Closing. 5.01 Date of Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place at a mutually agreed time and place on a Business Day within 30 days following the satisfaction (or waiver, when appropriate) of all conditions, including the receipt of all required regulatory approvals for the transactions provided for herein, and the expiration of any statutory waiting periods applicable thereto. The date of Closing is referred to herein as the "Closing Date". The effective time of the Closing for the purpose of final calculation of balances of Assets transferred, liabilities assumed, and Deposits and accrued interest thereon shall be as of Seller's normal close of business on the Determination Date. Purchaser shall take possession of the Branch Premises and shall open branch offices at the Branch Premises effective at the normal closing of business on the Closing Date notwithstanding the fact that the Closing may not be concluded until later that day. Provided that the Closing is in fact consummated on the Closing Date, all banking transactions occurring (deposits, withdrawals, receipt of loan payments, accrual of interest, etc.) with respect to any Assets purchased or Deposits assumed shall be treated (as between Purchaser and Seller) as having occurred subsequently to the Closing and shall become part of the operations of the Purchaser. 5.02 Actions of Parties at Closing. (a) At Closing, Seller Shall: (1) Execute and deliver to Purchaser in recordable form an assignment of the Leases together with any required consents and any assignments reasonably necessary in order to evidence the sale to Purchaser, without recourse, of the Transferred Loans and any collateral relating thereto; (2) Execute and deliver to Purchaser such bills of sale, endorsements, assignments and other instruments of transfer as reasonably required in order to evidence ownership of the Assets in Purchaser, together with any required consents; (3) Deliver to Purchaser, all files, documents, papers, agreements and other records pertaining to the Assets transferred and the Assumed Liabilities; (4) Deliver the Cash on Hand to Purchaser; (5) Deliver physical possession of the Branch Premises to Purchaser, including delivery of keys, security codes, etc; (6) Pay to Purchaser by wire transfer in same day funds a sum of money equal to the amount of the Deposits assumed by Purchaser pursuant to Section 3 (including interest accrued through the Determination Date) and execute, acknowledge and deliver to Purchaser all certificates and other documents required to be delivered to Purchaser at the Closing pursuant to the terms of this Agreement. (b) At the Closing, Purchaser shall: (1) Pay to Seller the Purchase Price; (2) Execute, acknowledge and deliver to Seller such instruments and documents as reasonably required to evidence Purchaser's assumption of the Assumed Liabilities (3) Execute, acknowledge and deliver to Seller all certificates and other documents required to be delivered to Seller at the Closing pursuant to the terms of this Agreement. 5.03 Adjustment Date: The payments which are required to be made on the Closing Date shall be made pursuant to a preliminary settlement statement agreed to by the parties, substantially in the form of Schedule 2.0 hereto. On the Adjustment Date, Seller and Purchaser shall make an adjusting settlement between each other as of the Determination Date with regard to pro-rations and other adjustments provided in this Agreement and with regard to any errors, omissions or miscalculations with regard to amounts paid by either party on the Closing Date or subsequently; notwithstanding the foregoing, Purchaser and Seller shall make settlement with each other as often 7 as each Business Day, if necessary, in order to reimburse the other party for cashier's checks or customer checks presented to and paid by one party but required to be paid by the other party pursuant to this Agreement. Section 6. Representations and Warranties of Seller. Seller represents and warrants to Purchaser as follows: 6.01 Organization of Seller. Seller is a federal savings bank duly organized, validly existing under the laws of the United States and has all requisite corporate power and authority and possesses all governmental and other permits, licenses, approvals and other authorizations to own or lease its properties and to carry on its business as now being conducted. Seller is an insured bank as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. 6.02 Authority; Binding Effect. Seller has full right and authority to enter into this Agreement and subject to receipt of any applicable regulatory approvals, to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Seller and no other corporate acts or proceedings on the part of Seller are necessary to authorize this Agreement or the transaction contemplated hereby; and this Agreement constitutes the valid and legally binding obligation of Seller enforceable against Seller in accordance with its terms. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the compliance by Seller with any of the provisions hereof will not conflict with, result in a breach of, or entitle any party to terminate or call a default with respect to any contract or instrument to which the Seller and the Assets or liabilities assumed hereunder are subject. 6.03 Financial Records. All books and records of the Branches have been (and will be as of the Closing Date) kept in accordance with generally accepted accounting principles and in accordance with all applicable record retention periods under federal or state law in all material respects and the financial records of the Seller as of November 30, 2003 present fairly in all material respects the financial position of the Branches and are complete, current, and accurate in all material regards as of the date(s) so stated. 6.04 Liability and Obligations. At the Agreement Date, the Branches had no obligation or liability, whether accrued, absolute, contingent or otherwise, which was material to the financial condition, business or obligations of the Branches or which when combined with all similar obligations or liabilities, would have been material, which has not been reflected in the Branches' financial records, or in the schedules referred to herein, nor does there exist a set of circumstances resulting from transactions effected or events occurring with respect to the Assets on or prior to the Agreement Date, or from any action omitted to be taken during such period which, to the knowledge of Seller, could reasonably be expected to result in any such material obligation or liability, except as disclosed in the financial records or in the schedules referred to herein. 6.05 Evidence of Indebtedness. Each note or other instrument evidencing a Transferred Loan and any related security agreement or instruments (including without limitation a guaranty or similar instrument) is (A) to the knowledge of Seller, a legal, valid and binding obligation of the obligor named therein, enforceable against such obligor in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, 8 reorganization, moratorium and similar laws from time to time in effect), (B) has not been participated out to another lender, and (C) all actions necessary to perfect any related security interest have been taken or will be taken by Seller in a timely manner. To the best knowledge of Seller, no Transferred Loan is subject to any defense, offset or counterclaim and each Transferred Loan complies with all applicable laws and regulations known to Seller. To the knowledge of Seller there are no valid claims for offset or other defense (including, but not limited to usury) by any such obligor based on any action or omission of Seller. 6.06 Physical Properties. Schedule 6.06, to be delivered by Seller to Purchaser within ten (10) calendar days following the execution of this Agreement, provides an itemized list of all items of Furniture, Fixtures, Equipment, and other Assets owned by Seller and located at the Branches as of the Agreement Date, except those items, if any, of Furniture, Fixtures and Equipment listed in Schedule 6.06 which are not being acquired by Purchaser. Seller owns each such item free and clear of all liens, pledges, security interests, charges, burdens, encumbrances, options and adverse claims. The operation of the property and business of Seller at the Branches in the manner in which they were previously operated or are now operated does not, to the knowledge of Seller, violate any existing or proposed environmental laws, zoning ordinances, building codes or municipal regulations in such a way as could, if such laws, ordinances or regulations were enforced, result in any material impairment of the use of the Branches for the purpose for which they are now operated. Seller is aware of no existing or contemplated condemnation proceedings affecting or relating to the Branch premises and Seller has paid or will pay in full all bills and invoices for labor and materials arising from the ownership and operation of the Branch premises and such Branch premises shall be in good operating condition and free of all liens and claims. 