-----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, NLrfUj6DUPvp2+mbNClZJW9Y10vLG9sbjXmj5u9lfPOrxb1zIJKABLJ9bG8khIJM uIpkkp/QorG2lu9xQcTjjw== 0000922907-01-000108.txt : 20010319 0000922907-01-000108.hdr.sgml : 20010319 ACCESSION NUMBER: 0000922907-01-000108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 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: SEC FILE NUMBER: 000-21231 FILM NUMBER: 1570416 BUSINESS ADDRESS: STREET 1: 1380 LAWRENCE ST STREET 2: STE 1410 CITY: DENVER STATE: CO ZIP: 80204 BUSINESS PHONE: 3035959898 MAIL ADDRESS: STREET 1: 1380 LAWRENCE STREET STREET 2: SUITE 1410 CITY: DENVER STATE: CO ZIP: 80204 FORMER COMPANY: FORMER CONFORMED NAME: MATRIX CAPITAL CORP /CO/ DATE OF NAME CHANGE: 19960711 10-K 1 0001.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, 2000 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 1380 Lawrence Street, Suite 1400 80204 Denver, Colorado (Zip Code) (Address of principal executive offices) 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 (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] As of March 2, 2001, 6,525,904 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 March 1, 2001, was $23,967,808. 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 11, 2001 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS Page ---- PART I Item 1. Business...............................................................3 Item 2. Properties............................................................23 Item 3. Legal Proceedings.....................................................24 Item 4. Submission of Matters to a Vote of Security Holders...................26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................................................26 Item 6. Selected Financial Data...............................................27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................28 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............49 Item 8. Financial Statements and Supplementary Data...........................49 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................................49 PART III Item 10. Directors and Executive Officers of the Registrant....................49 Item 11. Executive Compensation................................................49 Item 12. Security Ownership of Certain Beneficial Owners and Management........49 Item 13. Certain Relationships and Related Transactions........................49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......49
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, mortgage banking, trust and clearing activities and other fee-based services and lending activities. Our traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository services. Our mortgage banking activities consist of purchasing and selling residential mortgage loans and residential mortgage servicing rights; offering brokerage, consulting and analytical services to financial services companies and financial institutions; servicing residential mortgage portfolios for investors; originating residential mortgages; and providing real estate management and disposition services. Our trust and clearing activities focus primarily on the administration of self-directed individual retirement accounts, qualified business retirement plans and custodial and directed trust accounts, as well as offering specialized custody and clearing services to banks, trust companies, broker-dealers, third party administrators and investment professionals. Our other fee-based services and lending activities include providing outsourced business services, such as budgeting, governmental reporting, accounts payable, payroll, facility and safety management and comprehensive insurance programs to charter schools. We also offer financing to charter schools for the purchase of school sites and equipment. 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." The Subsidiaries Our core business operations are conducted through the seven operating subsidiaries and an investment in a settlement and clearing operation described below. See Note 22 to the consolidated financial statements included elsewhere in this document for a presentation of financial information by industry segment. Matrix Capital Bank. With its main office in Las Cruces, New Mexico, full service branches in Sun City, Arizona and Las Cruces, New Mexico, and loan offices in Phoenix, Arizona and Denver and Evergreen, Colorado, Matrix Bank serves its local communities by providing a broad range of personal and business depository services, offering residential loans and providing consumer and commercial real estate loans, including Small Business Administration loans. For a discussion of the depository services offered by Matrix Bank, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." For a discussion of the historical loan portfolio of the Company, including that of Matrix Bank, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Lending Activities." 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. These deposits, generated through activities of affiliates, as well as other traditional deposits, are used primarily to fund bulk purchases of residential mortgage loan portfolios throughout the United States, a substantial portion of which are serviced for Matrix Bank by Matrix Financial following their purchase. As of December 31, 2000, Matrix Bank had total assets of $1.3 billion. Matrix Bank and our other subsidiaries have significant experience in purchasing and originating mortgage loans, have familiarity with real estate markets throughout the United States and have traditionally had access to relatively low-cost deposits. 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 became a direct, wholly owned subsidiary of Matrix Bank in August 2000, acquires mortgage servicing rights on a nationwide basis through purchases in the secondary market, services the loans underlying the mortgage servicing rights and originates mortgage loans through its wholesale loan origination network. As of December 31, 2000, Matrix Financial serviced 92,404 borrower accounts representing $5.5 billion in principal balances, excluding $1.2 billion in subservicing for companies that are unaffiliated with us. Many of these accounts were seasoned loans having lower principal and higher custodial escrow balances than newly originated mortgage loans. As a servicer of mortgage loans, Matrix Financial is required to establish custodial escrow accounts for the deposit of borrowers' payments. These custodial accounts are maintained at Matrix Bank. At December 31, 2000, the custodial escrow accounts related to our servicing portfolio maintained at Matrix Bank were $77.6 million. During 2000, Matrix Financial originated $512.5 million in residential mortgage loans primarily through its regional wholesale production offices located in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Santa Ana and St. Louis. The mortgage loans originated by Matrix Financial are typically sold in the secondary market. United Financial, Inc. United Financial provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry. These services include: o the brokering and analysis of residential mortgage loan servicing rights and residential mortgage loans; o corporate and mortgage loan servicing portfolio valuations, which includes the "mark-to-market" valuation and analysis required under Statements of Financial Accounting Standards No. 125 and No. 140; o assisting companies with the development of mortgage loan servicing retention programs in lower interest rate environments; and o to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. United Financial provides brokerage services to the mortgage banking entities of several of the nation's largest financial institutions. During 2000, United Financial brokered the sale of 143 mortgage loan servicing portfolios totaling $36.4 billion in outstanding mortgage loan principal balances. United Financial's volume of brokerage activity and the expertise of its analytics department give us access to a wide array of information relating to the mortgage banking industry, including emerging market trends, prevailing market prices, pending regulatory changes and changes in levels of supply and demand. Consequently, we are often able to identify certain types of mortgage loan and mortgage loan servicing portfolios that are well suited to our particular servicing platform, investment objectives and unique corporate structure. Matrix Asset Management Corporation. Matrix Asset Management, formerly known as United Special Services, Inc., provides nationwide real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions. In addition to the unaffiliated clients currently served by Matrix Asset Management, Matrix Financial utilizes these outsourced services offered by Matrix Asset Management exclusively in handling the disposition of foreclosed real estate for which it is responsible. As of December 31, 2000, Matrix Asset Management had approximately 950 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. 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, 2000, Sterling Trust administered approximately 39,200 accounts with fiduciary assets under administration of over $3.8 billion, of which approximately $121.4 million represented deposits under administration held at Matrix Bank. First Matrix Investment Services Corporation. First Matrix is registered with the NASD as a fully disclosed broker-dealer with its headquarters in Fort Worth, Texas and a branch office in Denver, Colorado. First Matrix offers a wide range of investment options for both individual and institutional investors, including stocks, bonds, mutual funds and fixed income and debt securities. Currently, First Matrix has over $100 million in assets under management. The Fort Worth office focuses primarily on long-term investing and retirement planning. The Denver office assists primarily financial institutions in managing their investment portfolios. Denver's client base currently consists of more than 85 banks throughout the United States. ABS School Services, L.L.C. ABS provides outsourced business services to charter schools. Charter schools are public schools that are an alternative to traditional public schools. As of December 31, 2000, ABS was providing its services to approximately 150 schools. The primary services offered include fund accounting, cash management, budgeting, governmental reporting, payroll and accounts payable. Additionally, ABS offers administrative and instructional leadership, as well as consults with schools and offers assistance in the following areas: facility and safety management, technology, policy development, grant administration and comprehensive insurance programs. ABS also has a financing division, which offers financing to charter schools for the purchase of school sites and equipment. Matrix Settlement & Clearance Services, L.L.C. Much of our efforts to expand our trust, custody and clearing services have centered on a recent joint venture, Matrix Settlement & Clearance Services, in which we own a 45% equity stake. 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. For the year ended December 31, 2000, Matrix Settlement & Clearance Services had $1.5 million of revenues and a net loss of $955,000. We currently expect that Matrix Settlement & Clearance Services will become a member of the NASD and a registered broker-dealer, and we are currently evaluating our alternatives for accomplishing this result. As of December 31, 2000, Matrix Settlement & Clearance Services had 33 clients under contract after its first full year of operations. These clients administer approximately $8.9 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 is 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, 2000, Matrix Settlement & Clearance Services' clients had $25.9 million of deposits at Matrix Bank. Sale of United Capital Markets, Inc. As previously disclosed, on August 1, 2000, we sold one of our wholly owned subsidiaries, United Capital Markets, to an officer of that company. United Capital Markets is a registered investment advisor that focuses on interest rate management services for institutional clients. Lending Activities Purchase and Sale of Bulk Loan Portfolios. In addition to our mortgage loan origination and servicing-related activities, which are discussed under "--Residential Mortgage Loan Origination" and "Mortgage Servicing Activities," respectively, we traditionally make bulk purchases of residential mortgage loans 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 United Financial, 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. o Matrix Bank's subsidiary, Matrix Financial, provides servicing advantages that a typical 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. Substantially all of the residential mortgage loans that Matrix Bank acquires are classified as held for sale. This accounting classification requires Matrix Bank to carry the loans at the lower of aggregate cost or market. The purchased loan portfolios typically include both fixed and adjustable rate mortgage loans. Although Matrix Bank reviews many loan portfolios for prospective acquisition, it focuses on acquiring seasoned first lien priority loans secured primarily by one-to-four single-family residential properties with unpaid principal balances of less than $350,000. To the extent that adjustable rate loans are available, Matrix Bank generally targets adjustable over fixed rate portfolios. Due to the accounting treatment required, we believe that the focus on seasoned and adjustable rate products is generally expected to reduce the effect of rising interest rates on the portfolio's market value. Matrix Bank purchases mortgage loan portfolios from various sellers who have either originated the loans or, more typically, acquired the loan portfolios in bulk purchases. Matrix Bank considers several factors prior to a purchase. Among other factors, Matrix Bank considers the product type, the current loan balance, the current interest rate environment, the seasoning of the mortgage loans, payment histories, geographic location of the underlying collateral, price, the current liquidity of Matrix Bank and the product mix in its existing mortgage loan portfolio. In some cases, the mortgage loan portfolios that Matrix Bank acquires are purchased at yields that exceed market. Some of the loans in these portfolios are considered performing loans that have had payment problems in the past or have had document deficiencies. These types of portfolios afford Matrix Bank with an opportunity to resell the loans at a higher price if the discount to market on these portfolios accurately reflects the additional risks associated with purchasing these types of loans. Loan document deficiencies are identified in the due diligence process and, to the extent practical, are cured by Matrix Bank prior to reselling the loans. Matrix Bank also analyzes the payment history on each mortgage loan portfolio. Many prior problems may be a result of inefficient servicing or may be attributable to several servicing transfers of the loans over a short period of time. Because many considerations may impact pricing or yield, Matrix Bank prices each loan package based on the specific underlying loan characteristics. In the past, Matrix Bank has purchased nonperforming Federal Housing Administration and Veteran's Administration loans from third party sellers. The Department of Housing and Urban Development generally guarantees the majority of principal and interest on these nonperforming loans. These loans are at fixed rates and generally have a short average life as the loans are typically liquidated through the foreclosure and claim process. As of December 31, 2000, Matrix Bank owned $101.1 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 non-conforming 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. As noted earlier, in August 2000, Matrix Financial became a direct, wholly owned subsidiary of Matrix Bank. Prior to that time, Matrix Financial was a direct, wholly owned subsidiary of Matrix Bancorp and accordingly, a "sister" company of Matrix Bank. This new structure allows Matrix Bank to fund Matrix Financial's residential loan production activities without the prior "affiliate" restrictions imposed by Office of Thrift Supervision regulations. Much of the Company's loan growth in late 2000 and projected loan growth in 2001 is due to Matrix Financial's loan origination initiatives. See "--Residential Mortgage Loan Origination" for additional discussion. Matrix Bank continually monitors the secondary market for purchases and sales of mortgage loan portfolios and typically undertakes a sale of a particular loan portfolio in an attempt to "match" an anticipated bulk purchase of a particular mortgage loan portfolio or to generate current period earnings and cash flow. To the extent that Matrix Bank is unsuccessful in matching its purchases and sales of mortgage loans, Matrix Bank may have excess capital, resulting in less leverage and higher capital ratios. During the year ended December 31, 2000, we made bulk purchases of mortgage loans of approximately $225.9 million and made bulk sales of approximately $108.5 million for a net gain on sale of bulk mortgage loans of $982,000. Residential Mortgage Loan Origination. We originate residential mortgage loans on a wholesale basis through Matrix Financial and on a retail basis through both Matrix Financial and Matrix Bank. Matrix Financial originated a total of $512.5 million in residential mortgage loans for the year ended December 31, 2000. Wholesale Originations. Matrix Financial's primary source of mortgage loan originations is its wholesale division, which originates mortgage loans through approved independent mortgage loan brokers. These brokers qualify to participate in Matrix Financial's program through a formal application process that includes an analysis of the broker's financial condition and sample loan files, as well as the broker's reputation, general lending expertise and references. As of December 31, 2000, Matrix Financial had approved relationships with approximately 1,480 mortgage loan brokers. From Matrix Financial's offices in Atlanta, Chicago, Dallas, Denver, Houston, Phoenix, Santa Ana and St. Louis, the sales staff solicit mortgage loan brokers throughout the Southeastern, Western, Midwestern and Rocky Mountain areas of the United States for mortgage loans that meet Matrix Financial's criteria. In January 2001, Matrix Financial opened an additional office in Sacramento. Mortgage loan brokers act as intermediaries between borrowers and Matrix Financial in arranging mortgage loans. Matrix Financial, as an approved seller/servicer for Fannie Mae, Freddie Mac, the Government National Mortgage Association and a multitude of private investors, provides these brokers access to the secondary market for the sale of mortgage loans that they otherwise cannot access because they do not meet the applicable seller/servicer net worth requirements. Matrix Financial attracts and maintains relationships with mortgage loan brokers by offering a variety of services and products. To supplement our product offerings made through our wholesale loan origination network, we offer a program tailored to borrowers who are unable or unwilling to obtain mortgage financing from conventional mortgage sources. The borrowers who need this type of loan product often have impaired or unsubstantiated credit histories and/or unverifiable income and require or seek a high degree of personalized service and swift response to their loan applications. As a result, these borrowers generally are not averse to paying higher interest rates for this loan product type, as compared to the interest rates charged by conventional lending sources. We have established classifications with respect to the credit profiles of these borrowers. The classifications range from A- through D depending upon a number of factors, including the borrower's credit history and employment status. During 2000, Matrix Financial originated $97.7 million of A- through D credit residential mortgage loans, the majority of which were sold to unaffiliated third party investors on a nonrecourse basis under standard industry representations and warranties. All current originations of A- through lesser quality credit loans are originated under third party investor guidelines and are generally sold monthly in bulk loan portfolios. This method of sale generally provides better execution as compared to selling individual loans. In 2000, Matrix Financial acquired a servicing portfolio and production platform in Missouri. The production platform specializes in the origination of loans under a first-time home buyer program. Under this program, first-time home buyers are able to obtain loans at rates that are generally below market. The funding for the loans is available as a result of bond issues through various state and local governmental units. As master servicer under the bond programs, Matrix Financial purchases the loans from the originator, principally other financial institutions or mortgage brokers. Once acquired by Matrix Financial, the loans under the specific bond programs are packaged and Government National Mortgage Association securities are issued to the bond trustees under the programs. For strategic purposes, Matrix Financial's management has increased its emphasis on wholesale originations through opening two new production offices in 2000 and another in January 2001, acquiring a servicing and production platform and hiring additional administrative and production staff at existing offices. In low or decreasing interest rate environments, increased loan origination volumes, which generally result in increased fee income, can act as an economic hedge against decreases in interest income and the decreasing value of mortgage servicing portfolios caused by increased prepayments, which reduces revenues. Retail Originations.Matrix Bank originates residential loans on a retail basis through its branches in Las Cruces, New Mexico and Sun City, Arizona. In early 1997, Matrix Bank opened a lending office in Evergreen, Colorado. This location primarily originates residential construction loans and commercial loans in the local market place. We attempt to convert the construction loans funded through the Evergreen 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. Matrix Financial has also developed a retention center that focuses on the solicitation of our portfolio and others' owned servicing portfolios for refinancing opportunities. The goal is to identify those mortgagees which are likely to refinance and have them refinance with Matrix Financial. If the borrower is from our servicing portfolio, we have effectively preserved a portion of our servicing portfolio, as the borrower would have been likely to refinance with another lender. Quality Control. We have a loan quality control process designed to ensure sound lending practices and compliance with Fannie Mae, Freddie Mac and applicable private investor guidelines. Prior to funding any wholesale or 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. In addition, on a monthly basis, we select 10% of all closed loans for a detailed audit conducted by our own personnel or a third party service provider. The quality control process entails performing a complete underwriting review and independent re-verification of all employment information, tax returns, source of down payment funds, bank accounts and credit. Furthermore, 10% of the audited loans are chosen for an independent field review and standard factual credit report. All discovered deficiencies in these audits are reported to our senior management to determine trends and additional training needs. We then address and cure all resolvable issues. We also perform a quality control audit on all early payment defaults, first payment defaults and 60-day delinquent loans, the findings of which are reported to the appropriate investor and/or senior management. Sale of Originated Loans. We generally sell the residential mortgage loans that we originate. Under ongoing programs established with Fannie Mae and Freddie Mac, conforming conventional loans may be sold on a cash basis or pooled by us and exchanged for securities guaranteed by Fannie Mae or Freddie Mac. We then sell these securities to national or regional broker-dealers. Mortgage loans sold to Fannie Mae or Freddie Mac are sold on a nonrecourse basis, except for standard representations and warranties, so that foreclosure losses are generally borne by Fannie Mae or Freddie Mac and not by us. We also sell nonconforming and conforming residential mortgage loans on a nonrecourse basis to other secondary market investors. 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. We sell residential mortgage loans on a servicing-retained or servicing-released basis. Certain purchasers of mortgage loans require that the loan be sold to them servicing-released. We sell nonconforming loans on a servicing-released basis and may sell conforming loans on a servicing-retained or servicing-released basis. See "Mortgage Servicing Activities --Residential Mortgage Loan Servicing." In connection with our residential mortgage loan originations and sales, we make customary representations and warranties, similar in nature and scope to those provided in connection with sales of mortgage servicing rights. Our experience has been that giving such representations and warranties has not resulted in material repurchases. However, 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 issued. 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 result in changes in the market value of the mortgage loans from the time that the price commitment is given to the borrower until the time that the mortgage loan is sold to the investor. Net gains and losses on originated loans sold are recorded in loan origination income. In order to hedge against the interest rate risk resulting from these timing differences, we historically have committed to sell all closed originated mortgage loans held for sale and a portion of the mortgage loans that are not yet closed but for which the interest rate has been established, sometimes referred to in this document as "pipeline loans." We adjust our net commitment position daily either by entering into new commitments to sell or by buying back commitments to sell depending upon our projection of the portion of the pipeline loans that we expect to close. These projections are based on numerous factors, including changes in interest rates and general economic trends. The accuracy of the underlying assumptions bears directly upon the effectiveness of our use of forward commitments and subsequent profitability. In addition, during the second half of 2000, we began selling the majority of our pipeline loans, both conforming and nonconforming, to third party investors on a best efforts basis. By selling the loans on a best efforts basis, we significantly reduce our hedging risk. The market value of loans committed for sale is determined based on the related forward loan sale commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Risk Sensitive Assets and Liabilities" for information on our adoption of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. Commercial and Other Lending. We have sought to diversify and enhance the yield of our loan portfolio by originating commercial and 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 Small Business Administration loans; and financing to charter schools for the purchase of real estate and equipment. Matrix Bank's loan production office in Evergreen, Colorado, a suburb of Denver, principally originates single-family construction and commercial real estate loans. Matrix Bank's main office in Las Cruces, New Mexico also originates a portion of these loans. ABS performs underwriting and funding of financings for charter schools. 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 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 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. 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. Matrix Bank's SBA division offers the following loan products: SBA 7a loans; first trust deed loans under the SBA 504 program; first trust deed companion loans, also known as "piggyback" loans; and Business and Industry Guaranteed Loans offered through the United States Department of Agriculture. Matrix Bank has received preferred lender status under the SBA program in the Denver, Colorado market area. Preferred lender status allows Matrix Bank to approve SBA-guaranteed loan applications without prior review from the SBA, thereby accelerating the approval process for small business loan applications. Preferred lenders also receive priority funding and service from the SBA. Matrix Bank plans to apply for preferred lender status in other market areas such as Arizona, New Mexico, Texas and Utah in 2001. During 2000, Matrix Bank originated $27.7 million SBA loans. ABS offers financing to charter schools located primarily in Arizona, Colorado, Florida and Texas for the purchase of real estate, modular space and equipment. As previously mentioned, charter schools are public schools that serve as an alternative to traditional public schools, thereby providing additional academic choices for parents and students. 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 2000, we funded $30.5 million loans to charter schools and, as of December 31, 2000, we had a total of $51.9 million loans 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 90% and for furniture, fixtures and equipment and modular space it is 100%; o there are no personal guarantees; and o cash flow to service the financing is derived from the school's student count. If the school's student count 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. At December 31, 2000, Matrix Financial serviced approximately $5.5 billion of mortgage loans, excluding $1.2 billion 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, 2000, Matrix Financial's annual weighted-average servicing fee was 0.40%. 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, 2000, on the basis of outstanding principal balances, less than 1% 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 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 the Government National Mortgage Association, for which we provide significant amounts of mortgage loan servicing. As of December 31, 2000, we had advanced approximately $14.2 million in funds on behalf of third party investors. For the Veteran's Administration loans sold and serviced for the Government National Mortgage Association, which are sold on a nonrecourse basis, the Veteran's Administration loan guarantees may not cover the entire principal balance and, in that case, the Company is responsible for the losses which exceed the Veteran's Administration's guarantee. 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 Alltel Information Services, Inc. Because Alltel is one of the largest mortgage banking service bureaus in the United States, we believe that this system gives Matrix Financial capacity to support expansion of 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, ----------------------------------------------------------- 2000 1999 1998 ----------------- ---------------- ------------------ (In thousands) FHA insured/VA guaranteed residential................................. $1,608,115 $ 926,179 $ 960,053 Conventional loans.................................................... 3,764,586 4,891,809 4,338,308 Other loans........................................................... 145,262 71,727 59,368 --------------- ---------------- -------------- Total mortgage servicing portfolio.............................. $5,517,963 $5,889,715 $5,357,729 =============== ================ =============== Fixed rate loans...................................................... $4,346,813 $4,926,055 $4,234,349 Adjustable rate loans................................................. 1,171,150 963,660 1,123,380 ----------------- ----------------- --------------- Total mortgage servicing portfolio.............................. $5,517,963 $5,889,715 $5,357,729 ================= ================= ===============
The following table shows the delinquency statistics for the mortgage loans serviced by Matrix Financial, excluding loans subserviced for others, compared with national average delinquency rates as of the dates presented. Delinquencies and foreclosures for the mortgage loans serviced by us generally exceed the national average due to high rates of delinquencies and foreclosures on certain bulk loan and bulk servicing portfolios that we acquired at a discount. In September 1999, we acquired a servicing portfolio with higher loan delinquency. The majority of loans in that portfolio were in active bankruptcy or foreclosure. This portfolio was responsible for the majority of the increase in the percentage of our servicing portfolio that was delinquent at both December 31, 1999 and 2000.
As of December 31, ---------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------- National National Company Average(1) Company Average(1) ---------------------------------------------------------------------------------- Number Percentage Percentage Number Percentage Percentage of of Servicing of of of Servicing of Loans Portfolio Loans Loans Portfolio Loans -------------------------------------------------------------------------------- Loans delinquent for: 30-59 days........ 5,214 5.64% 2.84% 4,079 4.50% 2.74% 60-89 days........ 992 1.07 0.64 1,120 1.24 0.63 90 days and over.. 530 0.58 0.56 2,426 2.68 0.56 ------------ ---------- ---------- ------------ ------- ---------- Total delinquencies........ 6,736 7.29% 4.04% 7,625 8.42% 3.93% ============ ========== ========== ============ ======= ========== Foreclosures...... 1,027 1.11% 0.84% 905 1.00% 0.98% ============ ========== ========== ============ ======= ========== [Table Continued] As of December 31, ------------------------------------- 1998 --------------------------------------- National Company Average(1) --------------------------------------- Number Percentage Percentage of of Servicing of Loans Portfolio Loans --------------------------------------- Loans delinquent for: 30-59 days........ 3,120 3.98% 2.96% 60-89 days........ 612 0.78 0.68 90 days and over.. 712 0.91 0.60 Total ---------- ------------ ---------- delinquencies........ 4,444 5.67% 4.24% ========== ============ ========== Foreclosures...... 727 0.93% 1.11% ========== ============ ==========
- ---------- [FN] (1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit Residential Mortgage Loans" (Seasonally Adjusted) (Data as of September 30, 2000, December 31, 1999 and December 31, 1998, respectively. Data as of December 31, 2000 was not yet available). 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:
As of December 31, ------------------------------------------------------------------------------------ 2000 1999 ---------------------------------------- -------------------------------------------- Percentage Percentage Number Aggregate of Aggregate Number Aggregate of Aggregate Rate of Principal Principal of Principal Principal Loans Balance Balance Loans Balance Balance ---------- ------------- ------------- ----------- ------------ -------------- (Dollars in thousands) Less than 7.00%........ 6,317 $ 474,596 8.60% 7,301 $ 618,659 10.50% 7.00%--7.99%......... 18,424 1,335,738 24.21 30,848 2,467,177 41.89 8.00%--8.99%......... 27,691 1,801,131 32.64 28,620 1,822,777 30.95 9.00%--9.99%......... 19,369 1,002,226 18.16 15,892 647,918 11.00 10.00%--10.99%.......... 20,603 904,272 16.39 7,898 333,184 5.66 11.00%--11.99%.......... - - - - - - 12.00% and over........ - - - - - - ----------- ------------ ----------- ----------- ---------- ----------- Total............... 92,404 $5,517,963 100.00% 90,559 $ 5,889,715 100.00% =========== ============= ============ ============ =========== ============ [Table Continued] ---------------------------------------- 1998 ---------------------------------------- Percentage Number Aggregate of Aggregate of Principal Principal Loans Balance Balance ---------------------------------------- Less than 7.00%........ 7,123 $ 662,491 12.36% 7.00%--7.99%......... 22,341 1,799,472 33.59 8.00%--8.99%......... 26,702 1,859,471 34.71 9.00%--9.99%......... 15,557 731,586 13.65 10.00%--10.99%.......... 6,067 284,637 5.31 11.00%--11.99%.......... 251 9,441 0.18 12.00% and over........ 305 10,631 0.20 ---------- ------------- ---------- Total............... 78,346 $ 5,357,729 100.00% ========== ============= ==========
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. The changes in the remaining maturities as a percentage of unpaid principal between 2000, 1999 and 1998, as reflected below, are the result of acquisitions of mortgage servicing rights completed during 2000 and 1999.
As of December 31, ------------------------------------------------------------------------------------------- 2000 1999 --------------------------------------------- --------------------------------------------- Percentage Percentage Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid of of Number Principal Principal of of Number Principal Principal Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount ------- ---------- ---------- ---------- -------- ---------- --------- ----------- (Dollars in thousands) 1--5 years.... 19,489 21.09% $ 321,196 5.82% 34,990 38.64% $ 1,043,559 17.72% 6--10 years.... 15,891 17.20 411,152 7.45 10,364 11.44 577,077 9.80 11--15 years..... 14,981 16.21 779,922 14.13 8,691 9.60 560,212 9.51 16--20 years..... 27,779 30.06 2,505,728 45.41 18,624 20.57 1,766,824 30.00 21--25 years..... 4,522 4.90 444,679 8.06 3,417 3.77 381,663 6.48 More than 25 years 9,742 10.54 1,055,286 19.13 14,473 15.98 1,560,380 26.49 ------ ------ ---------- ----- ------ ------ ------------ ------- Total........ 92,404 100.00% $5,517,963 100.00% 90,559 100.00% $ 5,889,715 100.00% ====== ====== ========= ====== ====== ====== ============ ====== [Table Continued] -------------------------------------------- 1998 -------------------------------------------- Percentage Number Percentage Unpaid Unpaid of of Number Principal Principal Loans of Loans Amount Amount --------- ------- ------ ------ 1--5 years.... 9,478 12.10% $ 216,441 4.04% 6--10 years.... 21,320 27.21 943,428 17.61 11--15 years..... 10,231 13.06 534,187 9.97 16--20 years..... 7,870 10.04 545,628 10.18 21--25 years..... 12,524 15.99 1,184,562 22.11 More than 25 years 16,923 21.60 1,933,483 36.09 ------- ------- ---------- ------- Total........ 78,346 100.00% $ 5,357,729 100.00% ====== ======= =========== ======
Our servicing activity is diversified throughout all 50 states with concentrations at December 31, 2000 in California, Texas, Missouri and Florida of approximately 18.9%, 13.7%, 12.8% and 7.3%, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. Acquisition of Servicing Rights. Our strategy with respect to mortgage servicing focuses on acquiring servicing for which the underlying mortgage loans tend to be more seasoned and to have higher interest rates, lower principal balances and higher custodial escrow balances than newly originated mortgage loans. We believe this strategy allows us to reduce our prepayment risk, while allowing us to capture relatively high custodial escrow balances in relation to the outstanding principal balance. During periods of declining interest rates, prepayments of mortgage loans 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 since the cost savings to the borrower from refinancing can be significant. Despite the strategy mentioned above, we remain opportunistic in our acquisition philosophy. If higher balance, less seasoned portfolios are available at our desired internal rate of return, we may, from time to time, pursue such acquisitions. The following table shows quarterly and annual average prepayment rate experience on the mortgage loans serviced by Matrix Financial, excluding loans subserviced by and for others: For the Year Ended December 31, ------------------------------------ 2000(1)(4) 1999(2)(4) 1998(3)(4) ----------- ----------- ----------- Quarter ended: December 31 .......... 12.50% 13.63% 28.36% September 30 ......... 12.70 17.43 23.60 June 30............... 12.70 24.70 21.53 March 31.............. 10.50 26.47 17.00 ----------- ----------- ----------- Annual average.......... 12.10% 20.56% 22.62% =========== =========== =========== ----------------- [FN] (1) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $447 million, $0, $16 million and $0 for the quarters ended December 31, September 30, June 30, and March 31, 2000, respectively. (2) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $0, $576 million, $1.0 billion and $ 238 million for the quarters ended December 31, September 30, June 30 and March 31, 1999, respectively. (3) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for us by others of $930 million, $703 million, $0 and $1.3 billion for the quarters ended December 31, September 30, June 30, and March 31, 1998, respectively. (4) These prepayment rates do not include prepayments that resulted from us targeting our own servicing portfolio for refinance opportunities. We acquire substantially all of our mortgage servicing rights in the secondary market. The industry expertise of United Financial and Matrix Financial allows us to capitalize upon inefficiencies in this market when acquiring mortgage servicing rights. Prior to acquiring mortgaging servicing rights, we analyze a wide range of characteristics of each portfolio considered for purchase. This analysis includes projecting revenues and expenses and reviewing geographic distribution, interest rate distribution, loan-to-value ratios, outstanding balances, delinquency history and other pertinent statistics. Due diligence is performed either by 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 the mortgage servicing rights generated from the origination of loans sold to the Government National Mortgage Association. As of December 31, 2000, in terms of unpaid principal amount, approximately $111 million of the mortgage servicing rights in our portfolio were from loans originated and sold by Matrix Financial. Sales of Servicing Rights. We periodically sell our purchased mortgage servicing portfolios and generally sell all mortgage servicing rights on new loans that we originate, except as mentioned above with regard to loans sold to the Government National Mortgage Association. These sales increase current revenue, which is reflected in loan origination income for originated servicing and gain on sale of servicing for purchased servicing, and generate cash at the time of sale, but reduce future servicing fee income. We sold mortgage servicing rights on loans that we originated having an aggregate principal amount of $412.5 million during the year ended December 31, 2000. Periodically, we may also sell purchased mortgage servicing rights to restructure our portfolio or generate revenues. Purchased mortgage servicing rights were sold on loans having an aggregate principal amount of $1.1 billion during the year ended December 31, 2000 for net gains of $2.6 million. We anticipate that we will continue to sell substantially all originated mortgage servicing rights on new loans that we originate, except as noted above. We also may sell purchased mortgage servicing rights. We intend to base decisions regarding future mortgage servicing sales upon our cash requirements, purchasing opportunities, capital needs, earnings and the market price for mortgage servicing rights. During a quarter in which we sell purchased mortgage servicing rights, reported income will tend to be greater than if we had not made the sale during that quarter. Prices obtained for mortgage servicing rights vary depending on servicing fee rates, anticipated prepayment rates, average loan balances, remaining time to maturity, servicing costs, custodial escrow balances, delinquency and foreclosure experience and purchasers' required rates of return. In the ordinary course of selling mortgage servicing rights in accordance 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 on segments of our mortgage servicing portfolio reaches a level higher than we projected for an extended period of time, the associated basis in the mortgage servicing rights may be impaired. To mitigate this risk of impairment due to declining interest rates, we initiated a hedging strategy during 1997 that uses a program of exchange-traded futures and options. In terms of unpaid principal amount, we had hedged approximately 6.4% of our servicing portfolio as of December 31, 2000. Through December 31, 2000, our hedging program qualified for hedge accounting treatment based on a high degree of statistical correlation and current accounting guidance. With the required adoption of SFAS 133 on January 1, 2001, we will not attempt to qualify for hedge accounting treatment due to the requirements in the standard that are necessary to do so. Despite this, we have not made any changes to our hedging program and, as such, we will have to record our outstanding derivatives at their fair values on January 1, 2001, with subsequent changes in value recognized in earnings. See additional information regarding the impact of SFAS 133 in Note 2 to the consolidated financial statements included elsewhere in this document. Brokerage, Consulting and Outsourcing Services Brokerage Services. United Financial operates as one of the nation's leading full-service mortgage servicing and mortgage loan brokers. It is capable of analyzing, packaging, marketing and closing transactions involving mortgage servicing and loan portfolios and selected merger and acquisition transactions for mortgage banking entities. United Financial markets its services to all types and sizes of market participants, thereby developing diverse relationships. Mortgage servicing rights are sold either on a bulk basis or a flow basis. In a bulk sale, the seller identifies, packages and sells a portfolio of mortgage servicing rights to a buyer in a single transaction. In a flow sale, the seller agrees to sell to a specified buyer from time to time, at a predetermined price, the mortgage servicing rights originated by the seller that meet certain criteria. United Financial is capable of helping both buyers and sellers with respect to bulk and flow sales of mortgage servicing rights. We believe that the client relationships developed by United Financial through its national network of contacts with commercial banks, mortgage companies, savings associations and other institutional investors represent a significant competitive advantage and form the basis for United Financial's national market presence. These contacts also enable United Financial to identify prospective clients for our other subsidiaries and make referrals when appropriate. See "--Consulting and Analytic Services." The secondary market for purchasing and selling mortgage servicing rights has become increasingly more active since its inception during the early 1980s. Most institutions that own mortgage servicing rights have found that careful management of these assets is necessary due to their susceptibility to interest rate cycles, changing prepayment patterns of mortgage loans and fluctuating earnings rates achieved on custodial escrow balances. Since companies must capitalize originated mortgage servicing rights, management of mortgage servicing assets has become even more critical. These management efforts, combined with interest rate sensitivity of assets and the growth strategies of market participants, create constantly changing supply and demand and, therefore, constantly changing price levels in the secondary market for mortgage servicing rights. The sale and transfer of mortgage servicing rights occurs in a market that is inefficient and often requires an intermediary to match buyers and sellers. Prices are unpublished and closely guarded by market participants, unlike most other major financial secondary markets. This lack of pricing information complicates an already difficult process of differentiating between servicing product types, evaluating regional, economic and socioeconomic trends and predicting the impact of interest rate movements. Due to its significant contacts, reputation and market penetration, United Financial has access to information on the availability of mortgage servicing portfolios, which helps it bring interested buyers and sellers together. In addition, United Financial provides brokerage services to buyers and sellers of all types of loan products. United Financial provides loan brokerage services to both servicing brokerage clients and non-servicing brokerage clients. During 2000, United Financial significantly enhanced its ability in the areas of analyzing, brokering and acquisition of all loan products. This was accomplished through hiring additional personnel and cross-training of existing staff. Consulting and Analytic Services. United Financial 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. United Financial has enhanced its existing valuation models and has created a software program that can be customized to fit its customers' many different needs and unique situations in performing valuations and analyses. In addition, United Financial has the infrastructure and management information system capabilities necessary to undertake the complex analyses required by SFAS 125/SFAS 140. Many of the companies affected by the implementation of SFAS 125/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 125/SFAS 140 valuations. Because SFAS 125/SFAS 140 requires that mortgage servicing portfolios be valued at the lower of cost or market value on a quarterly basis, active management of servicing assets has become a critical component to holders of mortgage servicing rights. Due to the risk of impairment of mortgage servicing rights as a result of constantly changing interest rates and prepayment speeds on the underlying mortgage portfolio, risk management of mortgage servicing rights by holders of mortgage servicing rights portfolios, which typically takes the form of hedging the portfolio, has become more prevalent. The SFAS 125/SFAS 140 "mark-to-market" analyses done by United Financial help clients assess which of their portfolios of mortgage servicing rights are most susceptible to impairment due to interest rate and prepayment risk. In 2000, United Financial expanded its analytic and consulting services to include advisory services on business performance, including the risks and rewards of various business lines, and loan retention programs. We believe that the services offered by the analytics department of United Financial 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. In addition, United Financial is able to refer clients to Matrix Bank for financing opportunities and bulk loan acquisitions and to Matrix Asset Management for real estate management and disposition services. The full range of services offered by United Financial and its affiliates further strengthens United Financial's client relationships. Real Estate Management and Disposition Services. Matrix Asset Management, formerly called United Special Services, recently changed its name to better identify itself as affiliated with the Matrix family of companies. Matrix Asset Management provides real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions across the United States. In addition to the unaffiliated clients currently served by Matrix Asset Management, many of which are also clients of United Financial, Matrix Financial uses 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, since 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. 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. School Services. In addition to providing financing to charter schools as mentioned in "Lending Activities --Commercial and Other Lending," ABS 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, ABS consults with and offers programs to charter schools in the following areas: o facility and safety management; o technology; o policy development; o grant administration; and o comprehensive insurance coverage. 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. The business services provided by ABS are integral to the financing division, as these services allow ABS to use their 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 ABS 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 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. At December 31, 2000, Sterling Trust had assets under administration of over $3.8 billion. Individual Retirement Account Services. Account holders have complete control in the selection and management of all investments. Because investment decisions are involved, account holders may choose to appoint their financial planner, stockbroker or other individual to be their authorized representative. The advantages offered by a Sterling Trust self-directed IRA include the freedom to hold a wide array of investments and the convenience of consolidation. A Sterling Trust self-directed IRA offers the ability to invest in all types of publicly-offered investments such as mutual funds, stocks, annuities and limited partnerships. In addition, a Sterling Trust IRA allows an account holder to hold nonstandard investments such as real estate, trust deeds and promissory notes, as well as private placement offereings of closely-held stock, limited partnerships, limited liability companies and debt instruments. With this high degree of investment flexiblity, a Sterling Trust self-directed IRA may enable account holders to meet their retirement objectives. With a Sterling Trust self-directed IRA, several IRA accounts may be consolidated into one IRA. This consolidation may potentially reduce administrative fees, as well as save account holders time spent managing their investments. Sterling Trust's quarterly statements allow account holders to view their IRA holdings on one comprehensive, easy-to-read statement. Qualified Business Retirement Plan Services. Sterling Trust offers quality record keeping and administration services on 401(k) plans, profit sharing plans, money purchase pension plans and other types of defined contribution and defined benefit plans. Prototype plan documents that provide cost-effective compliance with the tax codes are available for employers of all sizes, from sole proprietors to large corporations. Sterling Trust's qualified business retirement plans are designed to allow the employer to choose the level of service needed, from simple bookkeeping and government reporting, to complete, comprehensive services. No matter what level of service an employer selects, Sterling Trust offers complete independence from investment products, which allows the employer to choose among a full range of investment options. In addition to choosing a plan that meets their service needs and provides investment flexibility, the employer can also select from among a wide range of plan features, which include daily valuation, participant loans, integration with social security and the ability to hold life insurance within the plan. Custodial Services. Sterling Trust offers custodial services on both qualified business retirement plans and personal custodial accounts. Custodial services are also offered on 403(b) plans. By using Sterling Trust's custodial services, individuals and businesses nationwide can monitor and track all investments held within their portfolio. Sterling Trust will execute trades at the direction of the account holder, hold title to the assets as custodian, receive and process periodic reports and earnings and then summarize this activity on quarterly account statements. At year-end, all tax reporting data is prepared and sent to the account holder for income tax preparation purposes. Custodial accounts are provided the same investment flexibility as that which is offered on other types of accounts. Corporate Trust/Escrow Services. Sterling Trust offers escrow and paying agent services for a variety of business transactions, primarily to investment product sponsors. Sterling Trust will provide escrow and/or paying agent services under service agreements, provided that it has no discretion with regard to the investment of assets. Typical administrative services include holding funds in escrow, maintenance of investor records and processing of fund disbursements in accordance to the service agreement. 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. As of December 31, 2000, Matrix Settlement & Clearance Services had 33 clients under contract with those clients administering approximately $8.9 billion in funds that would be eligible for inclusion in the automated clearing environment of the National Securities Clearing Corporation. Competition We compete for the acquisition of mortgage servicing rights and bulk loan portfolios mainly with mortgage companies, savings associations, commercial banks and other institutional investors. We believe that we have competed successfully for the acquisition of mortgage servicing rights and bulk loan portfolios by relying on the advantages provided by our unique corporate structure and the secondary market expertise of our employees. We believe that Matrix Bank's most direct competition for deposits comes from local financial institutions. Customers distinguish between market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Matrix Bank's cost of funds fluctuates with general market interest rates. During certain interest rate environments, we expect additional significant competition for deposits from corporate and governmental debt securities, as well as from money market mutual funds. Matrix Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing. 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. United Financial 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 compete mainly with other mortgage companies, finance companies, savings associations and commercial banks. Customers distinguish among market participants based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Aggressive pricing policies of our competitors, especially during a declining period of mortgage loan originations, could in the future result in a decrease in our mortgage loan origination volume and/or a decrease in the profitability of our loan originations, thereby reducing our revenues and net income. We compete for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to mortgage brokers and borrowers than is furnished by our competitors. However, we do not have a significant market share of the lending markets in which we conduct operations. Sterling Trust faces considerable competition in all of the services and products that it offers, mainly from other self-directed trust companies and broker-dealers. Sterling Trust also faces competition from other trust companies and trust divisions of financial institutions. Sterling Trust's niche has been, and will continue to be, providing high quality customer service and servicing 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, 2000, the Company had 735 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 and 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. 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 of 1933. As such, we have registered with the Office of Thrift Supervision and are subject to Office of Thrift Supervision regulation, examination, supervision and reporting requirements. In addition, the Office Thrift Supervision has enforcement authority over us and our savings association and non-savings association subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of our subsidiary savings institution, Matrix Bank. In addition, Matrix Bank must notify the Office of Thrift Supervision at least 30 days before making any capital distribution to us. As a unitary savings and loan holding company, we generally are not restricted under existing laws as to the types of business activities in which we may engage, provided that Matrix Bank continues to be a "qualified thrift lender" under the Home Owners' Loan Act. To maintain its status as a qualified thrift lender, Matrix Bank must maintain a minimum percentage of its assets in qualified thrift investments unless the Office of Thrift Supervision grants an exception to this requirement. In general, qualified thrift investments include certain types of residential mortgage loans and mortgage-backed securities. Upon any nonsupervisory acquisition by us of another savings association or of a savings bank or a cooperative bank that is an insured bank that meets the qualified thrift lender test and is deemed to be a savings association by the Office of Thrift Supervision, we would become a multiple savings and loan holding company if the acquired institution is held as a separate subsidiary. Multiple savings and loan holding companies are subject to extensive limitations on the types of business activities in which they may engage. The Home Owners' Loan Act limits the activities of a multiple savings and loan holding company and its uninsured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, subject to the prior approval of the Office of Thrift Supervision, and activities authorized by Office of Thrift Supervision regulation. In addition, if Matrix Bank fails to maintain its status as a qualified thrift lender, the Home Owners' Loan Act would limit the types of business activities in which we may engage to those permissible for a multiple savings and loan holding company, and, except in limited circumstances, it would impose significant limitations on the types of activities in which Matrix Bank would be permitted to engage, on the ability of Matrix Bank to establish additional branch offices and on the types of investments that Matrix Bank would be permitted to make and retain. Federal law imposes limitations on who may control us. Specifically, the Change in Bank Control Act prohibits a person or group of persons from acquiring control of a savings association directly, or indirectly by acquiring control of a savings and loan holding company, unless the Office of Thrift Supervision has been given 60 days prior written notice of the proposed acquisition and within that time the Office of Thrift Supervision has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which the Office of Thrift Supervision may issue such a disapproval. The Office of Thrift Supervision may further extend the disapproval period under certain circumstances. A proposed acquisition may be made prior to the expiration of the disapproval period if the Office of Thrift Supervision issues written notice of its intent not to disapprove the action. Notwithstanding the above, except in certain limited circumstances, the Home Owners' Loan Act also requires that any "company" obtain the prior approval of the Office of Thrift Supervision prior to acquiring control of a savings association directly or indirectly by acquiring control of a savings and loan holding company. In considering whether to approve such an acquisition, the Office of Thrift Supervision must consider a number of factors, including: the financial and managerial resources and future prospects of the acquirer and the savings association involved, the effect of the acquisition on the savings association, the insurance risk to the deposit insurance funds of the Federal Deposit Insurance Corporation and the convenience and needs of the community to be served. The Office of Thrift Supervision may not approve a proposed acquisition which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the savings and loan business in any part of the United States. The Office of Thrift Supervision also may not approve any proposed acquisition the effect of which in any part of the United States may be substantially to lessen competition, or tend to create a monopoly, or which in any other manner would be in restraint of trade, unless the Office of Thrift Supervision finds that the anticompetitive effects of the proposed acquisition are clearly outweighed in the public interest by the probable effect of the acquisition in meeting the convenience and needs of the community to be served. Among other circumstances, under a conclusive presumption established by the Office of Thrift Supervision regulations, an acquirer will be deemed to have acquired control of a savings and loan holding company if the acquirer, directly or indirectly, through one or more subsidiaries or transactions, or acting in concert with one or more persons or companies, acquires control of more than 25 percent of any class of voting stock of the savings and loan holding company or controls in any manner the election of a majority of the board of directors of the savings and loan holding company. The Office of Thrift Supervision regulations also establish other presumptions of control with respect to acquisitions of interest in savings and loan holding companies. Gramm-Leach-Bliley. 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, and also prohibits purchase of unitary thrift holding companies by commercial firms. The Financial Services Modernization Act grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 (or has or will become a unitary savings and loan holding company pursuant to an application pending on that date). Such a company may continue to operate under present law as long as the company continues to control only one savings institution, excluding supervisory acquisitions, and each controlled institution must meet the qualified thrift lender test. It further requires that a granfathered unitary savings and loan holding compnay must continue to control at least one savings association, or a successor institution, that it controlled on May 4, 1999. 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 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. The Office of Thrift Supervision is proposing to require certain savings and loan holding companies to notify the Office of Thrift Supervision 30 days before undertaking certain significant new business activities. According to the Office of Thrift Supervision, the notice will enable the agency to assess the potential impact on the risk profile of the consolidated entity and subsidiary thrifts. The Office of Thrift Supervision also seeks comment on its proposal to codify its current practices for reviewing the capital adequacy of savings and loan holding companies and, when necessary, requiring additional capital on a case-by-case basis. The Office of Thrift Supervision could object to or conditionally approve an activity or transaction if it finds a material risk to the safety and soundness and stability of the thrift. It is possible that such regulations, if adopted, would impose time delays and potential increased capital costs to the operations of Matrix Bank. Federal Savings Bank Operations. Matrix Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its chartering authority and primary regulator, and potentially by the Federal Deposit Insurance Corporation, which insures its deposits up to applicable limits. Such regulation and supervision: 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 imposes specified liquidity requirements; 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 imposes a level of portfolio assets in which Matrix Bank must invest in qualified thrift investments, which include primarily residential mortgage loans and related investments; o places limitations on capital distributions by savings associations such as Matrix Bank, including cash dividends; o imposes assessments to the Office of Thrift Supervision to fund its 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 audit reports prepared by independent auditors to federal and state regulators. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted to the Office of Thrift Supervision. The 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 Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material impact on Matrix Bank and its operations. Transactions with Affiliates. Under current federal law, Sections 23A and 23B of the Federal Reserve Act govern transactions between depository institutions and their affiliates. These provisions are made applicable to savings associations such as Matrix Bank by the Home Owners' Loan Act. In a holding company context, in general, the parent holding company of a savings association and any companies that are controlled by the parent holding company are affiliates of the savings association. In addition, any companies that are sponsored and advised on a controlled basis by a savings association or its affiliates and any investment companies to which a savings association or its affiliates act as investment advisors are deemed to be affiliates. Section 23A limits the extent to which the savings association or its subsidiaries may engage in certain transactions with its affiliates. These transactions include, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Generally, these transactions between the savings association and any one affiliate cannot exceed 10% of the savings association's capital stock and surplus, and these transactions between the savings institution and all of its affiliates cannot, in the aggregate, exceed 20% of the savings institution's capital stock and surplus. Section 23A also establishes specific collateral requirements for loans or extensions of credit to an affiliate, and for guarantees or acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that transactions covered by Section 23A and a broad list of other specified transactions be on terms 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 Office of Thrift Supervision also generally prohibit a savings association from purchasing or investing in securities issued by an affiliate. Matrix Bank engages in transactions with its affiliates, which are structured with the intent of complying with these regulations. Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation. Matrix Bank is a member of the Savings Association Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The deposits of Matrix Bank are insured up to $100,000 per depositor by the Federal Deposit Insurance Corporation. This insurance is backed by the full faith and credit of the United States. As insurer, the Federal Deposit Insurance Corporation imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by institutions insured by the Federal Deposit Insurance Corporation. It also may prohibit any Federal Deposit Insurance Corporation-insured institution from engaging in any activity the Federal Deposit Insurance Corporation determines by regulation or order to pose a serious risk to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also may initiate enforcement actions against savings associations and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The Federal Deposit Insurance Corporation Improvement Act of 1991 required the Federal Deposit Insurance Corporation to implement a risk-based deposit insurance assessment system. Under this risk-based assessment system, all depository associations insured by the Savings Association Insurance Fund are placed into one of nine categories and assessed based upon their level of capital and supervisory evaluation. Under this system, associations classified as well capitalized and considered healthy pay the lowest assessment, which is currently 0 basis points (or, hundredths of one percent), while associations that are less than adequately capitalized and considered of substantial supervisory concern pay the highest assessment, which is currently 27 basis points. Matrix Bank currently qualifies for the lowest assessment rate. In addition, under the Federal Deposit Insurance Corporation Improvement Act, the Federal Deposit Insurance Corporation may impose special assessments on Savings Association Insurance Fund members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation may increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the Savings Association Insurance Fund will be less than the designated reserve ratio of 1.25% of deposits insured by the Savings Association Insurance Fund. In setting these increased assessments, the Federal Deposit Insurance Corporation must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the Federal Deposit Insurance Corporation. The Financing Corporation is a government agency-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. Matrix Bank's portion of the payment on the Financing Corporation bonds was .0202% of deposits for the fourth quarter of 2000 and will be .0196% of the deposits for the first quarter of 2001. The financing corporations created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Competitive Equality Banking Act of 1987 are also empowered to assess premiums on savings associations to help fund the liquidation or sale of troubled associations. Such premiums cannot, however, exceed the amount of Savings Association Insurance Fund assessments and are paid in lieu thereof. Brokered Deposits. Under the Federal Deposit Insurance Corporation regulations governing brokered deposits, well capitalized associations, 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, 2000, Matrix Bank had $203.6 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 purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Office of Thrift Supervision has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be: 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, 2000, 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 Office of Thrift Supervision 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 Office of Thrift Supervision to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restriction on interest rates paid on deposits, compensation of executive officers and capital distributions 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 at December 31, 2000: As of December 31, 2000 ------------------------ Core Risk-Based Capital Capital ------------ ------------ (Dollars in thousands) Shareholder's equity/GAAP capital.................... $ 98,920 $ 98,920 Disallowed assets.................................... 3,812 3,812 Gain on available for sale securities................ (819) (819) Additional capital items: General valuation allowances..................... -- 5,802 ------------ ------------ Regulatory capital as reported to the Office of Thrift Supervision................................... 94,289 100,091 Minimum capital requirement as reported to the Office of Thrift Supervision......................... 53,694 65,387 ------------ ------------ Regulatory capital--excess............................ $ 40,595 $ 34,704 ============ ============ Capital ratios....................................... 7.02% 12.25% Well capitalized requirement......................... 5.00% 10.00% Federal Home Loan Bank System. Matrix Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. The Federal Home Loan Bank advances must be secured by specified types of collateral and may only be obtained for the purpose of providing funds for residential housing finance. The Federal Home Loan Bank funds its operations primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank system. Matrix Bank, as a member of the Federal Home Loan Bank system, must acquire and hold shares of capital stock in its regional Federal Home Loan Bank in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 0.3% of total assets, or 5% of its advances (borrowings) from the Federal Home Loan Bank. Matrix Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2000 of $27.8 million. Federal Reserve System. The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: o for that portion of transaction accounts aggregating $44.3 million or less, which may be adjusted by the Federal Reserve Board, the reserve requirement is 3%; and o for accounts greater than $44.3 million, the reserve requirement is $1.329 million plus 10% of amounts over $44.3 million, which may be adjusted by the Federal Reserve Board between 8% and 14%, against that portion of total transaction accounts in excess of $44.3 million. At December 31, 2000, Matrix Bank had $8.7 million of reserves with the Federal Reserve System and was in compliance with the Federal Reserve Board's reserve requirements. Mortgage Banking Operations. The rules and regulations applicable to our mortgage banking operations establish underwriting guidelines that, among other things, include anti-discrimination provisions, require provisions for inspections, appraisals and credit reports on prospective borrowers and fix maximum loan amounts. Moreover, we are required annually to submit audited financial statements to the Department of Housing and Urban Development, Fannie Mae, Freddie Mac and the Government National Mortgage Association, and each regulatory entity maintains its own financial guidelines for determining net worth and eligibility requirements. Our operations are also subject to examination by the Department of Housing and Urban Development, Fannie Mae, Freddie Mac and the Government National Mortgage Association 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 Office of Thrift Supervision, as primary regulatory authority over Matrix Bank (the parent of Matrix Financial), examines our mortgage banking operations as well. Additionally, there are various state and local laws and regulations affecting our operations. We are licensed in those states in which we do business requiring such a license where the failure to be licensed would have a material adverse effect on us, our business, or our assets. Mortgage origination operations also may be subject to state usury statutes. Regulation of Sterling Trust Company. Sterling Trust provides custodial services and directed, non-discretionary trustee services. Sterling Trust was chartered under the laws of the State of Texas, and as a Texas trust company is subject to supervision, regulation and examination by the Texas Department of Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is subject to virtually all provisions of the Texas Finance Code as if the trust company were a state chartered bank. The activities of a Texas trust company are limited by applicable law generally to acting as a trustee, executor, administrator, guardian or agent for the performance of any lawful act, and to lend and accumulate money when authorized under applicable law. In addition, a Texas trust company with capital of $1 million or more, such as Sterling Trust, has the power to: o purchase, sell, discount and negotiate notes, drafts, checks and other evidences of indebtedness; o purchase and sell securities; o issue subordinated debentures and capital notes with the written consent of the Texas Banking Commissioner; and o exercise powers incidental to the enumerated powers described in the Texas Finance Code. A Texas trust company, such as Sterling Trust, is generally prohibited from accepting demand or time deposits if not insured by the Federal Deposit Insurance Corporation. Limitation on Capital Distributions. The Texas Finance Code prohibits a Texas trust company from reducing its outstanding capital and restricted surplus through redemption or other capital distribution without the prior written approval of the Texas Banking Commissioner. The Texas Finance Code does not prohibit the declaration and payment of pro rata share dividends consistent with the Texas Business Corporation Act. Moreover, Sterling Trust anticipates that it will not pay cash dividends during 2001. Investments. A Texas trust company is generally obligated to maintain an amount equal to 40% of its capital and surplus in investments that are readily marketable and that can be converted into cash within four business days. So long as it complies with those requirements, a Texas trust company generally is permitted to invest its corporate assets in any investment permitted by law. However, unless otherwise permitted by the Texas Finance Code, a Texas trust company cannot invest an amount in excess of 15% of its capital and certified surplus in the securities of a single issuer without the prior written consent of the Texas Banking Commissioner. Branching. The Texas Finance Code permits a Texas trust company to establish and maintain branch offices at any location within the state if it first obtains written approval of the Texas Banking Commissioner. Transactions with Related Parties. The Texas Finance Code prohibits the sale or lease of an asset of a Texas trust company, or the purchase or lease of an asset by a Texas trust company, where the transaction involves an officer, director, principal shareholder or affiliate, unless the transaction is approved by a disinterested majority of the board of directors or the written approval of the Texas Banking Commissioner is first obtained. Enforcement. Under applicable provisions of the Texas Finance Code, the Texas Banking Commissioner has the power to issue enforcement actions against a Texas trust company or any officer, employee or director of a Texas trust company. In addition, in certain circumstances, the Texas Banking Commissioner may remove a present or former officer, director or employee of a Texas trust company from office or employment, and may prohibit a shareholder or other persons participating in the affairs of a Texas trust company from such participation. The Texas Banking Commissioner has the authority to assess civil penalties of up to $500 per day for violations of a cease and desist, removal or prohibition order. Capital Requirements. Applicable law generally requires a Texas trust company to have and maintain minimum restricted capital of at least $1 million. The Texas Banking Commissioner may require additional capital of a Texas trust company if the Texas Banking Commissioner determines it necessary to protect the safety and soundness of such company. If the Texas Banking Commissioner were to do so, there is no assurance that Sterling Trust would be able to meet such additional requirements. In such 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. 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 Location Square Feet Owned/Leased Occupant Mortgage Payment - -------------------------- -------------- ------------------------------------- -------------------------------- ------------------ Denver, CO.............. 29,298 Leased through July 31, 2006 Matrix Bancorp, United $ 44,168 Financial, Matrix Asset Management, Matrix Bank, First Matrix and Matrix Settlement & Clearance Services Denver, CO.............. 8,100 Leased through June 30, 2001 Matrix Asset Management $ 8,746 Newtown, PA............. 1,365 Leased through June 30, 2003 Matrix Asset Management $ 2,446 Phoenix, AZ............. 62,771 Leased through February 28, 2007 Matrix Financial, Matrix Bank, $50,133 ABS and Matrix Bancorp Atlanta, GA............. 4,129 Leased through August 31, 2003 Matrix Financial $ 4,843 Chesterfield, MO........ 1,570 Leased through May 1, 2001 Matrix Financial $ 2,355 Chicago, IL............. 294 Leased through April 30, 2003 Matrix Financial $ 2,729 Clayton, MO............. 6,718 Leased through June 30, 2003 Matrix Financial $13,996 Dallas, TX.............. 6,205 Leased through May 31, 2004 Matrix Financial $ 7,756 Denver, CO.............. 9,549 Leased through June 30, 2002 Matrix Financial $11,401 Houston, TX............. 4,011 Leased through October 31, 2003 Matrix Financial $ 5,682 Phoenix, AZ............. 4,040 Leased through June 14, 2002 Matrix Financial $ 6,902 Sacramento, CA.......... 4,202 Leased through December 31, 2003 Matrix Financial $ 7,353 Santa Ana, CA........... 8,851 Leased through August 31, 2003 Matrix Financial $13,277 Albuquerque, NM......... 143 Leased through August 15, 2001 Matrix Bank $ 450 Evergreen, CO........... 1,855 Leased through February 1, 2003 Matrix Bank $ 4,085 Las Cruces, NM.......... 1,800 Owned Matrix Bank N/A Las Cruces, NM.......... 30,000(1) Owned Matrix Bank N/A Sandy, UT............... 245 Leased through July 1, 2001 Matrix Bank $ 1,255 Sun City, AZ............ 3,000 Owned Matrix Bank N/A Westminster, CO......... 823 Leased through March 1, 2003 Matrix Bank $ 1,419 Waco, TX................ 11,300 Leased through June 30, 2001(2)(3) Sterling Trust $13,553 Waco, TX................ 928 Leased through June 30, 2001(3) Sterling Trust $ 1,021 Fort Worth, TX.......... 1,148 Leased through November 30, 2004 First Matrix $ 1,579 Cottonwood, AZ.......... 2,400 Owned ABS N/A Cottonwood, AZ.......... 600 Leased month to month ABS $ 365 Peoria, AZ.............. 3,319 Leased through June 6, 2002 ABS $ 5,360 Tuscon, AZ.............. 1,879 Leased through September 30, 2002 ABS $ 2,322 Snowflake, AZ........... 2,850 Leased month to month ABS $ 2,760 Deerfield Beach, FL 500 Leased month to month ABS $ 795
[FN] (1)Of this 30,000 square feet, approximately 17,800 square feet serve as the headquarters for Matrix Bank. Substantially all of the remaining space is rented to unaffiliated third parties at market prices. (2)The lease agreement provides for renewal options and allocation of certain expenses the lessee would reimburse over a specified amount during the life of the lease. (3)Management anticipates renewal of this lease at its expiration. 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. With respect to all litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty. Nevertheless, we do not believe any of such litigation matters will result in a material adverse impact on our consolidated financial condition, results of operations or cash flows, except that no such assurances can be given with respect to the litigation matters set forth below, against which no accrual for loss has been made as of December 31, 2000. Matrix Bancorp. 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 Matrix Bancorp and Fidelity in connection with the termination of their proposed merger. The arbitration panel has ruled that the entire Merger Termination Agreement was unenforceable. Matrix Bancorp and Matrix Bank have filed an appeal of the arbitration panel's decision in federal district court in Phoenix, Arizona. Matrix Bancorp and Matrix Bank believe they have meritorious points of appeal and intend to prosecute the appeal vigorously. Matrix Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings, Inc., Matrix Bank, and Guy A. Gibson, President and Chief Executive Officer of Matrix Bancorp, Richard V. Schmitz, Chairman of the Board of Matrix Bancorp, and D. Mark Spencer, Vice Chairman of Matrix Bancorp, have been named defendants in an action 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. 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 ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Matrix Bancorp and Sterling Trust have been named defendants in an action styled Victor Doroski v. David M. Mobley, et. al. pending before the American Arbitration Association in Waco, Texas. This action was initially filed by the plaintiff in the United States District Court for the Southern District of California, but was ordered to arbitration by the court in July 2000. In this action, the plaintiff has alleged that Sterling Trust and Matrix Bancorp violated various provisions of the Commodities Exchange Act in connection with plaintiff's investment of certain monies in his self-directed IRA in various funds allegedly affiliated with Mr. Doroski's appointed representative, David M. Mobley (the "Mobley Funds"). Sterling Trust acted only as self-directed custodian for Mr. Doroski's IRA. Matrix Bancorp never had any dealings with Mr. Mobley, the Mobley Funds or Mr. Doroski. The arbitration hearing is set for June 2001. The defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. 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 "Origination Facilities"). At this time, it appears that no other financial institution that provided an Origination Facility to Island Mortgage has a conflicting interest with Matrix Bank in respect of the loans purchased by Matrix Bank, which were approximately $12.4 million in original principal amount (the "Purchased Loans"). However, several third parties have instituted lawsuits against Matrix Bank claiming an equitable interest in a portion of the Purchased Loans (approximately $2.4 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. In addition, parties in the chain of title to property securing approximately $2.5 million loans, including sellers and prior lienholders are seeking to void or rescind their transactions on the theory that they never received consideration. Matrix Bank believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. The trustee for Island Mortgage has received an order from the Bankruptcy Court finding that the Purchased Loans are a part of the estate of Island Mortgage. Nevertheless, the trustee and Matrix Bank have reached an agreement, in principle, whereby the trustee will release all of its right in and to the Purchased Loans if the trustee, after performance of a "due diligence" review, determines that Matrix Bank owns the Purchased Loans or, would otherwise have a perfected security interest in the Purchased Loans. Matrix Bank believes it can adequately demonstrate to the trustee that it is the owner of the Purchased Loans, or otherwise has a perfected security interest in the Purchased Loans. The Company intends to vigorously defend its position in this matter. The ultimate legal and financial liability of the Company, if any, in this bankruptcy cannot be estimated with certainty at this time. For a description of Roderick Adderley, et al. v. Guy A. Gibson, et al., please see "Matrix Bancorp" above. Sterling Trust. Sterling Trust has been named a defendant in an action 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. Sterling Trust has filed an appeal of this judgment and believes it has meritorious points of appeal. It intends to vigorously prosecute the appeal of this action against which no accrual for loss has been made. The ultimate resolution of this matter, which is expected to occur in nine to 18 months, could result in a loss of up to $6.4 million plus post-judgment interest and additional attorneys' fees. The ultimate legal and financial liability, if any, of Sterling Trust cannot be estimated with certainty at this time. Sterling Trust has been named a defendant in an action styled John A. Redin, et. al. v. Sterling Trust Company, et. al. pending in the Superior Court of the State of California for the County of Los Angeles. The plaintiffs in this action seek to certify a class action on behalf of all persons and entities that invested in promissory notes issued by Personal Choice Opportunities. The plaintiffs allege, among other things, that Sterling Trust, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. Sterling Trust believes it has adequate defenses and intends to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. Sterling Trust has been named a defendant in several lawsuits pending in the United States District Court for the Western District of Pennsylvania. All of such actions have been instituted by one law firm. The style of these actions 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.; Don Glazer, et. al. v. Technical Support Servs., Inc., et. al.; and Donald Maudlin, et. al. v. World Vision Entertainment, Inc., et. al. Each case seeks certification of a class action and alleges negligent misrepresentation, breach of fiduciary duty, negligence and civil conspiracy against Sterling Trust in connection with Sterling Trust's performance of its duties as self-directed custodian for the plaintiffs' IRAs, which participated in promissory note programs issued by the various companies named in the style of the cases above. Sterling Trust believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. For a description of the Doroski arbitration, please see "-Matrix Bancorp" above. 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, 2000. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock, $.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, 2000............................ $ 8.250 $ 6.031 September 30, 2000........................... 12.938 5.500 June 30, 2000................................ 9.000 6.750 March 31, 2000 .............................. 14.125 7.875 December 31, 1999............................$ 15.125 $ 11.000 September 30, 1999........................... 16.063 11.250 June 30, 1999................................ 18.000 7.625 March 31, 1999............................... 18.500 11.625
On March 1, 2001, the closing price of our common stock was $8.813 per share. Also, as of that date, the approximate number of holders of record of our common stock was 48. 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 this program, we repurchased a total of 237,000 shares through December 31, 2000, for a total purchase price of approximately $1.8 million. Our ability to repurchase stock is 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 million plus 25% of the Company's cumulative consolidated net income for fiscal quarters beginning with the quarter ending March 31, 2001. We have not paid any dividends on our equity for the last two 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 9 to the consolidated financial statements included elsewhere in this document. In addition, the ability of Sterling Trust and Matrix Bank to pay dividends to Matrix Bancorp may be restricted in certain instances. See "Regulation and Supervision." 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. should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each of which is included elsewhere in this document. In February 1997, we completed our acquisition of The Vintage Group in a transaction accounted for as a pooling of interests. As a result of the pooling, our historical financial and other information has been restated to include the financial and other information of The Vintage Group.
As of and for the Year Ended December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- --------- --------- ---------- -------- (Dollars in thousands, except per share data) Statement of Income Data Net interest income before provision for loan and valuation losses....... $ 29,785 $ 29,463 $ 24,190 $ 13,888 $ 6,059 Provision for loan and valuation losses.......... 4,235 3,180 4,607 874 143 -------- --------- --------- ---------- -------- Net interest income after provision for loan and valuation losses...... 25,550 26,283 19,583 13,014 5,916 Noninterest income: -------- --------- --------- ---------- -------- Loan administration........ 23,850 23,686 17,411 16,007 8,827 Brokerage.................. 5,476 6,156 7,054 3,921 4,364 Trust services............. 4,923 4,840 4,169 3,561 3,061 Real estate disposition services................. 3,677 3,659 2,036 1,121 564 Gain on sale of loans and mortgage-backed securities............... 982 3,247 3,108 2,441 3,121 Gain on sale of mortgage servicing rights......... 2,634 363 803 3,365 3,232 Loan origination........... 7,587 6,218 5,677 4,694 1,809 School services............ 4,240 2,813 46 - - Other...................... 5,423 9,378 6,441 2,919 1,609 -------- --------- --------- ---------- -------- Total noninterest income.. 58,792 60,360 46,745 38,029 26,587 Noninterest expense.......... 77,841 69,586 52,939 37,746 26,655 -------- --------- --------- ---------- -------- Income before income taxes... 6,501 17,057 13,389 13,297 5,848 Income taxes................. 2,243 6,278 4,876 5,159 2,278 -------- --------- --------- ---------- ------- Net income................... $ 4,258 $ 10,779 $ 8,513 $ 8,138 $ 3,570 ======== ========= ========= ========== ======= Net income per share assuming dilution(1) ..... $ 0.63 $ 1.58 $ 1.24 $ 1.20 $ 0.68 Weighted average common shares assuming dilution.. 6,748,857 6,833,546 6,881,890 6,781,808 5,077,321 Cash dividends(2)............ $ -- $ -- $ -- $ -- $ 201 Balance Sheet Data Total assets.................$1,418,795 $1,283,746 $1,012,155 $ 606,581 $ 274,559 Mortgage-backed securities... 66,616 -- -- -- -- Total loans, net............. 1,116,021 1,103,515 848,448 511,372 212,361 Mortgage servicing rights, net....................... 71,529 63,479 57,662 36,276 23,680 Deposits(3)(4)............... 602,669 562,194 490,516 224,982 90,179 Custodial escrow balances.... 77,647 94,206 96,824 53,760 37,881 FHLB borrowings.............. 519,433 405,000 168,000 171,943 51,250 Borrowed money(5)............ 124,503 142,101 178,789 89,909 42,431 Total shareholders' equity... 64,023 60,497 49,354 40,610 32,270 Operating Ratios and Other Selected Data Return on average assets(6).. 0.32 % 1.02 % 1.02 % 1.78% 1.69% Return on average equity(6).. 6.79 19.79 18.92 22.71 24.30 Average equity to average assets(6)................. 4.75 5.16 5.41 7.86 6.97 Net interest margin(6)(7).... 2.51 3.25 3.37 3.70 3.45 Operating efficiency ratio(8) 76.76 59.21 59.74 60.14 74.20 Total amount of loans purchased................ $ 225,898 $ 701,952 $ 678,150 $493,693 $159,015 Balance of owned servicing portfolio (end of period). 5,517,963 5,889,715 5,357,729 3,348,062 2,505,036 Trust assets under administration (end of period) .................. 3,847,038 2,545,060 2,089,562 1,437,478 1,162,231 Wholesale loan origination volume.................... 512,541 443,363 574,963 402,984 583,279 Ratios of Earnings to Fixed Charges(9) Including interest on deposits.................. 1.09x 1.38x 1.36x 1.71x 1.54x Excluding interest on deposits.................. 1.15x 1.75x 1.64x 2.30x 1.84x Loan Performance Ratios and Data Allowance for loan and valuation losses.......... $ 8,581 $ 6,354 $ 3,710 $ 1,756 $ 1,039 Nonperforming loans(10) ..... 28,516 25,641 13,209 4,990 3,903 Nonperforming loans/total loans(10) ................ 2.54 % 2.31% 1.55 % 0.97% 1.83% Nonperforming assets/total assets(10) ............... 2.20 2.06 1.40 1.03 1.89 Net loan charge-offs/average loans(6) .................... 0.18 0.06 0.38 0.04 0.03 Allowance for loan and valuation losses/ total loans ............. 0.72 0.57 0.44 0.34 0.49 Allowance for loan and valuation losses/ nonperforming loans ...... 30.09 24.78 28.09 35.19 26.62
- ---------- [FN] (1) Net income per common share assuming dilution is based on the weighted average number of common shares outstanding during each period and the dilutive effect, if any, of stock options and warrants outstanding. There are no other dilutive securities. (2) Represents dividends paid by The Vintage Group prior to its acquisition by us. (3) Following our acquisition of The Vintage Group in February 1997, Sterling Trust moved approximately $80.0 million of fiduciary deposits from a third party institution to Matrix Bank. (4) Beginning in February 1998, Matrix Bank began accepting brokered deposits. At December 31, 2000, 1999 and 1998, the total balance of brokered deposits was $203.6 million, $221.5 million and $148.7 million, respectively. (5) Included in borrowed money at December 31, 2000 and 1999, is $27.5 million pertaining to the guaranteed preferred beneficial interests in the Matrix Bancorp's 10% junior subordinated debentures. See additional discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." (6) Calculations are based on average daily balances where available and monthly averages otherwise. (7) Net interest margin has been calculated by dividing net interest income before loan and valuation loss provision by average interest-earning assets. (8) The operating efficiency ratio has been calculated by dividing noninterest expense, excluding amortization of mortgage servicing rights, by operating income. Operating income is equal to net interest income before provision for loan and valuation losses plus noninterest income. (9) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense. (10)See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Nonperforming Assets" for a discussion of the impact of certain bulk purchases of mortgage loan portfolios on the level of nonperforming loans and the effect of repurchasing sub-prime automobile 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. General Matrix Bancorp was formed in June 1993 when the founding shareholders of Matrix Financial and United Financial, two of our subsidiaries, exchanged all of their outstanding capital stock for shares of our stock in a series of transactions that were each accounted for as a pooling of interests. In September 1993, we acquired Dona Ana Savings and Loan Association, FSB, which was subsequently renamed Matrix Capital Bank. The acquisition was accounted for using the purchase method of accounting. We formed 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 in a pooling of interests and, accordingly, no goodwill was recorded and our consolidated financial statements for the prior periods have been restated. Additionally, we acquired ABS in March 1999. The acquisition was accounted for using the purchase method of accounting. On August 1, 2000, we sold the stock of United Capital Markets to one of the officers of that company, as previously disclosed. Additionally, on August 1, 2000, Matrix Financial, our mortgage banking operation, became an operating subsidiary of Matrix Bank. The principal components of our revenues consist of: o net interest income recorded by Matrix Bank; o loan administration fees generated by Matrix Financial; o brokerage and consulting and disposition services fees realized by United Financial and Matrix Asset Management, respectively; o loan origination fees and gains on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial; o trust service fees generated by Sterling Trust; and, o school service fees generated by ABS. Our results of operations are influenced by changes in interest rates and the effect of these changes on our interest spreads, the volume of loan originations, mortgage loan prepayments and the value of mortgage servicing portfolios. Comparison of Results of Operations for Fiscal Years 2000 and 1999 Net Income; Return on Average Equity. Net income decreased $6.5 million to $4.3 million for fiscal year 2000 as compared to $10.8 million for fiscal year 1999. On a per share basis, net income was $.63 per share for fiscal year 2000 and $1.58 for fiscal year 1999. Return on average equity decreased to 6.8% for fiscal year 2000 as compared to 19.8% for fiscal year 1999. The decreases in net income, earnings per share and return on average equity were caused primarily by the substantial increase in the cost of our interest-bearing liabilities, which resulted from the higher interest rate environment of fiscal year 2000 as compared to fiscal year 1999. Additionally, we incurred losses related to loans that we acquired under a previously existing purchase/repurchase facility, as well as related to the settlement of the Harbor Financial Mortgage Corporation bankruptcy. Our legal expenses in fiscal year 2000 were substantially higher than the prior fiscal year relating to litigation at Sterling Trust and the two losses mentioned above. See "Legal Proceedings." Net Interest Income. Net interest income before provision for loan and valuation losses increased $322,000 to $29.8 million for fiscal year 2000 as compared to $29.5 million for fiscal year 1999. Our net interest income before provision for loan and valuation losses increased only slightly in spite of the $276.9 million, or 30.5%, increase in our interest-earning assets. The reason for the small increase in net interest income before provision for loan and valuation losses was due to the interest rate environment, which caused the cost of our interest-bearing liabilities to increase significantly more than the yield on our interest-earning assets. The cost of our interest-bearing liabilities increased by 87 basis points, whereas the yield on our interest-earning assets only increased 9 basis points between the comparable periods. The increase in the cost of our interest-bearing liabilities caused our net interest margin to decrease to 2.51% for fiscal year 2000 as compared to 3.25% for fiscal year 1999 and our interest rate spread to decrease to 2.07% for fiscal year 2000 as compared to 2.85% for fiscal year 1999. As noted above, the compression in our net interest margin was a result of the interest rate environment during 2000 and our continued philosophy of acquiring adjustable-rate mortgages. 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 $1.0 million, or 33.2%, to $4.2 million for fiscal year 2000 as compared to $3.2 million for fiscal year 1999. This increase was primarily attributable to ABS' charge-off of a $768,000 loan during 2000 due to the closing of one of its school customers. The remaining increase was due to increases in the provision at ABS, Matrix Bank and Matrix Financial. 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 were consistent with an increase of only $164,000 to $23.9 million for fiscal year 2000 as compared to $23.7 million for fiscal year 1999. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. Our mortgage loan servicing portfolio decreased to an average balance of $5.4 billion for fiscal year 2000 as compared to an average balance of $5.6 billion for fiscal year 1999. This decrease was offset by a small increase in the average service fee rate, including all ancillary income, to 0.44% for fiscal year 2000 as compared to 0.43% for fiscal year 1999. Brokerage fees. Brokerage fees represent income earned from brokerage and consulting services performed pertaining to mortgage servicing rights. Brokerage fees decreased $680,000, or 11.0%, to $5.5 million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999. This decrease was the result of a decrease in the balance of residential mortgage servicing portfolios brokered by United Financial, which in terms of aggregate unpaid principal balances on the underlying loans, decreased $11.3 billion to $36.4 billion for fiscal year 2000 as compared to $47.7 billion for fiscal year 1999. Brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon the seller's need to recognize a sale or to receive cash flows. Trust Services. Trust service fees increased $83,000, or 1.7%, to $4.9 million for fiscal year 2000 as compared to $4.8 million for fiscal year 1999. Trust accounts under administration at Sterling Trust increased to 39,220 accounts at December 31, 2000 from 36,546 accounts at December 31, 1999 and total fiduciary assets under administration increased to $3.8 billion at December 31, 2000 from $2.5 billion at December 31, 1999. Most of the growth in accounts and assets under administration occurred in third party administrator accounts, which are generally priced at lower fees based on the level of administration required. Real Estate Disposition Services. Real estate disposition services represents fees earned by Matrix Asset Management for real estate management and disposition services provided on foreclosed properties owned by third party financial services companies and financial institutions. Real estate disposition service income was consistent between the fiscal years 2000 and 1999, with only an $18,000 increase in fiscal year 2000 over fiscal year 1999. Gain on Sale of Loans and Mortgage-Backed Securities. Gain on sale of loans and mortgage-backed securities decreased $2.3 million to $982,000 for fiscal year 2000 as compared to $3.2 million for fiscal year 1999. These loan sales were completed under standard purchase and sale agreements, with standard representations and warranties and without recourse. The gains from these sales represent cash gains. Gain on sale of loans can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights increased $2.3 million to $2.6 million for fiscal year 2000 as compared to $363,000 for fiscal year 1999. In terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights, we sold $1.1 billion in purchased mortgage servicing rights during fiscal year 2000 as compared to $161.2 million during fiscal year 1999. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we expect to, at times, pursue opportunistic sales of mortgage servicing rights. The current year sale was undertaken to take advantage of aggressive pricing in the marketplace. Loan Origination. Loan origination income includes all mortage loan fees, secondary marketing activity on new loan originations and servicing release premiums on new originations sold, net of origination costs. Loan origination income increased $1.4 million, or 22.0%, to $7.6 million for fiscal year 2000 as compared to $6.2 million for fiscal year 1999. Approximately $806,000 of this increase related to loans originated loans as a result of increased originated and sold by Matrix Bank's SBA loan department. The remainder of the increase is attributable to an increase in wholesale residential mortgage loan production by $69.1 million, or 15.6%, to $512.5 million during fiscal year 2000 as compared to $443.4 million during fiscal year 1999. School Services. School services income represents fees earned by ABS for outsourced business and consulting services provided to scdhools. School services income increased $1.7 million, or 50.7%, to $4.2 million for fiscal year 2000 as compared to $2.8 million for fiscal year 1999. This increase was primarily due to an increase in the pricing for ABS services, the addition of new school customers and our acquisition of ABS in March 1999, which resulted in less than a full year of revenues being recognized in 1999. Other Income. Other income decreased $4.0 million, or 42.2%, to $5.4 million for fiscal year 2000 as compared to $9.4 million for fiscal year 1999. The decrease in other income was primarily due to: o a $1.9 million decrease in consulting income from United Capital Markets because of its August sale and an overall slower year for that company; and o a decrease in Matrix Bank's income from certain financing transactions, which decreased miscellaneous fee income by $1.7 million compared to the prior fiscal year. Noninterest Expense. Noninterest expense increased $8.2 million, or 11.9%, to $77.8 million for fiscal year 2000 as compared to $69.6 million for fiscal year 1999. This increase was primarily due to increased compensation and benefits expense, increased other general and administrative expense and increased professional fees. These increases were offset by a decrease in the amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated:
Year Ended December 31, ------------------------------ 2000 1999 -------------- ------------- (In thousands) Compensation and employee benefits.................................... $ 34,245 $ 29,336 Amortization of mortgage servicing rights ............................ 9,851 16,403 Occupancy and equipment............................................... 4,785 3,727 Postage and communication............................................. 2,812 2,688 Professional fees..................................................... 4,687 2,385 Data processing....................................................... 2,413 1,688 Other general and administrative...................................... 19,048 13,359 -------------- ------------- Total........................................................... $ 77,841 $ 69,586 ============== =============
Compensation and employee benefits increased $4.9 million, or 16.7%, to $34.2 million for fiscal year 2000 as compared to $29.3 million for fiscal year 1999. This increase was primarily the result of increased salary expense at Matrix Financial, ABS, Matrix Bancorp and Matrix Bank. Matrix Financial's salary expense increased towards the later half of 2000 related to its initiative to build a production platform. This initiative involved opening two new production offices, acquiring a servicing and production platform and hiring additional administrative and production staff. We had an overall increase of 135 employees, or 22.5%, to 735 employees at December 31, 2000 as compared to 600 employees at December 31, 1999. Amortization of mortgage servicing rights decreased $6.5 million, or 39.9%, to $9.9 million for fiscal year 2000 as compared to $16.4 million for fiscal year 1999. 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 higher interest rates prevalent in the market, prepayment speeds on our servicing portfolio decreased to an average of 12.1% during fiscal year 2000 as compared to 20.6% during fiscal year 1999. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $9.9 million, or 41.5%, to $33.7 million for fiscal year 2000 as compared to $23.8 million for fiscal year 1999. The $5.7 million increase in other general and administrative expense increase was primarily attributable to previously mentioned losses from a purchase/repurchase facility and the Harbor settlement. Additionally, we experienced a $2.3 million increase in professional fees related mainly to litigation at Sterling Trust and legal expenses associated with the Harbor settlement. Provision for Income Taxes. Our provision for income taxes decreased $4.1 million to $2.2 million for fiscal year 2000 as compared to $6.3 million for fiscal year 1999. The decrease in pre-tax income was further enhanced by a reduction in our effective tax rate to 34.5% for fiscal year 2000 from 36.8% for fiscal year 1999. The decrease in the effective tax rate was the result of our reduced earnings and our origination of tax-exempt financing. Comparison of Results of Operations for Fiscal Years 1999 and 1998 Net Income; Return on Average Equity. Net income increased $2.3 million, or 26.6%, to $10.8 million for fiscal year 1999 as compared to $8.5 million for fiscal year 1998. On a per share basis, net income was $1.58 per share for fiscal year 1999 and $1.24 for fiscal year 1998. Return on average equity increased to 19.8% for fiscal year 1999 as compared to 18.9% for fiscal year 1998. Excluding 1998 non-recurring charges, net income increased $869,000, or 8.8%, to $10.8 million for fiscal year 1999 as compared to $9.9 million for fiscal year 1998. Non-recurring charges in 1998, on a pre-tax basis, consisted of a $2.3 million loss recorded related to alleged fraud committed by MCA Mortgage Corporation ("MCA"). The alleged fraud involved loans acquired by Matrix Financial from MCA for which MCA continued to provide servicing on Matrix Financial's behalf. Excluding non-recurring charges, earnings per share and return on average equity for fiscal year 1998 were $1.44 and 22.0%, respectively. Net Interest Income. Net interest income before provision for loan and valuation losses increased $5.3 million, or 21.8%, to $29.5 million for fiscal year 1999 as compared to $24.2 million for fiscal year 1998. The increase in net interest income before provision for loan and valuation losses was due to a 26.7% increase in our average loans, which was offset by a decrease in our average yield on loans to 8.25% in 1999 from 8.59% in 1998, primarily due to the continuation of lower interest rates in the market during the first half of 1999, as well as our acquisition of fewer discounted loans. The decrease in the average yield on loans was offset by a reduction in the cost of our interest-bearing liabilities to 5.28% in 1999 from 5.50% in 1998, as we experienced significant decreases in our costs for deposits and Federal Home Loan Bank borrowings. Average interest-earning assets and average interest-bearing liabilities both increased 26.3% in fiscal year 1999 as compared to the prior year. Our net interest margin decreased to 3.25% for fiscal year 1999 as compared to 3.37% for fiscal year 1998. 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 $1.4 million to $3.2 million for fiscal year 1999 as compared to $4.6 million for fiscal year 1998. This decrease was primarily attributable to the $2.2 million pre-tax provision recorded in 1998, related to MCA, but was offset by increases made to the provision due to the increase in the balance of net loans receivable, which increased to $1.1 billion at December 31, 1999 as compared to $848.4 million at December 31, 1998 and our origination of additional non-residential mortgage loans. 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 fees increased $6.3 million, or 36.0%, to $23.7 million for fiscal year 1999 as compared to $17.4 million for fiscal year 1998. Loan administration fees are affected by factors that include the size of our residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees received. The mortgage loan servicing portfolio increased to an average balance of $5.6 billion for fiscal year 1999 as compared to an average balance of $4.0 billion for fiscal year 1998. Our average service fee rates (including all ancillary income) were comparable during the two years with 0.43% for fiscal year 1999 as compared to 0.44% for fiscal year 1998. Brokerage Fees. Brokerage fees decreased $898,000, or 12.7%, to $6.2 million for fiscal year 1999 as compared to $7.1 million for fiscal year 1998. This decrease is the result of a decrease in the balance of residential mortgage servicing portfolios brokered by United Financial, which in terms of aggregate unpaid principal balances on the underlying loans, decreased $18.7 billion to $47.7 billion for fiscal year 1999 as compared to $66.4 billion for fiscal year 1998. The decrease is attributable to a slow down in the market for the purchase and sale of mortgage servicing rights, which was seen primarily in the last quarter of 1999. Brokerage fees vary from quarter to quarter as the timing of servicing sales is dependent upon the seller's need to recognize a sale or to receive cash flows. Trust Services. Trust service fees increased $671,000, or 16.1%, to $4.8 million for fiscal year 1999 as compared to $4.2 million for fiscal year 1998. This increase is associated with the growth in total assets under administration to over $2.5 billion at December 31, 1999 from $2.1 billion at December 31, 1998, primarily as a result of increased mutual fund values at year-end 1999. The number of trust accounts remained fairly constant with 36,546 accounts at December 31, 1999 and 36,374 accounts at December 31, 1998. Most of the growth in accounts and assets under administration occurred in third party administrator accounts, which aregenerally priced at lower fees based on the level of administration required. Real Estate Disposition Services. Real estate disposition service income increased $1.7 million, or 79.7%, to $3.7 million for fiscal year 1999 as compared to $2.0 million for fiscal year 1998. Gain on Sale of Loans and Mortgage-Backed Securities. During fiscal years 1999 and 1998, we made bulk loan sales of approximately $192.7 million and $319.4 million, for gains on sale of bulk mortgage loans of $3.2 million and $3.1 million, respectively. Gain on sale of loans can fluctuate significantly from year to year based on a variety of factors, such as the current interest rate environment, the supply and mix of loan portfolios available in the market, the type of loan portfolios we purchase and the particular loan portfolios we elect to sell. Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage servicing rights decreased $440,000, or 54.8%, to $363,000 for fiscal year 1999 as compared to $803,000 for fiscal year 1998. In terms of aggregate outstanding principal balances of mortgage loans underlying such mortgage servicing rights, we sold $161.2 million in purchased mortgage servicing rights during fiscal year 1999 as compared to $175.3 million during fiscal year 1998. Gains from the sale of mortgage servicing rights can fluctuate significantly from year to year based on the market value of our servicing portfolio, the particular servicing portfolios we elect to sell and the availability of similar portfolios in the market. Due to our position in and knowledge of the market, we will at times pursue opportunistic sales of mortgage servicing rights. Loan Origination. Loan origination income increased $541,000, or 9.5%, to $6.2 million for fiscal year 1999 as compared to $5.7 million for fiscal year 1998. Approximately $391,000 of this increase related to loans originated and sold by Matrix Bank's SBA loan department. The remaining increase resulted primarily from differences in the pricing and mix of loans originated, which offset the $131.6 million decrease in wholesale residential mortgage loan production. We originated $443.4 million of wholesale residential mortgage loans in 1999 as compared to $575.0 million in 1998. We attribute the decrease in wholesale originations primarily to the effects of rising interest rates in the last half of 1999. School Services. School services income increased to $2.8 million for fiscal year 1999 as compared to $46,000 for fiscal year 1998. The increase was due to our acquisition of ABS in March 1999. Other Income. Other income increased $3.0 million, or 45.6%, to $9.4 million for fiscal year 1999 as compared to $6.4 million for fiscal year 1998. The increase in other income was primarily due to certain of our financing transactions which increased miscellaneous fee income approximately $2.3 million over the prior fiscal year. Noninterest Expense. Noninterest expense increased $16.7 million, or 31.4%, to $69.6 million for fiscal year 1999 as compared to $52.9 million for fiscal year 1998. This increase was primarily due to our overall growth and expansion, including the acquisition of ABS, and an increase in the amortization of mortgage servicing rights. The following table details the major components of noninterest expense for the periods indicated:
Year Ended December 31, ------------------------------ 1999 1998 -------------- ------------- (In thousands) Compensation and employee benefits........................... $ 29,336 $ 22,194 Amortization of mortgage servicing rights ................... 16,403 10,563 Occupancy and equipment...................................... 3,727 3,059 Postage and communication.................................... 2,688 2,393 Professional fees............................................ 2,385 1,439 Data processing.............................................. 1,688 1,344 Other general and administrative............................. 13,359 11,947 -------------- ------------ Total.................................................. $ 69,586 $52,939 ============== ============
Compensation and employee benefits increased $7.1 million, or 32.2%, to $29.3 million for fiscal year 1999 as compared to $22.2 million for fiscal year 1998. This increase was primarily the result of our acquisition of ABS, which resulted in increased compensation expense of $2.3 million. Additionally, expansions in the operations of Matrix Financial, Matrix Bank and Sterling Trust also increased compensation expense. We had an overall increase of 153 employees, or 34.2%, to 600 employees at December 31, 1999 as compared to 447 employees at December 31, 1998, of which 84 were at ABS. Amortization of mortgage servicing rights increased $5.8 million, or 55.3%, to $16.4 million for fiscal year 1999 as compared to $10.6 million for fiscal year 1998. Amortization of mortgage servicing rights fluctuates based on the size of our mortgage servicing portfolio and the prepayment rates experienced. Our prepayment rates on our servicing portfolio averaged 20.6% during fiscal year 1999 as compared to 22.6% during fiscal year 1998. In response to the lower interest rates prevalent in the market during the first half of 1999, prepayment speeds remained high due to borrowers refinancing into lower interest rate mortgages. However, we have seen significant decreases in our prepayment speeds in the latter half of 1999. The remainder of noninterest expense, which includes occupancy and equipment expense, postage and communication expense, professional fees, data processing costs and other expenses, increased $3.6 million, or 18.2%, to $23.8 million for fiscal year 1999 as compared to $20.2 million for fiscal year 1998. The increase was generally attributable to increased legal expenses and increased servicing costs associated with the nonperforming Federal Housing Administration/Veteran's Administration loans that were transferred to us in September 1999 as part of the loans acquired from Harbor. See "--Asset and Liability Management--Nonperforming Assets." Provision for Income Taxes. Our provision for income taxes increased $1.4 million to $6.3 million for fiscal year 1999 as compared to $4.9 million for fiscal year 1998. The increase was a result of our increased pre-tax income, as well as a slight increase in the effective tax rate to 36.8% for fiscal year 1999 from 36.4% for fiscal year 1998. 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, ----------------------------------------------------------------- 2000 1999 ------------------------------- ------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ----------- --------- --------- ----------- --------- ---------- (Dollars in thousands) Assets Interest-earning assets: Loans receivable, net ....................... $ 1,086,041 $ 90,591 8.34 % $ 877,117 $ 72,355 8.25 Mortgage-backed securities................... 45,253 3,374 7.46 -- -- -- Interest-earning deposits.................... 28,831 1,508 5.23 16,326 629 3.85 Federal Home Loan Bank stock................. 24,199 1,913 7.91 13,934 766 5.50 ----------- --------- --------- ----------- --------- ---------- Total interest-earning assets.............. 1,184,324 97,386 8.22 907,377 73,750 8.13 Noninterest-earning assets: Cash......................................... 16,305 18,090 Allowance for loan and valuation losses...... (7,302) (4,392) Premises and equipment....................... 10,318 10,765 Other assets................................. 116,602 122,705 ----------- ----------- Total noninterest-earning assets........... 135,923 147,168 ----------- ----------- Total assets............................... $ 1,320,247 $ 1,054,545 =========== =========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts............................ $ 2,981 102 3.42 $ 2,758 96 3.48 Money market and NOW accounts................ 156,649 3,671 2.34 213,192 6,356 2.98 Certificates of deposit...................... 361,084 22,502 6.23 287,347 15,137 5.27 Federal Home Loan Bank borrowings............ 430,331 27,242 6.33 175,619 9,184 5.23 Borrowed money............................... 147,377 14,084 9.56 159,272 13,514 8.48 ----------- --------- --------- ----------- --------- ----------- Total interest-bearing liabilities......... 1,098,422 67,601 6.15 838,188 44,287 5.28 ----------- --------- --------- ----------- --------- ----------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances).................................... 140,615 140,847 Other liabilities............................ 18,505 21,054 ----------- ----------- Total noninterest-bearing liabilities........ 159,120 161,901 Shareholders' equity......................... 62,705 54,456 ----------- ----------- Total liabilities and shareholders' equity. $ 1,320,247 $ 1,054,545 =========== =========== Net interest income before provision for loan and valuation losses....................... $ 29,785 $ 29,463 ========= ========= Interest rate spread........................... 2.07 % 2.85 % ========= ========== Net interest margin............................ 2.51 % 3.25 % ========= ========== Ratio of average interest-earning assets to average interest-bearing liabilities............... 107.82 % 108.25% ========= ========== [Table Continued] Year Ended December 31, ---------------------------------- 1998 -------------------------------- Average Average Balance Interest Rate ----------- -------------------- Assets Interest-earning assets: Loans receivable, net .......................$ 692,443 $ 59,452 8.59 % Mortgage-backed securities................... -- -- -- Interest-earning deposits.................... 15,042 627 4.17 Federal Home Loan Bank stock................. 10,719 615 5.74 -------------------------------- Total interest-earning assets.............. 718,204 60,694 8.45 Noninterest-earning assets: Cash......................................... 13,241 Allowance for loan and valuation losses...... (2,223) Premises and equipment....................... 9,913 Other assets................................. 93,208 ------------ Total noninterest-earning assets........... 114,139 ------------ Total assets...............................$ 832,343 ============ Liabilities and Shareholders' Equity Interest-bearing liabilities: Passbook accounts............................$ 2,859 102 3.57 Money market and NOW accounts................ 142,382 4,432 3.11 Certificates of deposit...................... 211,592 11,687 5.52 Federal Home Loan Bank borrowings............ 159,381 8,554 5.37 Borrowed money............................... 147,368 11,729 7.96 -------------------------------- Total interest-bearing liabilities......... 663,582 36,504 5.50 -------------------------------- Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances).................................. 106,247 Other liabilities............................ 17,518 ------------ Total noninterest-bearing liabilities........ 123,765 Shareholders' equity......................... 44,996 ------------ Total liabilities and shareholders' equity.$ 832,343 ============ Net interest income before provision for loan and valuation losses....................... $ 24,190 ========== Interest rate spread........................... 2.95 % ========== Net interest margin............................ 3.37 % ========== Ratio of average interest-earning assets to average interest-bearing liabilities........... 108.23 % ==========
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, 2000 vs. 1999 Year Ended December 31, 1999 vs. 1998 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, net................. $ 17,438 $ 798 $ 18,236 $ 15,308 $ (2,405) $ 12,903 Mortgage-backed securities........... 3,374 -- 3,374 -- -- -- Interest-earning deposits............. 599 280 879 52 (50) 2 Federal Home Loan Bank stock.......... 719 428 1,147 177 (26) 151 ---------- ----------- ------------ ----------- ----------- ----------- Total interest-earning assets....... 22,130 1,506 23,636 15,537 (2,481) 13,056 ----------- ----------- ------------ ----------- ----------- ----------- Interest-bearing liabilities: Passbook accounts..................... 8 (2) 6 (5) (1) (6) Money market and NOW accounts......... (1,886) (799) (2,685) 2,120 (196) 1,924 Certificates of deposit............... 4,307 3,058 7,365 4,009 (559) 3,450 Federal Home Loan Bank advances....... 15,770 2,288 18,058 853 (223) 630 Borrowed money........................ (957) 1,527 570 986 799 1,785 ----------- ----------- ------------ ----------- ----------- ----------- Total interest-bearing liabilities.. 17,242 6,072 23,314 7,963 (180) 7,783 ----------- ----------- ------------ ----------- ----------- ----------- Change in net interest income before provision for loan and valuation losses......................$ 4,888 $ (4,566) $ 322 $ 7,574 $ (2,301) $ 5,273 =========== =========== ============ =========== =========== ===========
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 Utilizing mortgage servicing rights as a source of noninterest income and as a countermeasure against the decline in the value of mortgage loans during a rising interest rate environment. Increases in interest rates tend to increase the value of mortgage servicing rights because of the resulting decrease in prepayment rates on the underlying loans; o Focusing on noninterest-bearing custodial escrow balances related to our mortgage servicing rights; o Increasing focus on lines of business that are less interest rate sensitive, such as brokerage activities, consulting services, self-directed trust services, real estate disposition and school business services; o Maintaining a wholesale loan origination operation. Wholesale originations provide a form of hedge against the balance of mortgage servicing rights. In a decreasing interest rate environment, the value of the servicing portfolio tends to decrease due to increased prepayments of the underlying loans. During this same environment, however, the volume of loan originations generally increases; o Originating and purchasing adjustable rate mortgages and selling newly originated fixed rate residential mortgages in the secondary market; o Increasing emphasis on the origination of construction 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 Increasing retail deposits, which are less susceptible to changes in interest rates than other funding sources; o Pursuing strategic acquisitions or alliances that provide fee-based income or generate liabilities that are less expensive or less interest rate sensitive than retail deposits or borrowings from third party institutions to fund our investing activities; 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 Hedging segments of our servicing portfolio and selling forward commitments on our loan pipeline. Lending Activities. Our major interest-earning asset is our loan portfolio. Consequently, a significant part of our asset and liability management involves monitoring the composition of our loan portfolio, including the corresponding maturities. The following table sets forth the composition of our loan portfolio by loan type as of the dates indicated. The amounts in the table below are shown net of discounts and other deductions.
As of December 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 -------------------------- ------------------------ ---------------------- --------------------- Amount Percent Amount Percent Amount Percent Amount Percent -------------- ---------- ------------- ---------- ----------- ---------- ----------- --------- (Dollars in thousands) Residential................. $ 903,955 81.00% $ 954,424 86.49 % $ 732,512 86.34% $ 462,604 90.46% Multi-family, commercial real estate and commercial.................. 123,491 11.07 78,046 7.07 52,689 6.21 29,492 5.77 School financing................... 51,909 4.65 31,748 2.88 24,429 2.88 2,708 0.53 Construction ............... 36,768 3.29 36,056 3.26 27,648 3.26 7,591 1.48 Consumer.................... 8,479 0.76 9,595 0.87 14,880 1.75 10,733 2.10 --------- -------- ---------- ---------- ------- ------- --------- --------- Total loans........... 1,124,602 100.77 1,109,869 100.57 852,158 100.44 513,128 100.34 Less allowance for loan and valuation losses..... 8,581 0.77 6,354 0.57 3,710 0.44 1,756 0.34 --------- -------- ----------- ---------- --------- ------- --------- --------- Loans receivable, net....... $ 1,116,021 100.00% $ 1,103,515 100.00% $ 848,448 100.00% $ 511,372 100.00% ========= ======== =========== ========== ========= ======= ========== ========= [Table Continued] As of December 31, ------------------------- 1996 ------------------------ Amount Percent ------------- ---------- Residential................. $ 192,118 90.47 % Multi-family, commercial real estate and commercial................ 15,352 7.23 School financing............ -- -- Construction ............... 1,061 0.50 Consumer.................... 4,869 2.29 ---------- ---------- Total loans........... 213,400 100.49 Less allowance for loan and valuation losses..... 1,039 0.49 ---------- ---------- Loans receivable, net....... $ 212,361 100.00 % ========== ==========
The following table presents the aggregate maturities of loans in each major category of our loan portfolio as of December 31, 2000, excluding the allowance for loan losses. Loans held for sale are classified as maturing over five years. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments or the timing of loan sales.
As of December 31, 2000 ------------------------------------------------------------- Less than One to Over Five One Year Five Years Years Total ----------------- -------------- ---------------------------- (In thousands) Residential............................................. $ 302,206 $ 593,873 $ 7,876 $ 903,955 Multi-family, commercial real estate and commercial..... 23,911 30,982 68,598 123,491 School financing........................................ 3,400 48,509 - 51,909 Construction............................................ 29,385 6,078 1,305 36,768 Consumer 2,915 3,964 1,600 8,479 ------------- ------------ ------------ ------------ Total loans ...................................... $ 361,817 $ 683,406 $ 79,379 $ 1,124,602 ============= ============ ============= =============
Loans held for sale, which are contractually due in less than one to five years, are split between fixed and adjustable rates as follows:
As of December 31, 2000 ------------------------------------------------ Less than One to Five One Year Years Total ----------------- -------------- --------------- (In thousands) Fixed.....................................................$ 182,290 $ 242,447 $ 424,737 Adjustable................................................ 123,521 400,712 524,233 ------------- ------------ --------------- Total loans.........................................$ 305,811 $ 643,159 $ 948,970 ============= ============ ===============
Loans held for investment, which are contractually due in one or more years, are split between fixed and adjustable rates as follows:
As of December 31, 2000 ------------------------------------------------ One to Five Over Five Years Years Total ----------------- -------------- --------------- (In thousands) Fixed.................................................. $ 28,759 $ 16,632 $ 45,391 Adjustable............................................. 68,524 61,717 130,241 ------------- ------------ --------------- Total loans...................................... $ 97,283 $ 78,349 $ 175,632 ============= ============ ===============
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, ----------------------------------------------------------------------- 2000 1999 1998 1997 ------------ ------------ ------------ ------------ (Dollars in thousands) Nonaccrual mortgage loans................................ $ 23,160 $ 20,185 $ 8,208 $ 4,796 Nonaccrual commercial loans and school financing ............................................ 5,224 5,301 4,349 -- Nonaccrual consumer loans................................ 132 155 652 194 ------------ ------------ ------------ ------------ Total nonperforming loans.......................... 28,516 25,641 13,209 4,990 Foreclosed real estate................................... 2,646 800 916 1,242 Repossessed automobiles.................................. -- -- -- -- ------------ ------------ ------------ ------------ Total nonperforming assets......................... $ 31,162 $ 26,441 $ 14,125 $ 6,232 ============ ============ ============ ============ Total nonperforming loans to total loans........................................ 2.54 % 2.31 % 1.55 % 0.97 % Total nonperforming assets to total assets............... 2.20 % 2.06 % 1.40 % 1.03 % Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 30.09 % 24.78 % 28.09 % 35.19 % Interest income on nonperforming loans not included in interest income.......................................... $ 1,016 $ 979 $ 524 $ 89 [Table Continued] As of December 31, --------------------- 1996 ------------ (Dollars in Thousands) Nonaccrual mortgage loans................................ $ 3,031 Nonaccrual commercial loans and school financing ............................................ -- Nonaccrual consumer loans................................ 872 ------------ Total nonperforming loans.......................... 3,903 Foreclosed real estate................................... 788 Repossessed automobiles.................................. 506 ------------ Total nonperforming assets......................... $ 5,197 ============ Total nonperforming loans to total loans........................................ 1.83 % Total nonperforming assets to total assets............... 1.89 % Ratio of allowance for loan and valuation losses to total nonperforming loans......................... 26.62 % Interest income on nonperforming loans not included in interest income.......................................... $ 120
As of December 31, 2000, we had approximately $89,000 of non-government accruing loans that were contractually past due 90 days or more. We accrue for interest on government-sponsored loans such as Federal Housing Administration insured and Veteran's Administration guaranteed loans which are past due 90 or more days, as the majority of the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $101.1 million, $147.9 million and $165.7 million as of December 31, 2000, 1999 and 1998, respectively. Nonaccrual mortgage loans as a percentage of total loans were 2.1% at December 31, 2000, 1.8% at December 31, 1999, 1.0% at December 31, 1998, 0.9% at December 1997 and 1.4% at December 31, 1996. A significant portion of the increases in 1999 and 2000 can be primarily attributed to several portfolios. The first is a sub-prime residential portfolio that we acquired on a scheduled interest and scheduled principal remittance with full recourse to the seller/servicer. In October 1999, however, the seller/servicer declared bankruptcy and the servicing was transferred to us. The total principal balance of the sub-prime portfolio was $12.2 million at December 31, 2000 and approximately $3.1 million was 90 or more days delinquent at that time. Associated with these loans, we have a $303,000 specific reserve. The second portfolio was principally associated with the Harbor settlement and consists of $11.2 million of loans at December 31, 2000, of which $5.0 million loans were 90 days or more delinquent at that time. Recorded against the $11.2 million of loans, we have $1.9 million of discounts. The increase in nonaccrual commercial loans and school financing in 1999 and 1998 is primarily the result of our origination of tax-exempt financing for charter schools for the purchase of real estate and equipment. Several of the charter schools for which we have provided financing have encountered enrollment and/or state funding delays, which has caused them to become delinquent on their obligations to us. With the start of the new fiscal year for the schools, which began on July 1, 2000, and through the efforts of ABS employees who have worked with several of the schools on their cash flow issues, we were able to remove several schools from nonaccrual status during 2000. Offsetting the decrease in nonaccrual commercial loans and school financing related to charter schools were several SBA loans that went into nonaccrual status during 2000. The prior delinquency and anticipated future delinquencies are taken into consideration in the pricing of the loans acquired. We generally purchase such loans at discounts and, in limited instances, receive recourse from the seller to further reduce our risk of loss associated with the loans' nonaccrual status. At December 31, 2000, $15.4 million, or 54.1%, 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, 2000, were $942.5 million, of which $25.4 million, or 2.7%, were nonaccrual loans. The percentage of the allowance for loan and valuation losses to nonaccrual loans varies widely due to the nature of our portfolio of mortgage loans, which are collateralized primarily by residential real estate. We analyze the collateral for each nonperforming mortgage loan to determine potential loss exposure. In conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and valuation losses. 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, -------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ------------ ------------ ------------ ----------- (Dollars in thousands) Balance at beginning of period................... $ 6,354 $ 3,710 $ 1,756 $ 1,039 $ 943 Charge-offs: Real estate-mortgage....................... 434 98 1,922 22 64 Real estate-construction................... 320 -- -- -- -- Commercial loans and school financing ..... 819 -- -- -- -- Consumer................................... 476 509 789 166 6 ------------- ------------ ------------ ------------ ------------ Total charge-offs.................... 2,049 607 2,711 188 70 Recoveries: Real estate-mortgage....................... 1 2 2 -- 8 Consumer................................... 40 69 56 31 15 ------------- ------------ ------------ ------------ ------------ Total recoveries..................... 41 71 58 31 23 ------------- ------------ ------------ ------------ ------------ Net charge-offs.................................. 2,008 536 2,653 157 47 Provision for loan losses charged to operations.. 4,235 3,180 4,607 874 143 ------------- ------------ ------------ ------------ ------------ Balance at end of period......................... $ 8,581 $ 6,354 $ 3,710 $ 1,756 $ 1,039 ============= ============ ============ ============ ============ Ratio of net charge-offs to average loans(1)..... 0.18 % 0.06 % 0.38 % 0.04 % 0.03 % ============= ============ ============ ============ ============ Average loans outstanding during the period...... $ 1,086,041 $ 877,117 $ 692,443 $ 355,848 $ 162,648 ============= ============ ============ ============ ============
- ------------ [FN] (1) Excluding charge-offs related to charter schools and our credit card operations in 2000, our credit card operations in 1999 and related to MCA and our credit card operations in 1998, the ratio of net charge-offs to average loans was 0.09%, 0.02% and 0.03%, respectively. A majority of the increase in real estate-mortgage charge-offs for 1998 as compared to 1997 is due to the loss recognized related to MCA. See "--Comparison of Results of Operations for Fiscal Years 1999 and 1998--Net Income; Return on Average Equity" for additional information. Additionally, the increases in consumer charge-offs in 2000, 1999 and 1998 pertains to losses experienced on our credit card portfolio. Credit card loans accounted for 0.12%, 0.27% and 0.53% of our total loan portfolio as of December 31, 2000, 1999 and 1998, respectively. The majority of our credit card portfolio was originated in 1996 and the balance of our unsecured credit card portfolio at December 31, 2000 was $1.4 million. The allowance for loan and valuation losses is increased by the provision for loan and valuation losses (which is charged to operations) for particular loans where management considers ultimate collection to be questionable. We evaluate all other loans as part of their respective categories and not on an individual basis. Each category of loans in the loan portfolio is assigned a loss factor based on: o the assessed risk inherent in each loan category; o certain qualitative evaluations of individual classified assets; o trends in the portfolio; o geographic and portfolio concentrations; o new products or markets; and o 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. These loss factors range from 0.10% for Federal Housing Administration/Veteran's Administration loans guaranteed by the Department of Housing and Urban Development to 8.00% for credit card loans. Additionally substandard and doubtful loans of homogeneous loan portfolios are assigned loss factors of 5.00% to 50.00% and 50.00%, respectively. We had $5.2 million, $5.3 million and $4.3 million of impaired commercial loans and school financing at December 31, 2000, 1999, and 1998, respectively. We had no impaired loans as of December 31, 1997 and 1996. The loss factors are applied to the outstanding principal balance of loans in their respective categories, and the total for all categories determines our allowance for loan and valuation losses. 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, ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ ------------------------ Percentage Percentage Percentage of Loans of Loans of Loans in each in each in each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ---------- ------------ ---------- ------------ ---------- ------------ (Dollars in thousands) Residential.................. $ 4,133 80.39 % $ 3,591 86.00 % $ 2,295 85.96 % Multi-family, commercial real estate and commercial ...... 1,684 11.28 835 7.02 564 6.18 School financing............. 2,329 4.31 1,320 2.86 275 2.87 Construction................. 302 3.27 286 3.25 207 3.24 Consumer 133 0.75 322 0.87 369 1.75 ------- ------------ ------- ------------ ------- ------------ $ 8,581 100.00 % $ 6,354 100.00 % $ 3,710 100.00 % ======= ============ ======= ============ ======= ============ [Table Continued] As of December 31, ---------------------------------------------------- 1997 1996 ------------------------ ------------------------ Percentage Percentage of Loans of Loans in each in each Category to Category to Amount Total Loans Amount Total Loans ---------- ------------ ---------- ------------ Residential.................. $ 1,234 90.15 % $ 911 90.03 % Multi-family, commercial real estate and commercial ...... 91 5.75 51 7.19 School financing............. -- 0.53 -- -- Construction................. 23 1.48 6 0.50 Consumer 408 2.09 71 2.28 ------- ------------ ------- ------------ $ 1,756 100.00 % $ 1,039 100.00 % ======= ============ ======= ============
The ratio of the allowance for loan and valuation losses to total loans was 0.77% at December 31, 2000; 0.57% at December 31, 1999; 0.44% at December 31, 1998; 0.34% at December 31, 1997; and 0.49% at December 31, 1996. 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, multi-family, commercial real estate, commercial, school financing and construction loans has increased mainly due to the increased outstanding loan principal balances in these loan categories. In addition, we have increased our origination of non 1-4 family loans, which are perceived to be higher risk and also is a contributor to the overall increase in the balance of the allowance. As of December 31, 2000, we believe that the allowance, when taken as a whole, is adequate to absorb the inherent losses in the current loan portfolio. Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability Management - General" a significant portion of our earnings and ultimate success is partially dependent upon our ability to manage our interest rate risk. Interest rate risk can be defined as the exposure of our net interest income to adverse movements in interest rates. Although we manage other risks, such as credit, operational and liquidity risk in the normal course of business, we consider interest rate risk to be a significant market risk which could potentially have the largest material effect on our financial condition and results of operations. The majority of our market risk related to interest rates exists within the operations of Matrix Bank. However, Matrix Financial also has interest rate risk related to its primary asset, mortgage servicing rights, and also related to its loan origination volumes, as well as the net interest income earned on its originated loans that are funded through warehouse lines of credit. With the majority of Matrix Financial's operations being funded by Matrix Bank, this is a smaller risk to the Company as compared to when Matrix Financial's operations were funded entirely by unaffiliated financial institutions. The susceptibility to movements in interest rates affects the cash flows generated from the mortgage servicing rights which are recorded in other income versus interest income. In a decreasing interest rate environment, the underlying servicing portfolio tends to prepay faster which reduces future servicing income; while in an increasing interest rate environment, prepayments tend to decrease, which increases expected future servicing income. As it relates to Matrix Financial's lending activities, Matrix Financial originates residential mortgage loans, which are generally pre-sold. However, between the time that the loan is originated and sold to the ultimate investor, Matrix Financial earns interest income. The loans are funded through the use of warehouse credit facilities or borrowings from Matrix Bank, both of which are generally priced based on short-term interest rates. Therefore, the net interest income that is earned by Matrix Financial is generally dependent on the spread between long-term mortgage rates and short-term interest rates. Additionally, rising interest rate environments typically decrease loan origination volumes, whereas falling interest rate environments typically increase loan origination volumes. 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. 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. Due to the historical size of Matrix Bank's loan portfolio and the high degree of purchase and sale activity, the Asset and Liability Committee has relied on the Office of Thrift Supervision interest rate risk exposure report to assist in the overall monitoring of Matrix Bank's interest rate sensitivity. Based on the information and assumptions used in the Office of Thrift Supervision exposure report as of December 31, 2000, a downward 200 basis point shock over a twelve month period would decrease Matrix Bank's capital by approximately 6%, and an upward 200 basis point shock over a twelve month period would decrease Matrix Bank's capital by approximately 12%. As Matrix Bank grew to in excess of $1 billion in total assets in 1999, we can no longer rely on the Office of Thrift Supervision reports to manage our interest rate risk. We have engaged a third party to provide consulting services that assists us with our asset/liability management. We meet with this consulting firm quarterly to review the results of our interest rate risk analysis and to discuss strategies. We are also researching various asset/liability software packages for possible future acquisition by Matrix Bank. We continue to attempt to reduce the volatility in net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate residential mortgages and have increased our efforts regarding the origination of residential construction loans, commercial real estate loans, SBA loans and limited consumer lending, which re-price or mature more quickly than fixed rate residential real estate loans. The other significant asset that we invest 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. 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, which uses Matrix Bank as the clearing bank, which creates low-cost deposits. In the ordinary course of business, we make commitments to originate residential mortgage loans and hold originated loans until delivery to an investor. Inherent in this business are risks associated with changes in interest rates and the resulting change in the market value of the pipeline loans. We mitigate this risk through the use of mandatory and best effort forward commitments to sell loans and mortgage-backed securities. As of December 31, 2000, we had $109.5 million and $132.0 million in pipeline and funded loans, respectively, offset with mandatory forward commitments of $70.7 million and best effort forward commitments of $122.0 million. The market value of loans committed for sale is determined based on the related forward loan sale commitments. Effective January 1, 2001, with the adoption of SFAS 133, we are required to treat substantially all mortgage loan commitments and loan sale commitments (both mandatory and best effort) as derivatives and record the fair value of those derivatives on the balance sheet and any subsequent changes in the fair value of those derivatives through current earnings. As the changes in fair value of the loan commitments and the loan sale commitments are generally expected to offset one another, we do not anticipate any material impact to our future earnings from pipeline loans as a result of the adoption of SFAS 133. Ownership of mortgage servicing rights exposes us to impairment of their value in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of our mortgage servicing portfolio achieves a level higher than we projected for an extended period of time, then an impairment in the associated basis in the mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, we hedged a segment of our portfolio beginning in September 1997. We had identified and hedged $353.2 million as of December 31, 2000 and $604 million as of December 31, 1999 of our mortgage servicing portfolio using a program of exchange-traded futures and options. As discussed in the notes to the consolidated financial statements presented elsewhere in this document, we are currently not seeking hedge accounting treatment following our adoption of SFAS 133 on January 1, 2001. As a result, interest rate fluctuation will impact the value of our hedging instruments and the resulting change in value will be reflected in our current operating results. Under prior accounting methods, the gain or loss associated with the change in the value of the hedging instruments would be included as an adjustment in the basis of our investment in mortgage servicing rights. Following the adoption of SFAS 133, economically, and from a cash flow perspective, we are in the same position as under the prior accounting method. However, the recognition of the change in the value of the hedging instruments is required to be recognized currently in earnings as opposed to over the life of the servicing asset. As a result, SFAS 133 may cause fluctuations in quarterly earnings that we did not incur under the prior accounting method. The following tables represent, in tabular form, contractual balances of our on balance sheet financial instruments in dollars at the expected maturity dates, as well as the fair value of those on balance sheet financial instruments for the periods ended December 31, 2000 and 1999. The expected maturity categories take into consideration historical and anticipated prepayment speeds, as well as actual amortization of principal and do not take into consideration the reinvestment of cash. Our assets and liabilities that do not have a stated maturity date, such as interest-earning deposits, Federal Home Loan Bank stock and certain other deposits, are considered to be long term in nature and are reported in the thereafter column. We are very active in the secondary market as it relates to the purchase and sale of mortgage loans. In the past, we have made the assumption that the entire portfolio of loans held for sale will mature in the first three years, as the total amount of loans sold generally represent a significant portion of our held for sale portfolio. In the past year, loans sold as a percentage of the held for sale portfolio has decreased. The total amount of loans sold by Matrix Bank in 2000 and 1999 approximated 10% and 30%, respectively, of Matrix Bank's total held for sale portfolio at December 31, 1999 and 1998. This proves our intent to sell the loans classified as held for sale, but no longer supports our three-year maturity assumption. We will now use a five-year maturity assumption for all of Matrix Bank's held for sale loans and school financing in 2000, and we will continue to use a one-year maturity assumption for Matrix Financial's originated loans held for sale. We also treat the Federal Home Loan Bank and revolving borrowings as long term in nature, as the continued availability of these amounts is anticipated indefinitely. Third party servicers service a portion of our loan portfolio; as a result, a portion of the information presented is based on the best available information. For the most part, the carrying amounts of interest-earning deposits, Federal Home Loan Bank stock, Federal Home Loan Bank borrowings and borrowed money approximate those assets' and liabilities' fair values. The fair values of the loan portfolios for held for sale and held for investment are based on quoted market prices or outstanding commitments from investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The fair values of demand deposits are, by definition, equal to the amount payable upon demand at the reporting date. The fair value of time deposits are based upon the discounted value of contractual cash flows, which is estimated using interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. Mortgage servicing rights are not included in the tabular presentation, as the investment does not directly affect interest income. As noted, however, earnings from mortgage servicing rights directly correlate with market risk as it relates to interest rate fluctuations. We mitigate this risk through both the type of mortgage servicing rights acquired and hedging of mortgage servicing rights. The loans underlying the servicing rights acquired tend to be more seasoned and have lower principal balances. Management believes that the more seasoned, lower balance servicing portfolios carry less prepayment risk than less seasoned, higher balance mortgage servicing, because the cost savings of refinancing a lower balance loan tend to be less than for a higher balance loan with a comparable interest rate. We also believe that if a loan has been outstanding for a period of time and has been through several declining interest rate cycles without refinancing, the risk of prepayment in the future is less than a newly originated loan. Although significantly higher in 1999 and 1998, the prepayment percentages which we have experienced over the past three years have been lower than experienced in the industry, as a whole. The prepayment speeds for the years ended December 31, 2000, 1999 and 1998 were 12.1%, 20.6% and 22.6%, respectively. In the tables below, prepayment speeds of 12% were used for all loan types to project expected cash flows. These assumptions are based on our historical prepayment speeds, as well as our knowledge and experience in the market. The Company's on balance sheet financial instruments for the period ended December 31, 2000:
Expected Maturity Date - Fiscal Year Ended December 31, ----------------------------------------------------------------------------------------- Fair 2001 2002 2003 2004 2005 There-after Total Value ----------- ---------- ---------- ---------- ---------- ----------- --------- ---------- (Dollars in thousands) Interest-earning assets: Available for sale: Fixed-rate mortgage- backed securities..................$ 4,540 $ --- $ --- $ --- $ --- $ --- $ 4,540 $ 4,540 Average interest rate.............. 7.54% --- % --- % --- % --- % --- % 7.54% Adjustable rate mortgage- backed securities..................$ 62,076 $ --- $ --- $ --- $ --- $ --- $ 62,076 $ 62,076 Average interest rate.............. 8.31% --- % --- % --- % --- % --- % 8.31% Held for sale (1)(2): Fixed-rate residential loans..........$176,811 $ 48,130 $ 48,130 $ 48,130 $ 48,130 $ --- $369,331 $371,637 Average interest rate............. 8.28% 8.56% 8.56% 8.56% 8.56% --- % 8.42% Adjustable-rate residential loans.....$124,104 $ 99,858 $ 99,858 $ 99,857 $ 99,857 $ --- $523,534 $526,802 Average interest rate............. 8.51% 8.47% 8.47% 8.47% 8.47% --- % 8.47% Fixed-rate commercial loans...........$ 9,926 $ 9,926 $ 9,926 $ 9,926 $ 9,926 $ --- $ 49,630 $ 49,630 Average interest rate............. 10.65% 10.65% 10.65% 10.65% 10.65% --- % 10.65% Held for investment(2): Fixed-rate residential loans..........$ 602 $ 526 $ 460 $ 402 $ 351 $ 2,139 $ 4,480 $ 4,665 Average interest rate(3).......... 8.10% 8.10% 8.10% 8.10% 8.10% 8.10% 8.10% Adjustable-rate residential loans(4)..$ 495 $ 432 $ 377 $ 329 $ 287 $ 1,608 $ 3,528 $ 3,673 Average interest rate(3).......... 8.47% 8.47% 8.47% 8.47% 8.47% 8.47% 8.47% Fixed-rate consumer loans.............$ 2,513 $ 2,170 $ 1,870 $ --- $ --- $ --- $ 6,553 $ 6,538 Average interest rate(3).......... 10.93% 10.93% 10.93% ---% --- % --- % 10.93% Adjustable-rate consumer loans(4).....$ 351 $ 306 $ 265 $ 230 $ 199 $ 322 $ 1,673 $ 1,669 Average interest rate(3).......... 11.04% 11.04% 11.04% 11.04% 11.04% 11.04% 11.04% Fixed-rate other loans(5).............$ 9,064 $ 7,787 $ 6,670 $ 5,694 $ 4,842 $ --- $ 34,057 $ 34,182 Average interest rate(3).......... 9.31% 9.31% 9.31% 9.31% 9.31% --- % 9.31% Adjustable-rate other loans(4)(5).....$ 24,048 $ 20,919 $ 18,172 $ 15,761 $ 13,646 $ 30,688 $123,234 $123,688 Average interest rate(3).......... 10.66% 10.66% 10.66% 10.66% 10.66% 10.66% 10.66% Federal funds sold.......................$ 20,000 $ --- $ --- $ --- $ --- $ --- $ 20,000 $ 20,000 Average interest rate............. 5.94% --- % --- % --- % --- % --- % 5.94% Interest-earning deposits................$ --- $ --- $ --- $ --- $ --- $ 15,631 $ 15,631 $ 15,631 Average interest rate............. --- % --- % --- % --- % --- % 4.27% 4.27% Federal Home Loan Bank stock.............$ --- $ --- $ --- $ --- $ --- $ 27,814 $ 27,814 $ 27,814 Average interest rate............. --- % --- % --- % --- % --- % 6.52% 6.52% Total interest-earning assets.........$434,530 $190,054 $185,728 $180,329 $177,238 $ 78,202 $1,246,081 $1,252,545 ======== ======== ======== ======== ======== ======== ========== ========== Interest-bearing liabilities: Passbook accounts........................$ --- $ --- $ --- $ --- $ --- $ 3,010 $ 3,010 $ 3,010 Average interest rate............. --- % --- % --- % --- % --- % 3.44% 3.44% NOW accounts(6)..........................$ --- $ --- $ --- $ --- $ --- $ 33,000 $ 33,000 $ 33,000 Average interest rate............. --- % --- % --- % --- % --- % 2.01% 2.01% Money market accounts....................$ --- $ --- $ --- $ --- $ --- $122,992 $122,992 $122,992 Average interest rate............. --- % --- % --- % --- % --- % 2.37% 2.37% Certificates of deposit over $100,000....$ 11,382 $ 5,161 $ 871 $ --- $ 1,401 $ --- $ 18,815 $ 18,916 Average interest rate............. 6.54% 6.67% 6.47% --- % 6.58% --- % 6.57% Brokered certificates of deposit..........$175,600 $ 28,000 $ --- $ --- $ --- $ --- $203,600 $204,129 Average interest rate................. 6.42% 6.53% --- % --- % --- % --- % 6.44% Other certificates of deposit............$120,968 $ 33,448 $ 4,870 $ 1,440 $ 7,540 $ --- $168,266 $169,390 Average interest rate............. 6.48% 6.58% 6.13% 5.59% 6.68% --- % 6.49% Federal Home Loan Bank borrowings(7).....$ --- $ --- $ --- $ --- $ --- $519,433 $519,433 $521,194 Average interest rate............. --- % --- % --- % --- % --- % 6.29% 6.29% Revolving borrowings.....................$ --- $ --- $ --- $ --- $ --- $ 66,288 $ 66,288 $ 66,288 Average interest rate............. --- % --- % --- % --- % --- % 8.26% 8.26% Term borrowings..........................$ 3,793 $ 1,468 $ 5,398 $ 20,056 $ --- $ 27,500 $ 58,215 $ 52,965 Average interest rate............. 9.65% 8.28% 8.28% 11.50% --- % 10.00% 10.29% Total interest-bearing liabilities....$311,743 $ 68,077 $ 11,139 $ 21,496 $ 8,941 $772,223 $1,193,619 $1,191,884 ======== ======== ======== ======== ======== ======== ========== ==========
---------- (1) Loans held for sale are assumed to mature within one year, as the intent is to sell the loans. (2) Balances are stated net of discounts and other deductions. (3) For the fixed-rate loans held for investment, we computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 12% in determining the cash flows. The same approach was used for the adjustable-rate loans, which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3-, 5- and 7-year treasury. (5) Other consists of multi-family, commercial real estate, commercial, land and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $53.0 million. (7) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings. The Company's on balance sheet financial instruments for the period ended December 31, 1999 were:
Expected Maturity Date - Fiscal Year Ended December 31, ---------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 There-after ----------- ------------- ------------- ------------- ------------ ------------- (Dollars in thousands) Interest-earning assets: Held for sale (1)(2): Fixed-rate residential loans........ $ 131,830 $ 91,413 $ 91,413 $ -- $ -- $ -- Average interest rate........... 8.60 % 8.56 % 8.56 % -- % -- % -- % Adjustable-rate residential loans... $ 210,472 $ 209,606 $ 209,606 $ $ -- $ -- Average interest rate........... 7.55 % 7.55 % 7.55 % -- % -- % -- % Fixed-rate commercial loans......... $ 33,411 $ -- $ -- $ -- $ -- $ -- Average interest rate........... 11.35 % -- % -- % -- % -- % -- % Held for investment(2): Fixed-rate residential loans........ $ 598 $ 524 $ 459 $ 402 $ 352 $ 2,177 Average interest rate(3)........ 9.01 % 9.01 % 9.01 % 9.01 % 9.01 % 9.01 % Adjustable-rate residential loans(4) $ 365 $ 319 $ 278 $ 243 $ 211 $ 1,248 Average interest rate(3)........ 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % 7.45 % Fixed-rate consumer loans........... $ 3,256 $ 2,797 $ 2,394 $ -- $ -- $ -- Average interest rate(3)........ 10.17 % 10.17 % 10.17 % -- % -- % -- % Adjustable-rate consumer loans(4)... $ 162 $ 142 $ 125 $ 109 $ 95 $ 402 Average interest rate(3)........ 11.83 % 11.83 % 11.83 % 11.83 % 11.83 % 11.83 % Fixed-rate other loans(5)........... $ 11,851 $ 10,120 $ 8,611 $ 7,294 $ -- $ -- Average interest rate(3)........ 8.84 % 8.84 % 8.84 % 8.84 % -- % -- % Adjustable-rate other loans(4)(5)... $ 27,587 $ 23,574 $ 20,069 $ -- $ -- $ -- Average interest rate(3)........ 9.45 % 9.45 % 9.45 % -- % -- % -- % Interest-earning deposits.............. $ -- $ -- $ -- $ -- $ -- $ 13,172 Average interest rate........... -- % -- % -- % -- % -- % 4.77 % Federal Home Loan Bank stock........... $ -- $ -- $ -- $ -- $ -- $ 22,414 Average interest rate........... -- % -- % -- % -- % -- % 5.75 % Total interest-earning assets....... $ 419,532 $ 338,495 $ 332,955 $ 8,048 $ 658 $ 39,413 =========== ============ ============ =========== ========== ========== Interest-bearing liabilities: Passbook accounts...................... $ -- $ -- $ -- $ -- $ -- $ 2,793 Average interest rate........... -- % -- % -- % -- % -- % 3.40 % NOW accounts(6)........................ $ -- $ -- $ -- $ -- $ -- $ 21,609 Average interest rate........... -- % -- % -- % -- % -- % 2.45 % Money market accounts.................. $ -- $ -- $ -- $ -- $ -- $ 141,641 Average interest rate........... -- % -- % -- % -- % -- % 2.56 % Certificates of deposit over $100,000.. $ 11,179 $ 773 $ 1,032 $ 666 $ 223 $ -- Average interest rate........... 5.50 % 5.91 % 6.18 % 5.89 % 5.77 % -- % Brokered certificates of deposit........ $ 221,510 $ -- $ -- $ -- $ -- $ -- Average interest rate............... 5.71 % -- % -- % -- % -- % -- % Other certificates of deposit.......... $ 112,544 $ 10,647 $ 9,432 $ 4,646 $ 2,321 $ -- Average interest rate........... 5.49 % 5.61 % 6.04 % 5.79 % 5.45 % -- % Federal Home Loan Bank borrowings(7)... $ -- $ -- $ -- $ -- $ -- $ 405,000 Average interest rate........... -- % -- % -- % -- % -- % 5.64 % Revolving borrowings................... $ -- $ -- $ -- $ -- $ -- $ 54,180 Average interest rate........... -- % -- % -- % -- % -- % 7.30 % Term borrowings........................ $ 5,991 $ 13,877 $ 6,003 $ 5,962 $ 4,807 $ 51,281 Average interest rate........... 7.56 % 7.97 % 7.29 % 7.30 % 7.31 % 10.35 % Total interest-bearing liabilities.. $ 351,224 $ 25,297 $ 16,467 $ 11,274 $ 7,351 $ 676,504 =========== ============ ============ =========== ========== ========== [Table Continued] Expected Maturity Date - Fiscal Year Ended December 31, ---------------------------------------------------------------- Fair Total Value -------------- -------------- Interest-earning assets: Held for sale (1)(2): Fixed-rate residential loans....... $ 314,656 $ 316,241 Average interest rate.......... 8.58 % Adjustable-rate residential loans.. $ 629,684 $ 632,873 Average interest rate.......... 7.55 % Fixed-rate commercial loans........ $ 33,411 $ 33,411 Average interest rate.......... 11.35 % Held for investment(2): Fixed-rate residential loans....... $ 4,512 $ 4,429 Average interest rate(3)....... 9.01 % Adjustable-rate residential loans(4 $ 2,664 $ 2,616 Average interest rate(3)....... 7.45 % Fixed-rate consumer loans.......... $ 8,447 $ 8,691 Average interest rate(3)....... 10.17 % Adjustable-rate consumer loans(4).. $ 1,035 $ 1,064 Average interest rate(3)....... 11.83 % Fixed-rate other loans(5).......... $ 37,876 $ 38,199 Average interest rate(3)....... 8.84 % Adjustable-rate other loans(4)(5).. $ 71,230 $ 71,837 Average interest rate(3)....... 9.45 % Interest-earning deposits............. $ 13,172 $ 13,172 Average interest rate.......... 4.77 % Federal Home Loan Bank stock.......... $ 22,414 $ 22,414 Average interest rate.......... 5.75 % Total interest-earning assets...... $ 1,139,101 $ 1,144,947 ============ ============= Interest-bearing liabilities: Passbook accounts..................... $ 2,793 $ 2,793 Average interest rate.......... 3.40 % NOW accounts(6)....................... $ 21,609 $ 21,609 Average interest rate.......... 2.45 % Money market accounts................. $ 141,641 $ 141,641 Average interest rate.......... 2.56 % Certificates of deposit over $100,000. $ 13,873 $ 13,449 Average interest rate.......... 5.59 % Brokered certificates of deposit....... $ 221,510 $ 219,619 Average interest rate.............. 5.71 % Other certificates of deposit......... $ 139,590 $ 143,073 Average interest rate.......... 5.54 % Federal Home Loan Bank borrowings(7).. $ 405,000 $ 405,067 Average interest rate.......... 5.64 % Revolving borrowings.................. $ 54,180 $ 54,180 Average interest rate.......... 7.30 % Term borrowings....................... $ 87,921 $ 87,921 Average interest rate.......... 9.20 % Total interest-bearing liabilities. $ 1,088,117 $ 1,089,352 ============ =============
---------- [FN] (1) Loans held for sale are assumed to mature within one year, as the intent is to sell the loans. (2) Balances are stated net of discounts and other deductions. (3) For the fixed-rate loans held for investment, we computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 12% in determining the cash flows. The same approach was used for the adjustable-rate loans, which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3,5 and 7-year treasury. (5) Other consists of multi-family, commercial real estate, commercial (including SBA), land and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $21.2 million. (7) See "--Short-term Borrowings" for additional discussion on the term of the Federal Home Loan Bank borrowings. Short-term Borrowings. A primary function of asset and liability management is to ensure adequate liquidity. In addition to cash and cash equivalents, we rely heavily on short-term borrowing capabilities for liquidity and as a funding vehicle. The primary sources for short-term borrowings are the Federal Home Loan Bank for Matrix Bank, and Matrix Bank and unaffiliated financial institutions for Matrix Financial. See "Liquidity and Capital Resources." The following table sets forth a summary of our short-term borrowings during 2000, 1999 and 1998 and as of the end of each such period:
Average Amount Amount Maximum Weighted Outstanding Outstanding Outstanding Average Interest at During the at any Rate During Year End Year(1) Month End the Year ------------------- ------------------ -------------------- ------------------ (Dollars in thousands) At or for the year ended December 31, 2000: Federal Home Loan Bank borrowings (2)........... $519,433 $430,331 $526,450 6.33% Revolving lines of credit....................... 21,956 40,701 52,750 8.23 Repurchase agreements........................... 385 3,240 6,906 10.70 School financing................................ 44,308 30,262 44,308 8.18 At or for the year ended December 31, 1999: Federal Home Loan Bank borrowings(3)............ 405,000 175,619 417,606 5.23 Revolving lines of credit....................... 28,205 49,762 73,878 6.38 Repurchase agreements........................... 3,156 7,157 12,467 10.11 School financing................................ 22,819 21,853 25,379 7.56 At or for the year ended December 31, 1998: Federal Home Loan Bank borrowings(4)............ 168,000 159,381 271,000 5.37 Revolving lines of credit....................... 86,936 74,973 92,507 6.55 Repurchase agreements........................... 7,350 1,445 7,350 9.06 School financing................................ 22,559 9,304 22,559 7.32 [Table Continued] Weighted Average Interest Rate at Year End ---------------------- (Dollars in thousands) At or for the year ended December 31, 2000: Federal Home Loan Bank borrowings (2)........... 6.29% Revolving lines of credit....................... 7.63 Repurchase agreements........................... 8.75 School financing................................ 8.56 At or for the year ended December 31, 1999: Federal Home Loan Bank borrowings(3)............ 5.64 Revolving lines of credit....................... 6.71 Repurchase agreements........................... 8.67 School financing................................ 7.77 At or for the year ended December 31, 1998: Federal Home Loan Bank borrowings(4)............ 4.90 Revolving lines of credit....................... 6.23 Repurchase agreements........................... 9.02 School financing................................ 7.27
- --------- [FN] (1) Calculations are based on daily averages where available and monthly averages otherwise. (2) A total of $26.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2000 were borrowed under a short option advance agreement with the Federal Home Loan Bank. These short option advance borrowings have a term of ten years, but are callable by the Federal Home Loan Bank beginning after a six-month or one-year lockout period depending on the particular short option advance borrowing. After the expiration of the lock-out period, the short option advance borrowings are callable at three month intervals. If the Federal Home Loan Bank exercises its call option on a short option advance borrowing, the Federal Home Loan Bank is required to offer replacement funding to us at a market rate of interest for the remaining term of the short option advance borrowing. The interest rates on the short option advance borrowings ranged from 5.40% to 5.63% at December 31, 2000 and their possible call dates varied from February 20, 2001 to March 26, 2001. Under the terms of the short option advance agreement, we are not permitted to prepay or otherwise retire a callable short option advance borrowing prior to the final maturity date. Additionally, $1.4 million of the Federal Home Loan Bank borrowings outstanding at December 31, 2000 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank 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 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 2, 2014. Matrix Bank also had short-term, fixed-term/rate borrowings outstanding at December 31, 2000 from the Federal Home Loan Bank. These short-term, fixed-term/rate borrowings totaled $150.0 million, with interest rates ranging from 6.00% to 6.23% and maturity dates ranging from March 27, 2001 through June 26, 2001. (3) A total of $100.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1999 were borrowed under a short option advance agreement with the Federal Home Loan Bank. The interest rates on the short option advance borrowings ranged from 4.90% to 5.63% at December 31, 1999 and their possible call dates varied from January 14, 2000 to December 26, 2000. Additionally, $1.5 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1999 are fixed-term/rate advances, which were borrowed from the Federal Home Loan Bank 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 2, 2014. (4) A total of $47.0 million of the Federal Home Loan Bank borrowings outstanding at December 31, 1998 were borrowed under a short option advance agreement with the Federal Home Loan Bank. The interest rates on the short option advance borrowings ranged from 4.85% to 4.94% at December 31, 1998 and their possible call dates varied from January 15, 1999 to April 14, 1999. 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 10% preferred securities through Matrix Bancorp Capital Trust I in July 1999; 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, 2000, Matrix Bancorp had $55.7 million in indebtedness outstanding. The borrowed funds have been used historically as capital injections to Matrix Bank, Matrix Financial and ABS. On December 27, 2000, Matrix Bancorp amended its bank stock loan agreement. The amended bank stock loan agreement has two components, a $10.0 million term loan and a revolving line of credit of $10.0 million. As of December 31, 2000, the balance of the term loan was $8.2 million and there was no outstanding balance on the revolving line of credit. As part of the amended agreement, the balance of the term loan was increased to $10.0 million on January 2, 2001. The amended bank stock loan requires Matrix Bancorp to maintain total shareholders' equity of $60.0 million. On July 30, 1999, Matrix Bancorp Capital Trust I, a Delaware business trust formed by Matrix Bancorp, completed the sale of $27.5 million of 10% preferred securities. Matrix Bancorp Capital Trust I also issued common securities to Matrix Bancorp and used the net proceeds from the offering to purchase $28.6 million in principal amount of 10% junior subordinated debentures of Matrix Bancorp due September 30, 2029. The junior subordinated debentures are the sole assets of Matrix Bancorp Capital Trust I and are eliminated, along with the related income statement effects, in the consolidated financial statements. We used the proceeds from the sale of the junior subordinated debentures to redeem our outstanding senior subordinated notes due July 15, 2002, to make contributions to Matrix Bank, Matrix Financial and ABS to fund their respective operations, to redeem other higher interest rate indebtedness and for other general corporate purposes. Capitalized expenses associated with the offering of approximately $1.4 million are included in other assets at December 31, 2000 and are being amortized on a straight-line basis over the life of the junior subordinated debentures. The preferred securities accrue and pay distributions quarterly at an annual rate of 10% of the stated liquidation amount of $25 per preferred security. We have fully and unconditionally guaranteed all of the obligations of Matrix Bancorp Capital 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 Matrix Bancorp Capital 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. We have 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. See Note 9 to the consolidated financial statements included elsewhere in this document. Under the indenture, we are prohibited from paying dividends on our common stock if the scheduled payments on our junior debentures and trust preferred securities have not been made. On September 29, 1997, we completed a registered debt offering of $20.0 million in senior notes due 2004, raising net proceeds of approximately $19.1 million. Interest on the senior notes of 11.5% is payable semi-annually on March 31 and September 30 of each year, commenced on March 31, 1998, with a balloon payment for the entire principal balance due in September 2004. The 11.5% senior notes require us to: 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. The trend of net cash used by our operating activities experienced over the reported periods results primarily from the growth at Matrix Bank. We anticipate the trend of a net use of cash from operations to continue for the foreseeable future. This anticipation results from the expected growth, albeit less than our historical growth at Matrix Bank, which we believe will consist primarily of increased activity in the purchasing of loan portfolios and increased loan production projected at Matrix Financial. However, due to liquidity and capital availability, we do not anticipate growth to be as significant as in prior periods. Matrix Bank's primary source of funds for use in lending, purchasing bulk loan portfolios, investing and other general purposes are: o retail deposits; o trust deposits; o custodial escrow balances; o brokered deposits; o Federal Home Loan Bank borrowings; 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 Federal Home Loan Bank as its primary source for borrowings. At December 31, 2000, Matrix Bank had overnight and term borrowings from the Federal Home Loan Bank of $519.4 million. To increase its available liquidity, Matrix Bank swapped approximately $27.2 million of residential loans during the first quarter of 2000 and $48.8 million of residential loans during the third quarter of 2000 with the agencies in exchange for agency securities. In combination, these securities had a balance of $66.6 million at December 31, 2000. Matrix Bank is able to pledge these securities with the Federal Home Loan Bank at a higher advance rate. Additionally, the market for securities is more liquid than the market for whole loans. 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 occur. 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, as well as through an Internet service. Therefore, its retail deposits are concentrated primarily in Las Cruces and Sun City, except for the Internet deposits, which could be out-of-market retail deposits. Matrix Bank relies principally on customer service, marketing programs and its relationships with customers to attract and retain in-market deposits. Beginning in February 1998, brokered deposits were accepted and have been utilized to support growth at Matrix Bank. In pricing deposit rates, management considers profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by competitors. Matrix Bank intends to continue its efforts to attract deposits as a primary source of funds to support its lending and investing activities. 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:
Year Ended December 31, -------------------------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------------- ---------------------------------- -------------------------------- Weighted Weighted Weighted Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ----------------- ---------------- ----------------- ---------------- ----------------- -------------- (Dollars in thousands) Passbook accounts.......... $ 2,981 3.42 % $ 2,758 3.48 % $ 2,859 3.58 % NOW accounts............... 64,523 0.96 24,038 2.50 17,586 2.97 Money market accounts...... 130,592 2.34 189,154 3.04 124,796 3.13 Time deposits (except brokered)........ 177,399 6.10 131,054 5.45 108,107 5.79 Brokered deposits.......... 183,685 6.36 156,293 5.11 103,485 5.25 -------------- ------------- -------------- ------------- -------------- ------------- Total deposits....... $ 559,180 4.70 % $ 503,297 4.29 % $ 356,833 4.37 % ============== ============= ============== ============= ============== ==============
The following table sets forth the amount of Matrix Bank's certificates of deposit that are greater than $100,000 by time remaining until maturity as of December 31, 2000:
As of December 31, 2000 -------------------------- Weighted Average Amount Rate Paid ------------ ------------- (Dollars in thousands) Three months or less.......................... $ 2,248 6.13 % Over three months through six months.......... 3,706 6.56 Over six months through twelve months......... 5,428 6.69 Over twelve months............................ 7,433 6.63 ---------- ----------- Total...................................... $ 18,815 6.57 % ========== ===========
We actively monitor Matrix Bank's compliance with regulatory capital requirements. Historically, Matrix Bank has increased its core capital through the retention of a portion of its earnings. Matrix Bank's future growth is expected to be achieved through deposit growth, brokered deposits, borrowings from the Federal Home Loan Bank and custodial deposits from affiliates. We anticipate that such growth will require additional capital. The capital requirements related to the anticipated growth will in part be fulfilled through retention of earnings, potentially increasing our bank stock loan and future possible debt or equity offerings. Prior to Matrix Financial becoming a subsidiary of Matrix Bank, our principal source of funding for our servicing acquisition activities and working capital needs of Matrix Financial consisted of a line of credit facility and a working capital facility provided to Matrix Financial by an unaffiliated financial institution. As noted earlier, effective August 1, 2000, Matrix Financial became a wholly owned subsidiary of Matrix Bank. The contribution of Matrix Financial increased the capital of Matrix Bank by approximately $25 million, which will provide capital for future growth at Matrix Bank. In addition, effective August 1, through financing provided by Matrix Bank, Matrix Financial paid off its line of credit for the financing on its servicing acquisitions. In addition, Matrix Financial paid off approximately $4 million of higher costing borrowings under its purchase/repurchase facilities and paid off its working capital facility. Matrix Financial's principal source of funding for its loan origination business consists of a warehouse line of credit provided to Matrix Financial by Matrix Bank. Additionally, we have a warehouse line of credit provided to Matrix Financial and a sale/repurchase facility provided to ABS by unaffiliated financial institutions. As of September 29, 2000, Matrix Financial's warehouse line of credit facility provided by an unaffiliated financial institution was amended. It aggregates $60.0 million, of which $38.4 million was available to be utilized as of December 31, 2000. The September 29, 2000 warehouse agreement provides financing for Matrix Financial's wholesale lending without sub-limits for such items as servicing acquisitions or working lines of credit. At December 31, 2000, $21.6 million was outstanding under the warehouse line at a weighted average interest rate of 7.63%. Borrowings under the warehouse line of credit are secured by all of the mortgage loans funded with warehouse loan proceeds and bear interest at the LIBOR rate plus a negotiated margin. The sale/repurchase facility provided to ABS houses school financing. As of December 31, 2000, $17.1 million was outstanding under the sale/repurchase facility at a weighted average interest rate of 8.95%. Borrowings under the sale/repurchase facility are secured by all of the school financing funded with sale/repurchase facility proceeds and bear interest at 8.00% on the tax-exempt school financing and 9.00% on all other school financing. Our principal sources of funding for school financing are internal capital, a line of credit facility and a partnership trust with an unaffiliated financial institution. Amounts available under the line of credit facility and the partnership trust are at the lender's sole discretion. During 2000, 1999 and 1998, the Company placed tax-exempt financing it originated to charter schools into several 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 are guaranteed by a letter of credit issued by a third party investment bank, and the underlying financing. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the investment bank. Generally, the trusts are short-term in nature with an average life of one year or less. The "B" Certificates are owned in part by the Company and in part by the investment bank. The interest rate paid on the "A" Certificates and the "B" Certificates owned by the investment bank is considered the Company's financing cost. The approximate cost of the financing at December 31, 2000 and 1999 was 7.23% and 7.63%, respectively. The interest that the Company receives through its part ownership of the "B" Certificates is tax-exempt. Although the investment bank acts as a guarantor to the "A" Certificates, the Company provides limited recourse to the investment bank in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the trusts, the transactions have been accounted for as a secured financing. Matrix Bank and Sterling Trust are restricted from paying dividends to Matrix Bancorp due to certain regulatory requirements. See "Regulation and Supervision. "Matrix Financial is prohibited from paying dividends to Matrix Bank under its credit agreement dated September 29, 2000. At December 31, 2000, we were in compliance with all debt covenants. Inflation and Changing Prices The consolidated financial statements and related data presented in this document have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as prices of goods and services. We disclose the estimated fair market value of our financial instruments in accordance with Statement of Financial Accounting Standards No. 107. See Note 16 to the consolidated financial statements included elsewhere in this document. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends certain provisions of SFAS 133. These statements establish accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. These statements become effective for the Company on January 1, 2001, and generally, will affect the Company in two principal areas, the hedging activities related to our investment in mortgage servicing rights and certain mortgage banking related commitments made by us in our wholesale mortgage operations, as well as forward loan sale commitments. Currently, in terms of unpaid principal amount, we have approximately 6% of our $71.5 million investment in mortgage servicing rights hedged through an investment in exchange-traded futures and options. We are currently unable to achieve hedge accounting treatment due to the systems and operational issues surrounding the tracking required to do so. The financial impact to future earnings related to our hedging strategies on mortgage servicing rights, assuming that we continue to hedge with exchange-traded futures and options and elect not to achieve hedge accounting treatment, can not be estimated and will largely depend on future market conditions. Based on an October 2000 FASB tentative conclusion, loan commitments that relate to the origination or acquisition of mortgage loans that will be held for resale ("pipeline") will be accounted for as derivatives under SFAS 133. Additionally, we determined that both our mandatory and best effort forward loan sale commitments meet the SFAS 133 derivative definition, and accordingly, are required to be recorded at fair value as an asset or liability upon adoption of SFAS 133. Since the fair values of the pipeline and the forward loan sale commitments (both mandatory and best effort) used to economically hedge all or a portion of the pipeline are generally expected to offset each other, we do not believe the adoption of SFAS 133, with respect to these instruments, will result in a material impact to our operations in the first quarter of 2001 and prospectively. In addition to the pipeline loans, we also use both mandatory and best effort loan sale commitments to hedge our originated loans held for sale. To the extent that we do not receive hedge accounting treatment related to our originated loans held for sale, we will be required to record these loans at the lower of aggregate cost or market with the corresponding loans' sale commitments recorded at fair value. In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that replaces, in its entirety, SFAS 125. SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS 140 is effective for transfers occurring after March 31, 2001 and the expanded disclosure requirements regarding securitizations and collateral are effective for fiscal years ended after December 15, 2000. We believe that the adoption of SFAS 140 on April 1, 2001, will have no material impact on our net income. 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 those that are parties to the existing bankruptcies of the Company's customers or litigation related thereto; unanticipated developments in connection with the bankruptcy actions or litigation described above, including judicial variation from existing legal precedent and the decision by one or more parties to appeal decisions rendered; the risks and uncertainties discussed elsewhere in 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 Not Applicable. PART III Items 10 through 13. The information for these items is incorporated from the definitive proxy statement to be filed with the Commission. PART IV Item 14. 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 None. (c) Exhibits See Exhibit Index, beginning on page II-1. (d) Financial Statement Schedules None. 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 16th day of March, 2001. Matrix Bancorp, Inc. By: /s/ Guy A. Gibson Guy A. Gibson President and Chief Executive 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/ Guy A. Gibson President, Chief Guy A. Gibson Executive March 16, 2001 Officer and a Director (Principal Executive Officer) /s/ Richard V. Schmitz Chairman of the Board March 16, 2001 Richard V. Schmitz /s/ D. Mark Spencer Vice Chairman and D. Mark Spencer Director March 16, 2001 /s/ Thomas M. Piercy Director March 16, 2001 Thomas M. Piercy /s/ David W. Kloos Senior Vice President, David W. Kloos Chief Financial March 16, 2001 Officer and a Director (Principal Accounting and Financial Officer) /s/ Stephen Skiba Director March 16, 2001 Stephen Skiba /s/ David A. Frank Director March 16, 2001 David A. Frank INDEX TO EXHIBITS 3.1 /// Amended and Restated Articles of Incorporation of the Registrant (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 + Specimen certificate for Common Stock of the Registrant (4.1) 4.3 + o Amended and Restated 1996 Stock Option Plan (4.2) 4.4 // o Employee Stock Purchase Plan, as amended (4.4) 4.5 + Form of Common Stock Purchase Warrant by and between the Registrant and Piper Jaffray, Inc. (4.4) 4.6 + Form of Common Stock Purchase Warrant by and between the Registrant and Keefe, Bruyette & Woods, Inc. (4.5) 4.7 ^ 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) 4.8 ^ Form of Junior Subordinated Debentures (4.8) 4.9 ^ Certificate of Trust of Matrix Bancorp Capital Trust I (4.9) 4.10 ^ Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust I (4.10) 4.11 ^ Preferred Security Certificate for Matrix Bancorp Capital Trust I (4.11) 4.12 ^ Preferred Securities Guarantee Agreement of the Company relating to the Preferred Securities (4.12) 4.13 ^ Agreement as to the Expenses and Liabilities (4.13) 4.14 ^^o Matrix Bancorp, Inc. Executive Deferred Compensation Plan (4.1) 4.15 ^^ Trust Agreement, dated December 7, 2000 between Matrix Bancorp, Inc. and Matrix Bancorp, Inc., as Trustee (4.2) 10.1 + o Employment Agreement, dated as of January 1, 1995, between Matrix Capital Bank and Gary Lenzo and as amended January 1, 1996 (10.5) 10.2 + Mortgage Loan Purchase and Servicing Agreement, dated as of August 1, 1993, by and between Argo Federal Savings Bank, FSB, and Matrix Financial Services Corporation (10.11) 10.3 + 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) 10.4 + Development Management Agreement, dated as of June 28, 1996, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.31) 10.5 /// 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) 10.6 //// Employment Agreement Addendum of Gary Lenzo, dated December 14, 1999 (10.7) 10.7 * Promissory Note, dated as of January 31, 2001, from D. Mark Spencer, as maker, to the Registrant, as payee 10.8 + Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as of November 28, 1995 (10.36) 10.9 + Loan Agreement, dated as of June 21, 1996, by and between Matrix Funding Corporation and The First Security Bank (10.41) 10.10 + Loan Agreement, dated July 10, 1992, by and between American Strategic Income Portfolio, Inc. and Matrix Financial Services Corporation (10.45) 10.11 + Promissory Note, dated as of July 10, 1992, by Matrix Financial Services Corporation, as maker, to American Strategic Income Portfolio, Inc., as payee (10.46) 10.12 *** 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) 10.13 *** Guaranty, dated as of September 29, 2000, from the Registrant to U.S. Bank National Association, as agent (10.3) 10.14 / o Employment Agreement, dated as of February 4, 1997, by and between The Vintage Group, Inc. and Paul Skretny (10.38) 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 10.16 //o Agreement, dated October 1, 1997, with T. Allen McConnell (10.37) 10.17 +++ Agreement and Plan of Merger, dated as of March 25, 1998, among Fidelity National Financial, Inc., MCC Merger, Inc. and Matrix Capital Corporation (99.2) 10.18 ++ Merger Termination Agreement between Matrix Capital Corporation, Fidelity National Financial, Inc., and MCC Merger Sub, Inc., dated August 28, 1998 (10.1) II-1 10.19 * Promissory Note, dated as of February 21, 2001, from Thomas P. Cronin, as maker, to the Registrant, as payee 10.20 +o Amendment of Employment Agreement dated as of February 4, 1997, dated as of February 4, 2000, by and between The Vintage Group, Inc. and Paul E. Skretny (10.32) 10.21 ** Executive Employment Agreement, dated as of April 20, 2000, by and between United Financial, Inc. and Carl G. de Rozario (10.6) 10.22 * Lease dated as of September 1, 1999, by and between Matrix Financial Services Corporation and Suncor Development Company 10.23 * Lease with a reference date of 1999, by and between the Registrant and the Regents of the University of Colorado 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 10.25 * 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 10.26 * Promissory Note, dated as of February 21, 2001, from Thomas M. Piercy, as maker, to the Registrant, as payee 10.27 *. Matrix Bancorp, Inc. Executive Incentive Plan 10.28 +. Executive Employment Agreement, dated as of January 1, 1996, by and between the Registrant and David W. Kloos (10.4) 12 * Statement Re: Computations of Ratios 21 * Subsidiaries of the Registrant 23 * Consent of Ernst & Young LLP - -------------------------- * 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. ++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-34977), filed by the Registrant with the Commission. +++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's 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 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, 1999, filed by the Registrant with the Commission. + Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's current 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 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 registration statement on Form S-1/A (No. 333-79731), filed by the Registrant with the Commission. II-2 ^^ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-8 (No. 333-51516), filed by the Registrant with the Commission. o Management contract or compensatory plan or arrangement. INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of Matrix Bancorp, Inc. Report of Independent Auditors..............................................F-2 Consolidated Balance Sheets--December 31, 2000 and 1999.....................F-3 Consolidated Statements of Income--for the years ended December 31, 2000, 1999 and 1998............................................F-4 Consolidated Statements of Shareholders' Equity--for the years ended December 31, 2000, 1999 and 1998............................................F-5 Consolidated Statements of Cash Flows--for the years ended December 31, 2000, 1999 and 1998............................................F-6 Notes to Consolidated Financial Statements--December 31, 2000...............F-7 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Matrix Bancorp, Inc. We have audited the accompanying consolidated balance sheets of Matrix Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of Matrix Bancorp, Inc.'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. 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 consolidated financial position of Matrix Bancorp, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Phoenix, Arizona /s/ Ernst & Young LLP February 23, 2001 Matrix Bancorp, Inc. Consolidated Balance Sheets (Dollars in thousands) December 31, 2000 1999 ------------------------- Assets Cash.............................................$ 17,539 $ 13,437 Federal funds sold............................... 20,000 - Interest-earning deposits........................ 15,631 13,172 Mortgage-backed securities available for sale.... 66,616 - Loans held for sale, net......................... 942,496 977,751 Loans held for investment, net................... 173,525 125,764 Mortgage servicing rights, net................... 71,529 63,479 Other receivables................................ 58,262 44,933 Federal Home Loan Bank of Dallas stock........... 27,814 22,414 Premises and equipment, net...................... 13,189 10,817 Other assets..................................... 12,194 11,979 ------------------------- Total assets.................................... $1,418,795 $1,283,746 ========================= Liabilities and shareholders' equity Liabilities: Deposits.......................................$ 602,669 $ 562,194 Custodial escrow balances...................... 77,647 94,206 Payable for purchase of mortgage servicing rights....................................... 12,666 3,163 Federal Home Loan Bank of Dallas borrowings.... 519,433 405,000 Borrowed money................................. 97,003 114,601 Guaranteed preferred beneficial interests in company's 10 percent junior subordinated debentures.................................... 27,500 27,500 Other liabilities............................... 14,504 14,826 Income taxes payable............................ 3,350 1,759 ------------------------- Total liabilities................................ 1,354,772 1,223,249 Commitments and contingencies Shareholders' equity: Preferred stock, par value $.0001; authorized 5,000,000 shares; no shares outstanding....... - - Common stock, par value $.0001; authorized 50,000,000 shares; issued and outstanding 6,558,904 and 6,759,241 shares at December 31, 2000 and 1999, respectively...... 1 1 Additional paid-in capital...................... 23,004 22,780 Treasury shares at cost, 237,000 shares at December 31, 2000.......................... (1,775) - Retained earnings............................... 41,974 37,716 Accumulated other comprehensive income.......... 819 - ------------------------- Total shareholders' equity....................... 64,023 60,497 ------------------------- Total liabilities and shareholders' equity.......$1,418,795 $1,283,746 ========================= See accompanying notes. Matrix Bancorp, Inc. Consolidated Statements of Income (Dollars in thousands except per share information) Year Ended December 31, 2000 1999 1998 ------------------------------------- Interest income: Loans and mortgage-backed securities...................... $ 93,965 $ 72,355 $ 59,452 Interest-earning deposits......... 3,421 1,395 1,242 ------------------------------------- Total interest income............ 97,386 73,750 60,694 Interest expense: Savings and time deposits.......... 22,603 15,233 11,789 Demand and money market deposits... 3,672 6,356 4,432 Federal Home Loan Bank of Dallas borrowings....................... 27,242 9,184 8,554 Borrowed money..................... 14,084 13,514 11,729 ------------------------------------- Total interest expense............... 67,601 44,287 36,504 ------------------------------------- Net interest income before provision for loan and valuation losses............................. 29,785 29,463 24,190 Provision for loan and valuation losses............................. 4,235 3,180 4,607 ------------------------------------- Net interest income after provision for loan and valuation losses...... 25,550 26,283 19,583 Noninterest income: Loan administration................ 23,850 23,686 17,411 Brokerage.......................... 5,476 6,156 7,054 Trust services..................... 4,923 4,840 4,169 Real estate disposition services... 3,677 3,659 2,036 Gain on sale of loans and mortgage-backed securities....... 982 3,247 3,108 Gain on sale of mortgage servicing rights................. 2,634 363 803 Loan origination................... 7,587 6,218 5,677 School services.................... 4,240 2,813 46 Other.............................. 5,423 9,378 6,441 ------------------------------------- Total noninterest income............. 58,792 60,360 46,745 Noninterest expense: Compensation and employee benefits.. 34,245 29,336 22,194 Amortization of mortgage servicing rights.................. 9,851 16,403 10,563 Occupancy and equipment............. 4,785 3,727 3,059 Postage and communication........... 2,812 2,688 2,393 Professional fees................... 4,687 2,385 1,439 Data processing..................... 2,413 1,688 1,344 Other general and administrative.... 19,048 13,359 11,947 ------------------------------------- Total noninterest expense............ 77,841 69,586 52,939 ------------------------------------- Income before income taxes........... 6,501 17,057 13,389 Provision for income taxes........... 2,243 6,278 4,876 ------------------------------------- Net income...........................$ 4,258 $ 10,779 $ 8,513 ===================================== Matrix Bancorp, Inc. Consolidated Statements of Income (continued) (Dollars in thousands except per share information) Year Ended December 31 2000 1999 1998 ------------------------------------- Net income per common share..........$ 0.63 $ 1.60 $ 1.27 ===================================== Net income per common share - assuming dilution..................$ 0.63 $ 1.58 $ 1.24 ===================================== Weighted average common shares....... 6,713,251 6,728,211 6,704,991 ===================================== Weighted average common shares - assuming dilution.................. 6,748,857 6,833,546 6,881,890 ===================================== See accompanying notes. Matrix Bancorp, Inc. Consolidated Statements of Shareholders' Equity (Dollars in thousands)
Accumulated Common Stock Additional Other ----------------- Paid In Treasury Retained Comprehensive Comprehensive Shares Amount Capital Shares Earnings Income Total Income --------------------------------------------------------------------------------------- Balance at December 31, 1997..... 6,703,880 $ 1 $22,185 $ - $18,424 $ - $40,610 Issuance of stock related to employee stock purchase plan and options.................. 20,031 - 231 - - - 231 Net income..................... - - - - 8,513 - 8,513 --------------------------------------------------------------------------------------- Balance at December 31, 1998..... 6,723,911 1 22,416 - 26,937 - 49,354 Issuance of stock related to employee stock purchase plan and options.................. 35,330 - 364 - - - 364 Net income..................... - - - - 10,779 - 10,779 --------------------------------------------------------------------------------------- Balance at December 31, 1999..... 6,759,241 1 22,780 - 37,716 - 60,497 Shares repurchased............. (237,000) - - (1,775) - - (1,775) Issuance of stock related to employee stock purchase plan and options.................. 36,663 - 224 - - - 224 Comprehensive income: Net income................... - - - - 4,258 - 4,258 $ 4,258 Net unrealized holding gains - - - - - 819 819 819 ---------- Comprehensive income........... $ 5,077 -----------------------------------------------------------------------------========== Balance at December 31, 2000..... 6,558,904 $ 1 $23,004 $(1,775) $41,974 $ 819 $64,023 ============================================================================= See accompanying notes.