6.07. Agreements, Contracts and Commitments. Schedule 6.07 to this Agreement lists specifically all Contracts to which Seller is a party or by which Seller or any of the Assets is in any way affected or bound. All such Contracts are legally valid and binding and in full force and effect, and neither Seller nor, to the knowledge of Seller, any other party is in default thereunder. None of the rights of Seller thereunder will be impaired by the consummation of the transactions contemplated hereby. 6.08. Taxes. (a) There are no tax liabilities of Seller that could become payable by Purchaser as a result of the fact that Purchaser will be the transferee of the Assets (except only ad valorem taxes, personal property taxes, real estate taxes, which are not yet due and payable, and which are to be prorated pursuant to Section 4. (b) With respect to all interest bearing accounts assigned to Purchaser, the records of Seller transferred to Purchaser contain or will contain all information and documents (including without limitation properly completed Forms W-9) necessary to comply in all material respects with all information reporting and tax withholding requirements under federal and state laws, rules and regulations, and such records identify with specificity all accounts subject to backup withholding under the Internal Revenue Code. (c) All federal, state, and local payroll, withholding, property, sales, use and transfer taxes, if any, which are due and payable by Seller relating to the operation of the Branches on or prior to the Closing Date shall be paid in full or Seller shall have made appropriate provision for such payment in accordance with ordinary business practices. 9 6.09 Compliance with Laws. Seller is not in violation of any law, statute, rule, governmental regulation or order, or court decree or judgment which violation would reasonably be expected to have a material adverse effect on the Assets, the liabilities to be assumed under this Agreement, or the business and operations of the Branches. 6.10 Litigation or Other Proceedings. There is no suit, action or legal, administrative, arbitration or other proceedings or governmental investigation pending or threatened, which would reasonably be expected to have a material adverse financial effect on Seller, the Assets, the liabilities assumed or the business and operations of the Branches. 6.11 Inchoate Claims. Seller has no notice or knowledge of any agreement, claim or controversy, relating to Seller either directly or indirectly, which would reasonably be expected to result in a suit, action, proceeding or other formal procedure against Seller relating to the Assets, the liabilities assumed, or the business and operations of the Branches, nor knowledge of any circumstances which might give rise to such claim or controversy other than actions taken by Seller in the normal course of banking business. 6.12 Broker's or Finder's Fee. There is no valid claim against Seller by any broker or other third party for any finder's fee, brokerage commission or other similar payment related to the transactions contemplated hereby. 6.13 Insurance. Seller has in full force and effect policies of insurance and fidelity bonds of type and in amounts that are customary in the banking industry for an institution of comparable size and Seller will continue all of such insurance and bonds in full force and effect and will give all notices and present all claims thereunder in due and timely fashion up and to the Closing Date. 6.14 Accident and Claims. There have been no accidents or similar events relating to the Branches which have resulted, or may result, in claims against Seller which are not either fully covered by insurance, or by reserves, or other provisions created, or made, for such claims. 6.15 Employment Agreements. Seller is not a party to (i) any written employment agreement, (ii) any oral or written management agreement relating to the Real Estate Properties, or (iii) any oral employment agreement with personnel of the Branches which cannot be terminated at the election of Seller on not more than thirty (30) days notice. 6.16 Hazardous Substances. The Branches and the use and operation of the Branches are in compliance with all federal, state or local laws, ordinances or regulations relating to industrial hygiene and to the best knowledge of the Seller the environmental conditions on, under or about the Branches including without limitation air, soil, surface water and groundwater conditions are in material compliance with all federal, state or local laws, ordinances or regulations relating to environmental conditions. To the best knowledge of Seller, there are no environmental, health or safety conditions on, under or about the Branches, including without limitation the air, soil, surface water and groundwater that would materially interfere with the conduct of the business of the Branches or materially adversely affect the Branches, the Assets, or the assumed liabilities. To the best of the knowledge of Seller, neither Seller nor any third party, including, without limitation, Seller's predecessors in title to the Branches, have used or installed any underground tanks or gas or oil wells, or used, generated, manufactured, treated, stored, 10 placed, deposited, discharged, released or disposed of on, under or about the Branches or transported to or from the Branches any Hazardous Substances (as defined below). To the best knowledge of the Seller, the Branches have never been used as a dump or landfill site, there are no asbestos-containing materials in the Branches or incorporated into the improvements in violation of applicable laws, there are and have been no polychlorinated biphenyl ("PCB")-containing electrical transformer fluorescent light fixture with ballasts or other PCB Item, as defined at 40 C.F.R. Section 761.3 or any PCB-containing fluid on the Branches, or to the best knowledge of the Seller are there or have there ever been any investigations, notices or violations, requests for information or claims of any kind asserted or threatened to be asserted by any person, including any federal, state or local governmental agency relating to the storage, disposal, discharge or release of any Hazardous Substances. For purposes of this Agreement, "Hazardous Substances" shall mean any flammable, explosive, radioactive material, hazardous waste, toxic substance or related material and any other substance or material defined or designated as a hazardous or toxic substance, material or waste by any federal, state or local law or environmental statute, regulation or ordinance presently in effect and shall include, without limitation, (i) those substances included within the definition of "hazardous substances", "hazardous materials", toxic substances", "solid waste" in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601, et seq. the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Sections 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq., and the Hazardous Materials Transportation Act, 49 U.S.C Sections 1801 et seq., and in the regulations promulgated pursuant to said laws; (ii) those substances listed in the United States Department of Transportation Table (49 D.F.R. 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances (40 C.F.R. Part 302 and amendments thereto); (iii) such other substances, materials and wastes which are regulated under applicable local, state or federal law, or the Unites States government, or which are classified as hazardous or toxic under federal, state or local laws or regulations; (iv) any material, waste or substance which is or contains (i) petroleum, (ii) asbestos or (iii) PCB, or which is designated as a "hazardous substance" pursuant to Section 311 of the Clear Water Act, 33 U.S.C Sections 1251 et seq. (33 U.S.C. ss.1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. ss.1317), provided, however, that the term shall not include those substances that are of a character and quantity that are reasonably associated with the use of the Real Estate Properties as bank branches. 6.17 Deposits. Attached hereto as Schedule 6.17 is a true and accurate schedule of all Deposits (excluding brokered CDs, but including IRA's), and related information, which are domiciled at the Branches, prepared as of a date within 10 calendar days of the Agreement Date (which Schedule shall be updated at and as of the Determination Date and, as updated, shall be true and accurate as of such date). The Deposits are insured by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation to the fullest extent permitted by federal law. To the best knowledge of the Seller, the Deposits were solicited and currently exist in material compliance with all applicable requirements of federal, state and local laws and regulations promulgated thereunder (for purposes of this clause, Deposit would not be in material compliance if the non-compliance subjects the depository institution to any penalty or liability). The Deposits (i) are in all material respects genuine and enforceable obligations of Seller, except to the extent enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditor's rights generally and by general principles of equity and (ii) were acquired in the ordinary course of Seller. 