Matrix Bancorp, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Year Ended December 31, 2000 1999 1998 --------------------------------- Operating activities Net income...............................$ 4,258 $ 10,779 $ 8,513 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization......... 2,583 4,424 2,519 Provision for loan and valuation losses.............................. 4,235 3,180 4,607 Amortization of mortgage servicing rights.............................. 9,851 16,403 10,563 Unrealized gain on securities......... 819 - - Deferred income taxes................. (518) (391) 48 Gain on sale of loans and mortgage-backed securities.......... (982) (3,247) (3,108) Gain on sale of mortgage servicing rights.............................. (2,634) (363) (803) Gain on sale of premises and equipment........................... (1,159) - - Loans originated for sale, net of loans sold.......................... (125,944) 69,722 (76,544) Loans purchased for sale.............. (225,898) (701,952) (678,150) Proceeds from sale of loans purchased for sale.................. 108,466 192,722 319,430 Originated mortgage servicing rights, net......................... (16) (1,514) 24 Decrease(increase) in other receivables and other assets.................... 6,777 (6,796) (23,743) Increase in other liabilities and income taxes payable................ 3,682 2,369 1,935 --------------------------------- Net cash used in operating activities (216,480) (414,664) (434,709) Investing activities Loans originated and purchased for investment............................. (202,300) (118,327) (82,547) Principal repayments on loans............ 353,713 303,026 176,520 Purchase of Federal Home Loan Bank of Dallas stock........................... (5,400) (6,771) (6,943) Purchases of premises and equipment...... (7,089) (2,615) (3,028) Hedging of servicing portfolio, net...... 95 (3,257) 321 Acquisition of mortgage servicing rights. (22,380) (28,694) (31,388) Proceeds from the sale of premises and equipment.............................. 3,664 - - Proceeds from sale of mortgage servicing rights....................... 3,537 2,827 5,160 --------------------------------- Net cash provided by investing activities............................. 123,840 146,189 58,095 Matrix Bancorp, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Year Ended December 31, 2000 1999 1998 --------------------------------- Financing activities Net increase in deposits................ $ 40,475 $ 71,678 $ 265,534 Net (decrease) increase in custodial escrow balances....................... (16,559) (2,618) 43,064 Increase in revolving lines and repurchase agreements, net............ 125,743 174,334 64,564 Payments of notes payable............... (31,169) (31,890) (64,539) Proceeds from notes payable............. 2,325 33,395 85,078 Payment of financing arrangements....... (63) (117) (166) Payment of subordinated debt............ - (2,910) - Proceeds from junior subordinated debentures............................ - 26,063 - Treasury shares repurchased............. (1,775) - - Proceeds from issuance of common stock related to employee stock purchase plan and options...................... 224 364 231 --------------------------------- Net cash provided by financing activities............................ 119,201 268,299 393,766 --------------------------------- Increase (decrease) in cash and cash equivalents........................... 26,561 (176) 17,152 Cash and cash equivalents at beginning of year............................... 26,609 26,785 9,633 --------------------------------- Cash and cash equivalents at end of year.................................. $ 53,170 $ 26,609 $ 26,785 ================================= Supplemental disclosure of cash flow information Cash paid for interest expense.......... $ 68,298 $ 41,139 $ 34,547 ================================= Cash paid for income taxes.............. $ 1,592 $ 5,248 $ 4,664 ================================= See accompanying notes. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements December 31, 2000 1. Organization Matrix Bancorp, Inc. (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), United Financial, Inc. (United Financial), Matrix Asset Management Corporation (Matrix Asset Management), ABS School Services, L.L.C. (ABS), Sterling Trust Company (Sterling) and First Matrix Investment Services Corporation (First Matrix), all of which are wholly owned. Matrix Bank, a federally chartered savings and loan association, serves its local communities of Las Cruces, New Mexico, and Phoenix, Arizona, by providing personal and business depository services, offering residential loans and providing, on a limited basis, commercial real estate and consumer loans. The Company's mortgage banking business is primarily conducted through Matrix Financial, and was established with the primary objective of acquiring, originating and servicing residential mortgage loan servicing rights. Servicing mortgage loans involves the contractual right to receive a fee for processing and administering mortgage loan payments. The Company acquires servicing rights primarily in the secondary market. Matrix Financial originates residential loans primarily through its wholesale loan origination offices in the Atlanta, Dallas, Denver, Chicago, Houston, Phoenix, Santa Ana and St. Louis metropolitan areas. United Financial provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry, primarily related to the brokerage and analysis of residential mortgage loan servicing rights and residential mortgage loans, corporate and mortgage loan servicing portfolio valuations, development of mortgage loan servicing retention programs, and, to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Matrix Asset Management, formerly known as United Special Services, Inc., provides real estate management and disposition services on foreclosed properties owned by financial services companies and financial institutions. ABS provides outsourced business services and financing to charter schools. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 1. Organization (continued) Sterling's operations, which are located in Texas, consist of a nonbank 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. First Matrix is registered with the National Association of Securities Dealers as a fully disclosed broker-dealer with headquarters in Fort Worth, Texas and a branch office in Denver, Colorado. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States and to general practices within the financial services industry. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. 2. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The Company contributed 100 percent of Matrix Financial's stock to Matrix Bank on August 1, 2000. All of Matrix Financial's assets and liabilities were transferred at their carrying or book basis. This transaction had no impact on the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from these estimates. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Mortgage-Backed Securities Available for Sale Securities available for sale include mortgage-backed securities. Securities available for sale are carried at estimated fair values with the net unrealized gains or losses reported in accumulated other comprehensive income, which is included as a separate component in shareholders' equity. The Company records its securities portfolio at estimated fair value at the end of each quarter based on public market quotes. At disposition, the realized gain or loss is included in earnings on a specific identification basis. Loans Held for Sale Loans originated or purchased 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 market value. 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, would be recognized in a valuation allowance by charges to income. Discounts or premiums on loans held for sale are not accreted or amortized into income on an interest method; however, discounts and premiums related to payments of loan principal are recorded in interest income. The loans are primarily secured by one-to-four family residential real estate located throughout the United States. Gains and losses on loan sales are determined based on the difference between the allocated cost basis of the assets sold and the proceeds, which includes the fair value of any assets or liabilities that are newly created as a result of the transaction. Losses related to recourse provisions in excess of the amount originally provided are accrued as a liability at the time such additional losses are determined, and recorded as part of noninterest expense. Loans Held for Investment Loans held for investment are stated at unpaid principal balances, less unearned discounts and premiums, deferred loan fees, loans in process and allowance for loan losses. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Allowance for Loan Losses The allowance for loan losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors such as any qualitative evaluations of individual classified assets, geographic portfolio concentrations, new products or markets, evaluations of the changes in the historical loss experience component, and projections of this component into the current and future periods based on current knowledge and conditions. After an allowance has been established for the loan portfolio, management establishes an unallocated portion of the allowance for loan losses, which is attributable to factors that cannot be associated with a specific loan or loan portfolio. These factors include general economic conditions, recognition of specific regional geographic concerns, loan type and trends in portfolio growth. Loan losses are charged against the allowance when the probability of collection is considered remote. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb 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. 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 and school financing classified as nonperforming loans. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. As of December 31, 2000 and 1999, the Company had $5,224,000 and $5,301,000, respectively, of impaired commercial loans and school financing with related specific allowances for loan and valuation losses of $287,000 and $649,000, respectively. 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. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Mortgage Servicing Rights The Company recognizes mortgage servicing rights (MSRs) as an asset separate from the underlying originated mortgage loan and initially, upon sale of the loans, measures retained MSRs by allocating the previous carrying amount of the originated mortgage loan between the loan and the servicing right based on their respective fair values. Purchased MSRs are initially measured at fair value. MSRs are carried at the lower of cost (allocated cost for originated MSRs), less accumulated amortization, or fair value. MSRs are amortized in proportion to and over the period of the estimated future net servicing income. The fair value of MSRs is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its MSRs by product type and investor to reflect the predominant risk characteristics. To determine the fair value of MSRs, the Company uses a valuation model that calculates the present value of future cash flows. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing per loan, including incremental interest cost of servicer advances, 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 estimated fair value using the following primary assumptions: prepayment speeds ranging from 133 PSA to 2,000 PSA (Public Securities Association prepayment speed measurement), discount rates ranging from 9.50 percent to 22 percent, and default rate's ranging from 0 percent to 50 percent. 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, 2000, no valuation allowance was required, and the fair value of the aggregate MSRs was approximately $75,185,000. Gain on sale of MSRs is recognized when title to MSRs and substantially all the risks and rewards inherent in owning the MSRs have been transferred to the buyer, and any protection provisions retained by the Company are minor and can be reasonably estimated. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated lives of the assets, which range from three to seven years for office furniture, equipment and software and 30 years for buildings. Foreclosed Real Estate Real estate acquired through foreclosure, deed in lieu of foreclosure or in judgment is carried at the lower of fair value, 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 fair value, less estimated costs to sell. The net carrying value of foreclosed real estate, which is classified in other assets, was $2,646,000 and $800,000 at December 31, 2000 and 1999, respectively. A substantial majority of the Company's foreclosed properties relate to residential real estate as of December 31, 2000 and 1999. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Acquired Real Estate Costs directly attributable to the acquisition, development and construction of land development are capitalized. Such costs include preacquisition costs, direct project costs and holding costs. The investment in land development is carried at the lower of cost, which includes capitalized costs, or net realizable value. Net unrealized losses, if any, would be recognized in a valuation allowance. As of December 31, 2000, there was no valuation allowance necessary for the land development. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. The subsidiaries are charged for the taxes applicable to their profits calculated on the basis of filing separate income tax returns. Matrix Bank qualifies as a savings and loan association for income tax purposes. The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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 that are not delinquent or are delinquent by no more than 60 days are recognized when earned. All other income is recognized when the related payments are received. Brokerage Income Brokerage income represents fees earned related to servicing brokerage and consulting services. Brokerage income is recognized when earned. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) 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 when earned. Real Estate Disposition Services Income Real estate disposition services income represents fees earned related to real estate management and disposition services. Real estate disposition services income is recognized when earned. Loan Origination Income Loan origination income for loans originated for sale, which includes all mortgage origination fees, secondary marketing activity and servicing-released premiums on mortgage loans sold, net of outside origination costs, is recognized as income at the time the loan is sold and funded by the investor. Loan origination income for loans originated for investment, which includes mortgage origination fees and certain direct costs associated with loan originations, is deferred and amortized as a yield adjustment over the contractual life of the related loan using the interest method, adjusted for estimated prepayments. 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 earned. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) 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. Risk Management Activities for MSRs The Company hedges a segment of its servicing portfolio using exchange-traded futures and options. A change in the market value of the futures contract is deferred and amortized in proportion to and over the period of the estimated future net servicing income of the hedged servicing portfolio. The option premium or cost is amortized ratably over the period of the option. If any of the hedged servicing portfolio is sold, then the realized and unrealized gain or loss from the futures and options attributable to the portion sold is included in the basis of the MSRs sold for purposes of calculating gain or loss on sale. These realized and unrealized hedging gains and losses are considered in the determination of the fair value of the MSRs. Effective January 1, 2001, the Company's derivative instruments used in risk management activities for MSRs will be accounted for in accordance with Statement No. 133. Net Income Per Share Basic earnings per share (EPS), or net income per common share, excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Net income per common share assuming dilution is computed by dividing net income by the weighted average number of common shares outstanding for the period and the dilutive effect, if any, of stock options and warrants outstanding for the period. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Investment in Joint Venture The Company's 45 percent-owned investment in Matrix Settlement & Clearance Services, L.L.C. (MSCS) is accounted for using the equity method. This investment was classified in other assets, and had a carrying value of $653,000 and $276,000 as of December 31, 2000 and 1999, respectively. For the years ended December 31, 2000 and 1999, the Company recorded losses of $478,000 and $324,000, respectively, in other income related to MSCS operations. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, generally requires the Company to recognize all free standing and embedded derivative instruments as either assets or liabilities on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. Statement No. 133 allows for hedge accounting treatment for derivatives used to hedge various risks and sets forth specific documentation requirements and qualifying criteria to be used to determine when hedge accounting can be applied. Depending on the nature of the hedging relationship, hedge accounting treatment provides for changes in the fair value of derivatives to be either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Derivative instruments designated and qualifying to hedge the exposure to changes in the fair value of an asset, a liability or a firm commitment, or an identified portion thereof that is attributable to a particular risk, such as interest rate risk, are considered fair value hedges under Statement No.133. Fair value hedges are accounted for by recognizing the changes in fair value of the derivative currently in earnings, offset by a concurrent recognition in earnings of gains or losses on the hedged item attributable to the hedged risk and adjusting the carrying value of the hedged item. Derivative instruments designated and qualifying to hedge the exposure to variability in expected future cash flows, such as forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the derivative instrument on the balance sheet as either an asset or a liability with a corresponding offset, representing the effective portion of the hedge, recorded in other comprehensive income within shareholders' equity, net of related income taxes. Amounts are reclassified from other comprehensive income to earnings in the same period or periods during which the hedged transaction affects earnings. Generally, under both hedging methods, derivative gains and losses which relate to permissible hedge ineffectiveness are recognized currently in earnings. As discussed in Note 14, the Company uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities or on future cash flows. The fair value of these derivatives is currently not recognized on the balance sheet. On January 1, 2001, the Company adopted Statement No. 133, and at that time, designated anew certain of its derivative instruments used for mortgage banking risk management activities into hedging relationships in accordance with the requirements of the new standard. The Company's transition adjustment of $550,000, offset by the related income taxes of $190,000, resulting from the adoption of Statement No. 133 on January 1, 2001 will be recorded as a cumulative effect transition adjustment in earnings in the 2001 consolidated financial statements. This transition adjustment relates primarily to the Company's mortgage banking activities, including mandatory and best effort forward commitments to sell loans, forward commitments to sell mortgage-backed securities, loan origination commitments (interest rate locks), and certain derivative instruments used in risk management activities for MSRs. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards (continued) The transition amount was determined by the Company based on the existing interpretive guidance issued by the Financial Accounting Standards Board (FASB). The FASB continues to issue interpretive guidance that could require changes in the Company's application of Statement No. 133 and may impact future earnings. Statement No. 133, as applied to the Company's risk management strategies in mortgage banking activities, may increase or decrease quarterly or annual net income and shareholders' equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on future cash flows and will not modify the Company's economic risks associated with its activities. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 2. Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards (continued) In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that replaces, in its entirety, FASB Statement No. 125. Statement No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. Statement No. 140 is effective for transfers occurring after March 31, 2001, and the expanded disclosure requirements regarding securitizations and collateral are effective for fiscal years ended after December 15, 2000. The Company believes that the adoption of Statement No. 140 on April 1, 2001, will have no material impact on net income. Reclassifications Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. 3. Net Income Per Share The following table sets forth the computation of net income per share and net income per share, assuming dilution: Year Ended December 31, 2000 1999 1998 ------------------------------------- (Dollars in thousands) Numerator: Net income available to common shareholders........$ 4,258 $ 10,779 $ 8,513 ===================================== Denominator: Weighted average shares outstanding................ 6,713,251 6,728,211 6,704,991 Effect of dilutive securities: Common stock options......... 35,606 95,899 150,478 Common stock warrants........ - 9,436 26,421 ------------------------------------- Dilutive potential common shares...................... 35,606 105,335 176,899 ------------------------------------- Denominator for net income per share, assuming dilution.................... 6,748,857 6,833,546 6,881,890 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 4. Mortgage-Backed Securities Available for Sale At December 31, 2000, mortgage-backed securities available for sale were as follows: Gross Amortized Unrealized Cost Gains Fair Value ------------------------------------------- (In thousands) Mortgage-backed securities.......... $ 65,375 $ 1,241 $ 66,616 The Company expects to receive payments on securities over periods that are considerably shorter than the contractual maturities of the securities, which range from six to 30 years, due to prepayments. Unrealized gains of $1,241,000 were recorded in other comprehensive income, net of the related income taxes of $422,000, as of December 31, 2000. 5. Loans Receivable Loans Held for Investment Loans held for investment consist of the following: December 31, 2000 1999 ------------------------- (In thousands) Residential loans........................ $ 8,382 $ 7,473 Multi-family, commercial real estate, and commercial............................. 123,118 76,185 Construction loans....................... 50,131 48,819 Consumer loans and other................. 8,438 9,903 ------------------------- 190,069 142,380 Less: Loans in process......................... 13,146 14,167 Purchase discounts, net.................. 569 252 Unearned fees............................ 722 764 Allowance for loan losses................ 2,107 1,433 ------------------------- 16,544 16,616 ------------------------- $ 173,525 $ 125,764 ========================= Activity in the allowance for loan losses is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Balance at beginning of year...$ 1,433 $ 1,136 $ 689 Provision for loan losses...... 1,508 735 1,178 Charge-offs.................... (874) (509) (789) Recoveries..................... 40 71 58 ------------------------------------- Balance at end of year.........$ 2,107 $ 1,433 $ 1,136 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 5. Loans Receivable (continued) Loans Held for Investment (continued) Nonaccrual loans in the loans held for investment portfolio totaled approximately $3,087,000 and $498,000, or 1.8 percent and 0.4 percent, of the total loans held for investment portfolio at December 31, 2000 and 1999, respectively. Loans Held for Sale Loans held for sale consist of the following as of: December 31, 2000 1999 ------------------------- (In thousands) Residential loans......................... $ 893,034 $ 945,095 Commercial loans, school financing and other................................... 54,540 36,911 ------------------------- 947,574 982,006 Less: Purchase premiums, net.................. (1,396) (666) Valuation allowance..................... 6,474 4,921 ------------------------- 5,078 4,255 ------------------------- $ 942,496 $ 977,751 ========================= Activity in the valuation allowance is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Balance at beginning of year...$ 4,921 $ 2,574 $ 1,067 Provision for valuation allowance.................... 2,727 2,445 3,429 Charge-offs.................... (1,175) (98) (1,922) Recoveries..................... 1 - - ------------------------------------- Balance at end of year.........$ 6,474 $ 4,921 $ 2,574 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 5. Loans Receivable (continued) Loans Held for Sale (continued) Nonaccrual loans related to the loans and school financing held for sale portfolio aggregated approximately $25,429,000 and $25,143,000 at December 31, 2000 and 1999, respectively. Interest income that would have been recorded for nonaccrual loans was approximately $1,016,000, $979,000 and $524,000 during the years ended December 31, 2000, 1999 and 1998, respectively. 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 $101,104,000 and $147,869,000 as of December 31, 2000 and 1999, respectively. 6. Premises and Equipment Premises and equipment consist of the following: December 31, 2000 1999 ------------------------- (In thousands) Land................................. $ 830 $ 754 Buildings............................ 6,314 4,775 Leasehold improvements............... 1,590 997 Office furniture and equipment....... 12,216 9,384 Other equipment...................... - 1,381 ------------------------- 20,950 17,291 Less accumulated depreciation and amortization....................... 7,761 6,474 ------------------------- $ 13,189 $ 10,817 ========================= Included in occupancy and equipment expense is depreciation and amortization expense of premises and equipment of approximately $2,212,000, $2,126,000 and $1,712,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 7. Mortgage Servicing Rights The activity in the MSRs is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Balance at beginning of year...$ 63,479 $ 57,662 $ 36,276 Purchases...................... 31,883 19,754 34,831 Originated, net of MSRs sold... 16 1,514 (24) Hedging (gain) loss............ (95) 3,257 (321) Amortization................... (9,851) (16,403) (10,563) Sales.......................... (13,903) (2,305) (2,537) ------------------------------------- Balance at end of year.........$ 71,529 $ 63,479 $ 57,662 ===================================== The Company's servicing activity is diversified throughout 50 states with concentrations at December 31, 2000, in California, Texas, Missouri and Florida of approximately 18.9 percent, 13.7 percent, 12.8 percent and 7.3 percent, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. As of December 31, 2000 and 1999, the Company subserviced loans for others of approximately $1,163,811,000 and $205,929,000, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 7. Mortgage Servicing Rights (continued) The Company's servicing portfolio (excluding subserviced loans) comprised the following: December 31, 2000 1999 ------------------------------------------- Principal Principal Number Balance Number Balance of Loans Outstanding of Loans Outstanding ------------------------------------------- (Dollars in thousands) Freddie Mac.............. 16,476 $ 836,054 20,028 $1,334,058 Fannie Mae............... 34,706 1,887,925 38,779 2,427,053 GNMA..................... 20,930 1,106,939 11,720 558,086 VA, FHA, conventional and other loans........ 20,292 1,687,045 20,032 1,570,518 ------------------------------------------- 92,404 $5,517,963 90,559 $5,889,715 =========================================== The Company's custodial escrow balances shown in the accompanying consolidated balance sheets at December 31, 2000 and 1999, pertain 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 of approximately $77,647,000 and $94,045,000, respectively. The Company also has custodial accounts on deposit from other mortgage companies aggregating approximately $0 and $161,000 at December 31, 2000 and 1999, respectively. 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. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 8. Deposits Deposit account balances are summarized as follows: December 31, 2000 1999 ---------------------------------------------------- Weighted Weighted Average Average Amount Percent Rate Amount Percent Rate ---------------------------------------------------- (Dollars in thousands) Passbook accounts... $ 3,010 0.50% 3.43% $ 2,793 0.50% 3.48% NOW accounts ....... 85,986 14.27 0.96 42,787 7.61 1.33 Money market accounts ......... 122,992 20.41 2.34 141,641 25.19 3.04 ---------------------------------------------------- 211,988 35.18 1.91 187,221 33.30 2.72 Certificate accounts 390,681 64.82 6.23 374,973 66.70 5.27 ---------------------------------------------------- $602,669 100.00% 4.70% $562,194 100.00% 4.12% ==================================================== Included in NOW accounts are noninterest-bearing demand deposit accounts of $52,986,000 and $21,178,000 at December 31, 2000 and 1999, respectively. Contractual maturities of certificate accounts as of December 31, 2000: Under 12 12 to 36 36 to 60 months months months ------------------------------------- (In thousands) 4.00-4.99% ................... $ 968 $ 387 $ 140 5.00-5.99% ................... 16,078 5,563 1,117 6.00-6.99% ................... 282,503 63,536 8,462 7.00-7.99% ................... 8,401 2,865 661 ------------------------------------- $ 307,950 $ 72,351 $ 10,380 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 8. Deposits (continued) Approximately $131,443,000 and $133,589,000 of fiduciary assets under administration by Sterling are included in NOW and money market accounts as of December 31, 2000 and 1999, respectively. Of the $131,443,000 at December 31, 2000, $10,028,000 was held by Sterling under a temporary paying agent agreement. Included in certificate accounts is $203,600,000 and $221,510,000 of brokered deposits as of December 31, 2000 and 1999, respectively. Interest expense on deposits is summarized as follows: Year Ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Passbook accounts ........... $ 102 $ 96 $ 102 NOW accounts ............... 619 600 522 Money market ............... 3,053 5,756 3,910 Certificates of deposit ..... 22,501 15,137 11,687 ------------------------------------- $ 26,275 $ 21,589 $ 16,221 ===================================== The aggregate amount of deposit accounts with a balance greater than $100,000 (excluding brokered deposits) was approximately $18,815,000 and $13,873,000 at December 31, 2000 and 1999, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests Borrowed money and guaranteed preferred beneficial interests are summarized as follows: December 31 2000 1999 ------------------------- (In thousands) Revolving Lines $120,000,000 revolving warehouse loan agreement with banks, secured by mortgage loans held for sale, interest at federal funds rate plus 0.85 percent to 1.50 percent ................. $ - $ 25,864 $10,000,000 working capital facility with banks secured by mortgage loans held for sale, MSRs, eligible servicing advance receivables and eligible delinquent mortgage receivables; interest at federal funds rate plus 1.5 percent ....... - 541 $10,000,000 revolving line of credit with a third party financial institution, secured by common stock of Matrix Bank; interest due monthly at LIBOR plus 2.65 percent; $10,000,000 available at December 31, 2000 ............... - 1,800 $60,000,000 revolving warehouse loan agreement (which was increased to $80,000,000 on March 5, 2001), secured by mortgage loans held for sale, interest at LIBOR plus 1.07 percent (7.63 percent rate at December 31, 2000); $38,405,000 available at December 31, 2000 ............... 21,595 - ------------------------- Total revolving lines ........................... 21,595 28,205 Term Notes Payable $45,000,000 servicing acquisition loan agreement with a bank, secured by MSRs, due at the earlier of the maturity of the MSRs or amortized over five to six years from the date of the borrowing through June 30, 2005; interest at federal funds rate plus 2 percent ........... - 28,088 Senior notes, interest at 11.50 percent payable semiannually, unsecured and maturing September 30, 2004 ................. 20,000 20,000 $10,000,000 note payable to a third party financial institution due in quarterly installments of $357,000 plus interest, through December 31, 2003, collateralized by the common stock of Matrix Bank; interest at LIBOR plus 2.65 percent at December 31, 2000 ................. 8,214 9,286 Financing agreement with a bank, secured by real estate, interest at prime plus 1 percent ......................... 2,325 - Other ......................................... - 2,008 ------------------------- Total term notes.................................. 30,539 59,382 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests (continued) December 31 2000 1999 ------------------------- (In thousands) Other Agreements with a bank to sell school financing originated by the Company under agreements to repurchase. The agreement can be terminated upon 90 days written notice by either party; interest rates are variable from 8 percent to 9.50 percent. Total commitment is at the option of the bank. Increases are at the discretion of the bank ................................. $ 17,094 $ 11,545 Financing agreement, collateralized by school financing; interest variable ......... 27,599 14,430 Other financing agreements ................... 176 1,039 ----------- --------- Total other ..................................... 44,869 27,014 --------------------- Total borrowed money ........................... $97,003 $114,601 ===================== Guaranteed preferred beneficial interests in Company's 10 percent junior subordinated debentures payable quarterly, unsecured and maturing September 30, 2029 ........................... $ 27,500 $ 27,500 ===================== As of December 31, 2000, the maturities of term notes payable are as follows: (In thousands) 2001 ................................................. $ 3,753 2002 ................................................. 1,428 2003 ................................................. 5,358 2004 ................................................. 20,000 ------------- $ 30,539 ============= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests (continued) 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, maintain classified assets of not greater than three percent and maintain the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized," as defined. The credit facility agreement for the $60,000,000 warehouse loan agreement requires Matrix Financial to maintain, among other things, net worth, as defined, of at least $25,000,000, a leverage ratio of no more than eight to one and a minimum cash flow coverage ratio for four consecutive quarters of no less than 1.3 to 1.0. At December 31, 2000, the Company and its subsidiaries were in compliance with these covenants. School Financing Agreement During 2000 and 1999, the Company placed tax-exempt financing it originated to charter schools into several 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 are guaranteed by a letter of credit issued by a third party investment bank (Investment Bank) and the underlying financing. The "A" Certificates' interest rate may be determined weekly, monthly or for a term for up to one year. The interest rate and the term of the interest rate are determined by the Remarking Agent, which is also the Investment Bank. Generally, the Trusts are short-term in nature with an average life of one year or less. The "B" Certificates are owned in part by the Company and in part by the Investment Bank. The interest rate paid on the "A" Certificates and the "B" Certificates owned by the Investment Bank is considered the Company's financing cost. The approximate cost of the financing at December 31, 2000 and 1999 was 7.23% and 7.63%, respectively. The interest that the Company receives through its part ownership of the "B" Certificates is tax-exempt. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 9. Borrowed Money and Guaranteed Preferred Beneficial Interests (continued) School Financing Agreement (continued) Although the Investment Bank acts as a guarantor to the "A" Certificates, the Company provides limited recourse to the Investment Bank in all cases of loss or default. Due to the nature of the recourse and the ability of the "A" Certificate holders to put the certificates to the Trusts, the transactions have been accounted for as a secured financing. Guaranteed Preferred Beneficial Interests in Company's 10 Percent Junior Subordinated Debentures On July 30, 1999, Matrix Bancorp Capital Trust I (MBC Trust), a Delaware business trust formed by the Company, completed the sale of $27,500,000 of 10 percent preferred securities. The MBC Trust also issued common securities to the Company and used the net proceeds from the offering to purchase $28,600,000 in principal amount of 10 percent junior subordinated debentures of the Company due September 30, 2029. The junior subordinated debentures are the sole assets of MBC Trust and are eliminated, along with the related income statement effects, in the consolidated financial statements. Capitalized expenses associated with the offering of approximately $1,370,000 are included in other assets at December 31, 2000 and are being amortized on a straight-line basis over the life of the junior subordinated debentures. The preferred securities accrue and pay distributions quarterly at an annual rate of 10 percent of the stated liquidation amount of $25 per preferred security. The Company has fully and unconditionally guaranteed all of the obligations of MBC Trust 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 MBC Trust. 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. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 10. Federal Home Loan Bank of Dallas Borrowings Federal Home Loan Bank of Dallas (FHLB) borrowings aggregated $519,433,000 and $405,000,000 at December 31, 2000 and 1999, respectively. Advances of $26,000,000 and $100,000,000 at December 31, 2000 and 1999, respectively, were borrowed under a Short Option Advance (SOA) Agreement with the FHLB. These SOA borrowings have a term of ten years, but are callable by the FHLB beginning after a six month or one year lock-out period depending on the particular SOA borrowing. After the expiration of the lock-out period, the SOA borrowings are callable at three-month intervals. If the FHLB exercises its call option on a SOA borrowing, the FHLB is required to offer replacement funding to the Company at a market rate of interest for the remaining term of the SOA borrowing. 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, 2000, the interest rates on the SOA borrowings ranged from 5.40 percent to 5.63 percent and their possible call dates varied from February 20, 2001 to March 26, 2001. At December 31, 1999, the interest rates on the SOA borrowings ranged from 4.90 percent to 5.63 percent and their possible call dates varied from January 14, 2000 to December 26, 2000. Advances of $151,433,000 and $1,501,000 at December 31, 2000 and 1999, respectively, were borrowed under a fixed term and rate. These advances are at a rate from 5.84 percent to 6.23 percent and mature from March 27, 2001 through June 2, 2014. All advances are secured by first lien mortgage loans of Matrix Bank and all of its FHLB stock. Matrix Bank is on full custody status, which requires Matrix Bank to place loan collateral at the FHLB. As of December 31, 2000, Matrix Bank had available unused borrowings from the FHLB for advances of approximately $31,041,000. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes The income tax provision consists of the following: Year ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Current: Federal ................... $ 2,350 $ 5,340 $ 3,837 State ..................... 411 1,329 991 Deferred: Federal ................... (451) (341) 42 State ..................... ( 67) (50) 6 ------------------------------------- $ 2,243 $ 6,278 $ 4,876 ===================================== A reconciliation of the provision for income taxes with the expected income taxes based on the statutory federal income tax rate follows: Year ended December 31, 2000 1999 1998 ------------------------------------- (In thousands) Expected income tax provision .$ 2,210 $ 5,799 $ 4,552 Effect of federal tax brackets. - 52 13 State income taxes ........... 343 827 660 Other ......................... (310) (400) (349) ------------------------------------- $ 2,243 $ 6,278 $ 4,876 ===================================== Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes (continued) 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. December 31, 2000 1999 ------------------------- (In thousands) Deferred tax assets: Allowance for loan and valuation losses .$ 5,400 $ 2,713 Discounts and premiums ................. 71 141 Deferred fees ........................... 1,141 1,145 Delinquent interest ..................... 413 287 Other ................................... 197 - ------------------------- Total deferred tax assets 7,222 4,286 Deferred tax liabilities: Gain on sale of loans ................... (2,773) (1,436) Amortization of mortgage servicing rights (3,178) (1,814) Depreciation ........................... (354) (539) Other ................................... - (98) ------------------------- Total deferred tax liabilities ........... (6,305) (3,887) ========================= Net deferred tax asset ...................$ 917 $ 399 ========================= 12. Regulatory The Company is a unitary thrift holding company and, as such, is subject to the regulation, examination and supervision of the Office of Thrift Supervision (OTS). Matrix Bank is also subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Matrix Bank'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 items as calculated under regulatory accounting practices. Matrix Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 12. Regulatory (continued) Quantitative measures established by regulation to ensure capital adequacy require Matrix Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to total assets (as defined). Management believes, as of December 31, 2000 and 1999, that Matrix Bank met all applicable capital adequacy requirements. As of December 31, 2000, 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 following table. There have been no conditions or events since that notification that management believes have changed the institution's category.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------- (Dollars in thousands) As of December 31, 2000 Total Capital (to Risk Weighted Assets) ...........$100,091 12.2% $65,387 8.0% $81,734 10.0% Core Capital (to Adjusted Tangible Assets)... 94,289 7.0 53,694 4.0 67,117 5.0 Tier I Capital (to Risk Weighted Assets) ........... 94,289 11.5 N/A 49,041 6.0 As of December 31, 1999 Total Capital (to Risk Weighted Assets) ........... 70,236 10.5 53,397 8.0 66,746 10.0 Core Capital (to Adjusted Tangible Assets)... 65,987 5.8 45,548 4.0 56,935 5.0 Tier I Capital (to Risk Weighted Assets) ........... 65,987 9.9 N/A 40,048 6.0 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 Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 12. Regulatory (continued) Matrix Bank is required to maintain vault cash or balances with the Federal Reserve Bank of Dallas in a noninterest-earning account based on a percentage of deposit liabilities. Such balances averaged $13,168,000 and $14,720,000 in 2000 and 1999, respectively. Matrix Bank is required by Federal regulations to maintain a minimum level of liquid assets of four percent. Matrix Bank exceeded the Federal requirement at December 31, 2000 and 1999. 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 $4,566,000 at December 31, 2000 and $5,104,000 at December 31, 1999. At December 31, 2000 and 1999, Matrix Financial was in compliance with these regulatory requirements. 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, 2000, Sterling was in compliance with all capital requirements under Texas law. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan The Company has elected to follow Accounting Principles Board 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 September 1996, the board of directors and shareholders adopted the 1996 Stock Option Plan, which amended and restated the Company's stock option plan adopted in 1995. The Company's 1996 Stock Option Plan, as amended, allows for the grant of options to substantially all of the Company's full-time employees and directors for up to 750,000 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-up, combination or exchange of shares of common stock. No Incentive Option may be granted with an exercise price per share less than the fair market value of the common stock at the date of grant. The Nonqualified Options may be granted with any exercise price determined by the administrator of the 1996 Stock Option Plan. The expiration date of an option is determined by the administrator at the time of the grant, but in no event may an option be exercisable after the expiration of ten years from the date of grant of the option. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan (continued) The 1996 Stock Option Plan further provides that, in most instances, an option must be exercised by the optionee within 30 days after the termination of the consulting contract between such consultant and the Company or termination of the optionee's employment with the Company, as the case may be, if and to the extent such option was exercisable on the date of such termination. Pro forma information regarding net income and earnings per share is required by Statement No. 123, Accounting for Stock-Based Compensation, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.1 percent, 5.4 percent and 5.4 percent; a dividend yield of zero percent; volatility factors of the expected market price of the Company's common stock of .63, .56 and .39; and a weighted-average expected life of the option of four years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan (continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: Year ended December 31, 2000 1999 1998 ------------------------------------- (Dollars in thousands except per share data) Pro forma net income................ $ 3,980 $ 10,462 $ 8,256 Pro forma earnings per share: Basic............................. 0.59 1.55 1.23 Diluted .......................... 0.59 1.53 1.20 A summary of the Company's stock option activity and related information is as follows: Year ended December 31, 2000 1999 1998 ----------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------------------------------------------------- Outstanding, beginning of year..431,600 $ 11.07 387,700 $ 10.90 330,150 $ 10.55 Granted............. 95,000 7.65 55,500 12.34 63,000 12.96 Exercised........... (500) 10.00 (6,100) 12.36 (1,725) 12.25 Forfeited...........(29,400) 10.77 (5,500) 12.32 (3,725) 14.00 --------- ---------- --------- Outstanding, end of year.............. 496,700 10.54 431,600 11.07 387,700 10.90 ========= ========== ========= Exercisable end of year.............. 286,500 10.34 226,150 9.70 167,350 8.49 Weighted average fair value of options granted during the year... $ 4.86 $ 7.68 $ 6.03 ========= ========== ========= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Stock Option Plan (continued) Options outstanding at December 31, 2000, have exercise prices ranging from $5.13 to $26.50 per share, as outlined in the following table: Weighted Weighted Weighted Average Average Average Range of Number of Exercise Remaining Number of Exercise Exercise Options Price Per Contractual Options Price Prices Outstanding Share Life Exercisable Per Share - ------------------------------------------------------------------------- $5.13 79,500 $ 5.13 4.00 79,500 $ 5.13 6.50 - 7.13 12,500 6.98 9.88 - - 8.00 - 8.44 97,500 8.31 8.91 11,500 8.11 10.0 98,200 10.00 5.79 83,250 10.00 11.50 - 13.88 113,000 12.88 7.10 51,750 13.09 14.25 - 17.25 93,000 15.17 6.59 57,500 15.16 26.50 3,000 26.50 7.33 3,000 26.50 ----------- ----------- 496,700 10.54 6.68 286,500 10.34 =========== =========== Restricted Net Assets As a result of the regulatory requirements and debt covenants, substantially all of the net assets of the Company are restricted at December 31, 2000 and 1999. Warrants The Company issued warrants exercisable for an aggregate of 75,000 shares of its common stock to its primary underwriters upon the closing of the Company's initial public offering. The warrants are exercisable, from time to timefrom October 1997 to October 2001. The exercise price for the shares of common stock underlying such warrants is $12 per share. The shares of common stock underlying such warrants are entitled to certain demand and incidental registration rights. The warrants expire on October 18, 2001. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 13. Shareholders' Equity (continued) Employee Stock Purchase Plan In September 1996, the board of directors and shareholders adopted on Employee Stock Purchase Plan (Purchase Plan) and authorized 125,000 shares of common stock (ESPP Shares) for issuance thereunder. The Purchase Plan became effective upon consummation of the initial public offering. The price at which ESPP Shares are sold under the Purchase Plan is 85 percent of the lower of the fair market value per share of common stock on the enrollment or the purchase date. In May 2000, the authorized number of shares available for issuance under the Purchase Plan was increased to 250,000 shares. As of December 31, 2000, there were 145,552 ESPP Shares available for future issuance. 14. 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, 2000, are approximately as follows: (In thousands) 2001.................................................. $ 2,557 2002.................................................. 2,358 2003.................................................. 2,067 2004.................................................. 1,513 2005.................................................. 1,487 Thereafter............................................ 1,320 ------------- $ 11,302 ============= Total rent expense aggregated approximately $2,319,000, $1,327,000 and $955,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and is recorded in occupancy and equipment expense. Off-Balance Sheet Risk and Concentration of Commitments 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 to provide 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. Since 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. As of December 31, 2000 and 1999, the Company had commercial credit off-balance sheet instruments of $27,905,000 and $40,475,000, respectively. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Mortgage Banking Risk Management Activities In the ordinary course of business, the Company makes commitments to originate residential mortgage loans (Pipeline) and holds originated loans until delivery to an investor. Inherent in this business is a risk associated with changes in interest rates and the resulting change in the market value of the Pipeline and funded loans. The Company mitigates this risk through the use of mandatory and best effort forward commitments to sell loans or mortgage-backed securities. At December 31, 2000, the Company had $109,490,000 and $132,000,000 in Pipeline and funded loans, respectively, offset with mandatory forward commitments of $70,730,000 and best effort forward commitments of $121,950,000. At December 31, 1999, the Company had $10,663,000 and $30,515,000 in Pipeline and funded loans, respectively, offset with mandatory forward commitments of $35,127,000 and best effort forward commitments of $3,690,000. Effective January 1, 2001, the Company adopted Statement No. 133, which impacts the accounting for both Pipeline and risk management activities for Pipeline and funded loans. Risk Management Activities for MSRs Ownership of MSRs exposes the Company to impairment of its value in certain interest rate environments. The incidence of prepayment of a mortgage loan increases during periods of declining interest rates as the homeowner seeks to refinance the loan to a lower interest rate. If the level of prepayment on segments of the Company's mortgage servicing portfolio achieves a level higher than projected by the Company for an extended period of time, then an impairment in the associated basis in the MSRs may occur. To mitigate this risk of impairment due to declining interest rates, the Company hedges a segment of its mortgage servicing portfolio. As of December 31, 2000, the Company had identified and hedged approximately $353 million of its mortgage servicing portfolio, in terms of principal loan balance outstanding, using a program of exchange-traded futures and options. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Hedging of MSRs (continued) At December 31, 2000, the Company had the following open positions: Unrecognized Open Gain Expiration Positions Notional (Loss) on Date (No. of Amount Open Contracts) Positions -------------------------------------------- Ten year Treasury Note futures ................ March 2001 118 $11,800,000 $ 302,649 Ten year Treasury Note put options ............ March 2001 45 4,500,000 (6,374) Ten year Treasury Note call options............ March 2001 37 3,700,000 8,277 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. 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, 2000, 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 condition, results of operations or cash flows of the Company. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Contingencies (continued) The Company has been named defendant in an arbitration action in which the plaintiff alleges that the Company violated various provisions of the Commodities Exchange Act in connection with plaintiff's investment of certain monies in his self-directed IRA. The plaintiff seeks compensatory damages of $250,000 plus interest and other costs, including attorneys' fees. The arbitration hearing is set for June 2001. 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 this matter, cannot be estimated with certainty at this time. A former customer of the Company is a debtor in a Chapter 11 proceeding under the Bankruptcy Code. 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 customer, with the customer having the right or obligation to repurchase such mortgage loans within a specified period of time. Several other financial institutions had provided the customer with warehouse financing or additional purchase/repurchase facilities (the Origination Facilities). At this time, it appears that no other financial institution that provided an Origination Facility to the customer has a conflicting interest with the Company in respect of the loans purchased by the Company, which were approximately $12,400,000 in original principal amount (the Purchased Loans). However, several third parties have instituted lawsuits against the Company claiming an equitable interest in a portion of the Purchased Loans (approximately $2,400,000 in original principal amount). In addition, parties in the chain of title to property securing approximately $2,500,000 of loans, including sellers and prior lienholders, are seeking to void or rescind their transactions on the theory that they never received consideration. The Company believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. The trustee for the customer mentioned above has received an order from the Bankruptcy Court finding that the Purchased Loans are a part of the estate of the customer. Nevertheless, the trustee and the Company have reached an agreement, in principle, whereby the trustee will release all of its right in and to the Purchased Loans if the trustee, after performance of a "due diligence" review, determines that the Company owns the Purchased Loans or, would otherwise have a perfected security interest in the Purchased Loans. The Company believes it can adequately demonstrate to the trustee that it is the owner of the Purchased Loans, or otherwise has a perfected security interest in the Purchased Loans. The Company intends to vigorously defend its position in this matter. The ultimate legal and financial liability of the Company, if any, in this bankruptcy cannot be estimated with certainty at this time. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments, Contingencies and Related Party Transactions (continued) Contingencies (continued) The Company has been named a defendant in an action that was tried in Tarrant County, Texas, district court in the spring of 2000. The jury returned a verdict adverse to the Company 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 $6,400,000. The Company has filed an appeal of this judgment and believes it has meritorious points of appeal. It intends to vigorously prosecute the appeal of this action. The ultimate resolution of this matter, which is expected to occur in nine to 18 months, could result in a loss of up to $6,400,000 plus post-judgment interest and additional attorneys' fees. 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, the Company 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 defendants believe they have adequate defenses and intend to vigorously defend this action. The ultimate legal and financial liability of the Company, if any, in this matter cannot be estimated with certainty at this time. The Company has been named a defendant in approximately nine alleged class actions in which the plaintiffs allege, among other things, that the Company, as custodian of the plaintiffs' self-directed IRAs, breached its fiduciary duty and was negligent. In each case, the plaintiff seeks unspecified damages and costs. The Company believes it has adequate defenses and intends to vigorously defend these actions. The ultimate legal and financial liability of the Company, if any, in these matters cannot be estimated with certainty at this time. Related Party Transactions At December 31, 2000, the Company had unsecured loan receivables from executive officers and a shareholder of $230,000 and approximately $68,000, respectively, which all bear interest at varying rates and are renewable at the Company's option. 15. Defined Contribution Plan The Company has a 401(k) defined contribution plan (Plan) covering all employees who have elected to participate in the Plan. Each participant may make pretax contributions to the Plan up to 15 percent of such participant's earnings with a maximum of $10,500 in 2000. The Company makes a matching contribution of 25 percent of the participant's total contribution. Matching contributions made by the Company vest over six years. The cost of the plan approximated $261,000, $211,000 and $162,000 during the years ended December 31, 2000, 1999 and 1998, respectively, and was recorded in compensation and employee benefits expense in the consolidated statements of income. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 16. Financial Instruments Fair Value of Financial Instruments The carrying amounts and estimated fair value of financial instruments are as follows: December 31, 2000 1999 ------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------- (In thousands) Financial assets: Cash and cash equivalents.......$ 53,170 $ 53,170 $ 26,609 $ 26,609 Mortgage-backed securities...... 66,616 66,616 - - Loans held for sale, net........ 942,496 948,069 977,751 982,525 Loans held for investment, net........................... 173,525 174,581 125,764 126,937 FHLB stock...................... 27,814 27,814 22,414 22,414 Financial liabilities: Deposits........................ 602,669 604,423 562,194 563,473 Custodial escrow balances....... 77,647 77,647 94,206 94,206 Payable for purchase of MSRs.... 12,666 12,666 3,163 3,163 FHLB borrowings................. 519,433 521,194 405,000 405,067 Borrowed money and guaranteed preferred beneficial interests.......... 124,503 119,253 142,101 142,101 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 16. Financial Instruments (continued) Fair Value of Financial Instruments (continued) The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments: The carrying amounts reported in the balance sheet for cash and cash equivalents, FHLB stock, payable for purchase of MSRs and certain components of borrowed money approximate those assets' and liabilities' fair values. The fair values of loans are based on quoted market prices where available or outstanding commitments from 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 fair value disclosed for FHLB borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on FHLB borrowings. The fair value for the remainder of borrowed money, which includes the Company's 11.50 percent senior notes and guaranteed preferred beneficial interests, is based on over the counter (OTC) market prices. 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, 2000 and 1999, 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). Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows: December 31, 2000 1999 ------------------------- (In thousands) Condensed Balance Sheets Assets: Cash......................................$ - $ 2 Other receivables......................... 279 1,801 Premises and equipment, net............... 989 2,254 Other assets.............................. 2,489 2,693 Investment in and advances to subsidiaries............................ 123,755 117,290 ----------------------- Total assets................................$ 127,512 $ 124,040 ======================= Liabilities and shareholders' equity: Borrowed money and guaranteed preferred beneficial interests (a)...............$ 55,714 $ 59,568 Other liabilities........................ 7,775 3,975 ----------------------- Total liabilities.......................... 63,489 63,543 Shareholders' equity: Common stock............................. 1 1 Treasury shares ......................... (1,775) - Additional paid in capital............... 23,004 22,780 Retained earnings........................ 42,793 37,716 ----------------------- Total shareholders' equity................. 64,023 60,497 ----------------------- Total liabilities and shareholders' equity.$ 127,512 $ 124,040 ========================= (a)The Parent's debt is set forth below. The Parent also guarantees the revolving warehouse loan agreement and the financing related to charter schools. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information (continued) December 2000 1999 ------------------------- (In thousands) Senior notes.............................. $ 20,000 $ 20,000 Bank stock loan........................... 8,214 9,286 Other..................................... - 2,782 ------------------------- Total term notes.......................... 28,214 32,068 Guaranteed preferred beneficial interests. 27,500 27,500 ------------------------- Total debt................................ $ 55,714 $ 59,568 ========================= As of December 31, 2000, the maturities of term notes payable are as follows: (In thousands) 2001.................................................. $ 1,428 2002.................................................. 1,428 2003.................................................. 5,358 2004.................................................. 20,000 ------------- $ 28,214 ============= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information (continued) Year ended December 31, 2000 1999 1998 ----------------------------------- (In thousands) Condensed Statements of Income Income: Interest income on loans..... $ 2,202 $ 1,257 $ 17 Other........................ 1,362 616 463 ----------------------------------- Total income................... 3,564 1,873 480 Expenses: Compensation and employee benefits................... 3,686 2,628 2,412 Occupancy and equipment...... 674 718 600 Interest on borrowed money... 6,923 5,521 3,601 Professional fees............ 510 400 295 Other general and administrative............. 2,209 1,948 1,416 ----------------------------------- Total expenses................. 14,002 11,215 8,324 ----------------------------------- Loss before income taxes and equity income of subsidiaries................. (10,438) (9,342) (7,844) Income taxes (a)............... - - - ----------------------------------- Loss before equity income of subsidiaries................. (10,438) (9,342) (7,844) Equity income of subsidiaries.. 14,696 20,121 16,357 ----------------------------------- Net income.....................$ 4,258 $ 10,779 $ 8,513 =================================== (a)The Company's tax-sharing agreement with its subsidiaries provides that the subsidiaries will pay the Parent an amount equal to its individual current income tax provision calculated on the basis of the subsidiary filing a separate return. In the event a subsidiary incurs a net operating loss in future periods, the subsidiary will be paid an amount equal to the current income tax refund the subsidiary would be due as a result of carryback of such loss, calculated on the basis of the subsidiary filing a separate return. Accordingly, the Parent's condensed statements of income do not include any income tax benefit for the current losses. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 17. Parent Company Condensed Financial Information (continued) Year ended December 31 2000 1999 1998 ------------------------------------- (In thousands) Condensed Statements of Cash Flows Operating activities: Net income........................$ 4,258 $ 10,779 $ 8,513 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity income of subsidiaries..................(14,696) (20,121) (16,357) Dividend from subsidiaries..... 6,509 11,468 4,534 Depreciation and amortization.................. 621 763 281 Unrealized gain on securities.................... 819 - - Gain on sale of premises....... (823) - - Increase in other liabilities................... 3,800 2,556 169 Decrease (increase) in other receivables and other assets.................. 1,459 (1,754) 945 --------------------------------- Net cash provided by (used in) operating activities.............. 1,947 3,691 (1,915) Investing activities: Purchases of premises and equipment....................... (457) (221) (964) Proceeds from sale of premises.... 2,191 - - Investment in and net change in advances to subsidiaries......... 1,722 (19,846) (14,926) --------------------------------- Net cash provided by (used in) investing activities.............. 3,456 (20,067) (15,890) Financing activities: Repayments of notes payable and revolving line of credit....(39,554) (30,007) (14,774) Proceeds from notes payable and revolving line of credit.... 35,700 19,800 31,047 Shares repurchased................ (1,775) - - Proceeds from junior subordinated debentures......... - 26,063 - Proceeds from issuance of common stock.................... 224 364 231 --------------------------------- Net cash (used in) provided by financing activities.............. (5,405) 16,220 16,504 --------------------------------- Decrease in cash.................... (2) (156) (1,301) Cash at beginning of year........... 2 158 1,459 --------------------------------- Cash at end of year.................$ - $ 2 $ 158 ================================= Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 18. Selected Quarterly Financial Data (Unaudited) 2000 --------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter --------------------------------------------- (Dollars in thousands except per share data) Operations Net interest income after provision for loan and valuation losses................... $ 7,084 $ 6,191 $ 6,242 $ 6,033 Noninterest income......... 14,971 15,340 14,705 13,440 Noninterest expense........ 20,234 19,849 20,462 16,960 ------------------------------------------- Income before income taxes. 1,821 1,682 485 2,513 Income taxes............... 513 615 151 964 ------------------------------------------- Net income................. $ 1,308 $ 1,067 $ 334 $ 1,549 =========================================== Net Income Per Share Data Basic...................... $ .20 $ .16 $ .05 $ .23 =========================================== Diluted.................... $ .20 $ .16 $ .05 $ .23 =========================================== Balance Sheet Total assets...............$1,418,795 $1,367,647 $1,293,828 $1,302,593 Total loans, net........... 1,116,021 1,086,388 1,073,630 1,088,170 Shareholders' equity....... 64,023 63,664 62,730 62,051 1999 --------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter --------------------------------------------- (Dollars in thousands except per share data) Operations Net interest income after provision for loan and valuation losses.................$ 6,847 $ 6,454 $ 6,429 $ 6,553 Noninterest income....... 15,383 15,085 15,686 14,206 Noninterest expense...... 17,820 17,091 17,816 16,859 ------------------------------------------- Income before income taxes.................. 4,410 4,448 4,299 3,900 Income taxes............. 1,712 1,662 1,509 1,395 ------------------------------------------- Net income...............$ 2,698 $ 2,786 $ 2,790 $ 2,505 =========================================== Net Income Per Share Data Basic....................$ .40 $ .41 $ .41 $ .37 =========================================== Diluted..................$ .40 $ .41 $ .41 $ .37 =========================================== Balance Sheet Total assets.............$1,283,746 $1,059,815 $1,034,699 $ 996,519 Total loans, net......... 1,103,515 887,032 835,960 803,002 Shareholders' equity..... 60,497 57,500 54,714 51,869 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 19. Transactions with MCA Mortgage Corporation During recent years, the Company entered into several purchase transactions with MCA Mortgage Corporation (MCA), a Michigan-based mortgage banking entity. At December 31, 1998, the Company was carrying approximately $5,000,000 of residential mortgage loans on its balance sheet that were purchased from MCA on a servicing retained basis. The Company also had an outstanding receivable relating to brokerage and consulting services provided to MCA. In January 1999, the Company learned that MCA was closing its operations. Additionally, in February 1999, the Company learned that MCA had declared bankruptcy and it appeared likely that some of the loans purchased by the Company had been sold multiple times or pledged multiple times as security for repayment of various credit facilities. The Company also discovered that there appeared to be servicing issues relating to some of the purchased loans. The servicing issues consisted of instances in which loans owned by the Company and serviced by MCA had previously paid off, but for which MCA had continued to remit monthly principal and interest, rather than the payoff proceeds. As a result of the above MCA issues, the Company recorded a provision for valuation losses of approximately $2,200,000 as of December 31, 1998. Additionally, the Company wrote off approximately $100,000 of accounts receivable and accrued interest relating to MCA as of December 31, 1998. 20. Transactions with Harbor Financial Mortgage Corporation During 1999 and 1998, the Company entered into several transactions with Harbor Financial Mortgage Corporation and its wholly owned subsidiary New America Financial Inc. (collectively Harbor). The transactions included the purchase of nonperforming FHA/VA loans, servicing retained, on a scheduled/actual remittance; the purchase of performing residential mortgage loans including sub-prime loans, servicing retained, on a scheduled/scheduled remittance with full recourse; the acquisition of MSRs; and the purchase of receivables related to servicing sales by Harbor to third parties. In July 1999, Harbor, as servicer for the nonperforming FHA/VA loans, breached its servicing contract. As a result, in September 1999, the Company transferred the servicing of the loans to Matrix Financial. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 20. Transactions with Harbor Financial Mortgage Corporation (continued) In October 1999, Harbor filed for bankruptcy. Subsequent to the bankruptcy there were several lawsuits filed by and against the Company and third parties, generally surrounding the ownership and competing interest in certain of the Harbor assets that the Company had acquired. In August 2000, the Company entered into a global settlement with all of the third parties. As part of the settlement, the Company acquired additional assets from the Harbor estate and was required to make settlement payments. Related to the settlement, curtailments and legal expenses the Company expensed approximately $2,800,000, the majority of which was recorded in other general and administrative expense in the consolidated statement of income for the year ended December 31, 2000. The most significant assets which remain from the Harbor transactions are the nonperforming FHA/VA loans with a balance of $80,025,000 at December 31, 2000. Because the principal and interest is largely insured or guaranteed by the federal government at a stated debenture rate, the Company continues to accrue interest on the loans. However, both the interest and advances made on the loans are subject to certain curtailments. The interest and advances are analyzed quarterly by the Company for collectibility. 21. Transactions with Island Mortgage Network Over the past two years, the Company provided Island Mortgage Network (Island), a New York mortgage banking entity, with a purchase/repurchase facility under which the Company purchased residential mortgage loans from Island, with Island having the right or obligation to repurchase such mortgage loans within a specified period of time. In June 2000, Island breached terms of its agreement with the Company and, in July, Island filed for bankruptcy. At the time of the bankruptcy, the Company had approximately $12,400,000 of loans that it had acquired from Island. Relating to $2,400,000 of the loans, there have been lawsuits initiated by third parties alleging a competing interest in the loans. With respect to an additional $2,500,000 of loans, the Company believes that the loans were never closed with good funds. As of December 31, 2000, the Company had $11,600,000 of loans and receivables originated by Island. As a result of the above Island issues, the Company recorded a provision for losses in other general and administrative expense of approximately $2,600,000 for the year ended December 31, 2000. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 22. Segments of the Company and Related Information The Company has four reportable segments under Statement No. 131, Disclosures about Segments of an Enterprise and Related Information: a traditional banking subsidiary, a mortgage banking subsidiary, a servicing brokerage and consulting subsidiary 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 and residential MSRs. The mortgage banking subsidiary acquires residential MSRs and services the mortgage loans underlying those MSRs and, in addition, originates residential mortgage loans through its wholesale loan origination offices. The servicing brokerage subsidiary offers brokerage and consulting services for residential MSRs. 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 of the Company's trust operations, real estate disposition services, a broker-dealer and the Parent company operations. The Company evaluates performance and allocates resources based on operating profit or loss before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices (i.e., prices that would be paid if the companies were not affiliates). Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 22. Segments of the Company and Related Information (continued) For the years ended December 31: Servicing Brokerage Traditional Mortgage and School All Banking Banking Consulting Services Others Total -------------------------------------------------------- 2000 (In thousands) Revenues from external customers: Interest income.........$86,535 $ 5,973 $ - $ 4,691 $ 187 $97,386 Noninterest income......... 9,144 27,430 6,871 4,240 11,107 58,792 Intersegment revenues.......... 3,620 5,746 220 - 2,233 11,819 Interest expense.... 47,978 8,296 7 4,413 6,907 67,601 Depreciation/ amortization...... 2,447 8,469 155 269 1,094 12,434 Segment income (loss) before income taxes...... 17,170 2,209 1,431 (4,019) (10,290) 6,501 Segment assets (a).............. 1,286,971 259,726 2,304 62,245 30,740 1,641,986 1999 Revenues from external customers: Interest income......... 66,057 4,433 - 3,249 11 73,750 Noninterest income......... 13,903 24,779 9,662 2,813 9,203 60,360 Intersegment revenues.......... (68) 2,782 861 - 3,183 6,758 Interest expense.... 30,812 6,572 1 2,586 4,316 44,287 Depreciation/ amortization...... 3,691 13,498 216 183 942 18,530 Segment income (loss) before income taxes...... 29,047 (4,529) 3,871 (1,895) (9,437) 17,057 Segment assets (a)1,138,650 93,252 1,803 37,640 29,446 1,300,791 1998 Revenues from external customers: Interest income.........52,445 6,566 - 1,661 22 60,694 Noninterest income......... 7,603 21,971 9,993 46 7,132 46,745 Intersegment revenues.......... (133) 991 501 - 1,665 3,024 Interest expense....24,972 6,767 1 1,128 3,636 36,504 Depreciation/ amortization...... 1,516 10,306 227 28 1,005 13,082 Segment income (loss) before income taxes......21,470 (3,983) 4,119 (742) (7,475) 13,389 Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) Segment assets(a)..821,448 156,523 3,143 24,875 28,304 1,034,293 (a) See reconciliation to total consolidated assets in the following table. Matrix Bancorp, Inc. Notes to Consolidated Financial Statements (continued) 22. Segments of the Company and Related Information (continued) 2000 1999 1998 ------------------------------------- (In thousands) Revenues for year ended December 31, Interest income for reportable segments...........................$ 97,199 $ 73,739 $ 60,672 Noninterest income for reportable segments........................... 47,685 51,157 39,613 Intersegment revenues for reportable segments........................... 9,586 3,575 1,359 Other revenues....................... 13,527 12,397 8,819 Elimination of intersegment revenues. (11,819) (6,758) (3,024) ------------------------------------- Total consolidated revenues..........$ 156,178 $ 134,110 $ 107,439 ===================================== Profit for year ended December 31, Total profit for reportable segments.$ 16,791 $ 26,494 $ 20,864 Other loss........................... (10,803) (9,152) (7,367) Adjustment to intersegment profit (loss) in consolidation............ 513 (285) (108) ------------------------------------ Income before income taxes...........$ 6,501 $ 17,057 $ 13,389 ==================================== Assets as of December 31, Total assets for reportable segments.$1,611,246 $1,271,345 $1,005,989 Other assets......................... 30,740 29,446 28,304 Elimination of intercompany receivables........................ (215,998) (16,689) (21,905) Other eliminations................... (7,193) (356) (233) ------------------------------------ Total consolidated assets............$1,418,795 $1,283,746 $1,012,155 ==================================== Other Significant Items for the year ended December 31, Depreciation/amortization expense: Segment totals.....................$ 11,340 $ 17,588 $ 12,077 Adjustments........................ 1,094 942 1,005 ------------------------------------ Consolidated totals..................$ 12,434 $ 18,530 $ 13,082 ==================================== Interest expense: Segment totals.....................$ 60,694 $ 39,971 $ 32,868 Adjustments........................ 6,907 4,316 3,636 ------------------------------------ Consolidated totals..................$ 67,601 $ 44,287 $ 36,504 ==================================== EX-10.7 2 0002.txt PROMISSORY NOTE Dated: January 31, 2001 Principal Amount: $79,340.45 State of Colorado FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to pay to the order of Matrix Bancorp, Inc. The sum of Seventy Nine Thousand Three Hundred Forty and 45/100, Dollars ($79,340.45), together with interest thereon at the rate of Prime per annum on the unpaid balance. Said sum shall be paid in the manner following: All principal and interest shall be due on January 31, 2002. All payments shall be first applied to interest and the balance to principal. This note may be prepaid, at any time, in whole or in part, without penalty. All prepayments shall be applied in reverse order of maturity. This note shall at the option of any holder hereof be immediately due and payable upon the failure to make any payment due hereunder within five (5) days of its due date. This note at the option of any holder hereof may be extended on an annual basis for increments of one (1) year. The terms and interest rate will remain constant. In the event this note shall be in default, and placed with an attorney for collection, then the undersigned agree to pay all reasonable attorney's fees and costs of collection. Payments not made within five (5) days of due date shall be subject to a late charge of 2% of said payment. All payments hereunder shall be made to such address as may from time to time be designed by any holder hereof. The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound hereunder until this note shall be fully paid and waive demand, presentment and protest and all notices thereto and further agree to remain bound, notwithstanding any extension, renewal, modification, waiver, or other indulgence by any holder or upon the discharge or release of any obligor hereunder to this note, or upon the exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing: and any indulgence on any one occasion shall not be an indulgence for any other or future occasion. Any modification or change of terms, hereunder granted by any holder hereof, shall be valid and binding upon each of the undersigned, notwithstanding the acknowledgment of any of the undersigned, and each of the undersigned does hereby irrevocably grant to each of the others a power of attorney to enter into any such modification on their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. This note shall take effect as sealed instrument and shall be construed, governed and enforced in accordance with the laws of the State first appearing at the head of this note. The undersigned hereby execute this note as principals and not as sureties. Maker: /s/ D. Mark Spencer - ------------------------ D. Mark Spencer EX-10.15 3 0003.txt EXECUTION COPY CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of December 27, 2000 is by and among MATRIX BANCORP, INC., a Colorado corporation (the "Borrower"), the lenders which are signatories hereto (individually, a "Lender" and, collectively, the "Lenders") and U.S. BANK NATIONAL ASSOCIATION, a national banking association, one of the Lenders, as agent for the Lenders (in such capacity, the "Agent"). The Borrower and the Banks agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms. As used in this Agreement the following terms shall have the following respective meanings (and such meanings shall be equally applicable to both the singular and plural form of the terms defined, as the context may require): "Adjusted Eurodollar Rate": On any date of determination, the rate (rounded upward, if necessary, to the next higher one hundredth of one percent) determined by dividing the Eurodollar Rate for such date by 1.00 minus the Eurodollar Reserve Percentage. "Advance": Any portion of the outstanding Revolving Loans or Term Loans by a Lender as to which one of the available interest rate options and, if pertinent, an Interest Period, is applicable. An Advance may be a Eurodollar Rate Advance or a Reference Rate Advance. "Affiliate": When used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by or is under common control with, the Person referred to, (b) each Person which beneficially owns or holds, directly or indirectly, five percent or more of any class of voting stock of the Person referred to (or if the Person referred to is not a corporation, five percent or more of the equity interest), (c) each Person, five percent or more of the voting stock (or if such Person is not a corporation, five percent or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person's officers, directors, joint venturers and partners. The term control (including the terms "controlled by" and "under common control with") means the possession, directly, of the power to direct or cause the direction of the management and policies of the Person in question. "Agent": As defined in the opening paragraph hereof. "Aggregate Revolving Commitment Amounts": As of any date, the sum of the Revolving Commitment Amounts of all the Lenders. "Aggregate Term Commitment Amounts": As of any date, the sum of the Term Loan Commitment Amounts of all the Lenders. "Applicable Lending Office": For each Lender and for each type of Advance, the office of such Lender identified as such Lender's Applicable Lending Office on the signature pages hereof or such other domestic or foreign office of such Lender (or of an Affiliate of such Lender) as such Lender may specify from time to time, by notice given pursuant to Section 9.4, to the Agent and the Borrower as the office by which its Advances of such type are to be made and maintained. "Applicable Margin": The Applicable Margin for Reference Rate Advances in effect at all times shall be zero percent (0.00%). The Applicable Margin for Eurodollar Rate Advances in effect at all times shall be two and sixty-five-hundredths percent (2.65%). "Bankers Blanket Bond": The bond or bonds, and any renewals, extensions, or modifications of them, issued with respect to losses incurred by Matrix Bank, including, without limitation, all bonds represented by Bankers Blanket Bond, Standard Form No. 24, with attached riders, as revised, and Bank Employee Dishonesty Blanket Bond, Standard Form No. 28, Surety Association of America. "Board": The Board of Governors of the Federal Reserve System or any successor thereto. "Borrower": As defined in the opening paragraph hereof. "Borrower Loan Documents": This Agreement, the Notes and any of the Security Documents to be executed by the Borrower. "Borrowing": Any amount disbursed (a) by any Lender to Borrower under the Loan Documents as an original disbursement of funds, a renewal, extension, or continuation of an amount outstanding, or (b) by Agent or any Lender in accordance with, and to satisfy a Company's obligations under, any Loan Document. "Business Day": Any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which lenders are permitted to be open in Minneapolis, Minnesota. "Capitalized Lease Obligations": As to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). "Cash Equivalents": Investments described in Section 6.10(a) through (e). "Change of Control": Any (i) material change in the ownership or senior management of Borrower or any Guarantor from that ownership or senior management as it exists in the date of this Agreement without the written approval of all Lenders, (ii) failure to provide advance notice of any material change in ownership or management, or (iii) common stock, preferred stock or ownership interest in Matrix Bank ceases to be owned by Borrower. "Classified Assets": For Matrix Bank and at any time, all (a) assets of Matrix Bank that are classified as "substandard," "doubtful," or "loss" by FDIC, OTS, or any other tribunal with regulatory authority over Matrix Bank, (b) assets that are otherwise subject to special credit quality supervision by Matrix Bank or the financial institution through which Matrix Bank claims an interest in the particular asset, (c) Other Real Estate Owned, and (d) Other Impaired Assets. "Closing Date": Any Business Day selected by the Borrower for the making of the Loans hereunder; provided, that all the conditions precedent to the obligation of the Lenders to make such Loans, as set forth in Article III, have been, or, on such Closing Date, will be, satisfied or waived by the Agent in its sole discretion. "CMLTD": For Borrower alone and at any time, the current maturities of long-term Indebtedness except that for purposes of this definition the Indebtedness of Matrix Financial and guaranties of that Indebtedness by Borrower or Matrix Bank are excluded. "Code": The Internal Revenue Code of 1986, as amended. "Collateral": As defined in the Pledge Agreement. "Commercial Loan": A loan that is not a one- to four-family residential loan, nor an installment loan to an individual, nor the portion of a loan guaranteed by the Small Business Administration, but is a loan for commercial purposes, or a loan secured by chattel or a mortgage note on real property other than a one- to four-family residential real property. "Commitments": The Revolving Commitments and the Term Loan Commitments. "Consolidated Net Income": The consolidated net income of the Borrower and its Subsidiaries as determined in accordance with GAAP. "Consolidated Net Worth": The consolidated net worth of the Borrower and its Subsidiaries as determined in accordance with GAAP. "Contingent Obligation": With respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or otherwise: (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any direct or indirect security therefore, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided, that the term "Contingent Obligation" shall not include endorsements for collection or deposit, in each case in the ordinary course of business. "Default": Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender": At any time, any Lender that, at such time (a) has failed to make a Revolving Loan or a Term Loan required pursuant to the terms of this Agreement, including the funding of any participation in accordance with the terms of this Agreement, (b) has failed to pay to the Agent or any Lender an amount owed by such Lender pursuant to the terms of this Agreement, or (c) has been deemed insolvent or has become subject to a bankruptcy, receivership or insolvency proceeding, or to a receiver, trustee or similar official. "Eligible Receivables": At the time of determination, Receivables meeting the sale or loan eligibility criteria set forth in one or more of the Warehouse Facilities to which the Borrower or any Subsidiary is a party at such time and Receivables which are eligible for sale in a Securitization. "Equi-Mor": Equi-Mor Holdings, Inc., a Nevada corporation. "ERISA": The Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate": Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code. "Eurodollar Business Day": A Business Day which is also a day for trading by and between lenders in United States dollar deposits in the interlender Eurodollar market and a day on which lenders are open for business in New York City. "Eurodollar Rate": On any date of determination, the average offered rate for deposits in United States dollars having a maturity of thirty days (rounded upward, if necessary, to the nearest 1/16 of 1%) for delivery of such deposits on such date of determination which appears on the Reuters Screen LIBO page as of 11:00 a.m., London time (or such other time as of which such rate appears) on such date of determination, or the rate for such deposits determined by the Agent at such time based on such other published service of general application as shall be selected by the Agent for such purpose; provided, that in lieu of determining the rate in the foregoing manner, the Agent may determine the rate based on rates at which United States dollar deposits having a maturity of thirty days are offered to the Agent in the interbank Eurodollar market at such time for delivery in Immediately Available Funds on such date of determination in an amount equal to $1,000,000 (round upward, if necessary, to the nearest 1/16 of 1%). "Reuters Screen LIBO page" means the display designated as page "LIBO" on the Reuters Screen Money Rate Screen (or such other page as may replace the LIBO page on such service for the purpose of displaying London interbank rates of major banks for United States dollar deposits). "Eurodollar Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Adjusted Eurodollar Rate. "Eurodollar Reserve Percentage": As of any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board for determining the maximum reserve requirement (including any basic, supplemental or emergency reserves) for a member lender of the Federal Reserve System, with deposits comparable in amount to those held by the Agent, in respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of the Board. The rate of interest applicable to any outstanding Eurodollar Rate Advances shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Event of Default": Any event described in Section 7.1. "Excess Spread": Over the life of a pool of Receivables that have been sold by the Borrower or any Subsidiary in a Securitization, the rights, other than Servicing Rights, retained by the Borrower or such Subsidiary at or subsequent to the closing of such Securitization or sale with respect to such pool, to receive cash flows attributable to such pool. "FDIC": Federal Deposit Insurance Corporation. "Federal Funds Rate": On any date of determination, a fluctuating interest rate per annum (based on a 360 day year) equal for each day to the weighted average of the rates of interest charged on overnight federal funds transactions with member banks of the Federal Reserve System only, as reasonably determined by the Agent. "First Matrix": First Matrix Investment Services Corp., a Texas corporation. "GAAP": Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. "Government Securities": To the extent they mature within one year from the date in question, readily marketable (a) direct full faith and credit obligations of the United States of America or obligations guaranteed by the full faith and credit of the United States of America, and (b) obligations of an agency or instrumentality of, or corporation owned, controlled, or sponsored by, the United States of America that are generally considered in the securities industry to be implicit obligations of the United States of America. "Guarantors": Matrix Funding Corporation, a Colorado corporation, United Financial, Inc., a Colorado corporation, United Special Services, Inc., a Colorado corporation, Equi-Mor, ABS School Services, LLC, an Arizona limited liability company, and any Person that hereafter becomes a Subsidiary of Borrower other than a Subsidiary of Matrix Bank. "Guaranty": A guaranty from each Guarantor, in a form acceptable to the Agent. "Hedge Contract": For any Person, any present or future, whether master or single, agreement, document or instrument providing for (or constituting an agreement to enter into) (a) commodity hedges in the normal course of business in accordance with prior practices of that Person before the date of this agreement for purposes of hedging material purchases, (b) foreign-currency purchases and swaps, (c) interest-rate swaps, and (d) interest-rate-hedging products. "Immediately Available Funds": Funds with good value on the day and in the city in which payment is received. "Indebtedness": With respect to any Person at the time of any determination, without duplication, all obligations, contingent or otherwise, of such Person which in accordance with GAAP should be classified upon the balance sheet of such Person as liabilities, but in any event including: (a) all obligations of such Person for borrowed money (including non-recourse obligations), (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services (other than trade payables occurred in the ordinary course of business and not 90 days overdue), (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capitalized Lease Obligations of such Person, (h) the net amount payable in respect to all obligations of such Person in respect of interest rate swap agreements, cap or collar agreements, interest rate futures or option contracts, currency swap agreements, currency futures or option agreements and other similar contracts, (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers' acceptances, (j) all obligations of any partnership or joint venture as to which such Person is or may become personally liable, (k) all obligations of such Person under any equity security issued by such Person which ceases to be considered an equity interest in such Person, and (l) all Contingent Obligations of such Person. "Investment": The acquisition, purchase, making or holding of any stock or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisitions of real or personal property (other than real and personal property acquired in the ordinary course of business) and any purchase or commitment or option to purchase stock or other debt or equity securities of or any interest in another Person or any integral part of any business or the assets comprising such business or part thereof. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "Lender": As defined in the opening paragraph hereof. "Lien": With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any Capitalized Lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law. "Loan": A Revolving Loan or a Term Loan. "Loan Documents": This Agreement, the Notes, and the Security Documents. "Majority Lenders": At any time, Lenders other than Defaulting Lenders holding at least 66% of the aggregate unpaid principal amount of the Notes, excluding Notes held by Defaulting Lenders or, if no Loans are at the time outstanding hereunder, Lenders other than Defaulting Lenders whose Total Percentages aggregate at least 66% (with Total Percentages being computed without reference to the Revolving Commitment Amounts and Term Loan Commitment Amounts of Defaulting Lenders). "Material Adverse Occurrence": Any occurrence of whatsoever nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) which (a) has materially adversely affected the present, or which is reasonably likely to materially adversely affect the prospective financial condition or operations of the Borrower and its Subsidiaries, taken as a whole, (b) impair the ability of the Borrower or any Subsidiary to perform its obligations under any Loan Document, or any writing executed pursuant thereto, (c) is reasonably likely to materially adversely affect the validity or enforceability of the material obligations of the Borrower under any Loan Document, (d) is reasonably likely to materially adversely affect the rights and remedies of the Lenders or the Agent against the Borrower, or (e) is reasonably likely to materially adversely affect the timely payment of the principal of and interest on the Loans or other amounts payable by the Borrower hereunder. "Matrix Bank": Matrix Capital Bank, a federal savings bank. "Matrix Financial": Matrix Financial Services Corporation, an Arizona corporation. "Matrix Financial Loan Agreement": The Credit Agreement dated as of September 29, 2000, between Matrix Financial, certain lenders, and U.S. Bank National Association, as Agent for the Lenders, as the same may be amended, supplemented, restated or otherwise modified from time to time. "Multiemployer Plan": A multiemployer plan, as such term is defined in Section 4001 (a) (3) of ERISA, which is maintained (on the Closing Date, within the five years preceding the Closing Date, or at any time after the Closing Date) for employees of the Borrower or any ERISA Affiliate. "Net Charge Offs": For Matrix Bank and at any time, the sum of its "Gross Charge Offs" minus its "Recoveries," as those items are reflected in its quarterly call reports. "Net Income": For any period and any Person, the net income of that Person as determined in accordance with GAAP. "Note": A Term Note or a Revolving Note. "Obligations": The Borrower's obligations in respect of the due and punctual payment of principal and interest on the Notes when and as due, whether by acceleration or otherwise and all fees (including Revolving Commitment Fees), expenses, indemnities, reimbursements and other obligations of the Borrower under this Agreement or any other Borrower Loan Document, in all cases whether now existing or hereafter arising or incurred. "Other Impaired Assets": For Matrix Bank and at any time, assets (excluding Other Real Estate Owned) acquired by Matrix Bank through foreclosure or other realization upon collateral or rearrangement, settlement, or satisfaction of debt. "Other Real Estate Owned": For Matrix Bank and at any time, each of its ownership interests (including any option in its favor and any put or similar agreement requiring it to purchase but excluding any Lien constituting a bona fide encumbrance to secure obligations owed to it) in any real property not currently used solely as either a principal banking house, an office, branch, parking facility, remote manned or unmanned teller facility, or real estate acquired for development in the ordinary course of business and that was not acquired through foreclosure or other realization upon collateral or rearrangement, settlement, or satisfaction of debt. "OTS": Office of Thrift Supervision. "PBGC": The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof. "Permitted Warehouse Debt": Warehouse Debt of the Borrower or any Subsidiary incurred under one or more Warehouse Facilities (excluding any Guarantees issued by the Borrower or any Subsidiary in connection therewith), provided, however, that (i) the assets purchased with proceeds of such Warehouse Debt are or, prior to any funding under such Warehouse Facility with respect to such assets, were eligible to be recorded as held for the balance sheet of the Borrower and its Subsidiaries in accordance with GAAP; and (ii) such Indebtedness will be deemed Permitted Warehouse Debt (A) in the case of a Purchase Facility, only to the extent the holder of such Warehouse Debt has no contractual recourse to the Borrower or any Subsidiary to satisfy claims in respect of such Warehouse Debt in excess of the realizable value of the Eligible Receivables financed thereby, and (B) in the case of any other Warehouse Facility, at the time such Warehouse Debt is incurred, only to the extent of the lesser of (1) the amount advanced by the lender with respect to the Eligible Receivables financed by such Indebtedness, and (2) 100% of the aggregate principal amount of such Eligible Receivables, and (C) in the case of such Warehouse Debt that is not secured by a Lien, any such Indebtedness incurred has not been outstanding in excess of 364 days. "Person": Any natural person, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan": Each employee benefit plan (whether in existence on the Closing Date or thereafter instituted), as such term is defined in Section 3(3) of ERISA, maintained for the benefit of employees, officers or directors of the Borrower or of any ERISA Affiliate. "Pledge Agreement": A Pledge Agreement from the Borrower to the Agent, for the benefit of the Lenders, granting the Agent a security interest in the capital stock of Matrix Bank, in the form required by the Agent. "Prohibited Transaction": The respective meanings assigned to such term in Section 4975 of the Code and Section 406 of ERISA. "Purchase Facility": Any Warehouse Facility in the form of a purchase and sale facility pursuant to which the Borrower or any Subsidiary sells Receivables to a financial institution, commercial paper facility or conduit and retains a right of first refusal or other repurchase arrangement upon the subsequent resale of such Receivables by such financial institution, commercial paper facility or conduit. "Receivables": Any residential mortgage, consumer and commercial mortgage loans, leases and receivables purchased or originated by the Company or any Subsidiary. "Reference Rate": The greater of (a) the rate of interest from time to time publicly announced by the Agent as its "reference rate" and (b) Federal Funds Rate plus 0.50%. The Agent may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate hereunder or under any other Loan Document which is based on the Reference Rate, such interest rate shall change as and when the Reference Rate shall change. "Reference Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Reference Rate. "Regulatory Change": Any change after the Closing Date in federal, state or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requests applying to a class of lenders including any Lender under any federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reportable Event": A reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA that result in an accumulated funding deficiency (as such term is defined in Section 302 of ERISA or 412 of the Code) whether or not waived with respect to any Plan in an aggregate amount exceeding $50,000 shall be a Reportable Event regardless of the issuance of any waiver in accordance with Section 412(d) of the Code. "Residual Receivables": At any time, the capitalized asset value of Excess Spread of the Borrower and any Subsidiary (including, without limitation, subordinated, interest-only and residual certificates of a Securitization Trust), with respect to any Receivable pool of any Securitization Trust, calculated in accordance with GAAP. "Restricted Payments": With respect to the Borrower, all dividends or other distributions of any nature (cash, securities other than common stock of the Borrower, assets or otherwise), and all payments on any class of equity securities (including warrants, options or rights therefor) issued by the Borrower and its Subsidiaries, whether such securities are authorized or outstanding on the Closing Date or at any time thereafter and any redemption or purchase of, or distribution in respect of, any of the foregoing, whether directly or indirectly. "Revolving Commitment": With respect to a Lender, the agreement of such Lender to make Revolving Loans to the Borrower in an aggregate principal amount outstanding at any time not to exceed such Lender's Revolving Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "Revolving Commitment Amount": With respect to a Lender, initially the amount set opposite such Lender's name on Schedule 1.1-1 hereto as its Revolving Commitment Amount, but as the same may be reduced from time to time pursuant to Section 2.13. "Revolving Commitment Fees": As defined in Section 2.15. "Revolving Loan": As defined in Section 2.1. "Revolving Loan Date": The date of the making of any Revolving Loans hereunder. "Revolving Note": A promissory note of the Borrower in the form of Exhibit A hereto. "Revolving Percentage": With respect to any Lender, the percentage equivalent of a fraction, the numerator of which is the Revolving Commitment Amount of such Lender and the denominator of which is the Aggregate Revolving Commitment Amounts. "Securitization": A public or private transfer of Receivables in the ordinary course of business and by which the Borrower or any Subsidiary directly or indirectly securitizes a pool of specialized Receivables. "Securitization Trust": Any Person established exclusively for the purpose of issuing securities in connection with any Securitization, the obligations of which are without recourse to the Borrower or any other Subisidiary. "Security Documents": The Pledge Agreement and the Guaranties. "Servicing Rights": A contractual right to receive a fee for processing and administering loan payments with respect to Receivables or loans, leases or receivables originated by third parties or any interest in such right. "Subordinated Debentures": The 10% Junior Subordinated Debentures issued by Borrower in the total principal amount of $28,350,525 under the Indenture dated as of July 30, 1999 between Borrower and State Street Bank and Trust Company, as Trustee, as in effect on the date hereof and as hereafter amended, supplemented, restated or otherwise modified in accordance with the terms hereof. "Subordinated Debt": At any time (a) Indebtedness existing on the Closing Date, that is by its terms subordinated to the payment of the Obligation in a manner satisfactory to the Agent, (b) the Indebtedness evidenced by the Subordinated Debentures, and (c) Indebtedness of Borrower that (i) is subject to subordination, payment blockage, and standstill provisions at least as favorable to Lenders as are applicable to the Subordinated Debentures, (ii) does not subject Borrower to representations, covenants, events of default, and other provisions significantly more onerous to Borrower than those contained in the Subordinated Debentures, (iii) does not have any scheduled or mandatory principal or sinking fund payment due before 180 days after the Maturity Date, and (iv) is upon terms and conditions otherwise reasonably acceptable to Majority Lenders. "Subsidiary": Any corporation or other entity of which securities or other ownership interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more Subsidiaries. "Taxes": For any Person, taxes, assessments, or other governmental charges or levies imposed upon it, its income, or any of its properties, franchises, or assets. "Term Loan": As defined in Section 2.1(b). "Term Loan Commitments": With respect to a Lender, the agreement of such Lender to make a Term Loan to the Borrower in an amount equal to such Lender's Term Loan Commitment Amount upon the terms and subject to the conditions of this Agreement. "Term Loan Commitment Amount": With respect to a Lender, the amount set opposite such Lender's name on Schedule 1.1-1 hereto as its Term Loan Commitment Amount. "Term Loan Percentage": With respect to any Lender, the percentage equivalent of a fraction, the numerator of which is the amount of the applicable Term Loan Commitments of such Lender and the denominator of which is the sum of the Term Loan Commitments of all the Lenders for such Term Loans. "Term Note": A promissory note of the Borrower in the form of Exhibit B hereto. "Termination Date": The earliest of (a) December 26, 2001, (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amounts are reduced to zero pursuant to Section 2.13 hereof. "Total Percentage": With respect to any Lender, the percentage equivalent of a fraction, the numerator of which is the sum of the Revolving Commitment Amount of such Lender and the Term Loan Commitment Amount of such Lender and the denominator of which is the sum of the Revolving Commitment Amounts and Term Loan Commitment Amounts of all the Lenders. "Unpaid Drawing": As defined in Section 2.11. "Unused Revolving Commitment": With respect to any Lender as of any date of determination, the amount by which such Lender's Revolving Commitment Amount exceeds such Lender's Revolving Loans on such date. "Warehouse Debt": In the case of a Purchase Facility, Indebtedness of the Company or any Subsidiary equal to the greater of (x) the amount received by the Company or any Subsidiary under such Purchase Facility and (y) the book value of the Eligible Receivables or Servicing Rights financed under such Purchase Facility, until such time as such Eligible Receivables or Servicing Rights are (i) securitized, (ii) repurchased by the Borrower or any Subsidiary, or (iii) sold by the counterparty under the Purchase Facility to a Person who is not an Affiliate of the Borrower, including any Guarantees issued by the Borrower or any Subsidiary in connection therewith. In the case of a Warehouse Facility which is not a Purchase Facility, the amount received by the Company or any Subsidiary under such Warehouse Facility. "Warehouse Facility": Any funding arrangement, including Purchase Facilities, with a financial institution or other lender or purchaser or any conduit or special purpose vehicle used in connection with such funding arrangement, to the extent (and only to the extent) that the Borrower or any Subsidiary incurs Warehouse Debt thereunder exclusively to finance or refinance the purchase, origination or holding of Receivables or Servicing Rights by the Borrower or such Subsidiary. Section 1.2 Accounting Terms and Calculations. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrower and Majority Lenders agree in writing on an adjustment to such computation or determination to account for such change in GAAP. Section 1.3 Computation of Time Periods. In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word "from" means "from and including" and the word "to" or "until" each means "to but excluding". Section 1.4 Other Definitional Terms. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, schedules and like references are to this Agreement unless otherwise expressly provided. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." All incorporation by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, include all necessary definitions and related provisions from such other agreements but including only amendments thereto agreed to by the Majority Lenders, and shall survive any termination of such other agreements until the obligations of the Borrower under this Agreement and the Notes are irrevocably paid in full, all Letters of Credit have expired without renewal or been returned to the Agent, and the commitments of any Lender to advance funds to the Borrower are terminated. ARTICLE 2 TERMS OF THE CREDIT FACILITIES Part A - Terms of Lending Section 2.1 Lending Commitments. On the terms and subject to the conditions hereof, each Lender severally agrees to make the following lending facilities available to the Borrower: (a) Revolving Credit. A revolving credit facility available as loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower on a revolving basis at any time and from time to time from the Closing Date to the Termination Date, during which period the Borrower may borrow, repay and reborrow in accordance with the provisions hereof, provided, the unpaid principal amount of outstanding Revolving Loans of a Lender shall not at any time exceed the Revolving Commitment Amount of such Lender. Revolving Loans hereunder shall be made by the several Lenders ratably in the proportion of their respective Revolving Commitments Amounts. Revolving Loans may be obtained and maintained, at the election of the Borrower but subject to the limitations hereof, as Reference Rate Advances or Eurodollar Rate Advances or any combination thereof. (b) Term Loan. A term loan from each applicable Lender (each being a "Term Loan" and, collectively, the "Term Loans") to the Borrower on the Closing Date in an amount from each such Lender equal to its Term Loan Commitment Amount. The Term Loans and any portion of the balance thereof (in minimum amounts of $100,000, or, if more, in integral multiples thereof) may be made, maintained, continued and converted to Reference Rate Advances or Eurodollar Rate Advances as the Borrower may elect in its notice of borrowing, continuation or conversion. Section 2.2 Procedure for Loans. (a) Procedure for Revolving Loans. Any request by the Borrower for Revolving Loans hereunder shall be in writing or by telephone and must be given so as to be received by the Agent not later than 1:00 P.M. (Minneapolis time) on the requested Revolving Loan Date. Each request for Revolving Loans hereunder shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Revolving Loan Date and after giving effect to the requested Revolving Loans the applicable conditions specified in Article III have been and will be satisfied. Each request for Revolving Loans hereunder shall specify (i) the requested Revolving Loan Date, (ii) the aggregate amount of Revolving Loans to be made on such date, which shall be in a minimum amount of $100,000 or, if more, an integral multiple thereof, and (iii) whether such Revolving Loans are to be funded as Reference Rate Advances or Eurodollar Rate Advances (and, if such Revolving Loans are to be made with more than one applicable interest rate choice, specifying the amount to which each interest rate choice is applicable). The Agent may rely on any telephone request by the Borrower for Revolving Loans hereunder which it believes in good faith to be genuine; and the Borrower hereby waives the right to dispute the Agent's record of the terms of such telephone request. The Agent shall promptly notify each other Lender of the receipt of such request, the matters specified therein, and of such Lender's ratable share of the requested Revolving Loans. On the date of the requested Revolving Loans, each Lender shall provide its share of the requested Revolving Loans to the Agent in Immediately Available Funds not later than 2:00 P.M. Minneapolis time. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make available to the Borrower at the Agent's principal office in Minneapolis, Minnesota in Immediately Available Funds not later than 3:00 P.M. (Minneapolis time) on the requested Revolving Loan Date the amount of the requested Revolving Loans. If the Agent has made a Revolving Loan to the Borrower on behalf of a Lender but has not received the amount of such Revolving Loan from such Lender by the time herein required, such Lender shall pay interest to the Agent on the amount so advanced at the Federal Funds Rate from the date of such Revolving Loan to the date funds are received by the Agent from such Lender, such interest to be payable with such remittance from such Lender of the principal amount of such Revolving Loan (provided, however, that the Agent shall not make any Revolving Loan on behalf of a Lender if the Agent has received prior notice from such Lender that it will not make such Revolving Loan). If the Agent does not receive payment from such Lender by the next Business Day after the date of any Revolving Loan, the Agent shall be entitled to recover such Revolving Loan, with interest thereon at the rate (or rates) then applicable to the such Revolving Loan, on demand, from the Borrower, without prejudice to the Agent's and the Borrower's rights against such Lender. If such Lender pays the Agent the amount herein required with interest at the Federal Funds Rate before the Agent has recovered from the Borrower, such Lender shall be entitled to the interest payable by the Borrower with respect to the Revolving Loan in question accruing from the date the Agent made such Revolving Loan. (b) Procedure for Term Loans. Not later than 1:00 P.M. (Minneapolis time) one Business Day prior to the requested Closing Date, the Borrower shall deliver to the Agent a written notice of borrowing. Such notice of borrowing shall be irrevocable and shall be deemed a representation by the Borrower that on the Closing Date and after giving effect to the Term Loans the applicable conditions specified in Article III have been and will be satisfied. Such notice of borrowing shall specify (i) the requested Closing Date, and (ii) whether such Term Loans are to be funded as Eurodollar Rate Advances or Reference Rate Advances. The Agent shall promptly notify each Lender of the receipt of such notice and the matters specified therein. On the requested Closing Date, each Lender shall provide to the Agent the amount of such Lender's Term Loan in Immediately Available Funds not later than 2:00 P.M., Minneapolis time. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the proceeds of the Term Loans available to the Borrower at the Agent's Minneapolis, Minnesota office on the requested date. Section 2.3 Notes. The Revolving Loans of each Lender shall be evidenced by a single Revolving Note payable to the order of such Lender in a principal amount equal to such Lender's Revolving Commitment Amount originally in effect. The Term Loan of each Lender shall be evidenced by a Term Note and payable to the order of such Lender in a principal amount equal to such Lender's Term Loan Commitment Amount. Upon receipt of each Lender's Notes from the Borrower, the Agent shall mail such Notes to such Lender. Each Lender shall enter in its ledgers and records the amount of its Term Loans and each Revolving Loan, the various Advances made, converted or continued and the payments made thereon, and each Lender is authorized by the Borrower to enter on a schedule attached to its Term Notes or Revolving Note, as appropriate, a record of such Term Loans, Revolving Loans, Advances and payments; provided, however that the failure by any Lender to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Borrower hereunder and on the Notes, and, in all events, the principal amounts owing by the Borrower in respect of the Revolving Notes shall be the aggregate amount of all Revolving Loans made by the Lenders less all payments of principal thereof made by the Borrower and the principal amount owing by the Borrower in respect of the Term Notes shall be the aggregate amount of all Term Loans made by the Lenders less all payments of principal thereof made by the Borrower. Section 2.4 Conversions. On the terms and subject to the limitations hereof, the Borrower shall have the option at any time and from time to time to convert all or any portion of the Advances into Reference Rate Advances or Eurodollar Rate Advances; provided, however that no Advance may be converted to a Eurodollar Rate Advance if a Default or Event of Default has occurred and is continuing on the proposed date of conversion. Advances may be converted to Eurodollar Rate Advances only in integral multiples, as to the aggregate amount of the Advances of all Lenders so converted or continued, of $100,000. The Borrower shall give the Agent written notice of any conversion of any Advances and such notice must be given so as to be received by the Agent not later than 1:00 P.M. (Minneapolis time) on the date of the requested conversion. Each such notice shall specify (a) the amount to be converted, and (b) the date for the conversion (which must be a Business Day). Any notice given by the Borrower under this Section shall be irrevocable. All conversions and continuation of Advances must be made uniformly and ratably among the Lenders. Section 2.5 Interest Rates, Interest Payments and Default Interest. Interest shall accrue and be payable on the Revolving Loans as follows: (a) Subject to paragraph (c) below, each Eurodollar Rate Advance shall bear interest on the unpaid principal amount thereof at a varying rate per annum equal to the sum of (A) the Adjusted Eurodollar Rate for such Interest Period, plus (B) the Applicable Margin. (b) Subject to paragraph (c) below, each Reference Rate Advance shall bear interest on the unpaid principal amount thereof at a varying rate per annum equal to the sum of (A) the Reference Rate, plus (B) the Applicable Margin. (c) Upon the occurrence and during the continuance of any Event of Default, each Advance shall, at the option of the Majority Lenders, bear interest until paid in full at a rate per annum equal to the sum of (1) the Reference Rate, plus (2) the Applicable Margin for Reference Rate Advances, plus (3) 2.0%. (d) Interest shall be payable on the last day of each month; provided that interest under Section 2.5(c) shall be payable on demand. Section 2.6 Principal Payments. (a) Revolving Loans. The unpaid principal balance of all Revolving Notes, together with all accrued and unpaid interest thereon, shall be due and payable on the Termination Date. (b) Term Loans. The principal of the Term Loans shall be payable in quarterly installments of $357,000 beginning on March 31, 2001 and each June 30, September 30, December 31 and March 31 thereafter, with a final installment in the amount of the unpaid principal balance of the Term Notes, together with all accrued, unpaid interest thereon, on December 31, 2003. Section 2.7 Prepayments. (a) Optional Prepayments. The Borrower may prepay Loan, in whole or in part, at any time, without premium or penalty. Each partial prepayment shall be in an aggregate amount for all the Lenders of $500,000 in the case of Term Loans, and $100,000 in the case of Revolving Loans, or an integral multiple thereof. Amounts paid (unless following an acceleration or upon termination of the Revolving Commitments in whole) or prepaid on Revolving Loans may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement. Amounts prepaid on the Term Loans may not be reborrowed. Amounts paid or prepaid under this Section 2.7 shall be for the account of each Lender in proportion to its share of outstanding Revolving Loans. Amounts prepaid on the Term Loans shall be applied equally to installments due thereon in an inverse order of maturities. Part B - General Section 2.8 Optional Reduction of Revolving Commitment Amounts or Termination of Revolving Commitments. The Borrower may, at any time, upon not less than 3 Business Days prior written notice from the Borrower to the Agent, reduce the Revolving Commitment Amounts, ratably, with any such reduction in a minimum aggregate amount for all the Lenders of $1,000,000, or, if more, in an integral multiple of $1,000,000; provided, however, that the Borrower may not at any time reduce the Aggregate Revolving Commitment Amounts below the aggregate unpaid principal amount of the Revolving Loans. The Borrower may, at any time upon not less than 10 Business Days prior written notice from the Borrower to the Agent, terminate the Revolving Commitments in their entirety. Upon termination of the Revolving Commitments pursuant to this Section, the Borrower shall pay to the Agent for the account of the Lenders the full amount of all outstanding Revolving Loans, all accrued and unpaid interest thereon, all unpaid Revolving Commitment Fees accrued to the date of such termination. Section 2.9 Fees. (a) Revolving Commitment Fee. The Borrower shall pay to the Agent for the account of each Lender fees (the "Revolving Commitment Fees") in an amount equal to 0.18% per annum of the amount of its Unused Revolving Commitment, payable quarterly in arrears on the last Business Day of each month. (b) Other Fees. On or before the Closing Date, the Borrower will pay the Agent the fees set forth in the separate letter agreement dated the date hereof between the Agent and the Borrower. Section 2.10 Computation. Revolving Commitment Fees and interest on Loans shall be computed on the basis of actual days elapsed and a year of 365 days. Section 2.11 Payments. Payments and prepayments of principal of, and interest on, the Notes and all fees, expenses and other obligations under this Agreement payable to the Agent or the Lenders shall be made without setoff or counterclaim in Immediately Available Funds not later than 2:00 P.M. (Minneapolis time) on the dates called for under this Agreement and the Notes to the Agent at its main office in Minneapolis, Minnesota. Funds received after such time shall be deemed to have been received on the next Business Day. The Agent will promptly distribute in like funds to each Lender its ratable share of each such payment of principal, interest and fees received by the Agent for the account of the Lenders. Whenever any payment to be made hereunder or on the Notes shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment; provided, however, that if such extension would cause payment of interest on or principal of a Eurodollar Rate Advance to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. Section 2.12 Use of Loan Proceeds. The proceeds of the Term Loans shall be used to refinance outstanding Indebtedness of the Borrower and for the Borrower's general corporate purposes. The proceeds of the Revolving Loans shall be used for the Borrower's general corporate purposes. Section 2.13 Interest Rate Not Ascertainable, Etc. If, on or prior to the date for determining the Adjusted Eurodollar Rate in respect of the Interest Period for any Eurodollar Rate Advance, any Lender determines (which determination shall be conclusive and binding, absent error) that: (a) deposits in dollars (in the applicable amount) are not being made available to such Lender in the relevant market, or (b) the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to such Lender of funding or maintaining Eurodollar Rate, such Lender shall forthwith give notice to the Borrower and the other Lenders of such determination, whereupon the obligation of such Lender to make, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Lender notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist. While any such suspension continues, all further Advances by such Lender shall be made with an interest rate option to which such suspension does not apply. No such suspension shall affect the interest rate then in effect during the applicable Interest Period for any Eurodollar Rate Advance outstanding at the time such suspension is imposed. Section 2.14 Increased Cost. If any Regulatory Change: (a) shall subject any Lender (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Eurodollar Rate Advances, its Notes or its obligation to make Eurodollar Rate Advances or shall change the basis of taxation of payment to any Lender (or its Applicable Lending Office) of the principal of or interest on its Eurodollar Rate Advances or any other amounts due under this Agreement in respect of its Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances (except for changes in the rate of tax on the overall net income of such Lender or its Applicable Lending Office imposed by the jurisdiction in which such Lender's principal office or Applicable Lending Office is located); or (b) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board, but excluding, with respect to any Eurodollar Rate Advance, any such requirement to the extent included in calculating the applicable Adjusted Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, any Lender's Applicable Lending Office or against Letters of Credit issued by the Agent or shall impose on any Lender (or its Applicable Lending Office) or on the United States market for certificates of deposit or the interlender Eurodollar market any other condition affecting its Eurodollar Rate Advances, its Notes or its obligation to make Eurodollar Rate Advances; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making or maintaining any Eurodollar Rate Advance, or to reduce the amount of any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement or under its Notes, then, within 30 days after demand by such Lender (with a copy to the Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. Each Lender will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate of any Lender claiming compensation under this Section, setting forth the additional amount or amounts to be paid to it hereunder and stating in reasonable detail the basis for the charge and the method of computation, shall be conclusive in the absence of error. In determining such amount, any Lender may use any reasonable averaging and attribution methods. Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable shall not constitute a waiver of such Lender's rights to demand compensation for any increased costs or reduction in amounts subsequently received or receivable; provided, however, that, unless Regulatory Change has a retroactive effect, the Borrower shall not be required to compensate such Lender for any amounts or costs incurred more than 180 days prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor. Section 2.15 Illegality. If any Regulatory Change shall make it unlawful or impossible for any Lender to make, maintain or fund any Eurodollar Rate Advances, such Lender shall notify the Borrower and the Agent, whereupon the obligation of such Lender to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Lender notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist. Before giving any such notice, such Lender shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. Any Eurodollar Rate Advances outstanding shall be automatically converted to Reference Rate Advances as of the date of such Lender's notice. Section 2.16 Capital Adequacy. In the event that any Regulatory Change reduces or shall have the effect of reducing the rate of return on any Lender's capital or the capital of its parent corporation (by an amount such Lender deems material) as a consequence of its Commitments and/or its Loans to a level below that which such Lender or its parent corporation could have achieved but for such Regulatory Change (taking into account such Lender's policies and the policies of its parent corporation with respect to capital adequacy), then the Borrower shall, within 30 days after written notice and demand from such Lender to the Borrower (with a copy to the Agent), pay to such Lender additional amounts sufficient to compensate such Lender or its parent corporation for such reduction; provided, however, that, unless Regulatory Change has a retroactive effect, the Borrower shall not be required to compensate such Lender for any amounts or costs incurred more than 180 days prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor. Any determination by such Lender under this Section and any certificate as to the amount of such reduction given to the Borrower by such Lender shall be final, conclusive and binding for all purposes, absent error. Section 2.17 Discretion of Lenders as to Manner of Funding; Replacement of Lenders. Each Lender shall be entitled to fund and maintain its funding of Eurodollar Rate Advances in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under Section 2.23) shall be made as if such Lender had actually funded and maintained each Eurodollar Rate Advance during the Interest Period for such Advance through the issuance of its certificates of deposit, or the purchase of deposits, having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. ARTICLE 3 CONDITIONS PRECEDENT Section 3.1 Conditions of Initial Transaction. The making of the Term Loans and the initial Revolving Loans shall be subject to the prior or simultaneous fulfillment of the following conditions: (a) Documents. The Agent shall have received the following in sufficient counterparts (except for the Notes) for each Lender: (i) A Revolving Note, in the form of Exhibit A hereto, and a Term Note, the form of Exhibit B hereto, drawn to the order of each Lender, executed by a duly authorized officer (or officers) of the Borrower and dated the Closing Date. (ii) A Guaranty, duly executed by each Guarantor. (iii) The Pledge Agreement, duly executed by the Borrower, together with (A) such financing statements and other instruments required by the Agent to perfect the security interests granted under the Pledge Agreement, and (B) share certificates representing all of the issued and outstanding shares of Matrix Bank and undated stock powers for such certificates, duly executed in blank. (iv) Certificates of the Secretary or Assistant Secretary of the Borrower and each Guarantor dated as of the Closing Date and certifying as to the following: (A) A true and accurate copy of corporate resolutions authorizing the execution, delivery and performance of the Loan Documents to which it is a party; (B) The incumbency, names, titles and signatures of the officers of the Borrower or such Guarantor authorized to execute such Loan Documents and, in the case of the Borrower, to request Advances; and (C) A true and accurate copy of the bylaws for the Borrower or such Guarantor. (v) A copy of the Articles of Incorporation of the Borrower and each Guarantor with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a date reasonably prior to the Closing Date. (vi) A certificate of good standing for the Borrower and each Gurarantor in the jurisdiction of its incorporation, certified by the appropriate governmental official which shall be dated reasonably prior to the Closing Date. (vii) A certificate dated the Closing Date of the President of the Borrower certifying as to the matters set forth in Sections 3.2(a) and 3.2(b) below. (b) Opinion. The Borrower and the Guarantors shall have requested the Borrower's in-house counsel to prepare a written opinion, addressed to the Lenders and dated the Closing Date, covering the matters set forth in Exhibit C hereto, and such opinion shall have been delivered to the Agent in sufficient counterparts for each Lender. (c) Compliance. The Borrower shall have performed and complied with all agreements, terms and conditions contained in this Agreement required to be performed or complied with by the Borrower prior to or simultaneously with the Closing Date. (d) Security Documents. All Security Documents (or financing statements with respect thereto) shall be in a form appropriate for filing or recording to the satisfaction of the Agent; any pledged collateral shall have been duly delivered to the Agent; any title insurance required by the Agent (with endorsements required by the Agent) shall have been obtained and be satisfactory to the Agent; and the priority and perfection of the Liens created by the Security Documents shall have been established to the satisfaction of the Agent and its counsel. (e) Other Matters. All corporate and legal proceedings relating to the Borrower and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in scope, form and substance to the Agent, the Lenders and the Agent's special counsel, and the Agent shall have received all information and copies of all documents, including records of corporate proceedings, as the Agent or its special counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. (f) Fees and Expenses. The Agent shall have received for itself and for the account of the Lenders all fees and other amounts due and payable by the Borrower on or prior to the Closing Date, including the reasonable fees and expenses of counsel to the Agent payable pursuant to Section 9.2. Section 3.2 Conditions Precedent to all Loans. The obligation of the Lenders to make any Loans hereunder (including the Term Loans and the initial Revolving Loans) shall be subject to the fulfillment of the following conditions: (a) Representations and Warranties. The representations and warranties contained in Article IV shall be true and correct in all material respects on and as of the Closing Date and on the date of each Revolving Loan, with the same force and effect as if made on such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on the Closing Date and on the date of each Revolving Loan or will exist after giving effect to the Loans made on such date. (c) Notices and Requests. The Agent shall have received the Borrower's request for such Loans as required under Section 2.2. ARTICLE 4 REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants to the Lenders: Section 4.1 Organization, Standing, Etc. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted, to enter into this Agreement and to issue the Notes and to perform its obligations under the Borrower Loan Documents. Each Subsidiary is duly organized and validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to carry on its business as now conducted and to enter into any Loan Documents to which it is a party and perform its respective obligation thereunder. Each of the Borrower and the Subsidiaries (a) holds all certificates of authority, licenses and permits necessary to carry on its business as presently conducted in each jurisdiction in which it is carrying on such business, except where the failure to hold such certificates, licenses or permits would not constitute a Material Adverse Occurrence and (b) is duly qualified and in good standing as a foreign corporation (or other organization) in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary and the failure so to qualify would permanently preclude the Borrower or such Subsidiary from enforcing its rights with respect to any assets or expose the Borrower to any Material Adverse Occurrence. Section 4.2 Authorization and Validity. The execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action by such Person, and this Agreement constitutes, and the Notes and other Loan Documents when executed will constitute, the legal, valid and binding obligations of such Person, enforceable against such Person in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and subject to limitations on the availability of equitable remedies. Section 4.3 No Conflict; No Default. The execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to such Person, (b) violate or contravene any provision of the Articles of Incorporation or bylaws of such Person, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which such Person is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. Neither the Borrower nor any Subsidiary is in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could constitute a Material Adverse Occurrence. Section 4.4 Government Consent. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower or any Subsidiary to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents, except for those filings which have been made or obtained and any necessary filing or recordation of or with respect to any of the Security Documents. Section 4.5 Financial Statements and Condition. The unaudited, unreviewed, combined financial statements of the Borrower and its Subsidiaries as at September 30, 2000, and the audited combined financial statements of the Borrower and its Subsidiaries of December 31, 1999 as heretofore furnished to the Agent, and except as set forth on Schedule 4.5, have been prepared in accordance with GAAP on a consistent basis (except for the absence of footnotes and subject to year-end adjustments as to the interim statements) and fairly present in all material respects the financial condition of the Borrower and its Subsidiaries as at such dates and the results of their operations and changes in financial position for the respective periods then ended. As of the dates of such financial statements, neither the Borrower nor any Subsidiary had any material obligation, contingent liability, liability for taxes or long-term lease obligation which is not reflected in such financial statements or in the notes thereto. Other than as has been disclosed in Forms 10-Q filed with the Securities and Exchange Commission on March 31, 2000, June 30, 2000 and September 30, 2000, there has been no Material Adverse Occurrence since December 31, 1999. Section 4.6 Litigation. Except as disclosed in the Borrower's periodic SEC filings or as set forth on Schedule 4.6, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or any of their properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to the Borrower or such Subsidiary, would constitute a Material Adverse Occurrence. Section 4.7 Environmental, Health and Safety Laws. There does not exist any violation by the Borrower or any Subsidiary of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which will or threatens to impose a material liability on the Borrower or a Subsidiary or which would require a material expenditure by the Borrower or such Subsidiary to cure. Neither the Borrower nor any Subsidiary has received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to constitute a Material Adverse Occurrence. The Borrower does not have knowledge that it or its property or any Subsidiary or the property of any Subsidiary will become subject to environmental laws or regulations during the term of this Agreement, compliance with which could reasonably be expected to require Capital Expenditures or which would constitute a Material Adverse Occurrence. Section 4.8 ERISA. Each Plan is in substantial compliance with all applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would reasonably be expected to result in the institution of proceedings to terminate any Plan under Section 4042 of ERISA. With respect to each Plan subject to Title IV of ERISA, as of the most recent valuation date for such Plan, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Lenders) of such Plan's projected benefit obligations did not exceed the fair market value of such Plan's assets. Section 4.9 Federal Reserve Regulations. Neither the Borrower nor any Subsidiary is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board). The value of all margin stock owned by the Borrower does not constitute more than 25% of the value of the assets of the Borrower. Section 4.10 Title to Property; Leases; Liens; Subordination. Each of the Borrower and the Subsidiaries has (a) good and marketable title to its real properties and (b) good and sufficient title to, or valid, subsisting and enforceable leasehold interest in, its other material properties, including all real properties, other properties and assets, referred to as owned by the Borrower and its Subsidiaries in the most recent financial statement referred to in Section 5.1 (other than property disposed of since the date of such financial statements in the ordinary course of business). None of such properties is subject to a Lien, except as allowed under Section 6.11. The Borrower has not subordinated any of its rights under any obligation owing to it to the rights of any other person. Section 4.11 Taxes. Each of the Borrower and the Subsidiaries has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. The charges, accruals and reserves on the books of the Borrower in respect of taxes and other governmental charges are adequate in all material respects and the Borrower knows of no proposed material tax assessment against it or any Subsidiary or any basis therefor. Section 4.12 Trademarks, Patents. Each of the Borrower and the Subsidiaries possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of its business, without known conflict with the rights of others. Section 4.13 Burdensome Restrictions. Neither the Borrower nor any Subsidiary is a party to or otherwise bound by any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter, corporate or partnership restriction which would foreseeably constitute a Material Adverse Occurrence. Section 4.14 Force Majeure. Since the date of the most recent financial statement referred to in Section 5.1, the business, properties and other assets of the Borrower and the Subsidiaries have not been materially and adversely affected in any way as the result of any fire or other casualty, strike, lockout, or other labor trouble, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, activity of armed forces or act of God. Section 4.15 Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended. Section 4.16 Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a holding company or an "affiliate" of a holding company or of a subsidiary company of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.17 Retirement Benefits. Except as required under Section 4980B of the Code, Section 601 of ERISA or applicable state law, neither the Borrower nor any Subsidiary is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees. Section 4.18 Subsidiaries. Schedule 4.18 sets forth as of the date of this Agreement a list of all Subsidiaries and the number and percentage of the shares of each class of capital stock owned beneficially or of record by the Borrower or any Subsidiary therein, and the jurisdiction of incorporation of each Subsidiary. Section 4.19 Labor Matters. There are no pending or threatened strikes, lockouts or slowdowns against the Borrower or any Subsidiary. No Borrower nor any Subsidiaries has been or is in violation in any material respect of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from the Borrower or any Subsidiary on account of wages and employee health and welfare insurance and other benefits (in each case, except for de minimus amounts), have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the transactions contemplated under the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound. Section 4.20 Full Disclosure. Subject to the following sentence, neither the financial statements referred to in Section 5.1 nor any other certificate, written statement, exhibit or report furnished by or on behalf of the Borrower or any Subsidiary in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading, in light of the circumstances in which such statements were made and taken together with all other certificates, written statements, exhibits, and reports. Certificates or statements furnished by or on behalf of the Borrower or any Subsidiary to the Lenders consisting of projections or forecasts of future results or events have been prepared in good faith and based on good faith estimates and assumptions of the management of the Borrower, and the Borrower has no reason to believe that such projections or forecasts are not reasonable. ARTICLE 5 AFFIRMATIVE COVENANTS Until any obligation of the Lenders hereunder to make the Term Loans and Revolving Loans shall have expired or been terminated and the Notes and all of the other Obligations (other than contingent obligations for indemnity under the Loan Documents) have been paid in full, unless the Majority Lenders shall otherwise consent in writing: Section 5.1 Financial Statements and Reports. The Borrower will furnish to the Lenders: (a) Annually. Promptly after preparation but no later than 90 days after the last day of each fiscal year of Borrower (i) the consolidated and consolidating financial statements of the Borrower consisting of at least statements of income, cash flow and changes in stockholders' equity, and a consolidated balance sheet as of the end of such fiscal year, setting forth in each case in comparative form corresponding figures from the previous annual audit, (ii) Matrix Bank's consolidated and consolidating financial statements of the Borrower consisting of at least statements of income, cash flow and changes in stockholders' equity, and a consolidated balance sheet as of the end of such fiscal year, setting forth in each case in comparative form corresponding figures from the previous annual audit, (iii) solely with respect to the consolidated portion of financial statements referenced in (i) and (ii) above, the opinions, without material qualification, of Ernst & Young or of another firm of nationally-recognized independent certified public accountants reasonably acceptable to Majority Lenders, based on audits using generally accepted auditing standards, that the consolidated portion of those financial statements were prepared in accordance with GAAP and present fairly, in all material respects, Matrix Bank's and Borrower's respective consolidated financial conditions and results of operations. (b) Quarterly. Promptly after preparation but no later than 45 days after the last day of the first three fiscal quarters of Borrower each year (i) the consolidated and consolidating financial statements of the Borrower consisting of at least statements of income, cash flow and changes in stockholders' equity, and a consolidated balance sheet as of the end of such fiscal year, setting forth in each case in comparative form corresponding figures from the previous annual audit, (ii) Matrix Bank's most recent call reports or other quarterly and annual reports of condition or income furnished to the FDIC or the OTS, and (iii) reports sent to and all consents and resolutions adopted by Matrix Bank's Board of Directors during the preceding fiscal quarter. (c) As soon as practicable and in any event within 60 days after the beginning of each fiscal year of the Borrower, statements of forecasted consolidated and consolidating income for the Borrower for each fiscal quarter in such fiscal year and a forecasted consolidated balance sheet of the Borrower, together with supporting assumptions, as at the end of each fiscal quarter. (d) As soon as practicable and in any event within 45 days after the end of each fiscal quarter, a Compliance Certificate in the form attached hereto as Exhibit 5.1(d) signed by the chief financial officer of the Borrower demonstrating in reasonable detail compliance (or noncompliance, as the case may be) with Section 6.15, as at the end of such quarter and stating that as at the end of such quarter there did not exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto. (e) Immediately upon any officer of the Borrower becoming aware of any Default or Event of Default, a notice from the Borrower describing the nature thereof and what action the Borrower proposes to take with respect thereto. (f) Immediately upon any officer of the Borrower becoming aware of the occurrence, with respect to any Plan, of any Reportable Event or any Prohibited Transaction, a notice from the Borrower specifying the nature thereof and what action the Borrower proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan. (g) Immediately upon any officer of the Borrower becoming aware of any matter that has resulted or is reasonably likely to result in a Material Adverse Occurrence, a notice from the Borrower describing the nature thereof and what action the Borrower proposes to take with respect thereto. (h) Promptly but not later than 45 days after receipt by Matrix Bank, and to the extent lawful, copies of all federal regulatory examinations of Matrix Bank, including all calculations of its Risk Based Capital. (i) Immediately upon any officer of the Borrower becoming aware of the occurrence, (i) any notice of intention to cancel or of cancellation of Matrix Bank's Bankers Blanket Bond, or (ii) any notice or capital directive from OTS to Matrix Bank indicating that it does not have an amount of capital satisfying its minimum capital requirements or imposing any restrictions on Matrix Bank's ability to declare and pay cash Distributions to Borrower. (j) From time to time, such other information regarding the business, operation and financial condition of the Borrower and the Subsidiaries as the Agent may reasonably request. Section 5.2 Corporate Existence. The Borrower will maintain, and cause each Subsidiary to maintain, (a) its corporate existence and (b) its good standing under the laws of its jurisdiction of incorporation and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower or such Subsidiary from enforcing its rights with respect to any material asset or would expose the Borrower or such Subsidiary to any material liability; provided, however, that nothing herein shall prohibit the merger or liquidation of any Subsidiary allowed under Section 6.1. Section 5.3 Insurance. The Borrower shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable firms engaged in the same or similar business and similarly situated. Section 5.4 Payment of Taxes and Claims. The Borrower shall file, and cause each Subsidiary to file, all tax returns and reports which are required by law to be filed by it and will pay, and cause each Subsidiary to pay, before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehouses, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, and as long as the Borrower's or such Subsidiary's title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on the Borrower's or such Subsidiary's books in accordance with GAAP. Section 5.5 Inspection. Upon reasonable notice, the Borrower shall permit, and shall cause each Subsidiary to permit, any Person designated by the Agent or the Majority Lenders to visit and inspect any of the properties, corporate books and financial records of the Borrower and such Subsidiary, to examine and to make copies of the books of accounts and other financial records of the Borrower and such Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and such Subsidiary with, and to be advised as to the same by, its senior executive officers at such reasonable times and intervals as the Agent or the Majority Lenders may designate. So long as no Event of Default exists, the expenses of the Agent or the Lenders for such visits, inspections and examinations in excess of one collateral audit per fiscal year shall be at the expense of the Agent and the Lenders, but any such visits, inspections and examinations made while any Event of Default is continuing shall be at the expense of the Borrower. Section 5.6 Maintenance of Properties. The Borrower will maintain, and cause each Subsidiary to maintain, its properties used or useful in the conduct of its business in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be conducted without material disruption. Section 5.7 Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs. Section 5.8 Compliance. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject; provided, however, that failure so to comply shall not be a breach of this covenant if such failure does not have, or is not reasonably expected to constitute a Material Adverse Occurrence or such Subsidiary is acting in good faith and with reasonable dispatch to cure such noncompliance. Section 5.9 Notice of Litigation. The Borrower will give prompt written notice to the Agent of (a) the commencement of any action, suit or proceeding before any court or arbitrator (other than any litigation where the insurance insures against the damages claimed and the insurer has assumed defense of the litigation without reservation) in which the damages claimed could exceed $500,000, (b) any material arbitration or governmental investigation or proceeding not previously disclosed by the Borrower to the Agent which has been instituted or, to the knowledge of the Borrower, is threatened against the Borrower or any Subsidiary or to which its respective property is subject and which, if determined adversely to the Borrower or such Subsidiary, would constitute a Material Adverse Occurrence; and (c) any adverse development which occurs in any litigation, arbitration or governmental investigation or proceeding previously disclosed by the Borrower to the Agent which if determined adversely to the Borrower or any Subsidiary would constitute a Material Adverse Occurrence. In each case, such notice shall state the nature and status of the matters set forth in this Section 5.9. Section 5.10 ERISA. The Borrower will maintain, and cause each Subsidiary to maintain, each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code and will not, and will not permit any of the ERISA Affiliates to (a) engage in any transaction in connection with which the Borrower or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $50,000, (b) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $50,000 or (c) fail to make any payments in an aggregate amount exceeding $50,000 to any Multiemployer Plan that the Borrower or any of the ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto. Section 5.11 Environmental Matters; Reporting. The Borrower will observe and comply with, and cause each Subsidiary to observe and comply with, all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a material liability or otherwise constitute a Material Adverse Occurrence. The Borrower will give the Agent prompt written notice of any violation as to any environmental matter by the Borrower or any Subsidiary and of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (a) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by the Borrower or any Subsidiary which are material to the operations of the Borrower or such Subsidiary, or (b) which will or threatens to impose a material liability on the Borrower or such Subsidiary to any Person or which will require a material expenditure by the Borrower or such Subsidiary to cure any alleged problem or violation. Section 5.12 Reaffirmation of Guaranties. When so requested by the Agent from time to time, the Borrower will promptly cause any Person who has or may hereafter guaranty the Obligations or any part thereof, to execute and deliver to the Agent reaffirmations of their respective Guaranties in such form as the Agent may require. Section 5.13 Further Assurances. The Borrower shall, and shall cause each Subsidiary to, promptly correct any defect or error that may be discovered in any Loan Document or in the execution, acknowledgment or recordation thereof. Promptly upon request by the Agent or the Majority Lenders, the Borrower also shall, and cause each Subsidiary to, do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all deeds, conveyances, mortgages, deeds of trust, trust deeds, assignments, estoppel certificates, financing statements and continuations thereof, notices of assignment, transfers, certificates, assurances and other instruments as the Agent or the Majority Lenders may reasonably require from time to time in order: (a) to carry out more effectively the purposes of the Loan Documents; (b) to perfect and maintain the validity, effectiveness and priority of any security interests intended to be created by the Loan Documents including, without limitation, the delivery of a landlord waiver from any landlord required by the Agent or the Majority Lenders; and (c) to better assure, convey, grant, assign, transfer, preserve, protect and confirm unto the Agent and the Lenders the rights granted now or hereafter intended to be granted to the Agent and the Lenders under any Loan Document or under any other instrument executed in connection with any Loan Document or that the Borrower may be or become bound to convey, mortgage or assign to the Agent for the benefit of the Lenders in order to carry out the intention or facilitate the performance of the provisions of any Loan Document. The Borrower shall furnish to the Agent evidence satisfactory to the Agent of every such recording, filing or registration. Section 5.14 Compliance with Terms of Material Contracts. The Borrower shall, and cause each Subsidiary to, make all payments and otherwise perform all obligations in respect of all material contracts to which the Borrower or any Subsidiary is a party if any such non-compliance would be reasonably likely to constitute a Material Adverse Occurrence. ARTICLE 6 NEGATIVE COVENANTS Until any obligation of the Lenders hereunder to make the Term Loans and Revolving Loans shall have expired or been terminated and the Notes and all of the other Obligations (other than contingent obligations for indemnity under the Loan Documents) have been paid in full, unless the Majority Lenders shall otherwise consent in writing: Section 6.1 Merger. The Borrower will not, nor permit any Subsidiary to, merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided, however, any Subsidiary may be merged with or liquidated into the Borrower or any wholly-owned Subsidiary (if the Borrower or such wholly-owned Subsidiary is the surviving corporation); further provided that nothing in this Section 6.1 shall prevent the Borrower from entering into any transactions with respect to First Matrix. Section 6.2 Disposition of Assets. Neither Borrower nor Matrix Bank may sell, assign, lease, transfer, or otherwise dispose of any of its assets (including, without limitation, equity interests in any other Company) except (a) sales and dispositions in the ordinary course of business for a fair and adequate consideration and (b) sales of assets which are obsolete or are no longer in use and which are not significant to the continuation of that Company's business. Section 6.3 Plans. The Borrower will not permit, nor allow any Subsidiary to permit, any event to occur or condition to exist which would permit any Plan to terminate under any circumstances which would cause the Lien provided for in Section 4068 of ERISA to attach to any assets of the Borrower or any Subsidiary; and the Borrower will not permit, as of the most recent valuation date for any Plan subject to Title IV of ERISA, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Lenders) of such Plan's projected benefit obligations to exceed the fair market value of such Plan's assets. Section 6.4 Change in Nature of Business. The Borrower will not, nor permit any Subsidiary to, make any material change in the nature of the business of the Borrower or such Subsidiary, as carried on at the date hereof. Section 6.5 Subsidiaries. After the date of this Agreement, the Borrower will not, and will not permit any Subsidiary to, form or acquire any corporation which would thereby become a Subsidiary; provided, that the Borrower may form or acquire additional Subsidiaries as long as (A) all of the issued and outstanding shares of each class of capital stock, partnership interests in or other ownership interests in each such Subsidiary is owned, directly or indirectly, by the Borrower (except for directors' qualifying shares, shares or other ownership interests issued to satisfy local ownership requirements and shares or other ownership interests issued for similar legal purposes), and (B) each such Subsidiary shall have executed and delivered to the Agent a Guaranty, together with such certificates and opinions as the Agent may reasonably request in connection therewith. Section 6.6 Negative Pledges; Subsidiary Restrictions. The Borrower will not, nor permit any Subsidiary to, enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Lenders which would (i) prohibit the Borrower or such Subsidiary from granting, or otherwise limit the ability of the Borrower or such Subsidiary to grant, to the Lenders any Lien on any assets or properties of the Borrower or such Subsidiary (other than any such provision contained in a Capitalized Lease or other similar lease relating to specific property), or (ii) require the Borrower or such Subsidiary to grant a Lien to any other Person if the Borrower or such Subsidiary grants any Lien to the Lenders. The Borrower will not permit any Subsidiary to place or allow any restriction, directly or indirectly, on the ability of such Subsidiary to (a) pay dividends or any distributions on or with respect to such Subsidiary's capital stock or (b) make loans or other cash payments to the Borrower. Section 6.7 Transactions with Affiliates. The Borrower will not, nor permit any Subsidiary to, directly or indirectly enter into any transaction with any of its Affiliates other than transactions in the ordinary course of business or upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's-length transaction with a Person that was not its Affiliate. Notwithstanding the preceding sentence, nothing in this Section 6.7 shall apply to transactions between the Borrower and any wholly-owned Subsidiary. Section 6.8 Accounting Changes. The Borrower will not, nor permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year or the fiscal year of any Subsidiary. Section 6.9 Investments. The Borrower will not acquire for value, make, have or hold any Investments, except: (a) Government Securities. Government Securities. (b) State Obligations. Readily marketable direct obligations of any state of the United States of America given on the date of such investment a credit rating of at least Aa by Moody's Investors Service, Inc. or AA by Standard & Poor's Corporation, in each case due within one year from the making of the investment. (c) Certificates of Deposit, Etc. Certificates of deposit issued by, bank deposits in, eurocurrency deposits through, bankers' acceptances of, and repurchase agreements covering Government Securities executed by (i) any Lender or (ii) any domestic bank or any domestic branch or office of a foreign bank, in either case having on the date of the investment a short-term certificate of deposit credit rating of at least P-2 by Moody's Investors Service, Inc., or A-2 by Standard & Poor's Corporation, in each case due within one year from the making of the investment. (d) Government Repos. Repurchase agreements covering Government Securities executed by a broker or dealer registered under Section 15(b) of the Securities Exchange Act of 1934 having on the date of the investment capital of at least $100,000,000, due within 30 days after the date of the making of the investment, so long as the maker of the investment receives written confirmation of the transfer to it of record ownership of the Government Securities on the books of a "primary dealer" in the Government Securities as soon as practicable after the making of the investment. (e) Commercial Paper. Readily marketable commercial paper of domestic corporations doing business in the United States of America or any of its states or of any corporation that is the holding company for a bank described in clause (c) above and having on the date of the investment a credit rating of at least P-1 by Moody's Investors Service, Inc., or A-1 by Standard & Poor's Corporation, in each case due within 90 days after the date of the making of the investment. (f) Preferred Stock. "Money market preferred stock" issued by a domestic corporation given on the date of the investment a credit rating of at least Aa by Moody's Investors Services, Inc., and AA by Standard & Poor's Corporation, in each case having an investment period not exceeding 50 days, so long as (i) the amount of all of those investments issued by the same issuer does not exceed $5,000,000 and (ii) the total amount of all of those investments does not exceed $10,000,000. (g) Mutual Funds. A readily redeemable "money market mutual fund" sponsored by a bank described in clause (c) above, or a registered broker or dealer described in Clause (d) above, that has and maintains an investment policy limiting its investments primarily to instruments of the types describe in clauses (a) through (f) above and has on the date of those investment total assets of at least $1,000,000,000. (h) Other Companies. Investments by Borrower in any other Company in compliance with Sections 6.1 and 6.5. (i) Directors, Etc. Loans or advances to directors, officers, and employees of the Borrower that never exceed a total of $1,000,000 in principal-amount outstanding. (j) Customers. Indebtedness of its customers created in its ordinary course of business in a manner consistent with its present practices. (k) Hedge Contracts. Hedge Contracts. (l) Charter-School Assets. Investments in charter-school leases or loans originated or acquired by Equi-Mor in the ordinary course of business. (m) Miscellaneous. Other Investments made in the ordinary course of business for a financial services firm. For purposes of this Section 6.9, the total amount outstanding of any Investment by any Person in any other Person is to be determined net of repayments and dividends to, and sales of securities of the second Person by, the first Person. Section 6.10 Indebtedness. The Borrower will not, nor permit any Subsidiary to, incur, create, issue, assume or suffer to exist any Indebtedness, except: (a) Indebtedness described on Schedule 6.10 and all renewals, extensions, amendments, modifications, and refinancings of (but not any principal increases after the date of this agreement to) such Indebtedness. (b) The Obligations. (c) Indebtedness of Matrix Bank to Borrower. (d) Other Indebtedness incurred by either Borrower or Matrix Bank that never exceeds $1,000,000 in total-principal amount outstanding for both Borrower and Matrix Bank, together with renewals, extensions, amendments, modifications, and refinancings of that Indebtedness and those obligations subject to the foregoing limitations of this clause (d). (e) Hedging Contracts, trade payable, accrued Taxes, and other liabilities that do not constitute Indebtedness for borrowed money or Capitalized Leases; and endorsements of negotiable instruments in the ordinary course of business. (f) Subordinated Debt, so long as Borrower does not (A) prepay or cause to be prepaid any principal of, or any interest on, any of the Subordinated Debt except (i) conversions of Subordinated Debt to equity of Borrower that is not mandatorily redeemable, (ii) exchanges of Subordinated Debt for other Subordinated Debt, and (iii) prepayment of Subordinated Debt with the proceeds of the issuance of additional Subordinated Debt or capital stock issued by Borrower, or (B) amend or modify the terms of any Subordinated Debt, or incur any new Subordinated Debt, to the extent that (A) any of the applicable subordination, payment blockage, or standstill provisions are less favorable to Lenders than exists for the Subordinated Debentures, (B) the applicable representations, covenants, events of default, and other provisions are materially more onerous to the obligor than exists for the Subordinated Debentures, or (C) scheduled or mandatory principal or sinking fund payment obligations are (I) with respect to Subordinated Debt outstanding on the date hereof, added or modified , or (II) with respect to any Subordinated Debt incurred after the date hereof, would take effect before 180 days after the final Maturity Date of the Term Loan. (g) Indebtedness incurred by Matrix Bank in the ordinary course of business which are consistent with prudent banking practices. (h) Indebtedness secured by Liens permitted under Section 6.11(q) hereof. (i) Indebtedness consisting of Permitted Warehouse Debt, provided, however, that to the extent such Indebtedness ceases to constitute Permitted Warehouse Debt, such Indebtedness shall be deemed to be incurred at the time it ceased to be Permitted Warehouse Debt. Section 6.11 Liens. The Borrower will not, nor permit any Subsidiary to, create, incur, assume or suffer to exist any Lien, or enter into, or make any commitment to enter into, any arrangement for the acquisition of property through conditional sale, lease-purchase or other title retention agreements, with respect to any property now owned or hereafter acquired by a Borrower or a Subsidiary, except: (a) Liens existing on the Closing Date and described on Schedule 6.11 and all renewals, extensions, amendments, and modifications of any of them to the extent that the total principal amount each individually secures never exceeds the total-principal amount secured by it on the date of this agreement. (c) Liens granted to the Agent and the Lenders under the Security Documents to secure the Obligations. (e) Any interest or title of a lessor in assets being leased under an operating lease that does not constitute Indebtedness. (f) Liens arising under Hedging Contracts that do not cover any Collateral. (h) Liens that secure any of the Indebtedness described in Section 6.10(d) (together with any renewal, extension, amendment, or modification of any such Lien) so long as each such Lien never covers any assets except the assets acquired, constructed, or improved with such Indebtedness. (i) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution. (j) Pledges or deposits (to the extent that they do not cover any Collateral except cash proceeds of Collateral arising in the ordinary course of business) made to secure payment of workers' compensation, unemployment insurance, or other forms of governmental insurance or benefits or to participate in any fund in connection with worker's compensation, unemployment insurance, pensions, or other social security programs. (l) Good-faith pledges or deposits (to the extent that they do not cover any Collateral except cash proceeds of Collateral arising in the ordinary course of business) (i) for 10% or less of the amounts due under (and made to secure) the Borrower's, or any Subsidiary's, performance of bids, tenders, contracts (except for the repayment of borrowed money), (ii) in respect of any operating lease, that are for up to but not more than the greater of either 10% of the total rental obligations for the term of the lease or 50% of the total rental obligations payable during the first year of the lease, or (iii) made to secure statutory obligations, surety or appeal bonds, or indemnity, performance, or other similar bonds benefiting the Borrower or any Subsidiary in the ordinary course of its business. (m) Zoning and similar restrictions on the use of, and easements, restrictions, covenants, title defects, and similar encumbrances on, real property that do not materially impair the use of the real property and that are not violated by existing or proposed structures or land use. (n) If no Lien has been filed in any jurisdiction or agreed to (i) claims and Liens for Taxes not yet due and payable, (ii) mechanic's Liens and materialman's Liens for services or materials and similar Liens incident to construction and maintenance of real property, in each case for which payment is not yet due and payable, (iii) landlord's Liens for rental not yet due and payable, and (iv) Liens of warehousemen and carriers and similar Liens securing obligations that are not yet due and payable. (o) Liens incurred pursuant to Indebtedness permitted under Section 6.10(g) hereof. (p) Liens incurred pursuant to Indebtedness permitted under Section 6.10(i) hereof on (i) Eligible Receivables under such Warehouse Facility and any and all notes, instruments, general intangibles or other documentation underlying such Eligible Receivables; (ii) Servicing Rights with respect to such Eligible Receivables, (iii) Residual Receivables, and (iv) capital stock of any Subsidiary of the Borrower where substantially all of the assets of such Subsidiary are Residual Receivables. (q) The interest of any lessor under any Capitalized Lease entered into after the Closing Date or purchase money Liens on property acquired after the Closing Date; provided that such Liens are limited to the property acquired and do not secure Indebtedness other than the related Capitalized Lease Obligations or the purchase price of such property. Section 6.12 Contingent Liabilities. The Borrower will not, nor permit any Subsidiary to, be or become liable on any Contingent Obligations, except (i) Contingent Obligations existing on the date of this Agreement and described on Schedule 6.12, (ii) Contingent Obligations for the benefit of the Lenders, and (iii) Contingent Obligations expressly permitted pursuant to Section 6.10. Section 6.13 Loan Proceeds. The Borrower will not, nor permit any Subsidiary to, use any part of the proceeds of any Loan or Advances directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or carry margin stock (as defined in Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U or X of the Board. Section 6.14 Restricted Payments. The Borrower may not make any Restricted Payment, except (a) after the Closing Date, the Borrower may make Restricted Payments in an aggregate amount not exceeding $3,000,000 pursuant to its stock repurchase plan in effect on the Closing Date; and (b) with respect to any fiscal year of the Borrower, the Borrower may make Restricted Payments on or with respect to its capital stock in an aggregate amount not exceeding 25% of the Borrower's consolidated net income for such year. Section 6.15 Financial Covenants. (a) Net Worth. The Borrower shall not permit its Consolidated Net Worth, at any time, to be less than $60,000,000. (b) Cash Coverage. The Borrower shall not permit the ratio (calculated only in respect of the Borrower) of cash dividends and tax sharing payments available to be received by the Borrower from its Subsidiaries to cash expenses and CMLTD paid by the Borrower, as of the last day of any fiscal quarter, for the four consecutive fiscal quarters ending on such date, to be less than 1.5 to 1.0. (c) Net Income. The Borrower shall not permit Matrix Bank's Net Income, as of the last day of any fiscal quarter, for the four consecutive fiscal quarters ending on such date, to be less than $7,500,000. (d) Capital Ratio. The Borrower shall not permit Matrix Bank to fail to either (a) maintain a "well capitalized" designation from OTS with respect to its minimum "Risk Based Capital," as defined in 12 C.F.R.ss.565.4(b)(1), or (b) have a "Risk Based Capital Ratio," as defined in 12 C.F.R.ss.567.2(a)(1), of less than 10%. (e) Leverage Ratio. The Borrower shall not permit Matrix Bank to fail to either (a) maintain a "well capitalized" designation from OTS with respect to its "leverage," as defined in 12 C.F.R.ss.565.4(b)(1), or (b) have a "Leverage Ratio," as defined in 12 C.F.R.ss.567.2(a)(2)(ii), of less than 5.0%. (f) Classified Assets. The Borrower shall not permit Matrix Bank to have a ratio (stated as a percentage) of Classified Assets to total assets at any time greater than 3%. ARTICLE 7 EVENTS OF DEFAULT AND REMEDIES Section 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) The Borrower shall fail (i) to make when due, whether by acceleration or otherwise, any payment of principal of any Note when due or any other Obligation required to be made to the Agent or any Lender pursuant to this Agreement or any Rate Protection Obligation, or (ii) to make any payment of interest on any Note within 5 days of the date when due. (b) Any representation or warranty made by or on behalf of the Borrower, any Subsidiary or any Guarantor in this Agreement or any other Loan Document or by or on behalf of the Borrower, any Subsidiary or any Guarantor in any certificate, statement, report or document herewith or hereafter furnished to any Lender or the Agent pursuant to this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified. (c) The Borrower shall fail to comply with Sections 5.2(a), 5.3 or any Section of Article VI hereof. (d) The Borrower shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set forth in this Section 7.1) and such failure to comply shall continue for 30 calendar days after whichever of the following dates is the earliest: (i) the date the Borrower gives notice of such failure to the Agent or, (ii) the date the Borrower should have given notice of such failure to the Agent pursuant to Section 5.1, or (iii) the date the Agent or the Lender gives notice of such failure to the Borrower. (e) Any default (however denominated or defined) shall occur under any Security Document. (f) The Borrower, any Subsidiary or any Guarantor shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Borrower, such Subsidiary or such Guarantor or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Borrower, any Subsidiary or any Guarantor or for a substantial part of the property thereof and shall not be discharged within 45 days, or the Borrower, any Subsidiary or any Guarantor shall make an assignment for the benefit of creditors. (g) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Borrower, any Subsidiary or any Guarantor, and, if instituted against the Borrower, any Subsidiary or any Guarantor, shall have been consented to or acquiesced in by the Borrower, such Subsidiary or such Guarantor, or shall remain undismissed for 60 days, or an order for relief shall have been entered against the Borrower, such Subsidiary or such Guarantor. (h) Any dissolution or liquidation proceeding not permitted by Section 6.1 shall be instituted by or against the Borrower or any Subsidiary or any dissolution or liquidation proceeding shall be instituted by or against any Guarantor, and, if instituted against the Borrower, any Subsidiary or any Guarantor, shall be consented to or acquiesced in by the Borrower, such Subsidiary or such Guarantor or shall remain for 45 days undismissed. (i) A judgment or judgments for the payment of money in excess of the sum of $250,000 in the aggregate shall be rendered against the Borrower or any Subsidiary and either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment. (j) The maturity of any material Indebtedness of the Borrower (other than Indebtedness under this Agreement) or any Subsidiary shall be accelerated, or the Borrower or a Subsidiary shall fail to pay any such material Indebtedness when due (after the lapse of any applicable grace period) or, in the case of such Indebtedness payable on demand, when demanded (after the lapse of any applicable grace period), or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such Indebtedness or any trustee or other Person acting on behalf of such holder to cause, such material Indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor. For purposes of this Section, Indebtedness of the Borrower or any Subsidiary shall be deemed "material" if it exceeds $250,000 as to any item of Indebtedness or in the aggregate for all items of Indebtedness with respect to which any of the events described in this Section 7.1(j) has occurred. (k) Any execution or attachment shall be issued whereby any substantial part of the property of the Borrower or any Subsidiary shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 30 days after the issuance thereof. (l) Any Guarantor shall repudiate or purport to revoke its, his or her Guaranty, or any Guaranty for any reason shall cease to be in full force and effect as to the Guarantor executing and delivering the same or shall be judicially declared null and void as to such Guarantor. (m) Any Security Document shall, at any time, cease to be in full force and effect or shall be judicially declared null and void, or the validity or enforceability thereof shall be contested by the Borrower or any Subsidiary, or the Agent or the Lenders shall cease to have a valid and perfected security interest having the priority contemplated thereunder in all of the collateral described therein, other than by action or inaction of the Agent or the Lenders if (i) the aggregate value of the collateral affected by any of the foregoing exceeds $10,000 and (ii) any of the foregoing shall remain unremedied for ten days or more after receipt of notice thereof by the Borrower from the Agent. (n) Any Change of Control shall occur. (o) Matrix Bank has, or receives notice or a directive from OTS that it has, inadequate capital to satisfy its minimum capital requirements, receives any notice or capital directive from OTS restricting its ability to pay cash Distributions to Borrower, or receives notice of intention to cancel or of cancellation of its Bankers Blanket Bond. Section 7.2 Remedies. If (a) any Event of Default described in Sections 7.1(f), (g) or (h) shall occur with respect to the Borrower, the Commitments shall automatically terminate and the Notes and all other Obligations shall automatically become immediately due and payable; or (b) any other Event of Default shall occur and be continuing, then, upon receipt by the Agent of a request in writing from the Majority Lenders, the Agent shall take any of the following actions so requested: (i) declare the Commitments terminated, whereupon the Commitments shall terminate, and (ii) declare the outstanding unpaid principal balance of the Notes, the accrued and unpaid interest thereon and all other Obligations to be forthwith due and payable, whereupon the Notes, all accrued and unpaid interest thereon and all such Obligations shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding. Upon the occurrence of any of the events described in clause (a) of the preceding sentence, or upon the occurrence of any of the events described in clause (b) of the preceding sentence when so requested by the Majority Lenders, the Agent may exercise all rights and remedies under any of the Loan Documents, and enforce all rights and remedies under any applicable law. Section 7.3 Offset. In addition to the remedies set forth in Section 7.2, upon the occurrence of any Event of Default and thereafter while the same be continuing, the Borrower hereby irrevocably authorizes each Lender to set off any Obligations owed to such Lender against all deposits and credits of the Borrower with, and any and all claims of the Borrower against, such Lender. Such right shall exist whether or not such Lender shall have made any demand hereunder or under any other Loan Document, whether or not the Obligations, or any part thereof, or deposits and credits held for the account of the Borrower is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to such Lender or the Lenders. Each Lender agrees that, as promptly as is reasonably possible after the exercise of any such setoff right, it shall notify the Borrower of its exercise of such setoff right; provided, however, that the failure of such Lender to provide such notice shall not affect the validity of the exercise of such setoff rights. Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on any Lender to all rights of banker's Lien, setoff and counterclaim available pursuant to law. ARTICLE 8 THE AGENT The following provisions shall govern the relationship of the Agent with the Lenders. Section 8.1 Appointment and Authorization. Each Lender appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such respective powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. Neither the Agent nor any of its directors, officers or employees shall be liable for any action taken or omitted to be taken by it under or in connection with the Loan Documents, except for its own gross negligence or willful misconduct. The Agent shall act as an independent contractor in performing its obligations as Agent hereunder. The duties of the Agent shall be mechanical and administrative in nature, and nothing herein contained shall be deemed to create any fiduciary relationship among or between the Agent, the Borrower or the Lenders. Section 8.2 Note Holders. The Agent may treat the payee of any Note as the holder thereof until written notice of transfer shall have been filed with it, signed by such payee and in form satisfactory to the Agent. Section 8.3 Consultation With Counsel. The Agent may consult with legal counsel selected by it and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. Section 8.4 Loan Documents. The Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties in any Loan Document or be under a duty to examine or pass upon the validity, effectiveness, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto, and the Agent shall be entitled to assume that the same are valid, effective and genuine and what they purport to be. Section 8.5 Agent and Affiliates. With respect to its Commitments and the Loans made by it, the Agent shall have the same rights and powers under the Loan Documents as any other Lender and may exercise the same as though it were not the Agent consistent with the terms thereof, and the Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower as if it were not the Agent. Section 8.6 Action by Agent. Except as may otherwise be expressly stated in this Agreement, the Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, or with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, the Loan Documents. The Agent shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to the Loan Documents or applicable law. The Agent shall incur no liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties and to be consistent with the terms of this Agreement. Section 8.7 Credit Analysis. Each Lender has made, and shall continue to make, its own independent investigation or evaluation of the operations, business, property and condition, financial and otherwise, of the Borrower in connection with entering into this Agreement and has made its own appraisal of the creditworthiness of the Borrower. Except as explicitly provided herein, the Agent has no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect to such operations, business, property, condition or creditworthiness, whether such information comes into its possession on or before the first Event of Default or at any time thereafter. Section 8.8 Notices of Event of Default, Etc. In the event that the Agent shall have acquired actual knowledge of any Event of Default or Default, the Agent shall promptly give notice thereof to the Lenders. The Agent shall not be deemed to have knowledge or notice of any Default or Event of Default, except with respect to actual defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "Notice of Default". Section 8.9 Indemnification. Each Lender agrees to indemnify the Agent, as Agent (to the extent not reimbursed by the Borrower), ratably according to such Lender's share of the aggregate Revolving and Term Loan Commitment Amounts from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on or incurred by the Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Agent under the Loan Documents, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. No payment by any Lender under this Section shall relieve the Borrower of any of its obligations under this Agreement. Section 8.10 Payments and Collections. All funds received by the Agent in respect of any payments made by the Borrower on the Term Notes shall be distributed forthwith by the Agent among the Lenders, in like currency and funds as received, ratably according to each Lender's Term Loan Percentage. All funds received by the Agent in respect of any payments made by the Borrower on the Revolving Notes or Revolving Commitment Fees shall be distributed forthwith by the Agent among the Lenders, in like currency and funds as received, ratably according to each Lender's Revolving Percentage. After any Event of Default has occurred, all funds received by the Agent, whether as payments by the Borrower or as realization on collateral or on any Guaranties, shall (except as may otherwise be required by law) be distributed by the Agent in the following order: (a) first to the Agent or any Lender who has incurred unreimbursed costs of collection with respect to any Obligations hereunder, ratably to the Agent and each Lender in the proportion that the costs incurred by the Agent or such Lender bear to the total of all such costs incurred by the Agent and all Lenders; (b) next to the Agent for the account of the Lenders (in accordance with their respective Total Percentages) for application on the Notes and any Rate Protection Obligations; and (c) last to the Agent for the account of the Lenders (in accordance with their respective Revolving Percentages) for any unpaid Revolving Commitment Fees owing by the Borrower hereunder. Section 8.11 Sharing of Payments. If any Lender shall receive and retain any payment, voluntary or involuntary, whether by setoff, application of deposit balance or security, or otherwise, in respect of Indebtedness under this Agreement or the Notes in excess of such Lender's share thereof as determined under this Agreement, then such Lender shall purchase from the other Lenders for cash and at face value and without recourse, such participation in the Notes held by such other Lenders as shall be necessary to cause such excess payment to be shared ratably as aforesaid with such other Lenders; provided, that if such excess payment or part thereof is thereafter recovered from such purchasing Lender, the related purchases from the other Lenders shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest. Subject to the participation purchase obligation above, each Lender agrees to exercise any and all rights of setoff, counterclaim or banker's lien first fully against any Notes and participations therein held by such Lender, next to any other Indebtedness of the Borrower to such Lender arising under or pursuant to this Agreement and to any participations held by such Lender in Indebtedness of the Borrower arising under or pursuant to this Agreement, and only then to any other Indebtedness of the Borrower to such Lender. Section 8.12 Advice to Lenders. The Agent shall forward to the Lenders copies of all notices, financial reports and other communications received hereunder from the Borrower by it as Agent, excluding, however, notices, reports and communications which by the terms hereof are to be furnished by the Borrower directly to each Lender. Section 8.13 Defaulting Lender. (a) Remedies Against a Defaulting Lender. In addition to the rights and remedies that may be available to the Agent or the Borrower under this Agreement or applicable law, if at any time a Lender is a Defaulting Lender such Defaulting Lender's right to participate in the administration of the Loans, this Agreement and the other Loan Documents, including without limitation, any right to vote in respect of, to consent to or to direct any action or inaction of the Agent or to be taken into account in the calculation of the Majority Lenders, shall be suspended while such Lender remains a Defaulting Lender. If a Lender is a Defaulting Lender because it has failed to make timely payment to the Agent of any amount required to be paid to the Agent hereunder (without giving effect to any notice or cure periods), in addition to other rights and remedies which the Agent or the Borrower may have under the immediately preceding provisions or otherwise, the Agent shall be entitled (i) to collect interest from such Defaulting Lender on such delinquent payment for the period from the date on which the payment was due until the date on which the payment is made at the Federal Funds Rate, (ii) to withhold or setoff and to apply in satisfaction of the defaulted payment and any related interest, any amounts otherwise payable to such Defaulting Lender under this Agreement or any other Loan Document until such defaulted payment and related interest has been paid in full and such default no longer exists and (iii) to bring an action or suit against such Defaulting Lender in a court of competent jurisdiction to recover the defaulted amount and any related interest. Any amounts received by the Agent in respect of a Defaulting Lender's Loans shall not be paid to such Defaulting Lender and shall be held uninvested by the Agent and either applied against the purchase price of such Loans under the following subsection (b) or paid to such Defaulting Lender upon the default of such Defaulting Lender being cured. (b) Purchase from Defaulting Lender. Any Lender that is not a Defaulting Lender shall have the right, but not the obligation, in its sole discretion, to acquire all of a Defaulting Lender's Commitments. If more than one Lender exercises such right, each such Lender shall have the right to acquire such proportion of such Defaulting Lender's Commitments on a pro rata basis. Upon any such purchase, the Defaulting Lender's interest in its Loans and its rights hereunder (but not its liability in respect thereof or under the Loan Documents or this Agreement to the extent the same relate to the period prior to the effective date of the purchase) shall terminate on the date of purchase, and the Defaulting Lender shall promptly execute all documents reasonably requested to surrender and transfer such interest to the purchaser thereof subject to and in accordance with the requirements set forth in Section 9.6, including an Assignment in form acceptable to the Agent. The purchase price for the Commitments of a Defaulting Lender shall be equal to the amount of the principal balance of the Loans outstanding and owed by the Borrower to the Defaulting Lender. The purchaser shall pay to the Defaulting Lender in Immediately Available Funds on the date of such purchase the principal of and accrued and unpaid interest and fees on the Loans made by such Defaulting Lender hereunder (it being understood that such accrued and unpaid interest and fees may be paid pro rata to the purchasing Lender and the Defaulting Lender by the Agent at a subsequent date upon receipt of payment of such amounts from the Borrower). Prior to payment of such purchase price to a Defaulting Lender, the Agent shall apply against such purchase price any amounts retained by the Agent pursuant to the last sentence of the immediately preceding subsection (a). The Defaulting Lender shall be entitled to receive amounts owed to it by the Borrower under the Loan Documents which accrued prior to the date of the default by the Defaulting Lender, to the extent the same are received by the Agent from or on behalf of the Borrower. There shall be no recourse against any Lender or the Agent for the payment of such sums except to the extent of the receipt of payments from any other party or in respect of the Loans. Section 8.14 Resignation. If at any time the Agent shall deem it advisable, in its sole discretion, it may submit to each of the Lenders and the Borrower a written notification of its resignation as Agent under this Agreement, such resignation to be effective upon the appointment of a successor Agent, but in no event later than 30 days from the date of such notice. Upon submission of such notice, the Majority Lenders may appoint a successor Agent with the consent of the Borrower, so long as a Default or an Event of Default has not occurred and is continuing and which consent shall not be unreasonably withheld. ARTICLE 9 MISCELLANEOUS Section 9.1 Modifications. Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower; provided that no amendment, modification or waiver of any provision of this Agreement or any other Loan Document or consent to any departure therefrom by the Borrower or other party thereto shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (The Agent may enter into amendments or modifications of, and grant consents and waivers to departure from the provisions of, those Loan Documents to which the Lenders are not signatories without the Lenders joining therein, provided the Agent has first obtained the separate prior written consent to such amendment, modification, consent or waiver from the Majority Lenders.) Notwithstanding the forgoing, no such amendment, modification, waiver or consent shall: (a) Reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or modify any of the provisions of any Note with respect to the payment or repayment thereof, without the consent of all the Lenders; or (b) Increase the amount or extend the time of any Commitment of any Lender, without the consent of all the Lenders; or (c) Reduce the rate or extend the time of payment of any fee payable to a Lender, without the consent of all the Lenders; or (d) Except as may otherwise be expressly provided in any of the other Loan Documents, release any material portion of collateral securing, or any guaranties for, all or any part of the Obligations without the consent of all the Lenders; or (e) Amend the definition of Majority Lenders or otherwise reduce the percentage of the Lenders required to approve or effectuate any such amendment, modification, waiver, or consent, without the consent of all the Lenders; or (f) Amend any of the foregoing Sections 9.1(a) through (e) or this Section 9.1(f) without the consent of all the Lenders; or (g) Amend any provision of this Agreement relating to the Agent in its capacity as Agent without the consent of the Agent; or (h) Amend any provision of this Agreement relating to the issuance of Letters of Credit without the consent of the Agent. Section 9.2 Expenses. Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to reimburse the Agent upon demand for all reasonable out-of-pocket expenses paid or incurred by the Agent (including filing and recording costs and fees and expenses of Dorsey & Whitney LLP, counsel to the Agent) in connection with the negotiation, preparation, approval, review, execution, delivery, administration, amendment, modification and interpretation of this Agreement and the other Loan Documents and any commitment letters relating thereto. The Borrower shall also reimburse the Agent and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable expenses of legal counsel) paid or incurred by the Agent or any Lender in connection with the collection and enforcement of this Agreement and any other Loan Document. The obligations of the Borrower under this Section shall survive any termination of this Agreement. Section 9.3 Waivers, etc. No failure on the part of the Agent or the holder of a Note to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in the other Loan Documents provided are cumulative and not exclusive of any remedies provided by law. Section 9.4 Notices. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Agent or any Lender under Article II hereof shall be deemed to have been given only when received by the Agent or such Lender. Section 9.5 Taxes. The Borrower agrees to pay, and save the Agent and the Lenders harmless from all liability for any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Notes, which obligation of the Borrower shall survive the termination of this Agreement. Section 9.6 Successors and Assigns; Participations; Foreign and Purchasing Lenders. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent, the Lenders, all future holders of the Notes, and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more lenders or other entities ("Participants") participating interests in a minimum aggregate amount of $5,000,000 in the Loans, the Notes and the Revolving Commitment held by such Lender, and any other interest of such Lender hereunder. In the event of any such sale by a Lender of participating interests to a Participant, (i) such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible for the performance thereof, (iii) such Lender shall remain the holder of any such Revolving Note and Term Note for all purposes under this Agreement, (iv) the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) the agreement pursuant to which such Participant acquires its participating interest herein shall provide that such Lender shall retain the sole right and responsibility to enforce the Obligations, including, without limitation the right to consent or agree to any amendment, modification, consent or waiver with respect to this Agreement or any other Loan Document, provided that such agreement may provide that such Lender will not consent or agree to any such amendment, modification, consent or waiver with respect to the matters set forth in Sections 9.1(a)(e) without the prior consent of such Participant. The Borrower agrees that if amounts outstanding under this Agreement, the Revolving Notes, the Term Notes and the Loan Documents are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have, to the extent permitted by applicable law, the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Revolving Note, Term Note or other Loan Document to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or any Revolving Note, Term Note or other Loan Document; provided, that such right of setoff shall be subject to the obligation of such Participant to share with the Lenders, and the Lenders agree to share with such Participant, as provided in subsection 8.11. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.13 through 2.17 and 9.2 with respect to its participation in the Revolving Commitments, Term (A) Loan Commitments, Term (B) Loan Commitments, Revolving Loans, the Term (A) Loans and the Term (B) Loans; provided, that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Each Lender may, from time to time, upon the Borrower's prior written consent (so long as a Default or an Event of Default has not occurred and is continuing), such consent not to be unreasonably withheld, assign to other lenders ("Assignees") part of the Indebtedness in a minimum aggregate amount of $5,000,000, which shall consist of equivalent proportions of its Revolving Commitment, Revolving Note and Term Note, pursuant to written agreements executed by such assigning Lender, such Assignee(s), the Borrower and the Agent in substantially the form of Exhibit 9.6, which agreements shall specify in each instance the portion of the Obligations evidenced by the Revolving Note and Term Note which is to be assigned to each Assignee and the portion of the Pro Rata Share and Revolving Commitment of such Lender to be assumed by each Assignee (each, an "Assignment Agreement"); provided, however, that the assigning Lender must pay to the Agent a processing and recordation fee of $3,500; provided further that the Borrower may reasonably withhold its consent if any assignment would result in increased costs to the Borrower with respect to the matters set forth in Sections 2.14, 2.15 and 2.16. Upon the execution of each Assignment Agreement by the assigning Lender, the relevant Assignee, the Borrower, and the Agent, payment to the assigning Lender by such Assignee of the purchase price for the portion of the Obligations being acquired by it and receipt by the Borrower of a copy of the relevant Assignment Agreement, (x) such Assignee lender shall thereupon become a "Lender" for all purposes of this Agreement with a Pro Rata Share, Revolving Commitment and outstanding Term Loans in the amount set forth in such Assignment Agreement and with all the rights, powers and obligations afforded a Lender under this Agreement, (y) such assigning Lender shall have no further liability for funding the portion of its Revolving Commitment assumed by such Assignee and (z) the address for notices to such Assignee shall be as specified in the Assignment Agreement executed by it. Concurrently with the execution and delivery of each Assignment Agreement, the assigning Lender shall surrender to the Agent the Revolving Note, the Term Note, a portion of which is being assigned, and the Borrower shall execute and deliver a Revolving Note and Term Note to the Assignee in the amount of such Assignee's Revolving Commitment and outstanding Term Loans, respectively, and a new Revolving Note and Term Note to the assigning Lender in the amount of its Revolving Commitment and outstanding Term Loans, after giving effect to the reduction occasioned by such assignment, all such Notes to constitute "Revolving Notes" and "Term Notes" for all purposes of this Agreement and of the other Loan Documents. (d) The Borrower shall not be liable for any costs incurred by the Lenders in effecting any participation under subparagraph (b) of this subsection or by the Lenders in effecting any assignment under subparagraph (c) of this subsection except with respect to the Agent as provided in this Section 9.6. (e) Each Lender may disclose to any Assignee or Participant and to any prospective Assignee or Participant any and all financial information in such Lender's possession concerning the Borrower or any of its Subsidiaries (if any) which has been delivered to such Lender by or on behalf of the Borrower or any of its Subsidiaries pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower or any of its Subsidiaries in connection with such Lender's credit evaluation of the Borrower or any of its Subsidiaries prior to entering into this Agreement, provided that prior to disclosing such information, such Lender shall first obtain the agreement of such prospective Participant to comply with the provisions of Section 9.7. (f) Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any note held by it in favor of any federal reserve lender in accordance with Regulation A of the Board or U. S. Treasury Regulation 31 CFR ss. 203.14, and such Federal Reserve Lender may enforce such pledge or security interest in any manner permitted under applicable law. Section 9.7 Confidentiality of Information. The Agent and each Lender shall use reasonable efforts to (a) hold as confidential information about the Borrower and its operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Agent or such Lender pursuant to the provisions hereof; (b) only use such information for the purposes of this Agreement and any other relationship between any Lender and the Borrower; and (c) not divulge such information to any Person other than the Lenders, their Affiliates and their respective officers, directors, employees and agents, except: (i) to their attorneys and accountants, (ii) in connection with the enforcement of the rights of the Agent or the Lenders under the Loan Documents or otherwise in connection with applicable litigation, (iii) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in the immediately preceding Section, (iv) if such information is generally available to the public other then as a result of disclosure by the Agent or a Lender, (v) to any direct or indirect contractual counterparty in any hedging arrangement or such contractual counterparty's professional advisor, (vi) to any nationally recognized rating agency that requires information about a Lender investment portfolio in connection with ratings issued with respect to such Lender, and (vii) as may otherwise be required or requested by any regulatory authority having jurisdiction over the Agent or any Lender or by any applicable law, rule, regulation or judicial process, the opinion of the Agent or such Lender's counsel concerning the making of such disclosure to be binding on the parties hereto. Neither the Agent nor any Lender shall incur any liability to the Borrower by reason of any disclosure permitted by this Section 9.7. Section 9.8 Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL LENDERS. Whenever possible, each provision of this Agreement and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto. Section 9.9 Consent to Jurisdiction. AT THE OPTION OF THE AGENT, THIS AGREEMENT AND THE OTHER BORROWER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE AGENT AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. Section 9.10 Waiver of Jury Trial. THE BORROWER , THE AGENT AND EACH LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 9.11 Confirmation of Security Interest. The Borrower confirms that its obligations under this Credit Agreement, shall constitute Obligations within the meaning of the Security Documents. Section 9.12 Survival of Agreement. All representations, warranties, covenants and agreement made by the Borrower herein or in the other Borrower Loan Documents and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be deemed to have been relied upon by the Lenders and shall survive the making of the Loans by the Lenders and the execution and delivery to the Lenders by the Borrower of the Notes, regardless of any investigation made by or on behalf of the Lenders, and shall continue in full force and effect as long as any Obligation is outstanding and unpaid and so long as the Commitments have not been terminated; provided, however, that the obligations of the Borrower under Sections 9.2, 9.5 and 9.13 shall survive payment in full of the Obligations and the termination of the Commitments. Section 9.13 Indemnification. The Borrower hereby agrees to defend, protect, indemnify and hold harmless the Agent and the Lenders and their respective Affiliates and the directors, officers, employees, attorneys and agents of the Agent and the Lenders and their respective Affiliates (each of the foregoing being an "Indemnitee" and all of the foregoing being collectively the "Indemnitees") from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise: (a) by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any transaction contemplated by any Loan Document; or (b) by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Lenders by way of foreclosure of the Lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise; provided, however, that the Borrower shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee's gross negligence or willful misconduct. In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law. This indemnification applies, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the later of the Termination Date or the date of payment in full of the Obligations, including specifically Obligations arising under clause (b) of this Section. The indemnification provisions set forth above shall be in addition to any liability the Borrower may otherwise have. Without prejudice to the survival of any other obligation of the Borrower hereunder the indemnities and obligations of the Borrower contained in this Section shall survive the payment in full of the other Obligations. Section 9.14 Captions. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. Section 9.15 Entire Agreement. This Agreement and the other Borrower Loan Documents embody the entire agreement and understanding between the Borrower, the Agent and the Lenders with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Nothing contained in this Agreement or in any other Loan Document, expressed or implied, is intended to confer upon any Persons other than the parties hereto any rights, remedies, obligations or liabilities hereunder or thereunder. Section 9.16 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. Section 9.17 Borrower Acknowledgments. The Borrower hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents, (b) neither the Agent nor any Lender has any fiduciary relationship to the Borrower, the relationship being solely that of debtor and creditor, (c) no joint venture exists between the Borrower and the Agent or any Lender, and (d) neither the Agent nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the business or operations of the Borrower and the Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to, the Borrower by the Agent or any Lender is for the protection of the Lenders and neither the Borrower nor any third party is entitled to rely thereon. Section 9.18 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as interest on such Loan under applicable law (collectively, the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") that may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Rate to the date of repayment, shall have been received by such Lender. [Remainder of this page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. MATRIX BANCORP, INC. By /s/ Guy A. Gibson Title President Address for Borrower: 1380 Lawrence Street, Suite 1400 Denver, CO 80204 U.S. BANK NATIONAL ASSOCIATION, As Agent and a Lender By /s/ Mark A. Bagley Title Vice President In its individual corporate capacity and as Agent Address: U.S. Bank National Association 918 17th Street Denver, CO 80202 ATTN: Mark A. Bagley [Signature Page to Credit Agreement] S - 1 EX-10.19 4 0004.txt PROMISSORY NOTE Dated: February 21, 2001 Principal Amount: $89,236.20 State of Colorado FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to pay to the order of Matrix Bancorp, Inc. the sum of eighty-nine thousand two hundred thirty-six and 20/100 dollars ($89,236.20), together with interest thereon at the rate of Prime per annum on the unpaid balance. Said sum shall be paid in the manner following: All principal and interest shall be due on February 21, 2002. All payments shall be first applied to interest and the balance to principal. This note may be prepaid, at any time, in whole or in part, without penalty. All prepayments shall be applied in reverse order of maturity. This note shall at the option of any holder hereof be immediately due and payable upon the failure to make any payment due hereunder within five (5) days of its due date. This note at the option of any holder hereof may be extended on an annual basis for increments of one (1) year. The terms and interest rate will remain constant. In the event this note shall be in default, and placed with an attorney for collection, then the undersigned agree to pay all reasonable attorney's fees and costs of collection. Payments not made within five (5) days of due date shall be subject to a late charge of 2% of said payment. All payments hereunder shall be made to such address as may from time to time be designed by any holder hereof. The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound hereunder until this note shall be fully paid and waive demand, presentment and protest and all notices thereto and further agree to remain bound, notwithstanding any extension, renewal, modification, waiver, or other indulgence by any holder or upon the discharge or release of any obligor hereunder to this note, or upon the exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing; and any indulgence on any one occasion shall not be an indulgence for any other or future occasion. Any modification or change of terms, hereunder granted by any holder hereof, shall be valid and binding upon each of the undersigned, notwithstanding the acknowledgment of any of the undersigned, and each of the undersigned does hereby irrevocably grant to each of the others a power of attorney to enter into any such modification on their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. This note shall take effect as sealed instrument and shall be construed, governed and enforced in accordance with the laws of the state first appearing at the head of this note. The undersigned hereby execute this note as principals and not as sureties. Maker: /s/ Thomas P. Cronin - ------------------------------- Thomas P. Cronin EX-10.22 5 0005.txt TRIPLE NET LEASE BETWEEN SUNCOR DEVELOPMENT COMPANY, an Arizona corporation, as Lessor and MATRIX FINANCIAL SERVICES CORPORATION, an Arizona Corporation, as Lessee Dated: September 1, 1999 BLACK CANYON COMMERCE PARK PHOENIX, ARIZONA
TABLE OF CONTENTS Page 1. IDENTIFICATIONS AND DEFINITIONS......................................................1 1.1 Parties.......................................................................1 1.1.1 Lessor.................................................................1 1.1.2 Lessor's Address.......................................................1 1.1.3 Lessee.................................................................1 1.1.4 Lessee's Address.......................................................1 1.2 Building......................................................................1 1.3 Gross Leasable Floor Area.....................................................1 1.4 Lease Term....................................................................1 1.5 Lease Year....................................................................1 1.6 Premises; First Phase Space and Second Phase Space Defined....................2 1.7 Project.......................................................................2 2. LEASE OF PREMISES....................................................................2 3. TERM; OCCUPANCY......................................................................2 3.1 Commencement of Term..........................................................2 3.2 Option to Extend Term.........................................................2 3.3 Refurbishment Allowance.......................................................3 4. RENT.................................................................................3 4.1 Payment of Monthly Base Rent..................................................3 4.2 Initial Base Rent.............................................................3 4.3 Base Rental Adjustments.......................................................4 4.3.1 Initial Term...........................................................4 4.3.2 Extension Periods......................................................4 4.4 Additional Payments; No Offset................................................5 4.5 Common Area Maintenance and Expenses..........................................5 4.5.1 Common Area............................................................5 4.5.2 Common Expenses........................................................5 4.5.3 Collection in Advance..................................................8 4.5.4 Audit..................................................................8 5. SECURITY DEPOSIT [Intentionally Deleted].............................................8 i 6. USE..................................................................................8 6.1 Use...........................................................................8 6.1.1 Use of Premises........................................................8 6.1.2 Use of Common Areas....................................................9 6.1.3 Alterations to the Common Areas........................................9 6.2 Hazardous Substances.........................................................10 6.2.1 Reportable Uses Require Consent.......................................10 6.2.2 Duty to Inform Lessor.................................................10 6.2.3 Lessee's Indemnification..............................................11 6.2.4 Lessor's Representations and Obligations..............................11 6.3 Lessee's Compliance With Law.................................................11 6.4 Inspection; Compliance.......................................................12 6.5 Condition of Premises........................................................12 7. MAINTENANCE, REPAIRS AND ALTERATIONS................................................14 7.1 Lessee's Obligations.........................................................14 7.2 Surrender....................................................................14 7.3 Lessor's Rights..............................................................15 7.4 Lessor's Obligations.........................................................15 7.5 Alterations and Additions....................................................16 8. INSURANCE...........................................................................17 8.1 Required Insurance...........................................................17 8.2 Notice of Insurance..........................................................18 8.3 Waiver of Subrogation; Release...............................................18 8.4 Adequacy of Coverage.........................................................18 8.5 Assumption and Waiver........................................................18 8.6 Notice by Lessee.............................................................19 8.7 Lessee's Indemnity ..........................................................19 8.8 Lessor's Indemnity...........................................................20 8.9 Lessor's Insurance...........................................................20 9. DAMAGE OR DESTRUCTION...............................................................21 9.1 Definitions..................................................................21 9.2 Partial Damage - Insured Loss................................................21 9.3 Partial Damage - Uninsured Loss..............................................21 9.4 Total Destruction............................................................22 9.5 Damage Near End of Term......................................................22 9.6 No Abatement of Rent; Lessee's Remedies......................................22 9.7 Hazardous Substance Conditions...............................................23 9.8 Termination - Advance Payments...............................................24 9.9 Waive Statutes...............................................................24 ii 10. TAXES...............................................................................24 10.1 Payment of Real Property Taxes...............................................24 10.2 Definition of "Real Property Tax"............................................24 10.3 Joint Assessment.............................................................25 10.4 Transaction Taxes............................................................25 10.5 Personal Property Taxes......................................................25 11. UTILITIES...........................................................................25 12. ASSIGNMENT AND SUBLETTING...........................................................25 12.1 Consent of Lessor............................................................25 12.2 No Release of Lessee.........................................................26 12.3 Transferee's Obligations.....................................................26 12.4 Expenses.....................................................................26 12.5 Void Transfers...............................................................26 12.6 No Merger....................................................................26 12.7 No More Than Three Tenants; No Reduction of Rent.............................26 12.8 Half of Consideration Paid to Lessor.........................................27 13. DEFAULTS; REMEDIES..................................................................28 13.1 Defaults.....................................................................28 13.2 Remedies.....................................................................28 13.3 Default by Lessor............................................................30 13.4 Late Charges.................................................................30 13.5 Use of Impounds Upon Default.................................................30 14. CONDEMNATION........................................................................31 15. BROKER'S FEE........................................................................31 16. ESTOPPEL CERTIFICATE................................................................32 17. LESSOR'S LIABILITY..................................................................32 18. SEVERABILITY........................................................................32 19. INTEREST ON PAST DUE OBLIGATIONS....................................................32 20. TIME OF ESSENCE.....................................................................32 21. ADDITIONAL RENT.....................................................................33 iii 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS.......................................33 23. NOTICES.............................................................................33 24. WAIVERS.............................................................................34 25. NO RECORDING........................................................................34 26. HOLDING OVER........................................................................34 26.1 With Lessor's Consent........................................................34 26.2 Without Lessor's Consent.....................................................35 26.3 Limited Right to Extend Lease Term...........................................35 27. CUMULATIVE REMEDIES.................................................................35 28. PARKING.............................................................................35 29. BINDING EFFECT; CHOICE OF LAW.......................................................35 30. SUBORDINATION OF LEASE; ATTORNMENT..................................................36 30.1 Subordination................................................................36 30.2 Execution of Documents.......................................................36 31. ATTORNEYS' FEES.....................................................................36 32. LESSOR'S ACCESS.....................................................................37 33. AUCTIONS............................................................................37 34. SIGNS...............................................................................37 35. MERGER..............................................................................37 36. QUIET POSSESSION....................................................................37 37. SECURITY MEASURES...................................................................38 38. AUTHORITY...........................................................................38 39. FINANCIAL STATEMENTS................................................................38 iv 40. LESSOR'S AND LESSEE'S WORK..........................................................38 40.1 Interior Tenant Improvements.................................................38 40.2 Governmental Approvals.......................................................41 40.3 Lessee Delay.................................................................41 40.4 Architect's Determination....................................................42 40.5 Lease Starting Date in Event of Lessee Delay.................................42 40.6 Lessee Pays Damages..........................................................42 40.7 Inspection by Lessee.........................................................42 40.8 Condition of the Premises....................................................42 40.09 Lessee's Permitted Work......................................................43 41. FORCE MAJEURE - UNAVOIDABLE DELAYS..................................................43 42. EASEMENTS; ADDITIONAL CC&Rs.........................................................44 43. AMERICANS WITH DISABILITIES ACT.....................................................44 44. ELECTRIC SERVICE PROVIDER...........................................................45 45. GUARANTY OF LEASE...................................................................45
v TRIPLE NET LEASE between SUNCOR DEVELOPMENT COMPANY, as Lessor and MATRIX FINANCIAL SERVICES CORPORATION, an Arizona Corporation, as Lessee 1. IDENTIFICATIONS AND DEFINITIONS. 1.1 Parties. 1.1.1 Lessor: SunCor Development Company, an Arizona corporation. 1.1.2 Lessor's Address: 3838 N. Central Ave., Suite 1500, Phoenix, AZ 85012. 1.1.3 Lessee: Matrix Financial Services Corporation, an Arizona corporation 1.1.4 Lessee's Address: 2133 W. Peoria, Phoenix, Arizona 85021. 1.2 Building. The entire Building 2 to be constructed by Lessor depicted on the site plan attached hereto as Exhibit "A", as outlined on the floor plan attached hereto as Exhibit "B" and commonly known as Building 2, Black Canyon Commerce Park, at the southwest comer of Peoria Avenue and 21st Avenue, Phoenix, Arizona. 1.3 Gross Leasable Floor Area. The actual number of gross square feet of completed floor space on all levels of the Building, including all ground floor space, hallways and mezzanines, within the drip line on the exterior of the Building, which shall be determined utilizing the BOMA Standard. As used in this Lease, "BOMA Standard" shall mean the American National Standard of the Building Owners and Managers Association International as set forth in the Standard Method for Measuring Floor Area in Office Buildings, ANSI 265.1 - 1980. Lessor's architect and Lessee's architect have stipulated that, based on preliminary plans and specifications for the Building, the total Gross Leasable Floor Area for the Building shall be 62,771 square feet. 1.4 Lease Term. Includes the Initial Term (as defined in Paragraph 3.1) of this Lease and each Extension Period (as defined in Paragraph 3.2), or until this Lease is sooner terminated pursuant to those terms hereof expressly providing for termination. 1.5 Lease Year. A period during the Lease Term (including Extension Periods) commencing at 12:01 a.m. on January 1st of each calendar year and ending at midnight on December 31st next succeeding, except that the first Lease Year shall commence at the start of the Lease Term and shall end at midnight on December 31st next succeeding, and the last Lease Year shall end at the end of the Lease Term. 1.6 Premises; First Phase Space and Second Phase Space Defined. The entire Building consisting of 62,771 square feet of Gross Leasable Floor Area. The parties acknowledge that certain portions of the Premises will be treated differently as hereafter provided with respect to Base Rent (as hereafter defined in Paragraph 4.1), and the construction and payment of tenant improvements as provided in Article 40. As used in this Lease, "First Phase Space" will refer to 50,000 square feet of Gross Leasable Floor Area, and "Second Phase Space" will refer to the remaining 12,171 square feet of Gross Leasable Floor Area. 1.7 Project. A portion of Black Canyon Commerce Park approximately 5.94 acres in size owned by Lessor and depicted on Exhibit "A-l" attached hereto. 2. LEASE OF PREMISES. Lessor hereby leases to Lessee, and Lessee leases from Lessor, the Premises for the Lease Term, at the rental and on all the terms and conditions set forth in this Lease. 3. TERM; OCCUPANCY. 3.1 Commencement of Term. The Term of this Lease shall be for a period of seven (7) years (84 months) commencing 30 days after Lessor makes the Premises available to Lessee as hereafter provided ("Commencement Date") so that Lessee may install its fixtures, install wiring and cables for its computer systems, and prepare the Premises for its business operations, unless sooner terminated pursuant to any provision hereof ("Initial Term"). Lessor agrees to make the Premises available to Lessee on February 1, 2000, subject to the provisions of Paragraph 40.3 and 41, so that Lessee may install its fixtures, install wiring and cables for its computer system, and prepare the Premises for its business operations by March 1, 2000. If Lessor cannot make the Premises available to Lessee by February 1, 2000 as provided above and such failure is the result of any Lessee Delays (as defined in Paragraph 40), the Initial Term shall nevertheless begin on March 1, 2000 and Base Rent, common expenses and other amounts provided for in this Lease will be due as of said date. If Lessor cannot make the Premises available to Lessee by March 1, 2000, due to delays that are not "Lessee Delays" as defined in Paragraph 40.3, then the Base Rent due hereunder shall be abated one day for each day of such delay in making the Premises available to Lessee, provided that if Lessor cannot make the Premises available to Lessee by June 1, 2000, Lessee shall have the right to terminate this Lease upon written notice to Lessor. 3.2 Option to Extend Term. Provided Lessee is not in default, as defined in Paragraph 13.1, and is occupying all of the Premises, both at the time of the exercise of each option and at the time of the commencement of each Extension Period hereunder, Lessee may elect to extend the term of this Lease for two (2) successive five (5)-year periods (the "Extension Periods") by delivering to Lessor, at least one hundred eighty (180) days before the end of the Initial Term (but not earlier than 270 days) or the then current Extension Period, a written notice of such election. The Extension Periods shall begin on the day immediately following the last day of the Initial Term or the then current Extension Period, as the case may be. The Extension Periods shall be subject to all the terms and conditions of this Lease. The Base Rent for each Extension Period shall be established as set forth in Paragraph 4.3. 3.3 Refurbishment Allowance. If Lessee exercises its option rights as set forth above in Paragraph 3.2 with respect to an Extension Period, Lessor shall pay to Lessee after commencement of each Extension Period, if Lessee is not then in default under this Lease beyond the expiration of any applicable notice and cure period, a tenant improvement refurbishment allowance equal to $2.00 per square foot of Gross Leasable Floor Area within the Premises as of the first or second Extension Period, as the case may be ("Refurbishment Allowance"). The Refurbishment Allowance must be used by Lessee, subject to Paragraph 7.5, only to repair, paint or upgrade the improvements initially installed therein by Lessor, or otherwise to construct or install fixed capital improvements to the Premises, but not for improvements, additions to, or replacements of trade fixtures, equipment, furniture and personal property. After commencement of the Extension Period, Lessor shall reimburse Lessee from time to time for the Refurbishment Allowance within thirty (30) days after Lessee submits to Lessor invoices, statements, or other reasonable evidence that funds have been spent in the manner set forth above, together with appropriate lien waivers for all work performed, all in a form reasonably acceptable to Lessor, provided that no reimbursement will be due if Lessee is in default under this Lease beyond the expiration of any applicable notice and cure period at the time payment is due. 4. RENT. 4.1 Payment of Monthly Base Rent. Lessee shall pay to Lessor as base rent for the Premises ("Base Rent"), monthly payments as set forth below, in advance, without prior notice and without right of offset, on the first day of each month of the Lease Term. Rent for any period during the Lease Term which is for less than one month shall be a pro-rata portion of the monthly installment based on a 30-day month. Base Rent and other amounts due under this Lease shall be payable in lawful money of the United States to Lessor, together with applicable taxes, at the address stated in Paragraph 1.1 or to such other persons or at such other places as Lessor may designate in writing. 4.2 Initial Base Rent. The initial annual Base Rent shall be $11.75 per square foot of Gross Leasable Floor Area in the Premises, plus taxes thereon, commencing on the Commencement Date; provided that (a) Lessee shall be obligated to pay to Lessor Base Rent on the Commencement Date only for the First Phase Space, and (b) Base Rent for the entire Premises (both the First Phase Space and the Second Phase Space) shall be due commencing on that date which is 12 months after the Commencement Date. If Lessor cannot make the Premises available to Lessee as a result of any Lessee Delays (as defined in Paragraph 40.3), then the Initial Term shall nevertheless begin on the date Lessor could have completed the Work and tendered possession of the Premises but for Lessee's Delay, or March 1, 2000, whichever is earlier, and Base Rent, common expenses and other amounts provided for in this Lease will be due from Lessee to Lessor as of said date. Upon execution of this Lease, Lessee shall pay Lessor one (1) month of Base Rent (using 50,000 square feet as a multiplier), which shall be applied as a partial payment to the first month of the Lease Term. 4.3 Base Rental Adjustments. 4.3.1 Initial Term. As of the first day of each respective time period set forth below, the monthly Base Rent shall be increased as follows ("sf" means square feet of Gross Leasable Floor Area): Period ....... Rate ------ ---- (Initial Term). (assuming 62,771 sf) months 25 through 60 $12.00 NNN/sf/year or $62,771.00 per month months 61 through 84 $12.75 NNN/sf/year or $66,694.19 per month 4.3.2 Extension Periods. The monthly Base Rent due for each Extension Period shall be an amount per square foot of Gross Leasable Floor Area equal to the greater of (i) the amount per square foot of Gross Leasable Floor Area paid by Lessee for the last month of the Initial Term, with respect to the first Extension Period, or the last month of the first Extension Period, with respect to the second Extension Period, or (ii) ninety-five percent (95%) of the prevailing market rate (including rent escalation provisions, if any, then prevailing and factoring in the Refurbishment Allowance) for space, improvements and amenities substantially comparable to the Premises in a substantially comparable location in developments substantially comparable to Black Canyon Commerce Park, as reasonably determined by Lessor and set forth in writing to Lessee at least ninety (90) days before the commencement of the respective Extension Period and said rent shall be the Base Rent to be paid by Lessee during the respective Extension Period unless, within thirty (30) days after Lessee receives such written notice of the Base Rent as determined by Lessor, Lessee submits to Lessor in writing Lessee's objection to the Base Rent determined by Lessor, in which event the following shall apply: (a) At least forty-five (45) days prior to the commencement of the respective Extension Period for which Base Rent will be adjusted, Lessor and Lessee shall each appoint a qualified, independent MAI appraiser of its choice with at least 10 years of experience in appraising prevailing market rates for properties similar to the Premises and developments similar to Black Canyon Commerce Park. The two appraisers selected by Lessor and Lessee shall then appoint a third qualified, independent MAI appraiser with at least 10 years of experience in appraising prevailing market rates for properties similar to the Premises and developments similar to Black Canyon Commerce Park. (b) At least fifteen (15) days prior to the commencement of the respective Extension Period for which Base Rent will be adjusted, each such appraiser shall make an independent determination of the prevailing market rate (including rent escalation provisions, if any, and factoring in the Refurbishment Allowance) for space, improvements and amenities substantially comparable to the Premises in a substantially comparable location in a development substantially comparable to Black Canyon Commerce Park, and shall send a copy of its appraisal to Lessor and Lessee. Base Rent to be paid by Lessee during the respective Extension Period shall be calculated using subparagraphs (i) and (ii) above, and for purposes of this subparagraph (b), "prevailing market rate" shall mean the average of the prevailing market rate (including rent escalation provisions, if any and factoring in the Refurbishment Allowance) set forth in each appraisal, calculated on a monthly basis. (c) Lessor and Lessee shall each bear the full expense of the appraiser it selects; the expense of the third appraiser shall be shared equally by Lessor and Lessee. 4.4 Additional Payments; No Offset. All sums of money or charges (other than Base Rent and common area charges, which shall be payable in the manner elsewhere provided in this Lease) required to be paid by Lessee under this Lease shall, except where provided to the contrary in this Lease, be due and payable, together with taxes thereon, within thirty (30) days after demand, and shall constitute additional rent. Lessee's failure to pay any such amounts or charges when due shall carry with it the same consequences as Lessee's failure to pay rent. All payments under this Lease shall be made in full and without right of offset or deduction of any kind. 4.5 Common Area Maintenance and Expenses. 4.5.1 Common Area. Throughout the Lease Term, Lessee shall pay as additional rent to Lessor, together with taxes thereon, all common expenses (as hereafter defined) of every kind and nature paid or incurred by Lessor in operating, maintaining and replacing in a first class manner (a) the "common areas", which term shall mean all common amenities now or hereafter existing outside of the Building and within the Project, including, without limitation, driveways, parking areas, covered parking structures, landscaped areas (and irrigation and sprinkler, systems included as a part thereof), fountains and other water features, if any, lighting facilities, the Project signage, fire lanes, sidewalks, walkways, service roads, drainage and retention areas, perimeter walls and fences and adjacent sidewalks, utility lines up to the exterior of the Building, sculptures and artwork, if any, and all other areas and facilities located on and in the Project which are available for the use and enjoyment of occupants of the Project and their customers, agents and invitees, (b) all "service areas" within the Project, which term shall mean all garbage and refuse disposal facilities, including compactors if furnished by Lessor, all loading areas, and all areas and facilities which are used in the maintenance and operation of the Project by Lessor, and (c) the exterior surfaces of all perimeter walls, the roof membrane, and all exterior surfaces of the Building which are not the specific obligation of Lessee. 4.5.2 Common Expenses. Costs, charges and expenses constituting "common expenses" shall include, without limitation, the cost of maintaining, cleaning, repairing, and replacing all common areas and service areas and all other areas and improvements referred to in Paragraph 4.5.1(c), including, without limitation, line painting and striping; resurfacing and repaving; exterior washing of windows and other glass surfaces; painting, repairing and replacing exterior walls (but not glass) of the Building and perimeter walls of the Project; removal of graffiti; resurfacing or replacing the roof membrane; replacing and maintaining landscaping; premiums for public liability, property damage, fire and extended coverage, lost rental and income, and other insurance as Lessor deems appropriate for the common areas, service areas and the Building (but Lessor shall have no obligation to provide or obtain such insurance except as expressly set forth in this Lease); costs of materials and labor; supplies; fire protection and fire hydrant charges; electric, gas, water and sewer charges not separately metered to Lessee; cost of providing on-site and off-site traffic control; cost of professional fees relating to the common areas and service areas; parking area surcharges or levies if imposed by governmental entities; interest charges on loans for the purchase of and reasonable depreciation of equipment used in operating and maintaining the common areas and service areas and the exterior of the Building, and rent and other charges paid for leasing of any such equipment; all property taxes due on such equipment; license', permits and inspection fees; garbage disposal; sweeping and cleaning services; all real estate taxes and assessments due on the Building and the Project; all assessments and fees due from Lessor for the Project under any Additional CC&Rs (as defined in Paragraph 42), as equitably apportioned by Lessor; cost of security personnel, if Lessor elects to provide the same pursuant to Paragraph 37; and an administrative and management fee to Lessor in an amount equal to 10% of all common expenses for Lessor's services in managing, maintaining, repairing, replacing and administering the common areas, service areas, the exterior Building surfaces designated above, and all common expenses. Notwithstanding anything in this Lease to the contrary, "common expenses" shall not include any of the following (which costs may be allocated to the parties by other provisions of this Lease): (a) Costs for which Lessor receives reimbursement from insurance or from other parties (excluding reimbursement by tenants for common expenses). (b) Leasing commissions, attorneys' fees, advertising expenses, and other expenses incurred in connection with leasing, selling or conveying an interest in the Building or the land associated therewith. (c) Expenditures for improvements to the Building which should be capitalized according to generally accepted accounting principles, which shall be the responsibility of the Lessor or Lessee as provided elsewhere in this Lease; provided that Lessor shall nevertheless be entitled to include in common expenses all costs related to resurfacing or replacing the roof membrane of the Building, but to the extent the cost of any such improvements which should be capitalized according to general accepted accounting principles totals more than $20,000 or more to complete, such excess amount shall be amortized over the useful life thereof to Lessor, as reasonably determined by Lessor, with interest on the unreimbursed balance at a rate per annum equal to the prime rate of interest per annum: quoted by Bank One of Arizona (or its successor) and adjusted from time to time at Phoenix, Arizona, plus three percent (3%), with only such amortized portion and interest thereon applicable to and included in the common expenses for any year. (d) Income, excess profits, franchise, capital stock, estate, or inheritance taxes payable by Lessor except to the extent the same shall have been levied as a substitute for existing real property taxes. (e) Costs of Lessor's general corporate overhead and general administrative expenses; provided that Lessor shall be entitled to the management fee referred above even if applied to such expenses. (f) The cost of repairs or alterations required to correct any noncompliance of the Building as of the date hereof with all laws, ordinances, rules and regulations in effect on or before the date hereof, except to the extent such noncompliance is caused by Lessee's architect or other contractors or the agents, officers or employees of Lessee. (g) Costs paid to any affiliate of Lessor for goods or services that exceed the fair market price or cost generally payable for comparable goods or services in the area of the Building. (h) Costs of satisfying or defending any tort claims not fully covered by Lessor's insurance. (i) Costs resulting from the past, present or future presence of asbestos, polychlorinated biphenyl or other hazardous materials or substances in the Building or the land which Lessor is responsible for pursuant to Paragraph 6.2.4 of this Lease. (j) Dividends or similar distributions paid by Lessor to shareholders, partners or other persons having an ownership interest in Lessor. (k) Ground lease payments and interest on debt or amortization or other payments on loans to Lessor, whether secured or unsecured, except for lease or loan payments for equipment used by Lessor to maintain the Project. (1) Costs relating directly to any building or land other than the Building and the Project (provided, common expenses may include an allocation of shared costs involving other portions of Black Canyon Commerce Park if the nature of such costs are otherwise includable in common expenses and if such allocation is made on a reasonable and consistent basis that fairly reflects the share of such costs actually attributable to the Building and the Project. (m) Costs (including fines, penalties and interest) of defending and satisfying any claims made by third parties because of the negligence or willful misconduct of Lessor or its agents or employees or because of Lessor's breach or violation of any contract, lease or law. 4.5.3 Collection in Advance. All common expenses for a Lease Year, as estimated by Lessor, and any taxes thereon shall be paid in monthly installments on the first day of each month in advance in an amount equal to 1/12th of the estimated common expenses for the applicable Lease Year, but not less than $15,222.00 per month. Lessee agrees that even though Base Rent will not be due for the first year of the Lease Term with respect to the Second Phase Space, common expenses shall be due and payable for the entire Premises from and after the Commencement Date. Within ninety (90) days following the close of Lessor's annual accounting period, Lessor shall furnish to Lessee a statement of the actual amount of Lessee's common expenses for such period. If the actual amount of Lessee's common expenses is less than the total amount paid by Lessee for such period, the excess shall be credited first against any past due payments and then against Lessee's next succeeding payments. If the actual amount of Lessee's common expenses exceeds the total amount paid by Lessee for such period, Lessee shall pay to Lessor, within thirty (30) days following its receipt of Lessor's statement, the amount shown as due. 4.5.4 Audit. Lessee shall have the right, at its expense, to audit Lessor's books and records to verify the amount charged to Lessee for common expenses. If an accurate audit reveals that the amount charged to and actually paid by Lessee is incorrect, Lessor and Lessee shall make an appropriate adjustment within thirty (30) days after the completion of the audit, with any amounts owed from Lessee to Lessor to be paid in cash within said 30-day period and any amounts owed from Lessor to Lessee to be credited first against unpaid Base Rent and then against successive installments of Base Rent. If such audit reveals that Lessee was overcharged for such common expenses by more than five percent (5 %) over the actual amount due and owing by Lessee, Lessor will reimburse Lessee for the reasonable cost of such audit by crediting the amount thereof first against unpaid Base Rent and then against successive installments of Base Rent. 5. SECURITY DEPOSIT. [INTENTIONALLY DELETED] 6. USE. 6.1 Use. 6.1.1 Use of Premises. The Premises shall be used and occupied only for reputable general office uses, as reasonably determined by Lessor, and for no other purposes. However, subject to Paragraph 6.3, Lessee shall comply at all times with all governmental regulations and requirements, as well as any easements or restrictions of record or any Additional CC&Rs. Lessee shall not use or permit the use of the Premises for any retail purposes of any kind or the sale of items directly to the public other than retail banking services, or in a manner that creates waste or a nuisance with respect to the Building or the Project, or that disturbs owners and/or occupants of, or causes damage to, the remaining portion of the Building, the Project or any neighboring premises or properties. 6.1.2 Use of Common Areas. During the Lease Term, Lessee's agents, employees, customers and permitted subtenants (if any) shall have the non-exclusive right in common with Lessor, other present and future owners of the Project or portions thereof, other tenants of the Project and any other parties permitted to use the same by Lessor, and their respective agents, employees, customers, licensees and subtenants, to use those portions of the common areas designed for access, parking, loading and unloading, and for depositing trash; subject, however, to the terms and conditions of this Lease, any easements or restrictions of record or any Additional CC&Rs. The foregoing notwithstanding, (i) Lessee shall have no claims against Lessor arising out of the condemnation or other taking by any public authority, or sale in lieu of condemnation, of any or all such common areas, (ii) Lessee shall have exclusive use of 65 parking spaces as provided in Paragraph 28, but Lessor reserves the right to grant any person or entity the exclusive right to use other designated portions of the common areas for the benefit of such person or entity and its agents, employees, invitees, customers and subtenants, in which case Lessee shall have no right to use such designated portions, (iii) Lessor at all times during the Lease Term shall have sole and exclusive control of the common areas and service areas and each and every part thereof and may, at its option, at any time and from time to time, exclude and restrain any person from the use or occupancy thereof, and (iv) Lessee, in the use of the common areas, shall comply and shall cause its employees, agents, contractors and invitees to comply, with all rules and regulations promulgated by Lessor from time to time and all restrictions provided in any easements or restrictions of record or any Additional CC&Rs, and Lessee's failure to do so shall constitute a breach of this Lease. Nothing contained herein shall affect the right of Lessor at any time or from time to time to remove unauthorized persons from the common areas or service areas or to restrain the use thereof by unauthorized persons. Nothing contained herein shall be construed as limiting Lessor's right to use the common areas, service areas or the Project for any retail, office or other legally permitted use. 6.1.3 Alterations to the Common Areas. Lessor shall have the right to alter, improve, diminish, delete or add. to portions of or otherwise change the common areas or service areas, including, without limitation, change of location, area, level, size and arrangement of driveways, entrances, exits, parking spaces, service areas, landscaped areas, signs and the direction of traffic flow, designate restricted areas and employee parking areas, and construct additional improvements, as Lessor deems advisable. Lessor shall have the right to make alterations or additions to and to build additional buildings and improvements within Black Canyon Commerce Park. 6.2 Hazardous Substances. 6.2.1 Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Project, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. "Hazardous Substance" shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil, or any products, by-products or fractions thereof, and asbestos. Lessee shall not engage in any activity in, on, or about the Premises which constitutes a Reportable Use (as hereinafter defined) of a Hazardous Substance without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on, or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises, the Building, the Project or neighboring properties to any meaningful risk of contamination or damage. Lessor may condition its consent to, the use or presence of any Hazardous Substance, activity, or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises, the Building, the Project and the environment against damage, contamination or injury and/or liability therefrom, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements). 6.2.2 Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under, or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any attachment, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. 6.2.3 Lessee's Indemnification. Lessee shall indemnify, protect, defend, and hold Lessor, its agents, contractors, partners, officers, directors, employees, lenders, and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or a sublessee, or otherwise under Lessee's control or at Lessee's request, or arising out of or involving the exercise, of Lessee's inspection rights as set forth in Paragraph 6.2.4 below. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property, or the environment created or suffered by Lessee and arising from the circumstances described in the preceding sentence, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation, or release agreement entered into by Lessor and Lessee shall release Lessee for its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.2.4 Lessor's Representations and Obligations. Lessor represents and warrants to Lessee that Lessor has not, nor is it aware of any person or entity who has (with no duty to investigate further), at any time used or permitted the use of any portion of the Premises, the Building, or common areas to be used in violation of any Applicable Laws relating to Hazardous Substances on, under, or about the Premises, the Building, or the common areas. In addition, Lessor agrees that it shall not use, generate, store or dispose of on, under, or about the Premises, the Building, or the common areas, or transport to or from the same, any Hazardous Substances or permit any third party to do so, except in compliance with all Applicable Laws. Lessor agrees to indemnify, defend and hold harmless Lessee from and against any and all losses, costs (including reasonable attorneys' fees), liabilities and claims arising from a breach of Lessor's obligations under this Paragraph 6.2.4, except to the extent the same arise from the acts or omissions of Lessee or its employees, agents, contractors, or invitees. Lessee or its designated agent shall, at all times during the Lease Term have the reasonable right to conduct testing and inspections on or about the Premises, the Building, or the common areas during normal business hours, provided that (i) Lessee shall first give reasonable prior notice to Lessor of its intention to do so, and (ii) Lessee shall promptly repair any damage or injury to persons or property on or about the Premises, the Building, the common areas or the Project in connection with the exercise of the inspection rights provided for herein, and (iii) Lessor, acting reasonably, shall have the right to approve the agents and/or contractors of Lessee who will conduct the testings and inspections provided for herein. 6.3 Lessee's Compliance With Law. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law", which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises, including, but not limited to, matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance or storage tank, whether now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Notwithstanding anything in this Lease to the contrary, in no event shall Lessee be responsible for compliance with laws, ordinances, rules and regulations that require structural or other changes to the Premises or the Building unless due to (1) the particular use or manner of occupancy by Lessee or Lessee's obligations under the ADA (as defined in Paragraph 43 below) or similar laws to accommodate disabled employees, customers, and invitees of Lessee, (2) the acts or omissions of Lessee or its agents, employees, officers, contractors (including Lessee's architect), invitees, customers or licensees, or (3) alterations or improvements made by Lessee or its subtenants or their respective agents, employees, officers or contractors. Further, Lessee shall be obligated to remove only those Hazardous Substances or wastes or solid wastes that are deposited on or in the Premises, the Building or the Project by Lessee or its subtenants or their respective agents, employees, officers, contractors, invitees, customers or licensees, and all other Hazardous Substances or wastes or solid wastes shall be removed by Lessor at its expense. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's lender(s) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times agreed to by Lessor and Lessee in good faith and in a manner which reasonably minimizes disruption of Lessee's business, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Law, and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless Lessee is in default under this Lease or is in violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee, is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall, upon request, reimburse Lessor or Lessor's lender, as the case may be, for the costs and expenses of such inspections. 6.5 Condition of Premises. 6.5.1 Lessor warrants to Lessee that the plumbing, electrical and HVAC (but not telephone, communication or cable facilities) in the Premises shall be in good operating condition on the Commencement Date. If any of such items are not in good operating condition on the Commencement Date, Lessee shall give Lessor written notice of such condition within thirty (30) days following the Commencement Date and Lessor shall, within a reasonable time, effect necessary repairs. Lessee's failure to give such written notice to Lessor within thirty (30) days after the Commencement Date shall terminate Lessor's obligations under this Paragraph. Notwithstanding anything to the contrary in this Paragraph 6.5.1, Lessor will, after the Commencement Date, provide to Lessee copies of any contractor or supplier warranties applicable to the Building Shell (as defined in Paragraph 40.1.7) and the Work (as defined in Paragraph 40.1.7), and will use reasonable efforts to obtain the benefits of and enforce said warranties if Lessor receives timely notice under the applicable warranty from Lessee, provided that if Lessor determines in good faith that arbitration or litigation is the only remaining alternative for enforcing a particular warranty, it shall advise Lessee in writing and Lessor will agree to proceed to enforce the warranty through litigation or arbitration, as the case may be, if Lessee agrees in writing to bear the reasonable costs, expenses and fees incurred by Lessor with respect thereto. 6.5.2 If any curtailment or interruption of the utilities and services referred to in the first sentence of Paragraph 6.5.1 excluding telephone, communication or cable facilities (collectively "Building Services") beyond the reasonable control of Lessor continues for thirty (30) days after Lessor is notified thereof, Base Rent and common expenses due under this Lease shall abate for only those portions of the Premises that Lessee cannot (and does not) use because of such curtailment or interruption; and if such curtailment or interruption continues for one hundred twenty (120) days after Lessor is notified thereof and of Lessee's intention to terminate this Lease with the result that Lessee cannot (and does not) use a substantial portion of the Premises during such 120-day period, then Lessee shall be entitled to terminate this Lease by giving another written notice to Lessor after said 120-day period but prior to the time the applicable curtailment or interruption ceases or Lessor otherwise makes the Premises suitable for Lessee's use. If Building Services are curtailed or interrupted for any reason within the reasonable control of Lessor, Lessee shall have the right, after giving Lessor notice pursuant to Paragraph 13.3 and upon expiration of the cure period set forth therein, to cure the interruption or curtailment and all reasonable costs incurred by Lessee to do so shall be reimbursed by Lessor. 6.5.3 Except as otherwise provided in this Lease, including, without limitation, Paragraph 40.8, and subject to the warranties benefitting Lessee as provided in the last sentence of Paragraph 6.5.1, Lessee hereby accepts the Premises in their condition as of the Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances, codes and regulations governing and regulating the use of the Premises, and any covenants, easements, or restrictions of record, including any Additional CC&Rs, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises or the Project for the conduct of Lessee's business. Nothing contained herein shall be construed as a waiver by Lessee of any Latent Defects in the Premises or the Building which are caused by Lessor or its contractors and do not result from the acts or omissions of Lessee, its agents, employees, officers or contractors. As used in this Lease, "Latent Defects" shall mean defects in materials or workmanship that could not have been discovered by Lessee or professional consultants retained by Lessee using reasonable diligence and without causing material damage to the Premises or Building. 6.5.4 The foregoing notwithstanding, the obligations of Lessor under this Paragraph 6.5 shall not apply to any damage, repair, injury or condition caused by Lessee or its employees, agents, contractors, or invitees, all of which shall be the responsibility of Lessee to repair promptly at its expense. 7. MAINTENANCE, REPAIRS AND ALTERATIONS. 7.1 Lessee's Obligations. 7.1.1 Except as provided in Paragraphs 6.5.1 and 7.4, Lessee shall keep in good order, condition, and repair the Premises and every part thereof (whether or not such portion of the Premises requiring repair, or the means of repairing the same are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use or the elements, including, without limiting the generality of the foregoing, all telephone, communication and cable facilities (whether within or outside of the Premises), all plumbing, heating, ventilating, air conditioning, electrical, lighting facilities, and equipment within the Premises (or mounted on the roof of the Building, provided that Lessee shall promptly repair any damage to the roof caused by such repairs); the communications antenna or dish referred to in Paragraph 40.9, and all banking and drive-thru facilities Lessee may elect to construct and operate with Lessor's approval as provided in Paragraph 7.5.1, whether any of the foregoing are within or outside of the Premises; fixtures; interior walls (including interior surfaces of exterior walls); light bulbs, air filters and other regular maintenance items; ceilings and interior roof except supporting structures; floors and floor surfaces and coverings; windows (internal and external), doors (both internal and external, including locks and door openers), vestibules, plate glass (internal and exterior) and skylights; and Lessee's signs located on the Premises (including perimeter signs which may be allowed by the terms of this Lease). Notwithstanding the foregoing, Lessee shall be entitled to the benefit of any warranties provided by contractors or suppliers in connection with the construction of the Building as provided in Paragraph 6.5.1, but with respect to any roof repairs Lessee is required to make pursuant to this Paragraph, Lessee must first advise Lessor at least ten (10) days prior to commencing the repairs, must use the contractor who installed the roof and must otherwise comply with all requirements necessary to preserve the warranty for the roof 7.1.2 Lessee shall maintain the Premises and all of Lessee's signs in a neat, clean, attractive and orderly condition at all times, and shall be responsible for janitorial services. 7.2 Surrender. On the last day of the Lease Term, Lessee shall surrender the Premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment, subject to the limitations on removal in Paragraph 7.5.4. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, heating systems, air conditioning, ventilation, plumbing, and fencing on the Premises in good operating condition. 7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations under this Paragraph 7, or under any other paragraph of this Lease, Lessor may at its option (but shall not be required to) enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required and immediate entry will be permitted), and perform such obligations on Lessee's behalf and put the same in good order, condition and repair, and the cost thereof, together with interest thereon at a rate designated by Lessor not to exceed the maximum rate then allowable by law, shall become due and payable as additional rent to Lessor within thirty (30) days of the Lessee's receipt of an invoice for such amounts. 7.4 Lessor's Obligations. 7.4.1 Lessor shall repair and maintain the roof structure only (but Lessee shall maintain the interior ceilings and all of the interior portions of the roof which are not structural in nature, and the roof membrane shall be maintained as a common expense pursuant to Paragraph 4.5), foundations, and structural portions of exterior walls (but not exterior surfaces or plate glass) of the Premises. 7.4.2 Except for the obligations of Lessor under Paragraph 7.4.1 above, Paragraph 4.5 (common area and Building maintenance), Paragraph 6.5.1 (warranties), Paragraph 9 (destruction of the Premises) and Paragraph 14 (condemnation of the Premises), it is intended by the parties hereto that Lessor shall have no obligation, in any manner whatsoever, to repair and maintain the Premises nor the Building, nor the equipment serving the same, all of which obligations shall be that of Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit of any statute now or hereinafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition, and repair. 7.4.3 If Lessor is in default under this Paragraph 7.4 as a result of its failure to perform one of its obligations hereunder, and upon expiration of applicable grace periods in paragraph 13.3, Lessee shall have the right, but shall not be obligated, after ten (10) days' prior written notice to Lessor (except in the event of an emergency, in which case no notice to Lessor shall be required), to perform such obligation on behalf of Lessor, and Lessor shall reimburse Lessee within thirty (30) days after demand by Lessee for all reasonable expenses incurred by Lessee in performing such obligation, together with interest thereon at the rate of twelve (12%) per annum from the date of advancement until the date of payment. 7.5 Alterations and Additions. 7.5.1 Lessee shall not, without Lessor's prior written consent, which shall not be unreasonably withheld or delayed, (i) make any alterations, improvements, additions, or Utility Installations (as defined below) in, on or about the Premises, except for non-structural alterations not exceeding $25,000 in total costs per project, or (ii) change paint colors. In any event, whether or not in excess of $25,000 in cost, Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the Building without Lessor's prior written consent; provided that with respect to alterations to the exterior of the Building relating to the retail banking activities proposed to be conducted by Lessee, Lessor's consent shall not be unreasonably withheld or delayed if such alterations are not physically attached in any way to the Building (except for below grade utilities and pneumatic tubes) and are located solely within the building envelope shown on Exhibit "B" attached hereto, and such alterations constitute limited facilities such as ATM machines and speaker stands with underground transmission facilities for conducting Lessee's retail banking business from the Building through typical drive-thru facilities (and in no event shall Lessee be entitled to construct a separate building or buildings or other structures for personnel within said building envelope). As used in this Paragraph 7.5, the term "Utility Installation" shall mean air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, heating systems, air conditioning, ventilation, plumbing and fencing. Lessee shall not be required or allowed to remove any of said alterations, improvements, additions, or Utility Installations at the expiration of the Lease Term unless Lessor specifically requires removal as a condition to Lessor's approval. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, Lessor may require that Lessee remove any or all of the same promptly. Any alterations and additions installed or performed by Lessee shall comply with all applicable building codes, ordinances, and similar requirements. 7.5.2 Any repainting or alterations, improvements, additions, or Utility Installations in, or about the Premises that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor gives its consent, the consent shall be deemed conditioned upon Lessee's acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work, and the compliance by Lessee of all conditions of said permit and this Lease in a prompt and expeditious manner. 7.5.3 Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein, and shall promptly discharge any such liens, either by payment or by lien release bond. If Lessee shall, in good faith, contest the validity of any such lien, claim, or demand, then Lessee shall, at its sole expense defend itself and Lessor against same and shall pay and satisfy such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor, the Premises or the Project, and shall, in any event, procure and furnish evidence to Lessor thereof, a lien release bond holding the Premises and the Project free from the effect of such lien or claim. 7.5.4 Unless Lessor requires their removal, as set forth in the next to last sentence of Paragraph 7.5.1, all alterations, improvements, additions, and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall become the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this Paragraph, Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises (unless Lessee elects to effect such repairs promptly at its expense, but in any event prior to the end of the Lease Term), shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2. 8. INSURANCE. 