11 6.18 Tenant Leases. (a) The Leases are valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, subject as to enforcement to bankruptcy, insolvency, reorganization, moratorium, laws governing fraudulent conveyance or equitable subordination principles and other laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. To the best knowledge of Seller, the Leases are valid and binding obligations of the lessees, enforceable against the lessees in accordance with their terms, subject as to enforcement to bankruptcy, insolvency, reorganization, moratorium, laws governing fraudulent conveyance or equitable subordination principles and other laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. To the best knowledge of Seller, the lessees under the Leases are not in default under, and no event has occurred which, with notice or the lapse of time or both would constitute a default by any lessee under the Leases. Seller has not previously received notice of any event of default, or event or condition which with the giving of notice or lapse of time, or both, would constitute a default under the Leases. Seller has delivered a true and correct copy of the Leases to Purchaser. The Leases are the only agreements between the Seller and the respective tenants thereunder relating to the Branch Premises. The respective Leases represent the entire agreement between the respective tenants thereunder and the Seller with respect to the Branches. All payments of rent or other monies required to be paid to the Seller pursuant to the Leases have been paid. The terms of the Leases permit the premises subject to the Leases to be used as commercial offices only. Lease summaries are detailed herein as Schedule 4.06. (b) Seller is not entitled to, and has made no agreements with the tenants under the Leases, or tenants' agents, employees or representatives, concerning free rent, or other type of rental concession including, without limitation, lease support payments or lease buyouts. 6.19 FIRPTA. Seller is not a "foreign person" within the meaning of the Internal Revenue Codess.1445. 6.20 Closing Date. Each representation and warranty made by Seller in this section shall be deemed to be made on and as of the date here of and as of the Closing Date. 6.21 Representation Not Misleading. No representation or warranty by the Seller contained in this Agreement, nor in any exhibit or schedule furnished to the Purchaser by the Seller under and pursuant to, this Agreement contains or will contain as of the date made and on the Closing Date any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which it was or will be made, not misleading. 6.22 Consents and Approvals. Except for any applicable regulatory approvals, no consents, approvals, filings or registrations with any third party or public body or agency are required in connection with Seller's consummation of this transaction. Section 7. Representations and Warranties of Purchaser. Purchaser represents and warrants to Seller as follows: 7.01 Organization of Purchaser. Purchaser is a federal savings bank, duly organized, validly existing under the laws of the United States of America and has all corporate power and authority and possesses all governmental and other permits, licenses, approvals and other authorizations to own or lease 12 its properties and to carry on its business as now being conducted. Purchaser is an insured bank as defined in the Federal Deposit Insurance Act and applicable regulations relating thereto. 7.02 Authority; Binding Effect. Purchaser has full right and authority to enter into this Agreement and, subject only to obtaining regulatory approvals, to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Purchaser; no other corporate acts or proceedings on the part of Purchaser are necessary to authorize this Agreement or the transactions contemplated hereby; and this Agreement constitutes the valid and legally binding obligation of Purchaser enforceable against Purchaser in accordance with its terms. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the compliance by Purchaser with any of the provisions hereof will not conflict with, result in a breach of, or entitle any party to terminate or call a default with respect to any contract or instrument to which the Purchaser is subject. 7.03 Broker's or Finder's Fees. Except for the fee to Bearing Point, Inc., which shall be paid solely by Purchaser, there is no valid claim against Purchaser by any broker or other third party for any finder's fee, brokerage commission or other similar payment related to the transactions contemplated hereby. 7.04 Closing Date. Each representation and warranty made by Purchaser in this Article 7 shall be deemed to be made on and as of the date hereof and as of the Closing Date. 7.05 Representation Not Misleading. No representation or warranty by the Purchaser contained in this Agreement, nor in any exhibit or schedule furnished to the Seller by the Purchaser under and pursuant to this Agreement contains or will contain as of the date made and on the Closing Date any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which it was or will be made, not misleading. 7.06 Consents and Approvals. Except for any applicable regulatory approvals, no consents, approvals, filings or registrations with any third party or public body or agency are required in connection with Purchaser's consummation of this transaction. 7.07 Community Reinvestment Act. At its most recent regulatory evaluation of the Purchaser's performance under the Community Reinvestment Act (the "CRA"), the Purchaser's record of performance was deemed to be "outstanding" or "satisfactory", and no proceedings are pending or, to the knowledge of the Purchaser, threatened, that would result in a change in such evaluation. Purchaser has not received any adverse public comments with respect to its compliance under the CRA since the date of its most recent regulatory evaluation of its performance under the CRA. 7.08 USA PATRIOT Act. The Purchaser is in material compliance with the applicable provisions of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and the Bank Secrecy Act, and its implementing regulations. 13 7.09 Regulatory Conditions. To the Purchaser's knowledge, no fact or condition exists with respect to the Purchaser which Purchaser has reason to believe will prevent it from obtaining approval from the applicable governmental authorities of the transactions contemplated herein. 7.10 Application Filings. The Purchaser and Seller shall cause to be filed within 10 calendar days of the Agreement Date, those applications necessary to obtain the approval from the applicable governmental authorities to complete the transactions contemplated herein. Purchaser and Seller shall pay their own application filing fees. Section 8. Conduct and Transactions Prior to Closing Date. Seller or Purchaser, as the case may be, covenant that, except as otherwise previously consented to in writing by the other party not making such covenant between the date of this Agreement and the Closing Date, such party will do or cause the following to occur: 8.01. Preservation of the Business of Seller. The business of Seller at the Branches shall be conducted only in the ordinary course consistent with past practices of the Seller. 8.02 Employee Compensation. Except for (A) customary merit and grade increases, and (B) annual bonuses for 2003 performance that have not yet been paid, in each case made in the ordinary course by Seller and consistent with its past practices, no increase will be made in the compensation of the employees at the Branches including, but not limited to, normal bonus, profit sharing and other compensation. 8.03 Relationship. Seller shall use its commercially reasonable efforts to maintain and preserve its relationships with depositors, customers, and others having business relationships with the Branches. 8.04 Public Announcements; Purchaser's Right to Communicate with Bank Customers. Neither the Purchaser nor Seller shall make any press release, public announcements, or disclosure to any person or entity not having a need to know, including announcements to employees or customers, concerning the transactions provided for in this Agreement without the prior consent of the other party hereto, which consent shall not unreasonably be withheld, delayed, or denied, unless disclosure is required by law or regulation. Purchaser shall also have the right to participate in preparing the text of any written communication which the Seller may mail to its customers concerning the proposed transaction or the assumption of their Deposits by the Purchaser. 8.05 Regulatory Approvals. Purchaser, with the reasonable cooperation of the Seller, shall promptly prepare and file (but in any event no later than 10 calendar days following the Agreement date) appropriate documents with The Office of Thrift Supervision, and any other regulatory agencies whose approval or consent may be required and thereafter use its best efforts to obtain timely the requisite, unconditional approvals for the transactions contemplated hereby from those agencies. 8.06 No Offers or Negotiations. Neither Seller nor its affiliates will, directly or indirectly, negotiate, solicit, initiate or encourage submission of proposals or offers from any other persons (including without limitation any of its or their officers, directors, employees or significant stockholders) relating to any acquisition or purchase of any portion 14 of the Assets or Assumed Liabilities. Seller shall promptly cease and cause to be terminated any current negotiations conducted with any parties other than Purchaser with respect to any such acquisition. Any consent heretofore granted by Seller or its affiliates to permit persons to make any such proposal (other than consents given to Purchaser) shall immediately be withdrawn and no further consents, waivers or amendments shall be granted by Sellers. The provisions and requirements of this Section 8.06 shall immediately terminate upon any termination of this Agreement pursuant to Section 15. 8.07 IRA Accounts. Prior to the Closing Date, Purchaser shall designate a successor trustee or custodian, which may be Purchaser, as to any IRA constituting a liability to be assumed by Purchaser and for which Seller acts as trustee or custodian. Seller will transfer the trusteeship or custodianship of all such IRAs to such successor trustee or custodian on the Closing Date. Seller shall be responsible for all federal, state and local income tax reporting for such accounts for the period ending on the Closing Date, and the successor trustee or custodian shall be responsible for such reporting thereafter. 8.08 Operational and Data Processing Conversion Matters. Seller shall cooperate with Purchaser's reasonable requests in order to accommodate any and all requirements for Purchaser to convert the operations of the Branches from branches of Seller to branches of Purchaser, including without limitation any requirements for the conversion of data processing to Purchaser's systems. Seller covenants that it will assist Purchaser with Purchaser's reasonable requests following the Closing in the event that Purchaser is unable to complete its requirements prior thereto. If Purchaser believes it will be unable to complete conversion prior to Closing, Purchaser shall so notify Seller at least 30 days prior to Closing. In such event, Seller and Purchaser shall negotiate in good faith to reach a service agreement that provides for Seller to continue to "service" the Deposits and Transferred Loans for an interim period of time and which provides for Seller to be compensated for providing such services at Seller's fully-loaded costs not to exceed $5,000 per month. 8.09 Access to Books and Records. Seller shall furnish Purchaser with such additional financial and other data and information regarding the Assets and liabilities to be assumed as Purchaser reasonably may request from time to time, including without limitation any information required for inclusion in all government applications necessary to effect the transaction contemplated hereby. Upon reasonable notice, Seller shall permit officers and authorized representatives of Purchaser access to inspect the Branches during normal business hours or at such other time mutually agreed by both parties and permit Purchaser to make or cause to be made such reasonable investigation of information and material relating to the condition of the Branches, including, if any, general and subsidiary ledgers, deposit records and other information concerning the business, property and legal questions concerning the Branches as Purchaser reasonably deems necessary or advisable. Purchaser shall furnish Seller with such additional financial and other data and information regarding Purchaser as Seller reasonably may request from time to time, including without limitation any information required for inclusion in all government applications necessary to effect the transaction contemplated hereby. 8.10 Operation of Branches pending Closing. Excluding loan commitments and deposits issued in the ordinary course of Seller, Seller shall not in respect of the operations at the Branches enter into any contract agreement or commitment which obligates the Purchaser for amounts in excess of $5,000 without prior written approval from Purchaser, which shall not be unreasonably withheld. 15 Section 9. Obligation of Parties After the Closing. After the Closing Date, and in addition, and not by way of limiting any of the foregoing: 9.01 Business Relationship. (a) For a period of twenty-four months after the Closing Date, Seller shall not cause, or attempt to cause or induce, directly or indirectly, any person now or hereafter employed at the Branches to terminate such employment; nor cause, directly or indirectly, or attempt to cause, any customer or depositor whose name now or hereafter appears on the books and records of the Branches to withdraw her, his or its banking affiliation from the Branches; provided, however, the mere fact that Seller hires any person formerly employed at the Branches or accepts banking business from a former customer or depositor of the branches shall not be deemed to prove Seller's breach under this subsection 9.01. (b) For a period of twelve months following the Closing Date, Seller shall not and shall cause it subsidiaries and affiliates, successors or assigns not to, and shall not enter into any agreement to, acquire, lease, purchase, own, operate or use any building, office or other facility or premises located within Dona Ana County in the State of New Mexico for the purpose of accepting deposits, cashing checks, making loans or conducting general banking business. This provision shall not prohibit any acquirer of the Seller or any of its subsidiaries or affiliates that currently maintains banking operations in Dona Ana County from continuing such operations after any such acquisition. 9.02 Transit Items. Each party shall exercise its best efforts to assist the other party in the adjustment and delivery of all overages and shortages of documentary and cash items in transit and items in collection as of the Determination Date, as the interest in such items of the respective parties hereto may then appear. 9.03 Indemnification. (a) Seller agrees to and does hereby indemnify, defend and hold Purchaser harmless from any loss, demand, obligation, cost, expense or liability (including reasonable attorney's fees and expenses) (i) arising out of any actions, suits or other proceedings by third parties which (A) relate to the operations at the Branches on or prior to the Determination Date, (B) relate to any wrongful act, omission or negligence of Seller in regards to the operations of the Branches, the Assets or performance (or the failure to fully perform or discharge any) of the Assumed Liabilities on or prior to the Determination Date, or (C) relate to any liabilities of the Seller or the Branches not specifically assumed by Purchaser hereunder or any assets of the Seller or the Branches not acquired by Purchaser hereunder, or (ii) arising out of the inaccuracy of any representation or warranty made by Seller or any breach by Seller of its covenants or agreements contained herein or in any instrument, document or certificate delivered to Purchaser pursuant hereto. (b) Purchaser agrees to and does hereby indemnify, defend and hold Seller harmless from any loss, demand, obligation, costs, expense or liability (including reasonable attorney's fees and expenses) (i) arising out of any actions, suits or other proceedings by third parties which (A) relate to the operations at the Branches subsequent to the Determination Date, or (B) relate to any wrongful act, omission or negligence of Purchaser relating to the operations of the Branches, the Assets or the performance (or the failure to fully perform or discharge any) of the Assumed Liabilities subsequent to the Determination Date; or (ii) arising out of the 16 inaccuracy of any representation or warranty made by Purchaser or any breach by Purchaser of its covenants or agreements contained herein or in any instrument, document or certificate delivered to Seller pursuant hereto. (c) Any claim from indemnification under this Section 9.03 must be made by the party claiming a right to such indemnification on or before the date that is twenty-four months from the Closing Date. 9.04 Tax Reporting. Seller and Purchaser agree that each party shall be solely responsible for providing to the Internal Revenue Service and to each depositor, other holder of a liability assumed or customer, to the extent required by law, Forms 1098, 1099 INT, 1099R and 5498 and other applicable reporting forms with respect to each of the liabilities assumed and Assets transferred for the period during which Seller or Purchaser, as applicable, administers such liabilities or Assets during 2004. Section 10. Risk of Loss. Pending the Determination Date, the risk of loss in regard to the Assets shall be upon Seller. After the Determination Date, the risk of loss in regard to the Assets shall be on Purchaser. Each party shall procure insurance, as appropriate, to cover such risks. Section 11. Conditions to Obligations of Parties. The obligations of Purchaser and Seller to consummate the transactions contemplated hereby shall be subject to the condition that all orders, consents and approvals of regulatory agencies necessary in order for the transactions provided for in this Agreement to be lawfully accomplished shall have been obtained in form and substance reasonably satisfactory to the Purchaser and Seller. Section 12. Conditions to Obligations of Purchaser. The obligations of Purchaser hereunder shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions, unless Purchaser shall have waived such condition in writing. 