8.1 Lessee's Required Insurance. Lessee, at its sole cost and expense, shall procure and maintain during the Lease Term the following policies of insurance covering the Premises, which insurance shall be obtained from a company with a Best's general policy holder rating of at least "A" and a financial rating of "VII" or better (or a comparable rating by other reputable insurance industry rating organizations) and shall, in each instance, name Lessor, Lessor's property manager and any other entities designated by Lessor, as additional insureds: 8.1.1 A commercial general liability insurance policy against claims for bodily injury, death or property damage, occurring in, on or about the Premises or the Project, the adjoining sidewalks and passageways, or resulting from Lessee's use, occupancy or maintenance thereof. Such insurance shall be primary with respect to Lessor and shall be in the amount of at least Five Million Dollars ($5,000,000) combined single limit (or in such higher amounts as Lessor may reasonably designate from time to time). No parties named as additional insureds shall incur any liability for the payment of premiums for such policy. Such policy shall include a form of endorsement substantially similar to the form attached hereto as Exhibit "C", and shall be further endorsed to indicate that it will cover Lessee's obligations under Paragraphs 8.5 through 8.7 to the coverage limit of such policy. 8.1.2 "All Risk" fire and extended broad form coverage property insurance against damage and destruction to Lessee's personal property (including inventory, fixtures, machinery, equipment and merchandise) and all fixtures, equipment, improvements, additions and alterations to the Premises the Building or the Project made by Lessee in the amount of 100% of full replacement cost. If such items are damaged or destroyed, Lessee shall diligently and fully repair and restore such items. 8.1.3 Business interruption insurance in an amount equal to 12 months of Base Rent and 12 months of common expenses. 8.1.4 Workmen's compensation and employers' liability insurance in amounts required under Arizona law. 8.1.5 Such other insurance and in such amounts as may from time to time be reasonably required by Lessor against other insurable hazards, 8.2 Notice of Insurance. All insurance provided for in Paragraph 8.1 shall be effected under valid and enforceable policies issued by insurance companies authorized to do business in the State of Arizona and approved by Lessor. The insurance policies shall be endorsed to indicate that Lessee's coverage shall not be invalid due to any act or omission on the part of Lessor. Lessee shall cause the insurance companies issuing such insurance to agree to notify Lessor in writing of any cancellation, alteration or non-renewal of said insurance at least thirty (30) days prior thereto. Lessee shall deliver to Lessor at least thirty (30) days prior to occupation of the Premises, and thereafter on each anniversary of the Commencement Date, certificates (or such additional evidence as Lessor may request) evidencing the insurance coverage required herein, confirming that the premiums therefor have been paid in full, and showing all insurance policies contain "occurrence" coverage, rather than "claims made" coverage. Said certificates shall also include a footnote referring to this Lease and certifying that the policy or policies issued to Lessee comply with all of the provisions of this Paragraph 8. If Lessee fails to obtain the insurance required herein to deliver said certificates thereof to Lessor as provided for above, Lessor shall be entitled (with no obligation to do so) to obtain said policies at Lessee's expense. 8.3 Waiver of Subrogation; Release. Notwithstanding any other provisions in this Lease, Lessor and Lessee each hereby waives any and all rights of recovery each may have against the other, or against the directors, partners, officers, employees, agents and representatives of the other party, for loss of, or damage to (whether or not such loss or damage is caused by the fault of the other party) the other party, its property or the property of others under its control to the extent the same is insured against under any insurance policy in force at the time of such loss or damage. Each party shall, upon obtaining the insurance policies required hereunder, give notice to the insurance carrier or carriers that the foregoing waiver of subrogation is contained in this Lease and shall obtain, at such party's expense, an appropriate waiver of subrogation endorsement from the insurer. If the Premises or Lessee's personal property are damaged or destroyed by fire or any other cause against which Lessee is required to maintain insurance pursuant to this Lease, Lessor shall not be liable to Lessee for any such damage or destruction. Lessee shall have no claim to or interest in any portion of the proceeds of any insurance maintained by Lessor. 8.4 Adequacy of Coverage. Lessor makes no representations that the types of policies or the coverage limits that Lessee is required to maintain are adequate to protect Lessee. Lessee shall be entitled, at Lessee's expense, to obtain such additional insurance coverage as Lessee deems appropriate. 8.5 Assumption and Waiver. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of, and waives all claims against Lessor arising from, any and all damage, loss or theft of property or injury to persons in, upon or about the Premises or the Project from any cause, including without limitations, (i) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or insulation thereof, water pipes, stairs, railings or walks; (ii) the disrepair of any equipment or appurtenances; (iii) the bursting, leaking or running of any tank, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the Premises; (iv) the back-up of any drain., sewer pipe or downspout; (v) the escape of steam or hot water; (vi) water, snow or ice being upon or coming through the roof or any other place upon or near the Premises or otherwise; (vii) the falling of any fixture, plaster or stucco; (viii) broken glass; (ix) any act or omission of other occupants of premises within the Project or of adjoining or contiguous property or buildings; and (x) any unauthorized or criminal entry of third parties into or onto the Premises or the Project, regardless of any breakdown, malfunction or insufficiency of any security measures, practices or equipment provided by Lessor, unless caused by the gross negligence or intentional acts of the Lessor. Lessee shall immediately notify Lessor in writing of any breakdown or malfunction of any security measures, practices or equipment provided by Lessor of which Lessee has knowledge. 8.6 Notice by Lessee. Lessee shall give immediate written notice to Lessor in case of fire or accidents in the Premises or in the building of which the Premises are a part. Lessee shall also give immediate written notice to Lessor of any claim, action, proceeding or suit instituted or threatened against Lessor. 8.7 Lessee's Indemnity. Subject to the waiver of subrogation provisions in Paragraph 8.3, Lessee shall defend, indemnify and hold Lessor and Lessor's managing agent, if any, harmless from and against any and all claims, costs, fees (including without limitation attorneys' fees), damages, expenses, liabilities and losses arising out of or in connection with any of the following: 8.7.1 Lessee's use of the Premises or the Projector the conduct of Lessee's business thereon. 8.7.2 Any activity, work or occurrence performed, permitted or suffered by Lessee in, on, or about the Premises or the Project. 8.7.3 Lessee's failure to perform fully and properly all of Lessee's obligations under this Lease. 8.7.4 The negligence or intentional misconduct of Lessee, its agents, employees, contractors, guests, customers, invitees, or licensees. 8.7.5 Any loss or damage to Lessee's property or the property of others or death of or injury to Lessee's employees, agents, visitors, invitees, contractors, guests, customers, or licensees, unless caused by the gross negligence or willful misconduct of Lessor, or its employees, agents, officers, contractors or invitees. 8.7.6 Compliance with or violation of any laws, statutes, codes, licensing requirements, ordinances, orders and rules and regulations of any public authority applicable to the Premises or the Project, or any activity engaged thereon, caused or permitted by Lessee or its employees, agents, officers, contractors or invitees. 8.7.7 The sale or distribution of alcoholic foods or beverages. 8.7.8 Lessee's failure to surrender the Premises immediately upon the expiration or termination of the Lease Term. 8.7.9 The acts or omissions of Lessee, its employees, agents, or contractors, in policing or monitoring Lessee's reserved parking spaces as provided in Paragraph 28 below, or causing the vehicles to be towed therefrom. If any claim is made or action or proceeding is brought against Lessor as a result of any activity, event, or omission listed above, Lessee, upon notice from Lessor, shall diligently defend the same at Lessee's expense through counsel satisfactory to Lessor. 8.8 Lessor's Indemnity. Subject to the waiver of subrogation provisions in Paragraph 8.3, Lessor shall defend, indemnify and hold Lessee harmless from and against any and all claims, costs, fees (including without imitation, attorneys' fees), damages, expenses, liabilities and losses for any bodily injury, injury to person or damage to property occurring in the common areas outside of the Building, unless caused by the gross negligence or willful misconduct of Lessee, its employees, officers, agents, contractors or invitees. 8.9 Lessor's Insurance. During the Lease Term, Lessor shall procure and maintain the following insurance (the cost of which shall be included within the common expenses for the Project): 8.9.1 Commercial general liability insurance against claims for bodily injury, death or property damage occurring in, on or about the Project outside of the Building in the amount of at least Five Million Dollars ($5,000,000.00) combined single limit (or in such higher amounts as Lessor may reasonably designate from time to time). 8.9.2 Property insurance covering damage to the Building (including the Premises, but excluding Lessee's personal property, inventory, furniture, fixtures, equipment, improvements, additions and alterations) in an amount of not less than One Hundred Percent (100%) of the replacement value thereof. The foregoing notwithstanding, Lessor may satisfy the insurance requirements set forth in this Paragraph utilizing a plan of self-insurance from time to time if Lessor maintains, during the entire period a self-insurance plan is in effect, a net worth of $100,000,000.00 or more. The annual report or annual financial statements of Lessor audited by an independent certified public accounting firm shall be sufficient evidence of the net worth of Lessor. 9. DAMAGE OR DESTRUCTION. 9.1 Definitions. 9.1.1 "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee owned alterations and Utility Installations, the repair cost of which damage or destruction is between 25% and 75% of the then Replacement Cost (as defined below) of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee owned alterations and Utility Installations. 9.1.2 "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee owned alterations and Utility Installations, the repair cost of which damage or destruction is seventy-five percent (75%) or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee owned alterations and Utility Installations. 9.1.3 "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee owned alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.1, irrespective of any deductible amounts or coverage limits involved. 9.1.4 "Replacement Cost" shall mean the cost to repair of rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. 9.1.5 "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance in, on or under the Premises. 9.1.6 "Minor Damage" shall mean damage or destruction to the Premises, the repair cost of which damage or destruction is less than 25% of the then Replacement Cost of the Premises immediately prior to such damage or destruction. 9.2 Partial Damage - Insured Loss. If Minor Damage or a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, utilizing insurance proceeds made available to Lessor, repair such damage (but not Lessee's trade fixtures or Lessee owned alterations and Utility Installations) in accordance with Paragraph 9.6.2 and this Lease shall continue in full force and effect. 9.3 Partial Damage - Uninsured Loss. Subject to the provisions of Paragraphs 9.4, 9.5, and 9.6, if at any time during the Lease Term there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage, unless such damage is negligently or intentionally caused by Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease, effective 60 days after the date of the occurrence of such damage. If Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible in accordance with the other requirements of this Lease. If Lessee does not give such notice within such 10-day period this Lease shall be canceled and terminated as of the date of the occurrence of such damage, 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), at Lessor's option this Lease shall terminate 60 days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. If, however, the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.3. If Lessor does not terminate this Lease as herein permitted, Paragraph 9.6.2 shall apply to such Premises Total Destruction. 9.5 Damage Near End of Term. If at any time during the last 12 months of the Lease Term there is a damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease, then Lessee may preserve this Lease by, within twenty (20) days following the date of Lessor's election to terminate or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), exercising such option. If Lessee duly exercises such option during said Exercise Period, Lessor shall, at Lessor's expense, repair such damage pursuant to Paragraph 9.6.2, subject to other applicable provisions of Paragraphs 9.3 and 9.4. 9.6 No Abatement of Rent; Lessee's Remedies. 9.6.1 In the event of damage described in this Paragraph 9, whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent and common expenses payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues shall not abate and all other obligations of Lessee hereunder shall be performed by Lessee. Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration and shall look to the proceeds of business interruption insurance to be maintained under Paragraph 8.1. 9.6.2 If Lessor is obligated to repair or restore the Premises under the provisions of this Paragraph 9 and (i) does not commence the repair or restoration of the Premises within ninety (90) days after the date of damage or destruction, or (ii) does not substantially complete the repair or restoration within a reasonable time thereafter given the extent of the damage or destruction, but in any event within 270 days after the date of such damage or destruction, then Lessee may thereafter give written notice to Lessor, and to any lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease effective thirty (30) days after receipt of such notice unless, if such notice refers to a failure to comply with subparagraph (ii) above, Lessor or its lender substantially completes the repair or restoration of the Premises within thirty (30) days after receipt of such notice, in which event this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.6.3 Within forty-five (45)days after the date of damage or destruction, Lessor shall deliver to Lessee a written estimate of the cost of repair or restoration of the Premises, and an estimate of the Replacement Cost of the Premises, as determined by a contractor or architect reasonably acceptable to Lessor and Lessee, which estimates shall be the basis for determining whether Minor Damage, Premises Partial Damage or Premises Total Destruction has occurred. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Conditions occurs, unless Lessee is legally responsible therefor based on Applicable Law or this Lease (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease, and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date one hundred eighty (180) days following the giving of such notice. If Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right, within ten (10) days after the receipt of such notice, to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. This Paragraph shall prevail over Paragraph 6.2.4 above. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease, and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. TAXES. 10.1 Payment of Real Property Taxes. Real estate taxes and assessments for the Building and the Project are included in the common expenses. Lessor shall forward to Lessee, upon request therefor, copies of all real property tax bills and assessments levied against the Premises. If any such taxes paid by Lessee shall cover any period of time prior to or after the expiration of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year during which this Lease shall be in effect. Lessor shall deliver to Lessee copies of all notices of proposed increases in assessments or proposed revaluation of any property that is included in the calculation of common expenses. If Lessor fails or refuses, on request of Lessee at Lessee's expense, to contest the validity or amount of the assessed valuation or real estate taxes for any tax year, Lessee may undertake such contest at Lessee's expense, by appropriate proceedings in the name of Lessor or Lessee. Within a reasonable time after demand therefor, Lessor shall execute and deliver to Lessee any documents reasonably required to enable Lessee to prosecute any such proceeding, and Lessor shall provide Lessee upon request with all pertinent data, in time to permit Lessee to undertake such contest. The foregoing notwithstanding, Lessee shall pay prior to delinquency all real estate taxes, but may do so under protest to reserve its rights to seek a reduction of taxes as set forth in this Paragraph. 10.2 Definition of "Real Property Tax". As used herein, the term "real property taxes and assessments" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy, or tax (other than inheritance, personal, corporate or other income or estate taxes) imposed on the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Premises or the Project or in the real property of which the same are a part, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Premises. The term "real property taxes and assessments" shall also include any tax, fee, levy, assessment, or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment, or charge hereinabove included within the definition of "real property taxes and assessments", or (ii) the nature of which was hereinbefore included within the definition of "real property taxes and assessments", or (iii) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Premises or the Project which is added to a tax or charge hereinbefore included within the definition of "real property taxes and assessments" by reason of such transfer, or (iv) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof 10.3 Joint Assessment. If the Project is not separately assessed, Lessee's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 Transaction Taxes. Lessee shall pay to Lessor all sales, use, transaction privilege, rental, excise, or other taxes levied or imposed upon, or measured by, any amount payable under this Lease. Lessee shall pay the tax to Lessor together with, and on or before the due date for, the amount to which it relates. 10.5 Personal Property Taxes. 10.5.1 Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere, including the emergency generating equipment referred to in Paragraph 40.9 below. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. 10.5.2 If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within thirty (30) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay when due the cost of all water, gas, heat, light, power, telephone, and other utilities and services supplied to the Premises, together with any taxes thereon. 12. ASSIGNMENT AND SUBLETTING. 12.1 Consent of Lessor. Lessee shall not assign, convey, transfer, mortgage, hypothecate, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the premises or permit the use or occupancy of the Premises or any part thereof by anyone other than Lessee without Lessor's prior written consent, which may not be unreasonably withheld; provided that (i) Lessor may withhold its consent if the proposed subletting or other transfer will breach the provisions of Paragraph 12.7 below, and (ii) Lessor's consent shall not be required for an assignment or subletting of this Lease and the Premises to the parent of Lessee, Matrix Bancorp, Inc., a Colorado corporation ("Matrix Bancorp"), or a subsidiary controlled by said parent, or a controlled subsidiary of Lessee, or to an entity into which Matrix Bancorp or Lessee is merged or consolidated or to which substantially all the stock or assets of Matrix Bancorp or Lessee are sold and conveyed. If Lessee desires Lessor's consent, Lessee shall submit in writing to Lessor the proposed sublease, assignment, or other transfer agreement to be executed by Lessee and its sublessee or transferee, together with any other information pertaining to such subletting or assignment Lessor may request. Lessor shall then have thirty (30) days to approve or disapprove such transfer. If Lessor does not give Lessee an answer within such thirty (30) day period, such failure to answer shall constitute a denial of Lessor's consent. If Lessor gives its consent to Lessee pursuant hereto, the provisions of Section 12.8 shall apply. 12.2 No Release of Lessee. Regardless of Lessor's consent, no subletting or assignment shall release any guarantor of its obligations or release Matrix Financial Services Corporation, an Arizona corporation, or other approved or permitted Lessee of its obligations or alter the primary liability thereof to pay the rent and to perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any other person or entity shall not be deemed to be a waiver by Lessor of any provision hereof. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee or successor. 12.3 Transferee's Obligations. If Lessor gives its consent to any transfer, prior to such transfer, the transferee shall agree in writing to comply with and be bound by all the terms, conditions, covenants, provisions, and agreements contained in this Lease, and Lessee shall deliver to Lessor promptly after execution an executed copy of each such transfer document and such agreement of such transferee to be bound by this Lease. 12.4 Expenses. Lessee shall pay Lessor's reasonable expenses for each transfer submitted to Lessor to cover the legal review and processing expenses of Lessor, irrespective of whether Lessor grants its consent. Said amount shall be paid as a condition precedent to such transfer. 12.5 Void Transfers. Any arrangement for a transfer which is not in compliance with the provisions of this Paragraph 12 shall be void and shall constitute a default by Lessee under the terms of this Lease. Lessor shall not be obligated to pay any finders fees, commissions or amounts in respect of any transfer, and all such obligations shall be the responsibility of Lessee. 12.6 No Merger. The voluntary or other surrender of this Lease by Lessee, mutual cancellation of this Lease, or the termination of this Lease by Lessor, shall not work as a merger, but, at Lessor's option, shall either terminate any and all existing subleases hereunder or operate as an assignment to Lessor of any such subleases. 12.7 No More Than Three Tenants; No Reduction of Rent. Notwithstanding any other provision of this Paragraph or this Lease, Lessee and its assignees and subtenants may not (i) make any transfer, subletting or assignment of this Lease which would result in the Premises containing more than three (3) tenants, or (ii) make any assignment or transfer (except a subletting permitted herein) which provides for a Base Rent which is less than the Base Rent provided for in this Lease during the entire Lease Term or which otherwise reduces other amounts to be paid by Lessee pursuant to this Lease. 12.8 Half of Consideration Paid to Lessor. It is the express intent of Lessor that any assignment, subletting, conveyance or other transfer of all or any part of Lessee's interest in this Lease or in the Premises (collectively, "transfer" for purposes of this Paragraph 12.8), as may be consented to by Lessor or otherwise permitted pursuant to the terms and requirements of Paragraph 12.1 above, shall not afford Lessee the opportunity to gain financially except as specifically permitted in this Paragraph. Accordingly, Lessor shall be entitled to receive fifty percent (50%) of all net consideration (as hereafter defined) paid or to be paid, directly or indirectly, to Lessee by the proposed subtenant, assignee or transferee (collectively, "transferee" for purposes of this Paragraph 12.8) with respect to each transfer, which amount or amounts shall be paid to Lessor simultaneously with payment of the amounts otherwise due to Lessee; provided that, as a condition precedent to the effectiveness of each such transfer, (i) if said net consideration is to be paid in a lump sum to Lessee then all net consideration shall be paid in a lump sum to Lessor, before and as a condition precedent to, the effectiveness of such transfer, (ii) if said net consideration is to be paid to Lessee over time, then this Lease shall be amended to increase the rent due under this Lease, for the period of time said net consideration is to be paid to Lessee, by an amount equal to fifty percent (50%) of all of the net considerations to be paid to Lessee, if any, which amount or amounts shall be due to Lessor at the time the net consideration is to be paid to Lessee by the transferee, and (iii) each such proposed transferee must agree directly with Lessor to pay such amounts to Lessor and must grant Lessor the right to enforce collection of such payments directly against the proposed transferee if Lessee does not pay the same when due under this Lease, as modified in accordance with subsection (ii) above. With respect to subsection (ii) above, if Lessee sublets less than all of the Premises in accordance with this Paragraph, then the rent due under this Lease will be increased pro-rata based on the number of square feet of Gross Leasable Floor Area to be sublet (for example, if Lessee sublets 50% of the Premises, the net consideration to be paid to Lessor under this Paragraph will be based on the total consideration to be paid by the proposed transferee over and above the rents due from Lessee to Lessor for 50% of the Premises). As used in this Paragraph 12.8, the term "net consideration" shall mean all monies, and the value of all in-kind services or property, or other consideration of any kind paid or to be paid, or provided or to be provided, directly or indirectly, to Lessee by the proposed transferee with respect to such transfer in excess of the rents otherwise due under this Lease from Lessee to Lessor, but excluding from such excess consideration (1) such reasonable and customary brokerage commissions, marketing expenses, and tenant improvement costs as may be reasonably incurred by Lessee directly in connection with obtaining the applicable transfer and (2) with respect to an assignment or subletting permitted by the terms of subparagraph (ii) of Paragraph 12.1, reasonable consideration legitimately paid for substantially all of the stock or assets of Lessee if sold and conveyed as therein provided, if valued independently of the value of the leasehold interest of Lessee with respect to this Lease. 13. DEFAULTS; REMEDIES. 13.1 Defaults. The occurrence of any one or more of the following events shall constitute a "default" by Lessee: 13.1.1 The abandonment of the Premises by Lessee for more than ninety (90) consecutive days. 13.1.2 The failure by Lessee to make any payment of Base Rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of five (5) days after the date such payment is due. 13.1.3 The failure by Lessee to observe or perform any of the covenants, conditions, or provisions of this Lease to be observed or performed by Lessee, other than described in subparagraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commences such cure within said 30-day period and thereafter diligently prosecutes such cure to completion. 13.1.4 (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days), (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises, or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises, or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. Provided, however, in the event that any provision of this Paragraph 13.1.4 is contrary to any applicable law, such provision shall be of no force or effect. 13.1.5 The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any successor-in-interest of Lessee or any guarantor of Lessee's obligation hereunder, and any of them, was materially false. 13.1.6 Any transfer of Lessee's interest in this Lease contrary to the terms and conditions of Article 12 of this Lease. 13.2 Remedies. In the event of a default by Lessee, Lessor shall have the right at anytime thereafter, with or without notice or demand, to pursue any one or more of the following remedies: 13.2.1 Institute suit against Lessee to collect each installment of rent and other sum due under this Lease or to enforce any other obligation under this Lease; or 13.2.2 Re-enter and take possession of the Premises and all personal property and fixtures therein and remove Lessee and Lessee's agents and employees therefrom, and either: (a) Terminate this Lease by giving Lessee written notice of Lessor's election to terminate, and recover from Lessee all amounts owed by Lessee prior to the date of termination, plus the worth, at the time of such termination, of the excess, if any, of the rent and other charges required to be paid by Lessee hereunder for the balance of the term hereof (if this Lease had not been so terminated) over the amounts reasonably expected by Lessor to be received from reletting. (b) Without terminating this Lease, relet, assign or sublet the Premises as the agent and for the account of Lessee in the name of Lessor or otherwise, upon the best terms and conditions Lessor may make with the new Lessee for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on such conditions as Lessor, in its uncontrolled discretion, may determine and may collect and receive the rent therefor, provided Lessor shall in no way be responsible or liable for any failure to relet the Premises or any part thereof, or for any failure to collect any rent due upon any such reletting. In such event, the rents received on any such reletting shall be applied first to the expenses of reletting and collecting, including, without limitation, all repossession costs, reasonable attorneys' fees, and any real estate commission paid, alteration costs and expenses of preparing said Premises for reletting, and thereafter toward payment of the rental and of any other amounts payable by Lessee under this Lease. If the sum realized shall not. be sufficient to pay such rent and other charges, Lessor may recover the deficiency from Lessee. 13.2.3 If Lessor elects to re-enter or take possession of the Premises, Lessee shall quit and peaceably surrender the Premises to Lessor, and Lessor may enter upon and re-enter the Premises and possess and repossess itself thereof, by force, summary proceedings, ejectment or otherwise, and may dispossess Lessee and remove Lessee, and may have, hold, and enjoy the Premises and the right to receive all rental income of and from the same. 13.2.4 No such re-entry or taking of possession by Lessor shall be construed as an election on Lessor's part to terminate or surrender this Lease unless a written notice of such intention is served on Lessee. 13.2.5 The enumeration of the foregoing remedies does not exclude any other remedy, but all remedies are cumulative and shall be in addition to every other remedy now or hereafter existing at law or in equity. 13.2.6 No failure by Lessor to insist upon the strict performance of any covenant, agreement, term, or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Lease to be performed or complied with by Lessee, and no breach thereof, shall be waived, altered, modified or terminated except by written instrument executed by Lessor. No waiver of any breach shall affect or alter this Lease, but each and every covenant, agreement, term and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof 13.2.7 If Lessee causes or threatens to cause a breach of any of the covenants, agreements, terms, or conditions contained in this Lease, Lessor shall be entitled to obtain all sums held by Lessee, by any trustee or in any account provided for herein, to enjoin such breach or threatened breach, and to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings and other remedies were not provided for in this Lease. 13.3 Default by Lessor. Lessor shall not be in default unless and until Lessor fails to perform obligations required of Lessor under this Lease within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor specifying the nature of the failure to perform an obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance, then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently prosecutes the same to completion. In no event will Lessee have any right of offset with respect to a default by Lessor and the amounts due from Lessee to Lessor under this Lease, but rather Lessee must maintain a separate action for damages in the event of a default by Lessor. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any installment of Base Rent or any other sum due from Lessee shall not be received by Lessor within fifteen (15) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to seven percent (7%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of Base Rent in any 12-month period, then Base Rent shall automatically become due and payable quarterly in advance rather than monthly, notwithstanding Paragraph 4 or any other provision of this Lease to the contrary. 13.5 Use of Impounds Upon Default. All monies paid to Lessor under Paragraph 4.5.3 may be intermingled with other monies of Lessor and shall not bear interest. In the event of a default by Lessee under this Lease, then any balance remaining from funds paid to Lessor under the provisions of said Paragraph may, at the option of Lessor, be applied to the payment of any monetary default of Lessee in lieu of being applied to the payment of common expenses. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called a "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than twenty-five percent (25%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area of the Project which is not occupied by any Building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing only within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes possession) terminate this Lease as of the date the condemning authority takes possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the proportion that the floor area of the Building taken bears to the total floor area of the Building situated on the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to a separate award for loss of or damage to Lessee's trade fixtures and removable personal property and moving expenses with respect thereto. If this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages actually received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessor and Lessee shall jointly select a contractor to effect such repairs and shall cooperate in initiating and completing such repairs. 15. BROKER'S FEE. Unless this Lease is terminated as provided in Paragraph 45 below, a brokerage commission shall be paid by Lessor to Cushman & Wakefield of Arizona, Inc. ("Listing Broker"), whose mailing address is 1850 N. Central Avenue, Suite 300, Phoenix, Arizona 85004 (Attn: Ashley Brooks), in accordance with a listing agreement between Lessor and Listing Broker. Lessor and Lessee acknowledge that Trammell Crow Company ("Lessee's Broker") represented Lessee in this transaction and compensation will be payable to Lessee's Broker in an amount equal to one half of said commission, when paid by Lessor to Listing Broker, and shall be the responsibility of Listing Broker. Lessee warrants it has not incurred the services of any other broker in connection with this Lease. Lessor and Lessee each agree to indemnify and defend the other party, its employees, agents, members, and assigns from and against all claims, demands, actions, liabilities, damages, costs, and expenses (including attorneys' fees) from any other broker, agent, or finder which arise or result from the actions of the indemnifying party. 16. ESTOPPEL CERTIFICATE. 16.1 Lessee shall, within ten (10) business days after written notice from Lessor, execute, acknowledge and deliver to Lessor a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in fall force and effect) and the date to which the Base Rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement must be in a form reasonably acceptable to, and when completed, may be conclusively relied upon by, any prospective purchaser or encumbrancer of the Premises. 16.2 At Lessor's option, Lessee's failure to deliver such statement shall be conclusive upon Lessee (i) that this Lease is in full force and effect, without modification except as may be represented by Lessor, (ii) that there are no uncured defaults in Lessor's performance, and (iii) that not more than one month's Base Rent has been paid in advance. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners at the time in question of the fee title to, or a lessee's interest in a ground lease of, the Premises. In the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall be binding on the initial Lessor and Lessor's successors and assigns only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid within seven (7) days after the due date shall bear interest at twelve percent (12%) per annum from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease, provided, however, that interest shall not be payable on late charges incurred by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor of any kind under the terms of this Lease shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the Listing Broker, Lessee's Broker nor any other cooperating broker on this transaction nor the Lessor or any employees or agents of any of said persons or entities has made any oral or written warranties or representations to Lessee relative to the condition, occupancy or use by Lessee of the Premises, the Building, or the Project, and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the Americans with Disabilities Act, and the legal use and adaptability of the Premises and the Building and the compliance thereof with all Applicable Laws in effect during the term of this Lease, except as otherwise specifically stated in this Lease. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed given when personally delivered or mailed postage prepaid by certified mail, or sent by reputable overnight courier such as Federal Express to Lessee or to Lessor at the following respective addresses: LESSOR: SunCor Development Company 3838 N. Central Avenue Suite 1500 Phoenix, Arizona 85012 Attn: Margaret Kirch With a copy to: SunCor Development Company 3838 N. Central Avenue Suite 1500 Phoenix, Arizona 85012 Attn: General Counsel LESSEE: Matrix Financial Services Corporation 201 W. Coolidge Phoenix, Arizona 85013 Attn: Julie Newland With a copy to: Osborn Maledon 2929 N. Central Avenue, 2 1 Floor Phoenix, Arizona 85012 Attn: Michelle Matiski Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes (2133 W. Peoria Avenue, Phoenix, Arizona 85021). A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by either party hereto of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by the other party of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any default by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. NO RECORDING. Neither this Lease nor a memorandum hereof shall be recorded without Lessor's prior written consent. 26. HOLDING OVER. 26.1 With Lessor's Consent. Subject to Paragraph 26.3, if Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the Lease Term, such occupancy shall be a tenancy from month-to-month upon all the provisions of this Lease pertaining to the obligations of Lessee, including payment of Base Rent, but all options and rights of first refusal, if any, granted under the terms of this Lease shall be deemed terminated and of no further force or effect during said month-to-month tenancy. 26.2 Without Lessor's Consent. If Lessee, without Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the Lease Term, Lessee shall pay to Lessor monthly rent for the period from expiration of the Lease Term until possession of the Premises is restored to Lessor in an amount equal to one hundred fifty percent (150%) of the monthly Base Rent due for the last month of the Lease Term, plus all common expenses and other amounts otherwise due under this Lease. Notwithstanding the foregoing, Lessor's right to collect such rent shall be in addition to and shall not preclude concurrent, alternative, or successive exercise of any rights or remedies available to Lessor, including, without limitation, commencing forcible detainer proceedings. 26.3 Limited Right to Extend Lease Term. Notwithstanding Paragraphs 26.1 and 26.2 above, in addition to the rights of Lessee set forth in Paragraph 3.2 above, Lessee shall have the right to extend the Lease Term for three (3) calendar months at the Base Rent due the last month of the Term without Lessor's consent, subject to the following: (i) Lessee must give written notice to Lessor of its intention to extend the Lease Term at least one hundred twenty (120) days prior to the expiration of the Lease Term and must state in said notice that Lessee desires to extend the Lease Term so that Lessee may hold over beyond the expiration thereof, and (ii) Lessee shall hold over subject to all of the provisions of this Lease pertaining to payment of Base Rent, common expenses and all other obligations of Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. PARKING. Lessor will provide Lessee with six (6) parking spaces for each 1,000 square feet of Gross Leasable Floor Area within the Premises. Sixty-five (65) of those spaces will be reserved for the exclusive use of Lessee and will be in a location to be agreed to by Lessor and Lessee in good faith. Lessor will also provide, as part of the T.I. Allowance (as defined in Paragraph 40.1 below) for the Premises covered parking structures for said reserved spaces (including meeting minimum ADA standards). Lessee will be responsible for monitoring the reserved spaces to ensure that only persons designated by Lessee are using the same. 29 BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of Paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State of Arizona. 30. SUBORDINATION OF LEASE; ATTORNMENT. 30.1 Subordination. Concurrent with the execution of this Lease, Lessor shall obtain and deliver to Lessee a subordination, nondisturbance and attornment agreement ("SNDA") in form and content reasonably acceptable to Lessee, from the holder of any ground lease, mortgage, deed of trust, or any other hypothecation or security now existing upon the real property of which the Project is a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee further agrees to subordinate this Lease to the lien or interest of any mortgage, deed of trust, or ground lease hereafter placed upon the real property of which the Project is a party, provided that, as a condition precedent to such subordination, the holder of such future lien or interest executes and delivers to Lessee an SNDA in form and content reasonably acceptable to Lessee, which provides that in the event of a foreclosure, deed in lieu of foreclosure, power of sale or other termination of Lessor's interest in the Premises, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust, or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust, or ground lease or the date of recording thereof 30.2 Execution of Documents. Subject to Paragraph 30.1, Lessee agrees to execute any documents reasonably requested to effectuate an attornment, a subordination, or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, which will also include the non-disturbance provisions contained in Paragraph 30.1. Lessee's failure to execute such documents within ten (10) business days after written demand shall be conclusive upon Lessee that this Lease is subordinated to the lien of any such mortgage, deed of trust, or ground lease. 31. ATTORNEYS' FEES. If either Lessor or Lessee commences, engages in, or threatens to commence or engage in any legal action or proceeding against the other party (including, without limitation, litigation, or arbitration) arising out of or in connection with the Lease, the Premises or the Project (including, without limitation (a) the enforcement or interpretation of either party's rights or obligations under this Lease, whether in contract, tort, or both, or (b) the declaration of any rights or obligations under this Lease), the prevailing party shall be entitled to recover from the losing party reasonable attomeys' fees, costs and expenses incurred in any such action or proceeding, including any attorneys' fees, costs, and expenses incurred for collection and on appeal. 32. LESSOR'S ACCESS. Lessor and Lessor's agents and lenders shall have the right to enter the Premises at reasonable times determined by Lessor and Lessee in good faith for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements, or additions to the Premises or the Building as Lessor may deem necessary or desirable. Such right of entry shall be exercised in a manner which reasonably minimizes disruption of Lessee's business given the purpose for entering the Premises. Lessor may at any time place on or about the Premises any ordinary "For Sale" signs and Lessor may at any time during the last 180 days of the Lease Term place on or about the Premises any ordinary "For Lease" signs, all without rebate of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. 34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or visible from the exterior of the Premises, including "For Rent" or "Sublet" signs, without Lessor's prior written consent in each instance. Lessor hereby consents to the placement by Lessee of a building-mounted sign and a monument sign adjacent to Peoria Avenue, each of which must comply with Lessor's tenant sign standards, applicable governmental regulations, and any Additional CC&Rs, and each of which will contain Lessee's name and logo and the size, design and location of which must be approved by Lessor, which approval shall not be unreasonably withheld. All expenses associated with Lessee's signs shall be the responsibility of Lessee. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. QUIET POSSESSION. Upon Lessee's paying when due the rent for the Premises and observing and performing in a timely manner all of the covenants, conditions, and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 37. SECURITY MEASURES. Lessee hereby acknowledges that the common expenses may include the cost of guard service or other security measures Lessor may elect to provide, but Lessor shall have no obligation whatsoever to provide the same. Lessee assumes all responsibility for the protection of Lessee, its agents, employees, officers, and invitees from acts of third parties. 38. AUTHORITY. Each individual executing this Lease on behalf of Lessee and Lessor represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. Lessee shall, prior to execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 39. FINANCIAL STATEMENTS. If Lessor desires to finance, refinance or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such existing financial statements of Lessee as may be reasonably requested in writing by Lessor or such lender or purchaser. Such statements shall include the past three years' financial statements of Lessee. All such financial statements shall be used only for the purposes herein set forth. All financial statements required under this Lease shall be delivered to Lessor or any lender or purchaser, as applicable, within thirty (30) days of Lessor's written request therefor. At Lessor's option, Lessee's failure to deliver those statements within that time shall be a breach of this Lease. 40. LESSOR'S AND LESSEE'S WORK. 40.1 Interior Tenant Improvements. Lessor shall construct the Building shell pursuant to the plans and specifications described on Exhibit "D" attached hereto (which Building shell, excluding the work not included as part thereof as designated on Exhibit "D", is referred to in this Lease as the "Building Shell") and provide for Lessee in the Premises the Work (as defined in Paragraph 40.1.7 below) for the First Phase Space, subject to Lessee Delays and Paragraph 41, and deliver non-exclusive possession thereof by February 1, 2000, and full possession thereof as provided in Paragraph 3.1 by no later than March 1, 2000 subject to the following: 40.1.1 It is acknowledged that certain portions of the Work cannot be completed until Lessee performs certain work for which it is responsible. Accordingly, Lessee shall cause its contractors to install all wire and cable in the Premises and perform all other design, construction and installation work with respect thereto reasonably designated by Lessor with prior notice, all in a manner reasonably approved by Lessor by no later than a date to be specified by Lessor in its critical path schedule for the Premises, a copy of which will be provided to Lessee from time to time, so that Lessor can complete all Work by no later than March 1, 2000. All installation of wire and cable and such other design, construction and installation work shall be at the expense of Lessee. 40.1.2 All Work shall be completed at Lessor's expense, provided that Lessor shall not be obligated to incur any expenses for the Work which exceed a total of $25.00 per square foot of Gross Leasable Floor Area comprising the First Phase Space, or $1,250,000.00 based on 50,000 square feet, as may be increased pursuant to Paragraph 45.4 (the "T.I. Allowance"). As additional material consideration for the abatement of Base Rent for the Second Phase Space as set forth in Paragraph 4.2 above, Lessee acknowledges and agrees that the T.I. Allowance shall be based on the square footage within the First Phase Space so that Lessee will pay as hereafter provided all amounts for completing the Work in excess of $1,250,000.00 (as may be increased pursuant to Paragraph 45.4), subject to reimbursement by Lessor for an amount equal to $25.00 per square foot of Gross Leasable Floor Area in the Second Phase Space to the extent provided in Paragraph 40.1.6 below; for purposes hereof, the Work shall include all improvements to the First Phase Space and the Second Phase Space. The T.I. Allowance is solely for the purpose of constructing covered parking stalls and tenant improvements to the Building Shell, and shall not be used to acquire any furniture, furnishings, equipment or personal property of Lessee. The T.I. Allowance includes all hard and soft costs necessary or appropriate to complete the Work, provided that Lessor will provide, at its expense, and in addition to the T.I. Allowance, construction management services utilizing personnel of Lessor or its members or affiliates. Accordingly, except as specifically noted above, all costs and expenses of completing the Work, including, without limitation, all costs of labor, materials, architectural, design, engineering and other professional fees, and permitting fees, shall not exceed a total of $25.00 per square foot of Gross Leasable Floor Area in the First Phase Space, subject to Paragraphs 40.1.6 and 45.4. 40.1.3 Lessee shall engage Cornoyer Hedrick as its architect for the Project, provided that Lessee will contract directly with and shall be responsible for the actions of Cornoyer Hedrick in its preparations of plans and specifications in a manner which permits Lessor to comply with its critical path schedule for the Work in the Premises, and provided further that the fees of Cornoyer Hedrick will be paid from the T.I. Allowance. 40.1.4 Lessee shall also have the right to select the general contractor for the Work by choosing among the following companies only: hardison/downey, Jokake Construction, or Stevens Leinweber Construction. Lessee and its architect will obtain competitive bids from each of said companies in a timely manner to permit Lessor to follow its critical path schedule for the Work in the Premises and provide the Premises to Lessee for its work by February 1,2000, and for Lessee's full occupancy by March 1, 2000. 40.1.5 If the actual cost of the Work is less than the T.I. Allowance, the savings shall be credited to Lessee in the form of a credit against successive installments of Base Rent due from and after the Commencement Date until such credit is applied in full. If the actual cost of the Work exceeds the T.I. Allowance, but is less than the T.I. Allowance plus $319,275,00, then any Second Phase Savings (as defined in Paragraph 40.1.6) shall be credited to Lessee in the form of a credit against successive installments of Base Rent due from and after that date which is one (1) year after the Commencement Date until such credit is applied in full. 40.1.6 Lessor and Lessee acknowledge that, as described in Paragraph 40.1.2 above, Lessor will be completing the tenant improvements for both the First Phase Space and the Second Phase Space, but that the T.I. Allowance covers only the First Phase Space. Accordingly, Lessor and Lessee expect that the costs of the Work will greatly exceed the T.I. Allowance. To the extent that the actual cost of the Work exceeds the T.I. Allowance, Lessee shall reimburse Lessor for the first $319,275.00 of such excess costs ($25.00 x 12,771 square feet of Gross Leasable Floor Area in the Second Phase Space) (the amount actually paid by Lessee to Lessor is referred to herein as "Second Phase T.I. Costs") as additional rent by paying the same in cash within thirty (30) days after Lessor delivers its request for payment and evidence of payment by Lessor; provided, however, that on the date Lessee becomes obligated to pay Base Rent on the Second Phase Space pursuant to Paragraph 4.2(b) and has paid the first monthly installment thereof, and provided that Lessee is not in default under this Lease (beyond the expiration of any applicable notice and cure period), Lessor shall reimburse Lessee in cash, without interest, for the Second Phase T.I. Costs. If the Second Phase T.I. Costs are less than $319,275,00, then the difference ("Second Phase Savings'" shall be credited to Lessee as provided in Paragraph 40.1.5. To the extent that the actual cost of the Work exceeds the T.I. Allowance and the sum of $319,275.00, such additional amounts shall be reimbursed by Lessee to Lessor, as additional rent, by either: (a) paying to Lessor all of such excess cost in cash within thirty (30) days after Lessor delivers its request for payment and evidence of payment by Lessor, or, (b) at Lessee's option, paying the same in equal monthly installments amortized over the Initial Term factoring in an interest rate of 12% per annum, which shall be added to and constitute a part of Base Rent. 40.1.7 Lessor's work shall consist of improvements to the Building Shell (both First Phase Space and Second Phase Space) and covered parking stalls as provided in Paragraph 28 (including meeting minimum ADA requirements for the covered parking stalls), and the 24-hour access security facilities designated by Lessee and approved by Lessor ("Work"). The Work will be constructed in accordance with plans and outline specifications for the interior layout of the Premises prepared by Lessee's architect in compliance with Lessor's critical path schedule and approved by Lessor, which approval shall not be unreasonably withheld or delayed ("Plans and Specifications"). A preliminary space plan for the entire Premises will be submitted by Lessee to Lessor on or before September 23, 1999. The first draft of the Plans and Specifications shall be prepared and delivered by Lessee to Lessor on or before October 22, 1999. Unless Lessor reasonably objects to the Plans and Specifications within five (5) business days after delivery thereof by Lessee, Lessor shall be deemed to have approved the Plans and Specifications. If Lessor does timely and reasonably object, and the changes requested by Lessor are satisfactory to Lessee, Lessee shall revise the Plans and Specifications and deliver revised Plans and Specifications to Lessor within five (5) business days thereafter. If Lessor does timely and reasonably object, but the changes requested by Lessor are not satisfactory to Lessee, Lessee and Lessor shall meet immediately after Lessor's objections and endeavor in good faith to agree upon Plans and Specifications mutually acceptable to Lessor and Lessee within five (5) business days after Lessor's objections. If Lessor and Lessee cannot reach an agreement regarding the Plans and Specifications after such meeting, such dispute shall then be immediately submitted to the architect for the Work in accordance with the provisions of Paragraph 40.4 below to resolve the dispute prior to November 5, 1999. When so approved, the Plans and Specifications shall be initialed by Lessor and Lessee and incorporated herein by this reference. 40.2 Governmental Approvals. After the Plans and Specifications have been approved by Lessor and Lessee, Lessee and Lessee's architect shall use diligent efforts to obtain approval of the Plans and Specifications as soon as possible from all appropriate governmental agencies. 40.3 Lessee Delay. As used herein, "Lessee Delay" shall mean any delay or delays in the substantial completion of the Work as a result of any one or more of the following: 40.3.1 The failure of Lessee or its architect to furnish, approve, or authorize, or provide information for, any portion of the Plans and Specifications in accordance with the critical path schedule established in good faith by Lessor and its contractor to meet the deadlines imposed by this Lease, and Lessor will give due consideration to the advice of Lessee's architect in preparing Lessor's critical path schedule; 40.3.2 Changes in or additions to the Plans and Specifications as requested by Lessee or its architect (notwithstanding Lessor's approval of such changes); 40.3.3 The performance or completion of any work in the Premises by Lessee or any person or entity employed by Lessee, including without limitation Lessee's architect or contractor; 40.3.4 Any request by Lessee or its architect for materials, components, finishes, or improvements other than Lessor's building standard or which are not available in a commercially reasonable time given the anticipated date of substantial completion of the Work, as set forth in the Plans and Specifications; 40.3.5 Lessee's failure to pay, when due, any amounts required to be paid by Lessee pursuant hereto; 40.3.6 Lessee's failure to comply with all federal, state, or local laws or regulations, including, without limitation, all codes and ordinances; 40.3.7 Lessee's request for additional bidding or rebidding of the cost of all or a portion of the Work; 40.3.8 Changes or postponements to the Work requested by Lessee or its architect; 40.3.9 Any error in the Plans and Specifications or other documents caused by Lessee, or its employees, agents or contractors; 40.3.10 Lessee's failure to apply for promptly and/or diligently seek to obtain all governmental approvals of the Plans and Specifications and all necessary permits by the dates to be specified by Lessor in its critical path schedule to be provided to Lessee pursuant to Paragraph 40.1 above; provided that if Lessee is in compliance with this Paragraph 40.3. 10 but a delay nevertheless occurs, the dates in the 2nd and 4th sentences of Paragraph 3.1, and in Paragraph 40.1, shall be extended for the period of such delay; and 40.3.11 Any other act or omission of Lessee or its employees, agents or contractors. 40.4 Architect's Determination. A determination by Cornoyer Hedrick as to the existence and duration of a Lessee Delay (which may be made only after Lessor and Lessee have attempted in good faith to make such a determination for at least ten (10) days), or in resolving disputes in the approval of the Plans and Specifications, shall be conclusive and binding on the parties under this Lease absent manifest error or bad faith on the part of said architect. 40.5 Lease Starting Date in Event of Lessee Delay. If a Lessee Delay occurs, then notwithstanding anything to the contrary set forth in this Lease, and regardless of the actual date of the substantial completion of the Work, the Commencement Date shall not be extended and Base Rent and common expenses will be due and payable. 40.6 Lessee Pays Damages. Lessee shall pay all costs and expenses incurred by Lessor that result from any Lessee Delay, including, without limitation, any costs and expenses attributable to increases in the cost of labor or materials. 40.7 Inspection by Lessee. Lessee shall be permitted to monitor and inspect the Work for the purpose of verifying that such construction is in compliance with the Plans and Specifications. Lessor shall complete any "punch list" work reasonably required by Lessee as provided in Paragraph 40.8 below. 40.8 Condition of the Premises. Lessee shall have thirty (30) days after the Commencement Date within which to give Lessor written notice of any alleged defects in the Premises or the Work. Such notice shall be in the form of a punch list identifying the defect and explaining what is necessary to complete the Work in a good and satisfactory manner. Upon the expiration of said 30-day period, the Premises, the Project, the Building and the Work shall be deemed in satisfactory condition and in compliance with the terms of this Lease, except as specifically set forth to the contrary in the written notice delivered by Lessee to Lessor, if any. If Lessee fails to give such notice within said 30-day period, or to specify in reasonable detail in said notice the nature of the defects, Lessee shall be deemed to have irrevocably waived all rights with respect to said defects. Upon receiving such written notice, if any, from Lessee, Lessor shall repair any actual defects or variances, to the extent such work is Lessor's obligation pursuant to this Lease, within thirty (30) days after receipt of written notice of such work is received by Lessor (or if more than thirty (30) days is reasonably necessary to complete such work, then Lessor shall commence to complete the work within said 30-day period and shall diligently pursue completion of such work as soon as reasonably possible thereafter). After the expiration of 30-day period, and within five (5) days after a request from Lessor, Lessee shall promptly execute and deliver to Lessor a certificate in the form supplied by Lessor certifying that the Premises, the Building, the Project and the Work are accepted in accordance with this Paragraph, subject only to any remaining punch list items designated by Lessee in the notice, if any, delivered within said 30-day period. The existence of any defects or variances shall not affect Lessee's obligations set forth in Paragraph 7.1 above. Nothing contained in this Paragraph shall be construed as a waiver by Lessee of any Latent Defects in the Premises or the Building which are caused by Lessor or its contractors and do not result from the acts or omissions of Lessee, its agents, employees, officers or contractors. 40.9 Lessee's Permitted Work. Lessee shall be permitted to install during the Lease Term, at Lessee's option, a communications antenna or dish on the roof of the Premises at a location to be approved by Lessor, subject to the following: 40.9.1 All such equipment shall be installed at the sole cost and expense of Lessee, and Lessor shall have the right to approve the size, design and color of such equipment and the screening methods to be used, and all plans and specifications for the installation thereof, which approval shall not be unreasonably withheld. 40.9.2 All work to be performed by Lessee as provided in this Paragraph shall be completed within a reasonable period of time after construction is commenced and shall be subject to Paragraphs 7.5.2 and 7.5.3. 40.9.3 All such equipment must be installed in a manner that does not result in material damage to the Premises when it is removed as herein required. 40.9.4 All work shall be performed by Lessee only after obtaining all necessary permits and otherwise complying with all applicable laws. 40.9.5 Lessor shall have the right to permit its employees or representatives to monitor any such work that involves penetration of the roof of the Building or affects any other structural elements of the Building to ensure that the roof remains water tight and that the structural integrity of the Building is not adversely affected, but Lessee is ultimately responsible to ensure that the roof remains water tight and the structural integrity of the Building is not adversely affected by the installation of Lessee's equipment. The foregoing notwithstanding, with respect to any roof repairs Lessee is required to make pursuant to this Paragraph, Lessee must first advise Lessor at least ten (10) days prior to commencing the repairs, must use the contractor who installed the roof, and must otherwise comply with all requirements necessary to preserve the warranty for the roof 40.9.6 All such equipment must be removed by Lessee at its expense on or before termination of the Lease Term and Lessee shall repair, prior to expiration of the Lease Term, at its expense, all damage to the Premises caused by the removal of such equipment. 41. FORCE MAJEURE -UNAVOIDABLE DELAYS. If the performance of any act required by this Lease to be performed by either Lessor or Lessee be prevented or delayed by reason of an act of God, strike, lockout, labor troubles, inability to secure materials, restrictive governmental laws or regulations, inclement weather, or any other cause (except financial inability) beyond the reasonable control of such party, the time for performance of the act will be extended for a period equivalent to the period of delay and performance of the act during the period of delay will be excused; provided, however, that nothing contained in this section shall excuse the prompt payment of rent by Lessee as required by this Lease or the performance of any act rendered difficult solely because of the financial condition of the party required to perform the act. 42. EASEMENTS; ADDITIONAL CC&Rs. In addition to easements and other matters currently of record, Lessor reserves to itself the right, from time to time, to grant and record such additional easements, rights and dedications that Lessor deems necessary or desirable with respect to the Project, so long as such easements, rights, dedications, maps and restrictions do not unreasonably and materially interfere with the use of the Premises by Lessee ("Additional CC&Rs"). Lessee shall sign any of the aforementioned documents upon request of Lessor, and failure to do so shall constitute a material breach of this Lease, but shall not invalidate the Additional CC&Rs. Notwithstanding anything to the contrary contained in this Lease, Lessee shall not be obligated to comply with any additional CC&Rs unless Lessee was first given an opportunity to review and approve the same (such approval not to be unreasonably withheld, conditioned, or delayed). 43. AMERICANS WITH DISABILITIES ACT. Lessee shall comply, at its sole cost and expense, with all requirements of the Americans With Disabilities Act of 1990, as amended from time to time, and any additional or successor law of similar import or application ("ADA"), applicable to the Premises. Lessee agrees to indemnify, defend, and hold harmless Lessor from and against any and all expenses, liabilities, costs, or damages (including reasonable attorneys' fees) suffered by Lessor as a result of a breach of the foregoing additional obligations imposed on the Premises under the ADA by virtue of Lessee's operations. Lessee agrees that it will be solely responsible for any accommodations or alterations which need to be made to the Premises because of changes applicable after the date of this Lease, or to correct violations of existing requirements arising from the acts or omissions of Lessee's architect or contractors, or to accommodate disabled employees, customers, and invitees of Lessee. Notwithstanding anything in this Lease to the contrary, in no event shall Lessee be responsible for compliance with ADA laws, ordinances, rules and regulations that require structural or other changes to the Premises or the Building unless due to the particular use or manner of occupancy by Lessee, or to accommodate the particular needs of disabled employees or invitees of Lessee, or caused by or resulting from the acts or omissions of Lessee's architect or contractors. In particular, Lessee shall be responsible for causing any improvements or alterations constructed by Lessee pursuant to this Lease to comply with all ADA laws, ordinances, rules and regulations. No provision in this Lease shall be construed as permitting, consenting, or authorizing Lessee to violate the requirements of the ADA. 44. ELECTRIC SERVICE PROVIDER. 44.1 Lessor has advised Lessee that presently Arizona Public Service ("Electric Service Provider") is the utility company selected by Lessor to provide electric service for the Building. Notwithstanding the foregoing, if permitted by law, Lessor shall have the right at any time and from time to time during the Lease Term to either contract for service from a different company or companies providing electricity service (each such company shall hereinafter be referred to as an "Alternate Service Provider") or continue to contract for service from the Electric Service Provider. 44.2 Lessee shall cooperate with Lessor, the Electric Service Provider, and any Alternate Service Provider at all times and, as reasonably necessary, shall allow Lessor, Electric Service Provider, and any Alternate Service Provider reasonable access to the electric lines, feeders, risers, wiring, and any other machinery within the Premises. 44.3 Lessor shall in no way be liable or responsible for any loss, damage, or expense that Lessee may sustain or incur by any reason of any change, failure, interference, disruption, or defect in the supply or character of the electric energy furnished to the Premises, or if the quantity or character of the electric energy supplied by the Electric Service Provider or any Alternate Service Provider is no longer available or suitable for Lessee's requirements, and no such change, failure, defect, unavailability, or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Lessee to any abatement or diminution of rent, or relieve Lessee from any of its obligations under the Lease. 45. GUARANTEE OF LEASE. Lessee acknowledges that Lessor requires that the obligations of Lessee must be guaranteed by Lessee's parent company, Matrix Bancorp, Inc., a Colorado corporation ("Guarantor"). Accordingly, as a condition to Lessor's ongoing obligations under this Lease, Lessee shall cause to be executed and delivered by Guarantor on or before September 30, 1999, a Guarantee of Lease in the form attached hereto as Exhibit "E". Lessor has been advised by Lessee that Guarantor must obtain from Guarantor's existing lenders certain approvals and/or waivers of certain debt ratio covenants ("Approvals") before Guarantor can execute the Guarantee of Lease and that the Approvals may not be forthcoming even after Guarantor undertakes diligent efforts to obtain the same. Accordingly, Lessor and Lessee agree as follows: 45.1 Lessee shall cause Guarantor to promptly take such action necessary to obtain the Approvals legally necessary to permit Guarantor to execute the Guarantee of Lease, and to diligently thereafter seek to obtain the Approvals on or before September 30, 1999. 45.2 If the Approvals are not obtained and the Guarantee of Lease is not duly executed by Guarantor and delivered to Lessor, together with a corporate resolution authorizing the executing officer to do so and a copy of the Approvals, on or before September 30, 1999, then Lessor shall have the right to terminate this Lease by giving written notice to Lessee on or before October 8, 1999, in which event this Lease shall thereafter be of no further force and effect except with respect to any breach of this Lease occurring prior to said date. 45.3 Unless and until notice of termination is given by Lessor to Lessee as provided for in Paragraph 45.2 above, Lessee and Lessor shall proceed under Paragraph 40.1 to prepare the Plans and Specifications and otherwise comply with Lessor's critical path schedule, and Lessee shall cause its architect to proceed accordingly. If the contingency set forth in Paragraph 45.2 is not satisfied on or before September 30, 1999 and Lessor elects to terminate this Lease as set forth above, then Lessee shall be responsible for paying all costs and fees incurred by Lessee with respect to its architect or otherwise in connection with this Lease, the T.I. Allowance shall not apply with respect thereto, and Lessor shall have no obligation to reimburse Lessee for costs, fees, or expenses incurred in connection with this Lease, preparation of the Plans and Specifications, or otherwise with respect to this Lease, the Building, or the Premises. Lessor will be responsible only for its own fees, costs and expenses incurred in connection therewith. 45.4 If the condition set forth in Paragraph 45.2 is satisfied as herein provided on or before September 30, 1999, then this Lease shall remain in full force and effect and Lessor agrees to increase the T.I. Allowance by an amount equal to the lesser of (a) one-half of Guarantor's reasonable attorneys' fees actually incurred in obtaining the Approvals, but not in connection with this Lease or the Guaranty of Lease, as evidenced by statements of legal services rendered showing the attorneys' fees were directly related to obtaining the Approvals, or (b) $15,000.00. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IN WITNESS WHEREOF, the Lessee and the Lessor have signed this Lease as of the 1st day of September, 1999. "LESSOR" "LESSEE" SUNCOR DEVELOPMENT COMPANY, MATRIX FINANCIAL SERVICES an Arizona corporation CORPORATION, an Arizona corporation By: /s/ Margaret E. Kirch By: /s/ George R. Bender ------------------------------------- ------------------------------- Its: Vice President Its: President LIST OF EXHIBITS Exhibit "A" -- Site Plan (unmarked) (see Paragraph 1.2) Exhibit "A-1" -- Site Plan with Project Outlined or Cross-Hatched see Paragraph 1.7) Exhibit "B" -- Floor Plan with Premises Outlined or Cross-Hatched - (See Paragraph 1.2); Building envelope for banking drive-thru facilities (see Paragraph 7.5.1) Exhibit "C" -- Comprehensive Liability Endorsement (see Paragraph 8.1) Exhibit "D" -- List of improvements, description of Building Shell (see Paragraph 40.1) Exhibit "E" -- Form of Guarantee of Lease (see Paragraph 45) EXHIBIT "A" [GRAPHIC OMITTED] EXHIBIT "B" [GRAPHIC OMITTED] EXHIBIT "A-1" [GRAPHIC OMITTED] EXHIBIT "C" COMPREHENSIVE OR COMMERCIAL GENERAL (OCCURRENCE) AND AUTOMOBILE LIABILITY ENDORSEMENT Attached to certificate of insurance for and hereby certified to be a part of the following policy or policies having the following expiration dates: Policy No. Company Providing Policy Expiration Date The scope of the insurance afforded by the policy(ies) designated in the attached certificate is not less than that which is afforded by the standard form(s) promulgated by the Insurance Service Organization. Such Policy(ies) provide for or are hereby amended to provide for the following: 1. The named insureds are ____________________________________________. 2. SunCor Development Company ("Company") is hereby included as an additional insured with respect to liability arising out of or in connection with the following agreement(s): That certain Lease dated the _____ day of ________________, 1999 between SunCor Development Company and Matrix Financial Services Corporation covering the lease and the use of property located in Phoenix, State of Arizona. The insurance provided hereunder applies as though separate policies are in effect for both the named insured and Company but does not increase the limits of liability set forth in said policies. 3. The limits of liability under the policy(ies) are not less than those shown on the certificate to which this endorsement is attached. 4. The commercial general liability policy, if any, provides for aggregate coverage at the location of the premises or work to be performed and for reinstatement of the aggregate in the event the limits of the policy are exhausted. 5. Cancellation or material reduction of this coverage will not be effective until thirty (30) days (ten (10) days in the case of cancellation for nonpayment of premium) following written notice to Company as follows: SunCor Development Company, 3838 N. Central Avenue, Suite 1500 Phoenix, Arizona 85012 Attention: Property Management 6. Contractual liability coverage for liability assumed by this insured under said agreement or agreements with Company. 7. This insurance is primary and insurer is not entitled to any contribution from insurance in effect for Company. 8. This insurance shall not be invalidated by the acts or omissions of other insureds. 9. Broad Form Property Damage endorsement. 10. Products/Completed Operations endorsement. 11. Personal Injury endorsement. 12. All policy or endorsement limitations relating specifically to operations on or near railroad property or track are eliminated. 13. All exclusions of explosion, collapse, or underground hazard are deleted. 14. In the event of reduction or exhaustion of the applicable aggregate limit or limits of liability under the primary policy or policies referred to in the attached certificate of insurance solely by reason of losses paid thereunder on account of occurrences during the policy period, the excess policy, if any, referred to herein, shall (i) in the event of reduction, apply as excess of the reduced limit of liability thereunder; and (ii) in the event of exhaustion, continue in force as though it were primary insurance. 15. The term "Company" includes successors and assigns of Company and the officers, employees, and agents thereof. __________________________________ Insurance Company(ies) Date: ____________________________ By: ______________________________________ Signature of Authorized Representative EXHIBIT "D" As used in this Lease, the term "Building Shell" shall mean all improvements related to the Building covered by the drawings, plans, and specifications listed on pages 2 and 3 of this Exhibit, EXCEPT the following, which will be included in the Work for purposes of this Lease even if described in said drawings, plans, and specifications: 1. Covered parking canopies, supports and related work and improvements for the covered parking structures. 2. Roof curbing for all HVAC units on the roof of the Building. Exhibit "D" - Page 1 Black Canyon Commerce Park Phase 2 List of Drawings [GRAPHIC OMITTED] Exhibit "D" - Page 2 Black Canyon Commerce Park Phase 2 List of Drawings [GRAPHIC OMITTED] Exhibit "D" - Page 3 EXHIBIT "E" GUARANTEE OF LEASE That Triple Net Lease dated as of the ____ day of September, 1999 of ("Lease") has been, or will be, executed by and between SunCor Development Company, an Arizona corporation ("Lessor"), and Matrix Financial Services Corporation, an Arizona corporation ("Lessee"), covering certain premises located in Black Canyon Commerce Park, Phoenix, Arizona, and more particularly described in the Lease ("Premises"). Lessor requires, as a condition to its execution of the Lease, that the undersigned ("Guarantor") guarantee the complete and timely performance of Lessee's obligations under the Lease. NOW, THEREFORE, in consideration of Lessor's execution of the Lease, Guarantor hereby agrees as follows: 1. Guarantor unconditionally guarantees the complete and timely performance of each and all of the terms, covenants and conditions contained in the Lease to be kept and performed by Lessee. 2. This Guarantee shall not be released, diminished or otherwise affected in any way by: 2.1 Any assignment of the Lease by Lessee or the subletting by Lessee of all or a portion of the Premises, with or without the consent of Lessor. 2.2 Any extension, modification or alteration of the Lease by Lessor and Lessee or their respective successors and assigns. 2.3 The bankruptcy, reorganization or insolvency of Lessee or any successor or assignee of Lessee or any disaffirmance or abandonment by a trustee or Lessee. 2.4 The granting of extensions of any time by Lessor with respect to the performance of any of the terms, covenants, obligations and conditions of the Lease. 2.5 Any deferral, reduction or compromising of any rentals and other charges, fees and monetary obligations of any kind due Lessor under the provisions of the Lease. 2.6 The failure by Lessor to require strict performance of any term, covenant, obligation or condition of the Lease or to exercise any rights, powers or remedies granted to Lessor in the Lease. 3. Lessor may, without notice, assign this Guarantee in whole or in part, and no assignment or transfer of this Guarantee shall extinguish or diminish the liability of Guarantor. 4. The liability of Guarantor under this Guarantee shall be primary. Lessor may, at its option, proceed directly against Guarantor without having commenced any action or having obtained any judgment against Lessee with regard to any right or action that accrues to Lessor under the Lease. Guarantor hereby waives the provisions of ss. 12-1641, et seq. of the Arizona Revised Statutes. Guarantor waives any defense arising by reason of any disability or other defense of Lessee, or by reason of the cessation of the liability of Lessee from any cause. Guarantor waives all defenses based upon statutes of limitation to the fullest extent permitted by law. Until the guaranteed obligations have been performed in full, Guarantor shall have no right of subrogation and shall waive any right to enforce any remedy that Lessor now has, or may hereafter have, against Lessee, and waive any benefit of and any right to participate in any security now or hereafter held by Lessor. 5. Lessor is authorized, without notice or demand and without affecting Guarantor's liability hereunder, to take and hold security for the performance of the Lease and/or this Guarantee or the guaranteed obligations, or any part thereof, and exchange, enforce, waive or release any such security, apply such security and direct the order or manner of sale thereof as Lessor, in Lessor's discretion, may determine. 6. Guarantor shall pay Lessor's reasonable attomeys' fees, expert witness fees, costs of tests and analyses, travel and accommodation expenses, deposition and trial transcript copies, court costs and other similar costs and fees incurred in any collection or attempted collection or in any negotiations relative to the obligations hereby guaranteed, or as a result of enforcing this Guarantee against the undersigned, regardless of whether legal proceedings are actually commenced. 7. Guarantor hereby waives presentment, demand, protest and notice of any demand by Lessor, including without limitation, any notice of default by Lessee under the terms of the Lease. 8. The use of the singular herein shall include the plural. The terms and provisions of this Guarantee shall be binding upon and inure to the benefit of the respective successors and assigns of the parties herein named. This Guarantee shall be construed in accordance with the laws of the State of Arizona. IN WITNESS WHEREOF, the undersigned has caused this Guarantee of Lease to be executed as of the _____ day of _____________________________, 1999. "GUARANTOR" MATRIX BANCORP, a Colorado corporation By: /s/ Guy Gibson, President and CEO ----------------------------------------------- Guy Gibson, President and CEO Address: ------------------------------------------ ------------------------------------------ EX-10.23 6 0006.txt LEASE AGREEMENT between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER and MATRIX BANCORP, INC., a Colorado corporation Table of Contents SECTION PAGE - ------- ---- 1. DEFINITIONS..........................................................2 2. PREMISES.............................................................2 3. TERM.................................................................2 4. RENTAL...............................................................2 5. ADJUSTMENT OF RENT...................................................3 6. MISCELLANEOUS TAXES..................................................6 7. USE..................................................................6 8. PREPARATION FOR OCCUPANCY............................................6 9. SERVICES.............................................................6 10. MECHANIC'S LIENS.....................................................8 11. QUIET ENJOYMENT......................................................8 12. CERTAIN RIGHTS RESERVED TO THE LANDLORD..............................8 13. ESTOPPEL CERTIFICATE BY TENANT.......................................8 14. WAIVER OF CERTAIN CLAIMS.............................................9 15. LIABILITY INSURANCE..................................................9 16. HOLDING OVER.........................................................10 17. ASSIGNMENT AND SUBLETTING............................................10 18. CONDITION OF PREMISES................................................12 19. RULES AND REGULATIONS................................................12 20. REPAIRS..............................................................14 21. UNTENANTABILITY......................................................15 22. EMINENT DOMAIN.......................................................15 23. LANDLORD'S REMEDIES..................................................15 24. LATE PAYMENTS; INTEREST AND LATE CHARGES.............................18 25. SALE AND ASSIGNMENT..................................................18 26. SUBORDINATION OF LEASE...............................................18 27. NOTICES AND CONSENTS.................................................18 28. SPRINKLERS...........................................................19 29. NO ESTATE IN LAND....................................................19 30. INVALIDITY OF PARTICULAR PROVISIONS..................................19 31. WAIVER OF BENEFITS...................................................19 32. WAIVER OF TRIAL BY JURY..............................................19 33. SECURITY DEPOSIT.....................................................19 34. SUBSTITUTE PREMISES..................................................20 35. PARKING..............................................................20 36. BROKERAGE............................................................20 37. SPECIAL STIPULATION..................................................20 38. EXHIBITS.............................................................23 (i) Rider to Lease........................................... (ii) Exhibit A - Legal Description of the Property............ (iii) Exhibit B - Lease Commencement Date Statement............ (iv) Exhibit C - Workletter Agreement......................... (v) Exhibit D - Cleaning Schedule............................ OFFICE LEASE THIS LEASE, made the _____ day of _____________, 1999, between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER (the "Landlord") and MATRIX BANCORP, INC., a Colorado corporation, having its principal place of business at 1380 Lawrence Street, Suite 1400, Denver, Colorado (the "Tenant"). L E A S E S U M M A R Y : 2. Premises: Suite 1350 and 1400 located on the 13th and 14th floors of the Building and consisting of approximately 8,768 square feet (13) and approximately 14,987 square feet (14) of Rentable Area Leased. 3. Term: Five (5) years and Eleven (11) Months. Commencement Date April 1, 2000 Termination Date February 28, 2006 4. Rental: Stepped rental rate as follows: Month Expansion Primary Monthly Total Annual Total 4/l/00 - 12/31/00 $14,796.00 $18,830.36 $33,626.36 $403,516.32 1/l/01 - 12/31/01 $15,161.33 $19,422.36 $34,583.69 $415,004.28 1/1/02 - 12/31/02 $15,526.67 $20,310.36 $35,837,03 $430,044.36 1/l/03 - 12/31/03 $15,782.40 $26,976.60 $42,759.00 $513,108.00 1/l/04 - 12/31/04 $16,147.73 $27,601.06 $43,748.79 $524,985.48 1/l/05 - 02/28/06 $16,513.07 $28,225.52 $44,738.59 $536,863.08 5. Adjustment of Rent: Base Year 2000 Tenant's Proportionate Share 13.73% 27. Notice To Landlord: Notice To Tenant: Jones Lang LaSalle Americas Matrix Bancorp, Inc., Inc (Colorado) L.P. 1380 Lawrence Street, Suite 1400 University of Colorado at Denver Denver, CO 80202 1380 Lawrence Street Denver, Colorado 80204 33. Security Deposit: $32,000 35. Parking: 20 10 unreserved spaces [Changes handwritten and 10 reserved spaces initialed by parties to Lease at time of signing] Rider: Option to Renew W I T N E S S E T H : 1. DEFINITIONS. The terms defined in this Section shall, for all purposes of this Lease, and all agreements amending or supplementing this Lease, have the meanings herein specified unless the context otherwise requires. (a) The "Building" shall mean the commercial office structure together with all appurtenant plazas, subgrade areas, garages and other improvements, situated on the Land, known as 1380 Lawrence Street, Denver, Colorado 80204. (b) The "Land" shall mean the real property whose legal address is attached and incorporated herein as Exhibit "A". The "Property" shall mean the Building and the Land. (c) "Rentable Area" shall mean the total number of square feet of rentable floor area of office space in the Building; and that number is 172,978 square feet. (d) "Rentable Area Leased" shall mean the total number of square feet of rentable floor area of office space in the Premises, and that number is 23,755 square feet. (e) Tenant's "Proportionate Share" shall be that percentage the Rentable Area Leased is of the Rentable Area. Such percentage is 13.73% . 2. PREMISES. In consideration of the rents, charges, covenants and agreements herein contained, Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord the space referred to as Suite 1350 and 1400 , located on the 13th and 14th floors of the Building (the "Premises"), together with the non-exclusive right to use, in common with others, the public areas of the Building including, without limitation, the lobby, stairs, elevators, entrances and loading docks. No easement for air or light or view is included with the Premises. Landlord and Tenant agree that the rentable square footage of the Premises is 23,755 square feet of rentable area, and waive and release any right to assert or claim otherwise. [Bold change handwritten and initialed by parties to Lease at time of signing] 3. TERM. The term (hereinafter called the "Term") of this Lease shall commence on the earlier of occupancy of the Premises by Tenant, or April 1, 2000, subject to items which will not materially affect the use of the Premises for the use in accordance with Section 7 hereof, and extension and earlier termination as hereinafter provided. Prior to occupying the Premises, Tenant shall execute and deliver to Landlord a letter in the form attached hereto and made a part hereof as Exhibit "B", acknowledging the commencement date (hereinafter called the "Commencement Date") and the expiration date (hereinafter called the "Expiration Date") of the Term for the Premises and, if applicable, any Excess Allowance owed pursuant to the Lease for Tenant Improvements. In the event the Tenant does not provide to Landlord such letter within thirty (30) days after occupying the Premises, then the Commencement Date shall be the earlier of the occupancy of the Premises by Tenant or the Target Date outlined above. Landlord shall use reasonable efforts to give Tenant at least thirty (30) days' notice of the date upon which, in Landlord's opinion, the Commencement Date shall occur, provided that Landlord shall have no liability in the event the Commencement Date shall not occur on the date specified, and failure to give possession on the date specified shall in no way affect the validity of this Lease or the obligations of the Tenant hereunder. Expiration Date. Unless otherwise terminated herein, if the Term commences on a date other than the first day of a month, it shall expire at the end of the day seventy-one (71) months from the last day of the month in which it commenced. If the Term commences on the first day of a month, it shall expire at the end of the day seventy-one (71) months from the last day of the calendar month preceding the Commencement Date. The expiration date is hereinafter referred to as the "Expiration Date". 