12.01 Representations and Warranties of Seller. The representations and warranties of Seller contained herein shall be true in all material respects when made and at the Closing Date with the same force and effect as though made at and as of such time, and Seller shall have performed all obligations and complied with all covenants to be performed or complied with by it on or prior to the Closing Date. Seller shall have delivered to Purchaser a certificate dated as of the Closing Date to such effect. Seller also shall have delivered to Purchaser all documents, instruments and other items required to be delivered by Seller under Section 5.02 hereof. 12.02 Litigation. At the Closing Date, there shall not be pending or threatened any litigation in any court or any proceeding before or by any governmental department, agency or instrumentality in which it is sought to restrain or prohibit or obtain damages in respect of the consummation of the transactions contemplated hereby, to cause a divestment by Seller or Purchaser of any significant portion of its respective assets or to impose any limitation upon the exercise by Purchaser of its general banking powers subsequent to consummation of the transactions contemplated hereby. 12.03 No Material Adverse Change. There shall not have occurred any material adverse change from Agreement Date to the Closing Date in the business of the Branches, the Assets, the Transferred Loans, the Deposits, 17 or the other Assets; provided, however, in no event shall the resignation of any employee (or any adverse change resulting primarily from the resignation of an employee) be deemed a material adverse change for the purpose of this paragraph. 12.04 Lease Agreements. The consents under the Leases to the assignment by Seller of the Leases to Purchaser shall have been obtained without the imposition of conditions Purchaser deems in its reasonable discretion to be unduly burdensome or unreasonable. Such consents shall be in form and substance satisfactory to Purchaser in the exercise of its reasonable discretion, and shall include the respective representation and warranty to Purchaser that each respective Lease is a valid and binding obligation. Section 13. Conditions to Obligations of Seller. The obligations of Seller hereunder shall be subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived in writing by Seller: 13.01 Representations and Warranties of Purchaser. The representations and warranties of Purchaser hereunder shall be true in all material respects when made and at the Closing Date with the same force and effect as though made at and as of such time, and Purchaser shall have performed all obligations and complied with all covenants required under this Agreement to be performed or complied with by it on or prior to the Closing Date. Purchaser shall have delivered to Seller a certificate dated as of the Closing Date to such effect. Purchaser shall have delivered to Purchaser all documents, instruments and other items required to be delivered by Purchaser under Section 5.02 hereof. 13.02 Litigation. At the Closing Date, there shall not be pending or threatened any litigation in any court or any proceeding before or by any governmental department, agency or instrumentality in which it is sought to restrain or prohibit or obtain damages in respect of the consummation of the transactions contemplated hereby, to cause a divestment by Seller or Purchaser of any significant portion of its respective assets or to impose any limitation upon the exercise by Purchaser of its general banking powers subsequent to consummation of the transactions contemplated hereby. 13.03 No Material Adverse Change. There shall not have occurred any material adverse change from Agreement Date to the Closing Date in the business or financial condition of Purchaser. 13.04 Lease Agreements. The consents under the Leases to the assignment by Seller of the Leases to Purchaser shall have been obtained without the imposition of conditions Purchaser deems in its reasonable discretion to be unduly burdensome or unreasonable. Such consents shall be in form and substance satisfactory to Purchaser in the exercise of its reasonable discretion, and shall include the respective representation and warranty to Purchaser that each respective Lease is a valid and binding obligation. Section 14. Notice to Depositors. Seller agrees that Purchaser shall, in the form of a letter mutually acceptable to Seller and Purchaser or as otherwise required by law, give notice to depositors of its assumption of the Deposits at the Branches. Section 15. Termination of Agreement. This Agreement may be terminated at any time prior to the Closing under the following conditions: 18 (a) By the consent in writing of the Purchaser and Seller; (b) By the Purchaser in writing if any of the conditions precedent to the obligations of the Purchaser contained in Section 12 of this Agreement or the conditions of the obligations of the parties contained in Section 11 of this Agreement shall not have been satisfied prior to June 1, 2004. (c) By the Seller in writing if any of the conditions precedent to the obligations of the Seller contained in Section 13 of this Agreement or the conditions to the obligations of the parties contained in Section 11 of this Agreement shall not have been satisfied prior to June 1, 2004. (d) By Purchaser in writing due to a breach by Seller of any of its representations, warranties or covenants or agreements contained herein, which breach remains uncured for more than 10 days following notice of such breach by Purchaser. (e) By Seller in writing due to a breach by Purchaser of any of its representations, warranties or covenants or agreements contained herein, which breach remains uncured for more than 10 days following notice of such breach by Purchaser. In the event of the termination of this Agreement pursuant to the provisions of this section, this Agreement shall be of no further force and effect, and no party hereto shall have any liability or further obligation to the other party to this Agreement. Notwithstanding the foregoing, no party shall be relieved by such termination for any liability that accrued due to any material breach of this Agreement prior to such termination. Section 16. Miscellaneous. 16.01 Expenses. Whether or not the transactions contemplated herein shall be consummated, Purchaser and Seller each shall pay their own expenses incident to, preparing for, entering into and carrying into effect the terms of this Agreement. 16.02 Notices. Any notice or communication required or permitted to be made hereunder shall be in writing, and shall be deemed to have been made if personally delivered in return for a receipt, or if mailed, by registered or certified mail, return receipt requested, to the parties at the addresses shown below. The date of personal delivery shall be the date of giving notice or if mailed in the manner prescribed above, notice shall be deemed to have been given three business days after the mailing. If to Purchaser: FIRSTBANK Mr. Don Padgett, President 5210 Eubank NE Albuquerque, NM 87111 (505) 343-9310 - Telephone (505) 343-9314 - Facsimile 19 with a copy to: Mr. James K. LeValley Quarles & Brady Streich Lang LLP Renaissance One Two N Central Avenue Phoenix, AZ 85004-2391 (602) 229-5260 - Telephone (602) 420-5056 - Facsimile E-Mail - jlevalle@quarles.com with a copy to Mr. Charles Moore Keleher & McLeod, P.A. PO Drawer AA Albuquerque, NM 87103 (505) 346-9110 Telephone (505) 346-1345 Facsimile If to Seller: Matrix Capital Bank D. Mark Spencer President 700 17th Street, Suite 100 Denver , CO 80202 (720)-932-4204 - Telephone (720)-946-1122 - Facsimile with a copy to: T. Allen McConnell General Counsel with a copy to: T. Allen McConnell General Counsel 700 17th Street, Suite 2100 Denver, CO 80202 (720) 932-4208 - Telephone (720) 946-1171 - Facsimile 16.03 Entire Agreement. This Agreement, including all exhibits, schedules and documents delivered in connection therewith, and the Confidentiality Agreement dated October 23, 2003 (the "Documents") sets forth the entire understanding of the parties hereto and supersedes all prior agreements and understanding, whether oral or written. This Agreement shall not be modified or amended except by written agreement of all parties hereto. Any reference herein to the Agreement shall be deemed to include the Documents. 16.04 Binding Effect. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto, their respective legal representatives, successors and assigns; provided, however, that no assignment of this Agreement or any rights or obligations hereunder may be made by any party hereto without the prior written consent of the other party and no assignment by any party hereunder shall relieve said party of any of its obligations or duties hereunder. 20 16.05 Further Assurances. Each of the parties hereto agrees to execute and deliver such further agreements, assurances, instruments and documents at any time reasonably requested by another party as are necessary or desirable in order to consummate the transactions contemplated by this Agreement. 16.06 Survival of Representations and Warranties. All representations and warranties contained in this Agreement shall survive the execution and delivery hereof for a period of twenty-four months. 16.07 Construction. This Agreement shall be construed and interpreted in accordance with the laws of the State of New Mexico applicable to contracts made and performed entirely therein. 16.08 Section Headings. The section headings contained in this Agreement are for convenience and reference only and shall not in any way affect the meaning or interpretation of this Agreement. 16.09 Counterparts. This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which taken together shall form but one Agreement. This Agreement may be executed and delivered by facsimile transmission of a counterpart signature page hereof. 16.10 Attorney Fees. In any action brought by a party hereto to enforce the obligations of any other party hereto, each party shall be responsible for its own litigation costs and attorney's fees and expenses (including court costs, reasonable fees of accountants and experts, and other expenses incidental to the litigation). IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. PURCHASER: FIRSTBANK By:_______________________ [seal] Don K. Padgett, President Attest: ___________________ ___________________ Title SELLER MATRIX CAPITAL BANK By:_____________________ D. Mark Spencer, President [seal] Attest: ____________________ ____________________ Title 21 SCHEDULE 4.06 RENT ROLL Matrix Capital Bank and Annex
Unit # Sq Ft. Lease Date Termination Date TOWER 100 7,433 N/A N/A 101 1,408 11/12/02 10/31/07 200/205 6,119 01/01/03 2/28/04 201 940 Vacant 204 1,433 07/01/03 06/30/04 301A/B 585 02/01/02 Month to month 301C/D 398 03/12/01 12/31/03 304 5,180 01/01/02 12/31/03 305 519 02/01/02 01/31/07 308 528 Vacant 309 1,344 12/01/01 11/30/04 ------ Total 25,897 ANNEX A 629 N/A N/A AA 1,576 N/A N/A C 1,369 01/01/03 06/30/05 D 703 N/A N/A F 1,406 G 1,625 01/01/03 12/31/03 H 1,345 N/A ------ Total Annex 8,662 Total Building 34,560
22 SCHEDULE 6.06 FURNITURE, FIXTURES, EQUIPMENT & LEASE HELD IMPROVEMENTS PURCHASED AMADOR FACILITY
BOOK VALUE ASSET DESCRIPTION TYPE PURCHASE PRICE - -------------------------------------------------------------------------------------------------------------- SMART 2/DH PCI ARRAY Computer Hardware $ - Video Conferencing System Las Cruces Office Equipment GMC YUKON 2001 Green Office Equipment F&F Board Room Art 4 PCS Robert Carlson Furniture & Fixtures F&F Board Room 12 chairs green leather Furniture & Fixtures Equip-Drive-up Camera Office Equipment Executive Conference Desk Furniture & Fixtures Kneespace Credenza Furniture & Fixtures High back chair with chrome base Furniture & Fixtures Lateral File Furniture & Fixtures Bookcase wire mesh doors for G. Lenzo Furniture & Fixtures F&F Board Room Cigar Chair/Ottoman Furniture & Fixtures Lamp Table Furniture & Fixtures Lamp Table Furniture & Fixtures Arm Chair Chesepeake Furniture & Fixtures Arm Chair Chesepeake Furniture & Fixtures Arm Chair Chesepeake Furniture & Fixtures Arm Chair Chesepeake Furniture & Fixtures F&F 3 paintings Furniture & Fixtures F&F Board room Universal Server Furniture & Fixtures F&-Shelving Unit for LN Files Furniture & Fixtures Equip-ATM Picacho Office Equipment Equip-Alarm & Camera-ATM Picacho Office Equipment Equip-ATM Pacacho FUJITSU Office Equipment F&F Cubicles Main Branch Furniture & Fixtures Dell Notebook C810 13GHZ P3 Computer Hardware VECTRA VE18DTP3 600E 13.5 GB Computer Hardware CPQ 2HD's Computer Hardware Computer-Dell Inspirion Laptop Computer Hardware Aeron Chair Furniture & Fixtures Equip Office Equipment Drive-up Unit W/2 Lanes Office Equipment F&F Furniture & Fixtures F&F Teller Seating 3 chairs Furniture & Fixtures F&F-6 Legal Size Drawer Cabinets Furniture & Fixtures F&F-6 Conference Chairs Furniture & Fixtures F&F-2 Posture Sterno Chairs Furniture & Fixtures F&F Wooden Aerial Bench Furniture & Fixtures F&F 4 Wooden Aerial Chairs New Accounts Furniture & Fixtures F&F-4 Whitnel Wooden Chairs Waiting Area Furniture & Fixtures F&F- Coffee Table East Mesa Furniture & Fixtures F&F-furniture E. Mesa Furniture & Fixtures 23 Equip-Undercounter Office Equipment Equip-Surveillance System Office Equipment Equip-Diebold Deal Drawer Office Equipment Night Depository Office Equipment Equip-ATM Office Equipment Equip-Refurbished Cash Vault Office Equipment Equip-15 Porta Vault Office Equipment Equip-Fax E. Mesa Office Equipment Comp-HDWATM Circuit DSU E. Mesa Computer Hardware (inactive) F&F-Refinish Desks Furniture & Fixtures Equip-Phone System E. Mesa Office Equipment Comp-HDWLASER Printer E. Mesa Computer Hardware (inactive) Comp-HDWSERVER E. Mesa Computer Hardware (inactive) Comp-HDWCABLING E. Mesa Computer Hardware (inactive) Comp-HDWCABLING E. Mesa Computer Hardware (inactive) Equip-Alarm System Office Equipment Comp-HDWCISCO Router E. Mesa Computer Hardware Lobby Cubicle Customer Service Furniture & Fixtures Lobby Cubicles Customer Service Furniture & Fixtures Coin Counter Main Lobby Office Equipment HP Switches for LC Computer Hardware Teller Pedestal W/Trays Furniture & Fixtures File Server LC Computer Hardware COMPAQ Proliant DL380 P3 Rembrandt Loan Computer Hardware Printers Computer Hardware Gary Lenzo/Computer Computer Hardware Router LC Computer Hardware HP Computer Equipment Las Cruces Computer Hardware HP Switches PWR SVP Computer Hardware SONY VAIO PCV LX700 P3 64GB 20GB Computer Hardware SONY VAIO PCV LX700 P3 64MD 20GBHD/CD Computer Hardware Dell Optiplex Computer Hardware Dell Optiplex Computer Hardware Dell Dimension Computer Hardware Dell Dimension Computer Hardware Dell Dimension Computer Hardware Dell Dimension Computer Hardware Currency Counter Office Equipment Equip-Audio System Drive-up Windows Office Equipment Audio System-Drive-up Office Equipment Modular Router Computer Hardware SAVIN 9220 Copier East Mesa Office Equipment FORM Printer Computer Hardware DELL Optiplex Computer Hardware DELL Optiplex Computer Hardware DELL Optiplex Computer Hardware Comp-HDW-COMPAQ/Server East Mesa Computer Hardware MAGNER Sorter/Counter Office Equipment Proof Imaging Equip Office Equipment SAVIN FAX/Print Office Equipment 24 MICROFICHE MACHINE Office Equipment File Server Computer Hardware CPQ 256 MB Registered SD RAM RIMM Computer Hardware HARD DRIVE COMPONENT UPGRANDES Computer Hardware HP Switches for LC Computer Hardware CPQ Desktop Kirk/LC Computer Hardware FAX Machine - Main Office Equipment NOVELL Network Components Computer Hardware Comp-HDW Printer Computer Hardware F&F-Carpet Mortgage Dept. Leasehold Improvements XEROX Work Center PRO765 Office Equipment INSPIRON 2500 12.1 SVGA Computer Hardware Laser Jet HP 4000 Office Equipment DELL Dimension Computer Hardware F&F - Door Furniture & Fixtures Comp-Soft - HMDA Relief software Computer Software HP E-PC CO 7933 20GB 128 Las Cruces Computer Hardware Cubicle Main Lobby Com Lending Furniture & Fixtures Cubicle Main Lobby Com Lend Furniture & Fixtures HP E-PC C10 20GB 128MB Computer Hardware WIN FAST 2.3A Moody's Risk Mgt Services Computer Software HP Vectra VL400 Computer Hardware HP Vectra VL400 Computer Hardware Cubicle Maon Lobby Cons Lend Furniture & Fixtures F&F-Exec Desk W/Hutch Furniture & Fixtures EQUIP Office Equipment Alarm System Office Equipment DELL Optiplex Computer Hardware Equip Office Equipment Shredder Office Equipment OFFICE BLDG-SLIM LINE ATM BLDG Commercial Property $ 227,000
SCHEDULE 6.07 CONTRACTS [Pat is verifying and updating]
Amount of Payment Per Year Person with whom Name of Date of Expiration Amount of Contract is made contract contract Date (indicate which) ---------------- -------- -------- ---- ---------------- - ---------------------------------------------------------------------------------------------------------------------- CREDIT CARD MERCHANT APPLICATION AND AGREEMENTS - ---------------------------------------------------------------------------------------------------------------------- Sun Bowl Inc. Credit Card Agree 11-18-96 15 day notice Unknown - No back side to the Agreement - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- RG River Resort Credit Card Agree 09-29-98 15 day notice Unknown - Bank N/S - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Cultural Society of Credit Card Agree 06-29-99 15 day notice Unknown Mesilla Valley - 150 - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Pace Management Credit Card Agree 04-12-00 15 day notice Unknown - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Las Cruces Symphony Credit Card Agree 07-06-00 15 day notice Unknown - Bank N/S - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Veteran Home Lns Inc Credit Card Agree 08-26-00 15 day notice Unknown - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Affordable Plumbing Credit Card Agree 09-05-00 15 day notice Unknown - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Pro Source Supply Credit Card Agree 01-22-01 15 day notice Unknown - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Lanelle's of Las Cruces Credit Card Agree 01-23-01 15 day notice Unknown - Not signed Bank or Merchant - ---------------------------- ------------------------- -------------- ---------------- ----------------------------- Guillermo Hernandez, Credit Card Agree 05-13-02 15 day notice Unknown D.O. - -------------------------------------------------------------------------------------------------------------------- LICENSE AGREEMENT - ---------------------------------------------------------------------------------------------------------------------- CALYX POINT@ S/W LIC 12-18-97 ??? $910 - 10 Computers - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- RMS Info. Services Mkt. Agreement 06-01-94 Yrly - Auto DA S&L - $63 p/m - $756 9-1-95 - 30 p/y d/not b/anniv - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Paul Brilliant Business Development 2000 Immediately $1,000 plus p/m - pd qtrly Rep. with notice either party - -------------------------------------------------------------------------------------------------------------------- SERVICE/ MAINTENANCE CONTRACTS - ---------------------------------------------------------------------------------------------------------------------- Knight Security School Courier Agree 01-07-02 5 working days $9.75 p/hour - Main notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Knight Security School Courier Agree 01-07-02 5 working days $9.75 p/hour - Mesa notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Knight Security Patrol Agreement 01-07-02 5 working days $100 p/m - Main notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Knight Security Patrol Agreement 01-07-02 5 working days $100 p/m - Mesa notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Knight Security Security Agreement 01-07-02 5 working days $9.75 p/hour - Main notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Knight Security Security Agreement 01-07-02 5 working days $40 p/m Church deposit notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Knight Security Security Agreement 01-07-02 5 working days $9.75 p/hour - Mesa notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- 26 SCHEDULE 6.07 - CONTINUED Amount of Payment Per Year Person with whom Name of Date of Expiration Amount of Contract is made contract contract Date (indicate which) ---------------- -------- -------- ---- ---------------- - ---------------------------------------------------------------------------------------------------------------------- SERVICE/ MAINTENANCE CONTRACTS CONTINUED - ---------------------------------------------------------------------------------------------------------------------- Fisource, Inc. ATM Software 12-01-97 1 yr, 1 yr $235.66 X 2 ATM's Maintenance (Fujitsus) auto renew., ($471.32 annually) notice to PREPAID cancel 60 dys prior to renew. - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Fisource, Inc. ATM 2nd line (3), 12-01-97 1 yr, 1 yr $10,861.46 annually Pneumatics (both auto renew., PREPAID branches, notice to cancel 60 dys prior to renew. - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- B&K System Technologies, Maintenance on NCR 7731 05-01-00 06-14-04 $1958.00 annually Inc. (proof) PREPAID - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Soto Enterprises d/b/a Armored car/cask 09-01-03 12 months, Per use fees apply per Miracle Delivery transport then 30 days schedule, no fixed payment notice required - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Distribution Management Cash Letter Delivery to 11-13-00 30 days notice $12.50 per day, as Corp. El Paso Fed. services are used - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Steinborn Inc. Realtors Leasing Brokerage 09-05-02 10-31-04 None, based on signed agreement on Amador leases, payable at signing - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Norstan Communications Telephone System Maint. 01-06-02 01-06-03 $6,284.48 (expired) - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Telstar Comm Alarm Monitoring 08-29-97 08-29-98 - mtm Mesa - $32 p/m 30 d/n - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Image Ideas Savin Copier 9965DP 12-01-99 Term not on $2,583 + p/y billed Bank Docs quarterly - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- SW Professional S Janitorial Services 12-01-00 30 day notice $3,174 Amador & Mesa - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Envir Systems Cont HVAC - Controls 07-23-01 None $489 - No Annex - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Go Direct Mailing Mail Processing 01-31-00 01-31-01 $3,000 p/mo plus - Bank N/S Annual Auto - 30 d/notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- DIEBOLD Alarm Ser Panel 04-01-97 12-01-94 DA S&L $134 p/y 60 day notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- ThyssenKrupp Elevator Elevator (2) 01-01-03 01-01-08 - $900 p/q noncancelable - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Burnham Ins. GP. SI Insurance 03-15-01 30 day notice Instl Repos $1,500=$50,000 - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- ADVERTISING AGENCY AGREEMENT - ---------------------------------------------------------------------------------------------------------------------- Perrault & Assoc Client/Agency 07-01-99 mtm 1-1-00 30 $1,500 p/m plus cost plus Agreement d/notice 15% ???? - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- LEASE AGREEMENTS - ---------------------------------------------------------------------------------------------------------------------- Pitney B Credit Corp Inserting System 03-18-00 08-20-04 $1,350 p/q - $5,400 p/y - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Picacho Hills Country Club Ground lease for ATM 05-01-02 5 years w/3 $150/quarter paid in year mutual advance option - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Aquaperfect, Inc. 3 water coolers 06-06-03 36 months $124.85/month - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- - -------------------------------------------------------------------------------------------------------------------- 27 SCHEDULE 6.07 - CONTINUED - ---------------------------------------------------------------------------------------------------------------------- STORAGE RENTAL - ---------------------------------------------------------------------------------------------------------------------- RMS, Inc. Record Storage 05-17-02 Continues Priced per container, until 60 day approx $500/month notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Holiday Storage 10' x 10' Stor Unit 08-31-99 10 days - Dep + $48 p/m - ---------------------------- -------------------------- -------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- COLLECTION AGREEMENT - ---------------------------------------------------------------------------------------------------------------------- Collectrite Collection Agreement 12-21-00 12-21-02 - 30% of accts placed for Annual Renewal collection. - ---------------------------- -------------------------- -------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- SERVICE/ MAINTENANCE CONTRACTS CONTINUED - ---------------------------------------------------------------------------------------------------------------------- Telstar Comm Alarm Monitoring 08-29-97 08-29-98 - mtm Mesa - $32 p/m 30 d/n - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Image Ideas Savin Copier 9965DP 12-01-99 Term not on $2,583 + p/y billed Bank Docs quarterly - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Copy Machines Inc Lanier Copier HIK003566 07-22-98 07-21-99 - $515 p/m Annual - unless 30 notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- SW Professional S Janitorial Services 12-01-00 30 day notice $3,174 Amador & Mesa - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Envir Systems Cont HVAC - Controls 07-23-01 None $489 - No Annex - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Go Direct Mailing Mail Processing 01-31-00 01-31-01 $3,000 p/mo plus - Bank N/S Annual Auto - 30 d/notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Pitney B Credit Corp Inserting System 03-18-00 08-20-04 $1,350 p/q - $5,400 p/y - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- DIEBOLD Alarm Ser Panel 04-01-97 12-01-94 DA S&L $134 p/y 60 day notice - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- ThyssenKrupp Elevator Elevator (2) 01-01-03 01-01-08 - $900 p/q noncancelable - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- Burnham Ins. GP. SI Insurance 03-15-01 30 day notice Instl Repos $1,500=$50,000 - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- ADVERTISING AGENCY AGREEMENT - ---------------------------------------------------------------------------------------------------------------------- Perrault & Assoc Client/Agency 07-01-99 mtm 1-1-00 30 $1,500 p/m plus cost plus Agreement d/notice 15% ???? - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- COCA-COLA MACHINE - ---------------------------------------------------------------------------------------------------------------------- ??? ??? To Be Furnished By PAT HOWARD - ---------------------------- ------------------------- --------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- STORAGE RENTAL - ---------------------------------------------------------------------------------------------------------------------- Holiday Storage 10' x 10' Stor Unit 08-31-99 10 days - Dep + $48 p/m - ---------------------------- -------------------------- -------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- COLLECTION AGGREEMENT - ---------------------------------------------------------------------------------------------------------------------- Collectrite Collection Agreement 12-21-00 12-21-02 - 30% of accts placed for Annual Renewal collection. - ---------------------------- -------------------------- -------------- ---------------- ---------------------------- - ---------------------------------------------------------------------------------------------------------------------- HOLD HARMLESS AGREEMENT - ---------------------------------------------------------------------------------------------------------------------- Dr. ??? TO BE FUR BY PAT Monitoring Equip 01-05-00 None No Income or Expense to H. Bank - ---------------------------- -------------------------- -------------- ---------------- ---------------------------- - -------------------------------------------------------------------------------------------------------------------- SUGGESTIONS ??? - --------------------------------------------------------- -------------- ---------------- ---------------------------- Armored car Looking - Have To Be Furnished By PAT HOWARD - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- ATM - Maintaince Fisource, CC, M&M To Be Furnished By PAT HOWARD - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- Landscaping None - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- Signs None - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- Data Processing N/A - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- Alarms - Main Diebold above - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- ATM - Cash Handling None - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- 28 - ---------------------------------------------------------------------------------------------------------------------- SCHEDULE 6.07 - CONTINUED - ---------------------------------------------------------------------------------------------------------------------- - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- Credit Life None - ------------------------------ -------------------------- -------------- ---------------- ---------------------------- HVAC - Mesa None - ------------------------------ -------------------------- -------------- ---------------- ----------------------------
29 EX-12 7 exhibit12.txt Exhibit 12
Matrix Bancorp, Inc. Computation of Ratio of Earnings to Fixed Charges (Unaudited) (Dollars in thousands) Year Ended December 31, 2003 2002 2001 2000 1999 ----------- ------------ ------------ ------------ ------------ A. Matrix Bancorp, Inc. and subsidiaries (consolidated) Earnings: 1. Income (loss) before income taxes .. $ (3,572) $ (17,025) $ 5 $ 10,038 $ 18,023 2. Plus interest expense (A) .......... 33,098 42,306 65,884 68,089 44,279 ----------- ------------ ------------ ------------ ------------ 3. Earnings including interest on deposits 29,526 25,281 65,889 78,127 62,302 4. Less interest on deposits........... 13,339 21,496 34,872 26,275 21,589 ----------- ------------ ------------ ------------ ------------ 5. Earnings excluding interest on deposits $ 16,187 $ 3,785 $ 31,017 $ 51,852 $ 40,713 =========== ============ ============ ============ ============ Fixed Charges: 6. Including interest on deposits excluding capitalized interest $ 33,098 $ 42,306 $ 66,119 $ 68,218 $ 44,279 7. Less interest on deposits (Line 4) . 13,339 21,496 34,872 26,275 21,589 ----------- ------------ ------------ ------------ ------------ 8. Excluding interest on deposits ..... $ 19,759 $ 20,810 $ 31,247 $ 41,943 $ 22,690 =========== ============ ============ ============ ============ Ratio of Earnings to Fixed Charges: Including interest on deposits (Line 3 divided by Line 6) ....... 0.89x 0.60x 1.00x 1.15x 1.41x Excluding interest on deposits (Line 5 divided by Line 8) ....... 0.82x 0.18x 1.00x 1.24x 1.79x ___________ (A) Includes amounts representing the estimated interest component of net rental payments.
EX-21 8 exhibit21.txt EXHIBIT 21 Matrix Bancorp, Inc. (d/b/a Matrix Bancorp) Subsidiaries of the Registrant 1. Matrix Capital Bank - Organized Pursuant to a Federal Savings and Loan Charter 2. Matrix Tower Holdings, LLC (d/b/a Matrix Tower Holdings and Matrix Financial Center) - Formed in Delaware 3. Matrix Financial Services Corporation (d/b/a Matrix Home Loans, Matrix Capital Mortgage and Matrix Capital Mortgage Corporation) - Incorporated in Arizona 4. Matrix Insurance Services Corporation - Incorporated in Arizona 5. The Vintage Group, Inc. - Incorporated in Texas 6. Vintage Delaware Holdings, Inc. - Incorporated in Delaware 7. Sterling Trust Company - Incorporated in Texas 7. MSCS Ventures, Inc. - Incorporated in Colorado 8. Matrix Settlement & Clearance Services, L.L.C. (d/b/a Matrix Settlement & Clearance Services) - 45% Owned and Organized in New York 9. MSCS Financial Services, LLC (100% owned by Matrix Settlement & Clearance Services, L.L.C.) - Formed in Delaware 10. Matrix Advisory Services, L.L.C. (d/b/a Matrix Advisory Services) - Formed in Delaware 11. Matrix Asset Management Corporation (d/b/a Matrix Asset Management, MTXC Realty and reoSource) - Incorporated in Colorado 12. Matrix Bancorp Trading, Inc. (d/b/a United Financial, Inc.) - Incorporated in Colorado 13. First Matrix Investment Services Corp. (d/b/a First Matrix Investment Services) - Incorporated in Texas 14. First Matrix, LLC - Organized in Colorado 15. Matrix Funding Corp. - Incorporated in Colorado 16. Equi-mor Holdings, Inc. - Incorporated in Nevada 17. ABS School Services, L.L.C. (d/b/a ABS School Services and The Geo Group) - Organized in Arizona 18. New Century Academy Property Management Group, LLC - Organized in Arizona 19. New Century Educational Management Services, LLC - Organized in Arizona 20. Matrix Bancorp Capital Trust I - Organized Under Delaware Law 21. Matrix Bancorp Capital Trust II - Organized Under Delaware Law 22. Matrix Bancorp Capital Trust III- Organized Under Delaware Law 23. Matrix Bancorp Capital Trust IV - Organized Under Delaware Law 24. Matrix Bancorp Capital Trust V - Organized Under Delaware Law EX-23.1 9 auditorconsent.txt Exhibit 23.1 Independent Auditors' Consent The Board of Directors Matrix Bancorp, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-75000, 333-40482, and 333-36671) on Forms S-8 of Matrix Bancorp, Inc. (the Company) of our report dated March 5, 2004, with respect to the consolidated balance sheets of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2003, which report appears in the December 31, 2003 Annual Report on Form 10-K of Matrix Bancorp, Inc. Our report refers to a change in the Company's method of accounting for variable interest entities in 2003 and a change in its method of accounting for goodwill and other intangible assets in 2002. KPMG LLP Denver, Colorado March 12, 2004 EX-31.1 10 ex31-1.txt Exhibit 31.1 CERTIFICATION I, D. Mark Spencer, President and Co-Chief Executive Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-K of Matrix Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. /s/ D. Mark Spencer -------------------------------- D. Mark Spencer President and Co-Chief Executive Officer March 12, 2004 EX-31.2 11 ex31-2.txt Exhibit 31.2 CERTIFICATION I, Richard V. Schmitz, Co-Chief Executive Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-K of Matrix Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. /s/ D. Mark Spencer -------------------------------- Richard V. Schmitz Co-Chief Executive Officer March 12, 2004 EX-31.3 12 ex31-3.txt Exhibit 31.3 CERTIFICATION I, David W. Kloos, Senior Vice President and Chief Financial Officer of Matrix Bancorp, Inc. (the "Registrant"), certify that: 1. I have reviewed this report on Form 10-K of Matrix Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading as with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. /s/ D. Mark Spencer -------------------------------- David W. Kloos Senior Vice President and Chief Financial Officer March 12, 2004 EX-32.1 13 ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Matrix Bancorp, Inc. (the "Company") on Form 10-K for the year ending December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, D. Mark Spencer, President and Co-Chief Executive Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 12, 2004 /s/ D. Mark Spencer ---------------------------------- Name: D. Mark Spencer Title: President and Co-Chief Executive Officer EX-32.2 14 ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Matrix Bancorp, Inc. (the "Company") on Form 10-K for the year ending December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard V. Schmitz, Co-Chief Executive Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 12, 2004 /s/ Richard V. Schmitz ---------------------------------- Name: Richard V. Schmitz Title: Co-Chief Executive Officer EX-32.3 15 ex32-3.txt EXHIBIT 32.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Matrix Bancorp, Inc. (the "Company") on Form 10-K for the year ending December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Kloos, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 12, 2004 /s/ David W. Kloos ---------------------------------- Name: David W. Kloos Title: Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----