4. RENTAL. (a) Tenant agrees to pay to Landlord for use and occupancy of the Premises, lawful money of the United States, payable without notice or demand in advance on the first day of each calendar month during the term, an initial annual base rental (hereinafter, "Initial Annual Base Rental") according to the schedule below. The Initial Annual Base Rental when adjusted as set forth in this Section shall be the Annual Base Rental. The Initial Annual Base Rental shall step as follows: Month Expansion Primary Monthly Total Annual Total 4/l/00 - 12/31/00 $14,796.00 $18,830.36 $33,626.36 $403,516.32 l/l/01 - 12/31/01 $15,161.33 $19,422.36 $34,583.69 $415,004.28 l/l/02 - 12/31/02 $15,526.67 $20,310.36 $35,837,03 $430,044.36 l/l/03 - 12/31/03 $15,782.40 $26,976.60 $42,759.00 $513,108.00 l/l/04 - 12/31/04 $16,147.73 $27,601.06 $43,748.79 $524,985.48 l/l/05 - 02/28/06 $16,513.07 $28,225.52 $44,738.59 $536,863.08 (b) All payments of Annual Base Rental required to be made under this Section 4, or payments to be made by Tenant under any other Section of this Lease (hereinafter designated "Additional Rent"), shall be made without any setoff or counterclaim whatsoever, and shall be made payable to and sent to Landlord at the management office of Landlord in the Building or such other place as Landlord may designate. (c) Annual Base Rental and Additional Rent are sometimes hereinafter collectively referred to as "Rent". The first monthly installment of Annual Base Rental shall be paid on the Commencement Date, except that in the event the Commencement Date shall be a date other than the first day of the calendar month, then Tenant shall pay on the Commencement Date an amount equal to such portion of an equal monthly installment as the number of days from the Commencement Date to the end of the calendar month in which the Commencement Date occurs bears to the total number of days in said calendar month, and said payment shall represent the pro-rata Annual Base Rental from the Commencement Date to the end of such calendar month. 5. ADJUSTMENT OF RENT. (a) Operating Costs: (i) Operating Costs shall be deemed to include all costs which, for federal tax purposes, may be expensed rather than capitalized and which Landlord will incur in owning, maintaining and operating the Property, exclusive of Real Estate Taxes, as hereinafter defined, mortgage interest and depreciation. Without limitation to the foregoing, the term "Operating Costs" shall mean those costs incurred during each year of the Term in respect of the operations and maintenance of the Property in accordance with accepted principles of sound management and accounting practices as applied to the operation and maintenance of first class office buildings in Denver, including the cost of or charges for the following by way of illustration but without limitation: landscaping and snow removal, water and sewer, insurance premiums, licenses, permits and inspections, heat, light, electrical power, steam, security, janitorial services, maintenance of and repairs to equipment servicing the Property (including costs associated to ensure the accurate processing of data), window cleaning, refuse removal services, air conditioning, supplies, materials, equipment and tools, contractual and recorded duties on the Property, administration and management of the Property; changing the Building's electric service provider and associated installation, maintenance, repair and service costs, personal property taxes on the personal property used in the operation of the Property, the cost, as reasonably amortized by Landlord with interest at one and one-half (1-1/2%) percent above the prime rate announced from time to time by the Norwest Bank of Denver, N.A., or its successor, on the unamortized amount of any capital improvement made after the Commencement Date which reduces Operating Costs but in an amount not to exceed such reduction for the relevant year, and the cost of contesting by appropriate proceedings the applicability to the Property or the validity of any statute, ordinance, rule or regulation affecting the Property which might increase Operating Costs. Operating Costs shall not include costs for repairs or other work occasioned by fire, windstorm or other insured casualty to the extent recovered by insurance proceeds; cost incurred in leasing or procuring new tenants (i.e., lease commissions, advertising costs and costs for renovating space for new tenants); legal costs in enforcing the terms of any lease; interest or amortization payments on any mortgage or mortgages. If Landlord makes any capital improvement during the Term of this Lease in order to comply with safety or any other requirements of any Federal, State or local law or governmental regulation, then the Tenant shall be responsible for its Proportionate Share of any such charges, with interest at one and one-half percent (1-1/2%) above the prime rate announced from time to time by Norwest Bank of Denver, N.A., or its successors. For the preceding sentence, Tenant's Proportionate Share of said charges is determined by multiplying the annual amortization of said charges as determined by generally accepted accounting principles by Tenant's Proportionate Share. Said amount with interest shall be deemed an Operating Cost in each of the calendar years during which such amortization occurs. Operating Costs allocated to Tenant shall not reflect any type or degree of service or duty performed by or through Landlord for any other tenant which is not required to be performed for Tenant under this Lease which results in a cost in excess of the services or duties required to be provided by Landlord under this Lease. (ii) Per square foot Operating Costs shall be determined by dividing the Operating Costs by the Rentable Area. (iii) The Annual Base Rental described in Section 4 hereof is predicated, in part, upon the total annual Operating Costs for the calendar year 2000 per square foot of Rentable Area within the Building. Prior to the first day of April of each calendar year during the course of the Term, Landlord shall furnish Tenant with an estimate of the per square foot Operating Costs for that calendar year. (iv) If annual Operating Costs as estimated by the Landlord exceed the total annual Operating Costs for the calendar year 2000 calculated on a per square foot basis, Tenant shall pay its Proportionate Share of such excess to Landlord as Additional Rent. Tenant agrees to pay in advance on a monthly basis its Proportionate Share of such excess, as reasonably calculated and adjusted, from time to time, by Landlord. Such amounts shall be paid to Landlord on the first day of the month. After December 31 of each year during the Term, when actual Operating Costs for the prior year have been calculated, Landlord shall credit Tenant for the amount of any overpayment, or Tenant shall pay to Landlord the amount of any underpayment as Additional Rent. It is the intention hereunder to estimate the amount of any Operating Costs for each year and then to adjust when actual costs are known, such estimates in the following year calculated from actual Operating Costs incurred or paid by Landlord for the prior year. (v) In determining the amount of Operating Costs for the purpose of this Section, for any calendar year including the base year, (i) if less than 95 % of the Building shall have been occupied by tenants and fully used by them at any time during such year, Landlord may increase Operating Costs to an amount equal to the like Operating Costs which would normally be expected to be incurred had such occupancy been 95% and had such full utilization been made during the entire period, and (ii) if the Landlord is not furnishing any particular work or service (the cost of which if performed by the Landlord would constitute an Operating Cost) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by the Landlord, Landlord may increase Operating Costs by an amount equal to the additional Operating Costs which would reasonably have been incurred during such period by the Landlord if it had at its own expense furnished such work or service to such tenant. Notwithstanding the foregoing, Landlord may not increase Operating Costs under this paragraph for any calendar year unless Landlord also has or does increase Operating Costs for the base year in a like manner. (b) Real Estate Taxes: (i) The term "Real Estate Taxes" means all taxes and assessments, special or otherwise levied upon or with respect to the Building and the Land (including air rights) imposed by Federal, State or local governments, use, occupancy, excise or similar taxes, and taxes on rent and other income from the Building (computed, in case of a graduated tax, as if Landlord's income from the Building were Landlord's sole taxable income), the cost of contesting by appropriate proceeding the amount or validity of any of the aforementioned taxes or assessments and taxes and assessments of every kind and nature whatsoever levied and assessed and imposed on Landlord in lieu of or in substitution for existing or additional real or personal property taxes or assessments on the Land, Building, or said personal property; except that Real Estate Taxes shall not include general income, franchise, capital stock, estate or inheritance taxes unless Landlord equitably determines that such taxes are in lieu of or a substitution for Real Estate Taxes. In the case of special taxes and assessments payable in installments, only the amount of each installment due and payable during a single calendar year shall be included in Real Estate Taxes for that year. (ii) Per square foot Real Estate Taxes shall be determined by dividing the Real Estate Taxes by the total number of square feet of Rentable Area in the Building. (iii) The Annual Base Rental described in Section 4 hereof is predicated, in part, upon the total annual Real Estate Taxes for the calendar year 2000 per square foot of Rentable Area within the Building. Prior to the first day of April of each calendar year during the course of the Term, Landlord shall furnish Tenant with an estimate of the per square foot Real Estate Taxes for that calendar year. (iv) If annual Real Estate Taxes as estimated by the Landlord exceed the total annual Real Estate Taxes for the calendar year 2000 calculated on a per square foot basis, Tenant shall pay its Proportionate Share of such excess to Landlord as Additional Rent. Tenant agrees to pay in advance on a monthly basis its Proportionate Share of such excess as reasonably calculated and adjusted, from time to time, by Landlord. Such amounts shall be paid to Landlord on the first day of the month. After December 31 of each year during the Term, when actual Real Estate Taxes for the prior year have been calculated, Landlord shall credit Tenant for the amount of any overpayment, or Tenant shall pay to Landlord the amount of any underpayment as Additional Rent. It is the intention hereunder to estimate the amount of any Real Estate Taxes for each year and then to adjust when actual costs are known, such estimates in the following year calculated from actual Real Estate Taxes incurred or paid by Landlord for the prior year. (v) In determining the amount of Real Estate Taxes for the purpose of this Section, for any calendar year including the base year, if less than 95% of the Building shall have been occupied by tenants and fully used by them at any time during such year, Landlord may increase Real Estate Taxes to an amount equal to the like Real Estate Taxes which would normally be expected to be incurred had such occupancy been 95 % and had such full utilization been made during the entire period. Notwithstanding the foregoing, Landlord may not increase Real Estate Taxes under this paragraph for any calendar year unless Landlord also has or does increase Real Estate Taxes for the base year in a like manner. (c) If the term shall terminate on a date other than December 31st, the adjustments in Annual Rent described in this Section shall be increased or decreased, as the case may be, for the period commencing on the January 1st following the last full calendar year of the Term and continuing to the end of the Term, in the manner set forth in this Section and the adjustment for such period shall be made within twenty (20) days after Landlord shall render its statements for the last monthly installment of the Annual Base Rental payable under this Lease, or if that is not reasonably feasible as soon thereafter as is reasonably feasible, and this obligation shall survive the expiration or earlier termination of the term. (d) Landlord shall deliver to Tenant, within one hundred twenty (120) days after the end of each calendar year during the Term, unless delayed by causes beyond Landlord's reasonable control, a written statement ("Statement") setting out in reasonable detail the amount of Operating Costs and Real Estate Taxes for the preceding calendar year. If the aggregate of monthly installments of Operating Costs and/or Real Estate Taxes actually paid by Tenant to Landlord differ from the amount due in the Statement, then, as the case may be, Tenant shall pay the difference to Landlord or Landlord shall issue a credit to Tenant against the Rent remaining to be paid hereunder for the difference, or if no Rent then remains to be paid, refund the difference to Tenant, without interest or penalty, within thirty (30) days after the date of delivery of the Statement. (e) In the event Tenant disputes the amounts set forth in the Statement set forth in Subparagraph 5(d) above, upon no less than ten (10) business days' prior written notice to Landlord, Tenant or Tenant's in-house employee or representative shall have the right to examine Landlord's books and records as to amounts due in the Statement. Any examination is subject to a confidentiality agreement executed by Tenant and Tenant's in-house employee or representative and shall occur at the location where said records are maintained during normal business hours. Tenant shall have thirty (30) calendar days after delivery of the Statement set forth in Subparagraph 5(d) above to provide Landlord with written notice of exception of any item in the Statement. Unless Tenant provides said written notice of exception detailing any disputed charges to Landlord within said time, Tenant shall conclusively be deemed to have accepted the accuracy of the Statement and to have waived any right to claim any readjustment in connection therewith. If Tenant makes such timely written notice of exception, a certification as to the proper amount of any item set forth in Tenant's written notice of exception shall be made by a reputable accounting firm reasonably satisfactory to Landlord and paid for by Tenant. Under no circumstances shall Tenant conduct a review of Landlord's books and records whereby the person or firm performing the review operates on a contingency fee or similar payment arrangement or if there exists an uncured Event of Default, as defined herein, by Tenant. (f) In no event shall the Annual Base Rental be reduced below the amount in Section 4 as a result of any adjustments pursuant to this Section. (g) Rent, whether Annual Base Rent or Additional Rent, or any other amount payable by Tenant to Landlord not paid when due will bear interest from the date due until the date paid at an annual rate equal to the prime rate charged from time to time by the Norwest Bank of Denver in ninety-day commercial loans. (h) All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of non-payment thereof, Landlord shall have all the rights and remedies herein provided for in case of non-payment of Rent. 6. MISCELLANEOUS TAXES. Tenant shall pay prior to delinquency all taxes assessed against or levied upon its occupancy of the Premises, or upon the fixtures, furnishings, equipment and all other personal property of Tenant located in the Premises, if non-payment thereof shall give rise to a lien on the real estate, and when possible Tenant shall cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord. In the event any or all of Tenant's fixtures, furnishings, equipment and other personal property, or taxes upon Tenant's occupancy of the Premises, shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's fixtures, furnishings, equipment or personal property. 7. USE. The Premises shall be used and occupied by Tenant for general office use and for no other purpose, (a) Tenant shall not at any time use or occupy the Premises or the Building, or suffer or permit anyone to use or occupy the Premises, or do anything in the Premises or the Building, or suffer or permit anything to be done in, brought into or kept on the Premises, which in any manner in the sole discretion of Landlord (a) violates the Certificate of Occupancy for the Premises or for the Building; (b) causes or is liable to cause injury to the Premises or the Building or any equipment, facilities or systems therein; (c) constitutes a violation of the laws and requirements of any public authorities or the requirements of insurance bodies; (d) impairs or tends to impair the character, reputation or appearance of the Building as a first-class office building; (e) impairs or tends to impair the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (f) constitutes a nuisance, public or private. (b) Notwithstanding any other provision of this Lease to the contrary (including without limitation, Paragraph 9 regarding heating, ventilation and air conditioning and Paragraph 19 regarding rules and regulations), Tenant hereby agrees that the aggregate number of people (including, without limitation, full-time employees, part-time employees, independent contractors and agents of Tenant) which may use or perform services or activities in the Lease Premises shall not exceed a ratio of one (1) person for each two hundred fifty (250) rentable square feet of space in the Leased Premises, regardless of whether such people "office share", "job share" or work in shifts. Landlord hereby acknowledges that Tenant may, from time to time, allow invitees, guests and repair workers to enter the Premises for the purposes of meeting with employees and making repairs, and that the presence of such people shall not be included in the aforementioned calculation. Any violation by Tenant of the terms and conditions of the Paragraph 7 shall be deemed to be an Event of Default as defined in Paragraph 23 of the Lease for which there is no cure period. 8. PREPARATION FOR OCCUPANCY. Prior to the Commencement Date, Landlord shall, at Landlord's sole cost and expense, alter and fit-up the Premises to the extent set forth in the Workletter Agreement of even date herewith, marked Exhibit "C" and attached hereto (herein referred to as "Building Standard Improvements"). Landlord and Tenant agree that, subject to the terms of this Lease and the Workletter Agreement, Tenant may construct a supplemental fire suppression system (the "Auxiliary Sprinkler System") in the Premises. Tenant agrees that upon termination of this Lease for any reason, at Landlord's sole option and Tenant's sole cost including any associated costs, Tenant shall remove the Auxiliary Sprinkler System and return the Premises, including all fire suppression systems altered by Tenant, to building standard conditions. Other than Building Standard Improvements, all pre-occupancy alteration and fit-up of the Premises shall be performed at Tenant's sole cost and expense (herein referred to collectively as "Special Work"), subject to the terms and provisions of the Workletter Agreement and this Lease. 9. SERVICES. The Landlord shall provide, at Landlord's expense, except as otherwise provided, the following services: (a) Janitor service as described in Exhibit "D" attached hereto, in and about the office space, Saturdays, Sundays, and legal and union holidays excepted. (b) Heat and, except for basement space, air-conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises, from 7:00 a.m. to 6:00 p.m. on Mondays through Fridays, from 9:00 a.m. to 1:00 p.m. on Saturdays, excepting Sundays, union and legal holidays in each instance, Whenever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air-conditioning system, Landlord reserves the right, at its option, either to require Tenant to discontinue the use of such heat generating machines or equipment or to install supplementary air-conditioning equipment in the Premises; the cost of such installation shall be paid by Tenant to Landlord promptly on being billed therefor, and the cost of operation and maintenance of said supplementary equipment shall be paid by Tenant to Landlord on the monthly rent payment dates as such rates as may be agreed on, but in no event at a rate less than Landlord's actual cost therefor of labor, materials and utilities. (c) Water for drinking, lavatory and toilet purposes, in public areas only. (d) Passenger elevator service at all times. (e) Window washing of all exterior windows, both inside and out. (f) Reasonable amounts of electricity, If Tenant shall require electric current design capacity in excess of 2.0 watts per square foot at 208/120v (three phase) for use of the Premises as general office space, Tenant shall first procure the consent of Landlord, which Landlord may refuse, to the use thereof and Landlord may cause an electric check meter to be installed in the Premises or Landlord shall have the right to cause a reputable independent electrical engineering or consulting firm to survey and determine the value of the electric service furnished for such excess electric current. The cost of any such survey or meters and/or installation, maintenance and repair thereof shall be paid for by Tenant. Tenant agrees to pay to Landlord promptly upon demand therefor, for all such electric current consumed as shown by said meters or by said survey at the rates charged for such services by the City, or the local public utility, as the case may be, furnishing the same, plus any additional expense incurred in keeping account of the electric current so consumed. It is understood that cost, as determined by Landlord, of material and labor for replacing light bulbs, tubes, ballasts, starters, switches and any other parts and fixtures used in furnishing electricity to the leased Premises shall also be paid by Tenant. Tenant covenants and agrees that at all times its use of electric current shall never exceed Tenant's proportionate share of the capacity of existing feeders to the Building or the risers or wiring installation. Any riser or risers or wiring to meet Tenant's excess electrical requirements, upon written request of Tenant, will be installed by Landlord, at the sole cost and expense of Tenant if, in Landlord's sole judgment, the same are necessary and will not cause permanent damage or injury to the Building or Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alteration, repairs or expense or interfere with or disturb other tenants or occupants. Landlord has advised Tenant that presently Public Service Company of Colorado ("Electric Service Provider") is the utility company selected by Landlord to provide electricity service for the Building. Notwithstanding the foregoing, if permitted by Law, Landlord shall have the right at any time and from time to time during the Term of the Lease and any extension thereof to either contract for service from a different company or companies providing electricity service (each such company shall hereinafter be referred to as an "Alternate Service Provider") or continue to contract for service from the Electric Service Provider. Tenant shall cooperate with Landlord, the Electric Service Provider, and any Alternate Service Provider at all times and, as reasonably necessary, shall allow Landlord, Electric Service Provider, and any Alternate Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Premises and accept reasonable disturbances caused thereby. Should Tenant require any additional work or service, including but not limited to the additional work or service described above, including service furnished outside the stipulated hours, Landlord may, upon reasonable advance notice by Tenant, furnish such additional service and Tenant agrees to pay the Landlord such charges as may be agreed on, but in no event at a charge less than Landlord's actual cost plus overhead for additional services provided, it being agreed that the cost to the Landlord of such additional services shall be excluded from Operating Expense. It is understood that Landlord does not warrant that any of the services referred to above, or any other services which Landlord may supply, will be free from interruption, Tenant acknowledging that any one or more such services may be suspended by reason of accident or of repairs, maintenance, tests, change of electric service provider (or the modification of facilities in connection therewith) alterations or improvements necessary or advisable to be made, or by strikes or lockouts, or by reason of operation of law, or causes beyond the reasonable control of Landlord. Any such interruption of service shall never be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, or render Landlord liable to Tenant for damages by abatement of Rent or otherwise, or relieve Tenant from performance of Tenant's obligations under this Lease. 10. MECHANIC'S LIENS. Tenant shall pay before delinquency all costs for work done or caused to be done by Tenant in the Premises which could result in any lien or encumbrance on Landlord's interest in the Land or Building or any part thereof, shall keep the title to the Land or Building and every part thereof free and clear of any lien or encumbrance in respect of such work and shall indemnify and hold harmless Landlord against any claim, loss, cost, demand and legal or other expense, whether in respect of any lien or otherwise, arising out of the supply of material, services or labor for such work. Tenant shall immediately notify Landlord of any such lien, claim of lien or other action of which it has, or reasonably should have had, knowledge and which affects, or could affect, the title to the Land or Building or any part thereof and Tenant shall cause the same to be removed within ten (10) days, failing which Landlord may take such action as Landlord deems necessary to remove the same and the entire cost thereof shall be immediately due and payable by Tenant to Landlord. 11. QUIET ENJOYMENT. So long as Tenant shall observe and perform the covenants and agreements binding on it hereunder, the Tenant shall at all times during the Term herein granted peacefully and quietly have and enjoy possession of the Premises without any encumbrance or hindrance by, from or through the Landlord, its successors or assigns. 12. CERTAIN RIGHTS RESERVED TO THE LANDLORD. The Landlord reserves the following rights: (a) To name the Building and to change the name or street address of the Building. (b) To install and maintain a sign or signs on the exterior or interior of the Building. (c) To designate all sources furnishing sign painting and lettering, ice, drinking water, towels, toilet supplies, shoe shining, vending machines, mobile vending service, catering, and like services used on the Premises. (d) During the last ninety (90) days of the Term, if during or prior to that time the Tenant vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for re-occupancy, without affecting Tenant's obligation to pay rental for the Premises. (e) To constantly have pass keys to the Premises. (f) On reasonable prior notice to the Tenant, to exhibit the Premises to prospective tenants during the last twelve (12) months of the Term, and to any prospective purchaser, mortgagee, or assignee of any mortgage of the Property and to others having a legitimate interest at any time during the Term, (g) At any time in the event of an emergency, otherwise at reasonable times, to take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or the Landlord's interests, or as may be necessary or desirable in the operation or improvement of the Building or in order to comply with all laws, orders and requirements of governmental or other authority. (h) To install vending machines of all kinds in the Premises, and to provide mobile vending service therefor, and to receive all of the revenue derived therefrom, provided, however, that no vending machines shall be installed by Landlord in the Premises nor shall any mobile vending service be provided therefor, unless Tenant so requests, 13. ESTOPPEL CERTIFICATE BY TENANT. The Tenant agrees that from time to time upon not less than ten (10) business days' prior request by the Landlord, the Tenant will deliver to the Landlord a statement in writing certifying (a) that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and identifying the modifications), (b) the Commencement Date, Termination Date, and the dates to which the Rent and other charges have been paid, and (c) that, to the best knowledge of the person making the certificate knows, the Landlord is not in default under any provision of this Lease, and, if the Landlord is in default, specifying each such default of which the person making the certificate may have knowledge, it being understood that any such statement so delivered may be relied upon by the Landlord, any landlord under any ground or underlying lease, or any prospective purchaser, mortgagee, or any assignee of any mortgage on tile Property. Tenant also shall include or confirm in any such statement such other information concerning this Lease as Landlord may reasonably request. 14. WAIVER OF CLAIMS, INDEMNITY, WAIVER OF SUBROGATION. The Tenant, to the extent permitted by law, expressly, knowingly and voluntarily waives and releases any claims it may have against the Landlord, and against the Landlord's agents, employees and contractors, for theft or damage to property (including business interruption of Tenant's Business) or injury to person sustained by the Tenant or by any occupant of the Premises, or by any other person, as a result of the acts or omissions of Landlord or Landlord's employees, agents, or contractors (including as a result of the negligence of Landlord or its employees, agents, or contractors). Without limiting the foregoing, Tenant waives any claims against Landlord as a result of any part of the Property or any equipment or appurtenances becoming out of repair, or resulting from any accident in or about the Property or resulting directly or indirectly from any act or neglect of any tenant or occupant of any part of the Property or of any other person. This provision shall apply especially (but not exclusively) to damage caused by water, frost, weather, steam, sewerage, electricity, gas, sewer gas or odors, or by the bursting or leaking of pipes or plumbing work, and shall apply equally whether such damage is caused or occasioned by anything or circumstance above-mentioned or referred to, or by any other thing or circumstance whether of a like or wholly different nature. If any damage to the property results from any act or neglect of the Tenant or Tenant's agents, employees or invitees, the Landlord may, at the Landlord's option, repair such damages and the Tenant shall thereupon pay to the Landlord the total cost of such repair. All personal property belonging to the Tenant or any occupant of the Premises that is in or on any part of the Property shall be there at the risk of the Tenant or of such other person only, and the Landlord, its agents and employees shall not be liable for any damage thereto or for the theft or misappropriation thereof. Notwithstanding any other provision of this Lease to the contrary, no term or condition of this Lease shall be construed or interpreted as a waiver, either expressed or implied, of any of the immunities, rights, benefits or protection provided to Lessor under the Colorado Governmental Immunity Act, 24-10-101 et seq., C.R.S., as amended (including, without limitation, any amendments to such statute, or under any similar statute which is subsequently enacted). The parties hereto understand and agree that liability for claims for injuries to persons or property arising out of the negligence of the State of Colorado, its departments, institutions, agencies, boards, officials and employees is controlled and limited by the provisions of 24-10-101, et seq., C.R.S., as amended. Any provision of this Lease, whether or not incorporated herein by reference, shall be controlled, limited and otherwise modified so as to limit any such liability of Landlord to the above cited laws. The Tenant agrees to hold the Landlord harmless and indemnified (including reasonable attorney fees) against claims and liability for injuries to all persons and for damage to or loss of property occurring in or about the Property, due to any act of negligence or default under this Lease by the Tenant, its contractors, agents, employees, invitees, or those on the Property by or through Tenant. Tenant agrees that in the event Tenant shall have any claim against Landlord under the Lease or arising out of the subject matter of the Lease, as amended from time to time, Tenant's sole recourse shall be against the Landlord's interest in the Building, for the satisfaction of any claim, judgment or decree requiring the payment of money by Landlord as a result of a breach hereof or otherwise in connection with the Lease, and no other property or assets of Landlord, its successors or assigns, shall be subject to the levy, execution or other enforcement procedure for the satisfaction of any such claim, judgment, injunction or decree. Moreover, Tenant agrees that Landlord shall in no even and under no circumstances be responsible for any consequential damages incurred or sustained by Tenant, or its employees, agents, contractors or invitees as a result of or in any way connected to Tenant's occupancy of the Premises. Tenant further hereby waives any and all right to assert any claim against or obtain any damages from, for any reason whatsoever, the agents, trustees, directors, officers and partners of Landlord including all injuries, damages or losses to Tenant's property, real and personal, whether known unknown, foreseen, unforeseen, patent or latent, which Tenant may have against Landlord or its agents, directors, officers or partners under the Lease or arising out of the subject matter of the Lease. Tenant understands and acknowledges the significance and consequence of the waivers and indemnifications set forth herein. The indemnity and hold harmless obligations of the Tenant shall survive termination of this Lease. To the extent that the Tenant carries insurance coverage, all policies shall include a clause or endorsement denying the insurer any rights of subrogation or recovery against the Landlord. 15. LIABILITY INSURANCE. Tenant shall, at its expense, maintain during the Term, comprehensive public liability insurance, contractual liability insurance and broad form property damage insurance under policies issued by insurers of recognized responsibility, with limits of not less than $2,000,000 for personal injury, bodily injury, death, or for damage or injury to or destruction of property (including the loss of use thereof) for any one occurrence. Tenant's policies shall name Landlord, its agents, servants and employees as additional insureds. Tenant shall provide, at least ten (10) days prior to the time such insurance is first required, and at least thirty (30) days prior to the expiration of each such policy, a Certificate of Insurance to Landlord (in a form substantially similar to an Acord Form 27), without notice. At the option of the Landlord, the originals of all policies of insurance shall be held by Landlord. Every policy shall contain an endorsement requiring thirty (30) days' written notice from the insurance company to the Landlord before cancellation or any change in the coverage, scope or amount of any policy and a clause or endorsement denying the insurer any rights of subrogation or recovery against Landlord as set forth in Section 14 above. 16. HOLDING OVER. If the Tenant retains possession of the Premises or any part thereof after the termination of the Term, the Tenant shall pay the Landlord Rent at double the monthly rate specified in Section 4 for the time the Tenant thus remains in possession and, in addition thereto, shall pay the Landlord for all damages, consequential as well as direct, sustained by reason of the Tenant's retention of possession. If the Tenant remains in possession of the Premises, or any part thereof, after the termination of the term, such holding over shall, at the election of the Landlord expressed in a written notice to the Tenant and not otherwise, constitute a renewal of this Lease for one year. The provisions of this Section do not exclude the Landlord's rights of re-entry or any other right hereunder. 17. ASSIGNMENT AND SUBLETTING. (a) The Tenant, or any other occupant, shall not, without the Landlord's prior written consent: (a) assign, convey, mortgage, pledge, encumber or otherwise transfer (whether voluntarily or otherwise) this Lease or any interest under it; (b) allow any transfer thereof or any lien upon the Tenant's interest by operation of law; (c) sublet the Premises or any part thereof, or (d) permit the use or occupancy of the Premises or any part thereof by any one other than the Tenant. (b) Notwithstanding anything herein to the contrary, if at any time or from time to time during the Term, Tenant desires to sublet or assign the Lease with respect to all or part of the Premises, Tenant shall notify Landlord in writing (hereinafter referred to in this Section as the "Notice") of the terms of the proposed subletting or assignment and the area proposed to be sublet or covered by the assignment and shall give Landlord the option to sublet from Tenant such space (hereinafter referred to as "Sublet Space") at the same Rent and Additional Rent as Tenant is required to pay to Landlord under this Lease for the same space, or, at Landlord's option, to terminate this Lease with respect to the Sublet Space. If the Sublet Space does not constitute the entire Premises and Landlord exercises its option to terminate this Lease with respect to the Sublet Space, then as to that portion of the Premises which is not part of the Sublet Space, this Lease shall remain in full force and effect except that the Rent and Additional Rent shall be reduced by a fraction, the numerator of which shall be the rentable square feet of the Sublet Space and the denominator of which shall be the rentable square feet of the Premises. The option to sublet, or to terminate this Lease, shall be exercisable by Landlord in writing within a period of thirty (30) calendar days after receipt of the Notice, In the event Landlord exercises the option to sublet the Sublet Space, the term of the subletting from the Tenant to Landlord shall be the term set forth in the Notice and shall be on such terms and conditions as are contained in this Lease to the extent applicable, except that the Landlord shall have the right to further sublet the Sublet Space, in its sole and absolute discretion. If Landlord fails to exercise either of its options within the said thirty (30) day period, the Tenant may submit to Landlord within twenty (20) days after said period a copy of the proposed assignment or sublease and such information concerning the proposed assignment or sublease as may be requested by Landlord for Landlord's review. If Landlord, in its sole discretion, approves in writing the terms of the proposed assignment or sublease and the proposed assignee or sublessee but a fully executed counterpart of such assignment or sublease is not delivered to Landlord within sixty (60) days after the date of Landlord's approval, then Landlord's approval of the proposed assignment or sublease shall be deemed null and void and Tenant shall again comply with all the conditions of this Section as if the Notice and options hereinabove referred to had not been given and received. (c) Assignment under the Lease. The following shall be deemed to be an assignment under this Lease: (i) the sale, transfer or creation of a total of more than Fifty Percent (50%) of the shares of the stock of a corporation, or more than Fifty Percent (50%) of the ownership interests of any other type of entity which is then the Tenant under this Lease, including, but not limited to, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, limited liability companies, and limited partnership associations; or (ii) the merger of the Tenant with another entity whereby the Tenant is not the surviving entity; or (iii) the conversion of the Tenant into another entity; or (iv) if the Tenant is a general or limited partnership, its registration with the Colorado Secretary of State's office pursuant to C.R.S. Section 7-60-144; or (v) if the Tenant is a general or limited partnership formed on or before December 31, 1997, its election to be governed by C.R.S. Section 7-64-101 et seq. (vi) provided that, notwithstanding the foregoing subsections of the Section 17(c), a sale or transfer of more than 50% of the shares of the stock of Tenant, or a merger of Tenant with or into another firm or entity, shall not be deemed to be an assignment under this Section 17 (and no consent of the Landlord shall be required) if the Tenant (or the entity with which Tenant merges) has immediately after giving effect to the transaction in question, a net worth (as determined under GAAP) of at least $50 million and Tenant (or the entity with which Tenant merges) consents to and is bound by all the terms and conditions of this Lease. (d) Tenant agrees to pay to Landlord, on demand, reasonable costs incurred by Landlord in connection with any request by Tenant for Landlord to consent to an assignment or subletting by Tenant. (e) If Landlord fails to exercise either of its options under Subsection (b) above, and if this Lease is assigned or if the Premises or any part thereof is sublet or occupied by anybody other than Tenant, Tenant shall pay to Landlord, as Additional Rent, all of the Excess Sublease Rent (as hereinafter defined) less the reasonable and customary out-of-pocket transaction costs incurred by Tenant in connection with such subletting or assignment, including attorney's fees, brokerage commissions, and alteration costs (which transaction costs shall be amortized on a straight-line basis over the sublease or assignment term). Excess Sublease Rent shall include all rents, additional charges, and any and all other consideration payable to Tenant by the subtenant or assignee for or by reason of such sublease or assignment and which are, in the aggregate, in excess of the rent payable under this Lease for the subleased or assigned space during the term of the sublease or assignment, and shall include but not be limited to any sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings, or other personal property, and sums paid for services provided by Tenant to such subtenant (including, without limitation, secretarial, word-processing, receptionist, conference room, library, etc.). Any amounts payable by Tenant under this Subsection (e) shall be paid by Tenant to Landlord as and when amounts on account thereof are due or paid, whichever occurs first, by any subtenant or assignee to Tenant, and Tenant agrees to promptly advise Landlord thereof and furnish such information and documentation with regard thereto as Landlord may request from time to time. Landlord shall have the right at any time and from time to time upon prior notice to Tenant to audit and inspect Tenant's books, records, accounts, and federal income tax returns to verify the determination of Additional Rent payable under this section. (f) If this Lease is assigned or if the Premises or any part thereof is sublet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent and Additional Rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of Tenant's covenants contained in this Lease or the acceptance of the assignee, subtenant or occupant as Tenant, or a release of Tenant from further performance by Tenant of covenants on the part of Tenant herein contained. (g) Any consent by Landlord to a particular assignment or sublease shall not constitute Landlord's consent to any other or subsequent assignment or sublease. Any assignment, subletting, or occupancy without Landlord's prior written consent shall be voidable by Landlord and shall, at the option of Landlord, constitute an Event of Default (as defined in Section 23 hereof) under this Lease. (h) In the event of a permitted subletting or assignment, any and all allowances, concessions and options set forth in this Lease shall, effective as of the date of the subletting or assignment, be deemed null and void, it being understood that said allowances, concessions and options were solely for the benefit of the original Tenant. In no event shall this be deemed to retroactively void any allowances or concessions disbursed prior to the subletting or assignment. (i) In no event may Tenant sublet or assign or be permitted to sublet or assign by operation of law or otherwise all or any portion of the Premises to any existing tenant or subtenant of the Building, or any other Building in metropolitan Denver then owned by Landlord. It is understood and agreed that said subletting or assignment would damage Landlord in an amount which would be difficult to determine and the parties hereby agree that any such subletting or assignment shall be void and of no further force and effect and that Tenant shall be liable to Landlord for damages in an amount equal to the then prevailing market rental rate for the Building in which the subtenant or assignee was located, for new leases multiplied by the number of rentable square feet in the Premises which were sublet or assigned, which give a per annum rental amount, which amount shall be multiplied by the number of lease years of the sublease or assignment, pro rata for any partial year. Said amount shall be due and payable upon demand from Landlord and shall be in addition to and not in limitation of any other rights or other remedies of Landlord under this Lease for default. (j) In no event may Tenant assign this Lease or sublet all or any portion of the Premises to any person or entity with whom Landlord, or its agent, is or was negotiating and to or from whom Landlord, or its agent, has given or received any written or oral proposal within the past twelve (12) months regarding a lease of space in the Building. (k) In no event may Tenant assign this Lease or sublet all or any portion of the Premises nor is any proposed assignment or sublease effective if there exists at the time of the proposed assignment or sublease an Event of Default under the Lease (as defined in Section 23 hereof) or Tenant has failed to pay Rent when, due. (l) Tenant shall not publicly advertise the rate for which Tenant is willing to sublet or assign the space; and all public advertisements of the assignment of the Lease or sublet of Premises, or any portion thereof, shall be subject to the prior written approval of Landlord. Said public advertisements shall include, but not be limited to, the placement or display of any signs or lettering on the exterior of the Premises, or on the glass or any window or door of the Premises, or in the interior of the Premises if it is visible from the exterior. (m) The listing of any name other than that of Tenant, whether on the doors of the Premises or the Building directory or otherwise, or the acceptance of payment for Rent or other charges from any person or entity other than Tenant, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. 18. CONDITION OF PREMISES. Tenant's taking possession of the Premises shall be conclusive evidence as against the Tenant that the Premises were in good order and satisfactory condition when the Tenant took possession, except as to latent defects. No promise of the Landlord to alter, remodel, repair or improve the Premises or the Building and no representation respecting the condition of the Premises or the Building have been made by Landlord to Tenant, other than the Workletter Agreement, attached hereto as Exhibit "C". At the termination of this Lease, the Tenant shall return the Premises broom-clean and in as good condition as when the Tenant took possession; (i) ordinary wear or (ii) damage caused by fire or other casualty not caused by Tenant or Tenant's agents, employees or invitees excepted, failing which the Landlord may restore the Premises to such condition and the Tenant shall pay the cost thereof on demand. However, Tenant shall remain liable to return the Auxiliary Sprinkler System to building standard condition as set forth in Section 8 above. 19. RULES AND REGULATIONS. The Tenant agrees to comply with the following rules and regulations and with such reasonable modifications thereof and additions thereto as the Landlord may hereafter from time to time make for the Building. The Landlord shall not be responsible for the non-observance by any other tenant of any said rules and regulations: (a) The Tenant shall occupy and use the Premises during the Term for general office and no other purpose whatsoever. (b) The Tenant shall not exhibit, sell or offer for sale on the Premises or in the Building any article or thing except those articles and things essentially connected with the stated use of the Premises by the Tenant without the advance consent of the Landlord. (c) The Tenant will not make or permit to be made any use of the Premises or any part thereof which would violate any of the covenants, agreement, terms, provisions and conditions of this Lease or which directly or indirectly is forbidden by public law, ordinance or governmental regulation or which may be dangerous to life, limb, or property, or which may invalidate or increase the premium cost of any policy of insurance carried on the Building or covering its operation, or which will suffer or permit the Premises or any part thereof to be used in any manner or anything to be brought into or kept therein which, in the judgment of Landlord, shall in any way impair or tend to impair the character, reputation or appearance of the Property as a high quality office building, or which will impair or interfere with or tend to impair or interfere with any of the services performed by Landlord for the Property. Bicycles or other vehicles shall not be permitted in the offices, halls, corridors and elevators in the Building, nor shall any obstruction of sidewalks or entrances of the Building by such be permitted. (d) The Tenant shall not display, inscribe, print, paint, maintain or affix on any place in or about the Building any sign, notice, legend, direction, figure or advertisement, except on the designated areas of the Premises and on the Directory Board, and then only such name(s) and matter, and in such color, size, style, place and materials, as shall first have been approved by the Landlord. The listing of any name other than that of Tenant, whether on the door of the Premises, on the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises or be deemed to be the written consent of Landlord mentioned in Section 17, it being expressly understood that any such listing is a privilege extended by Landlord revocable at will by written notice to Tenant. (e) The Tenant shall not advertise the business, profession or activities of the Tenant conducted in the Building in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining to such business, profession or activities, and shall not use the name of the Building for any purposes other than that of the business address of the Tenant, and shall never use any pictures or likeness of the Building in any circulars, notices, advertisements or correspondence without the Landlord's consent. (f) No additional locks or similar devices shall be attached to any door or window without Landlord's prior written consent. No keys for any door other than those provided by the Landlord shall be made. Tenant will be supplied, free of charge, with two keys for the main door entering the Premises. If more than two keys for one lock are desired, the Landlord will provide the same upon payment by the Tenant. All keys shall remain the property of the Landlord and must be returned to the Landlord at the expiration or termination of this Lease. Tenant shall also provide Landlord the explanation of the combination to all locks for safes, safe cabinets and vault doors, if any, in the Premises, (g) The Tenant shall not make any alterations, improvements or additions to the Premises including, but not limited to, wall coverings, floor coverings and special lighting installations, without the Landlord's advance written consent in each and every instance. In the event Tenant desires to make any alterations, improvements or additions, Tenant shall first submit to Landlord plans and specifications therefor and obtain Landlord's written approval thereof prior to commencing any such work. All alterations, improvements or additions, whether temporary or permanent in character, made by Landlord or Tenant in or upon the Premises shall become Landlord's property and shall remain upon the Premises at the termination of this Lease without compensation to Tenant (excepting only Tenant's movable office furniture, trade fixtures, office and professional equipment) provided, however, that Landlord shall have the right to require Tenant to remove such alterations, improvements or additions, at Tenant's cost, upon the termination of this Lease and to repair any damage to the Premises resulting therefrom. (h) Neither Tenant, its clerks, agents or servants, shall bring into the Building, without written consent, and under the direction of Landlord, gas pipes or any telephone, telegraph or electric wires for any purpose. (i) All persons entering or leaving the Building after hours on Monday through Friday, or at any time on Saturdays, Sundays or holidays, may be required to do so under such regulations as the Landlord may impose. The Landlord may exclude or expel any peddler. (j) The Tenant shall not overload any floor. The Landlord may direct the time and manner of delivery, routing and removal, and the location of safes and other heavy articles. (k) Unless the Landlord gives advance written consent, the Tenant shall not install or operate any steam or internal combustion engine, boiler, machinery, refrigerating or heating device or air-conditioning apparatus in or about the Premises, or carry on any mechanical business therein, or use the Premises for housing accommodations or lodging or sleeping purposes, or do any cooking therein, or use any illumination or other electric light, or use or permit to be brought into the Building any inflammable fluids such as gasoline, kerosene, naphtha, and benzene, or any explosives, radioactive materials or other articles deemed extra hazardous to life, limb or property except in a manner which would not violate any ordinance or governmental regulations. The Tenant shall not use the Premises for any illegal or immoral purpose. (l) The Tenant shall cooperate fully with the Landlord to assure the effective operation of the Building's air-conditioning system, including the closing of venetian blinds and drapes, and if windows are operable to keep them closed when the air-conditioning system is in use. (m) The Tenant shall not contract for or perform any work or service which might involve the employment of labor incompatible with the Building employees or employees of contractors doing work or performing services by or on behalf of the Landlord. (n) No freight, furniture, packages of bulky matter of any description will be received in the Building or carried up or down in the elevators except during such hours as the management may prescribe. (o) The sidewalk, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by the Tenant or used for any purpose other than for ingress to and egress from its Premises. The halls, passages, exits, entrances, elevators, stairways and roof are not for the use of the general public and the Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of the Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom the Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities. No tenant and no employees or invitees or any tenant shall go upon the roof or mechanical floors of the Building. (p) Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals other than guide dogs for disabled visitors or employees or birds be brought in or kept in or about the Premises or the Building. (q) Tenant shall see that the doors, and windows, if operable, of the Premises are closed and securely locked before leaving the Building and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant's employees leave the Building, and that all electricity shall likewise be carefully shut off so as to prevent waste or damage, and for any default or carelessness Tenant shall make good all injuries or losses sustained by other tenants or occupants of the Building or Landlord. (r) Tenant shall not allow its employees or invitees to smoke in the Premises or the Building unless the areas have been designated as smoking areas by Landlord. In addition to all other liabilities for breach of any covenant of this Section, the Tenant shall pay to the Landlord an amount equal to any increase in insurance premiums payable by the Landlord or any other tenant in the Building caused by such breach. 20. REPAIRS. Tenant shall give to Landlord prompt written notice of any damage to, or defective condition in any part or appurtenance of the Building's plumbing, electrical, heating, air-conditioning or other systems serving, located in, or passing through the Premises. Subject to the provisions of this Section 20, the Tenant shall, at the Tenant's own expense, keep the Premises in good order, condition and repair during the Term, except that the Landlord, at the Landlord's expense (unless caused by the fault or negligence of the Tenant, its contractors, agents, or employees) shall keep in repair the elevators, electrical lines, plumbing fixtures located in the Building (except those installed by Tenant) heating and air-conditioning equipment, outside walls, including windows, and roof. The Tenant at the Tenant's expense, shall comply with all laws and ordinances, and all rules and regulations of all governmental authorities and of all insurance bodies at any time in force, applicable to the Premises or to the Tenant's use thereof, except that the Tenant shall not hereby be under any obligation to comply with any law, ordinance, rule or regulation requiring any structural alteration of or in connection with the Premises, unless such alteration is required by reason of a condition which has been created by, or at the instance of, the Tenant, or is required by reason of a breach of any of the Tenant's covenants and agreements hereunder. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railing, ceiling, floor covering, partitions, or any other property installed in the Premises by the Tenant. 21. UNTENANTABILITY. If the Premises are made untenantable in whole or in part by fire or other casualty the Rent, until repairs shall be made or the Lease terminated as hereinafter provided, shall be apportioned on a per them basis according to the part of the Premises which is usable by the Tenant, if, but only if, such fire or other casualty be not caused by the fault or negligence of the Tenant, its contractors, agents, or employees. If such damage shall be so extensive that the Premises cannot be restored to Building Standard by the Landlord within a period of four (4) months, either party shall have the right to cancel this Lease by notice to the other given at any time within thirty (30) days after the date of such damage, except that if such fire or casualty resulted from the Tenant's fault or negligence the Tenant shall have no right to cancel. If a portion of the Building other than the Premises shall be so damaged that in the opinion of the Landlord the Building should be restored in such a way as to alter the Premises materially, the Landlord may cancel this Lease by notice to the Tenant given at any time within thirty (30) days after the date of such damage. In the event of giving effective notice pursuant to this Section, this Lease and the term and the estate hereby granted shall expire on the date fifteen (15) days after the giving of such notice as fully and completely as if such date were the date hereinbefore set for the expiration of the Term of this Lease. If this Lease is not so terminated, the Landlord will promptly repair the damage; however, no damage, compensation, or claim shall be payable by Landlord for any inconvenience, loss of business or annoyance arising from the fire or casualty or from any repair or restoration of any portion of the Premises or the Building. 22. EMINENT DOMAIN. (a) In the event that title to the whole or any part of the Premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title and the Landlord shall be entitled to receive the entire award, the Tenant hereby assigning to the Landlord the Tenant's interest therein, if any. (b) In the event that title to a part of the Building other than the Premises shall be so condemned or taken and if in the opinion of the Landlord, the Building should be restored in such a way as to alter the Premises materially, the Landlord may terminate this Lease and the term and estate hereby granted by notifying the Tenant of such termination within sixty (60) days following the date of vesting of title, and this Lease and the term and estate hereby granted shall expire on the date specified in the notice of termination, not less than sixty (60) days after the giving of such notice, as fully and completely as if such date were the date hereinbefore set for the expiration of the Term of this Lease, and the Rent hereunder shall be apportioned as of such date. 23. TENANT'S DEFAULT AND LANDLORD'S REMEDIES. All rights and remedies of the Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law. In addition to the other remedies in this Lease provided, the Landlord shall be entitled to restraint by injunction of the violation or attempted violation of any of the covenants, agreements or conditions of this Lease. (a) Any one of the following events shall be deemed to be an "Event of Default" by Tenant under this Lease: (i) Tenant fails to pay any installment of Annual Basic Rent or Additional Rent when due, or any other payment or reimbursement to Landlord required herein when due, and such failure shall continue for a period of five (5) days from the date such payment was due; (ii) Tenant defaults in the prompt and full performance of any other provision of this Lease and such default continues for twenty (20) days after notice from Landlord to Tenant; or, if such breach or noncompliance cannot be reasonably cured within such twenty (20) day period, Tenant does not, in good faith, commence to cure such breach or noncompliance within such twenty (20) day period; (iii) If the Tenant shall (a) apply for consent to the appointment of a receiver, trustee or liquidator of the Tenant or of all or a substantial part of its assets; (b) admit in writing its inability to pay its debts as they come due; (c) make a general assignment for the benefit of creditors; (d) file a petition or any answer seeking reorganization or arrangement with creditors or to take advantage of any insolvency law other than the Federal Bankruptcy Code; (e) file an answer admitting the material allegations of a petition filed against the Tenant in any reorganization or insolvency proceeding, other than a proceeding commenced pursuant to the Federal Bankruptcy Code, or if any order, judgment or decree shall be entered by any court of competent jurisdiction, except for a bankruptcy court or a federal court sitting as a bankruptcy court, adjudicating the Tenant insolvent or approving a petition seeking reorganization of the Tenant or appointing a receiver, trustee or liquidator of the Tenant or of all or a substantial part of its assets; or (f) make a transfer in fraud of creditors, then in any such events, in addition to other rights provided for herein, Landlord may give to the Tenant a notice of intention to end the Term of this Lease, specifying a day not earlier than ten (10) days thereafter, and upon the giving of such notice the Term of this Lease and all rights, title and interest of the Tenant hereunder shall expire as fully and completely on the day so specified as if that day were the date herein specifically fixed for the expiration of the Term; (iv) Tenant shall abandon or vacate any substantial portion of the Premises; (v) Tenant's interest under this Lease or in the Premises is transferred or passes to, or devolves upon, any other person or entity in violation of Section 17 of this Lease; or (vi) Tenant shall fail to discharge any lien placed upon the Premises or upon Tenant's interest in the Premises by any creditor and such lien is not discharged or disposed of in accordance with this Lease. (b) Upon the occurrence of any of such Event of Default described herein, Landlord shall have the option to pursue any or all of the following remedies: (i) If Tenant fails to make any payment or perform any other act on its part to be made or performed under this Lease, the Landlord may, but shall not be obligated to, after reasonable notice to Tenant and without waiving or releasing the Tenant from any obligation under this Lease, make such payment or perform such other act to the extent the Landlord may deem desirable, and in connection therewith to pay expenses and employ counsel. The Tenant agrees to pay reasonable attorney's fees if legal action is required to enforce performance by Tenant of any condition, obligation or requirement hereunder. All sums so paid by the Landlord and all expenses in connection therewith, together with interest thereon at the rate of Twelve Percent (12%) per annum from the date of payment, shall be deemed Additional Rent hereunder and payable at the time of any installment of Rent thereafter becoming due, and the Landlord shall have the same rights and remedies for the non-payment thereof, or of any other Additional Rent, as in the case of default in the payment of Rent. (ii) Terminate this Lease by giving to the Tenant a notice of intention to end the Term of this Lease, specifying a day not earlier than three (3) days thereafter, and, upon the giving of such notice, this Lease shall terminate on the day so specified, except as to Tenant's liability to pay rent and other charges for the remaining Term of this Lease, together with all arrearages, whereupon Tenant shall immediately surrender possession of the Premises to Landlord, and hereby grants to the Landlord full and free license to enter into and upon the Premises in such event with or without process of law and to repossess the Premises as the Landlord's former estate and, if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in Annual Base Rent, Additional Rent, or other charges, enter upon and take possession of the Premises and expel or remove Tenant, as well as any other person who may be occupying such Premises or any part thereof, by force if necessary, including removal of all personal property therein, without being liable for prosecution or any claim of damages therefor, and change the locks on the Premises. (iii) If the Tenant abandons or fails to operate in the Premises or the Landlord otherwise becomes entitled so to elect, and the Landlord elects, without terminating the Lease, to endeavor to relet the Premises, the Landlord may, at the Landlord's option, enter into the Premises, remove the Tenant's signs, personal property, and other evidence of tenancy, and take and hold possession thereof, without such entry and possession terminating the Lease or releasing the Tenant, in whole or in part, from the Tenant's obligation to pay the Rent hereunder for the full Term as provided in the Lease. Upon and after entry into possession without termination of the Lease, the Landlord may relet the Premises or any part thereof for the account of the Tenant to any person, firm or corporation other than the Tenant for such rent, for such time and upon such terms as the Landlord shall determine to be reasonable. In any such case, the Landlord may make repairs, alterations and additions in or to the Premises and redecorate the same to the extent deemed by the Landlord necessary or desirable. (c) If this Lease is terminated under the provisions of Section 23(b)(ii) or if the Landlord shall reenter the Premises under the provisions of Section 23(b)(iii), or in the event of the termination of this Lease, or of reentry, by or under any summary or other proceeding or action of any provision of law by reason of default hereunder on the part of the Tenant, Tenant shall pay to Landlord as damages in an amount equal to the Rent and other sums which would have been owed by Tenant hereunder for the balance of the Term, less the net proceeds, if any, of any reletting of the Premises by Landlord, after deducting all Landlord's expenses in connection with such reletting, including, but without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration and repair costs, and expenses of preparation for such reletting of the Premises, As used herein, the phrase "Preparation for such Reletting" shall mean restoring the Premises to a condition that is suitable for a new tenant, including any and all costs for tenant finish work for a new tenant. Landlord shall be entitled to collect such damages from Tenant monthly on the days on which the Rent and other amounts would have been payable under this Lease, and Landlord shall be entitled to receive the same from Tenant on each such day. Alternatively, at the option of Landlord, Landlord shall be entitled to recover forthwith against Tenant, as damages for the loss of the bargain and not as a penalty: (i) the worth at the time of award of any unpaid Rent and other sums due and payable which had been earned prior to return of possession of the Premises to Landlord; plus (ii) the worth at the time of award of the amount of unpaid Rent and other sums which would have been payable after the date of return of possession of the Premises until the time of award which exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided by Landlord; plus (iii) the worth at the time of award of the amount by which the unpaid Rent including sums for estimated Operating Costs which would have been incurred and any other sums due for the balance of the Term after the time of award that exceeds the amount that Tenant proves could be reasonably avoided by Landlord; plus (iv) any other amounts to compensate Landlord for the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (v) at Landlord's election, such other amounts and remedies in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of Colorado. The "worth at the time of award" of the amounts due prior to the date of the award is computed by allowing interest compounded annually, at Twelve Percent (12%), on all unpaid Rent and other sums due and payable. The "worth at the time of award" of the amounts due after the date of the award is computed by discounting such amount at the discount rate equal to the prime rate charged from time to time by Norwest Bank, N.A., in Denver, Colorado, or its successor(s). (d) Tenant agrees it would be difficult for the Landlord to prove the amount of damages it will incur as a result of any breach of the Lease by Tenant. Tenant hereby agrees that providing for the above liquidated sums in addition to, and not in lieu of, other amounts due and owing amount to a reasonable sum due and owing the Landlord in the event of a breach of this Lease by Tenant. (e) Any and all property which may be removed from the Premises by the Landlord pursuant to the authority of the Lease or of law, to which the Tenant is or may be entitled, may be handled, removed or stored by the Landlord at the risk, cost and expense of the Tenant, and the Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. The Tenant shall pay to the Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in the Landlord's possession or under the Landlord's control. Any such property of the Tenant not removed from the Premises or retaken from storage by the Tenant within thirty (30) days after the end of the Term or of the Tenant's right to possession of the Premises, however terminated, shall be conclusively deemed to have been forever abandoned by the Tenant and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit. 24. LATE PAYMENTS; INTEREST AND LATE CHARGES. (a) Any amount due from Tenant to Landlord which is not paid when due shall bear interest at the rate of Twelve Percent (12%) from the date such payment is due until paid, except that amounts spent by Landlord on behalf of Tenant shall bear interest at such rate from the date of disbursement by Landlord. (b) Tenant hereby acknowledges that in addition to lost interest, the late payment by Tenant to Landlord of rent or any other sums due hereunder will cause Landlord to incur other costs not contemplated in this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Such other costs include, but are not limited to, processing, administrative and accounting costs. Accordingly, if any installment of rent or any additional rent or other sum due from Tenant shall not be received by Landlord within five (5) days after such amount shall be due, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that (i) such late charge represents a fair and reasonable estimate of the costs Landlord will incur in processing such delinquent payment by Tenant, (ii) such late charge shall be paid to Landlord as liquidated damages for each delinquent payment, and (iii) the payment of the late charges and the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of the late charges is to compensate Landlord for the additional administrative expense incurred by Landlord in handling and processing delinquent payments (c) Following each second consecutive late payment of rent, Landlord shall have the option (i) to require that beginning with the first payment of rent next due, rent shall not longer be paid in monthly installments but shall be payable quarterly three (3) months in advance and/or (ii) to require that the Tenant increase the amount, if any, of the Security Deposit required under Section 33 below by one hundred percent (100%), which additional Security Deposit shall be retained by Landlord, and may be applied by Landlord, in the manner provided in Section 33. (d) Neither assessment nor acceptance of interest or late charges by Landlord shall constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies under this Lease. Nothing contained in this Section shall be deemed to condone, authorize, sanction or grant to Tenant an option for the late payment of rent, additional rent or other sums due hereunder, and Tenant shall be deemed in default with regard to any such payments should the same not be made by the date on which they are due. 25. SALE AND ASSIGNMENT. Landlord shall have full right to sell or assign its interest and rights to this Lease to any other person, firm or corporation capable of accepting such sale or assignment. In the event that the purchaser or assignee expressly covenants and agrees to accept and assume all the covenants, conditions and stipulations of the Lease and to comply with and be bound thereby, and to assume all liability of Landlord theretofore or thereafter arising, then Landlord shall thereupon be released from all liability under this Lease, and thereafter all liability in respect thereof shall rest upon the assignee alone. Any purchaser or assignee from Landlord may, subject to the provision hereof and upon the same terms and conditions, sell or assign his or its interest in and rights to this lease and like subsequent assignments may be made from time to time by anyone at any time owning such interest in and rights to this lease. 26. SUBORDINATION OF LEASE. The rights of the Tenant under this Lease shall be and are subject and subordinate at all times to the lease between The Auraria Foundation and Landlord, all ground leases, and/or underlying leases, if any, now or hereafter in force against the Property, and to the lien of any mortgage or mortgages now or hereafter in force against such leases and/or the Property, and to all advances made or hereafter to be made upon the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. This Section is self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute such further instruments as may be requested by the Landlord. The Tenant hereby irrevocably appoints the Landlord as attorney-in-fact for the Tenant with full power and authority to execute and deliver in the name of the Tenant any such instrument or instruments. Tenant, at the option of any mortgagee, agrees to attorn to such mortgagee in the event of a foreclosure sale or deed in lieu thereof. 27. NOTICES AND CONSENTS. All notices, demands, requests, consents or approvals which may or are required to be given by either party to the other shall be in writing and shall be deemed given when sent and received (a) when actually hand delivered, or three (3) business days after sending by United States Certified or Registered Mail, postage prepaid, (a) if for the Tenant, addressed to the Tenant at the Building, or at such other place as the Tenant may from time to time designate by notice to the Landlord, or (b) if for the Landlord, addressed to the management office of the Landlord in the Building, Jones Lang LaSalle Americas (Colorado) L.P., 1380 Lawrence Street, Suite 320, Denver, Colorado 80217, with a copy to Landlord addressed to University of Colorado at Denver, 1380 Lawrence Street, Suite 320, Denver, Colorado 80217, or at such other place as the Landlord may from time to time designate by notice to the Tenant. All consents and approvals provided for herein must be in writing to be valid. The date of service of such notices shall be the date such notices are received or refused, as the case may be, as evidenced by addressee's registry or certification receipt. If the term "Tenant", as used in this Lease, refers to more than one person, any notice, consent, approval, request, bill, demand or statement, given as aforesaid to any one of such persons shall be deemed to have been duly given to Tenant. Except as specifically provided in this Lease, Tenant hereby expressly waives the service of intention to terminate this Lease or to re-enter the Premises and waives the service of any demand for payment of Rent or for possession and waives the service of any other notice or demand prescribed by any statute or other law. 28. SPRINKLERS. If there now is or shall be installed in the Building a "sprinkler system", and such system or any of its appliances shall be damaged or injured or not in proper working order by reason of any act or omission of the Tenant, Tenant's agents, servants, employees, licensees or visitors, the Tenant shall forthwith restore the same to good working conditions at its own expense, and if the Board of Fire Underwriters of Fire Insurance Exchange or any bureau, department or official of the state or city government, require or recommend that any changes, modifications, alterations or additional sprinkler heads or other equipment be made or supplied by reason of the Tenant's business, or the location of partitions, trade fixtures, or other contents, of the Premises, or for any other reason, or if any such changes, modifications, alterations, additional sprinkler heads or other equipment, become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate as fixed by said Exchange, or by any fire insurance company, Tenant shall, at the Tenant's expense, promptly make and supply such changes, modifications, alterations, additional sprinkler head or other equipment. 29. NO ESTATE IN LAND. This contract and Lease shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord; and Tenant has only a usufruct which is not subject to levy and sale. 30. INVALIDITY OF PARTICULAR PROVISIONS. If any clause or provision of this Lease is or becomes illegal, invalid, or unenforceable because of present or future laws or any rule or regulation of any governmental body or entity, effective during its term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such invalidity is, in the sole determination of Landlord, essential to the rights of both parties in which event Landlord has the right to terminate this Lease on written notice to Tenant. 31. WAIVER OF BENEFITS. (Intentionally Deleted) 32. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of landlord and tenant, Tenant's use or occupancy of the Premises, and any emergency statutory or any other statutory remedy. 33. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of Thirty-two thousand dollars and no cents /100 Dollars ($ 32,000 ) as security for the full and faithful performance of every provision of this Lease to be performed by Tenant. If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Rent, Landlord may use, apply or retain all or any part of this security deposit for the payment of any Rent or any other sum in default or before the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss, cost or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a breach of this Lease, Landlord shall not, unless otherwise required by law, be required to keep this security deposit separate from its general funds, nor pay interest to its Tenant. If Landlord is required to maintain said deposit in an interest bearing account, Landlord will retain the maximum amount permitted under applicable law as a bookkeeping and administrative charge. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last transferee of Tenant's interest hereunder) at the expiration of the lease term and upon Tenant's vacation of the Premises. In the event the Building is sold, the security deposit will be transferred to the new owner. 34. SUBSTITUTE PREMISES. (Intentionally deleted) 35. PARKING. Tenant shall have the right, during the term of this Lease, to rent Ten (10) unreserved garage stalls and ten (10) reserved stalls for the parking of motor vehicles used by Tenant, its officers and employees at the monthly rates and upon the terms and conditions as may from time to time be established by Landlord, or the operator of the garage facility. Such garage stalls shall be at locations designated by Landlord or the operator of the garage facility. In the event Tenant does not continuously and at all times following the Commencement Date elect to pay rent on the garage stalls, Landlord shall have the right to cancel Tenant's right to use said garage stalls. [Bold change handwritten and initialed by parties to Lease at time of signing] 36. BROKERAGE. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than Jones Lang LaSalle Americas (Colorado), L.P. and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provisions of this Section shall survive the termination of this Lease. 37. SPECIAL STIPULATION. (a) No receipt of money by the Landlord from the Tenant after the termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit or imply consent for any action for which Landlord's consent is required. (b) Any claim, demand, right or, defense by Tenant that arises out of this Lease or the negotiations that preceded this Lease shall be barred unless Tenant commences an action thereon, or interposes a defense by reason thereof, within six (6) months after the date of the inaction, omission, event, or action that gave rise to such claim, demand, right, or defense. Tenant acknowledges and understands, after having had the opportunity to consult with legal counsel, that the purpose of Paragraph (b) is to shorten the period within which Tenant would otherwise have to raise such claims, demands, rights, or defenses under applicable laws. (c) No waiver of any default of the Tenant hereunder shall be implied from any omission by the Landlord to take any action on account of such default if such default persists or be repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. No subsequent novation, renewal, addition, deletion or other amendment hereto shall have any force or effect unless embodied in a written contract executed and approved pursuant to the Sate of Colorado Fiscal Rules. (d) The term "Landlord" as used in this Lease, so far as covenants or agreements on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners of the Landlord's interest in this lease at the time in question, and in the event of any transfer or transfers of such interest the Landlord herein named (and in case of any subsequent transfer, the then transferor) shall be automatically freed and relieved from and after the date of such transfer of all personal liability as respects the performance of any covenants or agreements on the part of the Landlord contained in this Lease thereafter to be performed. (e) It is understood that the Landlord may occupy portions of the Building in the conduct of the Landlord's business. In such event, all references herein to other tenants of the Building shall be deemed to include the Landlord as an occupant. (f) The term "City" as used in this Lease shall be understood to mean the City in which the Property is located, (g) All of the covenants of the Tenant hereunder shall be deemed and construed to be "conditions" as well as "covenants" as though the words specifically expressing or importing covenants and conditions were used in each separate instance. (h) The Tenant agrees that, upon receiving a written request from the Landlord, the Tenant will within ten (10) days deliver a copy of this Lease, or, if the Landlord so requests, a Memorandum of this Lease, in recordable form to the Landlord. Tenant shall not record this Lease or a Memorandum thereof, without the prior written consent of the Landlord. (i) Neither party has made any representations or promise, except as contained herein, or in some further writing signed by the party making such representation or promise. (j) In the absence of fraud, no person, firm or corporation, or the heirs, legal representatives, successors and assigns, respectively, thereof, executing this Lease for Landlord as agent, trustee or in any other representative capacity shall ever be deemed or held individually liable hereunder for any reason or cause whatsoever. (k) In the event of variation or discrepancy, the Landlord's original copy of the Lease shall control. (l) Each provision hereof shall extend to and shall, as the case may require, bind and inure to the benefit of the Landlord and the Tenant and their respective heirs, legal representatives and successors, and assigns in the event this Lease has been assigned with the express written consent of the Landlord, (m) The Tenant represents, warrants and covenants that (1) it will not bring, generate, store, use or dispose of Hazardous Substances (as hereinafter defined) at the Premises; (2) it shall, at all times, comply with all Environmental Laws (as hereinafter defined) and shall cause the Premises to comply; and (3) Tenant will keep the Premises free of any lien imposed pursuant to any Environmental Laws. "Hazardous Substance" means, (i) asbestos and any asbestos containing material and any substance that is then defined or listed in, or otherwise classified pursuant to, any Environmental Laws or any applicable laws or regulations as a "hazardous substance", "hazardous material", "hazardous waste", "infectious waste", "toxic substance", "toxic pollutant" or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or Toxicity Characteristic Leaching Procedure (TCLP) toxicity, (ii) any petroleum and drilling fluids, produced waters, and other wastes associated with the exploration, development or production of crude oil natural gas, or geothermal resources and (iii) petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive material (including any source, special nuclear, or by-product materials), and medical waste. "Environmental Laws" collectively means and includes all present and future laws and any amendments (whether common law, statute, rule, order, regulation or otherwise), permits, and other requirements or guidelines of governmental authorities applicable to the Premises and relating to the environment and environmental conditions or to any Hazardous Substance (including, without limitation, CERCLA, 42 U.S.C.ss. 9601, et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C.,ss. 6901, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.ss. 1801, et seq.; the Federal Water Pollution Control Act, 33 U.S.C.ss. 1251, et seq.; the Clean Air Act, 33 U.S.C.ss. 7401, et seq.; the Clean Air Act, 42 U.S.C.ss. 741, et seq.; the Toxic Substances Control Act, 15 U.S.C.ss. 2601-2629; the Safe Drinking Water Act, 42 U.S.C.ss. 300f-300j; the Emergency Planning and Community Right-To-Know Act, 42 U.S.C.ss. 1101, et seq.; and any so-called "Super Fund" or "Super Lien" law, any law requiring the filing of reports and notices relating to hazardous substances, environmental laws administered by the Environmental Protection Agency, and any similar state and local laws and regulations, all amendments thereto and all regulations, orders, decisions, and decrees now or hereafter promulgated thereunder concerning the environment, industrial hygiene or public health or safety.) In the event of (1) a violation of an Environmental Law, (2) a release, spill or discharge of a Hazardous Substance on or from the Premises, or (3) the discovery of an environmental condition requiring response which violation, release, or condition is attributable to the acts or omissions of Tenant, its agents, employees, representatives, invitees, licensees, subtenants, customers, or contractors, or (4) an emergency environmental condition (collectively "Environmental Defaults"), Landlord shall have the right, but not the obligation, to immediately enter the Premises, to supervise and approve any actions taken by Tenant to address the violation, release or environmental condition; and in the event Tenant fails to immediately address such violation, release, or environmental condition, or if the Landlord deems it necessary, then Landlord may perform, at Tenant's expense, any lawful actions necessary to address the violation, release, or environmental condition. Landlord has the right, but not the obligation, to cure any Environmental Defaults, has the right to suspend some or all of the operations of the Tenant until it has determined to its sole satisfaction that appropriate measures have been taken, and has the right to terminate the Lease upon the occurrence of an Environmental Default. Tenant shall indemnify, defend (with counsel approved by Landlord) and hold Landlord and Landlord's affiliates, shareholders, directors, officers, employees and agents harmless from and against any and all claims, judgments, damages (including consequential damages), penalties, fines, liabilities, losses, suits, administrative proceedings, costs and expenses of any kind or nature, known or unknown, contingent or otherwise, which arise out of or in any way related to the acts or omissions of Tenant, its agents, employees, representatives, invitees, licensees, subtenants, customers or contractors during or after the term of this Lease (including, but not limited to, attorney, consultant, laboratory and expert fees and including, without limitation, diminution in the value of the Premises, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises and damages arising from any adverse impact on marketing of space), arising from or related to the use, presence, transportation, storage, disposal, spill, release or discharge of Hazardous Substances on or about the Premises. The provisions of this section shall survive the expiration or earlier termination of this Lease. Tenant covenants to deliver to the Landlord, (a) copies of any documents received from the United States Environmental Protection Agency and/or any state, county or municipal environmental or health agency concerning the Tenant's operations upon the Premises; and (b) copies of any document submitted by the Tenant to the United States Environmental Protection Agency and/or any state, county or municipal environmental or health agency concerning its operations upon the Premises. (n) The Tenant agrees that it is Tenant's sole obligation to comply with the provisions of the Americans with Disabilities Act ("ADA"), as amended from time to time, with regard to the Premises. Tenant agrees to indemnify, defend and protect Landlord from any claim or suit brought against Landlord for Tenant's failure to comply with the Tenant's obligations to maintain the Leased Premises pursuant to ADA. (o) Each of Landlord and Tenant, and each person signing for them, hereby warrants and represents to the other that the individual signing on behalf of that party is fully authorized to sign on behalf of, and to bind, such party and that, when signed by the parties, this Lease shall be fully binding on the party on whose behalf this Lease is executed by such individual. The signatories aver that to their knowledge, no employee of the State of Colorado has any personal or beneficial interest whatsoever in the service or property described herein. Further, the signatories hereto aver that they are familiar with 18-8-301, et seq., (Bribery and Corrupt Influences) and 18-8-401, et seq., (Abuse of Public Office), C.R.S., as amended, and that no violation of such provisions is present. (p) If there be more than one Tenant, the obligations under the Lease imposed upon Tenant shall be joint and several. (q) This Lease represents the entire agreement of Landlord and Tenant with regard to the Lease, with all prior writings and verbal negotiations with regard thereto being merged herein. (r) Tenant acknowledges and agrees that Landlord, at its sole cost and discretion, shall have the right to remeasure the Building at any time. Such remeasurement shall be performed in accordance with the then existing standards established by Building Owners and Managers Association International ("BOMA"). The Landlord has the sole right and discretion to implement the remeasurement of the Building and revise Rentable Area, Rentable Area Leased, and any other remeasurements of the Building as provided for in this Lease upon thirty (30) days' notice to Tenant. (s) It is understood and agreed that this Lease shall not be binding until and unless all parties have signed it. (t) Landlord has reviewed financial statements if so requested of the Tenant and has relied upon the truth and accuracy thereof with Tenant's knowledge and representations of the truth and accuracy of such statements and that said statements accurately and fairly depict the financial condition of Tenant. Said financial statements are an inducing factor and consideration for the entering into of this Lease by Landlord with this particular Tenant. If requested by Landlord, or before the anniversary date of this Lease, Tenant shall provide to Landlord (a) Tenant's most recent audited financial statement or a document in which tenant states that its books are not independently audited, and (b) a current unaudited financial statement [current means within ninety (90) days of such anniversary date]. Tenant shall, at any time and from time to time upon not less than thirty (30) days prior written notice from Landlord, furnish Landlord with current financial statements reflecting Tenant's then financial condition. 38. EXHIBITS. Exhibits A, B, C, D and the Rider to Lease, consisting of Seven (7) pages, are attached hereto and become part of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease as of the day and year first above written. LANDLORD: Approved for legal sufficiency: THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver By: /s/ R. Augustine By: /s/ Georgia E. Lesh-Laurie Name: R. Augustine Name: Georgia E. Lesh-Laurie Its: Assoc. Univ. Counsel Its: Chancellor TENANT: MATRIX BANCORP, INC., a Colorado corporation By: /s/ Guy A. Gibson Name: Guy A. Gibson Its: CEO/President RIDER TO LEASE THIS RIDER TO LEASE is attached to and made a part of that certain Lease dated the _____ day of __________, 2000, between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER ("Landlord") and Matrix Bancorp, Inc., Inc., a Colorado corporation ("Tenant"). In the event the Lease and Rider to Lease are inconsistent, this Rider to Lease shall supersede any agreements previously made in such Lease regarding the following: 1. Termination of Existing Lease. Landlord and Tenant previously entered into an Office Lease dated October 14, 1991, as amended by Amendment Number One to Lease Agreement dated March 22, 1993, Amendment Number Two to Lease dated December 28, 1993, Amendment Number Three to Lease dated April 4, 1994, Forth Amendment to Lease dated March 1, 1996 and Fifth Amendment to Lease dated October 24, 1997 (hereinafter the "Previous Lease"). As of the Effective Date, except as previously exercised by Tenant, all Options to Extend, Options for Additional Space, Options for the Option space and First Right of Refusal and any other non-exercised rights of Tenant, as defined in the Previous Lease, shall be null and void and of no further force nor effect and all rights and obligations of the Landlord and Tenant. However, Tenant remains liable for its obligation to pay Rent and Additional Rent for the period that occurs prior to the Effective Date. Except as set forth above, as of the Effective Date, all remaining terms and conditions of the Previous Lease are null and void. 2. Renewal Term. (a) Renewal Option. Subject to the provisions hereinafter set forth, Landlord hereby grants to Tenant an option ("Renewal Option") to extend the Term on the same terms, conditions and provisions as contained herein, except as otherwise provided below, for one (1) additional period of five (5) years ("Renewal Term"), which Renewal Term shall commence on the date immediately following the Expiration Date ("Renewal Commencement Date") and end on the fifth (5th) anniversary of the Expiration Date ("Renewal Expiration Date"). (b) Renewal Option Notice. The Renewal Option shall be exercisable by written notice ("Renewal Option Notice") from Tenant to Landlord of Tenant's election to exercise the Renewal Option, which Renewal Option Notice must be given three hundred sixty (360) days prior to the Expiration Date. If Tenant fails to deliver to Landlord the Renewal Option Notice within the prescribed time period, the Renewal Option shall lapse and be forever waived. (c) Annual Base Rental During the Renewal Term. Annual Base Rental for the Premises payable during tile Renewal Term shall be equal to the prevailing Market Rental Rate, as hereinafter defined. (d) Market Rental Rate. The term "Market Rental Rate" per square foot of area shall mean (i) the Annual Base Rental being obtained by Landlord at the time of the Renewal Commencement Date for comparable space in the Building during the preceding six month period. If Landlord has no comparable lease transactions within the previous six month period, then the rate shall be the per square foot of area prevailing market rental rate in the Central Business District submarket for comparable office space for terms commencing on or about the Renewal Commencement Date and shall take into its consideration (i) the duration of the term for which such space is being leased, (ii) location within the applicable building, (iii) when the applicable rate first becomes effective, (iv) other concessions customarily given to other tenants including, without limitation, rent abatement and tenant improvement allowances, but assuming the leasing of the space "as is" on the Renewal Commencement Date, and (v) other comparable factors. Bona fide written offers to lease comparable space in the Building received by Landlord from third parties (at arm's length) and consummated between Landlord and such third party within six (6) months prior to the date of the Renewal Option Notice may be used by Landlord or Tenant as an indication of the Market Rental Rate. The components of the Market Rental Rate may include, among other items, the components of rent, periodic adjustments or additions to a fixed Annual Base Rental based upon a share of real estate taxes and other expenses and increases to adjust for inflation then customary in the Denver Metropolitan area. (f) Amendment to Lease. If Tenant validly exercises the Renewal Option, Landlord and Tenant shall enter into a written amendment to the Lease confirming the terms, conditions and provisions applicable to the Renewal Term, as determined in accordance herewith, with such revisions to the rental provisions as may be necessary to conform such provisions to the Market Rental Rate. (g) No Default. Tenant may exercise the Renewal Option, and an exercise thereof shall be effective, only if at the time of Tenant's exercise of the Renewal Option and on the Renewal Commencement Date (i) the Lease is in full force and effect, and (ii) there is no uncured event of default. (h) Not Transferable. Tenant acknowledges and agrees that the Renewal Option shall be deemed to be personal to Tenant and if Tenant subleases the entire Premises, assigns or otherwise transfers any interest hereunder prior to the exercise of the Renewal Option, such option shall lapse. 3. Right of First Offer. Landlord shall give to Tenant once during the Term of this Lease a right of first offer (the "Right of First Offer") to lease contiguous space to the Premises on the thirteenth (13th) floor of the Building (the "First Offer Space"). Said Right of First Offer shall be conditioned on Tenant providing Landlord with written notice of its election to expand and request for notification of available First Offer Space. Tenant's Right of First Offer is predicated upon (i) there being no uncured Events of Default by Tenant on the date Tenant provides notice as set forth above or on the date the Right of First Refusal Space is offered to Tenant and (ii) other tenant's rights to occupy the First Offer Space. The notice from Landlord to Tenant shall identify the date when the First Offer Space will be available and the Base Rent, as defined in the Lease, for the First Offer Space which will be the then prevailing Fair Market Rental Value as defined in, and determined under, Section #2 of this Rider. In the event Tenant elects to exercise said First Offer Space, it shall deliver written notice to Landlord of its election to exercise its Right of First Offer within Five (5) business days of receipt of the notice from Landlord. The lease term for, and possession of, the premises leased under and by virtue of the aforesaid election shall commence on the same date as the First Offer Space is available and shall be coterminous with the term of the Lease for the Premises and except as modified herein shall be on the same terms and conditions as prevail elsewhere in this Lease. All tenant improvements shall be pursuant to Tenant's reasonable space plans and specifications, which shall be subject to Landlord's consent, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, if the remaining portion of the Term, at the commencement of the lease term for any First Offer Space, is less than six (6) years, Tenant is only entitled to a portion of the tenant finish allowance stated above, by multiplying such otherwise determined tenant finish allowance by a fraction, the numerator of which shall be the remaining term of Tenant's Lease of the First Offer Space, and the denominator of which shall be 6. If Tenant does not exercise its Right of First Offer at the time of such offer, Tenant's rights hereunder this Right of First Offer shall lapse and be null and void. However, if no First Offer Space is offered to Tenant within six (6) months after Tenant provides Landlord with written notice of its election to expand and request for notification of available Right of First Offer Space said Right of First Offer shall expire subject, however, to Tenant reviving said Right of First Offer by providing another notice as set forth above. Landlord and Tenant shall use their best efforts to promptly prepare and execute an appropriate amendment to the Lease, documenting the terms relating to the lease by Tenant of any space which Tenant has leased pursuant to this Section #3. Tenant acknowledges this Right of First Offer is subject to Landlord's current leases on First Offer Space and tenant's rights thereunder as well as any future negotiations regarding the Right of First Offer Space as a portion of a larger leased space. Landlord shall pay no commission or fees in the event Tenant exercises its right under this Section #3. 4. Satellite Antenna Addendum. The terms and conditions of the Satellite Antenna Addendum entered into by Landlord's and Tenant's predecessor interest dated September 24, 1996, a copy of which is attached hereto, are incorporated in the Lease as of the Effective Date. LANDLORD: Approved for legal sufficiency: THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver By: /s/ R. Augustine By: /s/ Georgia E. Lesh-Laurie Name: R. Augustine Name: Georgia E. Lesh-Laurie Its: Assoc. Univ. Counsel Its: Chancellor TENANT: MATRIX BANCORP, INC., a Colorado corporation By: /s/ Guy A. Gibson Name: Guy A. Gibson Its: CEO/President Attest: Name: Its: Secretary EXHIBIT "A" PARCEL A: A PARCEL OF LAND BEING THE SOUTHWESTERLY 1/2 OF LOT 5, LOTS 6, 7, 8, PART OF LOTS 9, 10 AND 11 OF BLOCK 73 OF "EAST DENVER", CITY AND COUNTY OF DENVER, STATE OF COLORADO AND PART OF A 16.00 FOOT WIDE ALLEY IN SAID BLOCK 73 VACATED BY ORDINANCE NO. 95, SERIES OF 1981, RECORDED IN BOOK 2341 AT PAGE 120, CITY AND COUNTY OF DENVER, STATE OF COLORADO, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE MOST NORTHERLY CORNER OF SAID SOUTHWESTERLY 1/2 OF LOT 5, FROM WHENCE THE MOST WESTERLY CORNER OF SAID BLOCK 73 BEARS SOUTHWESTERLY A DISTANCE OF 287.48 FEET ALONG THE NORTHWESTERLY LINE OF SAID BLOCK 73, SAME BEING THE SOUTHEASTERLY RIGHT-OF-WAY (R.O.W.) LINE OF LAWRENCE STREET; THENCE SOUTHWESTERLY ALONG AND WITH SAID NORTHWESTERLY LINE OF BLOCK 73 A DISTANCE OF 95.00 FEET TO A POINT IN THE NORTHWESTERLY LINE OF SAID LOT 9; THENCE AN (INTERIOR) ANGLE TO THE RIGHT OF 90 DEGREES 00 MINUTES 00 SECONDS (SOUTHEASTERLY) A DISTANCE OF 60.00 FEET; THENCE AN (INTERIOR) ANGLE RIGHT OF 270 DEGREES 00 MINUTES 00 SECONDS (SOUTHWESTERLY) A DISTANCE OF 26.00 FEET; THENCE AN (INTERIOR) ANGLE TO THE RIGHT OF 90 DEGREES 00 MINUTES 00 SECONDS (SOUTHEASTERLY) A DISTANCE OF 22.00 FEET; THENCE AN (INTERIOR) ANGLE TO THE RIGHT OF 270 DEGREES 00 MINUTES 00 SECONDS (SOUTHWESTERLY) A DISTANCE OF 26.00 FEET; THENCE AN (INTERIOR) ANGLE TO THE RIGHT OF 90 DEGREES 00 MINUTES 00 SECONDS (SOUTHEASTERLY) A DISTANCE OF 51.02 FEET TO A POINT ON THE CENTERLINE OF SAID 16.00 FOOT WIDE ALLEY; THENCE AN (INTERIOR) ANGLE TO THE RIGHT OF 90 DEGREES 00 MINUTES 10 SECONDS (NORTHEASTERLY) A DISTANCE OF 147.08 FEET ALONG AND WITH THE CENTERLINE OF SAID ALLEY; THENCE AN (INTERIOR) ANGLE TO THE RIGHT OF 89 DEGREES 57 MINUTES 39 SECONDS (NWLY) A DISTANCE OF 133.03 FEET ALONG AND WITH THE NORTHEASTERLY LINE OF SAID SOUTHWESTERLY 1/2 OF LOT 5 AND THE EXTENSION THEREOF TO THE POINT OF BEGINNING. PARCEL B: THOSE BENEFICIAL EASEMENT RIGHTS AND OBLIGATIONS AS CREATED IN GRANT OF PARKING AND ACCESS EASEMENT RECORDED SEPTEMBER 1, 1981 IN BOOK 2442 AT PAGE 487, AND AMENDMENT THERETO RECORDED SEPTEMBER 4, 1986 AT RECEPTION NO. 15412 AND SECOND AMENDMENT THERETO RECORDED JUNE 24, 1998 UNDER RECEPTION NO. 9800097552. PARCEL C: THOSE BENEFICIAL EASEMENT RIGHTS AND OBLIGATIONS AS CREATED IN RECIPROCAL EASEMENT AGREEMENT RECORDED AUGUST 27, 1981 IN BOOK 2440 AT PAGE 186. PARCEL D: THOSE BENEFICIAL EASEMENT RIGHTS AND OBLIGATIONS AS CREATED IN MASTER DECLARATION OF COVENANTS, EASEMENTS, RIGHTS AND RESTRICTIONS RECORDED SEPTEMBER 1, 1981 IN BOOK 2442 AT PAGE 441 AND FIRST AMENDMENT THERETO RECORDED SEPTEMBER 26, 1985 UNDER RECEPTION NO. 070691. PARCEL E: THE BENEFICIAL INTEREST AND OBLIGATIONS IN REVOCABLE PERMIT OR LICENSE TO ENCROACH BENEATH A PORTION OF LAWRENCE STREET WITH UNDERGROUND PARKING GARAGE WALLS, AS PERMITTED BY ORDINANCE NO. 135, COUNCIL BILL NO. 151, SERIES OF 1981, RECORDED JULY 22,1981 IN BOOK 2410 AT PAGE 200. EXHIBIT "B" THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER and MATRIX BANCORP, INC., a Colorado corporation ------------------------------------------------------------ MEMORANDUM CONFIRMING TERM THIS MEMORANDUM, made as of __________________, 1999, by and between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER ("Landlord"), and Matrix Bancorp, Inc. , a Colorado corporation ("Tenant"). W I T N E S S E T H : Recital of Facts: Landlord and Tenant entered into the Lease Agreement (the "Lease") dated __________________, 1999. Words defined in the Lease have the same meanings in this Memorandum. NOW, THEREFORE, in consideration of the covenants in the Lease, Landlord and Tenant agree as follows: 1. Landlord and Tenant hereby confirm that: a. The Commencement Date under the Lease is __________________, 2000; b. The Expiration Date under the Lease is ______________, _______; and c. The date on which Landlord completed Landlord's Work (if any), Landlord delivered possession of the Premises to Tenant as required by the Lease, and Tenant's obligation to pay rent begins under the Lease is _________________, 1999. 2. Tenant hereby confirm that: a. All commitments, representations and assurances made to induce Tenant to enter into the Lease have been fully satisfied; b. All improvements to the Building and in the Premises to be constructed or installed by Landlord have been completed and furnished in accordance with the Lease to the satisfaction of Tenant; and c. Tenant has accepted and is in full and complete possession of the Premises. d. The undersigned further acknowledges and agrees that, pursuant to Paragraph 3 of Exhibit "C" (the "Workletter Agreement") of the Lease, the Excess Allowance of $______________________ will be included as Additional Rent in the amount of _________________________________ Dollars ($___________) per month. 3. This Memorandum shall be binding upon and inure to the benefit of Landlord and Tenant and their permitted successors and assigns under the Lease. The Lease is in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Memorandum as of the date first hereinabove written. LANDLORD: Approved for legal sufficiency: THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver By: By: Name: Name: Its: Its: TENANT: MATRIX BANCORP, INC., a Colorado corporation By: Name: Its: Attest: Name: Its: EXHIBIT "C" WORKLETTER AGREEMENT THIS WORKLETTER is dated ____________________, 199__, by and between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER ("Landlord") and Matrix Bancorp, Inc., a Colorado corporation ("Tenant"). R E C I T A L S: 1. This Workletter is attached to and forms a part of that certain Office Lease dated _________________, 19___ ("Lease"), pursuant to which Landlord has leased to Tenant office space in that building known as Lawrence Street Center , Denver, Colorado. 2. The parties have agreed to make certain improvements to the Premises, upon the terms and conditions contained in the Lease and this Workletter. 3. Tenant Improvements. Landlord has granted to Tenant an allowance of up to Five and 91/100 Dollars ($ 5.91 ) per rentable square foot of the Premises, for a total allowance of up to One Hundred Forty Thousand Three Hundred Ninety-two and 05/100 Dollars ($ 140,392.05 ) (the "Tenant Improvement Allowance"), for completion of slab-to-slab Tenant Improvements in accordance with the Space Plan. Except as provided herein, the Tenant Improvement Allowance is for Tenant Improvements in the Premises. In the event the Tenant Improvement Allowance is not used on or before May 1, 2000, Landlord shall retain such unused portion of the Tenant Improvement Allowance, and Tenant shall have no further rights thereto or hereunder. In the event that the cost of the Tenant Improvements exceed the Tenant Improvement Allowance, Landlord shall, at Landlord's written option, provide Tenant with an additional allowance, above the Tenant Improvement Allowance, to apply towards payment of the excess costs of the Tenant Improvements (the "Excess Allowance"), and Tenant shall deposit with Landlord funds sufficient to cover any additional projected excess costs and promptly pay to Landlord any costs in excess thereof. Any portion of the Excess Allowance paid by Landlord shall, at Landlord's sole option, either be, (i) amortized on a straight-line basis over the remaining rent paying term of the Lease, with interest at the rate of Eleven Percent (11%) per annum, payable by Tenant to Landlord as additional rent, or (ii) paid for directly by the Tenant. Landlord shall have the work depicted in the Tenant Space Plan attached hereto as Appendix A (the "Tenant Work") constructed with, unless otherwise specified, Building standard materials and in a good and workmanlike manner pursuant to the schedule provided for herein, subject, however, to extensions equal to the delays suffered by Landlord and caused by Tenant or by strike, lockouts, fire or other casualty loss, acts of God, unavailability of materials, hostile or war-like action, riot or other causes beyond Landlord's reasonable control. The Tenant Work, as modified from time to time pursuant to the provisions of this Workletter, shall be known as the "Tenant Improvements". The cost of preparing the Space Plan and any other architectural or engineering fees shall be paid for out of the Tenant Improvement Allowance as part of the costs of the Tenant Improvements. 4. Tenant Space Plan. Landlord and Tenant hereby approve the space layout and improvement plan for the Premises (the "Space Plan") in accordance with the construction drawings by Keeney Design dated November 11, 1999. 5. Tenant Working Drawings. Based upon the Tenant Space Plan, Landlord will cause working drawings for the improvements to the Premises ("Tenant Working Drawings") to be prepared and delivered to Tenant within a period as may be reasonably needed because of the complexity of Tenant's improvements or the nature of Tenant's non-building standard improvements, if any. The Tenant Working Drawings will include Tenant's partition layout, ceiling plan, electrical outlets and switches, telephone outlets, and detailed plans and specifications for the construction of the improvements called for under this Workletter. Tenant will furnish Landlord and its planners with all the information necessary to enable them to complete the Tenant Working Drawings. The cost of all working drawings for Tenant Improvements will be paid for out of the Tenant Improvement Allowance as part of the costs of the Tenant Improvements. Tenant will deliver to Landlord written acceptance or rejection of any Tenant Working Drawings (initial or revised) within three (3) business days after Tenant receives any such item. If Tenant rejects the Tenant Working Drawings (initial or revised), or fails to provide written acceptance or rejection within said three (3) business day period, Landlord shall not be obligated to proceed with any improvements of the Premises until such time as Tenant provides such written acceptance, and any delays in construction as a result thereof shall be deemed delays caused by Tenant. 6. Tenant Cost Estimate. Landlord shall also cause a cost estimate for the improvements to the Premises ("Tenant Cost Estimate") to be prepared and delivered to Tenant. The Tenant will furnish Landlord and its planners with all the information necessary to enable them to complete the Tenant Cost Estimate. The cost of all cost estimates for Tenant Improvements will be paid as part of the costs of the Tenant Improvements. Tenant will deliver to Landlord written acceptance or rejection of any Tenant Cost Estimate (initial or revised) within three (3) business days after Tenant receives any such item. If Tenant rejects the Tenant Cost Estimate, or fails to provide written acceptance or rejection within said three (3) business day period, Landlord shall not be obligated to proceed with any improvements of the Premises until such time as Tenant provides such written acceptance, and any delays in construction as a result thereof shall be deemed delays caused by Tenant. If at any time the costs of the Tenant Improvements as reasonably projected by Landlord exceed the Tenant Improvement Allowance, Tenant shall pay any such excess to Landlord in a manner reasonably acceptable to Landlord, and, until such payment, Landlord shall not be obligated to proceed with any improvements of the Premises, and any delays in construction as a result thereof shall be deemed delays caused by Tenant. Upon written approval of the Tenant Working Drawings and the Tenant Cost Estimate by Tenant, Landlord and Tenant shall be deemed to have given final approval to the Working Drawings, and the costs thereof, and Landlord shall be authorized to proceed with construction. 7. Change Orders. Tenant may request changes in the work during construction only by written requests to Landlord's Representative on a form approved by Landlord. All such changes will be subject to Landlord's prior written approval, which shall not be unreasonably withheld or delayed. Before commencing any change, Landlord or Landlord's agent will prepare and deliver to Tenant, for Tenant's written approval, a change order setting forth the cost of such change, which will include associated architectural, engineering and construction contractor's fees. If Tenant fails to approve such change order within three (3) business days, Landlord will not proceed to perform the change. If Tenant timely approves such change order, Tenant agrees to pay any amounts payable by Tenant in connection with the change order in the manner provided in Paragraph #3 above, to the extent the Tenant Improvement Allowance is exceeded. 8. Completion and Commencement of Rent. The term of the Lease shall commence as provided in Section #3 of the Lease. 9. Failure to Perform. If Landlord delivers to Tenant the Tenant Working Drawings and/or Tenant Cost Estimate and Tenant fails to accept or reject such Drawings or Estimate (or revised Drawings and/or Estimate) as provided in Paragraphs #5 and #6 hereof within the period provided herein, Landlord may, in its sole discretion, deem Tenant to have approved same, and proceed with construction. 10. Construction Administration. Landlord shall coordinate and administer all activities of contractor(s) in the performance of Tenant's Improvements in accordance with the plans and specifications. Landlord and Tenant agree that Jones Lang LaSalle Americas (Colorado), L.P., shall receive from the Tenant Improvement Allowance as a construction management fee, shall receive compensation from the Tenant Improvement Allowance in an amount no greater than Five Percent (5%) of the Tenant Improvement Allowance. Tenant agrees that it will not contract with any contractor, laborer or material supplier to perform any improvements in the Premises without providing Landlord with notice ten (10) days prior to any improvements and requiring said contractor, laborer or material supplier to execute an agreement acknowledging non-liability for payment by Landlord in accordance with C.R.S. ss. 38-22-105.5, as amended from time to time. [Overstruck and bold changes handwritten and initialed by parties to Lease at time of signing] 11. Miscellaneous. (a) Except to the extent otherwise indicated herein, the initially capitalized terms used in this Workletter Agreement shall have the meaning assigned to them in the Lease. (b) The terms and provisions of this Tenant Workletter are intended to supplement and are intended as an Amendment to the Lease and are specifically subject to all the terms and provisions of the Lease. In the event of conflict between the terms of this Tenant Workletter and the Lease, then the provisions of the Workletter shall govern. (c) Prior to the date the Premises are ready for occupancy Landlord's contractor and Tenant shall inspect the Premises and jointly complete a "punch list" of incomplete or defective work, and thereafter Landlord shall exercise due diligence to cause such punch list items to be completed within thirty (30) days following the date the Premises are ready for occupancy (except for any punch list items which, despite due diligence, cannot be completed within said thirty (30) day period). (d) This Tenant Workletter may not be amended or modified other than by supplemental written agreement executed by authorized representatives of the parties hereto. (e) Landlord shall have the right to issue reasonable construction rules, regulations and policies. If Tenant contests any of these rules, regulations, or policies, Landlord agrees to take reasonable steps to modify such rules, regulation, and policies at Tenant's request, except that Tenant shall pay directly any related expenses of construction or of consultants due to said changes to the extent said change exceeds the Tenant Improvement Allowance. (f) No waiver of any default of the Tenant hereunder shall be implied from any omission by the Landlord to take any action on account of such default if such default persists or be repeated, and no express waiver shall affect any default other than the default specified in the express waiver, and that only for the time and to the extent therein stated. (g) Except as modified herein, the provisions of the Lease shall continue in full force and effect. (h) Landlord neither warrants nor guarantees the accuracy of any estimated Costs or Tenant Cost Estimates. (i) Time is of the essence in this Workletter Agreement, and the failure by Tenant to timely respond or perform shall be deemed to be a material default. Tenant undertakes and agrees to, upon written request, meet or provide written response, as the case may be, within one business day of such written request, except as otherwise provided in this Workletter Agreement. Any delay caused by Tenant's failure to do so shall be deemed to be a delay caused by Tenant. (j) LANDLORD MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, IN CONNECTION WITH LANDLORD IMPROVEMENTS. LANDLORD: Approved for legal sufficiency: THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver By: /s/ R. Augustine By: /s/ Georgia E. Lesh-Laurie Name: R. Augustine Name: Georgia E. Lesh-Laurie Its: Assoc. Univ. Counsel Its: Chancellor TENANT: MATRIX BANCORP, INC., a Colorado corporation By: /s/ Guy A. Gibson Name: Guy A. Gibson Its: CEO/President EXHIBIT "D" CLEANING SCHEDULE Landlord shall furnish janitorial service to the Premises and the Building Complex as described below: DAILY MONDAY THROUGH FRIDAY, INCLUSIVE 1. Sweep, dry mop or vacuum all floors complete. Remove gum, tar, etc., adhering to the floor. 2. Empty and damp wipe all ashtrays. 3. Clean, polish and sanitize all drinking fountains. 4. Sweep all steps, sidewalks and plazas. 5. Clean passenger elevator cab and landing doors, including floors. 6. Empty all waste containers. 7. Clean all public and private (within Premises) wash and restrooms. (a) All cleaning will be performed with approved germicidal detergents at disinfectant strengths. (b) All toilets and urinals will be cleaned on all surfaces nightly; acid bowl cleaner to be used in the interior. (c) All wash basins, shelves, dispensers and all other washroom fixtures will be cleaned nightly. (d) All mirrors will be cleaned and polished nightly. (e) All chrome and other bright work, including exposed plumbing, toilet seat hinges, etc., will be cleaned and polished nightly. (f) All waste receptacles are to be emptied and cleaned nightly. (g) All lavatory floors will be swept and mopped with a germicidal detergent solution nightly. (h) Washroom supplies will be replenished nightly and at all other times as needed. (i) Once each month, remove hard water stains from toilet fixtures by using bowl cleaner after normal cleaning. Follow manufacturer's recommendations. 8. All normal rubbish and office waste paper shall be removed from the tenant floors. WEEKLY 1. Dust and wipe clean with dust cloth all desk tops. 2. Spot clean all doors, switch plates, wall and glass areas. 3. Dust and wipe all tops of all file cabinets and counters. 4. Sweep building stairwells. 5. Damp mop floors and/or spray buff for heavy scuffs, if necessary. 6. Clean glass in building directory. 7. Wipe all waste containers. 8. Wash all glass entrance doors and side panels inside and out. MONTHLY 1. When possible, sweep and hose down outside Plaza space, exterior walks, trucking areas and shipping platforms. 2. Shampoo all elevator carpeting. 3. Dust all windowsills. EVERY THREE MONTHS 1. When possible, wash all windows, interior no less than once per year and exterior not less than three times per year. 2. Dust vertical surfaces of all furniture. 3. Scrub all resilient floor areas so as to maintain a highly polished surface. SNOW AND ICE REMOVAL 1. Landlord shall be responsible for snow and ice removal from the parking lots and sidewalks servicing the Property. EX-10.24 7 0007.txt FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE ("Amendment") is made the ______ day of July, 2000, by and between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver ("Landlord"), and MATRIX BANCORP, a Colorado corporation ("Tenant"). RECITALS WHEREAS, Landlord leased certain premises on Floors 13 and 14 (the "Premises") in the building known as Lawrence Street Center, 1380 Lawrence Street, Denver, Colorado, to Tenant pursuant to that certain Lease with a reference date of 1999 (the "Lease"), the Premises being more particularly described therein; and WHEREAS, the Lease Term expires on February 28, 2006; and WHEREAS, Landlord and Tenant desire to amend the Lease as set forth below. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: AGREEMENT 1. Recitals. The foregoing recitals are true and correct and incorporated herein by this reference. Unless otherwise defined herein, capitalized terms shall have the same meaning ascribed to them in the Lease. 2. Effective Date. The terms and conditions contained in this Amendment shall become effective as of July 19, 2000 (the "Effective Date"). Until that date, the rights, liabilities and obligations of the parties hereto are as set forth in the Lease, without this Amendment. 3. Definitions. As of the Effective Date, Paragraphs #1(d), and #1(e) of the Lease are hereby deleted and replaced with the following: (d) "Rentable Area Leased" shall mean the total number of square feet of rentable floor area of office space in the Premises, and that number is 24,501 square feet. (e) "Tenant's Proportionate Share" shall be that percentage the Rentable Area Leased is of the Rentable Area. Such percentage is 14.17%. 4. Premises. As of the Effective Date, Paragraph #2 of the Lease is hereby deleted and replaced with the following: 2. PREMISES: In consideration of the rents, charges, covenants and agreements herein contained, Landlord leases to Tenant and Tenant hereby hires and takes from Landlord the space shown on Exhibit "A-1" to this Amendment on the 13th floor of the Building, known as Suite 1350, which consists of 9,514 rentable square feet (the "Expansion Premises"), and Tenant leases the space being more particularly shown on the floor plan(s) designated as Exhibit "A-2" to this Amendment on the 14th floor of the Building, known as Suite 1400, which consists of 14,987 rentable square feet (the "Primary Premises") (collectively referred to herein as the "Premises"). Tenant's use is subject to the non-exclusive right to use, in common with others, the public areas of the Building including, without limitation, the lobby, stairs, elevators, entrances and loading docks. No easement for air or light or view is included with the Premises or the Additional Premises. Landlord and Tenant agree that the rentable square feet of Premises ("Rentable Area Leased") is 24,501 and waive and release any right to assert or claim otherwise. 5. Term. The term (hereinafter called the "Term") of the Lease for the Premises shall commence on July 19, 2000 (the "Commencement Date") and terminate on June 30, 2006 (the "Expiration Date"). 6. Rental. Paragraph #4(a) of the Lease is hereby deleted and replaced with the following: (a) Tenant agrees to pay Landlord for the use and occupancy of the Premises lawful money of the United States, payable without notice or demand in advance, on the first day of each calendar month during the Term, an initial annual base rental (hereinafter "Initial Annual Base Rental") according to the schedule below. The Initial Base Rental, when adjusted as set forth in this section, shall be the Annual Base Rental. The Initial Annual Base Rental shall step as follows: Expansion Primary Monthly Annual Month Premises Premises Total Total ----- ----------- -------- ---------- --------- 07/19/00-12/31/00 $16,054.87 $18,830.36 $34,885.23 $189,055.44 01/01/01-12/31/01 $16,451.29 $19,422.36 $35,873.65 $430,483.80 01/01/02-12/31/02 $16,847.71 $20,310.36 $37,158.07 $445,896.84 01/01/03-12/31/03 $17,125.20 $26,976.60 $44,101.80 $529,221.60 01/01/04-12/31/04 $17,521.62 $27,601.06 $45,122,68 $541,472.16 1/01/05-06/30/06 $17,918.03 $28,225.52 $46,143.55 $784,440.35 7. Tenant Finish. The Tenant Improvement Allowance as provided for in the Lease is amended to include a total allowance of One Hundred Forty-Four Thousand Eight Hundred and 91/100 Dollars ($144,800.91). Further, Tenant acknowledges that Landlord has completed any and all alterations, tenant improvements and Tenant Work previously required by the Lease. 8. Commissions. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction, except for Jones Lang LaSalle Americas (Colorado), L.P., and that no other broker, agent or other person brought about this transaction, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provisions of this section shall survive the termination of this Lease. 9. Authority. Each of Landlord and Tenant, and each person signing for them, hereby warrants and represents to the other that the individual signing on behalf of that party is fully authorized to sign on behalf of, and to bind, such party and that, when signed by the parties, this First Amendment to Lease shall be fully binding on the party on whose behalf this First Amendment to Lease is executed by such individual. 10. Entire Agreement. This First Amendment to Lease represents the entire agreement of Landlord and Tenant with regard to the Amendment to Lease, with all prior writings and verbal negotiations with regard thereto being merged herein. Except as modified herein, the provisions of the Lease shall continue in full force and effect. In the event of any inconsistency or conflict between the terms and provisions of the First Amendment to Lease and those of the Lease, the terms and provisions of the First Amendment to Lease shall control. IN WITNESS WHEREOF, Landlord and Tenant have executed this instrument by duly authorized representative as of the day and year first hereinabove written. LANDLORD: THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver By: ------------------------------------- Name: ------------------------------------- Its: ------------------------------------- Approved for legal sufficiency: By: ------------------------------------- Name: ------------------------------------- Its: ------------------------------------- TENANT: MATRIX BANCORP, a Colorado Corporation By: /s/ Guy A. Gibson Name: Guy A. Gibson Its: CEO/President EXHIBIT A-1 [GRAPHIC OMITTED] EXHIBIT A-2 [GRAPHIC OMITTED] EX-10.25 8 0008.txt SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (the "Amendment"), is made and entered into this ______ day of October, 2000, by and between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the UNIVERSITY OF COLORADO AT DENVER (the "Landlord"), and MATRIX BANCORP, a Colorado corporation (the "Tenant"). W I T N E S S E T H: WHEREAS, Landlord leased certain premises on Floors 13 and 14 (the "Premises") in the building known as Lawrence Street Center, 1380 Lawrence Street, Denver, Colorado, to Tenant pursuant to that certain Lease with a reference date of 1999, as amended (hereinafter referred to as the "Lease"), the Premises being more particularly described therein; and WHEREAS, Landlord and Tenant acknowledge and agree that the Lease is in full force and effect for the Premises described therein, and that the Lease Term under the Lease would expire on June 30, 2006; and WHEREAS, Landlord desires to lease to Tenant, and Tenant desires to lease from Landlord, certain additional space, as hereinafter set forth, in addition to the Premises defined in the Lease, and WHEREAS, Landlord and Tenant desire to amend said Lease on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the Premises and the agreement of each other, Landlord and Tenant agree that said Lease be, and the same is hereby, amended, as follows: 1. Effective Date. -------------- Unless otherwise set forth herein, the terms and conditions contained in this Amendment become effective as of the date first set forth above (the "Effective Date"). 2. Definitions. ----------- As of December 1, 2000, Paragraphs #1(d) and (e) of the Lease are deleted and replaced with the following: (d) "Rentable Area Leased" shall mean the total number of square feet of rentable floor area of office space in the Premises, and that number is 29,298 square feet. (e) Tenant's "Proportionate Share" shall be that percentage the Rentable Area Leased is of the Rentable Area. Such percentage is 16.94%. 3. Premises. -------- Effective December 1, 2000, Paragraph #2 of the Lease is deleted in its entirety and replaced with the following: 2. PREMISES: In consideration of the rents, charges, covenants and agreements herein contained, Landlord leases to Tenant, and Tenant hereby hires and takes from Landlord, the space referred to as "Suite 1350," located on the 13th floor of the Building, which consists of 9,514 rentable square feet, and the space referred to as "Suite 1400" located on the 14th floor of the Building, which consists of 14,987 rentable square feet, and the space shown on Exhibit A to this Amendment referred to as "Suite 1300," located on the 13th floor of the Building, which consists of 4,797 rentable square feet. Tenant is also granted the non-exclusive right to use, in common with others, the public areas of the Building, including, without limitation, the lobby, stairs, elevators, entrances and loading docks. No easement for air or light or view is included with the Premises. Landlord and Tenant agree that the rentable square feet of Suites 1300, 1350 and 1400 ("Rentable Area Leased") is 29,298, and waive and release any right to assert or claim otherwise. Except as provided in this Amendment to the contrary, any reference in the Lease, Rider and Amendments to the Lease to "Rentable Area Leased" shall be deemed to include Suites 1300, 1350 and 1400, and any reference in the Lease to "Premises" shall be deemed to include Suites 1300, 1350 and 1400. 4. Term. ---- The term (hereinafter referred to as the "Term") of the Lease for Suite 1300 shall commence on November 1, 2000 and shall be coterminous with the terms for Suites 1350 and 1400. The Expiration Date for Suites 1300, 1350 and 1400, as defined in the Lease, shall be extended until 5:00 p.m. Denver time on July 31, 2006 (the "Expiration Date"). 5. Rental. ------ Pursuant to the terms and conditions of Paragraph 4(a) of the Lease, as of November 1, 2000, Tenant shall pay Landlord for the use and occupancy of Suites 1300, 1350 and 1400, in lawful money of the United States, payable without notice or demand in advance on the first day of each calendar month during the Term, Annual Base Rental in accordance with the following table: Suite 1300 (4,797 rentable square feet) Annual Rate Monthly Term Per Sq. Ft. Base Rent Base Rent ---- ----------- --------- --------- 12/01/00- 12/31/01 $20.75 $ 8,294.81 $107,832.53 (13 months) 01/01/02- 12/31/02 $21.25 $ 8,494.69 $101,936.25 01/01/03- 12/31/03 $21.60 $ 8,634.60 $103,615.20 01/01/04- 12/31/04 $22.10 $ 8,834.48 $106,013.70 01/01/05 07/31/06 $22.60 $ 9,034.35 $171,652.65 (19 months) Suites 1350 and 1400 (24,501 rentable square feet) Annual Rate Monthly Annual Term Per Sq. Ft. Base Rent Base Rent ---- ----------- --------- --------- 12/01//00- 12/31/00 $17.09 $34,885.23 N/A 01/01/01- 12/31/01 $17.57 $35,873.65 $430,483.80 01/01/02- 12/31/02 $18.20 $37,158.07 $445,896.84 01/01/03 12/31/03 $21.60 $44,101.80 $529,221.60 01/01/04- 12/31/04 $22.10 $45,122.68 $541,472.16 01/01/05- 07/31/06 $22.60 $46,143.55 $876,727.45 (19 months) 6. Taxes and Operating Cost Adjustments. ------------------------------------ The Base Year for Operating Costs and Real Estate Taxes, as defined in Sections 5(a) and 5(b) of the Lease, for Suite 1300 shall be the full calendar year of 2000. 7. Condition of the Premises and Preparation for Occupancy. ------------------------------------------------------- Tenant acknowledges that Landlord has completed any and all alterations, tenant improvements and Tenant Work previously required by the Lease. Landlord agrees to provide a Tenant Improvement Allowance of Sixteen and No/100 Dollars ($16.00) per square foot for Suite 1300 in accordance with the Workletter Agreement attached hereto as Exhibit B. The Tenant Improvement Allowance shall include the cost of architectural and engineering fees, as well as construction, the Landlord's construction management fee, and costs of demolition. Tenant may contract with Porter Construction to perform the Tenant Improvements; provided, however, that Porter Construction shall be subject to the terms of the Workletter Agreement. Except as set forth above or in the Workletter, all pre-occupancy alterations and fit-up of Suite 1300 shall be performed at Tenant's sole cost and expense (hereinafter referred to collectively as "Special Work"), subject to the terms and provisions of the Lease. 8. Early Occupancy of Suite 1300. ----------------------------- Tenant, its contractors, subcontractors and agents shall be allowed to enter Suite 1300 prior to December 1, 2000 to install furniture, fixtures and equipment. However, Tenant shall obtain prior approval from Landlord to enter Suite 1300 and shall not interfere with construction of Tenant Improvements. Further, Tenant shall comply with all the terms and conditions of the Lease during its early occupancy, except for the payment of Base Rent and Operating Costs as set forth in the Lease. 9. Parking. ------- As of December 1, 2000, Tenant shall have the right, during the Term of this Lease, to rent an additional three (3) unreserved garage stalls for the parking of motor vehicles used by Tenant, its officers and employees at the monthly rates and upon the terms and conditions as may from time to time be established by Landlord, or the operator of the garage facility. Such garage stalls shall be at locations designated by Landlord or the operator of the garage facility. In the event Tenant does not continuously and at all times elect to pay rent on the garage stalls, Landlord shall have the right to cancel Tenant's right to use said garage stalls. 10. Telecommunications. ------------------ (a) Limitation of Responsibility. Tenant acknowledges and agrees that all telephone and telecommunications services desired by Tenant for use in the Premises shall be ordered and utilized at the sole cost and expense of Tenant. Subject to Landlord's supervision and approval, Tenant shall have the right to use the riser cables by installing telecommunication lines from the Premises to the terminal block on the floor or floors on which the Premises are located (such lines, and any other voice/data cables, lines or wires used or installed by or for Tenant and serving the Premises are referred to as the "telecommunication lines"). Landlord, however, makes no representations or warranties with respect to the capacity, suitability or design of the riser cables or terminal blocks. If there is more than one tenant on a floor, Landlord will allocate hook-ups to the terminal block based on the proportion of rentable square feet that each tenant occupies on the floor. The installation and hook-up of telecommunication lines by Tenant will be subject to all of the terms and conditions of this Lease, including, without limitation, Paragraph 20 of this Lease. Tenant will have no rights or interest in the riser cables and terminal blocks in the Building therein except as set forth herein. Under no circumstances will Landlord or its agents or employees be liable for, and Tenant and each of its subtenants waives all claims with respect to, any damages or losses sustained by it or any occupant of the Premises, including any property or consequential damages, resulting from operating or maintenance of the riser cables and terminal blocks. Without limiting the generality of the foregoing, in no event shall Landlord be liable for: (a) any damage to Tenant's or its subtenants' telephone lines, telephones or other equipment connected to the telecommunication lines; (b) interruption or failure of, or interference with, telephone or other service coming through the telecommunication lines to the Premises; or (c) unauthorized eavesdropping or wiretapping. All telephone and telecommunications desired by Tenant must be ordered and utilized at the sole expense of Tenant. All of Tenant's telecommunications equipment affixed to the Premises must be and remain solely in the Premises, in accordance with this Lease and with the rules and regulations adopted by Landlord from time to time. Unless otherwise specifically agreed to in writing, Landlord shall have no responsibility for the maintenance of Tenant's telecommunications equipment, including wiring, nor for any wiring or other infrastructure to which Tenant's telecommunications equipment may be connected. Tenant agrees that, to the extent any such service is interrupted, curtailed or discontinued, Landlord shall have no obligation or liability with respect thereto and it shall be the sole obligation of Tenant at its expense to obtain substitute service. (b) Necessary Service Interruptions. Landlord shall have the right, upon reasonable prior notice to Tenant, to interrupt or turn off telecommunications facilities in the event of emergency or as necessary in connection with repairs to the Building or installation of telecommunications equipment for other tenants of the Building, but Landlord shall use commercially reasonable efforts to restore such services as soon as practicable. (c) Removal of Equipment, Wiring and Other Facilities. Any and all telecommunications equipment installed in the Premises or elsewhere in the Building by or on behalf of Tenant, including wiring, or other facilities for telecommunications transmittal, shall be removed prior to the expiration or earlier termination of the Lease Term, by Tenant at its sole cost or, at Landlord's election, by Landlord at Tenant's sole cost, with the cost thereof to be paid as Additional Rent. Landlord shall have the right, however, upon written notice to Tenant to require Tenant to abandon and leave in place, without additional payment to Tenant or credit against Rent, any and all telecommunications wiring and related infrastructure, or selected components thereof, whether located in the Premises or elsewhere in the Building. Tenant covenants that Tenant shall be the sole owner of such wiring and related infrastructure and shall have good right to surrender said wiring and related infrastructure, which shall at such time be free of all liens and encumbrances and shall be in working order. (d) New Provider Installations. In the event that Tenant wishes at any time to utilize the services of a telephone or telecommunications provider whose equipment is not then servicing the Building, no such provider shall be permitted to install its lines or other equipment within the Building without first securing the prior written approval of the Landlord, which approval may be withheld in Landlord's sole and absolute discretion. Landlord's approval shall not be deemed any kind of warranty or representation by Landlord, including, without limitation, any warranty or representation as to the suitability, competence, or financial strength of the provider. Without limitation of the foregoing standard, unless all of the following conditions are satisfied to Landlord's satisfaction, Landlord shall decline to give its approval: (i) Landlord shall incur no expenses whatsoever with respect to any aspect of the provider's provision of its services, including without limitation, the costs of installation, materials, services and supervision; (ii) Prior to commencement of any work in or about the Building by the provider, the provider shall supply Landlord with such written indemnities, insurance, financial statements, and such other items as Landlord determines to be necessary to protect its financial interests and the interests of the Building relating to the proposed activities of the provider; (iii) The provider agrees to abide by such rules and regulations, building and other codes, job site rules and such other requirements as are determined by Landlord to be necessary to protect the interests of the Building, the tenants in the Building and Landlord, in the same or similar manner as Landlord has the right to protect itself and the Building with respect to proposed alterations; (iv) Landlord reasonably determines that there is sufficient space in the Building for the placement of the provider's equipment and materials; (v) The provider agrees to abide by Landlord requirements, if any, that provider use existing building conduits and pipes or use building contractors (or other contractors approved by Landlord); (vi) Landlord receives from the provider such compensation as is determined by Landlord to compensate it for space used in the Building for the storage and maintenance of the provider's equipment, for the fair market value of a provider's access to the Building, and the costs which may reasonably be expected to be incurred by Landlord; (vii) The provider agrees to deliver to Landlord detailed "as-built" plans as soon as possible, but in no event later than sixty (60) days after the installation of the provider's equipment is complete; and (viii) All of the foregoing matters are documented in a written license agreement between Landlord and the provider, the form and content of which is reasonably satisfactory to Landlord. (e) Limit of Default or Breach. Notwithstanding any provision of the proceeding paragraphs to the contrary, the refusal of Landlord to grant its approval to any prospective telecommunications provider shall not be deemed a default or breach by Landlord of its obligation under this Lease unless and until Landlord is adjudicated to have acted recklessly or maliciously with respect to Tenant's request for approval, and, in that event, Tenant shall still have no right to terminate the Lease or claim an entitlement to rent abatement, but may, as Tenant's sole and exclusive recourse, seek a judicial order of specific performance compelling Landlord to grant its approval as to the prospective provider in question. The provisions of this paragraph may be enforced solely by Tenant and Landlord, are not for the benefit of any other party (including any subtenant), and specifically, but without limitation, no telephone or telecommunications provider shall be deemed a third party beneficiary of this Lease. (f) Installation and Use of Wireless Technologies. Tenant shall not utilize any wireless communications equipment (other than usual and customary cellular telephones), including antennae and satellite receiver dishes, within the Premises or the Building, without Landlord's prior written consent. Such consent may be conditioned in such a manner so as to protect Landlord's financial interests and the interests of the Building, and the other tenants therein, in a manner similar to the arrangements described in the immediately preceding paragraphs. (g) Limitation of Liability for Equipment Interference. In the event that telecommunications equipment, wiring and facilities or satellite and antennae equipment of any type installed by or at the request of Tenant within the Tenant's Premises, on the roof, or elsewhere within or on the Building causes interference to equipment used by another party, Tenant shall assume all liability related to such interference. Tenant shall use reasonable efforts, and shall cooperate with Landlord and other parties, to promptly eliminate such interference. In the event that Tenant is unable to do so, Tenant will substitute alternative equipment which remedies the situation. If such interference persists, Tenant shall discontinue the use of such equipment, and, at Landlord's discretion, remove such equipment according to foregoing specifications. 11. Right of First Offer. -------------------- The Tenant agrees that Paragraph 3 of the Rider to Lease, which contains a Right of First Offer, is hereby deleted in its entirety and Landlord shall have no further obligations thereunder. 12. Renewal Term. ------------ The Renewal Option in Paragraph 2 of the Rider to Lease, if exercised, shall also apply to Suite 1300. 13. Brokerage. --------- Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction, except for Jones Lang LaSalle Americas (Colorado) L.P., and that no other broker, agent or other person brought about this transaction, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. 14. Security Deposit. ---------------- Tenant, concurrently with the execution of this Amendment, hereby deposits an additional Ten Thousand and No/100 Dollars ($10,000.00) with Landlord pursuant to Paragraph 33 of the Lease as additional security for the performance of its obligations under the Lease. 15. Authority. --------- Each of Landlord and Tenant, and each person signing for them, hereby warrants and represents to the other that the individual signing on behalf of that party is fully authorized to sign on behalf of, and to bind, such party and that, when signed by the parties, this Amendment to Lease shall be fully binding on the party on whose behalf this Amendment to Lease is executed by such individual. 16. Entire Agreement. ---------------- This Amendment to Lease represents the entire agreement of Landlord and Tenant with regard to the Amendment to Lease, with all prior writings and verbal negotiations with regard thereto being merged herein. Except as modified herein, the provisions of the Lease, as amended, shall continue in full force and effect. In the event of any inconsistency or conflict between the terms and provisions of the Amendment to Lease and those of the Lease, as amended, the terms and provisions of the Amendment to Lease shall control. IN WITNESS WHEREOF, Landlord and Tenant have executed this instrument by duly authorized representative as of the day and year first hereinabove written. LANDLORD: REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver By: /s/ Georgia E. Lesh-Laurie Name: Georgia E. Lesh-Laurie Its: Chancellor Approved for legal sufficiency: By: /s/ R. Augustine Name: R. Augustine Its: Legal Counsel TENANT: MATRIX BANCORP, a Colorado corporation By: /s/ Guy A. Gibson Name: Guy A. Gibson Its: CEO EXHIBIT "A" SUITE 1300 EXHIBIT "B" WORKLETTER AGREEMENT (Suite 1300) THIS WORKLETTER is dated _________________, 2000, by and between THE REGENTS OF THE UNIVERSITY OF COLORADO, a body corporate, for and on behalf of the University of Colorado at Denver ("Landlord") and MATRIX BANCORP, a Colorado corporation ("Tenant"). R E C I T A L S: 1. This Workletter is attached to and forms a part of that certain Lease with a reference date of 1999, as amended ("Lease"), pursuant to which Landlord has leased to Tenant office space in that building known as Lawrence Street Center, Denver, Colorado. 2. The parties have agreed to make certain improvements to the Premises, upon the terms and conditions contained in the Lease and this Workletter. 3. Tenant Improvements. Landlord has granted to Tenant an allowance of up to Sixteen and No/100 Dollars ($16.00) per rentable square foot for Suite 1300, for a total allowance of up to Seventy-Six Thousand Seven Hundred Fifty-Two and No/100 Dollars ($76,752.00) (the "Tenant Improvement Allowance"), for completion of slab-to-slab Tenant Improvements in accordance with the Space Plan. Except as provided herein, the Tenant Improvement Allowance is for Tenant Improvements in the Premises. In the event the Tenant Improvement Allowance is not used on or before December 31, 2000, Landlord shall retain such unused portion of the Tenant Improvement Allowance, and Tenant shall have no further rights thereto or hereunder. In the event that the cost of the Tenant Improvements exceeds the Tenant Improvement Allowance, Landlord shall, at Tenant's written option, provide Tenant with an additional allowance, above the Tenant Improvement Allowance, to apply towards payment of the excess costs of the Tenant Improvements (the "Excess Allowance"), and Tenant shall deposit with Landlord funds sufficient to cover any additional projected excess costs and promptly pay to Landlord any costs in excess thereof. Notwithstanding the above, the Excess Allowance shall not exceed Five Dollars ($5.00) per rentable square foot for Suite 1300. Any portion of the Excess Allowance paid by Landlord shall either be (i) amortized on a straight-line basis over the remaining rent paying term of the Lease, with interest at the rate of Twelve Percent (12%) per annum, payable by Tenant to Landlord as additional rent, or (ii) paid for directly by the Tenant. Upon completion, Tenant agrees to execute the Lease Commencement Date Statement attached hereto as Appendix B. Landlord shall have the work depicted in the Tenant Space Plan attached hereto as Appendix A (the "Tenant Work") constructed with, unless otherwise specified, building standard materials and in a good and workmanlike manner pursuant to the schedule provided for herein, subject, however, to extensions equal to the delays suffered by Landlord and caused by Tenant or by strike, lockouts, fire or other casualty loss, acts of God, unavailability of materials, hostile or war-like action, riot or other causes beyond Landlord's reasonable control. The Tenant Work, as modified from time to time pursuant to the provisions of this Workletter, shall be known as the "Tenant Improvements". The cost of preparing the Space Plan and any other architectural or engineering fees shall be paid for out of the Tenant Improvement Allowance as part of the costs of the Tenant Improvements. Landlord agrees to pay Tenant's contractor directly by paying Fifty Percent (50%) of the invoices presented and the remaining Fifty Percent (50%) after Landlord receives acceptable lien waivers from the contractor and subcontractors. 4. Tenant Space Plan. Landlord and Tenant hereby approve the space ------------------- layout and improvement plan for the Premises (the "Space Plan") in accordance with the construction drawings by Architecture 2000 dated October 5, 2000. 5. Tenant Working Drawings. Based upon the Tenant Space Plan, Landlord will cause working drawings for the improvements to the Premises ("Tenant Working Drawings") to be prepared and delivered to Tenant within a period as may be reasonably needed because of the complexity of Tenant's improvements or the nature of Tenant's non-building standard improvements, if any. The Tenant Working Drawings will include Tenant's partition layout, ceiling plan, electrical outlets and switches, telephone outlets, and detailed plans and specifications for the construction of the improvements called for under this Workletter. Tenant will furnish Landlord and its planners with all the information necessary to enable them to complete the Tenant Working Drawings. The cost of all working drawings for Tenant Improvements will be paid for out of the Tenant Improvement Allowance as part of the costs of the Tenant Improvements. Tenant will deliver to Landlord written acceptance or rejection of any Tenant Working Drawings (initial or revised) within three (3) business days after Tenant receives any such item. If Tenant rejects the Tenant Working Drawings (initial or revised), or fails to provide written acceptance or rejection within said three (3) business day period, Landlord shall not be obligated to proceed with any improvements of the Premises until such time as Tenant provides such written acceptance, and any delays in construction as a result thereof shall be deemed delays caused by Tenant. 6. Tenant Cost Estimate. Landlord shall also cause a cost estimate for the improvements to the Premises ("Tenant Cost Estimate") to be prepared and delivered to Tenant. The Tenant will furnish Landlord and its planners with all the information necessary to enable them to complete the Tenant Cost Estimate. The cost of all cost estimates for Tenant Improvements will be paid as part of the costs of the Tenant Improvements. Tenant will deliver to Landlord written acceptance or rejection of any Tenant Cost Estimate (initial or revised) within three (3) business days after Tenant receives any such item. If Tenant rejects the Tenant Cost Estimate, or fails to provide written acceptance or rejection within said three (3) business day period, Landlord shall not be obligated to proceed with any improvements of the Premises until such time as Tenant provides such written acceptance, and any delays in construction as a result thereof shall be deemed delays caused by Tenant. If at any time the costs of the Tenant Improvements as reasonably projected by Landlord exceed the Tenant Improvement Allowance, Tenant shall pay any such excess to Landlord in a manner reasonably acceptable to Landlord, and, until such payment, Landlord shall not be obligated to proceed with any improvements of the Premises, and any delays in construction as a result thereof shall be deemed delays caused by Tenant. Upon written approval of the Tenant Working Drawings and the Tenant Cost Estimate by Tenant, Landlord and Tenant shall be deemed to have given final approval to the Working Drawings, and the costs thereof, and Landlord shall be authorized to proceed with construction. 7. Change Orders. Tenant may request changes in the work during construction only by written requests to Landlord's Representative on a form approved by Landlord. All such changes will be subject to Landlord's prior written approval, which shall not be unreasonably withheld or delayed. Before commencing any change, Landlord or Landlord's agent will prepare and deliver to Tenant, for Tenant's written approval, a change order setting forth the cost of such change, which will include associated architectural, engineering and construction contractor's fees. If Tenant fails to approve such change order within three (3) business days, Landlord will not proceed to perform the change. If Tenant timely approves such change order, Tenant agrees to pay any amounts payable by Tenant in connection with the change order in the manner provided in Paragraph #6 above, to the extent the Tenant Improvement Allowance is exceeded. 8. Completion and Commencement of Rent. The term of the Lease shall commence as provided in Section #4 of the Second Amendment. 9. Failure to Perform. If Landlord delivers to Tenant the Tenant Working Drawings and/or Tenant Cost Estimate and Tenant fails to accept or reject such Drawings or Estimate (or revised Drawings and/or Estimate) as provided in Paragraphs #5 and #6 hereof within the period provided herein, Landlord may, in its sole discretion, deem Tenant to have approved same, and proceed with construction. 10. Construction Administration. Landlord shall coordinate and administer all activities of contractor(s) in the performance of Tenant's Improvements in accordance with the plans and specifications. Tenant agrees that it will not contract with any contractor, laborer or material supplier to perform any improvements in the Premises without providing Landlord with notice ten (10) days prior to any improvements and requiring said contractor, laborer or material supplier to execute an agreement acknowledging non-liability for payment by Landlord in accordance with C.R.S. ss. 38-22-105.5, as amended from time to time. 11. Miscellaneous. (a) Except to the extent otherwise indicated herein, the initially capitalized terms used in this Workletter Agreement shall have the meaning assigned to them in the Lease. (b) The terms and provisions of this Tenant Workletter are intended to supplement and are intended as an Amendment to the Lease and are specifically subject to all the terms and provisions of the Lease. In the event of conflict between the terms of this Tenant Workletter and the Lease, then the provisions of the Workletter shall govern. (c) Prior to the date the Premises are ready for occupancy Landlord's contractor and Tenant shall inspect the Premises and jointly complete a "punch list" of incomplete or defective work, and thereafter Landlord shall exercise due diligence to cause such punch list items to be completed within thirty (30) days following the date the Premises are ready for occupancy (except for any punch list items which, despite due diligence, cannot be completed within said thirty (30) day period). (d) This Tenant Workletter may not be amended or modified other than by supplemental written agreement executed by authorized representatives of the parties hereto. (e) Landlord shall have the right to issue reasonable construction rules, regulations and policies. If Tenant contests any of these rules, regulations, or policies, Landlord agrees to take reasonable steps to modify such rules, regulation, and policies at Tenant's request, except that Tenant shall pay directly any related expenses of construction or of consultants due to said changes to the extent said change exceeds the Tenant Improvement Allowance. (f) No waiver of any default of the Tenant hereunder shall be implied from any omission by the Landlord to take any action on account of such default if such default persists or be repeated, and no express waiver shall affect any default other than the default specified in the express waiver, and that only for the time and to the extent therein stated. (g) Except as modified herein, the provisions of the Lease shall continue in full force and effect. (h) Landlord neither warrants nor guarantees the accuracy of any estimated Costs or Tenant Cost Estimates. (i) Time is of the essence in this Workletter Agreement, and the failure by Tenant to timely respond or perform shall be deemed to be a material default. Tenant undertakes and agrees to, upon written request, meet or provide written response, as the case may be, within one business day of such written request, except as otherwise provided in this Workletter Agreement. Any delay caused by Tenant's failure to do so shall be deemed to be a delay caused by Tenant. LANDLORD: TENANT: REGENTS OF THE UNIVERSITY MATRIX BANCORP, OF COLORADO, a body corporate, a Colorado corporation for and on behalf of the University of Colorado at Denver By: /s/ Georgia E. Lesh-Laurie By: /s/ Guy A. Gibson Print Name: Georgia E. Lesh-Laurie Print Name: Guy A. Gibson Its: Chancellor Its: CEO Approved for legal sufficiency: By:__________________________________ Attest:______________________________ Print Name:___________________________ Print Name:__________________________ Its:__________________________________ Its:_________________________________ APPENDIX A Tenant Work/Space Plan APPENDIX "B" LEASE COMMENCEMENT DATE STATEMENT Date: ________________, 2000 TO: Jones Lang LaSalle Management Services (Colorado) L.P. 1225 Seventeenth Street, Suite 2450 Denver, Colorado 80202 RE: Lease with a Reference Date of 1999, as amended Suite 1300, 1380 Lawrence Street Denver, Colorado Dear Jones Lang LaSalle: This letter is being delivered to you in accordance with Paragraph #3 of the Lease with a reference date of 1999, as amended (the "Lease"), between Matrix Bancorp, a Colorado corporation, and The Regents of the University of Colorado, a body corporate, for and on behalf of the University of Colorado at Denver, pertaining to the Premises referred to in the Lease. The undersigned hereby acknowledges and agrees that the Lease Commencement Date (as defined in the Lease) for the Premises is December 1, 2000, and the Expiration Date (as defined in the Lease for the Premises) is July 31, 2006. The undersigned further acknowledges and agrees that, pursuant to Paragraph 3 of Exhibit "B" (the "Workletter Agreement") of the Second Amendment to Lease, the Excess Allowance of $____________ be included as Additional rent in the amount of $___________________ Dollars ($____________) per month. LANDLORD: TENANT: REGENTS OF THE UNIVERSITY MATRIX BANCORP, OF COLORADO, a body corporate, a Colorado corporation for and on behalf of the University of Colorado at Denver By:__________________________________ By:_________________________________ Print Name:___________________________ Print Name:__________________________ Its:__________________________________ Its:_________________________________ Approved for legal sufficiency: By:__________________________________ Print Name:___________________________ Its:__________________________________ EX-10.26 9 0009.txt PROMISSORY NOTE Dated: February 21, 2001 Principal Amount: $68,257.39 State of Colorado FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to pay to the order of Matrix Bancorp, Inc. the sum of sixty-eight thousand two hundred fifty-seven and 39/100 dollars ($68,257.39), together with interest thereon at the rate of Prime plus 1.5% per annum on the unpaid balance. Said sum shall be paid in the manner following: All principal and interest shall be due on February 21, 2002. All payments shall be first applied to interest and the balance to principal. This note may be prepaid, at any time, in whole or in part, without penalty. All prepayments shall be applied in reverse order of maturity. This note shall at the option of any holder hereof be immediately due and payable upon the failure to make any payment due hereunder within five (5) days of its due date. This note at the option of any holder hereof may be extended on an annual basis for increments of one (1) year. The terms and interest rate will remain constant. In the event this note shall be in default, and placed with an attorney for collection, then the undersigned agree to pay all reasonable attorney's fees and costs of collection. Payments not made within five (5) days of due date shall be subject to a late charge of 2% of said payment. All payments hereunder shall be made to such address as may from time to time be designed by any holder hereof. The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound hereunder until this note shall be fully paid and waive demand, presentment and protest and all notices thereto and further agree to remain bound, notwithstanding any extension, renewal, modification, waiver, or other indulgence by any holder or upon the, discharge or release of any obligor hereunder to this note, or upon the exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing; and any indulgence on any one occasion shall not be an indulgence for any other or future occasion. Any modification or change of terms, hereunder granted by any holder hereof, shall be valid and binding upon each of the undersigned, notwithstanding the acknowledgment of any of the undersigned, and each of the undersigned does hereby irrevocably grant to each of the others a power of attorney to enter into any such modification on their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. This note shall take effect as sealed instrument and shall be construed, governed and enforced in accordance with the laws of the state first appearing at the head of this note. The undersigned hereby execute this note as principals and not as sureties. Maker: /s/ Thomas M. Piercy Thomas M. Piercy EX-10.27 10 0010.txt MATRIX BANCORP, INC. EXECUTIVE INCENTIVE PLAN The Matrix Bancorp, Inc. Executive Incentive Plan (the "Plan") is intended to reinforce certain objectives which are important to the continued success of Matrix Bancorp, Inc. and its subsidiaries (on a consolidated basis, the "Corporation"). These objectives would include, but not be limited to: |X|Attracting, developing, retaining and rewarding well-qualified executive staff. |X|Providing opportunities to earn financial rewards based on improved performance of the Corporation and individual contributions to that performance. |X|Ensuring that total compensation opportunities are competitive and variable based upon actual performance compared to predetermined goals. Plan awards are designed to motivate and reward Participants for achieving and exceeding specified corporate, individual and/or unit objectives, as appropriate. PARTICIPATION Eligibility will be limited to certain executives employed specifically within the Corporation as well as certain executives within the subsidiaries of the Corporation. These executives shall possess broad responsibility and decision-making authority, and have a major impact on the results of their own functional areas and on the overall performance of the Corporation. No employee shall have a right to be selected as a Participant for any year, nor having been selected as a Participant in the Plan for one year, to be a Participant in any other year. Participation in the Plan does not constitute a guarantee of employment for the entire Plan year, or for any specified time period. Executives selected for participation in the Plan shall be defined as a Participant. EFFECTIVE DATES The Plan shall be effective from January 1 through December 31. The Corporation reserves the right, however, to adjust, amend or suspend the Plan at its sole discretion during the Plan year, with the approval of the Compensation Committee of the Board of Directors of the Corporation. ANNUAL COMPENSATION COMPONENTS The total annual earning opportunity for Participants under the terms of the Plan includes two compensation components: |X| Base Salary |X| Incentive Compensation The Compensation Committee may consider and pay, outside of this Plan, stock options and other forms of non-cash compensation from time to time to Participants. Base Salary Base salary represents the "fixed" portion of the total compensation opportunity available to Participants. It is earned for performing duties which contribute to the long-term success of the Corporation, both within and beyond specified department or business unit assignments. Some of the duties for which performance is measured and base salary is earned include: |X| Consistently achieving and exceeding objectives. |X| The degree to which annual goals have been achieved and the relative significance of these achievements to overall results of the Corporation. |X| Overall performance in areas of major position responsibilities. |X| Performance in unanticipated circumstances or opportunities. |X| Subordinate and self-development activities. |X| Maximizing opportunities to enable the Corporation to achieve the highest possible net profit. |X| Exhibiting team supportive behavior, which contributes to the success of the entire organization. |X| Ensuring that managerial and administrative responsibilities are executed accurately and timely. |X| The terms of any employment agreement of the Participant. Additionally, more specific performance standards may be communicated to each Participant through his or her immediate management. The primary determinants of base salary are: Marketplace Salary Analysis, Years of Service, and Performance Evaluation. Base salary adjustments, if any, will be recommended by the Board of Directors to the Compensation Committee for approval at the beginning of each calendar year. Base salary adjustments will be included in the February 15 paycheck and will be retroactive to January 1 in the year to which the new salary applies. Incentive Compensation Incentive compensation represents the "variable" or "at risk" portion of the total compensation opportunity for Plan Participants. It is considered variable because it will vary in amount from year to year in direct relation to a Participant's performance against the established incentive goals. Incentive compensation can be based upon the Corporation's overall performance, individual/unit performance, or a weighted combination. The Incentive Award is based on a percentage of base salary and can vary by position level. The incentive opportunity for each participating position will be based upon competitive practices in the industry for positions of comparable responsibility and decision-making authority. Factors such as title, current salary, scope of responsibility and impact on the Corporation's financial performance and strategic plan will be considered in establishing the incentive opportunity. INCENTIVE AWARD DETERMINATION Holding Company Objectives One or more financial objectives for the Corporation shall be established at the beginning of each Plan year (the "Holding Company Objectives"). These objectives are generally quantitative and are established largely on the basis of the budget and business plan approved by the Board of Directors of the Corporation. Specific Holding Company Objectives shall be set forth for a Plan year in a Plan supplement to be adopted by the Board of Directors for that given year. Individual/Unit Objectives The determination of the individual/unit segment of the Incentive Award is based upon performance objectives which are established at the beginning of each year by the Corporation for certain subsidiaries of the Corporation (the "Individual/Unit Objectives"). These objectives represent clearly defined and meaningful accomplishments desired within the framework of the responsibilities of the Participant and should be measurable and quantifiable. As with the Holding Company Objectives, the Individual/Unit Objectives shall be set forth for a Plan year in a Plan supplement to be adopted by the Board of Directors for that given year. Position Ranking The intent of this Plan is to provide Incentive Awards that vary by job level. As such, a higher incentive potential may be given to the highest ranking executives, since it is assumed they have the most responsibility for ensuring that the Corporation achieves its annual objectives. The following ranks or tiers have been created for the various Participants in this Plan: Tier I - Holding Company Principal Officers Tier II - Subsidiary Presidents A These individuals are viewed as having a significant amount of control and influence over the financial results of their respective subsidiary Tier III -Subsidiary Presidents B These individuals are viewed as having less control and influence over the financial results of their respective subsidiary, as compared to Subsidiary Presidents A. Incentive Opportunity In addition to establishing criteria for awarding incentives, the Plan shall establish both targeted levels of incentives and maximum levels of incentives. The targeted and maximum levels of Incentive Awards shall be expressed as a percentage of the Participant's base salary. The Plan contemplates that if the Holding Company and Individual/Unit Objectives are met, a Participant would be awarded the targeted level of incentive opportunity. Performance above or below the established objectives may result in incentive opportunities greater than or less than the targeted level. Performance Weighting Incentive Award determinations for Participants in the Plan shall be distinguished between those Participants employed specifically within the Holding Company and those Participants employed within the subsidiaries of the Holding Company. Holding Company Participants shall be rewarded solely upon the Holding Company Objectives, while Participants who are executives within the subsidiaries shall be rewarded based upon a mix of Holding Company and Individual/Unit Objectives. The greater the control and influence a Participant can exert over the financial results of a specific subsidiary, the larger a portion of the Incentive Award will be based on Individual/Unit Objectives. Performance Schedules Performance schedules for both the Holding Company and Individual/Unit components of the Plan shall be established to indicate potential awards payable at various levels of performance: the threshold level, below which no award is paid, the target objective, and a maximum level which defines the limit of maximum incentive payout under the Plan. Specific Holding Company and Individual/Unit performance schedules shall be set forth for a given Plan year in a Plan supplement to be adopted by the Compensation Committee for that given year. Performance results shall be calculated after the inclusion of all bonuses to be paid under this Plan. Calculation of Incentive Award The Incentive Award shall be calculated as follows: Base Salary x Target Incentive % x (Sum of Weighted Corporate Factors + Sum of Weighted Individual/Unit Factors) = Incentive Award Additional Discretionary Award In certain cases, the Board of Directors may determine, in its sole discretion, to award an additional discretionary bonus to a Participant in recognition of a significant contribution to the success of the Corporation outside of the performance criteria set forth in the Plan supplement for a given year. PAYMENT OF AWARDS All Incentive Awards determined under this Plan will be payable in cash on February 15 following the end of the Plan Year. To receive an Incentive Award payment, a Participant must be in active full-time service of the Corporation at the end of the Plan Year and at the time the actual award payments are made. The Compensation Committee, at its sole discretion, may approve payment of all or a portion of an Incentive Award to a Participant (or beneficiary) whose service was terminated by death, disability or retirement or who is/was on an approved leave of absence. Cash Incentive Awards paid under this plan will be subject to the IRS specified withholding rates for annual bonus payments. TERMINATION OR AMENDMENT The Plan, in whole or in part, may at any time or from time to time be amended, suspended, or reinstated and may at any time be terminated by action of the Compensation Committee. Additionally, the Compensation Committee of the Board of Directors shall recommend adjustments as deemed advisable in order to give consideration to changes in accounting rules, principles, or methods; changes in portfolio such as mergers and acquisitions; or other extraordinary events (for example, one time sale of servicing rights), and may adjust financial performance measures in recognition of such occurrences. No Participant has a vested right to an Incentive Award under the Plan until paid. In addition, this Plan shall not establish any employment agreement nor any right for a Participant to continued employment with the Corporation. MISCELLANEOUS PROVISIONS Neither the adoption of the Plan nor its operation shall in any way affect the right and power of the Corporation to dismiss any Participant, or otherwise terminate the employment or take other action including, but not limited to, removing the Participant from the incentive-eligible position, at any time, for any reason, with or without cause. It remains the Compensation Committee's prerogative, in its sole discretion, to refrain from paying incentive payments to Participants who may attain the payout criteria in this Plan, but have otherwise failed to perform satisfactorily or to manage in a correct and efficient manner in accordance with the known or published policies and procedures of the Corporation. No Participant will have the right to assign, encumber, hypothecate or pledge his or her interest in any award under the Plan, voluntarily or involuntarily, and any attempt to so dispose of any such interest will be void. This document is a complete statement of the Plan and as of the date below, supersedes all prior plans, representations and proposals, written or oral, relating to its subject matter. The Corporation will not be bound by or liable to any Participant for any representation, promise, or inducement made by any persons which is not embodied in this document. The Compensation Committee has the power and authority to amend, construe, interpret, and administer the Plan. Any decision arising out of or in connection with the construction, interpretation, or administration of the Plan will lie within the Compensation Committee's absolute discretion and will be binding on all parties. All questions arising with respect to the provisions of this Plan shall be determined by application of the laws of the State of Colorado except to the extent Colorado law is preempted by federal law. IN WITNESS WHEREOF, Matrix Bancorp, Inc. acting by and through its duly authorized officer, has executed his Plan this 7th day of March, 2001. Matrix Bancorp, Inc. /s/ Guy A. Gibson EX-12 11 0011.txt
Exhibit 12 Matrix Bancorp, Inc. Computation of Ratio of Earnings to Fixed Charges (Unaudited) (Dollars in thousands) Year Ended December 31, 2000 1999 1998 1997 1996 ------------- -------------- -------------- -------------- ------------- A. Matrix Bancorp, Inc. and subsidiaries (consolidated) Earnings: 1. Income before income taxes ..............$ 6,501 $ 17,057 $ 13,389 $ 13,297 $ 5,848 2. Plus interest expense (A) ............... 68,089 44,234 36,822 18,471 10,670 ------------- -------------- -------------- -------------- ------------- 3. Earnings including interest on deposits 74,590 61,291 50,211 31,768 16,518 4. Less interest on deposits................ 26,275 21,589 16,221 8,376 3,760 ------------- -------------- -------------- -------------- ------------- 5. Earnings excluding interest on deposits $ 48,315 $ 39,702 $ 33,990 $ 23,392 $ 12,758 ============= ============== ============== ============== ============= Fixed Charges: 6. Including interest on deposits excluding capitalized interest ...................$ 68,218 $ 44,279 $ 36,901 $ 18,551 $ 10,708 7. Less interest on deposits (Line 4) ...... 26,275 21,589 16,221 8,376 3,760 ------------- -------------- -------------- -------------- ------------- 8. Excluding interest on deposits ..........$ 41,943 $ 22,690 $ 20,680 $ 10,175 $ 6,948 ============= ============== ============== ============== ============= Ratio of Earnings to Fixed Charges: Including interest on deposits (Line 3 divided by Line 6) ............ 1.09x 1.38x 1.36x 1.71x 1.54x Excluding interest on deposits (Line 5 divided by Line 8) ............ 1.15x 1.75x 1.64x 2.30x 1.84x
- ------------ (A) Includes amounts representing the estimated interest component of net rental payments. EX-21 12 0012.txt EXHIBIT 21 Matrix Bancorp, Inc. Subsidiaries of the Registrant 1. Matrix Financial Services Corporation - Incorporated in Arizona 2. United Financial, Inc. - Incorporated in Colorado 3. Matrix Capital Bank - Organized pursuant to a Federal savings and loan charter 4. Matrix Asset Management Corporation - Incorporated in Colorado and formerly known as United Special Services, Inc. 5. The Vintage Group, Inc. - Incorporated in Texas 6. Vintage Delaware Holdings, Inc. - Incorporated in Delaware 7. Sterling Trust Company - Incorporated in Texas 8. First Matrix Investment Services Corp. - Incorporated in Texas 9. Matrix Funding Corp. - Incorporated in Colorado 10. MSCS Ventures, Inc. - Incorporated in Colorado and formerly known as Matrix Advisory Services Corporation 11. Matrix Settlement & Clearance Services, L.L.C. (45%) - Organized in New York 12. Equi-Mor Holdings, Inc. - Incorporated in Nevada 13. ABS School Services, L.L.C. - Organized in Arizona 14. Matrix Aviation Corporation - Incorporated in Colorado 15. MCNP-1 Corp. - Incorporated in New Mexico 16. Dasalco Corporation - Incorporated in New Mexico 17. Matrix Advisory Services, Inc. - Incorporated in Delaware and formerly known as Leader Acquisition Corp. 18. Matrix Insurance Service Corporation - Incorporated in Arizona 19. Matrix Bancorp Capital Trust I - Organized under Delaware law EX-23 13 0013.txt Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements on Form S-8 of Matrix Bancorp, Inc. listed below of our report dated February 23, 2001, with respect to the consolidated financial statements of Matrix Bancorp, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000 expected to be filed with the Securities and Exchange Commission on or about March 15, 2001: 1. Registration Statement Number 333-51516, filed with the Securities and Exchange Commission on December 8, 2000 pertaining to the Executive Deferred Compensation Plan of Matrix Bancorp, Inc.; 2. Registration Statement Number 333-40482, filed with the Securities and Exchange Commission on June 29, 2000 pertaining to the 1996 Amended and Restated Employee Stock Option Plan and the 1996 Employee Stock Purchase Plan of Matrix Bancorp, Inc.; and 3. Registration Statement Number 333-36671, filed with the Securities and Exchange Commission on September 29, 1997 pertaining to the 1996 Amended and Restated Employee Stock Option Plan and the 1996 Employee Stock Purchase Plan of Matrix Bancorp, Inc. /s/ Ernst & Young LLP Phoenix, Arizona March 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----